Tag Archives: #Powell

Less Stout

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Suzuki-san and
Ueda-san are clearly
Flocking together

Events continue to unfold in Japan that appear to point to a more concerted effort to address the still weakening yen.  The problem, thus far, is that it hasn’t yet really worked, absent the direct intervention we saw at the beginning of the month.  For instance, last night, 10-yr JGB yields rose to their highest level since June 2012, trading up to 0.969% and finally looking like they are going to breech that 1.00% level that had so much focus back in October.  At the same time, the two key players in this drama, FinMin Suzuki and BOJ Governor Ueda are actively speaking to each other as they try to coordinate policy.  The problem for Suzuki-san is that Q1 GDP fell back into negative territory again, thus bringing two of the past three quarters down below zero.  While that is not the technical definition of a recession, it certainly doesn’t look very good.

And yet, the yen remains under pressure, slipping another 0.1% last night, and as can be seen from the chart below, continuing its steady decline (dollar rise) from the levels seen immediately in the wake of the intervention.

Source: tradingeconomics.com

Another interesting thing is that our esteemed Treasury Secretary, Janet Yellen, seems to be concerned over any intervention carried out by the Japanese, at least based on comments she recently made in a Bloomberg interview, “It’s possible for countries to intervene.  It doesn’t always work without more fundamental changes in policy, but we believe that it should happen very rarely and be communicated to trade partners if it does.” 

There have been several analysts of late who have made the case that Yellen’s trip to Asia last month included a ‘secret’ Plaza Accord II type arrangement, where there was widespread agreement that the dollar needed to come down in value.  First off, secrets like that are extremely difficult to keep secret, and history shows that doesn’t happen very frequently.  But more importantly, based on the fact that inflation is one of the biggest problems that her boss has leading up to the election, a weaker dollar is the last thing she would want.  I suspect if we continue to see the yen decline, the BOJ/MOF will be back at the intervention game again, but the US will not be helping.  Keep in mind, though, Japanese yields.  If the BOJ is truly going to allow yields to rise in Japan, that would have a significant impact on the yen’s value in the FX markets.  While 1.00% is a big round number, I think we will need to see the BOJ demonstrate a more aggressive stance overall…or we need to see the data turn softer in the US to allow the Fed to get on with their much-desired rate cuts.  We will need to watch this closely going forward.

While everyone’s waiting to see
How high CPI just might be
One cannot rule out
An outcome less stout
Where bond and stock bulls are set free

Which brings us to the inflation story.  By this time, everyone is aware that tomorrow’s CPI data is seen as a critical piece of the puzzle.  I continue to read coherent arguments on both sides of the debate regarding the trend going forward.  (Let’s face it, the error bars are far too wide to be confident in a specific forecast.)  For the inflationistas, they continue to look at things like the housing market, which while frequently expected to see declining price pressures, has maintained an upward trend for the past several years.  As well, things like the dramatic rise in certain commodity prices (coffee comes to mind) and the substantial rise in the price of insurance (something of which I speak from personal experience!), there is ample evidence that prices continue to climb. 

Part of this puzzle may be the result of the fact that companies continue to successfully raise prices, or at least had been doing so for the past two years, as evidenced by the continued strong earnings, and more importantly, still high gross margins they are able to achieve.  So, as input prices have risen, they have passed those costs along to the consumer quite successfully.  Now, the comments from Starbucks and McDonalds at their earnings reports indicating business is slowing down and attributing that slowdown to rising prices may well be a harbinger that companies have lost the ability to keep this up.  But two companies, even large ones, are not nearly the whole economy.  As well, much has been made, lately, of the K-shaped economy, where the haves continue to benefit from the rise in asset prices and are far less impacted by rising prices as they can afford them.  This has led to continued strong demand for luxury goods, which while a smaller sector of the economy, remain highly visible. Meanwhile, the less fortunate lower 90% of the population find themselves struggling to make ends meet as real wages remain stagnant and there continues to be a switch from full-time to part-time employment ongoing as companies adjust their staffing needs.  PS, those part time jobs don’t pay as well and generally don’t have benefits, so any price increases are very tough to swallow.  In the end, it appears that housing, insurance services and food remain in upward price trends.

On the flipside, there are many who see that while Q1’s inflation data was sticky on the high side, things should begin to improve going forward.  They point to things like M2, which has fallen dramatically over the past two years, although has recently inflected higher again.  However, the argument is that the lag between the movement in M2 and inflation is somewhere in the 16-24-month period, and we are now due to see prices decline.  In addition, they point to things like loan impairments and credit card delinquencies rising as signs that companies have lost their pricing power and prices will reflect that by slowing their ascent.

Now, today we see the PPI, which may give clues as to tomorrow’s outcome and the following are the median expectations:  headline 0.3% M/M, 2.2% Y/Y; core 0.2% M/M, 2.4% Y/Y.  Looking at the chart, it certainly appears that this statistic has bottomed out just like CPI.

