Weakness is Fate

Posted on by 
The punditry’s all of a piece
That growth in the future will cease
But ‘flation still reigns
And Jay’s been at pains
To force prices, soon, to decrease

There is a website, Seeking Alpha, that publishes a great deal of macroeconomic and market commentary on a daily basis.  Yesterday morning’s top headlines under the Economy section included the following list.

  1. Is Recent GDP Data Overestimating U.S. Growth?
  2. U.S. Stagflation Risks Rise as Service Sector Falters Alongside Manufacturing Downturn
  3. Global PMI Shows Recovery Fading Further in August as Developed World Output Falls
  4. The Unemployment Rate Just Signaled that a Recession May Occur Within the Next 6 Months
  5. German Industrial Production Goes from Bad to Worse
  6. The Economy is Not ‘Running Hot’
  7. U.S Labor Market Activity: Slowing, Not Weakening

The authors ranged from Investment firms like Neuberger Berman and ING to individuals with decent reputations and large numbers of followers (for whatever that is worth.)  My point is there is a lot of negativity in the analyst community regarding the near-term future of economic activity.  My question is, are people really concerned about the growth trajectory?  Or are they just trying to make the case that the Fed will consider cutting interest rates sooner rather than later in an effort to support the equity market?  

While I understand the negativity based on anecdotal evidence, the headline data continues to print at better than expected levels.  For instance, yesterday’s Initial and Continuing Claims data both fell sharply during the most recent week, indicating that the labor market remains quite robust.  It remains very difficult for me to see a case for the Fed to even consider cutting anytime soon.  Rather, the case for another rate hike seems to be growing, and if next week’s CPI print is at all hot, look for that to be the market discussion going forward.  

Of course, my opinions don’t sway markets.  The important voices are those of the Fed members themselves and yesterday, we heard from several of them that a pause is in the offing.  Based on the comments from John Williams (voter), Lorrie Logan (voter), Raphael Bostic (non-voter) and Austan Goolsbee (voter), it seems that the market pricing of < 7% probability of a hike on September 20th is appropriate.  However, the views of Fed actions in the ensuing meetings are beginning to diverge.  There are those (Logan, Bowman and Waller) who have been clear that further rate hikes past September may still be appropriate depending on the totality of the data.  Meanwhile, there are others who are quite ready to call the top and one (Harker) who is already calling for cuts in 2024.  In the end, though, Chairman Powell’s views remain the most important and the last we heard from him was that higher for longer remains the story and more hikes are possible.

The pressure’s been simply too great
For Xi’s central bank to dictate
The yuan shouldn’t sink
Which led them to blink
And now further weakness is fate

The PBOC cried uncle last night when they fixed the renminbi at its weakest level since early July as the pressures had simply grown too great to withstand.  The onshore yuan fell further and the spread between the fix and the spot rate there remains just below 2%.  The offshore market shows an even weaker CNY and looks like it will soon be trading more than 2% weaker.  As well, the CNY lows (dollar highs) seen in October 2022 are in jeopardy of being breeched quite soon.  Clearly, there is a steady flow of capital out of China at the current time and given the lackluster economic performance there along with the structural problems in the property market, it is hard to make a case that China is a good spot for investment right now.  And just think, this is all happening while the market belief is the Fed is finished raising rates.  What happens if we do see hotter inflation data and the Fed decides another hike is appropriate?  As I have maintained for quite a while, I expect the renminbi to continue to slide and a move to 7.50 or beyond to occur over the rest of 2023.  In fact, today I saw the first analyst say 8.00 is in the cards before this move is over.  Hedgers beware.

So, what comes next?  Well, on a day with no noteworthy economic data and no Fed speakers scheduled, with the FOMC set to enter their quiet period, market participants will be forced to look elsewhere for catalysts.  My take on the current zeitgeist is that the negativity seen in those headlines listed above is seeping into risk attitudes overall.  Not only that, but that there is nothing in the near-term that will serve to change that viewpoint.  We will need to see a very cool CPI print next Wednesday to get people excited and given the combination of base effects and oil’s recent price trajectory, that seems unlikely.  Anyway, let’s look at the overnight sessions results.

Equities continue to perform poorly overall as yesterday’s broad weakness in the US was followed by weakness in Asia across the board while European bourses are also all in the red.  In fairness, the European session, while uniform in direction, has not seen significant declines.  Rather, markets are down by -0.25% or so on average.  Alas, US futures are still under pressure at this hour (7:30), but here, too, the losses are modest so far.

Bond markets are not doing very much this morning as yields in the US and Europe are within 1 basis point of yesterday’s closing levels.  Yesterday we did see 10yr Treasury yields slide 4bps, but we remain at 4.25%, a level that is not indicative of expectations of rapidly declining inflation.  The odd thing about this is that if you look at inflation expectation metrics, they almost all are looking at inflation heading back to the 2% level within a year or two.  Something seems amiss here although exactly what is not clear.

Oil prices are rebounding this morning as the recent uptrend resumes.  If we continue to see better than expected US data and the soft landing or no landing thesis remains in play, it is hard to accept the idea that oil demand will decline very much.  Add to that the very clear efforts by OPEC+ to push prices higher and it seems there is further room to rise here.  But once again, the rest of the commodity space is telling a different story with base metals softer along with agricultural prices in general.  That is much more of a recession story than a growth one.  This is just another of the many conundra in markets these days.

Lastly, the dollar is softer this morning overall, although not dramatically so, at least not against its major counterparts.  The biggest gainer today is MXN (+0.7%) which is benefitting from one thing, the highest real yields available for investment at 5.5%, while overcoming another, comments from the opposition presidential candidate, Xochitl Galvez, that the peso is too strong and is hurting exports.   (There is a presidential election next year in Mexico and AMLO is prohibited from running as they have a one-term limit in place there.)  Regarding the peso, unless Banxico starts to cut rates aggressively, of which there is no sign, I expect it will continue to perform well.  As to the rest of the EMG bloc, there are more gainers than losers, but the movements have not been substantial.  In the G10, it is no surprise that NOK (+0.4%) is higher on the back of the rise in oil prices, and we have also seen NZD (+0.5%) rally, although that looks more like a trading rebound than a fundamental move.  Given the dollar’s relative strength over the past several sessions, it is no surprise to see it drift back at the end of the week.

There is no data of consequence on the docket and no Fed speakers.  This implies that the FX market will be looking for its catalysts elsewhere and that usually means the stock market.  If we continue to see weakness in equities, I suspect the dollar will regain a little ground, but in truth, ahead of next week’s key CPI data, I don’t anticipate very much activity at all today.

Good luck and good weekend

Adf

On the Schneid

Posted on by 
While data at home is robust
In Europe and China the thrust
Is weakness abounds
Which seems to be grounds
For traders, their risk, to adjust

So, equities are on the schneid
While bond yields have been amplified
The dollar’s on fire
Continuing higher
And oil’s climb won’t be denied

Another day, another wave of bad economic news from elsewhere in the world.  However, the US continues to surprise with better than expected results.  Yesterday’s ISM Services data was far better than forecast with a headline print of 54.5, 2 points above both last month and expectations for this month, while the sub-indices all showed significant strength, including the Prices Paid index.  The latter is clearly a concern for Chairman Powell and his crew as it is an indication that inflationary tendencies have not yet been snuffed out.  Ultimately, the market response was to sell stocks and bonds while increasing the probability of a November Fed funds rate hike a few points.  Interestingly, the market pricing for a September hike has fallen to just a 7% probability despite the hotter than expected data.  My sense is that the big market adjustment is going to come as traders come to understand that higher for longer means no cuts until 2025 on the current basis, especially if we continue to see data like the ISM print yesterday.

