Still Disrespected

Posted on by

According to data last night
The future in Germany’s bright
While right now, it stinks
Most everyone thinks
By Q3, they’ll all be alright

And yet, markets haven’t reflected
The positive vibe ZEW detected
Stock markets are dire
The dollar is higher
While oil is still disrespected

The one constant in the current market and economic environment is that nothing is consistent. For example, in Germany, the lockdown measures were extended for two weeks the day before Frau Merkel said that they would start to ease some restrictions, allowing small shops to open along with some schools. Then, this morning, the ZEW surveys were released with the Current Situation index printing at a historically low -91.5, well below the already dire forecasts of a -77.5 print. And yet, the Expectations index rose to +28.2, far higher than the median forecast of -42.0. Essentially, the commentary was that while Q1 and Q2 would be awful, things would be right as rain in Q3. But here’s a contradiction to that view, Oktoberfest, due to begin in late September, has just been canceled despite the fact that it is five months away and that it is in the middle of Q3, when things are ostensibly going to be much better there. My point is that, right now, interpreting signals of future activity is essentially impossible. Alas, that is what I try to do each morning.

So, what have we learned in the past twenty-four hours? Arguably, the biggest story was oil where the May WTI futures contract closed at -$37.63/bbl. In other words, the contract buyer is paid to take delivery of oil. And that’s the rub, storage capacity is almost entirely utilized while demand destruction continues daily. The IEA reported that current global production is running around 100 million barrels/day, with current demand running around 70 million barrels per day. In other words, plenty of oil is looking for a temporary home, and more of it is coming out of the ground each day. Arguably, this is a great opportunity for the US government to take delivery for the Strategic Petroleum Reserve, especially since they would be getting paid for the oil. But that would require a nimbleness of action that is unlikely to be seen at any government level. This morning, June WTI futures are under further pressure, down by another 20% at $16.50/bbl as I type, simply indicating that there is limited hope for a rebound in the near term. But the curve remains in sharp contango, with prices at $30/bl in December and higher further out. This price action is simply the oil market’s manifestation of the current economic view; negative growth in Q1 and Q2 with a rebound coming in Q3. However, despite the logic, seeing any commodity, let alone the world’s most important commodity, trading below zero is a strange sight indeed.

With the oil market grabbing the world’s focus, it can be no surprise that the dollar has responded by rallying strongly, especially against those currencies that are seen as tightly linked to the price of oil. So, in the G10 space, NOK (-1.7%) and CAD (-0.7%) are suffering, with the Nokkie the worst performer in the group. But AUD (-0.95%), NZD (-1.25%) and GBP (-0.95%) are all under significant pressure as well. It seems that Kiwi has responded negatively to RBNZ Governor Orr’s musings regarding additional stimulus in May, while Aussie has suffered on the back of the weak pricing in energy markets as well as lousy employment data. Meanwhile, today’s pressure on the pound seems to stem from a renewal of the Brexit discussion, and how a hard exit will be deleterious. In addition, there are still those who claim the UK’s response to the pandemic has been inadequate and the impact there will be much worse than elsewhere. Interestingly, UK employment data released this morning did not paint as glum a picture as might have been expected. While we can ignore the Unemployment Rate, which is February’s number, the March Claims data was surprisingly moderate. I expect, however, that next month’s data will be far worse. And I continue to think the pound has far more downside than upside here.

Turning to the EMG bloc, we cannot be surprised to see RUB as the worst performer in the group, down 1.3%, nor, given the growing risk-off sentiment, that the entire space is lower vs. the dollar. As today is a day that ends in ‘y’, MXN is lower, falling 0.7% thus far, as the market is increasingly put off by both the ongoing oil price declines as well as the ongoing incompetence demonstrated by the AMLO administration. (As an aside here, it seems that many Mexican financial institutions see much further peso weakness in the future as they are actively selling pesos in the market.) The other underperformers are HUF (-0.85%), ZAR (-0.8%) and KRW (-0.75%). Working in reverse order, the won is suffering as questions arise about the health of North Korean leader Kim Jong-un, who according to some reports, is critically ill and close to death. The concern is there is no obvious successor in place, and no way to know what the future will hold. Meanwhile, the rand is under pressure from the weakness throughout the commodity space as well as the realization that the carry that can be earned by holding the currency has diminished to its lowest level since 2008. For a currency that has been dependent on foreign holdings, this is a real problem.

I guess, given that the euro is only lower by 0.2%, it is actually a top performer of the day, so perhaps the German data has been a support to the single currency. The thing is, given the export orientation of the German (and Eurozone) economy, unless things pick up elsewhere, growth expectations will need to be modified lower for Q3. Don’t be surprised if we see this in the survey data going forward.

Elsewhere, equity markets everywhere are in the red, with European indices down between 1.7% and 2.5%. Asian stock markets were also lower, by similar amounts, and after yesterday’s US declines, the futures this morning show losses of between 0.7% for the NASDAQ and 1.5% for the Dow. Bond yields continue to fall, with 10-year Treasuries lower by 3bps this morning, and overall, risk is being sold.

The only data this morning is Existing Home Sales from March, with the median expectation for a 9% decline to 5.25M. As to Fed speakers, the quiet period ahead of next Wednesday’s FOMC meeting has begun so there is nothing to hear there. Of course, given what they have already done, as well as the fact that every act is unanimously accepted, I don’t see any value add from their comments in the near-term.

Last week saw a net gain in the equity markets as the narrative embraced the idea that the infection curve was flattening and that we were past the worst of the impact. This week, despite the ZEW data, I would contend investors are beginning to understand that things will take a very long time to get back to normal, and that the chance for new lows is quite high. In this environment, the dollar is likely to remain well bid.

Good luck and stay safe
Adf

 

The Absolute Fact

Posted on by

It’s been one score years and one more
Since prices for oil hit this floor
Despite last week’s pact
The absolute fact
Is there’s no place for, it, to store

Q1 1999 was the last time the price of the front-month oil contract on the Comex was trading as low as it has this morning. As I type, it is currently at $13.55/bbl, down more than $4.70 on the session, which on a percentage basis is more than 25%! And you thought currency volatility was high. At any rate, it seems the major issue is that oil producers have no place left to store the stuff, and since demand has collapsed, the natural response is for the price to collapse as well. Now, in fairness, while this will garner the headlines, the market reality may be slightly different, because the May futures contract, which expires tomorrow, is no longer the active contract, that has moved to June. Now, the June contract is down nearly 10%, but is still trading above $22/bbl, so this morning’s excitement may have less long-term market impact than it seems at first. Nonetheless, it does point to just how disruptive the coronavirus has been to markets all around the world.

