Tag Archives: #BOJ

Top of Mind

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Will they or won’t they?
The intervention question
Is now top of mind

 

As we approach Japanese Fiscal Year end, and while we all await Friday’s PCE data, the FX markets have taken on more importance, at least for now.  The big question is, will there be intervention by the Japanese?  Late last night, USDJPY traded to a new thirty-four year high of 151.96, one pip higher than the level touched in September 2022 which catalyzed the last intervention by the BOJ/MOF.  Recall, last week the BOJ “tightened” monetary policy by exiting their 8-year experiment with negative interest rates and ‘promised’ that they were just getting started.  Granted, they didn’t indicate things would move quickly in this direction and they also explained they would remain accommodative, but they did seem confident that this would change a lot of opinions.  Remember, too, that the market response to that policy shift was to weaken the currency further while JGB yields actually drifted lower.

So, here we are a bit more than a week later and the yen has fallen to new lows.  What’s a country to do?  In the timeless fashion of governments everywhere with respect to currency moves, they immediately started jawboning.  Last night we heard from BOJ Board member Naoki Tamura as follows, “The handling of monetary policy is extremely important from here on for slow but steady progress in normalization to fold back the extraordinarily large-scale monetary easing.  The continuation of an easy financial environment doesn’t mean there won’t be any more rate hikes at all.”  Traders did not exactly quake in fear that the BOJ was suddenly going to tighten aggressively, let’s put it that way, and so nothing has really changed.  One other thing to note is that Tamura-san is seen as the most hawkish member of the current BOJ, at least per Bloomberg Intelligence’s analysts.  Take a look at their views below.

But wait, there’s more!  We also heard from Japanese FinMin, Shunichi Suzuki, that the government would take “decisive steps” if they deemed it necessary to respond to recent currency movement.  And the, the coup de grace, an emergency meeting between the MOF, the BOJ and the Financial Services Agency (FSA) is ongoing as I type (6:30) to help come up with a plan.  

Does this mean intervention is coming soon to a screen near you?  While it is certainly possible, the ultimate issue remains that the relative monetary policy settings between the US (higher for longer) and Japan (still at ZIRP with a hike expected in…October) remain such that the yen is very likely to remain under pressure.  Remember, too, that Japan is in the midst of a technical recession, so tightening monetary policy is not likely to be appreciated by Mr and Mrs Watanabe.  At the end of the day, the politics of inflation are very different in the US and Japan, and I would contend that in Japan, it is still not the type of existential problem for the government that it appears to be in the US.

FWIW, which is probably not much, I expect the MOF to follow their playbook, talk tougher, check rates and ultimately intervene over the next several days.  They will take advantage of the upcoming Easter holiday weekend and the reduced liquidity in markets to seek an outsized impact for the least amount of money possible.  But I do not see them changing their monetary policy before the autumn and so I look for continued yen weakness over time.  Be careful in the short run, but the direction of travel is still the same, USDJPY will rise.

For China, the fact the yen’s weak
Has Xi and his staff set to freak
They’re all quite dismayed
‘Cause Japanese trade
Has lately been on a hot streak
 

The other story in markets has been the ongoing ructions in the Chinese renminbi market.  It is key to understand that this is directly related to the yen story above as China and Japan are fierce competitors in many of their export activities.  But of even more concern to Xi and his gang is that Japanese exports to China are growing so rapidly and Japan ran a trade surplus with China in December (the last month with data released).  When you are a mercantilist nation like China, having a key competitor, like Japan, allow its currency to weaken dramatically against your own is a major problem.  Last week I highlighted the dramatic decline of the yen vs. the renminbi, and that has not changed.  Below is a chart from tradingeconomics.com showing Japanese exports to China ($billions) showing just how much this trend has changed and continues to do so.

Ultimately, both of these countries rely on exports as a critical part of their economic growth and activity, and in both cases, exports to the US and Europe are crucial markets.  If the Japanese continue to allow the yen to weaken, China has a problem.  Remember, Japan does not have capital controls, so while they don’t want the yen to collapse, they are perfectly comfortable with capital outflows in general.  China, on the other hand, is terrified of massive outflows if they were to even consider relaxing capital controls.  The fact is both companies and individuals work very hard to get their money out of the country.  This is one reason that gold is favored there by the population, and the reason that the government banned bitcoin as it was an open channel for funds to leave the country. 

This battle has just begun and seems likely to last for quite a while going forward.  The Chinese are caught between wanting to devalue the renminbi to compete more effectively and maintaining a stable exchange rate to demonstrate there are no fiscal or economic problems in the country.  Alas for Xi and the PBOC, never the twain shall meet.  I would look for a continuation of the recent market volatility here as they will use that uncertainty to discourage large position taking by speculators.  But, as I have maintained for a long time, I expect that USDCNY will trade to 7.50 and beyond as time progresses.

And that’s really it for today.  Ultimately, very little happened in markets overnight, certainly there were no changes in the recent data trajectory nor in any commentary from speakers (other than that mentioned above).  It is a holiday week and a key piece of data, PCE, is set to be released on a broad market holiday this Friday.  Do not look for large moves before then.

There is no US data due today but we do hear from Fed Governor Christopher Waller this afternoon so there is an opportunity for some market movement then.  But for now, consolidation seems the most likely outcome.

Good luck

Adf

Threw in the Towel

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There once was a banker named Powell
Who fought, prices, high with a growl
Then going got tough
So he said, “enough”
And basically, threw in the towel
 
His problem’s inflation’s alive
And truthfully, starting to thrive
The worry is he
Will soon say that three
Percent’s the rate for which he’ll strive

 

With several days to digest the latest FOMC meeting results, and more importantly, the Powell press conference, my take is the Chairman recognizes that to get to 2.0% is going to be extremely painful, too painful politically during this fraught election cycle.  And so, while he tried very hard to convince us all that the Fed was going to get to 2.0%, he stressed it will “take time”.  The subtext of that is, it’s not going to happen in the next several years, at least, and this poet’s view is it may not happen again for decades.  The key to recognizing this subtle shift is to understand that despite increased forecasts for both growth and inflation, the Fed remains hell-bent on cutting interest rates.  Even the neo-Keynesian views which the Fed follows would not prescribe rate cuts in the current economic situation.  But rate cuts are clearly on the table, at least for now.

This begs the question, why is he so determined to cut interest rates with the economy growing above trend?  At this stage, the explanation that makes the most sense to me is…too much debt that needs to be refinanced in the coming years.

Consider, current estimates for total debt around the world are on the order of $350 trillion.  That compares to global GDP of just under $100 trillion.  Many estimates indicate that the average maturity of that debt is about 5 years which means that something on the order of $70 trillion of debt needs to be refinanced each year.  Now, the US portion of that debt is estimated at about $100 trillion, of which ~$34.5 trillion is Treasury debt, and the rest is made up of corporate, mortgage, municipal and private debt.  Remember, too, that total US GDP is currently about $28 trillion as of the end of February (according to the FRED database from the St Louis Fed), so the ratio here is similar to the global ratio.  [Note, this does not include unfunded mandates like Social Security and Medicare, just loans and bonds outstanding.]

Here’s the problem, we have all heard about the fact that the US debt service has climbed above $1 trillion per annum and given the underlying principle is growing, that debt service is growing as well.  In addition, on the private side, there is a huge proportion of corporate debt that has become a serious problem for banks and investors, notably the loans made for commercial real estate, but personal and credit card debt as well.  The Fed cannot look at this situation and conclude that higher rates, or even higher for longer, is going to help all the debtors.  And if the debtors default…that is going to be an economic disaster of epic proportions.Add it up and the only logical answer is Powell is going to gaslight everyone with the idea that the Fed is going to remain vigilant regarding inflation.  And they will right up until the time when the pain becomes too great, or too imminent and they cut.  I think that we are seeing the first signals from markets this is going to be the case from both gold and bitcoin.  But if I am correct, and the Fed cuts despite still elevated inflation readings, look for the dollar to decline sharply, at least initially until other central banks cut as well, look for bonds to fall sharply and look for hard assets to rally.  As to stocks, I expect that initially it will be seen as a positive and juice the rally, but that over time, stocks will begin to lag hard assets.  Quite frankly, this looks like it is a 2024 event, so perhaps if that first cut really comes in June, the summer is going to be far more interesting than anybody at the Fed would like to see.

