A Shocking Surprise

Posted on July 8, 2024 by fxpoet

On Wednesday the data was dreck
On Friday, twas more of a wreck
The read’s now that growth
Is set for more slowth
Will this break the Fed’s bottleneck?

Meanwhile, in a shocking surprise
In France, tis the Left on the rise
But no party there
Is willing to share
Their power and reach compromise

And while day-to-day matters greatly
The populists, worldwide, are lately
Ascending to power
And ready to shower
Their voters with cash profligately

This morning, the world is a very different place than it was when I last wrote. Broadly speaking there are three key stories of note; US data was much weaker than expected, the French election surprised one and all with the coalition of hard-left parties winning the most seats, although no group is even close to a majority of the French parliament, and the questions over President Biden’s capacity to remain on the job, let alone his ability to be president for the next four years, have been coming fast and furious from the mainstream media, many Democrats in Congress and the Democratic donor base.

So, let’s address them in order. On the US data front, arguably the best release was the Trade Balance printing at a slightly smaller deficit than forecast by the Street. Otherwise, ISM Services was miserable at 48.8, Factory Orders fell -0.5%, -0.7% ex Transport, and Initial and Continuing Claims both rose to new high levels for the cycle. And that was just Wednesday. On Friday, while the headline NFP number did beat forecasts, once again, there were major revisions lower to the past 3 months, -111K, the Unemployment Rate rose to a new high for the cycle at 4.1%, its highest level since November 2021 and a continuation of the recent uptrend in the data. A look at the chart below seems to show a defined trend higher in the Unemployment Rate, and as I explained last week, this is a statistic that tends to have momentum once it gets going. I would argue this number is going to continue to climb higher as the year progresses.

Source: tradingeconomics.com

As well, the biggest piece of the report was an increase of 70K Government jobs, compared to just 136K Private sector jobs and a loss of -8K in Manufacturing. The one thing we know is that government jobs do not add to economic growth as they are the least productive of all.

The upshot is that based on the data from Wednesday and Friday, the story of still strong growth in the US has clearly been called into question. Will Powell, who testifies before Congress this week, pay homage to the weaker data and hint that perhaps higher for longer has reached its sell-by date? While this is only one set of data, and he has been adamant that he needs to see several months of data, the market is becoming more convinced that a September rate cut is coming as the Fed funds futures probability of that cut has risen to 75%. It should be an interesting week given both the CPI release and the Powell testimony.

On to the French and what was truly a shocking outcome, at least on one level. After the first-round last week, the abject fear by the press in France, and all of Europe, of the idea that a right-wing government could come to power in a key European nation resulted in the numerous parties on the Left working with President Macron’s centrists to try to prevent any such thing from happening. As such, they strategically pulled candidates from different seats in order to prevent splitting the vote and allowing Marine Le Pen’s RN party from achieving a majority. And they were effective in that. Alas, they now have a completely unworkable setup where no party has anywhere close to a majority and so passing any legislation will be nigh on impossible.

Jean-Luc Melenchon, the Left’s most well-known proponent, and leader of a sect called France Unbowed, has declared that he wants his party’s agenda implemented full-on. That means reducing the retirement age, raising wages and establishing price controls on power and energy as well as expanding wind and solar power. Of course, the math on that won’t work, even if they raise taxes, but that certainly never stopped a populist once in office.

Interestingly, while on the surface it would have been easy to conclude that French OATs would see yields rise vis-à-vis German Bunds as fears of larger government deficits build, that has not yet been the case. In fact, this morning, yields across Europe are little changed as bond traders and investors seem to be ignoring the situation. The rationale here is that given no group has a majority, the probability of having any party’s wish list implemented by parliament is vanishingly small. The most likely outcome is a year of muddling through, with no decisions of any substance made and another election held next summer. (By law, President Macron must wait one year after an election to call a second one.) In fact, it will be very interesting to see how a prime minister will even be elected in parliament as it seems unlikely that any individual will have support of a majority of the chamber.

As to the other potential impacts of this election, neither French equities nor the euro have shown any substantive movement as traders in both these spaces see the same situation, a very low probability of any substantive policy changes given the lack of parliamentary leadership. Ultimately, while the political ramifications in France are large, the economic ones are not as obvious yet.

This is different than in the UK, where Keir Starmer and his Labour party swept to victory as widely expected. In the UK, Labour runs the show now and so will be able to implement whatever policies they deem appropriate. So far, there has been little in the way of concern demonstrated by market participants for UK assets either, but I fear the risk here is greater as the policy prescriptions that Starmer favors are likely to have a much larger negative economic toll.

Finally, in what must be THE most surprising aspect of the presidential election cycle in the US, former President Trump is NOT the major topic of conversation. Rather, in the wake of the debate 10 days ago, the only topic is President Biden’s fitness for office now, and in the future. This is certainly not a good look for the US, especially with a key NATO meeting this week in Washington D.C., but it is the current situation. Thus far, US risk assets have ignored all this, arguably because the fiscal spending spigot has not been turned off. But it is not hard to imagine that there are myriad problems ahead as Secretary Yellen tests just how many bonds the US can issue and still find buyers.

So, with all that remarkable news in our memory banks, let’s look at how markets are behaving this morning and what happened overnight. Ironically, it seems Asian investors are the ones most upset by the European elections of last week as equity markets throughout the time zone fell. The Hang Seng (-1.55%) was the laggard, although China (-0.85%) and Australia (-0.8%) also performed quite poorly and the Nikkei (-0.3%) was a star by comparison. There was very little in the way of economic data to drive things here, so this seems merely to be part of the usual ebb and flow of markets. The real surprise, though, is in Europe where equity markets are higher across the board. Despite the pressures for more spending and higher taxes that will come from both France and the UK, the CAC (+0.45%) and the FTSE 100 (+0.3%) are nonplussed by the situation. In the UK, as laws are implemented, I expect there will be a bigger reaction, but in France, perhaps the view that there is gridlock which will prevent any new legislation of note, means equities can run higher. As to the US, futures markets at this hour (7:00) are basically unchanged.

As mentioned above, bond yields throughout Europe have been limited in their movement while Treasury yields have rebounded 2bps from last week’s declines. While I was out, the weak data certainly encouraged bond investors to increase allocations as visions of a Fed rate cut grow. For now, the bond markets are not signaling any concerns over the electoral outcomes. My take is that may be appropriate for France and the continent, but I would be wary of UK Gilts given the likelihood of a downturn in the fiscal situation as more spending is implemented by parliament.

In the commodity markets, the end of last week saw sharp rallies in the metals markets, perhaps on those fears of a RN electoral victory in France, or perhaps on expectations of quicker Fed rate cuts, but this morning, commodities across the board are softer, with oil (-1.3%) leading the way, although WTI remains well above $82/bbl. As to the metals, both precious (Au -0.7%, Ag -0.7%) and industrial (Cu -0.2%, al -0.1%) are giving back some of those gains.

Finally, the dollar is somewhat higher than it closed on Friday, although not very much. In the G10, NOK (-0.5%) is suffering on oil’s decline which has dragged SEK (-0.4%) along with it. The yen (-0.1%) which fell to near 162 vs. the dollar last Wednesday recouped some of those losses into the weekend but seems to have bounced with 160.00 now showing technical support in USDJPY. In the EMG bloc, HUF (-0.8%) is the laggard as despite a lack of data, it seems markets are looking at the right-leaning politics of PM Orban and see continued friction between Hungary and the rest of the EU, specifically when it comes to subsidy payments. KRW (-0.5%) is softer as the government’s efforts to expand trading hours in the currency have not yet borne fruit although it is still early days. They are trying to improve onshore currency trading in order to allow more convertibility for equity investors and thus get Korean stock markets included in more global indices.

On the data front, while the calendar is not packed, it is impactful.

Today	Consumer Credit	$10B
Tuesday	NFIB Small Biz Optimism	89.5
	Powell Testimony
Wednesday	Powell Testimony
Thursday	Initial Claims	240K
	Continuing Claims	1860K
	CPI	0.1% (3.1% Y/Y)
	-ex food & energy	0.2% (3.4% Y/Y)
Friday	PPI	0.1% (2.3% Y/Y)
	-ex food & energy	0.2% (2.5% Y/Y)
	Michigan Sentiment	68.5

Source: tradingeconomics.com

In addition to Powell, 5 other Fed speakers are slated, but clearly all eyes will be on Powell. And the CPI reading. After last week’s soft data, there is a growing expectation that price pressures are going to fall back further and allow the Fed to cut rates. Certainly, if CPI prints soft, I expect to see a rally in risk assets, but we must wait to hear Powell’s spin ahead of those numbers.

