Tag Archives: #NFP

Fraught

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The job growth that everyone thought
Existed, seems like it was fraught
Meanwhile ISM
Showed further mayhem
As growth slowed while prices were hot
 
The funny thing was the reaction
Where stocks were a source of attraction
But at the same time
Bond buys were a crime
With sellers the ones gaining traction

 

The NFP data was certainly surprising as the headline number fell to its lowest level, 12K, since December 2020 with the worst part, arguably, the fact that government jobs rose 40K, so there were 52K private sector job losses.  That is just not a good look, nor were the revisions to the previous months which saw another 112K jobs reduced from the rolls.  It cannot be surprising that the Fed funds futures market immediately took the probability of a rate cut to 99% this week and raised the December probability to 82%, up more than 10 points in the past week.  After all, Chair Powell basically told us that he has slain inflation, and they are now hyper focused on the employment mandate.  With that in mind, the futures reaction makes perfect sense.

Perhaps even more surprising was the market reaction, or the dichotomy of market reactions, which saw equity markets in the US rally nicely, with gains between 0.4% and 0.8% in the major indices, while Treasury yields spiked 10bps despite the data.  That yield spike helped carry the dollar higher as the greenback rallied smartly against virtually all its counterparts by more than 0.50%, and it undermined commodity prices.  

The most common explanation here, though, had less to do with the NFP data and more to do with the recent polls regarding the US election, where it appeared the former president Trump was gaining an advantage.  Remember, the ‘Trump trade’ is being described as a steeper yield curve with benefits for the dollar and US equities on the back of stronger growth and higher inflation.

There once was a US election
Where both candidates lacked affection
The worry it seems
Is half the world’s dreams
Are likely soon met with dejection
 
Meanwhile for investors worldwide
This week ought to be quite a ride
To all our chagrins
No matter who wins
Look for either outcome denied

However, this morning, the markets have changed their collective mind, with virtually all of Friday’s movement now unwound, at least in the bond and FX markets.  What would have caused such a reversal?  Well, the latest polls show that the race is much tighter than thought on Friday, with VP Harris gaining ground in a number of them, which now has most pundits simply calling for their favored candidate to win, rather than trying to read the polls.  As such, the Trump trade has been partially unwound and my sense is that until there is an outcome, it will be difficult for markets to do more than increase the amplitude of their moves amid less and less actual trading.  At least, that is true in bonds, FX and commodities.  Stocks, as we all know, are legally mandated to rise every day, so are likely to continue to do so. 

And now, despite the fact that the Fed meets on Thursday, with a rate cut all but assured and ostensibly a great deal of interest in Chairman Powell’s press conference, all eyes are on the election.  Remember, too, not only is that the case in the US, but also around the world.  Whether friend or foe of the US, pretty much all 195 nations on the planet are invested in the outcome.

With that in mind, and since this poet has no deep insight into the outcome, let me simply recount the overnight market activity with the understanding that many trends have the opportunity to reverse depending on the results.

Starting with equity markets, Japanese shares (-2.6%) fell sharply as a combination of both their domestic political struggles (remember their government situation is unclear after the recent snap election) and the significant rebound in the yen (+0.9%) weighed on equities there.  India (-1.2%) also struggled but elsewhere in the time zone, stocks rallied nicely led by China (+1.4%) and Korea (+1.8%) as visions of that Chinese fiscal bazooka continue to dance in investors dreams.  Interestingly, the WSJ had an article this morning downplaying the idea, which based on their history makes a great deal of sense to me.  Turning to Europe, most markets there are firmer, albeit only modestly so, with gains from the CAC and IBEX (+0.3% each) outpacing the DAX (0.0%).  Finishing off, US futures are basically unchanged at this hour (7:00).

In the bond markets, while the Treasury move Friday did help drag European yields somewhat higher, it was nothing like seen in the US and this morning, those yields are essentially unchanged, +/- 1bp in most cases.  The only data of note was the final PMI data which confirmed the flash data from last week.  As to JGB yields, they have been stuck in the mud for a while now, still hanging below the 1.0% level with no designs of a large move.

Oil prices (+3.1%) are rebounding nicely on news that OPEC+ has delayed their previous plans to start increasing production as of December this year.  Concerns about oversupply in the global market plus the return of Libyan production and record high US production have convinced them they better leave things as they are.  Metals markets are a bit firmer this morning with gold (+0.2%) actually somewhat disappointing given the magnitude of the dollar’s decline, while both silver (+1.25%) and copper (+1.1%) show nice gains.

Finally, the dollar is under severe pressure across the board.  The biggest gainers are MXN (+1.2%), NOK (+1.2%) and PLN (+1.1%) although most gains are on the order of 0.7% or more.  Certainly, the oil story is helping NOK, and given the concerns that traders have about prospective tariff increases on Mexico if Trump wins, the idea that the race is closer than previously thought has supported the peso.  As to the zloty, it seems that their PMI data, printing at 49.2, a fourth consecutive rise) has traders looking for a more hawkish central bank on the back of stronger economic activity.

On the data front, aside from the election and the Fed, there is other information, although it is not clear that anyone will notice.

TodayFactory Orders-0.4%
TuesdayTrade Balance-$84.1B
 ISM Services53.8
ThursdayBOE Rate Decision4.75% (current 5.00%)
 Initial Claims223K
 Continuing Claims1865K
 Nonfarm Productivity2.5%
 Unit Labor Costs1.1%
 FOMC Rate Decision4.75% (current 5.0%)
FridayMichigan Sentiment71.0

Source: tradingeconomics.com

Of course, the election will dominate everything, and it certainly appears that there will be legal challenges from the losing side regardless of the outcome.  My expectation is that markets will remain jumpy with outsized moves on low volumes until there is more clarity.  It is not often that an FOMC meeting is seen as an afterthought, but much to Chairman Powell’s delight, I sense that is going to be the case this week.  

I have already voted early and I encourage each of you to vote as the more voices heard, the better the case the winner will have at achieving a mandate.  And the reality is, we need a president with a mandate if we are going to see broad-based positive changes in the nation going forward.

Good luck

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Looking Elsewhere

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The Middle East story is back
With fears that Iran might attack
So, oil is rising
And it’s not surprising
The dollar is leading the pack
 
But til anything happens there
The market is looking elsewhere
The Payrolls report
May well be the sort
That causes Chair Powell to care

 

It was only a week ago when the Israeli response to the Iranian missile barrage was seen by market participants as a clear de-escalation of tensions in the Middle East.  The market’s response was to reduce the risk premium in the price of oil which promptly fell $5/bbl amid signs of slowing growth in China as well.  Alas, as can be seen in the chart below, that was Monday’s story and no longer pertains.  Rather, the new concern is that Iran is planning to launch yet another attack, this time via proxies in Iraq, with Israel vowing to respond more severely.  You cannot be surprised that oil has regained its levels prior to Monday’s narrative.

Source: tradingeconomics.com

Adding to the buying pressure for oil has been the better than expected growth data from China (Caixin Mfg PMI printing better than expected 50.3) and solid US GDP data on Wednesday along with stronger Personal Income and Spending data yesterday.  And remember, the market is also looking ahead to the Standing Committee of the National People’s Congress in China to add significant fiscal stimulus there, with CNY 10 trillion (~$1.4 trillion) the most popular number being bandied about.  If that comes to pass, it will seemingly increase demand for oil on China’s part.

Of course, there is another piece of news that the market is awaiting with the potential for a significant impact, today’s Employment Report.  Ahead of the release, these are the current consensus forecasts:

Nonfarm Payrolls113K
Private Payrolls90K
Manufacturing Payrolls-28K
Unemployment Rate4.1%
Average Hourly Earnings0.3% (4.0% Y/Y)
Average Weekly Hours34.2
Participation Rate62.5%
ISM Manufacturing47.6
ISM Prices Paid48.5

Source: tradingeconomics.com

You may remember that last month, the NFP number printed much higher than expected at 233K which began the questioning of the Fed’s expected rate cutting path.  Frankly, the data since then has done very little to argue for much policy ease as Retail Sales have held up, GDP was solid and prices appear to be moving higher, not lower.  In fact, you can see how things have played out over the past month in the chart/table below from the CME showing the market priced probability of future Fed funds rates.  Check out where things were a month ago, just prior to the last NFP report.

