Tag Archives: #Powell

Magical Stuff

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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

Dragged Through the Mud

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The year started out with a thud
As equity markets saw blood
The bond market fell
And oil’s death knell
Was sounded, whilst dragged through the mud
 
The question we now must address
Is, are markets set to regress?
Or, is this a blip
O’er which we can skip
Without adding too much new stress?

 

Has the narrative already changed?  That seems to be the question we really need to ask after just one day of trading in 2024.  It seems hard to believe that the macroeconomic fundamentals have changed very much, especially since we have not gotten any substantial data yet.  While ISM Manufacturing (exp 47.1) and JOLTS Job Openings (8.85M) are due later this morning, it beggar’s belief that the market is anticipating much there.  Sure, we get the payroll report on Friday, but given the goldilocks, soft-landing scenario had seemed to be the prevailing theory, have we actually seen anything that would change that view?

Of course, it is possible that market participants are fearful that the FOMC Minutes, which are released at 2:00 this afternoon are not going to reconfirm their broadly dovish views.  You may recall that at the December FOMC meeting, Chairman Powell did nothing to disabuse the markets of the idea that the Fed had not only finished tightening, but that it was getting set to ease.  From that point, the Fed funds futures market has priced in a total of six rate cuts for 2024, twice the number the median dot plot numbers showed and a pretty dramatic easing, especially if the economy does not fall into recession.

There is, of course, another possible rationale for yesterday’s weak start in risk assets; they were wildly overbought.  Since that Fed meeting in the middle of December, stocks had rallied sharply (S&P 500 +3.4% at its peak), 10-year yields fell 40bps at their trough and the dollar, as measured by the DXY, had fallen more than 2%.  The peak (trough) was seen immediately after Christmas, and we have been drifting back since then.  In fact, I think it is fair to say that markets got a bit exuberant in the wake of the FOMC meeting.

But as we get back to fully staffed trading desks and investment managers are back from their holiday breaks, I suspect that price action is going to moderate a bit while volumes improve.   As I tried to make clear yesterday, I believe that the recent uptrend in risk assets will continue broadly until we see enough data to change opinions.  There remains a pretty large group of analysts who are in the “inflation is going to 1%” camp and that will allow (force?) the Fed to cut rates more aggressively to prevent real interest rates from becoming too restrictive.  As that is a pleasing narrative, and one that the current administration would really like to see evolve, I expect that we will hear a lot about that for a while.  And maybe that is what will come to pass.

However, my suspicions and fears are that 2024 will be less idyllic than those goldilocks scenarios that are being painted by the soft-landing crowd.  I find it difficult to believe that amongst all the potential big picture problems, including escalation of the Middle East war, the Ukraine war, China’s recent threats about reunification of Taiwan, and the more than 40 elections that are due this year, culminating in the US election, there won’t be at least a few major hiccups.  In fact, the ongoing unhappiness in the US electorate is likely to be one of the biggest issues driving what I believe will be risk aversion before the year ends.  But that has not yet manifested itself, so we are likely to have interesting times ahead.

In the meantime, let’s look at the overnight price action.  After the weak US equity performance, APAC markets mostly fell, with only Japan (Nikkei -0.2%) really holding in well.  European bourses this morning are all lower, on the order of -1.0%, with the CAC (-1.5%) really suffering and US futures all in the red, led by the NASDAQ (-0.7%) although the others are down about -0.35% at this hour (7:45).  Clearly, there has been no joy yet.

As to the bond market, this morning has seen Treasury yields back up a further 4bps and they are now at 3.97%, well off the lows seen post-Christmas.  European bond markets have seen less aggressive rebounds in yields as the economic picture on the continent remains more dire than here in the US.  Arguably, the ECB has a much tougher job than the Fed right now as the inflation data in Europe remains higher than in the US while economic activity is clearly slowing much more rapidly.  (I guess if they had pumped as much fiscal stimulus into their economy as we did into ours, they wouldn’t be in this situation.  Of course, the debt situation might be worse…). Ultimately, however, I expect that the lack of growth is going to dominate the mindset in Europe and that Madame Lagarde will be cutting rates as soon as she can.  One last thing, Japan.  Remember all the stories in December about how the BOJ was getting set to normalize policy (i.e., return rates to positive territory) and that Japanese investors would be repatriating money soon?  Well, this morning 10-year JGB yields are at 0.60%, far below the 1.00% former YCC cap and the new reference rate and showing no signs of doing anything unusual.  

Turning to the oil market, while it is rebounding this morning, +0.8%, it has been under significant pressure lately despite what appears to be a serious increase in the military posture in the Red Sea amid Houthi rebel attacks on ships and the US Navy responding more aggressively.  In fact, Maersk, the largest shipping company in the world, has once again indicated it will not transit the Red Sea, an outcome that can only negatively impact the cost basis for shipping, and ultimately push upwards on inflation.  This is an area where we need to keep a close eye for new developments.  However, this morning the metals markets are under pressure as gold (-0.65%) is giving up some of its recent gains, although remains well above the $2000 level.  But we are seeing weakness in the base metals as well, with both copper and aluminum under pressure this morning.

Perhaps a key driver of the metals markets has been the fact that the dollar has continued its rebound with the DXY higher by 0.3% this morning, having rallied 1.5% from its recent post-Christmas nadir.  This has been a broad-based dollar rally with gains against both G10 and EMG currencies as it seems to be a dollar story.  The best I can figure is that there is concern/anticipation that the Minutes are going to sound more hawkish than people remember the meeting and press conference.

On the data front, we see the following:

TodayISM Manufacturing47.1
 ISM Prices Paid47.5
 ISM Employment 46.1
 JOLTS Jobs Openings8.85M
ThursdayADP Employment115K
 Initial Claims216K
 Continuing Claims1883K
FridayNonfarm Payrolls168K
 Private Payrolls130K
 Manufacturing Payrolls5K
 Unemployment Rate3.8%
 Average Hourly Earnings 0.3% (3.9% Y/Y)
 Average Weekly Hours34.4
 Participation Rate62.7%
 ISM Serv ices52.6
 Factory Orders2.1%

Source: Tradingeconomics.com

Interestingly, only Richmond’s Thomas Barkin is scheduled to speak this week, first this morning and then on Friday afternoon as well.  

Absent a new escalation in the Middle East, though, I would look for a little more profit-taking ahead of the payroll data.  However, I continue to believe the market is going to push for the bullish framework for a few months at least which means equities will rally, yields will slide, and the dollar will fall as well.

