The BOJ did Absolutely nothing new Can we be surprised? The last of the key central bank meetings finished last night with the BOJ not only leaving policy on hold, as expected, but not even hinting that changes were in the offing. Much had been made earlier this month about a comment from Ueda-san that they may soon have enough information to consider policy changes. This was understood to mean that YCC might be ending soon. Oops! If that is going to be the case, it was not evident last night. Rather, the status quo seems the long-term view in Tokyo right now. Not surprisingly, the yen suffered accordingly, selling off another -0.5% overnight and is now back at its weakest point (highest dollar) since October 2022 when the BOJ intervened actively. Also, not surprisingly, after the yen weakened further, we started to hear from the MOF trying to scare the market. FinMin Shunichi Suzuki once again explained that he would not rule out any actions with respect to the currency market if volatility (read depreciation) increased too much. But as of yet, there have been no BOJ sightings and I suspect they will not enter the market until 150.00 is breached once again. Maybe next week. With central bank meetings now past The markets’ response has been fast It seems there’s a pox On both bonds and stocks And owners of both are aghast While further rate hikes may be rare Investors feel some small despair No rate cuts are planned Throughout any land And bond yields are now on a tear Turning to the rest of the G10, what was made clear over the past two weeks is that policy rates are not anticipated to fall anytime soon. While some central banks seemed to finish for sure (ECB, SNB, BOE) others seem like there may be another in the pipeline (Fed, Riksbank, Norgesbank, BOC, RBA), but in no case is there a discussion that inflation has reached a place of comfort for any central bank. Rather, even those banks on hold seem comfortable that policy rates need to remain at current levels in order to continue to battle the scourge of inflation. If anything, the hawks from most central banks continue to push for further tightening, although I suspect that will be a difficult hill to climb given the inherent dovishness of most central bank chiefs. So, what are we to expect if this is the new home for interest rates rather than the ZIRP/NIRP to which we had become accustomed for the past 15 years? The first thing to consider is that despite the higher rate structure, the financial position of the private sector, at least in the US, remains strong. Corporates termed out debt and tend toward being cash rich, so for now, they are benefitting from high interest rates as they locked in low financing and are earning the carry. Many households are in the same position, having refinanced home mortgages at extremely low rates so are not feeling the pain of the recent rise in mortgage rates. Of course, this has reduced the amount of activity in the housing market and is a problem for first-time buyers, but that is not the majority, so net, the pain is not so great. However, the US is unique in this situation as most of the rest of the world are beholden to short-term rates in their financing. This is true in the commercial sector, where bank lending is a far more important part of the capital structure than public debt. Those loans are floating, which is also true in the household sector where most mortgages elsewhere have 5-year fixed terms and so are already repricing higher and impacting homeowners. In fact, if you want one reason as to why the US is likely to outperform the rest of the world, this would be a good place to start. Despite much higher interest rates, the pain is not being felt across much of the US economy while it is being felt acutely throughout Europe and the UK. The upshot of this process is that inflation is likely to remain with us for quite a while going forward. This means that central banks are going to have a great deal of difficulty reversing course absent a major crash in economic activity. Given the US tends to lead the world’s capital markets, it also means that the combination of continuing gargantuan issuance by the Treasury to finance the never-ending budget deficits along with the stickiness of inflation implies that interest rates need to be higher. We saw this price action yesterday with 10yr Treasury yields jumping to 4.5%, another new high for the move, and importantly, a larger move than the 2yr yield. This is the ‘bear steepening’ that I have been writing about, with longer end yields rising faster than shorter yields. Ultimately, this will be quite a negative for risk assets, especially paper ones, although hard assets ought to benefit. The world that we knew has changed, so we all need to adjust accordingly. Turning to the overnight session, yesterday’s US weakness was followed by Japan (-0.5%) but Chinese shares bucked the trend, rising strongly on hopes that the recent data shows the worst is past for the mainland. That seems odd given the lack of additional stimulus forthcoming from the government, but that is the story. European shares are mostly a bit lower this morning after flash PMI data was released showing growth in the Eurozone remains elusive. Germany is still in dire straits with its Manufacturing PMI <40, but the whole of Europe is sub 50 for the past four months at least. Finally, US futures are bouncing slightly this morning, but that seems like a trading reaction to two consecutive days of sharp losses rather than new optimism. Other than YK Gilts, which traded at much higher levels back in August, European sovereigns are following Treasury yields to their highest level in more than a decade. And despite the weak economic story, the fact remains that sticky inflation is the clear driver for now. Consider that the ECB has essentially explained they have finished raising rates with their policy rate at 4.0% while CPI is running at 5.2% headline and 5.3% core. Those numbers do not inspire confidence that the ECB has done its job. I continue to look for higher long-term yields going forward. Part of the reason for this is that oil (+0.9%) continues to find support. While it had a couple of days of a modest pullback, we are back above $90/bbl and the news remains bullish the outcome. The latest is the Russia is halting deliveries of diesel fuel, a particular sore spot as there are already tight supplies around the world, especially here in the US. I see no reason for oil to decline structurally, and that is going to continue to pressure inflation higher. Perhaps of more interest is the fact that the metals complex is rallying today, despite the rise in interest rates. Gold (+0.3%), silver (+1.3%), copper (+0.8%) and aluminum (+1.1%) are all in the green. Again, I would say that owning hard assets is going to be a better outcome than paper ones. Finally, the dollar is mixed this morning, showing gains against the euro, pound and yen, but softer vs. the commodity bloc with AUD, NZD, CAD and NOK all firmer this morning. As well, EMG currencies are having a better session, rising a bit vs. the greenback, but recall, the dollar has had quite a good run lately. My take is there is a lot of profit-taking as we head into the weekend given the lack of fundamental stories that would undermine the buck. Nothing has changed my view it has further to rise. On the data front, the only releases are the flash PMIs here (exp 48.0 Manufacturing, 50.6 Services) and we get our first Fed speaker, Governor Lisa Cook, a confirmed dove. We have already had a lot of activity this week so I suspect that heading into the weekend, it is going to be a quiet session as traders and investors start to plan for next week’s excitement. Good luck and good weekend Adf
Concerns Are Severe
One look at the dot plot makes clear Inflation concerns are severe So, higher for longer Is growing still stronger And Jay implied few cuts next year
First, let’s recap the FOMC meeting. The term hawkish pause had been used prior to the meeting as an expectation, and I guess that was a pretty apt description. While they left policy on hold, as expected, the change in the dot plots, as seen below, indicate that even the doves on the Fed see fewer rate cuts next year, with just two now priced in from four priced in June.