Source: tradingeconomics.com

But here’s the thing…I have a feeling that regardless of the outcome, the market is going to rally in both stocks and bonds.  Certainly, if it is a softer than forecast number, the rate cut narrative is going to be going gangbusters and stocks will rocket while yields fall.  If it is on the money, my sense is the market is still in the camp that despite what we continue to hear, especially with Powell having removed the possibility of a rate hike, that the view will turn to rate cuts are coming as the Fed’s underlying dovishness will prevail.  But if the numbers are hot, while the initial reaction will almost certainly be a decline in risk asset prices, I have a feeling it will be short-lived.  Positioning is not overly long here, at least according to the fear/greed indicators, and the theme that the administration will do all it can to get re-elected, meaning lots more fiscal support, is going to work in favor of risk assets.  One other thing, if there is some trouble in the bond market, the one thing we know for sure is that Powell will come to the rescue and support the whole structure.

Net, while the timing of each outcome may differ, I sense the end result will be the same.  As to the dollar, I remain in the camp that international investors will continue to buy dollars to buy the S&P.  As well, given it seems very clear that both the ECB and BOE are going to cut rates in June while the Fed remains a much lower probability to do so, that should prevent any sharp dollar decline, although it may not push it any higher.

Overnight, basically nothing happened as everybody is holding their collective breath for tomorrow.  Maybe today will be a harbinger, but I expect a generally slow session overall absent a HUGE surprise in PPI.

Good luck

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Bears Will Riposte

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With CPI later this week

And many Fed members to speak

The news of the day

Is China’s array

Of debt issues they will soon seek

 

However, what matters the most

For markets is Wednesday’s signpost

If CPI’s cool

The bulls will still rule

But hot and the bears will riposte

 

While we all await Wednesday’s CPI data with bated breath, there are, in fact, other things happening in the world that can have an impact on markets and economies as well as on the narrative.  The story that seems to be getting the most press today is the leaked plans of China’s ultra-long bond issuance that was first hinted at two weeks ago.  The details show they are planning to issue, as soon as next Friday, the first tranche of 20-year bonds, with 50-year bonds coming in June and then the lion’s share of the issuance, 30-year bonds, due by November.  The total amount to be issued is CNY 1 trillion split as CNY 300 billion of 20-yr, CNY 600 billion of 30-yr and CNY 100 billion of 50-yr.

The reason this story is getting so much press is that the natural consequence of this issuance is that the national government is going to be spending that money on numerous projects, mainly infrastructure it seems, in an effort to ensure they achieve President Xi’s 5% GDP growth target for 2024.  This has knock-on implications for inflation, as it is unlikely that China’s disinflationary impulse can extend greatly with all this additional spending, and for markets as there will be clear impacts on Chinese interest rates, the CNY exchange rate and Chinese equity markets.  After all, CNY 1 trillion (~$138 billion) is a lot of money to push through in a short period of time so there will undoubtedly be some leakage from real economic activity into financial actions, and ultimately, that money will impact the performance of many companies to boot. 

A funny thing about leaked information is often the timing of those leaks.  After all, I’m pretty sure that it was no accident that this news managed to escape into the wild on the day after China’s loan data showed some pretty awful results.  For instance, what they term Total Social Financing, which is defined as a broad measure of credit and liquidity in the economy, FELL CNY 200 billion in April, the first decline in the history of the series since it began in 2002.  As well, New Yuan loans fell to CNY 730 billion, far below forecasts of CNY 1.2 trillion and down substantially from March’s data.  While this was not a historic low amount, it was definitely in the lower decile of readings and an indication that economic activity is just not doing much there.

As it happens, given the news was more about the specific timing than the idea of the issuance, the impact on the yuan was limited as it has barely moved.  Onshore Chinese equity markets did erase some early losses to close flat on the day after the news leaked into the market and Hong Kong shares rallied nicely, up 0.80%. 

But in truth, beyond this story, there has been very little of interest as all eyes turn to Wednesday morning’s CPI release.  I will offer my views on how that may play out tomorrow, so for now, let’s just quickly survey the overnight session and take a look at what is on deck this week, especially given the number of Fed speakers we shall hear.

Away from the Chinese markets, the only other equity market in Asia with a major move was Taiwan’s TAIEX (+0.7%), clearly benefitting on the idea that some of that money would head across the Strait, with the rest of the region +/- 0.2% or less.  Again, waiting for CPI is still the major idea.  This is true in Europe as well, although the bias is for very small losses, on the order of -0.2% or less, rather than the small gains seen in Asia.  Not surprisingly, US futures are virtually still asleep at this hour (6:45) and unchanged from Friday’s levels.

In the bond market, yields are edging lower by 2bps pretty much across the board, with Treasuries leading the way and virtually every European sovereign following suit by the same amount.  As always, the US market remains the dominant player here.  In Japan, though, yields crept higher by 3bps after the BOJ explained that they would be reducing their QQE purchases to ¥425 billion, from ¥475 billion last month.  Perhaps they really are trying to tighten policy!

In the commodity markets, oil (+0.6%) is edging higher after a generally rough week last week.  There has been no new news here, so this is all simply trading machinations.  Of more interest are the metals markets with copper (+0.9%) continuing its recent rally as it responds to the Chinese infrastructure spending news.  However, precious metals are under pressure today with gold (-0.75%) having a great deal of difficulty finding a bid as the market argument of whether inflation is picking up or not remains untested.

Finally, the dollar is mostly little changed with only a few currencies showing any life this morning, all in the EEMEA bloc.  ZAR (+0.4%) is firmer despite gold’s decline, as traders focus on hints that the SARB is going to maintain its tight monetary policy for even longer, not following the ECB when they cut in June.  Meanwhile, CZK (+0.5%) rallied on stronger than expected CPI data with the M/M number coming at +0.7% and talk that the central bank will be holding firm for longer than previously anticipated.