Good luck

Adf

Chairman Powell Has Struck Out

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(With apologies to Ernest Lawrence Thayer)

The outlook’s quite uncertain for the ‘conomy this year
As there are those with strong belief the future’s bright and clear
But just as many seem to take a different view instead
And what they see is awful, with recession dead ahead.

The key discussion centers on inflation and its course
And whether central bankers, tighter money still endorse.
The bulls believe the Fed is done, with rate cuts coming soon
Thus, other central banks will quickly sing that selfsame tune.

The bears, however, see that global structures have now changed,
With tariffs and near-shoring rising, free trade’s now estranged.
The upshot is the bears believe that higher’s still for longer
As pricing pressures bubble thus, inflation grows much stronger.

The funny thing about this split in views is that both sides
May find that for a time this year their views will be good guides.
I think the bulls will run the show for quarters one and two
But as the year progresses weaker outcomes will come due.

Now let’s consider how the year is likely to begin;
With visions of soft-landings leading bulls to go all-in.
They see inflation sliding down to two or even one,
As yields on 10-year bonds fall back to Three before they’re done.

In sync with this they’re certain that the Dow and S&P
Will make new highs o’er 40K and 5K ‘spectively.
The dollar, in this view, has seen its highs for years to come
And so, they think the DXY, to Ninety-Five, will plumb.

This means the euro ought to trade as high as One Two-Oh
While dollar yen descends below One Thirty midst great woe
The pound is like to rise above One Forty in this wave
And pesos and reals explode as these, investors, crave.

The final data point for Goldilocks to make her case
Is oil needs to settle here and simply stay in place.
So, while good growth ought help support demand for Texas Tea
More oil will be pumped by nations recently set free.

This means the current policies where sanctions have relaxed,
Will show that barrels pumped will not have waned, but rather waxed.
And one last thing, the price of gold, will rally to new highs
As low real rates and central banks will lead gold bears’ demise.

I must admit that this sounds great if it can last all year
Alas, there are some issues which are likely to appear.
Come summer solstice cracks in this façade will start to show
And as the year winds down I fear unhappiness will grow.

The causes, proximate, will have to do with lags in time
As rate hikes o’er the past two years have changed the paradigm.
And though we’ll surely see the Fed and ECB respond
Twon’t be in time to stop the selling of the ten-year bond.

Instead, as growth conditions slacken each and every day,
The rate cuts will not be enough to halt the growth decay.
As well, a problem central banks are likely still to face
Is that inflation will go back above their target pace.

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.

So, what can we expect as Twenty-Four plays out in time?
The second half is likely to create a different clime
Than what we saw through June, when everything was filled with cheer
And stocks made record highs with greed ascendant over fear.

Instead, as summer turns to fall, inflation will come back
And late Q3 Chair Powell will have started to backtrack,
So rather than more rate cuts a new message will be sent
A pause, or maybe rate hikes are the future fundament.

This news will not be taken by the markets with aplomb
Instead, the first half rally will collapse like Pets.com.
And with inflation creeping higher Jay will have to choose
Twixt prices or the market, either way he’s sure to lose.

Some folks believe the ‘lection in November will impact
The Fed, though Jay will surely claim their mandate’s what they’ve tracked;
Now, if they fight inflation then the Dems will surely scream
But if they help the markets rise, poor Jay, the Pubs, will ream.

This means we need look deeply into Powell’s inner thoughts
And see if Arthur Burns or Chairman Volcker calls the shots;
My money’s on the tall one which means tighter policy
As only that can help cement Jay’s hero’s legacy.

With this in mind we’re like to see stocks peak sometime in June
And for the rest of Twenty-Four we’ll watch those markets swoon.
So, from the heights, Dow Forty K and Five K S&P
To Thirty K and Three-point-Five K Spooz, I do foresee.

As to the bond, despite the fact that growth will be lackluster,
Inflation won’t cooperate and so, Jay will be flustered.
While we may see one Fed funds cut before the summertime
The back end of the market will reverse, and yields will climb.

Come Christmas time I see the bond will yield ‘bout Five point Five
And all those levered bets are not too likely to survive.
As to the dollar, it should find its footing in the summer
And start to rise, which for the shorts, will really be a bummer.

So, think about a euro back ‘neath One Oh-Five or less;
And Dollar Yen above One Fifty, midst Ueda’s stress,
As poor Kazuo will not get to normalize his rates
And so, investment from Japan will flow back to the States.

The pound will suffer too, as like in Europe, growth will lag
And so, below One Twenty t’almost certainly will sag.
Emerging market currencies will have a better run
As rates are more supportive and no cuts need be undone.

In fact, when winter solstice on the calendar appears
Reals and pesos won’t have moved from where they closed last year.
Let’s now turn to the stuff that we can touch and see and smell;
Commodities like oil, though, for not too long we’ll dwell.

In concert, and a reason for inflation’s resurrection
Demand for oil only goes in one long-term direction.
So, more demand will drive the price back to One Hundred bucks
And if a wider war breaks out its June ‘Oh Eight redux.

The final price that I foresee in this unnerving tale
Is gold which ought to sparkle as most fiat moneys fail.
The Relic that’s called Barbarous will head above 3K,
And after this there’s just one thing I’ve really left to say.

Oh, somewhere in this great big world the sun is shining bright;
The ‘conomy is growing and inflation’s very slight.
But here at home stagflation is what Jay has brought about
There’ll be no joy in ‘Twenty-Four, Chair Powell has struck out!

To all my readers near and far, please know my sole intent
Is offering my viewpoint and it always is well-meant.
So, as we all embark upon Two Thousand Twenty-four
I thank you all for reading, for its you I all adore.

Thanks and Happy New Year
Adf

Sufficiently

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Said Madame Lagarde, I don’t care

‘Bout dovishness seen over there

Though I’m not omniscient

We need rates sufficient-

Ly high til inflation is rare



The Old Lady’s governor, too

Expressed that no cuts were in view

But can both withstand

More slowing than planned

And, with their tough talk, follow through?

A little housekeeping to start this morning.  Today will be the last poetry until January 2nd when I will publish my ‘crystal ball’ viewings in a long-form poem.  For all my readers, thank you for reading and have a wonderful Christmas, Hannukah (I know it’s’ over), Kwanzaa, Festivus or whichever holiday is important as well as let’s hope 2024 is a fantastic new year.

So, let us review yesterday’s activity, and then, more broadly, the state of things as we come to the end of the year.

Arguably, the biggest news yesterday was not that the ECB left rates on hold, which was universally expected, but that Madame Lagarde tried very hard to continue to sound hawkish despite the Fed’s turn on Wednesday.  “Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.” [emphasis added.]