Source: Fedreserve.gov
A quick reading shows that a majority of members expect one more hike this year, and now the median expectation for the end of 2024 has moved up to 5.125%, so 50bps lower than the median expectation for the end of 2023 and 50bps higher than the June plot. To me, what is truly fascinating is the dispersion of expectations in 2025 and 2026, where there are clearly many opinions. And finally, the longer run expectation has risen to 2.5% with many more members thinking it should be even higher than that. The so-called neutral rate estimations seem to be creeping higher. If you think about it, that makes some sense. After all, given the ongoing forecasts for continued labor market tightness due to demographic concerns, and add in the massive budget deficits leading to significantly higher Treasury debt issuance, there is going to be pressure on rates to find a higher level.
The market response was quite negative, albeit not immediately, only after Powell started speaking. But in the end, equity markets fell across the board in the US, with the NASDAQ taking the news the hardest, down -1.5%, as its similarity to long duration bonds was made evident. Asian markets all fell overnight as well, with most tumbling more than -1.0% and European bourses are all under similar pressure, down -1.0% or so as well. The one exception in Europe is Switzerland, where the SNB surprised the market and left rates on hold resulting in a weaker CHF and a very modest gain in their equity market.
However, the bigger market response was arguably in bonds, where yields rose to new highs for the move with the 2yr at 5.15% and the 10yr at 4.43%. Once again, I point to the significant increase in debt that will be forthcoming from the US Treasury as they need to fund those budget deficits. I have been making the case that a bear steepener would be the more likely outcome for the US yield curve. That is where long-term rates rise more quickly than short-term rates due to the US fiscal policy and shrinking demand for US debt by key players, notably the Fed, but also China and Japan. Nothing has changed that view.
Then early this morning, up north Both Sweden and Norway brought forth A quarter point hike To act as a dike Preventing price rises henceforth
After the Fed’s hawkish pause, we turn our attention to Europe, where the early movers, Sweden and Norway, both hiked twenty-five basis points, as expected, while both hinted that further hikes are not out of the question. Inflation remains higher than target in both nations and in both cases, the currency has been relatively weak overall. Switzerland left rates on hold, pointing to the fact that for the past three months, inflation has been within their target range, and they are beginning to see downward pressure on economic activity which they believe will keep that trend intact.
And lastly, from London we’ve learned Another rate hike has been spurned Though voting was tight They said they’re alright With waiting to see if things turned
As to the bigger story, the UK, expectations were split on a hike after yesterday’s tamer than expected CPI report while the pound fell ahead of the news. And the change in expectations was appropriate as in a 5-4 vote, the BOE opted to remain on hold for the first time in two years. They see that inflation may be easing more rapidly than previously expected, and they are concerned about overtightening. While I have a hard time understanding how a 5.15% Base rate is tight compared to CPI running at 6.7% and core at 6.2%, I am clearly not a central banker. At any rate, the pound fell further on the news and is now at its lowest level since March, while the FTSE 100 rallied back and is close to flat on the day from down nearly -1.0% before the announcement. Gilt yields, however, are moving higher as the bond market there doesn’t seem to believe that the BOE is serious about fighting inflation.
And really, those are today’s key stories. Late yesterday, Banco Central do Brazil cut the SELIC rate by 0.50%, as expected, and at the same time the BOE announced, the Central Bank of Turkey raised their refinancing rate by 5 full percentage points, to 30.0%, exactly as expected. And to think, we get concerned over rates at 5%!
As to the rest of the day, there is a bunch of US data as follows: Philly Fed (exp -0.7), Initial claims (225K), Continuing Claims (1695K), Existing Home Sales (4.1M) and Leading Indicators (-0.5%). As is typical, there are no Fed speakers scheduled the day after the FOMC meeting, but we will start to hear from them again tomorrow.
Putting it all together tells me that the Fed is not nearly ready to back off their current stance and will need to see substantial weakness in economic activity before changing their mind. Meanwhile, last week’s ECB meeting and this morning’s BOE meeting tell me that the pain of higher interest rates in Europe is becoming palpable and the central banks are leaning more toward inflation as an outcome despite their mandates. This continues to bode well for the dollar as the US remains the place with the highest available returns in the G10.
Tonight, we hear from the BOJ, where no change is expected. I would contend, though, that the risk is there is some level of hawkishness that comes from that meeting as being more dovish seems an impossibility. As such, there is a risk that the yen could see some short-term strength. Keep that in mind as you look for your hedging levels.
Good luck
Adf
If Doves Seduced
The British inflation release Showed prices did not quite increase As much as expected Though still they’re projected To stay at a level, obese But truly, all eyes have now turned To Jay, when past two, we’ll have learned If hawks rule the roost Or if doves seduced The Chairman with more rate hikes spurned
As New York walks into the office this morning, all thoughts are on how the FOMC meeting will play out. The current expectation is for no rate movement today and still about a 50% chance of one more hike either in November or December. More remarkably, as I wrote yesterday, is the belief that there will be 100 basis points of cuts next year despite the growing belief of either a soft landing or no landing. Again, I ask, why would the Fed cut rates if the economy continues to grow with the current monetary policy? However, at this point, all we can do is wait.
FWIW, which may not be much, I continue to see the outcome as follows; no movement today, 25bps in November and then a reassessment in December based on how the data continues to flow. Nothing Powell has said indicates that he is comfortable that the Fed has vanquished inflation, and similar to the idea that every politician only cares about one thing, his reelection, I believe Powell is completely focused on just one thing, killing inflation. He has made it abundantly clear in the past that he expected some economic pain would be necessary in order to achieve that outcome, and he is not going to be deterred at this stage. It would not surprise me if Fed funds remained at the year-end 2023 rate, whether that is 5.50% of 5.75%, for all of 2024. In fact, absent a very significant recession, that is what I believe will occur. One man’s view.
Anyway, turning to the only other data of note today, UK CPI surprisingly fell to 6.7%, down from last month’s 6.8% reading and forecasts for a 7.0% outcome today based on rising energy and food prices. Even better for Governor Bailey, the core rate fell to 6.2%, well below last month’s level of 6.9% and forecasts of 6.8%. The pound dipped on the news, but only by -0.2%, as the entire FX complex remains in thrall to the FOMC outcome later this afternoon. However, this inflation result has pundits asking whether Governor Bailey will be able to skip tomorrow’s rate hike, just like the Fed, and wait until November if they deem it still necessary. My view here is that will not be the case. Given the overall weakness in the UK economy, Bailey is clearly running out of room to hike rates, and tomorrow is likely to be his last chance to raise rates before the evidence of sustained weakness becomes clear. Just like the rest of Europe, I expect the BOE will hike tomorrow and be done.
Once again, I will point out that the basis of my dollar views remains that the US is going to be the most hawkish of all the major economies, maintaining tighter monetary policy far longer than other nations, and that the dollar will naturally see investment flows continue. After all, the combination of higher yields and potentially better growth prospects will be far too much for international investors to ignore.
