Tag Archives: #CNY

Havoc the Dollar Will Wreak

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Apparently, President Xi
Is starting to listen to me 🤣
His currency’s falling
As he stops forestalling
The weakness in his renminbi
 
But it’s not just yuan that is weak
The havoc the dollar will wreak
Is set to keep growing
As funds keep on flowing
To US investments, still chic

 

It seems that one of President Xi Jinping’s New Year’s resolutions was to finally allow the renminbi to resume its longer-term decline.  While 7.30 has been the line in the sand for a while, as can be seen from the first chart below, suddenly, as the calendar page turned to 2025, it appears that the PBOC is going to allow for the renminbi to weaken further.  Thus far, the PBOC has been adamant about fixing the Chinese currency at levels much stronger than anyone wants to pay for it, and even last night that was the case, with a fixing rate of 7.1878.  However, while the onshore market must trade within +/- 2% of that fixing rate, no such restriction limits the offshore market, and this morning, the offshore renminbi is trading 2.3% weaker than the fixing, above 7.35 to the dollar.

Much has been made of the “chess” moves that are ongoing between the US and China regarding currency policy with many pundits blankly claiming that if Trump is to impose the threatened tariffs, the renminbi will simply weaken to offset them.  However, while I do believe the CNY has much further to fall, that is not the driving case I see.  Rather, Xi’s problem is that his economy is not in nearly as good condition as he needs it to be and confidence in the consumer sector continues to wane.  This is largely a result of the ongoing destruction of the property bubble that was blown for decades.

Remember, Chinese investors have tied up significant personal wealth in second and third homes as stores of value.  This was encouraged as cities could sell property to developers, get paid a bunch to help finance their operations, and since demand was so high, prices kept rising so everyone was happy.  Alas, as with all bubbles (I’m looking at you, too, NASDAQ) eventually the air comes out.  For the past three years the Chinese have been trying to deal with this collapsing property market, but house prices continue to decline thus reducing investor wealth and confidence.  I read that there are an estimated 80 million empty homes that have been built over the past decades and are now in disrepair in the countryside.  These are the ghost cities that were all part of the Chinese growth miracle, but in fact were simply massive malinvestment.

While the prescription for China has long been to increase its consumer sector of the economy, Xi and his minions at the central committee have no idea how to do that (given they are communist, this is not that surprising) and so continue to support the means of production.  The problem is they have now seemingly gone too far in that space as well with not merely the Western world, but also much of the developing world starting to push back on all the excess stuff that is coming from China.  

Xi’s other problem is that as he rails against the dollar and seeks others to use the renminbi in their trade, if the currency starts to fall sharply, that will be a difficult ask.  Given the US FX policy remains benign neglect, it is entirely upon China to solve their own problems.  While it is unlikely to happen in a big devaluation a la August 2015, weakness is the trend to bet here this year.

Source: tradingeconomics.com

Source: tradingeconomics.com

Away from that news, though, the year is starting off in a fairly modestly.  Most of the world’s focus is on the upcoming Trump inauguration as well as the political machinations that will begin today as Trump’s Cabinet nominees start to go through their paces in front of the Senate.  New Year’s Eve’s horrifying terrorist attack in New Orleans has just upped the ante with respect to Trump getting his picks through the process.  

So, let’s review the overnight market activity to get a sense of what today could bring.  The first day of the US trading year resulted in modest declines across the board in equities, although as I type (7:30), they appear to be retracing those losses and are slightly higher.  The bigger news was from Asia where both the Nikkei (-1.0%) and CSI 300 (-1.2%) showed weakness with the former feeling the pain of some profit taking after gains last week, although Chinese shares seem to be succumbing to the troubles I have described above.  Elsewhere in the region there was no consistency with gainers (Hong Kong, Taiwan, Korea and Australia) and losers (India, New Zealand, Malaysia) with other exchanges little changed.  In Europe this morning, there is more red than green with the CAC (-0.8%) the biggest laggard amid concerns over the fiscal situation in France.  But the DAX (-0.35%) and FTSE MIB (-0.45%) are also lagging with only Spain’s IBEX (0.0%) bucking the trend.

In the bond market, Treasury yields have slipped 2bps this morning, but remain above 4.50%, something that continues to vex Chairman Powell as he and the Fed seemed certain that by cutting the Fed funds rate, he would drive the entire yield curve lower.  I wonder if he will learn this lesson about the relation between a made-up rate (Fed funds) and market rates (bond yields) anytime soon.  In Europe, French yields are 2bps higher, widening their spread vs. German bunds and perhaps more remarkably, at least from a nominal perspective, well above Greek government bond yields now! (Remember, there are far fewer GGB’s around than OAT’s so there is a scarcity bid there). Certainly, Madame Lagarde must be getting a bit concerned over her native nation’s profligacy and I suspect that the fiscal ‘need’ for lower Eurozone interest rates is one of the features of the discussion regarding the ECB’s future path (lower).  As to JGB’s, they are unchanged, sitting at 1.07% and showing no sign of rising anytime soon.  One last thing, Chinese 10yr bonds now yield a new record low of 1.61%, 2bps lower on the day and pretty convincing evidence that not all is well in the Middle Kingdom’s economy.

On the commodity front, oil (-0.2%) is consolidating yesterday’s strong gains which were ostensibly based on the idea that President Xi will successfully implement more stimulus and aid growth in China.  History shows otherwise, but we shall see.  Gold (-0.1%) is also consolidating yesterday’s strong gains as it appears there has been renewed central bank buying activity to start the year.  The other metals also benefitted yesterday with silver (+0.8%) continuing this morning.

Finally, the dollar is retracing some of yesterday’s gains but remains much stronger than we saw just last week, and certainly since the last time I wrote.  Looking at the Dollar Index, it is hovering near 109 this morning, having traded well above that yesterday afternoon.  The next obvious technical target is 112, about 3% higher and there are now many calls for a test of the 2002 highs of 120.  I assure you, if the DXY gets to those levels, EMG currencies are going to come under a great deal of pressure.  As an example, we already see several EMG currencies (CLP, BRL) trading at or near all-time lows (dollar highs) and there is nothing to think this will change soon.  As well, check out the euro at 1.03 this morning, which while 0.3% higher on the session, appears as though it could well test those October 2022 lows (dollar highs) sooner rather than later, especially if the ECB continues to lean more dovish than the Fed.  If you are a receivables hedger, currency puts seem like a pretty good idea these days.