Kanda told us all
“We are always prepared” to
Prevent yen weakness
 
Meanwhile in Beijing
The central bank responded
Nothing to see here

 

“The current weakening of the yen is not in line with fundamentals and is clearly driven by speculation. We will take appropriate action against excessive fluctuations, without ruling out any options.”  So said Masato Kanda, the current Mr Yen at the MOF.  It seems possible, if not likely, the yen’s decline in the wake of the BOJ move last week came as a bit of a surprise.  This morning, the yen (+0.1%) has edged away from its lows from last week, but USDJPY remains above the 151 level and very close to the level when the MOF/BOJ intervened in October 2022.  Adding to the pressure was Friday’s very surprising sharp decline in the CNY, which many in the market took to mean the PBOC was comfortable with a weaker yuan. 

Economically, a weaker yuan seems to make sense, but the PBOC’s concern is that it could lead to increased capital outflows, something which they are desperate to prevent.  As such, last night, the CNY fixing was nearly 1200 points stronger than expected, with the dollar rate below 7.10, and we saw significant dollar selling by the large Chinese banks.  Apparently, Friday’s movement was a bit too much.  I suspect that these two currencies will continue to track each other at this point with both currently at levels which, in the past, have been demarcation lines for intervention.   

Here’s a conspiratorial thought, perhaps the Fed’s dovishness is a response to the weakness in the yen and Powell’s best effort to help the BOJ avoid having to intervene again.  The thing about intervention is it, by definition, represents a failure of monetary policy, at least in the market’s eyes.  And in the end, all G10 central banks are in constant communication.

Ok, let’s survey the markets overnight.  All the currency activity seemed to put a damper on equity investors as Asia saw weakness across the board with Japan (Nikkei -1.2%) falling, although still above 40K, and both Hong Kong and mainland shares in the red.  In Europe this morning, red is also the predominant color, although the declines are more muted, ranging from -0.1% (DAX) to -0.4% (CAC).  Finally, US futures, at this hour (7:00) are also slipping lower, down 0.25% on average.

In the bond market, Treasury yields are backing up 3bps this morning, bouncing off the critical 4.20% technical level again.  As well, in Europe, sovereign yields are rising between 2bps and 3bps across the board.  There has been no data of note, but we have heard a bit more from ECB bankers with a surprising comment from Austria’s Holtzmann that he saw no reason for rate cuts at all.  That is an outlier view!  And despite what is happening in the FX markets, JGB yields remain unchanged yet again.

Turning to commodities, oil (+0.3%) is edging higher this morning as, after a strong rally early in the month and a small correction, it appears that $80/bbl is a new floor for the price.  In the metals markets, after last week’s pressure lower, this morning both precious (gold +0.3%) and base (copper +0.1%) metals are edging higher.  There has not been much in the way of news driving things in this session.

Finally, the dollar is a touch softer this morning, but that is after a strong week last week.  We’ve already touched on the Asian currencies, and it is true the entire bloc, which had been under pressure, is a bit stronger this morning.  But we are seeing strength across the board with G10 currencies higher on the order of 0.2% and most EMG currencies firmer by between 0.1% and 0.2%.  So, while the movement is broad, it is not very deep.  I maintain this is all about US yields and the fact that despite Powell’s newfound dovishness, the Fed remains the tightest of the bunch.

On the data front, there is a lot of information to be released, but I suspect all eyes will be on Friday’s PCE data.  

TodayChicago Fed Nat’l Activity-0.9
 New Home Sales680K
TuesDurable Goods1.0%
 -ex Transport0.4%
 Case Shiller Home Prices6.8%
 Consumer Confidence106.7
ThursdayInitial Claims215K
 Continuing Claims1808K
 Q4 GDP3.2%
 Chicago PMI46.0
 Michigan Sentiment76.5
FridayPersonal Income0.4%
 Personal Spending0.4%
 PCE0.4% (2.4% Y/Y)
 Core PCE0.3% (2.8% Y/Y)
Source: tradingeconomics.com

In addition to that menu, Fed speakers will be about with five scheduled including Chairman Powell on Friday morning.  Remember, too, that Friday is a holiday, Good Friday, with market liquidity likely to be somewhat impaired as Europe will be skeleton staffed.  As well, it is month end, so my take is if Powell veers from the script, or perhaps reinforces the dovish theme, we could see an outsized move.  Just beware.

Recent activities by the BOJ and PBOC indicate that the market has found a sore spot for the central banks.  If the data this week doesn’t cooperate, meaning it remains stronger than forecast, it will be very interesting to hear what Chairman Powell has to say on Friday.  Cagily, he speaks after the PCE data, so he will be able to respond.  But especially if that data comes in hot, we are likely to see more volatile markets going forward.  However, today, it is hard to get too excited.

Good luck

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Just a Memory

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The doves are in flight
Alongside Dollar / Yen. NIRP
Just a memory

 

As many had been forecasting, notably the Nikkei News who as I mentioned yesterday have a perfect forecasting record, the BOJ ended NIRP by raising their overnight call rate to a range of 0.00% – 0.10%.  Thus ends one of the longest policy experiments in history.  I continue to believe when future historians look back at this time they will ask, what were they thinking?  At any rate, here is what they offered up to the world:

Summarizing the key changes, there is now a range for the short-term rate, like the Fed’s range, which is a new feature, although they maintain they will seek to keep the rate close to the ceiling.  As well, YCC is gone for good with no targets of any sort.  However, they committed to continuing to purchase JGBs in roughly the current amounts and retain the flexibility to increase that amount at any time as they see fit.  Regarding equities, REITs, and corporate bonds, they have officially declared those programs to be over, although in practice that has been the case for the past several months.

The market response was a classic ‘sell the news’.  The yen has fallen 0.9% and is firmly back above 150 this morning while JGB yields edged lower yet again, down 3bps and trading at 0.73%.  In the press conference, Ueda-san explained, “We judged that achieving the goal of sustainable 2% inflation has come within view. The large-scale monetary easing policy served its purpose.”  However, he was clear that this was not the beginning of a massive tightening of policy a la the Fed or other G10 central banks.  At the same time, PM Kishida said, “[The government] believes it is appropriate that the accommodative financial environment will be maintained from the perspective of taking a new step forward in light of the current situation and further ensuring positive economic developments.”

Summing everything up I would say that while this policy is marginally tighter than previous policy, there is no evidence that the BOJ is hawkish in any sense of the word.  They will still be buying JGBs regularly, ergo monetizing government debt, and they will respond ‘nimbly’ as they see fit if something changes.  My take on the impact is that the yen will be beholden to the Fed now and if the recent more hawkish narrative continues to evolve, look for USDJPY to continue to rise.  JGB yields are likely to drift higher alongside yields elsewhere is the world while the Nikkei has room to run.

It’s time now to turn to the Fed
With pundits now starting to dread
The idea rate cuts
Are now seeming nuts
An idea to which they were wed
 
So, while we know rates will remain
Unchanged, we’ve got dots on the brain
Are three cuts in store?
Or fewer called for?
That outcome is what’s most germane

 

Interestingly, given how much has been written by analysts and pundits, as well as this poet, already on the topic of the FOMC meeting that starts at 9:00 this morning and culminates in their statement at 2:00pm tomorrow, I feel like all that is necessary here is a recap.

As I type this morning, the Fed funds futures market is now pricing just 72bps of rate cuts for all of 2024 and 139bps of cuts through September of 2025.  While I had started discussing the concept of the dot plot pointing to a median of only two cuts this year several weeks ago, before the quiet period began and we started hearing more hawkish language from several FOMC members, that has become a mainstream discussion now.  In fact, I suspect that is the default setting for most analysts, although the dovish acolytes will still be arguing for at least three cuts.  Perhaps of more interest will be where the longer-term dots are printed.  