For now, though, we wait for 2:00pm and the FOMC statement along with their new Summary of Economic Projections, and then for Chairman Powell’s presser at 2:30. As such, until then I expect a pretty dull day.
Overnight, Asian equity markets were under pressure with losses in both Japanese and Chinese shares, as well as generally throughout the region. The only noteworthy news was that the PBOC left rates on hold, which was widely expected, although there were those who thought they might cut again to support the weakening Chinese economy. European bourses, though, are having a much better day, with all markets higher by at least 0.5% and several southern European nations seeing gains greater than 1%. Meanwhile, at this hour (7:30), US futures are edging higher by 0.2% or so after modest declines yesterday.
In the bond market, yesterday’s closing level for 10yr Treasuries was the highest, at 4.36%, since October 2007, and although the yield is lower today by about 2bps, this trend remains intact. The big mover today, though, is UK Gilts which have seen yields drop 8bps after that CPI report. This has helped drag European sovereign yields lower by about 2bps as traders want to believe that the rate hikes are over everywhere in Europe, and cuts are the next step. While that’s not my view, it is gaining traction.
In the commodity markets, oil (-1.0%) has finally had a pullback of substance after a rumor yesterday that the Biden administration was going to completely empty the SPR. There has been no source for that story and no corroboration but given the move that oil has seen over the past 3 months, up more than 35%, a pullback is no surprise. While there is likely to be a further short-term retreat here, the long-term prospects for oil remain significantly positive in my view. As to the metals markets, industrials are a bit firmer this morning, perhaps on the idea that the rate hiking cycle in Europe is ending, while gold is unchanged.
Finally, the dollar is a bit softer this morning, but not very much. The euro remains either side of 1.07 while USDJPY is pushing the 148 level, very close to the key 150 point where many participants believe the BOJ will step back into the market. As to CNY, its home has been the 7.30 level despite all the effort that the PBOC has expended to strengthen the yuan. The biggest winners today have been the Antipodeans, with both AUD and NZD firmer by 0.5% after the Minutes of the RBA meeting indicated that they were considering another rate hike at the last meeting although decided to hold off. The implication is another hike could be in the cards.
On the data front, really the FOMC meeting is today’s only activity of note, although we will see the EIA oil inventories as well. Until the meeting ends, I expect very little to occur. Once the announcement is out, and even more importantly, once Powell starts to speak, be prepared for more volatility.
Good luck
Adf
What He’s Sought
On Monday, the market did naught As traders were giving much thought To how Jay explains The work that remains For him to achieve what he’s sought And so, while no change is expected In rates, look at what is projected The June dot plot showed The Fed’s preferred road Was four cuts will soon be effected
Once again, the overnight activity remains fairly dull as traders and investors around the world await the results of tomorrow’s FOMC meeting. At this point, it seems quite clear the Fed will remain on hold tomorrow leaving Fed funds in a 5.25%-5.50% range while continuing their QT program. With this in mind, all the excitement will come from the new Summary of Economic Projections (SEP) which includes the dot plot. The dot plot is the graphical representation of the FOMC members’ expectations for the path of Fed funds going forward. Below is the most recent release from the June meeting (chart from Bloomberg).
The chart shows each of the FOMC members’ forecasts for where Fed funds will be at the end of 2023, 2024, 2025 and over the long term. The green line shows the median forecast which in June indicated a belief there will be one more rate hike in 2023 and then four rate cuts in 2024 with another five cuts in 2025 before eventually seeing Fed funds move back to the perceived ‘neutral’ rate of 2.5%.
However, let us consider how some alternative scenarios might evolve. For instance, I continue to wonder why the Fed will be cutting rates by 100bps in 2024 if they no longer forecast a recession in the US. After all, if the economy continues to chug along with rates at 5.5%, what purpose would be served by cutting rates? And if the economy does enter a recession next year, something which seems realistic, then the Fed will be cutting far more than 100bps. It’s funny, if you look at the dispersion of expectations for 2024, there is one member who feels certain a recession is coming, with an expected rate of 3.625%, and another one who sees higher for longer as lasting the entire year. At least those two members are making some sense. However, the idea that the Fed will cut just because, without a more severe economic shock, seems quite unlikely. After all, Chairman Powell has invoked the ghost of Paul Volcker numerous times and explained they will not be fooled by a temporary decline in inflation. Rather, they are in this for the long haul and will win the battle.
There are those who would argue that the Fed will cut rates, regardless of the economic situation, because the US cannot afford to continue to pay interest at the current level on their >$32 trillion in debt. As such, Powell will feel enormous pressure from the administration to reduce rates to help the government. Now, that is the exact opposite of central bank independence, but certainly not an impossible outcome. But absent that type of situation, it strikes me that we remain a very long way from the Fed achieving their target inflation rate of 2.0%. At this point, the one thing Powell has made abundantly clear is that he will not stop until they achieve that goal.
Another fly in the rate cutting ointment is the price of oil. Again, this morning it is higher, +0.8%, and now above $92/bbl and seemingly approaching the magical $100/bbl level. In the wake of the Russian invasion of Ukraine, the Biden administration released some 300 million barrels from the US’s Strategic Petroleum Reserve (SPR) which helped moderate price increases at the time. However, the ability to repeat that exercise does not exist as currently, the SPR only holds about 350 million barrels and there are actual physical constraints regarding the integrity of the salt domes in which the SPR is kept. If too much is released, the domes could cave in. When considering this alongside the ongoing production cuts from OPEC+ as well as the administration’s effective war on domestic oil production, it is reasonable to conclude that oil prices have higher to climb. Working our way back to the Fed, the problem is that high energy prices ultimately become embedded in all prices, as even services require energy to be accomplished. This underlying cost pressure is going to prevent any significant decline in the rate of inflation and, in turn, support the Fed’s higher for longer narrative for even longer.
Wrapping up the discussion, I would contend that absent a sharp recession, the Fed is not going to be pressured into cutting the Fed funds rate anytime soon. Instead, I expect that we will continue to see longer end rates rise slowly as the combination of massive new issuance of Treasury debt and lingering inflation will require higher yields to find buyers. Currently, the two largest non-Fed holders of Treasury securities are China and Japan, and both of them have been slowly liquidating their portfolios as they need dollars to sell in the FX markets in order to support their own currencies. When push comes to shove, I expect that we will see US rates retain their advantage over other G10 currencies and that it will continue for a while to come. As such, I continue to expect the dollar to outperform, at least until something really breaks. However, what that something is remains open to debate.
Turning to the overnight session, which was quite uninteresting as mentioned above, we saw mixed to weaker performance in Asian equities, with only the Hang Seng managing to eke out any gains at all, while European bourses are mixed with the major exchanges all within 0.2% of yesterday’s closing levels. Yesterday’s US performance was as close to unchanged as it could get while being open, and this morning’s futures market is showing tiny gains (<0.1%) at this hour (8:00).