The market was pricing a more than 50% probability of at least 75 basis points of rate cuts by December. Obviously, that is no longer the case and if this morning’s data proves stronger than forecast (remember, ADP Employment was significantly stronger than expected) many more people are going to call into question the assumption that the Fed is going to be cutting rates at all.  If you think about it, GDP is growing above trend at 2.8%, inflation remains above target with core CPI 3.3% and Unemployment is at a still historically low 4.1%.  if I look at those three major economic guideposts, the one that stands out to be addressed is inflation, not Unemployment, and that takes tighter policy.

Now, maybe this morning’s data will be awful, with a 50K NFP print and a jump in the UR to 4.3%.  That would certainly bring the doves out more aggressively but absent something like that, I continue to scratch my head as to why the Fed is so keen to cut the Fed funds rate.  Let’s put it this way, if the data surprises to the upside, I expect the December rate cut probability to fall close to 50%.

At any rate, those are the topics du jour, away from the election stories that are suffocating most everything else.  So, let’s see how things behaved overnight.

Well, I guess there has been one other story that has gotten tongues wagging, the fact that US equity markets had their worst session in two months with all three major indices falling sharply.  This was blamed on weaker than forecast earnings releases from several companies in the tech sector, where even if the actual earnings were solid, there were other issues like guidance or breakdowns of revenues, that disappointed.  It is far too early to declare that the love affair with the tech sector, especially AI, is ending, but there are a few names in the sector that are suffering greatly.  This certainly bears close watch going forward, because if this theme starts to lose adherents, even in the short run, it appears there is ample room for a move lower in stocks.

Turning to other markets overnight, Tokyo (-2.6%) led the way lower in Asia with most regional exchanges falling and only Hong Kong (+0.9%) bucking the trend.  There are those who believe there is a causal relationship between the Nikkei, the NASDAQ and USDJPY with one theory that it is the FX rate that drives these movements.  While it is certainly true that we have seen correlation amongst these three markets, I find it difficult to make the case that USDJPY is the driver.   A quick look at all three on the same chart certainly shows that they regularly move in similar directions, but I have a harder time claiming which one is the leader.

Source: tradingeconomics.com

However, despite the negativity from yesterday’s US moves and the overnight sell-off and the sharp rise in oil prices, European bourses are all in the green today, higher by about 0.5% across the board.  In fact, this is in sync with US futures which are also trading higher, by about 0.4%, this morning.

In the bond market, other than UK Gilt yields, which rose 7bps net yesterday although traded as high as 20bps higher than Wednesday’s close during the session, the rest of the bond markets were quiet.  It seems that UK bond investors are not that happy with the recently promulgated budget, and neither are voters as there was a by-election in a “safe” Labour seat that went to Nigel Farage’s Reform UK party.  I have a feeling that bond markets are going to be the epicenter of market activity over the next week or two as huge differences of opinion remain regarding the potential outcomes of the US election.

Away from oil (+1.9%) this morning, the rest of the commodity sector is also doing well today with both precious and base metals all in the green.  But they have not recouped yesterday’s declines which saw gold fall back -1.5% with even larger losses in silver (-3.2%) although copper (-0.6%) didn’t have nearly as bad a day.  This morning, the metals are higher by between 0.2% (gold ) and 0.6% (silver), so it seems like it was a month-end position adjustment and profit-taking exercise.

Finally, the dollar is strong this morning, rallying against most of its G10 counterparts with JPY (-0.4%) the laggard while the pound (+0.1%) seems to be benefitting from higher yields.  Versus the EMG bloc, the dollar is also broadly higher with only MXN (+0.2%) showing any life.  The peso has a number of issues ongoing with concerns that a Trump victory may lead to tariff increases and strain on the economy while domestic issues have arisen over the potential resignation of eight of their Supreme Court Justices which will have a big impact on the judicial system and potentially the Morena party’s ability to rule effectively.  However, after a steady weakening of the peso throughout October, it appears we are seeing a bit of a bounce this morning.

And that’s really what we have today.  At this point, we will all await the NFP and respond accordingly.  Something to keep in mind is that the hurricanes last month could well impact the data, so whatever the outcome, you can be sure that there will be those saying to ignore it as incomplete.  Regarding the dollar, it is still hard to bet against in my mind given the US economic data continues to be the best around.

Good luck and good weekend

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A Trumpian Size

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A question on analysts’ lips
Is whether Jay can come to grips
With job growth expanding
While he was demanding
A rate cut of fifty whole bips
 
Concerns are beginning to rise
That voters will soon recognize
Inflation’s returning
And they will be yearning
For change of a Trumpian size

 

By now, I am guessing you are aware that the payroll report on Friday was significantly better than expected.  Nonfarm Payrolls rose 254K, much higher than the 140K expected, and adding to the gains were revisions higher for the previous three months of 55K.  The Unemployment Rate fell to 4.051%, rounding to 4.1%, lower than expected and another encouraging sign for the economy.  You may remember the discussion of the Sahm Rule, which claims that if the 3-month average Unemployment Rate rises 0.5% from its low in the previous 12 months, history has shown the US is already in recession at that point.  Well, ostensibly that rule was triggered two months ago, and the Unemployment Rate has now fallen 0.25% since then with a gain of over 400K jobs since then.  Those are not recessionary sounding numbers.

The upshot is that the market got busy adjusting its views with the dollar continuing to rebound against most currencies, equity markets rejoicing in the renewed growth story and bond markets getting hammered with 10-year yields rising sharply in the US (10bps Friday and 4bps more this morning) with moves higher everywhere else in the world.  In fact, this morning, European sovereign yields are also higher by between 3bps and 5bps and we saw JGB yields jump 5bps overnight.  The end of inflation story is having a tough time.

Perhaps the best depiction of things comes from the Fed funds futures markets where now there is only an 85% probability priced for a 25bp cut and a 15% probability of no cut at all.  Look at the table below the bar chart to show how much things have changed in the past week.  Jumbo rate cuts are no longer a consideration.  It will be very interesting to see how the Fed speakers adjust their tone going forward as there were many who seemed all-in on another 50bp cut as soon as next month.

Source: cmegroup.com

So, is this the new reality?  Recession is out and another up-cycle is with us?  Certainly, recent data has been quite positive as evidenced by the Citi Surprise Index, seen below courtesy of cbonds.com, which has shown a positive trend since early July.

This index is a measure of the actual data releases compared to consensus market forecasts ahead of the release.  When it is rising, the implication is that the economy is outperforming expectations and therefore is growing more rapidly than previously priced by markets.  Again, the point is the recessionistas are having a hard time making their case.  However, for the inflationistas, it is a different story.  With the employment situation improving greatly and last week’s Services ISM data showing real strength, the inflation narrative is regaining momentum.  Recall, the Fed’s rationale for cutting 50bps was that they had beaten inflation and were much more concerned about the employment situation where things seemed to be cooling.  That line of reasoning has now been called into question and the market is awaiting Powell’s answers.

Remember the time
The yen carry trade was dead?
Nobody else does!

While it may seem like this is ancient history, it was less than a month ago when the market was convinced that the yen carry trade (shorting yen to go long higher yielding assets) was dead, killed by the combination of a dovish Fed and a hawkish BOJ.  Oops!  It turns out that story may not have been completely accurate, although it was a wonderful discussion at the time.  As you can see from the chart below, the yen peaked two days ahead of the FOMC meeting, as those assumptions about both central banks reached their apex and has been steadily weakening ever since.  In fact, late last week I saw an article somewhere discussing how the carry trade was back!  The thing to understand is the carry trade never left.  It has been a popular hedge fund positioning strategy for a decade, made even more popular by the Fed’s aggressive rate hiking cycle.  While latecomers to the trade may have been forced out in the past several months, I am confident the position remains widely held.  And, based on the recent price action in USDJPY, it is growing again.

Source: tradingeconomics.com

And I believe those are the key drivers of markets this morning.  Fortunately, the Middle East situation does not appear to have gotten worse although oil (+2.6%) is trading like something is about to blow up.  The rest of the noteworthy news shows that Germany remains in a funk with Factory Orders falling sharply, -5.8%, just another indication that growth on the continent is going to struggle going forward.

