Clouded and Blurry

Posted on October 10, 2024 by fxpoet

The Minutes explained twenty-five
Would likely still let markets thrive
But Powell demanded
A half, lest they landed
The ‘conomy in a crash dive

Yesterday’s release of the FOMC Minutes was enlightening to the extent it showed Chairman Powell did not have everybody in agreement for his 50bp rate cut last month. In the Fed’s own words, “…a substantial majority of participants supported lowering the target range for the federal funds rate by 50 basis points to 4-3/4 to 5 percent. However, noting that inflation was still somewhat elevated while economic growth remained solid and unemployment remained low, some participants observed that they would have preferred a 25 basis point reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision.”

Remember, too, that this meeting was held two days prior to the NFP report which changed a great deal of thinking on the subject, not least by the Fed funds futures market which as of this morning is pricing a 20% probability of no cut at the November meeting. Looking at the GDPNow calculation from the Atlanta Fed, that NFP number increased the estimate to 3.4%, although recent inventory data has seen it slip back a tick as you can see below.

Source: atlantafed.org

Despite that last little dip, though, the estimate remains far stronger than economists’ forecasts and paints a picture of a resilient economy. (Perhaps adding $1.8 trillion via the budget deficit has something to do with that, but that is a story for a different time.). While the Fed is clearly anxious, if not desperate, to cut rates further, the economic case, with inflation remaining above their targets and the employment situation looking better amid solid economic growth, seems to be waning.

Three weeks ago, Jay and the Fed
Said joblessness was their, flag, red
Explaining inflation
Had taken vacation
So, more cutting rates was ahead

This morning we’ll learn if that’s true
Or if, like employment, their view
Is clouded and blurry
Which could cause some worry
For bulls and for Biden’s whole crew

Which leads us to the other key market story today (clearly the devastation from Hurricane Milton is the most important news of the day and my thoughts and prayers go to all those in its path), the CPI report. Current consensus expectations are for a 0.1% rise in the monthly headline reading which translates to a 2.3% Y/Y increase and a 0.2% rise in the monthly core reading which translates into a 3.2% Y/Y increase.

Looking at some obvious pieces of the puzzle, gasoline prices fell 8.4% in September, which is one of the reasons the headline number is below the core number. The thing is, gasoline prices this morning are almost exactly where they were at the beginning of September, which informs us that the headline number could easily retrace somewhat next month. The point is, we need to keep our eye on the core number (after all, the reason they created it was because food and energy prices were volatile and monetary policy’s impact on them virtually nonexistent, so they needed something that might give them a better feel for the reality elsewhere). And I don’t know about you, but if the target is 2.0% then 3.2% doesn’t seem that close. I know they are focused on core PCE, but even that remains well above their target.

One of the stories around this morning is that used car prices have stopped declining and that could have an outsized impact resulting in a higher than otherwise reading. But in reality, I question whether this matters at all. What we have learned from the Fed over the past month is that they are going to cut rates no matter what. While the pace of those cuts may be faster or slower depending on some data, every Fed speaker this week, and even a review of the Minutes, points to the fact that they are all desperate to keep cutting rates.

But you know who is taking exception to that stance? The bond market. Perhaps the bond vigilantes of late 90’s fame have been resurrected, or perhaps investors are simply looking at the fiscal situation in the US, where deficit spending continues to increase which means more and more Treasury debt will need to be issued and decided that even 4.0% is no longer a reasonable nominal return on their investment.

As you can see below, 10-year Treasury yields have risen 46bps since just before the last FOMC meeting as the stronger US data combined with the Fed’s clear focus on cutting rates has made investors nervous.

Source: tradingeconomics.com

You may recall the discussion about the inverted yield curve, where 2yr yields traded above 10yr yields for more than two full years, a record amount of time. This fostered many recession calls as historically this has been a harbinger of a future recession. However, a key question was whether the disinversion would be a bull (falling 2yr yields) or bear (rising 10yr yields) steepener. Things started as a bull steepener with the Fed cutting rates, but lately, as we watch 10yr yields rise, fears are growing that inflation is making a comeback and the bond bears are going to drive this process. A bear steepening is not going to be a welcome result for Powell and friends, nor especially for Ms Yellen, as the cost of debt will continue to rise. It also speaks to concerns that the Fed has lost control of the narrative. It is still too early to declare the outcome, but the original, widely held view of a bull steepener is fraying at the seams.

Ok, let’s quickly touch on overnight markets. Yesterday’s US rally saw follow through in Japan (+0.25%) alongside a weakening yen (-0.75% yesterday, +0.2% this morning) and in China (+1.1%) and Hong Kong (+3.0%) after the PBOC detailed the support they would be giving to equity market players and indicated that more could follow. As to the rest of the region, there were more gainers than laggards but nothing of real note. In Europe, although most markets are little changed on the day, if leaning slightly lower, Spain’s IBEX (-0.9%) is the outlier on what seems to be profit taking ahead of the US CPI number after a strong 5-day run higher. And at this hour (7:10) US futures are pointing slightly lower, about -0.2%.

In the bond market, yields continue to climb around the world with Treasuries adding 1bp and most of Europe seeing yields rise 2bps – 3bps. The largest mover there, though is the UK (+6bps) as the market there prepares for Chancellor Rachel Reeves’ first budget and implies they are not expecting fiscal prudence. In Japan, JGB yields rose 2bps and are now at 0.94% as given the turnaround in rates globally, expectations are growing for the BOJ to consider another hike. In fact, ex-BOJ member Kazuo Momma was quoted last night saying that if USDJPY goes back above 150, the BOJ is likely to move before the January meeting currently expected.

Commodity markets are taking a breather from their recent rout with oil (+1.4%) leading the energy group higher while gold (+0.4%) leads the metals complex. It has been a rough week for commodity bulls (this poet included) but nothing has changed the long-term picture in my view. This is especially true if the Fed does cut rates regardless of the stronger data.

Finally, the dollar is continuing to show strength with the DXY pushing back to 103 and the euro back down near 1.09. It seems clear the market is adjusting its views as to how much the Fed is going to cut based on the data, not the Fedspeak, and that turn, from an uber dovish Fed to one less dovish is going to support the greenback. ZAR (+0.45%) is this morning’s outlier as it follows gold prices higher, but that is the largest movement across either the G10 or EMG blocs. It seems everybody is awaiting the CPI data.

In addition to the CPI, we see the weekly Initial (exp 230K) and Continuing (1830K) Claims data and we hear from Gvoernor Lisa Cook, one of the more dovish Fed governors. But for now, it is all CPI all the time. My take is a soft number will be seen as a signal the Fed will be cutting aggressively and help stocks and commodities while undermining the dollar with a strong number doing the opposite. Bonds, though, are much trickier here as I think there are a lot of fiscal concerns being priced in, and lower inflation won’t solve that problem in the short run.

Good luck

Adf

New Calculation

Posted on October 9, 2024 by fxpoet

The markets in China retraced
One-fifth of their rally post-haste
Not everyone’s sure
The promise du jour
Is where traders’ trust can be placed

In Europe, attention’s now turned
To lesson’s the ECB’s learned
Their new calculation
Shows Europe’s inflation
No longer has members concerned

Let’s take a trip down memory lane. Perhaps you can remember the time when the Chinese economy seemed to be faltering, and the Chinese stock markets were massively underperforming their peers. That combination of events was enough to get President Xi to change his tune regarding stimulus and over the course of several days, first the PBOC and then the government announced a series of measures to support both the economy and the stock market specifically. In fact, way back on September 24^th I described the measures taken in this post. Yep, that was two whole weeks ago! The initial response was a rip-roaring rally in Chinese equity markets (~34%), and substantial strength in the renminbi. Analysts couldn’t sing Xi’s praises loudly enough as they were certain that the government there was finally doing what was necessary to address the myriad issues within the Chinese economy.

But a funny thing happened on the way to this new nirvana, investors realized that all the hype was just that and the announced measures, while likely to help at the margins, were not going to change the big picture. Ultimately, China remains in a difficult situation as its entire economic model of mercantilistic practices is running into populist uprisings everywhere else in the world. And since domestic Chinese demand remains lackluster given the estimated $10 trillion that has evaporated in the local property markets, people at home are never going to be able to be a sufficiently large market for all the stuff that China makes.

As this realization sets in, there is no better picture of this change of heart than the chart below showing the recent performance of the CSI 300.

