Clearly Annoyed

In China they say speculation
And hoarding is now the causation
Of quite an ordeal
As copper and steel
See prices rise bringing inflation

(Or, the second variation on this theme)

The Chinese are clearly annoyed
That price signals have been destroyed
So, meetings were called
And price rises stalled
As punishment threats were employed

Markets are mixed this morning after a relatively quiet weekend, at least in the more mainstream markets.  Cryptocurrencies, on the other hand, continue to prove they are nothing more than speculative assets with Bitcoin declining 20% before rebounding 16% in the past 36 hours.  The proximate cause of that movement was a comment from the Chinese about cracking down on bitcoin mining, again.  Whether or not this particular initiative succeeds, the one thing that is abundantly clear when it comes to the cryptocurrency space is that more and more governments are lining up against them.  Do not underestimate government interest in regulating the crypto space out of existence, or at the very least to significantly marginalize it, as no government can tolerate a competitor for their incredibly lucrative monopoly of creating money.

Speaking of tolerance, the Chinese have also, this weekend, explained that they have “zero tolerance” for certain activities in the commodity markets like hoarding, speculating or disseminating misinformation. At a hastily called meeting of the heads of top metals producers, those words were used along with the explicit threat of severe punishment for violation of not only the letter, but the spirit, of the law.  Remember, China executed the former head of Huarong, a financial firm, for similar types of issues, so the notion of severe punishment must certainly be taken seriously.  It can be no surprise that metals prices fell in the Chinese session, with steel, iron ore, aluminum, zinc and tin all lower, although copper has maintained some of its recent gains.

From a market’s perspective, these were the only remotely noteworthy stories of the weekend.  While the inflation/deflation debate continues to rage, and rightly so given its importance, and speculation over potential central bank policy changes remains rife, as of now, we have no new information on either of these stories and so it will remain entirely opinion, not fact.  Of course, Friday we get the latest release of core PCE, which will certainly be above the 2.0% Fed target, and will certainly generate much tongue-wagging, but will have virtually no impact on the Fed.

A tour of markets this morning shows that movements have been modest and there is no direction or theme in any of them.  Asian equity markets were mixed (Nikkei +0.2%, Hang Seng -0.2%, Shanghai +0.3%) and movements were limited.  Europe has seen a bit more positivity, but only a bit (DAX +0.4%, CAC +0.1%, FTSE 100 +0.2%), hardly the stuff of dreams.  Finally, US futures are the market putting in the best performance, with gains between 0.4% and 0.6% two plus hours ahead of the opening.

Bond markets are showing even less movement than stocks at this hour with Treasury yields lower by 0.5bps while Bunds and OATs are essentially unchanged.  Gilts are the big mover, with the yields declining by 1.1 basis points.  Even peripheral nation yields are essentially unchanged.

On the back of the Chinese comments, commodity prices are mostly lower although oil will have none of it, rising 1.7% this morning.  However, while Cu is unchanged, Fe (-3.9%), Ni (-2.1%) and Zn (-1.1%) have all taken the Chinese to heart.  Precious metals are little changed although ags are a bit softer.

Finally, the dollar can only be described as mixed this morning, with an equal number of gainers and losers in both the G10 and EMG blocs.  And the thing is, those moves have been desultory, at best, with NOK (+0.25%) the leading gainer on the back of oil’s gains, while GBP (-0.15%) is the laggard, on position adjustments.  EMG currencies are seeing similar types of modest movements with nary a story to highlight.

Data this week is also pretty sparse although that core PCE number on Friday will be closely watched.

Tuesday Case Shiller Home Prices +12.55%
New Home Sales 950K
Consumer Confidence 118.9
Thursday Initial Claims 425K
Continuing Claims 3.68M
Durable Goods 0.8%
-ex transport 0.7%
Q1 GDP 6.5%
Friday Personal Income -14.8%
Personal Spending 0.5%
Core PCE 0.6% (2.9% Y/Y)
Chicago PMI 69.0
Michigan Confidence 83.0

Source: Bloomberg

There are several Fed speakers, but we already know what they are going to say, inflation is temporary, I’m sorry, transitory, and they have a significant way to go to achieve their goals.

