Tag Archives: #beigebook

Little Enjoyment

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The Beige Book reported inflation
Was modest across the whole nation
And growth and employment
Found little enjoyment
While JOLTs data showed retardation
 
The upshot is traders were caught
Offsides, which is why bonds were bought
But so too was gold
And as things unfold
Be nimble or you’ll be distraught

 

Bonds rallied on both soft data, Factory Orders falling and JOLTs Job openings declining as well as a Beige Book that described modest economic activity across the nation.  Some cherry-picked quotes are as follows:

  • Most of the twelve Federal Reserve Districts reported little or no change in economic activity since the prior Beige Book period.
  • Eleven Districts described little or no net change in overall employment levels, while one District described a modest decline.
  • Ten Districts characterized price growth as moderate or modest. The other two Districts described strong input price growth that outpaced moderate or modest selling price growth.

Actually, these were the first lines from each of the key segments, Overall Economic Activity, Labor Markets and Prices.  But if you read them, it is hard to get excited about either growth or inflation as both seem pretty lackluster.  This is at odds with the Q2 GDP results as well as the early Q3 estimates from the Atlanta Fed’s GDPNow forecast as per the below showing 3.0% growth.

While the JOLTS data has always been confusing, and I think is even less reliable these days given the number of phantom job openings (just ask anybody looking for a job using LinkedIn), the Factory Orders data seems to have lost some of its information content given current tariff policies, and their substantive changes on short notice, have upset a lot of apple carts.  I had the system draw a trend line in the below data because it was difficult for me to eyeball it, but FWIW this does not seem a positive result.  Arguably, this is exactly why President Trump is seeking to bring manufacturing back to the US.

Source: tradingeconomics.com

Meanwhile, with ADP jobs this morning (exp 65K) and NFP tomorrow (exp 75K), it is difficult to get too excited about the JOLTS data.  One interesting thing about this data is how it is undermining the higher bond yield narrative that has been rampant (I wrote about it on Tuesday) with yields around the world slipping yesterday in the US and then everywhere else overnight.  For instance, 10-year Treasury yields are lower by -9bps since yesterday morning with virtually all European sovereign yields having fallen about -5bps over the same period.  This is true even in France which auctioned €11 billions of 10yr through 30yr debt this morning.   Compared to their last auction, yields are 30bps to 40bps higher, a strong indication that investors are concerned over the French fiscal situation.

Of course, these two narratives can be simultaneously correct with timing the key difference.  While the short-term view is weaker economic activity will dampen demand and reduce yields, the long-term trajectory of government spending and debt issuance almost ensures that yields will go higher.  Corroborating the long-term story is gold (-0.6% this morning, +3.6% this week) as though some profit taking is evident right now, the barbarous relic has managed to trade to new all-time highs yet again.  That is not a sign of confidence in government finances.

And truthfully, that last sentence continues to be the overriding issue to my mind.  No matter what we hear from any government (perhaps Switzerland should be excluded here), spending is on a sharp upward trajectory, and no government wants to slow it down.  What they want to do is sound like they are doing things to slow it down, but politicians see too much personal benefit from increased government spending to ever stop.  And so, this will continue until such time as it no longer can.  Yesterday I mentioned YCC and I remain convinced that is coming to every major economy over time.  But different nations will respond on different timelines and that is what will drive FX rates given they are the ultimate relative relationship asset class.  I wish I could paint a cheerier picture, but I just don’t see it at this point.

So, let’s see how other markets behaved overnight.  Yesterday’s US equity rally (mostly anyway) seemed entirely on the back of Google’s legal victory allowing it to keep Chrome, where spinning it off was one of the proposed penalties in the anti-trust case, and which saw the share price rally more than 9% in the session.  That move helped Japan (+1.5%) and Australia (+1.0%) but China (-2.1%) and Hong Kong (-1.1%) both suffered on rumors that the government was growing concerned with excess speculation and would soon be implementing rules to prevent further inflating the stock market.  These two markets have had a very nice run since April, rising on the order of 25% each as per the below.