Source: tradingeconomics.com

Last night’s 7% decline, which followed a similar one in Hong Kong the night before, has certainly stifled some of the ebullience that existed two weeks ago. Now, the market has still gained a very healthy 25% from its lows last month, certainly nothing to sneeze at, but are the prospects really that great going forward? Only time will tell, but I am not confident absent another significant bout of fiscal stimulus, something on the order of a helicopter money drop. And that doesn’t seem like Xi’s cup of tea.

Turning to Europe, the economy there remains in the doldrums with some nations far worse off than others. Germany remains Europe’s basket case, as evidenced by this morning’s Trade Balance release there. While the balance grew to €22.5B, that was because imports fell a larger than expected -3.4%, a signal that domestic activity is still lagging. With the ECB set to meet next week, the market is currently pricing a 90% probability of a 25bp rate cut with talk of another cut coming at the following meeting as well.

You may remember that Madame Lagarde was insistent that there was no guaranty that the ECB would be cutting rates at every meeting once they started, rather that they would be data dependent. But with the combination of slowing economic activity, especially in Germany, and the ensuing political angst it has created amongst the governments throughout Europe, it seems that many more ECB members have seen the inflation light and have declared a much higher degree of confidence that it will be at, or even below, their 2% target soon enough. And maybe it will be. However, similar to the Fed’s prognosticatory record, the ECB has a horrific track record of anticipating future economic variables. A key problem for Europe is the suicidal energy policies they continue to promulgate. Granted, some nations are figuring out that wind and solar are not the answer, but Germany is not one of them, at least not yet. And as long as these policies remain in place and electricity prices continue to rise (they are already the highest in the world) then inflation pressures are going to continue.

Bringing this conversation around to more than macroeconomic questions, the market impact of recent data is becoming clearer. While the US economy continues to show resilience, as evidenced by that blowout NFP report last Friday, and Europe continues to falter, the previous assumptions on rate movements with the Fed being the most aggressive rate cutter around are changing. The result is the euro, which has slipped more than 2% in the past two weeks, is likely to continue to fall further, putting upward pressure on Eurozone inflation and putting the ECB in a bind.

Ok, those seem to be the drivers in markets today as we all look forward to tomorrow’s US CPI report. A tour of the rest of the overnight session shows that Japan (+0.9%) continues to rebound from its worst levels a month ago as worries of aggressive monetary policy tightening continue to abate. The latest view is the BOJ won’t move until January at the earliest. The rest of Asia was mixed with the biggest gainer being New Zealand (+1.7%) which responded to the RBNZ cutting rates by 50bps, as expected, but explaining that further cuts were in line as they expected inflation to head below the middle of their 1% – 3% target range. In Europe, the picture is mixed with more gainers than laggards but no movement of more than 0.3%, a signal that not much is happening. US futures are similarly little changed at this hour (7:45) this morning.

In the bond market, Treasury yields have edged higher by 1bp and continue to trade above 4.00%, a level that had been seen as critical when the market moved below that point. Given the overall lack of activity today, it should be no surprise that European sovereigns are also within 1bp of yesterday’s closing levels while JGB yields, following suit, rose a single basis point overnight. It feels like the market is awaiting the CPI data tomorrow to make its next moves.

Oil prices were clobbered yesterday, falling nearly 6% at one point on the session before a modest late bounce. This morning, they are slipping another -0.5% as market participants seem tired of waiting for a Middle East conflagration and instead have focused on the fact that more supply is coming on the market amidst softening demand. Libya is back to full output of 1.2mm bpd and OPEC is still planning to increase production while China and Europe show softer growth. That China story continues to undermine copper (-1.6%) although the precious metals, after downdrafts yesterday, are little changed this morning.

Finally, the dollar continues to find support on the strength of reduced Fed rate cut expectations alongside growing expectations for cuts elsewhere. NZD (-1.0%) is today’s laggard though the rest of the G10 are all showing declines. In the EMG bloc, the dollar is also higher universally, but the moves here are more modest. In fact, away from NZD, the next largest declines have been seen in NOK (-0.6%) and SEK (-0.5%), but LATAM, APAC and EEMEA are all softer as well.

On the data front, this morning brings EIA oil inventories, with a net draw expected and then at 2:00 we see the FOMC Minutes from the last meeting. But those are stale given the payroll report. Instead, we hear from seven more Fed speakers today which will set the tone. Yesterday’s speakers seemed to have been on the same page as Monday’s, with caution the watchword but rate cuts described as necessary despite the payroll report. Whatever there mental model is, it is clearly pointing to rate cuts are necessary.

It feels like today is going to be quiet as markets await tomorrow’s CPI data. The dollar seems likely to retain its bid, though, as the US is still the ‘cleanest shirt in the dirty laundry’ and global investors seem determined to own assets here.

Good luck

Adf

Condemned to Damnation

Posted on October 8, 2024 by fxpoet

The Chinese returned from vacation
But hopes for more subsidization
Were rapidly dashed
With early gains trashed
And Hong Kong condemned to damnation

Meanwhile, what we heard from the Fed
Was further rate cuts are ahead
They all still believe
That they will achieve
Their goal and inflation is dead

Talk about buzzkill. The Chinese Golden Week holiday is over and all the hopes that the National Development and Reform Commission Briefing would highlight new stimulus as well as further details of the programs announced prior to the holiday week were dashed. Instead, this group simply confirmed that they were going to implement the previously announced plans and insisted that it would be enough to get the economy back to its target growth rate of 5.0%. You may recall that the government had promised funds to support the stock market and some efforts to support the housing market, but there was little in the way of direct support for consumers. While the initial market response to the stimulus measures was quite positive, there is a rapidly growing concern that those measures will now fall short. In the end, much of the joy attached to the stimulus story has evaporated.

The market response was telling as while onshore stocks rallied (CSI 300 +5.9%) they closed far below their early session highs and the Hang Seng (-9.4%) in Hong Kong, which had been open all during the Golden Week holiday and rallied steadily through that time, retraced sharply, giving back all those gains and then some (see below).

Source: Bloomberg.com

In the end, it is difficult to look at the Chinese story and feel confident that the currently announced stimulus packages are going to be sufficient to make a major dent in the problems there. It appears that the limits of a command economy may have been reached, a situation that will not benefit anyone.

Turning to the first batch of Fed speakers, yesterday we heard from Governor Adriana Kugler, St Louis Fed president Alberto Musalem and Chicago Fed president Austan Goolsbee. While Mr Goolsbee explained, “I am not seeing signs of resurgent inflation,” it does not appear he is really looking. As to Ms Kugler, she “strongly supported” the 50bp cut and when asked about the strong NFP report explained that looking through the data, “several metrics point toward labor-market cooling”, despite the strong report. Finally, Mr Musalem, although he supported the 50bp cut, remarked, “Given where the economy is today, I view the costs of easing too much too soon as greater than the costs of easing too little too late.”

Net, it appears that recent data upticks have not had any impact on their views that they must cut rates further and are prepared to do so every meeting going forward. The Fed funds futures market has now priced 25bp rate cuts into both the November and December meetings, although that is reduced significantly from the nearly 100bps that was priced prior to the NFP report.

Away from those stories, though, there was not much other news of note overnight. Russia/Ukraine has moved to page 32 of the newspapers and is not even discussed anymore. Israel/Hamas/Hezbollah/Iran has more tongues wagging but at this point, it has become a waiting game for Israel to respond to the missile barrage from Iran last week. Given we are between Rosh Hashanah and Yom Kippur, it seems unlikely to me that we will see anything prior to the weekend. China fizzled after vacation. The US election remains a tight race at this point with no clear outcome. Hurricane Helene and the aftermath is being superseded by Hurricane Milton, due to hit the Tampa area shortly, but again, the latter two, while horrific tragedies, or potential tragedies, are not really market stories.

So, what’s driving things? Arguably, interest rate policies and bond markets are having the biggest impact on financial markets right now. With that in mind, the fact that 10-year Treasury yields are now back above 4.0% for the first time since August seems to be the main event. Why, you may ask, would bond yields have backed up so far so fast? Ultimately, it appears that bond investors are losing confidence in the central bank inflation story, the idea that they have it under control. First off, oil prices, though lower today by -1.9%, have still gained more than 8.3% in the past week with gasoline prices higher by nearly 7% in the same period. This does not bode well for lower inflation prints going forward. Second, the combination of the much stronger than expected NFP report and the Fed’s willful ignorance of the implications is also tipping the marginal investor toward seeing more inflation going forward.

