Tag Archives: #Kashkari

Losing Some Steam

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While equity bulls all still dream
The Fed has a rate cutting scheme
All ready to go
That going’s been slow
And clearly is losing some steam
 
Kashkari’s the latest to say
That higher for longer will stay
The policy choice
Of every Fed voice
Thus, bonds had a terrible day

 

Arguably, the most impactful news from yesterday’s session was the fact that the Treasury auctions of 2-year and 5-year Notes was so poorly received.  The tails on both auctions were more than 1 basis point, which for short-dated paper is highly unusual.  As well, the bid-to-cover ratio for the 5-year was just 2.3, well below the longer-term average of 2.45 resulting in dealers taking down more of the auction than either expected or wanted.  The overall bond market response was to see 10-year yields rise 7bps, although the 2-year yields only edged higher by about 2bps, thus steepening the yield curve a bit.

Of course, the question at hand is, what happened?  Not surprisingly, there are as many answers to this question as people asked, but a few of the logical responses ranged from the short-term concept that recent data has shown more robust growth than anticipated thus reducing the chance of any rate cuts soon to the long-term view that the Treasury is issuing so much debt they have overwhelmed the market and buyers are reluctant to step in at current levels given the ongoing deficit spending and lack of prospects for that to end regardless of the election results in November.

Of course, there may have been a more direct answer after Minneapolis Fed president Kashkari, added some quite hawkish commentary from an event in London.  Comments like, “I don’t think anybody has totally taken rate increases off the table.  I think the odds of us raising rates are quite low, but I don’t want to take anything off the table,” got tongues wagging, as well as, “Wage growth is still quite robust relative to ultimately what we think would be consistent with the 2% inflation target,” and “I want to get all the data I can get before the next FOMC meeting before I reach any conclusions, but I can tell you this, it certainly won’t be more than two cuts.”  This certainly didn’t warm the cockles of bond bulls’ hearts.  Stock bulls either, as other than Nvidia, equity markets gave up early gains after the comments.

Whatever the specific driver(s), the end result was that bonds sold off, and both stocks and metals markets gave up early gains.  In fact, the only beneficiaries on the day were the dollar, on the back of those higher interest rates and less prospects for future cuts, and oil, which continues to benefit from re-escalating tensions in Gaza and expectations that OPEC+ will continue producing at its current reduced rates.  

However, in truth, market activity remains lackluster overall.  The funny thing is that despite most risk asset markets still hovering near all-time highs, the mood has become far dourer than you might expect.  My take on reading headlines as well as my X(nee Twitter) feed is that there is much less bullishness around than just a week or two ago.  Certainly, the FOMC Minutes released last week didn’t help sentiment, but in fairness, the Fed commentary has been consistent since the last meeting, higher for longer has been the default option for every speaker.  So, let us look elsewhere for the catalysts.

Overnight, the Australian inflation rate rose to 3.6% unexpectedly with the result that traders have increased the odds of a rate hike Down Under although the Aussie dollar did not benefit at all, actually falling -0.25%. The bulls’ basic problem is that inflation throughout the Western economies is simply not cooperating with respect to heading back to central bank targets, and the prospect of rate cuts is slipping away.  In fact, in Japan, a BOJ member, Seiji Adachi, even indicated that the BOJ may be forced to act if the yen continues to weaken, even though he is not confident that the inflation rate is going to be sustainably at 2.0% anytime soon.  The point is, central banks, which had been almost universally expected to cut rates aggressively this year based on the idea that inflation was receding, are beginning to abandon those views and have continued to put rate hikes back in play, at least verbally.  While markets have not really started pricing hikes in yet, the number of rate cuts expected has fallen dramatically.  Keep in mind that if the future has higher rates in store, it seems likely that many risk assets will struggle.

Ok, let’s review last night’s price action to flesh out this bearishness.  In Asia, Japanese (Nikkei -0.8%) and Hong Kong (-1.8%) stocks were under pressure alongside Australian (-1.3%), Korean (-1.7%), Indian (-0.9%) and Taiwanese (-0.9%) shares.  In fact, the only market that managed to hold its own was China’s CSI 300 (+0.1%) after the IMF upgraded their GDP forecast to 5.0% for 2024. Not surprisingly given the overall tone, European bourses are all lower as well, ranging from -0.25% in the UK to -1.0% in Paris.  The most relevant data seems to be German inflation with the States reporting slightly higher than last month although the national number isn’t released for a little while yet.  Meanwhile, at this hour (7:30) US futures are in the red by about -0.6% across the board.

