Author Archives: fxpoet

Not Soaring

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It seems that prices
In Japan are not soaring
Like the hawks would want

 

Japanese inflation data last night showed a continued decline as the Core rate fell to 2.2%, and the so-called super core rate slipped to 2.4%, its lowest level since October 2022.  As you can see in the super core chart below, the trend seems clearly to be downward although the current level remains far above inflation rates for most of the past 30 years.

Source: tradingeconomics.com

The irony here is that were this the chart of the inflation rate in any other G7 nation, the central bank would be crowing about how successful they had been at slaying the inflation dragon.  Alas, as the chart demonstrates, Japan’s dragon was a different species, and one that I’m pretty sure the 122 odd million people there were very comfortable having as a “pet”.  After all, I have never met a consumer who was seeking prices to rise before they bought something, have you?

From a market perspective, the continued decline in inflation rates calls into question just how much further Japanese interest rates need to rise in order to achieve the BOJ’s goals.  Again, remember the BOJ’s goals for the past decade has been to RAISE the inflation rate to 2% and their tactic has been to create the largest QE program in the world such that they now own more than 50% of the outstanding Japanese government debt across all maturities.  If inflation continues to decline back to, and below, 2%, while I’m confident the general population there will have no objections, Ueda-san may find himself in a difficult position.  

Arguably, if higher inflation is the goal (and politically that seems nuts) then the most effective tool the nation has is to allow the yen to continue to weaken and import inflation.  I continue to believe that this will be the process going forward, and while very sharp and quick declines will be addressed, a slow erosion will be just fine.  Absent a major change in US monetary policy to something much easier, I still don’t see a case for a much stronger yen.  However, as a hedger, I would continue to consider options to manage the risk of any further bouts of intervention.

While many are still of the view
That rate cuts are long overdue
What yesterday showed
Is growth hasn’t slowed
So, Jay and his friends won’t come through

Back home in the US, yesterday’s data releases did nothing to encourage the large contingent of people who are desperate looking for a rate cut before too long.  While New Home Sales were certainly lousy, falling from the previous month’s downwardly revised level, and the Chicago Fed’s National Activity Index was also quite soft, indicating economic activity had slowed last month, the Flash PMI data got all the attention with both Manufacturing (50.9) and Services (54.8) rising sharply, an indicator that there is still life in the economy yet.  The result was that we saw US yields rise (10yr +7bps), the dollar strengthen, and equity markets give back their early, Nvidia inspired, gains to close lower on the day.  While equity futures are rebounding slightly this morning, confidence that a rate cut is coming soon has clearly been shaken.

Adding to the gloom was a reiteration by Atlanta Fed president Bostic that it is going to take a lot longer for rates to impact inflation than in the past.  In a discussion with Stanford Business School students, he focused on the fact that so many people locked in low mortgage rates during the pandemic and recognized, “the sensitivity to our policy rate — the constraint and the degree of constraint that we’re going to put on is going to be a lot less.” For those reasons, Bostic said, “I would expect this to last a lot longer than you might expect.”  This discussion has been gaining more adherents as the punditry is grudgingly beginning to understand that their previous models are not necessarily relevant given all the changes the pandemic wrought.  Summing up, there continues to be no indication, especially in the wake of the more hawkish tone of the Minutes on Wednesday, that the Fed is going to cut rates soon.

So, with the new slightly less perfect world now coming into view, let’s take a look at market behavior overnight.  Yesterday’s US equity slide was continued everywhere else around the globe with Asian markets (Nikkei -1.2%, Hang Seng -1.4%, CSI 300 -1.1%) under uniform pressure and European bourses, this morning, also in the red, but by a lesser -0.4% or so across the board.  For many of these markets (China excepted) they have recently run to all-time highs, or at least very long-term highs, so it should be no surprise that there is some consolidation.  There is a G7 FinMin meeting this weekend and the comments we have heard so far indicate that the ECB is on track to cut rates next month, but there are no promises for further cuts.  Net, it seems clear that as much as most central banks want to cut interest rates, they are still terrified that inflation will return and then they have an even bigger problem.

In the bond market, it has been a very quiet session after yesterday’s yield rally with Treasury yields unchanged this morning and European sovereign yields similarly unmoved.  Even JGB yields are flat on the day as it appears bond traders and investors started their long weekend a day early.  Remember, not only Is Monday a US holiday, but it is a UK holiday as well, so there will be very little activity then.

In the commodity markets, oil prices remain under pressure and are drifting back toward the low end of their recent trading range.  One story I saw was that there is a renewed effort to get the ceasefire talks in Gaza back on track, but that seems tenuous at best.  Given the strength seen in the PMI data across Europe and the US, it would seem the demand side of the story would improve things here, but not yet.  As to the metals markets, after a serious two-day correction, this morning is bringing a respite with both gold and silver prices bouncing while copper prices remain unchanged.  I remain of the view that the longer-term picture for metals is still intact, so day-to-day trading activity should be taken with a grain of salt.  Ultimately, I continue to believe that the central banking community is going to cut rates before inflation is controlled and that will lead to much bigger problems going forward along with much higher commodity prices.

Finally, the dollar, which rallied alongside yields yesterday, is giving back some of those gains, albeit not very many of them.  The commodity currencies (AUD +0.2%, NZD +0.2%, ZAR +0.4%, NOK +0.6%) are the leading gainers this morning although the euro is also firmer as is the pound despite much weaker than expected UK Retail Sales data.  Alas, the poor yen can find no support and continues to drift a bit lower, with the dollar back above 157 this morning and keep an eye on CNY, which is now back above 7.25 for the first time in a month after Chinese FDI data showed larger than expected -27.9% decline.  It seems that President Xi has successfully scared off most foreign investment which is very likely a long-term problem for the nation.  While it has been very gradual, the fixing rate continues to weaken each day as it appears the PBOC is finally accepting the need for a weaker yuan.

On the data front, we see Durable Goods (exp -0.8%, +0.1% ex-Transports) and then Michigan Confidence (67.5) which continues to be a problem for President Biden’s reelection campaign as the people in this country are just not happy.  We also hear from Governor Waller this morning.  It will be very interesting to hear him as my anecdotal take is that the regional presidents have been much more hawkish than the governors and Chairman Powell, so if he leans dovish, it may demonstrate a bigger split between factions on the board than we have been led to believe.  We shall see.

Net, it remains very difficult for me to make a case for the dollar to weaken substantially at this time.  While it may not power ahead, a decline seems unlikely for as long as higher for longer remains the mantra.

Good luck and good long weekend

Adf

There will be no poetry on Monday due to the holiday.

Just Swell!

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The markets were truly surprised
As yesterday’s Minutes advised
That higher for longer
Intent was much stronger
Than prior belief emphasized
 
The market response was to sell
Risk assets and thus, prices fell
But after the close
Nvidia rose
And now everything is just swell!

 

It turns out that Chairman Powell’s press conference had a distinctly more dovish feel to it than the tone of the FOMC meeting at the beginning of the month.  At least that appears to be the situation based on the Minutes of the meeting that were released yesterday afternoon.  In truth, it is somewhat surprising that given all the comments we have heard by virtually every member of the FOMC in the intervening three weeks, a reading of the Minutes resulted in altered opinions of how policy would evolve going forward.

While every Fed speaker has maintained the view that higher for longer remains the baseline, at the press conference, Powell essentially ruled out further rate hikes.  But in the Minutes, it turns out “various” members indicated a willingness to raise rates if necessary.  In addition, “a few” members would have supported continuing the QT process at the previous $60 billion/month runoff rather than adjusting it lower.  Finally, “many” questioned just how restrictive current monetary policy actually is, and whether it is sufficient to drive inflation back to their target.  Net, it appears there was quite a lively discussion in the room and the hawks are not willing to be ignored.