Bond markets are somewhat mixed on the day, with Treasury yields backing up 2bps, while UK gilt yields are lower by 4bps and everything else is in between. Eurozone final CPI for August was released with the headline ticking down 0.1% to 5.2%, but core unchanged at 5.3%, with both, obviously, still well above the ECB target. Madame Lagarde must be praying quite hard for inflation to fall further as she made it clear she does not want to raise rates again. In the end, the Eurozone has myriad problems with sticky high prices and slowing growth, an unenviable position.
Aside from oil’s gains, gold has been performing relatively well lately, which given the dollar’s resilience and higher interest rates seems somewhat odd. One possible explanation is that there continues to be significant demand in Asia, where, for example, the Shanghai Gold exchange price is currently some $30/oz higher than on the COMEX, and this spread has been growing. We have heard much about the record amount of gold buying by central banks this year, and this seems of a piece with that outcome. However, looking at industrial metals, both copper and aluminum are softer this morning as the prospects for Chinese growth diminish and with them so do prospects for demand for those metals.
Finally, the dollar is a bit softer this morning vs. most of its G10 counterparts with NOK (+0.75%) leading the way higher on the back of oil’s continuing rally. In fact, the entire commodity bloc is at the top of the charts today. However, in the EMG bloc, we are seeing more of a mixed picture with an equal number of gainers and laggards and none showing exuberance in either direction.
On the data front today, we see Housing Starts (exp 1439K) and Building Permits (1440K) as well as Canadian CPI (3.8% headline, 3.7% core), with both measures rising and keeping pressure on the BOC. There are still no speakers, so my take is that things will be dull until tomorrow’s FOMC announcement at 2:00pm.
Good luck
Adf
Some Dismay
While everyone’s certain that Jay Will leave rates alone come Wednesday The curve’s longer end Is starting to trend Toward rates that might cause some dismay The problem remains his frustration That he can do naught ‘bout inflation As oil keeps rising It’s demoralizing For Jay and his rate formulation
The overnight session was quite dull overall with virtually no new data or information on the macroeconomic front and a limited amount of commentary from the central banking and financial poohbahs of the world. Friday’s desultory US equity market performance was followed by a mixed session in Asia while European bourses are all in the red after the Bundesbank indicated that Germany would have negative growth in Q3. As well, after last week’s ECB rate hike, we did hear from one of the more hawkish members that further hikes are possible, although listening to Madame Lagarde’s comments, that seems quite a high bar at this time.
So, given the limited amount of new information, it seems that it is time for central bank prognostications. The first thing to note is that while the Fed is certainly the main act this week, there are no less than a dozen other major interest rate decisions due this week including the BOE, BOJ, PBOC, Swedish Riksbank, Norgesbank, SNB and Banco Central do Brazil.
While much has been written about the FOMC on Wednesday, with the current market pricing just less than a 1% probability of a hike, the European banks that are meeting are all expected to follow the ECB and hike by 25bps. Meanwhile, the PBOC remains caught between a rock (slowing economic growth) and a hard place (a weakening currency) and seems highly likely to follow the Fed’s lead and leave rates on hold.
The BOJ is also very likely to leave their rate structure on hold, but questions keep arising regarding any other potential tweaks to the YCC framework. However, given the relatively strong denials of anything like that from Ueda-san at the end of last week, I am inclined to believe they are comfortable where they are.
Finally, a look down south shows that Brazil is forecast to cut the SELIC rate (their Fed funds equivalent) by 50bps to 12.75% with a handful of analysts calling for a 75bp cut. Of course, inflation in Brazil has fallen from effectively 12% last summer to 4.65% now, so real rates are still remarkably high there which is the key reason the real has been such a great performer over the past twelve months, having risen ~8%.
The only market that is really showing much movement is oil, which is higher yet again this morning, by another 0.5% and now above $91/bbl. It is becoming very clear that the OPEC+ production cuts are having the impact that MBS desired, with tightening supply meeting ongoing demand growth, despite slowing economic activity. The one thing that should remain abundantly clear to all is that no amount of effort by Western governments to reduce demand for fossil fuels is going to have the desired impact as developing nations will not be denied their opportunities to improve their own economic situation and that generally takes access to energy. To date, fossil fuels continue to prove to be the most cost-effective and efficient sources, so that demand will just not abate. Oil prices are going to continue to head higher, mark my words.
And truthfully, on this rainy Monday morning in NY, that is pretty much all the excitement that we have ongoing. The data this week is focused on Housing and expectations are as follows:
| Tuesday | Housing Starts | 1437K |
| Building Permits | 1440K | |
| Wednesday | FOMC Rate Decision | 5.50% (current 5.50%) |
| Thursday | Initial Claims | 225K |
| Continuing Claims | 1695K | |
| Philly Fed | -1.0 | |
| Existing Home Sales | 4.10M | |
| Leading Indicators | -0.5% | |
| Friday | Flash PMI Manufacturing | 48.2 |
| Flash PMI Services | 50.6 |
Source: Bloomberg
A side note regarding the data is that the Leading Indicators Index is forecast to decline again, which will be the 17th consecutive decline, a very strong indication that future economic activity seems likely to suffer. Of course, this is just one of the numerous signals of an impending recession (inverted yield curve, ISM/PMI sub 50.0, etc.) that have yet to play out as they have done historically. Perhaps the UAW strikes will be enough to tip things over, especially if they widen in scope, but that seems premature.
In addition, we are beginning to hear more about a potential government shutdown as the House has not yet completed its funding bills but my take here is that while the rhetoric may heat up, the reality is that a continuing resolution will be passed and that this is just another tempest in a teapot in Washington, SOP really.
When looking a little further ahead, I continue to see a far better chance that the Fed remains the most hawkish of the major central banks, and that higher for longer really means just that. Economic activity elsewhere, notably in Europe and China, is suffering far more acutely than in the US, at least statistically, and that implies that this week’s rate hikes across the UK and the continent are very likely the end of the cycle. I am not convinced that the Fed is done. That combination leads me to continue to look for relative dollar strength over time. For asset/receivables hedgers, keep that in mind.
Good luck
Adf
Dreamlike
The ECB hiked twenty-five But Madame Lagarde tried to drive The idea they’d hike Again was dreamlike And so, euro-dollar did dive Then last night some Chinese reports Showed there was some growth there, of sorts The PBOC’s Continuous squeeze Of rates, too, has hammered yuan shorts
Starting with a quick recap of the ECB meeting, as I had believed, they hiked rates by 25bps which takes the Deposit rate to 4.00%, the highest level since the euro was created in 1999. It seems Madame Lagarde’s rationale was similar to my own, which was essentially, this was the last chance to raise rates before the recession in Europe really gets going at which point further rate hikes will be incredibly difficult politically. However, by essentially explaining they were done, with inflation running well above both the current interest rate structure as well as their 2.0% target, Lagarde undermined any support for the single currency which fell sharply yesterday after the announcement and has been unable to show any signs of life since then. Current market pricing shows a 38% probability of another hike this year before an eventual reduction in the rate structure by the middle of 2024. However, my take is that if the recession spreads further, the ECB will be quick to cut rates. Ultimately, I continue to believe the euro is going to have a very difficult time going forward.