Ok, let’s tour the markets we have not yet touched upon.  While Chinese markets remain closed (the holiday ended today and markets there reopen tomorrow), the Nikkei (+1.8%) continues to rebound alongside USDJPY and amid stories that new PM Ishiba has dramatically moderated his hawkish views ahead of the snap election called for the end of the month.  The Hang Seng (+1.6%) also had a strong session, with rumors of still more Chinese stimulus to be announced tonight. The combination of positive US growth news and the Chinese stimulus news helped virtually every market in Asia save India (-0.8%), which has been singing a different tune consistently.  In Europe, it should be no surprise the DAX (-0.3%) is softer, although there are some gainers on the continent (Spain +0.4%, Hungary (+0.4%) and other laggards (Norway -0.7%, Netherlands (-0.3%).  Overall, it is hard to get excited about the European scene this morning.  Alas, US futures are pointing lower this morning, down -0.5% at this hour (6:30).

We’ve already discussed the bond market and oil, but metals markets show a split this morning with gold (+0.2%) seeming to find haven support while both silver (-0.7%) and copper (-0.3%) are under modest pressure.  Remember, though, if the economic growth story is real, these metals should climb further.

Finally, the dollar is continuing its climb alongside US rates with the pound (-0.4%) the G10 laggard of note.  Most other G10 currencies are softer by a lesser amount although the yen (+0.1%) and NOK (+0.1%) are pushing slightly the other way, the former on a haven trade with the latter following oil.  The EMG bloc is more mixed with ZAR (+0.5%) actually the biggest mover as investors continue to flock toward the stock market there on the back of positivity of a change in the trajectory of the economy from the new government.

On the data front, the biggest number this week is CPI, but of real note are the 13(!) Fed speakers over 20 different venues this week.  I don’t know if I’ve ever seen that many on the calendar for such a short period.  It strikes me that they understand they need to tweak their message after the recent data.  It will be very interesting to see if they fight the data and stay the course for another cut in November or whether they walk it back completely. After all, they claim to be data dependent, and if the data points to growth, why cut?

Here is the rest of the data:

TodayConsumer Credit$12B
TuesdayNFIB Small Biz Optimism91.7
 Trade Balance-$70.4B
WednesdayFOMC Minutes 
ThursdayInitial Claims230K
 Continuing Claims1829K
 CPI0.1% (2.3% Y/Y)
 -ex food & energy0.2% (3.2% Y/Y)
FridayPPI0.1% (1.6% y/Y)
 -ex food & energy0.2% (2.7% Y/Y)
 Michigan Sentiment71.0

Source: tradingeconomics.com

And that’s how we start the week.  Whatever your personal view of the economy, the recent data certainly points to more strength than had been anticipated previously and markets are responding to that news.  For equities and the dollar, good news is good, but there seems to be a lot of time between now and Thursday’s CPI reading for attitudes to change.

Good luck

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Awakened the Beast

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The longshoreman’s union conceded
And ports will now work unimpeded
But is that enough
To make sure that stuff
Gets everywhere that it is needed?
 


Arguably, one of the biggest stories this morning is that the fears over the longshoreman’s union strike dramatically weakening the US economy while pushing up inflation have passed as there has been a temporary agreement to raise workers’ pay by 62% over the next six years although it seems that the questions over automation remain.  However, the agreement will last until January 15th, so the 3-day work stoppage is unlikely to have a major impact on the US economy, although I’m sure there will be a few hiccups around.  But hey, at least one problem is off the docket.
 
Meanwhile, problems in the Mideast
Continuously have increased
Iran took their shot
And all that it wrought
Was fear they’ve awakened the beast

Which takes us to the next major story, the nature of Israel’s response to Iran’s missile attack from earlier this week.  From what I have read, the US is trying very hard to persuade PM Netanyahu to leave Iran’s nuclear facilities and oil production capabilities alone.  While I understand the latter, given an attack there would likely drive oil prices far higher and not help VP Harris’s election prospects, I cannot understand why the US would be so adamant that Israel not seek to destroy Iran’s nuclear capabilities.  At any rate, the headline in this morning’s WSJ, “Biden Sidelined as Israel Reshapes Middle East”, seems to say it all.  At this point, we can only watch and wait.  

However, consider the benefits of either of those targets.  As it remains unclear whether Iran has achieved the capability to create nuclear weapons, an attack on those facilities, which are hardened and underground, may or may not be effective at preventing a future nuclear Iran.  But an attack on the oil production facilities, which are wide open and not nearly as well-defended, would immediately limit Iran’s income despite the certain rise in oil prices, as they would not be able to sell any.  Starving Iran of capital to continue to run its military and fund its proxies would likely be extremely effective at dramatically reducing threats to Israel.  As well, I’m pretty confident the Saudis would not be unhappy if oil rose to $90 or $100 per barrel.  My point is the latter strategy is likely to be effective at reducing Iranian activities while being quite achievable.  We shall see.

And finally, early today
The payrolls report will hold sway
O’er markets worldwide
As traders decide
If more cuts are soon on their way

Which takes us to the big economic story today, the monthly payroll report.  Wednesday’s ADP Employment data was much better than expected, showing job growth of 143K.  Current expectations are as follows:

Nonfarm Payrolls140K
Private Payrolls125K
Manufacturing Payrolls-5K
Unemployment Rate4.2%
Average Hourly Earnings0.3% (3.8% Y/Y)
Average Weekly Hours34.3
Participation Rate62.9%

Source: tradingeconomics.com

One thing to keep in mind is this is going to be the last meaningful payroll report before the next FOMC meeting because the October report, scheduled to be released on November 1st, is going to be a complete wreck with virtually no information because of the impact of Hurricane Helene.  In fact, it will likely take several months before economic data gets back to whatever its underlying trend may be given the disruption over such a wide swath of the nation.

The question of the economy’s strength continues to be a hotly contested disagreement between those who believe that a recession is coming soon, or has already started, vs. those who believe that there is no recession coming in the near future.  The first group tends to look through the headline data and sees decreasing quit rates and reduced hiring offsetting reduced firing with the lack of hiring seen as an indication business activity is slowing.  They look at high household credit card debt and growing delinquencies and see analogies to past recessions.  Meanwhile, the bulls look at the headline data and say, GDP continues to grow, inflation continues to slide and while manufacturing has been weak for nearly two years, this is a services economy and that has been strong (yesterday’s ISM Services print was a much stronger than expected 54.9).

Now, the very fact that Powell cut rates two weeks ago is indicative of the fact that there is real concern at the FOMC that growth is slowing.  I will not discuss the political question here.  But data like TSA travel clearances and restaurant seatings and the crowds at events show that at least some portion of the economy is still doing well.  Yesterday’s Claims data was 225K, a few thousand more than expected but still nowhere near a level that would indicate there is an employment glut.  

I believe the idea of the K-shaped recovery is the best description of things around.  The top quartile of income earners is doing just fine while the rest of the economy is struggling.  But that top quartile represents an outsized amount of economic activity, so the data continues to be positive.  In fact, if you are looking for a reason that there is so much angst in the electorate, this is it.  With all that in mind, though, my take is this morning’s number is going to be better than expected, somewhere on the 175K – 200K level.

Ok, let’s quickly run through market activity overnight.  Yesterday’s modest decline in US markets did not really give much direction to the overnight session as the Nikkei (+0.2%) managed to continue its recent modest rally and the Hang Seng (+2.8%) continues to benefit from a belief that Chinese stimulus is coming to the rescue.  But the rest of Asia couldn’t make up its mind (China is still closed) with gainers (Korea, New Zealand, Singapore) and laggards (India, Australia , Taiwan).  In Europe, the picture is also mixed ahead of the US data with modest gainers (CAC, DAX) and laggards (FTSE 100, IBEX) as the US data is still the key driver.  One story here is that the EU decided to impose tariffs of as much as 45% on Chinese BEV’s, something that is likely to become problematic for European exporters going forward.  As to US futures, just ahead of the data (8:00) markets are edging higher by 0.2%.