With this more hawkish stance now more widely understood, it cannot be surprising that risk assets sold off yesterday afternoon.  While I grant that the equity declines were modest, between -0.2% and -0.5% in the US, the tone of conversation clearly changed.  Meanwhile, the real damage occurred in the commodity markets where the recent sharp rise in metals prices ran into a proverbial buzzsaw and all of them fell sharply.  For instance, gold fell -1.5% yesterday and is lower by another -0.7% this morning.  Silver was a bit more volatile, losing -3.0% yesterday and down a further -1.25% today and the king of this move was copper, which tumbled more than -4% yesterday although it seems to be basing for now.

While there are several pundits who are describing these commodity price moves as a reaction to the dollar’s rebound, I actually see it more as a response to the idea that the Fed may be willing to fight inflation more aggressively than previously thought.  Remember, a key to the metals markets’ rally is the idea that the Fed is going to allow inflation to run hotter than target going forward, with 3% as the new 2%, and the widely mooted rate cuts would simply hasten that outcome.  In that scenario, ‘real’ stuff will retain its value better than paper assets and metals are as real as it gets.  However, if the Fed is truly going to stay the course and is willing to raise rates further to achieve their 2% goal, that is a very different stance which will support the dollar and paper assets far better.

Of course, none of this really mattered because the most important news yesterday was after the equity market close when Nvidia reported even stronger than expected results and also split their stock 10:1.  And, so, all is now right in the universe because…AI!  

Alas, this poet is not an equity analyst and has no useful opinion on the merits of the current valuations of AI stocks, so I will continue to focus on the macroeconomic story and try to interpret how things may evolve going forward.

Keeping in mind that the Fed may well be more hawkish than previously thought, that is quite a change in mindset compared to most other central banks where rate cuts appear far more likely as the summer progresses.  For instance, yesterday Madame Lagarde explained, “I’m really confident that we have inflation under control. The forecast that we have for next year and the year after that is really getting very, very close to target, if not at target. So, I am confident that we’ve gone to a control phase.”  This is her rationale for essentially promising, once again, that the ECB will cut rates next month.  However, we continue to get pushback from the ECB hawks that a June cut does not mean a July cut or any other cuts afterwards.  Now, I am inclined to believe that while they may skip July, they will cut again in September and probably consistently after that.

Of course, this is a very different stance than what was indicated by the FOMC Minutes, and I expect that there should be a greater divergence between European and US markets going forward because of this.  In fact, I am quite surprised that the FX market has not taken this to heart and that the euro remains as well bid as it is.  While the single currency has slipped about 2% since the beginning of the year, it is higher this morning by 0.2% and well above the lows seen back in mid-April.  Today’s price action has been driven by slightly better than expected Flash PMI data, but the big picture strikes me that there is more room for the euro to fall than rise.

And really, isn’t that the entire discussion overall, relative policy stances by the main central banks?  I continue to see that as the key driving force in markets at this time, and the macro data helps inform what those stances are likely to be.  If the US growth story is accelerating vs. other G7 countries, then we should expect to see continued outperformance by US assets and the dollar.  However, if the rest of the G7 is catching up, perhaps those tables will turn.  While PMI data has not been a particularly good indicator lately, the fact that European data (and Japanese data overnight) were slightly better than forecast may be an indication that things are changing.  Later this morning we will see the US version (exp 50.0 Manufacturing, 51.3 Services, 51.1 Composite) so it will be interesting to see if the market responds to any surprises there.

As to the rest of the overnight session, markets in Asia were mixed with more gainers (Japan, India, South Korea, Taiwan) than laggards (China, Hong Kong, Australia) with the gainers generally benefitting from somewhat better than expected PMI data and the laggards the opposite.  European bourses are mostly higher on the back of that better data as well.  As to US futures, at this hour (7:30) Nvidia has pulled the entire complex higher with the NASDAQ (+1.1%) leading the way.

In the bond markets, most major countries have seen essentially zero movement this morning with the UK (-3bps) the one exception as the PMI data there was a touch softer than expected.  Of course, you may recall that yields rose sharply in the UK yesterday after the hotter than expected CPI data, so this is a bit of a give-back.  JGB yields, interestingly, slipped back 1bp and are now back below 1.00% despite a modestly better than expected PMI reading.

Oil prices (+0.7%) are bouncing slightly after a string of down days and despite slightly larger than expected inventory builds in the US.  But for now, it seems clear there is ample supply.  And, of course, we already discussed the metals markets.

Finally, the dollar is a touch softer overall this morning with most of the movement as you might expect.  For instance, NOK (+0.7%) is rallying alongside oil and adding to the dollar’s broad weakness.  However, ZAR (-0.5%) remains beholden to the metals complex and is still under pressure.  Of minor note is the fact that the CNY fixing last night at 7.1098 was the weakest renminbi fix since January and some are claiming this is a harbinger of the PBOC relaxing its control of the currency.  While that may be true, I suspect it will be extremely gradual.  And the yen continues to tend weaker, not stronger, as the interest rate differential is too wide for traders and investors to ignore.  As well, it is fair to ask if Japan is really concerned about the level of the yen, or if they truly are only concerned with a slow and steady movement.  

Before the PMI data, we see Initial (exp 220K) and Continuing (1799K) Claims and the Chicago Fed National Activity Index (0.16).  Then, at 10:00 we see New Home Sales (680K) which are following yesterday’s much softer than expected Existing Home Sales data.  It seems clear that there is an ongoing problem in the housing market.  Finally, this afternoon, Atlanta Fed president Rafael Bostic speaks, and it will be quite interesting to hear his views now in the wake of the Minutes.

While actions speak louder than words, yesterday’s FOMC Minutes certainly have given me pause regarding my view that they were going to ease policy more quickly than inflation data may warrant.  That should help support the dollar and keep pressure on risk assets.  Of course, given the ongoing euphoria over AI and the Nvidia earnings, I don’t expect equity traders to care much about that at all.

Good luck

Adf

Likely Passé

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The markets continue to snooze
Although today we’ll get some news
But Home Sales don’t spark
A narrative arc
About which most folks would enthuse
 
As well, given all that they’ve said
Those dozens of folks from the Fed
The Minutes today
Are likely passé
So, markets will head back to bed

 

Another very lackluster session yesterday resulting in marginal equity gains in the US as the dearth of new information continues to weigh on trading volumes and overall activity.  Of course, the one thing we did get yesterday was another tsunami of Fedspeak but all of it was the same as what we have already heard.  There is no need to go into details but suffice to say that the theme remains, April’s CPI reading was encouraging, but not nearly enough to consider rate cuts soon.  Instead, while they all believe that inflation will continue to head back to their 2% goal (although none of them have explained why they believe that) it appears that the first cut is not likely to be warranted before the fourth quarter.  In fact, it seems that several FOMC members are lining up with a December cut in mind although the Fed funds futures market continues to price a 60% probability of that first cut coming in September.

But here’s the thing I don’t understand; why are they so keen to cut rates at all?  This is the actual language in the Federal Reserve Act as amended in 1977 [emphasis added]:

“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

As is typical with legislation, there is no specificity as to what each of these terms mean and thus, they are open to interpretation by each Fed chair.  For instance, prior to 2012, the concept of stable prices did not have a numeric attachment, and, in fact, when Alan Greenspan was Fed chair, he explicitly mentioned that 0% inflation was indicated.  However, Ben Bernanke determined that in the wake of the GFC, a numeric definition would be appropriate and that is how we got the 2% target.

On the employment question, the economic concept of NAIRU (non-accelerating inflation rate of unemployment) had been the north star for the Fed for decades and that number had typically been estimated at 5% +/- a bit.  The concept is that there is a theoretical unemployment rate below which wage pressures will rise and drive inflation higher and above which the opposite will occur.  However, just like the Fed’s other imaginary friend, R*, NAIRU is not observable, and nobody knows where it is.  Recent indications are that it is at a much lower level than previously thought as evidenced by the fact that Unemployment (ignoring the pandemic activity) was able to hover below 4% without any inflationary pressures of note.  At least that was true until the pandemic response flooded the economy with massive amounts of liquidity and funding directly to the population via stimulus checks.  But, as I said, nobody really knows what that level is, and so the concept of maximum employment is extremely nebulous.