Turning our attention east, the Chinese monthly data dump was released last night and virtually every single measure beat expectations, even the property investment. None of the beats were very large, but I guess the question has become are analysts and investors overly bearish on China (or perhaps the question is can we trust Chinese data)? For instance, IP rose 4.5% Y/Y, vs. 3.9% expected; Retail Sales rose 4.6% Y/Y vs. 3.0% expected; Property Investment fell -8.8% Y/Y vs. -8.9% expected and the Unemployment Rate fell to 5.2% rather than remaining unchanged at 5.3%. The only outlier was Fixed Asset Investments which rose 3.2% rather than the 3.3% expected. The market response to this was quite interesting. The yuan was little changed, although it remains well above its recent lows with USDCNY hovering around 7.2800. The CFETS fixing continues to be pushed toward a lower dollar, although the spread between the fixing and the onshore market has narrowed slightly to 1.4% from its recent levels above 1.9%.
As I mentioned yesterday, the Chinese cut their RRR by 0.25% trying to inject more liquidity into the economy and they have also been pushing up offshore CNY interest rates which are now equal to USD interest rates so there is no carry benefit in shorting the CNY offshore. This, too, will help eliminate some of the downward pressure on the yuan. In fact, it appears that much of the recent policy focus has been to prevent the yuan from weakening much further. I guess if you are trying to convince other countries that they can use the yuan for payments and holding it is safe, it really cannot be seen falling sharply. I suspect that the PBOC will be doing everything they can to support the currency going forward. In a bit of a surprise, Chinese shares were the worst performers overnight, with all the main indices there in the red while markets elsewhere in Asia (Nikkei +1.1%, Hang Seng +0.75%, ASX 200 +1.3%) and Europe (DAX +1.0%, CAC +1.6%, FTSE 100 +0.8%) are all higher. As it happens, US futures are little changed this morning after a strong equity performance yesterday. So, all in all, I would say risk is in favor today.
This risk attitude is evident in bond yields as well as they are rising with investors moving from bonds to stocks. Treasury yields are higher by 3.5bps, while in Europe, yields are all higher at least 6bps with Italian BTPs seeing the most selling and a rise of 7.5bps. Arguably, if the ECB has finished its tightening cycle, which it seems to have done, and inflation remains as high as it is, the value of bonds should decline. This movement is logical based on what appears to be the new narrative.
A quick aside on Japan, where you may recall that on Monday, the yen strengthened and JGB yields rose after comments from BOJ Governor Ueda regarding the possibility that they would have enough information to potentially end ZIRP there. It turns out that was not Ueda-san’s intention, and rather he thought his comments were benign. It seems there is no intention to adjust policy anytime soon. The market response was seen in FX where the yen fell -0.3% and is now pressing to 148. I suspect 150 is coming soon, although further intervention at that level cannot be ruled out.
Turning to commodities, oil (+0.5%) continues to rally and is now solidly above $90/bbl. The other gainer today is gold (+0.4%) but base metals are softer. A possible train of thought here is that rising oil prices will both force interest rates higher through the inflation channel as well as undermine economic growth, so the industrial sector is getting double-whammied in the short-term. As with energy, the long-term prospects remain quite positive for base metals as production is just not going to be able to keep up with demand given the lack of investment in the sector since the ESG movement began a decade ago. Even if it is recognized that this must change, it will take years before new production can come online which should continue to be supportive of the sector overall.
Finally, the dollar is mixed this morning, with the EMG bloc seeing half gainers and half laggards although the largest movement is less than 0.2%. In other words, nothing is going on here. Similarly, in the G10, other than the yen mentioned above, movement has been mixed with no real substance in either direction. Given the FOMC meeting next week, it appears that traders are unwilling to position themselves too much in either direction. Net, this week, the dollar did fall a bit, but remains well above its recent lows.
Yesterday’s Retail Sales data was once again quite hot, rising 0.6% for headline and ex-autos, which just goes to show that there is a lot of money still sloshing around the system. As well, the Claims data was solid again with 220K Initial Claims, less than forecast and certainly not showing any weakness in the labor market. Today brings a bunch of secondary data with Empire Manufacturing (exp -10.0), IP (0.1%), Capacity Utilization (79.3%) and Michigan Sentiment (69.0). The Citi Surprise Index continues to push higher which continues to indicate that economic activity in the US remains solid. While a recession is clearly going to arrive at some point, for now, it remains a distant prospect. With that in mind, do not think that the Fed is going to go soft anytime soon and that ongoing higher for longer is very likely to help support the dollar overall.
Good luck and good weekend
Adf
Results May Be Dire
It turns out inflation was higher Though no one would call it on fire The problem, alas Is food, rent and gas Show future results may be dire But CPI’s yesterday’s news Today it’s Christine and her views Will she hike once more Though growth’s on the floor Or will, all the hawks, she refuse?
Yesterday’s CPI report could be termed luke-warm, I think, as the headline number was a tick higher than expected at 3.7%, while the core M/M number was also a tick higher than expected at 0.3%, although the Y/Y core number was right at the 4.3% expectation. This provided fodder for both sides of the inflation discussion, with the inflationistas all claiming that higher CPI is coming, and we have bottomed while the deflationistas claimed that the results were insignificantly different from expectations and, oh yeah, rental prices are still falling so they are certain CPI will follow lower. My go-to on this subject is always @inflation_guy and he explained (here) that some areas were hot and some not so much but does agree that any further declines in the CPI are likely to be quite small if they come at all. I am in the camp that the new inflation level is somewhere in the 3.5%-4.0% area and short of a drastic recession, it will be extremely difficult to change that.
The stock market was certainly confused by the data as it initially sold off 0.5%, rebounded through most of the day only to see another late day decline and finish up very slightly higher overall. In other words, it certainly doesn’t seem as though opinions were changed. Treasury yields did edge a bit lower, falling 3bps, although this morning they have backed up by 1bp. And the dollar finished the day net stronger vs. the G10, but actually net weaker vs. the EMG bloc. All in all, I would argue we didn’t learn that much.
This brings us to today’s key story, the ECB meeting. After the leaked story about the newest ECB forecasts calling for CPI above 3.0% next year, the market priced a greater probability of a hike today, it is still 65%, but net, have only one more hike priced in before the ECB is finished. Madame Lagarde’s problem is that inflation is running hotter than in the US while their interest rate structure is 150bps lower and growth is very clearly rolling over. The stickiness of European inflation has been quite evident and shows no signs of changing. So what will she do?