Net, the market is seemingly turning toward a more dovish approach with visions of rate cuts coming fast and furious once they get started. That seems excessive to me, but for now, it is hard to like the dollar’s status as rate cut expectations build, especially given the market has ignored potential problems elsewhere.

Good luck

Adf

Thwarted?

Posted on July 1, 2024 by fxpoet

For those of the dovish persuasion
Last Friday was quite the occasion
At zero percent
Those doves are now bent
On writing a new Fed equation

If PCE really is nil
It’s likely that Chair Powell will
Be forced to cut rates
And shut down debates
Inflation is bothersome still

Meanwhile, out of France its reported
Macron’s government’s been aborted
Will Madame Le Pen
Now lead all Frenchmen
Or will her success soon be thwarted?

A funny thing happened on the way to lower interest rates on Friday; the long end of the curve, from 10-year to 30-year Treasury yields, exploded higher by 15bps from their post PCE nadir. While the initial reaction to the PCE data, which, by the way, was exactly in line with forecasts, was to see a modest decline in yields as all those pushing for Fed rate cuts were out in force making their case again, by the end of the day, the damage was done with yields 10bps higher despite the data.

Now, part of that move might be blamed on the fact that Chicago PMI printed at a much better than expected 47.4, indicating that last month’s horrendous figure of 35.4 was the true aberration. And part might be blamed on the Michigan Consumer sentiment, having barely fallen, to 68.2, rather than the expected 3+ point fall the analysts had forecast. Of course, there were those who raised the question of the outcome of the US elections in November after Thursday night’s debate and the disastrous Biden performance seemed to open the door for a Trump victory. For some reason, bond investors seem to think that Trumpian spending is worse than Bidenomics spending although both are likely to be far too much overall.

Or perhaps, this is the first step toward a growing concern that the trajectory of US government spending is becoming problematic writ large. After all, there is no indication that whoever is the next president is going to rein in spending and run an austerity budget. While they may spend on different things, it will still require the Treasury to borrow trillions more dollars. Perhaps the biggest buyers of Treasury debt, be they foreign governments, hedge funds or individual investors do not believe that the Fed is going to do, as Mario Draghi once promised, “whatever it takes” to achieve their 2.0% inflation target. If this is the case, then beware as yields will be able to rise much further. I’m not saying this is what is happening, just that it is one possible explanation.

While there is much yet to discern in the US, we must, at this stage, turn to France, where the first round of President Macron’s snap election was held yesterday and the results were largely as expected, although Marine Le Pen’s RN party did not quite achieve quite the heights that some had ~~feared~~ forecasted. However, she did win more than one-third of the vote relegating Macron to just over 20% and the awkward coalition of the Left, the so-called New Popular Front, to 29% or so. (Maybe they aren’t as popular as they thought!)

The upshot is that there are now all types of maneuvering between the New Popular Front and Macron to figure out a way to prevent Le Pen’s RN from winning an outright majority of 289 seats. That vote comes this Sunday so we will have to wait and see what happens, but between now and then, there is an enormous amount of new information due to arrive including the results of the UK elections on July 4^th and then the US employment report on July 5^th. This week has the opportunity to be quite volatile given the news forthcoming and the fact that in the US, there will be many trading desks that are lightly staffed due to the holiday.

So, let’s take a look at how markets are behaving given all the new information. The first thing to note is that despite a strong start in US equity markets Friday, all three major indices closed in the red, not dramatically so, but certainly a concerning reversal of fortune. This, of course, coincided with the melt down in Treasury prices. However, in Asia, there is far more green than red on the screen led by China (+0.5%) and India (+0.5%) with most other markets showing less enthusiasm and Australia following the US markets as the only nation with equity declines. Japanese Tankan data was largely in line with expectations with one outlier, the Non-Manufacturing Outlook was much weaker than expected. Chinese Manufacturing PMI data was unchanged at 49.5, still hovering below the growth/slowdown line while the Non-Manufacturing Index fell to 50.5, down 0.6 and indicative of the fact that economic growth in China is slowing more quickly than expected. It appears that market participants are now looking for more stimulus from the government, hence the support in the equity markets.

In Europe, markets are powering ahead this morning led by the CAC (+1.25%) in Paris as the new story is there is hope that Le Pen’s RN party will not win an outright majority of Parliament and therefore be unable to implement their policies. It is not clear why a caretaker government, which would be the result in that case, is seen as so positive, although arguably, this is simply a modest retracement of the CAC’s 8% decline over the past six weeks as fears over a Le Pen victory rose. However, the rest of the continent is also moving higher this morning despite (because of?) PMI data showing that the continent remains in the economic doldrums. I guess the view is ongoing weakness will reduce inflationary pressures and thus allow the ECB to cut rates more aggressively. Finally, US futures at this hour (6:00) have edged higher by 0.1% or so.

The bond market, though, is where there has been far more activity as following Friday’s massive sell-off in the US, we are seeing European yields climb, although there are idiosyncratic stories here as well. For instance, German Bunds have seen yields jump 8bps, while French OATs are only higher by 2bps and Italian BTPs are unchanged. It appears that bond investors have taken equal solace in the fact that the RN party may not win an outright majority on Sunday coming, and so are modestly less worried about more pressure in the Eurozone. However, it cannot be overlooked that yields are generally higher this morning across the board than they were las Monday, and the market appears far more concerned over the future.

In the commodity markets, oil (+0.55%) is modestly higher this morning as are the metals markets with both precious and base metals all in the green. While oil has had a life of its own lately, responding to idiosyncratic features of the market, the metals have lately been closely linked to the dollar, rallying when the dollar is under pressure and vice versa. Today is a perfect example of that movement with the dollar largely weaker across the board.

The biggest mover in the dollar, at least vs. the G10 currencies, is the euro (+0.35%) as traders and investors follow French stocks and have shown some relief in the fact that an RN victory may not be forthcoming. (Just be prepared for a major reversal if RN does win an outright majority.). This has helped virtually all the other G10 currencies except the yen (-0.15%) and CHF (-0.3%), both of whom have lost some of that haven status this morning. In the EMG bloc, things are largely as you would expect with the CE4 all gaining and ZAR (+0.8%) gaining slightly more with the help of metals markets. As to APAC currencies, they are essentially sitting out the French elections and are little changed across the board this morning.

On the data front, as it is the first week of the month, there is much to await.

Today	ISM Manufacturing	49.1
	ISM Prices Paid	55.9
Tuesday	JOLTS Job Openings	7.85M
Wednesday	ADP Employment	170K
	Initial Claims	235K
	Continuing Claims	1841K
	Trade Balance	-$76.0B
	ISM Services	52.5
	Factory Orders	0.3%
	-ex Transport	0.3%
	FOMC Minutes
Friday	Nonfarm Payrolls	195K
	Private Payrolls	169K
	Manufacturing Payrolls	5K
	Unemployment Rate	4.0%
	Average Hourly Earnings	0.3% (3.9% Y/Y)
	Average Weekly Hours	34.3
	Participation Rate	62.7%

Source: tradingeconomics.com

In addition to all this, we hear from Chairman Powell tomorrow morning and NY Fed president Williams on Wednesday and Friday. Given Friday’s PCE data moved closer to their target, there are many looking for a clear signal that rate cuts are coming soon. The Fed funds futures market has not really changed its pricing with a bit more than a 10% probability of a July cut and a roughly two-thirds probability for September. And remember, virtually every Fed speaker in the past two weeks has looked through the data and indicated they need to see more of it moving in their direction to consider it to be time to ease policy. I suspect that Friday’s NFP and Unemployment Rate are going to be critical at this juncture although certainly Chairman Powell can change the tone of the narrative all by himself.

One last thing, Thursday, the UK will hold an election with the Labour Party is so far ahead in the polls, it appears a foregone conclusion that they will win, ousting the Tories after 14 years in power. As such, the market has already made their peace with that. In the end, the hopes and prayers of many are that inflation is truly ebbing and that the Fed will be able to take their foot off the brakes. Certainly, if the NFP is weak, we need to look for them to hit the gas and rate cuts will be back in play for this month. In that case, look for the dollar to tumble and stocks to rock. But if NFP and Unemployment remain solid, there is little cause for the Fed to change the current higher for longer.

