Tag Archives: #FOMC

Wages on Fire

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The ECI data’s designed
To help understand what’s enshrined
In hiring workers,
Including the shirkers,
With numbers quite nicely streamlined
 
The problem for Jay and the Fed
Is yesterday’s data brought dread
It rocketed higher
With wages on fire
And showing that rate cuts are dead

It’s funny the way things work.  Historically, the number of people who paid attention to the Employment Cost Index (ECI), even in financial markets, could be counted on your fingers and toes.  It was just not a meaningful datapoint in the scheme of the macro conversation.  And yet, here we are in extraordinary times and suddenly it is a market mover!  I have updated yesterday’s 10-year graph with the most recent print of 1.2% and it is now very evident that wage pressures are not dissipating at all.  Rather, they seem to be accelerating and that is not going to help Jay achieve the 2.0% inflation goal.

Source: tradingeconomics.com

But in fairness, it wasn’t just the ECI.  Yesterday’s data releases were lousy across the board.  Case-Shiller Home prices rose more than expected, by 7.3% Y/Y.  Chicago PMI fell sharply to 37.9, far below expectations and I guess we cannot be surprised that, given all that, Consumer Confidence fell to 97.0, its lowest reading since immediately after the pandemic.  The upshot is rising prices and weakening growth, back to fears of stagflation.  With that as backdrop, the fact that risk assets got slaughtered across the board yesterday seems par for the course. 

And that is the setup for Jay and his merry band at the FOMC today.  At this point, much ink has already been spilled trying to anticipate what the statement will say and how hawkish/dovish Powell will be at the press conference so there is very little I can add that will be new.  I would contend the consensus is that the statement will be more hawkish, likely removing the line about “Inflation has eased over the past year but remains elevated,” or adjusting it.  However, one of the things that has been pointed out lately is that Powell’s press conferences seem to have consistently been more dovish than the statement.  Perhaps that happens again today, but I have to have some faith that Powell is actually trying to achieve the mandates and it is abundantly clear that right now the price side of the mandate is in jeopardy.  As there are no dots or ‘official’ forecasts coming, my take is a slightly more hawkish statement and Powell backing that up later.

I guess the biggest question, especially after yesterday’s data, is how he will respond to questions regarding hiking rates further.  If I were him, I would have that answer prepared to be as nondescript as possible. Because if he opens up that avenue of discussion, we are going to see a much more serious decline in risk assets.

One other thing of note yesterday was a comment by Secretary Yellen which was almost laughable when considering who is making the statement.  Apparently, she is,” concerned about where we’re going with [the] US deficit.”  Seriously?  She is the Treasury Secretary in charge of spending plans and after pitching for ever more money to spend she is now concerned about the budget deficit?  Then, apparently according to Axios, in a speech later today she is set to make a plea for the Fed’s independence!  Again, seriously?  The Fed is ostensibly already independent, yet I’m pretty certain she is bending Powell’s ear daily about what to do, i.e., commingling Treasury and the Fed.  But suddenly she is concerned about its independence?  It is things like this that make it so difficult to take certain players on the stage seriously.  It doesn’t speak well of the current administration’s efforts to fix the problems that exist, many of which they have initiated.

Ok, enough ranting on my part.  As it is May Day, much of Europe and some of Asia was closed last night but let’s recap the session as well as look ahead to the data before the FOMC.  I’m pretty sure you know how poorly the equity markets behaved yesterday with -1.5%- to -2.0% losses in the US.  In Asia, the markets that were open, Japan, Australia and New Zealand followed the same course, falling, albeit not quite as far, more on the order of -0.5% to -1.0%.  in Europe, only the FTSE 100 is trading today, and it is flat on the session while US futures are pointing lower again, down -0.3% or so at this hour (7:00).

In the bond market, after yesterday’s Treasury selloff with yields jumping 8bps across the curve, markets are quiet with Europe on holiday so no change ahead of the NY opening.  The rise in Treasury yields did drag European sovereign yields up as well, just not as far with most higher by 3bps-4bps yesterday and they are closed today.  As to JGB yields, despite all the huffing and puffing in the FX market, they are essentially unchanged so far this week.

But the real fun yesterday was in the commodity markets with significant declines across the board.  Oil prices fell on a combination of higher inventories according to the API as well as hopes of a ceasefire in Gaza helping to settle things down in the middle east.  And they are lower by another -1.5% this morning.  Meanwhile, metals markets, which had been exploding higher across the board until two days ago, had another wipeout yesterday with all the metals falling by 1% or more.  This morning, though, they seem to have found some support with gold (+0.1%) and silver (+0.5%) bouncing slightly while copper (-0.8%) and aluminum (-0.3%) are still under pressure given the weaker economic data.  Of course, underlying all this movement is concerns that interest rates are going to continue higher.

Which brings us to the dollar, which, not surprisingly given the rise in interest rates, rose sharply yesterday and is holding those gains this morning.  On average, I would say the dollar gained 0.5% yesterday and it was broad based, rising against both G10 and EMG currencies as well as against financial and commodity currencies.  For instance, CLP, which is closely linked to copper prices, fell -2.0% yesterday while ZAR was lower by -1.0%.  But the euro (-0.6%) and pound (-0.4%) were also under pressure as traders started to anticipate an even more hawkish Fed today.  I suspect things will be quiet until the FOMC this afternoon despite the data that is due.

Speaking of that data, first thing we get the ADP Employment report (exp 175K) then JOLTS Job Openings (8.69M) and ISM Manufacturing (50.0).  A little later comes the EIA oil inventory data and then, of course, the FOMC statement at 2:00 with the press conference at 2:30.  Since all eyes are focused on that, I would not expect much activity until it is released, and Powell speaks.

Good luck

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Yellen’s Lifeblood

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The QRA was quite the dud
Though mentioned, in Q3 a flood
Of new bonds are coming
To keep the gov humming
As debt is Ms Yellen’s lifeblood
 
So, now all eyes turn to the Fed
With doves looking on with much dread
According to Nick
Chair Powell will stick
With Higher for Longer ahead

 

Below is the actual QRA release from the Treasury which I thought would be useful to help everyone understand how benign the statement seems, although it has great importance.  

WASHINGTON – The U.S. Department of the Treasury today announced its current estimates of privately-held net marketable borrowing[1] for the April – June 2024 and July – September 2024 quarters. 

  • During the April – June 2024 quarter, Treasury expects to borrow $243 billion in privately-held  net marketable debt, assuming an end-of-June cash balance of $750 billion.[2]  The borrowing estimate is $41 billion higher than announced in January 2024, largely due to lower cash receipts, partially offset by a higher beginning of quarter cash balance.[3]
  • During the July – September 2024 quarter, Treasury expects to borrow $847 billion in privately-held net marketable debt, assuming an end-of-September cash balance of $850 billion.

During the January – March 2024 quarter, Treasury borrowed $748 billion in privately-held net marketable debt and ended the quarter with a cash balance of $775 billion.  In January 2024, Treasury estimated borrowing of $760 billion and assumed an end-of-March cash balance of $750 billion.  Privately-held net marketable borrowing was $12 billion lower largely because higher cash receipts and lower outlays were partially offset by a $25 billion higher ending cash balance.  

Additional financing details relating to Treasury’s Quarterly Refunding will be released at 8:30 a.m. on Wednesday, May 1, 2024.

The market response was muted, at best, as bonds barely budged throughout the day.  Clearly, the surprise that we received back in October was not part of today’s message.  Two things I would note are first, Q3 borrowing is a huge number, $847 billion expected, although it seems to have been largely ignored; and second, the action really comes tomorrow when Yellen will describe the mix of coupons and T-bills that she plans to issue this quarter.  However, given the Q2 numbers are so much smaller than either Q1 or Q3, while there may be some signaling effect, the actual impact on the fixed income markets seems likely to be muted.

Which takes us to the FOMC meeting that begins this morning and will conclude tomorrow at 2:00pm with the statement and then Chairman Powell will hold his press conference at 2:30.  But I have a funny feeling we already know what is going to happen as this morning’s WSJ had an article from the Fed whisperer, Nick Timiraos, explaining that higher for longer was still the play and that while there was no cause yet to consider rate hikes, the recent inflation data has done nothing to convince the Chairman that cuts are due anytime soon.  Now, this seems obvious to those of us paying attention given that the data continues to show a far more robust economy than many had anticipated, and more importantly, there has not been any type of inflation related print that indicated price pressures are abating very quickly.  Of course, one never knows what will happen at the presser, but it seems highly unlikely that the committee is in the mood to cut rates.

