Tag Archives: #missionaccomplished

A Financial Home Run

Posted on by

Seems President Xi isn’t done
And last night he added a ton
Of new stimuli
In order to try
To hit a financial home run
 
The market response has been clear
Forget anything that’s austere
It’s buy with both hands
Ere Powell rebrands
QE as just more Christmas Cheer

Things are obviously worse in China than President Xi had been willing to let on for the past several months/years, as after two straight days of monetary policy stimulus announcements, they pulled out the big guns and got the fiscal side of the process involved.  Last night the Politburo pledged further support after a surprise meeting to discuss economic policies.  Their economic discussions have historically only occurred in April, July and December, so this was the latest indication that Xi is really concerned. 

Some of the actions include an (unspecified) effort to make the real estate market “stop declining”, limiting construction of new home projects, issuing CNY 2 trillion of special sovereign bonds to disburse funds to help fund financial assistance for low-income workers, shore up bank capital to encourage more lending and support further investment in productive capacity as well as to potentially buy up unfinished homes.  

Obviously, Xi was quite concerned that the country would not achieve his 5% GDP growth target for 2024 as an increasing number of analysts around the world were penciling in slower growth, and he decided he could not wait until December for the next policy adjustments.  Remember, too, that next week is a week-long Chinese holiday, so part of the impetus was to give cash to people to encourage more spending/activity.  While it is far too early to determine how effective these new policies will be at supporting real, organic economic activity, they did wonders for equity markets and risk assets around the world.

And really, that continues to be the main story.  With the Fed now having confirmed that lower rates are appropriate, I would look for almost every nation to boost stimulus, both monetary and fiscal, especially in the wake of recent election results which have seen incumbent after incumbent tossed from office.  After all, what good is being in power if you cannot buy your way to re-election?

So, how has all this impacted financial markets this morning?  You will not be surprised to see that risky assets are in huge demand with equity markets rallying everywhere along with metals, while haven assets see much more modest demand, with bond yields having slipped just a bit lower.

Yesterday’s mixed US market performance is but a distant memory this morning with Asian shares roaring higher (Nikkei +2.8%, Hang Seng +4.2%, CSI 300 +4.2%) and gains virtually across the region, albeit not quite as robust as those.  But after the Fed cut, this fiscal stimulus from China is seen as helping everybody.  Europe, too, is rocking this morning with gains well above 1.0% everywhere (DAX +1.2%, CAC +1.6%, IBEX +1.1%) except the UK (FTSE 100 +0.2%) which continues to struggle as the Labour government is shown to be further and further out of its depth with respect to actually running things rather than carping about how the Tories did it.  And not to worry, US futures are all racing higher as well this morning, higher by between 0.3% (DJIA) and 1.5% (NASDAQ) at this hour (7:15).

In the bond market, Treasury yields have edged lower by 2bps and remain far below the Fed funds rate.  It is not clear if this is the market anticipating a more significant economic slowdown or simply a continued manifestation of the fact that the Fed still owns a significant portion of the debt outstanding and so has restricted supply at the margin.  In Europe, yields are also lower, with the riskiest nations seeing the biggest declines as risk assets are in vogue this morning.  Thus, Italy (-7bps) and Greece (-6bps) have moved the farthest, but otherwise we are seeing movement on the order of -3bps elsewhere.  In another quirk, and a telling comment on the state of France’s finances, Spanish 10yr bonos now yield less than French 10yr OATs for the first time in more than 15 years.

Turning to commodities, oil (-2.8%) didn’t get the China rebound memo and has tumbled nearly $2/bbl falling well below the $70/bbl level.  It seems that Saudi Arabia is dropping its price target and preparing to increase production, something the market has been fearing.  As well, in Libya, which had not been producing lately due to political issues, it appears a tentative agreement is in place that will allow for more supply on the market.

But you know what really benefits from a lot of deficit spending and the effective abandonment of inflation targets?  That’s right, precious metals as gold (+0.8%) continues its steady move higher to new all-time highs and quickly approaches $2700/oz.  This has taken both silver (+2.2%) and copper (+2.2%) along for the ride and there is currently no end in sight.

Finally, the dollar is under pressure this morning in a classic risk-on reaction.  AUD (+0.9%) is the leading G10 gainer on the back of its strong metals exposure while NZD (+0.8%) is right behind.  But the dollar’s weakness is manifest in Europe (EUR +0.2%, GBP +0.5%, SEK +0.5%) as well as against most EMG currencies.  In fact, CNY (+0.55% and below 7.00) is one of the biggest movers today although we are seeing strength in KRW (+0.7%), MXN (+0.5%) and ZAR (+0.4%), an indication that this move is widespread.  As long as the perception remains that the Fed is going to lead the way to lower interest rates, I can see the dollar underperforming.  However, as soon as we see other nations become more aggressive, this move will abate.