On the data front, ISM Manufacturing (exp 48.4) and Prices Paid (51.7) are all we have today and late this morning Richmond Fed president Barkin speaks.  Interestingly, tomorrow evening and Sunday we hear from SF Fed President Daly and tomorrow evening Governor Kugler will be joining Daly.  I guess they can’t go but so long without hearing their voices in the echo chamber!

There is nothing to suggest that the dollar, while modestly softer today, is set to turn around soon.  Keep that in mind.

Good luck and good weekend

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A New Denouement

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The story is that the Chinese
Will speed up their policy ease
Creating for Yuan
A new denouement
Of currency weakness disease
 
Their problem is that in the past
That weakness could happen too fast
So, how far will Xi
Be willing to see
Renminbi decline at long last?

 

As we await the US CPI data this morning, the story du jour in markets revolves around the Chinese renminbi and whether President Xi will allow, or encourage, the PBOC to weaken the currency.  Strategically, Xi has made a big deal to the rest of the world that the Chinese currency will remain strong and stable as he seeks other nations to increase their use of the renminbi in commercial transactions as well as a store of value.  I believe part of this is a legitimate goal but that there is also a significant fear underlying these actions as history has shown the Chinese people will flee the currency if it starts to weaken too quickly.  It is the latter issue that has been the primary driver of the PBOC’s efforts to continuously fix the renminbi at stronger than market levels.
 
This process worked well enough for the past four years as the Biden administration, while certainly not friendly to China, was not aggressively attacking the nation’s efforts to expand its influence.  However, that situation is about to change with the Trump administration and as Mr Trump has already threatened numerous new tariffs on various parts of China’s production economy, Xi’s calculus must change.  This puts Xi in a difficult situation; allow the currency to weaken more aggressively to offset the impact of any tariffs and suffer through capital flight or maintain the renminbi’s value and see exports decline along with overall economic activity.  It is easy to see in the chart below when the story about allowing a weaker currency hit the tape.  However, there is not nearly enough information to take a longer-term view on the subject.

 

Source: tradingeconomics.com

One other thing to remember is that Chinese interest rates are continuing to decline with 10-year yields trading to yet another new low last night at 1.88%.  As the spread between US and Chinese yields continues to widen, by itself that will put pressure on the renminbi to decline.  The problem for Xi is that no matter the control the PBOC has over the FX markets in China, now that there is an offshore market, if the Chinese people become concerned over the value of the renminbi, it has the ability to decline far more quickly than the government would want to allow.

For those of you with Chinese assets on your balance sheet or Chinese denominated revenues, I would be looking to maximize my hedges for now.  As an aside, there were a number of forecast changes by major banks overnight with many calls for USDCNY to reach 7.50 or higher by the end of next year now.

The market’s convinced
A rate hike is on the way
Why won’t the yen rise?

The other story overnight focused on Japan, or more precisely the BOJ meeting to be held in one week’s time.  It seems that there is a lot of dissent amongst the analyst community regarding whether or not the BOJ will hike rates.  As an example of how thin all the analyst gruel really is, one of the key rationales for the belief in a rate hike was that last week, Toyoaki Nakamura, perceived as the most dovish BOJ board member, indicated he didn’t object to a rate hike, although wanted to see more data before declaring one was appropriate for December.  However, just last night the BOJ added a speech and press briefing to their calendar for Deputy Governor Ryozo Himino right before the January meeting.  This has the punditry now expecting the BOJ to wait until then rather than move next week.  The below chart shows the change in the market’s expectations for a rate hike over the past week.

As I said, the tea leaves that the punditry are reading really don’t say very much at all.  Perhaps we can look at the economic data to get a sense.  Over the past month, we have seen CPI for both the nation and Tokyo print higher than forecast and continue to slowly climb.  As well, PPI printed higher and GDP continues to grow, albeit at a modest pace.  Of greater concern is that earnings data is lagging the CPI data.  

A look at the FX market would indicate that traders are losing their taste for a rate hike next week, at least as evidenced by the yen’s recent weakness.  As you can see in the past week, it has slipped nearly 2%, hardly a sign that higher Japanese rates are expected.  But something that is not getting much press is the potential Trump impact, where the incoming president would like to see the yen, specifically, strengthen as it is truly historically undervalued.  FWIW, which is probably not that much, I am in the rate hike camp for next week and expect the yen will find some support soon.

Source: tradingeconomics.com

Ok, enough Asian currency talk.  Let’s see how everything else behaved ahead of this morning’s data.  Yesterday’s modest US equity declines were followed by virtually no movement in Japanese shares although most of the rest of Asia followed the US lower.  Hong Kong (-0.8%) and Taiwan (-1.0%) were the worst performers and the one outlier the other way was Korea (+1.0%) as the KOSPI continues to recoup the losses made after the martial law fiasco.  European bourses are mostly little changed on the day with Spain’s IBEX (-1.1%) the lone exception which has been negatively impacted by Q3 results from Inditex (the parent company of Zara).  As to US futures, at this hour (7:25) they are little changed.

In the bond market, yields continue to edge higher in Treasuries (+2bps) and European sovereigns with gains on the order of 1bp to 2bps across the board.  While there is some discussion regarding fiscal questions in Europe, ultimately, nothing has broken the connection between US and European yields, and I would contend they are all awaiting this morning’s CPI.

In the commodity markets, oil (+1.4%) is rebounding although remains below $70/bbl, which seems to be a trading pivot for now.  The China stimulus story remains the key in the market with a growing belief that if China does successfully stimulate, oil demand will increase.  Meanwhile in the metals markets, gold is unchanged this morning after another nice rally yesterday while both silver and copper are under modest pressure.  I would contend, however, that the trend for all metals remains slightly upward.