Given Lagarde’s political background, as opposed to any central banking background, I expect that she will see the writing on the wall with respect to economic activity in the Eurozone, and if the ECB is going to be able to raise rates at all, this is probably the last chance. By the October meeting, the European recession will be quite evident and her ability to hike rates then will be heavily circumscribed. As such, I see 25bps today and that is the end, regardless of what her comments afterwards are.
Trying to consider how the markets will react to this leads me to believe that European equities will soften a bit, although ahead of the meeting they are higher by about 0.3% across the board. It also implies to me that we could see European sovereign yields creep higher (although right now they are lower by about 1bp across the board) as the inflation fighting stance alters before inflation retreats, and ultimately, I think the euro suffers as investors decide that there are better places to put their money. In fact, I expect this opens the door for the next leg lower in the single currency, perhaps down to 1.05 before it finds a new ‘home’.
But wait, there’s more! In fact, we have a plethora of data being released today in the US as follows:
| Retail Sales | 0.1% |
| -ex Autos | 0.4% |
| Initial Claims | 225K |
| Continuing Claims | 1693K |
| PPI | 0.4% (1.3% Y/Y) |
| -ex food & energy | 0.2% (2.2% Y/Y) |
Source: Bloomberg
For the market, and the Fed, I expect the Retail Sales number will be critical as last month we saw a very hot read, 0.7% while the market was looking for just 0.4%, and the ex Autos number was even hotter at 1.0%. If we were to see another strong number here, especially if the Claims data continues to point to strength in the labor market, the Fed will certainly take note. And while they may not hike next week, it would likely increase the odds of a November hike substantially.
Those are the key macro stories to watch today but there is one micro story that is worth noting and that is that the PBOC has been quite active recently in its efforts to prevent further renminbi weakness. This morning they cut the reserve requirement ratio by a further 0.25% for banks in China and they also increased the issuance of bills offshore in Hong Kong thus pushing CNY rates higher there and pressuring those who would short the currency. Finally, it appears that they have instructed several of the large state-owned banks to essentially intervene in the spot market at their direction, although the banks are the ones holding the risk. So far, all their activity this week has pushed USDCNY lower by just 1.0%, so having some effect, but hardly reversing the longer-term trend weakness in the currency. My take is, like the Japanese, they are more worried about the pace of any decline than the decline itself. But in the end, unless we see some macro policy changes by either or both China and the US, the trend here remains for a weaker renminbi.
Ahead of the ECB meeting, markets have been quiet overall. The dollar is mixed with an equal number of gainers and losers in both the G10 and EMG blocs and none of the movement more than 0.3%. We have already discussed both stocks and bonds which leaves only commodities, which is the exception to the rule of limited movement today as oil (+1.5%) has jumped further with WTI pushing to just below $90/bbl. While metals markets are mixed and little changed overall, the oil story is going to be a problem for both central bankers and politicians alike if the price continues to rise. As we head into election season in the US, rising gasoline prices, and they are rising fast, will likely cause panic in the current administration. Alas, they no longer have an SPR to offset the OPEC+ production cuts, they used that bullet, so the only hope for lower prices seems to be a dramatic decline in demand, and that will only occur if we have a deep recession, something else that politicians are desperate to avoid. I remain bullish on oil overall, although we have seen a pretty big move over the past month, nearly 11%, so some consolidation wouldn’t be a big surprise.
And that’s really it for today. At 8:15, the ECB releases its decision and statement. At 8:30 the US data drops and then at 8:45 Madame Lagarde holds her press conference. So, plenty to look forward to in the next hour or so.
Good luck
Adf
Having Some Fits
While all eyes are on CPI Some other news may now apply The Germans and Brits Are having some fits As they both, to growth, wave bye-bye The other thing that we have heard Is ECB forecasts have stirred What was 3% They’ve had to augment So, Thursday, a hike is the wor
Clearly, the top story today will be the release of the August CPI data with the following expectations: Headline 0.6% M/M, 3.6% Y/Y and ex food & energy 0.2% M/M, 4.3% Y/Y. The headline number has been boosted by the rise in energy prices, although it is important to understand that the bulk of the gains in oil’s price are not going to be in this number, but in next month’s release. As well, oil prices continue to rise, up another 0.65% this morning and now above $89/bbl. Too, gasoline prices, the place where we feel this rise most directly, continue to climb right alongside crude. This release will have the chance to alter some views on the Fed meeting next week, but it will need to be a big miss one way or the other to really have an impact, I think. While I am not modeling inflation directly, certainly my anecdotal evidence is that prices are continuing to rise at better than a 4% clip for ordinary purchases, whether in the supermarket or at a restaurant or retail store.
But perhaps, the more interesting things today have come from Europe and the UK, with three key, somewhat related stories. The first was the release of the UK monthly GDP data which fell -0.5%, far worse than anticipated as IP (-0.7%), Services (-0.5%), and Construction (-0.5%) all were released with negative numbers for July. What had been a seemingly improving outlook in the UK certainly took a hit today and has placed even more pressure on the BOE. Despite the weaker than expected growth situation, there is, as yet no evidence that inflation is really slowing down very much leaving Bailey and company in a pickle. Tightening further to fight inflation while the economy declines is a very tough thing to do. But letting inflation run is no bowl of cherries either. It should be no surprise that both the pound (-0.2%) and the FTSE 100 (-0.5%) are under pressure today.
The other two stories come from Frankfurt where, first, the German government is apparently set to downgrade its outlook for full-year 2023 GDP to -0.3% from its previous assessment of +0.4%, which was quite weak in its own right. Apparently, poorly designed energy policy is coming back to haunt the nation as manufacturing activity continues to diminish under the pressure of the highest energy prices in Europe. Unfortunately for Germany, and likely for Europe as a whole, unless they adjust their energy policies such that they can actually generate relatively cheap power and create a hospitable environment for manufacturing, I fear this could be just the beginning of a longer-term trend.
The other story here is not an official change, but a leak from ECB sources, which indicates that the ECB’s inflation estimate for 2024 will now be above 3.0%, from its last estimate right at 3.0%. The implication is that the hawks continue to push for another rate hike at tomorrow’s council meeting. In the OIS market, the probability of a hike tomorrow has risen to 67% from about 50% yesterday. As a reminder, this is what Madame Lagarde told us back in July, “We have an open mind as to what decisions will be in September and subsequent meetings…We might hike, and we might hold. And what is decided in September is not definitive, it may vary from one meeting to another.” With this in mind, it appears that some members are trying to put their thumb on the scales and get a push toward one more hike. Especially given weakness in German economic activity, if they don’t hike tomorrow, it will get increasingly difficult to justify more hikes later, so in the hawks’ minds, it’s now or never.
