Category Archives: Uncategorized

Debased

Posted on by

Said Powell, the path is still clear
For cutting three times all this year
Though data’s been hot
We’ve certainly not
Decided no rate cuts are near

This was, of course, warmly embraced
By traders who bought shares post-haste
But do not forget
The very real threat
The dollar will, thus, be debased

Chairman Powell regaled us once again and yesterday he sounded far more like the December Powell than the March Powell.  Notice in his comments that he has essentially dismissed the recent hotter than expected inflation data and instead insists they are on the right road to achieve their goal.  He explained [emphasis added], “The recent data do not…materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down to 2% on a sometimes bumpy path.” And maybe he is correct.  Maybe the January and February data points are the outliers, and the rate of inflation is going to reverse back lower.

But he has to know that when he coos like a dove, risk assets are going to rally sharply.  The difference today is that the bond market is beginning to ignore all the Fed talk as we see despite these dovish tones, yields remain at their highest level (4.36%) since November, with no downward movement at all.  In fact, perhaps the real concern that the Fed should have is that gold continues to rise strongly almost every day, trading to $2300/oz and showing no signs of slowing down.

I have been consistent in my view that if the Fed cuts despite the ongoing better than expected data the result would be a sharp decline in the dollar, a sharp decline in bond prices (rise in yields) and a sharp rise in commodity prices.  I have also indicated that, at least initially, I expected equities to rally, but their medium-term outlook was more suspect.  Well, yesterday, that was exactly how the market behaved with metals markets screaming higher, stocks trading well and bonds lacking any bids.

Yesterday’s data showed the ADP Employment number jumping 184K, well above expectations of 148K, but the ISM Services data was a bit soft at 51.4 (exp 52.7) and more importantly, the Prices sub-index fell to 53.4 down 5 points from last month.  That was the set-up for Powell’s comments, and he jumped on board.  It remains abundantly clear that the Fed is desperate to cut rates almost regardless of the economics.  My take is the reason has more to do with the debt situation than the presidential election although there is a third possible explanation as well, a too-strong dollar.

Consider the following: the dollar remains the world’s reserve currency and the currency most widely used in trade and financing activity.  Because of this, a large majority of the world’s total outstanding debt of approximately $350 trillion is denominated in dollars despite the fact that most companies and countries are not USD functional.  The result of this situation is that all those non-USD functional debtors need to buy dollars in order to service and repay that debt.  If you were looking for an underlying reason as to the dollar’s broad strength, this is another candidate in the mix.

As such, it is entirely realistic that Chairman Powell is feeling intense pressure from the international community to cut interest rates to weaken the dollar.  While I don’t expect that a Plaza Accord type agreement is in the offing, it is possible that Powell sees this as an achievable outcome and one that would not result in global chaos.  However, whatever the reason, as we watch commodities rally, while the dollar and bond market sell off, we are watching Fed credibility dissipate.

Ok, let’s peruse the overnight session to see how markets have responded to the dovish version of Powell. While US equities sold off late in the day yesterday, minimizing gains, the same was not true overseas.  Though Chinese markets were closed for the Ching Ming Festival, pretty much everywhere else in Asia saw equity rallies of substance with the Nikkei’s 0.8% rise a good proxy for all.  Meanwhile, in Europe the screens are all green as well, although not quite as impressively, more on the order of 0.25% – 0.5%.  This performance is in accord with Services PMI data that was released this morning showing broadly better than expected outcomes across all the major nations as well as the Eurozone as a whole.  Finally, US futures at this hour (6:45) are firmer across the board by 0.25%.

In the bond market, Treasury investors do not see the benefits of Powell’s dovish turn amid still high inflation.  The ADP data is certainly a concern as all eyes turn toward tomorrow’s NFP report.  In fact, what we are seeing is a bit of a curve steepening (less inversion) with the 10yr-2yr inversion now down to -31bps from its -40bp level that had been steady for the past several weeks.  However, European sovereign yields are all a touch lower this morning, down between 2bps (Germany) and 6bps (Italy) as comments from Robert Holtzmann, Austrian central bank chief and the most hawkish ECB member finally conceded that a cut in June could be appropriate.  Of course, now there is talk of a cut at the end of this month weighing on yields.  Meanwhile, JGB yields crept higher by 1bp, but remain at 0.75%, showing no signs of running away higher.

Oil prices (-0.3%) are consolidating this morning after yet another positive session yesterday with WTI now trading above $85/bbl and Brent crude just below $90/bbl.  OPEC reconfirmed that production would remain at current levels and two nations, Iraq and Kazakhstan have promised to cut back to bring their numbers back in line with quotas.  As well, EIA data showed a build in crude but a much larger draw in gasoline stocks (which is why prices are rising at the pump) adding support to the market.  Gold (-0.1%), too, is consolidating this morning but the trend remains strongly higher.  At the same time, copper (+0.5% today, +5.75% this week) is continuing its rapid rise and is back to levels last touched in January of last year.  It appears the broader growth story remains a driver here, especially with the idea that the Fed may be cutting rates and goosing it further.

Finally, the dollar is under a bit more pressure this morning after Powell’s dovish stance, sliding against most of its counterparts in both the G10 and EMG blocs.  AUD (+0.65%) and SEK (+0.65%) are the leaders in the G10 space with most of the rest of the bloc following higher.  One exception is CHF (-0.4%) which has fallen after CPI there fell to 1.0% Y/Y (0.0% M/M) and encouraged traders to bet on faster rate cuts from the SNB.  The yen (-0.1%) too, is not following suit, which perhaps indicates we are seeing a reversion to the classic risk-on stance (higher stocks and commodities, weaker dollar and havens), at least for today.  In the emerging markets, most currencies are firmer led by (CLP +0.6% on copper strength) and HUF (+0.4%) which is simply demonstrating its higher beta relative to the euro, although there are key currencies that are little changed like MXN, BRL and CNY.

On the data front, this morning brings the weekly Initial (exp 214K) and Continuing (1822K) Claims data as well as the Trade Balance (-$67.3B).  As well we hear from five more Fed speakers (Barkin, Goolsbee, Mester, Musalem, and Kugler) to add to yesterday’s comments.  The question I would ask is, even if some of them sound more hawkish, given what we just heard from Powell, will it matter?  For instance, yesterday, Atlanta’s Raphael Bostic reiterated his stance that one cut was likely all that was necessary this year and nobody heard him speak, effectively.  We would need to hear every one of them vociferously defend the current stance and call for zero cuts to have an impact.  And that ain’t happening!

With Powell showing his dovish feathers, the dollar is going to remain under pressure while asset prices perform.  I think that’s the most likely outcome ahead of tomorrow’s data, where a particularly hot number could change things.  But we will discuss that then.

Good luck
Adf

Wronger

Posted on by

The data was, once again, stronger
Reminding us higher for longer
Is still on the cards
Despite the diehards’
Beliefs that Chair Powell is wronger

As well, from two speakers we heard
And none of their signals were blurred
Said Daly and Mester
To every investor
All rate cuts are likely deferred

First, our thoughts are with the people of Taiwan which suffered a massive earthquake last night registering 7.4 on the Richter Scale.  The damage was substantial and while the early count of fatalities is relatively low, just seven so far, I fear there will be more.  From a business perspective, roads and rail lines were damaged and some of the semiconductor fabs were taken offline. The last issue matters greatly as it has the potential to drive up costs and thus prices of finished goods even further (remember what happened to auto prices during Covid when there was no availability of chips?).  It is still too early to determine what the ultimate impacts will be, but the risk is that this will add to inflationary pressures if anything.

