Tag Archives: #Daly

Things Went to Hell

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There once was a company, strong
Whose shares, everyone had gone long
But things went to hell
Nvidia fell
And folks wonder now, were they wrong?
 
The narrative hasn’t adjusted
Though certainly some are disgusted
AI, after all
To which they’re in thrall
Is perfect, so why’s it seem busted?

 

Times are tough for macro pundits and analysts, like this poet, as there is so little ongoing at the moment.  Data releases are sparse, and generally of a secondary nature and even commentary has been less active.  Truly, the summer doldrums have arrived.

With this in mind, perhaps it is a good time to consider what the broad risk asset narrative looks like these days, especially since the most recent version was exceedingly clear; Nvidia is the only company that matters in the world and its stock price should go to 10,000.  While there had been pushback on this idea, with the naysayers comparing the stock to Cisco and Qualcomm during the dot com bubble in 2000, the true believers countered with the fact that Nvidia was wildly profitable and given the race by companies all over the world to embrace AI, would continue to grow at its extraordinary recent pace.  But consider…

Back in the 1970’s, there was a group of companies described as the Nifty Fifty that represented the growth companies of the time.  And they were great companies, with most of them still around today including American Express, Coca-Cola, IBM and Walt Disney, to name just a few.  The thesis at the time was that these companies represented the future, and that if an investor didn’t own them, they were missing out.  The thing that was ignored at the time (and in truth is ignored in every bubble) is there is a difference between the company and its share price.  Overpaying for a good company can result in poor investment performance even if the underlying company continues to have magnificent results.

I mention this era as there are certainly parallels to the current mania for the Supremes (Nvidia, Apple, Microsoft) and the narrative at that time.  There is nothing inconsistent with understanding that these companies, and especially Nvidia, have created something special, but that they cannot possibly sustain their current valuations and so their share prices may fall.  And they can fall a lot.  After all, Nvidia has retraced 13% in just 3 sessions.  As much momentum as these shares have had on the way up, they can have that much and more on the way back down.  I’m not saying this is what is going to happen today, simply highlighting that trees don’t grow to the sky.  Perhaps we have now seen how tall they can grow.  

One thing I sense is that if this correction continues, it is likely to broaden out.  Perceptions are funny things, and if the zeitgeist changes, even if the companies continue to put up terrific numbers, the share prices can go a lot lower.  Consider that if the Supremes each fall 50%, they will still have market caps of $1.5 trillion and be amongst the largest companies in the world.  In fact, if they fall 50%, I’m pretty confident so would most of the rest of the market, so they would likely maintain their relative crowns of size, just at a smaller number. 

At any rate, this is an important discussion as the equity markets have been key drivers of all markets, and a change there will naturally result in some different opinions elsewhere.  Arguably, the biggest question is, if the stock market falls sharply, but the economic data don’t respond in the same way, will the Fed really cut rates?  There are many who remain firmly in the camp that the ‘Fed put’ is still intact, and they will come to the rescue.  Personally, my take is if there is a Fed put, the strike price is a lot lower, maybe S&P 3500, not S&P 5000.  Chairman Powell has enough other problems to address so that the value of the S&P is probably not job one.  In fact, it could become quite a political problem for him if the Fed is seen as rescuing Wall Street again while so many on Main Street struggle.

Ok, it’s time to look at the freshly painted wall and watch it dry overnight session.  Yesterday’s US session was unusual for its composition as the DJIA had a solid day, gaining 0.7%, while the NASDAQ suffered, falling -1.0%.  Asia, too, had an interesting session with the Nikkei (+1.0%) and Australia (+1.3%) both rallying while the Hang Seng was little changed and China (-0.5%) fell.  One possible explanation is that the tech sectors are getting unwound while money flows into less exciting areas like natural resources and manufacturing.  Of course, given there are no tech shares of which to speak in Europe, the fact that every bourse on the continent, and the UK as well, is lower, led by the DAX’s -1.0% decline, I am searching for another explanation.  At this hour (7:20) US futures are a touch firmer, 0.3%, but I don’t put much stock in this given the past several sessions.

In concert with the risk-off theme, bond markets are seeing a bid with corresponding yield declines.  Treasury yields are lower by 1bp with European sovereigns lower by between -2bps and -4bps.  There is still a great deal of anxiety, at least according to the press, about the French elections, but given the political bias of most mainstream media, which is decidedly against the idea that Marine Le Pen’s RN should win, it is possible that the actual situation is far less concerning.  The fact that the Bund-OAT spread continues to narrow at the margins tells me that there are fewer concerns than immediately following Macron’s call for the snap election.

