Tag Archives: #china

Condemned to Damnation

Posted on by

The Chinese returned from vacation
But hopes for more subsidization
Were rapidly dashed
With early gains trashed
And Hong Kong condemned to damnation
 
Meanwhile, what we heard from the Fed
Was further rate cuts are ahead
They all still believe
That they will achieve
Their goal and inflation is dead

 

Talk about buzzkill.  The Chinese Golden Week holiday is over and all the hopes that the National Development and Reform Commission Briefing would highlight new stimulus as well as further details of the programs announced prior to the holiday week were dashed.  Instead, this group simply confirmed that they were going to implement the previously announced plans and insisted that it would be enough to get the economy back to its target growth rate of 5.0%.  You may recall that the government had promised funds to support the stock market and some efforts to support the housing market, but there was little in the way of direct support for consumers.  While the initial market response to the stimulus measures was quite positive, there is a rapidly growing concern that those measures will now fall short.  In the end, much of the joy attached to the stimulus story has evaporated.  

The market response was telling as while onshore stocks rallied (CSI 300 +5.9%) they closed far below their early session highs and the Hang Seng (-9.4%) in Hong Kong, which had been open all during the Golden Week holiday and rallied steadily through that time, retraced sharply, giving back all those gains and then some (see below). 

Source: Bloomberg.com

In the end, it is difficult to look at the Chinese story and feel confident that the currently announced stimulus packages are going to be sufficient to make a major dent in the problems there.  It appears that the limits of a command economy may have been reached, a situation that will not benefit anyone.

Turning to the first batch of Fed speakers, yesterday we heard from Governor Adriana Kugler, St Louis Fed president Alberto Musalem and Chicago Fed president Austan Goolsbee.  While Mr Goolsbee explained, “I am not seeing signs of resurgent inflation,” it does not appear he is really looking.  As to Ms Kugler, she “strongly supported” the 50bp cut and when asked about the strong NFP report explained that looking through the data, “several metrics point toward labor-market cooling”, despite the strong report.  Finally, Mr Musalem, although he supported the 50bp cut, remarked, “Given where the economy is today, I view the costs of easing too much too soon as greater than the costs of easing too little too late.”

Net, it appears that recent data upticks have not had any impact on their views that they must cut rates further and are prepared to do so every meeting going forward.  The Fed funds futures market has now priced 25bp rate cuts into both the November and December meetings, although that is reduced significantly from the nearly 100bps that was priced prior to the NFP report.

Away from those stories, though, there was not much other news of note overnight.  Russia/Ukraine has moved to page 32 of the newspapers and is not even discussed anymore.  Israel/Hamas/Hezbollah/Iran has more tongues wagging but at this point, it has become a waiting game for Israel to respond to the missile barrage from Iran last week.  Given we are between Rosh Hashanah and Yom Kippur, it seems unlikely to me that we will see anything prior to the weekend.  China fizzled after vacation.  The US election remains a tight race at this point with no clear outcome.  Hurricane Helene and the aftermath is being superseded by Hurricane Milton, due to hit the Tampa area shortly, but again, the latter two, while horrific tragedies, or potential tragedies, are not really market stories.

So, what’s driving things?  Arguably, interest rate policies and bond markets are having the biggest impact on financial markets right now.  With that in mind, the fact that 10-year Treasury yields are now back above 4.0% for the first time since August seems to be the main event.  Why, you may ask, would bond yields have backed up so far so fast?  Ultimately, it appears that bond investors are losing confidence in the central bank inflation story, the idea that they have it under control.  First off, oil prices, though lower today by -1.9%, have still gained more than 8.3% in the past week with gasoline prices higher by nearly 7% in the same period.  This does not bode well for lower inflation prints going forward.  Second, the combination of the much stronger than expected NFP report and the Fed’s willful ignorance of the implications is also tipping the marginal investor toward seeing more inflation going forward.

Ok, so how have these things impacted markets?  Well, aside from China/HK and following yesterday’s US declines, there were far more laggards (Japan, Singapore, Korea, Australia) than leaders (India) across Asia with Tokyo (-1.0%) the next worst performer.  In Europe, all the screens are red this morning led by the UK (-1.1%) but with losses between -0.2% in Germany after a much better than expected IP reading, to -0.6% in France.  Oftentimes, it seems like Europe is trading on yesterday’s US news, and that is the case today as US futures are pointing higher by about 0.4% at this hour (7:40).

Bond yields, which have been climbing for the past week, are little changed this morning, with neither Treasuries nor European sovereigns showing any movement of note.  However, one need only look at the chart below to see the trend over the past month.

Source: tradingeconomics.com

Aside from the oil retreat mentioned above, which seems to be a response to the absence of that Israeli action so widely expected, copper (-2.6%) is the laggard as disappointment over the Chinese stimulus dud pushed down demand expectations.  Gold (+0.3%) though, remains in demand and is hovering just below its recent all-time highs.

Finally, the dollar is backing off a bit this morning, although as evidenced by the chart below of the DXY, it has been on a bit of a tear for the past week, so consolidation should not be a surprise.

Source: tradingeconomics.com

However, overall, today’s price activity has been relatively muted with all G10 currencies within 0.2% of yesterday’s closing levels and the biggest movers in the EMG bloc (PLN +0.4%, ZAR -0.4%) hardly showing much more motion.  One exception is IDR, where the central bank intervened overnight after six consecutive days of rupiah weakness which saw the currency decline -4.5%.

On the data front this morning, the NFIB Small Business Optimism Index was released at a slightly softer than expected 91.5 although the Uncertainty sub index it a record high of 103 indicating small businesses are in a tough spot.  Otherwise, the only number is the Trade Balance (exp -$70.6B) and then a bunch more Fed speakers, all different ones than yesterday.  We also see the 3-year Note auction, so that may give us some clues as to the demand story for Treasuries ahead of the CPI data on Thursday.

The ongoing conflicting data has many, if not most, investors confused.  I believe that people will be seeking more clarity on Thursday and so until then, absent another geopolitical shock, we are likely to see modest market movements overall.  However, with the Fed hell-bent on cutting, I continue to fear inflation starting to reaccelerate and the dollar starting a more substantive decline.

Good luck

Adf

A Brand New Zeitgeist

Posted on by

Although it’s the number two nation
Of late its shown real desperation
Seems Xi did appraise
The recent malaise
And ordered growth maximization
 
So, mortgage rates there have been sliced
And refi’s are now getting priced
It’s different this time
The bulls, in sync, chime
As Xi seeks a brand new zeitgeist

 

As China gets set to head off for a week-long holiday, President Xi wanted to make sure everybody there felt great and would start to spend money again.  His latest move came via the PBOC where they loosened the regulations regarding refinancing of home mortgages, now allowing them for everybody starting November 1st.  The key housing rate in China is the 5-year Loan Prime Rate, and while that has fallen steadily over the past two years, down nearly 1%, all the people who were swept up in the property bubble that began to burst three years ago have not been able to take advantage of the lower rates.  This is what is changing, and I presume there will be quite a bit of refi activity for the rest of the year.

So, to recap what China has done in the past week, they have cut interest rates across the board, guaranteed loans to be used for stock repurchases, changed regulations to allow lower down payments on mortgages for first and second homes and now allowed more aggressive refinancing of existing mortgages.  As well, they reduced the RRR, freeing up capital for banks, and relaxed rules for regional governments to be able to spend more.  Now matter how this ultimately ends up, you must give Xi full marks for finally figuring out that in a command economy, he needed to command some more stimulus.  The latest mortgage news has simply excited the equity market even more and there was another huge rally last night (CSI 300 +8.5%), which when looking at a chart of that index shows an impressive rally in the past two weeks, slightly more than 27%!

