Tag Archives: #Harker

Much Maligned

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Though pundits worldwide have opined
The world’s in a terrible bind
Investors don’t seem
Concerned ‘bout that theme
With naysayers still much maligned

But trees cannot grow to the sky
And rallies, at some point, must die
If Jay and his kin
Do not soon begin
To cut rates, bulls will start to cry

I guess the hint at peace negotiations in the Israeli-Palestinian conflict was enough to get the bulls back in front of the move.  Or perhaps it was the comments from Philly Fed president Patrick Harker, who seems to be one of the most dovish on the FOMC these days.  After explaining, “Small firms are really struggling with access to capital,” and “some of the bankers I’ve talked to are concerned that their business plans just aren’t going to be able to make it at the higher rates” he gave us the money line (my emphasis), “This is why we should hold rates steady, we should not at this point be thinking about any increases, because if that’s true – and it is true – then we should let that ride out.”  So here is the first clear signal for an FOMC member that they are done.  Now, Harker is a voter, so that matters, but it seems pretty clear that nobody is expecting a rate hike in early November.  Arguably, the big question is what will happen in December and that is still very far away.

However, that signal implying the Fed is well and truly done was sufficient to boost risk assets, well at least to boost equity markets with US markets all higher by 1% or so while European bourses had smaller gains, on the order of 0.3%.  Bond markets, meanwhile, remain under pressure as the hint of peace talks removed some of the need for a haven, and our Treasury Secretary explained that “we can certainly afford two wars.”  If you were wondering what the fiscal situation was, she seems to have things under control.  However, beware that paying for two wars by issuing yet more debt seems like it may have a significant negative impact on bond prices.  With this attitude in Washington, perhaps we should be looking for 6% in the 10-year Treasury yield soon.

And that’s really the crux of the issue, it seems that the stock market and the bond market are pricing very different outcomes.  Stocks continue to trade well as we enter earnings season and investors remain sanguine about any potential economic downturn.  There is a great deal of belief that if the economy does reverse course from its recent apparent strength, the Fed will step right back into the market, cut rates and end QT, if not restart QE.  Meanwhile, the bond market continues to look at the still too hot inflation data and combines that with the prospect of still more debt issuance as Secretary Yellen funds two wars and more social programs and is quite concerned.  Perhaps it is my age and experience, but alas, I fear the bond market is correct.  The prospects for better investment performance in the near-term seem limited to me.

For now, given the lack of significant new news or data, as well as the anticipation of Chairman Powell’s comments come Thursday, markets in Europe and US futures are biding their time.  Remember, too, that we see US Retail Sales as well as Canadian CPI this morning at 8:30, so either of those could well be a new catalyst.  But until then, a look at markets shows that equities are mixed in Europe with the FTSE 100 slightly higher while continental bourses are slightly softer while US futures are a touch softer at this hour (6:30), down about -0.3%, as they consolidate after yesterday’s rally.

Bond markets, however, continue to fade as the benefits accorded to stocks (potential end to Israeli war and hoped for better earnings) are anathema to bond investors.  Treasury yields are higher by 5bps this morning, leading the way higher while European sovereigns are all higher by between 3bps and 6bps with the Bund-BTP spread widening back above 200bps.  Last night saw JGB yields edge higher to 0.77%, as the new Mr. Yen, Kanda-san, once again explained that intervention was possible as was the idea of raising interest rates.  (Yes, I know that the MOF doesn’t control interest rates, but apparently, he doesn’t.)

Turning to commodities, oil continues to consolidate its recent gains, essentially unchanged today, but still above $85/bbl with a major concern that any escalation in fighting in Israel may spread to OPEC producers.  That certainly cannot be ruled out, and remember, the US has already wasted utilized its SPR so there is no additional supply likely to emerge in that situation.  As to the metals markets, gold (+0.2%) continues to consolidate after last week’s impressive rally while both copper and aluminum are softer this morning on economic concerns.  Here too, there seems to be a disconnect between investors and traders in stocks and commodities with the former remaining quite bullish overall while the latter are anything but.

