Tag Archives: #PCE

Quite Vexatious

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The data remains quite vexatious
As some shows that growth is bodacious
But other releases
Are closer to feces
Implying the first stuff’s fallacious
 
For instance, the GDP print
At two point eight offered no hint
Recession is nearing
Yet stocks aren’t cheering
For bears, in their eyes, there’s a glint
 
But Durable Goods was abysmal
At minus six plus, cataclysmal
And more survey data
Implied that pro rata
The story ‘bout growth’s truly dismal

 

In the past week, we have seen a decent amount of data, and the upshot is that there is still no clarity on the US economic condition.  Many analysts accept the data at face value, and with today’s GDP print as the latest installment, dismiss the idea of a recession coming soon.  Others look at the headline, and then the underlying pieces and detect that ‘something is rotten in Denmark the US’.

 A quick review of the recent data shows the housing market is weakening further, with both New and Existing Home Sales declining on a monthly and annual basis.  As well, the Survey data showed the Richmond and Kansas City Fed’s Manufacturing Indices falling deeper into negative territory as well as a weak Flash PMI Manufacturing print.  Durable Goods headline fell -6.6%, which while it is a volatile series (depending largely on airplane deliveries by Boeing), was still a terrible outcome.  Absent transports, though, it rose 0.5%, which seems more in line with the first look at Q2 GDP, showing a 2.8% annualized growth rate.  (One thing to watch in that GDP report is the PCE index that is implied and showed a surprising rise.  Keep this in mind for tomorrow’s PCE report.). Alas, final Sales in the GDP report only rose 2.0%, a potential harbinger of future weakness.  

If we go back and look at the CPI data, which was soft, or the NFP data, which was strong, there continue to be underlying pieces of almost every report which indicate weakness compared to headline strength or vice versa.  So, which is it, recession or no?

Unfortunately, we will not know until the next recession has likely finished given the NBER’s methodology of declaring a recession.  (It is important to understand in the US, the rule of thumb, two consecutive quarters of negative real GDP growth is not the definition.)  Regardless, we haven’t even had one quarter of negative growth.  This poet’s view is that the economy is clearly slowing down with respect to activity but does not seem like it has yet tipped into recession.  Perhaps things will be clearer in Q3, but for now, the arguments are going to continue.

Tokyo prices
Keep on decelerating
Why will they tighten?

Tokyo CPI data was released overnight and once again, it was a touch softer than expected with both headline and core printing at 2.2%.  In fact, the ex-food & energy index rose only 1.1% Y/Y!  The Tokyo data is typically a harbinger of the national number and when looking at the data, it is easy to understand why Ueda-san is reluctant to tighten further.  As per the chart below, the trend here remains toward lower inflation without any further policy adjustments.  

Source: tradingeconomics.com

So, why would they move next week?  This is especially so given the yen has rebounded nearly 6% over the past several weeks, relieving pressure on the biggest current concern.  I know it is fashionable to think that the BOJ is going to tighten policy while the Fed cuts, but it is not difficult to make the case that the US economy is continuing to tick along and so higher for longer remains appropriate, while in Japan, price pressures are easing without any further policy tightening.  There is increasing analyst discussion the BOJ is going to move, but I remain suspect, at least at this point.  Rather, I expect that there is probably more short-covering to come in the JPY and that is going to further relieve pressure on the BOJ to act.

This morning, we get PCE
The data most pundits agree
Will license the Fed
To cut rates ahead
At least that’s the stock market’s plea
 
The final big story today is the release of the PCE data.  As we all know by now, this is the inflation metric the Fed uses in their models.  Current median expectations are as follows: Headline (+0.1% M/M, 2.5% Y/Y) and Core (+0.1% M/M, 2.5% Y/Y).  In both cases, that would represent a tick lower in the annual number compared to last month, and based on the current narrative, would add to the Fed’s confidence that inflation is coming under control.  And maybe that will be the case.  After all, the past two inflation reports have come in below the median expectations. 
 
However, there is another PCE report that is published alongside the GDP data.  Essentially, it is the number that determines how much of nominal GDP is actual growth and how much is price growth.  As part of yesterday’s GDP release, the core PCE index rose at a 2.9% rate, lower than Q1 but above expectations.  I’m merely pointing out that as seen above, there is a lot of conflicting data out there.  It would be premature to assume that inflation is under complete control in my view, although that is the growing market belief.
 
Ok, let’s look at what happened overnight.  Equity markets are trying to figure out what everything means right now.  Yesterday’s US performance was mixed, with Tech stocks still under pressure although the DJIA managed to gain on the day.  Overnight, Japanese stocks (-0.5%) continued their recent decline, following the NASDAQ lower, but both Hong Kong and China managed small gains on the session.  As to Europe, most major indices are in the green led by the CAC (+0.85%) despite the terrorist attacks on the high-speed rail network as the Olympics begin there.  But after several down days, investors feel like the correction has run its course and are coming back.  This is evidenced by US futures which are higher by upwards of 1% at this hour (6:30).
 
After yesterday’s more aggressive risk-off session, this morning bond yields are little changed to slightly higher around the world.  Treasuries are unchanged and European sovereigns have seen yields rise by either one or two basis points.  JGB yields, too, are higher by 1bp, as it appears investors have been exhausted by this week’s volatility.  Of course, a surprising number this morning will almost certainly get things moving again.
 
In the commodity markets, oil, which managed to rebound at the end of the day yesterday, is lower by -0.4% this morning.  Given the volatility across all markets right now, it is difficult to come up with a coherent story about the situation here in the short run.  Gold (+0.4%) which got decimated yesterday, has run into technical support and is rebounding, but the same is not true for silver or copper, both of which remains near their recent lows.  I will say this about copper; as it remains one of the most important industrial metals, its weakness does not seem to bode well for economic growth going forward, and yet as we saw yesterday, US GDP is running above trend.  This is simply more evidence that confusion reigns in market views.
 
Finally, the dollar is generally lower this morning. While the yen (-0.55%) is giving back some of its recent gains, almost all of the other major currencies in both the G10 and EMG blocs are a touch stronger.  MXN (+0.7%) is the leader followed by ZAR (+0.5%) with most others gaining much smaller amounts.  The thing is, aside from the US data, there has been precious little other data of note that would drive things.  One might make the argument that the rebound in gold is helping the rand, but that seems tenuous.  Right now, with risk being re-embraced, my take is the dollar is simply softening a bit.
 
In addition to the PCE data we also see Personal Income (exp 0.4%) and Personal Spending (0.3%) and then at 10:00 we get the Michigan Sentiment Index (66.0).  But all eyes will be on PCE.  I look at the GDP data and think we could see something a bit hotter than currently forecast and desperately hoped for.   If that is the case, I suspect that stocks may falter and bonds as well although the dollar should regain ground.
 