Ok, so how have these things impacted markets? Well, aside from China/HK and following yesterday’s US declines, there were far more laggards (Japan, Singapore, Korea, Australia) than leaders (India) across Asia with Tokyo (-1.0%) the next worst performer. In Europe, all the screens are red this morning led by the UK (-1.1%) but with losses between -0.2% in Germany after a much better than expected IP reading, to -0.6% in France. Oftentimes, it seems like Europe is trading on yesterday’s US news, and that is the case today as US futures are pointing higher by about 0.4% at this hour (7:40).

Bond yields, which have been climbing for the past week, are little changed this morning, with neither Treasuries nor European sovereigns showing any movement of note. However, one need only look at the chart below to see the trend over the past month.

Source: tradingeconomics.com

Aside from the oil retreat mentioned above, which seems to be a response to the absence of that Israeli action so widely expected, copper (-2.6%) is the laggard as disappointment over the Chinese stimulus dud pushed down demand expectations. Gold (+0.3%) though, remains in demand and is hovering just below its recent all-time highs.

Finally, the dollar is backing off a bit this morning, although as evidenced by the chart below of the DXY, it has been on a bit of a tear for the past week, so consolidation should not be a surprise.

Source: tradingeconomics.com

However, overall, today’s price activity has been relatively muted with all G10 currencies within 0.2% of yesterday’s closing levels and the biggest movers in the EMG bloc (PLN +0.4%, ZAR -0.4%) hardly showing much more motion. One exception is IDR, where the central bank intervened overnight after six consecutive days of rupiah weakness which saw the currency decline -4.5%.

On the data front this morning, the NFIB Small Business Optimism Index was released at a slightly softer than expected 91.5 although the Uncertainty sub index it a record high of 103 indicating small businesses are in a tough spot. Otherwise, the only number is the Trade Balance (exp -$70.6B) and then a bunch more Fed speakers, all different ones than yesterday. We also see the 3-year Note auction, so that may give us some clues as to the demand story for Treasuries ahead of the CPI data on Thursday.

The ongoing conflicting data has many, if not most, investors confused. I believe that people will be seeking more clarity on Thursday and so until then, absent another geopolitical shock, we are likely to see modest market movements overall. However, with the Fed hell-bent on cutting, I continue to fear inflation starting to reaccelerate and the dollar starting a more substantive decline.

Good luck

Adf

A Trumpian Size

Posted on October 7, 2024 by fxpoet

A question on analysts’ lips
Is whether Jay can come to grips
With job growth expanding
While he was demanding
A rate cut of fifty whole bips

Concerns are beginning to rise
That voters will soon recognize
Inflation’s returning
And they will be yearning
For change of a Trumpian size

By now, I am guessing you are aware that the payroll report on Friday was significantly better than expected. Nonfarm Payrolls rose 254K, much higher than the 140K expected, and adding to the gains were revisions higher for the previous three months of 55K. The Unemployment Rate fell to 4.051%, rounding to 4.1%, lower than expected and another encouraging sign for the economy. You may remember the discussion of the Sahm Rule, which claims that if the 3-month average Unemployment Rate rises 0.5% from its low in the previous 12 months, history has shown the US is already in recession at that point. Well, ostensibly that rule was triggered two months ago, and the Unemployment Rate has now fallen 0.25% since then with a gain of over 400K jobs since then. Those are not recessionary sounding numbers.

The upshot is that the market got busy adjusting its views with the dollar continuing to rebound against most currencies, equity markets rejoicing in the renewed growth story and bond markets getting hammered with 10-year yields rising sharply in the US (10bps Friday and 4bps more this morning) with moves higher everywhere else in the world. In fact, this morning, European sovereign yields are also higher by between 3bps and 5bps and we saw JGB yields jump 5bps overnight. The end of inflation story is having a tough time.

Perhaps the best depiction of things comes from the Fed funds futures markets where now there is only an 85% probability priced for a 25bp cut and a 15% probability of no cut at all. Look at the table below the bar chart to show how much things have changed in the past week. Jumbo rate cuts are no longer a consideration. It will be very interesting to see how the Fed speakers adjust their tone going forward as there were many who seemed all-in on another 50bp cut as soon as next month.

Source: cmegroup.com

So, is this the new reality? Recession is out and another up-cycle is with us? Certainly, recent data has been quite positive as evidenced by the Citi Surprise Index, seen below courtesy of cbonds.com, which has shown a positive trend since early July.

This index is a measure of the actual data releases compared to consensus market forecasts ahead of the release. When it is rising, the implication is that the economy is outperforming expectations and therefore is growing more rapidly than previously priced by markets. Again, the point is the recessionistas are having a hard time making their case. However, for the inflationistas, it is a different story. With the employment situation improving greatly and last week’s Services ISM data showing real strength, the inflation narrative is regaining momentum. Recall, the Fed’s rationale for cutting 50bps was that they had beaten inflation and were much more concerned about the employment situation where things seemed to be cooling. That line of reasoning has now been called into question and the market is awaiting Powell’s answers.

Remember the time
The yen carry trade was dead?
Nobody else does!

While it may seem like this is ancient history, it was less than a month ago when the market was convinced that the yen carry trade (shorting yen to go long higher yielding assets) was dead, killed by the combination of a dovish Fed and a hawkish BOJ. Oops! It turns out that story may not have been completely accurate, although it was a wonderful discussion at the time. As you can see from the chart below, the yen peaked two days ahead of the FOMC meeting, as those assumptions about both central banks reached their apex and has been steadily weakening ever since. In fact, late last week I saw an article somewhere discussing how the carry trade was back! The thing to understand is the carry trade never left. It has been a popular hedge fund positioning strategy for a decade, made even more popular by the Fed’s aggressive rate hiking cycle. While latecomers to the trade may have been forced out in the past several months, I am confident the position remains widely held. And, based on the recent price action in USDJPY, it is growing again.

Source: tradingeconomics.com

And I believe those are the key drivers of markets this morning. Fortunately, the Middle East situation does not appear to have gotten worse although oil (+2.6%) is trading like something is about to blow up. The rest of the noteworthy news shows that Germany remains in a funk with Factory Orders falling sharply, -5.8%, just another indication that growth on the continent is going to struggle going forward.

Ok, let’s tour the markets we have not yet touched upon. While Chinese markets remain closed (the holiday ended today and markets there reopen tomorrow), the Nikkei (+1.8%) continues to rebound alongside USDJPY and amid stories that new PM Ishiba has dramatically moderated his hawkish views ahead of the snap election called for the end of the month. The Hang Seng (+1.6%) also had a strong session, with rumors of still more Chinese stimulus to be announced tonight. The combination of positive US growth news and the Chinese stimulus news helped virtually every market in Asia save India (-0.8%), which has been singing a different tune consistently. In Europe, it should be no surprise the DAX (-0.3%) is softer, although there are some gainers on the continent (Spain +0.4%, Hungary (+0.4%) and other laggards (Norway -0.7%, Netherlands (-0.3%). Overall, it is hard to get excited about the European scene this morning. Alas, US futures are pointing lower this morning, down -0.5% at this hour (6:30).

We’ve already discussed the bond market and oil, but metals markets show a split this morning with gold (+0.2%) seeming to find haven support while both silver (-0.7%) and copper (-0.3%) are under modest pressure. Remember, though, if the economic growth story is real, these metals should climb further.

Finally, the dollar is continuing its climb alongside US rates with the pound (-0.4%) the G10 laggard of note. Most other G10 currencies are softer by a lesser amount although the yen (+0.1%) and NOK (+0.1%) are pushing slightly the other way, the former on a haven trade with the latter following oil. The EMG bloc is more mixed with ZAR (+0.5%) actually the biggest mover as investors continue to flock toward the stock market there on the back of positivity of a change in the trajectory of the economy from the new government.

On the data front, the biggest number this week is CPI, but of real note are the 13(!) Fed speakers over 20 different venues this week. I don’t know if I’ve ever seen that many on the calendar for such a short period. It strikes me that they understand they need to tweak their message after the recent data. It will be very interesting to see if they fight the data and stay the course for another cut in November or whether they walk it back completely. After all, they claim to be data dependent, and if the data points to growth, why cut?

