Tag Archives: #PPI

He’s Got Spine

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The market’s now certain that June
Is when Jay, the funds rate, will prune
Inflation don’t matter
Despite all the chatter
They don’t want to cut rates too soon
 
But what if inflation keeps rising?
And data continues surprising?
Can he hold the line?
And show he’s got spine
Despite all the doves’ vocalizing?

 

It’s funny.  So much was made about the CPI number on Tuesday and the lines seemed to have been drawn quite clearly; soft or as expected data would cement a June cut while hot data would call that into question.  And yet, here we are two days later, with the only information in the interim showing that oil and product inventories have fallen further driving oil prices higher, and the probability of a June cut has risen above 90%.  In fact, amid a day with limited new information, and during the Fed’s quiet period, perhaps the most interesting comments came from Treasury Secretary Yellen.  Not only did she indicate she regretted her use of the word ‘transitory’ at the beginning of the inflation episode, but more importantly, it appears that Treasury is now assuming much higher interest rates in their forecasts than before.  In other words, she no longer believes that interest rates are going to head back down to 2%.  Personally, I think that is a huge step in the right direction.  Alas, that concept certainly did nothing to constrain their spending plans, so it is not clear it really matters.

But the reality as that even though we get some more Tier 1 data this morning, it has become quite clear, to me at least, that the market is uninterested in anything other than the FOMC statement, the dot plots and Powell’s press conference coming on Wednesday next week.  You can see this in the equity markets which are now trading in ranges after their recent sharp rises, and you can see this in the FX market given the dollar’s virtual complete lack of volatility.  In fact, the only place that is demonstrating some concern is the bond market, where yields continue to edge higher very slowly.

Let’s start by taking a quick look at this morning’s data.  Retail Sales (exp 0.8%, 0.5% ex-autos) is set to rebound from last month’s terrible -0.8% print.  Many have looked past that number as a combination of bad seasonal adjustments and heavy discounting and continue to see strength in the economy.  We also see PPI (0.3%, 1.1% Y/Y) and Core (0.2%, 1.9% Y/Y) which seems to have bottomed, not dissimilar to CPI, but which will be a problem for those who believe that inflation is still trending lower.  Finally, as it is Thursday, we see Initial (218K) and Continuing (1900K) Claims, both in line with recent outcomes signaling the labor market remains in solid shape.

Now, you all know my view that inflation is not dead and that the market will need to continue to adjust interest rates higher over time to account for that fact.  Since the beginning of the year, as you can see from the chart below courtesy of tradingeconomics.com, while there have been several cycles, it seems clear that the trend in yields remains higher.

I think this makes a lot of sense and expect it to continue.  In fact, the question I have is how can the Fed truly consider it will be appropriate to cut the Fed funds rate given the economic signals are showing continued solid growth, a solid labor market and indications that inflation is heading higher?  Many make the political argument that since they are hell-bent on cutting, they need to get started before it gets too close to the election.  But I am going to go out on a limb here and say that I think Powell has shown he is made of sterner stuff and if the data remains where it has been, let alone inflation ticks higher between now and June, there will be no rate cuts.  If I am correct, risk assets are going to rerate, trust me.  And that is really the only question that needs to be answered at this point.

And so, other than bonds which seem to be sussing out the potential for rates to continue at their higher-for-longer pace, a look at other asset class markets shows not much overall movement.  After yesterday’s mixed US session, Asia, too, was mixed with Japan slightly firmer while Chinese shares slid as there appears to be no real help in sight there.  European bourses are also mixed with the UK lagging and slightly softer on the day and the bulk of the movement higher quite modest.  The only exception is the CAC in Paris higher by 0.9%, on the back of continued strong performance of the luxury goods sector.  (As an aside, why would central bankers think that the economy is going to tank if luxury goods remain hot?). US futures, though, are firmer at this hour (7:30) with all three indices higher by 0.5%.

In the bond market, while US yields have been dragging the global structure higher, they are unchanged on the morning and European sovereigns are actually a touch softer, between 1bp and 2bps today.  That is likely on the back of comments by Greek ECB member Stournaras that they need to quickly make two rate cuts to manage things properly.  While that seems excessive, I maintain the ECB cuts before the Fed.  As to Japan, JGB yields have edged higher by one more basis point overnight, though remain at just 0.77%.  Ueda-san, when he speaks, sounds far less hawkish than many of the analysts in Tokyo, or the other members of the BOJ from whom we have recently heard.  I am still in the April camp for the first rate hike, and very few afterwards.

Oil is the big mover of the day, up 0.9% with WTI back over $80/bbl for the first time since early November.  Yesterday’s EIA Inventory data showed drawdowns in crude and gasoline stocks that were much greater than expected.  You may have noticed at the pump that gas prices are rising, and it seems the market is figuring that out as well.  Remember, though, that OPEC+ has reduced production so has significant spare capacity at this stage, probably 2mm – 3mm bbl/day that they can restart at any time, so I don’t expect prices here to skyrocket.  Gold, which rallied nicely yesterday, is slightly softer this morning, as is copper, although the red metal remains above $4.00/Lb.  It strikes me that the commodity markets are not anticipating a significant economic slowdown right now.

Lastly, the dollar is very little changed overall this morning, with the largest moves NZD (+0.25%) and PLN (-0.25%) and every other major currency seeing less movement than that.  USDJPY is pushing back toward 148.00 slowly and seems likely to be the next big mover based on Monday night’s BOJ meeting.  Otherwise, this space is dead.

And that’s really what we have for the day.  If the data is hot, look for yields to continue their recent climb and for the dollar to take on a bid tone.  As to stocks, demand remains strong regardless of the economics.  If the data is soft, then a weak dollar should accompany strength in both stocks and bond prices.