Good luck

Adf

Crushed

Posted on June 10, 2024 by fxpoet

On Friday, the NFP showed
That job growth has not really slowed
And wages were hot
So, pundits all thought
That ‘flation just might well explode

But under the NFP’s hood
Some things didn’t look quite so good
The joblessness rate
Itself did inflate
Though household jobs fell, understood?

Meanwhile across Europe the vote
For Parliament seems to denote
Incumbents were crushed
And governments flushed
While media seeks a scapegoat

Remember the narrative that had everyone feeling so good? Inflation was drifting lower, albeit not in a straight line, but central bankers around the world were quite confident that their collective 2.0% targets were coming into view, and pretty soon at that. This would lead to lower bond yields, continued strong performance in risk assets and slowing, but still solid economic activity. In other words, many were invested in the Goldilocks thesis of a soft landing.

Now, the data that we had seen last week seemed to indicate that was a viable process as the ADP Employment number was a touch soft, the JOLTS Job Openings number was definitely soft and although the ISM Services data was a lot stronger than anticipated, the ISM Manufacturing number was soft as well. In addition, if we go back to the previous week, the Chicago PMI print was abysmal at 35.4.

This was all a prelude to Friday’s NFP data which ~~confirmed~~ confused everything. While the headline number was much stronger than expected at 272K, the Unemployment Rate rose to 4.0% for the first time in more than two years, and Average Hourly Earnings rose 0.4% with an annual increase of 4.1%. But even more confusing was the fact that looking at the Household survey, the survey that is used to calculate the Unemployment Rate, showed the number of jobs FELL by 408K while 250K people exited the workforce. Now, if things were truly running smoothly, as the NFP number indicated, we would expect to see that household number of jobs rise, not fall. Something is amiss.

Having read far too much about this over the weekend, it appears that the BLS data and its models are not a very accurate representation of the current reality, at least for the monthly data. The BLS also produces a quarterly survey called the Quarterly Census of Employment and Wages (QCEW) which is a census of 11 odd million businesses in the US, rather than a survey of some 600k businesses for the NFP. If one looks at the growing discrepancy between the number of jobs shown in that data vs. the NFP data, the NFP data has been rising far faster with the gap widening severely. This can be seen in the below graph from the mishtalk.com website (from Mike Shedlock, an excellent economist/analyst).

The upshot is that while that headline NFP number has looked very good, there appears to be something else happening in the underlying data. Early next year, the BLS will revise its NFP data, and you cannot be surprised if they reduce the readings significantly. But revisions don’t have the same cachet as headlines, and so this is our current world.

The market response was as you would expect; bonds got crushed with the entire yield curve jumping 15bps, the dollar rallied sharply, up nearly 1% on the DXY with several currencies falling farther than that (e.g., MXN -2.85%, NOK -1.5%, BRL -1.6%), and equity markets falling although not nearly as much as you might expect, only about -0.15% on average across the big indices. But the notable moves were in commodities with gold (-2.2%), silver (-3.9%) and copper (-3.0%) just in the wake of the NFP data, with larger declines overall on the day. Energy was the only space that held in on the day, but of course, it has been under pressure for several weeks.

What’s next? Well, this week brings a great deal of new information including CPI, PPI, the FOMC Meeting and the BOJ meeting. My take is many traders are licking their wounds right now, so given today’s calendar is quite benign, I imagine things will be a bit choppy as positions get adjusted, but direction will be hard to discern. Except…

The European Parliament elections were held starting last Thursday but running through Sunday, with all 27 nations in the EU voting for their parliamentary representatives. The story is, as you will clearly have heard by now, that the left wing, center-left and centrist parties got decimated while everyone on the right side of the aisle massively outperformed. The Belgian PM resigned and there will be elections there. French President Macron dissolved parliament for a snap election as his party won just 15% of the vote while Marine Le Pen, the conservative candidate leading the National Rally, won more than 31% of the votes. As well, German Chancellor Olaf Sholz has been decimated as have the Green parties across the continent. Times, they are a-changin’. It is no surprise that the euro continues to falter after Friday’s declines as the European part of the equation just added to the woes from the US implication of higher interest rates.

What will these elections mean for markets? The clearest message that I see is that the climate agenda is likely to be altered such that demand for oil and gas may well increase. Do not be surprised to see more European nations abandon the Net Zero concept, at least reaching it by 2050. Ironically, while the first move was seen as a negative for the euro, this may well be a harbinger of future euro strength if the Eurozone economies waste less money on impossible dreams and spend more on actual economic activity that generates benefits and income for its citizens without government subsidies. But that will take a bit more time.

Perhaps the most important thing is that this election may well be a harbinger of the US election in November as the European people have clearly rejected the current themes and are looking for a change. Far left Green policies that have been promulgated by the Biden administration have found no favor in Europe and certainly the current polling indicates it is equally unpopular in the US.

OK, a quick tour of the overnight session shows that Japanese equity markets performed well after GDP data there last night showed a less negative outcome in Q1 than originally reported, while most of the rest of Asia was closed for various holidays. European bourses, however, are under pressure across the board led by France (-2.2%) although most of the rest of the continent has seen declines on the order of -1.0%. As to the US futures markets, at this hour (6:15), they are lower by -0.3%.

Bond yields continue to climb with Treasuries up another 2bps and European sovereigns rising between 2bps (Germany) and 8bps (France and Italy) as the combination of higher US yields and some concerns over the future direction in Europe have come to the fore. Overnight, JGB yields also jumped 7bps and are back above 1.00%, with the Japanese data and US data the drivers. The BOJ meets Friday this week, so there is much speculation as to the outcome, although a rate hike is not forecast.

In the commodity markets, after Friday’s rout in the metals space, the big ones are all firmer this morning, although this looks like a trading bounce rather than a change of views. Oil markets are little changed this morning, trading at the lower end of their recent ranges but NatGas, something I haven’t discussed in a while, is rallying again. It is higher by 3% this morning and 26% in the past month, rising to $3.00/MMBtu, its highest price since November and double the lows seen in March. Consider that if there is continued pushback against the Green agenda, as evidenced by the European elections, demand for NatGas is likely to grow quite strongly.

Finally, the dollar is continuing to gain strength this morning, with the euro down -0.6% following Friday’s declines and the EEMEA currencies all falling more than that. Given the holidays in Asia, there was limited trading in the onshore markets there, and other than MXN, which is unchanged this morning, the rest of LATAM hasn’t opened yet. However, remember that the peso has fallen 10% in the past week, so there is likely going to be some more movement in that space going forward. Markets typically don’t dislocate by 10% and then just stop.

As if last week didn’t bring enough surprises between the NFP and election results in India, Mexico and Europe, this week we have a lot more to look for, although today is a blank slate.

Tuesday	NFIB Small Biz Optimism	89.8
Wednesday	CPI	0.1% (3.4% Y/Y)
	-ex food & energy	0.3% (3.5% Y/Y)
	FOMC Rate Decision	5.5% (unchanged)
Thursday	Initial Claims	224K
	Continuing Claims	1800K
	PPI	0.1% (2.5% Y/Y)
	-ex food & energy	0.3% (2.5% Y/Y)
Friday	BOJ Rate Decision	0.10% (unchanged)
	Michigan Sentiment	72.0

Source: tradingeconomics.com

As this is a quarterly meeting of the FOMC, we will get new projections and a new dot plot, and of course, Chairman Powell will be speaking afterwards. As of now, the market is pricing about a 50:50 chance of the first cut coming in September and a total of one and one-half cuts for the rest of the year. It remains very difficult to discern what is really happening in the economy with all the conflicting data. However, whatever the growth stories, nothing has indicated that inflation is going to decline very far. I maintain the Fed is going to be higher for longer for even longer. It continues to be difficult to see the benefits of many other currencies, although I would not be surprised to see MXN regain much of its lost ground as I doubt Banxico will be easing policy anytime soon, and president-elect Sheinbaum is not going to change things there that much and doesn’t take office until October.

