Tag Archives: #FOMC

A Stock Jamboree

Posted on by

Said Jay, there are two goals we seek
Strong job growth while prices are weak
And as I sit here
The way things appear
Come autumn, Fed funds we may tweak

The market responded with glee
Twas truly a stock jamboree
Plus, bonds joined the fun
And went on a run
The dollar, though, sank in the sea

At this point, the only question in market participants’ minds is whether the Fed will cut 25bps or 50bps in the September meeting.  Yesterday afternoon, as widely expected, the FOMC left rates unchanged and tried to offer a balanced view of the future, explaining that both of their dual mandate goals were normalizing.  Obviously, inflation, which has been their primary focus for the past two years, has been moving in the right direction and Chairman Powell reiterated that they are gaining ‘confidence’ that they will achieve their 2% target.  But this time, Powell spent more time describing the job market and how it was now coming into balance.  In other words, what had previously been a significant inflationary pressure in the Fed’s collective view, was now having less of an impact on prices.

At the press conference, Powell would not be pinned down on a September cut, although based on pricing in the Fed funds futures market, you would be hard pressed to believe that.  This morning, the market is pricing more than 28bps of rate cuts (a 13.5% probability of a 50bp cut) into the September meeting, so the key will be to watch how that probability of a 50bp cut evolves.  If we start to see hard data, like tomorrow’s NFP or CPI, in two weeks’ time, decline, I’m confident that the market will be calling for a 50bp cut before long.

In the end, the recent correction seen in risk asset markets seems to have been just that, a correction, and now the narrative is that there are blue skies ahead with lower rates to support things and the Fed is going to stick the soft landing.  This poet is less certain that the best case will obtain, but that’s what makes markets.

So, even though we have not yet heard from the third major central bank as I write (the BOE is due to announce in a few hours’ time), I don’t think that is going to impact the global narrative.  Let me start by saying that I believe they will cut rates in the UK as yesterday’s activities in the US make it all but certain a cut is coming here, and given the ECB, BOC and Riksbank have all cut already, they have plenty of company.  However, let’s recap where things are now and what the market narrative is now explaining to us all.

Policy normalization is the new watchword as we hear that the BOJ is normalizing policy by raising interest rates and tightening while the rest of the G10 are normalizing policy by cutting rates and ending activities like QT.  I guess the definition that the punditry ascribes to normal policy is, every country has the same interest rate!  In fact, I say that only half tongue in cheek, as there is some merit to the discussion.  While it is certainly true that global economies have evolved in greater synchronicity over the past decades, interest rate policy has always been based on the idiosyncrasies of each economic area.  For instance, money supplies and productive capacities differ widely amongst countries, so why should we believe that the “proper” monetary policy is the same level of interest rates across the board.  Of course, we shouldn’t, but for market participants, it is much easier if they have one target for everything rather than being forced to understand each economy in its own right.

But with that in mind, let’s recap where things currently stand around the major economies.

1.     US – economic activity is slowing, but the pace of that slowdown is very modest, at least based on the recent GDP reading.  Inflation is slowly receding but has not yet achieved the Fed’s target and the jobs market has, to date, held up reasonably well.  Of course, we will know more about that tomorrow.  On the flip side, the manufacturing portion of the economy has been the laggard, with PMI and regional Fed surveys pointing to subpar activity.  There seems to be a disconnect between the slowing economy and the roaring equity market, but markets have a life of their own.
2.     Europe – economic activity overall is modest with a reversal in the weak vs. strong players as Germany is the sick man of Europe and the PIGS economies are all faring far better.  Inflation here is a bit stickier than it seems in the US as evidenced by yesterday’s higher than expected readings and remains well above the 2% target here.  Most nations are seeing more substantial weakness in their manufacturing sectors, although for some (I’m looking at you Germany) it is self-inflicted based on insane energy policies driving energy costs much higher.
3.     Japan – recent growth signs have been quite poor with a negative GDP release just last week indicating things are not going well.  This has been accompanied by above target inflation, which while seeming to slow, is slowing very gradually.  In fact, this is the one place where the FX rate seems to really have had an impact, with the yen’s previous weakness adding to inflationary pressures and offsetting their very modest monetary policy tightening.  However, the combination of the BOJ hiking and the Fed seeming to promise a cut has led the yen to recoup nearly 8% over the past several weeks and now that USDJPY is below 150, I expect to see this move continue.  That should help ameliorate some of the inflation pressures, although it is not clear to me it will help economic growth.
4.     China – last night’s Caixin Manufacturing PMI was a disappointing 49.8, down two points and below expectations.  The indication is that economic activity in China remains hampered by the lack of consumer activity.  China’s long-term policy of mercantilism is running into its limits as nations around the world are unwilling to take their excess production freely, and the domestic economy remains in the doldrums, still suffering from the ongoing deflation of the property bubble.  While the PBOC did reduce interest rates recently, the fact that neither the Third Plenum nor the Politburo were willing to inject real stimulus into the economy indicates that things are going to remain lackluster going forward.

Arguably, the lesson from this recap is that economic activity is in a downtrend and that inflation is also in a downtrend, just a shallower one.  Policy makers around the world are struggling to find the right mix because oftentimes, the right mix means something politically difficult.  Net, I expect this process will continue and that we will see more and more efforts to turn around the economic trend while ignoring the inflation trend.

Ok, this has turned into more than I expected, so let’s be quick on markets today.  Yesterday’s Fed led to a huge tech sector rally in the US but that was not enough to help the rest of the world.  Despite that optimism, Japanese shares (-2.5%) were down sharply on the continued strength of the yen, while Chinese shares, in both Hong Kong (-0.25%) and the mainland (-0.7%) saw no love either.  In fact, the whole region was under water.  The same is true in Europe this morning with all the continental bourses lower on average by -0.65% or so after continued weak PMI data was released this morning.  The only exception here is the UK, where the FTSE 100 is now higher by 0.3% after the BOE, as I expected, cut rates by 25bps at 7:00am.  As to US futures, euphoria is still alive and they are all higher at this hour, just past 7:00.

In the bond market, yields are declining around the world led by Treasury yields which fell 10bps yesterday, although they have rebounded by 2bps this morning.  2yr yields also fell a similar amount so the yield curve’s inversion remains at -23bps this morning.  In Europe, yields also slid yesterday, albeit not as much as in the US and are a further 2bps lower this morning as they try to catch up.  The exception here is the UK, again, as 10yr Gilt yields are lower by 5bps this morning in the wake of the BOE cut.  JGB yields overnight fell 1bp, although given the move in Treasury yields, that gap has still narrowed substantially.

In the commodity markets, oil (+0.9%) continues to rally as fears over an Iranian retaliation against Israel grow with no clear idea where this will stop.  Consider, though, WTI remains below $80/bbl still, so right in the middle of its longer term range.  I imagine we could see a bump higher, but remember, OPEC has a lot of spare capacity, so if some countries are forced to stop producing, the Saudis can turn on the taps.  Gold (-0.4%) is backing off the new all-time highs it reached yesterday, but remains far above $2400/oz.  In fact, all the metals markets saw gains yesterday and this morning they are ceding some of those gains, but I don’t think this story has changed; if the Fed gets more aggressive, I expect these commodity prices to rise further.

Finally, the dollar is on fire this morning, rallying against everything but the Swiss franc right now.  The pound (-0.7%) is under the most pressure in the G10 after the rate cut, but we are seeing weakness everywhere else but Norway and Switzerland.  Even the yen, which had broken through the 150 level earlier this morning is now back below (dollar above) that level, although I expect there are further declines to come here in the dollar.  One other surprisingly large mover is CNY (-0.4%) which has given back more than half its gains from the activities last week involving the PBOC rate cuts and intervention.  Remember, if the yen continues to strengthen, the renminbi will be able to do so at a very gradual rate and maintain increased competitiveness vs. Japanese exports.

On the data front, this morning brings Initial (exp 236K) and Continuing (1860K) Claims, Nonfarm Productivity (1.7%), Unit Labor Costs (1.8%) and ISM Manufacturing (48.8).  Remarkably, there are no Fed speakers on the schedule, but I imagine they will not be able to keep quiet for long.  However, while there is a definite glow amongst investors, all eyes will turn to tomorrow’s NFP data, where a hot number will not be taken well, at least not at first, but if we print below NFP expectations, look for stocks to rock on a growing expectation of 50bps in September.  That will also hurt the dollar, which should retrace some of today’s gains.

Good luck
Adf

New Shibboleth

Posted on by

A second rate hike
By Japan has resulted
In strong like bull yen

 

Last night, Governor Kazuo Ueda and the BOJ raised their overnight call rate to 0.25% from the previous level of between 0.00% and 0.10%.  This move was forecast by several analysts but was certainly not the base case for most, nor what this poet expected.  However, it appears that the gradual slowing in inflation in Japan was not seen as sufficient and so they moved.  By far, the biggest reaction came in the FX markets where the yen jumped sharply, now higher by 1.5% compared to yesterday’s NY close.  A look at the longer-term chart of USDJPY below shows that at its current level just above 150.00 (obviously a big round number), the currency has reached a double support level based on its 50-week moving average (the curved line) and the trend line that starts from the time the Fed began raising interest rates in March 2022.