Good luck and good weekend
Adf
 
 

No Quid

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We have now a President Joe
Whose allies had asked him to go
Reject them, he did
For there was no quid
To pay him if he gave the quo
 
But Sunday, the news was revealed
That his campaign, he would now yield
It’s, therefore, not clear
Who’s running this year
‘Gainst Trump, it’s a wide-open field

 

Of course, you are all aware by now that President Biden has decided to abandon his re-election campaign and “to focus solely on fulfilling my duties as president for the remainder of my term.”  While he has endorsed Vice-president Kamala Harris, and since the announcment, there have been more endorsements for the VP, nothing is clear yet.  If nothing else, there has been no clarity whatsoever regrading who VP Harris would select as her running mate should she be the presidential nominee.

In the end, this adds uncertainty to the political situation and is likely to add some volatility to financial markets as well.  However, remember that political impact on financial markets tends to be relatively rare and if it is going to be significant, must be a genuine surprise.  Given the drumbeat from an increasing number of Democrat politicians and donors, this cannot be considered a real surprise.  I suspect that recent volatility will continue, but it is unlikely to increase substantially because of this.  However, if, say, the Fed were to cut rates next week, that would be a genuine surprise with a major market reaction.  (That is a hypothetical, I am not forecasting that.)  All told, the circus that is the US presidential campaign seems likely to simply continue for the next four months.

In China, the Plenum has ended
And rate cuts last night were extended
But is that enough
To help Xi rebuff
The weakness with which he’s contended

In the meantime, while all eyes around the world remain on the US as both allies and enemies try to determine what is happening, and likely to happen going forward, in the US regarding its presidential politics, China’s Third Plenum has ended, and the decisions have been made public.  Reuters has given an excellent, and succinct, description of what this meeting represents and why it is seen as so important.  The link above is a worthwhile, and quick read, but the money lines are [emphasis added]: “China’s ruling Communist Party commenced its so-called third plenum on Monday, a major meeting held roughly once every five years to map out the general direction of the country’s long-term social and economic policies,” and “This week’s third plenum, described by Chinese state media as “epoch-making”, is expected to deliver major initiatives to address the risks and obstacles related to China’s long-term social and economic progress.”  

So, in essence, this is the annual meeting where Xi and his fellow senior policymakers focus on the economy for the next decade.  This is quite timely given the economy in China has been consistently disappointing over the past several years with the most recent data releases showing that GDP growth declined to 4.7%, far below expectations as well as Xi’s target, in the second quarter.  Now, the law of large numbers would indicate it will be increasingly difficult for China, a $17 trillion economy, to continue to grow at previous rates, especially since its population is shrinking.  But that will not stop Xi from trying, or at least from having the government publish numbers that indicate he is succeeding.  

Ultimately, the problem in China remains that domestic consumer demand remains lackluster, largely because of the sharp decline in the Chinese property market.  In China, property had been a key store of personal wealth as there were limited vehicles in which citizens could invest.  But with that bubble having burst, and continuing to deflate, ordinary people do not feel the confidence to continue previous consumption patterns.  This is the underlying reason why China continues to focus on industry, and the genesis of the international angst over China’s manufacturing exports.  It is also the genesis of why tariffs are so prominent in discussions around Western policy circles.  The perception that China is dumping product offshore at a loss, undermining Western companies, and therefore Western job markets, is a powerful political motive to find some way to restrict said exports.  Tariffs are the most obvious first solution.

But China knows there are problems internally and that led to last night’s surprise cuts in the Loan Prime Rates for both 1-year and 5-year, with each being cut by 10 basis points.  I would look for further rate cuts shortly after the Fed starts to cut rates here (assuming they do so) whether that is next week or in September. Ultimately, I continue to believe that the PBOC will need to allow the renminbi to weaken, but it will be a long, drawn-out process as Xi remains steadfast in his view that the currency must be seen as a stable store of value.  Ironically, I believe we are entering a timeline when pretty much every nation will seek to weaken their currency to gain a trading advantage, but of course, if that is the case, then the only thing that will change is inflation will rise.  Oh well, policymakers around the world all have the same blind spots.

And those are really the only stories of note, although naturally, the first one is massive and will be the talk of the world for at least the next month until the Democratic convention produces a presidential ticket.  So, with all that in mind, let’s look at the market responses overnight.

Friday’s continued weakness in the US equity markets was mostly followed in Asia with the Nikkei (-1.2%) continuing its recent retracement from the highs made a week and a half ago.  And that red ink was seen throughout the region with one exception, the Hang Seng (+1.25%) as it responded to the PBOC’s rate cuts.  Interestingly, the onshore markets (CSI 300 -0.7%) did not.  However, in Europe, this morning, equities are having a great day with strong gains across the board.  While part of this is certainly simply a rebound from last week’s declines, it seems that there is a thesis brewing regarding Europeans now gaining confidence that Mr Trump will not be re-elected and so attracting some bullish views.  I don’t necessarily agree with that, but that seems to be the take.  As to US futures, they are firmer this morning as well, although given the sharp declines at the end of last week, this seems a reflexive bounce

In the bond markets, Treasury yields, which backed up despite the equity market declines on Friday, are softening a bit this morning, down 2bps, while European sovereign yields are mostly little changed from Friday’s levels, down about 1bp in most nations.  Right now, there is very little excitement in this space.

In the commodity space, oil prices are continuing their decline from last week with WTI back below $80/bbl as this market seems to believe that Mr Trump will win in November and that he is very serious about ‘drill baby, drill’.  Certainly, I would anticipate a Trump administration will be quite focused on increasing energy output and that should undermine prices.  As to the metals markets, gold (+0.5%) continues to find buyers although it did sell off sharply on Friday, but the rest of the space is under pressure, notably copper (-1.25%) as that Third Plenum did not encourage anyone that China would be subsidizing further economic activity and driving up demand for the red metal.

Finally, in the FX markets, the dollar is under modest pressure overall, although not universally so.  JPY (+0.4%) is the leading gainer in the G10 space as hopes for a Fed cut continue to impact views on the carry trade here.  However, the euro (+0.1%) and pound (+0.25%) are also edging higher, albeit on much less information.  Perhaps, the idea that Trump has been vocally calling for a weaker dollar is part of this movement, but that seems awfully early in the process.  On the flip side, AUD (-0.3%) is being weighed down by the decline in commodity prices.  In the EMG bloc, MXN (+0.35%) is the biggest gainer on the day although the CE4 currencies are all demonstrating their high beta with the euro as they have gained about 0.25% across the board.  Lacking new information, it appears that the peso is acting as a broad EMG proxy for traders wanting to short the dollar.

On the data front, the important stuff all comes at the end of the week with GDP on Thursday and PCE on Friday.

TodayChicago Fed National Activity0.3
TuesdayExisting Home Sales3.99M
WednesdayGoods Trade Balance-$98.0B
 Flash Mfg PMI51.7
 Flash Services PMI54.4
 New Home Sales640K
ThursdayInitial Claims239K
 Continuing Claims1869K
 GDP Q21.9%
 Durable Goods0.4%
 -ex Transport0.2%
FridayPersonal Income0.4%
 Personal Spending0.3%
 PCE0.1% (2.4% Y/Y)
 Core PCE0.1% (2.5% y/Y)
 Michigan Sentiment66.5
Source: tradingeconomics.com

Mercifully, there will be no Fedspeak at all this week as they remain in the quiet period.  The expected declines in PCE inflation will continue to support the September rate cut expectation which remains at a virtual 100% probability according to the CME Fed funds futures pricing.  That would be in concert with everything we heard from Fed speakers in the past several weeks, although the stronger than expected Retail Sales data has some claiming the Fed will remain on hold.  My read is there are fewer people discussing an impending recession, although that may be more about the cacophony of political discussion drowning things out, than a real change in sentiment.  Alas, I find myself far more concerned about an economic slowdown, although not necessarily with a corresponding decline in inflation.  Meanwhile, the dollar, while under some modest pressure, remains pretty solid and I wouldn’t look for a significant change, at least not until Friday’s data.