Good luck

Adf

The Fed’s Tug-of-War

Posted on June 7, 2024 by fxpoet

Each month there’s a Payrolls report
That pundits and traders exhort
To rise or to fall
Subject to their call
And whether they’re long or they’re short

But this month, there seems to be more
At stake, for the Fed’s tug-of-war
If joblessness rises
Each pundit advises
That rate cuts, this summer, we’ll score

Here we are on the first Friday of the month and, as almost always, markets remain quiet ahead of the release of the monthly Payroll report. For good order’s sake, here are the current median expectations:

Nonfarm Payrolls	185K
Private Payrolls	170K
Manufacturing Payrolls	5K
Unemployment Rate	3.9%
Average Hourly Earnings	0.3% (3.9% Y/Y)
Average Weekly Hours	34.3
Participation Rate	62.7%

Source: tradingeconomics.com

Recall, on Wednesday, the ADP Employment number was a bit softer at 152K while the ISM Employment sub-indices showed conflicting data between Manufacturing (much stronger at 51.1) and Services (weaker at 47.1). Ironically, the headline ISM data was the other way around, with Manufacturing weaker and Services stronger than expected. One other data point of note was the JOLTS Job Openings which shrunk about 300K to 8.059M, still high relative to the number of unemployed people, but with the ratio falling to 1.24 jobs/unemployed person. That ratio is down from nearly 2:1 shortly after the pandemic, but up from about 1:1 pre-pandemic.

As with so much of the other data that we have seen over the past months, there is no clear direction here. Economy bulls can make the case that job growth remains solid and that there is no indication that a recession is on the way. While the no-landing thesis has lost adherents, there are still many soft-landing adherents to be found. At the same time, the economic bears have plenty of data to claim that a recession is around the corner, if we are not already in one. I saw an analysis by Mike Shedlock (@MishGEA), a well-respected economist, that claims the NFP data has overstated job growth by 3.4 million jobs as per the following Tweet:

Since the beginning of 2023, looking at BLS data, the initial NFP report has been revised down in twelve of the fourteen months where there has been a third revision, by a total of 496K. I created a chart to show the consistency of those revisions to help you get a better idea of the issue.

Source: data BLS, graph @fx_poet

Something that has always been true with respect to economic data, and NFP is no different than any other piece of information, is that the revisions tell an important story. When initial data gets revised lower on a consistent basis, it has been indicative of a slowing economy. Remember that when the NBER declares a recession, it is always a backward-looking effort, it is never in real-time. But revisions are a key part of that process. As well, given the ~~fudge~~ factors built into the BLS model, notably the birth/death factor for new businesses, history has shown that particular piece of the puzzle is always a lagging indicator as during a recession, more companies fail than are created, and that needs to be addressed via the revisions.

In the end, the issue is no matter the actual data point this morning, it will almost certainly be revised substantially before the end of the summer and could well tell a very different tale. But today’s task is to understand what tale it is going to tell right now.

To that end, the narrative, the best that I can tell, is that we are seeing a gradual reduction in economic activity, but nothing dramatic. Recession is still a remote concern, perhaps for 2025 or 2026, but the slowdown in activity will open the door for the Fed to start to ease policy going forward. While the futures market is virtually certain that there will be no Fed action next week, the probability of a July cut has risen to 22.5% from less than 16% a week ago. Several big banks are calling for a July cut, including JPM and Goldman Sachs, and there is a group of analysts who maintain that the underlying data that has been released indicates we are already in recession, and that rate cuts are coming very soon.

Here’s the thing, this focus on the Fed cutting rates remains, IMHO, a bad indicator of future risk asset strength. Rather, as I showed earlier this week, when the Fed is cutting rates, it is usually because the economy is already in a recession and earnings are declining rapidly. So, while the first cut may be sweet, the second should be a serious warning of what is coming down the pike. I have already made my bed regarding my view that the top is in, but a softish number this morning, especially if the Unemployment Rate were to rise to 4.0% or 4.1%, would certainly increase the July cut probabilities, and almost certainly be followed by an equity market rally. However, I would call that the last leg of the move. As to my opinion of what today’s number will be, my sense, looking through my lens of further economic weakness (although still sticky inflation) is that it will be on the soft side, but not dramatically so. Maybe 130K-150K.

Ok, ahead of the data, a quick tour of the markets shows that stocks in Asia were mixed with Japan edging lower, China and Hong Kong seeing declines of about -0.5%, but South Korea (+1.2%) and India (+2.1%) having strong sessions. The same cannot be said for Europe, where every major index is lower by between -0.5% (Spain) and -1.0% (France) as German IP (-0.1%) continues to lag and the French Trade Balance (-€7.6B) fell into a deeper deficit than forecast. Not surprisingly, US futures are essentially unchanged ahead of the NFP.

In the bond market, yields are edging up from their recent lows with Treasuries up 1bp and European sovereign yields higher by between 3bps and 5bps despite yesterday’s rate cut from the ECB. Or perhaps because of it as remarkably, the ECB raised its own inflation forecasts and then cut rates. The political imperative to cut interest rates is clearly growing quite strongly.

In the commodity markets, while oil (+0.7%) continues to rebound from its recent lows as OPEC+ worked to clarify their statements about future production, the big move today is in metals where gold (-1.8%) is selling off sharply after the news that the PBOC did not buy any additional metal during the month of May. As they have been one of the key supporters of the barbarous relic, their absence really was a surprise. Most pundits believe they are simply taking a break for now given the sharp rise in the price of the metal, but that they will return. However, the other metals have all sold off alongside gold, with silver (-3.0%) and copper (-2.25%) giving back a good portion of their gains from the past two sessions.

Finally, the dollar is basically unchanged ahead of the NFP data with none of the G10 currencies moving more than 0.1%. In the EMG bloc, though, ZAR (+0.9%) is the outlier, as despite the weakness in the gold price, the political situation seems to be getting better with a coalition government looking to be formed shortly.

In addition to the payroll data, we see Consumer Credit (exp $11B) this afternoon, and confusingly, despite the Fed being in its quiet period, Governor Lisa Cook is on the calendar to speak at noon today. I would guess this will not be a discussion on monetary policy, but you never know.

At this point, it’s all about the data. A hot number should see yields rise, stocks fall and the dollar bounce. A cool number the opposite as more and more people anticipate that first rate cut. Buckle up!

Good luck and good weekend

Adf

A Modest Decrease

Posted on June 3, 2024 by fxpoet

On Friday, the latest release
For some, showed a modest decrease
In pace of inflation
Although observation
By others was not of that piece

As an indication of just how confusing everything is in the macroeconomic world, and how earnestly different pundits try to make their individual cases, the following two headlines were in the same email roundup of market and economic articles that I receive daily.

The Fed’s Favored Inflation Gauge Reinforces The Disinflationary Trend

Federal Reserve Watch: Inflation Not Dropping

Parsing a specific data point that is subject to so much revision is always a fraught activity, and this time is no different. Did the PCE data Friday indicate the inflation trend is starting to head back down or not? Beats me. Below are the forecasts and actual results as released Friday morning by the Bureau of Economic Analysis (BEA). While the M/M Core PCE print was a tick lower than the consensus forecast, everything else was right there. If anything, the fact that Personal Spending fell ought to be a bigger concern.

Source: tradingeconomics.com

So, ask yourself this question, based on the information above, is the disinflationary trend being reinforced? Or is inflation still sticky and rising? Personally, I don’t think we have enough information to have changed our views from whatever they were ahead of the release, but that’s just me. If nothing else, perhaps this will help you understand just how little anybody really knows about the situation. One other seeming anomaly is that the M/M Core PCE number was lower than expected, yet the Y/Y number was right on target. Whatever your null hypothesis, it doesn’t seem as though there is enough new information in this report to reject it. Of course, that didn’t stop the punditry!

In Mexico, voters have spoken
And Claudia Sheinbaum’s awoken
This morning as prez
From Roo to Juarez
Alas, now the peso’s been broken

In a historic, although completely expected outcome, Claudia Sheinbaum has been elected president of Mexico, the first woman to hold the office. She is current president Lopez Obrador’s protégé as well as the former mayor of Mexico City. Now, she will be ruling from Quintana Roo in the south to Ciudad Juarez in the north of the country. However, perhaps the bigger news, at least from the market’s perspective, is that her party, Morena, looks like it will win a supermajority in both the House and Senate there. This matters because it will allow congress to alter the constitution as they see fit with no checks against it. Given that Morena is a left-wing party, markets have suddenly become concerned that there could be serious impacts to the nature of business in Mexico which might impact both strategic and operational questions.

Consider, part of Mexico’s attractiveness as a manufacturing base was its relatively low wages. However, with this type of political control, it is not hard to believe that a much higher minimum wage would be imposed, perhaps only on companies that export goods, but one that would substantially reduce the profitability of those operations. As well, changes in the constitution would now be achievable with no recourse. Reduction of judicial independence and the removal of the presidential term limit are two key domestic issues that may be addressed and are garnering concern. After all, the one thing we all know is that when one political party can change the rules without the opposition having a say, those rule changes are generally designed to maintain power in perpetuity. History has shown that is not typically a great situation.