Here is the rest of the data:

Today	Consumer Credit	$12B
Tuesday	NFIB Small Biz Optimism	91.7
	Trade Balance	-$70.4B
Wednesday	FOMC Minutes
Thursday	Initial Claims	230K
	Continuing Claims	1829K
	CPI	0.1% (2.3% Y/Y)
	-ex food & energy	0.2% (3.2% Y/Y)
Friday	PPI	0.1% (1.6% y/Y)
	-ex food & energy	0.2% (2.7% Y/Y)
	Michigan Sentiment	71.0

Source: tradingeconomics.com

And that’s how we start the week. Whatever your personal view of the economy, the recent data certainly points to more strength than had been anticipated previously and markets are responding to that news. For equities and the dollar, good news is good, but there seems to be a lot of time between now and Thursday’s CPI reading for attitudes to change.

Good luck

Adf

Awakened the Beast

Posted on October 4, 2024 by fxpoet

The longshoreman’s union conceded
And ports will now work unimpeded
But is that enough
To make sure that stuff
Gets everywhere that it is needed?

Arguably, one of the biggest stories this morning is that the fears over the longshoreman’s union strike dramatically weakening the US economy while pushing up inflation have passed as there has been a temporary agreement to raise workers’ pay by 62% over the next six years although it seems that the questions over automation remain. However, the agreement will last until January 15th, so the 3-day work stoppage is unlikely to have a major impact on the US economy, although I’m sure there will be a few hiccups around. But hey, at least one problem is off the docket.

Meanwhile, problems in the Mideast
Continuously have increased
Iran took their shot
And all that it wrought
Was fear they’ve awakened the beast

Which takes us to the next major story, the nature of Israel’s response to Iran’s missile attack from earlier this week. From what I have read, the US is trying very hard to persuade PM Netanyahu to leave Iran’s nuclear facilities and oil production capabilities alone. While I understand the latter, given an attack there would likely drive oil prices far higher and not help VP Harris’s election prospects, I cannot understand why the US would be so adamant that Israel not seek to destroy Iran’s nuclear capabilities. At any rate, the headline in this morning’s WSJ, “Biden Sidelined as Israel Reshapes Middle East”, seems to say it all. At this point, we can only watch and wait.

However, consider the benefits of either of those targets. As it remains unclear whether Iran has achieved the capability to create nuclear weapons, an attack on those facilities, which are hardened and underground, may or may not be effective at preventing a future nuclear Iran. But an attack on the oil production facilities, which are wide open and not nearly as well-defended, would immediately limit Iran’s income despite the certain rise in oil prices, as they would not be able to sell any. Starving Iran of capital to continue to run its military and fund its proxies would likely be extremely effective at dramatically reducing threats to Israel. As well, I’m pretty confident the Saudis would not be unhappy if oil rose to $90 or $100 per barrel. My point is the latter strategy is likely to be effective at reducing Iranian activities while being quite achievable. We shall see.

And finally, early today
The payrolls report will hold sway
O’er markets worldwide
As traders decide
If more cuts are soon on their way

Which takes us to the big economic story today, the monthly payroll report. Wednesday’s ADP Employment data was much better than expected, showing job growth of 143K. Current expectations are as follows:

Nonfarm Payrolls	140K
Private Payrolls	125K
Manufacturing Payrolls	-5K
Unemployment Rate	4.2%
Average Hourly Earnings	0.3% (3.8% Y/Y)
Average Weekly Hours	34.3
Participation Rate	62.9%

Source: tradingeconomics.com

One thing to keep in mind is this is going to be the last meaningful payroll report before the next FOMC meeting because the October report, scheduled to be released on November 1^st, is going to be a complete wreck with virtually no information because of the impact of Hurricane Helene. In fact, it will likely take several months before economic data gets back to whatever its underlying trend may be given the disruption over such a wide swath of the nation.

The question of the economy’s strength continues to be a hotly contested disagreement between those who believe that a recession is coming soon, or has already started, vs. those who believe that there is no recession coming in the near future. The first group tends to look through the headline data and sees decreasing quit rates and reduced hiring offsetting reduced firing with the lack of hiring seen as an indication business activity is slowing. They look at high household credit card debt and growing delinquencies and see analogies to past recessions. Meanwhile, the bulls look at the headline data and say, GDP continues to grow, inflation continues to slide and while manufacturing has been weak for nearly two years, this is a services economy and that has been strong (yesterday’s ISM Services print was a much stronger than expected 54.9).

Now, the very fact that Powell cut rates two weeks ago is indicative of the fact that there is real concern at the FOMC that growth is slowing. I will not discuss the political question here. But data like TSA travel clearances and restaurant seatings and the crowds at events show that at least some portion of the economy is still doing well. Yesterday’s Claims data was 225K, a few thousand more than expected but still nowhere near a level that would indicate there is an employment glut.

I believe the idea of the K-shaped recovery is the best description of things around. The top quartile of income earners is doing just fine while the rest of the economy is struggling. But that top quartile represents an outsized amount of economic activity, so the data continues to be positive. In fact, if you are looking for a reason that there is so much angst in the electorate, this is it. With all that in mind, though, my take is this morning’s number is going to be better than expected, somewhere on the 175K – 200K level.

Ok, let’s quickly run through market activity overnight. Yesterday’s modest decline in US markets did not really give much direction to the overnight session as the Nikkei (+0.2%) managed to continue its recent modest rally and the Hang Seng (+2.8%) continues to benefit from a belief that Chinese stimulus is coming to the rescue. But the rest of Asia couldn’t make up its mind (China is still closed) with gainers (Korea, New Zealand, Singapore) and laggards (India, Australia , Taiwan). In Europe, the picture is also mixed ahead of the US data with modest gainers (CAC, DAX) and laggards (FTSE 100, IBEX) as the US data is still the key driver. One story here is that the EU decided to impose tariffs of as much as 45% on Chinese BEV’s, something that is likely to become problematic for European exporters going forward. As to US futures, just ahead of the data (8:00) markets are edging higher by 0.2%.

In the bond market, yields are continuing to rise around the world with Treasuries higher by 2bps this morning after a 5bp climb yesterday afternoon. European sovereign yields are also much firmer, between 3bps and 6bps across the continent as concerns over inflation reignite. Both the price of oil and the Chinese tariff story are driving this bond move. As to JGB’s, they jumped 6bps last night, but that was more on the back of the US rise than any domestic news.

Oil (+1.4%) is continuing to rally as fears over an Israeli attack on Iranian assets builds. This has helped the entire commodities complex with metals markets also firmer this morning, albeit only on the order of +0.25%. Nonetheless, the commodity higher story remains a fundamental one in my world view, especially as food prices are picking back up again around the world. The UN’s FAO Food price index rose to its highest level in more than a year and looks for all the world like it has based and is now going to trend higher again.

Finally, the dollar is mixed this morning, with no defining theme here. The pound (+0.35%) and MXN (+0.4%) have rallied while KRW (-0.5%) and AUD (-0.25%) have declined with the euro virtually unchanged. My point is there is nothing specific to explain the movement.

And that’s really it. We hear from a couple of more Fed speakers but since Powell on Monday cooled the idea of another quick 50bp cut, they have not given us much new guidance. If I am correct and the data is strong, I expect bonds to suffer along with commodities while the dollar should gain. Stocks are a little less clear. However, if it is a soft number, you can be sure that the 50bp talk will dramatically increase and stocks and commodities will soar as the dollar slides.

Good luck and good weekend

Adf

Surprise!

Posted on October 3, 2024 by fxpoet

Ishiba explained
He was just kidding about
Tight money…surprise!

So, yesterday’s biggest mover was JPY (-2.1%), where the market responded to comments by new PM Ishiba that all his previous comments regarding policy normalization were not really serious (and you thought Kamala flip-flopped!)

Here are his comments in the wake of that massive 12% decline in the Nikkei back in early August:

“The Bank of Japan (BOJ) is on the right policy track to gradually align with a world with positive interest rates,” ruling party heavyweight Shigeru Ishiba told Reuters in an interview.

“The negative aspects of rate hikes, such as a stock market rout, have been the focus right now, but we must recognize their merits, as higher interest rates can lower costs of imports and make industry more competitive,” he said.

And here are his comments after meeting with BOJ Governor Ueda Wednesday morning in Tokyo:

“From the government’s standpoint, monetary policy must remain accommodative as a trend given current economic conditions.”

See if you can tell the difference. The below chart includes the market response to his election last week as well as its response since uttering those last words early yesterday morning.