Finally, the dollar is also biding its time this morning although it is beginning to creep higher.  Two particular movers are the pound (-0.5%) which has responded to slightly softer payrolls and wages data opening some room for the BOE to back off a bit from its tightening schedule, and NZD (-0.7%), where CPI was quite a bit softer than forecast.  Meanwhile, USDJPY seems frozen just below 150 as the threats of intervention are currently sufficient to offset the ongoing carry opportunities.  In this case, I continue to see room for the dollar to rise as intervention is only ever a temporary solution and I cannot see a reason why the Fed would object to a strong dollar given its inflation fighting impact.  

In the EMG space, the dollar is broadly higher with the renminbi back above 7.32 and pushing toward the lows (dollar highs) seen last month.  But KRW, THB, TWD and SGD are all softer as well.  Meanwhile in LATAM, we are seeing the same general price action in BRL and MXN both having weakened more than 9% through August and September and both now edging a bit higher lately.  However, there is no indication that the broader dollar strengthening trend has ended.

As mentioned above, this morning we see Retail Sales (exp 0.3%, 0.2% ex autos) and Canadian CPI (exp 4.0%, core 3.3%).  We also hear from Williams, Bowman, Barkin and Kashkari throughout the day as virtually every FOMC member wants to get on the tape before the quiet period begins on Friday.  In the end, consolidation seems the likely activity for now barring something new in Israel or a blowout number this morning.  Net, I still like the dollar overall.

Good luck

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Small Beer

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The market has made it quite clear
That over the course of next year
The interest rate Jay
Is willing to pay
On Fed funds will soon be small beer

The key to this view is the thought
Inflation will soon fall to naught
But if that is wrong
It will not be long
Ere stocks will be sold and not bought

As the market braces for today’s CPI data, investors and traders continue to home in on the view that the soft-landing scenario is the most likely.  While US equity markets sold off yesterday afternoon, futures this morning are higher across the board by about 0.5% and European bourses are also all higher.  In other words, fear is not in today’s lexicon as concerns over continuing gains in inflation quickly dissipate and the narrative focuses on said soft-landing.

A quick look at today’s data expectations shows the following according to Bloomberg:

Initial Claims230K
Continuing Claims1707K
CPI0.2% (3.3% Y/Y)
-ex food & energy0.2% (4.7% Y/Y)

I’m sure you all remember that last month’s CPI reading was 3.0%, which was widely touted as a sign the Fed has been successful in their efforts to slow price increases.  Of course, the reason the headline number fell so far was the base effect as in 2022, June’s monthly reading was +1.2% which drove the Y/Y number then to the cyclical high of 9.1%.  With that data point falling out of the mix, the comparison changed dramatically.  Here’s the thing, July 2022’s monthly print was 0.0%, so those same base effects are going to push the headline number higher. 

Now, if you annualize 0.2% it comes to a bit more than 2.4% inflation, so if the monthly number can maintain this level, the Fed will truly have achieved their goal.  Alas, oil (+15.8%) and gasoline (+11.2%) both rose sharply in the month of July and so that headline number seems likely to be higher.  The Cleveland Fed’s CPI Nowcast (similar to the Atlanta Fed’s GDP Nowcast) is pointing to a monthly CPI increase of 0.41%.  My suspicion is that we are going to see a hotter CPI number today and that is likely to be met with a little bit of concern, especially by risk assets that are counting on that soft-landing.

As long as the narrative continues to look for that soft-landing success, it opens up the risk of a significant repricing.  While Philly Fed president Harker was the first to talk about rate cuts next year, the futures market has been all-in on that view for quite a while.  A firm number today will bolster Powell’s ‘higher for longer’ narrative at the expense of those rosy views.  Be prepared for some market volatility today, especially in the bond market.

