Tag Archives: #Powell

The NASDAQ in Tatters

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The only thing that really matters
Is whether NVIDIA shatters
It’s forecasted earnings
And market bulls’ yearnings
Else watch for the NASDAQ in tatters
 
Of lesser importance we see
The thoughts from the FOMC
Since last they all met
Stock bulls have beset
The rate hawks with obvious glee

 

While I know this is a macro focused discussion, and that is what this poet understands best, unquestionably, the biggest market news for the day, for all markets, is the NVIDIA earnings release after the close this afternoon.  There has been more press about this particular number, and more commentary on Fintwit (FinX?) than any other single stock earnings number I can remember.  And let me be clear, I have no idea what is forecast, let alone what the whisper number is, nor do I really care.  But I am definitely in the minority.  My take is that there are many analysts who will consider adjusting their big picture view of the economy and markets based on one company’s earnings.  This might be a sign that things are somewhat unhinged in markets.  

Before then, absent any hard statistical data, we will see the FOMC Minutes from the January 31st meeting.  You may remember that as the one where Chairman Powell flopped back to hawkish after he flipped to a dovish pivot in December.  Since then, there has been a pretty steady drumbeat from all the FOMC members that they are still not confident they have beaten inflation and so want to wait further before they cut rates.  And it’s a good thing they have had that view as last week we all saw that inflation was not cooling quite like the doves had expected.  In fact, they look pretty smart right now because of their reluctance to join the rate cutting mania.

A review of the Fed funds futures this morning shows that the probability for a March cut has fallen to just 6.5% while May is down to a 37.3% probability.  As a demonstration of just how much things have changed in the past month, in the middle of January, March was priced for a 46% probability and May for an 85% probability of the first cut in the cycle.  As well, we have seen the number of cuts priced for the full year fall from 6 down to just under 4, not far from the dot plot guidance we received back in December.  So far, the Fed has been successful in getting its message across despite a great deal of wailing and gnashing of teeth that if they didn’t cut soon, the world would end.

This begs the question, why is everybody so keen to see the Fed cut rates at all?  Consider the issue from the perspective of the saver and retiree.  Things are much better when one’s money market account yields 5% than 0% so I expect that most retirees are pretty happy at the current state of affairs.  From the equity market’s perspective, the very fact that we have set 11 new S&P 500 all-time highs so far in 2024 indicates that the current level of interest rates is not that big a problem broadly speaking.  Yes, there are segments of the market that have underperformed but that is always the case.  

On the flipside, of course, Janet Yellen would like to see rates decline as it would cut her interest rate bill, and certainly all those commercial property holders with mortgages coming due this year, a number that has grown to ~$960 billion I understand, are desperate for lower rates, but that is a pretty small subset of the country.  All I’m saying is that if the current rate structure is benefitting savers and also putting downward pressure on the rate of inflation, it’s just not clear why so many are desperate for a change.  And what if, just for argument’s sake, PCE is hot as is the February CPI print which comes ahead of the next FOMC meeting?  Rate hikes are going to start to get discussed a lot more frequently.

One other thing to keep in mind is that the US economy is currently the only major one that is showing any real life.  Europe, the UK and Japan are all in recession and China’s growth is effectively stagnating.  Other nations are desperate to cut interest rates to help support their economies but are unwilling to do so for fear that their currencies will fall further and invite even more inflation (China excluded) onto their shores.  So, they really want the Fed to cut so they can follow along without the concomitant problem of a falling currency.  But is the Fed responsible for the problems in Europe or Japan?  I think not.

At any rate, we will not solve this dilemma today, and all we can do is observe how things play out over the coming weeks and months.  FWIW, which is probably not a huge amount, I have seen precious little evidence that inflation is going to collapse, and rather expect it to stay here or edge higher.  In that case, I think the Fed may maintain their current rates for far longer than even June.  Absent a banking crisis, perhaps started by more trouble in the commercial real estate sector, my view remains, at most, one token cut this year.  Of course, if we do see that banking crisis, then 300bps will be the minimum.

Ok, overnight, most markets remain in thrall to the NVIDIA earnings story with one exception, China, where the regulators there tightened things even further instituting a new rule that there can be no net selling by institutional accounts in the first 30 minutes of trading or the last 30 minutes of trading.  This was in response to an algorithmic hedge fund selling a huge chunk of shares Tuesday ($350mm) in just a one-minute window and pressuring the whole market lower.  Apparently, they have been fined and prevented from trading for the rest of the week.  The idea behind the rule seems to be that if there can be no net selling in the last 30 minutes, the Chinese plunge protection team can work its magic unimpeded and push things higher on command.  I continue to wonder why the Chinese Communist Party is so keen to support the very essence of capitalism, but there you have it.  

With this in mind, you will not be surprised to know that the CSI 300 rallied 1.4% and the Hang Seng 1.6% overnight.  But the rest of Asia was less positive with most markets following the US lead lower.  Europe, though, except for the UK’s -0.85% performance, is higher on the day despite an absence of any major data or news.  The scuttlebutt is that there is a positive vibe for NVIDIA earnings.  Seriously!  As to the US futures, at this hour (7:45), they are continuing yesterday’s decline with the NASDAQ leading the way lower by -0.65%.

In the bond market, Treasury yields are softer by 1bp this morning while most European yields are higher by 1bp, so in other words, not much movement overall.  Asia saw a similar lack of movement as traders are awaiting the Minutes, NVIDIA and the uptick in Fedspeak tomorrow.

Oil prices (-0.4%) are a bit lower this morning but are just giving up yesterday’s small gains.  In fact, they are essentially unchanged so far in February as concerns over weakening global growth have been offset by concerns over an uptick in the middle east anxiety.  Speaking of energy, what I haven’t mentioned is NatGas, which while higher today by 10%, given it has fallen to $1.75/MMBtu, the move is not that impressive.  Warmer than expected weather has really undermined the price action lately.  In the metals markets, gold (+0.3%) continues to creep higher and today copper (+0.3%) is following suit.  As to aluminum, it is much higher, +2.4%, as concerns over fresh US sanctions on Russian aluminum have raised the risk of overall market disruption.

Finally, the dollar is little changed against most of its counterparts, G10 and EMG.  The biggest mover I see is ZAR (+0.4%) after core CPI ticked higher than expected and raised thoughts of tighter monetary policy there.  In the G10, NZD (+0.25%) is also responding to a higher-than-expected PPI print bringing a rate hike more sharply into focus there.  Otherwise, nada.

Aside from the Minutes, there is nothing else of note on the data calendar.  We do hear from Atlanta’s Raphael Bostic and Governor Michelle Bowman today, but I don’t expect either to waver from the current lack of confidence story.  It feels like it is going to be a quiet session overall, with the real fireworks reserved for 4:15 or so when NVIDIA reports.

Good luck

Adf

Not Quite Mawkish

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On Friday, in quite the surprise
Our payrolls did massively rise
At least that’s what printed
But where those jobs minted?
Or will, next month’s data revise?
 
Perhaps Chairman Jay had a sense
And that’s why his press confer-ence
Was ever so hawkish
Although not quite mawkish
So, traders, more buys, did commence

 

I would contend that nobody was anticipating the NFP data on Friday which printed so much higher than forecasts it was remarkable.  A headline number of 353K with a revision up for December of 116K is huge and certainly puts paid to any thoughts of the economy slowing.  As well, Average Hourly Earnings rose a more than expected 0.6%, certainly good for workers, but another nail in the coffin of a quick rate cut by the Fed.  Of course, none of that seems to matter anymore to equity investors as despite every indication that given the recent data, the Fed will remain higher for longer, stocks rocked higher.  Bonds did not fare quite as well, though, as 10-year yields rocketed 15bps higher by the close.

Another interesting anomaly was in the Fed funds futures market where in the immediate wake of the FOMC meeting, the probability of a March rate cut (which you may recall Powell specifically took off the table) fell to 20% from a coin toss earlier.  But Friday, that closed back at 38%! (PS, this morning it is down to 15.5%, so remains quite volatile.)  Rounding out the asset classes, the dollar followed yields, with the euro falling nearly 1% and other currencies close behind.  As to oil, that slid about $1, but it has been softening all week, so there are obviously other issues there.  What gives?