Finally, moderate long-term interest rates are another bridge too far for the Fed given its ordinary operations.  While the Fed clearly controls the short end of the curve via the Fed funds markets and its interest payments on reserves, the long end of the interest rate curve is a completely different story.  Certainly, QE was a direct effort to impact long-term interest rates and was quite successful at lowering them, although the definition of moderate remains missing in action.  For instance, a look at the below chart with data from the FRED database shows that the long-term average 10-year yield (my definition of long-term interest rates in this context) is 5.56%.

Source: data FRED database; calculations @fx_poet

With this in mind, the current level of 4.45% or so remains relatively low, not high, and so the idea that rate cuts are necessary to meet the Fed’s mandate seems disingenuous at best.  This is especially true given that inflation is still well above their target of 2%.  Unless there has been a complete sea change of economic theories at the Fed where suddenly higher interest rates are inflationary*, not deflationary, it seems that there is something else at play here.

In the end, my point is that Fedspeak, which is widely followed, usually highlights that there is no guiding star as to what they want to achieve.  As well, their definitions are apt to change quickly if there is a perceived political expedient.  However, I will say that at the current moment, it certainly appears the entire committee is on the same page and wants to cut rates but cannot come up with an excuse they believe the market will accept as real.

Essentially, this was all a preamble to today’s FOMC Minutes release, which given just how much Fedspeak there has been between the meeting and today indicates there is very little new information likely to be revealed.  In the meantime, markets overall remain quiet and rangebound with commodities the lone exception.

Equity markets overnight were mixed in Asia while European bourses are marginally lower (albeit still near all-time highs) and US futures are essentially unchanged yet again.  Bond yields are rising a bit with Treasuries higher by 3bps and European yields higher by 4bps with an outlier UK rise of 10bps after a much hotter than expected inflation reading this morning (3.9% vs. 3.6% expected) reduced the chance of a rate cut next month.  And finally, 10-year JGB yields broke through the 1.00% level last night although the JPY (-0.15%) is actually weaker on the news.

Commodities, though, continue to be the most interesting story around with oil (-0.7%) slipping further after a bigger than expected inventory build from the API data as well as news that the Biden administration is looking to release a portion of gasoline inventories into the market to lower prices ahead of the election.  In the metals markets, the big three are softer again this morning (Au -0.4%, Ag -085%, Cu -2.3%) although on the charts, all remain above key support levels.  It can be no surprise that they are consolidating after their massive runs of the past week or two.

Finally, the dollar is tracking Treasury yields higher with strength almost across the board.  The notable exception is NZD (+0.4%) which has rallied after the RBNZ, while maintaining interest rates unchanged, was far more hawkish in their commentary and indicated they discussed further rate hikes given inflation’s stubbornness overall.  But otherwise, ZAR (-0.8%) is the worst performer, which given the metals market moves should be no surprise, but the dollar’s strength is otherwise universal.

On the data front, as well as the Minutes this afternoon, we see Existing Home Sales (exp 4.21M) at 10:00 and then the EIA oil inventory data at 10:30.  Mercifully, there are no Fed speakers scheduled today, although I wouldn’t be surprised if one gets interviewed somewhere.

Rumors of the dollar’s demise seem badly overblown, and it remains tightly linked to the move in US yields.  Unless we see yields take a serious step lower, I suspect the dollar is likely to remain well bid overall.

Good luck

Adf

*As an aside, several years ago Turkish President Erdogan made this case and kept firing central bankers who wanted to raise interest rates in Turkey to fight their significant inflation problems.  At that time, the economics profession ridiculed the idea completely.  However, lately, there have been a number of articles published that have made the case Erdogan was correct.  Of course, that seems to be an effort to encourage the Fed to cut rates despite high inflation.  As of yet, this brainworm has not infected Chairman Powell, but who knows what will happen as the election approaches.

Soothsay

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On Monday, we heard the first five
Fed speakers, as all of them strive
To make a clear case
As why there’s no place
For cuts, lest they see a crash-dive
 
Amazingly, later today
We’ll hear seven others soothsay
Inflation’s still falling
Although it was stalling
Last quarter, much to our dismay

 

As Queen Gertrude noted in Shakespeare’s Hamlet, “The lady doth protest too much, methinks.” This is the first thing that comes to mind as we face yet another seven Fed speakers today (at eight venues, Mr Bostic will speak twice) in their effort to effectively communicate their current strategy, whatever that may be.  The very fact that we will have heard from a dozen of the nineteen FOMC members in the first two days of the week implies to me that the FOMC has absolutely no confidence that market participants are on the same page as they are.

My first observation is they really don’t have any idea what to do to achieve their goals.  Whatever their models are telling them, it is not aligned with the reality on the ground around the nation.  This is the most benign explanation I can see for their actions.  History has shown that the Fed PhD’s all believe very strongly in their models and when the models don’t accurately describe the economy, their first instinct is that the economy is wrong and that the people who make up the economy are not behaving properly because they don’t understand the beauty of the models and why the model should be correct.  This is akin to the government complaining that things are great and those who say otherwise just don’t understand things well enough.  Not surprisingly, this leads to overcommunication as the in-house view is the messaging is the problem, not the reality.

A less benign view is that they are politicking quite hard to ensure that the current administration is re-elected because they have a significant fear of a change of control at the White House.  As such, they believe that a constant drumbeat of ‘things are going to get better, and we are doing a great job’ will allay any fears that the current administration’s policies have resulted in the inflation that has been the main feature of the nation’s very clear unhappiness.

Perhaps the thing I understand less, though, is why any market participants even care about what Fed speakers say right now.  After all, yesterday’s comments were so closely aligned that a single speech would have sufficed.  I am quite certain that today’s messages will be similarly aligned both amongst themselves and with yesterday’s message.  The one thing that is very clear is that Chairman Powell has them all singing from the same hymnal.

And for those of you who have not been paying close attention, the message, in a nutshell, is that Q1 inflation was disappointingly high and so while April’s data was a bit better, they still do not have confidence that inflation is going to quickly head back to their 2% target so will maintain the current, restrictive, policy for as long as necessary.  It strikes me as unnecessary to have a dozen FOMC members repeat this message in a short period of time.

At any rate, given the remarkable lack of new information, other than the Fedspeak, which as I explain above is hardly new, let’s look at the markets overnight.  Yesterday’s US equity markets mixed performance was followed by weakness throughout Asia with Japan (-0.3%) slightly lower and Hong Kong (-2.1%) sharply lower and a lot more red than green throughout the region.  Of course, given the recent rally we have seen, it is not that surprising to see some consolidation.  European bourses are all lower this morning with losses ranging from Spain (-0.25%) to France (-1.0%) and everything in between.  There has been precious little new information here either, so again, given most of these indices are near record highs, some consolidation is inevitable.  Finally, US futures are little changed at this hour (7:30) as the market awaits idiosyncratic news for individual stocks as well as Nvidia earnings later this week.

In the bond market, quiet is the name of the game with Treasury yields edging lower by 2bps this morning, but really, just back to where they were yesterday morning.  Across Europe, the sovereign market is mixed with Switzerland (+3bps) the worst performer and the UK (-2bps) the best but most markets unchanged on the day.  Unchanged also describes the Asian session as JGB yields didn’t budge.

In the commodity markets, oil (-1.5%) is under pressure this morning, following yesterday’s modest declines as clearly there are no concerns over the situation in Iran regarding the death of the president there yesterday.  As to the metals markets, which in fairness have been FAR more exciting, more record highs yesterday are seeing a bit of consolidation this morning, although the declines in precious, (both Au and Ag -0.25%) are modest.  However, copper (+0.7%) knows no top as it continues to rally on the growing understanding that there is a long-term supply/demand mismatch, and it will be a sellers’ market going forward.