Remember, the dot plot shows each members forecasts for the next three years individually as well as the ‘Longer Run’.  In December, the Longer Run had a median of 2.50% and that has been the case for a very long time.  The implication is that the Fed’s broad view of their policy is that the infamous r*, or neutral interest rate, is 2.5% which consists of a 2% inflation target and a 0.5% real interest rate.  However, there has been a significant increase in the discussion amongst the analyst community about how that might change.  If we consider that the nature of the economy post-pandemic, has changed in two key areas, the size of the workforce has shrunk and the efforts at reshoring or nearshoring productive capacity has expanded greatly, both of those things would lead one to expect a higher level of inflation and correspondingly higher interest rates.  So, while a change in the Fed’s target rate is not likely anytime soon, a change in the Fed’s thinking of the appropriate r* is very possible.  

Do not be surprised to see that median rise to 2.75% as members increasingly accept that the current state no longer resembles the previous, pre-pandemic, state.  And that, I believe, is where there is more potential for market reaction than anywhere else.  A rise in the longer run median forecast implies that Treasury yields, and in fact, the entire yield curve, should be permanently higher.  While there has been some discussion of this idea, I would contend that is nowhere near the consensus view, and certainly not the current market narrative.  But that would imply a pretty sharp sell-off in bonds with a corresponding rise in yields.  Initially, I do not believe that would be a net positive for risk assets, although ultimately, I believe equity markets will absorb the news as companies adjust to the change.  But it could get messy during that adjustment.  This is where my eyes will be tomorrow.

Ok, let’s recap the overnight session.  After a solid day in the States yesterday to start the week, the Nikkei (+0.65%) managed to recapture the 40K level amid a weaker yen and the new understanding that policy is not going to ratchet much tighter.  China, on the other hand saw equity weakness in both Hong Kong (-1.25%) and on the mainland (-0.7%) as traders await the news tonight as to whether the PBOC is going to reduce the Loan Prime Rate again as they did last month.  Clearly, there is not much hope right now!  In Europe, markets are mostly a touch higher, but movement is very modest, +/-0.2% basically, as all eyes there are also on the FOMC tomorrow.  As to US futures, they are modestly weaker this morning at this hour (7:30), down -0.4% on average.

In the bond market, Treasury yields are unchanged this morning after having drifted another 2bps higher yesterday.  In Europe, it is a mixed picture with UK Gilt yields sliding 3bps, while the continent is seeing either no movement or a 1bp rise.  The only data of note was German ZEW sentiment which rose significantly, to 31.7, back to its highest level in two years.  We also continue to hear from ECB speakers that they are not yet ready to cut rates and remain data, not Fed, dependent!

Oil (+0.1%) continues to power higher on the back of softer supply data, increased success by Ukraine in attacking Russian refineries and a new situation, Iraq promising to abide by the OPEC+ production cuts.  WTI is firmly above the $80/bbl level and looks like it wants to try for a move toward $90/bbl, at least on a technical basis.  That cannot be helping central bank efforts at reducing inflation.  As to the metals markets, they are softer this morning with gold (-0.2%) still holding up quite well given the dollar’s rebound, and copper (-1.1%) also under pressure today, but also holding the bulk of its recent gains.

Finally, the dollar is in the ascendancy today as not only is the yen under pressure, but too, the Aussie dollar (-0.6%) and its little brother NZD (-0.5%) after the RBA left rates on hold last night, as universally anticipated, but adopted modestly more dovish language in their statement and Governor Bullock was unable to convince the market in her press conference that they could still raise rates if inflation reappeared.  But the dollar is higher vs. essentially all its counterparts, both G10 and EMG, with the CHF (0.0%) the best performer of the bunch.  There is no need to seek other idiosyncratic stories for this move.

As to the data today, Housing Starts (exp 1.425M) and Building Permits (1.495M) are all we’ve got.  Keep an eye on Canadian CPI (exp 3.1%) as that would represent an uptick from last month akin to what we are seeing elsewhere in the G10.  Inflation is not dead my friends.

And that’s really it for today.  It is hard to see the data having a substantive impact and that means that traders will spend the day adjusting their positions to prepare for tomorrow afternoon’s excitement.  I imagine we could see the dollar drift off a bit today given how far it’s come, but nothing of note seems likely.

Good luck

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Some Regrets

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Six central bank meetings this week
Will give us a new inside peak
At their dedication
To wipe out inflation
And just how much havoc they’ll wreak
 
Investors have made all their bets
And so far, today, risk assets
Show green on the screen
Ere any convene
Methinks, though, there’ll be some regrets

 

It is central bank week as we hear from more than half of the G10 between tomorrow and Thursday.  The BOJ kicks things off followed by the RBA, FOMC, Norgesbank, the SNB and finally the BOE.  A great deal of stock has been put into these meetings by both traders and investors as everyone is seeking clues for the future. Alas, looking for central banks, whose crystal balls are cloudier than most, to give solid clues is probably not the best idea.  But let’s take a quick look at each meeting and expectations:

BOJ – next to the Fed, this is the meeting that has gotten the most press both because Japan is the largest of the other economies, but also because there is much talk that they are going to raise their base rate for the first time in 17 years!  At this point, despite the most recent dovish comments from Ueda-san two weeks’ ago, the best indicator seems to be Nikkei News, which has had several articles (courtesy of Weston Nakamura’s Across the Spread substack) declaring that rate hike is coming.  Apparently, they have a perfect record in these forecasts, so it looks a done deal.

Arguably, the question is will they do anything else beyond moving from NIRP to ZIRP?  There are several analysts who believe they will adjust YCC as well, either eliminating it completely, or changing the terms to buy a fixed amount each period rather than responding to market conditions.  As well, they continue to buy equity ETFs and REITs so it is quite possible they end those programs.

The funny thing is so many believed that when the BOJ finally started their tightening cycle that would be the signal for selling JGBs and buying yen.  Well, if that has been your strategy going into the meeting, it has not worked out that well.  JGB yields (-3bps) have been consolidating around the 0.75% level virtually all year while the yen, which did have a little pop higher at the beginning of the month, is now back close to 150 again.  Regarding the yen, the driver in the currency continues to be US interest rates and the incremental adjustment by the BOJ is just not enough to move the needle absent a firm commitment by Ueda-san to hike regularly going forward.  And there is no evidence of that.  As to JGB yields, a slow grind higher seems possible, but a run up above 1.0% seems highly unlikely, especially given the economic cycle has just turned down with two consecutive quarters of negative real GDP activity.

RBA – there is no policy movement anticipated here for this meeting as both growth and inflation remain above targets but have not been relatively stable.  In fact, there is a minority looking for a cut, but that seems unlikely right now simply based on the inflation data.  Generically, I find it extremely difficult to believe that any central bank will be able to cut their rates with inflation running well above the target and, in most places, looking like it has found a bottom.  I realize there is a significant desire to cut rates by virtually all central bankers, but given the current economic situation, if they want to salvage whatever credibility they may have left, it is a hard case to make to cut right now.  

One other thing to remember is that Australia is more dependent on China than any other G10 nation and China last night published better than expected economic data with IP jumping to 7.0%, far better than expected and its fastest pace in two years.  If China is starting to pick up again, that will be a net benefit for Australia and put upward pressure on commodity prices and prices in general Down Under.  I think they remain on hold for a while yet.

FOMC – suffice to say no change in rate policy but we will discuss the other features tomorrow regarding the dot plot and potential guidance.

SNB – The Swiss may be the other central bank to move this time as inflation there has fallen to 1.2%, well below the ceiling of their 0% – 2% target range.  While the market consensus remains no change and the franc has softened nearly 4% vs. the euro so far this year, we cannot forget that it remains far stronger than its historic levels and the opportunity to weaken the currency a bit to help its export industries while inflation remains quiescent is something that may appeal to SNB President Jordan.  Keep an eye out here.

Norgesbank – No change here as inflation remains far too firm, ~5%, while oil’s recent rebound has helped the currency rebound.  I don’t think there is anything to be learned from this outcome.

BOE – Here, too, no change is expected and there is no press conference.  As such, the most interesting question will be the vote split.  Last time, the split was 1-6-2 for a cut, hold and hike respectively.  (Talk about not seeing things the same way!  How is it possible that two committee members can look at the same data and believe opposite conclusions?  Seems there is some ideology in play there.). At any rate, a change in the vote count will be a signal.  Recent data has shown that wages are still hot, but slowing down, while inflation is similarly hot but slowing.  The latest CPI data will be released on Wednesday so the BOE will have that to account for as well as everything else.  At this point, I’m in the no move camp with the same split of votes the outcome.