Speaking of the bond market, yesterday’s 10-year auction went pretty well as the clearing yield was (barely) below 4.00% at 3.999%.  The bid/cover ratio was a healthy 2.56, meaning there were bids for slightly more than $97 billion for the auction of $38 billion in new paper.  Today brings the final leg of the quarterly refunding with $23 billion of 30-year bonds to be auctioned.  At this hour (7:00) the 30yr yield is 4.17% with the 10yr yield at 4.00%.  A high CPI print could wind up costing the US government a bit more if yields move higher on the news, just another reason this CPI print will be so closely watched.  Meanwhile, European sovereigns are all softer this morning with yields edging higher by roughly 2.5 basis points across the board, and we saw higher yields across Asia as well, with JGBs rising 2bps, although still below the 0.6% level.  So far, Ueda-san has not had too much difficulty managing the yield there.

Turning back to the commodity markets, oil is little changed this morning, consolidating its recent gains, but certainly not showing any signs of reversing course.  Despite China’s lackluster economic performance, the supply situation continues to underpin oil prices.  Remarkably, despite all the focus on the need to reduce the use of fossil fuels, and the weaker than forecast Chinese economy, demand for oil continues to increase with the IEA raising its forecast for the next several years.  At the same time, oil companies are feeling only modest pressure to drill more, and instead are enjoying the fruits of their current production by repurchasing shares and paying large dividends to their shareholders.  In other words, it seems that supply is unlikely to ramp up to meet this increased demand and that can only lead to even higher oil prices over time.  $100/bbl seems quite realistic within the next 12 months, and that doesn’t assume any additional price shocks like we saw in the Russian invasion of Ukraine.  But while oil is on hold today, the metals markets are feeling a bit better with both precious and base metals rising nicely on the session.

Finally, the dollar is softer pretty much across the board this morning with AUD (+0.6%) the leading G10 gainer although virtually the entire bloc is higher by between 0.3% and 0.5%.  The exception to this is JPY, which is unchanged on the day.  The yen continues to chart its own course lately as uncertainty about the ultimate outcome in the JGB market and any further monetary policy changes has traders and investors treading fearfully.  It remains the favored funding currency given its still lowest rates in the world, but the prospect of that changing has many traders on constant edge.

As to the emerging markets, they too are seeing strength virtually across the board with HUF (+1.3%) and ZAR (+1.2%) the leaders as both are benefitting from their high nominal interest rate carry.  After that there is a long list of currencies that are firmer by between 0.25% and 0.5% and only one laggard, THB (-0.5%) which continues to suffer from political uncertainties over the ability to establish a government there after the recent election.

And that is really the story today.  We hear from three more Fed speakers; Daly, Bostic, and Harker, so it will be interesting to see if either of Daly or Bostic hint at rate cuts next year.  All three are scheduled to speak after the CPI release, which if firm is likely to quash any hopes for that.  My take is that a hot CPI number will help to reverse some of the dollar’s losses, but a soft number could easily see the dollar slide further.

Good luck

Adf

Not Preordained

Posted on by 
The first cracks have started to show
In Jay’s, up til now, status quo
When Harker explained,
Though not preordained,
That rate cuts, next year, they’d bestow

While he is the first of the Fed
To claim that rate cuts are ahead
Do not be surprised
When views are revised
By others now this road’s been tread

While things looked dire yesterday morning with respect to risk assets, along around lunchtime there was a reversal of attitudes and while equity markets did finish in the red, they were all well off their lows by the close. So, the question is, what could have caused that reversal?  Interestingly, an argument can be made that Philadelphia Fed President Patrick Harker’s comments may well have been the catalyst.  