As well, she explicitly mentioned that there was no discussion of interest rate cuts in the meeting.  The hawks on the committee managed to get a bone thrown their way with the announcement of a phased exit from the PEPP program starting in the second half of next year.  At the same time, their staff projections for GDP growth and inflation were all reduced slightly for 2024 and 2025 with low numbers penciled in for 2026.  She maintained that inflation has been “too high for too long”, clearly true, and has been unwilling to consider anything but their inflation fight.

Alas, this morning’s Flash PMI data releases make ugly reading with French, German and the Eurozone overall reading weaker than last month and weaker than expected.  The Eurozone growth engine has been stalling for quite a while despite falling energy costs.  And now, in the wake of the Fed turning dovish, energy costs are rebounding which will almost certainly negatively impact the continent’s growth trajectory.  Maybe Lagarde can hold out for another month, but I suspect if the data continues to erode in the manner, it has recently, the ECB will recognize that the worst is over and it’s time to alter policy, just like the Fed has done. As well, given the economy in Europe is in far worse shape than here in the US, I expect that they will be cutting more quickly as 2024 progresses.  That will not help the euro, but that is a story for some time next year, not for the remainder of this one.

At almost the same time, the BOE also maintained their policy rate and also indicated that they were not anywhere near ready to cut rates.  In fact, 3 voters wanted a 25bp rate hike, which given inflation in the UK is the highest in the western world, with core still at 5.7%, makes sense.  But, as on the continent, economic activity continues to stumble along, with manufacturing, according to this morning’s Flash PMI reading of 46.4 in recession although Services activity, 52.7 does seem to be rebounding.  However, here, too, I believe the gravitational pull of a dovish Fed is going to quickly weigh on the BOE and we are going to see a pivot in the first half of next year amid weaker growth and slowing inflation.

One final note from yesterday was that Retail Sales were a bit stronger than expected, rising 0.3% and failing to show the slowdown that would be expected to help reduce inflationary pressures.  And just think, that was before the Fed pivot, which has ignited a massive risk-on rally in assets and likely will juice things even more in the short-term.

The result of these policy decisions is that stocks are rallying pretty much everywhere in the world, bonds are rallying pretty much everywhere in the world, commodities prices are rallying, and the dollar is falling.  Not only that, I see nothing that is likely to change those views until somewhere toward the end of Q1 2024 at the earliest.

But let’s step back for a moment and consider the medium-term impacts of all this change.  Remember this, a soft-landing is merely the last stop in the cycle before a hard landing.  The soft-landing narrative is clearly the majority view and driving force in markets as 2023 comes to a close.  But is that a realistic outcome?  

I think a very strong case can be made that we have seen the bulk of the disinflationary forces that are coming as the combination of Covid driven supply chain issues being fixed and higher interest rates / QT has weighed on marginal demand.  It has been a fun story while it lasted and has certainly cheered markets.

But structural issues remain, many of which are outside any central bank’s abilities to address adequately.  Consider what I believe is the biggest structural change, the turn from capital-focused economic policies to labor focused economic policies.  This is inherently inflationary and regardless of what Powell or Lagarde or Ueda or anyone in that chair does, this change is going to continue.  It is a political change, and one that is only getting started.  Politically, we call it populism, and one need only read the papers to recognize this is the new world.

For 40 years, since the Reagan/Thatcher leadership, the world has seen low inflation from a combination of demographics and globalization creating downward pressure on wages and reduced taxation increasing the return on capital.  This led to the financialization of western, especially the US, economies and expanded the wealth/income gaps that are prevalent around the world today.  

But this is changing, and changing far more rapidly than the current governments in power would like to see or believe.  As I wrote earlier, 2016 was a test run for what is looming in 2024.  Consider the populist views of recent election outcomes in Argentina and the Netherlands as well as the rise in the polls of the National Front in France, AfD in Germany, and the strength of both Trump and RFK Jr in the US, with populism as the driving force.  2023 saw more labor unrest in the US than any time in the past 20 years and harkens back to conditions in the 60’s and 70’s.  The big difference between now and then is that union membership has declined so dramatically in the interim.  Do not be surprised to see unions rise again in popularity.

But populism drives more than labor unrest, and ultimately rising wages, it also encourages governments to consider trade barriers and tariffs, both of which drive consumer prices higher.  And populism is very easy for governments to adopt because it sounds so good.  Consider the key tenets; buy domestic goods, limit immigration and tax the rich so they pay their fair share.  We will hear some version of these policies in every country around the world in 2024, and not just western nations, but communist bloc countries as well.  

If this is the future, and I believe it is, then the current risk rally is merely a hiatus before things turn much worse.  In a populist driven society, profit margins are going to decline, and capital will flee to where it feels safest.  That may be whichever nations push back against this trend, although they will be few and far between, and things like real assets, commodities, and real estate.  While I believe this will be the general trend, from an FX perspective, given everything is relative there, strength or weakness will depend on the relative decisions made in each nation.  Arguably, the less populist the decision outcomes, the stronger the currency, but ex ante, there is no way to know how that will turn out.  If I had to bet now, I would suggest that the nation least susceptible to this wave is Japan, a truly homogenous society, and that bodes well for the yen going forward.

In the meantime, as I head off, here are today’s data points with Empire State Manufacturing just released at a much worse than expected -14.5.  We are due to see IP (exp 0.3%), Capacity Utilization (79.1%), and the Flash PMI’s (Mfg 49.3, Services 50.6).  Through the rest of the month, the most important data point will be the PCE data on the 22nd, but arguably, Powell already told us it is not going to be hot, that’s why he turned away from higher for longer.

Today is triple witching in the equity markets, with stock options, future options and futures all expiring, so volume should be high and movement can be surprising.  But the trend right now is positive for risk assets, and I believe that will continue through the holidays and into January.

Good luck, good weekend and have a wonderful holiday

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Miles Off Base

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This poet was miles off base

As Powell, more growth, wants to chase

So, hawks have been shot

With nary a thought

While doves snap all stocks up apace.



It seems clear that Jay and the Fed

Decided inflation is dead

Through Q1 at least

Bulls will have a feast

Though after, take care where you tread

It turns out that not only were my tail risk ideas wrong, I was on the wrong side of the distribution!  Powell has decided that the soft-landing narrative is the best estimator of the future and wants to make sure the Fed is not responsible for a recession.  Concerns over inflation, while weakly voiced, have clearly dissipated within the Eccles Building.  I hope they are right.  I fear they are not.