Source: tradingeconomics.com

As to the rest of the region, Korea (+0.5%) was the next best performer with lots of nothing elsewhere, +/-0.3% or so.  In Europe, the DAX (+0.7%) and IBEX (+0.6%) are having solid sessions although the CAC (-0.2%) seems to be feeling pressure from the bond auctions and concerns over the future government situation.  European data was largely in line with expectations and secondary in nature at best.  Meanwhile, at this hour (7:20) US futures are little changed to slightly higher.

We’ve already discussed bonds, but I should mention that even JGB yields slid -4bps overnight as the status of the Ishiba government remains unclear as well.

In the commodity space, oil (-1.3%) continues to chop around in its recent trading range as yesterday’s concerns over OPEC increasing production seem to be giving way to today’s story about weaker demand and growing inventories available in the US.  It’s tough to keep up without a scorecard, that’s for sure.  It should not be surprising that the other metals (Ag -0.75%, Cu -1.2%) are also slipping this morning after they also rallied sharply along with gold yesterday.  In fact, as is often the case, silver’s recent moves have been much more aggressive than gold’s, although in the same direction.

Finally, the dollar is a bit firmer this morning after a modest decline yesterday.  If we use the DXY as our proxy, while there is no doubt the dollar fell sharply during the first half of the year, arguably, since just past Liberation Day in early April, it has gone nowhere.  

Source: tradingeconomics.com

The short-term story for the dollar revolves around the Fed and its behavior.  After yesterday’s data, Fed funds futures increased the probability of a cut on the 17th to 97.6% with a one-third probability of a total of 75bps by year end.  If the Fed were to become more aggressive, perhaps after a much weaker than expected NFP number on Friday, then the dollar would have room to fall.  But you cannot show me the combined fiscal and economic situations elsewhere in the world and explain those are better places to hold assets at this time.

As to today’s movements, the laggards are ZAR (-0.9%) following the precious metals complex lower, and NOK (-0.6%) suffering on the back of oil’s decline.  Otherwise, there is a lot of -0.2% across the board with no terribly interesting stories.

This morning’s data brings Initial (exp 230K) and Continuing (1960K) Claims along with ADP as well as the Trade Balance (-$75.7B), Nonfarm Productivity (2.7%), Unit Labor Costs (1.2%) and finally ISM Services (51.0).  Two more Fed speakers are on the docket, Williams and Goolsbee, but the Fed story is much more about President Trump’s ability to fire Governor Cook than about the nuances these speakers are trying to get across.

Weak data should reflect as a weaker dollar in the near term, and the opposite is true as well.  My sense is a very weak number on Friday will result in the market starting to ramp up the odds of a 50bp cut later this month and that will undermine the buck.  But if that number is solid, I need another reason to sell dollars and I just don’t have it yet.

Good luck

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To Further Debase

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Said Jay, “The economy’s strong”
But rate cuts before weren’t wrong
We’re in a good place
To further debase
Your dollars and will before long
As we slow the pace
Of policy ease all year long

 

Chairman Powell regaled the market for the last time before the Fed’s quiet period begins tomorrow evening and here are the three comments that seem to explain his current views. 

  • “We wanted to send a strong signal that we were going to support the labor market if it continued to weaken.”
  • “The economy is strong, and it’s stronger than we thought it was going to be in September.”
  • “The good news is that we can afford to be a little more cautious as we try to find a rate-setting that neither spurs nor slows growth.”

My read is he was trying to make an excuse for the 50bp cut that started the process in September as there is still no justification for that move.  However, he essentially reiterated his last remarks of the Fed not being in a hurry to cut rates further.  As it happens, SF Fed president Mary Daly also explained, “We do not need to be urgent. There’s no sense of urgency, but we do need to continue to carefully calibrate our policy and make sure it’s in line with the economy we have today the one we expect to have going forward.” 

Now, a funny thing happened to me yesterday as I read those comments, and my expectation was that the Fed funds futures market might reduce the probability of a December rate cut.  After all, we just heard from the Chairman that things are good and they can be cautious about further cuts, while another member expressly said there was no urgency to cut.  But in fact, the 74% probability this morning is unchanged from yesterday’s level and the punditry remains very convinced that they are going to cut next week despite their caution.  It seems that my understanding of caution and Powell’s are somewhat different.  However, his understanding is the one that matters, so it appears absent a major upside surprise in both NFP tomorrow and CPI next week, a cut is coming on the 18th.