Source: tradingeconomics.com

However, before we get too carried away, a little perspective may be in order.  The below chart is the 5-year view, and while the recent rebound is quite impressive, it simply takes us back to the level from July 2023 and remains more than 30% below the highs seen in February 2021.  I might argue that even if all of these policies work out as planned, something which rarely ever happens, until the economic data start to prove it out, things here feel a bit overbought for now.  Putting an exclamation on the last point, last night China released its monthly PMI data which showed just why Xi has become so aggressive.  Every reading, from both Caixin and the National Bureau of Statistics, was weaker than last month and weaker than expected.  Xi certainly needed to do something.

Source: tradingeconomics.com

Gravity remains
An unyielding force, even
For Japanese stocks

Now, a quick mea culpa from Friday’s note as I was in error on my analysis of the Japanese stock market in the wake of the election of Ishiba-san.  It seems that the announcement of his victory was not made until after the cash equity market was closed for the day. At that time, Sanae Takaichi remained the odds-on favorite to win the vote, and the market was anticipating a more dovish approach to things. Hence, the idea of the return to Abenomics and a much slower policy tightening was welcomed by the equity market at the same time the yen weakened.  But with Ishiba-san’s surprise victory, all of that got tossed out the window.  

Of course, USDJPY was able to respond instantly, hence the sharp reversal in the market I showed in a chart on Friday.  However, the futures market sold off sharply on the election news and now that has been reflected in the overnight session with the Nikkei (-4.8%) giving back all the gains it had made in the previous two sessions in anticipation of a dovish turn.  So, as you can see in the below chart for the Nikkei 225 over the past week, we are basically exactly where things started before the Takaichi expectations built.  Truly much ado about nothing.

Source: tradingeconomics.com

As to the rest of the overnight session, beyond the Chinese data, we saw German state CPI readings which continue to fall as the German economy continues to slow appreciably.  We also saw UK GDP data, which was slightly softer than forecast, although at 0.9% Y/Y, still well ahead of Germany’s pace.  But otherwise, not very much else.  Last Friday’s PCE data was largely in line and quite frankly, most of the market seems to be focused on China right now, not the US, as that has become the newest idea on how to get rich quick.

So, here’s a quick recap of the session thus far.  Away from China and Japan, we saw more weakness than strength in Asia with both Korea and India falling more than -1.0%, although the rest of the region was mixed with much smaller moves.  Australia (+0.8%), though, benefitted from the China story as the price of iron ore, one of its major exports, rose 11% overnight on the idea that Chinese construction was coming back.  However, European bourses are under pressure this morning led by the CAC (-1.6%) with the rest of the continent also soft on the back of weaker earnings forecasts and announcements from European companies.  As to US futures, at this hour (7:20), they are pointing lower by -0.25%.

In the bond market, with all the excitement over renewed growth in China and continued tightening in Japan, yields are backing up slightly with virtually every G10 government seeing yields higher by 2bps this morning.  Ultimately, for Treasuries my fear is with the Fed cutting rates now and no real sign that the economy is slowing rapidly, we are going to see a quicker rebound in inflation than they are anticipating and that will not help the long end of the curve at all.

In the commodity markets, we are following Friday’s declines with further moves lower this morning as oil (-0.55%) continues to struggle on the weak demand story (this time from Europe, not China) while metals markets are also under pressure with all three biggies down (Au -0.75%, Ag -1.4%, Cu -0.7%).  This is a bit confusing for two reasons.  First, with the euphoria that the Chinese reflation story has generated, I would have expected copper to continue to rally alongside iron ore, but second, the dollar is softer today, and that generally supports the metals markets.

So, a quick look at the dollar shows the DXY is looking to test 100.00, a level it last briefly touched in July 2023 but spend most of 2020 and 2021 below.  This is concurrent with the euro (+0.3%) testing 1.12 and the pound (+0.3%) testing 1.35, with the former showing virtually the same pattern as the DXY and the latter making new highs for the past two years.  But there is some schizophrenia in the G10 with JPY (-0.2%), CHF (-0.3%), NOK (-0.35%) and SEK (-0.2%) all under pressure today.  While NOK and SEK make sense given the commodity moves, that doesn’t explain gains in AUD and NZD.  Some days are just like that.  In the EMG bloc, in truth, the dollar is showing more strength than weakness with ZAR (-0.35%), CNY (-0.2%) and KRW (-0.15%) although MXN (+0.3%) is bucking that trend.  On the one hand, it is quite confusing to see so many contrary moves amongst the currencies that typically track closely together.  On the other, though, none of the moves are very large, so there can be idiosyncratic explanations for all of this without changing the big picture story.

On the data front, we get a bunch of stuff culminating in NFP on Friday.

TodayChicago PMI46.2
 Dallas Fed Manufacturing-4.5
TuesdayISM Manufacturing47.5
 ISM Prices Paid53.7
 JOLTS Job Openings7.67M
WednesdayADP Employment120K
ThursdayInitial Claims220K
 Continuing Claims1837K
 ISM Services51.6
 Factory Orders0.1%
FridayNonfarm Payrolls140K
 Private Payrolls120K
 Manufacturing Payrolls-5K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.8% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.9%

Source: tradingeconomics.com

As well as all that, we hear from nine different Fed speakers over 13 different speeches this week, including Chairman Powell this afternoon at 2:00pm.  It’s not clear that we have learned enough new information for Powell to change his tune although given all of China’s moves there could be some belief that the Fed doesn’t need to be so aggressive.  Now, as of this morning, the Fed funds futures market is pricing a 41% probability of a 50bp cut in November and a 50:50 chance of a total of 100bps by the end of the year.  but, if China is easing so aggressively, does the Fed need to as well?

Right now, the story is all China.  However, I still detect a lot of positive sentiment in the US and expectations that the Fed is going to continue to ease and boost growth, inflation be damned.  It still strikes me that you cannot be bullish both stocks and bonds here as they are going to respond quite differently to the future.  As to the dollar, it is clearly on its back foot as the pricing of further Fed ease undermines it for now, but remember, as other central banks follow the Fed more aggressively, any dollar declines will be muted.

Good luck

Adf

More Money to Mint

Posted on by

As an eagle soars
So too did the yen after
Ishiba-san won

 

Political change in Japan is far less bombastic and exciting than here in the US as evidenced by the election of Shigeru Ishiba as the new leader of the Liberal Democratic Party (LDP) last night.  Given the LDP’s large majority in the Diet (Japan’s parliament), as the new leader, Ishiba-san is now all but certain to be the new Prime Minister. This will likely be confirmed by a vote as early as next Tuesday, but sometime very soon regardless.

Ishiba’s background, a party veteran and former defense minister, seems to have been the right focus at the right time as strains with China have recently increased and the electorate (LDP members, not the general population) are clearly hearing about security concerns more than other issues.  The implication is that economic issues were not the driving force here, but in that vein, Ishiba’s views appear to be to allow the BOJ and Governor Ueda to continue their normalization process, finally ending the decade plus of Abenomics that worked to raise inflation.  

Now, as it happens, last night Tokyo inflation was released with the headline falling to 2.2% and the core falling to 2.0%, as expected.  It also appears that one of his key opponents, Sanae Takaichi, had been an advocate of pressuring the BOJ to slow its policy normalization, so with the results, market participants reacted swiftly, and the yen rallied sharply on the news as per the below chart while the Nikkei after an initial sharp decline, rebounded and closed higher by 2.3%.

Source: tradingeconomics.com

Going forward, it seems unlikely that the yen is going to be a focus of the new Ishiba administration.  Rather, he is clearly focused on defense strategy so Ueda-san will be able to continue his normalization efforts at his own pace.  As evidence, JGB yields stopped their recent slide and backed up 2bps overnight.  I suspect that we will see a very gradual move higher here with key drivers to be purely economic issues rather than political ones, at least for a while.

