As we look ahead to this week
Til Thursday, when Jay’s set to speak
There’s little of note
That’s like to promote
A change in one’s views, bright or bleak

Then Friday, we’ll get PCE
When traders are waiting to see
If there’s any chance
The Fed’s hawkish stance
May change and they’ll restart QE

Some days there is less happening than others, and today is one of those days.  There has been very limited data released with the German Ifo the most notable statistic and it showed virtually no change from last month, still quite negative on the German economy.  Given that Germany is in a recession, I guess that shouldn’t be a big surprise, but the depth of the gloom has only been surpassed by the Covid situation and the GFC.  Even the Eurozone bond crisis in 2012 never saw this indicator so weak.  However, beyond that, there is really very little to discuss.

Thus, let us focus on how things may look going forward.  There continues to be an underlying negative perception across most macroeconomic indicators with the US economy the last bastion of any sort of strength.  China remains in the doldrums with the property sector still under huge pressure and the government there not yet willing to truly bail it out.  Germany is leading Europe lower with other nations beginning to see accelerating weakness as evidenced by last week’s flash PMI data, and emerging markets are beholden to global growth as they do not yet have the ability to drive things on their own.  If the situation in the US is one of a slide into recession, then I expect that the EMG nations will find themselves under further pressure.

And what, you may ask, is driving this process?  Clearly it is the G10 central bank mantra of higher for longer as inflation continues to run rampant around the world.  This results in a situation where investors and hedgers need to determine how much longer the Fed and its brethren central banks will be able to hold the line.  The problem here is this is a political question, not an economic one and political answers are extremely difficult to forecast.

Given that there is a presidential election in the US in 2024 and that the UK will be going to the polls as well with PM Sunak’s stint in office on the line, I expect that there will be significant pressure from both those governments to have the central banks back off the policy tightening and support economic activity.  However, it is unclear when that pressure will really increase and how long either Powell or Bailey will be able to hold the current line.  One of the biggest problems for the Biden administration is that a Republican House of Representative seems unlikely to pass significant stimulus to help the president when recession arrives.  This can be seen in the current fight over the completion of the funding bills for next fiscal year and the potential for a government shutdown at the end of the month.  As such, for Biden, he will be entirely reliant on monetary stimulus which, right now, doesn’t seem forthcoming.

The UK situation will be different, as the Tories control Parliament, however, they are extremely unpopular right now, and it is not clear what they can do to change that situation.  Certainly, if the BOE were to ease policy, it might be a positive but remember, inflation in the UK is the highest in the developed world and so driving inflation higher will not be seen as a positive at all.  My understanding is inflation remains the major pub talking point throughout the UK.  And not in a good way!

In the end we are going to need to see some policy changes to change market behaviors and right now, that seems a fairly distant prospect.  For all of us holding risk assets, that may lead to an uncomfortable time as we have seen over the past week or two and as we see continuing this morning.  Unfortunately, the prospects for a reversal seem as gloomy as this morning’s NY weather.

Anyway, let’s turn to the markets and take stock.  The Nikkei (+0.85%) was the outlier overnight as it managed to rally while the rest of Asia, notably Chinese and Hong Kong shares, all fell pretty sharply.  As to Europe, it is all red there with most bourses pushing lower by about -1.0%.  It seems there is no reprieve yet.  US futures at this hour (8:00) are also under pressure after a lousy week last week, with all three major indices lower by about -0.3%.

However, don’t look for any support in the bond market with yields higher virtually across the board.  Treasury yields are now north of 4.50% and show no sign of slowing down while the 2yr note is not rising in sync.  The curve inversion is down to -60bps now, as the bear steepening continues.  But yields are higher across Europe as well as concerns over inflation continue to grow.  The only exception here is Japan, where JGB yields have edged down 1bp.

In the commodity space, it should be no surprise that the base metals are softer this morning given the economic gloom. As to oil, it was higher for most of the overnight session although it has slipped back to unchanged as New York gets going.  One interesting story is that Eastern Russian crude is now trading above Brent prices near $100/bbl, far, far above the G7 price cap of $60/bbl that was imposed last year.  I guess the G7 didn’t have the market power implicit with that ridiculous idea.

Finally, the dollar is firmer this morning against most of its counterpart currencies.  In the G10 the one outlier is SEK (+0.9%) which has rallied on the idea that the Riksbank has further to tighten than previously expected.  But otherwise, USDJPY is pushing toward 149 and clearly getting close to an uncomfortable level for the BOJ/MOF.  In the EMG space, the story is similar, with the dollar broadly higher across the board.  This has all the appearances of a straight dollar story on the back of rising yields.

On the data front, as mentioned earlier, there is not much on the docket:

Today	Chicago Fed Nat’l Activity	0.15
Tuesday	Case Shiller Home Prices	-1.0%
	New Home Sales	700K
	Consumer Confidence	105.6
Wednesday	Durable Goods	-0.4%
	-ex Transport	0.2%
Thursday	Initial Claims	217K
	Continuing Claims	1675K
	Q2 GDP Final	2.2%
Friday	Personal Spending	0.5%
	Personal Income	0.4%
	Core PCE	0.2% (3.9% y/Y)
	Chicago PMI	47.4
	Michigan Sentiment	67.7

Source: Tradingeconomics.com

As well as the data, we hear from five Fed speakers beyond Chairman Powell, but clearly all eyes will be on him Thursday afternoon.  It is very difficult to look at the sweep of data and feel confident that the economy is going to avoid a recession.  However, as long as we continue to see strength in the payroll data, I think the Fed has the cover to maintain higher for longer.  Next week’s NFP is going to be crucial with the early estimates at 145K, still positive but sliding down from the past several years.  In the meantime, especially as yields continue to climb in the US, the dollar should remain underpinned against all its counterparts.

Good luck

Adf