Though markets appeared somewhat queasy
Said Janet, it’s really quite easy
To fund wars times two
But Moody’s said ooh
Your credit is now a bit wheezy

The combo of deficit growth
As well as a Congress that’s loath
To pass any bills
Has given us chills
So downgrading debt’s due to both

Under cover of night last Friday, Moody’s put US Treasury debt on Negative watch, citing, “…the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”  Ultimately, they criticized the combination of rising interest rates and a concern that the current polarization in Congress will prevent anything from being done about constantly growing deficits and calls into question the ultimate value of the debt.  Moody’s is the last ratings agency to maintain the Aaa rating for the world’s risk-free asset, so this is quite a blow.  

Not surprisingly, the administration disagreed with the decision as Deputy Treasury Secretary Wally Adeyemo explained,” we disagree with the shift to a negative outlook.  The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”  I don’t believe anyone is concerned that repayment in full is in question, this is simply another shot across the bow of the idea that the value of the nominal dollars that are repaid will be anywhere near what they were when originally invested.

But that was just one of the many crosscurrents that have been afflicting the macro scene and markets of late.  For instance, in the past month, we have seen better than expected data from Retail Sales, IP, Capacity Utilization, New Home Sales, GDP, Durable Goods, Personal Spending, Nonfarm Productivity and Unit Labor Costs.  That’s quite an impressive listing of reports, and the characteristic they all share is they are ‘hard’ data.  In other words, this is not survey data, but rather these are measured statistics.

Meanwhile, the prognosis for the future continues to be far less optimistic with worse than expected outcomes in Empire State Manufacturing, ISM Manufacturing and Services, Leading Indicators and Michigan Sentiment.  The common thread here is these are all surveys and subject to the whims of the person answering the question.  In fact, the only ‘hard’ data points that were worse than expected were the Nonfarm Payrolls and Unemployment Rate.  I guess we can add the Moody’s downgrade to the list of worse than expected data, but it too is subjective rather than a hard data point.

Given the widely diverging data story, it should be no surprise that there are widely divergent views on how things are going to progress from here.  In fact, I read this morning that the two best known Investment Banks, Goldman Sachs and Morgan Stanley, have pretty divergent views on what the future holds.

The bullish argument remains that despite the gnashing of teeth and clutching of pearls by the faint-hearted, the data continues to perform well and that is the best measurement of the economy.  Certainly, the Fed is using this as their crutch to maintain their higher for longer stance and fight back against anyone who claims they have overtightened policy and need to cut rates.

However, all the hard data is backward looking, so describing what has already passed.  The bulls claim that there is autocorrelation in the data, so the past is prolog.  My observation is this is generally true in a trending market, but at inflection points, things become much murkier.

Meanwhile, the bears point to the ongoing weakness in all the survey data, which shows a dour view of the future with ISM in contraction, Michigan Sentiment falling to levels only surpassed during Covid, and inflation expectations continuing to rise.  

Another perfect analogy of this dichotomy is the S&P 500, where the median stock is -36% this year while the index is +14% given the extreme narrowness of breadth.  Absent the so-called Magnificent 7*, the index is actually lower on the year.  Now, those seven stocks are part of the index and so the reality is the S&P remains higher, but if looking for a signal on the economy, the case can certainly be made that broadly speaking, things are not great.

There is one potential reason for this dichotomy of survey vs. hard data, and that is the outside world.  After all, through the lens of the ordinary American, we see two hot wars ongoing, both of which we are spending money in supporting as well as a growing divide in the country along political party lines and sides in each conflict.  Perhaps Moody’s is onto something after all.  But with all that negativity in the press, it is easy to understand why surveys look so dismal.  However, people continue to spend money for things they need and want and given there is still so much money floating around in the wake of the pandemic stimulus efforts, business continues to get done.

There is, of course, one other thing that is part of the equation and that is the presidential election that is coming in one year’s time.  If history is a guide, you can be sure that the administration will be seeking to spend as much money as possible to support reelection, although with the House in opposition, it won’t be as much as they would like.  Nonetheless, at the margin, I expect that it will be substantial enough to continue to pressure yields higher which ought to weigh on equities and support the dollar, at least ceteris paribus.

Ok, so let’s look at how markets have behaved overnight as we start the week.  In the equity space, after a massive rebound rally on Friday in the US, only the Hang Seng in Hong Kong managed any love, rising 1.3%, but the rest of the space was flat to marginally lower on the day.  However, European bourses are all firmer this morning, about 0.5% or so.  As to US futures, they are pointing slightly lower, -0.25%, at this hour (7:20).

Turning to the bond market, Treasury yields are softer by 2bps this morning, but still well off the lows seen last week ahead of the lousy 30-year auction.  I still see higher yields in the future, but I am increasingly in the minority on this view.  European sovereigns are all bid today with yields declining between -3bps and -6bps despite a dearth of new data.  In fact, if anything, from the periphery we have seen firmer inflation data from Sweden and Norway and the market is now looking for both those central banks to hike again later this month.  That does not sound like a reason to buy bonds but it’s all I’ve seen.

Turning to the commodity markets, oil (+0.3%) is edging higher this morning but is just consolidating after a terrible week last week.  Gold, too, is in consolidation, unchanged this morning but having lost some of its recent luster.  Interestingly, both copper and aluminum are firmer this morning, arguably on discussion of further Chinese stimulus that may be coming soon.

Finally, the dollar is little changed this morning, with G10 currencies all within +/-0.2% of Friday’s levels while EMG currencies are showing a similar mixed picture, although with slightly wider ranges of +/-0.4%.  It appears traders are awaiting the next key piece of information, perhaps tomorrow’s CPI.

Speaking of which, after a week that was dominated by Fed speeches (18 of them I think), we are back to some hard data with CPI tomorrow and Retail Sales on Wednesday.  

Tuesday	NFIB Small Biz Optimism	89.8
	CPI	0.1% (3.3% Y/Y)
	-ex food & energy	0.3% (4.1% Y/Y)
Wednesday	PPI	0.1% (1.9% Y/Y)
	-ex food & energy	0.3% (2.7% Y/Y)
	Retail Sales	-0.3%
	-ex autos	-0.1%
Thursday	Initial Claims	220K
	Continuing Claims	1848K
	Philly Fed	-10
	IP	-0.3%
	Capacity Utilization	79.4%
Friday	Housing Starts	1.347M
	Building Permits	1.45M

Source: tradingeconomics.com

As well as all the data, we hear from eight more Fed speakers across 14 different speeches, and that doesn’t include any off-the-cuff interviews.  Waller and Williams arguably highlight the schedule, and it will be quite interesting to see if anyone is going to try to adjust Powell’s themes from last week.  I kind of doubt it.

Putting it all together tells me that today is likely to see limited activity as everyone awaits both the CPI and Retail Sales data to see if the hard data is going to start to follow the surveys or not.  As such, I see little reason for the dollar to decline very far absent a big surprise lower in the data.

Good luck

Adf

*Magnificent 7 stocks = Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, Tesla,