Of course, one should not be surprised by the currencies that have felt the repercussions of this oil price decline the most severely; MXN (-1.9%), RUB (-0.45%), NOK (-0.65%) and CAD (-0.7%). The peso has been one of the market’s favorite whipping boys all year, as it has declined nearly 22% thus far. ZAR (-25.7%) and BRL (-23.0%) are the only two currencies to underperform the peso. Thus, this morning’s nearly 2% decline cannot be a surprise. In fact, since March 2, truthfully before Covid was widely understood to be the threat it has become to Western economies, the average daily range in USDMXN has been 3.78% which works out to an annualized volatility of nearly 60%. The remarkable thing is how cheap MXN options are relative to actual movement. For example, this morning, 1-month implied volatility is trading on the order of 25%, clearly far less than the type of movement we have seen in the past seven weeks. And given oil’s extreme volatility, and the peso’s link to the price of oil, I expect that we are going to continue to see the peso trade like this for the foreseeable future. The implication here is that hedgers might want to consider owning some of this optionality to help manage the uncertainties of their exposures during this time.

Away from the oil story, though, we have an entirely different narrative forming regarding the virus and its impact on the broader economy. Despite a number of countries having extended their lockdown procedures into the second week of May, we are also getting the first signs that the peak of infections may have passed, and we are hearing from more and more quarters that reopening the economy is more critical given that fact. This has been a big part of the rationale behind the equity market rally we saw last week, which despite the evidence of just how awful Q1 earnings are going to be, was really remarkably robust.

There continue to be two strong storylines with bulls claiming that this is a temporary hit and given the amount of stimulus, both fiscal and monetary, that has been brought to bear on the problem, the ‘V’ shaped recovery is still a high probability outcome. The bears, on the other hand, continue to highlight that expectations for the economy going forward to look anything like it did three months ago are misguided, and that it will take far longer to achieve any real recovery. Structural changes will have been made resulting in a much higher unemployment rate, considerably less consumption and, thus, much weaker GDP growth. Earnings will suffer and stock prices alongside them. Last week’s price action, with both up and down days, was an excellent depiction of this battle. And this battle will continue until one side’s argument is borne out. In other words, equity market volatility is likely to be with us for many months to come as well.

So, turning to this morning’s session, we have actually seen equity markets somewhat softer, with most of Europe lower by a bit below 1.0% which followed Asia’s similarly modest weakness. US futures, though, are starting to come under more pressure, having only been down 0.5% early in the session, but now looking at 1.5% declines. Interestingly, Treasury yields have barely moved, with the 10-year lower by less than 1 basis point, although in Europe, the weakest economies (PIGS) have all seen their government bond yields rise by more than 8bps, a sign of risk being jettisoned. And finally, gold is little changed on the morning, although given the dollar’s broad rally since the beginning of March, it has held its value extremely well.

As to the rest of the FX market, the dollar is largely, albeit not universally stronger this morning, and has been gaining ground as risk has been selling off. NOK and CAD lead the way lower, but the pound is also feeling stress as Brexit (remember that?) comes back into view with discussions starting up again. There is a big question as to whether PM Johnson will concede to an extension of the current situation given the unprecedented disruption caused by Covid-19. Fears that he won’t, and that the UK will crash out with no deal are likely to start to come back if we don’t hear positive news on this front soon. In the EMG bloc, away from the peso, there were more losers than winners, but the magnitudes of movement this morning have been far less than what we have seen recently. Ultimately, if risk continues to be shed, I expect the dollar to remain well bid against all comers.

On the data front, we start to see a bigger range of March data, which will clearly have been impacted by the virus and response.

Tuesday Existing Home Sales 5.3M
Thursday Initial Claims 4.5M
  Continuing Claims 17.27M
  Markit Mfg PMI 38.0
  Markit Services PMI 31.3
  New Home Sales 644K
Friday Durable Goods -12.0%
  -ex Transport -6.0%
  Michigan Sentiment 68.0

Source: Bloomberg

As we have seen for the past several weeks, the Claims data is likely to be the most important, although the PMI data will be interesting as well. Of course, the question, at this point, is whether the market will have discounted what it perceives to be all the bad news and ignore this data. While we may see that again for another week or two, my sense is that at some point, investors will realize that the future is not quite so bright, and that risk is not where they want to be. That seems to be today’s short-term narrative, but it has not changed the bigger view yet.

Good luck and stay safe
Adf

The First Battlefield

Posted on by

The data from China revealed
This bug, is in fact, the windshield
It splattered the hope
That ‘war’ was a trope
Instead ‘twas the first battlefield

China released its main grouping of March data last night and the picture was not pretty. Q1 GDP fell 9.8% Q/Q and was 6.8% below Q1 2019. Those are staggeringly large contractions of economic activity and likely portend what we will begin to see throughout the rest of the world over the next several weeks. The other key data points were Retail Sales (-15.8%), Fixed Asset Investment (-16.1%), both with record declines, and then surprisingly, Industrial Production, which fell just 1.1% in March from last year’s results, though has declined 8.4% thus far in 2020. The official spin of the data was that while February was abysmal, given the nation was essentially completely closed that month, things have started to pick up again and the future is bright. While Q2 seems likely to be better than Q1, bright may overstate the case a bit. After all, the Chinese economy remains highly dependent on its export industries, and the last I checked, most of its major western markets like the US and Europe remain closed for business. So even if Chinese factories are restarting and producing goods again, their client base is not yet in the market for consuming most things.

Excitement is starting to build
And President Trump’s clearly thrilled
That plans are afoot
To increase output
In states where Covid has been chilled

But as important as that data is, and despite the harbingers it brings regarding the rest of the world in Q1 and Q2, market focus is clearly on an even more important subject, the timing of the reopening of the US economy. Last evening, in his daily press conference, the President explained that there will be a three-step approach outlined for individual states to follow in order to try to return to more normal conditions. The idea is that when reported infections show a downward trend over a two-week period, that would be an appropriate time to allow certain businesses (e.g. restaurants, movie theaters, gyms and places of worship) to reopen amid strict social distancing guidelines. Assuming no relapse in the data, phase two would include the allowance of non-essential travel with bars and schools reopening, while phase three, also assuming a continued downward slope of the infection curve, would allow the bulk of the remaining economy to reopen, while observing ongoing social distancing.