With that recap, let’s look at the overnight session briefly.  As mentioned above, equities are green everywhere with the Nikkei (+2.7%) leading the way around the world and pushing back close to the key 40K level.  But there was strength in every market in Asia.  Europe, too, is all green, albeit less impressively, with gains on the order of 0.25% while US futures are looking good at this hour (7:45) with the NASDAQ leading the way, up 1.0%.  (Here, many are counting on more amazing news from Nvidia as they have a weeklong conference starting today.)

After last week’s rush higher in yields on the strength of the hotter inflation prints from the US, this morning is seeing very little movement overall ahead of the central bank meetings this week.  Basically, every market is within 1bp of Friday’s closing levels, with a few higher and others lower.  One other thing I failed to mention was the PBOC will be revealing their 5-year Loan Prime Rate on Tuesday night, and while no change is forecast, it was last month when they cut this to help the property market that kicked off the idea more stimulus was coming.

Oil prices continue to perform well on the back of several different factors.  First, we have seen inventory draws much greater than expected in the US.  At the same time, Ukraine has damaged several Russian refineries thus reducing the supply of products and we still have OPEC+ maintaining their production restrictions.  Add to this China’s apparent rebounding growth supporting demand and that is a recipe for higher prices.  As to the metals markets, despite the dollar’s recent rebound, gold continues to hold its own and copper is still rising consistently.  In fact, the red metal is higher by 5% in the past week, a potential harbinger of better global growth.

Finally, the dollar is a touch softer this morning, but only a touch.  The biggest mover is ZAR (-0.6%) which is opposite the broader trend of very slight dollar weakness.  While South African equities have been drifting lower of late, today’s move feels more like an order in the market than a fundamental change.  Away from that, though, no currency of note has moved more than 0.2% on the day as traders await the onslaught of central bank news.

Speaking of news, we have other things beyond the central banks as follows:

TuesdayHousing Starts1.43M
 Building Permits1.50M
ThursdayInitial Claims216K
 Continuing Claims1815K
 Philly Fed-2.5
 Current Account-$209.5B
 Existing Home Sales3.95M
 Flash PMI Manufacturing51.7
 Flash PMI Services52.0
Source: tradingeconomics.com

In addition, starting Thursday, the first Fed speakers will be back on the tape to reinforce whatever message Chair Powell articulates on Wednesday.

From my vantage point, it appears that the BOJ’s rate hike has been accepted and priced in already, while the biggest surprise could be Switzerland.  However, the fate of the dollar lies in the hands of Powell, and that is an open question we will discuss tomorrow.  For today, don’t look for too much of anything in any market.

Good luck

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Offsides

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The PPI data revealed
Inflation has clearly not healed
Will Jay and the Fed,
When looking ahead
Now tell us one cut’s been repealed?

So, now here we are at the Ides
Of March, as opinion divides
Some still say a cut
Will come in June, but
Some others think, no that’s offsides

Once again, the inflation data did nothing to help the case for a rate cut anytime soon in the US.  This time the PPI data showed that prices rose far more than expected in February, 0.6% at the headline level and 0.3% at the core level.  The rises, when broken down, were across the spectrum of goods and services.  The point is despite what appears to be an overriding desire to cut rates by June, the data is not cooperating for Jay and his friends.  Will this be enough to dissuade them?  We still have 3 more months before the critical time and the market, despite itself, is now putting all its eggs in the June basket, having reduced the May probability to just 7%.  Clearly, it remains highly dependent on how the data progresses, and not just the inflation data, but also the employment data, but for now, I find it hard to make the case that the Fed should be cutting rates anytime soon.

Of course, there remains a large contingent of analysts, economists and pundits who believe that the Fed should cut next week, or May at the latest, as they are already doing grave damage to the economy.  You may recall the immediate response by the Nick Timiraos article to the hotter than expected CPI data.  Well, this morning, we have Bloomberg with an article that claims a solid majority of the forty-nine economists they surveyed continue to look for the first cut in June and three cuts this year.  It certainly appears there is a great effort to convince us that those rate cuts are coming, although as I have maintained, if the Fed is truly data dependent, the data is not pointing to cutting rates as the appropriate move at this time.  This argument discussion will continue for the foreseeable future, that is the only certainty.

Wages have blossomed
Will Ueda-san enjoy
The view, and end NIRP?

The preliminary indication from the Shunto wage negotiations shows that the average wage increases in Japan this year will be 5.28%, the largest rise in decades.  Apparently, Toyota accepted the union’s demands fully and didn’t even offer a counter!  When comparing this outcome to the most recent CPI readings in Japan, which showed a headline rate of 2.2% and a Core of 2.0%, it certainly appears that there could be some wage driven price increases upcoming.  As has been mentioned repeatedly, this was seen as a key issue for the BOJ ahead of their meeting this coming Monday night (Tuesday in Japan) in terms of being a sufficient catalyst for the BOJ to finally raise their overnight interest rate from its current -0.10%.

Now, while Ueda-san’s own words have seemed more circumspect, the growing consensus amongst the analyst community in Tokyo is that the move will happen next week with no need to wait until the April meeting.  But a funny thing has been ongoing in markets while this consensus has been building, the yen has been falling.  While there was essentially no movement overnight, since Monday, when the discussion began to heat up, the yen has declined more than 1.5% in value, almost as though the market is selling the news ahead of the news.  Perhaps of more interest is the fact that 2-year JGB yields have fallen this week by 2bps, which while not a great deal overall, represents a reversal of the gradual increase that has ostensibly been driven by the upcoming BOJ policy tightening.  I have a funny feeling that while NIRP may well turn into ZIRP next week, as the market looks ahead, there is much less tightening perceived in the future.  I have maintained that a move beyond +0.2% would be highly unlikely this year, and possibly next year.  As such, when considering the FX rate, USDJPY remains far more beholden to the Fed and US interest rates than to whatever the BOJ does at the margins.  Let’s face it, if the BOJ hikes rates to 0.2% by December, but Fed funds remains at 5.5%, it is still a very difficult case to buy yen.

And those have been the key stories driving things since I last wrote.  A look at the overnight session shows that Asian equity markets were mixed with the Nikkei sliding a bit, while the Hang Seng fell sharply (-1.4%), perhaps on fears of increased tech stress between China and the US.  However, the CSI 300 managed a small gain despite weak Loan data and the rest of the bloc saw a lot of red on the screen, following the US session losses yesterday.  In Europe this morning, it is the opposite reaction with green across the screen led by Spain (+1.1%) but modest strength everywhere as inflation data from Italy and France seemed to show more moderation.  Meanwhile, at this hour (7:30), US futures are edging higher by 0.3%, essentially unwinding yesterday’s losses.

In the bond market, yesterday’s PPI data saw bonds sell off aggressively in the US with yields across the entire curve rising 10bps.  This morning, Treasury yields have backed off 2bps, but remain at 4.27%, above what is perceived to be a trading pivot level of 4.20%.   European yields also rose yesterday, albeit not quite as aggressively as US yields, and this morning they are essentially unchanged.

In the commodity markets, oil (-0.5%) is giving back a bit of its recent gains but WTI remains above $80/bbl and Brent crude above $85/bbl.  Apparently, the IEA has revised its global oil demand figures higher by more than 1 million bbl/day and despite the fact that there is ample spare capacity in OPEC, the market is tightening right now.  Gold, which sold off yesterday on the rising rates / higher dollar situation, is rebounding a bit this morning, +0.3%.  Interestingly, copper (+1.3%) did not sell off on the interest rate or dollar story and is now back at its highest levels in nearly a year and firmly above $4.00/Lb.  Something is going on here which seems to be a positive hint for growth.

Finally, the dollar, which rocked yesterday, rising almost 0.65% across the board with some significant gains vs. specific currencies, is essentially unchanged overall this morning, holding onto those gains.  In fact, there are a few currencies that are still feeling pressure like KRW (-0.5%) and NZD (-0.5%) but there has been a modest bounce in ZAR (+0.4%) on the back of the strong metals complex.  Net, the DXY is unchanged on the day, back above the 103 level.