On this subject, if there is a move toward the dovish side, either with the statement or things Powell says in the press conference, I would take those very seriously as that would imply the Fed is no longer worried about inflation, per se, but more about doing what they perceive will benefit the current administration.  That would be hugely negative, in my view, for both the dollar and the bond market, although stocks and commodities would likely benefit greatly.  Ironically, it is not clear to me that cutting rates is going to be any help to President Biden as it is not going to change mortgage rates very much, and certainly not going to reduce credit card rates, so all it is likely to do is feed more inflation.  But one of the underlying narratives seems to be that a rate cut helps Biden’s election chances.  

Ok, with the Treasury and Fed out of the way, let’s look at overnight price action.  After modest gains in the US yesterday, most Asian equity markets performed well, although mainland Chinese shares were under some pressure (CSI 300 -0.5%).  This is interesting given the stories that the Chinese government is considering stepping up its support for the economy there with more borrowing at the national and local levels (total of ~$680B) to support overall activity as well as the property market.  I would have thought that was a positive, but I would have been wrong.  In Europe, preliminary GDP data showed that the economy across the major nations was not quite as bad as last quarter, but certainly not showing much strength.  Perhaps we are bottoming, but there is no V-shaped rebound coming.  Ultimately, equity markets on the continent are all lower as a result, with losses ranging from tiny (CAC -0.1%) to larger (IBEX -1.3%).  As to US futures, they are essentially unchanged this morning.

Meanwhile, bond yields are edging higher this morning with Treasuries (+1bp) just barely so, but all of Europe seeing yields rise by 3bps.  Perhaps investors are growing concerned that a rebound in growth in Europe is going to force rates higher, but the data this morning was really minimal.  In truth, I wouldn’t make much of today’s moves and rather focus on the trend since the beginning of the year where yields everywhere have rebounded following Treasuries.

In the commodity markets, oil (+0.4%) is bouncing slightly this morning after a couple of weak sessions as there appears to be a growing narrative that a ceasefire in Gaza is closer to being negotiated.  At least that’s the story making the rounds.  I will believe it when I see it actually happen.  But metals markets are under pressure this morning with all the main ones sharply lower (Au -0.8%, Ag -1.5%, Cu -1.0%, Al -0.5%).  Now, given how far these have moved higher over the past month, it should be no surprise there is a correction.  Has this changed the longer-term narrative?  I think not, but remember, nothing goes up in a straight line.

Finally, the dollar is modestly stronger this morning as the yen (-0.4%) starts to give back some of its intervention inspired gains from yesterday.  Apparently, the MOF spent ¥5.5 trillion (~$35B) in their activities yesterday and we are more than 1% lower (dollar higher) than the yen’s post intervention peak.  I expect that we will continue to see this move, especially if the Fed maintains its current policy stance.  Elsewhere, commodity currencies are under pressure (AUD -0.5%, ZAR -0.4%) on the back of the weaker metals prices while financially oriented currencies have shown much less activity, with all of them somewhere on the order of 0.2% weaker.  As I wrote above, a substantive change by the Fed will have an impact on the dollar, I just don’t see that happening this week.

On the data front, there are a few things released this morning as follows: Employment Cost Index (exp +1.0%), Case-Shiller Home Prices (6.7%), Chicago PMI (44.9) and Consumer Confidence (104.0).  The ECI is something to which the Fed pays close attention as one of the best measures of the wage situation in the US.  As you can see from the below chart, while those costs have been declining, they remain well above the pre-pandemic levels and thus remain a concern for the Fed.  And a move back to 1.0% would indicate things have stopped declining.

Source: tradingeconomics.com

That’s really all we have today as the market awaits tomorrow’s Fed as well as Friday’s NFP data.  My take is there is very little chance the Japanese come back into the market soon, and so a grind higher in the dollar remains my base case.

Good luck

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Cooed Like Doves

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Well, Jay and the Fed cooed like doves
And treated the bulls with kid gloves
But under the hood
Was it quite so good?
It’s clear number up’s what he loves!
 
The upshot is stocks really soared
As everyone’s sure Jay’s on board
To cut first in June
And thrice when Cold Moon
Is seen, near the birth of our Lord

 

Whatever the pundits thought about the hottish inflation readings in January and February, they clearly did not read the room properly, at least not the room in the Eccles Building.  Despite raising their 2024 forecasts for GDP growth (2.1% from 1.4%) and Core PCE (2.6% from 2.4%), as well as maintaining their forecast for the Unemployment Rate to remain quiescent (4.0% to 4.1%), they are hell-bent on cutting rates this year, with June still the most likely starting point.  I created a little table to show, however, that perhaps the consensus is not quite what the headlines would have you believe.

 DecMar
 MedianAvgMedianAvg
20244.6254.7044.6254.809
20253.6253.6123.8753.783
20262.8752.9473.1253.066
Longer Term2.5002.5862.6252.813

Source: Data FRB, calculations @fx_poet

The highlighted points show that while the median for 2024 remained the same, the average was nearly a full cut less.  In fact, if one more member had adjusted their forecast higher, the median would have come out for just 2 cuts this year.  But as I wrote yesterday, perhaps of more importance is the Longer Term view, where not only did the median rise by 12.5bps, but the average is substantially higher, a full 25bps higher than the December views.  

However, the market has ignored this wonkish number crunching and accepted the numbers at face value; three cuts this year and three more next year helping drive equity prices to yet another set of new all-time highs.

Regarding the tapering of the balance sheet, Powell explained at the press conference that they had, indeed, discussed the topic as they were trying to determine the best way to continue the process without any untoward events, but that is not the issue.  The issue is…BUY STONKS!!!

I would estimate that Chairman Powell is pretty happy with the outcome and am certain that Secretary Yellen is very happy with the outcome.  After all, the equity rally continued while bond yields managed to drift lower by a couple of basis points.  But the really happy campers are the holders of gold which rallied more than 1% and traded above $2200/oz for the first time ever.  The market has reviewed this outcome and decided that the biggest risk going forward is a further devaluation of the dollar vs. stuff, although vs. other fiat currencies it is likely to hold its own.  In other words, inflation ain’t dead.  I expect the bond market to determine this is the case over the next several weeks and see yields rising further, especially if the PCE data next week is hot again.

While Jay may have had the most press
In Switzerland, Tom did aggress
He cut twenty-five
In order to drive
Their growth with a bit more largesse

 

This morning, we have seen three more G10 central banks and the only surprise comes from Switzerland, where soon-to-retire President, Thomas Jordan, cut their base rate by 25bps to 1.50%.  While there were several analysts who had suggested this might be the case (including this poet on Monday), the bulk of the market was in the no change camp.  However, cut they did, and the result was an immediate 1.1% decline in the Swiss franc, arguably a key part of their goal.  In the statement, they explained that inflation had been well within their target range, and they would have the tool of further currency intervention if they felt the franc was weakening too much.

One theory on the surprise cut is that the SNB wanted to get ahead of the pack as they only meet 4 times each year and their next meeting is after the June Fed and ECB meetings.  As well, many pundits are now saying this is the “proof” that the Fed and ECB are going to cut in June.  My take is that while I agree the ECB is a done deal come June, I think the Fed may have a tougher time as there is still no evidence that inflation is heading back to their 2% target.  We have two more CPI and PCE reports before the June meeting, and if the recent price activity continues (and given energy prices remain buoyant I expect they will), it will be very difficult for Chair Powell to explain the need to cut rates unless Unemployment is surging.  Perhaps that will be the case, but right now, the data does not indicate things are collapsing.  The next three months should be quite interesting.

Ok, let’s see how other markets have responded to Powell and the SNB surprise.  Equity markets are in a happy place right now after records fell in the US yesterday.  The Nikkei (+2.0%) also set a new record and the Hang Seng (+1.9%) continued its recent rebound.  In fact, only mainland Chinese stocks couldn’t muster a rally last night, with every other nation in APAC in the green, often by more than 1%.  In Europe, though, the picture is a bit more mixed with more gainers than losers, but still several nations seeing modest pressure on their equity indices.  It should be no surprise that Swiss stock markets are higher, but France and Denmark are suffering somewhat today.  The best performer is the UK (+0.9%) which seems to be benefitting from a solid uptick in its Flash Manufacturing PMI (49.9, exp 47.8).  Lastly, in what should not be a surprise at all, US futures are pointing higher across the board.