Finally, the dollar is firmer against virtually all its counterparts this morning with most G10 currencies softer on the order of -0.3% or so although CAD and CHF are little changed on the session.  In the EMG bloc, KRW (+0.3%) is rebounding alongside the KOSPI as the excesses from the martial law story last week continue to be unwound, but elsewhere in the bloc, modest weakness, between -0.2% and -0.4%, is the rule.  However, this is all dollar focused today.

On the data front, it is worth noting that yesterday’s NFIB Small Business Optimism Index shot higher in November in the wake of the election results, heading back toward its long-term average just above 100.  As to this morning, forecasts for Headline (exp 0.3%, 2.7% Y/Y) and Core (0.3%, 3.3% Y/Y) CPI continue to indicate that the Fed may be overstating the case in their belief that inflation pressures are ebbing.  Rather, I continue to believe that we have seen the bottom in the rate of inflation and a gradual increase is in our future.  Two other things of note are the BOC rate decision (exp 50bps cut) this morning and then the Brazilian Central Bank rate decision (exp 75bp HIKE) this afternoon.  The latter is clearly an attempt to rein in the BRL’s recent dramatic decline.

With no Fed speakers, if the data this morning is significantly different than expectations, I would look for the Fed Whisperer, Nick Timiraos, to publish something before the end of the day in order to get the Fed’s latest views into the market.  Absent that, nothing has gotten in the way of the higher dollar at this stage so stay sharp.

Good luck

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Juiced

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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

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Recalibration

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All week we had heard many clues
That fifty is what Jay would choose
And that’s what he cut
With only one but
From Bowman, who shuns interviews
 
The key is now recalibration
In order to tackle inflation
Without driving higher
The joblessness spire
So, trust us, it’s all celebration

 

“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.” [emphasis added]

Reading the opening paragraph of the FOMC Statement, it might be confusing as to why they needed to cut rates 50bps.  After all, the economy is expanding at a solid pace (In fact, after the Retail Sales data on Tuesday, the Atlanta Fed’s GDPNow reading for Q3 is up to 3.0%!)  unemployment remains low and inflation is still somewhat elevated.  I know I am a simple poet, but the plain meaning of those words just doesn’t lead my thinking to, damn, we better cut 50 to get started.  But I guess that is just another reason I am not a member of the FOMC.

Perhaps the more interesting thing was the Summary of Economic Projections and the dot plot which showed that while expectations were for rates to fall far more dramatically than in June, the longer run expectations continue to rise.  In fact, Chairman Powell specifically addressed the SEP in the press conference, “If you look at the SEP you’ll see that it’s a process of recalibrating our policy stance away from where we had it a year ago when inflation was high and unemployment low to a place that’s more appropriate, given where we are now and where we expect to be, and that process will take place over time.” [emphasis added] In fact, there was a lot of recalibrating going on as that appears to be the Chairman’s new favorite word, using it 8 times in the press conference.

Source: federalreserve.cgov

Notice that their current forecasts are for GDP to slow to 2.0% with Unemployment edging only slightly higher while PCE inflation magically returns to their 2.0% target.  And take a look at the last two lines, with the Fed funds rate projections falling substantially for the next three years, far more quickly than their previous views, although they think the long-run level will be higher.  

I wonder about that last issue.  Historically, the thought was that the long run Fed funds rate would be inflation (2.0%) + real interest rate (0.5%) and they pegged it at 2.5% for years.  Now that they see it at 2.9%, is that because they think inflation is going to be higher (not according to their projections) which means that for some reason they think real interest rates are going to be higher.  However, when asked, Chairman Powell and every member of the board has been unable to explain this change.

But what really matters is how have markets responded to this earth-shattering news?  The initial movement was as expected, with stocks rallying sharply (see chart below) and yields sliding along with the dollar while commodities rallied.

Source: Bloomberg.com

But a funny thing happened on the way to the close, as can be seen in the chart.  Stocks gave back all their gains and then some, with all three major indices lower on the session while 10yr Treasury yields backed up 7bps and the dollar rebounded.  Arguably, this was a sell the news response, but we need to be careful.  Remember, there are many analysts who believe the economy is in deep trouble already and by starting off with a big cut, those with paranoia may be wondering what the Fed knows that the data, at least the headline data, is not really showing.

So much for yesterday, now let’s look at markets this morning beyond the initial knee-jerk responses.  Absent any other major news or data (Norgesbank leaving rates on hold doesn’t count as major), markets have played out far more along the lines of what would have been expected in the wake of a 50bp cut.  In other words, the dollar has fallen sharply against almost all its counterparts, equity markets have rallied around the world, commodity prices have rallied sharply, and bond yields are…unchanged? 

Which brings us to the question that has yet to be answered.  Which market is right, stocks or bonds?  They appear to be telling us different stories with stocks pushing to new highs amid rising multiples and rising profit growth expectations while bonds are pricing in another 200bps of rate cuts by the end of 2025, an outcome that would only seem to make sense in the event the economy fell into a recession.  But if we are in a recession, corporate earnings seem highly unlikely to rise as much as currently forecast and typically, P/E multiples contract.  Meanwhile, if the economy is humming along such that current equity pricing is warranted, what will be the driver for the Fed to cut rates as that will almost certainly reignite inflation.  

History has shown that the bond market tends to get these big questions right when they are pointing in different directions, but that doesn’t mean that risk assets will stop rallying right away.  In fact, this will likely take quite a while to play out.

Ok, so let’s put a little more detail on the market activity overnight.  Tokyo rocked (+2.0%) as did Hong Kong (+2.0%), Taiwan (+1.7%), Singapore (+1.1%) and even mainland China (+0.8%) managed to rally some.  It appears that investors around the world believe the Fed has opened the floodgates for a much lower interest rate environment everywhere.  European bourses, too, are sharply higher led by the CAC (+2.1%) but with strength across the board (DAX +1.5%, FTSE 100 +1.3%).  And US futures have shaken off the late selloff yesterday and are firmly higher this morning led by the NASDAQ (+2.2%).