But the US storyline is clearly not the same as the storyline elsewhere in the world.  Last night, for example, Chinese trade data was released and both imports (-7.3%) and exports (-8.8%) fell sharply again, with the Trade Surplus falling to $68.3B.  Granted, the declines were not as bad as last month, nor quite as bad as expectations, but there is no way to spin the data as indicating a positive economic impulse in China right now.  While Chinese equity markets fell sharply (Hang Seng and CSI 300 both -1.4%) we also saw further weakness in the renminbi.  

The PBOC is still desperately trying to prevent the renminbi from weakening too quickly, but they are having a hard time at this stage.  The difference between the CFETS fixing and the onshore spot market is now 1.8%, dangerously close to the 2.0% boundary.  At the same time, the offshore renminbi, CNH, is pushing back to its highs from last October, now trading above 7.3400, which is 1.97% above the fixing.  This is a losing battle for the PBOC unless they change their monetary policy, but given the Chinese economy’s weakness, tighter money seems an unlikely step.  7.50 is still on the cards here.

China, though, is not the only problem.  European data this morning was uniformly lousy with German IP (-0.8%) and Eurozone GDP (Q2 revised lower to 0.1% Q/Q, 0.5% Y/Y) highlighting the problems facing the old world.  Alas, price pressures have not yet abated there, and stagflation is the new watchword on the continent.  

When the US was faced with stagflation in the 1970’s, Paul Volcker opted to fight inflation first, sending the country into a double dip recession in 1980 and 1981-82, before things turned around.  But that was a different time…and Christine Lagarde is no Paul Volcker!  Is it even possible for an “independent” central bank to knowingly create a recession to slay inflation these days?  I suspect inflation would need to be far higher, stable in double digits, before politicians would accept that it is a bigger problem than a recession, at least electorally.  The upshot of this scenario is that the ECB, despite ongoing higher than targeted inflation, is very likely at the end of its hiking cycle.  This, combined with the overall weak economy there, is going to continue to undermine support for the euro.  While the movement will be gradual, I expect that the single currency will slide below 1.05 and possibly get to parity by the end of the year.

And I would be remiss if I didn’t touch quickly on Japan, where they released their Leading Indicators at a weaker than expected 107.6, continuing the two-year downtrend.  Slowing growth in Japan and still extraordinarily loose monetary policy is going to continue to weigh on the yen.  While it has bounced slightly this morning, 0.2%, it continues to weaken steadily closer to the psychological 150.00 level.  

So, with all that happy news, let’s tour the overnight session to see the results.  The rest of the APAC equity markets also were under pressure overnight with Japan, Australia and South Korea all in the red as well.  In Europe this morning, the picture is more mixed with some gainers and some losers but no large movements overall, mostly +/- 0.2%.  US futures, after a lousy session yesterday, are all pointing lower at this hour (7:30) as well.

In the bond market, Treasury yields are essentially unchanged on the day, holding onto their gains for the past week and just below the 4.30% level.  European sovereigns, though, are seeing a bit of support as the weak economic data has engendered hope that inflation will stop rising and the ECB will be okay to pause.  The latter remains to be seen.  I cannot get over the idea that the uninversion of the yield curve is going to come because long rates are going to rise, not because short rates are going to be cut, and I’m pretty sure nobody is ready for that outcome.

Oil (-0.5%) is consolidating its recent gains with WTI north of $87/bbl and showing no signs of backing off.  If OPEC+ keeps a lid on production, you have to believe that prices will continue to rise.  In the metals markets, both copper and aluminum are soft today, responding to the weak Chinese and German data, while gold, after a selloff this week, is bouncing slightly.

Finally, the dollar remains king of the hill, stronger against virtually all its counterparts in both the G10 and EMG blocs.  I’m old enough to remember when the prevailing narrative was the dollar was dead and would be replaced by the euro, or the yuan, or a BRICS currency and yet, it continues to be subject to more demand than virtually every other currency around.  The broad story is the US economy continues to lead the global economy and the prospects for Fed rate cuts are diminished relative to other nations.  Tight monetary and loose fiscal policy combinations have historically been very supportive of a currency and clearly that is the current US state.

Two quick stories in the EMG bloc are from Poland (-0.7%), where yesterday’s surprising 75bp rate cut has undermined the zloty amid concerns that inflation is going to remain unhindered there, and MXN (+0.75%) where traders are unwinding some positions after a sharp decline over the past week.  The peso has been one of the few currencies that has outperformed the dollar this year as Banxico has been ahead of the curve on inflation and tight monetary policy.  However, with an election upcoming it appears there may be a change in attitude there.  If that is the case, then look for the dollar to regain some lost ground.

On the data front, Initial (exp 234K) and Continuing (1719K) Claims are released along with Nonfarm Productivity (3.4%) and Unit Labor Costs (1.9%).  As traders and investors bide their time ahead of next week’s CPI and the following week’s FOMC meeting, it is not clear that today’s numbers will have much impact.  As such, I see no reason for the dollar to cede its recent gains, especially if equities remain under pressure.

Good luck

Adf

Quickly Slowing

Posted on by 
We will take action
Threatened Vice FinMin Kanda
If you speculate

“If these moves continue, the government will deal with them appropriately without ruling out any options.”  So said Vice FinMin Masato Kanda, the current Mr Yen.  Based on these comments, one might conclude that ‘evil’ speculators were taking over the FX market and distorting the true value of the yen.  One would be wrong.  The below chart shows the yields for 10yr JGBs vs 10yr Treasuries.  You may be able to see that the most recent readings show a widening in that yield spread in the Treasury’s favor.  It cannot be a surprise that investors continue to seek the highest return and the yen most certainly does not offer that opportunity.

While I don’t doubt there is a place where the BOJ/MOF will intervene, they know full well that the yen’s weakness is a policy choice, not a speculative outcome.  They simply don’t want to admit it.  The upshot is that the yen edged a bit higher overnight, just 0.2%, as market realities are simply too much for words to overcome.  The yen has further to fall unless/until the BOJ changes its monetary policy and ends YCC while allowing yields in Japan to rise.  Until then, nothing they can say will prevent this move.

While ECB hawks keep on screeching
More rate hikes are not overreaching
The data keeps showing
That growth’s quickly slowing
So, comments from Knot are just preaching

“I continue to think that hitting our inflation target of 2% at the end of 2025 is the bare minimum we have to deliver.  I would clearly be uncomfortable with any development that would shift that deadline even further out.  And I wouldn’t mind so much if it shifted forward a little bit.”   These are the words of Dutch central bank chief and ECB Governing Council member Klaas Knot.  As well, he intimated that the market might be underestimating the chance of a rate hike next week, which at the current time is showing a 33% probability. Another hawk, Slovak central bank chief Peter Kazimir also called for “one more step” next week on rates.  

The thing about these comments is they came in the wake of a German Factory Orders number that was the second worst of all time, -11.7%, which was only superseded by the Covid period in March 2020.  Otherwise, back to 1989, Factory Orders have never fallen so quickly in a month.  This is hardly indicative of an economy that is going to grow anytime soon.  Rather, it is indicative of an economy that has inflicted extraordinary harm to itself through terrible energy policies which have forced producers to leave the country.  