This morning, the PCE print
Will help give another key hint
To whether the Fed
When looking ahead
Will soon start, more money, to mint

The other story for the day is the PCE report to be released at 8:30. Current expectations are for a 0.1% M/M, 2.3% Y/Y rise in the headline number and a 0.2% M/M, 2.7% Y/Y rise in the ex-food & energy reading.  If these are the realized outcomes, the trend lower in inflation will remain on track and all the Fed speakers will feel vindicated that the 50bp cut last week was appropriate.  But I think it is worthwhile to take a quick look at a chart of how this number (core PCE) has evolved over time to help us better understand where things are in relation to the pre-pandemic economy. 

Source: tradingeconomics.com

Now, while there is no doubt that we are well below the highest levels seen two years ago, it is not difficult to look at this chart and see a potential basing formation, well above the pre-pandemic levels.  In fact, today’s expectations on the core reading are for a bounce higher of 0.1% which would only reinforce the idea that we have seen the bottom in this reading.  Of course, any one month’s data is not definitive as everything is subject to revisions, and simply looking at the chart, it is easy to see both ebbs and flows in the data well before the pandemic.  But I continue to be concerned that the Fed’s very clear ‘mission accomplished’ attitude on inflation is a big mistake that will come back to haunt us all sooner than you think.

Ahead of the data, a look at the overnight session shows that the ongoing rally in risk assets that started with the Fed and has been goosed by China’s efforts this week, remains the dominant theme.  In fact, Chinese shares had another gargantuan session last night (CSI 300 +4.5%, Hang Seng +3.6%) as hedge funds who had been quite short the Chinese stock market prior to the announcements this week continue to scramble to cover those shorts as well as get long for the rest of the expected ride.  But away from China and Japan, the rest of Asia was far less excited with declines seen in India, Korea and Australia leading most indices lower there.  As to European bourses, they are firmer this morning led by the DAX (+0.8%) but green everywhere after preliminary inflation data for September from France and Spain saw declines well below expectations to 1.5% and investors increased the probability of an October ECB rate cut substantially.  While some ECB members remain concerned over the stickiness of services prices, which continue to hover above 4%, if the headline numbers are falling below 2%, I think it will be very difficult for Madame Lagarde to push back against another cut next month.  Meanwhile, ahead of the data, US futures are unchanged.

In the bond market, Treasury yields have edged lower by 1bp while European sovereign yields have moved a similar amount except for French OATs which have slipped 3bps.  The story about French debt yielding more than Spain, one of the original PIGS has gotten a lot of press and it seems deeper thinkers disagree with the idea and are buying ‘undervalued’ French OATs.  

In the commodity markets, oil (+0.15%) has finally stopped falling, at least for the moment, although the recent trend is anything but encouraging for oil bulls.  Crude is lower by -4.5% in the past week and -9.0% in the past month, clearly helping the headline inflation readings.  As to the metals markets, after another strong day yesterday, they are consolidating with very modest declines (Au -0.2%, Ag -0.1%, Cu -0.4%) although the trend in all three remains firmly higher.

Finally, the dollar, after several sessions under a lot of pressure, is also bouncing slightly, at least against most of its counterparts.  We have already discussed the yen’s gains, but vs. the rest of the G10, it is firmer by roughly 0.15% or so while vs. its EMG counterparts some are seeing losses  (CE4 -0.3% to -0.4%) while there are others with modest gains (ZAR +0.3%, MXN +0.4%).  For now, the trend remains for a lower dollar, and if we see a soft PCE reading this morning, I expect that to reassert itself as thus far, today’s price action appears more like a trading response to the recent weakness.

In addition to the PCE data, we also see Personal Income (exp 0.4%), Personal Spending (0.3%), the Goods Trade Balance (-$99.4B) and Michigan Sentiment (69.3).  Mercifully, on the Fed front, only Governor Bowman speaks, she of the dissent at the last meeting, although yesterday’s plethora of Fed speakers taught us nothing new at all.  

I don’t have a strong opinion as to how this data will play out, but I would caution that if PCE is firmer than expected, look for a hiccup in the recent euphoria over stocks and bonds, while the dollar consolidates its support.  However, if we see a softer print than forecast, watch out for a much bigger rally in stocks and a much weaker dollar.

Good luck and good weekend

Adf

A Financial Home Run

Posted on by

Seems President Xi isn’t done
And last night he added a ton
Of new stimuli
In order to try
To hit a financial home run
 
The market response has been clear
Forget anything that’s austere
It’s buy with both hands
Ere Powell rebrands
QE as just more Christmas Cheer

Things are obviously worse in China than President Xi had been willing to let on for the past several months/years, as after two straight days of monetary policy stimulus announcements, they pulled out the big guns and got the fiscal side of the process involved.  Last night the Politburo pledged further support after a surprise meeting to discuss economic policies.  Their economic discussions have historically only occurred in April, July and December, so this was the latest indication that Xi is really concerned. 

Some of the actions include an (unspecified) effort to make the real estate market “stop declining”, limiting construction of new home projects, issuing CNY 2 trillion of special sovereign bonds to disburse funds to help fund financial assistance for low-income workers, shore up bank capital to encourage more lending and support further investment in productive capacity as well as to potentially buy up unfinished homes.  

Obviously, Xi was quite concerned that the country would not achieve his 5% GDP growth target for 2024 as an increasing number of analysts around the world were penciling in slower growth, and he decided he could not wait until December for the next policy adjustments.  Remember, too, that next week is a week-long Chinese holiday, so part of the impetus was to give cash to people to encourage more spending/activity.  While it is far too early to determine how effective these new policies will be at supporting real, organic economic activity, they did wonders for equity markets and risk assets around the world.

And really, that continues to be the main story.  With the Fed now having confirmed that lower rates are appropriate, I would look for almost every nation to boost stimulus, both monetary and fiscal, especially in the wake of recent election results which have seen incumbent after incumbent tossed from office.  After all, what good is being in power if you cannot buy your way to re-election?

So, how has all this impacted financial markets this morning?  You will not be surprised to see that risky assets are in huge demand with equity markets rallying everywhere along with metals, while haven assets see much more modest demand, with bond yields having slipped just a bit lower.

Yesterday’s mixed US market performance is but a distant memory this morning with Asian shares roaring higher (Nikkei +2.8%, Hang Seng +4.2%, CSI 300 +4.2%) and gains virtually across the region, albeit not quite as robust as those.  But after the Fed cut, this fiscal stimulus from China is seen as helping everybody.  Europe, too, is rocking this morning with gains well above 1.0% everywhere (DAX +1.2%, CAC +1.6%, IBEX +1.1%) except the UK (FTSE 100 +0.2%) which continues to struggle as the Labour government is shown to be further and further out of its depth with respect to actually running things rather than carping about how the Tories did it.  And not to worry, US futures are all racing higher as well this morning, higher by between 0.3% (DJIA) and 1.5% (NASDAQ) at this hour (7:15).

In the bond market, Treasury yields have edged lower by 2bps and remain far below the Fed funds rate.  It is not clear if this is the market anticipating a more significant economic slowdown or simply a continued manifestation of the fact that the Fed still owns a significant portion of the debt outstanding and so has restricted supply at the margin.  In Europe, yields are also lower, with the riskiest nations seeing the biggest declines as risk assets are in vogue this morning.  Thus, Italy (-7bps) and Greece (-6bps) have moved the farthest, but otherwise we are seeing movement on the order of -3bps elsewhere.  In another quirk, and a telling comment on the state of France’s finances, Spanish 10yr bonos now yield less than French 10yr OATs for the first time in more than 15 years.

Turning to commodities, oil (-2.8%) didn’t get the China rebound memo and has tumbled nearly $2/bbl falling well below the $70/bbl level.  It seems that Saudi Arabia is dropping its price target and preparing to increase production, something the market has been fearing.  As well, in Libya, which had not been producing lately due to political issues, it appears a tentative agreement is in place that will allow for more supply on the market.

But you know what really benefits from a lot of deficit spending and the effective abandonment of inflation targets?  That’s right, precious metals as gold (+0.8%) continues its steady move higher to new all-time highs and quickly approaches $2700/oz.  This has taken both silver (+2.2%) and copper (+2.2%) along for the ride and there is currently no end in sight.