The first thing to recall is that January data tends to be pretty sloppy.  My good friend, Mike Ashton (aka @inflation_guy) made the point eloquently as follows:

This is not to say that the adjustments WILL be huge, just that over time, that has been the case.  Recall that almost every reading last year was revised lower in subsequent reports.  All I’m saying is that as terrific as that number was, add at least a pinch of salt, I think.

The other thing that doesn’t seem to square is that so many other employment indicators are trending in the opposite direction.  After all, ADP was only 107K, and the employment reading in the ISM fell last month along with the employment readings in many of the regional Fed surveys.  As well, continuing claims have been trending higher for the past several months, generally not a good sign for employment.  Again, all I am trying to highlight is that this number may not be quite as robust as it seems on the surface.  At the same time, for the Fed, if they need an excuse to leave policy at current levels, the combination of strong job growth and rising wages is plenty of ammunition.

Sunday night, Chairman Powell was interviewed on 60 Minutes but really didn’t tell us anything new.  Essentially, I would say he repeated his Wednesday press conference with one exception, he did, when asked, indicate that the current fiscal profligacy would be a problem in the long run.  To date, he has been reluctant to even discuss the issue, so perhaps that is a signal of something, but of what I have no idea.

Moving on from Friday, finally, the weekend saw the Biden administration’s retaliation for the deaths in Jordan of 3 US soldiers, however, that is not a market impactful event.  Coming into the new week, the Services PMI data has been released everywhere and we are awaiting ISM Services this morning in NY.  In aggregate, the data showed that some nations are doing better than others.  In the positive camp, India (61.8 final) was by far the nation with the highest reading, but Japan, China, Spain, Italy and the UK all showed growth above 50.  On the other side of the ledger, Australia, Germany, France and the Eurozone overall remain well below 50, although seem to have found a bottom for now.  As to the US, the current forecast is for a 52.0 print, up from December’s number of 50.6.

Is this really telling us that much?  Remember, the question that is asked in these surveys is, how do things compare this month to last month?  Remember, too, that recent data has shown weakness across the surveys with strength in the hard data.  Friday’s NFP is the perfect encapsulation of that idea.  Perhaps the one thing we can consider is that if today’s ISM is quite strong, it will be enough to completely remove March from the rate cut schedule.  Of course, my question is, if today’s data is strong, why exactly will the Fed feel the need to cut rates at all?  I simply do not understand this baseline assumption that interest rates are “too high”.  In fact, based on the evidence provided by GDP and NFP data, they seem to be just fine.  And, hey, isn’t it better for all of us to earn 5% in our Money Market Fund accounts than 0.0% like we did for years?  In fact, based on the common view that there are several trillion dollars of “excess” savings in the economy, it seems the holders of those savings must be quite happy with rates where they are.

Ok, let’s tour overnight market behavior quickly before we finish up.  In the equity space, Japanese stocks continue to rise with the Nikkei up another 0.5% while Chinese stocks continue to struggle.  While the CSI 300 managed a 0.6% gain, the small-cap CSI 1000 fell 8% as small cap stocks around the world remain unloved.  However, the Chinese government is definitely concerned as rumors of another rescue package are all over the tape.  As to Europe, modest gains are the order of the day, with most markets higher by about 0.25%.  meanwhile, US futures, they are ever so slightly softer at this hour (7:15), down about -0.1%.

Turning to the bond market, apparently everybody is turning away from the bond market!  Yields are higher across the board with Treasuries leading the way, up a further 7bps, but all European sovereign yields higher by between 3bps and 5bps as well.  The story in Asia was even more impressive with JGB’s (+5bps) and Australia (+12bps) all catching up to the Treasury story.  Ultimately, the issue I see is that while growth in the US remains strong, pretty much all of Europe is in recession.  This seems likely to lead to the ECB cutting rates before the Fed as they will have a reason to do so, while as I ask above, what is the Fed’s rationale for a cut?

The higher interest rate story has weighed heavily on commodity prices with oil sliding -0.8% this morning, although it has been falling for a week.  But we see metals prices under pressure as well with gold (-0.6%), copper (-0.4%) and aluminum (-0.6%) all sliding this morning amid the move in yields.

Not surprisingly, the dollar has been a major beneficiary of the higher yield story, following Friday’s sharp rally with a continuation across the board.  The euro is back to 1.0750, a level not seen since mid-November, while USDJPY is back above 148.50 and USDCNY above 7.21.  In fact, the only currency bucking the trend today is KRW (+0.4%) which managed to rally despite any obvious macro catalysts.  Equities fell there alongside Chinese stocks, so it was not investment inflow.  Sometimes, currencies just move, that much we know.

Turning to the data this week, there is much less on the docket than we saw last week with, arguably, today’s Services ISM the most important number.

TodayISM Services52.0
WednesdayTrade Balance-$62.2B
 Consumer Credit$15.0B
ThursdayInitial Claims220K
 Continuing Claims1902K

Source: tradingeconomics.com

However, we do hear from 10 different Fed speakers this week starting with Atlant’s Raphael Bostic and then inundated rhoguhout the week.  But I ask you, will they really stray far from Powell’s message?  Especially after the blowout NFP number?  Higher for longer still lives, and if we continue to get strong data, May will soon start losing its appeal for a rate cut.  This will not help the bond market, that’s for sure, but it will help the dollar.

Good luck

Adf

Beware

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It wasn’t all that long ago
When Powell commanded the show
At least so it seemed
But maybe we dreamed
Those attributes we did bestow
 
But now traders seem not to care
That Wednesday, Chair Jay said beware
No rate cuts next meeting
Instead, they are treating
That warning’s though it wasn’t there
 
The upshot is bonds are on fire
And stocks turned around and went higher
Today’s NFP
Will help us to see
If Jay is still leading the choir

 

Well, it seems that Chair Powell’s hawkish message resonated with investors for about 12 hours, at which point they decided to forget all he said and side with Treasury Secretary Yellen and her spending plans.  Or maybe the trading community just doesn’t believe he can pull it off, keep policy rates at 5.5% while the government needs to borrow so much money.

There are other possible explanations as well.  The NYCB meltdown yesterday may have opened some eyes regarding the commercial real estate (CRE) problems that certainly exist everywhere in the world, but notably here in the US.  If reclassifying just two loans was enough for a $100 billion bank to cut their dividend completely and increase loan loss reserves nine-fold, what about all the other CRE loans that are also under pressure on other bank balance sheets?  Perhaps the bond market is sniffing out the next banking crisis in front of our eyes.  For the conspiracy theorists, the Fed did remove the following line from their statement yesterday, “The U.S. banking system is sound and resilient.”  Perhaps that was a hint that it is not sound and resilient.

Regardless of the driver, yesterday saw a ripping rally in the bond market with the 10-year yield touching 3.82% before bouncing, nearly as low as it reached following Powell’s ultra-dovish performance in December.  That certainly doesn’t square easily with the hawkish statement and comments on Wednesday.

I have no good explanation for the movements, and I would argue neither does anyone else.  As has been the case for the past year, at least, economic data is simply a Rorschach test for your underlying views and biases.  Once again, the financial markets appear to be fighting the Fed tooth and nail.  Perhaps one clue was the fact that gold prices rallied yesterday, as did bitcoin.  Now, it is possible that is simply because lower yields enhance the willingness to hold those assets, or perhaps it is because the market smells a banking crisis coming and wants to hide.

Fortunately, we get new and important information this morning with the release of the NFP data at 8:30.  Here are the current median forecasts:

Nonfarm Payrolls180K
Private Payrolls155K
Manufacturing Payrolls5K
Unemployment Rate3.8%
Average Hourly Earnings0.3% (4.1% Y/Y)
Average Weekly Hours34.3
Participation Rate62.4%
Factory Orders0.2%
Michigan Sentiment78.9

Source: tradingeconomics.com

As well, the BLS will be releasing their annual revisions to their data, so everything will be a mess.  However, traders, and trading algorithms, only ever look at the headlines.  The fact that 11 of the past 12 NFP numbers have been revised lower over time seems not to be a major concern to investors, although it is certainly not a positive signal for the economy writ large.