Good luck

Adf

A Narrative Flaw

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At first it was just CPI
With heat like the fourth of July
But Friday we saw
A narrative flaw
As PPI jumped, oh so high
 
The narrative’s now in a bind
While working so hard to remind
Investors that prices
Are not in a crisis
And Goldilocks can’t be maligned

 

It must be very difficult to be a cheerleader for the immaculate disinflation* these days given we continue to see data showing inflation is no longer receding.  Friday’s PPI was the latest chink in the deflationists’ armor as both the headline and core numbers printed well above expectations.  Of course, this followed Tuesday’s hot CPI prints as well as some lesser data like the prices paid portion of the NFIB survey and the last ISM Services survey.  Energy prices, which had fallen throughout Q4 but have since bottomed and appear to be trending higher again, are no longer a cap on inflation.  But of greater consequence is the fact that services inflation remains higher on the back of continued wage gains and rises in the price of things like insurance.  

Market participants are slowly coming around to the idea that the Fed may not be cutting rates quite like they were hoping for praying for anticipating just a few weeks ago.  This has been made clear by a quick look at the Fed funds futures market in Chicago which is now pricing in just a 10% chance of a March cut, a 35% chance of a May cut and a 75% chance of a June cut.  In fact, the market is now pricing in barely more than the Fed’s last dot plot for 2024, just 81bps for the entire year.

Of course, there is one benefit to the recent data and that is we stopped hearing about the 3-month trend and the 6-month trend showing the Fed had reached their target and so should be cutting rates NOW!  Instead, the fact that those trends are now pointing higher insures that we won’t hear about that for quite a while…I hope.

Philosophically, I remain confused as to why there is so much ‘demand’ that the Fed cuts rates at all.  While I certainly understand why the administration would like to see it, given the budget deficits that need to be financed, arguably, if nominal GDP growth is between 6% and 7% and Fed funds are at 5.5%, things don’t seem out of place.  If anything is out of place it is the 10-year yield, which even after rising 6bps on Friday, remains at 4.30%.  Historically, a more normal level of 10-year yields would be the same as nominal GDP growth.  Currently, that tells me either 10-year yields have much further to rise, or GDP is going to fall A LOT.  I sure hope it is the former.

Now, looking past Friday’s activity, this morning has been extremely quiet overall with the prospects for action looking quite limited.  Today the US celebrates President’s Day, so banks are closed as is the stock market, although futures markets are trading.  Canada is also mostly on holiday which implies that once Europe goes home, things will really die out.

But quiet is the best description of everything overnight.  One surprise was that Chinese equity markets were far less bullish than many anticipated as they reopened after the extended Lunar New Year holiday.  While the CSI 300 managed to rise 1.2% on the session, the bulk of the move came at the close with a wave of buying by their plunge protection team.  The disappointment was based on the stories that holiday travel had risen substantially which had been pumping up the Hang Seng which reopened last Thursday.  Alas, that market fell -1.1%, a perfect encapsulation of the overall disappointment.  In the meantime, European bourses are trading either side of unchanged and at this hour (7:00), US futures are doing the same, basically unchanged on the day.

Basically unchanged is an excellent description of the bond markets as well, with virtually every major European sovereign market either unchanged or higher by 1bp this morning.  Overseas trading of Treasuries has also seen limited activity and no yield change, and you will not be surprised to learn that JGB yields were also unchanged.  

In the commodity space, oil, which had a solid week last week and now shows WTI at ~$79.00/bbl, is a touch softer this morning, but only just.  I have seen a number of stories about peak oil having been reached again, but as you may know, I am no longer convinced that is the case.  Of course, that is a very long-term discussion which will have nothing to do with the daily fluctuations.  And shocks to the system can have a big impact regardless of the long-term story.  In the metals markets, gold is edging higher again, +0.3%, but both copper and aluminum are softer this morning by about -0.4%.  As with every other market, there is a lot of conflicting data that has been preventing a more coherent directional view here.  I suspect that will resolve over time, but in commodities, over time can mean months or years.

Finally, the dollar is little changed net with a mixture of gainers and losers.  For instance, in the G10, we are seeing very modest strength in NZD (+0.25%) and JPY (+0.2%, and just below 150.00 as I type), while in the EMG space there is some weakness as evidenced by ZAR (-0.4%) and KRW (-0.3%).  As with all markets today, I don’t think we are going to learn very much new.

As it is a holiday, there is no data today and, in truth, there is very little to be released all week.

TuesdayLeading indicators-0.3%
WednesdayFOMC Minutes 
ThursdayChicago Fed National Activity-0.19
 Initial Claims217K
 Continuing Claims1900K
 Flash Manufacturing PMI50.2
 Flash Services PMI52.0
 Existing Home Sales3.97M
source: tradingeconomics.com

In addition to that short slate, we hear from seven different Fed speakers including Governor Waller who seems to be the most important voice after Powell and Williams.  As it happens, five of those come Thursday with Waller the last at 7:30 that evening.

For today, I would not expect much at all in the way of market movement.  Given the lack of obvious catalysts, a quiet week seems likely as well.  Perhaps the biggest news is NVDIA is releasing their earnings Wednesday after the close, although from an FX perspective, that doesn’t seem crucial.  Big picture tells me that the Fed is not going to be easing policy soon, and that as long as the US economy continues to outperform those of Europe, Japan, the UK and China, the dollar is likely to find continued support.  Realistically, I think you could make the case for the dollar to rally substantially over the course of the year, but right now, that doesn’t feel like the move.

Good luck

Adf

*Immaculate disinflation – the idea that inflation can decline without a slowdown in growth or recession, but rather because it’s previous rise was transitory, just taking a little longer than originally anticipated.