At least, that is the gist of the idea. Each state will be able to decide for itself when it reaches appropriate milestones to expand allowable activities with the Federal government not imposing any specific restrictions. While the exact timing of these activities remains uncertain, there are likely some states that will be ready to start phase one before the end of April, while others will take much longer to get there.

Investors, though, see one thing only, that the worst is behind us and that if the US is going to reopen, then so, soon, will the rest of the world. After all, Europe was inundated with the virus earlier than the US. Thus, the prospect of restarting economic activity combined with the extraordinary stimulus measures undertaken by governments around the world has encouraged the investment community to race back into equity markets before they get too rich! At least that is what it seems like this morning.

Fear has taken a back seat to greed and stock markets around the world are higher. So, we saw Asian markets (Nikkei +3.1%, Hang Seng +1.6%, Shanghai +0.7%) all perform well despite the Chinese data. Europe has been even better, with the DAX +4.2%, CAC +4.0% and FTSE 100 + 3.4%, and US futures are closely following Europe with all three indices up well more than 2.0% at this point in the session. In other words, earnings collapses are now seen to be one-time impacts and will soon be reversed. At the same time, pent-up demand will restore much of the luster to so many beaten down stocks, especially in the retail and consumer space.

This seems a tad aggressive for two reasons. First, though undoubtedly reopening the economy will result in better outcomes, it is not clear that the future will resemble the past that closely. After all, are we going to see a much greater use of telecommuting, thus less need for daily transport? Will restaurant and bar business pick up in the same way as prior to the virus’s onset? Will shopping malls ever recover? All these questions are critical to valuations, and answers will not be known for many months. But second, the one thing of which we can be pretty certain, at least in the short run, is that share repurchase programs are going to be thin on the ground for quite a while, and given the more than $1 trillion of spending that we have been seeing in that space, it seems that a key pillar of equity market support will have gone missing. So, while today is clearly all about risk being acquired, it will be a bumpy ride at best.

Speaking of risk-on, a quick look at the FX market shows that the dollar, for the first time in a week is under pressure this morning, having fallen against all its G10 peers. NZD is the leading gainer today, up 0.75%, as kiwi appears to be the highest beta currency in the group and is responding to the US reopening story. Aussie is next on the list, +0.45%, with its beta second only to kiwi, and then the rest of the bloc is higher but in a more limited fashion.

EMG currencies, too, are showing life this morning with IDR in the lead, having rallied 1.1% alongside TRY up a similar amount. The rupiah seems to be the beneficiary of the announcement by the central bank there that they are going to begin direct purchases of government bonds, i.e. monetizing the debt, on Monday, which is apparently a positive statistic in the beginning of the process. Meanwhile, on this risk-on day, Turkey’s 8%+ yields remain extremely attractive for investors, drawing funds into the country. But essentially, the entire bloc is firmer today, even the Mexican peso, which has been one of the absolutely worst performing currencies around. It has rallied 0.25%, its first gain in more than a week.

Today’s narrative is clearly that whatever damage has been incurred by Covid-19, the worst is behind us. Investors are looking forward and anxious to take part in the next up cycle. Alas, the curmudgeon in me sees a scenario where it will take far longer to regain previous levels of activity than the market currently seems to be pricing, and so risk attitudes have room to reverse, yet again, in the not too distant future. But as long as the narrative is the future is bright, the dollar should soften while equity markets rally.

Good luck, good weekend and stay safe
Adf

 

New Aspirations

Posted on by

In Europe, the largest of nations
Has made clear its new aspirations
As Covid now peaks
In less than three weeks
Some schools can return from vacations

Despite less than stellar results from other countries that have started to reopen their economies (Japan, Singapore, South Korea) after the worst of the virus seemed to have passed, Germany has announced that by May 4, they expect to begin reopening secondary schools as well as small retail shops, those less than 800 square meters in size. This is a perfect example of the competing pressures on national leaders between potential health outcomes and worsening economic conditions.

The economic damage to the global economy has clearly been extraordinary, and we are just beginning to see the data that is proving this out. For instance, yesterday’s US Retail Sales data fell 8.7%, a record decline, while the Empire Manufacturing result was a staggering -78.2. To better understand just what this means, the construction of the number is as follows: % of surveyed companies reporting improving conditions (6.8%) less % of surveyed companies reporting worsening conditions (85%). That result was far and away the worst in the history of the series and more than double the previous nadir during the GFC. We also saw IP and Capacity Utilization in the US decline sharply, although they did not achieve record lows…yet.

Interestingly, we have not yet seen most of the March data from other countries as they take a bit longer to compile the information, but if the US is any indication, and arguably it will be, look for record declines in activity around the world. In fact, the IMF is now forecasting an actual shrinkage of global GDP in 2020, not merely a reduction in the pace of growth. In and of itself, that is a remarkable outcome.

And yet, the question with which each national leader must grapple is, what will be the increased loss of life if we get back to business too soon? Once again, I will remind everyone that there is no ‘right’ answer here, and that these life and death tradeoffs are strictly the purview of government leadership. I don’t envy them their predicament. In the meantime, markets continue to try to determine the most likely path of action and the ultimate outcome. Unfortunately for the market set, the unprecedented nature of this government activity renders virtually all forecasting based on historical information and data irrelevant.

This should remind all corporate risk managers that the purpose of a hedging program is to mitigate the changes in results, not to eliminate them. It is also a cogent lesson in the need to have a robust hedging program in place. After all, hedge ineffectiveness is not likely to be a major part of earnings compared to the extraordinary disruption currently underway. Yet a robust hedging program has always been a hallmark of strong financial risk management.

In the meantime, as we survey markets this morning, here is what is happening. After yesterday’s weak US equity performance, Asia was under pressure, albeit not aggressively so with the Nikkei (-1.3%) and Hang Seng (-0.6%) falling while Shanghai (+0.3%) actually managed a small gain. European bourses are mostly positive this morning, but the moves are modest compared to recent activity with the DAX (+1.0%), CAC (+0.6%) and FTSE 100 (+0.4%) all green. And US futures are pointing higher, although all three indices are looking at gains well less than 1.0%.

Bond markets have been similarly uninteresting, with 10-year Treasury yields virtually unchanged this morning, although this was after a near 12bp decline yesterday. German bunds, too are little changed, with yields higher by 1bp, but the standout mover today has been Italy, where 10-year BTP’s have seen yields decline 14bps as hope permeates the market after the lowest number of new Covid infections in more than a month were reported yesterday, a still high 2.667.