In the bond market, yields are continuing to rise around the world with Treasuries higher by 2bps this morning after a 5bp climb yesterday afternoon.  European sovereign yields are also much firmer, between 3bps and 6bps across the continent as concerns over inflation reignite.  Both the price of oil and the Chinese tariff story are driving this bond move.  As to JGB’s, they jumped 6bps last night, but that was more on the back of the US rise than any domestic news.

Oil (+1.4%) is continuing to rally as fears over an Israeli attack on Iranian assets builds.  This has helped the entire commodities complex with metals markets also firmer this morning, albeit only on the order of +0.25%. Nonetheless, the commodity higher story remains a fundamental one in my world view, especially as food prices are picking back up again around the world.  The UN’s FAO Food price index rose to its highest level in more than a year and looks for all the world like it has based and is now going to trend higher again.

Finally, the dollar is mixed this morning, with no defining theme here.  The pound (+0.35%) and MXN (+0.4%) have rallied while KRW (-0.5%) and AUD (-0.25%) have declined with the euro virtually unchanged.  My point is there is nothing specific to explain the movement.

And that’s really it.  We hear from a couple of more Fed speakers but since Powell on Monday cooled the idea of another quick 50bp cut, they have not given us much new guidance.  If I am correct and the data is strong, I expect bonds to suffer along with commodities while the dollar should gain.  Stocks are a little less clear.  However, if it is a soft number, you can be sure that the 50bp talk will dramatically increase and stocks and commodities will soar as the dollar slides.

Good luck and good weekend

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A Brand New Zeitgeist

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Although it’s the number two nation
Of late its shown real desperation
Seems Xi did appraise
The recent malaise
And ordered growth maximization
 
So, mortgage rates there have been sliced
And refi’s are now getting priced
It’s different this time
The bulls, in sync, chime
As Xi seeks a brand new zeitgeist

 

As China gets set to head off for a week-long holiday, President Xi wanted to make sure everybody there felt great and would start to spend money again.  His latest move came via the PBOC where they loosened the regulations regarding refinancing of home mortgages, now allowing them for everybody starting November 1st.  The key housing rate in China is the 5-year Loan Prime Rate, and while that has fallen steadily over the past two years, down nearly 1%, all the people who were swept up in the property bubble that began to burst three years ago have not been able to take advantage of the lower rates.  This is what is changing, and I presume there will be quite a bit of refi activity for the rest of the year.

So, to recap what China has done in the past week, they have cut interest rates across the board, guaranteed loans to be used for stock repurchases, changed regulations to allow lower down payments on mortgages for first and second homes and now allowed more aggressive refinancing of existing mortgages.  As well, they reduced the RRR, freeing up capital for banks, and relaxed rules for regional governments to be able to spend more.  Now matter how this ultimately ends up, you must give Xi full marks for finally figuring out that in a command economy, he needed to command some more stimulus.  The latest mortgage news has simply excited the equity market even more and there was another huge rally last night (CSI 300 +8.5%), which when looking at a chart of that index shows an impressive rally in the past two weeks, slightly more than 27%!

Source: tradingeconomics.com

However, before we get too carried away, a little perspective may be in order.  The below chart is the 5-year view, and while the recent rebound is quite impressive, it simply takes us back to the level from July 2023 and remains more than 30% below the highs seen in February 2021.  I might argue that even if all of these policies work out as planned, something which rarely ever happens, until the economic data start to prove it out, things here feel a bit overbought for now.  Putting an exclamation on the last point, last night China released its monthly PMI data which showed just why Xi has become so aggressive.  Every reading, from both Caixin and the National Bureau of Statistics, was weaker than last month and weaker than expected.  Xi certainly needed to do something.

Source: tradingeconomics.com

Gravity remains
An unyielding force, even
For Japanese stocks

Now, a quick mea culpa from Friday’s note as I was in error on my analysis of the Japanese stock market in the wake of the election of Ishiba-san.  It seems that the announcement of his victory was not made until after the cash equity market was closed for the day. At that time, Sanae Takaichi remained the odds-on favorite to win the vote, and the market was anticipating a more dovish approach to things. Hence, the idea of the return to Abenomics and a much slower policy tightening was welcomed by the equity market at the same time the yen weakened.  But with Ishiba-san’s surprise victory, all of that got tossed out the window.  

Of course, USDJPY was able to respond instantly, hence the sharp reversal in the market I showed in a chart on Friday.  However, the futures market sold off sharply on the election news and now that has been reflected in the overnight session with the Nikkei (-4.8%) giving back all the gains it had made in the previous two sessions in anticipation of a dovish turn.  So, as you can see in the below chart for the Nikkei 225 over the past week, we are basically exactly where things started before the Takaichi expectations built.  Truly much ado about nothing.

Source: tradingeconomics.com

As to the rest of the overnight session, beyond the Chinese data, we saw German state CPI readings which continue to fall as the German economy continues to slow appreciably.  We also saw UK GDP data, which was slightly softer than forecast, although at 0.9% Y/Y, still well ahead of Germany’s pace.  But otherwise, not very much else.  Last Friday’s PCE data was largely in line and quite frankly, most of the market seems to be focused on China right now, not the US, as that has become the newest idea on how to get rich quick.

So, here’s a quick recap of the session thus far.  Away from China and Japan, we saw more weakness than strength in Asia with both Korea and India falling more than -1.0%, although the rest of the region was mixed with much smaller moves.  Australia (+0.8%), though, benefitted from the China story as the price of iron ore, one of its major exports, rose 11% overnight on the idea that Chinese construction was coming back.  However, European bourses are under pressure this morning led by the CAC (-1.6%) with the rest of the continent also soft on the back of weaker earnings forecasts and announcements from European companies.  As to US futures, at this hour (7:20), they are pointing lower by -0.25%.

In the bond market, with all the excitement over renewed growth in China and continued tightening in Japan, yields are backing up slightly with virtually every G10 government seeing yields higher by 2bps this morning.  Ultimately, for Treasuries my fear is with the Fed cutting rates now and no real sign that the economy is slowing rapidly, we are going to see a quicker rebound in inflation than they are anticipating and that will not help the long end of the curve at all.

In the commodity markets, we are following Friday’s declines with further moves lower this morning as oil (-0.55%) continues to struggle on the weak demand story (this time from Europe, not China) while metals markets are also under pressure with all three biggies down (Au -0.75%, Ag -1.4%, Cu -0.7%).  This is a bit confusing for two reasons.  First, with the euphoria that the Chinese reflation story has generated, I would have expected copper to continue to rally alongside iron ore, but second, the dollar is softer today, and that generally supports the metals markets.

So, a quick look at the dollar shows the DXY is looking to test 100.00, a level it last briefly touched in July 2023 but spend most of 2020 and 2021 below.  This is concurrent with the euro (+0.3%) testing 1.12 and the pound (+0.3%) testing 1.35, with the former showing virtually the same pattern as the DXY and the latter making new highs for the past two years.  But there is some schizophrenia in the G10 with JPY (-0.2%), CHF (-0.3%), NOK (-0.35%) and SEK (-0.2%) all under pressure today.  While NOK and SEK make sense given the commodity moves, that doesn’t explain gains in AUD and NZD.  Some days are just like that.  In the EMG bloc, in truth, the dollar is showing more strength than weakness with ZAR (-0.35%), CNY (-0.2%) and KRW (-0.15%) although MXN (+0.3%) is bucking that trend.  On the one hand, it is quite confusing to see so many contrary moves amongst the currencies that typically track closely together.  On the other, though, none of the moves are very large, so there can be idiosyncratic explanations for all of this without changing the big picture story.

On the data front, we get a bunch of stuff culminating in NFP on Friday.

TodayChicago PMI46.2
 Dallas Fed Manufacturing-4.5
TuesdayISM Manufacturing47.5
 ISM Prices Paid53.7
 JOLTS Job Openings7.67M
WednesdayADP Employment120K
ThursdayInitial Claims220K
 Continuing Claims1837K
 ISM Services51.6
 Factory Orders0.1%
FridayNonfarm Payrolls140K
 Private Payrolls120K
 Manufacturing Payrolls-5K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.8% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.9%

Source: tradingeconomics.com

As well as all that, we hear from nine different Fed speakers over 13 different speeches this week, including Chairman Powell this afternoon at 2:00pm.  It’s not clear that we have learned enough new information for Powell to change his tune although given all of China’s moves there could be some belief that the Fed doesn’t need to be so aggressive.  Now, as of this morning, the Fed funds futures market is pricing a 41% probability of a 50bp cut in November and a 50:50 chance of a total of 100bps by the end of the year.  but, if China is easing so aggressively, does the Fed need to as well?