Oil prices (-0.6%) are retracing yesterday’s modest gains as there continues to be uncertainty over the demand situation and whether economic activity is slowing offset by what appears to be a modest escalation in the Russia/Ukraine war with concerns that could impact supply.  As to the metals markets, prices there are little changed this morning after having edged higher yesterday.  My take here is that traders are keenly focused on Friday’s PCE data as an indication to whether the Fed will be cutting sooner rather than later.  The sooner the cut, the better metals prices should perform.

Finally, the dollar is almost unchanged this morning after having fallen modestly yesterday.  All eyes continue to focus on USDJPY, although it has slipped back this morning to 159.50.  Right now, my sense is there are many ‘tourists’ in the FX market trying to play for the next intervention, but as I said yesterday, I do not believe the MOF is going to be as concerned as they were in April/May given the pace of the move has been so much more modest.  For instance, last night FinMin Suzuki explained, “[the MOF] will continue to respond appropriately to excessive FX moves.  It is desirable for FX to move stably.”  Now, aside from the oxymoron of stable movement, this type of commentary is typically not indicative of any immediate concerns.  As to the rest of the G10, modest gains and losses define the day although we have seen both MXN (-0.65%) and ZAR (-0.4%) slide this morning, although given the amount of money involved in the carry trade for both these currencies, this is likely just positions adjusting rather than a fundamental change.

This morning brings more tertiary data with the Chicago Fed National Activity Index (exp -0.4), Case Shiller Home Prices (6.9%) and Consumer Confidence (100).  We also hear from two speakers, Governors Cook and Bowman.  Perhaps the most interesting thing yesterday was that SF Fed President Daly specifically touched on Unemployment in her comments, explaining that though there was still insufficient confidence that inflation was declining to target, she was paying close attention to the Unemployment rate, “so far, the labor market has adjusted slowly, and the unemployment rate has only edged up. But we are getting nearer to a point where that benign outcome could be less likely.”  I have a feeling that the employment report a week from Friday is going to have a lot more riding on it than in the recent past.  Any weakness there could really change the tone of the market regarding the economy and the Fed’s actions.

It is difficult to get too excited about today although if the recent correction in Nvidia continues and widens to some other names (a distinct possibility) do not be surprised if there are some fireworks later on.  In that case, I would look for a traditional risk-off session with the dollar higher while bond yields and stocks fall.

Good luck

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Not Harebrained

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While here in the States there’s no chance
That rate cuts, by June, will advance
In England, we learned
They’re growing concerned
The ‘conomy’s still in a trance

So yesterday, Bailey explained
By June, a rate cut’s not hairbrained
But, closer to home
The Frisco Fed gnome
Said cutting rates will be restrained

You can tell that very little continues to happen in the macro world when the key stories that are in the discussion regard secondary players and their commentary.  While it is true that Andrew Bailey is the governor of the Bank of England, the reality is that the UK is just a secondary player on the world stage.  However, after their meeting yesterday, much digital ink has been spilled over the potential for the BOE to cut rates at the June meeting.  Prior to this meeting, it seemed that the BOE was tracking the Fed rather than the ECB, but that idea has now been dispelled.  Governor Bailey indicated that come June, a rate cut “is neither ruled out nor a fait accompli.”  However, he did comment that cuts were likely “over the coming quarters” and the market took him up on the news, with yields sliding and stocks rallying.

A key to the discussion is the fact that the BOE will see two more CPI reports between now and the next meeting on June 20th.  As well, both the ECB and the Fed will have met and potentially acted before they next meet.  As such, despite the fact that the BOE’s own forecasts showed improvement in both GDP and CPI over the next 3 years with current policy, the market is all-in on the cuts for June.  Well, maybe not all-in, but has increased the probability to 50%, up from just under one-third prior to the meeting.  Regarding the pound, if we continue to hear more dovish cooing from the Old Lady, especially given the fact that the Fed is clearly on hold, I expect it could drift back toward 1.20 over time.

Which brings us to the Fed, and an unscheduled appearance by San Francisco Fed president, Mary Daly, yesterday afternoon.  The two key comments she made were as follows: “There’s considerable, now, uncertainty about what the next few months of inflation will be and what we should do in response,” and “It’s far too early to declare that the labor market is fragile or faltering.”  In essence, this is repeating everything that we have heard consistently since the FOMC meeting last week.  I would boil it down to ‘as much as we are desperate to cut rates, neither prices nor the labor market are falling quickly enough to allow us to do so soon.’