However, away from that news, the market story from yesterday and overnight is that the data continues to point to stronger growth in the US (Factory Orders jumped 1.4%) and the latest Fed speakers we heard, Daly and Mester, explained that while three cuts are still possible this year, neither one yet has the confidence that inflation is truly heading back to their 2% goal.

And this is really the entire story for now.  It remains abundantly clear that the Fed is very keen to cut interest rates.  Their macroeconomic backgrounds look at all that has happened and given their underlying belief that the “proper” long-term interest rate is somewhere between 2.5% and 3.0%, they are concerned their current policy is too tight.  And yet, despite these views, virtually every data point that is released shows solid economic activity and no hint that things are slowing down, especially in the labor market.

So, despite that strong desire, they are wary of acting because they know, or at least Powell knows, that if they cut and inflation resurges, it is all on him.  Remember, Powell has made it clear multiple times that he wants to be Paul Volcker redux, not Arthur Burns redux.  The Fed funds futures market continues to price just 66bps of cuts by the December meeting, a telling statement about the difference between market beliefs and Fedspeak, at least yesterday’s Fedspeak.  Granted, we heard last week from two Fed speakers who thought either one or two cuts was the most likely outcome.

Today brings five more speakers including Chair Powell as well as both ADP Employment (exp 148K) and ISM Services (52.7), so there is ample opportunity for news to shake things up.  Based on everything we have seen regarding the US economic data; it seems the risks are for hotter data rather than softer data.  But of more importance, I believe, will be Powell’s comments.  If he accepts the idea that the economy continues to run fairly well with the current interest rate structure and says anything about less than three cuts being appropriate, watch out!

So, let’s look at what happened in markets overnight.  After a weak session in the US yesterday on the growing concern that monetary policy is going to remain tighter, Asia followed suit with declines across the sector.  The Nikkei (-1.0%) and Hang Seng (-1.2%) were both feeling the weight of this evolving narrative.  Surprisingly, mainland Chinese shares were also under pressure despite continued talk of more fiscal stimulus as well as a resurfacing of the idea that President Xi is willing to countenance some version of QE there.  It should be no surprise that virtually every regional market was in the red.

European bourses, though, are a different story this morning as they are higher after the initial read for Eurozone inflation fell to 2.4%, two ticks lower than expected while the Core reading fell to 2.9%, one tick lower than expected and the lowest since February 2022.  Equity investors saw this and decided that the ECB has far fewer impediments to cutting rates than the Fed.  In fact, the only market not behaving like this is the FTSE 100, which received no such news and is somewhat softer this morning.  As to US futures, they are essentially unchanged ahead of Powell’s speech today.

In the bond market, this dichotomy of policy views is also evident as Treasury yields continue to climb, edging up another basis point this morning while European sovereign yields are mostly lower, between 2bps (Spain) and 4bps (Germany) with one outlier, Italy (+2bps).  The Italian situation has to do with the European commission putting pressure on the nation regarding its budget situation which may fall afoul of the current regulations.

In the commodity markets, oil (+0.45%) continues to trade higher as the tensions in the Middle East show no sign of abating while Ukraine has been successful in interrupting Russian refinery production to some extent. Meanwhile. OPEC meets today and there is no indication that they will be changing their production restrictions.  Gold (-0.4%) which has been flying, is taking a breather today although the other metals continue to grind higher.  Nothing has really changed this story as the industrial metals continue to respond to brighter economic prospects while the precious sector continues to worry about the ultimate debasement of the fiat world.

Finally, in that fiat world, the picture is mixed this morning, although the best description is probably unchanged.  I’m hard pressed to look at my screen and see any exchange rate that is more than 0.1% different than yesterday’s levels.  Just like in the equity market, I believe traders are awaiting Chairman Powell’s comments today before taking any new positions.  Over the course of the past three weeks, the dollar has been quite strong, rallying about 3% on a DXY basis.  If the Fed continues to highlight that it is too soon to ease policy, and with today’s Eurozone inflation data, we start to hear more from ECB officials about the ability to cut, my sense is that we could see further strength in the greenback.

Overall, almost everything in markets continues to rely on Powell and the Fed.  Remember, Friday we will see the March payroll report.  If it continues the recent trend of >200K new jobs, it will be very difficult for any doves at the Fed to make their case effectively.  That could begin to weigh more heavily on the equity market but should support the dollar going forward.  Let’s listen to Chairman Jay today for our next clues.

Good luck
Adf

Dismay

Posted on by

The data continues to show
The US is able to grow
If this is the case
Seems foolish to chase
The idea rate cuts are a go
 
Instead, I expect Powell’s way
Is higher for longer will stay
If rates, thus, stay high
Can risk assets fly?
Or will those high rates cause dismay?

 

The case for the Fed to cut rates continues to fade as not only have Powell and his team been cautioning patience, the data continue to show that economic activity is not slowing down.  The latest exhibit comes from yesterday’s ISM Manufacturing data which printed at a much better-than-expected 50.3, its first print above 50 in 16 months.  Not only that, but the New Orders and Prices Paid sub-indices both printed much higher than last month indicating business is picking up and so are prices.  Certainly, the chart below from tradingeconomics.com indicates that a clear trend is forming for better growth ahead.

The Prices Paid chart looks almost identical.  It strikes me that the recession call continues to get harder to make.  Certainly, things can change, but as of right now, I cannot look at the menu of data and conclude growth is set to slow rapidly.  Given this as background, it becomes increasingly difficult to make the case that the Fed is going to cut rates at all, at least based on the data.  This is a big problem for Powell if he remains insistent on making those cuts because it will call into question the rationale and really push the politics front and center.

As it happens, I am not the only one concluding that rate cuts are less likely, the CME’s Fed funds futures contract is slowly pricing cuts out of the mix as well.  This morning not only has the probability of a June cut fallen slightly to 58.8%, but the market is now pricing in just 66bps of cuts by the December meeting, less than the three full 25bp moves that the median dot indicated.  There is a ton of Fedspeak this week, starting with 4 speeches today from Bowman, Williams Mester, and Daly.  Chairman Powell speaks tomorrow and there are a dozen more after that, so it will be very interesting to see if the tone has changed to even more caution and patience.  With this as a backdrop, perhaps longer duration assets, like bonds and high growth companies (i.e., tech) could well feel some pressure.  We shall see how things play out.

Cooperation
Is not what the market gives
Instead look for pain

 

While the US story continues to be about stronger economic activity and a reduced probability of lower rates, in Japan, the story remains entirely focused on the yen’s weakness and whether the MOF/BOJ are going to respond.  First, remember that in Japan, like here in the US, the MOF is responsible for the currency, not the BOJ, meaning any intervention is directed by the MOF although it is executed by the BOJ.  This is why we need to focus on the FinMin and his minions regarding any actions.  In this vein, last night as USDJPY once again approached 152.00, FinMin Suzuki was back in front of reporters explaining, “Language aside, we’re now watching markets with a strong sense of urgency.  We are carefully watching daily market moves.”  He added, “All we can say is that we will take appropriate action against excessive volatility, without ruling out any options.”  

So, the MOF continues to threaten intervention with their urgent watching of markets (I feel like that is a very poor translation of whatever he is actually saying, although I suppose it gets the message across.). In one way, it was surprising they didn’t take advantage of illiquid markets yesterday to push the dollar lower as every dollar spent would have been far more effective, but a look at the recent price activity shows that while the yen has weakened appreciably since the beginning of the year, thus far their words have been sufficient to prevent further damage as the currency hasn’t budged in two weeks.  