Looking at this week’s data and commentary, there is much ground to cover although we start off slow with nothing today:

TuesdayNFIB Small Biz Optimism88.1
 PPI0.3% (2.2% Y/Y)
 -ex food & energy0.2% (2.4% Y/Y)
WednesdayCPI0.4% (3.4% Y/Y)
 -ex food & energy0.3% (3.6% Y/Y)
 Empire State Mfg-10
 Retail Sales0.4%
 -ex autos0.2%
ThursdayInitial Claims220K
 Continuing Claims1790K
 Housing Starts1.41M
 Building Permits1.48M
 Philly Fed7.7
 IP0.1%
 Capacity Utilization78.4%
FridayLeading Indicators-0.3%
Source: tradingeconomics.com

In addition to all that, we hear from, count ‘em, 11 Fed speakers during the week, including Chair Powell Tuesday morning (before CPI although he will probably know the number).  As well, he speaks again next Sunday afternoon.  I maintain they all speak too much and too often, and we would be far better off if they simply adjusted policy as they saw fit and ended forward guidance!

But we know they will never shut up, so we must deal with it as it comes.  As to today, it is hard to get excited about anything happening of note given the perceived importance of the rest of the week.  So, look for a quiet day today, a perfect day to initiate some hedges amid benign market conditions.

Good luck

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Dull as Can Be

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While last week a great deal was learned
‘Bout how much the Fed is concerned
That prices won’t fall
Chair Powell’s clear call
Was higher for longer’s returned

And next week, we’ll see CPI
A critical piece of the pie
Is ‘flation still hot?
And if it is not
Will traders, more equities, buy?

But this week is dull as can be
With virtually nothing to see
No data of note
And no anecdote
About which the masses agree

There is precious little to discuss this morning.  The market is still generally in a good mood for risk assets on the back of the combination of the perceived Powell dovishness and the softer than expected NFP data which adds to the opinion that monetary policy going forward will loosen further.  And this week offers virtually no data at all, just the weekly Claims data and then Michigan Confidence on Friday.

Granted, we will hear from several Fed speakers, a process which got started yesterday when Richmond Fed president Barkin explained that, while hopeful inflation declines, he continues to believe that the current policy stance is “sufficiently restrictive.”  Meanwhile, NY Fed president Williams assured us that, eventually there will be rate cuts, that GDP would remain solid and that the Fed is looking at the “totality” of the economic data.  Given how frequently Chairman Powell used that word, totality, I have the feeling that at the end of the FOMC meeting last Wednesday, Powell reminded every speaker to use that phrase in their speeches.  I only say that because I would contend it is not a word used regularly by the population, even when it might be appropriate.

But did we actually learn anything new from these two?  I would argue we have not, nor is it likely that any of the other speakers lined up this week, starting with Kashkari today and followed by Governors Jefferson and Cook tomorrow, SF President Daly on Thursday and Governors Bowman and Barr along with Chicago president Goolsbee on Friday, will tell us anything new at all.

So, where does that leave us?  With no new data and a low probability of new Fed opinions to be revealed, this week has all the earmarks of a complete nothingburger.  Granted we hear from both the Swedish Riskbank (no change expected) and the BOE (no change expected) but given the lack of likely policy adjustment, markets will be trying to discern the subtleties of their comments.  And the one thing we all know extremely well is that markets know absolutely nothing about subtlety.  With this in mind, my expectations are that the current driving force, the underlying bullish thesis based on slowly easing monetary policies around the world, will continue to be the main driver of markets this week.  This is not to say that things are on autopilot, but until we see a new piece of information, range trading with a bias toward higher risk asset prices seems to be the most likely outcome.

This was generally what we saw overnight with most Asian markets performing well led by the Nikkei (+1.6%), catching up after the Golden Week holidays, but other than Hong Kong (-0.5%), the rest of the region was green.  Europe, too, is having a good session, with gains ranging from the CAC (+0.3%) to the FTSE 100 (+1.0%).  However, at this hour (7:20), US futures are essentially flat.

Bond markets are still feeling good about the Fed and weaker employment data with yields continuing to drift lower.  This morning, Treasuries have seen yields decline 3bps, while in Europe, continental sovereigns are seeing similar yield declines.  The big exception is the UK, where gilt yields are down 9bps this morning despite any news of note or commentary by BOE policymakers.  I think there is a growing anticipation that the BOE is going to pivot more dovish on Thursday which is driving this story.  Finally, with Japan back in session, JGB yields also declined 3bps as the yen’s recent strength (albeit not today where it has drifted lower by -0.2%) has allayed some market fears that the BOJ will need to be more aggressive in their policy tightening.

Commodities, which have had a terrific run are under pressure this morning, although given the absence of new information, this has all the hallmarks of a trading correction.  But oil (-0.4%) cannot gain any traction despite the fact that Israel is in the process of their long-awaited incursion into Rafah while ceasefire talks have faltered.  Metals, too, are under pressure across the board, but on the order of -0.4% for all of them.  Given the recent movement, this cannot be surprising (nothing goes up in a straight line) and I expect that we will see directionless price activity for the next several sessions.