The key unknown is whether the slowing economic growth will also slow price growth.  Given oil’s continued recent strength, with no reason to think that process is going to change given the supply restrictions we have seen from the Saudis and Russia, I fear that Germany is setting up for a very long, cold winter in both meteorological and economic terms.  With the largest economy in the Eurozone set to decline further, it is very difficult to be excited at the prospect of a stronger euro at any point in time.  It feels to me like the late summer downtrend in the single currency has much further to go.  

This is especially true if the US economy is actually as resilient in Q3 as some economists are starting to say.  Yesterday, I mentioned the Atlanta Fed GDPNow number at 5.6%, but we are seeing mainstream economists start to raise their Q3 forecasts substantially at this point given the strength that was seen in July and August.  Not only will this weigh on the single currency, and support the dollar overall, but it may also put a crimp in the view that the Fed is done hiking rates.  Consider, if GDP in Q3 is 3.5% even, it will not encourage the Fed that inflation is going to slow naturally.  And while they may pause again this month, it seems highly likely they would hike again in November with that type of data.

Which takes us to the markets’ collective response to all this news.  Risk is definitely under some pressure as the combination of stickier inflation and slowing growth around the world is weighing on investors’ minds.  The only market to manage a gain overnight was the Nikkei (+0.6%) which continues to benefit from the weaker yen, ironically.  But China, which is also growing increasingly concerned over the renminbi’s slide, remains under pressure as do all the European bourses and US futures.  Good news is hard to find right now.

Meanwhile, bond investors are in a tough spot.  High inflation continues to weigh on prices, but softening growth, everywhere but in the US it seems, implies that yields should be softening with bond buyers more evident.  This morning, 10yr Treasury yields are lower by 2bp, but that is after rallying 16bps in the past 3 sessions, so it looks like a trading pullback, not a fundamental discussion.  But in Europe, sovereign yields are edging higher as concern grows the ECB will not be able to rein in inflation successfully.  As to JGB yields, they seem to have found a new home around 0.65%, certainly not high enough to encourage yen buying.

Oil prices (-0.1%) while consolidating this morning, continue to rally on the supply reduction story and WTI is back to its highest level since last November.  Truthfully, there is nothing that indicates oil prices are going to decline anytime soon, so keep that in mind for all needs.  At the same time, metals prices are mixed this morning with copper a bit softer and aluminum a bit firmer while gold is unchanged.  It seems like the base metals are torn between weak global economic activity and excess demand from the EV mandates that are proliferating around the world.  Lastly a word on uranium, which continues to trend higher as more and more countries recognize that if zero carbon emissions is the goal, nuclear power is the best, if not only, long term solution.  The price remains below the marginal cost of most production but is quickly climbing to a point where we may see new mining projects announced.  For now, though, it seems this price is going to continue to rise.

Finally, the dollar is mixed this morning, having fallen slightly vs. most G10 currencies, but rallied slightly vs. most EMG currencies.  This morning we will hear from the Bank of Canada, with expectations for another pause in their hiking cycle, but promises to hike again if needed.  Meanwhile, the outlier in the EMG bloc is MXN (-0.7%) which seems to be a victim of the overall risk situation as well as the belief that its remarkable strength over the past year might be a bit overdone.  In truth, this movement, five consecutive down days, looks corrective at this stage.

On the data front, we see the Trade Balance (exp -$68.0B) and ISM Services (52.5) ahead of the Beige Book this afternoon.  We also hear from two FOMC members, Boston’s Susan Collins and Dallas’s Lorrie Logan.  Yesterday, Fed Governor Waller indicated that while right now, the data doesn’t point to a compelling need to hike, he is also unwilling to say they have finished their task.  However, that is a far cry from the Harker comments about cutting in 2024 seems appropriate.  I suspect Harker is the outlier for now, at least until the data truly turns down.

Net, the big picture remains that the US economy is outperforming the rest of the world and the Fed is likely to retain the tightest monetary policy around, hence, the dollar still has legs in my view.

Good luck

Adf

Selling will be THE New Sport

Posted on by 
Last Friday the payroll report
Inspired some bears to sell short
As job growth starts shrinking
It seems that their thinking
Is selling will be THE new sport

But bulls will all argue the Fed
Will act if there’s weakness ahead
Rate cuts will come soon
And yields will then swoon
As stocks rise to green from the red

A brief recap of Friday’s payrolls data shows a mixed picture overall.  The positives were the NFP was higher than forecast, as were manufacturing jobs, and hours worked rose along with the participation rate.  The negatives were that the revisions to previous data were once again lower, the seventh time in the past eight months, and the Unemployment Rate jumped 0.3% to 3.8%.  Not surprisingly, the market response was as confusing as the data with equity markets in the US closing ever so slightly higher on the day while bond yields rose pretty sharply.  The latter was a bit of a surprise as there seemed to have been a growing consensus that we have seen the peak in yields.  I guess, though, if the idea is now there is no recession coming, then higher yields would be appropriate.  And that idea is gaining traction everywhere as evidenced by this morning’s report from the “great vampire squid wrapped around the face of humanity” as described by Rolling Stone Magazine in 2010, aka Goldman Sachs, that they now believe the probability of a recession has fallen to just 15%.

This poet’s view is that Friday’s data was hardly conclusive in either direction for the Fed which will be looking closely at the CPI data to be released next week, as well as myriad other signals on the economy and its prospects ahead of their next meeting in a few weeks’ time.  For instance, the Atlanta Fed’s GDPNow forecast is still at 5.6%, a crazy high number in my view, but one that is likely to have credence with those in the Eccles Building as evidence the economy is still quite strong.

Perhaps the more interesting thing about today’s market activity is that bond yields around the world are higher despite a run of pretty awful Services PMI data across Europe and Asia.  The most notable Asian casualty was China, where the Caixin PMI Servies was released at 51.8, more than 2 points below last month and nearly 2 points below expectations.  Then, we got to see weak prints from Spain, Italy, France, Germany and the UK, all in recession territory below 50.0 and most failing to meet weakened expectations.  Net, the situation doesn’t look that good for the Eurozone as the economy appears to be sliding into a full-blown recession across all nations, while price pressures remain stickily high.  After today’s weak PMI data, the probability of an ECB rate hike in September has fallen to just 25% from 50% last week.  And yet, sovereign yields continue to climb.  They got issues over there!

So, we’ve seen weakness in China and weakness in Europe.  What about the US?  While recent data has begun to disappoint slightly, it is not nearly in the same camp as the rest of the world.  Tomorrow’s ISM Services index is forecast to be 52.5, not huge, but clearly not recessionary.  And, in fact, while the jobs report was mixed, it was not a disaster.  While there is still good reason to believe a recession is coming to the US, perhaps by the end of this year, the US remains well ahead of the rest of the world in terms of growth at this stage.

With that in mind, it can be no surprise that the dollar is soaring today higher against every one of its major counterparts in both the G10 and EMG blocs.  While the particular drivers are different, they are all of a piece in the sense that problems elsewhere are greater than in the US.  In the G10, AUD (-1.45%) and NZD (-1.2%) are the worst performers having fallen immediately after the weak Chinese data.  But the best performer is CAD (-0.4%) to give an idea of just how strong the dollar is today.  In the EMG bloc, HUF (-1.4%) is the laggard after a ruling that the central bank’s losses would not be paid for by the government, but just deferred until they start to make money again.  Meanwhile, they have significant budget issues as well, so both fiscal and monetary concerns there.  But the entire bloc is under pressure, with APAC currencies suffering on the China news while EEMEA currencies feel the pain of a weakening Eurozone.  Today is not indicative of the looming end of dollar hegemony, that’s for sure.