Source: tradingeconomics.com

Surprisingly, given the sharp move seen overnight, there has been virtually no discussion as to whether the MOF asked the BOJ to intervene and further push the yen higher (dollar lower) in concert with its recent strategy of pushing a market that is moving in its favor rather than fighting a market that is moving against its goals.  Regardless, the 150 level is going to be a very important technical support, and any break below may open up another 10 yen decline in the dollar.

What, you may ask, would lead to such a move?  How about the Fed?

The pundits are holding their breath
With “cut Jay” their new shibboleth
But will Chairman Powell
Now throw in the towel
On prices and channel Macbeth?

Of course, this afternoon, the big news is the FOMC meeting wraps up and at 2:00 they release their statement which is followed by the Chairman’s press conference at 2:30.  As of this morning, the probability of a cut today is down to 3.1% according to the CME’s futures market.  However, that market has a 25bp cut locked in for September with a further 10% probability of a 50bp cut then and is pricing in a total of 66bps of cuts by the December meeting, so, a bit more than a 60% probability of three 25bp cuts by the end of the year.  That pricing continues to feel aggressive to this poet as the data has not yet shown that the economy is clearly in trouble.  Remember, too, the Fed is always reactive, despite any of their comments on trying to get ahead of the curve.

Continuing our observations of mixed data, yesterday saw that home prices, as per the Case-Shiller Index, remain robust, rising 6.8% in May (this data is always lagging), but there is little indication that the shelter component of the inflation statistics is set to decline sharply.  As well, the JOLTs Job Openings data printed at a higher than expected 8.184M, indicating that there is still labor demand out there.  Finally, the Consumer Confidence number rose a touch more than expected to 100.3.  My point is there continues to be strength in many parts of the economy and prices are nowhere near declining.  Granted, this Friday’s NFP report will take on added importance as if the numbers there start to decline and Unemployment continues its recent trend higher, there will be far more urgency to cut rates.  Perhaps this morning’s ADP Employment report (exp 150K) will help clear up some things, but I’m not confident that is the case.

Interestingly, there are still a number of analysts who are clamoring for the Fed to cut today, claiming they can get ahead of the curve and stick the soft landing.  However, history has shown that the Fed lives its life behind the curve, and there is no indication that is about to change.

There is one other thing to consider, though, and that is the politics of the situation.  While the Fed is adamant they are apolitical and only trying to achieve their mandated goals, we all know that in order to even be considered to reach the FOMC as a named member of the committee, one needs to be highly political.  Does that mean that partisan politics enters the arena?  These days, it is almost impossible for that not to be the case.  

The current narrative on this subject is that a rate cut will help the current administration, and by extension the candidacy of VP Harris.  I’m not sure I understand that given inflation, which remains a major topic of conversation around the country, especially at the proverbial kitchen table, is so widely hated across the board.  The most interesting poll results I saw were that a majority of those questioned indicated they hated inflation far more than a recession.  This surprised the economic PhD set, but as inflation is an insidious cancer on everyone’s wellbeing, it is no surprise to this poet.  My point is that a rate cut now will do exactly zero to help support growth before the election, but it will almost certainly boost the price of commodities, notably energy and gasoline, and that will show up in inflation post haste.  Thus, does the narrative even make sense?  If Powell is truly partisan (and I don’t think that is the case), he would refrain from cutting rates until September as any impact, other than in financial markets, will not be felt until long after the election.  FWIW, I agree with the market there will be no cut today, but absent a major decline in the employment situation by September, I see only 25bps there.

Ok, a bit too long to start today, but obviously there is much of importance to understand.  So, let’s look at how markets have responded to the BOJ while they await the FOMC.  As earnings season continues, the tech sector in the US continues to struggle as evidenced by the sharp decline in the NASDAQ yesterday, although the DJIA managed to gain 0.5%.  In Asia, though, tech concerns were overwhelmed by the excitement of the BOJ’s action and the strength in the yen.  Perhaps the surprising thing is the Nikkei (+1.5%) rose so much given a strong yen generally undermines the index, but the rate hike boosted bank shares by 5% or more across the board.  And that strong yen was welcomed everywhere else in Asia with Chinese shares (Hang Seng +2.0%, CSI 300 +2.2%) and almost every regional exchange gaining real ground on the back of a less competitive Japan given the higher yen.

In Europe, most markets are much firmer as well this morning, led by the CAC (+1.4%) and FTSE 100 (+1.4%) although Spain’s IBEX (-1.0%) is lagging on uninspiring corporate earnings results.  I would contend these markets are being helped by that stronger yen as well, given Japan’s status as a major exporter.  Lastly, US futures are higher at this hour (7:20) after some better-than-expected results from chipmaker AMD, although MSFT’s numbers were less impressive.  Net, though, NASDAQ futures are up 1.6% this morning dragging everything else along for the ride.

In the bond market, Treasury yields continue to edge lower, down -1bp this morning and European sovereign yields are all lower by between -2bps and-3bps.  That is somewhat interesting given the flash Eurozone inflation data printed higher than expected at 2.6% headline, 2.9% core, but the market is clearly going all-in on the rate cutting narrative.  The big moves in this market, though, came in Asia with JGB yields jumping 5bps after the rate hike and the BOJ’s announcement they would be reducing their monthly purchases by 50%…OVER THE NEXT TWO YEARS!  They are not exactly rushing to tighten policy.  However, even more impressive was the -16bp decline in Australian 10yr bond yields after softer than expected inflation data overnight got the market thinking about rate cuts instead of the previous view of rate hikes being the next move.

In the commodity markets, things have really broken out.  Oil (+3.5%) is finally paying attention to the escalation of hostilities in the Middle East after Hamas leader Haniyeh was killed while in Iran.  While Israel has not officially claimed the act, that is the assumption and concerns are elevated that there will be a more dramatic response impacting many oil producing nations.  This has encouraged the rally in precious metals with gold (+0.4%) continuing its rally after a >1% gain yesterday, and support for both silver and copper as well.  Frankly, the copper story doesn’t make that much sense given the ongoing lackluster economic growth story, but with the metal’s recent sharp decline, this could simply be a trading bounce.

Finally, the dollar is all over the place this morning.  As mentioned above, the yen is today’s big winner, but we have seen strength in CNY (+0.25%) and KRW (+0.85%) as well, with both those currencies directly aided by yen strength.  Meanwhile, AUD (-0.5%) has responded to the quickly evolving rate story Down Under and is cementing its position as the worst performing G10 currency in July.  Not surprisingly, the commodity linked currencies are having a good day with ZAR (+0.6%) and NOK (+0.5%) both stronger, but after that, the financially linked currencies are not doing very much, so the euro, pound, Loonie and Swiss franc are all only marginally changed on the day.

In addition to the ADP and the FOMC, this morning also brings the Treasury’s QRA, although there is little interest in that report this time around as expectations remain that there will be no major change to the recent mix of debt, i.e., mostly T-bills.  We also see Chicago PMI (exp 44.5) and get the EIA oil data, although the latter will have a hard time competing with a pending war in the Middle East.

All told, not only has a lot happened, but there is also room for a lot more to occur before we go home today.  Quite frankly, I don’t see anything extraordinary coming from Powell, but the risk, to me, is he is more dovish than required and the dollar falls more broadly while commodity prices rise.  Keep your eye on that 150 level in USDJPY, as a break there can really get things moving.

Good luck

Adf

Jay’s Motivation

Posted on by

The Keynesian view of inflation
Claims growth is its major causation
If that is the case
Then given the pace
Of growth, what is Jay’s motivation?
 
Instead, ought he not be concerned
Inflation will soon have returned?
Or does he believe
That he can deceive
The market without getting burned?

 

Another week passed with another set of confusing data.  But more important than the data’s inconsistency is the inconsistency in the arguments made by those desperate for the Fed to cut rates.  For instance, former NY Fed president Bill Dudley wrote a widely read article for Bloomberg saying that he had suddenly become a convert and that the Fed needed to act this week and cut rates.  Granted, he wrote this article the day before the much hotter than expected GDP data was printed, but nonetheless, he had been a staunch hawk and changed his feathers.  And he is not alone, with a number of other high profile financial personalities (I’m looking at you Claudia Sahm) in the same camp.

But I would ask them the following: since you are strong proponents of Keynesianism which describes inflation as a direct result of strong growth and labor markets, given that GDP is running at 2.8% annualized, double Q1’s pace and above trend, and a federal government budget deficit that is approaching 7% despite that growth, and the latest PCE data showing that services inflation remains quite robust (the 6-month level has risen to 5.4%), why do you think the Fed should cut rates?  By your own thesis, inflation is more likely to rise than fall given the economic strength.  Alas, either no journalist will ask that question, or no Fed official will answer. 

At the same time, those analysts who have been calling for a recession in the near future, continue to dig through the better-than-expected data releases and find the weak points to make their case.  Here’s the thing, Powell and company cannot point to yet another subindex of the major data points and claim that is why they are cutting.  He remembers far too well his focus on so-called super core (core ex housing) with the expectation that housing was the problem and if he removed the part of the index that was rising, the rest of the index would be lower.  Alas for his finely tuned plans, that number continues to power along at 4.0% or higher.  He will not make the same mistake again and focus on some obscure view.  