At this time, given the central banks have all proclaimed themselves data dependent, until we get data that indicates a change in the situation, there is no reason to believe that markets will do more than chop back and forth.  There is, as yet, no clarity in the inflation debate, nor will there be for a number of months to come.  So, for now, the dollar seems likely to continue to chop around until we see a break in interest rates in one direction or the other.  That said, if the inflationist camp is correct, then the first move should be for dollar strength alongside the higher interest rates that will ensue.

Good luck and stay safe

The Feathers of Hawks

It seems like the feathers of hawks
Turn whiter when each of them talks
On Monday, Loretta
Said policy betta
Stay easy for pumping up stocks

For those of you not familiar with a word ladder, it is a type of puzzle where you start with a word, Hawk, for example, and change one letter in each step, while maintaining the order of the letters, to form another word and keep doing so until you arrive at the desired second word.  The object is to complete this task in as few moves as possible.  In this way, this morning’s task is to use a word ladder to turn hawk into dove (one possible answer below).

Once upon a time, in the economic community, there were two schools of thought as to how monetary policy would best serve a nation.  There were hawks, who believed that Ludwig von Mises and Friedrich Hayek had identified the most effective way for central banks to behave; namely minimalist activity and allowing the markets to work.  The consequences of this policy view were that economic cycles would exist but would be moderated naturally rather than allowing bubbles to inflate and interest rates would be set by the intersection of supply and demand.  On the other side of the debate were the doves, whose hero was John Maynard Keynes (although Stephanie Kelton of MMT fame is quickly rising up the ranks) and who believed that an activist central bank was the most effective.  This meant constant monetary interventions to support demand, alongside fiscal interventions to support more demand.  As to the consequences of this policy, like unsustainable debt loads, or rising inflation, they were seen as ephemeral and unimportant.

But that was soooo long ago, at least a full year.  In the interim, Covid-19 appeared as a deadly and virulent disease. While we have learned that it is particularly dangerous for the elderly and for those with comorbidities, there is also another group which has basically been made extinct, monetary hawks in public policy positions.  For the longest time, the two most hawkish members of the FOMC were Kansas City’s Esther George and Cleveland’s Loretta Mester.  However, at the very least, Ms. Mester has now shown that she coos like a dove as per her comments yesterday about US monetary policy, “We’re going to be accommodative for a very long time because the economy just needs it to get back on its feet.

The global central bank community is all-in on the idea that ZIRP, NIRP and QE are the new normal, and as long as equity markets around the world continue to rally, they are not going to change their views.  In a related note, the BOJ is in the midst of continuing its policy review and the question of how they should describe their ETF purchases has come up.  It seems that while a number of board members would like to pare back the purchases, they are unwilling to explain that for fear the market would misinterpret their adjustments as a policy change and the result would be a sharp equity market sell-off.  And we know that cannot be tolerated!

The point is, no matter which central bank you consider, they have all reached the point where their previous actions have resulted in fragile markets and they appear to have lost the ability to change policy.  In other words, there is no end in sight to easy money, inflation be damned.

Which, of course, is exactly what we saw yesterday in markets, as equities rallied in the US, with all three major indices closing at new all-time highs.  Asian markets mostly followed through with the Nikkei (+0.4%), Hang Seng (+0.5%) and Shanghai (+2.0%) all nicely firmer, although Australia’s ASX (-0.9%) couldn’t find any love.  And perhaps, that is the story in Europe, as well, this morning, with various shades of red painting the screen.  The DAX (-0.5%) is the worst performer, with both the CAC (-0.1%) and FTSE 100 (-0.1%) more pink than red.  As to US futures, they find themselves in the unusual position of being negative at this hour, but only just, with all three indices looking at losses of between 0.1% and 0.2%.

Bond markets are clearly in more of a risk-off mood than a risk-on one, with Treasury yields lower by 2.2bps this morning and more than 4bps lower than the peak seen yesterday.  European markets have seen less movement, with yields in the major markets all down less than one basis point, hardly a strong signal, although notably, Italian 10-year yields, at 0.502%, have traded to a new historic low level.  Excitement over the prospect that Super Mario can fix Italy remains high.