As to the market impact, under the rubric, a picture is worth 1000 words, behold the chart of the peso as of this morning.

Source: tradingeconomics.com

FX traders and investors have determined there is a great deal of risk attached to the overall election outcome, and the peso has suffered accordingly. This morning it has fallen -2.6% and is showing no sign of slowing down. Remember, the peso has been a favorite currency in the hedge fund world as the carry trade has been a huge winner since last October. Not only did traders benefit from Mexico’s higher interest rates, but the currency appreciated nearly 10% as well from October through late May. But as of this morning, MXN has weakened nearly one full peso from its level just two weeks ago. I sense that many risk managers are forcing a lot of position unwinding as the broader concerns over the future direction of the country increase as per the above issues. For those of you with MXN revenues or assets, this will be a tricky time as hedging remains very expensive. For those with MXN expenses, flexibility will be key with option structures likely to be very effective right now.

However, beyond those stories, the overnight session was relatively muted. PMI data was largely in line with expectations around the world, confirming that economies are not seeing either significant growth or weakness, but rather muddling through. So, let’s see how markets behaved overall.

Friday’s late US rally was followed throughout Asia with the Nikkei (+1.1%), Hang Seng (+1.8%) and ASX 200 (+0.8%) all having solid sessions but pretty much all markets rallying overall. European bourses are also having a good day led by the DAX (+0.85%) and Spain’s IBEX (+0.8%) with green being the dominant color on screens here as well. US futures at this hour (6:45) are pointing higher, except for the Dow which is down ever so slightly.

In the bond market, yields are continuing their recent slide with Treasuries down 2bps this morning and 15bps from the levels seen just last Wednesday. European sovereign yields are also lower this morning, but between 4bps and 6bps as it appears traders remain highly confident the ECB, which meets Thursday, will cut rates by 25bps despite last week’s firmer than expected CPI data there. The fact that the PMI data was lackluster has probably helped this mindset.

In the commodity markets, oil prices have edged higher by 0.1% after OPEC+ laid out that they will maintain production cuts through 2025, but also created a process by which they would eventually grow production again. Given the fact that there is no indication demand for oil has peaked, I expect that all that production and more will ultimately be needed. In the metals markets, both precious and industrial metals are continuing their modest rebound after the recent selloff. Of course, given the strength of the rally since March across the board here, more consolidation seems quite likely for a while. However, I believe the direction of travel remains higher for all metals going forward.

Finally, in the FX markets, while the peso is the outlier, (now -3.4% just 45 minutes later than the earlier update), the dollar is mixed otherwise. ZAR (+0.6%) is benefitting from the news that a coalition government is forming, and Cyril Ramaphosa is likely to remain president. Meanwhile, KRW (+0.5%) rallied on the back of stronger PMI data. However, the euro (-0.1%) and its CE4 acolytes are all softer this morning as there has been more saber rattling over Ukraine’s use of recently acquired long-range missiles and ammunition from the West to attack deeper into Russia. Threats are now being made about an escalation of this conflict in terms of the sphere (i.e. Eastern Europe) and the tools (i.e. nukes), so the euro is feeling a little heat.

On the data calendar this week, there is a decent amount of new information culminating in the payroll report on Friday. As well, we hear from both the Bank of Canada and the ECB this week.

Today	ISM Manufacturing	49.6
	ISM Prices Paid	60.0
Tuesday	JOLTS Job Openings	8.34M
	Factory Orders	0.6%
Wednesday	ADP Employment	173K
	BOC Rate Decision	4.75% (5.00% current)
	ISM Services	50.5
Thursday	ECB Rate Decision	4.25% (4.50% current)
	Initial Claims	220K
	Continuing Claims	1798K
	Trade Balance	-$76.0B
	Nonfarm Productivity	0.3%
	Unit Labor Costs	4.7%
Friday	Nonfarm Payrolls	190K
	Private Payrolls	170K
	Manufacturing Payrolls	5K
	Unemployment Rate	3.9%
	Average Hourly Earnings	03% (3.9% Y/Y)
	Average Weekly Hours	34.3
	Participation Rate	62.7%
	Consumer Credit	$10.5B

Source: tradingeconomics.com

So, lots to look forward to all week with two key central bank rate decisions and rate cuts seen as the most likely outcome. As well, the payrolls will be a critical piece of the Fed discussion. But mercifully, the Fed is in its quiet period so there will be no actual Fed discussion.

Last week, investors and traders got excited over the prospect that inflation was heading back toward target which would allow the Fed to finally cut rates. However, that interpretation seems tenuous to me, as I do not see the data as pointing strongly in that direction. Given it seems likely that both the BOC and ECB will be cutting rates, Friday’s data will be extremely important in helping us determine the tone of the FOMC meeting. I believe we are seeing a growing split between the Fed governors and regional presidents with the former anxious to start easing policy while the latter see that as quite risky. My take is that split will prevent any actions for quite a while as both sides argue their case and so any rate cuts will not be coming until next year at the earliest. That is, of course, unless we see a significant economic downturn, which seems highly unlikely right now. In the end, I think the dollar will maintain its value overall as the Fed remains the most hawkish central bank around.

Good luck

Adf

Kind of a Mess

Posted on May 6, 2024 by fxpoet

The narrative which had been forming
Was prices were constantly warming
While job growth was strong
The bears were all wrong
And buyers of stocks were now swarming

But Friday the data was less
Impressive, and kind of a mess
At first, NFP
Was weak, all agree
Then ISM caused more distress

It is remarkable how quickly a narrative can change, that’s all I can say! One week ago, the story was all about how the economy continued to perform well overall, that inflation remained sticky at levels higher than targeted and that the Fed would stick with higher for longer with a chance of a rate hike on the table. This morning, in the wake of a clearly dovish Powell press conference and softer than expected ISM and employment data, the narrative appears to be coalescing around the idea that cuts are back on the table while a recession can no longer be ruled out.

The table below, courtesy of the Chicago Mercantile Exchange, shows the current probabilities for Fed funds based on futures pricing for the December 2024 contract as well as how they have evolved over the past week and month.

Source: CME

When calculating how much is priced into the market, one simply multiplies the size of the cut by its stated probability and voila, the answer appears. To save you the trouble of doing the math, the current market pricing shows that as of this morning, the market is pricing in 47.6bps of cuts by year-end, so essentially two cuts. One week ago, that number was 34.8bps while one month ago it was 65.7bps. in other words, we have seen a bit of movement in this sentiment indicator. And really, that’s exactly what this is, a measure of the market’s sentiment and expectations of how Fed funds are going to evolve over time.

What should we make of this information? Well, anecdotally, for the past several weeks I have not been reading about recession at all. The no-landing scenario seemed to be the favorite as the soft-landing idea ebbed amid too high inflation readings. But this morning, in concert with the Fed funds futures market, I have seen several stories discussing that a recession is on the horizon now and coming into view. The ISM data was clearly a problem as both the Manufacturing (49.2) and Services (49.4) numbers slipped below the 50.0 boom/bust line while the Chicago PMI release was abysmal at 37.9. Even worse, the Prices paid data for both Manufacturing (60.9) and Services (59.2) rose sharply, exactly what Chair Powell did not want to see. In fact, this data rhymes with the Q1 GDP data which showed the mix of activity was turning toward less growth (1.6%) and more inflation (3.7%) for a given amount of activity.

Now, Powell was very clear that he saw neither the ‘stag’ nor the ‘flation’ sides of the idea that the US was slipping into stagflation, and certainly compared to the situation in the 1970’s, we are nowhere near that type of situation. But there is a bit of whistling past the graveyard here, I believe, as slowing real growth and rising prices are not the combination that any central bank wants to have to fight. When Mr Volcker took over the role as Fed Chair in 1979, he pretty quickly decided that it was more important to fight inflation first, and deal with any recession later, hence the double-dip recessions of 1980 and 1982. But that set the stage for structurally lower interest rates for two generations.