In fairness, once again, yesterday I heard a very convincing argument that inflation was not only going to decline back to the Fed’s target of 2.0%, but it would have a 1 handle or lower by the middle of 2024 based on the weakening credit impulse that we have seen over the past 18 months.  And maybe it will.  But, while there is no question that money supply has been shrinking slowly of late, which has been a key part of that weakening credit impulse story, as can be seen from the chart below based on FRED data from the St Louis Fed, compared to the pace of M2 growth for decades, there are still an extra $3 trillion or so floating around the economy.  Iit seems to me prices will have a hard time falling with that much extra cash around.

Of course, there is one other place that money may find a home, and that is in financial assets.  So, perhaps the outcome will be a repeat of the post-GFC economy, with lackluster growth, and lots of money chasing financial assets while investors lever up to increase returns.  My guess is that almost every finance official in the world would take that situation in a heartbeat, slow growth, low inflation and rising asset prices.  The problem is that series of events cannot last forever.  As is usually the case with any negative outcome, the worst problems come from the leverage, not the idea.  When things are moving in one’s favor, leverage is fantastic.  But when they reverse, not so much.

A little data is in order here.  According to Statista, current global GDP is ~$103 trillion in current USD, current global stock market capitalization is ~$108 trillion, and the total amount of current global debt is ~$307 trillion according to the WEF.  In a broad view, the current debt/equity ratio is about 3:1 and the current debt/sales ratio is the same.  While this is not a perfect analogy, usually a debt/equity ratio of 3.0 is considered pretty high and a company that runs that level of debt would be considered quite risky.  Now, ask yourself this, if economic activity only generates $108 trillion, how will that >$300 trillion of debt ever be repaid?  The most likely answer is, it never will be repaid, at least not on a real basis.

If you wonder why central bankers favor lower interest rates, this is the primary reason.  However, at some point, there is going to be more discrimination between to whom lenders are willing to lend and who will be left out because they are either too risky, or the interest rate demanded will be too high to tolerate.  When considering these facts, it becomes much easier to understand the central bank desire to get back to the post-GFC world, doesn’t it?  And so, I would contend that Chairman Powell has just forfeited his efforts to be St Jerome, inflation slayer. 

The implication of this policy shift, and I would definitely call this a policy shift, is that the near future seems likely to see higher equity prices, higher commodity prices, higher inflation, first higher, then lower bond prices and a weaker dollar.  The one thing that can prevent the inflation outcome would be a significant uptick in productivity.  While last quarter we did see a terrific number there, +5.2%, the long-term average productivity growth, since 1948 is 2.1%.  Since the GFC, that number has fallen to 1.5%.  We will need to see a lot more productivity growth to keep goldilocks alive.  I hope AI is everything the hype claims!

Today, Madame Christine Lagarde

And friends are all partying hard

Now that Jay’s explained

Inflation’s restrained

And rate cuts are in the vanguard



This means that the ECB can

Lay out a new rate cutting plan

The doves are in flight

Which ought to ignite

A rally from Stuttgart to Cannes

Let’s turn to the ECB and BOE, as they are this morning’s big news, although, are they really big news anymore?  Both these central banks have been wrestling with the same thing as the Fed, inflation running far higher than target, although they have had the additional problem of a much weaker economic growth backdrop.  As long as the Fed was tightening policy, they knew that they could do so as well without having an excessively negative impact on their respective economies.  But given that pretty much all of Europe is already in recession, and the UK is on the verge, their preference would be to cut rates as soon as possible.  

But yesterday changed everything.  Powell’s bet on goldilocks has already been felt across European markets, with rallies in both equity and bond markets in every country.  The door is clearly wide open for Lagarde and Bailey to both be far more dovish than was anticipated before the FOMC meeting.  And you can be sure that both will be so.  While there will be no rate cuts in either London or Frankfurt today, they will be coming soon, likely early next year.  

At this point, the real question is which central bank will be cutting rates faster and further, not if they will be cutting them at all.  My money is on the ECB as there is a much larger contingent of doves there and the fact that Germany and northern European nations are already in recession means that the hawks there will be more inclined to go along for the ride.  Regardless, given the Fed has now reset the central bank tone to; policy ease is ok, look for it to happen everywhere.

Right now, this is all that matters.  Yesterday’s PPI data was soft, just adding fuel to the fire.  Inflation data that was released this morning in Sweden and Spain saw softer numbers and while Retail Sales (exp -0.1%, ex autos -0.1%) are due this morning along with initial Claims (220K), none of this is going to have a market impact unless it helps stoke the fire.  Any contra news will be ignored.

Before closing, there are two things I would note that are outliers here.  First, Japanese equity markets bucked the rally trend, with the Nikkei sliding -0.7% and the TOPIX even more (-1.4%) as they could not overcome the > 2% decline in USDJPY yesterday and the further 1% move overnight.  That very strong yen is clearly going to weigh on Japanese corporate profitability.  The other thing is that there is one country that is not all-in on the end of inflation, Norway.  This morning, in the wake of the Fed’s reversing course, the Norges Bank raisedrates by 25bps in a total surprise to the markets.  This has pushed the krone higher by a further 2.3% this morning and nearly 4% since the FOMC meeting.  

As we head toward the Christmas holidays and the beginning of a new year, it seems like the early going will be quite positive for risk assets and quite negative for the dollar.  Keep that in mind as you consider your hedging activities for 2024.

Good luck

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The Doves Will Be Shot

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Inflation was just a touch hot

And certainly more than Jay sought

So, later today

What will the Fed say?

My sense is the doves will be shot



Instead, as Jay’s made manifest

Inflation is quite a tough test

So, higher for longer

Or language much stronger

Is like what he’ll say when he’s pressed






Let’s think a little outside of the box this morning, at least from the perspective of virtually every pundit and their beliefs about what will happen at the FOMC meeting today.  At this point, most of the punditry seems to believe that Powell cannot be very much more hawkish, especially since the market is expecting comments like inflation is still too high and the Fed will achieve their goal.  So, there is a growing camp that thinks any surprise can only be dovish, since if he doesn’t push back hard enough or talk about loosening financial conditions being a concern, the equity market response will be BUY STONKS!!!





But what if, the thing Powell really wants, or perhaps more accurately needs, is not a soft landing, but a full-blown recession!  Think about it.  As I have written repeatedly, the idea that the Fed will cut rates by 125bps next year because growth is at 1.5% or 2.0% and inflation has slipped to 2.5% seems like quite an overreaction.  But given the current US debt situation ($34 trillion and counting) and the fact that the cost of carrying that debt is rising all the time, what would get the Fed to really cut rates?  And the only thing that can do it is a full-blown, multiple quarters of negative GDP growth, rising Unemployment Rate, recession.  If come February or March, we start seeing negative NFP numbers, and further layoff announcements as well as declining Retail Sales and production data, that would get the Fed to act. 