Bond yields, though, are largely unchanged on the day, with yesterday’s backup in Treasury yields maintained and European sovereigns all within 1bp of yesterday’s close.  It appears that bond investors are less confident in a soft landing than equity investors.  Interestingly, JGB yields rose 2bps last night as Japanese markets prepare for the BOJ meeting tonight.

In the commodity markets, oil (0.75%) is continuing its recent rebound after another massive inventory draw was revealed by the EIA yesterday prior to the Fed meeting.  There is a growing concern that inventories in Cushing, Oklahoma are falling to a point where products like gasoline and diesel will not be able to be produced.  As an example, gasoline futures have risen far more than crude futures this week on that fear.  As to the metals markets, gold briefly touched $2600/oz yesterday immediately in the wake of the FOMC but sold off hard afterwards.  This morning, however, it is back pushing up to that level again and the entire metals complex is rising nicely.

Finally, the dollar, has been a whipsaw of late.  Post the FOMC, it fell sharply across the board, and then into yesterday’s close it rebounded to close higher on the day.  However, this morning it has given back all those late gains and then some, and is now sitting at its lowest level, at least per the DXY, since April 2022.  This morning, in the G10, we are seeing many currencies rally between 0.5% (EUR) and 1.3% (NOK) vs the dollar and everywhere in between.  The one exception to that is the yen (-0.2%) which is biding its time ahead of the BOJ meeting.  The working assumption is that the BOJ will do nothing tonight, but now that the Fed has cut 50bps, and given Ueda-san’s history of actively trying to surprise markets to achieve outcomes he wants, we cannot rule out another rate hike in Japan.  Monday morning, USDJPY fell below 140 for the first time in 18 months.  My take is Ueda-san is quite comfortable with it heading back to the 130 level, if not the 120 level.  If he were to surprise markets and raise the base rate by even 10bps tonight, I think we would see a sea change in sentiment and a much lower dollar.  And given inflation in Japan seems to have stalled at 2.8%, well above their 2.0% target, he has a built-in excuse.

Too, watch the CNY (+0.45%) as it is now trading at its highest level (weakest dollar) in more than a year, and is approaching the big, round number of 7.00.  the linkage between JPY and CNY is tight as they constantly compete in markets, especially now in autos and electronics.  If the Fed is really going to cut as much as markets are pricing, both these currencies should strengthen much further.

It is almost anticlimactic to discuss the data today but here goes.  First, the BOE left rates on hold, as expected and the market impact was limited.  Expectations are they will cut next in November.  As to data, we see Initial (exp 230K) and Continuing (1850K) Claims, Philly Fed (-1.0) and Existing Home Sales (3.90M).  None of that is likely to change any views.  Prior to the BOJ meeting, at 7:30 this evening we see Japanese CPI, which may change views there.

For now, the dollar is very likely to remain on its back foot as enthusiasm builds for multiple rate cuts by the Fed going forward.  However, if the data continues to impress like it has lately, that enthusiasm will need to be tempered.

Good luck

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Wasn’t Whizzbang

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There once was a time in the past
When earnings reports were forecast
If companies beat
It was quite a treat
If not, CEOs were harassed
 
But that was before Jensen Huang
Described the AI bell he rang
Nvidia now
Is what defines tao
Alas, last night wasn’t whizzbang

 

In what cannot be that great a surprise, given the remarkable hype that continues to surround Nvidia, their earnings were great, but not great enough to exceed the outsized expectations that have become commonplace.  And while revenues and earnings more than doubled, and their profit margins are above 50%, it wasn’t enough to satisfy the underlying belief that exists.  What is that belief?  The best I can tell is that the true believers are certain Nvidia will be the only company left on earth when AI takes over, and so it’s value will equate to global economic activity, currently approximately $105 trillion, so it has much further to climb.  Perhaps the oddest result was that there were actual ‘watch parties’ for the earnings release.  It is not clear to me if that is more hype than a Jensen Huang fan asking him to sign her breast or not, but it is certainly a lot of hype.
 
And yet, the world continues to turn this morning despite the disappointment and US stock futures are actually higher after a lackluster day yesterday where all three main indices declined. As is always the case, in hindsight, the hype is revealed for just what it was, but usually the rest of our lives feel no impact.  That said, it was clearly the market driver yesterday and will almost certainly continue to have an outsized impact on things for a while yet.  But let’s move on.
 
Said Bostic, I need to see more
Results on inflation before
I’m banging the drum
For that cut to come
‘Cause I don’t know what more’s in store

Back in the macro world, we heard from Atlanta Fed president Bostic last night and he was far more circumspect of a rate cutting cycle than the market currently believes was signaled by Chairman Powell last week in Jackson Hole.  As of this morning, the market continues to price a one-third probability of a 50bp cut in September, a total of 100bps of cuts in the rest of 2024 and a total of 225bps of cuts by the end of 2025.  Meanwhile, Mr Bostic explained, “I don’t want us to be in a situation where we cut and then we have to raise rates again.  So, if I’m going to err on one side, it’s going to be waiting longer just to make sure that we don’t have that up and down.”

Now, I know I’m not a Fed funds trader, or even a fixed income trader (I’m just an FX guy) but these comments didn’t sound like he was ready to start slashing rates anytime soon.  Bostic is a voter this year, and while I’m pretty sure the Fed is going to cut next month, I remain in the 25bp camp, and I might suggest that there are still several FOMC members who see no reason to cut rates quickly.  After all, absent a serious downturn in the labor market, and given the economy continues to perform reasonably well, at least according to the data they watch, what is the rationale for a cut?  And remember, if the Fed is cutting rates quickly it means they are responding to economic difficulties.  That doesn’t seem like an outcome we want to see.

Beyond those two stories, though, once again, there is a dearth of new information on which to make decisions.  China continues to struggle and there are now more bank analysts (UBS being the latest) who are lowering their forecasts for GDP growth there to the 4.5% range, well below President Xi’s 5.0% target.  The ongoing implosion of the Chinese property market continues to weigh heavily on the economy there and, as the chart below shows, the Chinese stock market.