Finally, the dollar is under pressure this morning in a classic risk-on reaction.  AUD (+0.9%) is the leading G10 gainer on the back of its strong metals exposure while NZD (+0.8%) is right behind.  But the dollar’s weakness is manifest in Europe (EUR +0.2%, GBP +0.5%, SEK +0.5%) as well as against most EMG currencies.  In fact, CNY (+0.55% and below 7.00) is one of the biggest movers today although we are seeing strength in KRW (+0.7%), MXN (+0.5%) and ZAR (+0.4%), an indication that this move is widespread.  As long as the perception remains that the Fed is going to lead the way to lower interest rates, I can see the dollar underperforming.  However, as soon as we see other nations become more aggressive, this move will abate.

On the data front, there is much on the calendar this morning starting with the weekly Initial (exp 225K) and Continuing (1832K) Claims data as well as the 3rd look at Q2 GDP (3.0%).  We also see Durable Goods (-2.6%, +0.1% ex-Transports) and then the ancillary data that comes with the GDP report including Real Consumer Spending (2.9%), Final Sales (2.2%) and the GDP PCE indicator (2.5% headline, 2.8% core).  But perhaps of far more importance, we hear from a host of Fed speakers this morning.  Governor Kugler and Boston Fed president Collins speak about financial inclusion, Governor Bowman discusses the economy and monetary policy, Governor Cook discusses AI and workforce development, Vice-chair Barr discusses regulation and Chairman Powell gives the opening remarks at the US Treasury Market Conference in NY. 

Yesterday, Governor Kugler added to the ‘mission accomplished’ view on inflation at the Fed and lauded the move to focus on Unemployment.  I would contend this is the key issue right now, the fact that central banks around the world, but particularly the Fed, have determined that the inflation fight is over.  While we may very well touch 2.0% core PCE in the next months, it strikes me as highly unlikely that level will be maintained.  Rather, 2.0% is now the floor and if the Unemployment Rate behaves in its historic manner, accelerating higher now that it has started to move in that direction, look for much sharper interest rate cuts, much higher inflation and a much weaker dollar.  To me, that is the biggest risk.  However, if Unemployment follows the Fed’s projected path, and stays quiescent, then the current slow decline in rates and a very gradual decline in the dollar seems more likely.

Good luck

Adf

The Hits Keep on Coming

Posted on by

In China, the hits keep on coming
As Gongsheng adjusts China’s plumbing
Last night he cut rates
As he navigates
A way to help growth there keep humming
 
Combined with the Fed’s latest act
Worldwide it is clearly a fact
Liquidity’s growing
With stock markets showing
Why traders just love the impact

 

As virtually promised the other night, PBOC Governor Pan Gongsheng cut the medium-term lending facility rate to 2.0% from its previous level of 2.3% last night, the largest single cut in the history of this rate’s existence.  Of course, that only takes us back to 2016 when the PBOC rolled out this concept, but nonetheless, it is a clear expression of an aggressive easing policy by the central bank.  In fact, pundits are calling for further rate cuts this year as Xi’s government struggles with rekindling the animal spirits in China.  For equity investors there, this continues to be good news as the CSI 300 rallied another 1.5% and is now within spitting distance of being flat for the year.  As well, the renminbi rallied further, briefly trading through the 7.00 level and currently about 0.35% stronger than yesterday’s close.

Alas for President Xi, while all these measures are likely to have positive short-term impacts on economic statistics, especially the way they report them over there, it is unclear if they will help restart truly organic domestic economic activity.  Ultimately, that is a direct product of the level of confidence people have in their current employment situation as well as their perception of the prospects for better opportunities going forward.  Having the government pay you back for things that were supposed to rise in price forever is welcome, but not sufficient to do the trick, I think.  Clearly the current situation is that Chinese assets are going to perform in the short run, and it is very likely commodity prices will rise as well given the perception that Chinese demand will now increase, but personally, I suspect that the longevity of this price action, at least for the Chinese assets, may be limited.

Commodity prices, on the other hand, are getting boosts from all over the place, notably from the fact that virtually every country on earth, except perhaps Japan, has entered a monetary easing cycle.  Now that the Fed has begun, and gone big to start, other central banks will feel empowered to ease policy further with the confidence that their own currencies will not collapse amid a US rate cutting cycle.  And let’s face it, so far, everything we have heard in the wake of the FOMC move last week is that they are not afraid to cut rates a lot more.

Under the guise, actions speak louder than words, even though Powell explicitly said they had not declared victory over high inflation, listening to the four speakers since the meeting, it actually appears they have done just that.  Now, there is one market that seems to disagree with them, at least so far, and that is the 30-year Treasury bond. As you can see in the chart below, the yield there is now higher by 20bps since the first stories about the Fed cutting 50bps made their way into the press.  Whatever PCE holds in store for us later this week, the combination of commodity price rises and the yield on the long bond offer strong hints that inflation is going to make an inglorious return.

Source: tradingeconomics.com

But for now, be joyful because stock markets are continuing to rally.  This economic cycle is clearly unlike any others given the still subtle ripples from Covid policies and the fact that the housing market remains stuck with so many homeowners locked into their homes due to the exceptionally low mortgage rates they hold.  The result has been two very opposite views of how things are evolving, with one camp still celebrating the fact there has been no appreciable slowdown and all-in on the soft-landing while the other digs under the headlines and finds numerous issues with hiring and debt.  Perhaps next week’s NFP print will bring clarity although I doubt that will be the case.  In the meantime, we need to observe and react as it is all we have.  It is times like these that define why hedging is so important.

Ok, let’s look at the overnight activity.  After yesterday’s modest US rally, aside from China, the picture was far more mixed in Asia with the Nikkei (-0.2%) slipping slightly while the Hang Seng (+0.7%) continued its rally on the back of the China news.  But Singapore, Korea and the Antipodes all suffered although Taiwan (+1.5%) took heart in the Chinese news.  In Europe, the picture is also mixed with both the DAX (-0.4%) and CAC (-0.3%) slipping while the FTSE 100 (+0.4%) is higher despite a complete lack of data.  Well, that’s not completely true as French Consumer Confidence rose to 95, its highest level since February 2022, but apparently that is not so important.  Meanwhile, US futures are essentially unchanged at this hour (7:30).

In the bond market, Treasury yields are leading the way higher with 10-year yields higher by 3bps and pretty much all European sovereign yields higher by either 1bp or 2bps.  Bond investors are very clearly concerned over inflation’s prospects given the wholesale turn to monetary ease seen worldwide.  The outlier here was JGB yields (-1bp) as the market there continues to respond to Ueda-san’s comments from yesterday regarding the lack of urgency to tighten further, especially given the yen’s recent rebound.

In the commodity markets, oil (-1.3%) is fading this morning, perhaps because there has been no further escalation of hostilities in the middle east, they remain at a steady level, or perhaps because we have seen a 9% rally in the past two weeks, so traders are simply taking a rest.  Metals markets, too, are softer this morning, but that is also after a very strong rally and gold (-0.1%) continues to maintain the bulk of its daily new all-time high prints.  But both silver and copper have had very strong weeks as well.  One other thing to note is that NatGas is higher by 13% this week, perhaps an indication that supply concerns are growing.

As to the dollar, after several soft sessions, it is rallying this morning.  Weakness in currencies is broad-based with the pound (-0.4%), Aussie (-0.5%), yen (-1.0%) and Swiss franc (-0.9%) all retracing some of their recent gains.  We are seeing similar price action in the EMG bloc with MXN (-0.6%), KRW (-0.5%) and PLN (-0.3%) all under pressure but with one exception, ZAR (+0.4%) which continues to benefit from the combination of still high interest rates, so the carry trade, as well as a growing belief that the new government is going to be quite business, and by extension market, friendly.