At least initially, we would likely see inflation slide as well, and with that trend plus definitive weakness in the economy, it would open the door for some real interest rate cuts, 400bps in 100bp increments if necessary. Now, wouldn’t that take a huge amount of pressure off Treasury with respect to their refi costs?  And wouldn’t that encourage accounts all over the world to buy Treasuries so there would be no supply issues?  All I’m saying is that we cannot rule out that Powell’s master plan to cut rates is to drive the economy into a ditch as quickly as possible so he can get to it.  In fact, it would open the door to restart QE as well.





This is not to say that this is what is going to happen, just that it is not impossible, and I would contend is not on anyone’s bingo card.  Now, Powell will never say this out loud, but it doesn’t mean it is not the driving force of his actions.  Powell is incredibly concerned with his legacy, and he has made abundantly clear that he will not allow his legacy to be the second coming of Arthur Burns.  Instead, he has his sights on the second coming of Paul Volcker, the man who killed the 1970s inflation dragon.  St Jerome Powell, inflation slayer, is what he wants as his epitaph.  And causing a recession to kill inflation and then cut rates is a very clever, non-consensus solution.





How will we be able to tell if I’m completely nuts or if there is a hint of truth to this?  It will all depend on just how hard he pushes back on the current narrative.  Yesterday’s CPI results could best be described as ‘sticky’, not rebounding but certainly not declining further.  Shelter costs continue apace at nearly 6% Y/Y and have done so for more than 2 years.  I was amused this morning by a chart on Twitter (I refuse to call it X) that showed CPI less shelter rose at just 1.4% with the implication that the Fed needs to start cutting rates right away.  The problem with that mindset is that shelter is something we all pay, and there is scant evidence that housing markets are collapsing.  In fact, according to the Case Shiller index, they are rising again.  I would contend that there is plenty of evidence to which Powell can point that makes his case for an economy that is still running far too hot to allow inflation to slide back to their target.  And that’s what I expect to hear this afternoon.





Speaking of recession, let us consider the situation in China, where despite the CCP’s annual work conference just concluding with some talk of building a “modern industrial system” the number one goal this year, thus boosting domestic demand, they announced exactly zero stimulus measures to help the process.  Data from China overnight showed that their monthly financing numbers were all quite disappointing compared to expectations and the upshot was a further decline in Chinese and Hong Kong equity markets.  This ongoing economic weakness and the lack of Xi’s ability or willingness to address it continues to speak to my thesis that commodity prices will remain on the back foot.  If you combine the high interest rate structure in the G10 with a weaker Chinese economy, the direction of travel for energy and base metals is likely to be lower.  The one exception here is Uranium, where there is an absolute shortage of available stocks and a renewed commitment around the world to build more nuclear power plants.





At the same time, Europe remains pretty sick as well, with Germany leading the entire continent into recession, and likely dragging the UK with it.  Germany, France, Norway, the UK and others are all sliding into negative growth outcomes.  While Chairman Powell will continue to push back on the idea of rate cuts soon, I expect that tomorrow, when both the ECB and BOE meet, they will open the door to rate cuts early next year.  Inflation in both places has been falling sharply and there is no evidence that Madame Lagarde or Governor Bailey is seeking to be the next Paul Volcker.  Both will blink with the result that both the euro and the pound should feel pressure.





Summing it all up, today I think we get maximum hawkishness from the Fed with Powell pushing back hard on the market pricing.  Initially, at least, I expect we could see yields rise a bit and stocks sell off while the dollar continues its overnight rise.  But I also know that there are far too many people invested in the idea that the Fed must cut soon, and they will be back shortly, buying that dip until they are definitively proven wrong.  





As to the rest of the overnight session, aside from China’s weak performance, South Korea also lagged, but the rest of the APAC region saw modest gains.  Europe, meanwhile, is all green, although it is a very pale green with gains on the order of 0.2%, so no great shakes.  Finally, US futures are firmer by 0.1% at this hour (7:15) after yesterday’s decent gains.





Bond yields are sliding this morning, down 2bps in the US and falling further in Europe with declines of between -3bps and -6bps on the continent as investors and traders there start to price in a more aggressive downward path for interest rates by the ECB.  UK yields are really soft, -9bps, after GDP data this morning was disappointing across the board, especially the manufacturing data.





Oil prices (+0.45%) which got slaughtered yesterday, falling nearly 4%, are stabilizing this morning, as are gold prices, which fell yesterday, but not quite as much as oil.  However, the base metals complex continues to feel the pressure of weak Chinese demand.  I continue to believe that there are structural supply issues, but right now, the macro view of weak economic activity is the main driver, and it is driving prices lower.





Finally, the dollar is firmer this morning as weakness elsewhere in the world leaves fewer choices for where to park funds.  While the movement has not been overly large, it is quite uniform across both G10 and EMG currencies.  The laggards have been NZD (-0.6%) after a softer than expected CPI reading and ZAR (-0.6%) on the back of weakening metals prices.  If I am correct about the path going forward, the dollar should perform well right up until the Fed responds to much weaker economic activity and starts to cut rates aggressively.  At that point, we can see a much sharper decline in the greenback.





Ahead of the FOMC meeting, this morning we get November PPI (exp 1.0%, 2.2% core) which would represent a small decline from last month’s data.  We will also see the EIA oil inventory data, which has shown a recent history of builds helping to drive the oversupply narrative there.





At this point, it is all up to Jay.  I suspect that markets will be quiet until then, and it will all depend on the statement, the dot plot and the presser.





Good luck





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			No Matter What
		


				

			Posted on  by 		

			


		

		

The story that’s got the most press

Is CPI’s sure to regress

So, Jay and the Fed

Without any dread

Can start cutting rates with success



But what if instead of a nought

The data is higher than thought?

Will markets adjust?

Or will folks still trust

That rate cuts come no matter what?






While all eyes truly remain on the FOMC meeting announcement tomorrow afternoon, and of course, the ensuing press conference by Chairman Powell, this morning brings the November CPI report, which could well have an impact on tomorrow’s outcome.  Current median expectations are for a M/M headline release of 0.0% leading to a Y/Y result of 3.1%.  As to the core (ex food & energy) result, M/M is forecast to be 0.3% with the Y/Y result being unchanged at 4.0%.





Lately, the inflation bulls, aka the deflationistas, have been harping on the fact that if you annualize the past 3 months’ worth of data or the past 6 months’ worth of data, the annualized outcome is 2.5% or lower, and so the Fed has basically done their job and returned inflation back to their target.  In the very next breath, they explain that with inflation back at target, they can start to cut rates because otherwise they will choke off the economy.