In truth, I think that is an accurate representation because if we continue to see slowing growth in Europe, Madame Lagarde, who is a dove by nature, will be quite unwilling to weigh on growth and push up unemployment even if inflation won’t go away. With this in mind, I’m on board to see the final ECB rate hike tomorrow.
Not surprisingly, today’s news did not help risk appetites at all. Equity markets, after yesterday’s US declines (especially in the tech sector) were lower throughout most of Asia and are currently lower across all of Europe. In fact, the losses on the continent are worse than in the UK, with an average decline of about -0.9%. Pending higher interest rates amid weakening growth are definitely not a positive for equities.
However, investors have not been running to bonds as a substitute. Instead, bond yields are higher pretty much across the board, with Treasury yields up 2.5bps while European sovereigns have seen yields climb between 3.5bps (Bunds) and 7.0bps (BTPs). This has all the feel of rising inflation fears that are not likely to be addressed in the near term.
I already touched upon oil prices leading the energy space higher, but given the sliding views of economic activity, it is no surprise to see metals prices softer this morning with both precious and base metals under pressure. While the long-term prospects for commodities overall, I believe, remain quite bullish, if (when) we do go into recession, I expect a further price correction.
Finally, the dollar is a bit stronger against all its G10 counterparts and most EMG counterparts this morning. Granted, the movement has been modest so far, which given the importance of today’s data release, should be no surprise. But my take is that a hot CPI print, especially in the core, will see the dollar rise further as the market starts to price in at least one more rate hike by the Fed, probably in November. At the same time, if the CPI number is cool, then look for the dollar to give back a bunch of its recent gains as market participants go all in on rate cuts in the near future. It is that last part of the concept with which I strongly disagree. While the Fed may have reached its terminal rate, there is no evidence that they are even thinking about thinking about cutting rates. However, that is my sense of how today will play out.
Good luck
Adf
Higher For Longer is Key
As markets await CPI Some folks have begun to ask why The Fed needs to keep Inversion so deep Since ‘flation is no longer high Instead, what these folks want to see Is rates heading back down to three But Jay’s been quite clear Throughout this whole year That higher for longer is key
It has been an extremely quiet evening session with very little in the way of new information for market participants as all eyes are on tomorrow morning’s CPI print in the US. There were only two pieces of mildly noteworthy data, UK Unemployment rose one tick to 4.3%, as expected and the overall employment report was largely in line with expectations. As well, the German ZEW Survey showed that while the current situation has actually deteriorated, falling to Covid-like levels, Expectations were marginally less awful than forecast. But in the end, it is hard to make the case that either of these releases had much of an impact on the market.
On the geopolitical front, much is being made of North Korean leader Kim Jung-Un’s trip to Moscow to meet with President Putin, and ostensibly promise to sell him weapons and ammunition. But again, this doesn’t appear to have any market impact. Arguably, of much more importance to the market are two US tech firm stories; first Oracle giving disappointing guidance in their earnings last night indicating that perhaps AI is not actually going to rain money into every tech firm right away, and, second the anticipation of Apple’s release of the iPhone 15 today, as analysts try to determine if that company can continue to deserve its current valuation. At this hour (7:30), Oracle stock is much lower, about -10%, and the entire US equity futures market is marginally under water as well, but just -0.2% or so.
If I had to characterize today’s market it would be stagnant with a flavor of risk-off. Given the perceived importance of tomorrow’s data release, and the fact that its timing was well-known in advance, it appears that positions have already been established based on individual views. The result has been lower volumes and less movement ahead of the release. As well, absent any Fed speakers it is hard to come up with a reason to adjust any views at this point in time. So, my sense is we are set for quite a dull session overall.
Perhaps this is a good time to recap the current narrative, at least as I see it. I believe a majority of market participants believe the Fed is done hiking rates and it is only a matter of time before they start cutting them. There is a strong belief that the Fed will achieve the much-vaunted soft landing despite the long odds of success on that front and a history that shows they have only ever been able to do so once. The odd thing about this soft-landing belief is the idea that if the Fed is successful in achieving that outcome with interest rates at 5%, that they would suddenly cut rates afterwards. I need someone to explain to me why the Fed would change the policy that achieved their goals. A correlating narrative remains that AI is not merely the future, but the present and that tech stocks can grow to the sky. And maybe they can, but I would bet the under there.
And lastly, there is a conundrum in this narrative as the de-dollarization story continues to get a great deal of play. However, if the Fed is successful and AI really is going to drive tech stocks higher forever, why would the dollar lose its luster? It seems to me, especially given the fact that Europe and probably China are heading into recession, that the dollar will be in huge demand. At any rate, my take is those are the underlying theses driving markets right now.
So, a tour of markets overnight shows that bond markets are essentially unchanged, stock markets were mixed in Asia, with Chinese shares under pressure but Japanese and Australian shares ok while European shares are under some pressure, and the dollar is rebounding a bit from yesterday’s sell-off. Arguably, yesterday’s dollar move was a result of the news from Japan and China, both of whom were unhappy over their respective currency’s weakness, but that is, literally, yesterday’s news. One last thing shows oil (+0.8%) rallying again with WTI above $88/bbl this morning, a new high for this move, which continues to support all energy prices. In fact, it is this story, a continued lack of supply in the oil market relative to demand that, regardless of the much-hyped transition to renewables, continues to grow, is going to support the price for a long time to come. And that is going to continue to pressure prices higher as energy is an input into everything we do, both manufacturing and services.
And that’s really it for today, a very quiet session ahead of the next big data drop tomorrow morning. Before I end, though, I think it is important to understand the nature of economic forecasting and there is a perfect example right now. I have frequently mentioned the Atlanta Fed’s GDPNow forecast as a potential harbinger of things to come. Certainly, the market sees it that way. Well, other regional Fed banks wanted to have their own versions of that GDP Nowcast and this is what we are currently seeing:
- Atlanta Fed: 5.7%
- NY Fed: 2.3%
- St Louis Fed: -0.3%
To me, that is a perfect picture of the current situation, proof that nobody has any idea what is going on in the economy.
Good luck
Adf
Goldilocks Dream
It seems many thought the word ‘could’ Was feeble when posed against ‘would’ The fact Chairman Jay Had phrased things that way Last month, for the bulls, is all good And so, the new narrative theme Is Jay is convincing his team No more hikes are needed And they have succeeded In reaching the Goldilocks dream
The following quote from a weekend WSJ article by Fed whisperer Nick Timiraos is almost laughable in my mind.
This is apparent from how Fed Chair Jerome Powell recently described the risk that firmer-than-expected economic activity would slow recent progress on inflation. Last month, he twice used the word “could” instead of the more muscular “would” to describe whether the Fed would tighten again.Evidence of stronger growth “could put further progress at risk and could warrant further tightening of monetary policy,” he said in Jackson Hole, Wyo.