A graph with blue lines and numbers Description automatically generated

Source: Bloomberg.com

Aside from the irony of a strictly communist country even having the very essence of capitalism, an equity market, I believe the incredibly poor performance in Chinese shares is an ongoing signal that not all is well in China, regardless of what official statistical data they present.  President Xi has many problems to address, and I expect he will spend far more of his time trying to smooth international trade relations than anything else for the time being.  After all, the blank paper protests that led to the end of Covid restrictions in China are evidence that Xi is still subject to some popular sentiment.  If the economy were to crater, it would become a major problem for his power, and potentially his health.

Ok, let’s run through the overnight price action.  Asian markets were a mixed bag overnight with Japan essentially unchanged while China (-0.3%) continues to lag virtually all other markets.  The Hang Seng (+0.5%) managed a rally alongside India and Singapore, but there were more laggards including Australia, Korea, Indonesia and New Zealand.  But that is not the story in Europe this morning with all markets in the green led by the CAC (+0.7%) and DAX (+0.6%) on the back of somewhat softer German state inflation data (the national number is released at 8:00am) and what appears to be modestly better than expected Eurozone sentiment indices regarding services and industry, although consumers are still a bit unhappy.

In the bond market, everyone is asleep it seems as there has been no movement of more than 1 basis point in any major market.  Given the lack of new economic inputs, this should not be a great surprise.  I suspect that this morning’s US data, and especially tomorrow’s PCE data may shake things up if there are any unusual outcomes.

In the commodity markets, oil (+0.3%) has stopped falling for now as yesterday’s EIA inventory data showed a total draw of more than 4 million barrels, the 9th drawdown in the past 10 weeks and an indication that supply is falling to meet the alleged weakening demand.  Gold (+0.6%), which started off under pressure yesterday rebounded in the afternoon and continues this morning dragging silver along for the ride.  Copper (-1.9%) however, remains under pressure on both the softening demand story and a technical trading move.

Finally, the dollar, at least the DXY, is continuing to rebound from its Tuesday lows although there is a lot of mixed activity here with some gainers (AUD +0.55%, NZD +0.5%, ZAR +0.85%, CNY +0.6%) and some laggards (EUR -0.25%) along with the CE4 showing weakness.  The big outlier is CNY, which is showing one of its largest single day gains in the past year.  This seems a bit odd given the ongoing lackluster equity market performance and the data showing that foreign investment into China has reversed course and is now divestment.  None of that speaks to a currency’s strength, but as yet, I have not found a good rationale for the renminbi’s strength.  I will keep looking.

On the data front, we finally see some things this morning starting with Initial (exp 232K) and Continuing (1870K) Claims, the second look at Q2 GDP (2.8%) and all the attendant data that comes with that release (Real Consumer Spending +2.3%, PCE +2.6%, 2.9% core).  As well, Mr Bostic as back at it this afternoon at 3:30.  

My take is given the elevated importance of the employment report, today’s data that really matters will be the Claims numbers with any substantial miss (>15k different than forecast) leading to some price action and potential concerns.  But otherwise, Bostic certainly won’ change his tune in less than 24 hours, and the current market zeitgeist appears to be that the dollar, while headed lower, is going to chop to get there.  If we do see a high Claims number, above 245K, look for the dollar to fall more sharply, retracing its overnight bounce.

Good luck

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Destined for Sloth

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The Chinese are starting to worry
That if they don’t act in a hurry
Their ‘conomy’s growth
Is destined for slowth
Explaining their rate cutting flurry

 

Sunday night, the PBOC surprised markets by cutting both their 1-year and 5-year Loan Prime Rates by 10 basis points each.  As well, they cut the rate on their newly developed 7-day repo rate by 10bps as they endeavor to shorten the maturity of their money market operations. At the time, it was taken as a response to the Third Plenum and the only concrete action seen as new support for the economy.  As its name suggests, those rates represent the cost to borrow for credit worthy companies.  A quick look at the history of this rate (the blue line), which was first tracked toward the end of 2013, shows that over time, it has done nothing but decline.  I have overlayed a chart of USDCNY in the chart (the grey line) to help appreciate the long-term trend in that as well which, not surprisingly, shows a steady weakening of the renminbi (rise in the dollar).

Source: tradingeconomics.com

But the reason I bring this up is that last night, the PBOC surprised markets yet again by cutting its One-Year Medium-Term Lending Facility by 20 basis points, to 2.30%.  Not only was this the largest cut since the pandemic, but it was also done at an extraordinary meeting and combined with an injection of CNY235 billion (~$32B) into the economy.  Arguably, this is the most aggressive monetary policy stance that has been effected by the PBOC since the summer of 2015 when they surprisingly devalued the renminbi 2%.  Apparently, the PBOC is trying to adjust its policy actions to be more in line with the G7 where central banks use short term rates as their tools.  One other thing this implies is that President Xi remains steadfastly against any fiscal stimulus of substance at this point.  On the one hand, you must admire that effort, but I fear that the domestic Chinese economy remains so weighed down by the ongoing property sector problems, achieving their 5.0% GDP growth target is going to become that much more difficult as the year progresses.

For our purposes, though, the story is all about the CNY (+0.7%), which rallied sharply after the announcement, continuing its movement from the Monday rate cuts which totals 1.1%.  Now, ordinarily one might think that a country cutting its rates would lead to a weaker currency, ceteris paribus, However, given the market outcome, there is much discussion about how the PBOC “requested” Chinese banks to more aggressively buy CNY to support the currency.  Interestingly, the fixing rate on shore overnight (7.1321) continues to weaken ever so slightly overall, but now the spread between the fix and the market has fallen to just over 1%, well within the +/- 2% band and an indication there is less pressure on the currency.  My take is this is just window dressing, but I would not fight it.  I expect that we will see USDCNY slowly return to higher levels over time, with the key being it will take lots of time.

The ongoing rout
In tech stocks has another
Victim, dollar-yen

Under the guise, a picture is worth a thousand words, the below chart showing the NASDAQ 100 (blue line) and USDJPY (green line) overlaid is quite interesting.