Turning to the FX market, despite what appears to be a generally more positive framework in markets, the dollar continues to be the place to be. In the G10 space, only SEK is stronger this morning, having rallied 0.25% on literally no news, but the rest of the bloc is softer by between 0.15% and 0.3%. So, granted, the movement is not large, but the direction remains the same. Ultimately, the global dollar liquidity shortage, while somewhat mitigated by Federal Reserve actions, remains a key feature of every market.

Meanwhile, in the EMG bloc, we have seen two noteworthy gainers, RUB (+1.0%) and ZAR (+0.5%). The former is responding to oil’s modest bounce this morning, with prices there up about 2.0%, while the latter is the beneficiary of international investor inflows in the hunt for yield. After all, South African 10-year bonds yield 10.5% these days, a whole lot more than most other places! But, for the rest of the bloc, it is business as usual, which these days means declines vs. the dollar. Remarkably, despite oil’s rebound, the Mexican peso remains under pressure, down 0.6% this morning. But it is KRW (-0.95%) and MYR (-0.85%) that have been the worst performers today. The won appears to have suffered on the back of yesterday’s weak US equity market/risk-off sentiment, with the market there closing before things started to turn, while Malaysia was responding to yesterday’s weakness in oil prices. Arguably, we can look for both of these currencies to recoup some of last night’s losses tonight.

On the data front, this morning brings the latest Initial Claims number (exp 5.5M) as well as Housing Starts (1300K), Building Permits (1300K) and Philly Fed (-32.0). I don’t think housing data is of much interest these days, but the claims data will be closely scrutinized to see if the dramatic changes are ebbing or are still going full force. I fear the latter. Meanwhile, after yesterday’s Empire number, I expect the Philly number to be equally awful.

As much as we all want this to be over, we are not yet out of the woods, not even close. And over the next month, we are going to see increasingly worse data reports, as well as corporate earnings numbers that are likely to be abysmal as well. The point is, the market is aware of these things, so inflection in the trajectory of data is going to be critical, not so much the raw number. For now, the trend remains weaker data and a stronger dollar. Hopefully, sooner, rather than later, we will see that change.

Good luck and stay safe
Adf

Covid’s Attacks

Posted on by

We’re finally going to see
The data which shows the degree
Of all the impacts
By Covid’s attacks
On life as we knew it to be

Risk assets are under pressure this morning as market participants once again reevaluate the cost-benefit analysis of government actions during the ongoing Covid-19 crisis. The question which bedevils both politicians and markets is, what is the proper balance between restricting economic activity via lockdown orders to prevent further spread of the virus vs. maintaining economic activity in order to prevent the global economy from collapsing? The problem is there is no easy answer to this dilemma, and the reality is that every nation has a different tradeoff based on the nature of its economy as well as the social and cultural mores that exist there.

And so, every nation continues to go their own way as they try to figure out the response best suited for their own circumstances. What is beginning to change as time passes is the data reports that will be released in the coming days and weeks will now be reflective of the first periods of shutdowns and will offer the best indications yet of just how severe the economic damage, thus far, has been. Remember, most data are backward looking. In fact, other than the Initial Claims data, which is both timely and has been awful, analysts are simply guessing at the economic impact so far. Thus, much will be learned this week and next as we start to see the first measurements of how significant the impact has been to date. In fact, we start with today’s Retail Sales data (exp -8.0%, -5.0% ex autos), as well as Empire Manufacturing (-35.0), IP (-4.0%), Capacity Utilization (74.0%) and then the Fed’s Beige Book at 2:00. All of this data is for March, which means that the crisis was in full swing for the bulk of the period. Expectations, as can be seen above, are for substantial declines across the board. But are econometric models based on history going to be effective in forecasting unprecedented events? My money is on no. If the first pieces of data we have seen are any indication, then today’s numbers will be much worse than currently anticipated.

However, as any economist worth their salt will explain, markets are discounting instruments, always looking some period into the future, rather than looking backwards. And that is, no doubt, just as true now as before the Covid-19 outbreak. The question of the moment then becomes, just how far ahead is the market discounting? There seems to be a significant difference of opinion between the bond and equity markets, with the latter having a far more optimistic view than the former. In fact, the bond market appears to be pricing in a significantly longer period of economic disruption, as evidenced by the 30-year yield at 1.32%, than is the stock market, which has already retraced 50% of its initial decline.

One other thing to remember is that recent government actions indicate further delays in reopening economies, rather than any speeding up of the process. This is evidenced by this morning’s German announcement that they will be extending lockdown measures to May 3, from the previously expected April 19. And the Germans have had a measure of success in slowing the spread of the virus, with today being the sixth consecutive day of a lower count of new infections. So, for those nations where the infection rate is not slowing, like the US, it becomes that much more difficult to revert to any sense of normalcy.

History has shown that when the stock and bond markets tell different stories, like they are now, it is more frequent the bond market has things right. I see no reason that this situation is any different and expect that we are coming to the end of the equity market bounce. Risk is far more likely to be shed than added in the next few weeks, and that means that haven assets like the dollar and they yen should resume their climb.

With that in mind, let’s look at markets this morning. The dollar is definitely in the ascendant vs. its G10 brethren with NOK (-1.9%) the leading decliner after the OPEC+ talks led to a disappointing outcome and oil prices have fallen to new lows for the move with WTI touching $19.20/bbl earlier this morning. But Aussie (-1.8%) and Kiwi (-1.7%) are feeling the weight of weaker commodity prices and less confidence in China’s rebound as well. Even JPY, the best performer today is lower by 0.15%, just reinforcing that in the strange new world we inhabit, the dollar remains the single most attractive currency in which to hold assets.

In the Emerging markets, the story is similar with most currencies under pressure led by ZAR (-1.8%), MXN and RUB (both -1.7%) on the back of the weak oil/commodity story. However, we did see two gainers overnight, IDR (+0.45%) and THB (+0.3%). The former seems to be benefitting from the fact that the central bank there surprised markets and did not cut rates yesterday, as well as the positive economic impact of showing a small trade surplus, thus reducing external financing pressures. Meanwhile, the baht seems to be the beneficiary of an announcement of a new fiscal stimulus totaling nearly $31 billion, which is seen as quite substantial there. Otherwise, the bulk of this bloc has seen more modest losses, somewhere between 0.2% and 1.0%.

Having already discussed today’s data, I think the real question for FX markets today will be just how equity markets perform as a better indicator of risk sentiment. Europe has been under pressure all morning, with almost all markets there lower by about 2.0%. Meanwhile, US equity futures are pointing in the same direction, with losses currently pegged between 1.1% (NASDAQ) and 1.7%(S&P 500). Of course, the Retail Sales data will be out before the equity market opening, so there is ample opportunity for either a significantly worse opening in the event the data is even worse than expected, as well as an extension of the recent rally should the data somehow surprise on the high side. I fear the worst.