As to yields, as mentioned above they are firmer across the board, with 10yr Treasuries up 4bps and all European sovereigns seeing yields higher by between 2.5bps and 4.0bps.  while I’m no market technician, looking at the below chart (source Bloomberg) of 10yr Treasury yields, it is not hard to see the strong trend higher at this point.

In the equity markets, it is no surprise that Chinese shares were softer, nor most of the APAC markets, although the Nikkei (+0.3%) managed to close higher as the weaker yen improves profit performance for many large Japanese companies.  European bourses are mixed at this hour, with net, little movement and US futures are also mixed, with the NASDAQ a bit softer but the DOW up a touch at this hour (8:00).

Finally, in the commodity space, oil (-0.5%) is under some pressure this morning, although given the magnitude of the dollar’s strength, I would have thought we would see much more pressure on the commodity markets.  It seems that the Saudi production cuts are having their desired impact and are likely to continue to push prices there higher.  Of more interest is the fact that gold (-0.4%) is retaining most of its recent gains despite a strong dollar, indicating that there is buying interest all over the place for the barbarous relic.  Base metals this morning are somewhat softer, which is to be expected given the PMI data.

Speaking of data, because the payroll data was so early this month, this week is pretty quiet with CPI not released until next week.  However, here is what is on the calendar:

TodayFactory Orders-2.5%
 -ex Transports0.1%
WednesdayTrade Balance-$68.0B
 ISM Services52.5
 Fed Beige Book 
ThursdayInitial Claims234K
 Continuing Claims1715K
 Nonfarm Productivity3.4%
 Unit Labor Costs1.9%
FridayConsumer Credit$17.0B

Source: Bloomberg

On the Fed front, we hear from 7 speakers plus retired St Louis Fed President Bullard over 10 events this week.  As we approach the quiet period starting Saturday, the most noteworthy comments since Powell’s Jackson Hole speech have been from Harker who thought that enough has been done and cuts next year made sense.  It will be key if we hear other Fed speakers reiterate that sentiment or continue to push back.  This week, NY Fed President Williams is probably the most impactful speaker on the docket. 

In the end, while I definitely see signs of macroeconomic weakness in the US, they are much less concerning than those elsewhere in the world and so nothing has changed my view of dollar strength for the time being.

Good luck

Adf

A Crack in the Sheen

Posted on by 
Ahead of the holiday flight
The payroll report is in sight
This week we have seen
A crack in the sheen
That everything still is alright

So right now, bad news is all good
But there seems a high likelihood
That worsening data
Could impact the beta
And bad news turn bad, understood?

As we wake up on this Payrolls Friday, the market is biding its time ahead of the release this morning.  As I have been writing for a number of months now, I continue to believe the NFP number is the most important on the Fed’s radar as its continued strength has given Chairman Powell all the cover he needs to continue tightening monetary policy.  If job growth is averaging near 200K per month and the Unemployment Rate has a 3 handle, the doves have no solid case to make that policy is too tight.  With that in mind, here are the current median analyst expectations according to Bloomberg:

Nonfarm Payrolls170K
Private Payrolls148K
Manufacturing Payrolls0K
Unemployment Rate3.5%
Average Hourly Earnings0.3% (4.3% y/Y)
Average Weekly Hours34.3
Participation Rate62.6%
ISM Manufacturing47.0
ISM Prices Paid44.0
Course: Bloomberg

So far this week, we have received three pieces of employment data with a mixed outcome.  JOLTS Job Openings was much lower than expected and that encouraged the bad news is good phenomenon.  ADP Employment was weaker on the headline by a bit but had a very large revision higher to last month, so mixed news.  Meanwhile, Initial Claims were lower than expected and any sense of a trend higher in this series is very difficult to discern.  Anecdotally, I have to say I expect a softer number today, not a firmer one, but I believe it is anybody’s guess.

With that in mind, I believe a weak number, whether lower payrolls or a jump in the Unemployment Rate, will be met with an equity rally into the holiday weekend.  Investors are looking for ‘proof’ that the Fed is done so they can get on with rate cuts and support the stock market.  However, remember, if the data is weak and we are heading into recession sooner rather than later, all that bad news will likely not be taken well by equity investors as money will flow back to bonds as a haven.  At least, that has been the history.  So, a really bad number could well result in ‘bad news is bad’ and an equity market decline.  Alas, nothing is straightforward in markets.

One other thing to keep in mind is the relative Unemployment situation which can be seen below in the chart created with data from Bloomberg.  Structural unemployment in the Eurozone remains substantially higher than in either the US or the UK.  If you are wondering why I continue to have a favorable outlook on the dollar, this is one part of that puzzle.  Despite all the policy blunders questions that have been raised, things in the US remain far better than elsewhere.

In China, despite what they’ve done
To try to support the short-run
It’s not been enough
So, they did more stuff
Last night, though investors still shun

It wouldn’t be a day in the markets if there wasn’t yet another action by the Chinese to try to fix their myriad problems.  Today is not different as last night the PBOC reduced the FX RRR to 4% from its previous level of 6%.  This required reserve ratio defines the amount of reserves Chinese banks need to hold against their FX positions.  Reducing that number effectively boosts the amount of foreign currency available locally, and therefore takes pressure off market participants to horde their dollars, thus weakening the buck.  

And it worked…for about an hour as the renminbi initially rallied about 0.5%.  However, it has since ceded all those gains and is essentially unchanged on the day.  At the same time, the government has reduced the size of the down payment needed to buy a home while encouraging banks to lend more to home buyers to try to support the crumbling property market.  While certainly welcome relief to an extent, it does not appear to be enough to change the current trajectory, which is definitely lower.  At this point, we know that the PBOC is quite concerned over potential renminbi weakness and the central government is quite concerned over broad economic weakness led by the property sector.  We have not seen the last of these moves.

President Xi did, however, get one piece of positive news overnight, the Caixin Manufacturing PMI rose to 51.0, up 2 points from last month and well above expectations.  The combination of those factors helped the CSI 300 gain 0.7% last night, but that seems weak sauce overall.  As to the rest of the market’s risk appetite, I guess you would consider things mildly bullish.  While Hong Kong was weaker, the Nikkei managed a small gain and most of Europe is in the green, notably the UK (+0.7%) after weaker than expected House Price data encouraged belief that inflation may be ebbing sooner than previously expected.  As well, the UK revised higher its GDP data to show that they have, in fact, recovered all the Covid related losses.  US futures, meanwhile, are edging higher at this hour (7:00).

Bond yields are mixed this morning, but the moves have been small, generally +/- 1bp from yesterday’s close.  And yesterday’s closing levels, at least in Treasuries, was little changed from Wednesday.  Granted, European sovereigns saw yields decline yesterday on the order of 5bps, so this morning’s 1bp rise is not that impactful I would contend.

Turning to the commodity markets, they have embraced the Chinese stimulus efforts with oil (+1.5%) rising again and pushing close to $85/bbl, while metals markets are also robust with gold (+0.25%), copper (+1.6%) and aluminum (+1.3%) all seeing demand this morning.  While I have doubts about the effectiveness of the Chinese moves, for now the market is quite pleased.