Finally, the dollar is basically unchanged this morning as while it has fallen from the recent highs at the beginning of the month (DXY at 106.40), there is very little follow through selling of the dollar now that US yields have stopped declining.  Recall, Treasury yields are lower by about 25bps in the same period but have stopped their decline as well.  The largest movers overnight have been KRW (-0.3%), which suffered after a weaker than expected Consumer Confidence reading and NOK (+0.3%) which is odd given oil’s recent weakness but absent any other related news.  Sometimes, markets simply move.

And that’s all there is today.  The Fedspeak starts at 9:00 with Richmond’s Thomas Barkin and Governor Chris Waller at separate venues, and last all day into the evening when Bostic, Collins and Mester speak at 7:00pm.  My money is on the idea that there will be nothing new learned from any of them.

As such, we remain in a holding pattern, I think.  US rates are finding a home around 4.4% and the dollar index at 104.50 seems pretty comfortable as well.  While later in the week we start to see some new information, I fear that until next week’s PCE data, we could well be stuck in a pretty narrow range.

Good luck

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None Be Unique

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When looking ahead to this week
The noteworthy thing is Fedspeak
At least fifteen times
They’ll give us their dimes’
Worth of knowledge, though none be unique
 
For instance, we already know
Their confidence is rather low
So, absent new data
Do they have schemata
Designed to get ‘flation to slow?

 

Arguably, the biggest news this morning is the death of the Iranian President and Foreign Minister in a helicopter crash overnight as it opens a range of possibilities regarding the future stance of Iran in the Middle East.  Will it remain the strict theocracy that it has been?  Or will a new leadership recognize the people appear to be growing tired of that stance and want something different.  While it would seem unlikely that there will be a major change, at least from this view thousands of miles away, if one were to come about, it would have a major impact on the Middle East and the ongoing conflict in Gaza.  After all, if Iran stopped funding terrorist groups, that would de-escalate things dramatically and potentially see a significant decline in the price of oil.  At this time, however, there is no information as to who will step into the role and what policies will be followed, so it is a wait-and-see period.  As it happens, oil prices (-0.35%) have edged lower this morning, but this is hardly a sign of anything new.  This will be quite critical to watch going forward.

However, beyond that, there has been vanishingly little new information about which to speak regarding the macroeconomic situation around the world.  The Chinese left their policy rates unchanged, as universally expected, and there has literally not been any other data from any major nation since Friday.  In fact, looking ahead at the calendar for the week, arguably the most significant piece of data to be released is Canadian CPI, or perhaps UK CPI and then on Friday we see the Flash PMI reports. 

Which brings us back to the Fedspeak.  It is staggering to think that the FOMC believes they need to be so visible at this time, especially after Chairman Powell explained that rate hikes were off the table and that while it may take a little longer than they had initially expected, they were still certain that inflation was going to head back to their 2% target.

Speaking of inflation, over the weekend I was reading some analysis (sad, I know) that highlighted if the US used the European HICP calculation the core reading would already be below their target with April’s data coming in at 1.9%.  To me this is a similar stance to what we heard at the end of 2023 when numerous pundits were explaining that the 3-month trend or the 6-month trend was already at 2.0% so why wait to cut?  Of course, the sticky inflation camp (this poet included) was quick to hoist them on their own petard as the recent 3-month and 6-month trends are pointing to 4+% CPI readings going forward.  

In this particular instance the question I would ask is, other than the fact that the reading is lower, why would anyone think that the European HICP inflation reading is a more accurate representation than the BLS representation?  The difference lies in the fact that HICP doesn’t incorporate housing price changes, which given they remain stubbornly high, have been supporting higher CPI readings.  But don’t people pay for their housing?  Certainly, it would be easy to create a lower CPI if you simply remove all the items that are going higher in price.  Unfortunately, that process doesn’t really tell you anything about reality.

Below is a very interesting chart I found on X (nee Twitter) created by Professor Alberto Cavallo of Harvard and Oleksiy Kryvtsov, a Bank of Canada economist, which may be a better description of inflation as felt by the average person.

The fact that prices are rising fastest for the least expensive goods indicates that inflation is a major problem for Joe Sixpack, and no matter how pundits seek to adjust the measurement, so the numbers look better, reality is a harsh mistress.  (If you want to know why President Biden’s numbers are so bad, you needn’t look further than this chart.)  

Alas, there is no escaping the plethora of blather that will be coming from the Fed this week, although I sincerely doubt any of it will change anyone’s opinions about anything.  Ok, it was another generally quiet session overnight with the exception being the ongoing blast higher in metals markets.

Equity markets have performed well across the board, although the gains have not been too dramatic.  Japan (Nikkei +0.7%) was the best performer although the entire region was in the green to a lesser extent, about 0.35% or so.  In Europe, all the bourses are higher as well, but here the gains are even smaller, on the order of +0.25% across the board while US futures are essentially unchanged at this hour (6:30).

In the bond market, Treasury yields, which backed up 2bps on Friday are unchanged this morning while European sovereigns are higher by roughly 1bp across the board.  ECB speakers have conceded that a rate cut is coming in June, but many are pushing back hard against the idea that a July cut is a sure thing, preferring to wait until September.  However, the really interesting thing is in Japan, where JGB yields have traded up to 0.98%, a new high yield for this move and a level not seen since March 2012.  At this point, it would seem that 1.00% is a foregone conclusion so it will be interesting to see how the BOJ responds when that ‘magic’ number is finally traded.

But, as I mentioned above, it is a metals day with gold (+0.9%), silver (+1.1%) and copper (+0.9%) all continuing last week’s strong gains with gold making yet further new highs, copper pushing its historic highs and silver breaking above a key technical resistance level at $30/oz last week and now extending those gains.  While there have been many explanations for this price movement, I think you need to consider precious and industrial metals separately.  For precious, there continues to be a growing concern in the ongoing debasement of the fiat currency universe and both individuals and central banks are seeking to hold alternative assets.  On the industrial side, though, especially copper and silver which are both critical to electronics, the ten-year hiatus in investment due to the ESG cult combined with the recent recognition that all the new-fangled tech wizardry like AI is going to require gobs of power and electrical capacity has simply skewed the supply/demand curve to much more demand than supply.

Finally, the dollar is little changed this morning, pretty much at the same level overall since Thursday.  Given the lack of movement in the rates space, this ought not be a surprise.  It also ought not be surprising that the best performing currencies of the past week have been CLP (+3.5%) as it has simply traveled alongside its major export, copper, and ZAR (+5.1%) as it rallies alongside the precious metals complex.  Meanwhile, there has been no movement in the interest rate narrative with, perhaps, the exception of Japan, but what we have learned there lately is that higher JGB yields lead to a weaker yen.  Go figure!

On the data front, as I said earlier, it is extremely light this week,

WednesdayExisting Home Sales4.22M
 FOMC Minutes 
ThursdayInitial Claims220K
 Continuing Claims1799K
 New Home Sales680K
FridayDurable Goods-0.7%
 -ex Transport0.1%
 Michigan Sentiment67.6
Source: tradingeconomics.com

It is not clear, given how much we have already heard from Fed speakers since the last FOMC meeting, that the Minutes will be very informative.  Perhaps the discussion about QT will change some minds, but I doubt it.  Otherwise, if stocks continue to rally, market players will be happy and not try to rock the boat.  Meanwhile, the dollar will need a new impetus to break out of this narrow range, but that may not come until next month’s NFP data.

Good luck

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Naught to be Gained

Posted on by 
It now seems inflation has stalled
Which has bond investors enthralled
But Fedspeak explained
There’s naught to be gained
By cutting ere its, further, falled

Meanwhile, data China released
Showed Retail Sales nearly deceased
But factories still
Produce stuff at will
Thus, exports have widely increased

It has been quite a week with respect to the data that has been released as well as regards the ongoing commentary onslaught from central bank speakers around the world.  A quick recap shows that market participants have decided they know what is going to happen in the future (the Fed is going to start cutting rates and continue doing so) while every member of the Fed who has spoken has claimed just the opposite, that there is no reason for the Fed to adjust policy at this time given the still too high inflation readings and the seeming appearance of ongoing economic strength.  I continue to marvel at the ‘narrative’ which for 15 years warned, ‘don’t fight the Fed’ which was in its historic process of driving rates to and maintaining them at essentially 0.00%.  And yet now, those very same pundits listen to every Fed speaker with bated breath and conclude that despite their insistence that rate cuts are not coming anytime soon, rate cuts are just around the corner so ignore the Fed and buy risk assets.