At this point, there is certainly no reason for the Fed to act this Wednesday, and unless the economy essentially falls out of bed by September, it will be difficult to make that case as well.  This is not to say they won’t cut in September come hell or high water, just that if the economy proceeds as it currently appears to be doing, there will be no justification.  But just to put an exclamation point on the likelihood a cut is coming in September, this morning the Fed whisperer, Nick Timiraos, told us that is the case in his latest missive for the WSJ.

In addition to the Fed meeting this week, we also hear from Ueda-san and the BOJ on Tuesday night and Governor Bailey and the BOE on Thursday morning.  Given the near certainty that the Fed is going to remain on hold this week, arguably the BOJ is the far more interesting meeting, at least for financial market cues.  Remember, the narrative has been that the BOJ was finally going to start to “normalize” their policy, lifting interest rates above 0.0% and start to reduce their ongoing QQE program.  Now, this has been the story since last October, and while they did exit the NIRP stage back in March, there has been nothing since then.  Not only that, as I highlighted last week, inflation in Japan is already slowing with the current policy.  

In addition, the yen, while it has backed away from its recent highs (dollar lows) by about 1%, is far from its worst levels and appears to be trending slowly higher, exactly what they want.  I see no case for a rate hike here, although we will certainly hear about how they may modify their QQE actions going forward.  (As an aside, for those with JPY exposures, 152.00 is a very critical level in the market’s perception and a break below that level could well lead to a significant decline in the dollar.)

Lastly, the BOE is going to cut by 25bps.  Given that the ECB has already cut, as has Switzerland and Canada, they will not be able to hold out any further.  I don’t think we need any rationale beyond this to believe Bailey will act.

Ok, let’s look at the overnight market activities.  Friday, you may recall, US equities rebounded sharply from the short-term correction and Japanese shares (Nikkei +2.1%) followed right along, as did the Hang Seng (+1.3%) and almost every other major market in Asia save one, China (CS! 300 -0.5%) as there continues to be a distinct lack of progress on the economy there.  In Europe, the situation is mostly positive as both the DAX (+0.4%) and Spain’s IBEX (+0.6%) are rallying nicely but the French (CAC -0.1%) are suffering a bit, perhaps because of the seemingly constant mishaps regarding the Olympics and the nation’s infrastructure.  This morning, major internet connections were severed around the country, although backups are now working, which added to a dramatic blackout over the weekend and the high-speed rail terrorist arsonist attacks late last week.  But here at home, US futures are firmly in the green (+0.4%) at 6:15am.

In the bond market, euphoria is the story as virtually every major bond market has rallied with yields falling around the world.  Treasury yields are lower by -4bps while across European sovereigns, we are seeing declines of between -5bps and -7bps across the board.  Even JGB yields (-4bps) have fallen, perhaps another signal that the BOJ is unlikely to be acting this week.

In the commodity markets, oil (-0.3%) cannot seem to find any support of note despite a significant inventory draw last week and an escalation in events in the middle east over the weekend.  For the past year, oil has traded between $70/bbl and $90/bbl and we continue to trade in that range with no exit in sight.  We will need to see some very significant economic changes, either a sharp recession or a giant rebound in China, to break out of this range I believe, neither of which seems like a near-term phenomenon.  In the metals space, gold (+0.3%) continues to find support even after a sharp decline a couple of days last week, with spot hovering just below $2400/oz.  This morning, silver (+0.75%) is also rallying but copper (-1.1%) is in a sharp downtrend, despite the news that the workforce at the world’s largest copper mine, Escondida in Chile, is preparing to go on strike.  

Finally, in the currency markets, despite the lower yields everywhere and the generally positive risk environment, the dollar is higher nearly across the board.  Both the euro and pound are softer by about -0.2% and we are seeing the EEMEA currencies following suit with declines on the order of -0.4% across this bunch.  USDJPY is little changed this morning although CNY (-0.1%) is edging lower again after the PBOC’s recent efforts to prevent a sharp decline in the wake of their rate cuts.  Interestingly, the outlier this morning is NOK (+0.3%) despite oil’s decline and there is no obvious catalyst for this movement.  One other currency that is bucking this trend is AUD (+0.1%) which while not much higher this morning, given it has been falling sharply every day for the past two weeks, seems to have found a bottom.  That movement is highly linked to the JPY strength as AUDJPY is a favorite carry trade for many in both the institutional and retail spaces.  If USDJPY does break through that 152 level look for AUD to continue its decline.

On the data front, we know it is a big week, but here are the details:

TuesdayCase Shiller Home Prices6.6%
 JOLTS Job Openings8.03M
 Consumer Confidence99.5
WednesdayBOJ Interest Rate Decision0.1% (unchanged)
 ADP Employment149K
 Treasury QRA 
 Chicago PMI44.5
 FOMC Rate Decision5.5% (unchanged)
ThursdayBOE Rate Decision5.0% (-0.25%)
 Initial Claims236K
 Continuing Claims1860K
 Nonfarm Productivity1.7%
 Unit Labor Costs1.8%
 ISM Manufacturing49.5
 ISM Prices Paid52.5
FridayNonfarm Payrolls175K
 Private Payrolls150K
 Manufacturing Payrolls-2K
 Unemployment Rate4.1%
 Average Hourly Earnings0.3% (3.7% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.5%
 Factory Orders-3.0%
 -ex transport+0.3%

Source: tradingeconomics.com

Obviously, an awful lot to consume and digest this week with the central banks and then NFP.  In addition to all that, we have a significant amount of earnings data coming from some big names including Apple, Amazon, Meta and Microsoft.  Certainly, the strong expectation is for the Fed to remain on hold and prepare the market for a September cut.  That is already priced into the futures market, so much will depend on the tone of the statement and the press conference following the meeting.  As such, my sense is the real unknown is the BOJ early Wednesday morning, but I suspect they leave rates on hold.  If they do hike, I would look for USDJPY to break that key support level of 152, so that feels like the biggest risk heading into the week.

Good luck

Adf

Birds of a Feather

Posted on by

We all know that birds of a feather
Eventually will flock together
So, yesterday’s color
From Williams and Waller
Implied cuts are when and not whether

 

As I described yesterday morning, and have been observing since Chairman Powell’s Congressional testimony, all the members of the FOMC are on the same page.  Yesterday it was NY Fed president John Williams and Governor Chris Waller who explained that [Williams] “It is not really a story about a ‘last mile’ or some part that’s particularly sticky.”  [Different inflation measures are] “all moving in the right direction and doing that pretty consistently,” and [Waller] “The time to lower the policy rate is drawing closer.  Right now, the labor market is in a sweet spot.  We need to keep the labor market in this sweet spot.”

This is the same message Powell gave us in his testimony and on Monday.  It is what we have heard from Barkin, Kugler, Daly and Goolsbee so far this week and are likely to hear from Daly and Williams again today and Bowman and Bostic before they all go quiet ahead of the July 31st meeting.  While there are those who are calling for a cut at the July meeting (Goldman Sachs analysts explained their reasons and in this morning’s WSJ, pundit Greg Ip did the same), and, even though I think it is an interesting risk/reward opportunity, with less than a 5% probability currently priced into the market, I do not believe that the FOMC is going to cut even if next week’s PCE data is extremely soft.  

Consider, though, that between now and the September FOMC meeting, we will receive two more each of CPI, PCE and payroll reports as well as hear all the talk from the Jackson Hole Symposium.  If, and it’s a big if, the economy shows that it is slowing more rapidly than currently seems to be the case, I would not rule out a 50bp cut then, although that is clearly not my base case.

I think it says a great deal about the market’s narrative overall that the ECB is meeting as I write and will release their policy statement and actions, if any, shortly and it is not a top ten topic of conversation right now. There is no expectation of movement, and the market has lined up for a September cut there as well.  In other words, everything remains all about the Fed.

Well, the Fed and the US stock market.  Since its high print a week ago, the NASDAQ is down by 4% with some of its key constituents (NVDA -14.3%, MSFT -5.1%, GOOGL -5.6%) having fallen much further.  At the same time, the DJIA has rallied 3.7% as the new discussion is a rotation from growth to value stocks as the latter will ostensibly be better served by the Fed’s now-imminent rate cuts.  At least, that’s the story that has become the universal belief set.  It certainly sounds good and is logical so let’s go with it.  However, I guess the question we need to answer is, can it continue?  

Can it continue for another day or two?  Certainly, given positioning that exists and the fact this new idea has developed some momentum, it can go a bit further.  But is this the beginning of an entirely new trend?  Somehow, I do not see that being the case.  Remember, the Magnificent-7 story had evolved from an idea into a cult, not dissimilar to the Bitcoin story.  People believed and were rewarded for doing so.  Plus, they had the benefit of feeling like they were taking part in the cutting edge of technology and economic activity.  But buying the Dow Jones, the very definition of old-line manufacturing and traditional service companies, is not something that inspires that same fervor.  My take is this narrative will soon end.  The thing for which we must all watch out, though, is that investors have now seen that their golden stocks, specifically NVDA, can go down, and go down quickly.  The thing about momentum is that once it gets going in either direction, it can continue for quite a while.  Stay alert.