In the bond market, yesterday’s rally in yields is continuing with Treasuries higher by another 2bps and European sovereign yields all higher by between 4bps and 7bps.  Even JGB yields rose 5bps overnight to new highs but the biggest move was seen in Australia at +14bps after that inflation data.  While the future remains uncertain, I still don’t see any evidence that inflation is ebbing further and so there is no reason for bond yields to decline sharply.

In the commodity markets this morning, as mentioned above, oil (+0.1%) continues to edge higher while metals (Au -0.7%, Ag -0.35%, Cu -1.3%) are under pressure with higher interest rates all around the world.  But in fairness, these metals are all still solidly within their recent upward trends, so this seems like consolidation rather than a change in theme.

Finally, the dollar continues to benefit from the higher yield story in the US with gains this morning tacking onto yesterday’s moves.  While none of the moves have been very large, the movement has been universal, with only the yen, which is unchanged on the day, holding its own.  Aside from the interest rate story we also have South African elections today where the ANC, which has led the government since the end of Apartheid, appears set to lose its majority as Unemployment and Inflation rage there and the rand (-0.3%, today, -1.7% in the past week) is suffering accordingly.  Otherwise, there are precious few new stories to note here.

On the data front, the most noteworthy release is the Fed Beige Book this afternoon and we also hear from two more Fed speakers, Williams and Bostic, although it would be shocking if they didn’t repeat the higher for longer mantra.

Summing it all up, the recent Fed speakers seem to be leaning even more hawkish than the Minutes seemed to be, US yields continue to shake off every effort to sell them as the data has held in well enough to prevent any major fears of a sharp decline in the economy and quite frankly it is very difficult to look at the current situation and conclude that the US economy is in any trouble or that the dollar is going to suffer.  Can equities fell some pain?  Certainly, that is possible, but it is hard to see investors fleeing to bonds in that situation.

Good luck

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Hell or High Water

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Though Jay was as clear as a bell
That rate cuts were coming through hell
Or high water, it seems
Not all the Fed’s teams
Are ready to cut rates as well
 
A group of the regional Feds
Seems at, with Chair Jay, loggerheads
They think maybe two,
Or one, cut could do
Now, traders are sh**ting their beds!

 

Yesterday morning, I claimed that it didn’t matter what the plethora of Fed speakers were going to say given that Chairman Powell had seemed to clear the decks for a rate cut by June.  He swept away concerns about ‘too hot’ inflation and was clearly ready to go forward.  It seems that I didn’t read the market zeitgeist that well after all.

It turns out during the day, we heard from four different Fed regional presidents, Chicago’s Goolsbee, Minneapolis’s Kashkari, Cleveland’s Mester and Richmond’s Barkin, and not one of them sounded like they were ready to cut rates anytime soon.  While only two, Barkin and Mester, are voters this year, the story we consistently hear is that everybody’s voice is heard during the meetings.  Listening to those voices yesterday, it certainly doesn’t sound like everybody is ready to move in June.

Mester: “I don’t think the pace of disinflation this year will match what we saw last year as we need to see a reduction in the demand side this year.  Although if the economy evolves as I envision, we should be able to lower the Fed funds rate later this year.”   

And that was the most dovish we heard.

Barkin: “It is smart for the Fed to take our time.  No one wants inflation to re-emerge.”

Kashkari: “If inflation continues to move sideways, that would make me question whether we needed to do those rate cuts at all.”

Goolsbee: “I had been expecting it [inflation] to come down more quickly than it has.  The biggest danger to the inflation picture is continued high inflation in housing services.”

It is very hard to look at these comments and conclude that a June rate cut is a given.  And yet, the Fed funds futures market is now pricing a 64% probability of a June cut although is still pricing less than three full cuts for the rest of the year.

Risk assets were not enamored of these comments and the result was we saw a serious pullback in the equity markets in the US with all three major indices falling by between 1.25% and 1.40%.  Treasury yields fell as well, down 4bps, with its haven status making a comeback as did that status for both the yen (+0.4%) and Swiss franc (+0.6%).