Finally, the dollar is ever so slightly firmer this morning, with DXY having bounced off the 105 level and USDJPY starting to rise again with no sign that the MOF is keen to do anything else.  But as I look across the board, the largest movement of any currency, G10 or EMG, has been just 0.3% (both KRW and NOK having fallen that amount) which is really indicative of the doldrums into which this market has fallen.  I will say that there is growing talk that the next big trade is to be long yen (short dollars) with more and more people indicating they see higher Japanese rates coming while the Fed drifts toward eventual rate cuts.  The hard part about this trade is it is extremely expensive to carry for any length of time.  Until the Fed preps the market for cuts, rather than its current higher for even longer stance, I would be wary of the trade.  However, as I explained yesterday, for hedgers, this is exactly when options make the most sense.

And that’s really all there is.  Consumer Credit (exp $15.0B) is released this afternoon at 3:00 and Mr Kashkari speaks at 11:30.  It beggars’ belief that he will say something new and exciting so I anticipate a very dull session across the board today.

Good luck
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At Long Last

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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 Payrolls243K
Private Payrolls190K
Manufacturing Payrolls5K
Unemployment Rate3.8%
Average Hourly Earnings0.3% (4.0% Y/Y)
Average Weekly Hours34.4
Participation Rate62.7%
ISM Services52.0

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

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Tortured

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Intervention is
The last bastion of tortured
Finance ministers

 

Apparently, Japanese FinMin Suzuki did not want the spotlight to remain on Chairman Powell and the Fed so last night, in what was surprising timing given the absence of additional jawboning ahead of the move, it appears there was a second round of intervention orchestrated by the MOF and executed by the BOJ.  Looking at the chart below, courtesy of tradingeconomics.com, it is pretty clear as to the activity and timing, although as is often the case, 50% of the move has already been retraced.

According to Bloomberg’s calculations, they spent an additional ¥3.5 (~$22B) in the effort, so smaller than last time, but still a pretty decent amount of cash.  As of yet, there has been no affirmation by the MOF that they did intervene, although the price chart alone is strong evidence of the action.  Will it matter?  In the long run, not at all.  The only thing that will change the ultimate trajectory of the yen’s exchange rate is a policy change and based on last week’s BOJ meeting, there is no evidence a monetary policy change is in the offing.  Therefore, we need to see a US policy change and based on yesterday’s FOMC meeting and the following press conference, that doesn’t seem to be coming anytime soon either.  To my eye, the yen will continue to weaken until something changes.  This could take a few more years and USDJPY could wind up a lot higher than 160.

Said Jay, it is, frankly, absurd
A rate hike will soon be preferred
But neither will we
Soon cut, we agree
While ‘flation’s decline is deferred

To me, the encapsulation of the entire FOMC statement and Powell press conference can be summed up in the following two quotes from the Chairman while answering questions.  “I think it’s unlikely that the next policy rate move will be a hike,” and “inflation has shown a lack of further progress… and gaining confidence to cut will take longer than thought.”  In other words, we are not likely to change policy anytime soon absent a complete black swan event.

Since the press conference ended, there has been an enormous amount of speculation regarding what message Powell was trying to send.  I would argue the consensus is that he wants to cut but the data is just not in a place that would allow the Fed to go down that path without destroying what’s left of their credibility.  To me, the question is, why is he so anxious to cut rates?  Arguably, an unbiased Fed chair would simply ‘want’ to follow whatever is the appropriate course to achieve the mandate.  

One of the popular views is that there is substantial pressure from the White House to cut as the Biden administration believes lower rates will help Biden’s reelection bid, however Powell, when asked about the political issue, was explicit in rejecting that hypothesis and claiming that politics is never even part of the conversation, let alone the decision.  I accept that at face value, although certainly all 17 members of the FOMC have political biases that drive their actions.  But here is a take I have not heard elsewhere.  Perhaps Powell is keen to cut because it will help the private equity sphere, the place where he not only made his fortune, but where he also maintains a large social circle and he simply wants to help his friends.  There is no doubt that lower rates help the PE space!  Regardless of why, I have to agree that it appears he is leaning in that direction.

There was one other thing that was a minor surprise and that had to do with the balance sheet program.  As expected, the Fed explained they would be reducing the pace of QT starting in June, but they would be doing so by more than anticipated, slowing the runoff to $25 billion/month of Treasuries before reinvesting, down from the current level of $60 billion/month.  For MBS, the runoff remains at $35 billion/month, although if that number is exceeded, they would replace the MBS with Treasuries so allow the MBS portion of the portfolio (currently $2.38 trillion) to slowly disappear.  The operative word here, though, is slowly, as they have not come close to seeing that $35 billion since the program started.  After all, nobody is refinancing their mortgage with current rates thus reducing the churn in that part of the portfolio.  At any rate, that was very mildly dovish, I believe.

The market response to the entire show was quite positive with equity investors taking the dovish message to heart and equities and bonds both rallied in the immediate wake of the meeting, although the equity markets sold off on the close and wound up slightly lower for the session.  Not so bonds, where yields fell and continue at those levels, down about 5bps on the day.