On the commodity front, oil’s early gains have reversed, and it is now essentially flat on the day, although it remains within pennies of the highs set early this morning above $58/bbl.  Gold (+0.7%) is rebounding strongly, from the lows seen last Tuesday, with silver (+1.3%) even stronger.  Of course, all these non-fiat currency plays pale in comparison to Bitcoin (+17%) which exploded higher as the progenitor of one bubble (a certain EV maker in California) explained it bought $1.5 billion worth of Bitcoin for its Treasury reserves.

With this type of price action in commodities, as well as with the ongoing conversion of US monetary hawks into doves, it should not be surprising that the dollar is lower this morning, pretty much across the board.  In the G10 space, CHF and JPY are leading the way higher (+0.6% each) as investors seem to be running for havens not called the dollar.  But the euro (+0.45%) has also gained nicely and any thoughts that January’s price action was anything other than a short-term correction are now quickly fading away.  It will be interesting to see how the market responds to tomorrow’s CPI data, as that has the opportunity, if it prints higher than forecast, to alter views on real interest rates.  I have maintained that declining real yields will undermine the dollar, but I have to admit, I didn’t expect it to happen this early in the year.

EMG currencies are also firm this morning, led by ZAR (+0.6%) and RUB (+0.5%), on the back of commodity price rises, but with a pretty uniform strength throughout the CE4 and LATAM.  The one exception is BRL (-0.3%), the worst performing currency in the world this morning, as a lower than expected CPI print for January has traders shedding the belief that the central bank may be forced to raise rates any time soon.

On the data front, NFIB Small Business Optimism printed lower than last month and worse than expected at 95.0, not a good sign for the economy, but probably a boost for the view that more stimulus is coming.  At 10:00, we see JOLTs Job Openings (exp 6.4M), although that tends to be ignored.

The only Fed speaker today is St Louis’ Bullard, whose tendencies before Covid-19 were dovish, and he certainly hasn’t changed his views.  As such, and given that the market seems to have rejected the notion of a further USD correction higher, it looks like the dollar’s downtrend is getting set to resume.

Good luck and stay safe

One possible answer:  I would love to see others

The Dollar’s Fate (In the Coming Year)

With apologies to Henry Wadsworth Longfellow

Listen, my children, and you shall hear
Of the dollar’s fate in the coming year
In the wake of a time that’s ne’er been seen
Since the Spanish Flu of Nineteen Eighteen
Perhaps Twenty-One will bring joy, not fear

Recapping Twenty shows that despite
A plague of biblical magnitude
The printing press revealed its might
As governments everywhere, debt, accrued
And flooded the markets with cash untold
(The better their citizens be controlled)
But all of that money was used, not for,
Increased production of goods onshore
Instead, for the purchase of stocks galore

Thus, equity markets at home rose higher
With Asia, too, on proverbial fire
Though Europe lagged, as the ECB
Was late to the party with more QE
Risk was embraced with a multiplier
Government bonds, though falling of late
Had seen yields tumble, year-to date
And lastly, the dollar, is now descending
As traders await this trend extending

Looking ahead, what can we expect?
Has Covid passed? Will ‘normal’ return?
Or are there surprises we’ve yet to learn?
Will stocks continue their flights of fancy?
Will bonds, inflation, at last detect?
Will dollars, everyone, start to spurn?
Will gold and bitcoin still seem chancy?