Remember this, there are many different stories around the current market situation between the macroeconomics, the geopolitics of both Israel/Gaza and Russia/Ukraine and the central bank activities, not only with the Fed, but also the BOJ and ECB.  The point is markets are feeling many crosscurrents and it would not be surprising to see a more material breakout in one direction or the other on some seemingly less important piece of news.  In truth, when major moves begin, we rarely have a specific catalyst to which we can point.  I have a feeling the next big move will be confusing for a while.

While words have power
Policies ultimately
Matter much, much more
 
As summer passes
The transition to autumn
Should see prices rise

 

Adding to the cacophony of new information were comments from BOJ Governor Ueda that he believes the central bank may achieve its inflation target by late summer or early autumn as the impact of the recent wage negotiations begins to feed into the economy.  This story, Ueda’s first comments since the BOJ raised rates last month, has helped revive the yen bulls’ confidence that…this time it’s different!  Given the enormous size of the short yen positions outstanding, it is very possible that we see a sudden, sharp rise in the currency, but for the outcome to be more permanent, we will need to see much more aggressive BOJ tightening, or much more aggressive Fed easing.  Right now, I don’t believe either is in the cards, at least not until winter at the earliest.  This is especially true since when asked about the BOJ’s balance sheet, he indicated there was no reason for an immediate adjustment (sale) to ETF positions or their current, continued, ¥60 billion per month of JGB purchases.

Which brings us to this morning, when the monthly payroll report is set to be released at 8:30.  The latest consensus forecasts are as follows:

Nonfarm Payrolls200K
Private Payrolls160K
Manufacturing Payrolls5K
Unemployment Rate3.9%
Average Hourly Earnings0.3% (4.1% Y/Y)
Average Weekly Hours34.3
Participation Rate62.5%
Source: tradingeconomics.com

We have seen three consecutive reports above 200K, albeit replete with all types of revisions.  However, 200K new jobs per month is historically, a pretty good outcome.  It is certainly not indicative of a major decline in economic activity.  As well, yesterday’s Initial Claims data, at 221K, while a few thousand higher than expected, remains in a very comfortable place from the perspective of economic growth.  The point is the Fed’s concern over sticky inflation makes perfect sense when looking at these numbers.  After all, if people continue to work, they will continue to spend.

As it happens, my take today is we are setting up for a potential large ‘good news is bad’ type day and vice versa.  If the headline number is above 200K, and especially if the Unemployment Rate were to dip lower by a tick or two, I suspect that traders will quickly assume that the hawks are in control and any probability of a rate cut by June will dissipate.  Equity markets will not like this, nor will bond markets.  However, the dollar should continue to perform and, ironically, I see commodities doing the same thing.  We shall see how it plays out.

A quick recap of the overnight session shows that yesterday’s US selloff set the tone with declines throughout Asia (Nikkei -2.0%, China still closed) and Europe (DAX -1.45%, CAC -1.4%) as concerns grow regarding the future of monetary policy.  US futures, though, are modestly higher ahead of the data at this hour (7:00).

Ahead of the release, Treasury yields have reversed half of yesterday’s decline, currently higher by 2bps, and we are seeing similar movement across Europe with all markets seeing yields rise by between 1bp and 3bps.  Yesterday the ECB released their ‘minutes’ explaining they had seen further progress in their mission and the key elements, but that was before oil rebounded 10% from levels seen back then.  As has become the norm everywhere, there continues to be conflicting data and price movement clouding the picture for future policy actions.

Speaking of oil, this morning it is holding onto its gains from yesterday with WTI above $86/bbl and Brent crude at $91/bbl.  The ongoing tensions in the Middle East are clearly not helping things here as concerns grow that Iran is going to retaliate more directly to Israel’s actions earlier in the week, killing a senior Iranian general in Syria.  Of course, the entire combination of events continues to support gold prices, which are little changed this morning, but have absorbed all the selling pressure anyone can muster.  Copper and aluminum are also firmer this morning as the commodity sector seems on a mission right now.

Finally, the dollar is a touch higher this morning heading into the data.  While it has backed off its recent highs from Tuesday, the DXY remains above 104 and USDJPY remains above 151.  With that in mind, we must note ZAR (+0.65%) which continues to benefit from the rally across the entire metals complex and NOK (+0.3%) which is clearly benefitting from oil’s recent performance.  However, traders here are all anxiously awaiting this morning’s number alongside everyone else for more clarity on the next direction of travel.