So how have things fared overnight since the Fed?  Well, the Hang Seng (+2.5%) was the big winner as investors there took Powell’s dovishness to heart and that combined with confirmation that the Chinese Plenary meeting would be occurring in July, thus a chance for more stimulus to come, got investors excited.  However, the mainland was closed.  Japanese shares were basically unchanged after the intervention and the story throughout the rest of the region was mixed with some gainers (Australia, India) and some laggards (South Korea, Indonesia).  

In Europe, it is also a mixed picture as investors respond to the PMI data releases, which were also a mixed bag.  For instance, Spain saw a jump in PMI and the IBEX is firmer by 0.3% while France saw a 1-point decline in the index and the CAC is down by -0.7%.  Looking at the overall mix of data, it appears that European economic activity is bumping along the bottom, although not yet clearly turning higher.  Arguably that is a big reason the ECB has penciled in that June rate cut.  Finally, US futures are pointing higher at this hour (7:00) between 0.5% and 1.0%, so quite solidly so.

In the bond market, the doves are still in charge as Treasury yields have drifted lower by another 2bps and are back to 4.60%.  but in Europe, the story is even better with yields down between 4bps and 7bps as the modest growth outturn added to oil’s recent price declines has investors gaining confidence that inflation there, at least, is truly on its way back to target.  As to JGB’s, a 1bp rise overnight has yields back to 0.90%, obviously much closer to the previous limit at 1.0%, but still not moving there rapidly.

Going back to oil prices, while they have bounced 0.5% this morning, they are down more than 5.2% in the past week as rising inventories and growing hopes of a ceasefire in Gaza have been enough to get the CTAs and hedge funds to close their positions.  In something of a surprise to me based on the ostensible dovish tone of the Fed, metals markets are back under pressure after yesterday’s bounce so all of them, both precious and industrial, are lower by about -1.0% this morning.

Finally, the dollar, aside from the yen, is edging higher this morning, although edging is the key term here.  Against most majors it is firmer by just a bit, 0.15% or so, although in the G10 there are two outliers, CHF (+0.45%) which rallied after their CPI release this morning was much hotter than expected at 0.3% M/M indicating the SNB may be holding off on its next rate cut, and NOK (-0.6%) which is continuing to suffer from the oil decline in the past week.  It should also be no surprise that ZAR (-0.5%) is under pressure given the metals movement.  But elsewhere, things are far less interesting with modest dollar gains the rule today.  This seems at odds with the ostensible dovish Fed tone, but there you have it.

On the data front, we see Initial (exp 212K) and Continuing (1800K) Claims as always on a Thursday, as well as the Trade Balance (-$69.1B) and then Nonfarm Productivity (0.8%) and Unit Labor Costs (3.3%) all at 8:30 with Factory Orders (1.6%) coming at 10:00.  As of now, there are no Fed speakers on the docket, but I would not be surprised to see an interview pop up.  The Fed will be closely watching the productivity data as that is an important part of the macro equation regarding sustainable growth and inflation.  Certainly, the expectations do not bode well for a dovish stance.

Explain to me that policy has changed, and I will accept that it is time to change my view.  However, at this point, the dollar still gets the benefit of the doubt.

Good luck

Adf

Wages on Fire

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The ECI data’s designed
To help understand what’s enshrined
In hiring workers,
Including the shirkers,
With numbers quite nicely streamlined
 
The problem for Jay and the Fed
Is yesterday’s data brought dread
It rocketed higher
With wages on fire
And showing that rate cuts are dead

It’s funny the way things work.  Historically, the number of people who paid attention to the Employment Cost Index (ECI), even in financial markets, could be counted on your fingers and toes.  It was just not a meaningful datapoint in the scheme of the macro conversation.  And yet, here we are in extraordinary times and suddenly it is a market mover!  I have updated yesterday’s 10-year graph with the most recent print of 1.2% and it is now very evident that wage pressures are not dissipating at all.  Rather, they seem to be accelerating and that is not going to help Jay achieve the 2.0% inflation goal.

Source: tradingeconomics.com

But in fairness, it wasn’t just the ECI.  Yesterday’s data releases were lousy across the board.  Case-Shiller Home prices rose more than expected, by 7.3% Y/Y.  Chicago PMI fell sharply to 37.9, far below expectations and I guess we cannot be surprised that, given all that, Consumer Confidence fell to 97.0, its lowest reading since immediately after the pandemic.  The upshot is rising prices and weakening growth, back to fears of stagflation.  With that as backdrop, the fact that risk assets got slaughtered across the board yesterday seems par for the course. 

And that is the setup for Jay and his merry band at the FOMC today.  At this point, much ink has already been spilled trying to anticipate what the statement will say and how hawkish/dovish Powell will be at the press conference so there is very little I can add that will be new.  I would contend the consensus is that the statement will be more hawkish, likely removing the line about “Inflation has eased over the past year but remains elevated,” or adjusting it.  However, one of the things that has been pointed out lately is that Powell’s press conferences seem to have consistently been more dovish than the statement.  Perhaps that happens again today, but I have to have some faith that Powell is actually trying to achieve the mandates and it is abundantly clear that right now the price side of the mandate is in jeopardy.  As there are no dots or ‘official’ forecasts coming, my take is a slightly more hawkish statement and Powell backing that up later.

I guess the biggest question, especially after yesterday’s data, is how he will respond to questions regarding hiking rates further.  If I were him, I would have that answer prepared to be as nondescript as possible. Because if he opens up that avenue of discussion, we are going to see a much more serious decline in risk assets.