Good luck

Adf

Thwarted?

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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 4th and then the US employment report on July 5th.  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.

TodayISM Manufacturing49.1
 ISM Prices Paid55.9
TuesdayJOLTS Job Openings7.85M
WednesdayADP Employment 170K
 Initial Claims235K
 Continuing Claims1841K
 Trade Balance-$76.0B
 ISM Services52.5
 Factory Orders0.3%
 -ex Transport0.3%
 FOMC Minutes 
FridayNonfarm Payrolls195K
 Private Payrolls169K
 Manufacturing Payrolls5K
 Unemployment Rate4.0%
 Average Hourly Earnings0.3% (3.9% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.7%
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

Deep-Rooted

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We have now a president, Biden
Who lately, has taken much chidin’
Last night he debated
A man who he hated
Alas, polls against him did widen
 
The market response, though, was muted
With not many trades prosecuted
Instead, we await-a
The PCE data
To learn if inflation’s deep-rooted

 

While it was painful to watch, I did last through most of the debate.  Unfortunately, it didn’t help me sleep any better!  Clearly the top story around the Western world today is the performance of President Biden and the concerns it raised over his abilities to not merely execute the responsibilities of the President if he is re-elected, but to complete his current term.  There have been numerous calls by high profile Democratic strategists and pundits for him to step down from the ticket.  We shall see what happens, but my personal take is he will not willingly step aside regardless of the situation and that those closest to him will not force him to do so.

The upshot is that in the betting markets, Mr Trump is now a 60% favorite with Mr Biden at 22% and a host of other Democrats making up the difference, at least according to electionbettingodds.com.  Arguably, though, the question that most concerns all of us is how will this outcome impact markets going forward.  And remember, there is a very big election this weekend in France that is also going to have a major impact, not just in France, but in all of Europe.

Perhaps the most surprising thing to me is the non-plussed manner that markets have behaved in the wake of the debate.  Equity markets around the world have traded higher as have US futures.  Bond yields have traded modestly higher and so has oil, metals markets and the dollar.  Clearly, investors do not appear to be concerned that the leader of the free world is in such dire physical condition.  While I would not have expected a collapse, it doesn’t seem hard to foresee a chain of events that results in less positive economic outcomes.  

Or…perhaps the market has absorbed this outcome and determined that central banks, and especially the Fed, are going to be starting to err on the side of easy money to ensure that economies don’t fall into disarray, so all that rate cutting that has been discussed, hypothesized and, frankly, dreamed about may be coming sooner than the hawkish central bankers themselves had considered previously.  I understand that political events typically don’t have a big market response, but the depth and breadth of the damage that last night’s debate had on ideas about President Biden’s mental competence and acuity are stunningly large.  That cannot inspire confidence in investors.  

Of course, of far more importance to the market, obviously, is today’s PCE data release and the corresponding Personal Income and Spending figures.  So, let’s take a look at expectations there.

PCE0.0% (2.6% Y/Y)
Core PCE0.1% (2.6% Y/Y)
Personal Income0.4%
Personal Spending0.3%
Chicago PMI40.0
Michigan Final Sentiment65.8

Source: tradingeconomics.com

Of this grouping of data, the Core PCE reading is the most important as it represents the Fed’s North Star on inflation.  (While we all live in a CPI world, the Fed apparently found out that their models worked better with core PCE and so that became the benchmark.)  At any rate, forecasts are that prices, ex food & energy, did not rise in May.  That was not my lived experience, and I will wager not many of yours either, but we don’t really matter in this context.  However, the Bureau of Economic Analysis, when they are calculating GDP also calculate their own PCE figure for the quarter.  That was released yesterday with the Core PCE printing at 3.7% while GDP was raised to 1.4%.  In total, that implies nominal GDP was at 5.1% in Q1, a slight decline from Q4’s reading of 5.4%.  It should not be surprising that both these PCE measures track one another well, and as per the chart below, that seems to be the case.

Source: tradingeconomics.com

However, I cannot help but look at this chart and see that the blue line (the quarterly BEA data, RHS numbers) is not trending lower at all.  Perhaps it turns around, but perhaps the forecasts for this morning’s numbers are a bit too optimistic.  After all, we saw higher inflation in Canada and Australia this month.  As well, we have seen a continuation in the rise in the price of housing and energy.  None of those are perfect analogs for the PCE data this morning, but I sense that we may have found the lows in inflation.

Ahead of the data, as I discussed briefly above, markets are in fine fettle.  After a modestly positive session in the US yesterday, virtually every market in Asia was in the green as well, with the Nikkei (+0.6%) leading the way and smaller gains, on the order of 0.1% – 0.2% across the rest of the major markets in the region.  In Europe, the CAC (-0.3%) is bucking the trend as investors continue to leave the market ahead of the elections this weekend, but the rest of the bourses are all decently firmer, on the order of 0.35% – 0.55%.  I suppose the reason French investors are concerned is the possibility of a hung Parliament, where no party has a majority and therefore no new legislation will be able to be enacted under a caretaker government for at least a year.  Of course, there are also those who are concerned that a ‘cohabitation’ between President Macron and the RN might have trouble governing as well.  As to US markets, they continue to rally with futures higher across all three major indices this morning, roughly by 0.35%.

In the bond market, yields are higher across the board after they traded up yesterday as well.  This morning, Treasury yields are +2bps while European yields have risen between 3bps (Germany, Netherlands) and 9bps (Spain) with French and Italian yields 6bps higher.  This is the most straightforward explanation as investors demonstrate their concern with a further split between Germany and the rest of Europe regarding fiscal policies.  As to JGB’s they have slipped 2bps lower overnight, despite Tokyo CPI data printing a tick higher than expected at 2.3% headline, 2.1% core.

Oil prices (+0.75%) continue to rally as summer driving demand is now the story of the market despite the large inventory builds seen this week.  In a bit of a conundrum, metals markets are also firmer across the board despite the higher yields, although in the past hour or so, the dollar has reversed some of its earlier gains, so that is giving some support.  However, I suspect that these markets will be subject to a dislocation in the event that we see a surprising PCE report.

Finally, the dollar has edged a bit lower this morning with modest declines vs. the G10 bloc, on the order of 0.1% – 0.2%, and a few outliers vs. EMG currencies like ZAR (+1.4%) and KRW (+0.6%).  The won has benefitted from the upcoming increase in onshore trading hours as the country attempts to increase trading volumes and get more activity and more market participants to help the currency’s international standing.  As to the rand, it appears that the sharp rally today in the Johannesburg stock exchange has drawn in outside investors and supported the currency.