Source: tradingeconomics.com

Remember the idea that the carry trade was dead and completely unwound? Well, now the talk is its coming back with a vengeance between Powell sounding less dovish, Ishiba sounding more dovish and then yesterday’s ADP Employment Report printing at a higher-than-expected 143K. Maybe all those rate cuts that had been priced are not going to show up in traders’ Christmas stockings after all. Certainly, the Nikkei (+2.0%) was pleased with the weaker yen which has fallen further this morning (-0.2%) after further comments from BOJ member Noguchi calling for more time to evaluate the situation before considering tighter policy. In fairness, though, Noguchi-san is a known dove and voted against the rate hikes back in July. Summing it all up here, it is hard to make a case currently for the yen to strengthen too much from here. Rather, a test of 150 seems the next likely outcome.

In England, the Old Lady’s Guv
Explained that he’s really a dove
He’ll be more aggressive
Though not quite obsessive
While showing investors some love

The other big mover this morning is the British pound (-1.1%) which is responding to an interview BOE Governor Bailey had in The Guardian where he explained he could become “a bit more aggressive” in their policy easing stance provided inflation data continues to trend lower. Now, prior to the interview, the OIS market was already pricing in a 25bp cut at the next meeting in November, and 45bps of cuts by year end, and it is not much changed now. But for whatever reason, the FX market decided this was the news on which to sell pounds.

Remember, as I’ve repeatedly explained, the dollar’s demise is likely to be far slower than dollar bears believe because now that the Fed has begun cutting rates, and nothing is going to stop them going forward for a while, other central banks will feel empowered to cut as well. The only way the dollar falls sharply is if the Fed is the most dovish central bank of the bunch, but Monday, Chairman Powell made clear that was not the case. In fact, yesterday, Richmond Fed president Barkin was the latest to explain that things look good, but they are in no hurry to cut aggressively. Other central banks are now in a position to ease policy more aggressively, something many had been seeking to do as economic activity was slowing in their respective countries, without the fear of a currency collapse.

It was just a few days ago that I highlighted key technical levels the market was focused on, which if broken might herald a much weaker dollar. Across the board, we are more than 2% from those levels (EUR 1.12, GBP 1.35, DXY 100.00) and traveling swiftly in the other direction. A quick peek at the chart below shows that while the exact timing of these moves was not synchronized, the outcome is the same.

Source: tradingeconomics.com

Moving beyond the FX market, where the dollar is stronger literally across the board, the economic story continues to muddle along. Services PMI data was released this morning with most of Europe looking a bit better, although the Italians were lagging, but not enough to get people excited about European assets in general. Equity markets on the continent are mixed with both the DAX (-0.6%) and CAC (-0.8%) under pressure while Spain’s IBEX (+0.1%) and the FTSE 100 (+0.25%) buck the trend on the back of Spain’s best in class PMI data and, of course, the UK rate cut frenzy. As to last night’s Asian markets, while China remains closed, the Hang Seng (-1.5%) gave back some of yesterday’s gains and the rest of the region was unconvinced in either direction. While US markets eked out the smallest of gains yesterday, futures this morning are pointing lower by -0.4% or so at this hour (6:45).

In the bond market, Treasury yields are higher by 3bps this morning, as the market absorbs the idea that the Fed may not be cutting in 50bp increments each meeting and traders responded to a much better than expected ADP Employment Report yesterday (143K, exp 120K) so are prepping for a good NFP number tomorrow. Meanwhile, European sovereign yields are all higher by between 5bps and 7bps as they catch up to yesterday’s Treasury move, much of which occurred after European markets were closed. One thing to keep in mind here is that bond markets, at least 10-year and longer maturities, are far more concerned with the inflation outlook than the central bank discussion. Right now, as the world awaits Israel’s response to the Iranian missile attack, concerns are rife that oil prices could move much higher and take inflation readings along for the ride. If you add that to the idea that 3% is the new 2% for central bank inflation targets, something which is also gaining credence in the market, the case for higher bond yields is strong.

Speaking of oil markets, once again this morning the black sticky stuff is higher (+2.0%) amid those Middle East conflagration fears. As I highlighted yesterday, if Israel were to attack Iran’s oil fields and knock a large portion offline, I would expect oil to get back to $100 in a hurry. And if the damage was sufficient to keep it offline for many months, we could stay there. However, the combination of the stronger dollar and higher oil prices has taken a toll on the metals markets with all the major metals weaker this morning (Au -0.5%, Ag -1.1%, Cu -1.5%). This strikes me as a short-term phenomenon as the fundamental supply/demand issues remain in favor of higher prices and anything that drives inflation higher will help price as well. But not today.

As to the dollar, I have already discussed its broad-based strength with gains against literally all its G10 and EMG counterparts. It will take some pretty bad US data to change this story today.

Speaking of the data, as it’s Thursday, we get the weekly Initial (exp 220K) and Continuing (1837K) Claims data as well as ISM Services (51.7) and Factory Orders (0.0%). Yesterday, in a surprise, EIA oil inventories rose, a welcome outcome, but not enough to offset the Middle East fears. The only Fed speaker on the calendar today is Atlanta Fed president Bostic, one of the more hawkish members, so my guess is he is likely to continue to preach moderation in rate cuts. Speaking of the Atlanta Fed, their GDPNow reading fell to 2.5% for Q3 after the weaker than expected construction spending the other day, but it remains above the Fed’s estimated long-term trend growth rate.

Putting it all together, I can see no good reason for the dollar to reverse this morning’s gains absent a Claims number above 250K. The hyper dovishness that had been a critical part of the dollar decline story has been beaten back. Of course, tomorrow brings the NFP report, so anything can still happen.

Good luck

Adf

Impuissance

Posted on October 2, 2024 by fxpoet

The world now awaits the response
Of Israel, which at the nonce
Has traders concerned
Restraint will be spurned
While mullahs pray for impuissance

Thus, oil continues to rise
And it oughtn’t be a surprise
The talk that inflation
Achieved its cessation
Has slowed while concerns crystalize

The most important market story this morning, I would contend, is the potential response by Israel after Iran’s missile attacks yesterday. While only a handful of the approximately 180 missiles breached the Israeli aerial defenses, some damage was inflicted. Israel has promised a response at their leisure and history has shown they have been effective in inflicting greater damage than they receive.

The major market concern is that Israel will attack Iran’s oil production capability, something which would certainly drive oil prices, which have spiked more than 8% in the past two sessions, higher still. Currently, Iran is producing about 3.27 mm barrels/day, a solid 3% of global production and consumption. Given the highly inelastic nature of the oil price, any attack there would have a substantial impact, at least in the short term. Remember, though, that the Saudis have something along the lines of 3mm barrels/day of production shut in as OPEC+ has tried to support the price. I expect that they would be able to bring that online quite quickly, so any price move would be short-lived. The downside, though, is that it would use up the available spare capacity so any other event, say another hurricane which shuts in Gulf of Mexico production, would have an outsized impact. Net, a response of that nature may only have a short-term impact on the price but would lead to more fragility overall.

As well, I am confident that the Biden administration is really working to convince Israel to leave the oil assets alone as during the campaign, a spike in oil, and by extension gasoline, prices will not be a welcome turn of events. However, from Israel’s point of view, the destruction of Iran’s oil production capacity would result in a much weaker Iran, one that would have far more difficulty promoting their attacks on Israel. At this point, we can only wait and see.

Away from that news, yesterday saw the PMI and ISM data releases which simply confirmed that global manufacturing activity remains in a slump. The US report, printing at a weaker than expected 47.2, the 22ndmonth in the last 23 that the reading has been below the boom/bust line of 50.0, continues to drive concerns about economic weakness in the US. Of course, manufacturing represents less than 25% of the economy directly, although many service jobs are dependent on the manufacturing sector.

Arguably, the perception of economic weakness that remains prevalent in the US stems from this situation, where manufacturing remains weak, and the ancillary activity typically driven by it remains weak as well. These are the traditional blue-collar jobs, and it is those people who seem to be feeling the current economic malaise most severely. In fact, this is as good an explanation as I can find for why despite some decent top line economic data, there are still so many people in the US who are highly stressed and living paycheck to paycheck. While this is a macroeconomic discussion, it is also a key political discussion as it will highly likely be an important driver of voters come November.

As to the other topic that has traders engaged, central bank policy, the plethora of Fed speakers yesterday did nothing to alter any views on their next steps. Currently, the Fed funds futures market is pricing a 35% probability of a 50bp cut in November, but still pricing an 85% probability that there will be 75bps of cuts by year end. Now, this is less cutting than had been priced just a week ago, but that move was driven by Powell on Monday. Given the amount of data that we will be receiving between now and the November meeting, including two NFP reports as well as a CPI and PCE report this month, and the first look at Q3 GDP, many views can change.