Add it all up and you get a picture of a still tight Fed with no indication of a policy ease in the next quarter, at least, while another major central bank elsewhere has opened the doors to cutting rates.  Arguably, this should be a positive for the dollar except for the fact that this has been known, and the basic narrative for a while, so is already in the price.  If these policy divergences maintain for a much longer time, through the end of the year or beyond, then perhaps we will see more aggressive dollar strength.  But for now, I think the FX markets are going to be a dull affair.  The caveat here is if we see US data move away from its current trajectory, either picking up and pushing price pressures higher, or falling more rapidly resulting in a worse employment situation.

One last thing on the prospects for the US economy; there is still a large contingent of analysts who have been parsing the data and looking at secondary indicators and sub-indices of headline data, and who believe that a recession is much closer than the market is currently pricing.  Things like credit card delinquencies and the growing number of bankruptcies, as well as the discrepancy between the establishment and household surveys in the employment data have reached levels consistent with recessions in the past.  While last year I expected that would be the case, at this point, I believe that the ongoing massive fiscal spending (budget deficits >6% of GDP) and the ongoing availability of cheap energy continuing to draw investment into the US will prevent any substantive downturn for the rest of the year, at least.

As to market activity, yesterday’s higher than expected Initial Claims data (231K, highest since October) got the bulls all excited and drove a risk rally in stocks in the US which has been followed all around the globe.  Asian markets saw gains in Japan (+0.4%), Hong Kong (+2.3%) and almost everywhere else in the region except China which was flat on the day.  Meanwhile, European bourses are all green as well, led by the UK (+0.7%) on the back of stronger GDP data as well as the hopes for lower rates in the near future.  But the entire continent is higher as well, mostly on the order of 0.5%.  As to US futures, higher by 0.25% at this hour (7:30).

In the bond market, while Treasury yields drifted lower yesterday after that claims data, this morning they are higher by 1 basis point.  In Europe, though, sovereign yields are slipping 2bps to 3bps as traders and investors get more convinced of rate cuts coming soon.  Overnight, JGB markets did nothing.

In the commodity markets, Wednesday’s declines are a distant memory as we have seen oil (+0.7%) rally again this morning despite modest inventory builds which may be being offset by concerns that Israel is ignoring the recent pressure to stop its Rafah incursion.  However, the precious metals are not ignoring that story with both gold and silver higher by more than 1% this morning and copper rising 2.4%.  The day-to-day vagaries of these markets remain confusing, but the long-term trend, I believe, remains strongly intact, and that is higher prices going forward.

Finally, the dollar is little changed this morning but maintaining its gains from earlier in the week.  Looking across my screen, no currency has moved more than 0.3% in either direction, a clear sign that very little of note is happening.  As I wrote above, absent a major change in policy, I think the dollar is range bound for now.

On the data front, this morning brings only Michigan Sentiment (exp 76) and then a few more Fed speeches from Kashkari, Bowman, Goolsbee and Barr.  Regarding the data, I believe it will need to be a big miss in either direction to get much market reaction.  Regarding the Fedspeak, given the consistency with which every speaker has thus far explained they lack the confidence that 2% is in view, I see very little is likely to be newsworthy.

For today, don’t look for much at all.  For the longer term, the dollar’s future depends on how much longer the Fed maintains its relative tightness, and if that spread widens because either the Fed brings hikes back on the table or other central banks cut more aggressively.  But for now, as we enter the summer, I don’t see much at all.

Good luck and good weekend
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High Tide

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The dollar continues to slide
But is risk approaching high tide?
Last night t’was the Kiwis
Who hinted that their ease
Of policy may soon subside

As well, from the Fed yesterday
Three speakers had two things to say
It soon may be time
To change paradigm
Inflation, though, ain’t here to stay

“There will come a time in upcoming meetings, we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases.”  So said, Fed Vice-Chairman Richard Clarida yesterday.  “We are talking about talking about tapering,” commented San Francisco Fed President Mary Daly in a CNBC interview yesterday.  And lastly, Chicago Fed President Charles Evans explained, “the recent increase in inflation does not appear to be the precursor of a persistent movement to undesirably high levels of inflation.  I have not seen anything yet to persuade me to change my full support of our accommodative stance for monetary policy or our forward guidance about the path for policy.”

The Fed’s onslaught of forward guidance continues at full speed as virtually every day at least two or three Fed speakers reiterate that policy is perfect for the current situation, but in a nod to the growing chorus of pundits about higher inflation, they are willing to indicate that there will come a time, at some uncertain point in the future, when it may be appropriate to consider rolling back their current policy initiatives.