Xi Jinping’s Dreams

Posted on by 
The 30-year bond was a flop
Which helped cause an interest rate pop
Though CPI rose
A bit less than pros
Expected, risk prices did drop

Then early this morning we learned
That lending in China’s been spurned
It certainly seems
That Xi Jinping’s dreams
Of rebounds might soon be o’erturned

For all the bulls out there, yesterday must be just a bit disconcerting.  First, the highly anticipated July CPI data was released at a slightly lower than expected 3.2% headline number with core falling 0.1% to 4.7%, as expected.  As always when it comes to CPI data, there were two immediate takes on the result.  On one side, inflationistas pointed out that the future will be filled with higher numbers going forward as base effects for the rest of 2024 kick in with very low comparables in 2022.  They also point to the medical care issue, a detail I have not discussed, but which has to do with a change made by the BLS that has been indicating medical care prices have fallen all year, but which will fall out of the mix starting in September, thus reversing one of the drags we have seen on CPI.  And finally, the rebound in energy prices is continuing (oil +0.4% today) and will be a much bigger part of future readings.  This story was underpinned today by the IEA reporting a new record demand for oil in July of 103 million bbl/day.  Demand continues to support prices here.

Meanwhile, the deflationistas point to the recent trend in prices, which shows that on a 3-month basis, or a 6-month basis, if annualized, CPI is really only running at 2.4% or 2.9% or something like that.  The implication is because we have seen a reduction in the monthly number lately, that will continue.  As well, they make the case that China’s deflation is a precursor to lower US inflation with, I believe, a roughly 6-month lag.  Perhaps the most interesting take I saw was that the Fed has now achieved their goal of an average PCE of 2% if you take the last 14 years of data.  The idea is that Average Inflation Targeting was designed to have the economy run hot for a while to make up for the ‘too low’ inflation that has been published since the GFC.  And now, that average is 2.07% for the past 14 years.  (To me, the last idea is a chart crime, but I digress.)

The problem, though, for the bulls, is that the market’s behavior was not very bullish.  Although the initial move in Treasury yields was lower, with the 10-year yield falling 6bps right after the release, the 30-year Treasury auction that came later in the day was not nearly as well-received as the shorter dated paper seen earlier in the week.  The bid/cover ratio was only 2.42 and it seems that the market may be feeling a little indigestion from all the new paper just issued, as well as the prospects for the additional nearly $1.5 trillion left to come in 2023.  It is not hard to believe that longer end yields could rise further as the year progresses.  The upshot was 10-year yields rose 10bps on the day and are unchanged from there this morning.

Similarly, in the equity markets, the initial surge on the back of the slightly softer CPI was unwound throughout the day and though all three major indices ended the day in the green, the gains were on the order of 0.1% or less, so effectively unchanged.  Looking at futures there today, all three indices are unchanged from the close as investors and traders look for their next inspiration.  Meanwhile, I cannot ignore that overnight, Asian equity markets all fell, with the CSI 300, China’s main index, down -2.30%.  As well, European bourses are all lower this morning, mostly on the order of -1.0%.  Overall, this is not a positive risk day.

One of the things adding to the gloom is the financing data from China released early this morning.  New CNY Loans fell to CNY 345.9 billion, less than half the expected amount and down from >CNY 3 trillion in June.  M2 Money Supply there also grew more slowly than expected at just 10.7% as it seems that China’s debt woes are increasing.  China Evergrande was the first Chinese property company that gained notoriety for its problems, but Country Garden was actually the largest property company in China and now that looks to be heading toward bankruptcy.  

A quick tour of China shows it has a number of very big problems with which to contend.  Probably the biggest problem is demographics as the population begins to shrink.  However, two other critical issues are the massive amount of debt that is outstanding there (not dissimilar to the US situation) but much of it is more opaque sitting on the balance sheet of local government funding vehicles.  Just like in the West, this debt will not be repaid in full.  The question is, who is going to take the losses?  In China, the central government is trying to foist those losses on the local governments, but that will be a long-term power struggle despite President Xi’s ostensible powers.  Finally, the massive youth unemployment situation is simply dry tinder added to a very flammable mixture already.  This is not a forecast that China is going to implode, just that the claims that it is set to ascend to global superpower status may be a bit premature.

(By the way, for all of you who think a BRICS gold backed currency is on the way, ask yourself this question.  Why would India and Brazil want to link up with a nation with awful demographics and a gargantuan debt problem and link their currency to that?)

Finishing up, we have a bit more data this morning led by PPI (exp 0.7% Y/Y, 2.3% Y/Y ex food & energy) and then Michigan Sentiment (71.3) at 10:00.  With CPI already released, PPI would need to be dramatically different from expectations to have much of an impact at all.  There are no Fed speakers today, but yesterday we heard that there is still more to do by the Fed from both Daly and Bostic, and Harker did not repeat his idea that cuts were coming soon.

The dollar is mixed today, with Asian currencies under pressure, EEMEA and LATAM currencies performing well and the G10 all seeming in pretty good shape, although NOK (-0.7%) is under pressure after a much softer than expected CPI number yesterday has traders unwinding some future interest rate hikes.

Speaking of future interest rate hikes, the Fed funds futures market is down to a 10% chance of a September rate hike by the Fed, although there is still a ton of data yet to come, so that is likely to change a lot going forward.  My sense is that a little bit of fear is building in risk assets as despite some ostensible good news, with lower inflation and less chance of a Fed rate hike, risk is under pressure.  One truism is if a market cannot rally on good news, then it is likely to fall, especially if something negative shows up.  In that case, I suspect that we could see weakness in equities today, weakness in bonds and strength in the dollar before it is all over for the week.