In the end, we are all beholden to this data point and the market’s reaction function.  Based on what we have seen since the FOMC meeting I would suggest that a weak number will be seen as risk-on because it will encourage more rate cut talk and bring March back into view.  (FYI, the current probability of a March cut according to the futures market is 34.5%.  Sub 100K and I would look for that to go back to 50% at least.)  At the same time, a strong print, > 200K, and I expect a risk-on response as it will encourage the earnings growth story and reduce the probability of a recession.  In fact, after the strong earnings reports from Meta and Apple last night, the only way I think we see a risk-off outcome today is if NFP is sharply negative, enough so it forces people to put recession back on their bingo cards.  We shall see.

In the meantime, a quick look at the overnight session shows that Asian equity markets are back on the buy Japan / sell China train with the CSI 300 falling to its lowest level since 2019 as investors remain unimpressed by Xi’s efforts to fix things in China.  But away from China, the rest of the markets in Asia all had good session, up between 0.5% and 1.5%.  In Europe, green is the theme as well with every market higher on average by 0.7% or so.  Not surprisingly given the earnings reports, US futures are green as well, with the NASDAQ +1.0% at this hour (7:10).

Bond markets are all over the map this morning.  Treasury yields are unchanged from the closing level yesterday, although they bounced 5bps from that intraday low print mentioned above.  As to European sovereigns, yields have edged higher by 1bp-2bps on the continent although UK Gilts are higher by 6bps which is a bit strange given the BOE yesterday seemed far more dovish than many expected.  While leaving rates on hold, they explained they expected inflation to temporarily get back to their 2% target in Q2 before bouncing a bit, and the vote included one vote to cut rates, 6 to maintain and 2 to raise, a more dovish tilt.  And yet here we are, with Gilts selling off.  If you were interested, JGB yields have fallen as well, down 2bps and falling away from any ideas of policy changes in Tokyo.

Oil is little changed this morning after getting crushed yesterday on unconfirmed rumors of a cease-fire in the Israel-Gaza conflict.  It seems the betting is that if there is a cease-fire, the Houthis will stop attacking ships in the Red Sea and things will improve everywhere.  However, as of yet, no cease-fire has been reached.  As to the metals markets, gold is little changed after a more than 1% rally yesterday, while both copper and aluminum are softer this morning, although the movements have been small and may be meaningless.

Finally, the dollar is a bit softer this morning with AUD (+0.5%) the leading G10 gainer on the back of the ASX 200 reaching a new all-time high closing level overnight.  But the movement here is broad and shallow, most currencies are a bit stronger vs. the dollar, but that 0.5% move is the largest by far.  My take is that as long as US yields remain under pressure, the dollar will be on its back foot as well.  Hence, a strong NFP this morning could see yields bounce and the dollar along with it.

And that is all we have today.  It has been quite a week between the QRA, the FOMC and Powell presser and now today’s NFP.  While there was a great deal of uncertainty as the week began, at this point, it seems clear that the market has decided that rates are coming lower regardless of what Powell has to say.  We have yet to hear from any other Fed speakers, although I imagine we will be getting a full dose next week.  And Sunday night, on 60 Minutes, Powell will be interviewed so that will be closely watched for any clues.  Until then…

Good luck and good weekend

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Led to Dismay

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The first thing we saw yesterday
Was ADP led to dismay
But Treasury news
Adjusted some views
And stocks started trading okay
 
However, t’were two things we learned
First NYCB stock was spurned
Now, you may recall
That their greatest haul
Was Signature Bank, which was burned
 
And lastly Chair Powell, at two
Explained what he’s likely to do
They’re not cutting rates
As both their mandates
Remain far ahead in their view
 
Just when you thought it was safe to go back in the water…
 
I am old enough to remember when there was a growing certainty that not only was the Fed virtually guaranteed to cut rates by the May meeting, but the March meeting was very much on the table.  After all, inflation was below their 2.0% target (if you look at the recent 6-month run rate anyway) and therefore they just had to cut rates or stock prices might fall!  Or something like that.  But somehow, Jay and the FOMC missed that memo.  Instead, what they told us was [my emphasis];
 
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.”
 
In other words, while it is highly unlikely that they will need to hike rates further, unlike the markets or the punditry, Powell has little confidence that they have won the inflation battle and rate cuts remain merely a distant prospect.  Certainly, there was no obvious concern that interest rates are “too” high at this time.  In other words, this was a much more hawkish statement, and Powell’s answers in the press conference were in exactly the same vein.  Memories of the dovish December meeting have faded from view.    And this was the denouement to quite a day, one which gave us so much new information.
 
Things started with a weaker than expected ADP Employment result, just 107K, although that data point’s correlation to NFP has been diminishing of late.  Regardless, it was the type of softness that got people primed for a dovish Fed.  Then, the QRA indicated that the Treasury will be issuing what appears to be about $45-$50 billion in new coupons this quarter to fund a $400 billion or $500 billion budget deficit.  The balance of that will be via T-bills which means that while the ratio is not as aggressively leaning toward T-bills as last quarter, it is still miles above the historical rate of 20% ish.  Those two stories got bond bulls hyped, although equity markets struggled on some weak earnings numbers. 
 
And then we heard from New York Community Bank (NYCB), which you may recall, was the lucky recipient of the Signature Bank assets last March.  Well, it turns out they made a hash of things, losing a bunch of money with some pretty bad loan impairments added on to increased capital requirements because they grew to a new, larger risk-weighting tier after the acquisition.  At this time, there is no indication they are about to go bust, but the question has been asked a lot as the stock cratered and investors ran into Treasury debt just to be safe.  As it happens, the stock, which had basically doubled over the past year after buying Signature, has reverted to its pre-acquisition price and that added jitters to everyone’s views.  PS, those loan impairments were CRE based which naturally leads to the question of what is going on with other regional banks.
 
Finally, during the press conference, Chairman Powell was clear that a March rate cut was highly unlikely and that was the final nail in the equity market’s coffin.  So, the NASDAQ led the way lower, falling -2.2% while the S&P 500 tumbled -1.6%.  At the same time, 10-year yields dropped like a stone, down 12bps to 3.91%.
 
Looking ahead, I wonder how all those folks who were certain the Fed HAD to cut because policy was just TOO TIGHT for their liking will reframe their narrative.  To my eye, yesterday’s equity declines are a blip and will not even register at the Eccles Building.  There is a bit of irony in that the doves need now eat so much crow.
 
Ok, on to this morning, where the overnight price action saw another mixed picture in Asia, but this time with Japan (Nikkei -0.75%) sliding while Chinese shares (Hang Seng +0.5%, CSI +0.1%) edging higher.  There was yet another announcement of a bit of further fiscal support from the Chinese government, but Xi remains reluctant to bring out the bazookas.  European shares are also mixed with gains in the UK and Spain and losses in France and Germany.  PMI data showed that the Flash numbers were pretty much spot on and all of Europe remains well below 50.0 except Norway (50.7) which benefits from its oil industry.  It remains very difficult to get excited about the Eurozone’s economic prospects these days which should ultimately weigh on the ECB to cut rates sooner and the euro to suffer in that case.  As to US futures, after a wipeout yesterday, this morning they are firmer by about 0.5% at this hour (6:45).
 
In the bond market, after yesterday’s Treasury yield collapse, 10-year yields are higher by 3bps this morning and European sovereigns have risen about 4bps on average.  This movement is more a response to the large move yesterday rather than a result of new information.  Overnight, JGB yields slipped 4bps, clearly following in the footsteps of Treasury yields. 
 