Right now, the story is all China.  However, I still detect a lot of positive sentiment in the US and expectations that the Fed is going to continue to ease and boost growth, inflation be damned.  It still strikes me that you cannot be bullish both stocks and bonds here as they are going to respond quite differently to the future.  As to the dollar, it is clearly on its back foot as the pricing of further Fed ease undermines it for now, but remember, as other central banks follow the Fed more aggressively, any dollar declines will be muted.

Good luck

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Harshly Depressed

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The Payrolls report was a test
That Rorschach would clearly have blessed
The bears saw the data
As proof that the rate-a
Of growth would be harshly depressed
 
The bulls, though saw only the best
Of times and, their narrative, pressed
In their point of view
The Fed will come through
And stick the soft landing unstressed

 

With the Fed now in its quiet period, the market is trying to come to grips with what to expect going forward.  But before we look there, a quick recap of Friday’s NFP report, dubbed ‘the most important of all time’ by some hysterics, is in order.  By now you almost certainly know that the headline number was modestly weaker than expected, but that the revisions lower in the previous two months weighed on the report.  However, the Unemployment Rate ticked lower to 4.2% and wage growth edged higher by 0.1%.  Perhaps one of the worst pieces of the report was that the Manufacturing payrolls declined by -24K, the second worst outcome in the past 3 years, and hardly a sign of a strong economy.

The point is that depending on one’s underlying predispositions, it would be easy to come away with either a hopeful or dreary perspective after that report.  And, in fact, I would argue that the report changed exactly zero minds as to how the future is going to evolve, at least in the analyst community.  The biggest sentiment change came in the Fed funds futures markets where the probability of a 50bp cut next week fell to just 25%.  You may recall that particular probability has ranged from one-third up to one-half and now down to one-quarter just over the past week.  I think that is an excellent metaphor regarding both the uncertainty and the confidence in the economy’s growth and the Fed’s likely moves.  In other words, nobody has a clue (this poet included.)

One other observation is that reading headlines from various financial writers and publications shows that the world is still virtually split 50:50 on whether we are going to see a recession (with some calling for stagflation) or the Fed is going to stick the soft landing.  FWIW, which is probably not that much, my personal view is the recession is still going to arrive, but given how aggressively the government continues to spend money, we may need to redefine the concept of recession.  Consider if we look at only the private-sector and whether it is in recession and if that is enough to drag the overall economy, including the government spending, down with it.  In fact, given the 6+% deficits that the government is running, it may be realistic to consider this is exactly what is ongoing right now, although not to the extent that the totality of the economy is sinking.

Now that I’ve cleared that up 🤣, let’s look at how markets have been processing the NFP report and what we might expect going forward.  I’m sure you all know how poorly equity markets behaved on Friday, with US markets falling sharply led by the NASDAQ.  That negativity flowed into the Asian session with the Nikkei (-0.5%), Hang Seng (-1.4%) and CSI 300 (-1.2%) all under pressure.  While the Chinese data overnight, showing inflation rising slightly less than expected at 0.6% Y/Y while PPI there fell more than expected at -1.8%, continues to show that the Chinese economy is faltering and there is still no fiscal stimulus on the way, the Japanese data was generally solid with GDP growing 0.7% Q/Q, much higher than Q1 although a tick lower than the initial estimate.  The upshot is there is further slowing in China while Japan is rebounding.  I guess the question is why would both nations’ equity markets decline.  Arguably, the Chinese story is one of lost hope that the economy will be able to rebound in any timely fashion from an investor’s perspective while the Japanese story is that given the rebound in growth, the BOJ is far more likely to continue on the policy tightening path, thus undermining Japanese corporate earnings.

There once was a banker from Rome
Whose tenure preceded Jerome
“Whatever it takes”
Prevented the breaks
In Europe that would have hit home
 
But now he’s an eminence grise
Who answered the Eurozone’s pleas
To write a report
And help to exhort
Investment to beat the Chinese

But that was the Asian story.  In Europe, the story is far more optimistic with gains across the board on the order of 0.6% – 0.8% on all the major bourses.  The big news here is that Mario Draghi, he of “whatever it takes” fame from his time as President of the ECB and his famous comments that save the Eurozone and the euro back in 2012, was asked to evaluate the Eurozone and help come up with a plan to shake the economy from its current lethargy.  As a true technocrat, his view was that more government investment in key areas was critical.  On the positive side, he did suggest a reduction in regulations, although that really goes against the grain in Europe.  However, it appears that equity investors viewed the report positively as there has been no data or other commentary that might have catalyzed a rally there.  As to US futures, they are bouncing this morning after a rough week last week, with all three major indices higher by at least 0.6% at this hour (6:45).

In the bond market, after a week when yields fell around the world, we are seeing a bounce this morning everywhere.  Treasury yields (+4bps) are actually the laggard with European sovereigns all rising between 6pbs and 7bps and even JGB yields jumping 5bps overnight.  Of course, the Japan story is the solid growth numbers encouraging the belief that Ueda-san will raise rates again by December, while the European story is a combination of expectations of more European debt issuance (Draghi called for more European debt, rather than individual national debt) as well as the influence of Treasury yields.

In the commodity markets, oil (+0.8%) is bouncing this morning but remains well below $70/bbl and this looks far more like a trading bounce than a change in perspective.  The weak Chinese economic data continues to weigh on this market and if OPEC changes its stance and decides to restart production again later this year, it does appear that we could have a move much lower still.  As to the metals markets, they are firmer this morning although that is a bit surprising given the generally weak economic sentiment and the fact that the dollar is following yields higher.  Perhaps the biggest surprise is copper (+1.9%) which based on everything else, should be falling today.  Once again, markets are not mechanical and things occur, about which very few know, but have big consequences.

Finally, the dollar is much stronger this morning with the DXY (+0.5%) rejecting the push lower, at least for now.  This strength is broad-based with NOK (-1.1%) and JPY (-1.0%) the worst performers in the G10 despite the higher oil price and growing confidence that the BOJ will raise rates again.  But every G10 currency is weaker as are virtually every EMG currency with only MXN (+0.4%) bucking the trend, although that seems more of a trading response to the fact that the peso fell through 20.00 (dollar rose) for the first time in nearly two years on Friday.

As to the data this week, CPI is the biggest US number although we also hear from the ECB on Thursday.

WednesdayCPI0.2% M/M (2.6% Y/Y)
 -ex food & energy0.2% M/M (3.2% Y/Y)
ThursdayECB rate decision4.0% (current 4.25%)
 Initial Claims230K
 Continuing Claims1850K
 PPI0.1% (1.8% y/Y)
 -ex food & energy0.2% M/M (2.5% Y/Y)
FridayMichigan Sentiment68.0

Source: tradingeconomics.com

I guess the question is, does the CPI matter any more?  Given the Fed has essentially declared victory and turned its focus to employment, Wednesday’s number would have to be MUCH higher to matter.  With that in mind, I suspect that this week in FX will be far more focused on the equity market than on the macro situation.  If the equity rebound continues, I expect that the dollar will start to cede this morning’s gains, but if yields reverse their past two weeks’ sharp decline and the dollar continues this morning’s strength, then equity investors will feel some more pain.

Good luck

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A New Pox

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The interest rate doves are excited
That job growth in August was blighted
If that was the case
The Fed may embrace
Enough cuts to leave them delighted
 
But if they’re correct, what of stocks?
Will weak data be a new pox
On earnings and growth
And undermine both
With stocks falling onto the rocks?

 

As far as anyone can tell, there is only one thing that matters today, the payroll report.  Let’s set the table with the latest median forecasts:

Nonfarm Payrolls160K
Private Payrolls139K
Manufacturing Payrolls0K
Unemployment Rate4.2%
Average Hourly Earnings 0.3% (3.7% Y/Y)
Average Weekly Hours34.3
Participation Rate62.6%

Source: tradingeconomics.com

I’m sure you all remember that last month we got a surprising, and disappointing, reading of 114K for the headline number and then we subsequently got those massive revisions from the BLS which indicated that they had overstated job growth by more than 800K over the year from April 2023 through March 2024.  As well, yesterday’s ADP Employment data showed private job growth of a below expectations 99K with a revision lower to the previous month’s number.  Certainly, some of the data we have seen is pointing in the direction of a weaker outcome.  However, if one looks at the Initial and Continuing Claims data, neither of those series are pointing to a significant weakening in the labor market, although it has cooled somewhat since last year.