The problem they have is that the US seems less and less likely to begin easing monetary policy and so the underlying fundamental driver of the exchange rate, interest rate differentials, is going to continue to weigh on the yen (and every other currency).  I also see no reason for Secretary Yellen to consider that a weaker dollar is a help for the US right now, so concerted intervention, a redux of the Plaza Accord of 1985 seems highly unlikely.  While at some point I do expect the MOF to act on their own, as is always the case, it will only have a short-lived impact on markets and likely be used as an entry point for speculators to extend their short yen trade.  The only solution is a change in policies and the BOJ blew that last month.

Ok, now that markets are back open again, let’s see what’s happening.  In Asia, the big mover was the Hang Seng (+2.35%) which was catching up to the news that China seemed ready to implement further stimulus that we heard on Friday.  But there was no consistency throughout the rest of Asia with both gainers and losers around the continent.  Europe is a similar mixed bag, with some markets higher and others lower despite what I would characterize as mildly better than expected PMI data released this morning across the entire continent.  While it wasn’t showing growth, the data improved on the flash numbers of last week.  US futures, however, are softer this morning by about -0.5% after yesterday’s lackluster session.  Certainly, continued hopes for rate cuts are diminishing and that seems to be weighing on stocks at least a bit.

In the bond market, yesterday’s US data set the tone as Treasury yields jumped 12bps yesterday after the strong ISM data and are up another 5bps this morning.  This has dragged European yields higher across the board with gains between 9bps (Germany) and 14bps (Italy).  Of course, the mildly better PMI data in Europe is adding to that mix.  Even JGB yields managed to edge higher by 1bp overnight, although they remain below 0.75%.

Oil prices have been flying, up another 1.1% this morning and now nearly 9% in the past month.  It seems that the escalation of events in the Middle East is having an impact at the same time that OPEC+ is holding firm on their production cuts.  There are rumors of some big Middle East settlement deal to end the war as well as get Saudi Arabia to recognize Israel, but the market does not yet believe that, clearly.  Considering that growth is making a comeback, that China seems ready to stimulate further and that production is not growing, it seems there is a pretty good chance that oil prices continue to rally.  Meanwhile, metals remain the flavor of the day with gold (+0.3%), silver (+1.7%), copper (+0.6%) and aluminum (+1.6%) all in demand.  The industrial metals are responding to the growth story, while the precious set are simply on a roll with fears that fiat currencies are going to continue to be debased top of mind.

Speaking of fiat currencies, the dollar, which rallied nicely over the long weekend, is settling back a bit this morning, but with no consistency.  For instance, CHF (-0.5%) is lagging sharply while NOK (+0.5%) and SEK (+0.5%) are both powering ahead.  The rest of the G10 is modestly firmer, but the movements are within 10bps of yesterday’s closing levels.  In the EMG bloc, ZAR (+0.5%) continues to benefit from the metals rally while PLN (-0.4%) is under pressure after its PMI data disappointed relative to its peers.  My view continues to be that as long as the Fed remains the most hawkish central bank, the dollar will find support.

On the data front today we see JOLTS Job Openings (exp 8.75M) and Factory Orders (1.0%) and we have all those Fed speakers mentioned above.  German CPI fell to 2.2%, as expected, which implies to me that the chances remain greater the ECB will cut before the Fed.  And that is really the big question now, which major central bank acts first.  With all the Fed speakers on this week’s docket, I suspect by Friday we will have a much better idea as to whether a June cut is still on the table.  We will be watching closely.

Good luck

Adf

Limited Sellin’

Posted on by

After the data on Friday
Powell said, rushing’s not my way
Rates, we’ll still lower
If growth turns out slower
Least that’s what the punditry might say
 
Forget any thoughts about hikes
Old ideas that nobody likes
Other than Yellen
Limited sellin’
Suggests there will be no yield spikes

 

“The fact that the US economy is growing at such a solid pace, the fact that the labor market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates.”

When Chairman Powell expressed this sentiment Friday morning, my take was he was seeking to give himself an out.  One way to read it is, since the economy remains strong, higher for longer isn’t killing us.  However, my first reading of the statement was that since the economy is strong, they can confidently cut rates.  Perhaps it is my confusion, or perhaps it is simply a badly constructed statement of the first view, but regardless, my confidence in the process has not been enhanced.

Friday’s PCE data was released pretty much in line with expectations but that is not as helpful as you might think given expectations were for a continued rebound in the numbers.  The fact that Powell is not more vociferously calling for a tougher stance is the most important piece of the puzzle.  This is what tells me that he has abandoned the 2% target.  While he will never officially admit that is the case, it has become increasingly clear that to achieve that goal, the Fed will need to push much harder on the economy and possibly drive a recession.  My read is that there are very few FOMC members who are willing to accept that tradeoff, especially in a presidential election year.

Right now, as Q2 begins, there is still time to see inflation data ebb closer to their target and allow that June rate cut that he seems to be promising.  But if the data between now and then, which includes three NFP reports, three CPI reports and two more PCE reports, does not cooperate and continues to show economic strength and sticky, if not building, price pressures, Powell and friends are going to have a very hard case to make with regards to any rate cuts.  And this really cuts to the chase as it is increasingly clear that the Fed’s true goal is not to reduce inflation, but to reduce interest rates so government borrowing becomes cheaper.  If the Treasury is going to continue to flood the market with T-bills rather than coupons (see chart below from BofA Global Research), the Fed has the ability to reduce their interest costs directly.  I expect that the pressure to do so is immense and growing.  The Fed remains in a precarious position given their credibility is on the line and so much of it is dependent on things outside their control.

There continues to be a yawning gap between views on the economy in the analyst community.  One camp remains firmly committed to the soft or no-landing scenario, expecting ongoing economic growth as inflation magically fades away (the so-called immaculate disinflation).  The other camp sees a recession on the horizon, if not already arrived, as when breaking down the data, they are able to find key aspects which indicate growth is slowing rapidly.  Right now, my guess is Powell is praying for the recession to appear more clearly, so he has a good reason to cut rates because otherwise, any rate cuts are going to be much more difficult to explain.

Beyond the Fed story, the news overnight was about China and Japan as PMI data from the former showed unexpected strength (Caixin Manufacturing PMI to 51.1) while the latter saw a mixed picture with the PMI data rising to 48.2, but still below the key 50.0 level, while the Quarterly Tankan data had some good news for large manufacturers and not-so-good news for small manufacturers.  With all of Europe still closed for the Easter holiday, a look at the markets open in Asia shows that the Nikkei (-1.4%) found no joy in the data and the index slipped back below the 40K level.  However, Chinese shares rose (+1.6%) on the data as it seems any read of recent commentary from the nation’s leaders indicates more fiscal support is on its way.

Bond markets, too, are closed throughout Europe and so the overnight saw only JGB yields edge up 1bp, Chinese yields follow suit, rising 1bp while Treasury yields are higher by 3bps this morning.  My take is there is limited information in these movements given the overall lack of market activity.

In the commodity markets, oil prices are unchanged to start the day, although they rose more than 6% in March, so there is clearly upside pressure there.  But once again, the star is gold (+0.75%) which is at another new all-time high as it seems an increasing number of investors and traders are becoming more concerned over the ongoing flood of liquidity entering the markets.  This strength is gold is mirrored today in silver, copper and aluminum as the desire to own ‘stuff’ rather than paper continues to grow.

Finally, the dollar continues to be in demand versus essentially all its major counterparts.  With Europe out of the office today, movement has been muted, but it is firmer against every one of its G10 counterparts with NOK (-0.55%) and SEK (-0.5%) the laggards, while it remains stronger vs. most of its EMG counterparts, although ZAR (+0.3%) is benefitting from the strong rally in gold and precious metals.  When looking at the macro situation around the world, right now, the US remains the proverbial cleanest shirt in the dirty laundry and so has the lowest case to cut interest rates.  I believe the ECB and BOE (and BOC and Riksbank, etc.) will all be cutting before the Fed and the dollar will benefit accordingly.  However, as I have maintained for a long time, if the Fed starts cutting with inflation remaining well above target, the dollar will decline sharply.