On the data front, only New Home Sales (exp 700K) is on the docket although we also see the weekly EIA oil inventory data with further drawdowns forecast.  There are no scheduled Fed speakers, but I expect we will hear from one or two anyway.  While the dollar is bouncing today, I believe the current mindset is the Fed is going to lead the way lower in this rate cycle and that the dollar will suffer accordingly.  Just be careful as with everyone cutting rates, expecting a sharp dollar decline from here seems suspect.

Good luck

Adf

Juiced

Posted on by

No doubt it was President Xi
Who leaned on the PBOC
To cut rates at last
And try to recast
The tone of its cash policy
 
So, mortgage rates will be reduced
While bank reserves, too, will be juiced
But will cutting rates
Be what motivates
The people and give growth a boost?

 

It’s almost as though Pan Gongsheng, head of the PBOC, read my note yesterday morning and decided that it was time to really do something big!  While obviously, we know that is not the case (at least I don’t see his name on my subscriber list), the PBOC definitely painted the tape last night with their actions.  Fortunately, Bloomberg listed them for us as per the below:

  1. The seven-day reverse repurchase rate will be lowered to 1.5% from 1.7%
  2. RRR lowered by 0.5 percentage points, unleashing 1 trillion yuan in liquidity
  3. PBOC didn’t specify when RRR cut takes effect
  4. MLF expected to be cut by 0.3 percentage points
  5. Minimum down-payment ratio cut to 15% for second-home buyers, from 25%
  6. China may cut the RRR further this year by another 0.25 to 0.5 percentage points
  7. RRR cut won’t apply to small banks
  8. LPR and deposit rates to fall by 0.2 to 0.25 percentage points
  9. The PBOC to cover 100% of loans for local governments buying unsold homes with cheap funding, up from 60%

A glossary of terms is as follows:

  • RRR is the reserve ratio requirement which describes how much leverage banks may take, with the lower the number equating to more leverage (need to hold fewer reserves).
  • MLF is the medium-term lending facility which is the program that the PBOC uses to lend money to banks in China, and the rate had been the key interest rate for policy. 
  • LPR is the loan prime rate, the rate at which banks lend to their best clients
  • Seven-day reverse repurchase rate is a relatively new rate that the PBOC uses for its monetary policy efforts, similar to the Fed funds rate, and is now deemed the PBOC’s key interest rate.

Now, that’s a lot of activity for a central bank in one day.  Consider how long it takes the Fed to decide to raise or cut the Fed funds rate and compare that to just how much was done.  

And that’s just the rate moves.  In addition, they indicated they would lend up to CNY 500 billion for funds, brokers and insurers to buy Chinese shares and another CNY 300 billion for companies to buy back their own shares.  Again, I find the irony of a strictly communist nation worrying about their stock market unbelievably delicious.  So, the government is willing to roll out significant monetary stimulus, but as yet, has not been willing to inject fiscal stimulus.  Arguably the biggest economic problem in China right now is that sentiment is weak as people are concerned over both their jobs and the value of their property, hence consumption remains weak overall.  It is not clear what Xi can do to fix that problem, but cheap money is only effective if people and companies want to borrow and spend it.  That remains to be seen, although the odds of China achieving its 5.0% GDP growth target for 2024 have improved now.

One other thought is that this likely would not have been possible for the Chinese had the Fed not cut 50bps last week.  As I have consistently explained, once the Fed gets going, central banks everywhere will feel more comfortable cutting their own rates and easing policy further.  At least in China, inflation is not a problem, so they have plenty of room to cut.  However, elsewhere inflation has proven stickier than most central bankers would like to see.  Nothing is yet carved in stone as to just how many rate cuts are in the offing.

As this was the only noteworthy story, let’s look at how it impacted markets everywhere.  It can be no surprise that shares in China exploded higher given the explicit PBOC support with both the CSI 300 and Hang Seng rallying more than 4.1% on the session.  As well, Chinese yields backed up a bit, off the lows I described yesterday, but only by a few basis points.  As seen below, CNY (+0.4%) rallied nicely, trading to its strongest level since May 2023 and commodities rallied across the board with oil (+2.1%) and copper (+2.4%) the leaders although precious metals (Au +0.3%, Ag +0.8%) are also rising.

Source: tradingeconomics.com

Perhaps the most interesting thing about this story is just how little it impacted non-Chinese markets. Japanese shares (Nikkei +0.6%) rallied but given the yen’s decline (-0.3%) overnight, that likely had a bigger impact on those shares.  And the rest of Asia saw a mix of modest gains and losses, with Taiwan (+0.6%) and Korea (+1.1%) the next best performers although India, Australia and Singapore saw no benefit whatsoever.  It appears they are awaiting the fiscal boost.

In Europe, though, shares are definitely feeling the love led by the CAC (+1.6%) although even the DAX (+0.75%) is rallying despite another series of lousy data, this time the Ifo surveys all printing weaker than last month and weaker than expectations.  I guess given the importance of China as an export market for Germany, the PBOC news trumps the Ifo surveys from earlier this month.  As to US futures, after very modest gains yesterday, although some more record highs, they are essentially unchanged at this hour (7:00).

In the bond market, Treasury yields continue to back up, higher by 3bps this morning and now 15bps off the lows pre-FOMC meeting.  European sovereign yields are higher by 1bp across the board except for UK gilts (+4bps) as concerns grow that the fiscal situation in the UK may deteriorate more rapidly given the apparent confusion in the Starmer government about what to do to pay its bills.  It is also worth noting that JGB yields have slipped 3bps this morning and are now back to levels last seen back in April before the BOJ’s policy tightening got somewhat serious. 

As to the dollar, overall, it is on its back foot this morning although other than the renminbi, most of the moves have been 0.2% or less.  Today’s story is CNY for sure.

On the data front, this morning brings Case-Shiller Home Prices (exp 5.8%) and Consumer Confidence (103.8).  While there are no Fed speakers today, yesterday we heard from three (Goolsbee, Bostic and Kashkari) all of whom agreed with the 50bp cut last week and were mostly pushing for another one before the end of the year.  It seems Goolsbee has taken the mantle of chief dove on the committee, explaining there are “hundreds” of basis points left to cut before they achieve the neutral rate, however neither of the other two indicated any hesitation to cut further.  As of this morning, it is basically a 50:50 proposition as to 25bps or 50bps at the November 7th meeting according to the Fed funds futures market.

And that’s where we stand this morning.  China has opened their coffers and are adding yet more liquidity to the global system.  This should continue to help risk assets everywhere, and ultimately feed into inflation readings, although in China that is not a problem.  But what about elsewhere?  For now, it feels like the dollar is more likely to suffer given the dovish enthusiasm from the Fed speakers, but Thursday will bring 4 more speakers, including Chairman Powell, so perhaps we need to hear that before getting too excited.

Good luck

Adf

Juxtapose

Posted on by

In Europe, the ‘conomy’s woes
Continue while some juxtapose
Their weak PMIs
With US’s rise
Expecting the buck, higher, goes
 
Meanwhile, out of China we learned
The government there is concerned
Again, they cut rates
Which just illustrates
Their efforts, thus far, have been spurned

 

As we start a new week leading into month and quarter end, the market dialog continues to be about whether a recession is imminent or has been avoided completely.  As we have seen during the past months, it remains easy to choose the data that supports your view, in either direction, and make your case.  Ultimately, my take on that is very few opinions have been changed because as soon as one positive (negative) data point is printed, the opposite arrives within 24 hours.

However, let’s look at what we learned overnight.  The first story is that the PBOC cut their 14-day reverse repo rate by 10bps, another sign that the government there recognizes things are not really up to snuff.  In fact, most pundits were surprised that they didn’t cut the loan prime rates in the wake of the Fed’s rate cut last week.  Overall, this action is not that surprising, and most analysts are anticipating further rate cuts going forward, likely following the Fed lower every step of the way.  Perhaps the best indicator that more policy ease is coming is the fact that the yield on longer-term Chinese government debt has fallen to record lows (30-year at 2.15%, 10-year at 2.045%).

