While everyone waited for Jay
To blind us with brilliant wordplay
Seems he only said
The quants at the Fed
Try hard and their work is okay

This damp squib forced traders to seek
An alternate reason to tweak
Positions and views
But there’s just no news
At least not the rest of the week

The tedium continues another day.   There have always been periods in the markets when there is very little of note ongoing and so pundits work hard to pump one story or another in order to generate enthusiasm, and on Wall Street, more trading activity.  But sometimes, like right now, one is better off paying attention to something else more important (for instance, college football).  With that in mind, this morning’s note will be brief.

There was a great deal of anticipation ahead of Chairman Powell’s comments yesterday morning, but he gave no satisfaction by simply lauding the folks who work at the Fed’s Research and Statistics group.  That is the group that prepares the official Fed forecasts, and he was quite complementary of their effort.  The fact that they are often completely wrong is incidental.  Perhaps the most interesting thing he said was an oblique suggestion that they consider different models of the economy at times as things do change over time.  I heartily agree with that sentiment, but sincerely doubt that PhD economists who have made their entire reputation based on their pet models are going to change anything given it might imply their previous efforts fell short.  The upshot of the Powell speech was it had no impact on anything.

As to the rest of the Fed speakers, they simply repeated that inflation is still too high and that they will continue to do whatever they think is necessary to push it lower.  There was some caution about having gone too far from Chicago Fed President Goolsbee, but even he explained that it will take time before they can be certain they have achieved their goal.

Away from Fedspeak, there was no US data and this morning’s discussion has centered on Chinese CPI data which showed the M/M reading fell to -0.1% while the Y/Y reading fell to -0.2%.  Now, these are headline numbers, not core, and the fact that energy prices have been declining for the past month is likely a big part of this movement.  But the outcome has tongues wagging about the coming deflationary wave that will soon hit the world.  Don’t believe it.  If ever there was a good time to use the term transitory regarding inflation, this seems to be it.  Chinese deflation is transitory.

And that was literally the most impactful piece of data we have seen in the past 24 hours, if not the past 3 days.  One other thing to note was that Ueda-san spoke at a conference in London and explained, “When we normalize short-term interest rates, we will have to be careful about what will happen to financial institutions, what will happen to borrowers of money in general and what will happen to aggregate demand.  It is going to be a serious challenge for us.”  I think he is absolutely correct; it will be very difficult to change that policy without a few things breaking.  Good luck Ueda-san!

So, how have markets responded to this virtual lack of information?  Pretty much as you might expect, with minimal movement.  After a very quiet session in the US yesterday, where the major indices all closed withing 0.1% of Tuesday’s closes, Asia saw gains in Japan with the Nikkei higher by 1.5%, but Chinese shares did not respond well to the CPI data, sliding a bit.  Europe, this morning is modestly firmer, on the order of 0.4% as the many ECB speakers are unable to convince investors that they will remain hawkish going forward, while US futures are still within 0.1% of Tuesday’s closes, i.e., unchanged.

Bond yields continue to be the driving force in markets and after a small decline in 10-year yields yesterday, they have bounced 3bps this morning.  We have seen similar moves throughout Europe, 2bp – 3bp rises which seem to simply be following the Treasury market.  Meanwhile, JGB yields have edged lower by 2bps overnight, although it will be interesting to see how the local market responds to the Ueda comments above when they open tomorrow.  I would expect that we are still a long way from 1.00%.  One other thing to note is that the 2yr-10yr curve inversion is growing still larger, with this morning’s level up to -42bps.  This tells me that there is still a great deal of volatility to come in the bond market, and by extension across all financial markets.

Oil prices, which have been getting decimated lately, have settled for the moment and are higher by 0.5%, but now hovering around $75/bbl.  It is abundantly clear that the market is far more concerned with the demand destruction story than the supply constraint story.  This seems at odds with the soft-landing / no-landing crowd that is continuing to drive the equity markets, although I suspect the commodity folks have it right.  Metals markets, both precious and base, also remain under pressure on the weak economic story being driven by high real yields.

Finally, the dollar continues to range trade with the most noteworthy movement being USDJPY pushing toward new highs for the move above 151.00.  Until such time as the BOJ really changes policy, and based on Ueda-san’s comments, I think that is still some ways off, it is hard to get excited about owning the yen.  As to the rest of the market, the EMG bloc is suffering more than the G10 bloc, and if I had to describe a direction, I would say the dollar is modestly firmer overall.

We finally have some data this morning, with Initial (exp 218K) and Continuing (1820K) Claims hitting the tape at 8:30.  We have a bunch more Fed speakers, including Chairman Powell again at 3:00 this afternoon.  We shall see if he veers closer to monetary policy today than yesterday’s nothing burger.  And one last thing, Banxico meets today and is expected to leave their base rate unchanged at 11.25%.

It is difficult to get excited about this market and it beggars’ belief that Powell is going to change his tune given the lack of new information.  As such, look for another quiet session across the board.  The next shoe to drop is CPI, but that is not until next Tuesday.  Til then, there is little reason to expect any significant movement in either direction.

Good luck

Adf