Looking at the data this week shows we have much to anticipate, culminating in Friday’s NFP report:

TodayISM Manufacturing48.4
 ISM Prices Paid52.6
 Construction Spending0.6%
TuesdayJOLTS Job Openings8.79M
 Factory Orders1.0%
WednesdayADP Employment130K
 ISM Services52.6
ThursdayInitial Claims214K
 Continuing Claims1822K
 Trade Balance-$67.0B
FridayNonfarm Payrolls200K
 Private Payrolls160K
 Manufacturing Payrolls5K
 Unemployment Rate3.9%
 Average Hourly Earnings 0.3% ((4.1% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.5%
 Consumer Credit$16.5B

Source: tradingeconomics.com

In addition to the data, we hear from 15 different FOMC members across 18 speeches this week.  This includes Chairman Powell on Wednesday as he discusses the Economic Outlook at the Stanford Business, Government and Society Forum.  By the time he speaks, we will have seen the ISM and ADP data, but my guess is that nothing is going to change his mind right now.  At this stage, hotter data is the Fed’s real problem as it will make cutting rates that much more difficult.  The Atlanta Fed’s latest GDPNow reading ticked up to 2.3% for Q1, certainly not indicating a slowdown is coming.  Sit back and get your popcorn out, it is going to be interesting to watch the Fed explain why rate cuts are needed if the data continues along its recent trend.

Good luck

Adf

Crying Again

Posted on by

The boy who cried wolf
Better known as, Mr Yen
Is crying again

 

Masato Kanda, the vice finance minister for international affairs, also known as ‘Mr Yen’ was interviewed last night regarding the recent yen’s recent weakness.  “I strongly feel the recent sharp depreciation of the yen is unusual, given fundamentals such as the inflation trend and outlook, as well as the direction of monetary policy and yields in Japan and the US.  Many people think the yen is now moving in the opposite direction of where it should be going.  We are currently monitoring developments in the foreign exchange market with a high sense of urgency. We will take appropriate measures against excessive foreign exchange moves without ruling out any options.”

His comments [emphasis added] are consistent with what we have heard from FinMin Suzuki, PM Kishida and from him previously.  What makes this so interesting is that USDJPY is essentially unchanged from its level 10 days ago, immediately in the wake of the BOJ meeting.  While we did touch a new yen low (dollar high) earlier this week, that level was just a single pip weaker than the level seen back in 2022 (grey line) that seemed to be the intervention trigger at the time.  And consider, much has passed between then and now, with inflation in Japan (blue shaded area) having fallen back to levels last seen at that time, but now trending in the opposite direction.  

Source: tradingeconomics.com

It is abundantly clear that the MOF is concerned over a sharp decline in the yen.  It is also clear that the monetary policy differences between the US and Japan are such that there is very little reason for the yen to appreciate at the current time.  This is especially true since the US commentary we have heard lately, with Waller’s comments on Wednesday the most recent, indicate that the long-awaited Fed pivot continues to be a distant prospect, while Ueda-san made it clear that the BOJ was going to maintain easy money conditions despite having exited NIRP. 

FWIW, absent a sudden sharp move above 153, my take is the MOF/BOJ simply continue to jawbone the market.  However, if something changes and we rip higher in USDJPY, that would change my views.  

Though holiday markets abound
The info today could astound
At first, PCE
With fears it’s o’er three
Then Powell with words quite profound

And what, you might ask, could cause such a move in the FX markets?  Well, despite the fact that all of Europe and Canada are closed as well as both equity and futures exchanges in the US in observance of the Good Friday holiday, this morning we have critical US economic data being released at 8:30 as well as a speech by Chairman Powell at 11:30.  Liquidity is abysmal, which means that if the data is a surprise in either direction, we could see an outsized move in the dollar.  And then, Powell’s timing is such that even the skeleton staffs at European banks are likely to have gone home by the time he speaks. 

Given the recent commentary we have heard from other FOMC members, it is almost a certainty that there will be some movement.  Consider, if Powell pushes back and sounds dovish, that will change attitudes that have been adjusting to a more hawkish view.  At the same time, if he comes across as hawkish, that will be seen as confirmation that the Fed is on hold for much longer, and markets will continue to price out rate cuts.  Do not be surprised to see different prices on your screen when you come in on Monday.  Recognize, too, that Easter Monday is a holiday in many Eurozone countries as well, so liquidity will still not be back to normal.  It is for these situations that a consistent hedging program is needed.

Ok, that pretty much sums up the overnight session as well as a peek at what’s in store.  Asian equity markets were firmer overnight as the weak yen continues to support the Nikkei, while Chinese shares have benefitted from a story making the rounds that Xi Jinpeng, in an unpublished speech from last October, explained he thought the PBOC needed to consider QE, at least that’s the context.  He didn’t actually use the term QE.  But if that is the case, that is a huge consideration for Chinese asset prices.  We shall see.  Meanwhile, European bourses are all closed as are US futures markets.

Not surprisingly, bond markets have also been closed in Europe but it is noteworthy that Chinese 10-year yields fell to 2.20%, a new all-time low, on the back of the QE story.

Commodity markets are also shut, but I must explain that yesterday, gold rose 1.75% to yet another new high price at $2232/oz.  I believe its performance is quite a condemnation of the current monetary and fiscal policy stances around the world as investors, both public and private, are growing increasingly concerned that there is going to be a comeuppance in the future.

Finally, the FX markets are really the only ones that are open, and the dollar has continued to edge higher overall.  The euro is below 1.08, its lowest level in a month while USDJPY hovers just below its recent highs and USDCNY similarly hovers below its recent highs with both longer term trends clearly higher.  I repeat, this is all policy driven and until policies change, neither will these trends.

Let’s look at what the consensus views are for this morning’s data.  

Personal Income0.4%
Personal Spending0.5%
PCE0.4% (2.5% Y/Y)
Core PCE0.3% (2.8% Y/Y)
Source: tradingeconomics.com

While those Y/Y numbers are not terribly high, the problem is they have stopped trending lower.  Based on the CPI data from earlier in the month, another 0.4% print in the headline will more convincingly turn that trend back higher and that is exactly what frightens the Fed.  And if it’s a tick higher, heads will explode as their confidence in achieving their mooted goal of 2% will take a major hit.  I think the response here will be completely as one would expect; hot print means stronger dollar; cool print means weaker dollar, in-line print means no movement ahead of Powell’s speech.  Let’s see what happens!

Good luck and good weekend

Adf

Not In a Rush

Posted on by

Said Waller, I’m not in a rush
To cut, though some hopes that may crush
Inflation’s still sticky
And so, it’s quite tricky
For us to cut with prices flush
 
He also said that PCE
Tomorrow, may help him to see
If trends from Q4
Still hold anymore
Or whether its new home is three

 

Investors and traders have a problem, or perhaps several of them.  The timing of key data and events coincides with the Easter holiday weekend as well as month- and quarter-ends (and for Japan, fiscal year end).  Their problem is to discern how much movement is based on new information and the anticipation of tomorrow’s releases versus how much movement is a result of declining liquidity as trading desks throughout Europe see staff exit early for the holiday weekend.  If movement is due to new information, perhaps a response is required.  However, if it is due to illiquidity, sitting tight may well be the right thing to do.