And that’s kind of it this morning. Last night’s VP debate had no market impact, nor would I have expected it to do so. Worries about the Middle East and questions about central bank policy are the current market drivers.

With that in mind, let’s see how things played out overnight after yesterday’s weak showing in US markets. In Japan, the Nikkei (-2.2%) gave back Tuesday’s gains as the market tries to determine exactly how new PM Ishiba is viewing the economy and central bank. In a statement, he indicated the government would work with the BOJ to achieve joint goals, and his initial hawkish perception has been walked back. In fact, it is odd that Japanese stocks fell given JGB yields (-2bps) also declined alongside the yen (-0.7%) on those comments. As to the rest of Asia, the Hang Seng (+6.2%) rocketed higher on the Chinese stimulus story (mainland markets are still closed for their holiday), but the other Asian markets that were open, including Korea, Malaysia and Indonesia, all saw selling pressure with declines on the order of -1.0%.

In Europe, continental bourses are all lower led by the DAX (-0.6%) and IBEX (-0.6%) although the FTSE 100 (+0.2%) has managed a small gain. The UK move has been driven by energy stocks rallying on the Middle East story while the lack of energy stocks on the continent seems to be the key to losses as investors turn cautious. As to US futures, at this hour (7:30), they are lower by between -0.2% and -0.4%.

Bond yields are lower this morning with Treasuries down -2bps while European sovereign yields have all fallen between -5bps and -6bps. The weak PMI data there has increased the discussion about more aggressive policy ease from the central bank and the likelihood that inflation stays quiescent.

We have already discussed oil but a look at the metals markets shows that after a 1% rally yesterday, gold (-0.3%) is consolidating near its all-time highs, while both silver (+0.3%) and copper (+0.8%) continue to move higher. For the latter two, everything I read is about how both metals are critical for building out the energy transition infrastructure and both metals are in structural shortage with stockpiles being utilized as mining output lags demand and getting new mines up and running is a decade long affair. My take is both have further to rise.

Finally, the dollar is net little changed this morning after a very solid two-day rally. Remember it was just Monday that I was discussing key technical levels in the DXY (100.00), EUR (1.1200) and GBP (1.3500). Well, we have moved well away from all those levels as the dollar weakness story takes a break. When Chairman Powell explained he was in no hurry to cut rates rapidly, that part of the narrative needed to change quickly…and it did. So, this morning, aside from the yen’s weakness mentioned above, the other large mover is NOK (+0.7%) which is simply responding to the oil rally. In fact, the commodity currencies are doing exactly what they are supposed to be doing with CLP (+0.5%) tracking copper and MXN (+0.4%) tracking both silver and oil. ZAR (unchanged) is actually the surprise here although it has been rallying steadily since April on a combination of the strong metals markets and continued belief in a better economic situation based on the new government’s business friendly policies.

On the data front, this morning brings only ADP Employment (exp 120K) and the EIA oil inventories where further inventory drawdowns are anticipated. We also hear from four more Fed speakers although given Powell’s lack of concern regarding the speed of cuts, it will be hard for these speakers to change the market perception in my view. This leaves us with the big picture. Right now, employment remains the most important data for the Fed and their policy views. As such, this morning’s ADP is likely to have more importance than it ordinarily would, despite the limited correlation between this data and the NFP to be released on Friday.

It seems that there are some subtle changes in central bank views with market perceptions of FX moves impacted. The Fed is now seen as not quite as dovish, while the BOJ and ECB are seen as a touch more dovish, hence the dollar’s gains against both the yen and euro. However, I think the central bankers realize they are still feeling their way in the dark and will be slow to respond to outlier data, so this vibe seems likely to hold in the near term.

Good luck
Adf

Not in a Hurry

Posted on October 1, 2024 by fxpoet

The committee is not in a hurry
Said Jay, but the bulls needn’t worry
‘Cause Jay knows what’s what
And he can still cut
Quite quickly and watch the bears scurry

Meanwhile, at all ports in the east
The longshoremen’s working has ceased
With them now on strike
We could see a hike
In costs soon with ‘flation increased

“Overall, the economy is in solid shape; we intend to use our tools to keep it there. This is not a committee that feels like it’s in a hurry to cut rates quickly. Ultimately, we will be guided by the incoming data. And if the economy slows more than we expect, then we can cut faster. If it slows less than we expect, we can cut slower.”

These were the key comments by Chairman Powell yesterday at the National Association for Business Economics annual meeting in Nashville. They were the very essence of the two-handed economist who explains both sides of an issue without drawing a conclusion. However, it appears what the market heard was ‘the Fed’s only going to cut 25bps at a clip going forward’. This was made evident by the fact that when he began speaking, we saw equity markets dip right away as per the chart below of the S&P 500, although as he continued, and made clear that they expected to continue to cut rates and support the economy, traders (and algorithms) decided things were fine.

Source: Bloomberg.com

We also heard from two other Fed members, Atlanta Fed president Bostic and Chicago Fed president Goolsbee, who both explained 50bps could well be the appropriate next move if things don’t follow their current script perfectly. Naturally, equity markets heard that news and were soothed, hence the result that all three major indices closed slightly higher on the day.

The other major story this morning is that the International Longshoreman’s Association, the union for dockworkers along the entire East Coast and Gulf of Mexico, have gone on strike as of midnight. They are demanding a 77% increase in wages over the next 6 years as well as promises about the speed with which further automation will occur in order to save jobs. While the Taft-Hartley act could be invoked by the president to force both sides back to the bargaining table and require the workers to get back on the job for the next 80 days, President Biden has chosen not to do so in an effort to polish his political bona fides with unions.

The ultimate impact of the strike will depend entirely on its length. This was not a surprise and many retailers and other importers pre-ordered inventory to tide them over as the holiday shopping season gets going. However, estimates range up to an economic cost of $5 billion per day for each day of the strike, and the longer it goes on, the bigger the problem because rescheduling once things are settled will be that much more complex. Regardless of the timing, though, one can be pretty certain that this will pressure prices higher as either shortages of certain items develop, or the wage gains result in higher shipping costs which will almost certainly be passed through the value chain.

Remember, while headline PCE fell to 2.2% last month, core remained at 2.7%. In the CPI readings, headline is still 2.5% with core at 3.2%, and perhaps more disconcertingly, median CPI at 4.2%. Powell’s decision to cut rates 50bps last month with GDP still growing at 3%, the Unemployment Rate at a still historically low level of 4.2% and inflation, whether measured as PCE or CPI well above 2.0% was quite aggressive. If this strike lasts a while, more than one week, expect to see price pressures begin to build again and that is going to put the Fed in a very difficult position.

One last thing to consider is the fact that virtually every major central bank around the world is in easing mode now that the Fed has begun to cut despite the fact that growth remains in decent shape in most places (Germany excepted). This morning’s Eurozone CPI data (1.8%, 2.7% core) was even softer than expected virtually guaranteeing more aggressive action by the ECB and of course the PBOC was hyperaggressive last week in their easing actions. Yesterday, Banxico indicated they may begin to cut more aggressively after having started their easing stance with 25bp cuts, as inflation in Mexico continues to decelerate to their target level of 3% +/- 1%. The point is that policy worldwide is easing, or even in the few places where it is not, e.g. Japan and Australia, they are not tightening at any great pace. The upshot is there is greater scope for a rebound in inflation while the dollar and other currencies continue to devalue vs. real items like commodities and real estate. That is another way of saying that prices in those two asset classes should continue to climb. As to the fiat currency world, relative values will depend on the pace with which individual nations ease, but they will all sink over time.

So, how have markets responded to the latest news? After the modest US gains yesterday, and remember China is closed all week, Japan (+1.9%) regained about half of Monday’s declines after Ishiba-san was officially named PM and he appointed and Abenomics veteran, Katsunobu Kato, as his FinMin, helping encourage the idea that the BOJ may not be quite as aggressive as previously thought. The rest of Asia saw more gainers than laggards with Taiwan (+0.75%) the next best performer and a mix otherwise. In Europe, the picture is mixed with some gainers (FTSE 100 +0.4%, DAX +0.3%) and some laggards (IBEX -0.6%, CAC -0.2%) after Manufacturing PMI data across the continent continued to show lackluster results with Germany falling even further to a reading of 40.6 although Spain’s reading jumped to 53.0. I must admit the stock market outcomes seem backward although I can understand the German view that the ECB will be more aggressive, thus supporting stocks, but why that is not helping Spain is a mystery. As to US futures, at this hour (7:20) only the DJIA (-0.35%) is showing any discernible movement.

