Tag Archives: #corePCE

Gradually Growing

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Two giants have recently passed

Who both, did a century last

Charles Munger went first

Whose wit was well-versed

Then Kissinger, quite the contrast



Meanwhile, recent data is showing

Economies worldwide are slowing

But pundits still think

The world will not sink

Instead t’will keep gradually growing

If there is any truth to the concept that things happen in threes, keep your eyes peeled for another well-known individual to pass away soon.  In the past week, both Charlie Munger, Warren Buffet’s partner at Berkshire Hathaway, and the one with the sharp wit, passed at 99 and, last night, Henry Kissinger passed away after 100 years on this earth.  Both were highly accomplished and extraordinary individuals, and the world is a lesser place for their passing.  May they rest in peace.

But back to the market saga, or perhaps it is the economic saga, that we have been both watching and through which we are living.  The soft-landing narrative remains strong as we continue to see economic activity data slide slowly lower, although it is certainly not collapsing.  In fact, that is the whole point, the idea that the central banks have been able to engineer a sufficient slowdown in growth such that inflation pressures recede but economic activity remains strong enough so unemployment doesn’t rise too far.  While historically this has been a very rare occurrence, perhaps they will achieve it this time.

If we are to look at the recent data, certainly the forward looking data, it certainly seems like growth is slowing.  We can ignore yesterday’s upward revision in Q3 GDP as that is already behind us, although it is impressive in its own right.  But for things that are more current, or the surveys that look ahead like PMI, the news is not quite so robust.  For instance, yesterday saw weakness in Spanish Retail Sales, Swedish Business Confidence and Eurozone Industrial Sentiment.  Overnight, we saw weaker Korean IP and Retail Sales, weak Japanese Retail Sales, a further decline in Australian Building Permits and Chinese PMI data continuing to slide with Manufacturing slipping to 49.4 and Non-Manufacturing falling to 50.2, both the lowest levels in a year.  The point is, looking all around the world, the trend is pretty clearly for slowing economic activity.

The flip side of this story is the one that the central banks are really watching, the inflation situation, and there the central banks are starting to feel better.  Eurozone CPI was released this morning with headline falling to 2.4% and core to 3.6%.  Given the declines in CPI we have seen this month around the world (remember energy prices fell sharply), this should be no surprise.  And of course, later this morning we will see the Fed’s favorite, Core PCE (exp 0.2% M/M, 3.5% Y/Y).  While this reading remains well above their target, the trend has clearly been beneficial of late.

This idea has been largely reinforced by central bank speakers this week, notably with Chris Waller’s comments on Tuesday that in a few months, if inflation continues this trend, it could be time to cut rates, but also mostly from the other speakers, with even uber-hawk Mester, yesterday, saying the Fed is in a good place to wait and watch.  Talk of additional hikes if inflation resurfaces is scarce now and the market is really looking for Chairman Powell to reiterate that message when he speaks tomorrow morning at 11:00.  But the market will not wait for confirmation, they are already onboard with the message as it suits the narrative of BUY STONKS!  So, we have seen Fed funds futures rally further with the market now looking for 125bps of cuts by the end of 2024 with a 50/50 chance of the first coming in March.  Wow!

So, how should we think about this situation?  To me, there are two issues with which to contend.  First, my take is much of the CPI decline is due to energy and the one really sticky piece of inflation, at least in the US, the price of housing, is not showing any signs of declining.  I think the Case Shiller Home Price index remains the best measure and it is continuing to go higher.  While existing home sales have been crashing, it is because of a lack of supply, not a lack of demand.  So, prices remain firm, and that is going to feed into inflation data for a while.   My point is, while recent readings have shown CPI falling, we remain well above target, and I expect that we are going to stay above target, although not anywhere near where things were last summer.

The second thing is that as evidenced by the litany of weaker data we are seeing around the world, economic activity is pretty clearly slowing everywhere.  In this situation, waiting for the Fed to cut first may be a mistake as other central banks may find themselves with more dire economic circumstances before the US gets there.  And, if that is the case, all the bearishness that is building around the dollar because of the renewed belief the Fed is going to cut rates soon could well be misplaced.  Remember, the FX markets are relative, so if the ECB cuts before the Fed, that seems unlikely to help the euro.  The same is true with the BOE or BOC or any other central bank.  My point is, while the dollar has retraced some of its recent gains on the belief the Fed is ready to cut, even if the Fed does cut, they will not do so in isolation.

Remember, too, the wise words from Hemingway’s The Sun Also Rises.  “How did you go bankrupt?  Two ways, gradually and then suddenly”.  It is very possible, if not likely, that we are currently in the gradually phase of economic slowdown, with the suddenly phase yet to come.  Just beware.