Regarding the virus, it’s not dead yet
Though hope springs eternal, and at last
The vaccines imply the worst has passed
But life, as we knew it, has been reset
Working from home (or living at work)
Is mainstream now, and not just a quirk
Office demand will certainly slide
And travel for business will lessen worldwide
Normal has changed, for boss and for clerk

Let us now speak of growth and inflation
Will growth improve on last year’s “success”?
Or will it instead fall flat and regress
Lockdown renewals bode ill for salvation
Policymakers constantly flail
As policy efforts constantly fail
Stimulus, fiscal, continues to flow
Interest rates are now forevermore low
Central banks tell us that this combination
Is perfect to counter a fearful stagnation
But in their efforts, good times to hail
The rising of prices will bypass their gaze
Leading to many more difficult days
GDP this year will struggle to One
Inflation, however, at Four, will not stun

How, then, will markets respond to this fate?
Equity prices at first will inflate
By spring, though, ‘twill be clear something’s amiss
Traders, their holdings, will start to truncate
While we shall not tumble into the abyss
Do not be shocked if the market does fall
Some twenty percent, at the least, is my call
What about bonds? How will they react?
Powell will ne’er let their prices contract
Yield Curve Control is the future we’ll see
Alongside the horror of pure MMT
Hence, ten-year bonds when December arrives
Will keep up their value, a cat with nine lives
One percent will be the height they attain
Implying the real yield most certainly dives
And so, the dollar will suffer great pain

Starting in Europe where Madame Lagarde
Is trying to keep up with Fed Chairman Jay
Sadly, what’s clear, at the end of the day
The ECB’s structure will make it too hard
While Fed and the Treasury work hand in hand
Pushing more money throughout all the land
Treaties in Europe have outcomes, unplanned
PEPP’s not enough for a rebound unscarred

Even though growth throughout Europe will sag
Even though prices will still be a drag
Nothing Lagarde can create will impact
The outcome, a euro that’s sure to move higher
Thus, if it’s something you need to acquire
At year-end, One-Thirty, you’ll need, that’s a fact

Tumultuous best describes last year’s UK
Twixt Covid and Brexit, the nation felt pain
Unhappily, this year, to Johnson’s dismay
Could worsen for every old bloke on the street
With growth in the toilet while prices show heat
It doesn’t seem much like Pound Sterling could gain

But real rates keep diving throughout the US
Offsetting those troubles, so if you need quid
Come Christmas, One-Fifty, if I had to guess
Is what they will cost as the dollar’s declined
Looking elsewhere, perhaps north of the border
Canada still seems a bit out of order
Oil’s rebounded but still seems confined
Meanwhile, housing there is quite well bid

However, again, it is Fed Chairman Jay
Who’s promised support for considerable time
Thus, when we get to our next Boxing Day
One-Fifteen for Loonies you’ll see on your screen
Eastward now, let’s turn our gaze as we glean
Whether the yen can continue its climb
Long-term, the dollar, its trend has been clear
Even before the debasement of late
Several percent, like a clock every year
Why would this year, something new, demonstrate?

Frankly, it won’t, as the Fed’s in control
Rather, the yen, will continue to roll
So, Winter Solstice this year will reveal
Dollar-Yen, Ninety-Six, where you can deal
Let us turn now to both future and past
Bitcoin and gold, which have both been amassed
Can both their prices continue to rise?
Certainly, as they’ve restricted supplies

For centuries, gold has defined what’s secure
Its glitter unblemished while paper’s debased
So, don’t be surprised if the relic’s embraced
As buyers pay Three Grand their wealth to insure
But youth has ideas which to many seem odd
And bitcoin is one such that’s been called a fraud
So, is it? Or is Bitcoin digital gold?
An updated version important to hold
As fiat debasement continues apace
This digital token gains further allure
And this year it seems Bitcoin’s making its case
As something that everyone needs to procure

It’s starting this year right around thirty grand
And hodlers believe that ‘tween here and the sky
Unless countries call for Bitcoin to be banned
A doubling or tripling’s the gain they’ll apply
One last thing I’ll highlight in digital space

The DCEP is now leading the race
This digital yuan, the first CBDC
Is coming soon courtesy of Mr Xi
It’s impact initially is quite unclear
But I guarantee that inside of a year
Nations worldwide will each roll out their own
And each will define a DC trading zone

While last year was filled with surprises galore
This year we’re likely to see many more
And finally, thank you, my readers and friends
For listening to all the twists and the bends
Now looking ahead to Twenty Twenty-One
Let’s all keep perspective and try to have fun.

Good luck, stay safe and have a wonderful new year

DCEP = Digital Currency / Electronic Payment
CBDC = Central Bank Digital Coin