But ask yourself this; if inflation is going to be transitory, that implies that the current policy settings are not a proximate cause of rising prices.  If that is the case, why discuss tapering?  After all, high growth and low inflation would seem to be exactly the outcome that a central bank wants to achieve, and according to their narrative, that is exactly what they have done.  Why change?

This is just one of the conundra that is attendant to the current Fed policy.  On the one hand, they claim that their policy is appropriate for the current circumstance and that they need to see substantial further progress toward their goals of maximum employment and average 2% inflation before considering changing that policy.  On the other hand, we have now heard from five separate FOMC members that a discussion about tapering asset purchases is coming, which implies that they are going to change their policy.  Allegedly, the Fed is not concerned with survey data, but want to see hard numbers showing they have achieved their goals before moving.  But those hard numbers aren’t here yet, so why discuss changing policy?

The cynical answer is that the Fed actually doesn’t focus on unemployment and inflation, but rather on the equity markets foremost and the bond market secondarily.  Consider, every time there has been a sharp dislocation lower in stocks, the Fed immediately cuts rates to try to support the S&P.  This has been the case since the Maestro himself, Alan Greenspan, responded to the 1987 stock market crash and has served to inflate numerous bubbles since then.

A more charitable explanation is that they have begun to realize that they are in an increasingly untenable position.  Since the GFC, the Fed has consistently been very slow to reduce policy accommodation when the opportunity arose and so the history shows that rates never regain their previous peak before the next recession comes along.  Recall, the peak in Fed funds since 2009 was just 2.50%, reached in December 2018 just before the Powell Pivot in the wake of a 20% drawdown in the S&P 500.  In fact, since 1980, every peak in Fed Funds has been lower than the previous one.  The outcome of this process is that the Fed will have very little room to cut rates to address the next recession, which is what led to QE in the first place and more importantly has served to reduce the Fed’s influence on the economy.  Arguably, then, a major reason the Fed is keen to normalize policy is to retain some importance in policymaking circles.  After all, if rates are permanently zero, what else can they do?

It is with this in mind that we turn our attention elsewhere in the world, specifically to New Zealand, where the RBNZ signaled that its Official Cash Rate (Fed funds equivalent) may begin to rise in mid-2022.  This is a full year before previous expectations and makes the RBNZ the 3rd G10 central bank to talk about tightening policy sooner than thought.  The Bank of Canada has already started to taper QE purchases and the BOE has explained they will be starting next year as well.  It should be no surprise that NZD (+1.15%) is the leading gainer in the FX market today, nor that kiwi bonds sold off sharply with 10-year yields rising 8bps.

Do not, however, mistake this for a universal change in policy paradigm, as not only is the Fed unwilling to commit to any changes, but the BOJ remains in stasis and the ECB, continues to protest against any idea that they will be tightening policy soon.  For instance, just this morning, ECB Executive Board Member and Bank of Italy President, Fabio Panetta, said, “Only a sustained increase in inflationary pressures, reflected in an upward trend in underlying inflation and bringing inflation and inflation expectations in line with our aim, could justify a reduction in our purchases.  But this is not what we projected in March.  And, since then, I have not seen changes in financing conditions or the economic outlook that would sift the inflation path upward.”

Investors and traders have been moving toward the view that the ECB would be tapering purchases before 2023 as evidenced by the rise in the euro as well as the rise in European sovereign yields.  But clearly, though there are some ECB members (Germany, the Netherlands) who would be very much in favor of that action, it is by no means a universal view.  Madame Lagarde will have her hands full trying to mediate this discussion.

For now, the situation remains that the central bank narrative is still the most important one for markets, and the fact that we are seeing a split amongst this august group is a key reason FX volatility remains under pressure.  The lack of an underlying theme to drive the dollar or any bloc of currencies in one direction or the other leaves price action beholden to short-term effects, large orders and the speculator community.  We need a new paradigm, or at least a reinvigoration of the old one to get real movement.

In the meantime, the dollar continues to drift lower as US yields continue to drift lower.  Right now, the bond market appears to have faith in the Fed narrative of transitory inflation, and as long as that is the case, then a weaker dollar and modestly higher stock prices are the likely outcome.

Today’s price action, NZD excepted, showed that to be the case, with APAC currencies performing well, but otherwise a mixed bag.  Equity markets are marginally higher and bond yields have largely fallen in Europe, although Treasuries are little changed after a 4bp decline yesterday.  Gold is actually the biggest winner lately, having traded back above $1900/oz as investors watch the slow destruction of fiat currency values.  But in the FX space, the USD-Treasury link remains the most important thing to watch.

Good luck and stay safe
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