My observations on this conundrum are that first, the market is much bigger than the Fed or any central bank or even all the central banks put together.  So, if the market is of the mind to continue to add risk to their portfolios for whatever reason, risky assets will increase in price.  However, the central banks are not irrelevant to the process as they do control short-term interest rates (aka funding costs) directly and can have great sway on long-term interest rates through both commentary and the ability to intervene in those markets a la QE or QT.  In other words, the battle has been joined and while I expect the market will ultimately go wherever it wants to, the central banks will have something to say about the path taken to get there.  So, do not be surprised if there are some downdrafts along the way to higher prices.

Remember, too, that central banks have a great deal to do with creating inflation, not merely fighting it, and if they continue to add money and liquidity to both the economy and markets, the real value of assets will not climb nearly so far and could well decline.  While this is an age-old battle, arguably having been ongoing since the first central banks were created in the 1700’s, it does have the feeling as though we are coming to a point in time where things could get out of hand in the near future.  Perhaps not Weimar Republic out of hand, but certainly 1970’s stagflation out of hand.

Turning to the only real news overnight, Chinese data was released and the dichotomy in the Chinese economy continues to be evident to one and all.  While IP printed at a better than expected 6.7%, highlighting that Chinese factories are humming, Retail Sales fell to a 2.3% Y/Y reading, far below both last month and expectations.  In other words, while China continues to build lots of stuff, it is all for export as the domestic population is not in the mood to buy.  This has led to two consequences of note.  The first is that as the Chinese trade balance continues to expand, we have seen, and will likely see more, tariffs imposed by destination markets like Europe and the US thus straining economic ties further.  Too, this is in direct opposition to the idea of reshoring of manufacturing which continues to be the political goal throughout the West.

The second impact is that President Xi has clearly recognized that a major impediment to further Chinese economic growth is the ongoing disaster otherwise known as the Chinese property market.  This is the driving force behind the recent efforts to support things via government purchase of unfinished and unsold homes with the goal of those being converted into public housing. 

Alas, there are a few problems with this plan which may hinder a smooth application of the idea.  The first problem is that the reason these homes are unfinished or unsold is that the developers have run out of money or cannot sell them at a profit.  In other words, somebody needs to take some big losses and absent a directive from Beijing I assure you none of the developers will willingly do so.  The proposed fixes of reducing the minimum mortgage rate and size of the down payment necessary to purchase a home may help at the margin but will not solve the problem.  The problem is that the losses likely approach $1 trillion, a large amount for even the national government, and so finding those who can afford to absorb those losses is a difficult task.  Certainly, some of the state-owned banks will be in the spotlight here, but they are already insolvent (if one takes a realistic look at their non-performing loans) so don’t have that much capacity to do more. 

The critical feature here is that more time is needed for companies and banks to grow via their other businesses such that they can eventually absorb those losses.  But time is not on Xi’s side here.  All told, the underlying situation in China remains fraught, in my view, and so must be viewed with care.  While the PBOC is clearly willing to prevent the renminbi from collapsing, such an unbalanced economy is going to display a great deal of volatility going forward.

Ok, did markets do anything interesting overnight?  In truth, not really.  After yesterday’s modest declines in the US equity markets, Asian markets were mixed with Japan, Australia, Korea and Taiwan all under pressure while Chinese and Hong Kong shares rallied sharply on the back of the property proposals.  This morning, European bourses are mostly a bit softer as it seems that while a June rate cut is baked in, there has been significant push-back against a following cut in July, a story which had gained great credence lately.  Meanwhile, at this hour (6;45) US futures are ever so slightly lower, -0.1% across the board.

In the bond markets, after the post CPI yield decline in the US on Wednesday, yields have been backing up since their nadir and are now nearly 8bps higher from the bottom with 2bps this morning’s contribution.  European yields have shown similar price action, falling through Wednesday evening and bouncing since then.  As to the JGB market, yields there have backed up a bit as well, now trading at 0.95%, but have not yet been able to touch the big 1.00% level.  The irony is that USDJPY has been trading in sync with JGB yields, so as they climb, so does the dollar!  That is not what the narrative had in mind; I assure you!

In the commodity space, oil is little changed this morning but that is after rallying $1 during yesterday’s session as the market absorbed the larger than expected draw in inventories described on Wednesday.  As well, the idea that the Fed is soon going to cut rates and stimulate economic activity has pushed bullishness on the demand side.  As to the metals markets, they are edging higher again this morning with copper seeming to consolidate after its rocket higher and collapse earlier this week.  Adding to the copper story is that Goldman Sachs commodity analyst, Jeff Currie, said he was more bullish on copper than anything else during his career!  Based on my view that debasement of currencies remains a key feature of the current monetary regime globally, I expect metals to continue to rise as well.

Finally, the dollar continues to rebound from its lows seen Wednesday night late with the DXY having regained 0.8% since the bottom and the greenback higher versus nearly every one of its counterparts this morning.  I believe the dollar story remains closely tied to the Fed for now, and as long as the Fed maintains that rate cuts are a distant prospect, at best, it will retain its value.

The only data release this morning is Leading Indicators (exp -0.3%) which has been in negative territory for nearly two years and still no recession.  We also hear from Governor Waller, but all four Fed speakers yesterday were consistent that they do not yet have confidence inflation is falling to target and so higher for longer remains the base case.

It has been a volatile week and I expect that today will see far less activity as the lack of critical data and the fact that traders are tired from all the activity so far this week will lead to many leaving for an early weekend.  But the big trends remain intact, a higher for longer Fed will help support the dollar while the narrative will not be dissuaded and continue to buy risk assets.

Good luck and good weekend

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Losing His Doubt

Posted on by 
The jury is no longer out
And Jay may be losing his doubt
That ‘flation is slowing
So, bulls are now crowing
Let’s end, soon, this rate-cutting drought!

I am old enough to remember when Chairman Powell explained that he did not have confidence inflation was falling back to the target level and so maintaining the current, somewhat restrictive, policy stance would be appropriate for longer than had been originally anticipated.  In other words, higher for longer was still the operating thesis.  That is soooo two days ago!  Apparently, when CPI prints at 0.3% M/M for both headline and core with the Y/Y readings at 3.4% and 3.6% respectively, that means the inflation fight is won.  Now, I will grant that the headline monthly number was 0.1% below expectations, but everything else was right on the money.  On the surface, it is not clear to me that this signaled the all-clear for the end of inflation.  As my good friend Mike Ashton (@inflation_guy) said in his write-up yesterday, “the sticky stuff is not yet unstuck.”  But the market saw this news and combined with a clearly weaker than expected Retail Sales print (0.0%) and weaker than expected Empire State Manufacturing print (-15.6) and was off to the races.

So, risk is back in vogue and bond yields are tumbling.  Hooray!  This is the perfect encapsulation of how the actual data may not mean very much per se, but the framework of how investors and traders were positioned and anticipating the data is the key driving force.  So, not only did equity markets in the US rally 1% or more, but Treasury yields fell 10bps in the 10yr and 8bps in the 2yr.  Meanwhile, September is now the odds-on favorite for the first interest rate cut, politics be damned.

At this point, the question becomes will the Fed respond to this small sample of data in the same way the market has?  The first comments from Fed speakers seemed more circumspect than the market opinions.  Chicago Fed president Goolsbee, who was not on the calendar, said the following in an interview, “[inflation showed] some improvement from last time, pretty much what we expected, but still higher than we were running for the second half of last year, so there’s still room for improvement.”  Meanwhile, Minneapolis Fed president Kashkari explained, “The biggest uncertainty in my mind is how much downward pressure is monetary policy putting on the economy? That’s an unknown. And that tells me we probably need to sit here for a while longer until we figure out where underlying inflation is headed before we jump to any conclusions.”

