The ongoing data confusion
Is certainly not an illusion
Some numbers are solid
While others are squalid
And each begs a different conclusion
 
Last night, Chinese data revealed
The ‘conomy there hasn’t healed
And Germany’s ZEW
Showed weakness, beaucoup
More rate cuts will soon be, out, wheeled
 
But here in the US we learned
The NFIB, up, had turned
And yesterday showed
Inflation has slowed
Investors, though, still are concerned

 

As we await today’s US PPI data, and more importantly, tomorrow’s US CPI data, the one consistency we have observed is that the data remains all over the map.  Or does it?  The below chart (data from NY Fed, chart from @fx_poet) shows the median readings of 1-year ahead and 3-year ahead inflation expectations, based on a survey of 1300 households.  While the 1-year ahead expectations are unchanged at 3.0%, the 3-year ahead expectations fell to 2.3%, the lowest in the series’ history since the NY Fed began the survey in June 2013.

If you’re Jay Powell, that certainly must be good news as the Fed puts great stock into the idea that inflation expectations lead inflation outcomes. While this is not a universally held belief amongst economists and analysts, it is certainly the majority view.  However, given that the Fed is a strong believer in this theory, the fact that inflation expectations, as measured here, are declining will help inform their decisions going forward.  Based on this, it is easy to believe that September will bring a 50 basis point cut.

Of course, one might ask, why are inflation expectations declining?  And that is not part of the data that is collected, or at least not reported.  If the expectation is that the economy is headed into recession, that implies there is still great concern amongst households going forward.  However, if this result is due to a strong belief in the Fed’s policies, then economic optimism should abound.  As such, we need to see other data to help interpret things.

Perhaps the first piece we can observe is this morning’s NFIB Small Business Optimism Index, which printed at 93.7, its highest level since March 2022.  That is certainly encouraging as given the importance of small businesses to the overall economy, if things there are starting to look up, it should translate into stronger growth going forward.  On the flip side, in the anecdata department, earnings calls from Expedia, Marriott, Airbnb and Hilton indicated that there is real weakness in the travel economy.  This WSJ report indicates that perhaps things are not as strong as might be indicated by other data.

Now, if we look overseas, the data is also mixed, but there is more negative than positive.  For instance, Chinese money and lending data was released at substantially lower levels than last month and well below expectations.  As well, the PBOC is becoming very concerned about the Chinese bond market inflating a bubble.  Last week, ostensibly, they told several banks to renege on deals to buy Chinese government bonds because they are trying to prevent the back end of the yield curve from declining too far.  It seems they are worried (and probably rightly so) that regional Chinese banks don’t have the capability to manage interest rate risks effectively.  But slowing loan growth and a weak equity market continue to indicate that the Chinese economy is lagging.

As to Europe, the German ZEW data was released and it was, in a word, putrid.  The Economic Sentiment Index fell from 41.8 to 19.2, far below expectations while the Current Conditions index fell to -77.3.  Granted, these surveys were taken the week after the weak NFP data in the US when people were screaming for an emergency 75bp rate cut, so perhaps they are not reflective of the ongoing situation.  But this highlights the problems with survey data, if you are asked about something on a day when the world seems to be ending, your response is likely to be more negative than not.  In fact, this is a caution for all survey data.

So, what are we to make of all this mixed information?  Well, we are right where we started, with no clearer picture of the current situation, let alone how the future may unfold.  In fact, this is why unfettered markets are so important.  Markets are excellent indicators of both future activity and sentiment, and when they are manipulated for political outcomes, investors lose a great deal of information.

But let’s see what the markets are telling us today.  Yesterday’s US session was mixed with modest gains and losses across the board.  But I’ll tell you what, last night Tokyo took the bull by the horns and continued its strong rebound from the previous week’s collapse with the Nikkei rallying 3.5%.  it seems that not only was this move a continuation after the Monday holiday of last week’s rebound, but a former BOJ official, Makoto Sakurai, explained, “they [the BOJ] won’t be able to hike again, at least for the rest of the year.  it’s a toss-up whether they can do one hike by next March.”  You will not be surprised that traders and algorithms jumped on those comments to buy more stocks.  As to the rest of the major markets in Asia, they mostly edged slightly higher, but only about 0.2% or so.  In Europe, there are more laggards than gainers, with the CAC (-0.3%) the worst of the bunch, but as you can see by the relatively small decline, markets here are also quiet.  Finally, US futures are up 0.4% at this hour (8:15).

In the bond market, yields are edging lower this morning with Treasuries down -1bp while European sovereigns are lower by between -2bps and -3bps.  Given the tenor of the economic data, this should be no surprise.  Interestingly, JGB yields remain unchanged at 0.83%, well below that 1.00% critical level and hardly indicative that the BOJ is going to tighten further.

In the commodity space, oil (-0.5%) after touching $80/bbl for WTI yesterday, is slipping a bit as traders await the apparently imminent Iranian attack on Israel to see if a wider war starts.  Meanwhile, the metals complex is lower across the board with gold (-0.4%) giving back some of yesterday’s gains while copper (-1.0%) is also under pressure, arguably on the weak economic story.

Lastly, the dollar is firmer this morning, notably against the yen (-0.3%) and CHF (-0.4%) although there are exceptions to this rule.  I find it quite interesting that the yen carry trade unwind story has basically ended with several large banks explaining that the alleged $20 trillion that was outstanding has been unwound.  Personally, I think that is ridiculous and that there is plenty left in place.  Remember, this trade has been building since the Fed began raising interest rates in 2022 and there are many investors whose entry points are far, far below the current spot level.   A quick look at USDJPY over the past 5 years shows that while the latest batch of entrants may have left the building, there is likely still a lot of borrowed yen funding other positions.

Source: tradingeconomics.com

When the Fed started raising interest rates, USDJPY was about 115.  I assure you the carry trade has not ended.

Turning to the data, this morning brings PPI (exp headline 0.2%, 2.3% Y/Y) and (core 0.2%, 2.7% Y/Y), although I believe the data will need to be very different for traders and investors to change their view that inflation is continuing to decline.  And later this afternoon, Atlanta Fed President Bostic speaks.

I believe the narrative remains that the soft-landing is still in play and that the Fed’s cut in September will be adequately timed to prevent a recession.  As of this morning, the futures market is still pricing in a 50:50 chance of either a 25bp or 50bp cut.  Right now, my money is on 25bps, but there is a lot to learn between now and then.  In the meantime, it is hard to turn too negative on the dollar as everybody else is cutting rates as well, and growth elsewhere seems anemic at best.

Good luck

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