In the bond market, all is right with the world this morning as there are bids everywhere with yields declining correspondingly.  Treasury yields slipped another 4bps overnight and throughout Europe, we are seeing declines between 3bps and 5bps with Swiss bonds lower by 7bps.  In fact, Asia is where things were modestly different as JGB’s remain unchanged (tighter policy remains an idea not a reality yet) and Australian yields rose after much stronger than expected employment data was released last night.

In the commodity space, oil (-0.25%) is a touch softer after a decline of more than 1% during yesterday’s session.  With all the focus on the Fed, there was not a lot of news driving things here specifically.  But the real winner in the commodity space is gold (+1.0%) as the market appears to be calling BS on the Fed’s inflation and QT forecasts.  The thing to remember about gold is it is not so much a good hedge for consumer inflation, but it is a very good hedge for monetary inflation (i.e. the excess printing of money).  While those two inflations tend to be correlated, they are not tick for tick, so gold seems to be amiss at times.  But the very idea that despite ongoing inflationary pressures, and the continued supplying of liquidity by the global central banking cast, is the right time to cut interest rates is a step too far for gold markets.  I believe this has room to run higher.  As well, copper (+0.7%) is also rebounding, and I expect that we will see most commodities continue to perform well going forward in this environment.

Finally, the dollar is under some pressure this morning, adding to yesterday’s declines in the wake of the Fed meeting.  Recall, the dollar had rallied the first half of the week as the punditry was looking for the Fed to seem more hawkish.  But that was not to be and this morning it is broadly, though not universally lower.  AUD (+0.3%) and JPY (+0.2%) are the biggest gainers in the G10 while CHF (-0.65%) is the laggard after the rate cut, although has rebounded from its worst levels.  In the EMG space, PHP (+0.4%), MYR (+0.5%) and IDR (+0.4%) are the leading gainers although we are seeing weakness in EEMEA with ZAR (-0.3%) and CZK (-0.3%) lagging.  

On the data front, as it is Thursday, we see Initial (exp 215K) and Continuing (1815K) Claims as well as the Current Account deficit (-$209B) and Philly Fed (-2.3) all at 8:30.  Then as the morning progresses, we see the Flash PMI data (51.7 Manufacturing, 52.0 Services), Existing Home Sales (3.94M) and Leading Indicators (-0.2%).  As well, we get our first Fed speaker post the meeting, vice-chairman for regulation Michael Barr, this afternoon, but given my assessment that the Fed is happy with the market response, I don’t imagine he will say anything new.

Overall, the bulls and doves are walking hand in hand (what a terrible metaphor, sorry) and that means that risk assets are likely to continue to perform well for now and the dollar seems likely to come under a bit more pressure.  I maintain that the bond market is going to figure out the inflation story is not great and react, but that is not today’s story.

Good luck

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Still Inchoate

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The Fed is the talk of the town
Are dots set to move up, or down?
At this point it seems
Those with dovish dreams
Will finish the day with a frown

The other discussion of note
Is balance sheet size and its bloat
Will QT soon end?
Or will it extend?
It seems this idea’s still inchoate

Yesterday I offered my view that the most important potential changes in today’s FOMC statement and releases was the Longer Run median interest rate estimate.  Any change there will imply that the framework in which the Fed has been working is changing.  And one thing we know about changes in frameworks is they bring volatility.  But there is another issue I did not discuss yesterday, QT.  Currently, the Fed is allowing up to $60 billion/month of Treasury securities to mature from their balance sheet without being replaced and up to $35 billion in mortgage-backed securities.  This process has seen their balance sheet decline in size from a shade under $9 trillion in March 2022 to a shade over $7.5 trillion as of last week.

Doing the math, if the balance sheet had declined in size each month by their capped amounts, the current size would have been ~$6.7 trillion, so they have not kept up their desired pace.  The reason is that their mortgage portfolio is not rolling off very quickly since mortgages are not being prepaid at anywhere near the previous rates.  This is due to the impact of the Fed’s actions on the housing market.  Mortgage-backed securities get prepaid when the mortgages underlying are paid off.  That happens in one of two situations, either the house is sold or the homeowner refinances.  With so many homeowners having refinanced when rates were much lower, they have no incentive to do so now, so that channel has been essentially closed.  At the same time, given the dramatic slowdown in the sales of existing homes, that channel is moving at a much slower pace as well.

Prior to the quiet period, Governor Chris Waller gave a speech where he discussed the idea that he would like to see all the mortgages off the Fed’s balance sheet, and the balance sheet hold a far larger percentage of T-bills rather than the current construction of mostly longer-dated coupons.  If this is the consensus view at the FOMC, that means they have a lot of work left to do.  As well, many have questioned whether they can continue to shrink the balance sheet at the same time they are cutting interest rates.  When any FOMC member has been asked that question, they maintain the two issues are separate.  However, I would contend if they do operate in that manner, the results may not be what they want.  It would be a classic pressing on the accelerator and the brake at the same time type of situation.  Another framework change and the chance for more volatility.

It is not clear if the Fed will even discuss the end of QT in their statement although I suspect Powell will have to address the question in the press conference regardless.  But as I look at today’s potential outcomes, the thing that jumps out at me is the chance for several of their decisions to lead to more volatile markets going forward.  And that is across asset classes, so stocks, bonds and the dollar.  It is for times like these that hedging policies are important.  Properly constructed hedges can be very effective at reducing market driven volatility of results, whether corporate or trading profits.

Ok, let’s turn to the overnight session to see how things are shaping up heading into the meeting today.  Equity markets in Asia were generally positive with the Nikkei (+0.65%) recapturing the 40K level.  Chinese markets were ever so slightly firmer despite the fact that the PBOC left the Loan Prime Rate unchanged.  There seemed to be a lot more hope for a change than evidence the PBOC would act.  Europe, on the other hand is having a little more trouble this morning with most markets softer led by the CAC (-0.6%). The outlier here is the DAX (+0.2%) which seems to be responding to a larger than expected decline in German PPI to -4.1% Y/Y.  The implication is German corporate margins may improve.  As to the US, at this hour (7:15), futures are edging higher by about 0.1% across the board after another solid session yesterday.

In the bond market, Treasury yields have edged down 1bp in the 10yr with similar movement across the curve.  In Europe, yields have fallen a bit more, between 3bps and 5bps with UK Gilts (-5bps) leading the way after CPI data this morning printed at a softer than expected 3.4% headline, 4.5% core.  With the BOE on tap tomorrow, investors believe this improves the odds of a more dovish outcome, although no rate cuts are likely at all.

As to the continent, Madame Lagarde regaled us this morning with the following: “Our decisions will have to remain data dependent and meeting-by-meeting, responding to new information as it comes in. This implies that, even after the first rate cut, we cannot pre-commit to a particular rate path.”  In other words, she continues to sing from the same hymnal that all the G10 central bankers are using.  Once again, I don’t understand why anyone would believe that the central banks will be able to pivot on a timely basis if/when recession is coming.  By maintaining their data dependence, they are assured that they will be reactive, not proactive, since all data is backward looking.  And one more thing, JGB yields have been unchanged since the BOJ policy change.  Tighter policy is not in the cards here either.

In the commodity market, everything is under a bit of pressure this morning with oil (-0.8%) slipping back a bit on what seems more like a trading response than a fundamental change in anything.  EIA data later today can certainly have an impact if the recent drawdown in inventories continues because production does not appear to be increasing anywhere.  In the metals markets, gold is a hair softer, although remains within spitting distance of its recently traded all-time highs while copper (-1.0%) has been slipping the past several sessions and is basically right back at $4.00/lb.  This market remains beholden to the growth story overall, and China’s lack of activity last night is probably weighing on the red metal here.