Since the last NFP report, 10-year Treasury yields have declined by 28bps and now sit at 3.70% this morning.  If you compare that to the current Fed funds rate of 5.375%, the implication is that rates are going to fall by at least 160 basis points over the next two years.  In fact, we are starting to see some analysts (Citi) call for nearly that many cuts by the end of 2024!  It strikes me that 150bps of cuts by December 2024 would only occur in response to a significant slowing of US economic activity, in other words, the long-awaited recession. Now, if the Fed were to cut that aggressively without a clear decline in the economy, it would certainly open the door to much higher inflation ahead.  After all, why add liquidity and ease policy if the economy continues to cruise along at a decent clip?

The upshot is that it appears, at least to this poet’s eyes, that the bond market is way ahead of itself with respect to potential Fed rate cuts.  Either that or the stock market is completely mispriced for the potential future earnings results of its components.  The one consistent outcome from all recessions is that corporate earnings growth slows dramatically.  Given that current equity prices embody P/E multiples near historically high levels (see chart below of Cyclically Adjusted Price Earnings for the S&P 500), if the E in that fraction declines, you better believe that so will the P.

Source: lesswrong.com

What will this mean for other asset classes, notably commodities and the dollar?  Here we need to consider the driver of the potential rate cuts in question.  If the US economy is clearly slowing dramatically and the Fed is responding by cutting rates aggressively, I would expect that the dollar will come under real pressure, at least initially, as the Fed is likely to be more aggressive than other central banks.  However, remember that the market is already pricing in significant rate cuts, so given the reality that if the US enters recession, most of the rest of the world is going to see much slower economic growth with their central banks easing policy as well, I would not look for a dollar decline of historic proportions.  Another 5%-8% seems viable but looking for the euro at 1.50 or the pound at 1.75 or the renminbi at 6.00 seems unrealistic.  The one outlier here is the yen, of course, where a situation with declining US equity prices, and correspondingly declining risk asset prices all over the world, could easily see Japanese investors run home with their money and USDJPY could well fall back to the 120 level or even lower in that scenario.

As to commodity prices, I expect the initial move would be lower as concerns about growth would imply falling demand for the key commodities oil and copper.  Gold, however, is a different animal and I imagine that we could see more uptake here as a weaker dollar and growing fear drive more retail buying of the barbarous relic.

Of course, if the data this morning is firmer than expected, all these bets are off.  In fact, that appears to be the biggest risk in markets today, a strong NFP number with a decline in the Unemployment Rate.  Market participants seem quite confident that the slowdown is coming and that the Fed is going to stick the soft landing.  That is the only explanation for the fact that equity markets, despite yesterday’s modest declines, continue to trade near all-time highs regardless of the indications that US economic activity is slowing somewhat.  The belief seems to be that the Fed will be able to cut rates the appropriate amount to prevent a collapse without triggering a renewed burst in inflation.  And maybe they will.  But given the fact that equity ownership is at record high levels already, the question becomes who is going to buy from here.  Any misstep by the Fed, where it becomes clear that the outcome will be worse than a soft landing (either a recession or higher inflation or both) is going to weigh heavily on equity and other risk markets.

So, as we await the big news, a quick review of the overnight session shows that most equity markets in Asia (Nikkei -0.7%, CSI 300 -0.8%) and Europe (DAX -0.4%, FTSE 100 -0.3%) are lower, following the US session.

In the bond markets, yields everywhere continue to decline with Treasury yields (-3bps) continuing their fall while European sovereign yields are all softer by between -4bps and -5bps this morning.  Even JGB yields (-3bps) are continuing lower as the global bond markets seem to be implying that economic activity is waning everywhere.

In the commodity markets, oil (+0.5%) is a touch firmer but remains below $70/bbl and has not shown any real strength despite a dramatic inventory drawdown reported by the EIA yesterday.  OPEC+ has explained they are not going to restart production next month and will wait until at least December before doing so, but based on the price action of oil, I will wager they will delay it again then.  Metals markets are little changed this morning after rallying yesterday during the US session, but like almost every market, all eyes are on the tape at 8:30 when NFP is released.

Finally, the dollar is a touch softer net, with traders seemingly preparing for a weak number.  But the movements are so small that the largest is JPY (+0.25%) which is the result of a combination of fear and the broader dollar weakness I think.    Here, too, we will learn much based on the data, so not much to do until then.

In addition to the payroll report we will hear from NY Fed President Williams and Governor Waller this morning as they will be the last to speak ahead of the Fed’s quiet period.  Williams is due at 8:45, so his speech is prepared, but Waller will have time to alter things if the data is a significant surprise given he doesn’t speak until 11:00.

And that’s really it for today.  It’s all NFP all the time.  While it is very easy to believe that a weak number is coming, it is also clear to me that the pain trade would be a strong number.  As such, I have a sneaking suspicion we could see something much firmer than forecast, maybe 200K with the Unemployment Rate ticking back down to 4.1%.  That would be the real surprise.

Good luck and good weekend

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JOLTed

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The market, on Wednesday, was JOLTed
By data, and traders revolted
The jobs situation
Has changed the narration
And helped Jay, his door be unbolted

 

What door you may ask?  Why, the door that leads to a 50bp rate cut at the FOMC meeting in two weeks.  Already, the Fed funds futures market is pricing in a 43% probability of a 50bp cut, up from a one-third probability on Tuesday morning.  Remember, everything now revolves around the labor market, and yesterday’s JOLTs data was not only worse than forecast, at 7.67M (forecast 8.1M), but last month’s was revised lower by nearly 200K jobs as well.  Remember, too, that tomorrow the NFP report is released with current forecasts centering on 160K, higher than last month but well down on what we have been seeing all year prior to the August report.

There are many analysts who have been calling out Powell and the Fed for making a policy error and holding rates too high for too long.  Perhaps they are correct.  But so much of the decision to cut rates relies on the idea that inflation is well and truly dead, or at least terminal, and if that assumption is incorrect, there will be hell to pay.  The last time the US saw inflation of the same magnitude that we have seen in the past two years, then Fed Chair, Arthur Burns, cut rates too early and inflation exploded higher, peaking at a higher rate than the first rise.  In fact, he did that twice, with inflation spiking three times throughout the 1970’s and early 1980’s.  

Source: FRED database

Powell has been very clear that he is trying to channel Paul Volcker and not Arthur Burns, but if he cuts rates, he opens himself up to a much less satisfactory outcome.  There have been many charts of the following nature showing the parallels of the 1970’s to recent price levels and it is entirely possible we see another wave higher if the Fed cuts.

Source: Real Investment Advice

As things currently stand, I would contend that the Fed’s focus is almost entirely on employment, hence the market response to yesterday’s weaker than forecast JOLTs data.  This implies that this morning’s ADP and Initial Claims data have the chance to really move things.  It also means that tomorrow’s NFP data remains a critical focus for all markets.

In the meantime, market activity overall could well be described as choppy.  While US equity markets opened lower yesterday, following the sharp declines on Tuesday, they closed mixed with limited overall movement. The fears in the semiconductor sector, which were fanned by a, since denied, report that Nvidia had been subpoenaed in an anti-trust investigation, has stopped falling and there are still numerous stories about how much Capex the big 4 tech companies are going to invest this year in all things AI.  Traders and investors are looking for the next big clue which is why I expect limited activity until tomorrow morning’s data release.