We finish the week with some more secondary data as follows:  Empire State Manufacturing (exp -7.0), IP (0.0%), Capacity Utilization (78.5%) and Michigan Sentiment (76.9).  Now, we have seen secondary data have an impact recently, and given the quiet period prevents any Fedspeak, market participants are looking for any clues they can find.  It will be very interesting to see if today’s data indicates that the economy is continuing at its above trend growth rate or implies things are fading.  My observation is manufacturing continues to struggle overall, and sentiment on the economy isn’t great, so I would look for weakness rather than strength.  In that case, perhaps bonds rally further, and the dollar unwinds some of yesterday’s gains.

Good luck and good weekend
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Not Fading Away

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The first thing to mention today
Inflation’s not fading away
Instead, CPI
Was one again high
Though risk assets still made some hay

This raises the question again
Of if the Fed will, not of when,
Begin cutting rates
And foster debates
If Powell’s in charge…or Yel-len

Well, the CPI data was hotter than forecast with both headline and core printing at 0.4% and the Y/Y numbers both coming a tick higher than forecast at 3.2% and 3.8% respectively.  While serious analysts are revisiting their thoughts on whether the Fed is anywhere near a position to consider cutting rates, as I predicted yesterday, the Fed Whisperer, Nick Timiraos of the WSJ, was out before noon (at 11:25am to be precise) with his article explaining that the hot CPI print didn’t matter, and the Fed would still be cutting rates come June.

And maybe that is all we need to know.  As the working assumption is he is speaking directly to Chairman Powell, and that was the message he was instructed to convey, then maybe they will be cutting rates then.  But to take the doves’ favorite metric from December, the 3-month running average on an annualized basis, it is now running at 4.3%.  That feels a touch high for the Fed to consider cutting, but in fairness, we are still three months away from that June meeting so many things could change in the interim.

As it happens, the equity markets didn’t wait for the WSJ article to decide that rate cuts are still coming on schedule, as the futures rallied instantly, and stocks were higher all day.  At this point, it is very difficult to see what will derail the current rally as clearly there is no fear of the current rate structure remaining in place.  While trees don’t grow to the sky, apparently, they can get pretty tall!  It is a fool’s errand to try to determine the top ahead of time, and I believe the market, and the economy as a whole, needs to find a non-speculative clearing price (i.e. retreat sharply), but it doesn’t seem like that is a near-term scenario.  In other words, I guess it’s ‘party on!’

The first hints of Spring
Have seen wages in full bloom
Is ZIRP on its way?

Turning to Japan and the Spring wage negotiations there, headlines out of Tokyo this morning show that wages are going to be substantially higher in 2024 than they were in 2023.  Key results that have been announced include Nippon Steel, Nissan, Panasonic, and Toyota, which said its wages would be rising the most in 25 years.  These wage hikes are seen as a precondition for the BOJ to exit NIRP, although it is not clear if it is a sufficient condition.  While the politicians are crowing as higher wages are obviously welcome to the people there, the market is hardly behaving as though these numbers are going to do the job.  For instance, the yen (-0.2%) is a touch softer this morning, 10-year JGB yields didn’t budge while 2-year JGB’s saw yields tick down a bit, and Japanese stocks barely edged lower, down about -0.3%.  My point is the market behavior is not necessarily consistent with the view that Japanese rates are about to move.   The totality of the wage negotiations will be published on Friday, so perhaps that will offer more clarity.

However, at least with respect to USDJPY, given what we just learned about US inflation and the prospects for US rate cuts (which are diminishing in my view), that 10bp rate hike by the BOJ does not feel like it will be sufficient to cause a major adjustment.  We will need to hear Ueda-san explain that any move is the beginning of a new cycle, and rates are heading higher, full stop.  And I don’t see that happening.

And those are really the key stories for the morning, risk is still on, and Japan appears to be edging closer to exiting their negative rate policy.  So, let’s see how markets have behaved overall.

Despite the US rally, there were many more laggards than gainers in the Asia session with China, Hong Kong and India all seeing equity markets under pressure.  As well, the gainers showed only very modest gains (Australia +0.2%, South Korea +0.3%) so generally it was a negative session.  However, in Europe this morning, the screens are green with a mix of very marginal gains (UK, Germany) and strong performances (CAC +0.5%, IBEX +1.5%) with the Spanish and Italian markets making new multi-year highs.  As to US futures, at this hour (7:45) they are very slightly firmer, 0.15%.

The bond market did respond as one would expect on the back of the CPI data, with Treasury yields rising 6bps yesterday.  As well, there was a 10-year Auction which was a bit sloppy with a 0.9bp tail and settlement price of 4.166%.  European yields rose in the wake of Treasuries yesterday but are essentially unchanged this morning, as are Treasury yields.  As long as the inflation story remains on the hot side, it is difficult to see yields declining from these levels.

In the commodity markets, the one thing that really reacted to the CPI data was gold, which fell 1.1% yesterday, although given the recent remarkable run higher, it can be no surprise there was some profit-taking.  And this morning, it has bounced 0.25% so far.  As to oil (+1.6%) it is rallying this morning but that is simply offsetting yesterday’s declines and it remains in the middle of that $75-$80 range.  A quick word about copper (+2.0%) which has traded above $4.00/Lb for the first time in almost a year and looks to be making a strong move higher.  Whether that is on growing economic optimism in China or elsewhere is not clear, but that is the price action.

Finally, the dollar is surprisingly little changed overall.  In the immediate wake of the CPI print yesterday, it did rally nicely, but it has since ceded those gains and is largely unchanged from then.  In fact, net from yesterday’s closing levels, it is softer by about 0.2% against almost all its major counterpart currencies.  I am quite surprised at this price action as I would have expected the dollar to benefit, but not much as of yet.

The only data released today is the EIA oil and product inventories for the week, something which will impact the oil market but not much else.  When looking at the totality of the data, there is no indication to me that inflation is going to be declining soon.  It is very hard for me to look at what is happening and conclude that the Fed is compelled to cut interest rates to prevent a problem.  Until we see a more substantial decline in economic activity, I have to believe that they will stand pat, regardless of the politics.  If they don’t, I would expect the dollar will fall sharply as inflation reignites in the US.  And that doesn’t seem like the conditions they want if they truly want to prevent a change in the White House come November.

For today, and likely through the FOMC meeting in one week’s time, I suspect risk assets will perform well.  But it also feels like more risks are building that can have a negative result.

Good luck
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Whispers in the Wind

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Whispers in the wind
Imply rates may be rising
Sooner than we thought

In the wake of Friday’s noncommittal payroll data, which I will discuss below, the topic garnering the most interest this morning is the BOJ and whether they will be adjusting monetary policy one week from today rather than in April.  There have been several articles published on the topic which is usually a sign that the BOJ is floating trial balloons.  At this point, the market is pricing about a 2/3 probability of a move next week based on current Japanese OIS swap data.  That is a significant increase compared to the pricing just two weeks ago.  In addition, we have seen a number of analysts from the major Japanese banks move their call to March from April previously

You may recall that a key discussion point on this subject has been the Spring wage negotiations and whether the new round will embed higher wages into the economy.  Last week I mentioned that Rengo, one of the labor associations, was seeking a 5.85% increase, which would be the largest such move in more than 30 years.  As it happens, the results will be released this coming Friday, so if the outcome is high enough, arguably Ueda-san and the BOJ would have enough information for a move.

One other interesting tidbit was the fact that last night, the BOJ remained out of the equity market despite the fact that the TOPIX (Japan’s other major index) fell more than 2% in the morning session.  Ever since Covid and the market panics then, on every occasion when the morning session saw the index decline that much, the BOJ was a buyer in the afternoon.  While this was not an official policy per se, it was the reality.  The upshot is that the BOJ is the largest holder of Japanese stocks in the world, owning something on the order of 8% of the market.  The fact that despite that decline, they changed their response could well be a tell that other changes are coming.

In the end, I would argue it matters less whether the first adjustment happens in March or April and more about just how far they are going to adjust policy.  I remain unconvinced that this is the beginning of a true normalization of monetary policy, or perhaps more accurately, that the BOJ is going to raise rates to bring them in line with the rest of the G10.  Rather, my sense is we will get to 0.0% at the first move, and that over the ensuing years, a move to even 0.3% in the overnight market will be difficult to achieve absent a major explosion of economic growth alongside rapidly rising inflation.  And frankly, I just don’t see that happening at all.