The French president, M. Macron
May soon find himself overthrown
His PM is out
And there is great doubt
‘Bout any new views he has shown

The other topic of note this morning is the collapse of Monsieur Macron’s minority government in France.  This was the widely expected outcome that markets had priced in, so there has been little in the way of impact there.  However, the bigger picture impact is about the structure of the Eurozone (and EU) and its rules.  After all, if the second largest economy in the group is not merely floundering economically, but essentially leaderless, the concept of a coherent set of plans to oversee the Eurozone seems a bit of a stretch.

Macron’s term is not up until 2027, and he has consistently maintained he will not step down early, but there are increasing calls for him to do just that.  Members of parliament on both the left and right, although not Marine Le Pen, the RN’s leader, have been vocal on the subject and a recent poll by Cluster17 for Le Point magazine showed that 54% of the French public wanted him to step down as well.  Now, you know as well as I that absent a criminal conviction, the odds of an elected official stepping down anywhere in the world approach zero and I expect nothing less from Macron.  At the same time, French law prevents another parliamentary election for 12 months after the last, which means July.  At that time, one will almost certainly be called, and it will be interesting to see how that plays out.  

However, in the meantime, it seems likely that France will be floundering with no ability to address fiscal issues, be they spending or deficit focused.  This cannot be a positive for the single currency, especially if France slips into recession.  Again, despite all the concerns over the dollar and the untenable fiscal deficits, things in Europe appear far worse.  Parity in the euro and below seems a far better bet over the next 6 months than the opposite.  While the euro (+0.2%) has bounced slightly this morning, a look at the chart below indicates, at least to me, that the trend is distinctly lower.

Source: tradingeconomics.com

And with that, let’s look at the overnight session in markets.  Continuing in the FX world, that modest euro gain is descriptive of the market as a whole, with the dollar slightly softer this morning, although few currencies showing any notable strength.  I suspect much of this is based on the idea that the Fed will cut rates soon despite the “strong economy”.  In truth, in the G10, no currency has moved more than 0.2% and even in the EMG space, only ZAR (+0.4%) and HUF (+0.5%) have climbed more.  Those moves, which don’t appear to have any fundamental drivers, seem more likely to be expressions of the fact those markets are more volatile than the G10.

In the equity markets, yesterday’s US rally, to new all-time highs across the board, saw a mixed review in Asia with the Nikkei (+0.3%) edging higher but both Hong Kong (-0.9%) and Shanghai (-0.25%) slipping a bit.  The rest of Asia was also mixed with Korea (-0.9%) still suffering from the bizarre happenings there yesterday but other markets performing well (India +1.0%, Singapore +0.6%).  In Europe, only the UK (-0.1%) is under water this morning although the CAC (+0.2%) is the continental laggard.  Spain’s IBEX (+1.2%) is the leader on the back of stronger IP, and although Eurozone Retail Sales were much weaker than expected, it has not seemed to impact investor views.  As to US futures, they are little changed at this hour (7:30).

In the bond market, Treasury yields have backed up 3bps and I am beginning to sense that there is a negative correlation to the probability of a Fed rate cut and the 10-year yield.  As that probability rises, bonds sell off further, but that is merely an anecdotal observation, I have not done the math.  In Europe, yields are mixed, but within 1bp of yesterday’s closing levels with even French yields slipping 1bp. It will be very interesting to see how the European Commission handles the fact that the French budget deficit is so far above the targeted 3% level and now without a government, there is no way to address the situation.  The original idea when the euro was formed was that governments would be fined if they broke the policy caps on debt and deficits.  Of course, no fine has ever been imposed and I don’t suppose one will be now.  (However, if Marine Le Pen’s RN wins the election next summer, you can be sure they will seek to impose fines on her government!)

Finally, in the commodity markets, it is very quiet this morning.  Oil (+0.3%) is edging higher after a big rise and fall yesterday.  The rise was the result of a steep draw in US inventories, but the decline seemed to be a response to OPEC+ confirming they will be increasing production at some point in 2025.  Meanwhile, metals markets are basically unchanged this morning.