Ok, in the meantime, a quick look at markets shows that after another lackluster session in the US, Asian markets were able to rally a bit with the Hang Seng and mainland indices shaking off the weak PMI data while European bourses are clearly benefitting from the soft CPI data this morning out of Frankfurt.  At this hour (7:45) US futures are also a bit firmer, about 0.4% or so.

In the bond market, yields are rebounding a bit with Treasury yields up 4bps and European sovereigns a little less dynamic, higher between 1bp and 3bps.  However, we have come a long way this month, with 10yr Treasury yields down 64bps, their largest monthly decline since 2008.  My take is we will need to see confirmation from Powell tomorrow for there to be another leg lower in yields, but if he pushes back, look for a few fireworks there.

Oil prices are continuing their rebound as OPEC+ is meeting, up another 1% this morning and 4% on the week.  The whispers are another production cut is coming, and we also have seen the inventory builds slow down.  Meanwhile, gold is slightly softer this morning, but remains well above $2000/oz with many looking for a test of that all-time high at $2080.  As to the base metals, they are under a bit of pressure, which given the economic data, makes some sense.

Finally, the dollar is firmer this morning, recouping about 0.4% of its recent losses with strength largely across the board.  Ultimately, relative interest rates remain the key driver in this space and for now, while dollar yields have declined, they have not done so in isolation.  As such, until they start to fall more sharply than rates elsewhere, I think the dollar will be treading water in a range.

On the data front, aside from PCE we also see Personal Income (exp 0.2%), Personal Spending (0.2%), Initial Claims (220K), Continuing Claims (1872K) and Chicago PMI (45.4).  We hear from John Williams this morning as well, so it will be interesting to see if he backs up the recent shift of the Fed is done and things are going well.

My take is Williams will, indeed, hew that new line and we will see a bit more positivity in equities and bonds while the dollar fluctuates and perhaps gives up some of this mornings gains.  But really, all eyes are on Powell tomorrow.

Good luck

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Thrilled…Chilled

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The ECB just must be thrilled
Inflation they’ve tried hard to build
Is finally growing
Though Germany’s showing
The growth impulse there has been chilled

The news from the Continent this morning would seem to be pretty good.  GDP, which rose 2.0% Q/Q in Q2 was substantially higher than the forecast 1.5%.  The growth leadership came from Spain (2.8%) and Italy (2.7%) although France (0.9%) was somewhat lackluster and Germany (1.5%) was extremely disappointing, coming in well below expectations.  At the same time, Eurozone CPI rose to 2.2% in July, above both the expected 2.0% print, and the ECB’s target rate.  Given everything we have heard from Madame Lagarde and virtually every ECB speaker over the past months, this must be quite exciting as it is a demonstration of success of their policies.  It seems that buying an additional €3.3 trillion in assets was finally sufficient to drive inflation higher.  (Well, arguably, what that did was drive up the price of virtually every commodity while government lockdowns were able to reduce productive capacity sufficiently to create massive bottlenecks in supply chains forcing prices higher.)  Nonetheless, the ECB gets to take a victory lap as they have achieved their target.

As an aside, you may recall yesterday’s data that showed German CPI rose a shockingly high 3.8%, a level at which the good people of that nation are very likely horrified.  While the Eurozone, as a whole, continues to recover pretty well, there must be a little concern that Germany is facing a period of stagflation, with subpar growth and higher prices.  Of course, this is the worst possible outcome for policymakers as the remedy for the two aspects require opposite policies and thus a choice must be made that will almost certainly result in greater pain for the economy initially.  Forty years ago, Fed Chair Paul Volcker was able to withstand the political heat when making this decision, but I fear there is not a central banker in the seat who could do so today.

Perhaps the most disappointing aspect of all this is that European equity markets are all in the red, with not a single one responding positively to the data.  Ironically, Spain’s IBEX (-1.0%) is the laggard, despite Spain’s top of the list growth.  Then comes the DAX (-0.8%) and the CAC (-0.25%).  For good measure, the FTSE 100 (-0.9%) is following suit although its GDP data won’t be published for two more weeks.  Arguably, despite this positive news, the ongoing spread of the delta variant seems to be undermining both confidence and actual activity at some level.