Talk about parsing language to the nth degree! I bolded the line that I found the most ridiculous, but as we all know, my view does not drive the markets nor policy. However, as I had written last week, we have definitely seen a shift amongst some of the FOMC members with respect to the idea of another rate hike this year. Timiraos is widely believed to have the inside track to Chairman Powell, and now that the FOMC is in their quiet period ahead of the September 20th meeting, this will be the mode of communication.
I guess the big risk of going all in on the Fed is done is we are still awaiting CPI Wednesday morning and with energy prices continuing to climb, I fear the opportunity for a high surprise is very real. Literally every story that is written in the mainstream media these days tries to talk up the prospects of the economy and, correspondingly, for further equity market gains. To me, there is a lot of whistling past the graveyard here, but so far, equities have held in despite some weaker data. The one thing I would highlight is the market feels quite complacent with implied volatility across numerous markets, stocks, bonds, commodities and FX, all quite low. Hedge protection is cheap here, if you need to hedge something, don’t wait for the move.
Ueda explained We may soon understand if Inflation is back
“If we judge that Japan can achieve its inflation target even after ending negative rates, we’ll do so,” said Ueda. This was the key sentence in a weekend interview published last night. The market response was immediate with the yen jumping more than 1% in the early hours of Asian trading before ceding a large portion of those gains when Europe walked in the door. However, regardless of today’s price action, there is a longer-term signal here that is important to understand. It has become clear that the BOJ is becoming somewhat uncomfortable with the speed of the yen’s decline. Prior to last night’s session, the yen had fallen 7.75% from July’s levels, which is a pretty big move for less than 2 months. There is no secret to why the yen continues to decline, the vast policy differences between the US and Japan are sufficient reason. While Ueda-san made no promises, this was very clearly a signal that a change is coming soon. In the near-term, hedgers need to be very careful and those who are hedging JPY assets or revenues should really consider buying JPY puts outright or via collars as there is every reason to believe that further yen strength is coming by the end of the year.
Meanwhile, on the western edge of the Yellow Sea, the PBOC was quite vocal last night as well. On the back of Chinese monetary data that showed a larger rebound than forecast in New Loan data as well as Aggregate Financing data, the PBOC issued the following statement, “Participants of the foreign exchange market should voluntarily maintain a stable market. They should resolutely avoid behaviors that disturb market orders such as conducting speculative trades.” That is very clear language that the PBOC is unhappy with the recent CNY performance. In addition, the PBOC issued new regulations regarding large purchases of dollars telling banks that any corporate client that wants to purchase more than $50 million will need to get approval to do so, and that approval will take quite some time to be forthcoming.
It should be no surprise that the renminbi is stronger this morning, having rallied 0.65% and thus closing the gap with the CFETS fix for the first time in months. Of course, given the double whammy of Japanese and Chinese policy implications, it should be no surprise that the dollar is softer overall. Especially when considering the WSJ article explaining that the Fed may be finished hiking rates. So, we have seen the dollar fall against all its counterparts in the G10 and most in the EMG blocs. Aside from the yen (+0.65%), we have seen the most strength in AUD (+0.8%) which has benefitted from the overall Chinese story, both the currency issues and the better data, as well as the rise in commodity prices. Kiwi (+0.55%) and SEK (+0.45%) are next on the list as there is broad-based dollar weakness today after an eight-week run higher.
In the emerging markets, ZAR (+1.1%) is actually the best performer on the commodity story as well as the general dollar weakness, but after that and CNY, HUF (+0.6%) is the only other currency in the bloc with substantial gains. The story here is what appears to be a shift from zloty to forint as the market continues to punish PLN (-0.35%) after the surprisingly large rate cut last week by the central bank there. Net, however, the dollar is clearly under pressure this morning.
If we turn to other markets, though, things don’t seem to make as much sense. For instance, oil prices (-0.4%) are a bit softer while metals prices (AU +0.4%, CU +1.7%, AL +1.0%) are all firmer. Now, the metals seem to be behaving well on the back of the dollar’s weakness, but oil’s decline is not consistent with that view.
In the equity markets, last night saw a mixed picture in Asia with the Nikkei (-0.4%) and Hang Seng (-0.6%) both under pressure while the CSI 300 (+0.75%) and ASX 200 (+0.5%) both responded well to the news. For the Nikkei, the combination of prospects of higher rates and a stronger yen are both negative for Japanese stocks, while much of the rest of APAC benefitted from the Chinese story. In Europe, the bourses are all green, averaging about +0.5% as investors continue to believe the ECB is done hiking rates with the market now pricing less than a 40% probability of a hike this week and not even one full hike priced into the curve over time. US futures are also green as investors embrace the WSJ article’s hints that the Fed is done.
Finally, the big conundrum is the bond market, which is selling off across the board. Or perhaps it is not such a conundrum. If both the Fed and ECB are done hiking despite inflation continuing at a pace far above target, then the attractiveness of holding duration wanes dramatically. Add to that the gargantuan amount of debt yet to be issued and the fact that the biggest buyers of the past decades, China and Japan, seem to be backing away from the market, and it will require much higher yields for these issues to clear. Of course, one could also look at this as a risk-on session with stocks higher and bonds getting sold along with the dollar, so perhaps that is today’s explanation. Just beware the movement here. 10-Year Treasury yields (+3bps) are back to 4.30%, and if the story is no more Fed tightening thus higher inflation, that is unlikely to be a long-term positive for equities. At least that’s what history has shown.
On the data front, the back half of the week brings the interesting stuff.
| Tuesday | NFIB Small Biz Optimism | 91.5 |
| Wednesday | CPI | 0.6% (3.6% Y/Y) |
| -ex food & energy | 0.2% (4.3% Y/Y) | |
| Thursday | ECB Rate Decision | 3.75% (current 3.75%) |
| Initial Claims | 227K | |
| Continuing Claims | 1695K | |
| Retail Sales | 0.1% | |
| -ex autos | 0.4% | |
| PPI | 0.4% (1.3% Y/Y) | |
| -ex food & energy | 0.2% (2.2% Y/Y) | |
| Friday | Empire Manufacturing | -10.0 |
| IP | 0.1% | |
| Capacity Utilization | 79.3% | |
| Michigan Sentiment | 69.2 |
Source: Bloomberg
As we are in the Fed quiet period, there will be no Fedspeak, so it is all about the data this week. Beware a hot CPI print as that will pressure the narrative of the soft landing. This poet’s view is no soft landing is coming, rather a much harder one is in our future, but at this point, probably not until early next year. Until then, and despite today’s news cycle, I still think the dollar is best placed to rally not fall.
Good luck
Adf
fxpoetry 