Finally, the dollar is still kicking butt and taking names with the DXY back above 104 this morning.  The yen has not found its footing yet, trading to 151.65, down another -0.5%, and really getting hammered on the crosses vs. the euro and the pound, at all-time lows there.  But really, this remains a dollar strength story as hopes continue to recede for the Fed to start easing policy very soon.  On a relative basis, the US economy continues to be the best performing major economy (7% budget deficits will do that for you), but the reality is reasons for the Fed to start cutting rates remain scarce.  Until those change, the dollar should continue to perform well.  And remember, when that does change, we are likely to see every G10 nation cutting rates aggressively, so the dollar should still hold up well.

And that is it.  There is no data ahead of the Fed so I imagine we will all collectively hold our breath until the statement at 2:00 and Powell’s presser at 2:30. Until then, I foresee little in the way of movement.  After that, it all depends on what he does and says.

Good luck
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Just a Memory

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The doves are in flight
Alongside Dollar / Yen. NIRP
Just a memory

 

As many had been forecasting, notably the Nikkei News who as I mentioned yesterday have a perfect forecasting record, the BOJ ended NIRP by raising their overnight call rate to a range of 0.00% – 0.10%.  Thus ends one of the longest policy experiments in history.  I continue to believe when future historians look back at this time they will ask, what were they thinking?  At any rate, here is what they offered up to the world:

Summarizing the key changes, there is now a range for the short-term rate, like the Fed’s range, which is a new feature, although they maintain they will seek to keep the rate close to the ceiling.  As well, YCC is gone for good with no targets of any sort.  However, they committed to continuing to purchase JGBs in roughly the current amounts and retain the flexibility to increase that amount at any time as they see fit.  Regarding equities, REITs, and corporate bonds, they have officially declared those programs to be over, although in practice that has been the case for the past several months.

The market response was a classic ‘sell the news’.  The yen has fallen 0.9% and is firmly back above 150 this morning while JGB yields edged lower yet again, down 3bps and trading at 0.73%.  In the press conference, Ueda-san explained, “We judged that achieving the goal of sustainable 2% inflation has come within view. The large-scale monetary easing policy served its purpose.”  However, he was clear that this was not the beginning of a massive tightening of policy a la the Fed or other G10 central banks.  At the same time, PM Kishida said, “[The government] believes it is appropriate that the accommodative financial environment will be maintained from the perspective of taking a new step forward in light of the current situation and further ensuring positive economic developments.”

Summing everything up I would say that while this policy is marginally tighter than previous policy, there is no evidence that the BOJ is hawkish in any sense of the word.  They will still be buying JGBs regularly, ergo monetizing government debt, and they will respond ‘nimbly’ as they see fit if something changes.  My take on the impact is that the yen will be beholden to the Fed now and if the recent more hawkish narrative continues to evolve, look for USDJPY to continue to rise.  JGB yields are likely to drift higher alongside yields elsewhere is the world while the Nikkei has room to run.

It’s time now to turn to the Fed
With pundits now starting to dread
The idea rate cuts
Are now seeming nuts
An idea to which they were wed
 
So, while we know rates will remain
Unchanged, we’ve got dots on the brain
Are three cuts in store?
Or fewer called for?
That outcome is what’s most germane

 

Interestingly, given how much has been written by analysts and pundits, as well as this poet, already on the topic of the FOMC meeting that starts at 9:00 this morning and culminates in their statement at 2:00pm tomorrow, I feel like all that is necessary here is a recap.

As I type this morning, the Fed funds futures market is now pricing just 72bps of rate cuts for all of 2024 and 139bps of cuts through September of 2025.  While I had started discussing the concept of the dot plot pointing to a median of only two cuts this year several weeks ago, before the quiet period began and we started hearing more hawkish language from several FOMC members, that has become a mainstream discussion now.  In fact, I suspect that is the default setting for most analysts, although the dovish acolytes will still be arguing for at least three cuts.  Perhaps of more interest will be where the longer-term dots are printed.  

Remember, the dot plot shows each members forecasts for the next three years individually as well as the ‘Longer Run’.  In December, the Longer Run had a median of 2.50% and that has been the case for a very long time.  The implication is that the Fed’s broad view of their policy is that the infamous r*, or neutral interest rate, is 2.5% which consists of a 2% inflation target and a 0.5% real interest rate.  However, there has been a significant increase in the discussion amongst the analyst community about how that might change.  If we consider that the nature of the economy post-pandemic, has changed in two key areas, the size of the workforce has shrunk and the efforts at reshoring or nearshoring productive capacity has expanded greatly, both of those things would lead one to expect a higher level of inflation and correspondingly higher interest rates.  So, while a change in the Fed’s target rate is not likely anytime soon, a change in the Fed’s thinking of the appropriate r* is very possible.  

Do not be surprised to see that median rise to 2.75% as members increasingly accept that the current state no longer resembles the previous, pre-pandemic, state.  And that, I believe, is where there is more potential for market reaction than anywhere else.  A rise in the longer run median forecast implies that Treasury yields, and in fact, the entire yield curve, should be permanently higher.  While there has been some discussion of this idea, I would contend that is nowhere near the consensus view, and certainly not the current market narrative.  But that would imply a pretty sharp sell-off in bonds with a corresponding rise in yields.  Initially, I do not believe that would be a net positive for risk assets, although ultimately, I believe equity markets will absorb the news as companies adjust to the change.  But it could get messy during that adjustment.  This is where my eyes will be tomorrow.

Ok, let’s recap the overnight session.  After a solid day in the States yesterday to start the week, the Nikkei (+0.65%) managed to recapture the 40K level amid a weaker yen and the new understanding that policy is not going to ratchet much tighter.  China, on the other hand saw equity weakness in both Hong Kong (-1.25%) and on the mainland (-0.7%) as traders await the news tonight as to whether the PBOC is going to reduce the Loan Prime Rate again as they did last month.  Clearly, there is not much hope right now!  In Europe, markets are mostly a touch higher, but movement is very modest, +/-0.2% basically, as all eyes there are also on the FOMC tomorrow.  As to US futures, they are modestly weaker this morning at this hour (7:30), down -0.4% on average.

In the bond market, Treasury yields are unchanged this morning after having drifted another 2bps higher yesterday.  In Europe, it is a mixed picture with UK Gilt yields sliding 3bps, while the continent is seeing either no movement or a 1bp rise.  The only data of note was German ZEW sentiment which rose significantly, to 31.7, back to its highest level in two years.  We also continue to hear from ECB speakers that they are not yet ready to cut rates and remain data, not Fed, dependent!

Oil (+0.1%) continues to power higher on the back of softer supply data, increased success by Ukraine in attacking Russian refineries and a new situation, Iraq promising to abide by the OPEC+ production cuts.  WTI is firmly above the $80/bbl level and looks like it wants to try for a move toward $90/bbl, at least on a technical basis.  That cannot be helping central bank efforts at reducing inflation.  As to the metals markets, they are softer this morning with gold (-0.2%) still holding up quite well given the dollar’s rebound, and copper (-1.1%) also under pressure today, but also holding the bulk of its recent gains.

Finally, the dollar is in the ascendancy today as not only is the yen under pressure, but too, the Aussie dollar (-0.6%) and its little brother NZD (-0.5%) after the RBA left rates on hold last night, as universally anticipated, but adopted modestly more dovish language in their statement and Governor Bullock was unable to convince the market in her press conference that they could still raise rates if inflation reappeared.  But the dollar is higher vs. essentially all its counterparts, both G10 and EMG, with the CHF (0.0%) the best performer of the bunch.  There is no need to seek other idiosyncratic stories for this move.

As to the data today, Housing Starts (exp 1.425M) and Building Permits (1.495M) are all we’ve got.  Keep an eye on Canadian CPI (exp 3.1%) as that would represent an uptick from last month akin to what we are seeing elsewhere in the G10.  Inflation is not dead my friends.

And that’s really it for today.  It is hard to see the data having a substantive impact and that means that traders will spend the day adjusting their positions to prepare for tomorrow afternoon’s excitement.  I imagine we could see the dollar drift off a bit today given how far it’s come, but nothing of note seems likely.