So be prepared for a risk-off session as we finally start to see just how badly the US economy has been damaged by Covid-19. Ironically, this implies that the dollar is set for further gains as the rest of the world is likely to be even worse off.

Good luck
Adf

 

Until Covid-19 Is Dead

Posted on by

To those who had thought that the Fed
Was finished, Chair Powell just said
There’s nothing that we
Won’t do by decree
Until Covid-19 is dead

Small Caps? Check. Munis? Check. Junk bonds Fallen angels? Check. These are the latest segments in the credit market where the Fed has created new support based on yesterday’s stunning announcements. All told, the Fed has committed up to $2.3 trillion to support these areas, as well as the trillions of dollars they had already spent and committed to support the Treasury market, mortgage market, and ensure that bank finances remained sufficient for their continued operation and provision of loans and services to the economy.

While the breadth of programs the Fed has announced and implemented thus far is stunning, based on the CARES act passed last week, there is still plenty more ammunition available for the Fed to continue to be creative. Of course, the market reaction was highly positive to these announcements and served to cap off a week where the S&P 500 rose more than 12% from last Friday’s closing levels. In fact, a cynic might suggest that the Fed’s sole purpose is to prop up the equity market, but given the extraordinary events ongoing, I suppose that is merely a happy side effect. At any rate, there is no doubt that the Fed has taken its role as the world’s central bank seriously. Between swap lines and repo facilities for other central banks and purchase programs for virtually every type of domestic asset, Chairman Powell will never be able to be accused of fiddling while the economy burned. And while government programs are notoriously difficult to remove once enacted, based on the ongoing economic indicators, like yesterday’s second consecutive 6.6 million print in the Initial Claims data, it is evident that the Fed is being as aggressive as possible.

There will almost certainly be numerous longer-term negative consequences of all this activity and books will be written about all the ways the Fed overstepped its bounds, but right now, the vast majority of people around the world are hugely in favor of their actions. Anything that supports the economy and population through this period of mandated shutdown is appreciated. While they don’t run polls for popularity of central bank chiefs, I’m pretty confident Chairman Jay would be riding high these days.

In the meantime, there were two other noteworthy stories in the past 24 hours with market impact. The first was that the OPEC+ meeting did not come to agreement yesterday for production cuts totaling 10 million bbl/day as Mexico was the lone holdout, insisting that it would only cut 100,000 bbl/day of production, not the 400,000 bbl/day needed. After 16 hours of video conferencing, the energy leaders postponed any decision and decided to allow today’s G20 FinMin video conference to go forward and help try to break the impasse. It strikes me that Mexico will cave soon on this issue, but for now, nothing is agreed. It is hard to determine how oil markets have responded given essentially all cash and futures markets are closed today for the Good Friday holiday. However, oil futures had not fallen on Thursday afternoon which indicates they, too, believe a deal will be done.

And finally, the EU finally came up with a financing package to address the economic impact of the virus on its members. As was to be expected, it was significantly less than initially mooted and the construct of the deal indicates that there has not yet been any agreement by the Teutonic trio of Germany, Austria and the Netherlands to fund the PIGS. A brief overview of the deal shows the headline figure to be €540 billion made up of three pieces; a joint employment insurance fund (€100B), an EIB supported package designed to provide liquidity to impacted companies (€200B) and a ESM credit line (€240B) to backstop national spending. The problem with the latter is that the European Stability Mechanism is anathema to those nations that need it most like Spain and Italy, because it imposes fiscal conditions on the use of the funds. It is an ECB creation from the Eurobond crisis years by Mario Draghi, but it has never been used. Essentially, the rest of Europe has said to Germany, we may need your money, but we will not become your vassal. And this is exactly why the EU, and its subgroup the Eurozone, will remain dysfunctional going forward.

Thus, when compiling the newest information, the one thing that becomes clear is that the US continues to be the nation most willing to increase spending and liquidity to support its economy. And in the end, it cannot be surprising that the dollar will suffer in that scenario. Back in January, my view was the dollar would decline this year as the US was the economy with the most room to ease policy and that eventually, those much easier conditions would result in a weaker dollar. Well, that is exactly what we are seeing occur right now, as the Fed has upped the ante regarding monetary policy easing relative to the rest of the world at the same time that the broad narrative seems to be evolving into ‘the infection peak has passed and things are going to be better in the future than in the recent past’. Hence, the need to hold dollars as a haven has diminished, and the dollar has responded. For instance, this week AUD has rallied 5.7% while NOK is higher by 3.9%. Clearly both have been buoyed by the rise in oil prices as well as the generally better tone on risk. But the entire G10 bloc is higher, although the yen has gained just 0.1% on the week.

In the EMG space, we see a similar picture with MXN the leader, rallying 6.3%, followed closely by ZAR (5.6%) and HUF (5.2%) as virtually the entire bloc has gained vs. the dollar this week. And the story is identical throughout, a better risk tone and more available USD liquidity relieving pressure on USD borrowers throughout the world.

For the time being, this is very likely to remain the trend, but do not dismiss the fact that the global economy is currently in a very severe recession, and that it will take a long time to recover. During the Great Depression in 1929-1932, after a very sharp initial fall in equity markets, there was a powerful rally that ultimately gave way to a nearly 90% decline. We are currently witnessing a powerful rally, but another decline seems likely given the economic damage that will take years to fix. Meanwhile, the dollar, while under pressure right now, is likely to see renewed demand in the next wave.

Good luck, stay safe and have a good holiday weekend
Adf

PS. FX Poetry will return on Wednesday, April 15.

Just an Illusion

Posted on by

It seems there’s a bit of confusion
‘Bout whether this time of seclusion
Will actually end
The virus’ growth trend
Or if this is just an illusion

Markets have a less certain feel about them this morning than we have seen the past several days. Consider, despite continuing increases in both deaths and the caseload in the hardest hit areas, risk has been gathered up pretty aggressively. I realize that the narrative that is trying to be told is that we have passed the peak of infections and that with a little perseverance regarding all the shelter-in-place orders, we can expect the virtual halt in the global economy to end. The problem with this narrative is that the earliest infection sites in Asia; China, South Korea, Hong Kong, Singapore and Japan, have recently seen the infection data turn higher again. At the same time, we continue to hear of daily increases in the fatality count in Spain, Italy, Germany, the UK and New York, with all of those places considering extensions of their lockdowns.