Ok, let’s see how all this has impacted markets elsewhere in the world.  In Asia, the Nikkei (-2.4%) continued its recent struggles even though the yen (-0.5%) has slipped a bit overnight.  But just like in the US, the momentum in the Nikkei seems to be pointing lower for now as it tracks the NASDAQ.  Meanwhile, Chinese stocks showed modest gains with the rest of the region showing wildly disparate outcomes, (Korea -0.7%, Taiwan -1.6%, India +0.8%, Indonesia +1.3%) so it is hard to take a consistent message from here.  However, European bourses are all in the green this morning as they resemble the DJIA far more than the NASDAQ.  Granted, the gains have been modest (CAC +0.5%, FTSE 100 +0.7%, DAX +0.2%) but that is better than the red they have been showing lately.  Lastly, US futures at this hour (7:15) are reverting to the DJIA under pressure while the NASDAQ futures are higher by 0.4%.

In the bond market, yields are edging higher, pretty much by 2bps across the board in both Treasuries and European sovereigns.  However, I would contend that price action here has been a mere consolidation over the past several sessions after a sharp decline in yields since the beginning of the month.  In truth, during the past 3 sessions, there has been no net movement.

Commodity markets are mostly little changed this morning as oil, which rallied yesterday on further inventory draws according to the EIA, is unchanged and gold and silver are also unchanged this morning.  The one outlier is copper (-1.8%) which is continuing its recent declines as it seems the market is calling into question the demand side of the story.  While supply is currently adequate, Chinese economic weakness has been a major drag on the perception of demand.  I suspect that will change over time, but right now, the chart looks awful.

Source: tradingeconomics.com

Finally, the dollar is rebounding a bit this morning with modest gains against most of its G10 counterparts, although other than the yen, those gains are on the order of 0.1% to 0.2%.  In the EMG bloc, it is basically the same story, very modest USD gains with no outliers of which to speak.  One broader picture comment is that there have been several analysts who have discussed the dollar selling off sharply recently and how that is a harbinger of the end of the dollar’s dominance as the world’s reserve currency.  To put things in context, using the DXY as our proxy (which is very imperfect), for the past year, the DXY has traded between 101 and 107 and this morning it is trading at 103.8.  This is neither the story of a major move in either direction, nor of a trend of any consequence.  In order for things to change, we will need to see the Fed change its policy at a much different pace than the rest of the world’s central banks, and that is not yet an obvious outcome.

On the data front this morning, we get the weekly Initial (exp 230K) and Continuing (1860K) Claims data as well as Philly Fed (2.9) and the Leading Indicators (-0.3%).  I think we already know what the Fed speakers are going to tell us, as per the opening monologue, so absent some new piece of news, today is shaping up to be a very dull one.  The summer doldrums are clearly here.

Good luck

Adf

Indigestion

Posted on by

The answer to yesterday’s question
Is CPI’s seem some regression
Both stocks and bonds soared
The dollar was floored
But Powell now has indigestion
 
To no one’s surprise he left rates
Unchanged, while the dot plot translates
To higher for longer
Though pressure’s grown stronger
To cut to achieve his mandates

 

Unequivocally, the CPI data was cooler than market forecasts.  Month over month prices were unchanged at the headline level and grew only 0.16% on a core basis, with the year-on-year numbers each coming in one tick below expectations.  It took absolutely no time for markets to run with this data as the following charts from tradingeconomics.com for the NASDAQ 100, 10-year Treasury yields and EURUSD demonstrate.  See if you can determine when the CPI data was released.

Now, as I explained, and has become abundantly clear to anyone watching, the equity market is in a world of its own.  While yields backed up and the dollar rebounded (euro fell) after the somewhat more hawkish than expected FOMC statement, dot plot and Powell press conference, the NASDAQ ignored everything and kept on rallying.  While that is remarkably impressive, I remain of the opinion that trees still don’t grow to the sky, although apparently, they can get really tall!

At any rate, a quick look under the hood at the CPI shows that core goods prices continue to fall, which was largely why today’s data looked so good, but primary rents and OER continue to climb at about 0.4% monthly despite many assurances by many pundits, analysts and economists that rental inflation was sure to begin declining soon.  It has been rising at this pace or faster for more than two years, and while the actual pace has backed off from the rate a year ago, if you annualize 0.4% you come up with just under 5.0% inflation.  It remains hard to believe that shelter costs can rise at that pace and the general price level is going to get back to 2.0%.  Yesterday’s data was good, but we are not out of the woods yet.

Turning to the FOMC, the statement was virtually unchanged from the May statement, which makes sense since the mix of data that we have seen in the interim shows some hot and some cold numbers and no clear line of sight to the end game.  As such, it is not surprising that Chairman Powell tried to veer hawkish at the press conference in what appears to have been an attempt to offset the (over)reaction to the CPI data.  In fact, a look at the dot plot shows that, as I suggested, the median expectation for rate moves in 2024 is down to a single cut, although they are more confident that inflation will continue to fall next year with the median expectation for an additional 4 cuts.  However, as I also suggested, the longer-term outlook continues to rise with the median there now up to 2.80% from 2.60% in March, and 2.5% or below for the 3 years prior to that.

Interestingly, in their Summary of Economic Projections they expect PCE inflation to be 2.6% this year, up from 2.4% in March, with core PCE to be at 2.8% this year, up from 2.6% in March.  They did, however, maintain their views of GDP growth (2.1%) and Unemployment (4.0%).  At least, unlike Madame Lagarde who cut rates despite raising inflation forecasts, the Fed’s inaction made far more sense.

But pressure is building on Powell and the Fed to cut rates.  Today, several senators wrote (and released) a letter to Powell exhorting him to cut rates because everybody else is doing it.  They claim that his intransigence is hurting the economy, although the whole point of higher for longer is that there is scant evidence that the economy, as a whole, is in trouble despite rates where they are, although certainly some sectors are feeling a pinch.  As an aside, given the extreme degree of financial and economic ignorance that is routinely demonstrated by virtually every member of the House and Senate, this letter is simply political grandstanding.  But pressure is pressure, and Powell will certainly feel it, although I don’t think he is too concerned by this group overall.

While this morning brings PPI (exp 0.1%/2.5% headline and 0.3%/2.4% Core) as well as the weekly Initial (225K) and Continuing (1800K) Claims data, it is hard to believe that either of those data points are going to have any substantive impact given everything we learned yesterday.  So, let’s look elsewhere to see what is happening.

One of the interesting stories right now is the ongoing situation in France with the snap elections called by President Macron.  Apparently, the quick timing has resulted in significant confusion on both the left and right of the spectrum as to who will be allying with whom, and what they stand for.  While this is amusing in its own right (see this Twitter thread), the ramifications are greater for the impact on the French OAT market and the euro.

Briefly, the issue is that France has been slowly sliding from the figurative north of Europe to the South, meaning that it used to be considered a country with almost Germanic fiscal sensibilities and now it is much more akin to the PIGS than Germany.  The WSJ had an interesting article this morning describing the situation.  Ultimately, the market response has been for French yields to rise compared to German yields, adding pressure to the country as it needs to continue to finance its 5%+ budget deficit.  Now add to that the absolute trainwreck that is the current government leadership (as evidenced by that Twitter thread) and investors have decided that there are better places to invest with less credit risk.  After all, S&P Global downgraded French debt last month due to their profligate spending and I assure you, whatever the election outcome, there will be more spending not less.  

If we view this through a FX lens, the combination of clear dysfunction in Europe, lower interest rates in Europe and a Fed still committed to seeing the whites of 2%’s eyes before cutting rates here, it is very easy to anticipate the euro will be biased downwards over time.  While I know there are many who continue to write the dollar’s obituary, the fact remains that it is still standing with no competitors of note.  In fact, part of the raison d’etre of the euro was to be able to replace the dollar as a reserve currency.  It seems that hasn’t worked out all that well.

Ok, let’s see how global markets responded to the US data yesterday.  Perhaps the most interesting thing was that even in the US, the DJIA fell slightly, despite the conviction that rates are heading lower.  In Asia, the picture was mixed with Japan (-0.4%) and China (-0.5%) sliding while Hong Kong (+1.0%) rallied on the tech rally.  Many consider the Hang Seng to be China’s NASDAQ with respect to the weight of tech companies in the index.  As to European bourses, they are all in the red this morning by more than -1.0% with France (-1.4%) leading the way lower.  Of course, based on the above discussion, that can be no surprise.  Lastly, in the US, futures at this hour (6:45) are mixed with NASDAQ higher by 0.6% while DJIA futures are -0.4%.  Apparently, the prospect of lower rates doesn’t help more mature companies.

In the bond market, after yesterday’s wild ride (see above chart), Treasury yields have edged lower by -1bp, but in Europe, yields are continuing higher from their closing levels, catching up to the Treasury yield rebound in the wake of the FOMC meeting.  Not surprisingly, French OATs are leading the way with yields higher by 4bps while Germany has seen only a 2bp rise.