On the data front, there is much on the calendar this morning starting with the weekly Initial (exp 225K) and Continuing (1832K) Claims data as well as the 3rd look at Q2 GDP (3.0%).  We also see Durable Goods (-2.6%, +0.1% ex-Transports) and then the ancillary data that comes with the GDP report including Real Consumer Spending (2.9%), Final Sales (2.2%) and the GDP PCE indicator (2.5% headline, 2.8% core).  But perhaps of far more importance, we hear from a host of Fed speakers this morning.  Governor Kugler and Boston Fed president Collins speak about financial inclusion, Governor Bowman discusses the economy and monetary policy, Governor Cook discusses AI and workforce development, Vice-chair Barr discusses regulation and Chairman Powell gives the opening remarks at the US Treasury Market Conference in NY. 

Yesterday, Governor Kugler added to the ‘mission accomplished’ view on inflation at the Fed and lauded the move to focus on Unemployment.  I would contend this is the key issue right now, the fact that central banks around the world, but particularly the Fed, have determined that the inflation fight is over.  While we may very well touch 2.0% core PCE in the next months, it strikes me as highly unlikely that level will be maintained.  Rather, 2.0% is now the floor and if the Unemployment Rate behaves in its historic manner, accelerating higher now that it has started to move in that direction, look for much sharper interest rate cuts, much higher inflation and a much weaker dollar.  To me, that is the biggest risk.  However, if Unemployment follows the Fed’s projected path, and stays quiescent, then the current slow decline in rates and a very gradual decline in the dollar seems more likely.

Good luck

Adf

The Time Has Come

Posted on by

(with apologies to Lewis Carroll)

The time has come, the Chairman said,
To speak of many things.
Of joblessness and how inflation,
            Social unrest, brings
And whether we have done our job
            Although we live like kings
 
But wait a bit, the pundits cried
            Before you do explain
For we thought that inflation was
            The overwhelming bane
It was, the Chairman did remark
            But now its jobs that reign

 

On Friday morning, Fed Chair Jay Powell laid out his vision for the immediate future, and much as many had hoped, he was quite clear in his belief that the inflation mission is accomplished.

A person in a suit and tie Description automatically generated

Now, many of us remember how that worked out for the last official who exclaimed that concept a bit too early, but hey, maybe this time IS different!  At any rate, during his Jackson Hole speech, the below comments were what got speculative juices quickening, although a quick look at history indicates all may not be well, at least in the risk asset world.  But first to the soothing words of the Chairman [emphasis added]:

“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”  

“We will do everything we can to support a strong labor market as we make further progress toward price stability. With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market. The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.”

So, why, you may ask, would anything negative occur if the Fed is finally going to cut rates?  After all, lower rates add monetary stimulus and allow companies to borrow more cheaply while allowing individuals to reduce their borrowing costs and afford more stuff, like cheaper mortgages making houses more affordable.  But under the rubric, a picture is worth a thousand words, the following chart purloined from X in @allincapital’s feed, does an excellent job of highlighting how equity markets have performed after the Fed pivots to cutting rates.

A screenshot of a graph Description automatically generated

You may have notices that each pivot led to a substantial decline in the S&P 500.  Of course, if you think it through, the basic reason the Fed is pivoting is because the economy is typically heading into, or already in, a recession.  And there has never been a recession when corporate earnings rose across the board. 

This is the crux of the recession argument.  If those who are convinced we are already in a recession are correct, then the prospects for risk assets are dour at best.  On the other hand, for those who remain pollyannaish and believe that the data continues to point to economic strength, the first question is, why should the Fed cut?  And the second question is, why is the data showing rising unemployment, which has an almost perfect correlation of occurring during recessions, not indicating a recession this time?

One last thing, inflation.  You remember that bugaboo, the thing that has had the Fed’s undivided attention for the past two plus years.  Well, given that the money supply has resumed its growth, and money velocity continues to rise, while Chairman Powell has convinced himself that he won the battle, so did Chairman Arthur Burns…three times!  Friday, the equity bulls were in the ascendancy and the market moved to price a 36% chance of a 50bp cut in September with 100bps priced in for the rest of the year while the major indices all rose > 1%.  Personally, I’m a bit wary.