And yet, US and European stock markets are higher by between 8% and 12% so far this week. I continue to be confused by this price action as it appears to imply that investors expect companies to simply pick up where they left off before the lockdowns and disruption began. The problem with that view is it appears to be complete fantasy. Consider, this morning we are going to get our third consecutive Initial Claims number that prints in the millions. Prior to two weeks ago, the largest single data point ever in the series was 695K. The median expectation on Bloomberg this morning is for 5.5M with the range of estimates 2.5M and 7.5M. The thing is, this number has the potential to be much higher than that. In fact, it would not surprise me if we saw a 10.0M print. One of the biggest problems that has consistently been reported is that most states’ employment systems have not been able to handle the crush of applications, although they have been working feverishly to catch up. Add to that the fact that over the past week we have heard an increasing number of states declare that more and more non-essential businesses need to close down for the remainder of the month, while more and more large companies are furloughing employees and only covering health care costs. Prior to the onset of the pandemic, the workforce in the US numbered about 178 million. If 25% of the economy has been shuttered, and I think that is a conservative estimate, that implies some 44 million people will eventually be applying for unemployment insurance. Three plus weeks into this process, we have only heard about 10 million. I fear there are many more to come, so don’t be surprised if today’s number is MUCH higher.

Continuing along this premise, if the claims data turns out to be much worse than expected, will that unravel the narrative that the worst is behind us? Or in fact, will markets begin to understand that even when the infection is well past its peak, economic activity will take a long time to recover. There is a great deal of discussion right now about what shape the recovery will take later this year and next. The first big assumption is that the recovery will start in Q3, which seems brave given we still don’t have an accurate representation of Covid-19’s actual pathology. But let’s work with that assumption. The bulk of the debate is whether the recovery will chart like a ‘V’ or a ‘U’. However, the more pessimistic discuss a ‘W’ or even an ‘L’. Alas, I fear we may see a ‘Harry Potter’ recovery, one that looks more like

We will learn much in a short while. However, until then, let’s take a look at the markets this morning, where the dollar remains under pressure, akin to yesterday, yet government bonds are rallying and equity markets are having a mixed performance. Aside from the Claims data, all eyes are on the tape to see what comes out of the OPEC+ meeting and whether or not they can agree on significant production cuts to help stem the extraordinary build-up in stored oil. Oil traders remain quite bullish as we are seeing Brent crude futures higher by 4.1% and WTI higher by 6.7%. That is clearly helping support the narrative that the worst is behind us. But even if they manage to agree to the mooted 10 million barrel/day production cut, will that be enough to stem the tide? Estimated usage prior to the current situation was 93 million barrels/day, so this represents a nearly 11% production cut. But again, if I go back to my 25% decline in activity, that still means there is a lot of surplus oil being pumped with fewer and fewer places to put it. This price move has all the earmarks of a buy the rumor situation. Just watch out upon the news of an agreement. And especially be careful if they cannot agree production cuts, which is likely to be a significant market negative.

Turning to FX markets, in the G10 space, NOK is the leader today, rallying 0.5% on the back of oil’s gains, and we also see the pound rallying this morning, up 0.4%, after the BOE changed its mind and explained it would be monetizing UK debt, thus expanding the government’s ability to increase stimulus. Meanwhile, a few currencies, CAD, NZD, are a bit softer, but the movement is so small as to be meaningless. Looking at the EMG bloc, IDR is today’s champ, rising 2.3%, after the government issued 50-year dollar bonds and laid out its path to help finance extraordinary stimulus. The rupiah has been under significant pressure since the beginning of March, having fallen nearly 13% before today’s rebound. Allegedly the fundamentals show the currency is still too cheap, but markets may have another take. Beyond the rupiah, RUB has rallied 1.4% on the strength of oil, while HUF and CZK are both higher by a bit more than 1.0% as both currencies seem to be benefitting from large bond financings. However, with the Easter holiday upcoming, there were a number of markets closed last night and we will see many closed tomorrow as well, so price action has been somewhat muted.

On the data front, along with Initial Claims, we see PPI (exp 1.2%, 1.3% ex food & energy), as well as Michigan Sentiment (75.0). However, it is all about the Claims data today. My expectation is that if the print is within the range of expectations, that will not derail the recent equity strength, but if we come out on the high side, especially with Good Friday tomorrow and US equity markets closed, we could easily see a significant risk-off outcome by the end of the day.

Good luck and stay safe
Adf

A Bright Line

Posted on by

In Europe there is a bright line
Twixt nations, those strong, those supine
The Germans and Dutch
Refuse to give much
While Italy wilts on the vine

Once again, the EU has failed to accomplish a crucial task and once again, market pundits are calling for the bloc’s demise. The key story this morning highlights the failure of EU FinMins, after a 16-hour meeting yesterday, to reach a support deal for the whole of Europe. The mooted amount was to be €500 billion, but as always in this group, the question of who would ultimately pick up the tab could not be agreed. And that is because, there are only three nations, Germany, Austria and the Netherlands, who are in a net financial position to do so. Meanwhile, the other twenty-four nations all have their collective hands out. (And you wonder why the UK voted to leave!) Ultimately, the talks foundered on the desire by the majority of nations to mutualize the costs of the support (i.e. issue Eurobonds backed by the full faith and credit of the entire EU), while the Germans, Dutch and Austrians would not agree. Realistically, it is understandable why they would not agree, because in the end, the obligation will fall on those three nations to pick up the tab. But the outcome does not bode well for either the present or the future.

In the current moment, the lack of significant fiscal support is going to hamstring every EU nation, other than those three, in their attempts to mitigate the impacts of shutting down economies to halt the spread of Covid-19. But in the future, this issue is the latest manifestation of the fundamental flaw in the EU itself.

That flaw can be described as follows: the EU is a group of fiercely competitive nations masquerading as a coherent whole. When the broad situation is benign, like it is most of the time, and there is positive economic growth and markets are behaving well, the EU makes a great show of how much they do together and all the things on which they agree. However, when the sh*t hits the fan, it is every nation for themselves and woe betide any attempt by one member to collaborate with another on a solution. This makes perfect sense because, despite the fact that they have constructed a number of institutions that sound like they are democratically elected representatives of each nation, the reality is in tough times, each nation’s political class is concerned first and foremost with its own citizenry, and only when that group is safeguarded, will they consider helping others. At this point, in the virus crisis, no nation feels its own citizens are safe, so it would be political suicide to offer help to others. (Asking for help is an entirely different matter, that’s just fine.) In the end, I am confident that this group will make an announcement of some sort that will describe the fantastic cooperation and all they are going to do to support the continent. But I am also confident that it will not include a willingness by the Teutonic three to pay for the PIGS.