To my eye, there is no indication that the Fed has changed their tune, at least not yet.  If we continue to see data that indicates the long-awaited recession is actually closing in, I expect that we will begin to hear more of a consensus view regarding the initial rate cuts other than the current higher for longer stance.  Of course, if a recession is making an appearance, my sense is that will not be a huge benefit for risk assets either, but what do I know, I’m just a poet. Ok, I don’t think we need to spend any more time on that subject for today so let’s see what is happening elsewhere. 

In Japan, the economic news remains less positive than the Kishida administration would like to see.  Last night, Q1 GDP was released at a worse than expected -0.5%, its second negative print in the past three quarters with Q4 a ‘robust’ 0.0% in between.  While not technically a recession, the situation there certainly does not have a positive feel.  Making things even worse, of course, is the fact that inflation remains higher than their target of 2%, although it has been slowly drifting lower over the past year. 

The interesting thing about this situation is that the BOJ does not have a dual mandate regarding prices and employment; but is focused only on price stability.  However, if economic activity continues to slow there, can Ueda-san really tighten policy further?  And what of the yen?  It has drifted higher (dollar lower) alongside the dollar’s broad down move on the back of the recent decline in US yields.  However, it feels to me like Ueda’s path to tighter policy just got a lot narrower if economic activity in Japan is going to remain so lackluster.  Many pundits have decided that the yen’s weakness reached its peak ahead of the recent bout of intervention two weeks ago.  I am not so sure.  Absent a significant slowdown in the US, I’m sensing that the policy divergence may even widen going forward, not narrow, and the yen would not respond well to that outcome.

With all that in mind, let’s survey the overnight session to see what else is happening.  Asian equity markets followed the US rally with solid gains across the board.  Clearly, the prospect of lower US rates was seen as a positive.  However, the same is not true in Europe, where bourses are all lower this morning albeit not dramatically so.  Declines of between -0.25% and -0.5% are universal.  My take is that this is a bout of profit-taking as to much less fanfare than US markets, many European bourses have just touched all-time high levels, so a little pullback should be no surprise.  This is especially true given there was neither data nor commentary that would indicate something in Europe has changed.  The situation remains slow growth, slowing inflation and rate cuts next month.  Lastly, US futures are essentially unchanged at this hour (6:45) as traders await more data and, perhaps more importantly, 4 more Fed speakers.  I think the trading community is looking for Fed confirmation of their response to the CPI data yesterday which, as mentioned above, was not forthcoming.

Bond markets, which all rallied yesterday following the Treasury move, are little changed this morning with virtually no movement in the US or Europe.  Overnight, JGB yields slipped 3bps in the wake of the US data, but this market is entirely focused on the US economy and the Treasury marker for its lead.

In the commodity markets, oil is a touch softer this morning, but remains firmly toward the middle of its recent trading range as conflicting reports regarding expected demand continue to confuse practitioners.  FWIW any report that indicates demand for oil is going to decrease makes no sense to me given how many people on this earth are energy poor and will do as much as they can to get hold of energy.  But that’s just my view.  The IEA continues to forecast reductions in demand because they are desperately pushing their transition thesis because their models are old and unreliable.  As to metals markets, yesterday saw a major rally in gold and silver, with the latter making a push for $30/oz for the first time since 2013.  Copper, however, may have seen a blow-off top yesterday as it has fallen back sharply from its peak and is now back below $5.00/lb.  In truth, the demand story here remains attractive, but the price action did seem to get out of hand there.

Finally, the dollar, which sold off hard yesterday on the CPI and Retail Sales news is bouncing slightly this morning.  Those sharply lower yields in the US, even though they were matched by Europe, were a signal to sell dollars across the board.  Thus, this morning’s 0.2% ish bounce should not be that surprising.  It is in this segment of the market that I believe the opportunity for the biggest structural changes exist.  After all, the dollar’s strength over the past 3 ½ years has been built on the Fed being the most hawkish central bank around as they belatedly fought inflation.  While they have made clear they want to start to cut interest rates, the data has not been supportive of that move.  If yesterday’s data is the beginning of a more consistent slowdown in the US, those rate cuts may be coming sooner than currently priced and regardless of what happens to risk assets, the dollar would suffer.  We shall see.

On the calendar today we have a bunch more data and four more Fed speakers (Barr, Harker, Mester and Bostic).  The data brings the weekly Initial (exp 220K) and Continuing (1780K) Claims, Housing Starts (1.42M), Building Permits (1.48M) and Philly Fed (8.0) all at 8:30 then IP (0.1%) and Capacity Utilization (78.4%) at 9:15.  As Chairman Powell has repeatedly explained, he and his colleagues look at the totality of the data, so another wave of soft numbers here would likely get risk asset markets excited.  However, listening to what they have all continued to say informs me that the Fed is not nearly ready to cut rates.  September remains the odds-on favorite for the first cut, but I still suspect that they could be here all year long.  If I am right about that, the dollar will retain its bid overall.

Good luck

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Missing in Action

Posted on by 
The PPI data was shocking
Though previous months took a knocking
So, what now to think
Will CPI sink?
Or will, rate cuts, it still be blocking?

One of the features of the world these days is that the difference between a conspiracy theory and the truth has shortened to a matter of months.  I raise this issue as yesterday’s PPI data was remarkably surprising in both the released April numbers, with both headline and core printing at MUCH higher than expected 0.5%, while the revisions to the March numbers were suspiciously uniform to -0.1% for both readings.  The result was that despite the seeming hot print, the Y/Y numbers for both core and headline were exactly as forecast!

One of the things we know about data like PPI and CPI is that they are calculated from a sampling of data of the overall economy and there are fairly large error bars for any given reading.  In that sense, it cannot be surprising that the data misses forecasts regularly.  As well, given the sampling methodology, the fact that there are revisions is also no surprise.  But…it would not be hard for someone to suggest that the Bureau of Labor Statistics, when it saw the results of the monthly readings, manipulated the data to achieve a more comforting (for the current administration, i.e., their bosses) result.  I am not saying that is what happened, but you can see how a committed conspiracy theorist might get there. Now, in fairness, a look at the headline reading, on a monthly basis, for the past year, as per the below chart, shows that this is the 4th month in 12 that there was a negative reading.

Source: tradingeconomics.com

So, the fact that the revision fell to a negative number cannot be that surprising.  But it certainly got tongues wagging!  FWIW, I continue to believe that the process is where the flaws lie and that the BLS workers are trying to do their job in the best way they can.  In the end, though, much more attention will be paid to this morning’s CPI than to yesterday’s PPI.

For Jay and his friends at the Fed
His confidence ‘flation is dead
Is missing in action
Henceforth the attraction
That higher for longer’s ahead

Which brings us to Chairman Powell and his comments at the Foreign Bankers’ Association in Amsterdam yesterday.  In essence, he didn’t change a single thing regarding his views expressed at the last FOMC meeting, explaining he still lacked confidence that inflation would be reaching their 2.0% target soon.  As such, there is no reason to believe that the Fed is going to cut rates anytime soon.  As of this morning, the Fed funds futures market has a 9% probability of a rate cut priced for June, up from 3% yesterday, and a total of 45bps of cuts priced for the year.  There is obviously still a strong belief that the Fed will be able to act, although I am not sure why that is the case.  Interestingly, on the same panel, Dutch Central Bank president Klaas Knot essentially guaranteed an ECB cut in June.  As well, yesterday morning we heard Huw Pill, the chief economist at the BOE also talk up the probability of a June cut.  From a market response perspective, though, given these cuts are largely assumed, it will take new information to drive any substantive movement in the FX markets.

Here’s one thing to consider for everyone pining for that rate cut.  Given the history of the Fed always being behind the curve when it comes to policy shifts, if they realize they need to cut it is probably an indication that things in the US economy have turned down rather rapidly.  We may not want to see that either.  Just sayin!