The biggest news yesterday came from a speech by Fed Governor Chris Waller.  He certainly didn’t bury the lead as this was his opening paragraph:

“We made a lot of headway toward our inflation goal in 2023, and the labor market moved substantially into better balance, all while holding the unemployment rate below 4 percent for nearly two years. But the data we have received so far this year has made me uncertain about the speed of continued progress. Back in February, I noted that data on fourth quarter gross domestic product (GDP) as well as January data on job growth and inflation came in hotter than expected. I concluded then that we needed time to verify that the progress on inflation we saw in the second half of 2023 would continue, which meant there was no rush to begin cutting interest rates to normalize the stance of monetary policy.”

He spent the rest of the speech going through particular details about the labor market and the broad economic measures and data we have seen with the conclusion being, higher for longer (H4L) is still the correct policy.  While he did not explicitly say he moved his ‘dot’ to less than three cuts, I believe we can infer that he is now in the 2-cut camp based on the entirety of the speech.

Given the absence of other data released yesterday, as well as the dearth of other commentary, he was the main event.  Interestingly, despite what appears to have been a more hawkish tone to his comments, equity markets were sanguine about the news and rallied anyway.  To me, that indicates equity investors have made their peace with the current interest rate structure.  

What does this mean for markets going forward?  First, let’s assume that there are three potential ways the Fed funds discussion can evolve going forward; 1) raising rates from here, 2) status quo (H4L) and 3) starting to reduce rates.  Based on recent market price action in both equities and bonds, there is very little fear attached to number 2.  Investors have absorbed this information, are pricing a 61% probability of a June rate cut but are now pricing slightly less than 3 cuts in for the rest of the year.  In other words, H4L is no longer frightening.  The key near-term risk to markets is number 1; if the inflation data not merely drags on at current levels but starts to accelerate again.  I believe that is what would be necessary for the FOMC to consider tightening policy further and my take is that risk assets will not respond well to that situation.  Stocks would suffer on a valuation basis while bonds would likely sell off on the basis of still untamed inflation.

It is the third choice though, cutting rates, that is likely to generate the most fireworks.  Certainly, the initial movement will be a risk asset rally as investors will make the case that a lower discount rate means higher current values as well as invoke the idea that money currently invested in money-market funds will quickly move to stocks as interest rates decline.  At the same time, the front end of the yield curve will see yields decline amid what is likely to be a bull steepening of the curve.  And that’s the problem.  History has shown that when the curve re-steepens after a period of inversion, that is when trouble comes for markets.  As can be seen in the chart below from the St Louis Fed’s FRED database, the correlation between a declining Fed funds rate and a recession is very high (grey shaded areas represent recessions).  

This makes perfect sense as when the economy is heading into, or more likely already in, a recession, the Fed cuts rates to address the issue.  As such, the fervent desire to see rate cuts seems misplaced.  Strong economic activity comes alongside higher interest rates, not rate cuts.  If the Fed is cutting, that means there are problems as remember, whatever they say, they are always reactive, not proactive.  So, while the initial risk asset move may be positive, history has shown that during recessions, the average decline in the equity markets is on the order of 30%. Keep that in mind if you are hoping for the Fed to cut rates.

Ok, let’s tour the markets from overnight to see how things stand ahead of a bunch of data this morning. Japanese stocks suffered overnight, falling -1.5%, as the threat of intervention did little to strengthen the yen but certainly got some investors nervous.  As well, it is Fiscal year end there tonight, so I imagine we are seeing some profit taking given the remarkable run Japanese stocks have had in the past twelve months, rising 44% in yen terms.  The rest of Asia saw more gainers than losers with China, India and Australia all following the US markets higher although South Korea and Taiwan did lag.  In Europe, most bourses are higher this morning, but the gains have been more modest, on the order of 0.3% or so.  And as I write (7:30), US futures are unchanged on the day after yesterday’s gains.

In the bond market, yields are broadly higher with Treasuries (+3bps) reversing yesterday’s decline and similar price action in Europe with all sovereign yields higher by between 3bps and 5bps although Italy (+8bps) is an outlier as their finances are starting to look a bit dicier.  I would be remiss if I didn’t mention that JGB yields have edged down another basis point and are now at 0.70%.  There is no sign that yields are running away here.

Oil prices (+1.6%) continue to climb on the same story of reduced supply and ongoing demand.  Yesterday’s EIA data showed a smaller inventory build than forecast and there is no indication that OPEC+ is going to open the taps anytime soon.  Gold (+0.8%) is continuing its recent rally, following on yesterday’s move, as investors throughout Asia continue to hoard the barbarous relic.  As to the base metals, they are essentially unchanged over the past several sessions, seemingly waiting for the next economic data.

Finally, the dollar is feeling its oats this morning, rallying against every one of its G10 counterparts with this group (AUD -0.6%, NZD -0.6%, SEK -0.6%, NOK -0.6%) leading the way lower.  As well, the EMG bloc is also under pressure led by ZAR (-0.7%) and HUF (-0.6%) although the entire bloc is under pressure.  Of note is CNY (-0.15%) which the PBOC continues to struggle with as they cannot seem to decide if matching yen weakness is more important that maintaining stability.  It seems to me they are really hoping for BOJ intervention to reduce pressure on the renminbi.

On the data front, there is a bunch today starting with Initial (exp 215K) and Continuing (1808K) Claims, as well as the final look at Q4 GDP (3.2%).  As well we get Chicago PMI (46.0) and Michigan Sentiment (76.5) to finish out the morning.  There are no scheduled Fed speakers, but then, all eyes will be on Powell tomorrow.

It seems to me that Governor Waller made it clear that the tone in the Eccles Building is for more patience until they see inflation decline, or perhaps see the employment situation worse substantially.  With that as the backdrop, it is hard to see a good reason to sell dollars.  Keep that in mind for your hedging activities.

Good luck

Adf

Top of Mind

Posted on by

Will they or won’t they?
The intervention question
Is now top of mind

 

As we approach Japanese Fiscal Year end, and while we all await Friday’s PCE data, the FX markets have taken on more importance, at least for now.  The big question is, will there be intervention by the Japanese?  Late last night, USDJPY traded to a new thirty-four year high of 151.96, one pip higher than the level touched in September 2022 which catalyzed the last intervention by the BOJ/MOF.  Recall, last week the BOJ “tightened” monetary policy by exiting their 8-year experiment with negative interest rates and ‘promised’ that they were just getting started.  Granted, they didn’t indicate things would move quickly in this direction and they also explained they would remain accommodative, but they did seem confident that this would change a lot of opinions.  Remember, too, that the market response to that policy shift was to weaken the currency further while JGB yields actually drifted lower.

So, here we are a bit more than a week later and the yen has fallen to new lows.  What’s a country to do?  In the timeless fashion of governments everywhere with respect to currency moves, they immediately started jawboning.  Last night we heard from BOJ Board member Naoki Tamura as follows, “The handling of monetary policy is extremely important from here on for slow but steady progress in normalization to fold back the extraordinarily large-scale monetary easing.  The continuation of an easy financial environment doesn’t mean there won’t be any more rate hikes at all.”  Traders did not exactly quake in fear that the BOJ was suddenly going to tighten aggressively, let’s put it that way, and so nothing has really changed.  One other thing to note is that Tamura-san is seen as the most hawkish member of the current BOJ, at least per Bloomberg Intelligence’s analysts.  Take a look at their views below.

But wait, there’s more!  We also heard from Japanese FinMin, Shunichi Suzuki, that the government would take “decisive steps” if they deemed it necessary to respond to recent currency movement.  And the, the coup de grace, an emergency meeting between the MOF, the BOJ and the Financial Services Agency (FSA) is ongoing as I type (6:30) to help come up with a plan.  