Finally, the dollar is mixed and little changed net this morning.  In the G10, not surprisingly, NOK (+0.3%) is the leading gainer on the back of oil’s rally, but the rest of the bloc is +/- 0.1% or less, so essentially unchanged.  In the EMG bloc, I guess there are a few more laggards than gainers with HUF (-0.6%) the worst performer as traders prepare for a ratings downgrade from Moody’s after the close today, while MXN (-0.6%) suffered after Banxico indicated it would be winding down its forward FX program where it consistently supplied the market with dollars, buying pesos.  On the plus side, ZAR (+0.8%) is the lone outlier on the back of the commodities rally.

We hear from Bostic and Mester today, with Bostic already having told us he thinks it’s time to pause, although I doubt we will hear the same from Mester.  But in reality, it is all about the employment report.  For now, I believe bad news is good and vice versa, but that is subject to change with enough bad news.

Good luck and have a good holiday weekend.  There will be no poetry on Monday.

Adf

Further Downhill

Posted on by 
The data from China is still
Desultory and likely will
Result in support
In order, quite short,
Lest Xi’s plans go further downhill

Perhaps, though, he’ll find a reprieve
If Jay and his brethren perceive
Employment is slowing
And risks are now growing
Recession they’re soon to achieve

Poor President Xi.  Well, not really, but you have to admit his plans for widespread prosperity in China have certainly not lived up to the hype lately.  Last night, PMI data was released, and like the Flash PMI data we saw last week in Europe and the US, it remains quite weak.  Specifically, Manufacturing PMI printed at 49.7, slightly better than expectations but still below the key 50.0 level.  Non-manufacturing PMI printed at 51.0, continuing its slide toward recession and indicative that there is no strong growth impulse coming from any portion of the economy there.

Remember, manufacturing remains a much larger piece of the Chinese economy (28%) than that of the US economy (11%), so weakness there is really problematic for the overall economic situation.  And while the PBOC continues to try to prevent excessive weakness in the renminbi, Chinese exporters clearly need the support of a weaker currency to thrive.  Finally, given the slowing economic situation in Europe, which is now China’s largest export market, demand for their products is simply weak.  

To date, the Chinese government has not really provided substantial support to the economy, certainly there has been no fiscal ‘bazooka,’ and monetary efforts have been at the margin.  In the current environment, it remains hard to make a case for China’s natural rebound until the rest of the global economy rebounds.  And woe betide Xi if (when) the US goes into recession.  Things there will only get worse.  The FX market is uninterested in the PBOC’s views of where USDCNY should trade, maintaining a 1.5% dollar premium vs. the daily fixing rate.  At some point, the PBOC is going to have to relent and USDCNY will go higher, in my view to 7.50 or beyond.

Speaking of recession, while the Atlanta Fed’s GDPNow forecast for Q3 is at 5.90% (a remarkably high number in my view), yesterday we saw Q2 GDP revised lower to 2.1%, with the Personal Consumption component falling to 1.7%.  At the same time, Gross Domestic Income (GDI) in Q2 was released at +0.5%, substantially lower than GDP.  (GDI and GDP are supposed to measure the same thing from different sides of the equation.  GDP represents expenditures while GDI represents income.  Eventually, they must be equal, by definition, but the estimates until all the data is finally received can vary.  In fact, looking at GDI, it was negative in Q4 and Q1 and is just barely growing now.  This is another reason many are looking for a US recession soon.) 

In this vein, Richmond Fed president but non-voter, Raphael Bostic, in a speech overnight in South Africa said, “I feel policy is appropriately restrictive.  We should be cautious and patient and let restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain.  However, that does not mean I am for easing policy any time soon.”  So, this is not exactly the same message we heard from Chairman Powell last week, but the caveat of not cutting is certainly in line.  I suspect, especially if we start to see weaker labor market data, that more FOMC members are going to feel comfortable that rates have gone high enough.  At least that will be the case as long as inflation remains quiescent.  However, if it starts to pick up again, that will be a different story.

Ok, let’s look at the overnight session.  It should be no surprise, given the Chinese data, that equity markets there were underwater, with losses on the order of -0.6% in Hong Kong and on the mainland.  However, the Nikkei (+0.9%) was the star performer across all markets on the strength of strong Retail Sales data.  As to Europe, the DAX (+0.5%) is managing some gains, but the rest of the space is little changed on the day.  It seems the CPI data that has been released from Europe, showing higher prices in Germany, France and Italy despite weakening growth has raised concerns about another ECB rate hike.  As to US futures, at this hour (7:30) they are little changed to slightly higher.

Bond yields are falling today, especially in Europe where they are lower by about 5bp-6bp across the board.  It seems that there is more concern over the growth story, or lack thereof, than the inflation story right now.  In the Treasury market, yields are lower by 2bps as well, although remain well above the 4.0% level.  This has been a response to yet another weak headline labor number with yesterday’s ADP Employment figure reported at 177K.  It seems that the huge revision higher to the previous month, a 47K increase, was ignored.  However, this is setting the stage for tomorrow’s NFP, that’s for sure.

Oil prices (+0.8%) continue to rebound after another huge inventory draw last week and despite concerns over an impending recession.  Gold (+0.1%) has been performing extremely well given the dollar’s rebound, but the base metals remain recession focused, or at least focused on Chinese weakness, and are under pressure again today.

Finally, the dollar is firmer this morning, with only the yen (+0.2%) gaining in the G10 bloc as even NOK (-0.65%) is falling despite oil’s rally.  In fact, this move looks an awful lot like a risk-off move, especially when considering the rally in Treasuries, except the equity market didn’t get the memo.  In the emerging markets, the situation is similar, with many more laggards than gainers and much larger movement to the downside.  ZAR (-0.75%) is the worst performer followed by HUF (-07%) and CZK (-0.6%) although the entire EEMEA bloc is down sharply.  However, these currencies are simply showing their high beta attachment to the euro, which is lower by -0.5% this morning.  Again, given the data from Europe, this can be no surprise.

On the US data front, this morning brings the weekly Initial (exp 235K) and Continuing (1706K) Claims data as well as Personal Income (0.3%), Personal Spending (0.7%), the all-important Core PCE (0.2% M/M, 4.2% Y/Y) and finally Chicago PMI (44.2).  Yesterday’s data was soft and if that continues into today’s session, I suspect the ‘bad news is good’ theme will play out.  That should entail a further decline in yields and the dollar while equities continue higher.  However, any strength is likely to see the opposite.  Remember, too, tomorrow is the NFP report, so given the holiday weekend upcoming, it seems likely that positioning is already quite low and trading desks are thinly staffed.  In other words, liquidity could be reduced and moves more exaggerated accordingly.  However, until we see that recession and drop in inflation, my default view remains the dollar is better off than not.

Good luck

Adf

Singing the Blues

Posted on by 
For Jay and his friends at the Fed
What they’ve overwhelmingly said
Is weakened employment
Will give them enjoyment
While helping inflation get dead

So, yesterday’s JOLTS data news
Which fell more than ‘conomists’ views
Was warmly received,
Though bears were aggrieved,
By bulls who’d been singing the blues

In fairness, Chairman Powell never actually said he would revel in a weaker employment picture, but he did discuss it regularly as a critical part of the Fed’s effort to drive inflation back to their 2% target.  And, in this case, more importantly, he had specifically mentioned the JOLTS data as a key indicator as an indication of the still very tight labor market.  With this in mind, it should be no surprise that when yesterday’s number came in much lower than expected, at ~8.8 million, down from a revised 9.2 million (the original print last month had been ~9.6 million), risk assets embraced the news as evidence that the Fed is, in fact, done raising rates.  Now, tomorrow and Friday’s data releases are still critical with both PCE and NFP on the calendar, so there is still plenty of opportunity for changes in opinions.  However, there is no question that the risk bulls have made up their minds and decided the Fed is done.