While the CSI 300 (+0.35%) did finally manage a bounce in the wake of the rate cut, perhaps there is no better picture of the situation in China than the chart of that stock index, which has been falling steadily since 2021.  I realize that the stock market is not the economy, especially in a command economy like China’s, but it appears quite clear that the many problems that have manifest themselves in China as the property bubble continues to unwind have been reflected in investor appetite, or lack thereof, to own potential future growth on the mainland.  The below chart speaks volumes I believe.  It ought to be no surprise that the renminbi (-0.25%) suffered a bit after the rate cut as well.

Source: tradingeconomics.com

As to the other noteworthy story, the Flash PMI data out of Europe was, in a word, dreadful.  Both manufacturing and services readings were below last month’s readings and below forecasts as the European growth story continues to suffer.  Given Europe’s reliance on imported energy overall, the recent rebound in oil and product prices are clearly impacting the economies there.  As well, there appears to be a growing divergence of opinion as to how different nations in the Eurozone want to move forward.  

For instance, this weekend’s elections in the German state of Brandenburg once again saw AfD make huge strides and massively complicate the coalition math, the third state to have that outcome this month.  As well, one of the keys to European convergence is the Schengen Agreement which allows for open borders within the EU.  However, the immigration situation there has now resulted in several nations closing their borders, not merely with the outside world, but internally as well as they try to cope with the massive influx of immigrants and asylum seekers that have been coming to the continent.  My point is if nations cannot agree on critical policies of this nature, it will become that much more difficult to arrive at common economic policies that are universally accepted.

Remember, last week Mario “whatever it takes” Draghi released his report on how the Eurozone could improve things with suggestions including more Eurozone debt (as opposed to individual national debt) and more government focused investment in areas where Europe lags, notably technology.  I guess the first step to correcting a problem is recognizing it exists, so credit is due that the Eurozone leadership has figured out things aren’t great for their citizens.  Alas, I fear Signor Draghi’s prescriptions, if enacted, are unlikely to solve many problems.

But that’s really all we have from the weekend, so let’s see how markets fared ahead of the US open.  Japan was closed for Vernal Equinox Day, a delightfully quaint holiday, while we’ve already discussed the mainland. The rest of Asia was generally positive, although Australian shares slid from recent all-time highs as investors await the RBA rate tonight with no change expected.  In Europe, it is a mixed picture, which given the PMI data, is better than I would have expected.  In fact, Germany (+0.5%) is the leading gainer there, although I cannot figure out any sensible catalyst driving that move.  The rest of the continent is +/-0.2%, so nothing really to note.  As to US futures, overall, they are slightly firmer at this hour (7:00), maybe 0.15%.

In the bond market, Treasury yields have edged higher by 1bp, continuing their rise from last week just ahead of the FOMC decision and now 13bps off the lows.  My sense is that yields will continue to slowly grind higher as a more aggressive Fed will open the door for a rebound in inflation.  As to European sovereigns, all are seeing yields slide between 2bps and 4bps this morning as it becomes clearer that the growth situation there is fading.

Oil prices (+0.3%) continue their slow rebound from the lows seen two weeks ago, although this looks much more like market internals and positioning than fundamental news.  Some claim that the escalation between Israel and Hezbollah is behind this, but given how little the market has seemed to care about the entire situation there for the past year, virtually, that doesn’t make much sense to me.  As to the metals markets, gold is unchanged this morning, sitting on its new all-time high although we have seen a retracement in both silver (-1.7%) and copper (-0.7%), though both remain in uptrends for now.

Finally, the dollar is mixed this morning with the euro (-0.4%) feeling the weight of the lousy PMI data but the commodity bloc mostly performing well (AUD +0.3%, NZD +0.25%, CAD +0.2%).  One exception here is NOK (-0.3%) and we are seeing far more weakness in EMG currencies as well (PLN -0.6%, HUF -0.9%, MXN -0.4%, KRW -0.5%).  The outlier here is ZAR (+0.25%) where investors are becoming increasingly comfortable with the pro-business attitude of the recently elected government and inward investment continues to grow.

On the data front this week, there is plenty as well as a number of Fed speakers

TodayChicago Fed Nat’l Activity-0.6
 Flash Manufacturing PMI48.5
 Flash Services PMI55.3
TuesdayCase-Shiller Home Prices5.8%
 Consumer Confidence103.8
WednesdayNew Home Sales700K
ThursdayInitial Claims225K
 Continuing Claims1832K
 Durable Goods-2.6%
 -ex Transport0.1%
 Q2 GDP3.0%
 GDP Final Sales2.2%
FridayPersonal Income0.4%
 Personal Spending0.3%
 PCE0.1% (2.3% Y/Y)
 Core PCE0.2% (2.7% Y/Y)
 Michigan Sentiment69.3

Source: tradingeconomics.com

Given the Fed’s pivot to employment from inflation, I suspect there will be a lot of scrutiny on the Claims data, especially since last week’s numbers were so surprisingly low.  If the labor market is behaving better, the need for rate cuts diminishes.  In addition to the data, we also hear from 7 Fed speakers including Chairman Powell Thursday morning.  As well, Treasury Secretary Yellen speaks on Thursday, no doubt to explain how great a job she has done.

Summing it all up, we continue to see signs of weakness elsewhere in the world while thus far, the headline data in the US continues to hold up reasonably well.  While I have consistently explained that as the Fed starts cutting rates, the dollar would suffer, the decline may be quite gradual if the rest of the world is in worse shape than the US.

Good luck

Adf

Sayonara Yen

Posted on by

Ueda did not
Accept the challenge and hike
Sayonara yen

 

Market excitement has ebbed after yesterday’s massive risk rally around the world, especially with limited new information released.  The one place where there was a chance for excitement was Tokyo, where the BOJ was meeting.  Heading into the meeting, the analyst community anticipated no policy changes although it seems clear that there were at least some market participants who thought Ueda-san would take this opportunity to surprise markets once more.  However, in this case, the analysts were correct.  Policy was left as is, with the overnight rate remaining at 0.25%, and there was no discussion regarding the reduction of QE at all, in fact, the most noteworthy thing about the policy statement was the frequency with which they used the term ‘moderate’ or variations thereof.  

They explained that the Japanese economy’s recovery, overseas economies’ growth, corporate profits, private consumption, business fixed investment, and inflation expectations have all been increasing moderately.  As such, the unanimous decision was that policy was just fine already with no imminent concern over rising inflation and no need to do anything.  The upshot is that the Nikkei (+1.5%) continues its recent rebound rally, JGB yields didn’t budge and the yen (-0.9%) fell sharply, proving to be the worst performing currency in the session.  See if you can figure out when the BOJ news was released based on the chart below.  This is what I meant when I said while analysts weren’t looking for any policy changes, clearly FX traders were.

Source: tradingeconomics.com

However, beyond the BOJ nonevent, there has been very little to discuss overall.  There is still a sense of euphoria around equity markets as congratulations abound for Chairman Powell and his bold action on Wednesday, at least from the Keynesian audience.  The one other thing to mention is that the barbarous relic (+1.0%) has absorbed all this information and traded to yet another new all-time high, well above $2600/oz, dragging the rest of the metals complex along for the ride.

Some days, there is just not much to discuss, so I will recap markets and let us all start the weekend early.

Following the big rally in the US yesterday, alongside Japan, Hong Kong (+1.35%) stocks rallied as did most of Asia (Korea, India, Australia, Malaysia) although there were a few laggards (Indonesia and New Zealand stick out).  As to mainland Chinese shares (+0.15%), they did edge higher, which given their performance of late is clearly a positive, but the news from China continues to disappoint.  Last night, the PBOC left their 1yr and 5yr loan rates unchanged, unwilling to take advantage of the Fed’s rate cut to help try to boost the domestic economy.  There is talk that the government there is going to ease the Hukuo restrictions, a type of internal passport that restricts what citizens there can do, to try to goose the property market, but no confirmation of that.  