Does this mean intervention is coming soon to a screen near you?  While it is certainly possible, the ultimate issue remains that the relative monetary policy settings between the US (higher for longer) and Japan (still at ZIRP with a hike expected in…October) remain such that the yen is very likely to remain under pressure.  Remember, too, that Japan is in the midst of a technical recession, so tightening monetary policy is not likely to be appreciated by Mr and Mrs Watanabe.  At the end of the day, the politics of inflation are very different in the US and Japan, and I would contend that in Japan, it is still not the type of existential problem for the government that it appears to be in the US.

FWIW, which is probably not much, I expect the MOF to follow their playbook, talk tougher, check rates and ultimately intervene over the next several days.  They will take advantage of the upcoming Easter holiday weekend and the reduced liquidity in markets to seek an outsized impact for the least amount of money possible.  But I do not see them changing their monetary policy before the autumn and so I look for continued yen weakness over time.  Be careful in the short run, but the direction of travel is still the same, USDJPY will rise.

For China, the fact the yen’s weak
Has Xi and his staff set to freak
They’re all quite dismayed
‘Cause Japanese trade
Has lately been on a hot streak
 

The other story in markets has been the ongoing ructions in the Chinese renminbi market.  It is key to understand that this is directly related to the yen story above as China and Japan are fierce competitors in many of their export activities.  But of even more concern to Xi and his gang is that Japanese exports to China are growing so rapidly and Japan ran a trade surplus with China in December (the last month with data released).  When you are a mercantilist nation like China, having a key competitor, like Japan, allow its currency to weaken dramatically against your own is a major problem.  Last week I highlighted the dramatic decline of the yen vs. the renminbi, and that has not changed.  Below is a chart from tradingeconomics.com showing Japanese exports to China ($billions) showing just how much this trend has changed and continues to do so.

Ultimately, both of these countries rely on exports as a critical part of their economic growth and activity, and in both cases, exports to the US and Europe are crucial markets.  If the Japanese continue to allow the yen to weaken, China has a problem.  Remember, Japan does not have capital controls, so while they don’t want the yen to collapse, they are perfectly comfortable with capital outflows in general.  China, on the other hand, is terrified of massive outflows if they were to even consider relaxing capital controls.  The fact is both companies and individuals work very hard to get their money out of the country.  This is one reason that gold is favored there by the population, and the reason that the government banned bitcoin as it was an open channel for funds to leave the country. 

This battle has just begun and seems likely to last for quite a while going forward.  The Chinese are caught between wanting to devalue the renminbi to compete more effectively and maintaining a stable exchange rate to demonstrate there are no fiscal or economic problems in the country.  Alas for Xi and the PBOC, never the twain shall meet.  I would look for a continuation of the recent market volatility here as they will use that uncertainty to discourage large position taking by speculators.  But, as I have maintained for a long time, I expect that USDCNY will trade to 7.50 and beyond as time progresses.

And that’s really it for today.  Ultimately, very little happened in markets overnight, certainly there were no changes in the recent data trajectory nor in any commentary from speakers (other than that mentioned above).  It is a holiday week and a key piece of data, PCE, is set to be released on a broad market holiday this Friday.  Do not look for large moves before then.

There is no US data due today but we do hear from Fed Governor Christopher Waller this afternoon so there is an opportunity for some market movement then.  But for now, consolidation seems the most likely outcome.

Good luck

Adf

One, Two, Three

Posted on by

On Monday, no one could agree
So, Powell unleashed; one, two, three
At least with respect
To how they dissect
The prospect for rate cuts they see
 
For Bostic, he sees only one
Before the committee is done
While Cook thinks that two
Are likely to do
And Goolsbee said three need be spun

 

During a session with very little new news, and ultimately, very little in the way of net market movement, it was quite interesting to hear from three different Fed speakers with somewhat different views of what the future holds.

In order of their views, as opposed to the timing of their comments, Atlanta Fed President Raphael Bostic reiterated his view from Friday in a different venue.  He explained that given the resilience of the economy, he sees little reason for any rate cuts in the near term and that his ‘dot’ was for just one cut this year, later in the year.  The thing about Bostic is he has proven to be flexible, arguably adhering to the Keynesian concept of, when the facts change, he changes his mind.  While it is not clear to me that the facts have actually changed, his perception of them certainly has.  At this point, it appears that he has become one of the more hawkish FOMC members and he is a current voter on the FOMC.

One step further toward the median we found Governor Lisa Cook, who explained that “the path of disinflation, as expected, has been bumpy and uneven, but a careful approach to further policy adjustments can ensure that inflation will return sustainably to 2% while striving to maintain the strong labor market.”  In other words, we have been surprised by the two consecutive hotter than expected CPI reports and so despite our fervent desire to cut rates as quickly as possible, if we were to do so, whatever credibility we still have would be thrown away.  At least, that is how I read her comments as she is a clear dove and desperate to cut.  To her credit, as a governor, she is making the effort to be a bit more restrained.

Lastly, we heard from Chicago Fed President, Austan Goolsbee, who during his interview (at Yahoo! Finance) quickly highlighted that his ‘dot’ was for three cuts this year.  He further explained that housing was the problem, at least with respect to their forecasts, and why they had expected inflation to decline more rapidly. Now, based on the housing data we continue to see, at least the price data, inflation is unlikely to decline much further at all.  Add in the fact that commodity prices, notably energy prices, have been rebounding for the past month and any hopes for another leg lower in either CPI or PCE are slipping away.  Also, Goolsbee is not a current voter, so many take his views a bit less seriously.

Now, let me ask, do you feel more enlightened?  Me neither.  If I were to assess the current situation, my read is that the majority of the FOMC really does want to cut rates as they believe they have done enough regarding inflation.  Frighteningly, there was an article in the FT this morning from Mohamed El-Erian, claiming that the time is ripe for allowing inflation to run hotter in order to support nominal growth.  We know that is every FinMin’s wet dream, but historically central bankers pushed back on that thesis.  However, El-Arian now claims that the central banks are on board as well.  If this is true, the only conclusion is that all fiat currencies are going to decline in value vs. stuff.  The relative pace of these declines will ebb and flow based on interest rate differentials and other circumstances, but it is not a net positive for the ordinary consumer.

Ok, let’s turn our attention to the overnight session and how markets are behaving.  The bulls have to be disappointed that the recent Fed speakers have not been more dovish, and we have seen that in another lackluster equity session in the US yesterday, with all three major indices lower by about -0.3%.  In Asia, while Japanese shares were essentially unchanged, we saw some strength in China and Hong Kong with the noteworthy story being President Xi’s invitation to keep several US CEOs currently visiting there, in country with the promise of a meeting with him.  The read is he is open to deeper business relationships.  As to the rest of the region, equity markets were mixed with some gainers and some laggards and no large movers.  As to Europe this morning, the color on the screen is green, with a few gains of 0.5% (Germany and Spain) and the rest much more subdued.  US futures are pointing higher at this hour (7:00), by about 0.5%, so the bulls are back.

In the bond market, yields have backed off a bit with Treasuries lower by 2bps and European sovereigns falling between 3bps (Germany) and 6bps (Italy) as the ECB speak continues to point to rate cuts clearly coming, with more hope for April making its way into the market, at least according to Italy’s Panetta.  In what cannot be a huge surprise, 10-year JGB yields remain unchanged as the idea of a tightening cycle there is slowly ebbing from traders’ minds.