In addition to the data, we hear from both Governor Bowman, again, and SF Fed president Daly this afternoon.  Bowman has already explained, twice, that she would be amenable to raising rates if inflation rebounded, while you may recall Daly exhibited concern over the labor market and what to do if it deteriorates.  Well, labor is a discussion for next week when the NFP report is released.  Today is all about PCE.  My sense is it will be higher than forecast which will probably undermine equities to some extent and keep pressure on bonds while supporting the dollar.  In that situation, I see commodities suffering as well.

Good luck and good weekend

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The Fat Lady

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Is the fat lady
Starting to sing?  Listen for
More threats to be sure

 

Tell me if you’ve heard this one before, “It’s desirable for exchange rates to move stably. Rapid, one-sided moves are undesirable. In particular, we’re deeply concerned about the effect on the economy.”

Or this one, “We are watching moves with a high sense of urgency, analyzing the factors behind the moves, and will take necessary actions.”

Of course, the answer is yes, these are essentially verbatim of what Shunichi Suzuki, Japanese FinMin, said earlier this week, as well as several times back in April prior to their last bout of intervention.  It is probably step 3 on the 7-step program that leads to eventual intervention by the MOF/BOJ.   And those are his direct comments from last night in the wake of USDJPY trading to yet another new high (160.88) for the move.  The last time the currency was that weak vs. the dollar was in 1986.  

Now, perhaps I can help him analyze the factors behind the moves.  Why look, the entire interest rate complex in Japan remains significantly below the same metrics anywhere else in the world, but from a G10 perspective, specifically vs. the US.  As well, the commentary from the various Fed speakers we have heard just this week continues to indicate higher for longer remains the play.  Recall, Governor Bowman even suggested the possibility of raising rates if circumstances dictated.  I might suggest to Suzuki-san, that as long as the BOJ maintains ZIRP, and continues to hold 50% of the JGB market, the yen will remain under pressure. 

The question remains, just how high can USDJPY go?  And the answer remains much higher.  I continue to believe that we will need to see a quick move to 163, at least, before the MOF tries to slow things down again, meaning by Monday latest.  If, instead, the market simply hangs around at this new level, I expect more jawboning but no action.  The one caveat is that next Thursday is July 4th, when all banks in NY will be closed and market liquidity will be extremely suspect.  It would not be a surprise if they were to take advantage of those thin markets and aggressively sell dollars then.  It would certainly have an outsized impact.  We shall see.

Today’s likely to be at peace
As folks eye tomorrow’s release
Of PCE data
And so, options’ theta
Is vanishing like Credit Suisse

The truth is, away from the yen story, there is very little of consequence ongoing as the market sets its sights on tomorrow’s PCE data.   This evening’s Presidential debate will certainly be interesting and likely be entertaining, but it is not clear it will impact markets.  And while we continue to see gyrations in various markets, the big themes remain stable.  The Fed is not about to change its stripes as we have heard repeatedly since the FOMC meeting, the economy continues to move along, albeit at a somewhat slower pace than Q1, but not showing any hint of recession at this stage, and the geopolitical situation is constant with Russia/Ukraine and Israel/Gaza continuing to wreak havoc and destruction mostly in the background.  As such, I expect that we are going to be subject to more idiosyncratic movements in markets for now.
 
So, let’s look at what happened overnight.  After yesterday’s very limited equity moves in the US, most of Asia was in the red led by the Hang Seng (-2.1%) as tech shares were under pressure.  But the Nikkei (-0.8%) and Shanghai (-0.75%) also fell with the former a bit surprising given both the weaker yen and the surprisingly better than expected Retail Sales data released, while the latter seemed to respond to declining Industrial Profit data that was released.  As it happens, Australia shares were also softer as inflation data there continues to show stubborn strength squashing any ideas of an RBA rate cut soon.  In Europe, red is also the most common color with the CAC (-0.5%) and IBEX in Spain (-0.5%) leading the way lower.  Most other markets are softer although the DAX (+0.1%) is bucking the trend, despite lacking an obvious catalyst for the move.  And let’s face it, 0.1% is not really relevant to anything.  At this hour (7:00), US futures are pointing slightly lower ahead of the weekly Claims data.
 
In the bond markets, yields in the US backed up by 5bps and have stayed there this morning.  in Europe, the markets closed before the US move finished, so this morning, yields across the continent are higher by 3bps or so as they catch up to the US.  In Asia, the movement was stronger with JGBs +5bps and Australian bonds +10bps on the back of the US move as well as Australia’s growing inflation concerns (Consumer Inflation Expectations rose to 4.4%).  It strikes me, looking at the chart below, that yields have been in a wide range, about 90 basis points, for the past year and that we are currently pretty much in the middle of that range.  It is hard to get too excited about things until we break this range in my view.

Source: tradingeconomics.com

In the commodity space, oil (+0.35%) is rebounding slightly this morning after weakness in the wake of larger than expected inventory data released yesterday, with an over 6-million-barrel increase compared to expectations of a 5.5-million-barrel drawdown.  As to the metals markets, gold (+0.7%), which suffered on the back of the strong dollar yesterday, is rebounding and taking silver with it, although the industrial metals remain under pressure.

Finally, the dollar, which was king of the hill yesterday, with the Dollar Index trading back above 106 for a while, is softening a touch this morning, probably about 0.2% or so against its major counterparts.  However, while that is the general result today, there is one outlier, ZAR (-1.15%) which continues to demonstrate remarkable volatility amidst the political situation with no cabinet yet named.  Perhaps the driver this morning was the softening inflation picture enticing traders to believe that SARB may be considering rate cuts soon.

On the data front, this morning brings the weekly Initial (exp 236K) and Continuing (1820K) Claims data along with Durable Goods (-0.1%, +0.2% ex Transport), final Q1 GDP (1.4%) and its components of note like Final Sales (1.7%) and its Price Index (3.3%).  Remarkably, there are no Fed speakers due today either.  I think we need to keep a close eye on the employment situation as it has been slowly worsening overall.  It wasn’t that long ago when Initial Claims were pegged at 212K every week.  Now they have grown by more than 20K and any lurch higher will be noticed.  Next week’s NFP is going to be critical with the potential for a significant impact as it will be released the day after the July 4th holiday, a day when trading desks will be very lightly staffed.

For today, it is hard to get excited about anything, but if we continue to see the slow deterioration of US data, that will eventually feed into the rate picture and the dollar’s value as well.

Good luck

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A Modest Decrease

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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.