In the bond market, after yields backed up 5bps yesterday over concerns that the Fed’s more aggressive stance would lead to inflation and the port strike would not help that situation, they are sliding this morning. Treasury yields, after touching 3.80% during yesterday’s session are down to 3.74% this morning and European sovereign yields have fallen even more sharply, between -7bps (Germany) and -12bps (France) as traders and investors become convinced that the ECB is going to become more aggressive in their easing. JGB yields also slid 1bp last night after Kato-san’s appointment.

It should be no surprise that metals prices are rebounding this morning given the decline in yields as well as the growing concerns over inflation. So, gold (+0.5%) is leading the way higher but the entire group is higher on the session. However, oil (-0.8%) remains under pressure as news of Israel’s ground incursion into Lebanon to root out Hezbollah seem to be ignored while news that Libya is getting set to restart production after a political settlement was reached there adds to the supply picture.

Finally, the real surprise is the dollar, which based on yields and metals would have been expected to continue sliding, but instead has rebounded sharply. In fact, yesterday, the DXY rallied virtually all day and that has continued this morning with the index now above 101.00. You may recall I highlighted that it was testing the 100 level which is seen as a key support. I guess there is no break coming today. This morning, the dollar’s move is universal, rising versus both the euro (-0.5%) and pound (-0.5%) as well as the rest of the G10 save the yen which is unchanged on the day. In fact, 0.5% is the magnitude of that move virtually all the other currencies in the bloc. As to the EMG bloc, these currencies have also suffered by -0.5% or so regardless of the region with the CE4 the worst performers, averaging -0.7%, while Asian currencies were down more on the order of -0.3% and LATAM -0.5%.

On the data front, ISM Manufacturing (exp 47.5) and JOLTS Job Openings (7.655M) are the main features and we hear from four more Fed speakers (Bostic, Cook, Barkin and Collins) before the day is done.

It is hard for me to look at the current situation without growing concern that the Fed is in the process of making a catastrophic error by easing policy into the base of an inflation cycle that just got more impetus from a key labor situation. In the end, it is not clear to me how the dollar will behave against other currencies in the short run, but I see only upside for commodity prices. If things do get ugly, the dollar will be seen as the best of a bad lot, and as commodity demand grows, so will demand for the greenback in order to buy those commodities, but this is not a positive story.

Good luck

Adf

A Brand New Zeitgeist

Posted on September 30, 2024 by fxpoet

Although it’s the number two nation
Of late its shown real desperation
Seems Xi did appraise
The recent malaise
And ordered growth maximization

So, mortgage rates there have been sliced
And refi’s are now getting priced
It’s different this time
The bulls, in sync, chime
As Xi seeks a brand new zeitgeist

As China gets set to head off for a week-long holiday, President Xi wanted to make sure everybody there felt great and would start to spend money again. His latest move came via the PBOC where they loosened the regulations regarding refinancing of home mortgages, now allowing them for everybody starting November 1^st. The key housing rate in China is the 5-year Loan Prime Rate, and while that has fallen steadily over the past two years, down nearly 1%, all the people who were swept up in the property bubble that began to burst three years ago have not been able to take advantage of the lower rates. This is what is changing, and I presume there will be quite a bit of refi activity for the rest of the year.

So, to recap what China has done in the past week, they have cut interest rates across the board, guaranteed loans to be used for stock repurchases, changed regulations to allow lower down payments on mortgages for first and second homes and now allowed more aggressive refinancing of existing mortgages. As well, they reduced the RRR, freeing up capital for banks, and relaxed rules for regional governments to be able to spend more. Now matter how this ultimately ends up, you must give Xi full marks for finally figuring out that in a command economy, he needed to command some more stimulus. The latest mortgage news has simply excited the equity market even more and there was another huge rally last night (CSI 300 +8.5%), which when looking at a chart of that index shows an impressive rally in the past two weeks, slightly more than 27%!

Source: tradingeconomics.com

However, before we get too carried away, a little perspective may be in order. The below chart is the 5-year view, and while the recent rebound is quite impressive, it simply takes us back to the level from July 2023 and remains more than 30% below the highs seen in February 2021. I might argue that even if all of these policies work out as planned, something which rarely ever happens, until the economic data start to prove it out, things here feel a bit overbought for now. Putting an exclamation on the last point, last night China released its monthly PMI data which showed just why Xi has become so aggressive. Every reading, from both Caixin and the National Bureau of Statistics, was weaker than last month and weaker than expected. Xi certainly needed to do something.

Source: tradingeconomics.com

Gravity remains
An unyielding force, even
For Japanese stocks

Now, a quick mea culpa from Friday’s note as I was in error on my analysis of the Japanese stock market in the wake of the election of Ishiba-san. It seems that the announcement of his victory was not made until after the cash equity market was closed for the day. At that time, Sanae Takaichi remained the odds-on favorite to win the vote, and the market was anticipating a more dovish approach to things. Hence, the idea of the return to Abenomics and a much slower policy tightening was welcomed by the equity market at the same time the yen weakened. But with Ishiba-san’s surprise victory, all of that got tossed out the window.

Of course, USDJPY was able to respond instantly, hence the sharp reversal in the market I showed in a chart on Friday. However, the futures market sold off sharply on the election news and now that has been reflected in the overnight session with the Nikkei (-4.8%) giving back all the gains it had made in the previous two sessions in anticipation of a dovish turn. So, as you can see in the below chart for the Nikkei 225 over the past week, we are basically exactly where things started before the Takaichi expectations built. Truly much ado about nothing.

Source: tradingeconomics.com

As to the rest of the overnight session, beyond the Chinese data, we saw German state CPI readings which continue to fall as the German economy continues to slow appreciably. We also saw UK GDP data, which was slightly softer than forecast, although at 0.9% Y/Y, still well ahead of Germany’s pace. But otherwise, not very much else. Last Friday’s PCE data was largely in line and quite frankly, most of the market seems to be focused on China right now, not the US, as that has become the newest idea on how to get rich quick.

So, here’s a quick recap of the session thus far. Away from China and Japan, we saw more weakness than strength in Asia with both Korea and India falling more than -1.0%, although the rest of the region was mixed with much smaller moves. Australia (+0.8%), though, benefitted from the China story as the price of iron ore, one of its major exports, rose 11% overnight on the idea that Chinese construction was coming back. However, European bourses are under pressure this morning led by the CAC (-1.6%) with the rest of the continent also soft on the back of weaker earnings forecasts and announcements from European companies. As to US futures, at this hour (7:20), they are pointing lower by -0.25%.

In the bond market, with all the excitement over renewed growth in China and continued tightening in Japan, yields are backing up slightly with virtually every G10 government seeing yields higher by 2bps this morning. Ultimately, for Treasuries my fear is with the Fed cutting rates now and no real sign that the economy is slowing rapidly, we are going to see a quicker rebound in inflation than they are anticipating and that will not help the long end of the curve at all.

In the commodity markets, we are following Friday’s declines with further moves lower this morning as oil (-0.55%) continues to struggle on the weak demand story (this time from Europe, not China) while metals markets are also under pressure with all three biggies down (Au -0.75%, Ag -1.4%, Cu -0.7%). This is a bit confusing for two reasons. First, with the euphoria that the Chinese reflation story has generated, I would have expected copper to continue to rally alongside iron ore, but second, the dollar is softer today, and that generally supports the metals markets.

So, a quick look at the dollar shows the DXY is looking to test 100.00, a level it last briefly touched in July 2023 but spend most of 2020 and 2021 below. This is concurrent with the euro (+0.3%) testing 1.12 and the pound (+0.3%) testing 1.35, with the former showing virtually the same pattern as the DXY and the latter making new highs for the past two years. But there is some schizophrenia in the G10 with JPY (-0.2%), CHF (-0.3%), NOK (-0.35%) and SEK (-0.2%) all under pressure today. While NOK and SEK make sense given the commodity moves, that doesn’t explain gains in AUD and NZD. Some days are just like that. In the EMG bloc, in truth, the dollar is showing more strength than weakness with ZAR (-0.35%), CNY (-0.2%) and KRW (-0.15%) although MXN (+0.3%) is bucking that trend. On the one hand, it is quite confusing to see so many contrary moves amongst the currencies that typically track closely together. On the other, though, none of the moves are very large, so there can be idiosyncratic explanations for all of this without changing the big picture story.