Good luck

Adf

Some Regrets

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Six central bank meetings this week
Will give us a new inside peak
At their dedication
To wipe out inflation
And just how much havoc they’ll wreak
 
Investors have made all their bets
And so far, today, risk assets
Show green on the screen
Ere any convene
Methinks, though, there’ll be some regrets

 

It is central bank week as we hear from more than half of the G10 between tomorrow and Thursday.  The BOJ kicks things off followed by the RBA, FOMC, Norgesbank, the SNB and finally the BOE.  A great deal of stock has been put into these meetings by both traders and investors as everyone is seeking clues for the future. Alas, looking for central banks, whose crystal balls are cloudier than most, to give solid clues is probably not the best idea.  But let’s take a quick look at each meeting and expectations:

BOJ – next to the Fed, this is the meeting that has gotten the most press both because Japan is the largest of the other economies, but also because there is much talk that they are going to raise their base rate for the first time in 17 years!  At this point, despite the most recent dovish comments from Ueda-san two weeks’ ago, the best indicator seems to be Nikkei News, which has had several articles (courtesy of Weston Nakamura’s Across the Spread substack) declaring that rate hike is coming.  Apparently, they have a perfect record in these forecasts, so it looks a done deal.

Arguably, the question is will they do anything else beyond moving from NIRP to ZIRP?  There are several analysts who believe they will adjust YCC as well, either eliminating it completely, or changing the terms to buy a fixed amount each period rather than responding to market conditions.  As well, they continue to buy equity ETFs and REITs so it is quite possible they end those programs.

The funny thing is so many believed that when the BOJ finally started their tightening cycle that would be the signal for selling JGBs and buying yen.  Well, if that has been your strategy going into the meeting, it has not worked out that well.  JGB yields (-3bps) have been consolidating around the 0.75% level virtually all year while the yen, which did have a little pop higher at the beginning of the month, is now back close to 150 again.  Regarding the yen, the driver in the currency continues to be US interest rates and the incremental adjustment by the BOJ is just not enough to move the needle absent a firm commitment by Ueda-san to hike regularly going forward.  And there is no evidence of that.  As to JGB yields, a slow grind higher seems possible, but a run up above 1.0% seems highly unlikely, especially given the economic cycle has just turned down with two consecutive quarters of negative real GDP activity.

RBA – there is no policy movement anticipated here for this meeting as both growth and inflation remain above targets but have not been relatively stable.  In fact, there is a minority looking for a cut, but that seems unlikely right now simply based on the inflation data.  Generically, I find it extremely difficult to believe that any central bank will be able to cut their rates with inflation running well above the target and, in most places, looking like it has found a bottom.  I realize there is a significant desire to cut rates by virtually all central bankers, but given the current economic situation, if they want to salvage whatever credibility they may have left, it is a hard case to make to cut right now.  

One other thing to remember is that Australia is more dependent on China than any other G10 nation and China last night published better than expected economic data with IP jumping to 7.0%, far better than expected and its fastest pace in two years.  If China is starting to pick up again, that will be a net benefit for Australia and put upward pressure on commodity prices and prices in general Down Under.  I think they remain on hold for a while yet.

FOMC – suffice to say no change in rate policy but we will discuss the other features tomorrow regarding the dot plot and potential guidance.

SNB – The Swiss may be the other central bank to move this time as inflation there has fallen to 1.2%, well below the ceiling of their 0% – 2% target range.  While the market consensus remains no change and the franc has softened nearly 4% vs. the euro so far this year, we cannot forget that it remains far stronger than its historic levels and the opportunity to weaken the currency a bit to help its export industries while inflation remains quiescent is something that may appeal to SNB President Jordan.  Keep an eye out here.

Norgesbank – No change here as inflation remains far too firm, ~5%, while oil’s recent rebound has helped the currency rebound.  I don’t think there is anything to be learned from this outcome.

BOE – Here, too, no change is expected and there is no press conference.  As such, the most interesting question will be the vote split.  Last time, the split was 1-6-2 for a cut, hold and hike respectively.  (Talk about not seeing things the same way!  How is it possible that two committee members can look at the same data and believe opposite conclusions?  Seems there is some ideology in play there.). At any rate, a change in the vote count will be a signal.  Recent data has shown that wages are still hot, but slowing down, while inflation is similarly hot but slowing.  The latest CPI data will be released on Wednesday so the BOE will have that to account for as well as everything else.  At this point, I’m in the no move camp with the same split of votes the outcome.

With that recap, let’s look at the overnight session briefly.  As mentioned above, equities are green everywhere with the Nikkei (+2.7%) leading the way around the world and pushing back close to the key 40K level.  But there was strength in every market in Asia.  Europe, too, is all green, albeit less impressively, with gains on the order of 0.25% while US futures are looking good at this hour (7:45) with the NASDAQ leading the way, up 1.0%.  (Here, many are counting on more amazing news from Nvidia as they have a weeklong conference starting today.)

After last week’s rush higher in yields on the strength of the hotter inflation prints from the US, this morning is seeing very little movement overall ahead of the central bank meetings this week.  Basically, every market is within 1bp of Friday’s closing levels, with a few higher and others lower.  One other thing I failed to mention was the PBOC will be revealing their 5-year Loan Prime Rate on Tuesday night, and while no change is forecast, it was last month when they cut this to help the property market that kicked off the idea more stimulus was coming.

Oil prices continue to perform well on the back of several different factors.  First, we have seen inventory draws much greater than expected in the US.  At the same time, Ukraine has damaged several Russian refineries thus reducing the supply of products and we still have OPEC+ maintaining their production restrictions.  Add to this China’s apparent rebounding growth supporting demand and that is a recipe for higher prices.  As to the metals markets, despite the dollar’s recent rebound, gold continues to hold its own and copper is still rising consistently.  In fact, the red metal is higher by 5% in the past week, a potential harbinger of better global growth.

Finally, the dollar is a touch softer this morning, but only a touch.  The biggest mover is ZAR (-0.6%) which is opposite the broader trend of very slight dollar weakness.  While South African equities have been drifting lower of late, today’s move feels more like an order in the market than a fundamental change.  Away from that, though, no currency of note has moved more than 0.2% on the day as traders await the onslaught of central bank news.

Speaking of news, we have other things beyond the central banks as follows:

TuesdayHousing Starts1.43M
 Building Permits1.50M
ThursdayInitial Claims216K
 Continuing Claims1815K
 Philly Fed-2.5
 Current Account-$209.5B
 Existing Home Sales3.95M
 Flash PMI Manufacturing51.7
 Flash PMI Services52.0
Source: tradingeconomics.com

In addition, starting Thursday, the first Fed speakers will be back on the tape to reinforce whatever message Chair Powell articulates on Wednesday.

From my vantage point, it appears that the BOJ’s rate hike has been accepted and priced in already, while the biggest surprise could be Switzerland.  However, the fate of the dollar lies in the hands of Powell, and that is an open question we will discuss tomorrow.  For today, don’t look for too much of anything in any market.

Good luck

Adf

Whispers in the Wind

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Whispers in the wind
Imply rates may be rising
Sooner than we thought

In the wake of Friday’s noncommittal payroll data, which I will discuss below, the topic garnering the most interest this morning is the BOJ and whether they will be adjusting monetary policy one week from today rather than in April.  There have been several articles published on the topic which is usually a sign that the BOJ is floating trial balloons.  At this point, the market is pricing about a 2/3 probability of a move next week based on current Japanese OIS swap data.  That is a significant increase compared to the pricing just two weeks ago.  In addition, we have seen a number of analysts from the major Japanese banks move their call to March from April previously

You may recall that a key discussion point on this subject has been the Spring wage negotiations and whether the new round will embed higher wages into the economy.  Last week I mentioned that Rengo, one of the labor associations, was seeking a 5.85% increase, which would be the largest such move in more than 30 years.  As it happens, the results will be released this coming Friday, so if the outcome is high enough, arguably Ueda-san and the BOJ would have enough information for a move.

One other interesting tidbit was the fact that last night, the BOJ remained out of the equity market despite the fact that the TOPIX (Japan’s other major index) fell more than 2% in the morning session.  Ever since Covid and the market panics then, on every occasion when the morning session saw the index decline that much, the BOJ was a buyer in the afternoon.  While this was not an official policy per se, it was the reality.  The upshot is that the BOJ is the largest holder of Japanese stocks in the world, owning something on the order of 8% of the market.  The fact that despite that decline, they changed their response could well be a tell that other changes are coming.

In the end, I would argue it matters less whether the first adjustment happens in March or April and more about just how far they are going to adjust policy.  I remain unconvinced that this is the beginning of a true normalization of monetary policy, or perhaps more accurately, that the BOJ is going to raise rates to bring them in line with the rest of the G10.  Rather, my sense is we will get to 0.0% at the first move, and that over the ensuing years, a move to even 0.3% in the overnight market will be difficult to achieve absent a major explosion of economic growth alongside rapidly rising inflation.  And frankly, I just don’t see that happening at all.