TodayISM Manufacturing49.6
 ISM Prices Paid60.0
TuesdayJOLTS Job Openings8.34M
 Factory Orders0.6%
WednesdayADP Employment173K
 BOC Rate Decision4.75% (5.00% current)
 ISM Services50.5
ThursdayECB Rate Decision4.25% (4.50% current)
 Initial Claims220K
 Continuing Claims1798K
 Trade Balance-$76.0B
 Nonfarm Productivity0.3%
 Unit Labor Costs4.7%
FridayNonfarm Payrolls190K
 Private Payrolls170K
 Manufacturing Payrolls5K
 Unemployment Rate3.9%
 Average Hourly Earnings03% (3.9% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.7%
 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

The Ocular Veil

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In NY, the jury has spoken
And folks who run risk have awoken
Now looking ahead
Investors may dread
That property rights have been broken
 
For markets, what this may entail
Is loss of the ocular veil
The full faith and credit
Of Treasury debit
Just might not be seen as so hale

 

If you have suffered through my daily writings long enough, at least past the poetry up front, you have probably surmised that my views are in accord with free markets and capitalism.  In addition, regardless of the political insanity that continues to top headlines in every publication in the US, and across much of the world, I only try to touch on it if I believe it is going to have an impact on market behavior, whether short or long term.  For instance, during the runup to Brexit, I focused on the issue because I felt certain the outcome would impact the value of the pound as well as UK interest rates and equity markets.

Well, I might argue that another Rubicon has been crossed in the US, and one that I fear may have negative long-term implications for US assets of all stripes.  The guilty verdicts that were announced yesterday afternoon against former President Donald Trump are a new, and very disturbing outcome.  Whatever your view of the man, and whether you would like to see him be re-elected or not, the idea that a sitting government in the US would throw all its effort into imprisoning its major opponent seems far more akin to the actions of dictators like Vladimir Putin, Nicolas Maduro and Xi Jinping.  And yet here we are today with that being the biggest story in the world.

What, you may ask, is the market angle here?  Consider the other thing that has happened during this administration with respect to the Russian central bank’s reserve assets at the time of Russia’s invasion of Ukraine in the winter of 2022.  While freezing them was the first step, recent comments by Treasury secretary Yellen and her compatriots in the G7 indicate that they are going to start to confiscate those assets and give them to Ukraine to help them fight the war against Russia.  Irony aside, the bigger picture, which has been discussed numerous times since the initial action, is that the move calls into question the safety of foreign government assets held in the US and other G7 nations, especially those held in the most liquid, and ostensibly safest, debt instruments in the world, US Treasury securities.  If other nations begin to worry that the full faith and credit concept has a political angle, rather than purely a financial one, it will change asset allocations all over the world.

We have seen this already as China and Russia have been transacting between themselves in CNY, and we have seen India seek to pay Russia in rupees for the oil they have been buying.  Saudi Arabia has also been willing to accept CNY for oil sales in a major change to agreements made back in the 1970’s between the US and the Kingdom.  Of course, this has been the genesis of all the talk of the end of the dollar and dollar hegemony, and the idea that an alternative reserve currency will soon be coming to fruition.

Let me give you my take, at least at this early stage.  The connection between the Trump verdict and the Russian reserves is that arguably the bedrock of the US economy and one of the fundamental keys to its long-term success has been the knowledge, by friend and foe alike, that the rule of law is deeply imbedded into all business dealings here.  We know that other nations can be capricious and confiscate foreign-owned assets, or stomp on domestic businesses for political reasons.  But in the US, historically, while politics was part of the economic process, that strand was never before in doubt.  I fear that has changed irreparably now with the Trump verdict in combination with the Russian reserve assets decisions.

Going forward, will foreign investors truly believe that the rule of law, as written in the Constitution protecting property rights, is sacrosanct?  And if that is not the case, or there is doubt that is the case, will foreign investors (and domestic ones for that matter) be as anxious to purchase and hold US assets, whether they are equities or debt?  It is way too early to answer that question, but the fact that it needs to be asked is an entirely new and disconcerting situation.

I know this may seem like a big assertion based on limited evidence.  This will especially be true if you are of the belief that Trump is a crook, the NY DA was exactly correct, and the trial outcome was appropriate.  However, I am confident that this outcome will be seen very differently than that by many citizens and investors around the world and that very question of property rights and the rule of law will be raised again and again.  And that cannot be good for US risk assets.

If we add this new political angle to what has been a recent spate of weaker than expected economic data, it is quite possible, and I believe we are already moving in this direction, that soon, “bad news will be bad”.  This means that weak economic data will not encourage the bulls to buy quickly on the thesis that the Fed is going to start cutting rates sooner than the current view, but rather that a weak economy with still sticky inflation means that company earnings are going to suffer greatly, and equity multiples will rerate lower to reflect that.  Not necessarily today or Monday, but over time.  I am going to go out on a limb and predict that the highs for US equities are now in.  So, S&P 500 at 5341, DJIA at 40,077 and NASDAQ 100 at 17,032 are all we are going to get in this move with a substantial correction far more likely than a rally extension.  I also believe that the dollar will start to suffer more aggressively going forward, that the Treasury market will suffer as well, so much so that the Fed is going to be buying bonds again before the year ends, and that commodities are going to trade much higher.

Back in January, my view was just this, that we would peak around mid-year, that the Fed might get one rate cut in, but that was all, and that risk assets would finish the year much lower.  That was based on a belief that the economy would roll over.  Now, clearly the economy, while softening a bit, is not showing signs of a significant downturn.  After all, given how much money the government is pumping into it, it would be difficult to wind up with nominal GDP falling much at all.  But this is an entirely different reason, and one that is far more worrisome in my eyes, and likely to be more gradual in its impact, but more long-lasting.  As I said, a Rubicon has been crossed and not in a good way!

My apologies for that rant, but I am truly concerned for the way that things play out going forward.  However, let’s turn to the financial and economic issues rather than the political now.  US equities were under pressure all day yesterday, closing lower across the board as concerns over a lack of Fed policy ease joined with additional weaker-than-expected US data.  While the GDP revision was exactly as expected, Final Sales and Real Consumer Spending were both softer than forecast, and in the end, those are the critical drivers of economic activity.  The Trump verdict was released after the market close, so had no direct impact.  But following the US session, Asian stocks went their own way.  The Nikkei (+1.1%) performed well despite (because?) Tokyo CPI -ex food & energy printed at 2.2%, higher than last month, but continuing its broad downtrend from early last year.  Australia and New Zealand also performed quite well, but the rest of the region had a tougher time with both Hong Kong (-0.8%) and Mainland (-0.4%) shares under pressure and losses almost everywhere else in Asia.  

In Europe, the picture is one of mostly very small declines with the UK (+0.3%) the outlier in response to some solid UK housing data as well as growth in Mortgage Lending.  As to US futures, at this hour (6:00) they are little changed as we all await the PCE data.

In the bond markets, yesterday’s decline in yields is being reversed this morning as Treasuries creep back higher by 1bp while European sovereigns are seeing more selling pressure after Eurozone CPI was released at a hotter than forecast 2.6% (2.9% core).  While all the ECB commentary is still focused on a cut next week, this cannot have been a welcome result for the doves there.

Turning to the commodity markets, oil is slightly lower this morning following yesterday’s decline that was based on the significant build in gasoline inventories.  This was quite the surprise given the start of the summer driving season and may reflect softer overall demand (remember the weak GDP data).  As to the metals markets, gold, after a modest bounce yesterday is unchanged while silver (+0.25%) and copper (-0.5%) are responding differently to yesterday’s declines and weak data.  However, as I indicated earlier, I foresee these seeing continued structural strength.