Keep this in mind, 2-year JGB yields, which have been edging higher steadily for the past two months, are still at only 0.2%.  That is not a sign that the market is expecting a dramatic increase in Japanese policy rates anytime soon.  Since the beginning of the month, the yen has rallied about 2.65% on this story.  Can it go much further?  Certainly, there is room for further strength given its performance over the past several years.  However, I would argue that will rely on the Fed cutting rates, and doing so aggressively, to truly narrow the yield differential.  And right now, I just don’t see that happening.

On Friday, the payroll report
In some ways, came up rather short
While headlines were strong
Revisions felt wrong
For rate hikes, more folks, to exhort

By now, you are aware that despite a much stronger than forecast headline NFP print of 275K, (exp 200K), the revisions to the prior two months were -167K, which took the luster off the headline and reverted the revision story back to negative from the surprising positive result last month.  In addition, the Unemployment Rate rose 2 ticks to 3.9% and Average Hourly Earnings only rose 0.1% on the month.  The market response here was interesting, to say the least.  While Treasury yields continued their recent slide, perhaps anticipating Fed action sooner rather than later, the equity market sold off as well, although that easily could have been simple profit taking after a huge run higher.  Of more interest is the fact that NY Fed President Williams, the last Fed speaker before the quiet period started, sounded just a touch more dovish than a number of the speakers we heard last week.

At this point, market participants are focused on a couple of things I think, with the next big thing tomorrow’s CPI print.  Thursday brings Retail Sales and then, of course, the FOMC statement and Powell presser is the following Wednesday.  June remains the odds-on favorite for the first Fed cut but that is subject to change based on tomorrow’s data.  If CPI indicates that the January number was not an aberration, and that inflation is actually stickier than many (want to) believe, I would not be surprised to see the median dot plot expectations rise to only 2 rate cuts in 2024. That is substantially fewer than the current estimate of 4+.  That will have a significant impact on markets if that is the case.  Alternatively, a very soft number tomorrow could easily bring May back onto the table for the first rate cut and may alter the dot plot in the other direction.  We shall see,

As the market awaits all the upcoming news, here’s what happened overnight.  Along with the slide in Japanese shares, most Asian markets sold off, all in the wake of Friday’s weak US equity performance.  The one exception was China, where both the Hang Seng (+1.4%) and CSI 300 (+1.25%) rallied at the end of the Chinese National People’s Congress as hopes for more stimulus remain high. In Europe, bourses are all in the red, although the declines have not been excessive, just -0.25% to -0.5%.  And at this hour (7:45), US futures are pointing slightly lower, -0.2% across the board.

In the bond market, yields are generally little changed in both treasury and European sovereign markets with all eyes on tomorrow’s data.  Last week’s ECB meeting didn’t really add too much to the conversation although it appears that expectations are cementing around a June rate cut, regardless of the Fed’s actions.  Overnight, JGB yields edged another 2bp higher, which given the increased scrutiny on a March rate hike is not that surprising.

In the commodity markets, oil (-0.5%) is sliding a bit and generally remaining right in the middle of its $75-$80 trading range for the past month.  Meanwhile, gold, while little changed this morning, is holding onto its recent gains and showing no signs of slipping back soon.  As to the base metals, copper (+0.3%) is edging higher while aluminum is unchanged on the day.  These metals markets are looking toward China to get a sense of the chances for fresh new demand.

It can be no surprise that the dollar is largely unchanged this morning with very modest gains and losses across both the G10 and EMG blocs.  In the G10, JPY (+0.3%) is the biggest mover with the rest of the bloc +/-0.1% on the day and giving no signal.  In the EMG bloc, KRW (+0.5%) is the largest mover, although it is not clear what would have driven the move as equities there fell pretty sharply overnight.  Also, CNY (+0.15%) is rallying after CPI data released over the weekend showed a monthly rise of 1.0% and that brought the Y/Y number back into positive territory at +0.7%.

On the data front, there is some other interesting data aside from CPI as follows:

TuesdayCPI0.3% (3.1% Y/Y)
 -ex food & energy0.4% (3.7% Y/Y)
ThursdayInitial Claims218K
 Continuing Claims1911K
 Retail Sales0.7%
 -ex autos0.4%
 PPI0.3% (1.2% Y/Y)
 -ex food & energy0.2% (2.0% Y/Y)
 Business Inventories0.2%
FridayEmpire State Manufacturing-7.5
 IP0.0%
 Capacity Utilization78.4%
 Michigan Sentiment76.6

Source tradingeconomics.com

However, while there is a bunch of stuff coming out, I suspect that after CPI, it will all be anticlimactic.  As we are in the Fed quiet period, there will be no commentary, although in the wake of the CPI report, look for anything in the WSJ from the current Fed whisperer, Nick Timiraos.  This is especially so if the numbers are far from expectations.

In the end, today ought to be very quiet overall, with all eyes on tomorrow.  From there we shall see.

Good luck

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No Confidence

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So far, we’ve no confidence that
Inflation is down on the mat
Thus, rates won’t be sinking
Til prices are shrinking
Said Jay in his Wednesday House chat

But also, it seemed clear to all
No rate hikes were likely on call
With that set aside
He then did confide
That Basel III cap rules may fall

It can be no surprise that Chairman Powell’s testimony yesterday explained that the Fed is still not yet confident that inflation is going to achieve their 2% target on a sustainable basis.  While he was clear that most of them thought that would eventually be the case, the proof is not nearly conclusive at this stage.  Of course, this is exactly what he told us last month and essentially what every Fed speaker since has repeated.  He did appear to rule out any further rate hikes at this time, but quite frankly, if inflation readings start to head higher, you cannot take those off the table.  At the very least, the current Fed funds futures pricing for cuts (3% in March, 20% for May and 87% for June show the market has really decided the first cut is a summer event.  Remember, though, between now and the June 12 meeting, we will see three more CPI and PCE reports as well as three more NFP reports.  It would not be impossible for these ideas to change between now and then.

One other thing to note is we have heard several FOMC members now discuss needing only two rate cuts this year.  Do not be surprised if the March dot plot has that as the median forecast and that would be a significant change to market perceptions.

The essence of the questions by the Congressmen and women revolved around two things; the fact that high rates were hurting people trying to buy houses and how proposed capital increases due to the Basel III regulations were going to kill the banking community.  While Powell empathized with the housing issue, he reminded them all that inflation hurts everyone.  But the big surprise was Jay indicated that he may overrule Regulation vice-chair Barr and look to reduce some of those capital requirements.  Not surprisingly, the GSIB bank stocks rallied on the news!

And in fact, so did the overall stock market.  The combination of what seemed to be a promise to avoid further rate hikes and relaxing capital requirements was just what the doctor ordered to alleviate Tuesday’s pain.

Is the table set
For a March policy change?
A new wind’s blowing

The yen (+1.1%) is on the move this morning after a combination of news that Rengo, the Japanese Trade Union Confederation, is asking for wage increases of 5.8% this year, the highest request in 30 years.  While they will likely not get the full amount, certainly wages are set to rise more substantially than in a long time there.  This is music to PM Kishida-san’s ears as he wants to see more spending, and apparently, this is AOK with Ueda-san who now believes that their 2% price target has a greater chance of being sustainable.  Alongside the yen’s rally, the OIS market has bumped up the probability of a March rate hike to above 50% and several analysts in Tokyo are making that their new call.

Thinking about the situation here, the BOJ meets a week from Monday, 2 days prior to the FOMC.  It strikes me that we have the opportunity for some real volatility as if Ueda-san does raise their base rate to 0.00%, I expect the market will be looking at this being the beginning of a series of hikes and start to move the entire Japanese interest rate curve higher.  That will be bullish for the yen.  But…if the Fed’s dot plot comes in at only 2 cuts, or possibly even 1 cut this year, that is also quite hawkish for the US rate situation, will likely see the yield curve back up and should support the dollar.  The reason we hedge is to prevent movement of this nature from having too great an impact on results.  Keep that in mind.