Source: Tradingeconomics.com

While there is an ongoing argument amongst market practitioners as to whether it is the decline in the tech sector that is driving USDJPY’s decline or the other way round, what is clear is that there is a strong correlation between the two.  If you think about what the USDJPY trade represents, it is the purest form of a carry trade, shorting the cheapest currency and using the funds to buy a much higher yielding currency with maximum liquidity.  But another thing to do with those funds obtained from borrowing yen and buying dollars was to use the dollars to jump on the tech stock bandwagon.  After all, that added another 30% to the trade since the beginning of the year.  

However, over the past two weeks, nearly one-third of the NASDAQ gains have been erased and that has been made worse by the >6% rise in the yen.  At this stage, it no longer matters which is driving which, the reality is that we are seeing significant short covering in the yen with sales in other assets required to unwind the trade.  Arguably, this is why we are seeing virtually every risk asset lower this morning, although bonds are holding up as havens, as all have been funded with short yen.  Given that relationship, I am coming down on the side of the yen being the driver, but as I said, I don’t think it matters.  

The real question is can it continue?  It is important to understand that when markets achieve excessive levels like we saw in USDJPY, they rarely simply unwind to some concept of fair value.  Rather they typically overshoot dramatically in the other direction.  As such, if we assume PPP is fair value, and PPP for USDJPY is currently around 110.00, it appears there is ample room for USDJPY to decline much further.  Consider, this movement has happened, and the Fed has not even started to cut rates.  If we do, indeed, fall into recession, the Fed will respond, and I expect that we could see a very sharp decline in USDJPY.  Something to consider looking ahead.

While that was a lot about the currency markets, they seem to be the current drivers, so are quite important.  But let’s look at everything else.

Equity market pain has been universal with Japan (-3.3%), Hong Kong (-1.8%) and China (-0.6%) all following the US lower overnight and in Europe, this morning, it is no better with the CAC (-2.2%) the worst performer, but all the major indices falling sharply.  US futures are little changed at this hour (7:00), but remember, we are awaiting key GDP data and more earnings numbers, which have been the driver.

As mentioned above, bond markets are rallying with Treasury yields lower by 5bps and most European sovereigns seeing declines of -3bps or -4bps.  Credit is an issue as Italian BTPs are the laggard this morning, with yields there only lower by 1bp.  Equally of interest is the fact that the US yield curve inversion has been reduced to just 14bps and has been normalizing dramatically for the past several sessions.  One thing to remember about the yield curve is that when it inverts, it indicates a recession is coming, but when it uninverts, it indicates the recession has arrived!  This is all of a piece with softer economic data and expectations of Fed policy ease coming soon to a screen near you.

In the commodity markets, nobody wants to own anything.  Oil (-1.3%) is continuing its recent poor performance despite EIA data showing significant inventory reductions.  This is not a sign of strong demand.  But we are also seeing weakness across the entire metals space with gold (-1.0%) breaking back below $2400/oz and silver and copper under severe pressure.  Right now, nobody wants to hold these, although I suspect that the long-term supply/demand situation remains bullish.

Finally, the dollar is mixed overall.  While we have seen strength in JPY and CNY, as discussed above, and CHF (+0.8%) is also showing its haven status and use as a funding currency, there are numerous currencies under pressure, notably AUD (-0.8%), NOK (-0.8%), MXN (-0.8%), ZAR (-0.7% and SEK (-0.6%) all of which are commodity linked to some extent.  Yesterday, the BOC cut rates by 25bps, as expected, but the Loonie has been steadily weakening for the past two weeks, so yesterday’s decline and today’s is just of a piece with that.  Ultimately, we are watching a serious risk-off event, and I expect the dollar will hold its own vs. most currencies, although JPY and CHF seem to have room to run yet.

On the data front, once again yesterday’s data was on the soft side with the Flash Manufacturing PMI falling to 49.5, well below expectations and New Home Sales slipping to 617K.  In fact, it is difficult to find the last strong piece of data, perhaps the ex-autos Retail Sales number from last week.  This morning, we see Initial (exp 238K) and Continuing (1860K) Claims, Q2 GDP (2.0%), and Durable Goods (0.3%, 0.2% ex transport).  The Atlanta Fed’s GDPNow tool is indicating GDP in Q2 was 2.6%, well above the forecasts.  However, I think of much more interest will be to see how it starts out for Q3.  We have had a spate of weak data, and those recession calls are growing louder.

This is a tough market, but I expect we have not yet seen the last of the risk-off trade (just consider how long the risk-on trade has been going on) so further dollar strength against most currencies, except for JPY and CHF, and further weakness in commodities and equities seem the most likely direction.

Good luck

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Will They Return?

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One-Sixty is so
Close, you can almost touch it
But, will they return?

 

The current Mr Yen, Masato Kanda, was on the tape last night as USDJPY creeps ever closer to the 160 level that triggered the most recent bout of inflation at the end of April. He explained, “If there are excessive currency fluctuations, it has a negative impact on the national economy.  In the event of excessive moves based on speculation, we are prepared to take appropriate action.”  At this point, the overnight high of 159.89 is just 28 pips from the peak seen prior to the last bout of intervention, although the price action this time is far more muted than what we saw then.  While the yen’s decline has been steady, as can be seen in the below chart, it hasn’t been so swift it appears out of control.

Source: tradingeconomics.com

One of the key rationales for the previous bout of intervention was that the weakening of the yen occurred too rapidly, with a 10-yen decline seen over a short six-week period.  That has not been the case this time, so I do not anticipate any MOF/BOJ action at 160, but rather somewhere closer to 165 if we see that during the summer.  Remember, the BOJ meets again at the end of July at which point they are expected to present their new bond buying program with reduced amounts of JGBs, their version of QT.  Remember, too, that there is still a huge interest rate differential between the US and Japan, and until that narrows, and is expected to narrow further, it is very difficult to see the yen showing any substantive strength.  While caution is merited here, as the BOJ can certainly enter the market at any time, based on the summary of opinions from the last BOJ meeting, which were released last night, there is no clear consensus on the pace of either QT or rate hikes.  The yen seems to have further to fall this summer.