Finally, the dollar fell yesterday on the back of softer US yields, at least versus the G10 currencies.  As I highlighted yesterday, several EMG currencies are also under pressure and we continue to see that this morning, notably KRW (-0.7%) which cannot get out of its own way as worries over Chinese growth (last night Chinese PMI data was weak across the board with Manufacturing printing at 49.5) continue to weigh on its export prospects.  But I would say that broadly, the dollar is on its back foot right now and unless US yields start to climb again, will remain so.

This morning’s key data is, of course, PCE (exp 0.3% M/M for both Headline and Core with 2.7% and 2.8% expectations for the Y/Y respectively.)  As well we see Personal Income (0.3%), Personal Spending (0.3%) and Chicago PMI (41.0).  Finally, the last Fed speaker before the quiet period will be Raphael Bostic from the Atlanta Fed, whom we have heard half a dozen times in the past two weeks and seems unlikely to change his tune.  However, I must note that there is some dissent on the FOMC as evidenced by dueling comments yesterday from Dallas’s Lorie Logan and NY’s Jonathan Williams.  Logan continues to be concerned over the pace of decline in inflation and exhorts the committee to remain flexible and consider hikes if necessary.  Williams was adamant that inflation would achieve their target by next year and easing policy was appropriate.  In truth, that has been the most dovish commentary we have heard from a Fed speaker in a while.

One last thing regarding elections.  Yesterday’s South African results show that the ANC, which has led the country since Apartheid, is now scrambling to put together a coalition government which will be much weaker, or at least less able, when it comes to implementing any agenda.  Meanwhile, this weekend, Mexico goes to the polls and AMLO’s hand-chosen successor, Claudia Sheinbaum, seems set to win in a landslide with very little change in the nation’s international stance.

As I said at the top, the changes I foresee will be gradual, but I believe the direction of travel has changed.  Today will be a response to the PCE data, where a hot number is very likely to see concerns rise over the Fed’s future actions and risky assets decline, while a cooler than forecast number could well see a short-term rally.  But do not lose sight of the big picture.

Good luck and good weekend 

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‘Voiding a Crisis

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There once was a fellow named Jay
Whose job, as it works out today
Is managing prices
And ‘voiding a crisis
A mandate from which he can’t stray
 
The problem he has, as it stands
Is others are tying his hands
So, prices keep rising
And he’s now realizing
He’s no longer giving commands

Friday’s PCE data was not as hot as some had feared, but certainly showed no signs of cooling.  To recap, the M/M numbers for both headline and core were 0.3%, as expected, although at the second decimal they must have been higher because both Y/Y numbers were higher than expected at 2.7% headline and 2.8% core.  As can be seen in the chart below from tradingeconomics.com, both the core (blue line) and headline (gray line) have the appearance of having bottomed.

While things certainly could have been worse, especially based on the price deflator data we saw in the GDP report, this cannot have helped Chair Powell’s attitude.  Remember, too, that 0.3% rises annualize to a bit more than 3.6%, far higher than the ostensible target.  The inflation fight has not yet been won by the Fed although I expect that we are going to hear a lot of commentary going forward that it has.  Wednesday brings the FOMC meeting, something on which we will touch tomorrow, and obviously a critical aspect of the discussion.  One other thing, given the data was not as hot as feared, it took until yesterday for the Fed whisperer to write his article, which was focused on the long-term neutral rate rather than inflation per se.

Did they sell or not?
Looking at charts, possibly
But they’ll never say

The next story of note was the fact that USDJPY trade above 160 last night, during the early hours of the session.  As can be seen from the below chart from yahoo finance, it seemed to have touched 160.216 before slipping back to the mid-159’s and then collapsing a few hours later, back to its current state just below 156.

Something to remember is that it is golden week in Japan, with the nation on holiday yesterday so banks were, at most, running skeleton staffs of junior traders and market liquidity was significantly impaired.  But the question today is, did the BOJ intervene on behalf of the MOF.  From what I have been able to glean, there was significant selling by the big three Japanese banks, certainly a sign that intervention was possible.  Of course, the chart shows how sudden the decline was, also an indication that it could have been intervention.  The best explanation I have heard for the initial move above 160 was it was some bank(s) running stop-losses at the level, as well as triggering barriers there in the options market.  At this hour (6:15), the yen has appreciated by 1.6% from Friday’s closing levels.  However, I sincerely doubt that we have seen the end of the weakness in the yen.  This is especially true if Chair Powell comes across as more hawkish on Wednesday, something that is clearly quite possible.

The last thing to note for today
Is Yellen and her QRA
How much will she borrow?
And Wednesday, not ’morrow
We’ll learn if more bonds are in play

This brings us to the Quarterly Refunding Announcement (QRA) to be released at 3:00 this afternoon.  While historically, the only people who cared about this report were bond market geeks, it has gained a significant amount of status since the October 31st announcement where the Treasury indicated it would be issuing less debt than had been expected.  That led directly to the massive bond market rally at the end of last year as well as the concomitant stock market rally.  Looking at the below chart from tradingeconomics.com, it is pretty clear when things turned around, and it was right when the QRA came about.

Once we know the borrowing plans from this afternoon, we will learn on Wednesday the mix of borrowing that will be coming, and whether Secretary Yellen will continue to issue a more significant amount of debt in T-bills, or if she will try her hand at notes and bonds again.  Given that yields have been climbing lately, I suspect there will be more T-Bill issuance than is the historic norm, which has been about 20% of total borrowing, but perhaps not the 80% she issued last quarter.  Ultimately, the real concern today is that the estimated borrowing numbers could be larger than current forecasts, and perhaps just as importantly, the question of just how much was borrowed last quarter.  The sustainability of this process is starting to be called into question although I don’t expect anything to happen quite yet.  

Ok, that’s enough for one day!  A quick recap of the overnight session shows that Chinese shares rallied on the back of news from Beijing that the government was relaxing some regulations in the property sector.  In fact, that was sufficient to help all Asian equity markets higher on the order of 0.5% – 1.0%.  Meanwhile, European bourses are mixed this morning with both the DAX and CAC little changed, the FTSE 100 edging higher by 0.5%, but other continental exchanges under pressure.   As to US futures, they are very modestly higher this morning after Friday’s rally.

In the bond market, after modestly higher yields on Friday, this morning is seeing Treasury yields slip 4bps and European sovereigns fall between 5bps and 7bps.  Clearly, there is not much concern that the QRA is going to indicate massive new borrowing, but I guess we will know this afternoon.  

Commodity prices are on the quiet side this morning with oil basically unchanged, as is gold as both hold onto last week’s gains.  However, copper (+0.5%) continues to rally and is now just $0.30/pound below its all-time highs of $4.89.  There are many stories regarding the copper market with some discussing hoarding by the Chinese and others focused on the needs of the ongoing ‘energy transition’ which will need significant amounts of the red metal to electrify everything.  While it has run up quite quickly of late, I must admit the long-term view remains positive in my mind between the absence of new mines and the needs of the transition although a pullback would not be a surprise.