Good luck and good weekend

Adf

Weakness is Fleeting

Posted on by 
Two narratives are now competing
Recession, the first, is retreating
No-landing is rising
As those analyzing
The data claim weakness is fleeting

But what of the curse of inflation
Which for two years has gripped the nation
Is it really past
Or are we too fast
To follow that interpretation?

Friday’s employment data was, for a second consecutive month, a bit lower than the median forecast of economists.  However, it was still reasonable at 187K new jobs.  One of the positive aspects was the decline in the Unemployment Rate to 3.5% although from an inflation perspective, Average Hourly Earnings (AHE) rose more than forecast.  In a way, there was something for everyone in the report with the recessionistas highlighting the decline in average weekly hours and the fact that last month’s data was revised down for the 6th consecutive month, typically a very negative signal.  However, the no-landing crowd points to the AHE data as well as the Unemployment Rate and claim all is well.

Of course, ultimately, the opinion that matters the most is that of Chairman Powell and his acolytes at the Fed.  Are they glass half full or glass half empty folks?  I have been highlighting the importance of the NFP data as I believe it remains the fig leaf necessary for the Fed to continue to raise interest rates if they want to in their ongoing efforts to rein inflation back to their target level.  My sense is that Friday’s data will not dissuade them from hiking rates in September if they decide it is still appropriate, but it could also be argued as a reason for another pause.  Certainly, there is nothing about the data that would indicate a rate cut is on the table anytime soon.  And remember, we will see the August report shortly after Labor Day, which comes before the next FOMC meeting, so still plenty of information yet to come.

Which brings us to this week’s numbers on Thursday and Friday when CPI and PPI are set to be released respectively.  While we all understand that the Fed’s models use core PCE as their key inflation input, we also know that CPI, especially core -ex housing, has been a recent focus for Powell and that is the number that gets the press.  You may recall that last month, the headline CPI number printed at 3.0%, it’s lowest since early 2021, and was widely touted as proof positive that the Fed was close to achieving their objective.  Alas, energy prices have done nothing but rise in the ensuing month and given the ongoing reductions in production by OPEC+, it seems unlikely that we are done with this move.  In fact, ironically for the no-landing crowd, if there is no landing and supply continues to shrink, energy prices, both oil and gasoline, will likely continue to rise as well, putting significant upward pressure on headline CPI.  If CPI is rising it will be extremely difficult for Powell to consider anything but more rate hikes.

Currently, the market is pricing a very low probability of a September rate hike by the Fed, just 16%, so there is ample room for repricing if the data comes in hot.  Surprisingly, the market is pricing in a higher probability of an ECB hike, 38% in September, despite the fact that Madame Lagarde essentially told us at the last meeting they were done.  My suspicion is that there is room for a more negative outcome in the interest rate space going forward.  One other tidbit this morning is the Cleveland Fed has an CPI Nowcast, similar to the Atlanta Fed’s GDPNow but for inflation, and that number is currently 0.41% for July, well above the market median forecast of 0.2%.  The point is there is room for a negative inflation surprise and the knock-on effects of such a result would likely be risk negative.  Just sayin’.

Meanwhile, Friday’s equity market reversal in the US has mostly been followed around the world with red the dominant color on screens in the major markets.  In Asia, while the Nikkei managed to eke out a small gain, China and South Korea both saw renewed selling.  As to Europe, all markets are lower on the order of -0.25% to -0.5% at this hour (7:30).  However, US futures are currently edging higher on what seems to be a reflexive bounce rather than a fundamental opinion.

Bond markets, though, are reversing much of Friday’s rally with 10-yr Treasury yields higher by 7bps this morning and most European sovereign yields up a similar amount.  Friday saw a sharp rally on the headline NFP number which served to force the hand of many short sellers in the Treasury market.  Recall, heading into the release, there was a growing consensus, especially after a particularly strong ADP Employment number, that the no-landing scenario was the most likely and that would mean higher yields for longer.  In addition, the market was informed of the extra $1.9 trillion in Treasury issuance that was coming the rest of the year, with the bulk of that coming out the curve, rather than in the T-bills that have been the focus to date.  It feels like the short-selling crowd is getting back on board and the weight on prices of excessive issuance and the Fed’s ongoing QT program means higher yields should be expected.  

As to oil prices, while they are lower this morning by -0.7%, they remain well above $80//bbl and appear to be consolidating ahead of the next attempt to break above key technical resistance at $85/bbl.  Absent a very severe recession, which has not yet shown up, it is hard to make the case for a large decline in this sector of the market.  Metals markets are far more benign this morning with tiny gains and losses as traders continue to try to figure out if there is a recession coming.

Lastly, the dollar’s demise, which is touted on a weekly basis by pundits everywhere, will have to wait at least one more day as the greenback is stronger vs. essentially every one of its major counterparts.  There is still a strong relationship between US Treasury yields and the dollar, and with higher yields, it is no surprise the dollar is higher.  Consider, too, the fact that the market is pricing such a small probability of a Fed funds hike next month.  If (when?) that pricing changes, I expect the dollar to benefit greatly.

On the data front, there is a bit more than CPI and PPI, but not much:

TodayConsumer Credit$13.55B
TuesdayNFIB Small Biz Optimism90.5
 Trade Balance-$65.0B
ThursdayInitial Claims230K
 Continuing Claims1710K
 CPI0.2% (3.3% Y/Y)
 -ex food & energy0.2% (4.8% Y/Y)
FridayPPI0.2% (0.7% Y/Y)
 -ex food & energy0.2% (2.3% Y/Y)
 Michigan Sentiment71.5

Source: Bloomberg

In addition to the data, we have three Fed speakers, Bostic, Bowman and Harker, each speaking twice this week.  Ultimately, my take is that Friday’s NFP data did nothing to change the current Fed calculus and higher for longer remains the operative thought process.  As to the dollar, if we continue to see Treasury yields rise, which I think is the most likely scenario, then I suspect the dollar will find buyers.  For those of you awaiting a sharp dollar pullback to establish hedges, you may be waiting quite a while.