One other thing I have not discussed but is obviously getting a lot of press this morning, is Bitcoin which traded through $100K yesterday after President-elect Trump named Paul Atkins to be his new SEC Chair.  Atkins has a very pro crypto bias, and I expect we will see far more impetus in the crypto space going forward, not just in Bitcoin.

On the data front, yesterday’s ISM data was a bit softer than forecast while the Beige Book explained that economic activity rose slightly in the past month along with employment and prices, but all movements were quite modest.  This morning, we see Initial (exp 215K) and Continuing (1910K) Claims as well as the Trade Balance (-$75.0B) and later we hear from Richmond Fed president Barkin.  

Looking at the overall situation, investors continue to ignore any potential problems and run to risk assets, as evidenced by the rally in Bitcoin and new highs in stock prices.  Unless we see some really surprising data, either crazy strong implying the Fed is going to stop easing, or crazy weak implying we are in a recession, I see no reason for this process to end heading into the new year and President Trump’s inauguration.  Again, in that scenario, I think you have to like the dollar higher.

Good luck

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Filled with Frustration

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The Beige Book explained ‘round the nation

That growth was up, as was inflation

As well, we all learned

Of job offers spurned

And businesses filled with frustration

Meanwhile, round the world, PMI’s

Of Services were no surprise

As nations reopen

Most people are hopin’

The world will, at last, normalize

Ahead of tomorrow’s NFP report in the US, one which given last month’s extraordinary miss will be closely scrutinized by both investors and the Fed, most markets appear to be biding their time in narrow ranges.  This was largely true yesterday and so far, remains the case in the Asian and European sessions.  This lull in activity offers an excellent time to consider the supporting data that we have received in the past twenty-four hours, as well as the remainder due this morning.

Starting with the Fed’s Beige Book yesterday, the report highlighted the features of the economy we have been hearing about for the past several months.  The lifting of Covid inspired restrictions has led to strong increases in demand for products and services ranging from houses and cars to hotels and restaurants.  Business owners indicated that a combination of supply chain bottlenecks and increased demand have been forcing prices higher and that they saw no reason for that to end soon.  They also continue to comment on their inability to hire the workers necessary to satisfy demand, especially in lower wage segments of the economy.  The anecdote I feel best illustrates the issue came from St Louis where a job fair held by a dozen restaurants to fill more than one hundred open positions drew only twelve candidates!  It certainly appears as though the ongoing extra Federal unemployment benefits being offered through September are discouraging a lot of people from going back to work.

One of the underlying beliefs regarding the Fed’s transitory inflation story is that supply chain interruptions will quickly resolve themselves.  And it is not just the Fed that believes this will be the case, but virtually every other economist as well.  But I wonder, what prompts their faith in that outcome?  After all, with available labor scarce, who is going to relink those chains?  Consider, as well, industries like mining and extraction of raw materials.  Shortages of copper and iron ore require the reopening of mines or excavating new ones.  One of the impacts of Covid was that not only were current operating mines closed, but capex was drastically cut, so there is a significant disruption in the exploration process.  Add to that the rise of ESG as a business objective, which will, at the very least slow, if not prevent, the opening of new sources of these raw materials, and it becomes quite easy to believe that these bottlenecks will remain for more than just a few months.  In fact, it would not be surprising if it was several years before the supply/demand balance in many commodities is achieved.  Given the current assessment is a lack of supply, you can be certain that prices will continue to rise far longer than the Fed will have you believe.

As to the overnight session, we were regaled with the Services PMI data from around the world.  In Asia we saw Australia solid, at 58.0, and right in line with last month, while Japan, 46.5, did show a marginal increase, but remains well below the growth-contraction line of 50.0.  China’s Caixin data, at 55.1, was disappointing vs. expectations as well as lower by 1.2 points compared to April’s reading.  Is the Chinese economy beginning to roll over?  That is a question that is starting to be asked and would also explain the PBOC’s sudden concern over a too-strong renminbi.  In a strong economy, a rising currency is acceptable, but if things are not as good, currency strength is an unwelcome event.  Finally, the last major Asian nation reporting, India, showed awful data, 46.4, demonstrating the huge negative impact the recent wave of Covid infections is having on the economy there.