Based on Powell’s press conference comments as well as the tone of many of the mainstream media stories that are currently in print regarding the economic situation, it appears to this poet as though Mr Powell may be far more willing to allow inflation to run hotter than target for longer as he tries to prevent a sharp recession, especially ahead of the presidential election. With rate hikes no longer an option, any semblance of higher inflation will be met with words alone, and that will not do the trick. I have maintained for a long time that if the Fed eased policy before inflation was squashed, it would be bad for bonds, bad for the dollar and good for commodities and stocks. I am now coming to believe that we are entering this environment, and that while the initial move in bonds may be higher (lower yields) as it becomes clear that inflation remains with us, bond investors will quickly decide that the risk/reward in an inflationary environment is quite poor, and we will see the back end of the curve sell off.

After those cheery thoughts for a Monday morning, let’s look at how markets have behaved overnight. Friday’s rip-roaring rally in the US was mostly followed by strength throughout Asia where markets were open (Japan and South Korea were closed) with China, Hong Kong, Australia, and Taiwan all having good sessions, up between 0.75% and 1.25%. It should also be no surprise that European bourses are all in the green this morning as rate pressures eased and adding to the happiness were PMI Services reports that were generally on target or slightly better than the flash numbers. In other words, all is right with the world! Finally, US futures are also firmer by a bit this morning, up 0.2% or so with the main talk still about Apple’s massive stock repurchase program as well as the Berkshire Hathaway AGM this past weekend.

Of course, bonds were the big mover on Friday, with yields plummeting in the wake of the softer than expected NFP data, where not only were claims lower, but so was earnings data and the Unemployment Rate ticked up to 3.9%. The initial move was a 9bp decline in the 10yr and and 10bps in the 2yr although by Friday’s close, both markets had retraced half of those declines. This morning, though, yields are sliding again with 10yr Treasuries down 3bps and all European sovereigns following suit, falling 4bps. (As an aside, on Friday, the European yields followed Treasuries tick for tick.). With Japan closed, there was no JGB movement overnight.

In the commodity markets, crude oil (+1.0%) is bouncing today from yet another weak performance on Friday as the weaker economic data is weighing on the demand story there. However, regarding geopolitics and the middle east, this morning’s headlines regarding Israel telling Palestinians to leave Rafah has the market on edge. But metals markets are back on fire this morning with both precious (Au +0.7%, Ag +2.1%) and industrial (Cu +2.0%, Al +1.1%) rallying on the lower interest rate, higher inflation story that is percolating through markets.

Finally, the dollar, too, is under pressure this morning continuing its trend from last week, although it is not collapsing by any stretch with the DXY still trading just above 105.00. There is a great deal of discussion as to whether the BOJ/MOF have been successful in their efforts to stem the yen’s decline permanently. It is clear that their two bouts of intervention (neither officially admitted) has done a good job in the short run. The story here, though, is all about interest rates. If, and this is a big if, the Fed is truly turning their sights on cutting rates with any help at all from inflation showing signs of ebbing again, then the higher dollar thesis is going to run into real trouble. I have made no bones about the idea that the dollar’s strength was entirely reliant on the fact that the Fed was the most hawkish of all the main central banks. If that is no longer the case, then the dollar is going to come under universal pressure and the yen probably has the most to recover.

**This is really critical for JPY asset and receivables hedgers. There is no better time to consider using purchased options or zero premium collars than right now. If the recent movement is a head fake, and the inflation story in the US grows such that the Fed puts hikes back on the table, then you will have put hedges in place. But…if this is the beginning of a truly new narrative, where US rates are going to decline, USDJPY can fall a very long way in a very short time. Look at the 5-year chart of USDJPY below. It was in 2022 when USDJPY was trading at 115 and that had been the level for several years. we can go back there in a hurry, believe me!**

Source: tradingeconomics.com

As to the rest of the currencies out there, you will not be surprised that ZAR (+0.5%) is top of the heap this morning although a thought must be given to CLP’s 2.25% gain on Friday (market not open yet) as it rallied alongside copper’s rally. Ironically, the one currency that is under pressure this morning is JPY (-0.5%), but remember, it has risen 4% from the levels when the BOJ first intervened, so a little bounce is no surprise.

Turning to the data this week, it is an incredibly light week, with CPI not coming until next week.

Tuesday	Consumer Credit	$15B
Thursday	Initial Claims	212K
	Continuing Claims	1895K
Friday	Michigan Sentiment	77.0

Source: tradingeconomics.com

As well, we have eight Fed speakers including NY president Williams and vice-Chair Jefferson. It will be very interesting to hear how they play the apparent pivot. While I expect that the governors are all on board, the regional presidents will have more leeway to speak their mind I believe.

And that’s what we have for today. I believe that things have changed and that the Fed is now very clearly far more willing to allow inflation to run hotter. Be very wary of your bond positions and watch for the dollar to remain under pressure until something else changes.

Good luck

Adf

At Long Last

Posted on May 3, 2024 by fxpoet

With Jay and the Fed finally passed
All eyes are on jobs, at long last
These readings of late
Have all had the trait
Of rising more than the forecast

But now that Chair Powell has said
No rate hikes are likely ahead
If NFP’s hot
While stocks will be bought
Will bond markets trade in the red?

As we are another day removed from the FOMC meeting, perhaps we can get a better sense of what investors believe the future will bring. But the clear dovishness that Powell expressed, while a positive for markets yesterday, will force many to rethink the Fed’s reaction function to data going forward. And there is no single piece of data that garners more reaction than the payroll report. So, let’s start with a look at current median expectations:

Nonfarm Payrolls	243K
Private Payrolls	190K
Manufacturing Payrolls	5K
Unemployment Rate	3.8%
Average Hourly Earnings	0.3% (4.0% Y/Y)
Average Weekly Hours	34.4
Participation Rate	62.7%
ISM Services	52.0

Source: tradingeconomics.com

Nine of the past twelve months have resulted in headline numbers higher than the forecast and the recent trend remains for substantial growth. Certainly, there has been limited indication based on this data, that the job market is under significant negative pressure. Clearly, that is one of the keys for the Fed’s maintenance of their higher for longer stance as both inflation and the job market remain hot.

But now that Powell has taken a rate hike off the table, or at least raised the bar dramatically, how will markets respond to a hot number? In the past, another big beat would likely have seen the bond market sell off quickly and equities suffer on the thesis that not only was no rate relief going to be coming anytime soon, but that higher rates could be in the cards. However, most investors appear to have made their peace with the current interest rate framework and if they are no longer concerned about even higher funding costs, a hot number may simply be seen as an indication that profitability is going to continue to improve, and stocks are a raging buy. At the same time, while the long end of the yield curve is likely to suffer somewhat on a big beat, the front end is now anchored by Powell’s comments. In essence, we could easily see the yield curve bear steepen as inflation concerns grow and bond investors reduce duration risk while the front end of the curve remains relatively static.

Of course, despite the recent past, this morning’s data could be soft with a much lower print. In that case, given Powell’s clear dovish bias, I suspect the bond market would rally sharply, as it would really change the calculus on the timing of that first rate cut, and stocks would be flying along with commodities. In fact, the only loser in this scenario would be the dollar.

As it currently stands, the Fed funds futures market is now pricing just a 14% probability of a cut in June and still about 40bps of cuts total for the rest of the year. On a timing basis, September is now the estimated first chance for a cut. But a soft number, anything below 200K I think, is very likely to see that June probability jump substantially. In fact, it would not surprise me if that type of print resulted in a one-third probability of a June cut by the end of the session. Many people really want to see the Fed cut, and so they will push on any chance to drive the narrative.

To complete the discussion on the US session, we also see the ISM Services data at 10:00 and included with that will be the prices paid data. That has been an important data point for many analysts when trying to determine the future course of inflation. As can be seen from the chart below, unlike many other inflation readings, this one has the look of a still intact downtrend.

Source: tradingeconomics.com

And finally, we hear from our first Fed speakers post Wednesday’s meeting, with Goolsbee, Williams and Cook all on the calendar. As always, it is a mug’s game to try to guesstimate what this morning’s data is going to be like numerically, but based on the recent overall trend in data, I have a feeling that we are going to continue with strong results, and a continued risk rally.

A quick peak at the overnight session shows that while Japan and China remain closed, there was more green than red in Asia with the Hang Seng (+1.5%) leading the way higher, but gains, too, in Taiwan, Australia, New Zealand and Indonesia. Alas, both South Korea and India were under pressure, so not as universal a positive as might be hoped. In Europe, though, it is unanimous with every market higher, mostly by about 0.5%, clearly following yesterday’s US outcome as there was virtually no data or commentary to note there other than the Norgesbank leaving their base rate on hold as expected. As to US futures this morning, they are higher on the strength of Apple’s positive earnings report, and perhaps more importantly its newest buyback plan of $110 billion this year!