In China, a new idea’s floated
Though not yet officially quoted
In thinking, quite bold
All houses, unsold,
Will soon be, for homeless, devoted

Ok, let’s move on from yesterday to the overnight session and then this morning’s CPI and Retail Sales reports.  The first thing to note was the story from Beijing that in an effort to deal with the ongoing property crisis in China, the government, via regional special funding vehicles that borrow more money, is considering buying all the unsold homes from developers, at a steep discount, and then converting them into low-cost affordable housing.  In truth, I think this is an inspired idea on one level, as it would allocate a wasted resource to a better use.  On the other hand, the idea that the government would issue yet more debt seems like a potential future problem will grow larger.  As of now, this is not official policy, but the leak was clearly designed as a trial balloon to gauge the market’s response.  Not surprisingly, the response was that the Shanghai property index rose sharply, but the rest of the Chinese share complex was in the red.  At the same time, the PBOC left rates on hold last night, as expected, but the CNY (+0.3%) managed to rally nicely on the combination of events.

But away from that China story, very little of note happened as all eyes await the CPI later this morning.  After yesterday’s somewhat surprising rally in the US, Asia beyond China had a mixed performance with some gainers (Australia, Taiwan, South Korea) and some laggards (Hong Kong, New Zealand, Singapore) as investors adjusted positions ahead of the big report.  In Europe, too, the picture is mixed although there are far more gainers than laggards.  In the end, none of the movement is that large overall, so also indicative of waiting for the data.  Finally, it will be no surprise that US futures are basically flat at this hour (6:30).

In the bond market, traders decided that the hot April number was to be ignored and instead have accepted the idea that inflation is not really that hot after all.  At least that is what we might glean from the price action yesterday and overnight where yields initially jumped a few basis points before grinding down over the session and closing lower by 4bps.  This morning, that decline has continued with a further 2bp drop in Treasuries.  In Europe this morning, sovereign yields are seeming to catch up to the Treasury price action with declines across the board of between 6bps and 8bps.  Part of that is also a result of changing expectations for Eurozone growth and inflation with a growing belief that inflation is headed lower and the ECB is set to cut and continue to do so going forward. 

In the commodity markets, the big story has been copper (+2.4%), which has rallied parabolically and is currently above $5.00/lb, a new all-time high.  This takes the movement this week to more than 10% and more than 36% in the past year.  The electrification story is gaining traction again, and I guess the fact that nobody is digging new mines may finally be dawning on traders.  Precious metals are coming along for the ride with gold rebounding (+0.4%) on this story as well as the dollar’s recent weakness.  As to the oil market, it is little changed this morning in the middle of its recent trading range.  Perhaps today’s EIA inventory data will drive some movement.

Finally, the dollar is under modest pressure this morning after slipping a bit during yesterday’s session as well.  The combination of the Powell comments being seen as dovish and the interpretation of the PPI data in the same manner (which seems harder for me to understand) weighed on the greenback against virtually all its counterparts.  It should be no surprise that CLP (+0.9%) is the biggest winner given the move in copper.  But JPY (+0.5%) has also performed well with no new obvious catalysts.  In fact, the movement has been quite broad with the worst performers merely remaining unchanged vs. the dollar rather than gaining.  However, this morning’s data is going to be critical to the near-term views, so we need to wait and see.

As to the data, here are the current forecasts: CPI (0.4% M/M, 3.4% Y/Y), core CPI (0.3% M/M, 3.6% Y/Y), Retail Sales (0.4%, 0.2% ex autos) and Empire State Manufacturing (-10.0).  In addition, we hear from two Fed speakers, Minneapolis Fed president Kashkari and Governor Bowman.  However, on the Fed speaker part, especially since Powell just reinforced his post-FOMC press conference message, it seems hard to believe that there will be any changes of note.

And that’s all she wrote (well he).  A hot print will likely be met with an initial risk-off take with both equity and bond markets suffering, but I suspect that it will need to be really, really bad to change the current narrative.  However, a cool print seems likely to result in a major rally in both stocks and bonds and a much sharper sell-off in the dollar.

Good luck

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Less Stout

Posted on by 
Suzuki-san and
Ueda-san are clearly
Flocking together

Events continue to unfold in Japan that appear to point to a more concerted effort to address the still weakening yen.  The problem, thus far, is that it hasn’t yet really worked, absent the direct intervention we saw at the beginning of the month.  For instance, last night, 10-yr JGB yields rose to their highest level since June 2012, trading up to 0.969% and finally looking like they are going to breech that 1.00% level that had so much focus back in October.  At the same time, the two key players in this drama, FinMin Suzuki and BOJ Governor Ueda are actively speaking to each other as they try to coordinate policy.  The problem for Suzuki-san is that Q1 GDP fell back into negative territory again, thus bringing two of the past three quarters down below zero.  While that is not the technical definition of a recession, it certainly doesn’t look very good.

And yet, the yen remains under pressure, slipping another 0.1% last night, and as can be seen from the chart below, continuing its steady decline (dollar rise) from the levels seen immediately in the wake of the intervention.

Source: tradingeconomics.com

Another interesting thing is that our esteemed Treasury Secretary, Janet Yellen, seems to be concerned over any intervention carried out by the Japanese, at least based on comments she recently made in a Bloomberg interview, “It’s possible for countries to intervene.  It doesn’t always work without more fundamental changes in policy, but we believe that it should happen very rarely and be communicated to trade partners if it does.” 

There have been several analysts of late who have made the case that Yellen’s trip to Asia last month included a ‘secret’ Plaza Accord II type arrangement, where there was widespread agreement that the dollar needed to come down in value.  First off, secrets like that are extremely difficult to keep secret, and history shows that doesn’t happen very frequently.  But more importantly, based on the fact that inflation is one of the biggest problems that her boss has leading up to the election, a weaker dollar is the last thing she would want.  I suspect if we continue to see the yen decline, the BOJ/MOF will be back at the intervention game again, but the US will not be helping.  Keep in mind, though, Japanese yields.  If the BOJ is truly going to allow yields to rise in Japan, that would have a significant impact on the yen’s value in the FX markets.  While 1.00% is a big round number, I think we will need to see the BOJ demonstrate a more aggressive stance overall…or we need to see the data turn softer in the US to allow the Fed to get on with their much-desired rate cuts.  We will need to watch this closely going forward.

While everyone’s waiting to see
How high CPI just might be
One cannot rule out
An outcome less stout
Where bond and stock bulls are set free

Which brings us to the inflation story.  By this time, everyone is aware that tomorrow’s CPI data is seen as a critical piece of the puzzle.  I continue to read coherent arguments on both sides of the debate regarding the trend going forward.  (Let’s face it, the error bars are far too wide to be confident in a specific forecast.)  For the inflationistas, they continue to look at things like the housing market, which while frequently expected to see declining price pressures, has maintained an upward trend for the past several years.  As well, things like the dramatic rise in certain commodity prices (coffee comes to mind) and the substantial rise in the price of insurance (something of which I speak from personal experience!), there is ample evidence that prices continue to climb. 

Part of this puzzle may be the result of the fact that companies continue to successfully raise prices, or at least had been doing so for the past two years, as evidenced by the continued strong earnings, and more importantly, still high gross margins they are able to achieve.  So, as input prices have risen, they have passed those costs along to the consumer quite successfully.  Now, the comments from Starbucks and McDonalds at their earnings reports indicating business is slowing down and attributing that slowdown to rising prices may well be a harbinger that companies have lost the ability to keep this up.  But two companies, even large ones, are not nearly the whole economy.  As well, much has been made, lately, of the K-shaped economy, where the haves continue to benefit from the rise in asset prices and are far less impacted by rising prices as they can afford them.  This has led to continued strong demand for luxury goods, which while a smaller sector of the economy, remain highly visible. Meanwhile, the less fortunate lower 90% of the population find themselves struggling to make ends meet as real wages remain stagnant and there continues to be a switch from full-time to part-time employment ongoing as companies adjust their staffing needs.  PS, those part time jobs don’t pay as well and generally don’t have benefits, so any price increases are very tough to swallow.  In the end, it appears that housing, insurance services and food remain in upward price trends.