Interestingly, I believe those two stories are far more important to markets than the ECB meeting this morning.  There is virtually no chance of any policy change, so the real question is how the statement addresses the situation for the first rate cut and its potential timing.  The commentary that we have heard to date, at least to my ears, has been a split between April and June, with a slight nod toward the latter.  One key clue will be the updated economic and inflation forecasts with some analysts looking for lower outcomes there.  If that is the case, I expect that April will get a lot more press.

But ahead of the meeting, I would argue that the narrative is shifting as follows:  the Fed has indicated that the peak has been reached and it’s simply a matter of time before they start to cut rates while the ECB has been trying to hold out their hawkish bona fides.  As such, it should be no surprise that the dollar is under some pressure and the euro has rebounded to 1.09 for the first time since mid-January.  However, there is still a lot of new information on the horizon, specifically tomorrow’s NFP and next week’s CPI which can quickly alter the Fed narrative and with it, the dollar narrative.  Be careful.

Ok, let’s look at the overnight session where, not surprisingly, the Nikkei (-1.2%) fell on the back of the hawkish sentiment and stronger yen.  It has fallen back below the 40K level, so it remains to be seen if this is temporary or if, after 40 years, the new top was just barely above the old one.  Chinese shares were also weak despite a very strong Trade Balance, although the rest of Asia followed the US higher.  In Europe this morning, Spain’s IBEX (+0.6%) is once again leading the way higher although the major markets, FTSE 100, DAX and CAC are all little changed on the day.  Finally, at this hour (7:15), US futures are edging higher by about 0.25%.

In the bond market, yesterday saw Treasury yields fall 4bps and they are down a further 1bp this morning.  Market participants are going all-in on the idea that Fed funds are going to get cut soon.  I am not comfortable with that viewpoint at all.  As to European sovereigns, they too, have seen yields slide a bit, down 2bps-3bps this morning.  All this is in contrast to JGB yields, which backed up 2bps overnight on the new hawkish take.

In the commodity markets, oil (-0.75%) is softer this morning, unwinding yesterday’s modest rally.  For now, there has been much less focus on energy than on the interest rate story although I suspect that will change again going forward.  Gold (+0.4%) continues to be the absolute star of the commodity space, rallying for the 7th consecutive session and extending its all-time high levels.  My take is there is much more room on the upside here as it is not a widely held trade and if it continues, the momentum guys are going to want to get in.  But we are also seeing strength in the base metals with both copper (+1.3%) and aluminum (+0.9%) having strong sessions.  As long as the narrative is looking for US rate cuts, these metals have further to climb.

Finally, the dollar is under pressure everywhere, not just in Japan.  Both Aussie (+0.65%) and Kiwi (+0.5%) are strong on the back of commodity strength, and we are even seeing NOK (+0.2%) rise despite oil’s decline.  If you needed proof this is a broad dollar selling environment, that’s it.  Interestingly, in the EMG bloc, while almost every currency is firmer, the movement has been quite small, with nothing more than +0.2%.  So, this seems to be a comment on the ostensibly dovish Powell testimony that has bolstered the US stock market.

On the data front today, after the ECB leaves rates on hold at 4.5% we see Initial (exp 215K) and Continuing (1889K) Claims leading the way as they do every Thursday.  We also see the Trade Balance (-$63.5B), Nonfarm Productivity (3.1%) and Unit Labor Costs (0.6%) at 8:30.  Powell starts up again in front of the Senate at 10:00 and then this afternoon, Consumer Credit ($9.25B) is released.  In addition to Powell, we hear from Loretta Mester of the Cleveland Fed.  It will be quite interesting if she hints at only two cuts this year, following Goolsbee and Barkin.  I have a feeling that is the current direction and that is not in the pricing right now.

For now, the dollar remains under pressure, so unless Powell is perceived to be more hawkish this morning, I suspect the dollar can slide a bit more before it’s all over.

Good luck
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Thought-Provoking

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My sight is clearing
I now see the price target
Closer than you think

“With monetary easing continuing, I believe we have reached a point where attainment of the 2% price stability target is finally in sight, despite uncertainty over the Japanese economy.  It is necessary to consider shifting gears from extremely powerful monetary easing … and how we should respond nimbly and flexibly toward an exit.”  So said BOJ member Hajime Takata last night at a meeting with business leaders in western Japan.  These are the strongest words we have heard, I would argue, and the market did respond with the yen strengthening (+0.5%) and now right on the 150.00 level, while 2yr JGB yields rose another basis point, up to 0.18%, and its highest level since 2011.  I always find the BOJ wording to be odd as they try to be nimble and flexible in something that doesn’t appear to offer opportunities to behave in that manner.

Regardless, this has encouraged a more hawkish take on Japan with the probability of their first rate hike occurring in March rising to 26% from a previous level in single digits.  But despite these comments, we must remember this is from a single BOJ speaker.  Unless and until we hear this tone from multiple BOJ board members, I maintain that while an April move to 0.00% is possible, movement much beyond that seems very premature.  After all, last night saw IP in Japan fall -7.5% in January which takes the Y/Y number to -1.5%.  Recall, too, that Japan is in the midst of a technical recession.  It just doesn’t seem like tightening monetary policy is the prescription for what ails that nation.

However, the Japanese story is for the future as we have already seen the initial knee-jerk reaction.  And that means that all eyes are going to be on the US data at 8:30.

So, what if Core PCE’s smoking?
It seems that might be thought-provoking
If that is the case
We’d all best embrace
The idea the bulls will start choking

The flipside’s a cool PCE
Which winds up at zero point three
If that’s the result
The stock-buying cult
Will take every offer they see

As the market awaits this morning’s PCE data, a quick recap of yesterday seems in order.  I think you can argue that the data indicated economic activity remains at quite a high pace.  While the second look at Q4 GDP was revised down a tick, it is still at 3.2%.  The sub-indices showed that prices rose a bit more than expected and that Real Consumer spending rose a better than expected 3.0%.  The other data point was the Goods Trade Balance which showed a larger than expected deficit, a sign that imports are growing faster than exports.  This is typically a growth scenario, not a recessionary one, so nothing about the data hinted at a slowdown in things.

As well, we heard from three different Fed speakers and to a (wo)man they all explained that they remain data dependent and that the total economic situation was what they were following, not simply the inflation rate.  My point is that there is no indication that they are anywhere near ready to cut rates.

Turning to this morning’s release, expectations are as follows: Headline (0.3%, 2.4% Y/Y) and Core (0.4%, 2.8% Y/Y).  As well, we do see some other important data with Personal Income (exp 0.4%), Personal Spending (0.2%), Initial Claims (210K), Continuing Claims (1874K) and Chicago PMI (48.0).  But really, it is all about PCE.

My take is things are quite binary for a miss from expectations.  A hot print, 0.5% or more, will result in a sharp risk-off session as market participants will reduce the probability of future rate cuts.  This should see both stocks and bonds sell off, while the dollar rallies.  In contrast, a 0.3% or lower print for Core PCE will see the opposite outcome with a massive equity rally along with a huge bond rally, especially the front of the curve, and I suspect that futures markets will juice the odds of a May cut again (March is off the table no matter what.)

Of course, the last choice is a release right at the consensus view.  In that case, both sides of this argument will continue to argue their points, but my take is, based on yesterday’s price action, that equities may have a bit further to correct on the downside absent some other news that encourages the idea of stronger real growth, or an increased probability of a Fed cut.  One other thing to remember is we get four more Fed speeches today and this evening, so regardless of the outcome, there will be a lot of opportunity to reinforce their views.

Heading into the data release, a quick look at the overnight session shows us that the Asian market was quite mixed with Japan very little changed, a small decline in Hong Kong, but mainland Chinese shares rose sharply (CS! 300 +1.9%) as traders are looking for the government to announce a new fiscal stimulus package after they meet next week and roll out their growth targets for the coming year.  it strikes me there is ample opportunity for disappointment here given how unwilling Xi has been to do just that.  The European picture is equally mixed with some gainers (UK and Germany) and some laggards (France and Spain) although not a huge amount of movement in either direction.  There was a lot of Eurozone data released this morning with weak German Retail Sales, slowing growth in Scandinavia, and inflation throughout the continent coming in just a touch hotter than forecasts, although still trending lower.  And, after a lackluster day yesterday, US futures are softer by -0.2% at this hour (7:00).