In China, the powers that be
Are scared that their own renminbi
May fall and expose
The emperor’s clothes
Are missing, and that all might see

 

As things in the West are awaiting two key events at the end of the week, the PCE data in the US on Friday and the French elections on Sunday, we shall continue our look at Asia.  The CNY market onshore is frozen as it is pegged at the 2% maximum movement from the daily CFETS fixing.  Last night’s fixing of 7.1201 indicates that the highest the dollar can trade on shore is 7.2625, the level at which it is currently pegged.  In fact, given the interest rate differentials between the US and China, funding of traders’ books is becoming impossible because the one-day forward points will result in a price above the band.

While the offshore renminbi is slowly grinding lower, the pressure on the PBOC to adjust its daily fixing more rapidly grows.  This issue is a result of the following incompatible goals as defined by President Xi; support the collapsing local property markets by easing monetary policy while maintaining a stable and strong renminbi to demonstrate to the world that CNY should be a global currency (despite the capital controls in place!).  Alas for President Xi, these two ideas do not work in concert with the result that onshore FX markets are likely to remain frozen until things change.  A look at President Xi’s history tells me, at least, that like the Red Queen, he can believe multiple impossible things at the same time.  Ultimately, the great irony here is that despite Xi’s desires to demonstrate the importance of the renminbi to the world, he is entirely reliant on the Fed to cut rates in order to break this deadlock, and I strongly suspect that Chairman Powell cares not one whit about Xi Jinping and his problems.

Looking ahead, I anticipate the renminbi will grind lower over time as it remains the only outlet for the still lackluster growth in the economy with the property market problems forcing interest rates lower than otherwise would be desired.  Arguably, this is why the Chinese, in their current bout of trade talks with the EU, is demanding that Europe removes its tariffs on Chinese EVs.  Since they can’t weaken the currency further, they need to get the other side to effectively cut prices for them.

Ok, let’s review the overnight activity.  After Friday’s lackluster equity markets in the US (the NASDAQ actually fell, which I thought was illegal), the picture in Asia was mixed with the Nikkei (+0.5%) rallying a bit as the weak yen continues to support their exporters, while mainland Chinese shares (-0.5%) suffered as the ongoing weak economic data (Friday night showed Foreign direct investment fell -28.2% YTD, the weakest performance since 2009, and another indication that the renminbi is too strong).  As to the rest of the region, there were more laggards (Korea, Taiwan, Australia, New Zealand), than gainers (India, Singapore, Thailand).  However, in Europe this morning, the screens are all green as the limited data, German Ifo, indicated continued weakness raising hopes for a July rate cut by the ECB.  As to the US futures market, at this hour (7:15), they have edged slightly higher, about 0.15%.

Treasury yields have moved higher by 1bp but remain far closer to recent lows than the highs seen a month ago.  But the story in Europe is interesting as the Bund-OAT spread has narrowed by 5bps after comments by the RN party’s Jordan Bardella, the leading candidate as new PM, that were far more muted and accepting of Europe as a whole, and less populist financial goals.  This has played itself out across the entire continent with the perceived weaker countries seeing their yields slide slightly while Germany and the Netherlands have seen yields edge higher.  In Asia, JGB yields backed up 2bps to 0.98%, arguably in response to the summary statements from the BOJ.

Oil prices are continuing to show strength, up another 0.5% this morning, as the inventory draw from last week continues to support the market.  Meanwhile, after a very difficult session on Friday, metals prices are stabilizing with gold and silver both up 0.15%, although copper, which was higher earlier in the session, has now reversed course and is down -0.6%.

Lastly, the dollar is broadly, though not universally, under pressure this morning, with the euro (+0.35%) the driver in the G10 market which is also dragging the CE4 higher (PLN +0.9%, HUF +0.5%).  Bucking the trend is the rand (-1.0%) as market participants start to wonder who President Ramaphosa will be appointing to his cabinet now that he must share power.  One must be impressed with the volatility in the rand of late, that is for sure.

On the data front, while we get several indicators earlier in the week, all eyes will be on Friday’s PCE data.

TodayDallas Fed Manufacturing-13
TuesdayChicago Fed National Activity-0.4
 Case-Shiller Home Prices6.9%
 Consumer Confidence100.0
WednesdayNew Home Sales640K
ThursdayInitial Claims236K
 Continuing Claims1820K
 Durable Goods0.0%
 -ex Transports0.1%
 Q1 GDP (Final)1.3%
FridayPersonal Income0.4%
 Personal Spending0.3%
 PCE0.0% (2.6% Y/Y)
 Core PCE0.1% (2.6% Y/Y)
 Chicago PMI40.0
 Michigan Sentiment65.7

Source: tradingeconomics.com

As well as the data, we hear from five more Fed speakers with Governor Michelle Bowman speaking at three separate events this week.  However, thus far, there has been no substantive change from the Powell mantra that they need to see more evidence that inflation is slowing, several months’ worth, before considering easing policy.  Of course, if next week’s Unemployment rate were to tick up to 4.2%, I imagine that mantra might change.

On the central bank front, only Sweden’s Riksbank meets this week, and no policy change is expected.  If you recall last week, the bulk of the data was soft in the US, although the PMI data surprised to the high side.  However, if the data set is beginning to show more weakness, I suspect the Fed will begin to hint that cuts are possible sooner, rather than later.  Right now, the market is pricing about a 10% probability for the July meeting, but more than a two-thirds probability for September.  A little more weak data and I will likely adjust my views of rate cuts coming.  At that point, I think the dollar will suffer significantly.  But until we get a lot more evidence that is on the way, I think the default is the dollar is still the best bet.

Good luck

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Fearmongers Now Say

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A question that’s going around
Is where will the buyers be found
For all the new debt
That nations are set
To issue as budgets compound
 
As well, the fearmongers now say
A crisis is coming our way
If voters elect
The folks who reject
The status quo finance clichĂŠ

 

As markets return from yesterday’s US holiday, activity remains somewhere between muted and ordinary in most markets.  At times like these, it is interesting to take note of the tone of the articles in financial journals, whether the WSJ, Bloomberg or the New York Times, as they are the place where I find politics is inserted into the discussion.  