The initial market impact of this failure was exactly as expected, the euro (-0.5%) declined along with the other European currencies (SEK -0.75%, NOK -1.25%) and European equity markets gave back some of their recent gains with the DAX and CAC both falling around 1.5%. Meanwhile, European government bonds saw Italian, Spanish and Greek yields all rise, as hoped for support has yet to come. However, the EU is nothing, if not persistent, and the comments that have come out since then continue to suggest that they will arrive at a plan by the end of the week. This has been enough to moderate those early moves and at 7:00, as New York walks in the door, we see markets with relatively modest changes compared to yesterday’s closing levels.

In the G10 currencies, while the dollar remains broadly stronger, its gains are far less than seen earlier. For example, NOK is the current laggard, down 0.35%, while SEK (-0.3%) and EUR (-0.2%) are next in line. The pound has actually edged higher this morning, but its 0.1% gain is hardly groundbreaking. However, it is interesting to note that the non-EU currencies are outperforming those in the EU.

Emerging market currencies have also broadly fallen, with just a few exceptions. The worst performer today is INR (-0.9%), which seems to be responding to the growth in the number of coronavirus cases there, now over 5,000. But we are also seeing weakness, albeit not as much, from EU members CZK (-0.35%), BGN (-0.3%) and the rest of the CE4. The one notable gainer today is ZAR (+0.5%) which seems to be benefitting from a much smaller than expected decline in a key Business Confidence indicator. However, I would not take much solace in that as the data is certain to get worse there (and everywhere) before it gets better.

Overall, though, the market picture is somewhat mixed today. The FX market implies some risk mitigation, which is what we are seeing in the European equity space as well. However, US equity futures are all pointing slightly higher, about 0.5% as I type, and oil prices are actually firmer along with most commodities. In other words, there is no clear direction right now as market participants await the next piece of news.

The only data point we see today in the US is the FOMC Minutes, but I don’t see them as being that interesting given both how much the Fed has already done, thus leaving less things to do, and the fact they have gone out of their way to explain why they are doing each thing. So I fear today will be dependent on the periodic reports of virus progression. At the beginning of the week, it seemed as though the narrative was trying to shift to a peak in infections and better data ahead. Alas, that momentum has not been maintained and we have seen a weries of reports where deaths are increasing, e.g. in Spain and New York to name two, where just Monday it was thought things had peaked. Something tells me that the virus will not cooperate with a smooth curve of progress, and that more volatility in the narrative, and thus markets, lays ahead. We are not yet near the end of this crisis, so hedgers, you need to keep that in mind as you plan.

Good luck
Adf

Ere Prices Explode

Posted on by

The pace of infection has slowed
In Europe, and thus has bestowed
A signal its clear
To shift to high gear
And buy stocks ere prices explode

In the markets’ collective mind, it appears that the peak of concern has been achieved. At least, that is what the price action for the past two days is indicating as risk is once again being aggressively absorbed by investors. Equity prices in the US soared yesterday, up more than 7.0% and that rally followed through overnight in Asia (Nikkei, Hang Seng and Shanghai all +2%) and Europe (DAX +3.2%, CAC +2.8) as the latest data indicate that the pace of infection growth may have reached an inflection point and started to turn lower. At least, that is certainly the market’s fervent hope. The question that comes to mind, though, is just how badly the global economy has been damaged by the health measures taken to slow the spread of the virus. After all, entire industries have been shuttered, millions upon millions have been thrown out of work, and arguably most importantly, individual attitudes about large crowds and mingling with strangers have been dramatically altered. Ask yourself this: how keen are you to go to watch a baseball game this summer with 50,000 other fans, none of whom you know?

Consider the poor misanthrope
Whose previous role was to mope
‘bout Facebook and Twitter
While growing more bitter
With Covid, his views are in scope

It does not seem hard to make the case that the market has moved far ahead of the curve with respect to the eventual recovery of the economy. If anything, the economic data we have seen has indicated that the depth of the recession is going to be greater, not lesser than previously expected, while the length of that recession remains completely unknown. One thing we have seen from the nations who were the early sites of infection; China, Japan, Singapore and South Korea, is that once they started to relax early restrictions, the pace of infection increased again. In fact, in Japan, PM Abe has declared a state of emergency in 6 prefectures for the next month, to impose restrictions on businesses and crowds. Similarly, Singapore has seen a revival in the infection rate and has imposed tighter restrictions to last through the rest of April.

The point is, a possible inflection point in the pace of growth in cases, while a potential positive, doesn’t seem worthy of a 10% rally in stock prices. The one thing of which we can all be sure is that the recession, when it is eventually measured, is going to be remarkably deep. It is almost certain to be much worse than the GFC as the amount of leverage in the real economy is so much greater and will cause much more damage to Main Street. Recall, the GFC was a financial crisis, and once the Fed supported the banks, things were able to get back to previous operating standards. It is not clear that outcome will be the case this time. So, does it really make sense to chase after risk assets right now? Bear markets historically last far longer than a month, and it is not uncommon for sharp rallies to occur within the longer term bear market. Alas, I see more pain in the future so be careful.

And with that in mind, let us turn our attention to the FX market, where the dollar is lower versus every other currency of note. In the G10 bloc, NOK is today’s leader, +2.2%, as hopes that an OPEC+ agreement will be reached this week have helped oil prices rise more than 3.0%, thus ensuring a benefit to this most petro-focused of currencies. But it’s not just NOK, AUD is higher by 1.5% after the RBA left rates on hold, as expected, and announced that they have purchased A$36 billion of bonds via QE thus far. The rest of the bloc has seen gains ranging from 0.6% (CHF) to 1.1% (SEK) as the overall attitude is simply add risk. The one exception is the yen, which has barely edged higher by 0.1%, ceding earlier gains in the wake of the state of emergency announcement.

Turning to the emerging markets, CZK and ZAR are the frontrunners, with the former up a robust 2.4% while the rand is higher by 2.1%. It seems that the Czech story is merely one of a broad-based positive view of the country’s fiscal house, which shows substantial reserves and the best combined ability to deal with the crisis and prevent capital flight of all EM currencies. Meanwhile, the rand has been a beneficiary of inflows into their government bond market, which are currently competing with the SARB who is also buying bonds. Perhaps the most encouraging sight is that of MXN, where the peso is higher by 1.5% this morning as it is finally receiving the benefit of the rebound in oil prices. In addition, key data to be released this morning includes the nation’s international reserves, a number which has grown in importance during the ongoing crisis. We have already seen some significant drawdowns in EMG reserve data as countries like Indonesia and Brazil seek to stem the weakness in their currencies. That has not yet been the case in Mexico, but given the peso’s phenomenal weakness, it has fallen 25% since March 1, many pundits are questioning when the central bank will be in the market.