As to commodities, oil (+1.0%) has bounced after a weak session yesterday that was driven by demand worries.  But tensions in the Middle East seem to be reasserting themselves with several stories in the press this morning regarding the danger to the world from a potential collapse in shipping capabilities.  The ongoing Houthi attacks in the Red Sea are starting to really take their toll on supply chain situations.  This is not only bad for inflation readings but could well impair the ultimate delivery of critical things like oil, thus driving its price even higher.  As to the metals markets, they are all under pressure this morning with gold holding on best given its haven status but all the industrial metals lower by 1% or more.
 
Finally, the dollar is coming up roses this morning.  While in the early going yesterday, before the FOMC meeting, the dollar broadly sold off on the softer ADP and dovish QRA, Powell changed everything, and the dollar reversed course in the middle of the day and rallied back nicely.  This is true against virtually all its G10 and EMG counterparts.  The weakest members are AUD (-0.7%) after weak housing data Down Under added to thoughts of a rate cut coming soon.  As well, we see GBP (-0.4%) just ahead of the BOE meeting where expectations are for a more dovish statement although no policy change.  But we are seeing weakness in CLP (-1.3%) on the back of that weak copper price and weakness in ZAR (-0.4%) on the weak metals complex as well.  Given the hawkish tilt from Powell yesterday, unless there is a concerted effort by the Fed speakers that will be flooding the tape over the coming weeks to reverse that course, I suspect the dollar will benefit in the near-term.
 
On the data front, this morning brings Initial (exp 212K) and Continuing (1840K) Claims, Nonfarm Productivity (2.5%), Unit Labor Costs (1.6%) and ISM Manufacturing (47.0).  With NFP tomorrow, I expect that the productivity and ULC data should be of the most interest as they will play most deeply into the Fed’s thinking.  Improved productivity implies that there is less reason to cut interest rates as the “neutral rate” should be higher than previously thought.  In fact, that dynamic would be very positive for the dollar, and interestingly, for the equity market as well as it would be a clear boost to earnings potential.  We shall see how it turns out.
 
Good luck
Adf
 
 
 
 
 

Nary a Doubt

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The two things we’re watching today
Are Jay and the new QRA
The pundits are out
With nary a doubt
That easing is coming our way

But what if this faith is misplaced
And Jay, at the presser, bald-faced
Says policy ease
Is not what we please
And we’ll not get there in great haste

Reading the Fed Whisperer, Nick Timiraos of the WSJ, this morning was enlightening only to the extent that everybody he interviewed demonstrated they have no idea what will happen, and merely described what they would like to see.  Now, in fairness, I don’t think Powell himself really knows how things are going to play out as we continue to see mixed pictures on the economy.  For every strong datapoint (e.g., GDP, JOLTS, Case Shiller) indicating that there are many potential inflationary pressures extant, we see some softer data points (e.g., PCE, Empire Manufacturing, Dallas Fed) that indicate policy is excessively restrictive.  While it is very clear that the Fed will not adjust policy today, a look at Fed funds futures shows that the market is pricing in a 45% chance of a cut in March.  A month ago, that was over 70%, so Powell must be a bit happier, but 6 weeks is such a long time in this context, anything can happen between now and then.  And, oh yeah, the market is still pricing in 6 cuts this year.

Of course, long before the FOMC statement and Powell presser this afternoon, the Treasury will release its QRA and the market will learn if Secretary Yellen is going to continue down her recent path of leaning toward more T-bills and less coupons.  Based on her continuous comments that the soft landing has been achieved and inflation is no longer a problem, it seems quite clear that she wants to see the Fed cut rates soon.  After all, lower interest rates take pressure off the budget deficit, which is entirely her baby at this point.  Interestingly, she could essentially force Powell’s hand in this situation as follows:

1.     Issuing a high percentage of T-bills will lead to
2.     Reducing the RRP balances and bank reserves which will
3.     Force the Fed to respond by slowing/ending QT to prevent any systemic problems like seen in September 2019

Remember, we have already heard from Powell, as well as Dallas Fed President Lorie Logan, whose previous role was at the NY Fed overseeing the Fed’s reserve portfolio, that the time to discuss slowing or ending QT was fast arriving.  By itself, that is a policy ease, but it would also be a signal that further changes were on their way.  In fact, a continued heavy reliance on T-bill issuance would have two vectors to support the bond market; ending QT reduces the amount of bonds the market needs to absorb and reducing new supply by itself will do exactly the same thing.  At least for as long as inflation remains quiescent.  And in the end, that remains the biggest unknown, inflation.  All these plans and ideas revolve around the premise that the Fed has won its inflation fight.  But I ask you, what if they haven’t?

Too much digital ink has been spilled already on the inflation question and the two camps remain at distinct odds.  Forgetting all the conspiracy theorists who claim inflation is really 10% or more, and looking only at serious economists and analysts, while all agree that the rate of inflation has fallen from its peak levels in the summer of 2022, there is still a pretty even split between the two sides.  While I fall on the side of stickier inflation than the market is pricing, I can understand the other side of the story.  But the point is, there are two very real sides to the story and the outcome remains unwritten.  However, if inflation does remain stickier than the doves believe, it will destroy their entire thesis of why the Fed should be easing policy.  Given the stock market is making new highs regularly, I suspect investors and traders have largely bought into the ‘inflation is over’ view.  Just be careful if it’s not.

Ok, as we await today’s activities, let’s look at what happened overnight.  Following a mixed session in the US yesterday, Asian markets turned back the clock a few weeks with the Nikkei (+0.6%) continuing its longer-term rally while both the Hang Seng (-1.4%) and CSI 300 (-0.9%) revert to their losing ways.  It seems that investors simply do not believe that President Xi has either the ability or willingness to do anything to support the stock market there, at least, if not the economy.  I believe it would be a mistake to believe he is not willing, which calls into question exactly what they are going to do to prevent things from starting to impact the economy more negatively.  And perhaps we have seen the first steps.  The other noteworthy story in the WSJ this morning was about how Chinese authorities are “discouraging” negative takes on the economy from being published and instead telling news outlets to publish stories about the bright prospects there.

Moving on to Europe, the main indices have moved very little thus far today after a mixture of data showing inflation in Germany and France continue to decline but Retail Sales in Germany (-1.6%) and Switzerland (-0.8%) and Industrial Sales in Italy (-1.0%) all falling sharply in December.  Given the weak GDP data yesterday on the continent, none of this can be surprising.  Finally, US futures are mostly lower this morning, led by the NASDAQ (-1.0%) despite (because of?) what seemed to be solid earnings from Microsoft and Alphabet.  In the end, though, I sense that investors are far more focused on the QRA and FOMC right now.

Treasury yields are unchanged this morning but that is after a 4bp decline yesterday and we have seen European sovereign yields slide this morning as well, between 1bp and 3bps, which seems to be a catch up move to the Treasuries.  I must mention Australian government bonds, which saw yields tumble 13bps overnight on the back of a much softer than expected CPI reading which has the market talking rate cuts there again.  Finally, JGB yields edged 2bps higher, despite weaker than expected Retail Sales and IP data.

Oil prices (-1.1%) are backing off this morning after another positive day yesterday and a very strong month of January, where WTI rose > 9%.  (My take is that will not help the CPI data when it comes out in a few weeks’ time.)  Meanwhile, metals prices are trading near unchanged on the day as traders here are also awaiting the new information.

It should be no surprise that the dollar is, net, little changed this morning on the same premise of waiting for Godot Powell.  Looking at my screen, I don’t see any currency that has moved more than 0.3% in either direction so really no information yet today.

In addition to the QRA and FOMC meeting, we see the ADP Employment Report (exp 145K), the Employment cost Index (1.0%) and Chicago PMI (48.0).  Careful attention should be paid to the ECI as the Fed focuses on that metric for wage inflation data.  As an indication, prior to the pandemic, that index averaged around 0.6%, but since then, it is more like 1.0% on a quarterly basis.  That annualizes to more than 4% and will maintain upward pressure on inflation if it stays there.  Just something else to keep in mind.