Of course, European markets tend to take their cues from what happens in Asia before they open, and last night was another risk-off session there with the Nikkei (-1.8%), Hang Seng (-1.35%) and Shanghai (-0.4%) all sliding.  There are two stories here, one Japanese and one Chinese.  From Japan, the issue is clearly the resurgence of Covid as the recently imposed emergency lockdown has been extended further amid a spike in daily cases to near 10K, higher than the peaks seen in both January and May of this year.  The rapid spread of the disease has policymakers there quite flustered and investors are beginning to show their concern.

China, on the other hand, assures us that they have no Covid problems, rather markets there are suffering over policy decisions.  One observation that might be made is that the government is enhancing regulations on very specific segments of the economy in order to achieve their stated goals from the most recent 5-year plan.  So, education is very clearly seen as critical, far too important for capitalism to have any influence, and I would expect that this industry sector will ultimately privatize and turn into the suggested non-profit organizations.  On the tech side, China is all about hardware type tech, and will do all they can to support companies in that space.  However, companies like Didi, AliBaba and Tencent don’t produce anything worthwhile, they simply consume resources to provide retail services, none of which lead toward Xi Jinping’s ultimate goals.  As such, they are likely to find increasing restrictions on what they do in order to reduce their influence on the economy.

And as I hinted at the other day, there appears to be growing concern that the real estate bubble that exists in China has been a key feature of their demographic problems.  Couples are less likely to have children if they cannot afford to buy a house, and the damage from China’s one-child policy will take generations to repair, although that is a key focus of the government.  As such, do not be surprised if real estate firms come under pressure with respect to things like restrictions on margins and pricing as the government tries to deflate that bubble.  This opens the possibility that yet another sector of the Chinese equity market is going to come under further pressure.  To the extent that Asian markets set the tone for the global day, that does not bode well for the near future.

Interestingly, despite a lackluster performance by the European and Asian equity markets (and US futures, which are all lower this morning), the bond markets are not exactly on fire.  While it is true that Treasury yields have slipped 2.5bps, European sovereigns are either side of unchanged today, with nothing moving more than 0.3bps in either direction.  I would have expected a bit better performance given the equity risk-off signal.

Commodity markets are generally a bit softer with oil (-0.2%) slipping a bit although it has recovered almost all of its losses from two weeks ago and sits at $73.50/bbl.  Gold, after a huge rally yesterday is unchanged this morning, while base metals are mixed (Cu -0.2%, Al +1.4%, Sn +0.15%).  Finally, ags are all softer this morning as weather conditions in key growing areas have improved lately.

Lastly, the dollar can best be described as mixed, with NOK (-0.4%) and AUD (-0.35%) the laggards amid softer oil and  commodity prices while EUR (+0.1%) and CHF (+0.1%) have both edged higher on what I would contend is the ongoing decline in real US interest rates.

Emerging market currencies have performed far better generally with TRY (+0.6%) and PHP (+0.6%) the leaders although both EEMEA and other APAC currencies have performed well.  The lira responded to the Turkish central bank raising its inflation forecast thus implying rates would remain higher there for the foreseeable future.  Meanwhile, the peso seemed to benefit from the idea that the renewed covid lockdown would reduce its balance of payments issues by reducing its trade deficit.  On the other side of the ledger was KRW (-0.3%) which continues to suffer from the uncertainty over Chinese business activity.

On the data front today, we get the Fed’s key inflation reading; Core PCE (exp 3.7%) as well as Personal Income (-0.3%), Personal Spending (0.7%), Chicago PMI (64.1) and Michigan Sentiment (80.8).  Clearly all eyes will be on the PCE number, where a higher print will likely encourage more taper talk.  However, if it is below expectations, look for a very positive market response.  We also hear from two Fed speakers, Bullard and Brainerd, the former who has turned far more hawkish and has been calling for a taper, while Ms Brainerd is not nearly ready for such action.  And in the end, Brainerd matters more than Bullard for now.

I expect the market will take its cues from the PCE data, with a higher print likely to undermine the dollar while a softer print could well see a bit of a rebound from the past several sessions’ weakness.

Good luck, good weekend and stay safe
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Clearly Annoyed

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

(Or, the second variation on this theme)

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

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

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

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

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

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

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

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

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

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

Source: Bloomberg

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

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

Good luck and stay safe
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Waiting for Jay

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Investors are waiting for Jay
Their fears, about rates, to allay
They want it made clear
That rates will be here
From now ‘til we reach judgement day

From the market’s perspective, the world has essentially stopped spinning, at least until we finally hear the words of wisdom due from Chairman Powell beginning at 9:10 this morning.  Trading volumes across products are currently running at 50%-70% of recent average activity, highlighting just how little is ongoing.  And remember, too, as it is the last week of August, summer holidays are in full swing with most trading desks, on both the buy and sell sides, more lightly staffed than usual.  In other words, liquidity is clearly impaired right now, although by 10:00 this morning I expect that things will be back closer to normal.