In the commodity markets, oil (+0.2%) is creeping higher again as Russia has indicated it is going to restrict production alongside the lost output from refinery damage caused by Ukraine.  As well, after the UN Security Council vote yesterday, it appears that concerns are rising that there is no chance of a ceasefire anytime soon.  Meanwhile, gold (+1.2%) is screaming higher this morning and once again approaching $2200 as what appears to be a combination of growing geopolitical jitters combines with the growing awareness by market participants that inflation is not going to be addressed has investors seeking alternatives to fiat currencies.  Base metals, though, are not seeing the same boost, although are a touch higher overall.

Finally, the dollar is under some pressure this morning with most G10 currencies firmer, although the Swiss franc (-0.2%) is suffering a bit.  In fact, the biggest winner is NZD (+0.45%) but there is precious little to explain this movement.  One currency that is not gaining is the yen, which is unchanged on the session while the dollar remains just below its multi-decade highs set back in October 2022.  In the EMG bloc, the story is more mixed with some gainers (CZK +0.2%, HUF +0.3%) and some laggards (ZAR -0.3%, TWD -0.2%), but as you can see, the movement has been muted.

On the data front, this morning brings Durable Goods (exp 1.1%, 0.4% ex-transport) and Case Shiller Home Prices (6.7%). We also see Consumer Confidence (107.0) at 10:00.  There are no Fed speakers scheduled, but do not be surprised if there is an interview or two from a news source as they continue to try to tweak their message.

To me, the big picture is that there has been a clear relaxation by the Fed, and other central banks, in their attitude toward inflation.  As such, I expect to see risk assets perform and bonds lag.  However, regarding FX, it is all about the timing of the changes that are announced, or guided, rather than the absolute destruction in their value over time.  For now, though, the Fed remains the tightest policy around and the dollar should benefit because of that.

Good luck

Adf

Threw in the Towel

Posted on by

There once was a banker named Powell
Who fought, prices, high with a growl
Then going got tough
So he said, “enough”
And basically, threw in the towel
 
His problem’s inflation’s alive
And truthfully, starting to thrive
The worry is he
Will soon say that three
Percent’s the rate for which he’ll strive

 

With several days to digest the latest FOMC meeting results, and more importantly, the Powell press conference, my take is the Chairman recognizes that to get to 2.0% is going to be extremely painful, too painful politically during this fraught election cycle.  And so, while he tried very hard to convince us all that the Fed was going to get to 2.0%, he stressed it will “take time”.  The subtext of that is, it’s not going to happen in the next several years, at least, and this poet’s view is it may not happen again for decades.  The key to recognizing this subtle shift is to understand that despite increased forecasts for both growth and inflation, the Fed remains hell-bent on cutting interest rates.  Even the neo-Keynesian views which the Fed follows would not prescribe rate cuts in the current economic situation.  But rate cuts are clearly on the table, at least for now.

This begs the question, why is he so determined to cut interest rates with the economy growing above trend?  At this stage, the explanation that makes the most sense to me is…too much debt that needs to be refinanced in the coming years.

Consider, current estimates for total debt around the world are on the order of $350 trillion.  That compares to global GDP of just under $100 trillion.  Many estimates indicate that the average maturity of that debt is about 5 years which means that something on the order of $70 trillion of debt needs to be refinanced each year.  Now, the US portion of that debt is estimated at about $100 trillion, of which ~$34.5 trillion is Treasury debt, and the rest is made up of corporate, mortgage, municipal and private debt.  Remember, too, that total US GDP is currently about $28 trillion as of the end of February (according to the FRED database from the St Louis Fed), so the ratio here is similar to the global ratio.  [Note, this does not include unfunded mandates like Social Security and Medicare, just loans and bonds outstanding.]

Here’s the problem, we have all heard about the fact that the US debt service has climbed above $1 trillion per annum and given the underlying principle is growing, that debt service is growing as well.  In addition, on the private side, there is a huge proportion of corporate debt that has become a serious problem for banks and investors, notably the loans made for commercial real estate, but personal and credit card debt as well.  The Fed cannot look at this situation and conclude that higher rates, or even higher for longer, is going to help all the debtors.  And if the debtors default…that is going to be an economic disaster of epic proportions.Add it up and the only logical answer is Powell is going to gaslight everyone with the idea that the Fed is going to remain vigilant regarding inflation.  And they will right up until the time when the pain becomes too great, or too imminent and they cut.  I think that we are seeing the first signals from markets this is going to be the case from both gold and bitcoin.  But if I am correct, and the Fed cuts despite still elevated inflation readings, look for the dollar to decline sharply, at least initially until other central banks cut as well, look for bonds to fall sharply and look for hard assets to rally.  As to stocks, I expect that initially it will be seen as a positive and juice the rally, but that over time, stocks will begin to lag hard assets.  Quite frankly, this looks like it is a 2024 event, so perhaps if that first cut really comes in June, the summer is going to be far more interesting than anybody at the Fed would like to see.

Kanda told us all
“We are always prepared” to
Prevent yen weakness
 
Meanwhile in Beijing
The central bank responded
Nothing to see here

 

“The current weakening of the yen is not in line with fundamentals and is clearly driven by speculation. We will take appropriate action against excessive fluctuations, without ruling out any options.”  So said Masato Kanda, the current Mr Yen at the MOF.  It seems possible, if not likely, the yen’s decline in the wake of the BOJ move last week came as a bit of a surprise.  This morning, the yen (+0.1%) has edged away from its lows from last week, but USDJPY remains above the 151 level and very close to the level when the MOF/BOJ intervened in October 2022.  Adding to the pressure was Friday’s very surprising sharp decline in the CNY, which many in the market took to mean the PBOC was comfortable with a weaker yuan. 

Economically, a weaker yuan seems to make sense, but the PBOC’s concern is that it could lead to increased capital outflows, something which they are desperate to prevent.  As such, last night, the CNY fixing was nearly 1200 points stronger than expected, with the dollar rate below 7.10, and we saw significant dollar selling by the large Chinese banks.  Apparently, Friday’s movement was a bit too much.  I suspect that these two currencies will continue to track each other at this point with both currently at levels which, in the past, have been demarcation lines for intervention.   

Here’s a conspiratorial thought, perhaps the Fed’s dovishness is a response to the weakness in the yen and Powell’s best effort to help the BOJ avoid having to intervene again.  The thing about intervention is it, by definition, represents a failure of monetary policy, at least in the market’s eyes.  And in the end, all G10 central banks are in constant communication.

Ok, let’s survey the markets overnight.  All the currency activity seemed to put a damper on equity investors as Asia saw weakness across the board with Japan (Nikkei -1.2%) falling, although still above 40K, and both Hong Kong and mainland shares in the red.  In Europe this morning, red is also the predominant color, although the declines are more muted, ranging from -0.1% (DAX) to -0.4% (CAC).  Finally, US futures, at this hour (7:00) are also slipping lower, down 0.25% on average.

In the bond market, Treasury yields are backing up 3bps this morning, bouncing off the critical 4.20% technical level again.  As well, in Europe, sovereign yields are rising between 2bps and 3bps across the board.  There has been no data of note, but we have heard a bit more from ECB bankers with a surprising comment from Austria’s Holtzmann that he saw no reason for rate cuts at all.  That is an outlier view!  And despite what is happening in the FX markets, JGB yields remain unchanged yet again.

Turning to commodities, oil (+0.3%) is edging higher this morning as, after a strong rally early in the month and a small correction, it appears that $80/bbl is a new floor for the price.  In the metals markets, after last week’s pressure lower, this morning both precious (gold +0.3%) and base (copper +0.1%) metals are edging higher.  There has not been much in the way of news driving things in this session.

Finally, the dollar is a touch softer this morning, but that is after a strong week last week.  We’ve already touched on the Asian currencies, and it is true the entire bloc, which had been under pressure, is a bit stronger this morning.  But we are seeing strength across the board with G10 currencies higher on the order of 0.2% and most EMG currencies firmer by between 0.1% and 0.2%.  So, while the movement is broad, it is not very deep.  I maintain this is all about US yields and the fact that despite Powell’s newfound dovishness, the Fed remains the tightest of the bunch.