One other thing of note yesterday was a comment by Secretary Yellen which was almost laughable when considering who is making the statement.  Apparently, she is,” concerned about where we’re going with [the] US deficit.”  Seriously?  She is the Treasury Secretary in charge of spending plans and after pitching for ever more money to spend she is now concerned about the budget deficit?  Then, apparently according to Axios, in a speech later today she is set to make a plea for the Fed’s independence!  Again, seriously?  The Fed is ostensibly already independent, yet I’m pretty certain she is bending Powell’s ear daily about what to do, i.e., commingling Treasury and the Fed.  But suddenly she is concerned about its independence?  It is things like this that make it so difficult to take certain players on the stage seriously.  It doesn’t speak well of the current administration’s efforts to fix the problems that exist, many of which they have initiated.

Ok, enough ranting on my part.  As it is May Day, much of Europe and some of Asia was closed last night but let’s recap the session as well as look ahead to the data before the FOMC.  I’m pretty sure you know how poorly the equity markets behaved yesterday with -1.5%- to -2.0% losses in the US.  In Asia, the markets that were open, Japan, Australia and New Zealand followed the same course, falling, albeit not quite as far, more on the order of -0.5% to -1.0%.  in Europe, only the FTSE 100 is trading today, and it is flat on the session while US futures are pointing lower again, down -0.3% or so at this hour (7:00).

In the bond market, after yesterday’s Treasury selloff with yields jumping 8bps across the curve, markets are quiet with Europe on holiday so no change ahead of the NY opening.  The rise in Treasury yields did drag European sovereign yields up as well, just not as far with most higher by 3bps-4bps yesterday and they are closed today.  As to JGB yields, despite all the huffing and puffing in the FX market, they are essentially unchanged so far this week.

But the real fun yesterday was in the commodity markets with significant declines across the board.  Oil prices fell on a combination of higher inventories according to the API as well as hopes of a ceasefire in Gaza helping to settle things down in the middle east.  And they are lower by another -1.5% this morning.  Meanwhile, metals markets, which had been exploding higher across the board until two days ago, had another wipeout yesterday with all the metals falling by 1% or more.  This morning, though, they seem to have found some support with gold (+0.1%) and silver (+0.5%) bouncing slightly while copper (-0.8%) and aluminum (-0.3%) are still under pressure given the weaker economic data.  Of course, underlying all this movement is concerns that interest rates are going to continue higher.

Which brings us to the dollar, which, not surprisingly given the rise in interest rates, rose sharply yesterday and is holding those gains this morning.  On average, I would say the dollar gained 0.5% yesterday and it was broad based, rising against both G10 and EMG currencies as well as against financial and commodity currencies.  For instance, CLP, which is closely linked to copper prices, fell -2.0% yesterday while ZAR was lower by -1.0%.  But the euro (-0.6%) and pound (-0.4%) were also under pressure as traders started to anticipate an even more hawkish Fed today.  I suspect things will be quiet until the FOMC this afternoon despite the data that is due.

Speaking of that data, first thing we get the ADP Employment report (exp 175K) then JOLTS Job Openings (8.69M) and ISM Manufacturing (50.0).  A little later comes the EIA oil inventory data and then, of course, the FOMC statement at 2:00 with the press conference at 2:30.  Since all eyes are focused on that, I would not expect much activity until it is released, and Powell speaks.

Good luck

Adf

Yellen’s Lifeblood

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The QRA was quite the dud
Though mentioned, in Q3 a flood
Of new bonds are coming
To keep the gov humming
As debt is Ms Yellen’s lifeblood
 
So, now all eyes turn to the Fed
With doves looking on with much dread
According to Nick
Chair Powell will stick
With Higher for Longer ahead

 

Below is the actual QRA release from the Treasury which I thought would be useful to help everyone understand how benign the statement seems, although it has great importance.  

WASHINGTON – The U.S. Department of the Treasury today announced its current estimates of privately-held net marketable borrowing[1] for the April – June 2024 and July – September 2024 quarters. 

  • During the April – June 2024 quarter, Treasury expects to borrow $243 billion in privately-held  net marketable debt, assuming an end-of-June cash balance of $750 billion.[2]  The borrowing estimate is $41 billion higher than announced in January 2024, largely due to lower cash receipts, partially offset by a higher beginning of quarter cash balance.[3]
  • During the July – September 2024 quarter, Treasury expects to borrow $847 billion in privately-held net marketable debt, assuming an end-of-September cash balance of $850 billion.

During the January – March 2024 quarter, Treasury borrowed $748 billion in privately-held net marketable debt and ended the quarter with a cash balance of $775 billion.  In January 2024, Treasury estimated borrowing of $760 billion and assumed an end-of-March cash balance of $750 billion.  Privately-held net marketable borrowing was $12 billion lower largely because higher cash receipts and lower outlays were partially offset by a $25 billion higher ending cash balance.  

Additional financing details relating to Treasury’s Quarterly Refunding will be released at 8:30 a.m. on Wednesday, May 1, 2024.