But there was also news that the youth unemployment rate rose again, up to 18.8%.  You may recall that last summer, when the numbers started to really get bad, rising above 25%, they simply stopped publishing them.  Well, they rejiggered the data and brought them back at the beginning of the year, and now they are rising once again.  China still has many intractable problems and the equity market there seems likely to remain under pressure for a while yet.  As to US futures, at this hour (7:00) they are backing off a bit from recent highs, down -0.25% or so.

In the bond market, it is an extremely quiet session everywhere, with Treasury yields edging higher by 1bp and similar moves in some European sovereign markets while others remain unchanged.  It seems that with central bank meetings now behind us, there is no reason to anticipate the next move yet, so no reason to rock the boat.  I assume that as more data shows up, NFP, inflation, etc., we will see more movement, but for now, likely very little activity.

As mentioned above, the metals markets are rocketing this morning but the same is not true in energy with oil (-0.3%) and NatGas (-0.6%) both slipping a bit.  However, both have had strong weekly rallies, so this feels much more like a profit taking response as traders head into the weekend than anything fundamental.  After all, escalation in the Middle East doesn’t seem to faze traders, nor in Russia/Ukraine. 

Finally, the dollar is a touch higher overall, but really, in the G10 other than the yen, most currency movements have been very modest.  In the emerging markets, CNY (+0.25%) is the outlier, with those looking for a cut unwinding their short positions, but we have seen weakness elsewhere (KRW -0.65%, MXN -0.25%, ZAR -0.25%) all of which seem to be a reaction to the dollar’s sharp decline of the past two sessions.  Again, profit-taking on a Friday with no data is pretty common.

And that’s really it.  There is no data and only one Fed speaker, Philly Fed president Harker, who will be the first post-FOMC speaker we hear.  It is hard to get excited about anything in the markets today.  I expect that we will see more profit taking in those markets which moved significantly, like equities and eventually metals by the close.  In fact, if the metals markets don’t retrace, I think that could be a signal that there is a larger move in that space coming our way.

Good luck and good weekend

Adf

More Than a Pen

Posted on by

Twas just about two months ago
When President Trump was laid low
As bullets were flying
With somebody trying
To end his campaign in one blow
 
And now, yesterday, once again
A shooter used more than a pen
To try to rewrite
The vote that’s so tight
Enthused to act by CNN
 
By now, you are all aware of the second assassination attempt on former president Donald Trump’s life, this time while he was playing golf at his course in Palm Beach.  The difference, this time, is the alleged shooter was caught alive, so it will be very interesting to hear what he says under questioning and as this situation progresses.  While this is obviously newsworthy, it did not have a major market impact as investors are far more focused on the Fed coming Wednesday and then the BOJ on Friday.  As such, as I write (6:20) US equity futures are mixed with modest movements of +/-0.2%.
 
In China, poor President Xi
Is finding that his ‘conomy
Is not really growing
In fact, it is slowing
Much faster than he’d like to see

While last night there were different holidays in China, Japan and South Korea, causing all three markets to be closed, Saturday morning, the Chinese released their monthly data drop regarding IP (4.5%), Retail Sales (2.1%) and Fixed Asset Investment (3.4%) along with the Unemployment Rate (5.3%).  Then on Saturday evening here, they released their Foreign Direct Investment (-31.5%) with every one of those figures worse than the previous reading and worse than forecasts.  The evidence continues to show that the Chinese economy is slowing and seems to be slowing more quickly than previously anticipated.  In truth, from my perspective, the biggest concern Xi has is the FDI decline, which as can be seen below, has been falling (net, foreign investors are exiting China) for the past 15 months, and at an accelerating rate. 

Source: tradingeconomics.com

This bodes ill for President Xi’s 5.0% GDP growth target for 2024 and the working assumption amongst the market punditry is that he will soon announce fiscal stimulus in order to get things back on track.  Of course, one of the key problems is that not only are economies elsewhere in the world slowing down, thus reducing demand for Chinese exports, but as well, the expansion of tariffs on Chinese goods by the West continues apace, slowing that data even further.  I saw an estimate this morning that Chinese families have seen $18 trillion of wealth evaporate as the property market in China continues to decline which undoubtedly weighs on consumer sentiment and activity.  But Xi is going to have to do something to prevent a revolution, because remember, the basic Chinese Communist Party contract with the people is we will bring you economic betterment and you let us rule.  If they don’t achieve better economic growth, the population, especially the millions of unemployed young men, may get restless.  While I am not forecasting a revolution, this is typically a precursor to the process.

On Wednesday, the time will arrive
When Jay and his minions contrive
To try to explain
Their easing campaign
And hope stocks don’t take a swan dive

Now to the most important market story this week, will the Fed cut rates by 25bps or 50bps?  It’s funny, if you read independent economic analysis, both sides make their case, and not surprisingly, given the mixed data we have received over the past several months, each case makes some sense.  But…that is not the information you get when reading the press.  The WSJ, inparticular, is really banging the drum for a 50bp cut and many more to follow.  You will recall that Friday, the Fed whisperer was out with his latest piece discussing the merits of a 50bp cut.  Well, this morning there are two more articles, one by pundit Greg Ip basically begging for a 50bp cut, and one by a trio of authors laying out the case and coming down strongly on the side of 50bps.  

All this has helped push Fed funds futures to a 59% probability of a 50bp cut as of this morning.  As some have pointed out on X(fka Twitter), in the past, when there was uncertainty about a Fed move, they managed to get the word out as to what they wanted to do during the quiet period via articles like the ones above and sway markets to their preferred outcome.  As such, at this point I assume we are going to see a 50bp cut on Wednesday.

I guess the real question is what will the impact on markets be?  This morning, we are already seeing the impact in the FX market, with the dollar under pressure across the board.  Versus its G10 counterparts, it has declined by between 0.4% and 0.6% against all except CAD, which remains very tightly linked to the dollar and has gained just 0.1% this morning.  But this movement seems entirely a result of the belief that 50bps is coming.  In the EMG bloc, though, the picture is more mixed with some significant gainers (KRW +0.8%, CE4 +0.5%, ZAR +0.6%) but most other currencies little changed overall.  Nevertheless, the market is clearly pricing for 50bps across the board now and I expect that by Wednesday morning, the Fed funds futures market will reflect that as well.

But a weaker dollar is probably not the Fed’s goal.  After all, dollar weakness can help reignite inflation, so they will be wary.  Of more interest to them is the bond market which also appears to be in agreement as the 2yr yield has now fallen to 3.56%, 10bps below the 10yr yield and a clearer sign that the two plus year inversion is behind us.  Of course, as I pointed out Friday, with 2yr yields nearly 200bps below Fed funds, it can be interpreted that the market is anticipating a recession, something I’m pretty sure the Fed wants to avoid if it can.  Perhaps you can see in the chart below how the 2yr yield (in green) fell sharply this morning, almost exactly when those WSJ articles were published.  Go figure!

Source: tradingeconomics.com

At any rate, that is the current zeitgeist, the Fed has leaked they want 50bps and are pushing the levers so when they cut 50bps on Wednesday afternoon, nobody is surprised.  The Fed hates surprises.  It will, however, be very interesting to hear Chairman Powell’s comments given that economic data remains pretty strong overall.

As to the other markets beyond bonds and FX, equity markets, after Friday’s US strength, were generally positive in those countries in Asia not celebrating a holiday (Hong Kong +0.3%, Australia +0.3%, Taiwan +0.4%).  In Europe, though, the picture is more mixed with the DAX (-0.3%) lagging while Spain’s IBEX (+0.3%) is higher although other major markets are virtually unchanged on the session.

Finally, in the commodity markets, oil prices (+0.4%) are edging higher this morning as Libya’s production has been completely shut in due to ongoing internal military conflict.  In the metals markets, gold (+0.2%) remains the biggest beneficiary of the global central bank rate cutting theme as it continues to trade at new all-time highs virtually every day.  Silver (+0.7%) is getting dragged along for the ride with many pundits calling for a much more substantial rally there and copper (+0.4%) is responding to a combination of lower rates and lower inventories in exchange warehouses raising the specter of supply shortages.