On the data front, we get a bunch of stuff culminating in NFP on Friday.

Today	Chicago PMI	46.2
	Dallas Fed Manufacturing	-4.5
Tuesday	ISM Manufacturing	47.5
	ISM Prices Paid	53.7
	JOLTS Job Openings	7.67M
Wednesday	ADP Employment	120K
Thursday	Initial Claims	220K
	Continuing Claims	1837K
	ISM Services	51.6
	Factory Orders	0.1%
Friday	Nonfarm Payrolls	140K
	Private Payrolls	120K
	Manufacturing Payrolls	-5K
	Unemployment Rate	4.2%
	Average Hourly Earnings	0.3% (3.8% Y/Y)
	Average Weekly Hours	34.3
	Participation Rate	62.9%

Source: tradingeconomics.com

As well as all that, we hear from nine different Fed speakers over 13 different speeches this week, including Chairman Powell this afternoon at 2:00pm. It’s not clear that we have learned enough new information for Powell to change his tune although given all of China’s moves there could be some belief that the Fed doesn’t need to be so aggressive. Now, as of this morning, the Fed funds futures market is pricing a 41% probability of a 50bp cut in November and a 50:50 chance of a total of 100bps by the end of the year. but, if China is easing so aggressively, does the Fed need to as well?

Right now, the story is all China. However, I still detect a lot of positive sentiment in the US and expectations that the Fed is going to continue to ease and boost growth, inflation be damned. It still strikes me that you cannot be bullish both stocks and bonds here as they are going to respond quite differently to the future. As to the dollar, it is clearly on its back foot as the pricing of further Fed ease undermines it for now, but remember, as other central banks follow the Fed more aggressively, any dollar declines will be muted.

Good luck

Adf

More Money to Mint

Posted on September 27, 2024 by fxpoet

As an eagle soars
So too did the yen after
Ishiba-san won

Political change in Japan is far less bombastic and exciting than here in the US as evidenced by the election of Shigeru Ishiba as the new leader of the Liberal Democratic Party (LDP) last night. Given the LDP’s large majority in the Diet (Japan’s parliament), as the new leader, Ishiba-san is now all but certain to be the new Prime Minister. This will likely be confirmed by a vote as early as next Tuesday, but sometime very soon regardless.

Ishiba’s background, a party veteran and former defense minister, seems to have been the right focus at the right time as strains with China have recently increased and the electorate (LDP members, not the general population) are clearly hearing about security concerns more than other issues. The implication is that economic issues were not the driving force here, but in that vein, Ishiba’s views appear to be to allow the BOJ and Governor Ueda to continue their normalization process, finally ending the decade plus of Abenomics that worked to raise inflation.

Now, as it happens, last night Tokyo inflation was released with the headline falling to 2.2% and the core falling to 2.0%, as expected. It also appears that one of his key opponents, Sanae Takaichi, had been an advocate of pressuring the BOJ to slow its policy normalization, so with the results, market participants reacted swiftly, and the yen rallied sharply on the news as per the below chart while the Nikkei after an initial sharp decline, rebounded and closed higher by 2.3%.

Source: tradingeconomics.com

Going forward, it seems unlikely that the yen is going to be a focus of the new Ishiba administration. Rather, he is clearly focused on defense strategy so Ueda-san will be able to continue his normalization efforts at his own pace. As evidence, JGB yields stopped their recent slide and backed up 2bps overnight. I suspect that we will see a very gradual move higher here with key drivers to be purely economic issues rather than political ones, at least for a while.

This morning, the PCE print
Will help give another key hint
To whether the Fed
When looking ahead
Will soon start, more money, to mint

The other story for the day is the PCE report to be released at 8:30. Current expectations are for a 0.1% M/M, 2.3% Y/Y rise in the headline number and a 0.2% M/M, 2.7% Y/Y rise in the ex-food & energy reading. If these are the realized outcomes, the trend lower in inflation will remain on track and all the Fed speakers will feel vindicated that the 50bp cut last week was appropriate. But I think it is worthwhile to take a quick look at a chart of how this number (core PCE) has evolved over time to help us better understand where things are in relation to the pre-pandemic economy.

Source: tradingeconomics.com

Now, while there is no doubt that we are well below the highest levels seen two years ago, it is not difficult to look at this chart and see a potential basing formation, well above the pre-pandemic levels. In fact, today’s expectations on the core reading are for a bounce higher of 0.1% which would only reinforce the idea that we have seen the bottom in this reading. Of course, any one month’s data is not definitive as everything is subject to revisions, and simply looking at the chart, it is easy to see both ebbs and flows in the data well before the pandemic. But I continue to be concerned that the Fed’s very clear ‘mission accomplished’ attitude on inflation is a big mistake that will come back to haunt us all sooner than you think.

Ahead of the data, a look at the overnight session shows that the ongoing rally in risk assets that started with the Fed and has been goosed by China’s efforts this week, remains the dominant theme. In fact, Chinese shares had another gargantuan session last night (CSI 300 +4.5%, Hang Seng +3.6%) as hedge funds who had been quite short the Chinese stock market prior to the announcements this week continue to scramble to cover those shorts as well as get long for the rest of the expected ride. But away from China and Japan, the rest of Asia was far less excited with declines seen in India, Korea and Australia leading most indices lower there. As to European bourses, they are firmer this morning led by the DAX (+0.8%) but green everywhere after preliminary inflation data for September from France and Spain saw declines well below expectations to 1.5% and investors increased the probability of an October ECB rate cut substantially. While some ECB members remain concerned over the stickiness of services prices, which continue to hover above 4%, if the headline numbers are falling below 2%, I think it will be very difficult for Madame Lagarde to push back against another cut next month. Meanwhile, ahead of the data, US futures are unchanged.

In the bond market, Treasury yields have edged lower by 1bp while European sovereign yields have moved a similar amount except for French OATs which have slipped 3bps. The story about French debt yielding more than Spain, one of the original PIGS has gotten a lot of press and it seems deeper thinkers disagree with the idea and are buying ‘undervalued’ French OATs.

In the commodity markets, oil (+0.15%) has finally stopped falling, at least for the moment, although the recent trend is anything but encouraging for oil bulls. Crude is lower by -4.5% in the past week and -9.0% in the past month, clearly helping the headline inflation readings. As to the metals markets, after another strong day yesterday, they are consolidating with very modest declines (Au -0.2%, Ag -0.1%, Cu -0.4%) although the trend in all three remains firmly higher.

Finally, the dollar, after several sessions under a lot of pressure, is also bouncing slightly, at least against most of its counterparts. We have already discussed the yen’s gains, but vs. the rest of the G10, it is firmer by roughly 0.15% or so while vs. its EMG counterparts some are seeing losses (CE4 -0.3% to -0.4%) while there are others with modest gains (ZAR +0.3%, MXN +0.4%). For now, the trend remains for a lower dollar, and if we see a soft PCE reading this morning, I expect that to reassert itself as thus far, today’s price action appears more like a trading response to the recent weakness.

In addition to the PCE data, we also see Personal Income (exp 0.4%), Personal Spending (0.3%), the Goods Trade Balance (-$99.4B) and Michigan Sentiment (69.3). Mercifully, on the Fed front, only Governor Bowman speaks, she of the dissent at the last meeting, although yesterday’s plethora of Fed speakers taught us nothing new at all.

I don’t have a strong opinion as to how this data will play out, but I would caution that if PCE is firmer than expected, look for a hiccup in the recent euphoria over stocks and bonds, while the dollar consolidates its support. However, if we see a softer print than forecast, watch out for a much bigger rally in stocks and a much weaker dollar.

Good luck and good weekend

Adf

	fxpoet on The Doctrine, Donroe
	jimstopher3b51952be9 on The Doctrine, Donroe
	fxpoet on The Doctrine, Donroe
	jimstopher3b51952be9 on The Doctrine, Donroe
	fxpoet on Talk of the Town

fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Category Archives: Uncategorized

Clouded and Blurry

New Calculation

Condemned to Damnation

A Trumpian Size

Awakened the Beast

Surprise!

Impuissance

Not in a Hurry

A Brand New Zeitgeist

More Money to Mint