As discussed yesterday, the working assumption of most analysts and investors is that Jay is going to explain the benefits of targeting average inflation over time.  The implication being that the Fed’s new policy framework, when officially announced later this year, is going to include that as a KPI.  Of course, the big question about this policy is the average over exactly which period.

Consider, it has been 102 months since then-Chairman Bernanke established the target for core PCE at 2.0%.  During that time, core PCE has been between 1.9% and 2.1% just 12 times with 89 of the other 90 readings below 1.9% and a single print above 2.1%, which happens to have been the first print after the announcement.  Meanwhile, this past April’s reading of 0.931% is the lowest reading.  The average of the two extremes is 1.53%.  Is the Fed going to be happy if core PCE jumps to 2.47% and stays there for a while?  The average of all periods since January 2012 is 1.633%, does that mean we can expect the Fed to target 2.367% core PCE readings for the next eight plus years? The point is, without some specificity on what average inflation means, it is very difficult to understand how to incorporate the idea into investment and trading decisions.

But what if Chairman Powell does not bring clarity to the discussion, merely saying that average inflation over time seems like a good future benchmark.  How might different markets react to such a lack of specificity?

Starting with equity markets, certainly those in the US will rally because…well that’s all they do these days.  Good news, bad news, no news, none of that matters.  The rationale will be stocks are a good inflation hedge if inflation goes higher (they’re not) or stocks will benefit from ongoing low interest rates if inflation remains below target.  Parabolic markets are frightening, but there is no indication that Powell’s comments are going to change that situation.  We need a different catalyst here.

Now let’s look at the bond market and what might happen there.  Specificity on how much higher the Fed is going to target inflation is going to be a pretty distinct negative.  If you own 10-year Treasuries that are yielding 0.68% (today -1bp), and the Fed explains that they are going to push inflation above 2.0%, there is going to be a pretty spectacular decline in the price of your bond should they achieve their goal.  Will investors be willing to hold paper through that type of decline?  It would not be a surprise to see a pretty sharp sell-off in Treasuries on that type of news.  Remember, too, that Treasury yields have backed up nearly 20 basis points in the past three weeks, perhaps in anticipation of today’s comments.  If Powell delivers, there is likely far more room to run.  If he doesn’t, and there is no clarity, bond investors will be back to reading the economic tea leaves, which continues to be remarkably difficult at this time.

How about the gold market?  Well, here I think the case is quite straight forward.  Clarity as to the Fed’s efforts to drive inflation higher will result in anticipation of lower real yields, and that will be an unalloyed benefit (pun intended).  A lack of clarity and gold will likely continue to consolidate its recent gains.

And finally, what about the dollar?  How will it respond to the Chairman’s speech?  Consider that despite the dollar’s recent rebound, short dollar positions remain at near record levels against both the euro and the DXY futures.  The market scuttlebutt is that the hedge fund community, which was instrumental in the dollar’s recent modest strength as they pared short dollar positions, is ready and raring to buy euros on the idea that higher US inflation will lead to a weaker dollar à la economic theory.  Certainly, if Treasuries sell off, the dollar will see some downward pressure, but one of the things that does not get as much press in the FX market is the equity market impact.  Namely, as long as US equity indices continue to set records, international investors are going to continue to buy them, which will underpin the dollar.

But what if the speech is a dud?  If there is no clarity forthcoming, then the dollar story will revert to its recent past. The bear case continues to be that the Fed’s largesse will dwarf all other nations’ policy easing and so the dollar should resume its decline.  The bull case is that the US economy, at least by recent data, appears to continue to be outperforming its major counterparts, and thus inward investment flows will continue.  That current account deficit is only a problem if international investors don’t want to fund it, and with US equity markets amongst the best performing asset classes globally, that funding is easy to find.  I know I’m not a technician, but recent price action certainly appears to have created a top at the highs from last week, and a further pullback toward 1.1650 seems quite viable.

It is difficult to draw many conclusions from today’s market activity, which is why I have largely ignored it.  Equity markets are leaning a bit lower, although the movement is not large, less than 1%, and the dollar is mixed against both the G10 and EMG blocs.

Arguably, the biggest market risk is that Powell doesn’t tip his hand at all, and that we are no wiser at 10:10 than we are now.  If that is the case, I think the dollar’s consolidation will continue, and by the end of the day, I imagine stock prices will have recouped their early losses.

But for today, it is all about Jay.

Good luck and stay safe
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