If pressed, I believe that the QRA will show reduced coupon issuance and Powell will be more dovish than not.  While we know the Treasury is political, by definition, and will do everything in its power to stay in power and get re-elected, my take is the Fed is in that camp as well.  I would not be surprised to see a more dovish take this afternoon after the QRA this morning.  And initially, at least, that tells me the dollar will trade back toward its recent lows ceteris paribus.

Good luck
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Smokin’

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The GDP number was smokin’
As animal spirits have woken
The Core PCE
If higher than three
Could slay rate-cut talk that’s been spoken

Thus, if the Fed’s data dependent
The ‘conomy’s truly resplendent
So, please do explain
Why rate cuts are sane
Seems rates ought, instead, be ascendent

By now you are all aware that Q4 GDP was a significantly better than expected 3.3% SAAR, far above the 2.0% analyst forecasts and far above the Atlanta Fed’s GDPNow readings.  For everyone who is looking for that recession, thus far it still appears to be somewhere further down the road.  At some point, it is certain, there will be a recession but the when is the big question.

Now, a different question would be what is driving the economic activity that we have seen?  That answer is far easier to determine as in the equation that defines economic growth: Y=C+I+G+NX (exports-imports), the variable that is growing most consistently is the G, government spending. Simply look at the size of the budget deficit. This is not to say that government spending is not growth as measured, just that it is not organic growth that feeds on itself.  It is the organic kind that is the sign of a healthy economy.  Government spending can be analogized as gaining weight but not growing stronger, i.e. getting fat.

Regardless, though, of the reasons for the growth, it is real in the sense that more activity is taking place.  This implies that demand continues to be robust.  Since this is the case, I would ask all those who are expecting the Fed to cut rates by May at the latest, but begging for a March rate cut, why do you think that is appropriate?

First off, another way to say data dependent is to call the Fed reactive.  This means that the Fed is explicitly going to be behind the curve and react to the data they see, they are not going to pre-empt expectations for future economic outcomes.  Back in the day, when Alan Greenspan was Fed chair, he would raise rates occasionally to head off what he thought was incipient inflation, but rate cuts were then, and have always been, reactive to problems in the economy.  That is why, generally, rate decline much faster than the rise.  This cycle was quite the exception but then Chairman Powell was in denial for a very long time before he figured out he had made a mistake.  It is this reason that I believe the Fed funds outcome is bimodal, that either there will be only one or two token cuts, or we will see 300bps or more as the economy craters.  Based on yesterday’s data, I’m still in the one cut camp this year as per my 2024 forecasts.

It is important to remember that the Fed’s dot plot is not the road map, per se, it is merely a compilation of each member’s individual forecasts.  But they are just that, forecasts, and as we saw with yesterday’s GDP number, FORECASTS ARE WRONG ALL THE TIME!  There is no reason to believe the Fed or its members, who have an atrocious forecasting record, know where things are going to be later this year, let alone in 2025 or 2026.

Back to my point, to drive it home; the Fed has explained they are going to be reactive to the data when it comes to setting policy rates.  So far, the data is pointing to continued solid, above trend, economic growth and the employment situation remains strong (Initial Claims at 200K, Unemployment Rate at 3.7%).  As well, inflation remains well above their target.  Once again, I will ask, why will they be cutting rates in H1?  If they do, it implies that things have gotten a whole lot worse in a hurry, and that, my friends, will not be a positive for risk assets.

Turning to the overnight session, after a solid equity market performance in the US, where all three major indices rallied a bit, Asia took a different path as both Japanese and Chinese shares fell 1.35% or more.  Apparently, the luster of the Chinese fiscal and market support has faded a bit, but that hasn’t stopped those who got long Japanese shares in that pairs trade I discussed yesterday, from continuing to sell.  Interestingly, the data overnight showed that Tokyo CPI, on every measure, was much softer than forecast implying that the BOJ has far less need to consider tightening policy in the near future.  I would have thought that would have helped Japanese shares, but not so much.  Europe, though, is having a much better day with the CAC (+2.1%) leading the way on the back of very strong results by LVMH, the luxury goods firm.  But all the indices are higher on the continent.  Alas, US futures are a bit softer at this hour (7:00), but only just and really it is the NASDAQ which has been lagging a bit.

In the bond market, activity has been muted everywhere as investors and traders around the world await this morning’s PCE data in the US.  Treasury yields, which slid a few bps yesterday, are unchanged on the day and European sovereigns are all seeing yields drift lower by between 1bp and 3bps.  Perhaps the least surprising move is JGB yields sliding 3bps overnight on the back of that Tokyo CPI data.  As an indication of what those numbers are like, Headline and Core both printed at 1.6% Y/Y, significantly below the December readings and the lowest in nearly two years.

While oil prices have backed off a bit this morning, -0.8%, they have had an excellent week, up nearly 5% on the back of the stronger showing in the US economy, the fiscal stimulus stories in China and the fact that Ukraine was able to successfully attack a Russian oil shipping facility, closing it down and reducing supply.  In the short-term, it does feel like there are more potential catalysts to drive this price higher, but the long-term question remains open.  As to the metals markets, they continue to do very little with marginal gains or losses on a day-to-day basis as we have been trendless in gold and copper for the past several months.  We will need to see some fundamental changes in the supply/demand equation to shake out of this lethargy, but that remains true in many markets.  Data of late is a Rorschach test as there always seems to be a data point to help someone justify their view, regardless of their view.  We need to see things align more clearly for a change in either direction.

Finally, the dollar, which has been grinding ever so slightly higher over the past month or two, is a bit softer overall this morning, roughly 0.3% across the board in both the G10 and EMG blocs.  Arguably, the most important data overnight was that Tokyo CPI, but the yen is actually unchanged on the session, lagging the euro and pound, but not responding very much.  Interestingly, despite oil’s decline, NOK is slightly firmer, so this is really a modest dollar weakness story for now.  Perhaps in anticipation of a soft PCE number?

So, let’s turn to the data today.  Everything comes at 8:30 and here are the consensus views right now: Personal Income (0.3%), Personal Spending (0.4%) PCE (0.2% M/M, 2.6% Y/Y), and most importantly, Core PCE (0.2% M/M, 3.0% Y/Y).  Much has been made of comments that Governor Waller made a few weeks ago which have been interpreted as ‘knowledge’ that the M/M number would be soft, 0.1%, dragging all the other indicators with it.  As well, Treasury Secretary Yellen ostensibly explained that the recession has been avoided and the soft landing achieved so inflation is no longer a problem.  And maybe that will be the case.  But inflation is a funny thing.  It is insidious and extremely difficult to remove from an economy as complex as the United States once it is embedded there.  I have no idea where today’s data will print, but I will say that my bias is that inflation is stickier than the rate cut advocates believe.

As to the market reaction, that is also very difficult to anticipate.  Yesterday in my assessment of what would occur in response to a hot number, I was right about the dollar and oil, but not about stocks and bonds, both of which rallied.  As of now, the Fed funds futures market continues to price a 50:50 chance of a March cut.  I feel like we will need to see a very soft number today to keep that stable.  And if the M/M number is 0.3%, I would expect that March probability to shrink rapidly.  However, for now, those looking for rate cuts remain on top in the game, and they will only give up their views kicking and screaming.  Keep your ears peeled.

Good luck and good weekend
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Some Shocks

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While many still seek goldilocks
The problem is we’ve seen some shocks
Inflation won’t fall
And oil’s in thrall
To US and UK war hawks
 
But if we adhere to the data
It’s really not looking that great-a
For those who think Jay
Will soon lead the way
By cutting the Fed’s funding rate-a

We are back to being inundated with new information from both economic data and global events, both of which are driving markets for now.  Interestingly, depending on the asset class, it seems that some are studiously ignoring what this new information means, at least what it has historically meant.

Let’s start with yesterday’s CPI data, which printed higher than forecast on both the headline (3.4%) and core (3.9%) measures.  One needn’t be a market technician to look at the chart below of annualized CPI over the past five years and consider the possibility that the downtrend has ended, and we are reversing higher.