There is, however, a seeming inconsistency in this bullish thesis.  If the US economy is set to weaken, or perhaps is already weakening, with the jobs data starting to roll over, exactly what is there to be bullish about?  After all, China is clearly in the dumps, as is most of Europe.  While short-term interest rates are certainly likely to fall amid a recession, so too are earnings.  And if earnings are falling, explain to me again why one needs to be bullish on stocks.  I assume that the goldilocks scenario of the soft landing is the current driving force in markets, but that still remains a very low probability in my mind.  

History has shown that since they started compiling this particular labor market indicator in December 2000, peak-to-trough decline, has occurred leading directly to a recession.  This was true in 2001-02 (39% decline), 2008-09 (49% decline), 2020 (23% decline) as can be seen in the chart below, and now we are at the next sharp decline.  Thus far, the decline from the peak in March 2022 has been 27%, so there is ample room for it to fall further.  I merely suggest that if that is the case, things are probably not that great in the US economy, and therefore, are likely to have a negative impact on risk assets.  Keep that in mind as you consider potential future outcomes.

Source data: Bloomberg

The other data yesterday, Case Shiller House Prices and Consumer Confidence did little to enhance a bullish view.  Confidence fell sharply, by nearly 11 points and is not showing any trend higher.  Meanwhile, house prices fell less than expected, only about -1.2%, which has implications for the inflation picture.  After all, housing remains more than one-third of the CPI calculation, and if the widely assumed decline in house prices has ended, that doesn’t bode well for the idea inflation is going to fall further.  

Remember, Chairman Powell was quite clear that one data point would not be enough to change the Fed’s views, and while he is no doubt relieved that some of the job market pressure seems to be receding, he was also quite clear in his belief that rates needed to remain at least at current levels for quite some time to ensure success in their goal to reduce inflation.  The futures markets have reduced the probability of a September rate hike to 13% this morning, from nearly 25% before the data.  There is about a 50% chance of a hike at the November meeting.  It seems premature to determine that inflation is dead, and the Fed is getting set to cut soon, at least to my eyes.  Beware the hype.

As to the overnight session, after a strong US equity day, which saw the NASDAQ rally nearly 2% and the Dow nearly 1%, Asia had trouble following through. At least China had trouble, with virtually no movement there.  Australia rallied nicely, 1.2%, but otherwise, not much action in APAC.  In Europe this morning, there are far more losers than gainers, but the losses are on the order of -0.2%, so not substantial, but certainly not bullish.  The data out of Europe today showed inflation in Germany remains higher than desired, and confidence across the continent, whether consumer, economic or industrial, is sliding.  Not exactly bullish news.  As to US futures, they are ever so slightly softer this morning, down about -0.1% across the board.

In the bond market, it should be no surprise that bonds rallied and yields fell yesterday after the JOLTS data, with the 10yr yield falling 8bps.  However, this morning, it has bounced 3bps and European sovereign yields are higher by between 6bps and 7bps on the back of that higher than expected German inflation data.  The market is still pricing about a 50% probability of an ECB hike in September, but whether it happens in September or October, it is seen as the last one coming.

In the commodity space, oil (+0.5%) continues to hold its own, perhaps seeing support after OPEC member Gabon saw a coup yesterday, potentially reducing supply.  At the same time, we have seen several large drawdowns in inventories as well, so there seem to be some fundamentals at play.  Now, a recession is likely to dampen demand, but right now, the technicals seem to be winning out.  As to the metals markets, gold had a big rally yesterday on the back of declining real interest rates and is retaining those gains this morning.  The base metals are mixed this morning, but essentially unchanged over the past two sessions as the questions about growth vs. supply continue to be probed.

Finally, the dollar is modestly stronger this morning, but that is after a sharp decline yesterday.  With yields falling in the US it was no surprise to see the dollar under pressure.  With yields backing up, so is the dollar.  USDJPY is back above 146 again, having fallen below yesterday, but today’s movements are far more muted than yesterday’s.  As to the EMG bloc, the picture today is mixed with some gainers and some laggards, but aside from TRY and RUB, which are hyper volatile and illiquid, the gains and losses have been smaller.  One exception is ZAR (-0.5%), which fell after news the government ran a record budget deficit in July was released.

ADP Employment (exp 195K) headlines the data today, although we also see a revision of Q2 GDP (2.4%, unchanged) and the Advanced Goods Trade Balance (-$90.0B).  There are no Fed speakers on the calendar, so that ADP data will likely be the key for the day.  A weak print there will reinvigorate the Fed has finished debate, while a stronger than expected print may well see much of yesterday’s movement reversed.  With that in mind, remember that the past two months have seen very strong ADP numbers that were not matched by the NFP data, so this is likely to be taken with a little dash of salt.

We are clearly in a data dependent market right now as all eyes focus on this week’s news.  I need to see consistently weak data to alter my view that the Fed is going to step off the brakes, and it just has not yet appeared.  Until then, I still like the dollar.  

***Flash, ADP just released at 177K, with revision higher to last month’s number.  Initial move in equity futures is +0.2%, but there is a long time between now and the close.

Good luck

Adf

No Certitude

Posted on by 
The efforts from Xi haven’t yet
For locals, their appetites whet
So, more were announced
And equities bounced
But still there is just too much debt

Meanwhile, elsewhere things are subdued
As traders have no certitude
‘Bout data this week
And if it will wreak
More havoc on everyone’s mood

As the week progresses, we will get a raft of data culminating in Friday’s payroll report.  But for now, the market is looking elsewhere for its catalysts and China continues to provide fodder for the trading community.  Last night, the news hit that Chinese banks were going to be reducing their mortgage rates for mortgages on first homes by up to 60 basis points in order to help support domestic consumption.  At the same time, they are also likely to reduce deposit rates by between 5bps and 20bps as they try to maintain their lending margins, but net, it appears the move should free up some cash for the Chinese consumer.

This should certainly be a positive for the nation’s economy and the equity market in China responded accordingly, with the CSI 300 rallying 1.0% while the Hang Seng jumped nearly 2.0%.  However, Xi’s actions continue to be small beer, tweaking policies at the margin, while he apparently remains adamantly opposed to any broad fiscal stimulus.  Now, in the long-term, this is probably a pretty sensible move for China as they already have a massive amount of debt outstanding, especially in the property market, and if national debt were piled on top, it could lead to much worse long-term outcomes.  However, in the short run, a 50bp cut in mortgage rates is unlikely to change consumption patterns by very much, and more domestic consumption is what they need.  This is especially true given the ongoing economic weakness in Europe, which has become their largest trading partner.

While Xi continues to fiddle with minor policy adjustments, the PBOC is desperately trying to prevent more severe weakness in the renminbi.  Last night, for instance, they fixed USDCNY at 7.1851, far below the market’s calculated expectations and 1.65% lower than the market is actually trading.  Remember, the onshore rules are that spot can only trade within a +/- 2.0% band compared to that CFETS fix, and it has been pushing that boundary for a while now as can be seen in the chart below (source Bloomberg):

The spread between the blue and orange lines continues to increase, but more importantly, the trends are moving in opposite directions.  Given how close the spread already is to the 2% limit, it appears that there is the potential for some fireworks in the future.  At this point, I cannot see how the PBOC will not ultimately allow a weaker CNY.  This is especially true if (when?) the Fed raises the Fed funds rate again.  Nothing has changed my view of 7.50 and beyond.