On the flipside, there are many who see that while Q1’s inflation data was sticky on the high side, things should begin to improve going forward.  They point to things like M2, which has fallen dramatically over the past two years, although has recently inflected higher again.  However, the argument is that the lag between the movement in M2 and inflation is somewhere in the 16-24-month period, and we are now due to see prices decline.  In addition, they point to things like loan impairments and credit card delinquencies rising as signs that companies have lost their pricing power and prices will reflect that by slowing their ascent.

Now, today we see the PPI, which may give clues as to tomorrow’s outcome and the following are the median expectations:  headline 0.3% M/M, 2.2% Y/Y; core 0.2% M/M, 2.4% Y/Y.  Looking at the chart, it certainly appears that this statistic has bottomed out just like CPI.

Source: tradingeconomics.com

But here’s the thing…I have a feeling that regardless of the outcome, the market is going to rally in both stocks and bonds.  Certainly, if it is a softer than forecast number, the rate cut narrative is going to be going gangbusters and stocks will rocket while yields fall.  If it is on the money, my sense is the market is still in the camp that despite what we continue to hear, especially with Powell having removed the possibility of a rate hike, that the view will turn to rate cuts are coming as the Fed’s underlying dovishness will prevail.  But if the numbers are hot, while the initial reaction will almost certainly be a decline in risk asset prices, I have a feeling it will be short-lived.  Positioning is not overly long here, at least according to the fear/greed indicators, and the theme that the administration will do all it can to get re-elected, meaning lots more fiscal support, is going to work in favor of risk assets.  One other thing, if there is some trouble in the bond market, the one thing we know for sure is that Powell will come to the rescue and support the whole structure.

Net, while the timing of each outcome may differ, I sense the end result will be the same.  As to the dollar, I remain in the camp that international investors will continue to buy dollars to buy the S&P.  As well, given it seems very clear that both the ECB and BOE are going to cut rates in June while the Fed remains a much lower probability to do so, that should prevent any sharp dollar decline, although it may not push it any higher.

Overnight, basically nothing happened as everybody is holding their collective breath for tomorrow.  Maybe today will be a harbinger, but I expect a generally slow session overall absent a HUGE surprise in PPI.

Good luck

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Bears Will Riposte

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With CPI later this week

And many Fed members to speak

The news of the day

Is China’s array

Of debt issues they will soon seek

 

However, what matters the most

For markets is Wednesday’s signpost

If CPI’s cool

The bulls will still rule

But hot and the bears will riposte

 

While we all await Wednesday’s CPI data with bated breath, there are, in fact, other things happening in the world that can have an impact on markets and economies as well as on the narrative.  The story that seems to be getting the most press today is the leaked plans of China’s ultra-long bond issuance that was first hinted at two weeks ago.  The details show they are planning to issue, as soon as next Friday, the first tranche of 20-year bonds, with 50-year bonds coming in June and then the lion’s share of the issuance, 30-year bonds, due by November.  The total amount to be issued is CNY 1 trillion split as CNY 300 billion of 20-yr, CNY 600 billion of 30-yr and CNY 100 billion of 50-yr.

The reason this story is getting so much press is that the natural consequence of this issuance is that the national government is going to be spending that money on numerous projects, mainly infrastructure it seems, in an effort to ensure they achieve President Xi’s 5% GDP growth target for 2024.  This has knock-on implications for inflation, as it is unlikely that China’s disinflationary impulse can extend greatly with all this additional spending, and for markets as there will be clear impacts on Chinese interest rates, the CNY exchange rate and Chinese equity markets.  After all, CNY 1 trillion (~$138 billion) is a lot of money to push through in a short period of time so there will undoubtedly be some leakage from real economic activity into financial actions, and ultimately, that money will impact the performance of many companies to boot. 

A funny thing about leaked information is often the timing of those leaks.  After all, I’m pretty sure that it was no accident that this news managed to escape into the wild on the day after China’s loan data showed some pretty awful results.  For instance, what they term Total Social Financing, which is defined as a broad measure of credit and liquidity in the economy, FELL CNY 200 billion in April, the first decline in the history of the series since it began in 2002.  As well, New Yuan loans fell to CNY 730 billion, far below forecasts of CNY 1.2 trillion and down substantially from March’s data.  While this was not a historic low amount, it was definitely in the lower decile of readings and an indication that economic activity is just not doing much there.

As it happens, given the news was more about the specific timing than the idea of the issuance, the impact on the yuan was limited as it has barely moved.  Onshore Chinese equity markets did erase some early losses to close flat on the day after the news leaked into the market and Hong Kong shares rallied nicely, up 0.80%. 

But in truth, beyond this story, there has been very little of interest as all eyes turn to Wednesday morning’s CPI release.  I will offer my views on how that may play out tomorrow, so for now, let’s just quickly survey the overnight session and take a look at what is on deck this week, especially given the number of Fed speakers we shall hear.

Away from the Chinese markets, the only other equity market in Asia with a major move was Taiwan’s TAIEX (+0.7%), clearly benefitting on the idea that some of that money would head across the Strait, with the rest of the region +/- 0.2% or less.  Again, waiting for CPI is still the major idea.  This is true in Europe as well, although the bias is for very small losses, on the order of -0.2% or less, rather than the small gains seen in Asia.  Not surprisingly, US futures are virtually still asleep at this hour (6:45) and unchanged from Friday’s levels.

In the bond market, yields are edging lower by 2bps pretty much across the board, with Treasuries leading the way and virtually every European sovereign following suit by the same amount.  As always, the US market remains the dominant player here.  In Japan, though, yields crept higher by 3bps after the BOJ explained that they would be reducing their QQE purchases to ¥425 billion, from ¥475 billion last month.  Perhaps they really are trying to tighten policy!

In the commodity markets, oil (+0.6%) is edging higher after a generally rough week last week.  There has been no new news here, so this is all simply trading machinations.  Of more interest are the metals markets with copper (+0.9%) continuing its recent rally as it responds to the Chinese infrastructure spending news.  However, precious metals are under pressure today with gold (-0.75%) having a great deal of difficulty finding a bid as the market argument of whether inflation is picking up or not remains untested.

Finally, the dollar is mostly little changed with only a few currencies showing any life this morning, all in the EEMEA bloc.  ZAR (+0.4%) is firmer despite gold’s decline, as traders focus on hints that the SARB is going to maintain its tight monetary policy for even longer, not following the ECB when they cut in June.  Meanwhile, CZK (+0.5%) rallied on stronger than expected CPI data with the M/M number coming at +0.7% and talk that the central bank will be holding firm for longer than previously anticipated.

Looking at this week’s data and commentary, there is much ground to cover although we start off slow with nothing today:

TuesdayNFIB Small Biz Optimism88.1
 PPI0.3% (2.2% Y/Y)
 -ex food & energy0.2% (2.4% Y/Y)
WednesdayCPI0.4% (3.4% Y/Y)
 -ex food & energy0.3% (3.6% Y/Y)
 Empire State Mfg-10
 Retail Sales0.4%
 -ex autos0.2%
ThursdayInitial Claims220K
 Continuing Claims1790K
 Housing Starts1.41M
 Building Permits1.48M
 Philly Fed7.7
 IP0.1%
 Capacity Utilization78.4%
FridayLeading Indicators-0.3%
Source: tradingeconomics.com

In addition to all that, we hear from, count ‘em, 11 Fed speakers during the week, including Chair Powell Tuesday morning (before CPI although he will probably know the number).  As well, he speaks again next Sunday afternoon.  I maintain they all speak too much and too often, and we would be far better off if they simply adjusted policy as they saw fit and ended forward guidance!

But we know they will never shut up, so we must deal with it as it comes.  As to today, it is hard to get excited about anything happening of note given the perceived importance of the rest of the week.  So, look for a quiet day today, a perfect day to initiate some hedges amid benign market conditions.

Good luck

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