Even if I grant the first part of this thesis, of which I am suspect, it is the corollary rate cuts that make no sense at all.  Thus far, the bulk of the data that we have been observing has shown that the economy has held up extremely well despite 525 basis points of rate hikes over the course of less than two years.  This was made evident by Friday’s payroll report as well as the Q3 GDP report and much of the hard data that abounds.  Given the economy’s clear resilience to this higher rate structure, I can see no good case for the Fed to cut.





In fact, I think the key for the entire macroeconomic outlook revolves around just how long the US economy can maintain its growth trajectory with interest rates at their current levels.  The one thing of which we can be certain is that the Fed is not going to pre-emptively cut rates because they think a recession might show up, at least not now while inflation remains well above their target.  If the US economy continues to perform, meaning grow at 2%-2.5% over time while the Unemployment Rate stays below 4.5%, I would argue there is no incentive for the Fed to cut, at least not on a macro basis.  (There may be political reasons for them to cut, but that’s a different story.)  Now, if growth continues apace, will that be bullish or bearish for stocks?  For bonds?  For the dollar?  For commodities?  I would say that these are the questions we need to answer and are why the Fed remains such an important part of the discussion.  Do not discount a world where 10-year yields are 5.5%, Fed funds are 5.25% and GDP is 2.0% while inflation runs at 3.0%.  This could well be the near future.  It would also likely be quite a negative for risk assets.





My point is there continues to be a great dichotomy of thought as to how the future will unfold as we all are looking for the next clue to support our thesis.  While I continue to believe that a slowdown is coming, to date, there has been no clear evidence that is the case.  In fact, Friday’s Michigan Sentiment data was substantially better than anticipated while inflation expectations fell alongside the price of gasoline.  In fact, a marginally stronger than anticipated print this morning will simply be more proof that the market’s current anticipation for rate cuts in 2024, which sit between 4 and 5 cuts, will need to be repriced.  If risk assets have rallied on the basis of future Fed rate cuts, that could be a problem.  Just sayin’!





Ok, ahead of the data, this is what we have seen.  Yesterday’s modest US equity rally was followed by generally modest strength in Asia with the best performer being the Hang Seng (+1.1%).  Last night, China’s government made a series of announcements describing all the sectors of the economy that they would be supporting going forward with fiscal policy, although there were no numbers attached to any of it, it was all cheerleading.  Saturday night, Chinese CPI data was released at -0.5% both M/M and Y/Y, while PPI there fell to -3.0%.  The implication is that economic activity is not going very well.  In fact, it might be appropriate to define it as a recession, although I’m sure that won’t be the case.  However, looking for China to be the world’s growth engine may be a bad call for the time being.  As to Europe, it is a mixed picture there, with both modest gainers and modest laggards and no real direction overall.  US futures are higher by 0.2% at this hour (7:30) but are obviously keenly focused on the data release.





Yesterday’s bond market price action, where yields backed up, has been completely reversed this morning with 10-year Treasury yields lower by 5bps and European sovereign yields lower by even more, 6bps-7bps while UK gilts have really rallied, with yields there down by 12bps after the employment data showed wage pressures declining far more than anticipated.





On the commodity front, oil is drifting lower again this morning, down -0.6%, although the metals complex is showing strength with gains in gold (0.4%) and copper (0.3%), which seem to be rising on the back of a weaker dollar and lower US rates.  But a quick aside on oil and the commodities space in general.  I have made the point that the commodity markets are the only ones that are pricing in a recession.  And I would contend that is still the case.  Perhaps, though, I have been looking in the wrong place for that economic weakness.  Consider that China is the largest consumer of raw commodities in the world, by a wide margin.  Consider also that the Chinese economy is having all kinds of difficulty as the dash for growth seems to have reached its apex and is now sliding lower.  As I mentioned above, the idea that China is in a recession may not be absurd, and perhaps the fact that the commodity markets, in general, have been so soft is simply a recognition of that fact.  If this is the case, we need to watch Chinese economic activity closely in order to get a sense of the trend in commodities.  Or perhaps, we need to watch the trend in commodities to better understand the Chinese economy.  When base metals turn higher, look for Chinese stocks to do the same.





Finally, the dollar, as mentioned above, is under pressure this morning, down -0.3% when measured by the DXY.  The biggest mover is JPY (+0.7%) but we are seeing all the G10 bloc as well as the bulk of the EMG bloc rallying against the greenback.  Speaking of Japan, last night there was further commentary pushing back on the idea of any movement by the BOJ next Monday regarding the normalization of monetary policy in the near future.  I maintain that nothing will happen before they see the wage negotiation outcomes in March and, in the meantime, they are praying quite hard for the recent global inflation trend to remain downward as this will allow them to maintain their QE and fund the government.





And that’s really it for the day, as the CPI is the only news to be released.  Unless it is significantly different than the current expectations, I suspect that things will be quiet today, modest continued equity and bond rally as everybody places their bets that the Fed is getting ready to start to cut rates.  I’m not holding my breath.





Good luck





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			The New Allegory
		


				

			Posted on  by 		

			


		

		

On Friday, the data surprised

With job growth more than advertised

So, bonds took a bath

And stocks strode a path

Where growth is what’s now emphasized



But what of the soft landing story?

Will rate cuts now be dilatory?

If Jay just stands pat

Will stocks all go splat?

Or is this the new allegory?






Well, this poet was clearly wrong-footed by Friday’s employment report where not only were non-farm payrolls stronger than anticipated at 199K, but hours worked rose and the Unemployment Rate fell 2 ticks to 3.7%.  While revisions to previous reports were lower, as they have been all year, the report did not point to an imminent slowing of the economy nor a recession in the near-term.  Arguably, the soft-landing crowd made out best, as equity markets, which initially plunged on the report following Treasury prices, rebounded as investors decided that growth is a better outcome than not.  Yields jumped higher, as would be expected, rising 8bps in the US with larger gains throughout Europe before they went home for the weekend.  And finally, the dollar flexed its muscles again, rallying universally with gains against 9 of the G10 currencies, averaging 0.4% (only CAD (+0.1%) managed to hold its own) and against most of the EMG bloc with a notable decline by ZAR (-1.1%), although MXN (+0.6%) bucked the trend.





Does this mean the soft landing is coming?  As we start the last real data intensive week of 2023, it remains the favored narrative, but is by no means assured.  After all, before the end of this week we will have seen the latest CPI reading in the US (exp 3.1% headline, 4.0% core) and we will have heard from the FOMC, ECB and BOE as well as several smaller central banks like the Norgesbank and the SNB.  And let us not forget that the BOJ meets next Monday.  So, there is plenty of new, important information that is coming soon and will almost certainly drive potential narrative changes.