The market response was muted, at best, as bonds barely budged throughout the day.  Clearly, the surprise that we received back in October was not part of today’s message.  Two things I would note are first, Q3 borrowing is a huge number, $847 billion expected, although it seems to have been largely ignored; and second, the action really comes tomorrow when Yellen will describe the mix of coupons and T-bills that she plans to issue this quarter.  However, given the Q2 numbers are so much smaller than either Q1 or Q3, while there may be some signaling effect, the actual impact on the fixed income markets seems likely to be muted.

Which takes us to the FOMC meeting that begins this morning and will conclude tomorrow at 2:00pm with the statement and then Chairman Powell will hold his press conference at 2:30.  But I have a funny feeling we already know what is going to happen as this morning’s WSJ had an article from the Fed whisperer, Nick Timiraos, explaining that higher for longer was still the play and that while there was no cause yet to consider rate hikes, the recent inflation data has done nothing to convince the Chairman that cuts are due anytime soon.  Now, this seems obvious to those of us paying attention given that the data continues to show a far more robust economy than many had anticipated, and more importantly, there has not been any type of inflation related print that indicated price pressures are abating very quickly.  Of course, one never knows what will happen at the presser, but it seems highly unlikely that the committee is in the mood to cut rates.

On this subject, if there is a move toward the dovish side, either with the statement or things Powell says in the press conference, I would take those very seriously as that would imply the Fed is no longer worried about inflation, per se, but more about doing what they perceive will benefit the current administration.  That would be hugely negative, in my view, for both the dollar and the bond market, although stocks and commodities would likely benefit greatly.  Ironically, it is not clear to me that cutting rates is going to be any help to President Biden as it is not going to change mortgage rates very much, and certainly not going to reduce credit card rates, so all it is likely to do is feed more inflation.  But one of the underlying narratives seems to be that a rate cut helps Biden’s election chances.  

Ok, with the Treasury and Fed out of the way, let’s look at overnight price action.  After modest gains in the US yesterday, most Asian equity markets performed well, although mainland Chinese shares were under some pressure (CSI 300 -0.5%).  This is interesting given the stories that the Chinese government is considering stepping up its support for the economy there with more borrowing at the national and local levels (total of ~$680B) to support overall activity as well as the property market.  I would have thought that was a positive, but I would have been wrong.  In Europe, preliminary GDP data showed that the economy across the major nations was not quite as bad as last quarter, but certainly not showing much strength.  Perhaps we are bottoming, but there is no V-shaped rebound coming.  Ultimately, equity markets on the continent are all lower as a result, with losses ranging from tiny (CAC -0.1%) to larger (IBEX -1.3%).  As to US futures, they are essentially unchanged this morning.

Meanwhile, bond yields are edging higher this morning with Treasuries (+1bp) just barely so, but all of Europe seeing yields rise by 3bps.  Perhaps investors are growing concerned that a rebound in growth in Europe is going to force rates higher, but the data this morning was really minimal.  In truth, I wouldn’t make much of today’s moves and rather focus on the trend since the beginning of the year where yields everywhere have rebounded following Treasuries.

In the commodity markets, oil (+0.4%) is bouncing slightly this morning after a couple of weak sessions as there appears to be a growing narrative that a ceasefire in Gaza is closer to being negotiated.  At least that’s the story making the rounds.  I will believe it when I see it actually happen.  But metals markets are under pressure this morning with all the main ones sharply lower (Au -0.8%, Ag -1.5%, Cu -1.0%, Al -0.5%).  Now, given how far these have moved higher over the past month, it should be no surprise there is a correction.  Has this changed the longer-term narrative?  I think not, but remember, nothing goes up in a straight line.

Finally, the dollar is modestly stronger this morning as the yen (-0.4%) starts to give back some of its intervention inspired gains from yesterday.  Apparently, the MOF spent ¥5.5 trillion (~$35B) in their activities yesterday and we are more than 1% lower (dollar higher) than the yen’s post intervention peak.  I expect that we will continue to see this move, especially if the Fed maintains its current policy stance.  Elsewhere, commodity currencies are under pressure (AUD -0.5%, ZAR -0.4%) on the back of the weaker metals prices while financially oriented currencies have shown much less activity, with all of them somewhere on the order of 0.2% weaker.  As I wrote above, a substantive change by the Fed will have an impact on the dollar, I just don’t see that happening this week.

On the data front, there are a few things released this morning as follows: Employment Cost Index (exp +1.0%), Case-Shiller Home Prices (6.7%), Chicago PMI (44.9) and Consumer Confidence (104.0).  The ECI is something to which the Fed pays close attention as one of the best measures of the wage situation in the US.  As you can see from the below chart, while those costs have been declining, they remain well above the pre-pandemic levels and thus remain a concern for the Fed.  And a move back to 1.0% would indicate things have stopped declining.

Source: tradingeconomics.com

That’s really all we have today as the market awaits tomorrow’s Fed as well as Friday’s NFP data.  My take is there is very little chance the Japanese come back into the market soon, and so a grind higher in the dollar remains my base case.

Good luck

Adf

‘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

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Dripping Lower

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Like rain off a roof
The yen keeps dripping lower
Can it fall further?

 

On a quiet morning after a welcome rebound in equity markets around the world, there has been an uptick in discussion regarding the yen, BOJ Governor Ueda and the upcoming BOJ meeting this Friday.  One of the things that seems to have Ueda-san and the rest of the BOJ confused is that after their last meeting on March 18, where they raised interest rates for the first time in forever, the yen has continued to weaken.  A quick look at the chart below shows the relatively steady decline in the currency since that date.