Source: tradingeconomics.com

To the extent that financial data has trends, and I think that is a very realistic estimate of how things work, the Fed may have a much tougher time squeezing the last 1.0% – 1.5% out of the inflationary process than many seem to believe.  At least many in the bond market seem to believe that as despite the hotter than expected CPI data, bond yields actually declined yesterday.  As well, there is no indication from the Fed funds futures market that they have changed their view on the number of rate cuts coming in 2024 with an even higher probability of a March cut, > 70% this morning, and still 6 cuts priced in for the entire year.  

Regarding this seeming dichotomy, it is almost as if the market is trying to force the Fed’s hand.  Historically, the Fed has tried not to ‘surprise’ markets when it comes to decisions, keeping a close eye on market pricing on the day of each meeting.  As such, if the market is pricing in a cut or a hike, the Fed has been highly likely to follow through in the past.  When there have been disagreements, the Fed will typically roll out lots of speakers to get their view across before the meeting in order to prevent that surprise on meeting day.  As well, it is very clear that there is virtually no expectation of a rate adjustment at the FOMC meeting on January 31st, so perhaps the Fed doesn’t feel it is warranted to be that concerned yet.  And of course, the data may turn in the direction of much softer inflation and even modestly worse employment so a cut will become the de facto norm.  But my point is, the March 20th meeting is just 67 days away.  For an economy whose trends move very slowly, it seems like the market may be a bit ahead of itself in this case.

We did hear from three Fed speakers yesterday, Mester, Barkin and Goolsbee, all of whom indicated that while the broad direction of things seemed pretty good, a rate cut in March is very premature.  In fact, that has been the consistent theme from every Fed speaker and the market just doesn’t seem to care.  We will see two PCE reports, two more CPI reports and two more NFP reports before the March FOMC meeting.  And they will all be part of Q1 data, not Q4 data, so will at least have more relevance to the current situation.  Maybe the market is correct, and inflation is going to turn back lower, and the first signs of economic weakness will convince Powell and friends it’s time to preemptively cut rates.  However, even if that turns out to be the case, it is hard for me to see that as a > 70% probable outcome.  Of course, I am just an FX poet, so maybe I just don’t get it.

The other topic that is making an impact is the Middle East.  You may recall that oil prices had been on the soft side as the market saw weakening demand due to an impending recession with massive supply gains coming from better and better producer efficiency.  In fact, I wrote about the latter this past Sunday in Oil’s Price is not Rising.  However, all that efficiency is unimportant when compared to the escalation that we saw last evening in the Middle East, where US and UK forces attacked Houthi positions in Yemen in retaliation for the Houthi attacks on shipping in the Red Sea.  This morning, oil is higher by 3.5% and since Monday, the rise has been 6.6%.  

This poses several problems overall.  First, of course, is the widening of the Middle East conflict being a problem in and of itself.  The US military is already straining with its mission given the number of different places US troops are in harm’s way throughout the Middle East and Asia.  The one thing we have learned throughout history is that war is inflationary.  So, escalations in fighting will ultimately lead to escalations in prices of many things.  Oil is merely the first casualty.  

If you are Jay Powell whose current mission is to reduce inflationary pressures, a widening military conflict is not going to help the situation.  In fact, it is likely that he will be called upon to support the military by ensuring the Treasury can issue as much debt as necessary at reasonable prices.  This means the end of QT and a restarting of QE.  If that were to be the case, and that is a big if, inflation would start another strong leg higher, and markets will be greatly impacted.  Commodity prices will rise, the dollar will likely weaken, a bear steepening for bond yields would be in the cards and equity markets would rally, at least initially.  But it would throw out any ideas of low inflation.  I am not saying this is the current expectation, just that it is something that needs to be considered as events unfold going forward.

A quick look at the impact on markets today shows that equity markets are non-plussed by the escalation as yesterday’s benign US performance was followed by another rally in Japan although Chinese shares continue to lag after a big data dump showed economic activity there remains export oriented into a slowing global growth situation.  Inflation remains moribund there, the Trade Surplus grew, and domestic funding continues to grow at a slower and slower pace.    In Europe, though, there does not seem to be much concern as equity indices are all higher by about 0.5% although US futures are suffering a bit, -0.35%, at this hour (7:45).

In the bond market, Treasury yields are 3bps higher this morning than yesterday’s close, although they remain right at 4.00%, so are not really moving very much right now.  Meanwhile, European sovereign yields, which closed before the US yields declined late, are all down about 3bps this morning, helped by confirmation that final inflation readings in Europe remained at recent lows.  In the UK, the net data dump showed slightly weaker than forecast IP and GDP data which has helped drive the bid in Gilts. A quick JGB look, where yields fell 2bps, revolves around a story that the BOJ is going to reduce its end of year inflation forecast thus reducing the probability of any policy change anytime soon.  This is one of the things helping the Nikkei and also a key driver of USDJPY higher.

Aside from oil prices rising, we are seeing gold (+1.0%) on the move today on the back of the Middle East escalation although the base metals are mixed.  One other commodity note is uranium, a market which has been getting a lot more love lately given the recent acceptance by a portion of the eco community that its ability to generate electricity without producing CO2 is a net benefit.  40 nations have promised to increase their nuclear power use and demand for uranium has been rising amid a market where there is very limited supply and annual production does not meet current annual demand, let alone projected future demand.  I simply wanted to highlight that there are price movements all over the place and while uranium may not be a major contribution to inflation, the fact that its price is rising so rapidly (100% in the past year) is not going to push inflation lower.

Finally, the dollar is firming up this morning as risk assets come under pressure.  This is a typical war footing, where investors flee to the dollar in times of stress, just like they flee to gold.  While the movement thus far has not been substantial, just 0.3% on average, it definitely has room to move further if things deteriorate in the Red Sea.

On the data front, we see PPI this morning, expected 0.9% headline, 2.0% ex food & energy, although given CPI was released yesterday, I doubt it will matter very much.  As well, we hear from Minneapolis Fed president Kashkari, so it will be interesting to see if he has a different take than March is too soon, but things seem to be going well.

As we head into the weekend, the Middle East is the wild card.  If things heat up, look for oil prices to continue to rise and risk to be discarded.  That will probably help the bond market for now, and the dollar, but stocks will suffer.

Good luck and good weekend

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Jay’s Coronation

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The word for today is inflation
With many convinced its cessation
Is just round the bend
So, growth will ascend
Alongside Chair Jay’s coronation
 
But what if inflation don’t slow?
And rather, continues to grow
Can bonds stand the pain?
Will stocks feel the strain?
Or will we go on with the show?

The first thing to mention is the Bitcoin ETF was approved by the SEC last evening and the price…is basically unchanged.  As I mentioned yesterday, it seems quite ironic that Bitcoin, a shining symbol of freedom from the government and regulation is now tightly ensconced in government and regulation.  Do not be surprised if it becomes a much less interesting asset having lost one of the key things that makes it different.  Just a thought.

Ok, on to the more important stuff, the economy and today’s CPI report.  Current consensus forecasts are as follows: CPI 0.2% M/M (3.2% Y/Y) and -ex food & energy 0.3% M/M (3.8
% Y/Y).  If realized, these represent a 0.1% rise in the headline and 0.2% decline in the core readings from last month on an annual basis.  Now, in the broad scheme of things, and more importantly, in our day-to-day lives, that 0.1% or 0.2% has absolutely no meaning or impact.  However, the importance allotted to that 0.1% is remarkable.  Entire narratives will be spun about how the Fed has been amazing in their ability to achieve a soft landing, or the Fed is a group of 17 incompetent fools based on an estimated data point that is often revised and does not clearly measure what the words in its name describe.  As such, let’s simply focus on the market reaction function rather than the meaning of the data.

Heading into the release, my take is that given the recent run of softer than forecast inflation readings around the world, whatever the economists and analysts have forecast, the market is leaning toward a soft print.  The fact that oil prices fell about -6% during the month of December, although gasoline prices were nearly unchanged, has tongues wagging.  As well, discussions about slowing growth in China and their negative PPI as a driver of deflation is another key element of the narrative. 