For instance, there have been several articles regarding the pending French election and the market’s concern about a victory by Marine Le Pen on the right.  The thesis seems to be if her RN party wins and takes over parliament, that her plans will result in a collapse in French finances based on the promises she has made throughout the campaign.  There are many analogies to what occurred in October 2022 in the UK, when the newly elected PM, Liz Truss, put forth a program of unfunded spending and the Gilt market fell sharply.  You may recall the result was that the BOE had to step in to buy Gilts even though at that time, they had just begun to sell them to reduce the size of their balance sheet. 

Of course, what gets far less press is the fact that UK insurance companies had levered up their balance sheets because of ZIRP as they tried to earn a sufficient return to match their pension liabilities and when the BOE started tightening policy, those companies were already in trouble.  Certainly, the market response accelerated the problem, but even without Truss, as the BOE kept raising rates, the outcome would likely have been the same.  However, it was politically expedient for the press to blame Truss and the Tories.

Now consider the US, where government profligacy is truly breathtaking as the current government is borrowing $1 trillion every 100 days or so.  Certainly, this topic has been reported, although it is difficult to find a discussion from the mainstream media that makes the leap that spending as much as is currently happening is the underlying cause.  (Yes, there are many stories of this from conservative media as well as on Twitter, but not on the CBS Nightly News.)  However, those same mainstream sources threaten everyone that in the event Donald Trump is elected, it will spell the end of the bond market and the US economy because of his policy proposals of tax cuts and supporting energy growth.

It is commentary of this nature that, in my opinion, has reduced the value of mainstream media via the constant politicization of every subject.  This is also why alternate media sources, like the numerous excellent articles on Substack, have become so popular and widely read.  Analysts who are not beholden to a corporate policy and politics are able to give much more accurate and politically unbiased views.

At any rate, there was much concern ahead of this morning’s French bond auctions (they issued €10.5 billion across various maturities from 3-8 years) as this was the first attempt to sell debt since President Macron called his snap election after his European Parliament electoral disaster.  However, happily for all involved (except the doom mongers) things went just fine with a solid bid-to-cover ratio and a modest decline in market spreads.  All told, while nobody knows the future, it is difficult to expect that a Le Pen government will be any worse financially than the current Macron led government.  After all, France has just been warned by the European Commission that it must reduce its budget deficit from the current 5.5% to 3.0% as per the Maastricht Treaty, and there is no “far-right” influence on the current government.

Enough politics, let’s recap the overnight markets.  Asian markets were mixed as the Nikkei edged higher (+0.15%) but the Hang Seng (-0.5%) gave back some of yesterday’s spectacular rally.  The laggard, though, was mainland China (-0.7%).  In Europe this morning, despite the fears of a Le Pen victory, the CAC (+1.0%) is the leading gainer as either we are seeing a trading bounce after a terrible week last week, or maybe the initial hysteria is being seen for what it was, unfounded hysteria.  Meanwhile, as the BOE just left rates on hold, as widely expected, the FTSE 100 has bounced about 0.3% in the first 15 minutes since the announcement and is up 0.5% on the day.  Overall, Europe is having a good day with the DAX and virtually all markets ahead.  US futures, too, are firmer this morning, with both the NASDAQ and S&P higher by 0.5% or more although the Dow continues to lag.

In the bond market, Treasury yields have backed up 2bps this morning but the picture in Europe is much more mixed.  German yields are higher by 3bps, but UK yields have slipped a similar amount.  In fact, looking at all the nations there, it appears that there is slightly less concern over Europe as a whole as French yields are only higher by 1bp and Italian yields have slipped 1bp, thus narrowing the spread with Germany overall.  Turning to Asia, JGB yields rose 2bps, following USDJPY higher, or perhaps anticipating a higher inflation reading tonight.

In the commodity markets, crude oil (+0.15%) is edging higher this morning, although it slipped in futures trading yesterday (the only market open).  This morning brings the inventory data which is anticipating a draw of 2M barrels.  Metals markets are solid again with gold (+0.4%), silver (+1.7
%) and copper (+0.2%) all continuing their rebound from the dramatic decline two weeks ago.

Finally, the dollar is stronger this morning against most of its counterparts, notably the JPY (-0.3%) and CNY (-0.1%).  I highlight these because the yen story remains critical to the global financial markets, and it appears that Japanese investors are beginning to turn back toward Treasuries and away from JGBs supporting the moves in those markets and USDJPY.  

Regarding China, last night the PBOC fixing was at 7.1192, its highest level since November 2023 and the largest move (33 pips) in weeks.  It appears that there are numerous changes being considered and ongoing in China regarding its domestic bond market (the PBOC is looking to become more involved to support liquidity) as well as the overall monetary structure (there is talk that they will be adjusting the framework of three different rates to something more akin to what Western central banks use with a single policy rate).  In the end, given the ongoing lackluster performance of the Chinese economy, a weaker CNY remains my base case and while it may be gradual, it seems it is the PBOC’s view as well.  The onshore market continues to trade at the edge of the 2% allowable band and the offshore market is a further 35bps higher (weaker CNY) than that.  

Elsewhere, ZAR (-0.85%) which has had a good run on the back of the ultimate electoral outcome, seems to be afflicted with some profit-taking and then most of the rest of the currencies are softer vs. the dollar by about 0.2%.  One last exception is CHF (-0.65%) which has slipped after the SNB cut their policy rate by 25bps, as expected, to 1.25%.

On the data calendar today, we see Initial (exp 235K) and Continuing (1810K) Claims, Philly Fed (5.0), Housing Starts (1.37M) and Building Permits (1.45M), all at 8:30.  Then, later this afternoon, Thomas Barkin of the Richmond Fed will undoubtedly remind us that things are moving in the right direction, but patience is required.

Summing it all up, while I didn’t specifically mention it, the key thing in financial markets continues to be Nvidia, which is much higher in pre-market trading again, and apparently is the driver of everything.  However, traditional relationships have been under strain as although it appears to be a risk-on day, both the dollar and precious metals are firmer.  Overall, nothing has changed my view that the Fed is going to remain firm for now, and that (too) much credence will be assigned to next Friday’s PCE data.  But such is the state of the world.

Good luck

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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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