Good luck

Adf

Just a Dream

Posted on by 
Inflation is clearly passé
As traders and markets display
Remarkable trust
The Fed will adjust
The path of rate hikes come what may

The upshot is there’s a new meme
A landing so soft it would seem
No jobs will be lost
And there is no cost
Alas I fear it’s just a dream

I’m not sure if you saw the announcement yesterday, but everything is beautiful!  Inflation is a thing of the past, the economy continues to tick over quite nicely with employment remaining robust and the idea of recession is just a figment of the permabears’ imagination.  At least that’s what it seems like based on market movements of late.

Yes, PPI printed lower than forecast, which after the somewhat softer CPI and the known base effects, was not hugely surprising.  Perhaps a bit more surprising was that the Claims data, both on an Initial and Continuing basis, printed lower than expected.  The implication here is that the labor market remains quite robust with those folks who have been laid off able to find new employment quite rapidly.  While there is still plenty of data pointing to a manufacturing recession (ISM, IP, Factory Orders), the Services situation remains far better with increased activity and rising wages still apparent.  So, perhaps the optimists have it nailed, and believe Chairman Powell has managed to create a soft landing, where inflation comes back to target without having to cause a recession.

However, it feels like it is still a little early to take that victory lap.  After all, the inflation data was literally one data point driven largely by base effects and regardless of your view, one data point does not a trend make.  Certainly, the equity market is all-in on the soft-landing scenario.  The Treasury market, at least since the CPI print on Wednesday has rallied dramatically (another 10bps yesterday) and is now 29bps lower over the past week.  In fact, the 2yr Treasury has rallied even further, with yields there falling by 35bps over the same period.  To say that the market has adjusted its views on the Fed’s future activities would be an understatement.   There is still a 91% probability priced into a 25bp rate hike this month, but there are no more hikes after that priced at this stage and the first cut is seen in either March or May next year, at least according to the Fed funds futures market.

And what of the dollar?  While it is bouncing a little today, that is clearly modest position adjustment amid profit-taking as it is sharply lower on the week against all its G10 counterparts and almost all its EMG brethren.  

There is, of course, one fly in the ointment, oil prices, and commodities in general.  One of the key features of markets over time is that they tend to be self-correcting.  The saying, the solution to high prices is high prices is trying to explain the idea that high prices result in additional supply coming to market (to take advantage of those high prices) which results in prices falling back to earlier, lower levels.  The same process occurs with low prices as well, where low prices inspire increased demand and reduced supply thus driving prices higher again.  

Well, oil is exhibit A for this process.  Since oil continues to be priced and traded largely in dollars, when the dollar is strong, non-dollar countries (basically everybody else) finds that oil is expensive and so demand wanes a bit resulting in softening oil prices.  However, when the dollar declines, as we have seen in the past week, that opens the door for oil, and most commodities which are priced in dollars, to rally sharply.  Of course, if you are the Fed and continue to try to dampen price pressures, the last thing you want is a weak dollar and high commodity prices as both lead directly to rising inflation.  In fact, one reason that US inflation did not reach the levels seen in Europe and the UK is that the dollar remained quite strong throughout this period thus reducing inflationary pressures.  But right now, that dynamic is reversing with the dollar under pressure and commodity prices rising.  That bodes ill for continued declines in CPI and PPI which is certainly not part of the new narrative.  

(As an aside, it is this very feature that drives the de-dollarization narrative as you can easily understand why China, who is the largest importer of oil in the world, would like to see the dollar dethroned so they can pay for their imports with their own currency (printed as necessary) rather than have to earn dollars elsewhere to pay for their oil and other commodity imports.)

At any rate, I feel it is very important for everyone to remember that it is never the case when all signals point in the same direction.  It is only the case that the market responds to a group of signals that reinforce their underlying view, happily ignoring the rest.  As another saying accurately makes clear, nothing matters until it matters.

Ok, as we head into the weekend with a week’s worth of euphoria behind us, what is today shaping up to be?  Well, equity markets are muddling about with most ever so slightly higher but some sliding after the previous two days’ strong rallies.  US futures are also lackluster at this hour (8:00) barely higher as traders prepare for another summer weekend.  

Bond markets, too, are quiet after a raucous week, with yields little changed on the day in the US and throughout Europe and in Japan.  One cannot be surprised by the market response to the CPI data and now that this new narrative of rainbows, unicorns and lollipops is making its way around to every corner of the market, there is no reason to think that much will change in the near term.  Arguably, even if inflation is beaten and is heading back to 2%, a big IF, there is precious little reason for 10-year yields to fall very far as they would currently be offering a 1.75% real yield, a very normal situation throughout history.  Although, there would certainly be cause to believe the 2yr is set to see yields decline further and the yield curve normalize.  But again, I believe it is very early to take that as gospel.

Commodity markets are following the same pattern here, consolidation after a week of strong rallies in all the major commodities so the question is, will those rallies continue next week?  Or have we reached the end.  This story is true of the dollar as well, which is intimately linked to the commodity story.

Will today’s Michigan Sentiment (exp 65.5) change any views?  I doubt it although if the reading is quite strong, and given the growing bullish zeitgeist, it could certainly pump risk assets further.  However, a soft reading seems unlikely to derail the current risk attitude at this point.  With the Fed commentary under wraps until the FOMC meeting, today is likely to be entirely equity focused.  To that end, the big banks have been reporting Q2 earnings this morning and so far, they have all beaten (dramatically reduced) forecasts.  I expect that is all that is needed for risk to retain its luster, so do not be surprised to see the dollar continue its recent slide and stocks and commodities finish higher on the day.