After explaining, “I think there is a path to an economic soft landing,” Harker went on to the money quote, “Sometime, probably next year, we’ll start cutting rates.”  While the first comment was a nice sentiment, the second comment was the first time we have heard any Fed speaker consider that rate cuts would be appropriate in 2024.  Remember, the entire mantra has been, ‘higher for longer’ with no indication that the FOMC was even close to considering rate cuts.  Importantly, Mr Harker is a current voting member, so his views carry a touch more weight than the non-voters.

Of course, the Fed funds futures market has been pricing in that exact scenario for months, with the current expectation that by the end of 2024, Fed funds will be back to 4.0%.  The conundrum here, though, is that if the economy comes in for a soft landing, meaning we do not have a recession while inflation falls back to their target, why would they adjust rates at all?  It would seem under that scenario that interest rates could be termed ‘appropriate’, neither too high nor too low.  I get why equity investors want lower rates, but then seemingly, rate cuts could well bring on another bout of inflation as an already growing economy overheats with extra monetary stimulus.

Yesterday’s other Fed speaker, Richmond’s Thomas Barkin (a non-voter this year) had a less dovish message.  He was unwilling to ‘predeclare’ where rates are going, explaining they have time before the next FOMC meeting to monitor the data.  He also explained that there are competing outlooks for the economy, “one where inflation will glide down to 2%, another where it remains persistent.”  But that message is far more in line with what we have been hearing.  It was the Harker comments that got things rolling.

And so, as we walk in this morning, there is a lot of green on the screen in the equity markets as risk is once again in favor.  Not surprisingly, this has pushed commodity prices higher, especially oil, which while higher by 1.3% this morning, and back over $83/bbl, is more than 5% above the lows seen yesterday morning.  That is a big reversal!  Metals markets, too, are firmer this morning with gold, copper and aluminum all benefitting from this change in sentiment.

In the equity space, Asian markets were more mixed with the Nikkei (-0.5%) which had been holding its own giving back a bit, but the Hang Seng managed to reverse a small portion of yesterday’s losses.  The real story, though, is in Europe, where all the markets are higher, mostly by 1% or more, notably Italy’s FTSE MIB (+1.75%) which has benefitted from both the overall risk sentiment as well as a change in plans by the Italian government regarding the bank windfall profit tax mooted yesterday.  It seems that they got a little nervous over the market’s reaction, which wiped out more than €10 billion in market cap from the banking sector, and so reversed course a bit.  As to US futures, they are modestly firmer (+0.3%) at this hour (7:45).

In the bond market, after sharp declines in yields yesterday, we are seeing a bit of a reversal with 10yr Treasury yields up 1bp this morning.  While early yesterday that yield had fallen below 4.0%, it was a short-lived move, and we are back above that key level today.  The easy part of the quarterly refunding was well received yesterday with the 3yr note clearing at 4.398% and a 2.90 bid/cover ratio.  In other words, there were plenty of buyers for that $42 billion tranche.  Today could be a bit trickier as the Treasury seeks to sell $38 billion of 10yr notes.  We shall see where bonds trade as the auctions progress.  And tomorrow comes the 30yr, with $23 billion set to be auctioned, so there is still plenty of new supply coming.  Meanwhile, European sovereign bonds are all seeing yields higher as well this morning, mostly on the order of 1bp to 2.5 bps, after yesterday’s sharp yield declines.

Finally, the dollar is under a bit of pressure this morning, as would be expected given the change in risk attitude.  NOK (+0.5%) leads the way in the G10 on the back of oil’s performance, but in truth, the rest of this bloc has not moved very far at all, although I would argue that gainers mean more than laggards.  In the EMG space, the situation is similar with quite a few more currencies gaining ground, albeit not too much, while only a few are under pressure.  ZAR (-0.5%) is the laggard although there is no obvious catalyst for the movement, especially given the commodity rebound.

There is no data of note today and no Fed speakers are on the docket either.  With this in mind, and as we all await tomorrow’s CPI data, I suspect that risk will remain in favor today.  That means that commodities should continue to perform well along with equities, while the dollar remains under pressure.

Good luck

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