The central banks all through the West
Are trying to figure how best
To, policy, tighten
But not scare or frighten
Investors and so they are stressed
Meanwhile from Beijing data showed
That Chinese growth actually slowed
With prospects now dimmed
The central bank trimmed
Two interest rates, lest things implode
There is a new contest amongst the punditry to see who can call for the most shocking rate policy by the Fed this year. With the FOMC in their quiet period, they cannot respond to comments by the likes of JPM Chair Jamie Dimon (the Fed could raise rates 7 times this year!) or hedge fund manager and noted short seller Bill Ackman (the Fed should raise rates by 50 basis points in March to shock the market), and so those comments get to filter through the market discussion and creep into the narrative. A quick look at Fed funds futures shows that the market is now pricing in not only a 25bp rate hike, but a probability of slightly more at the March meeting.
Now, don’t get me wrong, I think the Fed is hugely behind the curve, as evidenced by the fact they are still purchasing assets despite raging inflation, and think an immediate end to asset purchases would be appropriate policy, as well as raising rates in 0.5% increments or more until they start to make a dent in the depth of negative real yields, but I also know that is not going to happen. Time and again they have effectively explained to us all that while inflation is certainly not a good thing, the worst possible outcome would be a decline in the stock market. Their deference to investors rather than to Main Street has become a glaring issue, and one that does not reflect well on their reputation. And yet, Chairman Powell has never given us a reason to believe that he will simply focus on inflation, which is currently by far the biggest problem in the economy.
However, with the market having already priced in a 0.25% rate hike for March, it is entirely realistic they will raise rates at that meeting. The key question, though, is will they be able to continue to tighten policy when equity markets start to respond more negatively? For the past 35 years (since Black Monday in 1987) the answer has been a resounding NO. Why does anybody think this time is different?
Interestingly, at the same time virtually every Western central bank is trying to figure out the best way to fight the rapidly rising inflation seen throughout the world, the Middle Kingdom has their own, unique, issues, namely disappointing economic growth and expanding omicron growth leading up to the Winter Olympics. Of course, the last thing that President Xi can allow is any inkling that things in China are not running smoothly, and so after the release of weaker than expected IP, Fixed Asset, Retail Sales and GDP data for Q4, the PBOC cut both its Medium-Term Lending and 7-day Reverse Repo rates by 0.10% last night. In addition to the weaker data came the news that yet another property developer, Logan Group, may have made guarantees that do not appear on their balance sheet to the tune of $812 million. I have lost count of the number of property developers in China that are now under growing pressure ever since the initial stories about China Evergrande. But that is the point, the entire property sector is under huge pressure of imploding and property development has been somewhere between 25%-30% of the Chinese GDP growth. This does not bode well for Chinese GDP growth going forward, which does not bode well for global growth. PS, one last thing to mention here is the Chinese birth rate fell to its lowest level since 1950! Only 10.62 million babies were born in 2021, despite significant efforts by the government to encourage family growth. As demographics is destiny, unless the Chinese change their immigration policies, the nation is going to find itself in some very difficult straits as the population there ages rapidly and the working population shrinks. Just sayin’.
Ok, with that out of the way, a look around today’s holiday markets shows that risk is on! Aside from the Hang Seng (-0.7%) overnight, which is where so many property firms are listed, every other major market is in the green. The Nikkei (+0.75%) and Shanghai (+0.6%) were both solid performers as that PBOC rate cut was seen as encouraging. In Europe, the DAX (+0.4%), CAC (+0.6%) and FTSE 100 (+0.6%) are all firmer as are the peripheral markets. Even US futures (+0.1% across the board) are firmer although there is no trading here today due to the MLK holiday.
Bond markets, on the other hand, are under pressure everywhere as Treasury futures are down 13 ticks or about 3 basis points higher, while European sovereigns (Bunds +1.7bps, OATs +2.0bps, Gilts +2.8bps) are all seeing higher yields as well. In fact, 10-year Bunds are approaching 0.0% for the first time since May 2019. Asia was no different with only China (-0.8bps) seeing a yield decline and sharp rises in Australia (+6.7bps) and South Korea (+9.7bps).
In the commodity markets, WTI (0.0%) is flat although Brent (-0.3%) is edging down from its multi-year highs. NatGas (-0.6%) is also edging lower and European gas prices are falling even more significantly as a combination of LNG cargoes and warmer weather eases some pressure on that market. Gold (+0.2%) is firmer, despite what appears to be a risk-on day, although copper (-0.7%) is under a bit of pressure. In other words, the noise is overwhelming the signal here.
As to the dollar this morning, mixed is the best description as there are gainers and losers in both G10 and EMG blocs. Interestingly, despite oil’s lackluster trading, both NOK (+0.3%) and CAD (+0.2%) are the leading gainers in the G10 while JPY (-0.25%) is following its risk history, selling off as equities gain. In the emerging markets, RUB (-0.55%) is the worst performer as there seems to be growing concern over the imposition of tighter sanctions in the event Russia does invade the Ukraine. KRW (-0.45%) is next in line after North Korea launched yet two more ballistic missiles, raising tension on the peninsula. On the plus side, THB (+0.4%) has been continuing its recent gains as the nation opens up more completely from Covid lockdowns.
It is a relatively light data week with Housing the main focus, and with the Fed in their quiet period, we won’t be getting help there either.
|Existing Home Sales||6.41M|
In truth, it is shaping up to be a quiet week. Next week brings the central bank onslaught with the Fed, BOJ and BOC, but until then, we will need to take our cues from equities and geopolitical tensions to see if anything occurs that may inspire the jettisoning of risk assets in a hurry. My gut tells me we will not be seeing anything of that nature, and so a range bound week for the dollar seems in store.
Good luck and stay safe