But, away from the ongoing recalibrations in the Chinese financial systems, there is precious little else on which to focus.  Generally, markets seem to have absorbed the idea that the Fed may continue to tighten further and remain resolutely bullish on risk.  It seems that the no-landing scenario is the current market fave.  And so, last night aside from the Chinese share gains, we saw green everywhere else as well, just not nearly as excited with rises on the order of 0.2% to 0.5%.  In Europe, it is also a positive morning with most gains relatively modest, of the 0.3% variety, with only the FTSE 100 (+1.45%) showing more substantial gains as the UK catches up with yesterday’s rally after their bank holiday.  Alas, US futures are actually leaning slightly negative this morning, but only just, as traders await the first pieces of data this week.  I would contend that the JOLTS data (exp 9.5M) is the most important as a key jobs indicator frequently mentioned by Powell, but we also see Case Shiller Home Prices (-1.60%) and Consumer Confidence (116.0).  Things pick up a bit tomorrow with ADP and then GDP on Thursday ahead of NFP on Friday.

In the bond market, lackluster describes things quite well with Treasury yields higher by 1 basis point and even lesser moves across the European sovereign space.  JGB’s, meanwhile are starting to drive a bit lower, but continue to hang around near 0.6%.  Traders and investors are awaiting this week’s data now that they have absorbed the Fed commentary.  If we see a surprisingly strong NFP print, do not be surprised to see yields back up toward their recent highs of 4.35% as many will assume at least one more hike is coming soon.  Correspondingly, a soft print will likely see a test of 4.00%, at least initially.

Oil prices continue to hold their own, perhaps getting a boost from the China story as any stimulus there is welcome and seen as a fillip for demand.  Metals prices, which had been a touch firmer earlier in the session, have given up those modest gains and at this hour (8:00), are basically flat on the day.

Finally, the dollar is mixed to slightly stronger this morning, but overall movement has been muted, like all the other markets.  While NOK (+0.15%) is managing some gains on oil’s strength, the rest of the G10 bloc is a touch softer, although other than JPY (-0.3%), which has managed to trade above 147 this morning, the movement is tiny.  In the EMG bloc, there is a more mixed view, but none of the movement is very large in either direction, with the biggest gainers and losers at +/- 0.3% on the day, effectively nothing in this space. Here, too, all eyes are on the data this week.

The only Fed speaker today is Michael Barr, and he is talking about banking services, with no policy discussions expected. Adding it all up leads to a conclusion of a pretty quiet session overall unless today’s data is dramatically surprising.  Remember, though, quiet sessions are good days to hedge.

Good luck

Adf

Still Avante-Garde

Posted on by 
As always, when Chairman Jay speaks
Each hawk and each dove caref’lly seeks
The words that best suit
Their story, and mute
All others with varied techniques

Every hawk in the market heard these words, right at the beginning of Powell’s speech Friday morning and rejoiced [emphasis added], “we are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

However, the doves didn’t need to wait long to find their counterpoint, with Powell giving them fodder in the very next paragraph, [emphasis added], “given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks.”

So, which is it?  Here is the link to the speech, so you can make up your own mind if you so choose but be prepared, if you listen to the punditry, you will hear both sides and likely no clear decision.  With that in mind, my take is that there is still far more hawkishness than dovishness around the table at the Eccles building.  Much of the speech focused on the fact that while things were certainly better than the peak inflation period last year, there is still a long way to go before they feel confident they have achieved their goal.  And one other thing, Powell made it clear that the goal remains 2%.  All this talk of raising the target seems like it will get no hearing at all for the time being.

A quick look at equity markets on Friday shows that the initial impression of the speech was the hawkish view as stocks fell pretty sharply right away.  However, after falling about 0.7% in the first hour, buyers returned, and the major indices all closed nicely higher on the day.  Of course, the irony of that outcome is higher equity prices beget easier financial conditions which implies even more tightening by the Fed.  But whatever.

Then later, said Madame Lagarde
This job that we have is so hard
The future’s unclear
And though we’re sincere
We’re clueless, though still avant-garde

Much later Friday, Madame Lagarde explained her updated framework for how the ECB is going to be handling things in the future.  The very best thing she said was that they would act with humility as they proceed.  And while it would be great if that were to be the case, my 40 years of experience tells me it is unlikely to work out that way.

The essence of her speech was to identify that the world has changed and that old economic relationships may no longer be viable.  As I have written many times about all the central banks, each of them has a series of econometric models by which they steer their course.  The problem is those models have over time been proven to be completely worthless.  And more disturbingly, anytime someone with a different viewpoint has a chance to be nominated to enter the club, they are shot down immediately.  There is virtually zero willingness to truly think outside of the box of their making.  While Lagarde preaches that they will be humble going forward, it seems highly unlikely they will consider anything that is not completely orthodox, even as a thought experiment.  And to my mind, that is the exact opposite of humility.

At any rate, Lagarde’s speech was very late in the market day and did not seem to have much impact at all.  Thus concludes the recap from Friday’s activity.  Now let’s turn to this morning.

In China, old President Xi
Keeps trying to force, by decree
A rally in stocks
By banning sales blocks
And halving the transaction fee

While it is getting tiresome to have to write about China yet again, it remains the other major story in the markets.  Last night, the government unveiled yet another set of measures to try to support the stock market there with only marginally more success than seen last week.  (As an aside, does it seem strange to anyone else that a communist country with state control over most aspects of life is keen to support the bastion of capitalism that is a stock market?).  

The latest effort included three steps; a 50% cut in the transaction tax, down to 0.05%; a limit on new listings (to prevent more supply); and a ban on sales by controlling shareholders if those companies have not paid dividends in the past three years or are trading below their IPO price.  These were announced before the market opened and the initial response was a 5.5% jump compared to Friday’s closing levels in the CSI 300.  Alas, it was a very short-lived gain with half that evaporating in the first 10 minutes of trading and the end result a gain of only about 1% on the day.  Certainly, better than a decline, but clearly not what President Xi had in mind.

Ultimately, the problems in China go far beyond the level of stamp duty on stock trades.  There are fundamental problems in the economy’s structure as well as the demographic and debt overhangs that exist there.  Despite the much ballyhooed efforts by Xi to adjust the Chinese economy away from its mercantilist economic model, that is still the predominant process there.  It is with this in mind that I continue to look for a much weaker renminbi going forward, and an eventual move to 7.50 and beyond.  

As to the rest of the equity markets, currently everything is in the green, with Japan having a great day (+1.7%) and all of Europe higher by between 0.50% and 1.00%.  US futures, too, are firmer this morning, although only just at this hour (7:20), about 0.2% across the board.  As there is a ton of data to come this week, I suspect that traders will be waiting for more information before making their next big bets.

In the bond market, things are quite benign with no major government market having seen a yield change of even 1 basis point this morning.  There are some gainers and some losers, but for all intents and purposes, bonds are unchanged on the day.  The one thing to note, though, is that the US Treasury curve inversion is growing again, back to -86bps, after having traded to as low as -65bps less than two weeks ago.  I feel like this movement simply adds to the confusion over the imminence of a recession, although I definitely believe one is coming by early next year.  Of course, we will learn far more about the economy this week given the data to be released.