Aside from the data this morning, we hear from three more Fed speakers to round out the week.  While Barkin is a repeat from yesterday, we also get some new perspectives from Boston’s Collins and Governor Bowman.  Yesterday’s market response to the hawkish views was quite surprising to me as I was very sure that Powell had set the tone.  If today’s data points to strength, do not be surprised to see equities sell off further alongside bonds.  However, a weak number is likely to signal the all-clear for the bulls to get back to business.

Good luck and good weekend

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Open and Shut

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Kashakari, on Friday, explained
For US growth to be sustained
The case for a cut
Was open and shut
Since then, talk of fifty has gained

As the new week begins, last week’s late trends remain in place, i.e. limited equity market movement as uncertainty over the outcome of the Trump-Xi meeting continues, continued demand for yield as investors’ collective belief grows that more monetary ease is on the way around the world, and a softening dollar vs. other currencies and commodities, as the prevailing assumption is that the US has far more room to ease policy than any other central bank. Certainly, the last statement is true as US rates remain the highest in the developed world, so simply cutting them back to the zero bound will add much more than the stray 20bps that the ECB, which is already mired in negative territory, can possibly add.

It is this concept which has adjusted my shorter-term view on the dollar, along with the view of most dollar bulls. However, as I have discussed repeatedly, at some point, the dollar will have adjusted, especially since the rest of the world will need to get increasingly aggressive if the dollar starts to really decline. As RBA Governor Lowe mentioned in a speech, one of the key methods of policy ease transmission by any country is by having the local currency decline relative to its peers, but if everyone is easing simultaneously, then that transmission channel is not likely to be as effective. In other words, this is yet another central bank head calling for fiscal policy stimulus as he admits the limits that exist in monetary policy at this time. Alas, the herd mentality is strong in the central bank community, and so I anticipate that all of them will continue down the same path with a minimal ultimate impact.

What we do know as of last week is there are at least two FOMC members who believe rates should be lower now, Bullard and Kashkari, and I suspect that there are a number more who don’t have to be pushed that hard to go along, notably Chairman Powell himself. Remember, if markets start to decline sharply, he will want to avoid as much of the blame as possible, so if the Fed is cutting rates, he covers himself. And quite frankly, I expect that almost regardless of how the data prints in the near-term, we are going to see policy ease across the board. Every central bank is too committed at this point to stop.

The upshot of all this is that this week is likely to play out almost exactly like Friday. This means a choppy equity market with no trend, a slowly softening dollar and rising bond markets, as all eyes turn toward Osaka, Japan, where the G20 is to meet on Friday and Saturday. Much to their chagrin, it is not the G20 statement of leaders that is of concern, rather it is the outcome of the Trump-Xi meeting that matters. In fact, that is pretty much the only thing that investors are watching this week, especially since the data releases are so uninteresting.

At this point, we can only speculate on how things will play out, but what is interesting is that we have continued to hear a hard line from the Chinese press. Declaring that they will fight “to the end” regarding the trade situation, as well as warning the US on doing anything regarding the ongoing protests in Hong Kong. Look for more bombast before the two leaders meet, but I think the odds favor a more benign resolution, at least at this point.

Turning to the data situation, the only notable data overnight was German Ifo, which fell to 97.4, its lowest level since November 2014, and continuing the ongoing trend of weak Eurozone data. However, the euro continues to rally on the overwhelming belief that the US is set to ease policy further, and this morning is higher by 0.25%, and back to its highest point in 3 months. As to the rest of the week, here’s what to look forward to:

Tuesday Case-Hiller Home Prices 2.6%
  Consumer Confidence 131.2
  New Home Sales 680K
Wednesday Durable Goods -0.1%
  -ex transport 0.1%
Thursday Initial Claims 220K
  Q1GDP 3.2%
Friday Personal Income 0.3%
  Personal Spending 0.4%
  Core PCE 0.2% (1.6% Y/Y)
  Chicago PMI 53.1
  Michigan Sentiment 98.0

Arguably, the most important point is the PCE data on Friday, but of more importance is the fact that we are going to hear from four more Fed speakers early this week, notably Chairman Powell on Tuesday afternoon. And while the Fed sounded dovish last week, with the subsequent news that Kashkari was aggressively so, all eyes will be looking to see if he is persuading others. We will need to see remarkably strong data to change this narrative going forward. And that just seems so unlikely right now.

In the end, as I said at the beginning, this week is likely to shape up like Friday, with limited movement, and anxiety building as we all await the Trump-Xi meeting. And that means the dollar is likely to continue to slide all week.

Good luck
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