Overall, though, it is a risk-on day and the dollar is suffering for it. Data this morning has already shown that the NFIB Small Business Optimism index is not so optimistic, falling 8 points to 96.4, back to levels seen just prior to the 2016 presidential election, which ushered in a significant increase in optimism. We also get the JOLT’s jobs data (exp 6.5M) but that is a February number, and obviously of little value as an economic indicator now.

It appears to me that the market is pricing in a lot of remarkably positive data and a happy ending much sooner than seems likely. Cash flow hedgers need to keep that in mind as they consider their next steps.

Good luck
Adf

Woe Betide Every Forecast

Posted on by

The number of those who have passed
Is starting to slow down at last
The hope now worldwide
Is this won’t subside
But woe betide every forecast

Arguably, this morning’s most important news is the fact that the number of people succumbing to the effects of Covid-19 seems to be slowing down from the pace seen during the past several weeks. The highlights (which are not very high) showed Italy with its fewest number of deaths in more than two weeks, France with its lowest number in five days while Spain counted fewer deaths for the third day running. Stateside, New York City, which given its highest in the nation population density has been the US epicenter for the disease, saw the first decline in fatalities since the epidemic began to spread. And this is what counts as positive news these days. The world is truly a different place than it was in January.

However, as everything is relative, at least with respect to financial markets, the prospects for a slowing of the spread of the virus is certainly welcome news to investors. And they are showing it in style this morning with Asian equity markets having started things off on a positive note (Nikkei +4.25%, Hang Seng +2.2%, Australia +4.3) although mainland Chinese indices all fell about 0.6%. Europe picked up the positive vibe, and of course was the source of much positive news regarding infections, and equity markets there are up strongly across the board (DAX +4.5%, CAC +3.7%, FTSE 100 +2.1%). Finally, US equity futures are all strongly higher as I type, with all three major indices up nearly 4.0% at this hour.

The positive risk attitude is following through in the bond market, with 10-year Treasury yields now higher by 6.5bps while most European bond markets also softening with modestly higher yields. Interestingly, the commodity market has taken a different approach to the day’s news with WTI and Brent both falling a bit more than 3% while gold prices have bounced nearly 1% and are firmly above $1600/oz.

Finally, the dollar is on its back foot this morning, in a classic risk-on performance, falling against all its G10 counterparts except the yen, which is lower by 0.6%. AUD and NOK are the leading gainers, both higher by more than 1% with the former seeming to be a leveraged bet on a resumption of growth in Asia while the krone responded positively to a report that in the event of an international agreement to cut oil production, they would likely support such an action and cut output as well. While oil prices didn’t benefit from this news (it seems that there are still significant disagreements between the Saudis and Russians preventing a move on this front), the FX market saw it as a distinct positive. interestingly, the euro, which was the epicenter of today’s positive news, is virtually unchanged on the day.

EMG currencies are also broadly firmer this morning although there are a couple of exceptions. At the bottom of the list is TRY, which is lower by 0.6% after reporting a 13% rise in coronavirus cases and an increasing death toll. In what cannot be a huge surprise, given its recent horrific performance, the Mexican peso is slightly softer as well this morning, -0.2%, as not only the weakness in oil is hurting, but so, too, is the perception of a weak government response by the Mexican government with respect to the virus. But on the flipside, HUF is today’s top performer, higher by 1.0% after the central bank raised a key financing rate in an effort to halt the freefalling forint’s slide to further record lows. Since March 9, HUF had declined more than 16.5% before today’s modest rally! Beyond HUF, the rest of the space is holding its own nicely as the dollar remains under broad pressure.

Before we look ahead to this week’s modest data calendar, I think it is worth a look at Friday’s surprising NFP report. By now, you are all aware that nonfarm payrolls fell by 701K, a much larger number than expected. Those expectations were developed because the survey week was the one that included March 12, just the second week of the month, and a time that was assumed to be at least a week before the major policy changes in the US with closure of businesses and the implementation of social distancing. But apparently that was not the case. What is remarkable is that the Initial Claims numbers from the concurrent and following week gave no indication of the decline.

I think the important information from this datapoint is that Q1 growth is going to be much worse than expected, as the number indicates that things were shutting down much sooner than expected. I had created a simple GDP model which assumed a 50% decrease in economic activity for the last two weeks of the quarter and a 25% decrease for the week prior to that. and that simple model indicated that GDP in Q1 would show a -9.6% annualized decline. Obviously, the error bars around that result are huge, but it didn’t seem a crazy outcome. However, if this started a week earlier than I modeled, the model produces a result of -13.4% GDP growth in Q1. And as we review the Initial Claims numbers from the past two weeks, where nearly 10 million new applications for unemployment were filed, it is pretty clear that the data over the next month or two are going to be unprecedentedly awful. Meanwhile, none of this is going to help with the earnings process, where we are seeing announcements of 90% reductions in revenues from airlines, while entire hotel chains and restaurant chains have closed their doors completely. While markets, in general, are discounting instruments, always looking ahead some 6-9 months, it will be very difficult to look through the current fog to see the other side of this abyss. In other words, be careful.

As to this week, inflation data is the cornerstone, but given the economic transformation in March, it is not clear how useful the information will be. And anyway, the Fed has made it abundantly clear it doesn’t care about inflation anyway.

Tuesday JOLTS Job Openings 6.5M
Wednesday FOMC Minutes  
Thursday Initial Claims 5000K
  PPI -0.4% (0.5% Y/Y)
  -ex food & energy 0.0% (1.2% Y/Y)
  Michigan Sentiment 75.0
Friday CPI -0.3% (1.6% Y/Y)
  -ex food & energy 0.1% (2.3% Y/Y)

Source: Bloomberg

Overall, Initial Claims continues to be the most timely data, and the range of forecasts is between 2500K and 7000K, still a remarkably wide range and continuing to show that nobody really has any idea. But it will likely be awful, that is almost certain. Overall, it feels too soon, to me, to start discounting a return to normality, and I fear that we have not seen the worst in the data, nor the markets. Ultimately, the dollar is likely to remain THE haven of choice so keep that in mind when hedging.

Good luck and stay safe
Adf