Counter to this is the fact that the Fed refuses to take their victory lap.  Yesterday, John Williams explained, “My base case is that the current restrictive stance of monetary policy will continue to restore balance and bring inflation back to our 2% longer-run goal.  As inflation comes down over time, my expectation is interest rates will also come down over time.”  In other words, things are going well, but we have not reached the finish line.  This certainly didn’t sound like someone who was ready to cut interest rates in two months’ time although the market continues to price a better than 2/3 probability that the Fed will do just that.  Now, if we take him at his word and inflation fell another 0.6% or more by March, maybe that would be enough to get them into a cutting mood.  But I just don’t see that.

One of the things that is often either overlooked or not well understood is the fact that things move REALLY slowly in the economy, especially when it comes to measured moves of economic data points.  Of course, the exception that proves this rule was the Covid recession, but in order to get data to move at the same speed as markets required virtually every government in the world to shut their economies down at the point of a gun!  My take is that will not happen again in our lifetimes, regardless of the threat.  As such, we need to recognize that, to use a well-worn metaphor, the economy is an aircraft carrier and turning it takes time.  

When applying this concept to inflation, and prices more generally, especially wages, they don’t move that quickly.  In fact, they move quite slowly.  People get annual raises, not weekly or monthly ones.  While gasoline prices move up and down on a daily basis, the same is not true for menu prices, items in the supermarket or rent.  Real-time price adjustments are a flaw feature of financial markets, not of real life.  While many will point to the fact that the shelter portion of CPI (and PCE) is a smoothed average of the past twelve months and so not indicative of today’s situation, I would counter that most of the people who pay rent haven’t moved in the past twelve months and their rent remains the same.  It is certainly not declining, and I am still looking for that first story of the landlord who saw the CPI data slipping and cut his tenants rent to keep in line!  

The point is that expectations of a sharp move in a slow-moving data series are misplaced.  Much has been made of the fact that if you annualized the last 3 months or 6 months of CPI monthly data, CPI is already below the Fed’s target of 2.0% and so they should be cutting.  Personally, I find that ridiculous.  But more importantly, the Fed, as evidenced by Williams’ comments above, has no truck with that idea.  Add to this the fact that growth seems to be holding in at trend or better, despite interest rates being “too high” according to the cutting advocates, and it becomes that much harder to believe the Fed is ready to go.

Net, regardless of today’s number, the Fed is not going to change its mind soon.  Markets, however, are a different story.  If the readings are soft, look for a big rally in both stocks and bonds, for the dollar to fall, and for commodity prices to rally nicely.  At least initially.  And the converse should be true as well, a hot number will see red numbers in the stock market, higher yields, a stronger dollar and commodities come under pressure.

Leading up to the number, here’s what we see.  After a nice day in the US yesterday, Asian markets were all in the green led by the Nikkei continuing its rip higher, but this time dragging Chinese shares along for the ride.  In Europe, it appears things are more circumspect as they await the CPI data with most markets +/- 0.2% or less on the day while US futures are currently (7:30) modestly in the green.

Bond yields are definitely in the low inflation reading camp as Treasury yields have fallen 4bps this morning and we are seeing similar movement all across Europe.  The one exception to this story is Japan, where JGB yields edged higher by 2bps despite a couple of soft Leading Economic Index numbers.  However, since the peak, just below 1% in early November, this trend remains clearly lower for yields.

Apparently, the hijacking of an oil tanker in the Persian Gulf has been seen as an escalation of the situation there and oil prices are higher by nearly 2% this morning, although that simply takes the weekly change back to flat.  Gold prices are rallying, 0.5%, and not surprisingly in this environment, so are base metals prices with both copper and aluminum higher by 0.6% this morning.

Finally, on the dollar front, it is lower after a small decline yesterday.  This is of a piece with the inflation expectation story and the idea that the Fed is preparing to cut rates, boost stocks and undermine the dollar.  Even the yen has rallied a bit today, so no currencies are really bucking the trend of a weak dollar, whether G10 or EMG.

Aside from the CPI data, as it’s Thursday we also see Initial (exp 210K) and Continuing (1871K) claims and then early this afternoon we hear from Tom Barkin again.  At this stage, the Fed seems to be of a mind that things are going well, and they are not about to rock the boat in either direction.  Absent a huge surprise in the data this morning, I think this slow grind toward risk on continues.

Good luck

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Magical Stuff

Posted on by

A critical piece of inflation’s
Aligned with the broad expectations
Of where it will be
In one year and three
As this feeds Jay’s model’s foundations
 
So, yesterday’s data release
That showed expectations decrease
Is magical stuff
And could be enough
To make sure all tight’ning will cease

 

While Thursday’s CPI report remains the key data point this week, there are plenty of other data points that get released on a regular basis that can give clues to how the economy is behaving, and perhaps more importantly to how the Fed’s reaction function may respond.  One of the lesser-known inflation readings is published by the NY Fed each month and shows Consumer Inflation Expectations one year ahead.  As can be seen in the below chart from tradingeconomics.com, the trend has been very positive (lower inflation expectations) for the past two years.

This must warm Powell’s heart as it appears his efforts at anchoring inflation expectations continue to work.  When combining this data with comments from two Fed speakers, Bostic and Bowman, who both indicated some satisfaction with the recent trajectory of inflation and were comfortable with the idea of rate cuts later this year, it is easy to see why yesterday was such a bullish one for risk assets.

Perhaps of more interest, at least to me, was the Consumer Credit Change report which showed that in November, consumer credit rose by a very large $23.75B!  This was the largest increase in twelve months and plays to the idea that people are using their credit cards to purchase consumer staples because they cannot afford them anymore.  On the flip side, given the way economic growth is measured, this will be a positive for Q4 as it implies more ‘stuff’ is being bought.  To my eye, this seems to be a short-term positive, but offers the chance of being a medium-term negative as delinquency in loans is typically not seen in a beneficial light and there are already many stories of people being overextended on their credit cards.

As well, Tokyo CPI was released overnight at 2.4%, 2.1% Core, which was right on expectations, but more importantly, indicative of the fact that inflation pressures in Japan are quickly ebbing.  Perhaps the BOJ’s view that they did not see sustainable price inflation despite almost 2 years of CPI prints above their 2.0% target, is turning out to be correct.  This has huge implications as it means there is little reason for the BOJ to consider exiting its current monetary policy combination of NIRP and QE combined.  As an aside, 10-year JGB yields fell 2bps last night and are currently at 0.58%.  This does not seem like a panicky level, nor one that is necessarily going to attract a lot of internationally invested Japanese money back home.  For all the JPY bulls out there, this is not a good sign.

Away from that news, European data continues to show Germany in a world of hurt, with IP falling -0.7% in November, far worse than expected and the 6th consecutive decline in the series.  However, Eurozone unemployment fell a tick, back to 6.4% and the lowest in the history of the series.  Meanwhile, the ECB just published a report indicating that the inflation suffered by the Eurozone was due almost entirely to supply chain disruptions with a small dose of energy price spike.  It had nothing to do with their policies!  To an outsider like me, this sounds like they are preparing to cut rates as soon as they can.  I wouldn’t be surprised if Madame Lagarde was on the phone with Chairman Powell right now!

And that’s really all we have seen overnight.  After yesterday’s strong rebound in the US, the overnight equity picture was somewhat mixed with Japan having a good session on the weak inflation data although the Hang Seng continues to slide.  Overall, there was no unifed trend in Asia with gainers and losers both.  European shares, though, are in the red this morning led by Spain’s IBEX (-1.75%) although that is the outlier worst performer.  (It seems that a single stock, Grifols, a pharma name, is down -28% on some recent reports about manipulated accounting and that is dragging the whole index lower.). However, US futures are also softer, down about -0.4% at this hour (8:00).  There is still much discussion if last week’s sell-off was just a reaction to a huge late 2023 rally, or the beginning of something much bigger.

In the bond market, Treasury yields have edged up 1bp this morning but remain either side of 4.0% for now.  European yields, though, are higher across the board once again, by between another 5bps and 6bps.  Now, this move is based on yesterday’s close, which saw a drop in yields at the end of the session there.  While the trend in European yields looks higher, they are little changed from this time yesterday.