Source: tradingeconomics.com

Perhaps this is a sign that Japan’s monetary policy, at least given the enormous interest rate differentials with the US, just doesn’t really matter to the traders in the FX market.  A look at relative interest rate movements in the respective 10-year bonds shows that Treasury yields have rallied about 30bps while JGB yields have risen just half that amount since that BOJ meeting.  One thing that is becoming clearer is that the pressure on Ueda-san and FinMin Suzuki to do something about the weakening yen is growing.  It seems they have finally figured out that a weak yen has a direct link to rising yen prices of energy for both home and autos, and that the people in Japan are running out of patience with those rises.

Perhaps this explains the increase in the comments by these two critical players, with both threatening action if things get out of hand.  For instance, Suzuki explained, “I think it’s fair to assume that the environment for taking appropriate action on forex is in place, though I won’t say what the action is,” when speaking to Parliament last night.  His problem is he knows that intervention by Japan only will have no long-term impact and merely allow traders a better entry point to continue to pressure the yen lower. 

Meanwhile, Ueda-san was absolutely loquacious in his comments to Parliament, explaining, “we will set our short-term interest rate target at a level deemed appropriate to sustainably and stably achieve our 2% inflation target.  If underlying inflation rises toward 2% in line with our projections, we will adjust a degree of monetary easing. In that case, we will likely raise short-term interest rates.”  

Now, does this mean that they are going to do something at their meeting this week?  I think the probability of a policy change is vanishingly small.  Quite frankly, they are very aware that their current toolkit is not fit for the purpose of strengthening the yen and so jawboning is pretty much all they have.  In fact, to the extent that they would like to see the yen strengthen, their best bet is to call Chairman Powell and plead their case that the US should cut rates, and by a lot, or the world will end.  I don’t see that happening either.

Something worth noting is that Powell is facing pressure from multiple directions as foreign central bankers are desperate for the Fed to cut so they can too, and from the administration which believes that lower rates will help them in their quest to be reelected.  But, in the end, there is no evidence that the Fed is going to reverse their recent comments and turn dovish.  As long as that is the case, the trend higher in USDJPY remains quite clear and I see no reason to expect anything other than minor pullbacks in the near future.  However, if the Fed does cut rates despite the ongoing inflation pressures in the US, look for the dollar to fall sharply while risk assets explode higher.

So, while we all await both the BOJ and the PCE data on Friday, let’s recap the overnight session.  While green was the predominant color on screens overnight with Japan (+0.3%) and Hong Kong (+1.9%) leading the way, mainland Chinese stocks continue to suffer (-0.7%) dragging down Korean shares (-0.25%).  But otherwise, India, Taiwan, Australia, Singapore, etc., were all in the green.  In Europe, there is no question that things are looking up as every market is higher, most by 1% or more after the Flash PMI data was released showing that economic activity was picking up across the continent.  While manufacturing remains in contraction, and is hardly improving, the services sector is definitely stronger.  Meanwhile, at this hour (7:30) US futures are firmer by about 0.25%.

In the bond markets, price activity has been far more muted with Treasury yields recouping the 2bps they lost yesterday, while European sovereigns are higher by 1bp across the board.  The ECB commentary continue to highlight a June hike with the most dovish acolytes calling for 100bps of cuts this year (Portugal’s Centeno) while Spain’s de Guindos reminded everyone that the Fed was still driving the bus and they need to think about the whole world, not just the US.  As you can see, Powell faces pressure from all over.

On the commodity front, the retracement from the massive bull rally in metals prices is continuing apace with gold (-1.4%), silver (-1.4%) and copper (-1.1%) all under more pressure today after having fallen sharply for the past two sessions already.  My take is that this is an overdue correction from a remarkable move higher, but that the underlying story remains intact.  Certainly, the apparent lessening of tensions in the Israel-Iran issue has helped this movement as well as its impact on the price of oil (-0.75% today, -4.65% in past week).  However, the inflation story remains front and center when it comes to pricing commodities and there is no evidence whatsoever that prices are slipping back.  As we head toward summer, I do anticipate that metals demand will return, especially if the economy continues to perform at its current levels.

Finally, the dollar is slightly softer this morning but remains above 106 on the DXY.  We have already discussed the yen, which cannot find a bid anywhere, but the pound (+0.25%) is rebounding after PMI data in the UK was also a bit better.  However, overall, there are gainers and losers in both the G10 and EMG blocs, the largest of which is the ZAR (-0.3%) which is clearly suffering alongside the slide in metals prices.  Not surprisingly, NOK (-0.2%) is feeling pressure from oil’s decline.  But the euro has edged higher, and it has taken its CE4 counterparts higher while LATAM currencies seem to be taking the day off entirely.  We need real news to change the story here.

On the data front, we see the Flash PMI data (exp Manufacturing 52.0, Services 52.0) and New Home Sales (662K) and that’s really it.  With no Fed speakers, once again the market will take its cues from earnings releases with today’s biggest likely to be Google Alphabet and Tesla.  The dollar has been on a roll lately, so it would be no surprise to see a bit of a pullback, but as long as the Fed is seen as maintaining its current tightness, it will be hard-pressed to decline very much.

Good luck

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