Perhaps an important part of the discussion is to define what we mean by a soft landing, or at least what the ‘market’ means by the concept.  My best understanding is as follows: GDP slides to 1% or so, but never goes negative.  Unemployment may edge higher than 4.0%, but only just, with a cap at the 4.2% or 4.3% area, and inflation, as measured by Core PCE finds a home between 2.0% and 2.5%.  This result, measured inflation falling back close to target while the growth and employment story just wobbled a bit, would be nirvana for Powell and friends.  





How likely is this outcome?  Ultimately, history is not on their side as arguably the only time the Fed ‘engineered’ a soft landing was in 1995, and on an analogous basis they had already started cutting rates by this time in the cycle.  The fact that we are still discussing higher for longer implies that there is much more pain likely to come than the optimists believe.  We have already seen the first signs of trouble as the number of bankruptcies soar and stories about non-investment grade companies needing to refinance their debt at much higher interest rates than the previous round fill the news.  Certainly, Friday’s employment data is encouraging for the economic situation, but the chink in the armor was the wage data which showed more resilience (+0.4%) than expected.  Given the Fed’s focus on wages and their impact on inflation, the fact that wage growth remains well above the levels the Fed deems appropriate to meet their inflation target is not a sign that policy ease is coming soon.





And ultimately, I believe that is the critical feature here.  The economy has held in remarkably well considering the pace and size of the interest rate changes we have already seen.  The big unknown is how much of that interest rate change has really been felt by the economy.  Obviously, the housing market has felt the impact, and to some extent the auto industry, but otherwise, it is not as clear.  Do not be surprised if this period of slow economic activity extends for a much longer time than in the past as the drip of companies that find themselves unable to refinance at affordable rates slowly grows.  By 2025, about $1 trillion of corporate debt that was issued at much lower interest rates will need to be refinanced.  I’m not worried about Apple refinancing their debt, but all the high-yield debt that was snapped up with a 4% or 5% handle during the period of ZIRP will now be at 10% or so and it is an open question if those business models will be functional with financing that expensive.  





So, perhaps, the story will be as follows:  economic activity is going to muddle along at low rates for an extended period, another 2 or 3 quarters, until such time as the debt ‘time-bomb’ explodes with refinancing rates high enough to force many more bankruptcies and start a more aggressive recessionary cycle with layoffs leading to rapidly rising Unemployment rates and economic activity falling more sharply.  In this timeline, we are talking about the recession becoming clear in Q3 of 2024, a time when most of that $1 trillion of corporate debt will be current.    While interest rates will certainly be slashed at some point, this does not bode well for risk assets in the second half of 2024.  For now, though, it certainly seems like the current narrative is going to continue.





There’s no urgency

To change policy quite yet

But…some day we will






A quick story about the BOJ which last night pushed back firmly against the growing narrative that they were about to start normalizing interest rate policy with a rate hike in either December or January.  Instead, several stories were released that described the recent decline in both GDP and inflation as critical and the fact that they still don’t have enough information with respect to wages in Japan, given the big spring wage negotiation has not yet happened, to make a decision.  In other words, the BOJ was successful at convincing markets to behave as the BOJ wants, not as the rest of the world wants.  The upshot was that the yen weakened sharply (-0.9%) while the Nikkei rose 1.5% and JGB yields were unchanged.  The BOJ pivot remains one of the biggest themes in the macro community, mostly because it is seen as the place where the largest profits can be made by traders.  But my experience (4 years working for a Japanese bank) helps inform my view that whatever they do will take MUCH longer to happen than the optimists believe.





Ok, let’s try a quick trip around markets here for today.  Aside from Japan, most of Asia had a good equity session with Hong Kong (-0.8%) the only real laggard.  Remember, a key story there remains the Chinese property sector as many of those firms are listed in HK.  Meanwhile, European bourses are mixed although movements haven’t been very large in either direction.  The worst situation is the UK (FTSE 100 -0.5%), while we are seeing some gains in the CAC and DAX, albeit small gains.  Finally, US futures are pointing a bit lower, -0.2%, at this hour (7:45).





In the bond market, after Friday’s dramatic price action, Treasury yields are continuing to rise, up 5bps this morning, although European sovereign yields are little changed on the day, with the bulk of them slipping about 1bp.  Given most saw quite large moves on Friday, and given the imminent policy decisions by the big 3 central banks, I suspect traders are going to be quiet for now.  





Oil prices (-0.3%) are slipping slightly this morning but are mostly consolidating Friday’s gains.  On the metals front, though, everything is red with gold, silver, copper and aluminum all under pressure.  Again, this is the one market that has been pricing a recession consistently for the past several months while certainly equity markets have a completely different view.





Finally, the dollar is continuing to rebound on the strength of rising Treasury yields.  While the euro is little changed on the day, the yen is driving price action in Asia with weakness also seen in CNY, KRW and TWD.  As well, ZAR (-0.8%) continues to suffer on weaker commodity pricing and both MXN and BRL are under pressure leading the LATAM bloc lower.  At this point, I would say the FX market has more faith in Powell’s higher for longer mantra than some other markets.





As mentioned, there is a lot of data this week:





TodayNY Fed Inflation Expectations3.8%
TuesdayNFIB Small Biz Optimism90.9
 CPI0.0% (3.1% Y/Y)
 -ex food & energy0.3% (4.0% Y/Y)
WednesdayPPI0.1% (1.0% Y/Y)
 -ex food & energy0.2% (2.3% Y/Y)
 FOMC Rate Decision5.5% (unchanged)
ThursdayECB Rate Decision4.5% (unchanged)
 BOE Rate Decision5.25% (unchanged)
 Retail Sales-0.1%
 -ex autos-0.1%
 Initial Claims221K
 Continuing Claims1891K
FridayEmpire State Manufacturing2.0
 IP0.3%
 Capacity Utilization79.2%
 Flash PMI Manufacturing49.1
 Flash PMI Services50.5





Source tradingeconomics.com





Thursday also has the Norges Bank and SNB, both of whom are expected to leave rates on hold.  For today, it strikes me that the discussion will continue as pundits try to anticipate what the FOMC statement will say and how Powell sounds in the press conference.  As such, it is hard to get excited that there is going to be a big move in either direction.  With all that in mind, my overall read on the economy is that while we may muddle along in the US for a while yet, it will be better than many other places in the world, notably the EU, the UK and China, and so the dollar is likely to hold up far better than most expect…at least until Powell changes his tune.