Keep this in mind, 2-year JGB yields, which have been edging higher steadily for the past two months, are still at only 0.2%.  That is not a sign that the market is expecting a dramatic increase in Japanese policy rates anytime soon.  Since the beginning of the month, the yen has rallied about 2.65% on this story.  Can it go much further?  Certainly, there is room for further strength given its performance over the past several years.  However, I would argue that will rely on the Fed cutting rates, and doing so aggressively, to truly narrow the yield differential.  And right now, I just don’t see that happening.

On Friday, the payroll report
In some ways, came up rather short
While headlines were strong
Revisions felt wrong
For rate hikes, more folks, to exhort

By now, you are aware that despite a much stronger than forecast headline NFP print of 275K, (exp 200K), the revisions to the prior two months were -167K, which took the luster off the headline and reverted the revision story back to negative from the surprising positive result last month.  In addition, the Unemployment Rate rose 2 ticks to 3.9% and Average Hourly Earnings only rose 0.1% on the month.  The market response here was interesting, to say the least.  While Treasury yields continued their recent slide, perhaps anticipating Fed action sooner rather than later, the equity market sold off as well, although that easily could have been simple profit taking after a huge run higher.  Of more interest is the fact that NY Fed President Williams, the last Fed speaker before the quiet period started, sounded just a touch more dovish than a number of the speakers we heard last week.

At this point, market participants are focused on a couple of things I think, with the next big thing tomorrow’s CPI print.  Thursday brings Retail Sales and then, of course, the FOMC statement and Powell presser is the following Wednesday.  June remains the odds-on favorite for the first Fed cut but that is subject to change based on tomorrow’s data.  If CPI indicates that the January number was not an aberration, and that inflation is actually stickier than many (want to) believe, I would not be surprised to see the median dot plot expectations rise to only 2 rate cuts in 2024. That is substantially fewer than the current estimate of 4+.  That will have a significant impact on markets if that is the case.  Alternatively, a very soft number tomorrow could easily bring May back onto the table for the first rate cut and may alter the dot plot in the other direction.  We shall see,

As the market awaits all the upcoming news, here’s what happened overnight.  Along with the slide in Japanese shares, most Asian markets sold off, all in the wake of Friday’s weak US equity performance.  The one exception was China, where both the Hang Seng (+1.4%) and CSI 300 (+1.25%) rallied at the end of the Chinese National People’s Congress as hopes for more stimulus remain high. In Europe, bourses are all in the red, although the declines have not been excessive, just -0.25% to -0.5%.  And at this hour (7:45), US futures are pointing slightly lower, -0.2% across the board.

In the bond market, yields are generally little changed in both treasury and European sovereign markets with all eyes on tomorrow’s data.  Last week’s ECB meeting didn’t really add too much to the conversation although it appears that expectations are cementing around a June rate cut, regardless of the Fed’s actions.  Overnight, JGB yields edged another 2bp higher, which given the increased scrutiny on a March rate hike is not that surprising.

In the commodity markets, oil (-0.5%) is sliding a bit and generally remaining right in the middle of its $75-$80 trading range for the past month.  Meanwhile, gold, while little changed this morning, is holding onto its recent gains and showing no signs of slipping back soon.  As to the base metals, copper (+0.3%) is edging higher while aluminum is unchanged on the day.  These metals markets are looking toward China to get a sense of the chances for fresh new demand.

It can be no surprise that the dollar is largely unchanged this morning with very modest gains and losses across both the G10 and EMG blocs.  In the G10, JPY (+0.3%) is the biggest mover with the rest of the bloc +/-0.1% on the day and giving no signal.  In the EMG bloc, KRW (+0.5%) is the largest mover, although it is not clear what would have driven the move as equities there fell pretty sharply overnight.  Also, CNY (+0.15%) is rallying after CPI data released over the weekend showed a monthly rise of 1.0% and that brought the Y/Y number back into positive territory at +0.7%.

On the data front, there is some other interesting data aside from CPI as follows:

TuesdayCPI0.3% (3.1% Y/Y)
 -ex food & energy0.4% (3.7% Y/Y)
ThursdayInitial Claims218K
 Continuing Claims1911K
 Retail Sales0.7%
 -ex autos0.4%
 PPI0.3% (1.2% Y/Y)
 -ex food & energy0.2% (2.0% Y/Y)
 Business Inventories0.2%
FridayEmpire State Manufacturing-7.5
 IP0.0%
 Capacity Utilization78.4%
 Michigan Sentiment76.6

Source tradingeconomics.com

However, while there is a bunch of stuff coming out, I suspect that after CPI, it will all be anticlimactic.  As we are in the Fed quiet period, there will be no commentary, although in the wake of the CPI report, look for anything in the WSJ from the current Fed whisperer, Nick Timiraos.  This is especially so if the numbers are far from expectations.

In the end, today ought to be very quiet overall, with all eyes on tomorrow.  From there we shall see.

Good luck

Adf

Who Do You Trust?

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At this point, it’s who do you trust?
‘Bout ‘flation, ‘cause as I’ve discussed
To some it seems hot
For others, it’s not
And so far, no one’s got it sussed

The thing is this PCE story
Is more than just mere allegory
Chair Jay and his team
Still harp on the theme
That higher for longer brings glory

I read far too much economic analysis each day as I try to glean interesting ideas from very smart people who are happy to offer them up.  Hopefully, my doing this allows you to spend your time doing more important things while still keeping abreast of the macroeconomic situation.  But, boy, I cannot remember a time when there was such vehement disagreement on a single statistic.  There have been many times where economic bulls look at all the data and see great things while the bears see death warmed over.  But that is generally based on a collection of items.  However, right now, literally every other piece that I read, all published by very reputable analysts and economists tells the opposite story.  One piece will explain that yesterday’s 0.4% rise in core PCE was just an aberration and that it is destined to reverse lower going forward largely because housing inflation is going to decline.  The next piece will point to yesterday’s release and explain that the recent three-month or six-month trend has turned higher in the critical core services component, and that there is no sign it is going to reverse.

The greatest (or worst) thing about economics is since it is not a hard science, everybody can have a view, typically back it up with some piece of data or another and make their case.  While ultimately, the proof is in the pudding, when economists are wrong, they will typically fall back on they missed the timing, not the actual direction of travel.

By this time, if you have been following my writings, you are aware I am in the ‘inflation is sticky’ camp, and I have not been surprised by the fact that it has stopped declining.  For 2 years we have been hearing that housing inflation is due to fall because of a massive supply of new apartments coming on the market soon, and yet I believe it is now 28 consecutive months where the housing component of CPI has risen at least 0.4% on the month.  I think one of the problems with the oversupply analysis is that it doesn’t account for the fact that a large proportion of those apartments are luxury apartments with very pricey rents.  As such, it is difficult for average or median rental prices to decline.  At the same time, the Case-Shiller Home price index rose 6.1% last month, which is not indicating any decline in single family home prices.  Given the proportion of housing in the inflation indices, whether CPI or PCE, if shelter costs are rising, you can bet that inflation will be rising.  And that’s where we stand.

The next question is, what does this mean for the Fed and their reaction function and then, how will it impact financial markets?  Well, we heard from four more Fed speakers yesterday and they remained consistent with their recent comments, i.e., there’s no need to rush as the economy remains strong and inflation isn’t declining as quickly as we hoped, but we remain confident that the time for rate cuts will come as the year progresses.  As of this morning, the market is pricing about an 80% chance of a June rate cut and is still pricing 3 ½ cuts for the year.  Meanwhile, Treasury yields have edged lower by 2bps, but remain well above the levels seen just one month ago, more than 40bps higher.  And lastly on this subject, equity markets are basically ignoring the data completely and focusing on internal factors like flows.  As such, my thought yesterday that they might stumble a bit, even with a lower PCE print, turned out to be completely wrong.  The party is still raging there.