Asian equity markets were similarly mixed overnight with some gainers (Australia +0.4%, Taiwan +0.45%, CSI 300 +0.2%) and some laggards (Nikkei -1.05%, KOSPI -0.2%, Hang Seng -0.1%), as no clear direction presently exists.  Late last week, BOJ Governor Ueda sent a letter to the Diet explaining he still expected to raise interest rates if the economy progressed as expected, and that has a number of analysts calling for another leg down in USDJPY and further Nikkei weakness.  But it seems that is a big IF.  With economic activity clearly slowing around the world, it is not hard to believe that the same will be true in Japan and conditions for further rate hikes may not develop.  As to European bourses, the picture here is mixed as well with the CAC (-0.5%) lagging while Spain’s IBEX (+0.7%) is having a pretty good day.  Both the DAX (+0.2%) and FTSE 100 (+0.1%) are modestly higher despite weak Construction PMI data, perhaps both anticipating further policy ease.

In the bond markets, though, the direction of travel is clear for now with yields everywhere having fallen sharply yesterday and simply consolidating today.  After the JOLTs data, Treasury yields fell 9bps (2yr yields fell 12bps and the 2yr-10yr spread is now flat), although this morning it has bounced by a single basis point.  European sovereign yields slipped yesterday as well, between -3bps and -5bps, after the JOLTs data and this morning have backed up by 1bp across the board.  As to JGB yields, they edged lower by -1bp last night and remain a good distance from the 1.00% level despite the recirculated Ueda comments.

In the commodity markets, oil (+0.2%) which had bounced a bit yesterday morning, ceded those gains as the session wore on and is currently below $70/bbl.  While talk of OPEC+ starting up more production has faded, the weak economy / slowing demand story, especially the weak Chinese economy story, remains front and center and continues to weigh on the price.  Meanwhile, in the metals markets, gold (+0.7%) continues to shine overall as the growing sentiment for a 50bp Fed funds cut helps all commodities, but especially this one as concerns over the dollar’s ability to maintain its purchasing power remain rife.  But this morning we are seeing silver (+1.4%) and copper (+0.2%) higher as well, although the latter seem more trading than fundamentally based.

Finally, the dollar is under some modest pressure this morning, which given the movement in yields and rate cut expectations, should be no surprise.  In the G10, virtually all the movement has been less than 0.2% with CAD (-0.1%) the laggard after the BOC cut rates by 25bps yesterday as widely expected.  This morning the yen is also a touch softer, but that is after a sharp rally yesterday of more than 1%, so this morning feels like a trading bounce.  In the EMG bloc, the picture is a bit more mixed with ZAR (+0.5%) the leader this morning on both the gold price as well as economic data showing the Current Account deficit shrank dramatically in Q2 in a pleasant surprise.  On the flipside, MXN (-0.3%) is lagging as the market absorbs recent modestly weaker than expected economic data on Unemployment and Fixed Investment.

Which brings us to today’s data releases.  We start with ADP Employment (exp 145K), then Initial (229K) and Continuing (1870K) Claims.  As well, at 8:30 we see Nonfarm Productivity (2.4%) and Unit Labor Costs (0.8%).  Then, at 10:00 comes ISM Services (51.1) with the final set of data the EIA oil inventories at 11:00 with net further drawdowns forecast.  There are no Fed speakers on the docket today, but we are supposed to hear from two tomorrow after the NFP data.

Absent a big surprise in either ADP or Initial Claims, with the former more likely than the latter, I suspect that it will be another choppy day as all eyes focus on NFP tomorrow.  However, the one thing that seems likely is the dollar has further to decline within the current market narrative of more rate cuts sooner by Powell and the Fed.

Good luck

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Quite Drear

Posted on by

The world is apparently ending
‘Cause stocks just will not stop descending
So, calls have increased
For fifty, at least
And government to up its spending
 
The cause of this rout is unclear
Though data of late’s been quite drear
If growth is much slower
Then stocks can go lower
And that, my good friends, triggers fear

 

The only topic on market practitioners’ lips this morning is the ongoing sell-off in equity markets around the world.  The US returned after the Labor Day holiday and sold equities aggressively with the NASDAQ falling more than 3.25% and the other major indices all declining at least -1.5%.  This led to a disastrous opening in Asia with the Nikkei (-4.25%) leading the way down as fears of a repeat of the early August rout were rampant.  While things never got to that point, we did see both Korea and Taiwan markets fall even more than Tokyo with declines between -4.5% and -5.0%.  This negative sentiment is alive and well in Europe with every market lower there, although the declines are less pronounced, between -0.7% and -1.1%, and US futures are lower this morning as well, down anywhere between -0.3% and -0.6% at this hour (6:30).

So, what’s happening?  Is there something new that was previously unknown?  The first place to look is the data which saw ISM manufacturing rise less than expected to 47.2, a number that historically represents recession, with the added problem of the ISM Prices Paid reading at 54.0, higher than expected and a potential harbinger that inflation may not be declining as quickly the Fed expects.  Add to that a weaker than expected Construction Spending result, -0.3%, and you have the makings of some potential dreariness on the economic front.  The problem with this thesis is that the equity market opened prior to the releases and was already down -1.0% by the time they hit the tape.

Perhaps it is simply the end of summer blues as historically, September seems to be the worst month for equity performance, although I don’t put much credence in the idea that just because something has happened at a particular time before in markets, it will happen again.  Seasonality is real, especially in things like commodities, but is technology really seasonal?  And tech was leading the way lower.

Of course, markets have a long history of simply moving up and down over time without any specific catalyst.  Positioning and changes in sentiment evolve over time and sometimes they combine to move markets more than would otherwise be expected.

From a macro perspective, I believe that this week will teach us a great deal as the ISM data along with the employment data will give further evidence of the potential for that widely hoped for soft-landing or whether things are declining more rapidly.  Certainly, we continue to read of problems arising elsewhere in the world with the VW news about potential plant closings and weakness in Chinese PMI data overnight indicating that President Xi may need to do more to support his economy.  The thing about sentiment is that it doesn’t necessarily need a clear catalyst to change.  

Source: Horace.org

In the end, I’m hard-pressed to define anything that has changed since Friday afternoon.  However, it appears that sentiment is clearly far more circumspect about the future of economic activity and how that will be able to support the current extremely high valuations of so many companies.  As Ace Greenberg, then Chairman of Bear Stearns said when asked about what happened in the wake of Black Monday in 1987, “markets move, next question.”  

To this poet’s eyes, the big picture remains that economic activity is continuing to slow down around the world, and that price pressures in the US are lagging that decline.  It appears that China is flooding the global markets with manufactured goods as domestic consumption there remains lackluster, thus goods price inflation remains under control.  However, there is no sign that central banks or governments are reducing the amount of available liquidity which is finding its way into services pricing, and that is a much larger part of the economy, hence likely to sustain inflation readings going forward.  I’m confident the Fed will cut rates in 2 weeks’ time, but I’m also highly concerned that the result will be inflation remaining higher than ‘target’ going forward.  The one thing on Powell’s side right now is the decline in oil, and by extension gasoline (see chart below where gasoline futures fell >15% in August), prices, which will help push headline numbers lower.

Source: tradingeconomics.com

So, how did other markets behave while stocks were getting hammered?  Treasury yields fell 9bps yesterday after the data release and are lower by another 2bps this morning.  Clear risk-off behavior.  In Europe, sovereign bonds are all seeing declines this morning between -4bps and -5bps after declines yesterday as well and even JGB yields are lower by -4bps this morning.  investors are running for the relative safety of fixed income right now.

In the commodity markets, oil (+1.3%) is bouncing off the lows seen yesterday, when WTI traded down to $69.15/bbl briefly, as the recent decline has OPEC rethinking their decision to start increasing supply next month.  You may recall that when they cut production, they kept renewing that decision every few months but were set to slowly increase production again starting in October.  However, the sharp decline in the price of oil has them backtracking now.  The problem is that the evidence of slowing economic activity is weighing on the price here.  I suspect that until there is clear evidence that economic activity is rebounding, oil could remain under pressure.  In the metals markets, they were also sold off sharply yesterday, but have basically stopped declining for now, consolidating those losses.  Gold continues to be the best performer as the combination of risk-off and ongoing central bank purchases are supporting it well enough.  This is clearer if you look at the price of gold in other currencies, where it continues to make new highs.  But the industrial metals will have a difficult road ahead with slowing growth.