On the data front, there is a lot of information to be released, but I suspect all eyes will be on Friday’s PCE data.  

TodayChicago Fed Nat’l Activity-0.9
 New Home Sales680K
TuesDurable Goods1.0%
 -ex Transport0.4%
 Case Shiller Home Prices6.8%
 Consumer Confidence106.7
ThursdayInitial Claims215K
 Continuing Claims1808K
 Q4 GDP3.2%
 Chicago PMI46.0
 Michigan Sentiment76.5
FridayPersonal Income0.4%
 Personal Spending0.4%
 PCE0.4% (2.4% Y/Y)
 Core PCE0.3% (2.8% Y/Y)
Source: tradingeconomics.com

In addition to that menu, Fed speakers will be about with five scheduled including Chairman Powell on Friday morning.  Remember, too, that Friday is a holiday, Good Friday, with market liquidity likely to be somewhat impaired as Europe will be skeleton staffed.  As well, it is month end, so my take is if Powell veers from the script, or perhaps reinforces the dovish theme, we could see an outsized move.  Just beware.

Recent activities by the BOJ and PBOC indicate that the market has found a sore spot for the central banks.  If the data this week doesn’t cooperate, meaning it remains stronger than forecast, it will be very interesting to hear what Chairman Powell has to say on Friday.  Cagily, he speaks after the PCE data, so he will be able to respond.  But especially if that data comes in hot, we are likely to see more volatile markets going forward.  However, today, it is hard to get too excited.

Good luck

Adf

The Dollar is King

Posted on by

The Old Lady left rates on hold
But two members changed views when polled
No longer did they
See hikes as the way
The outcome was pounds were then sold

In fact, the most noteworthy thing
Is watching the dollar’s upswing
Against all its foes
Its value has rose
And once more the dollar is king

Finalizing the commentary on central bank activity this week, while the BOE did not adjust its rates, as was universally expected, the excitement came when the votes were tallied up.  As I had mentioned on Monday, at the last meeting, the split was 1/6/2 for a cut, holding steady and a hike respectively.  It remains amazing to me that members of the committee could have viewed the data and come to completely opposite conclusions in the past.  But the big change was that the two members who had been consistently voting for a hike adjusted their view to holding steady with the outcome a single vote for a cut and the rest of the committee voting to keep policy unchanged.  Of course, in the world in which we live today, that was tantamount to a rate cut and seen as quite dovish with the result being the pound underperformed its peers and continues to do so this morning, falling another -0.6%.  The developing narrative here is that a rate cut is coming soon to the UK, certainly by the June meeting, even though inflation remains far above the BOE’s target.  Yes, the inflation readings earlier this week were a bit softer than forecast, but they are still running at 4.5% at the core level.

Arguably, the more amazing thing is that the narrative around the US seems to have subtly shifted despite Powell’s quite dovish tone at the press conference.  I have seen several analyses that indicate expectations are growing for other central banks to ease policy before the Fed.  Perhaps it was the SNB’s bold action yesterday that got people thinking the rest of the world wouldn’t wait for Powell.  Or perhaps, the punditry who push the narrative are finally considering the fact that the US economy continues to be the best performing one around with the least need for further stimulus.  For instance, yesterday’s US data showed softer than expected Unemployment Claims, higher than expected Home Sales with a huge jump in the average price, better than expected Philly Fed and better than expected Flash PMI data.

Whatever the driver, analysts all over are discussing the relative hawkishness of Powell vs. his central bank brethren.  The good news is that we will get to hear from the man himself again this morning at 9:00am so perhaps he will clarify the situation.

FWIW, which is probably not that much, I remain incredulous that the Fed can even consider cutting rates in the near future.  The data are certainly indicating that economic activity remains strong, and we have seen an increase in pricing pressures discussed in a number of the surveys, like yesterday’s Philly Fed and PMI.  As long as unemployment remains quiescent, and we don’t have a major banking catastrophe it is unclear what the motivation behind cutting rates would be on an economic basis.  And consider for a moment that home prices yesterday rose 5.7%, another dagger in the heart of the idea that the shelter component of inflation measures is going to decline.  Let’s see what he says.

Until then, a look at the overnight session shows a mixed picture after yet another record setting day in US equity markets yesterday.  Japan is keeping pace, holding on to its recent gains and drifting higher but Chinese shares had a very tough time, with the Hang Seng (-2.2%) leading the way lower while mainland shares (CSI 300-1.0%) fell as well.  Throughout the rest of the region, the tale was an amalgam of gainers (India, Taiwan, New Zealand) and losers (South Korea, Australia).  In Europe, the UK (+0.8%) is the best of the bunch after posting stronger than expected Retail Sales data, although the Y/Y numbers there are still negative.  But the change was good.  However, on the continent, it is also an amalgam of gainers (Italy, Spain, Germany) and losers (France, Greece) as despite comments from Bundesbank president Nagel that a cut was coming in June, excitement remains lacking.  US futures at this hour (7:30) are essentially unchanged.

The bond market has been a bit more positive with yields sliding across the US (2bps) and all of Europe (between 1bp and 4bps) as investors prepare for the initial move by the ECB.  JGB yields are unchanged as any idea that the BOJ’s recent action was the starting signal for a rush higher in interest rates have been completely quashed.  Perhaps the one area where there is more anticipation is in China, which has seen a very consistent decline in yields for the past year with the 10-year there now sitting at 2.3%, a historic low.  However, despite that, there are many analysts looking for further policy ease by the PBOC and the potential for yields to decline even further.

Oil prices (+0.1%) while essentially unchanged this morning are consolidating losses from the past three sessions which were driven by an increase in chatter about a ceasefire in Gaza.  At the same time, we continue to see net drawdowns of inventories as reported by the EIA which is typically a sign of future strength in the price.  After a great run, gold (-0.6%) and copper (-1.0%) are both under pressure this morning, a situation I attribute entirely to the dollar’s broad strength.

Finally, turning to the dollar, OMG it is ripping higher today.  Versus its G10 counterparts, it is nearly universal with the euro (-0.4%), AUD (-0.8%) and the Scandies (SEK -0.9%, NOK -0.95%) all under pressure.  The only currency not declining is JPY, which is flat on the day but remains at its recent lows (dollar highs) well above 151.50.  in the EMG space, ZAR (-1.15%) is leading the way lower, but the real surprise is CNY (-0.8%) a huge move for a currency with 5% volatility, as it appears the PBOC has stepped away from its efforts to support the currency.  Given the huge rate differential with the dollar, by rights, we would expect USDCNY to be closer to 7.50 than its current level of 7.28, and I expect it will continue to move in that direction.  Watch carefully, especially if/when the PBOC reduces the Reserve Ratio Requirement again in the next several months.

At any rate, you get the idea that the dollar is top of the charts today, ultimately on this renewed narrative of a relatively hawkish Fed versus relatively dovish central banks elsewhere.

There is no hard (or soft) data from the US today, all the new information comes from the speakers, with Powell leading off, and then, Jefferson, Barr and Bostic.  I guess everything will depend on Powell.  Will he try to walk back some of the dovishness that was seen in the press conference or will he double down.  It appears the market expects a less dovish voice.  As such, if he doubles down on the idea rate cuts are coming soon, despite all the data, I would look for the dollar to reverse course.  However, if he tries to but the dove back into its cage, I expect risk assets to be under some pressure and the dollar to hold its gains.

Good luck and good weekend
Adf