As we look ahead, I would contend that the big picture remains exactly the same.  On the price front, yesterday’s data did nothing to dissuade me from my sticky inflation thesis.  At the same time, yesterday’s other data showed that manufacturing remains in a recession (Chicago PMI fell to 44.0), but the labor market is holding up (Initial Claims edged higher to 215K, although Continuing Claims were substantially higher at 1905K).  For much of last year I was far more focused on the NFP number as being the most important based on the idea that the Fed could not withstand a significant uptick in Unemployment for political reasons.  I have a sense that dynamic is going to reassert itself going forward.  If last month’s number was the aberration that many claim, and we see weakness next Friday, I believe that will really impact the narrative and we will see May come back on the table for the first rate cut.  But if it remains strong, the bar for cutting rates will remain quite high.

With that in mind, let’s look at the overnight session.  Asia was on fire with the Nikkei (+1.9%) leading the way after Ueda-san pushed back on the message from Takata we discussed yesterday.  He cautioned patience was necessary and until they saw and digested the wage outcomes later this month, there was no reason to do anything, especially given the recent weakness in GDP growth.  That caused the yen to give back yesterday’s gains and a weaker yen tends to help Japanese stocks.  But there was strength in China, albeit not as much, with the indices there and in Hong Kong rising by 0.5% or so.  We did see Chinese PMI data which printed as expected (Manufacturing 49.1, Non-Manufacturing 51.4, Caixin 50.9), which implies nothing has changed on the mainland regarding the economy.  Next week’s plenary sessions are still the China bulls’ hope for more stimulus.

European shares are generally firmer, with only the CAC (0.0%) the laggard as the rest are higher by 0.5% or more.  PMI data here was also largely in line with the Flash data last week and is being spun as the beginning of a turn higher.  However, ECB speakers continue to push back on the need for rate cuts soon which is not supporting equities on the continent.  As to the US futures market, after another rally to all-time highs yesterday, this morning sees very little movement ahead of the ISM data.

While Treasury yields have edged lower, all of Europe have seen their sovereign yields rise by between 3bps and 6bps, arguably on the idea that the worst of the economic story has passed.  I’m not sure I agree with that, but that is all I can get from the data.  Overnight, JGB yields edged 1bp higher, but are still sitting right at 0.70%, the level at which they have been trading for the past 5 weeks give or take a nickel.

Oil prices (+1.2%) are continuing their recent rise with WTI pushing back toward $80/bbl, as traders continue to expect OPEC+ to maintain their production cuts.  As well, from a market internal perspective, the backwardation in the curve is steepening.  Briefly, this means that front month prices are higher than prices further out the curve, which in the futures market is a signal that there is excess demand for physical.  That demand is the bullish signal.  As to the metals markets, gold (+0.5%) is breaking above its recent range high at $2050/oz, as the dollar, after a strong day yesterday, is ceding some of those gains.  However, base metals can’t get going with both copper and aluminum sliding by about -0.25% this morning.

Finally, as mentioned, the dollar is sagging a little with only the yen performing worse.  But its losses are generally quite modest, on the order of 0.1% or 0.2% for both G10 and EMG currencies.  And while it is under pressure today, the trend so far in 2024 is still very clearly for dollar strength.  Given the continued hawkish tone from the Fed, I see no reason for that to change anytime soon.

On the data front, both ISM Manufacturing (exp 49.5) and Michigan Sentiment (79.6) are due at 10:00 this morning and then we hear from five different Fed speakers as the day progresses, including Governor Waller, maybe the second most influential voice on the FOMC.  It is hard for me to believe that they are going to change their tune, especially given that yesterday’s PCE data gave no hint that their 2.0% target was right around the corner.

Summing up, consider the fact that the US continues to benefit from a massive fiscal impulse, relatively cheap and abundant energy prices and the tightest monetary policy in the G10.  With that in mind, we continue to see international capital flow into the country (look at the stock market!) and I suspect those things need to change for the dollar’s trend to change.  That is not going to happen today.

Good luck and good weekend
Adf

Bears’ Great Dismay

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Their confidence clearly was lacking
So, now on rate cuts they’re backtracking
As well, they’re concerned
Some banks have not learned
To manage their risk and need smacking
 
But really the news of the day
Is AI remains the key play
NVIDIA beat
And all of Wall Street
Is buying to bears’ great dismay
 
Starting with the FOMC Minutes, the two things that stood out to me were these two lines, “The staff provided an update on its assessment of the stability of the U.S. financial system and, on balance, characterized the system’s financial vulnerabilities as notable. The staff judged that asset valuation pressures remained notable, as valuations across a range of markets appeared high relative to fundamentals.”  Arguably, this was why the Fed removed the line from the statement about “The U.S. banking system is sound and resilient,” which had been included since the Silicon Valley Bank debacle.  Perhaps they see something amiss.  As well, there was discussion regarding the timing of the end of QT with July seeming to be the latest thinking for its initial reduction.  But otherwise, as evidenced by the fact that virtually every Fed speaker has indicated they lack confidence inflation is dead, and that while policy is currently restrictive, it is still too soon to think about cutting rates, was clearly the broad theme of the meeting.  Next week we see the PCE data so perhaps that can change some opinions, but right now, given what we have just seen from CPI/PPI, they cannot have gained confidence it is time to cut.
 
As to NVIDIA, huge results, beating expectations and the word from the CEO is that demand will outstrip supply at least through the end of the year.  The market response here has been as one would expect; a big rally in stocks, especially tech.  ‘Nuff said.
 
Nikkei all-time high
Thirty-four years in waiting
Has finally come

Under the heading a picture is worth 1000 words, behold the relationship between NVIDIA and Nikkei 225 (chart from Weston Nakamura’s Across the Spread substack):

Pretty tight correlation, no?  Arguably, the question is which is driving which?  Does a stronger Nikkei drive NVIDIA’s performance or the other way around?  The first thing to note is that breaking down the Nikkei’s performance, similar to the NASDAQ, there are a handful of AI related stocks that have been the drivers of the move.  If you read Nakamura-san’s take, he believes that it is the Nikkei which is driving things, but I would argue while the Nikkei’s move happens earlier in the global day, the reality is that everything is an echo of the current AI craze which NVIDIA started.  

The next question is, just how long can this continue?  Remember two things here; first, trees don’t grow to the sky, and neither will NVIDIA’s stock; and second, new technologies take MUCH longer to assimilate than the initial hype would have you believe.  We are already seeing issues with Google’s Gemini AI with respect to drawing remotely accurate historical images of US presidents, as an example.  We are still in the very early innings of the AI phenomenon and there will be more hiccups along the way.  One last thing regarding AI is its power consumption, which is off the charts high.  If the world is going to be run by AI, we need a lot more electricity than is currently being produced and that alone will slow its incorporation into things.

Ok, on to more macro views, last night and this morning saw the release of the Flash PMI data all around the world.  Of the seven major releases thus far, only India is in expansion with it continuing to motor along in the low 60’s.  Otherwise, everything else (Australia, Japan, Germany, France, the Eurozone and the UK) are all in contraction in manufacturing.  Services is more mixed with several slightly above the 50 boom/bust line, but overall, while things might be seen as slightly improving, they are still pointing to recessions in Europe, Japan and the UK.

Despite this weakening data, virtually every one of these nations’ currencies is stronger vs. the dollar this morning.  In fact, the dollar is having a pretty rough session, down between 0.3% and 0.5% against most G10 counterparts with a slightly smaller decline vs. its EMG counterparts.  One of the odd things about this is that US yields have not really fallen much (Treasuries -1bp) which is right in line with the price action in European sovereigns and what we saw overnight in Asia across the board.

Add to the bond story the message from the Fed of higher for longer and it doesn’t appear that interest rates are today’s driver of the markets.  We already have seen that equity markets are rocking with the Nikkei (+2.2%), Hang Seng (+1.5%), CSI 300 (+0.9%), and most of Europe higher by 0.9% or more.  US futures, of course, are really flying with the NASDAQ (+2.2%) leading the way, but everything in the green.  I grant that a typical risk-on reaction is a weaker dollar but given the amount of funds that are flowing into the US equity markets, it is very hard to understand why the dollar is under pressure.  Something seems amiss.

If we look at the commodity markets, energy is softer across the board with oil (-0.2%) edging lower and basically unchanged on the week, while NatGas (-2.7%) is suffering as well.  As to the metals markets, gold (+0.2%) is edging higher on the back of the weaker dollar but both copper and aluminum are little changed on the day, less than 0.1% different from yesterday’s closing levels.  