Finally, the dollar, after a strong rally yesterday, is little changed this morning.  In fact, most currencies are within a few basis points of their closing levels yesterday with only MXN (-0.35%) and SEK (-0.3%) showing any semblance of weakness while ZAR (+0.3%) and JPY (+0.3%) are the biggest gainers.  The yen story is clearly the haven aspect with Japanese investors bringing funds home.  Both the peso and krona are likely feeling a little pressure from the declines in commodity prices, while the rand has bucked that trend after reporting higher than expected GDP growth in Q2 and higher Business Confidence this morning.

Data today brings the Trade Balance (exp -$79.0B) at 8:30 and then the JOLTs Job Openings (8.10M) and Factory Orders (4.7$, -0.2% ex transport) at 10:00.  We also will see the BOC cut rates 25bps this morning, although nobody is paying much attention to Canada with all eyes on the Fed and ECB.

While a lower opening seems baked in, I wouldn’t be surprised to see a bounce of some sort by this afternoon as market participants seem to have a hard time allowing prices to fall for too long.  But there appears to be ample reason for further equity declines and further risk reduction, which historically has supported the dollar.

Good luck

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Taboo’s Been Broken

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The calendar’s now turned the page
So, summer has moved to backstage
Thus, risk is retreating
And people are treating
The autumn as though it’s a phage
 
Meanwhile, German voters have spoken
And fears are a new trend’s awoken
Political leaning
Is rightward, thus meaning
A longstanding taboo’s been broken

 

Arguably, the biggest story from the long weekend was the voting in two German states, Thuringia and Saxony, where the Alternative for Germany (AfD) won one-third of the vote in each state thus destroying the traditional political calculus.  AfD is the right-wing party that has been described as neo-nazi and fascist regularly by the media (of course, the Republican party in the US has also been described in those same words), but more importantly, represents a complete rejection of the current status quo in Germany.  But perhaps the bigger concern for the German political elite is that an entirely new party, the Sarah Wagenknecht Alliance (BSW) won 15.5% and 11.5% of the votes in those two states respectively.  The BSW is a far-left party that espouses some of the same opinions, notably on immigration, as the AfD.  In other words, nearly half the electorate voted against the traditional parties as apparently people in Germany are not very happy.

To complete this story, the issue is that AfD, with which all parties have sworn against working in the parliament, has enough votes for a blocking minority, meaning they can (and almost certainly will) prevent the appointment of new judges and any constitutional changes that they don’t like.  As I said, the political calculus in Germany has changed significantly.  In fact, the parties in the current federal coalition (SPD, FDP and the Greens) saw their share of the vote fall to just 10.3% and 12.4%, respectively, in the two states.

I highlight this issue because it is indicative of the ongoing changes in Europe that may well undermine the single currency’s potential, and assumed, future strength based on the dollar’s assumed future weakness.  After all, whether or not the Fed embarks on a long period of rate cutting, or simply implements a token cut or two, given the political upheaval in Europe, is that going to be a good place for industry to invest?  Their energy policies have been hugely counterproductive, and Europe has about the most expensive energy in the Western world.  In fact, Volkswagen AG, has indicated it may be closing plants in Germany for the first time in the company’s long history.  It has simply become too expensive a place to do business.

This is not to imply that the euro (-0.25%) is going to collapse imminently.  Germany is only one of twenty nations in the Eurozone, albeit the largest economy by far.  But the story in Germany is not isolated to that nation.  We have seen similarly poor energy decisions and similar voter responses in other nations (notably the Netherlands, France and Austria). Whatever you think about the dollar, it is very difficult to get excited about the euro in my view.  

But let’s turn our attention to risk writ large.  I keep reading that September is historically the weakest month in the US equity markets and given the number of sources of strong repute that have written such, am willing to take that at face value.  As well, apparently, US households are the most bullish equities, or at least have the largest equity positions as a portion of their assets, in history (see chart below from @InvariantPersp1 on X).

It strikes me that the combination of extreme long positioning and a historical tendency for weakness may open up some downside in the equity markets, at least for a period.  Of course, if you are old enough to remember the yen carry trade debacle all the way back at the beginning of August, you know that even if we see a big downdraft, it can be reversed quite quickly.  And given both the Fed and ECB (and BOE) all meet later this month, it is not hard to believe that if equities were to decline sharply before their meetings, we could see larger than expected rate cuts across the board.  For now, the market continues to price a one-third probability of a 50bp cut by the Fed while expectations are for the ECB to cut in September and a 50% probability of an October cut.  

Net, do not be surprised if September has nearly as much volatility as August as the idea of max-long equity exposure into a slowing economy with still high inflation feels like a tenuous position.  We shall see.

Ok, let’s try to catch up to overnight activity, which has generally been of the risk-off variety.  Since Friday’s close, the story has been more negative than positive with Japanese (-1.1%) and Chinese (-1.5%) markets falling amid slightly softer than expected data and a more general malaise.  In Europe, too, things have been soft with today’s declines ranging from -0.2% (CAC) to -0.8% (Spain’s IBEX) and everything in between.  This is completely in sync with US futures markets which are all lower by at least -0.6% at this hour (7:20).  

Interestingly, while risk is under pressure, the traditional havens of government bonds are not seeing much benefit with Treasury yields edging higher by 1bp and similar moves throughout much of Europe although both Gilts and Bunds have seen yields edge lower by 1bp.  JGB yields have also edged higher by 1bp and are creeping, ever so slowly, back toward 1.00%.  This follows comments by BOJ Governor Ueda that he really means it when he says they BOJ will normalize policy.  The caveat is that will occur only if the economy meets their expectations with growth rising and inflation remaining high.  However, inflation continues to be fairly stable with services inflation actually declining there, thus undermining his message somewhat.

In the commodity markets, oil (-2.3%) has been taking it on the chin for the past week as the combination of the weaker demand story on a slowing global economy combines with growing confirmation that OPEC+ is going to end their production cuts starting next month, thus adding to supply, has weighed heavily on prices.  Back in January, I wrote a piece discussing my change of view on the long-term prospects for oil prices, which I flipped from bullish to bearish.  The essence of the piece was that there is plenty of oil around, it is political decisions that prevent its extraction.  As the politics of everything around the world continues to quickly change, I think this is an important baseline to keep in mind, although that doesn’t mean we won’t see short term spikes in oil’s price.  However, right now, it looks awful on the charts.

As to the metals markets, they have been under some pressure lately as well, notably copper and silver, with each of those falling more than 5% in the past week.  Gold, however, continues to find buyers as the bigger picture concerns of monetary debasement combine with still active central bank purchasers to support the barbarous relic.

Finally, the dollar is quite strong this morning, rallying against almost all its counterparts.  The commodity bloc are the laggards with AUD (-0.8%), NOK (-0.75%), NZD (-0.7%) and SEK (-0.5%) all suffering in the G10 with only JPY (+0.5%) rallying, arguably playing its haven role.  In the EMG bloc, ZAR (-0.8%), and the CE4 (-0.5% each) are under pressure along with KRW (-0.4%) and even CNY (-0.2%).  LATAM is the surprise with MXN (-0.1%) little changed at this hour.

On the data front, this is a big week that culminates in the payroll report on Friday.

TodayISM Manufacturing47.5
 Construction Spending0.0%
WednesdayTrade Balance-$78.9B
 JOLTs Job Openings8.10M
 Factory Orders4.6%
 -ex Transport-0.2%
ThursdayADP Employment145K
 Initial Claims230K
 Continuing Claims1870K
 Nonfarm Productivity2.4%
 Unit Labor Costs0.9%
 ISM Services51.1
FridayNonfarm Payrolls165K
 Private Payrolls138K
 Manufacturing Payrolls0K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.7% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.6%

Source: tradingeconomics.com

Obviously, all eyes will be on NFP as the Fed has clearly turned its primary attention to the employment side of its mandate.  However, don’t fall asleep on the JOLTs data tomorrow, as that has also been part of Powell’s calculus. (seems there was a lot of calculus today, I hope you all managed to get through that in college 😂).  Remember, too, that CPI comes next week and then the FOMC meeting is the following week, so there is no respite.

This morning, risk feels unwanted.  With equity markets still within spitting distance of their all-time highs, it appears there is ample room for some down days ahead.  Of course, Friday will be key.  Regarding the dollar, for now, I believe the bounce continues.  But Friday will dictate the medium term, at least until the FOMC meeting.

Good luck

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