This morning, commodities are uniformly under pressure with oil (-0.8%) sliding after a solid weekly performance while metals markets are also slipping (Au -0.1%, Ag -0.8%, Cu -0.6%) as traders try to come to grips with the next interest rate moves and adjust their positions.  An interesting story this morning is that a shipment of copper from Russia to China for 2000 tons apparently never arrived in China.  This is simply the latest quirk in the metals markets where confirmation of what is being traded is limited.  You may recall the story last year about nickel inventories at the LME actually being bags of painted rocks.  In this space, the broad trend remains that there is excess demand for metals, especially copper, silver and aluminum, as all three are critical to electrification of systems and grids, but it is going to be a bumpy ride higher!

Finally, the dollar, which was decimated in the immediate wake of the CPI data yesterday, managed to claw back some of those losses in the afternoon thanks to the more hawkish Fed and this morning, that slow rebound continues with the greenback higher vs. almost all its counterparts in both the G10 and EMG blocs.  However, nothing really stands out as having moved significantly, with a general trend of about 0.2% or so across the board.

And that is really all we have today.  The first post-FOMC speaker is NY Fed president Williams at noon, although I suspect his message will be identical to Powell’s yesterday.  As to the rest of things, the BOJ meets tonight and while there is no expectation of a policy change, Ueda-san’s comments will be carefully parsed for any clues to when a change may be coming.  

Since nothing seems to matter to the NASDAQ and everyone wants to own it, I suspect that the dollar will maintain its gradual strength until further notice.

Good luck

Adf

Thoroughly Schooled

Posted on by

Has CPI actually cooled?
Or did April have us all fooled?
Both Tiff and Lagarde
Have played their first card
Has Jay now been thoroughly schooled?
 
First, if CPI comes in hot
The Chairman will certainly not
Decide to cut rates
And leave the debates
Til things show the damage he’s wrought
 
But if the inflation report
Is nothing at all of that sort
Then many have said
This summer, the Fed
‘Round rate cuts will gather support

 

A quick look at yesterday’s 10-year Treasury auction shows it was far better than the 3-year on Monday with a strong bid/cover ratio of 2.67, its highest since February 2022, and a result where the auction cleared 2bps lower than the pricing ahead of the announcement, a sort of negative tail.  Indirect bidders represented nearly 75% of the bids, so there was real demand for this paper.  Certainly, Janet and Jay are feeling better, and yields fell 6bps on the day.  

As I explained yesterday, the auctions are just one tiny signal in a large body of information, and just like almost everything else, it seems there is no consistency there either.  However, one auction does not a trend make.  One last thing, the strength of the auction ahead of today’s CPI report and FOMC meeting seems somewhat odd given the potential risks attached to both those events.  Generally, investors would prefer to reduce exposure ahead of a big event, not increase it.  This has awakened some conspiracy theorists as to who actually bought the paper.  There is no evidence that there was any behind the scenes Fed activity, but many are trying to figure out the incentive to aggressively bid for bonds ahead of key data.  We need to stay vigilant.  

Ok, on to the CPI this morning.  The current consensus forecasts are for the headline (0.1% M/M and 3.4% Y/Y) and the core (0.3% M/m and 3.5% Y/Y).  During the month of May, wholesale gasoline prices fell nearly 6% which is clearly weighing on the headline monthly outcome.  Of course, that is not a seasonally adjusted number, that is the raw result.  Last month, despite gasoline prices rising a similar amount, in the CPI data, the seasonally adjusted number showed a decline, and that is what is in the report.  That is just one of the many unusual features of the way CPI is calculated, and why it must be carefully considered.  

However, beyond gasoline prices, the indications of rising prices continue to come from things like the ISM Prices paid index for both Manufacturing and Services, as well as the robust wage growth from the NFP report last week.  And certainly, I am hard-pressed to have seen prices do anything but rise in the past month and year based on my personal consumption basket.  But I do not have an econometric model that I use to estimate these things like my good friend the @inflation_guy, who you all should be following on X(Twitter) or at his inflationguy blog.  However, based on the other pricing data we have seen, I expect that the risks to the consensus are on the high side, not the low side.  We shall find out at 8:30.

In this case, I think it is clear that a hot number will result in a sharp decline in bond prices (jump in yields), a rise in the dollar and, at least initially, a decline in equity markets.  Of course, the latter clearly have a life of their own.  A lower-than-expected print should see the opposite, with stocks ripping higher.

And lastly, we turn to this afternoon’s FOMC meeting.  At this point, the only thing that anyone is discussing is the dot plot.  Below is the March edition where the median indicated 3 rate cuts in 2024, but it was very close, a 10-9 outcome with 9 members seeing 2 cuts or less.

Source: federalreserve.gov

As I recall, I was far more interested in the idea that the Longer run rate, which is often defined as R* or the neutral rate, started to creep higher than its recent estimates of 2.5%.  Since the March meeting, there has been an uptick in discussion as to what the longer run rate should be, with every estimate rising some amount.  

As to the immediate situation, given there is a vanishingly small chance they adjust rates today, there are only four meetings left in 2024 so it would seem likely that the maximum number of cuts the updated version of the dot plot will indicate is two.  Personally, I think it will come in at one unless this morning’s CPI is much lower than expectations, although given the ECB managed to cut rates while raising their inflation forecasts, anything is possible in the convoluted world of central banking.  Funnily, the strength of yesterday’s 10-year auction may give them enough confidence that their current policy is not a problem resulting in an estimate of fewer cuts rather than more.

However, the real interest will be Powell’s press conference.  Based on everything we heard from Powell and all his acolytes prior to the quiet period, there certainly seemed to be no rush to cut rates as they still lacked confidence that inflation was going to head back to target.  And, of course, the biggest piece of data we have seen in the interim, last Friday’s NFP number, was much hotter than expected as was the wage data, so it doesn’t seem that he would change that tune.  Thus, much relies on this morning’s CPI and how that may change any opinions on the committee.  While I believe that his underlying desire is to cut rates, there does not yet seem to be an opening to do so.  In the end, my take is that the risk to the market is he is more hawkish than dovish with the corresponding risk-off results.  That’s what makes markets.

Ok, I’ve rambled on a lot already so suffice to say that the overnight price action was generally pretty benign as everyone around the world has been awaiting today’s CPI and FOMC.  Yesterday’s mixed US session was followed by a mixed Asian session with some gainers and some laggards although European bourses are feeling chipper this morning, with all higher by about 0.5%.  As to US futures, they are ever so slightly firmer at this hour (7:00), just 0.1%.

Bond yields around the world have followed Treasuries lower, with the US 10-yr falling one more basis point while all of Europe is down 2bps, except for Italy (-5bps) where the spread to bunds is narrowing on hopes of broader interest rate declines.  Even JGB yields (-4bps) softened last night.  As I have repeatedly explained, as goes the Treasury market, so goes the rest of the global bond market.

Oil prices (+1.1%) are climbing again after inventory data yesterday showed larger draws than expected while metals prices are little changed this morning after another weak session yesterday.

Finally, the dollar is on its back foot, down about -0.15% vs. most of its G10 counterparts save the yen (-0.2%) which continues to drift back toward that 160 level which catalyzed the BOJ’s intervention.  I think the dollar’s movement is the easiest to forecast ahead of the CPI and FOMC as hot CPI will see the dollar rally, as will a hawkish Fed, with the opposite also true in the event that things are cool and/or dovish.

And that’s really all today.  So, buckle up for the 8:30 data and then after that flurry, you can relax until 2:00pm.

Good luck

Adf

Concern ‘Bout the Fate

Posted on by

While waiting for Jay and the Fed
And CPI data on Wed
This week’s 3-year note
Was less than the GOAT
Though risk assets still moved ahead
 
But talk from some sources of late
Exhibit concern ‘bout the fate
Of how the US
Will deal with excess
Supply of bonds as they inflate

 

Since we observe market activities daily, though we remain subject to surprising outcomes (see Friday’s NFP results), there are more consistent features that offer a hint of how the mechanics of financial markets are working, and whether those mechanics are running smoothly or a bit creakier.

Arguably, the thing getting the most press is Nvidia’s stock price, as its continued rapid rise has resulted in the company now representing ~6.5% of the market capitalization of the S&P 500.  Along with Apple and Microsoft, all currently having market caps > $3 trillion, we are looking at three companies representing nearly 20% of the S&P 500.  This is unprecedented and many (including this poet) believe that it is unsustainable in the long run, and probably the medium run.

But another key market, arguably the most important when discussing the financial markets and the Fed, is the US Treasury market.  Countless hours are devoted to dissecting each tick and how movements in the yields of various maturity bonds may impact the economy and overall market sentiment.  With this in mind, when new securities are auctioned, it is always worth a look.  So, yesterday, the Treasury issued $53 billion of 3-year notes at a yield of 4.659%.  The underlying characteristics of this auction were not particularly encouraging for a Treasury that will be issuing 10-year and 30-year bonds as the week progresses, as well as another $trillion this year.  