In the bond market, after rates declined yesterday despite data indicating higher prices (Unit Labor Costs +4.7%) along with weaker activity (Productivity 0.3%), it is clear that investors are simply paying attention to the Chairman’s messaging. So, yields fell across the board yesterday, with 2yr yields sliding 8bps while 10yrs fell only 5bps. That is the exact response you would expect given the end of any thoughts of a rate hike. European bond yields fell yesterday as well on the order of 4bps and this morning, everything, Treasuries and European sovereigns, are all seeing yields lower by one more basis point.

In the commodity markets, oil (+0.3%) is edging higher today after a pretty flat day yesterday, although remains more than 5% lower than when the week began. It appears that we have seen substantial position reductions here, but they seem to be finished for now. However, the surprising inventory builds of the past few weeks are likely to keep a lid on the price. Metals markets, too, were benign yesterday although this morning, copper (+1.2%) is showing some life. My take is the investment community here is waiting to get a better sense of the pace of interest rate adjustments (aka cuts) since that is what everybody is assuming. As well, metals prices have rocketed higher over the past several months, so this corrective price action can be no surprise.

Finally, the dollar is a touch softer this morning, arguably on the back of the recent decline in yields. The outlier here continues to be the yen, which is consolidating near 153 now, well below the initial levels seen on Monday that inspired the first wave of intervention. Remember, Japanese markets are closed, so liquidity there is suspect but more importantly, as the narrative adjusts to the idea that US rates will not be rising from here, that reduces substantial pressure on the yen. One other noteworthy mover yesterday was BRL, which rallied 1.5% on the back of an improved economic outlook helping to allay concerns of rate cuts coming soon. Away from those two, though, the overnight session has seen generally modest USD weakness pretty much across the board.

And that’s really all we have for today. As I said before, I expect the data will be above the median forecast based on the fact that has been its recent trend as well as the other solid data we have seen.

Good luck and good weekend

Adf

Unchained

Posted on April 8, 2024 by fxpoet

The data, on Friday, revealed
The job market’s mostly been healed
As such, any thought
The Fed really ought
Cut rates, simply must be repealed

In fact, two Fed speakers explained
That rate cuts were not yet ordained
Should prices keep rising
It won’t be surprising
If higher rates soon are unchained

Wow! Once again, the NFP report was significantly hotter than any analysts forecast, with a top line number of 303K while the previous 2 months were revised higher as well. The Unemployment Rate fell back a tick, to 3.8%, while wages continue to grow above 4%. In other words, it seems quite difficult to make the case that the economy is in a state that requires rate cuts. After all, if the Fed’s focus has turned from inflation specifically to employment now, and employment continues to rock, why cut?

However, the impression from the cacophony of Fedspeak we heard last week is that many members are still of a mind to cut the Fed funds rate, likely in June. Just not all of them. We heard from two more speakers Friday, Governor Michelle Bowman and Dallas Fed President Lorie Logan, and neither seemed in a cutting frame of mind. [Emphasis added]

Bowman: “While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse.”

Logan: “In light of these risks, I believe it’s much too soon to think about cutting interest rates. I will need to see more of the uncertainty resolved about which economic path we’re on.” She followed that with, “To be clear, the key risk is not that inflation might rise — though monetary policymakers must always remain on guard against that outcome — but rather that inflation will stall out and fail to follow the forecast path all the way back to 2 percent in a timely way.”

Now, it is very difficult for me to read these comments and think, damn, rate cuts are coming soon! By now, you are all aware that I have been in the sticky inflation camp from the get-go and certainly Friday’s data did nothing to change my mind. But my views don’t really matter. However, if we start seeing a majority of FOMC members talking about fewer cuts than expected/assumed in March, and even hikes, we need to pay attention. I don’t think it is yet a majority, and clearly Chair Powell is very keen to cut, but there is a long time between now and the June meeting, with much data to come. Unless that data starts to really back off and hint at a substantial slowing of the economy, my sense is that June will morph into November or December, with the median dot pointing at just one cut this year.

A quick look at the Fed funds futures shows that traders are growing even less confident in those rate cuts being implemented. As of this morning, the June probability has fallen slightly below 50% and there are a total of 61bps priced in by the December meeting, just over two cuts. This is quite a contrast to the Eurozone, where the market has fully priced in a June cut and is beginning to consider a 50bp reduction to get things going there. On the surface, this makes a great deal of sense as the Eurozone economy’s growth continues to lag that of the US and inflation has been ebbing more rapidly there than in the States. And don’t forget, the ECB meets this Thursday, so at the very least we should have a better sense of what will happen in June, and we cannot rule out a cut this week, regardless of market pricing.

Trying to step back for a broader perspective on the economy and the future of policy rates as well as market movements, there continue to be several conundrums in markets compared to historical trends. For instance, what is the meaning of the price of gold rising consistently alongside a rise in interest rates, both nominal and real? Historically, there has been a strong negative correlation between the two, but something has changed in the past two years as evidenced by the BofA Research chart below.

Is this a signal that the market is getting indigestion over the amount of sovereign debt that is outstanding, led by Treasuries? Is this an indication that investors are losing faith in fiat currencies and the current global monetary structure? Or is this simply a temporary anomaly that will correct over the course of the next several years? Unfortunately, there is no way for anyone to know the answer to these questions at this point in time. Anyone who says otherwise is not being honest.

However, my suspicion is that the consequences of monetary and fiscal policies around the world during the Pandemic and since has more and more people, and institutions, starting to hedge their bets on the future and its outcomes. From a more benign view that the authorities will be able to kick the can down the road, this relationship seems to indicate more than a few folks think that the fiscal and monetary authorities are about to stub their collective toe on the next kick. Ouch!

In many ways, I think that the change in this relationship is an excellent encapsulation of the problems currently faced by monetary and fiscal authorities. As such, I will be watching it closely as a key indicator of market sentiment overall.

Ok, let’s look at the overnight session. After Friday’s solid US equity performance, the picture elsewhere has been slightly less positive, although positive overall. In Asia, the Nikkei (+0.9%) followed the US price action although Chinese shares had a less positive session, falling on the mainland with the HK market staying flat. Treasury Secretary Yellen was in China trying to smooth things over, but the following two statements, I think, are a great description of how confused things are:

Talk about mixed messages! Meanwhile, in Europe, most bourses are a bit higher this morning, but on the order of 0.5%, half what we saw in the US on Friday. It seems that some traders are betting that the ECB, when it meets this Thursday, is going to cut rates. Lastly, at this hour (7:20), US futures are essentially flat.

The bond market, though, has seen far more activity lately as it appears the bond vigilantes, last seen in the 1990’s are reawakening. This morning, 10-year Treasury yields are back to 4.45%, their highest level since November when yields were falling in the wake of the Fed’s perceived pivot and the reduced amount of coupon issuance just announced at that time. This is 13bps higher than the yield just before the NFP data was released, 8bps on Friday and another 5bps this morning. Similarly, European sovereign yields hare higher by between 3bps and 5bps this morning, being dragged higher by Treasuries, but lagging as bets get made that the ECB acts sooner than the Fed.

In the commodity space, oil (-0.8%) is backing off its recent highs this morning as there appears to be an easing in some concerns over the Middle East, at least that is the story making the rounds. Meanwhile, metals prices continue to flourish despite the rise in interest rates with both precious (Au +0.4%, Ag +0.9%) and base (Cu +0.7%, Al +0.3%) all continuing their recent climbs. Another conundrum here is the fact that these metals prices are rising despite the dollar remaining reasonably well bid.

Turning to the dollar, it is little changed, on net, this morning although we have seen some strength against the CHF (-0.5%) and KRW (-0.4%). The former is the only currency seemingly following the interest rate story as the recent SNB rate cut plus low inflation readings indicates that the policy divergence between Switzerland and the US is set to widen further. The won, on the other hand, looks to be a proxy for China, which the PBOC refuses to allow to weaken despite many economic reasons it should. On the flipside, ZAR (+0.4%) is rallying on the back of those metals’ prices. One of the things that is confusing is the fact that the euro remains reasonably well bid despite the changing tone of the interest rate policies between the Fed and ECB. While the single currency has generally been declining over the past month, in truth, since the beginning of April, it has rebounded about 1% and held strong since then. Given the changing market perceptions, I would have anticipated the euro to continue its declining ways, but right now, that is not the case.