Good luck and good weekend
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Not Quite Right

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The data from China last night
Could, President Xi, give a fright
While IP was fine
Consumption’s decline
Show’s everything there’s not quite right

Now, turning our focus back home
The question that’s facing Jerome
Is should he increase
The speed that they cease
QE?  Or just leave it alone?

Clearly, the big news today is the FOMC meeting with the statement to be released at 2:00 and Chair Powell to face the press 30 minutes later.  As has been discussed ad nauseum since Powell’s Congressional testimony two weeks ago, expectations are for the Fed to reduce QE purchases more quickly than the previously outlined $15 billion/month with many looking for that pace to double.  If that does occur, QE will have concluded by the end of March.  This timing is important because the Fed has consistently maintained that they would not raise the Fed funds rate while QE was ongoing.  Hence, doubling the pace of reduction opens the door for the first interest rate hike as soon as April.

And let’s face it, the Fed has fallen a long way behind the curve with the latest evidence yesterday’s PPI data (9.6%, 7.7% core) printing much higher than expected and at its highest level since the series was renamed the PPI from its previous Wholesale Price Index in 2010.  Prior to that, it was in the 1970’s that last saw prices rising at this rate.  So, ahead of the meeting results, investors are trying to analyze just how quickly US monetary policy will be changing.  Recall, yesterday I made a case for a slower reduction than currently assumed, but as of now, nobody really knows.

What we do know, however, is that the economic situation in China is not playing out in the manner President Xi would like.  Last night China released its monthly growth data which showed Retail Sales (3.9% Y/Y) Fixed Asset Investment (5.2% Y/Y) and Property Investment (6.0% Y/Y) all rising more slowly than forecast and more slowly than last month. Only IP (3.8% Y/Y) managed to grow.  As well, Measured Unemployment rose to 5.0%, higher than expected and clearly not the goal.  For the past several years China has been ostensibly attempting to evolve its economy from the current mercantilist state, where production for export drives growth, to a more domestically focused consumer-led economy like the West.  Alas, they have been unable to make the progress they would have liked and now have to deal with not only Covid, but the ongoing meltdown in the property sector which will only serve to hold the consumer back further.  Interestingly, the PBOC did not adjust the Medium-term Lending Rate as some pundits had expected, keeping it at 2.95%, and so, it should not be that surprising that the renminbi has maintained its strength, although has appeared to stop rising.  A 2.95% coupon in today’s world remains quite attractive, at least for now, and continues to draw international investment.

Aside from these stories, the other headline of note was UK inflation printing at 5.1%, its highest level since 2011 and clearly well above the BOE’s 2.0% target.  Remember, the BOE (and ECB) meet tomorrow and there remains a great deal of uncertainty surrounding their actions given the imminent lockdown in the UK as the omicron variant spreads rapidly.  Can the BOE really tighten into a situation where growth will clearly be impaired?  It is this uncertainty that has pushed the timing of the first interest rate hike by the BOE back to February, at least according to futures markets.  But as you can see, the BOE is in the same position as the Fed, inflation is roaring but there are other concerns that prevent it from acting to stem the problem.  In sum, the betting right now is the Fed doubles the pace of taper and the BOE holds off on raising rates until February, but either, or both, of those remain far less than certain.  Expect some more market volatility across all asset classes today and tomorrow.

With all that in mind, here’s a quick look at markets overnight.  Equities in Asia (Nikkei +0.1%, Hang Seng -0.9%, Shanghai -0.4%) mostly followed the US declines of yesterday, although Japan did manage to eke out a small gain and stop its recent trend lower.  Europe, on the other hand, is having a better go of it with the DAX (+0.3%) and CAC (+0.6%) both performing well as inflation data there was largely in line with expectations, albeit far higher than targets, and there is little concern the ECB is going to do anything tomorrow to rock the boat.  In the UK, however, that higher inflation print is weighing on equities with the FTSE 100 (-0.2%) underperforming the rest of Europe.  Ahead of the open, and the FOMC, US futures are little changed in general, although NASDAQ futures continue to slide, down (-0.25%) as I type.

The rally in European stocks has encouraged a risk-on attitude and so bond markets are selling off a bit with yields edging higher.  Well, edging except in the UK, where Gilts (+3.7bps) are clearly showing their concern over the inflation print.  But in the US (Treasuries +0.3bps), Germany (Bunds +1.2bps) and France (OATs +0.9bps) things are far less dramatic.  Given the imminent rate decisions, I expect that there is a chance for more movement later and most traders are simply biding their time for now.

The commodity picture is a little gloomier this morning with oil (-1.2%) leading the way lower and weakness in metals (Cu -1.5%, Ag -0.5%, Al -1.4%) widespread.  Gold is little changed on the day and only NatGas (+2.1%) is showing any life.  These markets are looking for a sign to help define the next big trend and so are also awaiting the FOMC outcome today.

Finally, the dollar continues to consolidate its recent gains but has been range trading for the past month.  The trend remains higher, but we will need confirmation from the FOMC today to really help it break out I believe.  In the G10, the biggest gainer has been AUD (+0.4%), but that appears to be positional, as Aussie has been sliding for the past week and seems to be taking a breather.  Otherwise, in this bloc there are an equal number of gainers and laggards with none moving more than 0.2%, so essentially trendless.

In the emerging markets, TRY (-2.1%) continues its decline toward oblivion with no end in sight.  Elsewhere, ZAR (-0.6%) has suffered on continue high inflation and the SARB’s unwillingness to fight it more aggressively.  INR (-0.5%) suffered on the back of a record high trade deficit and concerns that if the Fed does tighten, funding their C/A gap will get that much more expensive.  Beyond those, though, there has been far less movement and far less interest overall.