In the bond market, yields are rising this morning with Treasuries (+4bps) back above 4.30% and all European sovereigns rising by at least that much.  In fact, UK Gilts (+7bps) are leading the way after some slightly better than expected housing data.  10-year JGB yields also edged up by 1bp after the Takata comments, but remain far below the 1.00% level that is still seen as a YCC cap.

Oil prices are a touch softer this morning, -0.4%, after a modest gain yesterday.  The big story remains the rumors of OPEC+ continuing to restrict their production.  In the metals markets, precious metals are under modest pressure this morning, but base metals are holding their own, with aluminum leading the way higher by 0.6%.

Finally, the dollar, away from the yen, has really done very little overall.  Looking at my screen, the only currency that has moved more than 0.2% in either direction is NZD (-0.25%) which seems to be continuing yesterday’s price action after the less hawkish RBNZ meeting outcome.  Otherwise, nada.

As we await the PCE data, and the Fedspeak later in the day, the one thing to remember is that if we see a soft number and the equity market cannot hold its early gains, that would be quite a negative signal for risk assets in the near term.  There are many who believe we are in a bubble market, especially the tech sector, and certainly there are many frothy valuations there.  It would not be hard to imagine a correction happening just because.  But if a market falls on ostensibly bullish news, that correction could have a little more oomph than most would like to see.  I’m not saying this is my expectation, just that it is something to keep in mind.  As to the dollar, that remains beholden to the monetary policy choices and so far, they haven’t changed.

Good luck
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Not Even a Token

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Like spring rains falling
So too, Japanese prices
Continue to slide

 

Once upon a time there was a tiny thought about Japan tightening monetary policy.  This thought, which had been seen lurking in the shadows of markets for the past thirty years, was largely ignored by all the ‘right’ people.  The illiterati economic gliteratti were all quite convinced that this would never happen as Japan was in a death spiral of rising debt and a shrinking population.  According to all the classical economic texts, interest rates could never rise again.

Then, one day there came along a virus that disrupted the world.  All the ‘important’ people in all the major nations determined that shutting down all economic activity while simultaneously printing trillions upon trillions of dollars, euros, pounds, and yen, and more importantly, giving that money to the people, was the best thing to do.  Not that surprisingly, with all that extra money chasing after fewer available goods and services, prices rose sharply almost everywhere.  Even in Japan, a nation that had suffered a generation-long deflationary bout, where companies literally apologized if they determined that a price rise was in order to cover rising expenses, prices started to go up more broadly.

This excited the policymakers in Japan as it was something they had been trying to achieve for the past 30 years.  It also excited the trading community as they became convinced that Japanese interest rates were set to explode higher.  And for a little while, Japanese inflation rates rose, surpassing the 2.0% target that had only been briefly brushed three times during that generation, the most recent being in the wake of the Covid actions.  Analysts were convinced that the new BOJ Governor, Kazuo Ueda, was getting set to raise the policy rate from its current level of -0.10%, its home for the past 8 years.  Traders positioned for JGB yields to rise and for the yen to strengthen against its currency counterparts.

Alas, so far this tale has not had that happy ending.  Instead, last night CPI in Japan printed at 2.2% headline, 2.0% core with both measures clearly trending lower for the past 18 months at least.  To be clear, in the very short term, these prints were marginally higher than market forecasts, which has resulted in a touch of strength in the yen (+0.3%), and a 1bp rise in 10-year JGB yields.  But bigger picture, this has further called into question the idea that Japanese inflation is going to remain stable at the BOJ’s 2% target.  In this situation, the idea the BOJ will tighten policy seems increasingly remote.  As such, all those delusions of tight money have been, once again, laid to rest.  The moral of this story is that; in Japan, the only money is easy money!

The newest Fed member has spoken
And Schmid said that things just ain’t broken
Thus, patience is needed
And so, he conceded
No rate cuts, not even a token
 
The Kansas City Fed’s new president, Jeffrey Schmid, made his first public comments yesterday but it could well have been his predecessor, uber-hawk Esther George, given that he hewed to the party line as follows:, “With inflation running above target, labor markets tight, and demand showing considerable momentum, my own view is that there is no need to preemptively adjust the stance of policy.  I believe that the best course of action is to be patient, continue to watch how the economy responds to the policy tightening that has occurred, and wait for convincing evidence that the inflation fight has been won.”  That’s pretty clear, and while he is not a current voter, it is simply another voice telling us that the Fed is not anxious to alter policy at all.  Even the market gets it now, with the March meeting down to a 0.5% probability of a cut, the May meeting down to a 16.3% probability and even the June meeting down to a 60% probability.  For all of 2024, the market is now pricing in just 3 ½ cuts, pretty darn close to the last dot plot.  Kudos to the Fed for getting their message across.
 
However, beyond those two stories, there is precious little to discuss this morning.  Data, beyond the Japanese CPI, has been sparse and the ECB speakers have also stayed true to their recent mantra of no reason to cut rates yet.  As such, it is not that surprising that markets remain mired in tight ranges overall.
 
Looking first at equity markets, after a lackluster session in the US yesterday, Japanese share prices were essentially unchanged although we did see some strength in Chinese shares with both the Hang Seng (+0.9%) and CSI 300 (+1.2%) rallying nicely on the back of increasing hopes for more Chinese stimulus coming in March at the annual plenary sessions.  As to the rest of Asia, activity was mixed with some countries seeing gains (India, Australia) and some losses (South Korea and Taiwan).  European bourses are also mixed with some gainers (Germany) and losers (Spain) while others have gone nowhere at all.  Finally, at this hour (6:45), US futures are ever so slightly firmer, just 0.1%.
 
In the bond market, both Treasuries and European sovereigns are seeing a bit of buying with yields lower by 1bp across the board.  Yesterday’s US 5-year auction was also somewhat unloved with a 0.8bp tail, quite large for that maturity.  It does appear that there is increasing pressure on the Treasury market as the pace of issuance picks up.  Over time, I believe this is going to matter a lot more to markets than it has thus far.
 
Oil prices, which rallied most of yesterday, are giving back some of those gains, down -0.4% this morning.  The rally was ostensibly based on further Red Sea concerns, but that really doesn’t make much sense given there were no new events there.  More likely, there was some short covering and analysts were looking for a story to tell.  Metals markets, though are in better shape this morning with gains in both precious (gold +0.3%) and base (copper +0.2%, aluminum +1.0%), largely on the back of the dollar’s modest weakness.
 
Which brings us to the dollar and the most confusing part of the session.  While it is true Treasury yields are lower by 1bp, that does not seem enough to weigh on the dollar, especially given the universal nature of yield declines.  The US curve actually inverted further, with the 2yr-10yr spread back to 42bps (it had been hanging around 25bps-30bps for several months), so that could be weighing on the greenback.  But whatever the cause, we are seeing pretty uniform weakness, although other than ZAR (+0.75%) which has clearly been helped by the metals rally, the rest of the movement is pretty modest, +/- 0.2% or less with more currencies gaining than losing.  I do not believe that the reaction function has changed here.  Rather, sometimes the FX market moves in funny ways.
 
On the data front, this morning brings Durable Goods (exp -4.5%, +0.2% ex transport) and Case-Shiller Home Prices (6.0%).  Yesterday saw a softer than expected New Home Sales and a weaker than expected Dallas Fed survey, although it was better than January’s print.  As well, we hear from Vice Chairman Barr, but there has been very little wavering from the message that patience is a virtue, and I don’t expect Mr Barr will change that tune.
 
The equity bulls took a rest yesterday but are clearly looking for more reasons to get back to buying.  To me, the potential problem will be home prices as, if they continue to rise, it will reduce hopes for any rate cuts at all, and there are still a number of pockets in the economy that are highly reliant on low interest rates to succeed.  Commercial real estate is simply the most frequently discussed, but consider much of the tech sector, where ideas that had been funded with free money that will not get the time of day if there is a cost of capital.  Ultimately, nothing has changed my idea of the dollar benefitting further as the market continues to understand that the Fed is not set to cut rates any time soon.  Of course, Thursday’s Core PCE could change a lot of views, mine included.
 
Good luck
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