Finally, the dollar, aside from vs. the yen, is generally lower across the board.  While it remains in the upper end of its recent trading range, it appears the sharp decline in USDJPY has had knock-on effects elsewhere. The financial currencies, like EUR (+0.3%), GBP (+0.4%) and CHF (+0.3%) are all firmer as are the commodity bloc (NOK +0.3%, ZAR +0.45%, AUD+0.5%).  In fact, I am hard-pressed to find a currency that is underperforming the greenback.  Positioning in dollars has been quite long lately so ahead of this week’s FOMC meeting as well as the NFP on Friday, it is quite likely that we are seeing a little reduction in those positions.  However, we will need to see a change in the data to change the longer-term view.

Obviously, there is a ton of stuff coming out this week.

TodayQRA 
TuesdayEmployment Cost Index1.0%
 Case Shiller Home Prices6.7%
 Chicago PMI44.9
 Consumer Confidence104.0
WednesdayADP Employment 179K
 ISM Manufacturing50.1
 JOLTS Job Openings8.68M
 FOMC Rate Decision5.50% (unchanged)
ThursdayInitial Claims212K
 Continuing Claims1782K
 Nonfarm Productivity0.8%
 Unit Labor Costs3.2%
 Factory Orders1.6%
FridayNonfarm Payrolls243K
 Private Payrolls180K
 Manufacturing Payrolls7K
 Unemployment Rate3.8%
 Average Hourly Earnings0.3% (4.1% Y/Y)
 Average Weekly Hours34.4
 Participation Rate62.7%
 ISM Services52.0

Source: tradingeconomics.com

In addition to all this, on Friday we will hear from two Fed speakers, Williams and Goolsbee, and I imagine if they are unhappy with the market response to their messaging on Wednesday, we will hear from more.

Ultimately, this is an important week to help us understand how things are going in the economy and how the Fed is thinking about everything.  As long as payrolls continue to hang in there, any chance of Fed dovishness seems to diminish by the day.  But stranger things have happened.  As to the dollar, today’s position adjustments make sense and I suspect there will be a few more before the big news hits on Wednesday and Friday.  Til then, I think all we can do is watch and wait.

Good luck

Adf

Stagflation

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Call rates will remain
Zero to Point-one percent
We’ll still purchase bonds

 

In a move that clearly captured my heart, the BOJ left policy on hold last night, as widely expected.  But the key is that the policy statement, in its entirety, is as follows:

I would contend they could have used my haiku above and completely gotten the message across!  This is the best central bank move I have seen in forever, an economy of words with limited discussion about their views of the future.  But that the Fed would be so terse in their statements.  By forcing investors and traders to consider all the issues and the best, or at least possible, ways in which the central bank can achieve their stated goals, positioning would be substantially reduced because nobody would think the central bank ‘had their back’.  This would prevent another SVB-type collapse, and probably go a long way to reducing the massive wealth inequalities that central banks have fostered since the GFC.  Just sayin’!

The market response to this, and the subsequent Ueda press conference was to sell the yen even more aggressively, with USDJPY touching yet further new 34-year highs at 156.80, higher by more than one full yen (0.7%) and JGB yields climbed to 0.92%, slowly approaching the big round number of 1.00%.  FinMin Suzuki was out trying to talk the yen higher (dollar lower) with the following comments, “the weak yen has both positive and negative impacts, but we are more concerned about the negative effects right now.”  Those comments were sufficient to drive USDJPY down about 90 pips in a few minutes, but as of right now (6:20), the dollar is back to its highs.  As long as the Fed and the BOJ remain on different wavelengths, the yen will not be able to rally, trust me.

The GDP data surprised
By showing less strength than surmised
But really, for Jay
The prob yesterday
Was PCE so energized

This brings us to the GDP data yesterday, which missed badly at 1.6%.  However, that was not the worst part of the report.  Alongside the GDP data, there is a PCE calculation, that while not the one on which the Fed focuses, is still a harbinger of how things are going.  That number was higher than expected with the Core rising 3.7% Q/Q, up from 2.0% in Q4.  The upshot of this data was that growth is slowing and inflation is rising, exactly the opposite of the Fed’s (and the administration’s) goals and moving toward the concept of stagflation.

While quoting oneself is not the best etiquette, I think it makes some sense here as I described this exact situation back in January as follows:

Stagflation is an awful word as it describes a state
Where prices rise too fast while growth just cannot germinate.
And this, dear friends, is what I fear will come to pass this year
By Christmas, bonds and stocks will fall while metals hit high gear.

It should be no surprise that both bonds and stocks fell yesterday as market participants are growing concerned that the Fed has lost control of the narrative.  After all, the last time we had stagflation, Chairman Volcker chose to fight inflation first by raising the Fed funds rate to 21% and driving the economy into a double-dip recession from 1980-1982.  But the debt/GDP ratio at the time was just 30% or so and the government could afford it.  That is not the case today, and quite frankly, there are exactly zero politicians on either side of the aisle who can tolerate a recession of any type, let alone a double dip.  My guess is that all hands will be pushing to increase the rate of growth and let inflation rip because given the current drivers of inflation (commodity prices, near-shoring and demographics), it is not clear the Fed can do anything about it anyway.  Don’t you feel better now?

All this leads us to this morning’s PCE data (exp 0.3% M/M for both headline and core, 2.6% Y/Y for both readings) as well as Personal Income (0.5%) and Personal Spending (0.6%).  Given yesterday’s outcomes and the fact that the Bureau of Economic Analysis produces both sets of numbers, the whisper number is clearly higher.  If that should manifest, I suspect that the price action from yesterday, lower stocks and bonds, is very likely to continue despite the after-market rally of both Google and Microsoft on better-than-expected earnings data.  I also suspect that before noon, the Fed whisperer, Nick Timiraos, will have an article out in the WSJ to give some Fed perspective as they are currently muzzled in their quiet period.            

I don’t think there’s anything else to say about this, so let me recap the overnight session, at least the parts I have not yet discussed.  While the US equity session did not finish on its lows, all three major indices were lower by at least -0.5% on the day.  However, the same was not true in Asia with the Nikkei (+0.8%) responding positively to the fact that tighter monetary policy was not on its way, while Chinese (+1.5%) and Hong Kong (+2.1%) shares positively ripped on the back of the strong tech earnings in the US.  As to European bourses, they are all in the green this morning, with Spain (+1.1%) leading the way but all higher by at least +0.5%.  Lastly, US futures are pointing higher as well after the strong earnings numbers overnight, up by +1.0% or so at this hour (7:20).

After jumping 8bps in the wake of the GDP data yesterday, 10-year Treasury yields slid a bit and finished the day up 5bps.  This morning, they have given back two more basis points, but still trade right at 4.70%.  If this morning’s data is 0.4%, watch for another sharp move higher in yields today.  European yields pretty much followed the US yesterday, all closing higher by between 4bps and 6bps, and this morning they are lower by similar amounts, right back to where they started.

Oil prices (+0.5%) are climbing higher again, seeming to have found a recent bottom and looking like they are set to push back toward $90/bbl by summer.  While the real GDP data was softer, nominal remains solid and that is what drives demand.  In the metals markets, they all jumped on the data release and this morning are continuing higher (Au +0.7%, Ag +0.8%, Cu +0.8%, Al +0.9%).  In the industrial metals, inventories are dropping while the precious space is clearly responding to the inflation fears.