In the commodity space, oil is marginally softer this morning, back just below $80/bbl, although there seems to be an increasing effort by OPEC+ to continue to restrict supply as they fear a recession coming.  Metals prices are generally little changed this morning, again, with market behaviors driven by the uncertainty over the week’s upcoming news.

Finally, the dollar is also mixed this morning, with a nice mix of gainers and losers across both the G10 and EMG blocs.  I feel the bias will be for a stronger dollar given my take on Powell’s comments as being hawkish, but as I explained, there was plenty of fodder for both arguments.

Turning to the data, there is a lot this week as follows:

TodayDallas Fed Manufacturing-19.0
TuesdayCase Shiller Home Prices-1.65%
 JOLTS Job Openings9450K
 Consumer Confidence116.2
WednesdayADP Employment 198K
 Advance Goods Trade Balance-$90.0B
 GDP Q22.40%
ThursdayInitial Claims235K
 Continuing Claims1705K
 Personal Income0.30%
 Personal Spending0.70%
 Core PCE Deflator0.2% (4.2% Y/Y)
 Chicago PMI44.1
FridayNonfarm Payrolls168K
 Private Payrolls150K
 Manufacturing Payrolls3K
 Unemployment Rate3.50%
 Average Hourly Earnings0.3% (4.3% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.60%
 Construction Spending0.50%
 ISM Manufacturing47.0
 ISM Prices Paid44.0

Source: Bloomberg

So, as can be seen there is a ton of stuff to digest this week.  On top of that, we do hear from a few Fed speakers, but I think that given we just got Powell’s views, the data will be far more important than anything from a few regional bank presidents.  While obviously, Core PCE is critical, as it is their key inflation metric, I continue to look at the payroll data as the key for Powell to believe that he has not broken anything yet.  Once that data starts to fade, we can look for a change in tone from the Fed.  But until then, higher for longer remains the key, and the dollar should continue to benefit.

Good luck

Adf

A Gaggle of Bankers

Posted on by 
At altitude 8000 feet
A gaggle of bankers will meet
All eyes are on Jay
And what he might say
Regarding the Fed’s balance sheet

Now, pundits galore have opined
But something we need bear in mind
Is policy tweaks
Are still several weeks
Away, and will like be refined

Well, at 10:00 this morning, Chairman Powell will speak to the world regarding his latest views on “Structural Shifts in the Global Economy.”  At least that is the theme of the entire event where there will be numerous speeches by central bankers including Madame Lagarde later today, as well as papers presented by economists.  The reason this event is so widely discussed is in the past, Fed Chairs have used the forum to signal a shift in policy.  

Is that likely today?  This poet’s view is no, it is unlikely.  The message from the July meeting was that the Fed was still concerned about inflation running too hot and that the higher for longer mantra still applied.  Since then, the data has, arguably, been somewhat better than expected, although certainly not universally so.  At the same time, 10-yr yields are some 40bps higher and the S&P 500 is lower by about 4% since the last FOMC meeting, market moves that indicate investors are listening.  I do not believe Chairman Powell is keen to rock the boat.  As well, I don’t believe he feels the need to imply any major changes are necessary and I have a feeling that he is actually going to speak about the global economy, and not the US one specifically.

Summing up, I have a feeling this is going to be a complete non-event, with no useful information forthcoming, at least from Powell.  As it happens, Madame Lagarde speaks at 3:00 this afternoon NY time, and there is considerably more uncertainty as to the ECB’s path forward given the fact that the economic data in the Eurozone continues to be weak (today, German GDP in Q2 was confirmed as 0.0% Q/Q, -0.2% Y/Y, with Private Consumption also at 0.0% and the Ifo sentiment fell to 85.7, several points below expectations) while inflation remains far above their target.  While the ECB hawks are still claiming it is far too early to consider a pause in rate hikes, the ECB doves have been clear they are ready to stop.  Remember, too, Lagarde is a dove at heart.  It would not be difficult to believe that Lagarde discusses the slowing growth in China and the assumed knock-on effects for Europe as a rationale for expecting inflation to continue to fall without further ECB actions.

But as always, this is merely speculation ahead of the speeches, which is why we all listen.  Away from this meeting, though, investors are demonstrating some concerns about the overall situation, at least as evidenced by recent market activity.

Yesterday, in what was clearly something of a surprise to most pundits, equities sold off sharply in the US, led by the NASDAQ which was down -1.9%.  The surprise comes from the fact that the Nvidia earnings the night before were so strong and the stock rallied sharply on the news.  And this weakness was spread across all the major US indices.  Adding to the confusion was the fact that the US data yesterday generally pointed to more economic growth, with lower Claims data, and a strong Durable Goods -ex transport print with survey data looking up as well.  I guess this is a ‘good news is bad’ situation as continued economic strength informs the idea the Fed is not going to change their stance on higher for longer.

That weakness fed into Asia, where markets were lower across the board led by the Nikkei (-2.05%).  But in Asia, the interesting thing was that China announced, during the session, additional support for the property market by altering some mortgage and tax rules to encourage more home buying as Beijing tries to grapple with the increasing speed of the property implosion.  Alas for President Xi, the positive impact in the stock market lasted…10 minutes only!  After that, selling resumed and all the major indices in Asia finished lower on the day.  Now, European bourses have reversed that trend and are higher by roughly 0.6% across the board, perhaps anticipating a Lagarde ease, while US futures at this hour (7:30) are edging higher by 0.2% or so.

In the bond market, yields, which had fallen sharply earlier in the week, bottomed on Wednesday and are now higher in the US and throughout Europe.  While the move largely occurred in the US yesterday, with a 5bp bounce, and this morning we are little changed, Europe is seeing yields climb by 5bp-6bp across the board today.  The one place where yields remain dull is Japan, which has seen the 10yr JGB hover either side of 0.65% for the past week or two.

In the commodity space, oil (+1.5%) is rebounding again, arguably on the better than expected US data.  This is consistent with firmer prices in base metals, which are rising despite the rise in yields.  Ultimately, what this tells me is that there remains a great deal of uncertainty as to the near future regarding the economy.  The battle over whether a recession is coming soon or never coming continues apace.  The thing about commodities is that the supply piece of the puzzle continues to be undermined (pun intended) by ESG focused investors and governmental actions, and so the ultimate direction remains higher in my mind. 

Finally, the dollar is mixed to slightly stronger this morning, with most of the G10 a touch weaker vs. the greenback except for NOK (+0.4%) which is clearly benefitting from oil’s rally.  In the EMG sector, ZAR (+0.9%) is the outlier on the high side as allegedly traders are betting on increased investment flows to the country in the wake of the expansion of the BRICS nations.  (As an aside, can somebody please tell me why adding Argentina, a nation with a history of hyperinflation and serial debt defaulter, would inspire confidence in a BRICS currency?). But other than the rand, movement in this space has also been limited, arguably with everyone waiting for Powell.

On the data front, just ahead of Powell’s speech, we get the Michigan Sentiment Survey (exp 71.2), but that will clearly be overshadowed by Powell.  While I anticipate very little activity in the market ahead of 10:00, I also anticipate very little after the speech as I don’t believe he is going to change any perceptions at this point.  There is still a lot of data before the next meeting, another NFP, CPI and PCE reading, so it is too early to look for a change.  

Good luck and good weekend

Adf