On the data front, this week is mostly about central banks, but we do get some other important numbers.

TodayEmpire State Manufacturing-3.9
TuesdayRetail Sales0.2%
 -ex autos0.3%
 IP0.0%
 Capacity Utilization77.9%
WednesdayHousing Starts1.25M
 Building Permits1.41M
 FOMC rate decision5.25% (-0.25% still median)
 Brazil interest rate decision10.75% (+0.25%!)
ThursdayBOE rate decision5.0% (no change)
 Initial Claims230K
 Continuing Claims1851K
 Philly Fed2.4
 Existing Home Sales3.85M
FridayBOJ rate decision0.25% (unchanged)

Source: tradingeconomics.com

Clearly Retail Sales will be closely scrutinized as evidence that the economy is still growing.  I would estimate that a weak number there would insure a 50bp cut, while a strong number may give some pause to those on the fence.  The other very interesting aspect of this week will be the BOJ’s communication in the wake of their meeting Friday.  They went from tough talk to just kidding in less than a week back in August.  What will Ueda-san try this time?  Japanese inflation data is released just hours before their announcement, and it remains well above the 2% target.  My sense here is they want to raise rates, they just need to prepare the market more effectively before doing so.

The dollar is already pricing a bunch of cuts as is the bond market.  If the Fed truly gets aggressive, I believe it can fall further, but if the Fed gets aggressive, you can be certain that so will the BOE, ECB and BOC at the very least.  When they start to catch up, the dollar’s decline will slow to a crawl at most.

Good luck

Adf

Our Future’s Austere#debate,#china,

Posted on by

This evening there’ll be a debate
And markets are willing to wait
To see if the polls
Will change who controls
The future, and all of our fate
 
Until then, it seems pretty clear
Investors are waiting to hear
Amid all the lies
If taxes will rise
And whether our future’s austere

 

It seems that all eyes have begun to focus on this evening’s debate between former President Trump and Vice-president Harris, with both sides bombarding every source of information available to the average person with their own spin.  Within the market context, the debate is about which candidate’s policies will be better for the economy and by extension equity markets.  As I am just a poet, this is all far above my pay grade.  Trying to be somewhat objective (and I’m sure you have figured out I lean toward the traditional conservative view of less government is better), from what I have read, neither side paints a particularly enticing picture.  

Tariffs have never proven effective, but the concept of taxing unrealized capital gains is abhorrent, and if enacted would be extremely detrimental to the nation.  Ultimately, I think the phrase, energy is the economy, is one to keep in mind as understanding that idea leads to an understanding of how policy choices will impact economic activity over time.  One need only look at Germany’s economic suicide following their Energiewende policy that has raised the price of electricity dramatically (it is 3x US prices) and led to a slow-motion collapse of the nation’s once strong manufacturing sector, to get a glimpse of the future without cheap and abundant energy.

So, with the Fed in their quiet period, let’s turn our attention overseas for any other news of note.  Chinese trade data was released overnight and showed a further increase in their trade surplus ($91B), news which probably did not brighten President Xi’s day as imports remain incredibly weak, a strong signal that the domestic economy is still stumbling along poorly under the weight of the ongoing collapse in the property bubble there.  The problem was highlighted by Exports growing 8.7% while Imports grew just 0.5%.  Chinese markets were largely unimpressed with this as the CSI 300 rose just 0.1% (although that is better than many of its recent sessions) and the renminbi slipped 0.1% despite a broader trend of modest dollar weakness.

The other notable data was from the UK where the employment situation continues to improve, with the Unemployment Rate falling to 4.1% while wages keep growing at 5.1% and there was a significant uptick in Employment by 265K with all of that data at least as good as expectations with some exceeding them.  When combining the resilience of the employment situation with the fact that inflation remains well above target in the UK, it continues to be difficult to understand the near desperation that the BOE has to cut interest rates.

In fact, that last comment can be applied to the US as well.  A look at the data shows that the job market, while not as robust as it had been last year, remains pretty solid, at least according to the BLS and the recent NFP report, while inflation, no matter how it is measured, remains well above the Fed’s 2.0% target.  In fact, the Atlanta Fed’s GDPNow data moved higher after the NFP report and is now sitting at 2.5% for the current quarter, which would follow the 3.0% Q2 measure.  Again, other than Powell’s promise to cut rates at Jackson Hole, it is not clear the data is pointing to that, at least not the data on the surface.  In fact, Torsten Slok, a well-known economist at Apollo Group, has put out a very interesting compilation of very current data showing that the economy seems to be doing fine.  My point is from the Fed’s perspective, this incredible desire to cut rates seems odd.

But that is the reality, central banks everywhere really want to cut rates, and come Thursday, the ECB will be the next to do so.  The question of 25bps or 50bps for the Fed next week seems almost moot compared to the fact that the market is pricing in 250bps of cuts by the end of next year.  Here’s the problem with that pricing; if the Fed does stick the soft landing, that seems like far too much policy ease without driving a significant uptick in inflation screwing up the soft landing theme.  However, if the economy does fall into recession, they will cut a lot more than that, probably on the order of 350bps to 400bps (Fed funds falling to 1.50% – 2.00%).  And one more thing to remember, QT continues in the background as the Fed gradually reduces the size of its balance sheet.  But can they continue to remove that liquidity while cutting rates as much as the market anticipates?  That feels like a very tough task and in truth, if the Fed is cutting rates, I think we are more likely to see QT turn into QE than anything else.  

So, regardless of the lack of activity today, there is much still to come.  As to today, let’s survey the rest of the markets outside China.  After yesterday’s solid rallies across US equity indices, other than Japan (-0.2%) and Korea (-0.5%), the rest of Asia had solid performances with gains ranging between 0.2% (HK) and 0.75% (Indonesia).  Europe, too, is mixed this morning with some modest gains (CAC, IBEX) and some modest declines (DAX, FTSE 100) with the latter more surprising given the solid employment data.  Perhaps that is the market showing concern the BOE will not cut rates as much as previously expected.  As to US futures, they are little changed at this hour (7:50).

In the bond market, Treasury yields are higher by 1bp this morning and we have seen similar rises across the entire European sovereign market.  Of more interest is the fact that the US 2yr-10yr yield curve is now positively sloped by 3bps this morning, with the long inversion finally having ended.  At least at those maturities.  But if you look at the 3mo (4.98%) – 2yr (3.68%) spread of -130bps, that is dramatically inverted with the market pricing in a huge amount of Fed rate cuts coming ahead.  I cannot help but look at that and be confused about equity analysts’ collective view of significant profit growth going forward.  One of those seems wrong.

In the commodity markets, oil (-1.2%) which had a nice bounce yesterday on concerns over Hurricane Francine hitting the Gulf of Mexico tomorrow, has given it all back after the weaker Chinese consumption data.  Meanwhile, metals prices, which also rallied yesterday amid the general good feelings, are little changed overall this morning.

Finally, the dollar is little changed net this morning as the euro has edged down a few pips while the pound has rallied a similar amount.  In fact, in the G10, only NOK (+0.45%) is showing any movement of substance after lower-than-expected inflation data has reduced the probability of further rate cuts by the central bank there.  Amazingly, in the EMG bloc, movements have been even smaller with really nothing of note to discuss amid overall changes of +/-0.2% or less.

On the data front, the NFIB Small Business Optimism Index was released earlier this morning at 91.2, more than 2 points below last month and expectations and an indication that the small business community remains concerned about future economic activity.  There are no speakers and no other data this morning, so I expect the currency markets to do little until after the debate this evening.  If one candidate is particularly effective, we may see some movement, but otherwise, I sense that people are awaiting tomorrow’s CPI for the next catalyst to make a move.

Good luck

Adf