We do have some important data this morning led by Empire Mfg (exp 25.0) and Retail Sales (0.8%, 0.9% ex autos) at 8:30 and then Business Inventories (1.1%) at 10:00 before the FOMC at 2:00.  The inventory data bears watching as an indication of whether companies are beginning to stockpile more and more product given the supply chain issues that remain front and center across most industries.

And that’s really what we have at this point in time.  A truly hawkish Fed should help support the dollar further, while anything else is likely to see the dollar back up as hawkish is the default setting right now.

Good luck and stay safe
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Prices Rise in a Trice#CPI, #inflationexpectations

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There once was a world where the price
Of stuff stayed the same…paradise
But then central banks
Were born, and now thanks
To them prices rise in a trice

Now, worldwide the story’s the same
As these banks, inflation, can’t tame
They’re all terrified
That stocks might just slide
And they would come in for the blame

“I’d expect price increases to level off, and we’ll go back to inflation that’s closer to the 2% that we consider normal.  In the 70’s and 80’s inflation expectations became embedded in the American psyche.  That isn’t happening now.”  So said Treasury Secretary Yellen yesterday in an interview on NPR.  One has to wonder on what she bases these expectations.  Certainly not on any of the evidence as per the most recent data releases.

For instance, the NY Fed’s latest Inflation expectation survey was released yesterday with 1-year (5.7%) and 3-year (4.2%) both at the highest level in the series’ history since it began in 2013.  She cannot be looking at yesterday’s PPI data (8.6%, 6.8% core) as an indicator given both of these are at their highest level on a final demand basis since PPI started being measured in this manner in 2011.  However, a look a little deeper at the intermediate levels, earlier in the supply chain, show inflation running at levels between 11.8% and 27.8% Y/Y.  While all of these costs are not likely to flow into the price of finished goods, you can be sure that the pressure to raise prices throughout the chain for both goods and services remains great.  And of course, later this morning we will see the CPI data (exp 5.9% Y/Y, 4.3% ex food & energy) with both indicators forecast to show substantial increases from last month.  Secretary Yellen continues to try to sell the transitory story and twelve months of increasing prices later, it is wearing thin.

The US, though, is not the only place with this problem, it is a global issue.  Last night China released its inflation readings with PPI (13.5%) rising far more than expected and touching levels not seen since 1995.  CPI there rose to 1.5%, a tick higher than expected which indicates that either there is a serious lack of final demand in the country or they are simply manipulating the data to demonstrate that the government is in control.  (In fact, it is always remarkable to me when a Chinese data point is released that is not exactly as expected given the control the government exerts on every aspect of the process.)  Regardless, the fact is that price pressures continue to rise in China on the back of rising energy costs and shortages of available energy, and ultimately, given China’s status as the world’s largest exporter, those costs are going to feed into other nations’ import prices.

How about Europe?  Well, German CPI rose 4.5% Y/Y in October, the highest level since September 1993 in the wake of the German reunification which dramatically shook up the economy there.  Remember, too, the German’s have a severe phobia over inflation given the history of the Weimar Hyperinflation, so discontent with the ECB’s performance is growing apace in the country.

Essentially, it is abundantly clear that rising prices have become the norm, and that any idea that we are going to ease back to moderate inflation in the near-term are fantasy.  Naturally, with inflationary pressures abundant, one might expect that central banks would be out to address them by tightening policy.  And yet, while peripheral nations have already done so, the biggest countries remain extremely reluctant to tighten as concern over economic output and employment growth continue to dominate their thoughts.

Historically, central bank decision making always required balancing the two competing goals of pumping up supporting the economy while preventing prices from running away.  Between the GFC and the pandemic, though, there was no need to worry as measured inflation never reared its ugly head, so easy money supported growth with no inflationary consequences.  But post-pandemic fiscal largess has changed the equation and now central banks have to make a decision, with significant political blowback to either choice.  Yet the biggest risk is the lack of a decisiveness may well lead to the worst of all worlds, rising prices and slowing growth, i.e. stagflation.  I promise you a stagflationary environment will be devastating to financial assets all over.

Now, as we await the CPI data, let’s take a look around the markets to see how traders and investors are responding to all the latest news and data.

Equity markets are mostly following the US lead from yesterday with declines throughout most of Asia (Nikkei -0.6%, Hang Seng +0.7%, Shanghai -0.4%) and most of Europe (DAX -0.2%, CAC -0.3%, FTSE 100 +0.4%).  US futures are all pointing lower at this hour as well (DOW -0.3%, SPX -0.3%, NASDAQ -0.5%) so there is little in the way of joy at the current moment.  Risk is definitely under pressure.

What’s interesting is that bonds are not seen as a viable replacement despite declining stock prices as yields in Treasuries (+2.7bps) and throughout Europe (Bunds +0.8bps, OATs +2.1bps, Gilts +3.4bps) are higher.  So, stocks are lower and bonds are lower.  Did I mention that stagflation would be negative for financial assets?

On this very negative day, commodity prices, too, are under pressure with oil (-0.6%), NatGas (-1.8%), gold (-0.35%), copper (-0.3%) and tin (-1.1%) all suffering.  In fact, throughout the entire commodity complex, only aluminum (+2.0%) and corn (+0.5%) are showing gains.  At this point, oil remains in a strong uptrend, so any pullback is likely technical in nature.  NatGas continues to respond to the glorious weather in the northeast and Midwest with reduced near-term demand.  Even in Europe, Gazprom has finally started to let some more gas flow hence reducing price pressures there although it remains multiples of the US price.