The numbers that are most closely watched are the tail (the difference between the market estimate of the final yield prior to the auction and the actual results) which was at 1.1bps, a full basis point above the average tail of the past 6 months, an indication that demand was lacking.  As well, the bid to cover ratio (how many $ of bids were received vs. the $53 billion offered) fell to 2.43X, well below the average over the past 6-months of auctions.  Dealers were saddled with nearly 20% of the paper and overall, domestic demand was not very robust.

This gets highlighted because these little data points are often harbingers of bigger problems to come.  After all, if there is a dearth of demand for US Treasury paper, even short-dated paper like 3-year notes, that bodes quite ill for the US government, as well as for global financial markets.  Remember, US Treasury paper is the baseline for virtually all debt issuance around the world.  If it fails here, it will be GFC 2.0 or worse.

Why, you may ask, is this becoming an issue?  Well, one answer would be that the US’s current financial profligacy is starting to be discussed in quite negative terms at key institutions around the world.  For instance, the IMF’s managing director, Kristalina Georgieva, has expressed concern recently that the US is essentially hogging all the borrowing capacity around the world.  As well, Banque de France governor, Francois Villeroy de Galhau, explained, “U.S. fiscal policy is the elephant in the room: it is not in the hands of the Fed, and could significantly affect the level of long-term interest rates.  A large U.S. fiscal deficit tightens financial conditions and fuels inflation.”  

The point is that while Secretary Yellen, and Chair Powell, will not even discuss the potential ramifications of excess US government borrowing, it is being noticed in the halls of power elsewhere in the world, as well as on trading floors and in investment meetings at major asset managers.  This is not to say that anything dramatic is going to happen anytime soon, but death by a thousand cuts is still death.  Remember this, whatever the Fed’s mandate may say about price stability and maximum employment, I assure you, their number one priority, by miles and miles, is a smoothly working Treasury bond market.  A 1 basis point tail may not seem to be much, but like the little boy in Holland with his finger in the dike, it may foretell bigger problems to come.

The reason I can focus on minutiae like the details of a Treasury auction is that there is so little else ongoing from a macro perspective right now.  With US CPI to be released tomorrow and the FOMC meeting, statement and subsequent Powell press conference coming later tomorrow afternoon, most market participants are effectively holding their collective breath waiting for new information.

So, let’s review the overnight activity, which was not that exciting.  After modest gains in the US yesterday, Asia couldn’t seem to follow except for Japan (+0.25%) with most of the rest of the region selling off, notably the Hang Seng (-1.0%) and Australia (-1.3%).  European bourses, too, are under pressure across the board this morning with Spain (-1.4%) leading the way, but all the other large markets lower by at least -0.7%.  There is a rumor that French President Macron may resign if the RN wins the election at the end of the month and the first polling shows that Marine Le Pen’s group will win a plurality of votes, but not necessarily a working majority.  This will obviously be a major focus of markets going forward as regardless of who is in charge, it would be reasonable to expect many of the key issues that have driven this political shift (immigration, inflation, Ukraine) to become policies going forward.  As to US futures, at this hour (6:45) they are lower by about -0.25%.

In the bond market, the big news is really in Europe where the spread between German bunds and French OATs has widened by a further 8bps as concerns over the future government of France creep into investors’ minds.  Historically, Madame Le Pen has been quite anti-Europe so there seem to be some worries that if the RN wins an outright majority, there will be significant ructions in the European Union with France seeking more independence.  In the end, uncertainty breeds investor concern so I would not be surprised to see this spread widen further leading up to the election.  As to the Treasury market, yields have backed off 4bps this morning in what appears to be position inspired trading rather than being caused by new information.

Commodities, which had a very nice rebound yesterday with both energy and metals markets performing well, are back under pressure this morning with oil (-0.3%) and gold (-0.1%) the least impacted but the rest of the metals complex feeling the heat again.  However, NatGas continues its strong rally, up another 5% this morning and looking for all the world like it is going to continue rising until it tests the November 2023 highs of $3.80/MMBtu which is still $.75 higher.

Finally, the dollar continues to gain at the margins with the euro (-0.2%) slipping further on the French political news, although the pound is bucking the trend with a very modest rise.  The other currency that is having a good day is MXN (+0.8%) which continues its slow rebound from its post-election collapse last week.  Otherwise, EEMEA currencies are all under pressure as is the CNY (-0.1%).  Now, 0.1% may not seem like a lot, but the PBOC has been walking the value of the renminbi lower (dollar higher) ever so slightly every day for the past three months and the fix last night was at its highest level since January.  It appears clear that the pressure for a devaluation is strong in China and that the PBOC is working very hard to maintain a sense of stability.  My sense is this gradual weakness will continue for quite a while, at least until the Fed makes a change.

And that’s what we have today.  The NFIB Small Business Optimism Index was just released at 90.5, a bit firmer than forecast, but that is not a market-moving data point.  And there are no other data points to await today, nor any Fedspeak so the FX markets will take its cues from bonds and stocks.  Given that CPI and the Fed are both tomorrow, I anticipate another very quiet session overall in the US as investors (and algorithms) will want new news to drive their next trades.  Broadly, I think we are in a ‘good data is bad’ for risk assets as the mindset is it will delay any Fed rate cuts even further.  Of course, if Treasury auctions continue to see shrinking demand (today there is a 10-year auction for $39 billion) that will certainly have an impact on the bond market, the Fed’s response, and by extension risk assets and the dollar.  So, arguably, that auction is the biggest news of the day this afternoon.

Good luck

Adf

Crushed

Posted on by

On Friday, the NFP showed
That job growth has not really slowed
And wages were hot
So, pundits all thought
That ‘flation just might well explode
 
But under the NFP’s hood
Some things didn’t look quite so good
The joblessness rate
Itself did inflate
Though household jobs fell, understood?
 
Meanwhile across Europe the vote
For Parliament seems to denote
Incumbents were crushed
And governments flushed
While media seeks a scapegoat

 

Remember the narrative that had everyone feeling so good?  Inflation was drifting lower, albeit not in a straight line, but central bankers around the world were quite confident that their collective 2.0% targets were coming into view, and pretty soon at that.  This would lead to lower bond yields, continued strong performance in risk assets and slowing, but still solid economic activity.  In other words, many were invested in the Goldilocks thesis of a soft landing.  

Now, the data that we had seen last week seemed to indicate that was a viable process as the ADP Employment number was a touch soft, the JOLTS Job Openings number was definitely soft and although the ISM Services data was a lot stronger than anticipated, the ISM Manufacturing number was soft as well.  In addition, if we go back to the previous week, the Chicago PMI print was abysmal at 35.4.

This was all a prelude to Friday’s NFP data which confirmed confused everything.  While the headline number was much stronger than expected at 272K, the Unemployment Rate rose to 4.0% for the first time in more than two years, and Average Hourly Earnings rose 0.4% with an annual increase of 4.1%.  But even more confusing was the fact that looking at the Household survey, the survey that is used to calculate the Unemployment Rate, showed the number of jobs FELL by 408K while 250K people exited the workforce.  Now, if things were truly running smoothly, as the NFP number indicated, we would expect to see that household number of jobs rise, not fall.  Something is amiss.

Having read far too much about this over the weekend, it appears that the BLS data and its models are not a very accurate representation of the current reality, at least for the monthly data.  The BLS also produces a quarterly survey called the Quarterly Census of Employment and Wages (QCEW) which is a census of 11 odd million businesses in the US, rather than a survey of some 600k businesses for the NFP.  If one looks at the growing discrepancy between the number of jobs shown in that data vs. the NFP data, the NFP data has been rising far faster with the gap widening severely.   This can be seen in the below graph from the mishtalk.com website (from Mike Shedlock, an excellent economist/analyst).

The upshot is that while that headline NFP number has looked very good, there appears to be something else happening in the underlying data.  Early next year, the BLS will revise its NFP data, and you cannot be surprised if they reduce the readings significantly.  But revisions don’t have the same cachet as headlines, and so this is our current world. 

The market response was as you would expect; bonds got crushed with the entire yield curve jumping 15bps, the dollar rallied sharply, up nearly 1% on the DXY with several currencies falling farther than that (e.g., MXN -2.85%, NOK -1.5%, BRL -1.6%), and equity markets falling although not nearly as much as you might expect, only about -0.15% on average across the big indices.  But the notable moves were in commodities with gold (-2.2%), silver (-3.9%) and copper (-3.0%) just in the wake of the NFP data, with larger declines overall on the day.  Energy was the only space that held in on the day, but of course, it has been under pressure for several weeks.

What’s next?  Well, this week brings a great deal of new information including CPI, PPI, the FOMC Meeting and the BOJ meeting.  My take is many traders are licking their wounds right now, so given today’s calendar is quite benign, I imagine things will be a bit choppy as positions get adjusted, but direction will be hard to discern.  Except…

The European Parliament elections were held starting last Thursday but running through Sunday, with all 27 nations in the EU voting for their parliamentary representatives.  The story is, as you will clearly have heard by now, that the left wing, center-left and centrist parties got decimated while everyone on the right side of the aisle massively outperformed.  The Belgian PM resigned and there will be elections there.  French President Macron dissolved parliament for a snap election as his party won just 15% of the vote while Marine Le Pen, the conservative candidate leading the National Rally, won more than 31% of the votes.  As well, German Chancellor Olaf Sholz has been decimated as have the Green parties across the continent.  Times, they are a-changin’.  It is no surprise that the euro continues to falter after Friday’s declines as the European part of the equation just added to the woes from the US implication of higher interest rates.