On the data front, the week starts out slowly, but we get the critical US CPI data on Wednesday.

Tuesday	NFIB Small Biz Optimism	89.5
Wednesday	CPI	0.3% (3.4% Y/Y)
	-ex food & energy	0.3% (3.7% Y/Y)
	Bank of Canada Rate Decision	5.0% (unchanged)
	FOMC Minutes
Thursday	Initial Claims	215K
	Continuing Claims	1792K
	PPI	0.3% (2.3% Y/Y)
	-ex food & energy	0.2% (2.3% Y/Y)
	ECB Rate Decision	4.5% (unchanged)
Friday	Michigan Sentiment	79.0

Source: tradingeconomics.com

In addition to the data and other central bank decisions, we hear from seven more Fed speakers this week, which given the recent more hawkish commentary, could well be quite interesting. If Wednesday’s CPI data is hotter than expected again, I suspect it will become increasingly difficult for the doves to spread their wings. As it happens, six of the seven speak after the CPI, so we could well see things evolve further. In the meantime, relative to other currencies, I continue to look at the rate picture and believe the dollar should remain firm. However, versus ‘stuff’ not so much.

Good luck

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Hell or High Water

Posted on April 5, 2024 by fxpoet

Though Jay was as clear as a bell
That rate cuts were coming through hell
Or high water, it seems
Not all the Fed’s teams
Are ready to cut rates as well

A group of the regional Feds
Seems at, with Chair Jay, loggerheads
They think maybe two,
Or one, cut could do
Now, traders are sh**ting their beds!

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

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

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

And that was the most dovish we heard.

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

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

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

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

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

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

While words have power
Policies ultimately
Matter much, much more

As summer passes
The transition to autumn
Should see prices rise

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

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

Nonfarm Payrolls	200K
Private Payrolls	160K
Manufacturing Payrolls	5K
Unemployment Rate	3.9%
Average Hourly Earnings	0.3% (4.1% Y/Y)
Average Weekly Hours	34.3
Participation Rate	62.5%

Source: tradingeconomics.com

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

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

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

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

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

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

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

Good luck and good weekend

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Limited Sellin’

Posted on April 1, 2024 by fxpoet

After the data on Friday
Powell said, rushing’s not my way
Rates, we’ll still lower
If growth turns out slower
Least that’s what the punditry might say

Forget any thoughts about hikes
Old ideas that nobody likes
Other than Yellen
Limited sellin’
Suggests there will be no yield spikes

“The fact that the US economy is growing at such a solid pace, the fact that the labor market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates.”

When Chairman Powell expressed this sentiment Friday morning, my take was he was seeking to give himself an out. One way to read it is, since the economy remains strong, higher for longer isn’t killing us. However, my first reading of the statement was that since the economy is strong, they can confidently cut rates. Perhaps it is my confusion, or perhaps it is simply a badly constructed statement of the first view, but regardless, my confidence in the process has not been enhanced.

Friday’s PCE data was released pretty much in line with expectations but that is not as helpful as you might think given expectations were for a continued rebound in the numbers. The fact that Powell is not more vociferously calling for a tougher stance is the most important piece of the puzzle. This is what tells me that he has abandoned the 2% target. While he will never officially admit that is the case, it has become increasingly clear that to achieve that goal, the Fed will need to push much harder on the economy and possibly drive a recession. My read is that there are very few FOMC members who are willing to accept that tradeoff, especially in a presidential election year.

Right now, as Q2 begins, there is still time to see inflation data ebb closer to their target and allow that June rate cut that he seems to be promising. But if the data between now and then, which includes three NFP reports, three CPI reports and two more PCE reports, does not cooperate and continues to show economic strength and sticky, if not building, price pressures, Powell and friends are going to have a very hard case to make with regards to any rate cuts. And this really cuts to the chase as it is increasingly clear that the Fed’s true goal is not to reduce inflation, but to reduce interest rates so government borrowing becomes cheaper. If the Treasury is going to continue to flood the market with T-bills rather than coupons (see chart below from BofA Global Research), the Fed has the ability to reduce their interest costs directly. I expect that the pressure to do so is immense and growing. The Fed remains in a precarious position given their credibility is on the line and so much of it is dependent on things outside their control.

There continues to be a yawning gap between views on the economy in the analyst community. One camp remains firmly committed to the soft or no-landing scenario, expecting ongoing economic growth as inflation magically fades away (the so-called immaculate disinflation). The other camp sees a recession on the horizon, if not already arrived, as when breaking down the data, they are able to find key aspects which indicate growth is slowing rapidly. Right now, my guess is Powell is praying for the recession to appear more clearly, so he has a good reason to cut rates because otherwise, any rate cuts are going to be much more difficult to explain.

Beyond the Fed story, the news overnight was about China and Japan as PMI data from the former showed unexpected strength (Caixin Manufacturing PMI to 51.1) while the latter saw a mixed picture with the PMI data rising to 48.2, but still below the key 50.0 level, while the Quarterly Tankan data had some good news for large manufacturers and not-so-good news for small manufacturers. With all of Europe still closed for the Easter holiday, a look at the markets open in Asia shows that the Nikkei (-1.4%) found no joy in the data and the index slipped back below the 40K level. However, Chinese shares rose (+1.6%) on the data as it seems any read of recent commentary from the nation’s leaders indicates more fiscal support is on its way.

Bond markets, too, are closed throughout Europe and so the overnight saw only JGB yields edge up 1bp, Chinese yields follow suit, rising 1bp while Treasury yields are higher by 3bps this morning. My take is there is limited information in these movements given the overall lack of market activity.

In the commodity markets, oil prices are unchanged to start the day, although they rose more than 6% in March, so there is clearly upside pressure there. But once again, the star is gold (+0.75%) which is at another new all-time high as it seems an increasing number of investors and traders are becoming more concerned over the ongoing flood of liquidity entering the markets. This strength is gold is mirrored today in silver, copper and aluminum as the desire to own ‘stuff’ rather than paper continues to grow.

Finally, the dollar continues to be in demand versus essentially all its major counterparts. With Europe out of the office today, movement has been muted, but it is firmer against every one of its G10 counterparts with NOK (-0.55%) and SEK (-0.5%) the laggards, while it remains stronger vs. most of its EMG counterparts, although ZAR (+0.3%) is benefitting from the strong rally in gold and precious metals. When looking at the macro situation around the world, right now, the US remains the proverbial cleanest shirt in the dirty laundry and so has the lowest case to cut interest rates. I believe the ECB and BOE (and BOC and Riksbank, etc.) will all be cutting before the Fed and the dollar will benefit accordingly. However, as I have maintained for a long time, if the Fed starts cutting with inflation remaining well above target, the dollar will decline sharply.

Looking at the data this week shows we have much to anticipate, culminating in Friday’s NFP report:

Today	ISM Manufacturing	48.4
	ISM Prices Paid	52.6
	Construction Spending	0.6%
Tuesday	JOLTS Job Openings	8.79M
	Factory Orders	1.0%
Wednesday	ADP Employment	130K
	ISM Services	52.6
Thursday	Initial Claims	214K
	Continuing Claims	1822K
	Trade Balance	-$67.0B
Friday	Nonfarm Payrolls	200K
	Private Payrolls	160K
	Manufacturing Payrolls	5K
	Unemployment Rate	3.9%
	Average Hourly Earnings	0.3% ((4.1% Y/Y)
	Average Weekly Hours	34.3
	Participation Rate	62.5%
	Consumer Credit	$16.5B

Source: tradingeconomics.com

In addition to the data, we hear from 15 different FOMC members across 18 speeches this week. This includes Chairman Powell on Wednesday as he discusses the Economic Outlook at the Stanford Business, Government and Society Forum. By the time he speaks, we will have seen the ISM and ADP data, but my guess is that nothing is going to change his mind right now. At this stage, hotter data is the Fed’s real problem as it will make cutting rates that much more difficult. The Atlanta Fed’s latest GDPNow reading ticked up to 2.3% for Q1, certainly not indicating a slowdown is coming. Sit back and get your popcorn out, it is going to be interesting to watch the Fed explain why rate cuts are needed if the data continues along its recent trend.

Good luck

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fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: #NFP

A Shocking Surprise

Thwarted?

Crushed

The Fed’s Tug-of-War

A Modest Decrease

Kind of a Mess

At Long Last

Unchained

Hell or High Water

Limited Sellin’