Finally, the dollar is little changed overall this morning.  while it has rallied sharply vs. the yen, ZAR (+0.85%) is gaining on metal market strength as an offset and pretty much everything else is +/- 0.25% or less.  My take is everyone is waiting for this morning’s data to determine if the Fed is going to become even more hawkish, or if there will be a reprieve. 

In addition to the PCE data, we get Michigan Sentiment at 10:00 (exp 77.8, down from 79.4).  Right now, players are holding their collective breath for the numbers.  After the release, it’s all about the results.  Given that every recent inflation print has been on the high side, I expect this to be no different.  Bonds should suffer, commodities should outperform, and I expect the dollar to do well.

Good luck and good weekend

Adf

Piffling

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The topic du jour
Is, will Japan intervene?
And will it matter?

History has shown
Until policy changes
All else is piffling

The next 30 hours have the chance to be quite meaningful for markets as we will learn a great deal about several very key issues.  While this morning’s Q1 US GDP data will be mildly interesting, I believe the real keys will be the following in order of their release: 1) earnings from Alphabet Google, Intel and Microsoft; 2) BOJ meeting and Ueda press conference; and 3) US Core PCE.

Let’s unpack them in order.

1)    Earnings for three key tech stocks are a critical data point to determine whether the current equity mulitples still make sense.  Already this week we saw Tesla miss estimates but give positive guidance and rally sharply on Tuesday, then Meta Facebook beat earnings nicely but gave negative guidance (they said costs were rising because of all the AI spending but revenues would not show a bump anytime soon on the back of that spending) and the stock fell sharply overnight and is called down -13% to open this morning.  Just remember, if the generals of the stock market rally are slipping, typically the market can follow lower.

2)    Now that USDJPY has breached the 155 level and has not even consolidated, but continues marching higher, all eyes are on Ueda-san to see if he will adjust policy to help mitigate the yen’s declines.  Of course, the BOJ is not in charge of yen policy, that is an MOF issue, but I assure you the two entities work closely together.  Ueda’s problem is that no matter what he does, it will not have enough of an impact to make a difference.  While no policy change is expected, even if the BOJ hikes rates 25bps, it would only have a very short-term effect because the interest rate differential remains huge and would still be in excess of 500 basis points.  While there are reasons for Ueda to consider a hike (rising wages, higher energy prices and the weak yen all can lead to further inflation), given they hiked at the last meeting and explicitly said they would be maintaining easy policy, it seems hard to believe anything will change.  (As an aside, the very fact that nobody is expecting a move would allow a disproportionate pop in the yen, although I believe it would be quite short-lived.)

3)    Finally, the release of the PCE data tomorrow morning will update both market participants and policymakers on the likelihood that the Fed is going to achieve their inflation target anytime soon.  Recall, we have seen three consecutive hotter than expected CPI monthly reports and the last two PCE reports were similarly hotter than expected.  If this one follows that pattern, any idea that a cut is coming before the election will dissipate even further.  As of this morning, the Fed funds futures market is pricing just 42bps of cuts for all of 2024 with the first cut not expected until September.  The options market is now pricing a 20% probability of a rate hike in the next twelve months.  I believe tomorrow’s data matters a great deal.

It is part 3 of my little exercise that is the key for USDJPY going forward.  Just like the ECB (and BOE and BOC), the BOJ was counting on the Fed to begin their rate cutting cycle initially by March, but certainly by June, and expecting quite a few rate cuts.  That would have been crucial to reduce the US yield advantage over the yen and likely would have seen the dollar slide against most currencies.  But it appears that the US economy, which continues to be propped up by massive deficit government spending, is not going to allow the Fed any leeway to reduce rates.  If that continues to be the case, and I see no reason for that to change ahead of the election, then the dollar is going to retain its bid.  In fact, this is exactly why yesterday I highlighted the conversations that are apparently ongoing within the Trump camp regarding ways to weaken the dollar.  Right now, it is not going to fall on its own.

So that’s how things stand as we head into a crucial period with disparate but important information.  In the meantime, let’s look at the overnight activity.

Yesterday’s US session was a wash as early declines were recovered into the close, but the Meta earnings have US futures pointing lower by about 0.7% at this hour (6:45).  Those earnings also seemed to impact Tokyo, which saw a sharp decline of -2.2% although Chinese and Hong Kong shares managed to rally on the session a bit, about 0.5%.  The rest of the time zone was mixed with some gainers (India, New Zealand, Thailand) and some laggards (South Korea, Taiwan).  The picture in Europe is also mixed with the FTSE 100 (+0.6%) having a solid session on the strength of an M&A deal regarding Anglo American, the mining giant receiving an unsolicited buyout offer from BHP Billiton.  However, pretty much the entire continent is under water this morning, sagging by 0.65% or so across the board.

In the bond market, Treasury yields are unchanged this morning, but 10yr still sit at 4.64%.  I expect that the data today and tomorrow will have quite an impact there.  European sovereign yields are all slipping 2bps this morning, as what little data that has been released, German GfK Confidence and French Business Confidence) have been on the soft side with a few comments that the June rate cut remains the favorite. Perhaps of more interest is that 10yr JGB yields rose 3bps overnight and are now at 0.89%, their highest level since November in the wake of the ostensible end of YCC.  Perhaps traders here are starting to bet on a BOJ move.

In the commodity space, oil (+0.3%) is bouncing from its worst levels recently, but in truth, remains in the middle of its trading range for the past week near $83/bbl.  Yesterday’s EIA data showed a very large net draw of inventories which has helped support the black sticky stuff.  As to the metals markets, it appears that the correction may be over with all the main players higher this morning (Au +0.5%, Ag +0.6%, Cu +1.7%, Al +0.2%).  Remember, if tomorrow’s PCE is hot, the metals should continue to rally.

Finally, the dollar is under a little pressure overall this morning, although it remains near its recent highs.  ZAR (+1.15%) is the leading gainer on the back of that metals strength, but we are seeing strength in AUD (+0.45%) and CLP (+0.6%) also helped by the metals markets.  However, it is not just that story as the euro (+0.2%) and pound (+0.4%) are both firmer and dragging their CE4 acolytes along for the ride as well.  The one exception remains the yen (-0.2%), which is above 155.50 as I type.  Of course, that story is told above.

Today’s data is as follows: Initial (exp 214K) and Continuing (1810K) Claims as well as Q1 GDP (2.5%) with its subsets of Real Consumer Spending (2.8%) and its measure of PCE (3.4%).  It is important to note that this PCE data is not the one the Fed tracks closely, although I am certain they pay attention.  FWIW, the Atlanta Fed’s GDPNow number is currently 2.7%.

Now we wait for the data to come.  When the dust settles, we should have a somewhat better idea of how things may play out, but right now there is a great deal of uncertainty.  In the end, nothing has altered the fact that the dollar continues to benefit from the relative tightness of the Fed vs. other nations, and that should continue to support the dollar.

Good luck
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