What will these elections mean for markets?  The clearest message that I see is that the climate agenda is likely to be altered such that demand for oil and gas may well increase.  Do not be surprised to see more European nations abandon the Net Zero concept, at least reaching it by 2050.  Ironically, while the first move was seen as a negative for the euro, this may well be a harbinger of future euro strength if the Eurozone economies waste less money on impossible dreams and spend more on actual economic activity that generates benefits and income for its citizens without government subsidies.  But that will take a bit more time.

Perhaps the most important thing is that this election may well be a harbinger of the US election in November as the European people have clearly rejected the current themes and are looking for a change.  Far left Green policies that have been promulgated by the Biden administration have found no favor in Europe and certainly the current polling indicates it is equally unpopular in the US.

OK, a quick tour of the overnight session shows that Japanese equity markets performed well after GDP data there last night showed a less negative outcome in Q1 than originally reported, while most of the rest of Asia was closed for various holidays.  European bourses, however, are under pressure across the board led by France (-2.2%) although most of the rest of the continent has seen declines on the order of -1.0%.  As to the US futures markets, at this hour (6:15), they are lower by -0.3%.

Bond yields continue to climb with Treasuries up another 2bps and European sovereigns rising between 2bps (Germany) and 8bps (France and Italy) as the combination of higher US yields and some concerns over the future direction in Europe have come to the fore.  Overnight, JGB yields also jumped 7bps and are back above 1.00%, with the Japanese data and US data the drivers.  The BOJ meets Friday this week, so there is much speculation as to the outcome, although a rate hike is not forecast.

In the commodity markets, after Friday’s rout in the metals space, the big ones are all firmer this morning, although this looks like a trading bounce rather than a change of views.  Oil markets are little changed this morning, trading at the lower end of their recent ranges but NatGas, something I haven’t discussed in a while, is rallying again.  It is higher by 3% this morning and 26% in the past month, rising to $3.00/MMBtu, its highest price since November and double the lows seen in March.  Consider that if there is continued pushback against the Green agenda, as evidenced by the European elections, demand for NatGas is likely to grow quite strongly.

Finally, the dollar is continuing to gain strength this morning, with the euro down -0.6% following Friday’s declines and the EEMEA currencies all falling more than that.  Given the holidays in Asia, there was limited trading in the onshore markets there, and other than MXN, which is unchanged this morning, the rest of LATAM hasn’t opened yet.  However, remember that the peso has fallen 10% in the past week, so there is likely going to be some more movement in that space going forward.  Markets typically don’t dislocate by 10% and then just stop.

As if last week didn’t bring enough surprises between the NFP and election results in India, Mexico and Europe, this week we have a lot more to look for, although today is a blank slate.

TuesdayNFIB Small Biz Optimism89.8
WednesdayCPI0.1% (3.4% Y/Y)
 -ex food & energy0.3% (3.5% Y/Y)
 FOMC Rate Decision5.5% (unchanged)
ThursdayInitial Claims224K
 Continuing Claims1800K
 PPI0.1% (2.5% Y/Y)
 -ex food & energy0.3% (2.5% Y/Y)
FridayBOJ Rate Decision0.10% (unchanged)
 Michigan Sentiment72.0
Source: tradingeconomics.com

As this is a quarterly meeting of the FOMC, we will get new projections and a new dot plot, and of course, Chairman Powell will be speaking afterwards.  As of now, the market is pricing about a 50:50 chance of the first cut coming in September and a total of one and one-half cuts for the rest of the year.  It remains very difficult to discern what is really happening in the economy with all the conflicting data.  However, whatever the growth stories, nothing has indicated that inflation is going to decline very far.  I maintain the Fed is going to be higher for longer for even longer.  It continues to be difficult to see the benefits of many other currencies, although I would not be surprised to see MXN regain much of its lost ground as I doubt Banxico will be easing policy anytime soon, and president-elect Sheinbaum is not going to change things there that much and doesn’t take office until October.

Good luck

Adf

Just Swell!

Posted on by

The markets were truly surprised
As yesterday’s Minutes advised
That higher for longer
Intent was much stronger
Than prior belief emphasized
 
The market response was to sell
Risk assets and thus, prices fell
But after the close
Nvidia rose
And now everything is just swell!

 

It turns out that Chairman Powell’s press conference had a distinctly more dovish feel to it than the tone of the FOMC meeting at the beginning of the month.  At least that appears to be the situation based on the Minutes of the meeting that were released yesterday afternoon.  In truth, it is somewhat surprising that given all the comments we have heard by virtually every member of the FOMC in the intervening three weeks, a reading of the Minutes resulted in altered opinions of how policy would evolve going forward.

While every Fed speaker has maintained the view that higher for longer remains the baseline, at the press conference, Powell essentially ruled out further rate hikes.  But in the Minutes, it turns out “various” members indicated a willingness to raise rates if necessary.  In addition, “a few” members would have supported continuing the QT process at the previous $60 billion/month runoff rather than adjusting it lower.  Finally, “many” questioned just how restrictive current monetary policy actually is, and whether it is sufficient to drive inflation back to their target.  Net, it appears there was quite a lively discussion in the room and the hawks are not willing to be ignored.

With this more hawkish stance now more widely understood, it cannot be surprising that risk assets sold off yesterday afternoon.  While I grant that the equity declines were modest, between -0.2% and -0.5% in the US, the tone of conversation clearly changed.  Meanwhile, the real damage occurred in the commodity markets where the recent sharp rise in metals prices ran into a proverbial buzzsaw and all of them fell sharply.  For instance, gold fell -1.5% yesterday and is lower by another -0.7% this morning.  Silver was a bit more volatile, losing -3.0% yesterday and down a further -1.25% today and the king of this move was copper, which tumbled more than -4% yesterday although it seems to be basing for now.

While there are several pundits who are describing these commodity price moves as a reaction to the dollar’s rebound, I actually see it more as a response to the idea that the Fed may be willing to fight inflation more aggressively than previously thought.  Remember, a key to the metals markets’ rally is the idea that the Fed is going to allow inflation to run hotter than target going forward, with 3% as the new 2%, and the widely mooted rate cuts would simply hasten that outcome.  In that scenario, ‘real’ stuff will retain its value better than paper assets and metals are as real as it gets.  However, if the Fed is truly going to stay the course and is willing to raise rates further to achieve their 2% goal, that is a very different stance which will support the dollar and paper assets far better.

Of course, none of this really mattered because the most important news yesterday was after the equity market close when Nvidia reported even stronger than expected results and also split their stock 10:1.  And, so, all is now right in the universe because…AI!  

Alas, this poet is not an equity analyst and has no useful opinion on the merits of the current valuations of AI stocks, so I will continue to focus on the macroeconomic story and try to interpret how things may evolve going forward.

Keeping in mind that the Fed may well be more hawkish than previously thought, that is quite a change in mindset compared to most other central banks where rate cuts appear far more likely as the summer progresses.  For instance, yesterday Madame Lagarde explained, “I’m really confident that we have inflation under control. The forecast that we have for next year and the year after that is really getting very, very close to target, if not at target. So, I am confident that we’ve gone to a control phase.”  This is her rationale for essentially promising, once again, that the ECB will cut rates next month.  However, we continue to get pushback from the ECB hawks that a June cut does not mean a July cut or any other cuts afterwards.  Now, I am inclined to believe that while they may skip July, they will cut again in September and probably consistently after that.

Of course, this is a very different stance than what was indicated by the FOMC Minutes, and I expect that there should be a greater divergence between European and US markets going forward because of this.  In fact, I am quite surprised that the FX market has not taken this to heart and that the euro remains as well bid as it is.  While the single currency has slipped about 2% since the beginning of the year, it is higher this morning by 0.2% and well above the lows seen back in mid-April.  Today’s price action has been driven by slightly better than expected Flash PMI data, but the big picture strikes me that there is more room for the euro to fall than rise.

And really, isn’t that the entire discussion overall, relative policy stances by the main central banks?  I continue to see that as the key driving force in markets at this time, and the macro data helps inform what those stances are likely to be.  If the US growth story is accelerating vs. other G7 countries, then we should expect to see continued outperformance by US assets and the dollar.  However, if the rest of the G7 is catching up, perhaps those tables will turn.  While PMI data has not been a particularly good indicator lately, the fact that European data (and Japanese data overnight) were slightly better than forecast may be an indication that things are changing.  Later this morning we will see the US version (exp 50.0 Manufacturing, 51.3 Services, 51.1 Composite) so it will be interesting to see if the market responds to any surprises there.

As to the rest of the overnight session, markets in Asia were mixed with more gainers (Japan, India, South Korea, Taiwan) than laggards (China, Hong Kong, Australia) with the gainers generally benefitting from somewhat better than expected PMI data and the laggards the opposite.  European bourses are mostly higher on the back of that better data as well.  As to US futures, at this hour (7:30) Nvidia has pulled the entire complex higher with the NASDAQ (+1.1%) leading the way.