But enough of Friday.  It will take a great deal of new and contradictory information to change the narrative now with the next real chance the NFP report to be released on September 6th.  In the meantime, let’s see what happened overnight.  There was very little in the way of data or activity with only German Ifo readings showing a continuation in their trend lower, printing at 86.6.  It has become increasingly difficult to look at Germany, and its place within Europe as the largest economy by far, and not be concerned over the entire continent’s economic situation.  Energy policies around the Eurozone have hamstrung the economy significantly, and there is no indication that this is either recognized, or if it is, of concern to the governments across the continent.  I understand the short-term view that the Fed is going to start cutting rates and that the dollar has the opportunity to decline because of that, but the longer-term prospects for the euro seem far more dire, at least to my eyes.

Ok, let’s see how markets are handling the unmitigated joy of the Fed finally doing what everyone was so fervently wishing them to do.  In Asia, the Nikkei (-0.7%) didn’t get the bullish memo, likely suffering on the yen’s strength (+1.3% Friday, +0.2% this morning) which started on Friday, right as the Powell speech began.  However, the Hang Seng (+1.0%), India (+0.75%) and Australia (+0.8%) all followed the US movement.  Alas, mainland Chinese shares (-0.1%) continue to lag as the PBOC left rates on hold last night, although some were hopeful of another cut.  In Europe, Germany (-0.3%) is the laggard this morning, not surprisingly given the Ifo data, but overall, markets are moving very little with only the FTSE 100 (+0.5%) showing any life as the only market there following the US.  As to US futures, at this hour (7:10) they are essentially unchanged.

In the bond market, Treasury yields are unchanged this morning, but did fall 5bps on Friday.  In Europe, sovereign yields have all rebounded 2bps, basically unwinding the Friday declines seen in the wake of the Powell comments.  In truth, this is surprising given the lackluster data that was released from Germany, but markets can be that way.  As to JGB yields, they slipped 1bp lower overnight, still not showing any evidence that there is concern the BOJ is going to tighten policy substantially going forward.

In the commodity markets, oil (+2.6%) is rocketing higher after Israel initiated a pre-emptive attack on Hezbollah in Lebanon and Hezbollah responded.  While the WSJ headline is that both sides are now trying to de-escalate things, the oil market, which has seemingly been underpricing risks of a greater supply disruption, has woken up to those risks this morning.  Arguably part of that wakening was the fact that Libya just declared force majeure and has stopped pumping oil because of internal conflict over the central bank and its use of monetary reserves.  Hence, a supply disruption!  Remember, though, the Saudis have a decent amount of spare capacity to fill in if prices start to rise “too” quickly.  

In the metals markets, green is today’s theme with gold (+0.6%) continuing to show its luster as a haven asset.  Meanwhile, silver (+0.9%) has been gaining rapidly amidst stories that China is hording it along with stories that there is not enough silver around to meet the plans for all the solar panels that are still expected to be built.  This movement is dragging copper and aluminum higher as well.

Finally, the dollar is slightly higher this morning overall, although there are some reasonably large movers in smaller currencies.  Surprisingly, NOK (-0.9%) is under pressure despite the big move in oil price higher.  As well, NZD (-0.5%) has slipped, but that was after a very sharp rally on Friday of nearly 2% which seemed to be based on the Fed rate cut story, although NZD responded far more aggressively than any other currency.  We are also seeing weakness in MXN (-0.4%) and SEK (-0.5%) while the euro (-0.2%) and pound (-0.2%) hold up slightly better.  ZAR (-0.1%) may be the best performer today as the metals’ strength seems to be offsetting the dollar’s own strength.

On the data front, there is a decent amount of new information culminating in the PCE data on Friday.

TodayDurable Goods5.0%
 -ex transport-0.1%
TuesdayCase Shiller Home Prices6.0%
 Consumer Confidence100.6
ThursdayInitial Claims234K
 Continuing Claims1870K
 Q2 GDP (2nd look)2.8%
 Goods Trade Balance-$97.5B
FridayPCE0.2% (2.5% Y/Y)
 Ex food & energy0.2% (2.7% Y/Y)
 Personal Income0.2%
 Personal Spendinmg0.5%
 Chicago PMI45.5
 Michigan Sentiment68.0

Source: tradingeconomics.com

In addition to the data, we hear from Fed Governor Waller and Atlanta Fed president Bostic but given that Powell just basically gave the market the roadmap for the Fed’s thinking, it would be surprising if either one changed anything at all.  And given the next really important data point is NFP at the end of next week, Fed speak is likely not that important right now.

At this point, Powell has explained what the Fed is going to do, so the data will help traders and investors adjust the amount of risk they want to take, at least until the point where a recession is more obvious.  Maybe Powell will have successfully prevented a recession, but I still believe the odds are against him.  With that in mind, though, I expect the dollar will remain under pressure for as long as the market believes that Powell is going to cut more aggressively than everybody else.

Good luck

Adf