Good luck





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			Jay Powell’s Dream
		


				

			Posted on  by 		

			


		

		

As markets await the release

Of Payrolls, all things are at peace

But once it’s revealed

We need watch the yield

In 10-years lest it should decrease



While Goldilocks is still the meme

And certainly, Jay Powell’s dream

The data’s beginning

To show growth is thinning

More quickly both down and upstream






So, here’s the scoop.  Today is payrolls day and that is the only thing that anybody cares about right now, ahead of the release, and it will be the topic du jour by all the talking heads for the rest of the day.  As of 7:00am, here are the latest consensus forecasts according to tradingeconomics.com:





Nonfarm Payrolls180K
Private Payrolls153K
Manufacturing Payrolls30K
Unemployment Rate3.9%
Average Hourly Earnings0.3% (4.0% Y/Y)
Average Weekly Hours34.3
Participation Rate62.7%





Now, looking at a chart of the past year’s releases, the numbers seem to show a very gradual decline, albeit hardly in a regular manner.










But let’s take a look at some underlying data that may help us understand the bigger picture a bit better.  First off, one of the things that draws a great deal of criticism is the birth/death model that the BLS uses to estimate the number of new companies that start up, hiring people, compared to the number of companies that close with the resulting job losses.  A key reason that every month this year has seen the data revised lower is because that portion of their data continues to be revised lower.  Historically, the birth/death model is at its worst during an inflection point, when the economy is either entering or exiting a recession.  Those downward revisions are a strong clue that things are not going that well.





But there is something else worth noting and that is the BLS breaks the payroll data down on a state-by-state basis as well.  This is not something that gets a lot of press but is nonetheless important.  While this data only goes back to 1976, that is still a fairly robust series.  I highlight this because every time in the past, when all 50 states + Washington DC have seen a decline in the number of employed workers, we have been in a recession already.  And shortly thereafter, the first negative NFP prints started showing up, usually withing 2-3 months.  Well, guess what?  Last month saw every state in the union report a decrease in the number of employed persons.  This is quite a negative signal for the economy, and one that is not getting much press, certainly not from the soft-landing set.  





I’m not saying that we are going to get a negative NFP print this morning, just that it seems one is coming to a screen near you soon.  If history is any guide, then sometime in Q1 seems realistic.  And ask yourself how Chairman Powell and his friends on the FOMC will respond to that type of data.  They had better hope that the recent trend in inflation, which has clearly been on a downward trajectory, continues, because otherwise, the Chairman will have nowhere to hide.  Cut rates to address economic weakness while stoking still firm inflation?  Leave rates on hold to fight inflation and let growth crater further?  Talk about a rock and a hard place.





It seems to me that the evidence continues to pile up on the side of a recession coming early next year.  Absent another wave of MMT or helicopter money or some type of direct fiscal stimulus by the federal government, this business cycle seems destined to end soon.  The bond market has been telling us that since the beginning of last month.  The oil market has been telling us that since the beginning of last month too.  The stock market has still not gotten the message.  It will, trust me, and it won’t be pretty.  However, I don’t think today is the day it will happen.  Just be prepared.





So, how have markets performed leading up to the NFP data?  Well, following yesterday’s rally in US stocks, Asia had a mixed picture.  Japanese equities continue to be pressured by a combination of concern over tighter monetary policy and a strengthening yen.  There was, however, a bump on the road to that tighter policy thesis as Q3 GDP was revised lower to -2.9% Y/Y, with the M/M falling -0.7%.  Will they really tighten policy into a shrinking economy?  Meanwhile, despite the word from the Chinese Politburo that they would be adding more fiscal stimulus in 2024, shares in Hong Kong and on the mainland barely eked out gains of 0.1%.  The rest of APAC, though, had a decent performance, with gains ranging from 0.3%-0.9%.





European bourses are in good shape today, with green across the board, albeit some just barely (DAX +0.1%) and some more robustly (CAC +0.7%).  Finally, US futures are edging lower, -0.2% or so, as I type (7:30am).





In the bond market, yields, which as we know have been trending sharply lower since early November, are rebounding slightly this morning with Treasuries up 3bps and European sovereigns all showing increases of between 5bps and 9bps. That seems a bit odd to me as there has been no data indicating inflation is rising or growth is impressive of late.  In fact, the Eurozone inflation data continues to point to deflation as Germany’s final reading came in at -0.4% in November.  In fact, as much as markets are expecting the Fed to cut rates soon, with a 60% probability now priced in for the March meeting, I suspect that the ECB is going to be cutting before the Fed as Eurozone growth and inflation are falling rapidly.  As to JGB’s, yields there edged higher by 1bp overnight and currently sit at 0.75%, certainly not pressing on the 1.00% cap.  





Turning to the commodity markets, oil (+2.2%) has finally found its footing with WTI back above $70/bbl.  While there continue to be rumors that OPEC+ is going to cut production further, this feels much more like a trading bounce than a structural move.  Interestingly, industrial metals are having a very good day with both copper and aluminum higher by 1% or more although gold is unchanged on the day.  Ordinarily, I might attribute that to a weaker dollar except that the dollar’s not weaker this morning.





Speaking of the dollar, if you remove the yen from the equation, it has, in truth, been reasonably strong.  Perhaps a better description is that other currencies have been weak as things like European economic doldrums weigh on those currencies while declining oil prices weigh on the petro-currencies.  Now, for all the JPY bulls out there, be careful as the weakening GDP growth and the fact that the most recent CPI data, while still above target, started to decline means that there is less pressure on Ueda-san to change policy.  Yes, they have started to discuss the idea of lifting rates out of negative territory, but they have also been quite clear that they need to see wage gains and the wage story really won’t be clear there until the March wage negotiations are completed.  All I’m saying here is that we have come quite a long way in less than a month.  Do not be surprised by a sharp rebound that wipes out a lot of profit and positions.





And that’s really it for the day.  At 10:00 we also see the first cut of the Michigan Sentiment Index (exp 62.0) as well as the concurrent inflation expectations indices (1yr 4.5%, 5yr 3.3%).  But by then, I expect that the excitement will have passed, and the market will be following whatever trend develops from the payrolls.  If pressed, I expect a softer number, something like 100K and a tick higher to 4.0% on Unemployment.  If that is correct, I expect that the market will continue with its ‘bad news is good’ concept and buy stocks in anticipation of Fed rate cuts.  But remember, virtually every time the Fed is cutting rates aggressively because economic activity is declining, risk assets are being sold, not bought.





Good luck and good weekend





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