Oil prices (+3.1%) are rebounding nicely from yesterday’s sharp decline.  You may recall that Saudi Arabia cut its selling price yesterday and the market read that as a sign of weak demand.  However, this morning, that story has faded and continuing tensions in the middle east seem to be having a bigger impact.  This is confirmed by the fact that gold (+0.35%) is rebounding as well although the base metals are mixed this morning with copper slightly higher and aluminum slightly lower.

Finally, the dollar is a touch stronger this morning, but not really by much.  Versus the G10, I see gains of about 0.15% or so with NOK (+0.25%) the exception as it is responding to the rebound in oil.  Versus the EMG bloc, the picture is clearer with almost all these currencies a bit softer, albeit between -0.2% and -0.4% generally.  The dollar continues to be the least interesting asset bloc around for now and is likely to remain so until the Fed starts to actually change policy rather than simply hint at it.

On the data front, we see the Trade Balance (exp -$65.0B) and we have already seen NFIB Small Business Optimism print at a better than expected 91.9.  But, while that is a nice outcome, recall that the index is back at levels below Covid and only above those seen in 2008 and 1980!  Fed Vice-Chair for regulation, Michael Barr speaks at noon, but my guess is he will be right in line with the recent commentary that things look good, but they are not done yet.

As I wrote yesterday, with the bulk of the focus on Thursday’s CPI print, I expect that while markets might be choppy, there will not be much directional information overall.  

Good luck

Adf

Somewhat Miffed

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The Minutes did naught to explain
Why Jay might need raise rates again
But if we all harken
The Fed’s Thomas Barkin
The future seems cloudy with rain
 
So, now it seems Jay’s somewhat miffed
As he and his team try to shift
The views he expressed
That rate cuts were blessed
And markets did act sure and swift

 

Remember the certainty with which market participants determined that the Fed had not only finished raising interest rates, but that they would be cutting them quite soon?  That is so last year!  It seems that after a powerful Santa Claus rally that was inaugurated by Secretary Yellen’s move to issue more T-bills and less coupons, and then seemingly confirmed at the December FOMC meeting, where the dot plot showed no more rate hikes and a median expectation of three cuts this year, and where Chairman Powell, when given a chance to push back on this new narrative in the press conference, went out of his way to embrace the ‘rate cuts coming soon’ narrative, the Fed is no longer happy about the situation.  Instead, now they seem to want the market to ratchet back these expectations for a quick decline in interest rates.  At least, that’s what we heard from Richmond Fed president Tom Barkin yesterday, “The FOMC’s December meeting got a lot of attention. We acknowledged the progress on inflation and explicitly reaffirmed our willingness to hike if necessary.”  [emphasis added].

Meanwhile, the Minutes seemed to lean more hawkish than not, “It was possible that the economy could evolve in a manner that would make further increases in the target rate appropriate.  Several also observed that circumstances might warrant keeping the target range at its current value for longer than they currently anticipated.”  Arguably the best line, though, was “Participants generally perceived a high degree of uncertainty surrounding the economic outlook,” which is likely the most honest statement they have ever made.  In the end, the Minutes didn’t sound very dovish to me, but as I mentioned above, the press conference came across far more dovishly.  One other thing to note is that they mentioned QT for the first time in quite a while.  It seems that they recognize the incongruity of shrinking the balance sheet while cutting interest rates, so they have begun to consider how to message any changes there.

With this new information being absorbed, the market is now in the process of re-evaluating the idea that rate cuts are going to happen as quickly and as substantially as thought just a week ago.  At this time, there is just a 10% probability of a cut at the end of this month (it was nearer 20% last week) and the March probability is down to 70% (it was 79% last week) though the market is still pricing in 6 cuts in 2024.  FWIW, that seems outside the bounds of how things will ultimately play out, and I maintain that while a cut could easily be made by the May meeting, I do not foresee inflation cooperating which will force a lot of rethinking.

To summarize the Fed story, the market has sensed a disturbance in the easing force that had been widely assumed and a key driver of the late 2023 risk rally.  This morning, markets have stabilized after two consecutive negative days to open the year.  As such, let us keep our eyes peeled for more, new and, potentially non-narrative, information going forward. 

Looking at the latest data releases overnight and this morning, they consisted of the Services PMI data as well as German state inflation.  Regarding the former, both Australian and Japanese data were soft although Chinese data was better than expected with the Caixin Services PMI printing at 52.9, continuing its rebound from summer lows.  Across Europe, Italian (49.8), French (45.7), German (49.3) and the Eurozone composite (48.8) all showed contractionary numbers although the UK (53.4) vastly outperformed.  As to the German state-by-state inflation readings, every one of them bounced sharply from last month’s recent lows and the market is looking for a sharp rebound in the national CPI to 3.7% later this morning.  As I have written before, that combination of rising inflation and weak growth is a tough situation for Madame Lagarde.  My money is still on her to address the growth rather than the inflation, although she will likely wait until the Fed moves before doing so in Frankfurt.

With all this in mind, let’s take a look at the overnight market activity.  In Asia, the picture was mixed although there was more red than green on the screen.  While the Nikkei (-0.5%) fell, other Japanese indices held their own, and we saw some strength in Indian shares as well.  However, China remains under pressure, despite the stronger than anticipated PMI reading and that has been weighing on South Korea, Hong Kong and Australia overall.  However, in Europe, we are seeing modest gains this morning, only on the order of 0.1% or 0.2%, but green is more pleasant than the red of the past two days.  As to US futures, they are little changed at this hour, although again, better than their recent performance.

In the bond market, from the time I wrote yesterday morning, yields fell through the rest of the session by nearly 7bps in the 10yr Treasury market, and this morning, they have bounced back from the closing levels by 4bps.  We have seen similar price action throughout Europe where yesterday’s declines to closing lows have been reversed and we are now between 6bps and 9bps higher than the end of Wednesday’s session.  JGB yields, though, remain anchored at 0.60%, unchanged.

Oil (+1.0%) is continuing to rebound as the situation in the Middle East seems to be getting more complex.  The Houthis continue to attack Red Sea shipping, Israel killed a Hezbollah leader in Lebanon, potentially widening the conflict and there was a terrorist bombing in Iran (with the best guess it was internally executed by an unhappy faction) which can only serve to increase the overall tension levels.  While the broader weakness we have seen in this space is likely a response to weaker overall economic activity, especially in China, at some point, that activity will pick up and I expect oil prices to do so as well.  In the metals complex, base metals are under further pressure this morning, with both copper and aluminum down -0.6% or so, although gold (+0.2%) is bucking that trend, perhaps on the back of the dollar’s marginal weakness this morning.

Speaking of the dollar, as measured by the DXY it is -0.2% softer this morning with pretty uniform losses vs the major G10 and EMG currencies.  The one exception is the yen (-0.6%) which continues to suffer based on the idea that the BOJ will not be able to consider interest rate normalization in the wake of the recent earthquake on the country’s west coast.  In truth, the dollar seems to be quite the afterthought in markets right now, with much greater focus on the bond market and central bank actions as the drivers.  While I would carefully watch if the dollar starts to break these correlations, I don’t see it as a key driver right now.

On the data front, we see a few things this morning, starting with ADP Employment (exp 115K) and then Initial (216K) and Continuing (1883K) Claims.  As well the Services PMI data is released later this morning (51.3) and finally we get the EIA oil inventories with another large draw of 3.7 million barrels expected which ought to continue to support the black, sticky stuff.

There are no Fed speakers on the calendar although we must all be watchful for the pop-up CNBC interview if they feel their message, whatever it may currently be, is not getting proper attention.  While the first two sessions of the year were certainly uncomfortable for risk assets, I do not believe that my idea of a solid first half followed by more evident problems in the second half of the year has been dismantled.  Clearly, tomorrow’s NFP data will be critical, and we will discuss it ahead of the release.  Until then…

Good luck

Adf