The European story was a bit better overall, with Germany (52.8 as expected), France (56.6 as expected), Italy (53.1 better than expected) and the Eurozone (55.2 slightly better than expected) all demonstrating the recovery is underway on the continent.  As well, the UK continues to burn brightly with a 62.9 reading, more than a point higher than forecast.  And don’t forget, later this morning the US releases both the PMI data (exp 70.1) as well as ISM Services (63.2) both demonstrating that the US economy remains the global leader for now.  With that in mind, it is kind of odd that the dollar is so hated, isn’t it?

The other data coming this morning will give us our first hints at tomorrow’s NFP with ADP Employment (exp 650K) released 15 minutes before both Initial (387K) and Continuing (3.614M) Claims.  As well, at 8:30 we see Nonfarm Productivity (5.5%) and Unit Labor Costs (-0.4%), which on the surface would indicate there are no wage pressures at all but continue to be distorted by the past year’s data outcomes.

As to the market situation, while equity markets in Asia were mixed (Nikkei +0.4%, Hang Seng -1.1%, Shanghai -0.4%), Europe has turned completely red (DAX -0.5%, CAC -0.4%, FTSE 100 -0.9%) despite the solid PMI data.  This feels far more like some profit taking ahead of tomorrow’s data as well as the upcoming ECB meeting next week.  US futures are also under pressure, with all three major indices lower by between 0.5% and 0.75%.

What is interesting about the market is that despite the selloff in stocks, we are seeing a selloff in bonds as well, with Treasury yields higher by 1.5bps and European sovereigns all higher by at least 1 basis point (Bunds +1.1bps, OATs +1.4bps, Gilts +2.7bps).  This, of course, begs the question, if investors are selling both stocks and bonds, what are they buying?

The answer is not clear at this point.  Oil (WTI -0.1%) while outperforming everything else, is still down on the day, as are gold (-0.65%) and silver (-1.4%).  Base metals?  Well, copper (-1.0%) is clearly not the winner, although aluminum (+0.25%) is the only green spot on the screen.  Well, that and agricultural products with Soybeans (+1.25%), Wheat (+1.0%) and Corn (+0.85%) all quite strong this morning, punctuating the idea that food inflation is running at its highest level in more than a decade according to a just released UN report.  That is something I certainly see every week at Shop-Rite and I imagine so does everyone else.

Finally, a look at the FX market shows the dollar is having a pretty good day all around.  In the G10, the pound (+0.1%) is the only currency to hold its own vs. the greenback, with the rest of the bloc lower by between 0.2% and 0.4%.  Frankly, this simply looks like a risk-off session as investors are selling both stocks and bonds across the G10, and no longer need to hold the local currencies.  In the EMG bloc, the story is largely the same, with only INR (+0.25%) rising and the rest of the bloc under some pressure.  The rupee movement seems to be more technical as alongside weak PMI data, the RBI meeting, coming up tonight, is expected to see policy remain unchanged with a dovish bias given the ongoing Covid problems in the country.  On the downside, while most currencies are lower, aside from TRY (-0.5%) on slightly lower inflation, therefore less need to maintain high rates, the rest of the bloc’s declines are only on the order of -0.2%.  Finally, I would be remiss if I didn’t mention yesterday’s price action in LATAM currencies, where we saw significant strength in BRL (+1.5%) and CLP (+1.1%) which has been a broad continuation of funds flowing back into the region.

We have a few more Fed speakers today, but they all say exactly the same thing all the time, it seems, that they are thinking about considering starting a discussion on tapering.  In this vein, there was a big announcement yesterday that the Fed would be unwinding one of the emergency bond buying programs, the secondary market corporate program, and selling out the $13 billion of bonds and ETF’s they own.  Of course, that is such a tiny proportion of their balance sheet, and of that market in truth, it seems unlikely to matter at all.

My observation lately has been that NY tends to go against the prevailing trend for the day during its session, meaning on a day like today, when the dollar is well bid as NY arrives, I would look for a bit of dollar selling.  We shall see, but in fairness, all eyes are really on tomorrow.

Good luck and stay safe

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