In the bond markets, most major countries have seen essentially zero movement this morning with the UK (-3bps) the one exception as the PMI data there was a touch softer than expected.  Of course, you may recall that yields rose sharply in the UK yesterday after the hotter than expected CPI data, so this is a bit of a give-back.  JGB yields, interestingly, slipped back 1bp and are now back below 1.00% despite a modestly better than expected PMI reading.

Oil prices (+0.7%) are bouncing slightly after a string of down days and despite slightly larger than expected inventory builds in the US.  But for now, it seems clear there is ample supply.  And, of course, we already discussed the metals markets.

Finally, the dollar is a touch softer overall this morning with most of the movement as you might expect.  For instance, NOK (+0.7%) is rallying alongside oil and adding to the dollar’s broad weakness.  However, ZAR (-0.5%) remains beholden to the metals complex and is still under pressure.  Of minor note is the fact that the CNY fixing last night at 7.1098 was the weakest renminbi fix since January and some are claiming this is a harbinger of the PBOC relaxing its control of the currency.  While that may be true, I suspect it will be extremely gradual.  And the yen continues to tend weaker, not stronger, as the interest rate differential is too wide for traders and investors to ignore.  As well, it is fair to ask if Japan is really concerned about the level of the yen, or if they truly are only concerned with a slow and steady movement.  

Before the PMI data, we see Initial (exp 220K) and Continuing (1799K) Claims and the Chicago Fed National Activity Index (0.16).  Then, at 10:00 we see New Home Sales (680K) which are following yesterday’s much softer than expected Existing Home Sales data.  It seems clear that there is an ongoing problem in the housing market.  Finally, this afternoon, Atlanta Fed president Rafael Bostic speaks, and it will be quite interesting to hear his views now in the wake of the Minutes.

While actions speak louder than words, yesterday’s FOMC Minutes certainly have given me pause regarding my view that they were going to ease policy more quickly than inflation data may warrant.  That should help support the dollar and keep pressure on risk assets.  Of course, given the ongoing euphoria over AI and the Nvidia earnings, I don’t expect equity traders to care much about that at all.

Good luck

Adf

Tortured

Posted on by

Intervention is
The last bastion of tortured
Finance ministers

 

Apparently, Japanese FinMin Suzuki did not want the spotlight to remain on Chairman Powell and the Fed so last night, in what was surprising timing given the absence of additional jawboning ahead of the move, it appears there was a second round of intervention orchestrated by the MOF and executed by the BOJ.  Looking at the chart below, courtesy of tradingeconomics.com, it is pretty clear as to the activity and timing, although as is often the case, 50% of the move has already been retraced.

According to Bloomberg’s calculations, they spent an additional ¥3.5 (~$22B) in the effort, so smaller than last time, but still a pretty decent amount of cash.  As of yet, there has been no affirmation by the MOF that they did intervene, although the price chart alone is strong evidence of the action.  Will it matter?  In the long run, not at all.  The only thing that will change the ultimate trajectory of the yen’s exchange rate is a policy change and based on last week’s BOJ meeting, there is no evidence a monetary policy change is in the offing.  Therefore, we need to see a US policy change and based on yesterday’s FOMC meeting and the following press conference, that doesn’t seem to be coming anytime soon either.  To my eye, the yen will continue to weaken until something changes.  This could take a few more years and USDJPY could wind up a lot higher than 160.

Said Jay, it is, frankly, absurd
A rate hike will soon be preferred
But neither will we
Soon cut, we agree
While ‘flation’s decline is deferred

To me, the encapsulation of the entire FOMC statement and Powell press conference can be summed up in the following two quotes from the Chairman while answering questions.  “I think it’s unlikely that the next policy rate move will be a hike,” and “inflation has shown a lack of further progress… and gaining confidence to cut will take longer than thought.”  In other words, we are not likely to change policy anytime soon absent a complete black swan event.

Since the press conference ended, there has been an enormous amount of speculation regarding what message Powell was trying to send.  I would argue the consensus is that he wants to cut but the data is just not in a place that would allow the Fed to go down that path without destroying what’s left of their credibility.  To me, the question is, why is he so anxious to cut rates?  Arguably, an unbiased Fed chair would simply ‘want’ to follow whatever is the appropriate course to achieve the mandate.  

One of the popular views is that there is substantial pressure from the White House to cut as the Biden administration believes lower rates will help Biden’s reelection bid, however Powell, when asked about the political issue, was explicit in rejecting that hypothesis and claiming that politics is never even part of the conversation, let alone the decision.  I accept that at face value, although certainly all 17 members of the FOMC have political biases that drive their actions.  But here is a take I have not heard elsewhere.  Perhaps Powell is keen to cut because it will help the private equity sphere, the place where he not only made his fortune, but where he also maintains a large social circle and he simply wants to help his friends.  There is no doubt that lower rates help the PE space!  Regardless of why, I have to agree that it appears he is leaning in that direction.

There was one other thing that was a minor surprise and that had to do with the balance sheet program.  As expected, the Fed explained they would be reducing the pace of QT starting in June, but they would be doing so by more than anticipated, slowing the runoff to $25 billion/month of Treasuries before reinvesting, down from the current level of $60 billion/month.  For MBS, the runoff remains at $35 billion/month, although if that number is exceeded, they would replace the MBS with Treasuries so allow the MBS portion of the portfolio (currently $2.38 trillion) to slowly disappear.  The operative word here, though, is slowly, as they have not come close to seeing that $35 billion since the program started.  After all, nobody is refinancing their mortgage with current rates thus reducing the churn in that part of the portfolio.  At any rate, that was very mildly dovish, I believe.

The market response to the entire show was quite positive with equity investors taking the dovish message to heart and equities and bonds both rallied in the immediate wake of the meeting, although the equity markets sold off on the close and wound up slightly lower for the session.  Not so bonds, where yields fell and continue at those levels, down about 5bps on the day.

So how have things fared overnight since the Fed?  Well, the Hang Seng (+2.5%) was the big winner as investors there took Powell’s dovishness to heart and that combined with confirmation that the Chinese Plenary meeting would be occurring in July, thus a chance for more stimulus to come, got investors excited.  However, the mainland was closed.  Japanese shares were basically unchanged after the intervention and the story throughout the rest of the region was mixed with some gainers (Australia, India) and some laggards (South Korea, Indonesia).  

In Europe, it is also a mixed picture as investors respond to the PMI data releases, which were also a mixed bag.  For instance, Spain saw a jump in PMI and the IBEX is firmer by 0.3% while France saw a 1-point decline in the index and the CAC is down by -0.7%.  Looking at the overall mix of data, it appears that European economic activity is bumping along the bottom, although not yet clearly turning higher.  Arguably that is a big reason the ECB has penciled in that June rate cut.  Finally, US futures are pointing higher at this hour (7:00) between 0.5% and 1.0%, so quite solidly so.

In the bond market, the doves are still in charge as Treasury yields have drifted lower by another 2bps and are back to 4.60%.  but in Europe, the story is even better with yields down between 4bps and 7bps as the modest growth outturn added to oil’s recent price declines has investors gaining confidence that inflation there, at least, is truly on its way back to target.  As to JGB’s, a 1bp rise overnight has yields back to 0.90%, obviously much closer to the previous limit at 1.0%, but still not moving there rapidly.

Going back to oil prices, while they have bounced 0.5% this morning, they are down more than 5.2% in the past week as rising inventories and growing hopes of a ceasefire in Gaza have been enough to get the CTAs and hedge funds to close their positions.  In something of a surprise to me based on the ostensible dovish tone of the Fed, metals markets are back under pressure after yesterday’s bounce so all of them, both precious and industrial, are lower by about -1.0% this morning.

Finally, the dollar, aside from the yen, is edging higher this morning, although edging is the key term here.  Against most majors it is firmer by just a bit, 0.15% or so, although in the G10 there are two outliers, CHF (+0.45%) which rallied after their CPI release this morning was much hotter than expected at 0.3% M/M indicating the SNB may be holding off on its next rate cut, and NOK (-0.6%) which is continuing to suffer from the oil decline in the past week.  It should also be no surprise that ZAR (-0.5%) is under pressure given the metals movement.  But elsewhere, things are far less interesting with modest dollar gains the rule today.  This seems at odds with the ostensible dovish Fed tone, but there you have it.

On the data front, we see Initial (exp 212K) and Continuing (1800K) Claims as always on a Thursday, as well as the Trade Balance (-$69.1B) and then Nonfarm Productivity (0.8%) and Unit Labor Costs (3.3%) all at 8:30 with Factory Orders (1.6%) coming at 10:00.  As of now, there are no Fed speakers on the docket, but I would not be surprised to see an interview pop up.  The Fed will be closely watching the productivity data as that is an important part of the macro equation regarding sustainable growth and inflation.  Certainly, the expectations do not bode well for a dovish stance.

Explain to me that policy has changed, and I will accept that it is time to change my view.  However, at this point, the dollar still gets the benefit of the doubt.

Good luck

Adf