Perhaps this is the new risk-on look, strong equity markets, a weak dollar and nobody cares about bonds.  But bonds have been far too important a driver of market activity to suddenly be ignored.  Now, yesterday, the Treasury auctioned some 20-year bonds and it did not go well, with a tail of 3.3bps, implying demand for the long-end remains tepid.  Given my personal view on inflation, that makes perfect sense, but arguably, the longest duration assets around are tech stocks and the divergence between bonds and those stocks is hard to reconcile.  I guess we will learn more as time progresses, but for now, I would be at least a little wary.  Absent a change in the inflation narrative back to the Fed has won, it does feel like there is still some risk to be seen.

On the data front, this morning brings the Chicago Fed National Activity Index (exp -0.15) which is a comprehensive view of financial conditions around the country and closely followed by the Fed.  As well we get Initial (218K) and Continuing (1885K) Claims and the Flash PMI’s (50.5 Manufacturing, 52.0 Services).  We close with Existing Home Sales (3.97M) and the oil inventory data and throughout the day we hear from four different Fed speakers, Jefferson, Harker, Cook and Kashkari.  Will any of this data matter?  I doubt it.  Can we expect anything new from the Fed speakers?  I kind of doubt that as well as there has been exactly zero evidence that the economy is slowing and dragging inflation lower since last week’s CPI and PPI data.   So, look for that lack of confidence in the demise of inflation to be widespread.

As to the dollar, something doesn’t smell right today.  I feel like it should be better bid and expect that by the end of the day, it will see that type of movement.

Good luck

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The NASDAQ in Tatters

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The only thing that really matters
Is whether NVIDIA shatters
It’s forecasted earnings
And market bulls’ yearnings
Else watch for the NASDAQ in tatters
 
Of lesser importance we see
The thoughts from the FOMC
Since last they all met
Stock bulls have beset
The rate hawks with obvious glee

 

While I know this is a macro focused discussion, and that is what this poet understands best, unquestionably, the biggest market news for the day, for all markets, is the NVIDIA earnings release after the close this afternoon.  There has been more press about this particular number, and more commentary on Fintwit (FinX?) than any other single stock earnings number I can remember.  And let me be clear, I have no idea what is forecast, let alone what the whisper number is, nor do I really care.  But I am definitely in the minority.  My take is that there are many analysts who will consider adjusting their big picture view of the economy and markets based on one company’s earnings.  This might be a sign that things are somewhat unhinged in markets.  

Before then, absent any hard statistical data, we will see the FOMC Minutes from the January 31st meeting.  You may remember that as the one where Chairman Powell flopped back to hawkish after he flipped to a dovish pivot in December.  Since then, there has been a pretty steady drumbeat from all the FOMC members that they are still not confident they have beaten inflation and so want to wait further before they cut rates.  And it’s a good thing they have had that view as last week we all saw that inflation was not cooling quite like the doves had expected.  In fact, they look pretty smart right now because of their reluctance to join the rate cutting mania.

A review of the Fed funds futures this morning shows that the probability for a March cut has fallen to just 6.5% while May is down to a 37.3% probability.  As a demonstration of just how much things have changed in the past month, in the middle of January, March was priced for a 46% probability and May for an 85% probability of the first cut in the cycle.  As well, we have seen the number of cuts priced for the full year fall from 6 down to just under 4, not far from the dot plot guidance we received back in December.  So far, the Fed has been successful in getting its message across despite a great deal of wailing and gnashing of teeth that if they didn’t cut soon, the world would end.

This begs the question, why is everybody so keen to see the Fed cut rates at all?  Consider the issue from the perspective of the saver and retiree.  Things are much better when one’s money market account yields 5% than 0% so I expect that most retirees are pretty happy at the current state of affairs.  From the equity market’s perspective, the very fact that we have set 11 new S&P 500 all-time highs so far in 2024 indicates that the current level of interest rates is not that big a problem broadly speaking.  Yes, there are segments of the market that have underperformed but that is always the case.  

On the flipside, of course, Janet Yellen would like to see rates decline as it would cut her interest rate bill, and certainly all those commercial property holders with mortgages coming due this year, a number that has grown to ~$960 billion I understand, are desperate for lower rates, but that is a pretty small subset of the country.  All I’m saying is that if the current rate structure is benefitting savers and also putting downward pressure on the rate of inflation, it’s just not clear why so many are desperate for a change.  And what if, just for argument’s sake, PCE is hot as is the February CPI print which comes ahead of the next FOMC meeting?  Rate hikes are going to start to get discussed a lot more frequently.

One other thing to keep in mind is that the US economy is currently the only major one that is showing any real life.  Europe, the UK and Japan are all in recession and China’s growth is effectively stagnating.  Other nations are desperate to cut interest rates to help support their economies but are unwilling to do so for fear that their currencies will fall further and invite even more inflation (China excluded) onto their shores.  So, they really want the Fed to cut so they can follow along without the concomitant problem of a falling currency.  But is the Fed responsible for the problems in Europe or Japan?  I think not.

At any rate, we will not solve this dilemma today, and all we can do is observe how things play out over the coming weeks and months.  FWIW, which is probably not a huge amount, I have seen precious little evidence that inflation is going to collapse, and rather expect it to stay here or edge higher.  In that case, I think the Fed may maintain their current rates for far longer than even June.  Absent a banking crisis, perhaps started by more trouble in the commercial real estate sector, my view remains, at most, one token cut this year.  Of course, if we do see that banking crisis, then 300bps will be the minimum.

Ok, overnight, most markets remain in thrall to the NVIDIA earnings story with one exception, China, where the regulators there tightened things even further instituting a new rule that there can be no net selling by institutional accounts in the first 30 minutes of trading or the last 30 minutes of trading.  This was in response to an algorithmic hedge fund selling a huge chunk of shares Tuesday ($350mm) in just a one-minute window and pressuring the whole market lower.  Apparently, they have been fined and prevented from trading for the rest of the week.  The idea behind the rule seems to be that if there can be no net selling in the last 30 minutes, the Chinese plunge protection team can work its magic unimpeded and push things higher on command.  I continue to wonder why the Chinese Communist Party is so keen to support the very essence of capitalism, but there you have it.  

With this in mind, you will not be surprised to know that the CSI 300 rallied 1.4% and the Hang Seng 1.6% overnight.  But the rest of Asia was less positive with most markets following the US lead lower.  Europe, though, except for the UK’s -0.85% performance, is higher on the day despite an absence of any major data or news.  The scuttlebutt is that there is a positive vibe for NVIDIA earnings.  Seriously!  As to the US futures, at this hour (7:45), they are continuing yesterday’s decline with the NASDAQ leading the way lower by -0.65%.

In the bond market, Treasury yields are softer by 1bp this morning while most European yields are higher by 1bp, so in other words, not much movement overall.  Asia saw a similar lack of movement as traders are awaiting the Minutes, NVIDIA and the uptick in Fedspeak tomorrow.

Oil prices (-0.4%) are a bit lower this morning but are just giving up yesterday’s small gains.  In fact, they are essentially unchanged so far in February as concerns over weakening global growth have been offset by concerns over an uptick in the middle east anxiety.  Speaking of energy, what I haven’t mentioned is NatGas, which while higher today by 10%, given it has fallen to $1.75/MMBtu, the move is not that impressive.  Warmer than expected weather has really undermined the price action lately.  In the metals markets, gold (+0.3%) continues to creep higher and today copper (+0.3%) is following suit.  As to aluminum, it is much higher, +2.4%, as concerns over fresh US sanctions on Russian aluminum have raised the risk of overall market disruption.

Finally, the dollar is little changed against most of its counterparts, G10 and EMG.  The biggest mover I see is ZAR (+0.4%) after core CPI ticked higher than expected and raised thoughts of tighter monetary policy there.  In the G10, NZD (+0.25%) is also responding to a higher-than-expected PPI print bringing a rate hike more sharply into focus there.  Otherwise, nada.

Aside from the Minutes, there is nothing else of note on the data calendar.  We do hear from Atlanta’s Raphael Bostic and Governor Michelle Bowman today, but I don’t expect either to waver from the current lack of confidence story.  It feels like it is going to be a quiet session overall, with the real fireworks reserved for 4:15 or so when NVIDIA reports.

Good luck

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