Turning to the dollar, it is today’s clear winner, gaining against 9 of its G10 brethren, with CAD (flat) the only currency holding its own.  SEK (-0.6%) and NOK (-0.5%) lead the way lower with the latter tracking oil’s declines while the former is simply showing off its high beta characteristics with respect to dollar movement.  In the EMG bloc, TRY (-1.1%) is the laggard as traders anticipate another interest rate cut, despite high inflation, and there is concern over the fiscal situation given significant foreign debt payments are due next week.  ZAR (-0.9%) is slumping on the commodity story as well as concerns that the budget policy may sacrifice the currency on the altar of domestic needs.  But the weakness extends throughout the space with APAC currencies under pressure as well as LATAM currencies.  This is a dollar story today, with very little holding up to the perceived stability of the buck.

As well as the CPI data, given tomorrow’s holiday, we see Initial (exp 260K) and Continuing (2050K) Claims at 8:30.  There are actually no further Fed speakers today with Bullard yesterday remarking that two rate hikes were likely in 2022.  We shall see.

With the inflation narrative so strong, this morning’s data will be key to determining the short-term direction of markets.  A higher than expected print is likely to see further declines in both stocks and bonds with the dollar benefitting.  A weaker outcome seems likely to unleash yet another bout of risk acquisition with the opposite effects.

Good luck and stay safe
Adf

Outmoded

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In Germany prices exploded
While confidence there has eroded
Now all eyes will turn
Back home where we’ll learn
On Tuesday if QE’s outmoded

The most disturbing aspect of the inflation argument (you know, is it transitory or not) is the fact that those in the transitory camp are willing to completely ignore the damage inflation does to household budgets.  Their attitude was recently articulated by the chief European economist at TS Lombard, Dario Perkins, thusly, “There is nothing inherently dangerous about inflation settling in, say, a 3-5% range instead of the 1-2% that’s been normal for the past decade.”  He continued, “the bigger risk is that hitherto dovish central bankers lose their nerve and raise interest rates until it causes a recession, like they’ve done in the past.”

Let’s consider that for a moment.  The simple math shows that at a 2% inflation rate, the price of something rises about 22% over the course of a decade.  So, that Toyota Camry that cost $25,000 in 2011 would cost $30,475 today.  However, at a 5% inflation rate over that time, it would cost $40,725, a 63% increase.  That’s a pretty big difference.  Add in the fact that wage gains have certainly not been averaging 5% per year and it is easy to see how inflation can be extremely damaging to anybody, let alone to the average wage earner.  The point is, while to an economist, inflation appears to be an abstract concept that is simply a number input into their models, to the rest of us, it is the cost of living.  And there is nothing that indicates the cost of living will stop rising sharply anytime soon.

This was reinforced overnight when Germany released its wholesale price index, which rose 12.3% in the past twelve months.  That is the highest rate of increase since 1974 in the wake of the OPEC oil embargo.  Now fortunately, the ECB is on the case.  Isabel Schnabel, the ECB’s head of markets explained, “The prospect of persistently excessive inflation, as feared by some, remains highly unlikely.  But should inflation sustainably reach our target of 2% unexpectedly soon, we will act equally quickly and resolutely.”  You know, they have tools!

On the subject of Wholesale, or Producer, Prices, while Germany’s were the highest print we’ve seen from a major economy, recall last week that Chinese PPI printed at 9.5%, in the US it was 8.3% and even in Japan, a nation that has not seen inflation in two decades, PPI rose 5.6% last month.  It appears that the cost of making “stuff” is rising pretty rapidly.  And even if the pace of these increases does slow down, the probability of prices declining is essentially nil.  Remember, the current central bank mantra is deflation is the worst possible outcome and they will do all they can to prevent it.  All I can say is, I sure hope everyone’s wages can keep pace with inflation, because otherwise, we are all at a permanent disadvantage compared to where things had been just a year or two ago.

Well, I guess there is one beneficiary of higher inflation…governments issuing debt.  As long as inflation grows faster than the size of their debt, a government’s real obligations decline.  And you wonder why the Fed insists inflation is transitory.  Oh yeah, for all of you who think that higher inflation will lead to higher interest rates, I wouldn’t count on that outcome either.  Whether or not the Fed actually tapers, they have exactly zero incentive to raise rates anytime soon.  And as to bonds, they have shown before (post WWII) that they are willing to cap yields at a rate well below inflation if it suits their needs.  And I assure you, it suits their needs right now.

So, what will all this do to the currency markets?  As always, FX is a relative game so what matters is the degree of change from one currency to the next.  The medium-term bearish case for the dollar is that inflation in the US will run hotter than in Europe, Japan or elsewhere, while the Fed caps yields in some manner.  The resultant expansion of negative real yields will have a significant negative impact on the dollar.  This argument will fail if one of two things occurs; either other central banks shoot for even greater negative yields, or, more likely, the Fed allows the back end of the curve to rise thus moderating the impact of negative real yields.  In either case, the dollar should benefit.  In fact, this is why the taper discussion is of such importance to the FX market, tapering implies higher yields in the back end of the US yield curve and therefore an opportunity for a stronger dollar.  Remember, though, there are many moving pieces, so even if the Fed does taper, that is not necessarily going to support the dollar all that much.

Ok, let’s look at this morning’s markets, where risk is largely being acquired, although there is no obvious reason why that is the case.  Equity markets in Asia were mixed with both gainers (Nikkei +0.2%, Shanghai +0.3%) and Losers (Hang Seng (-1.5%) as the ongoing Chinese crackdown on internet companies received new news.  It seems that the Chinese government is going to split up Ant Financial such that its lending business is a separate company under stricter government control.  Ali Baba, which is listed in HK, not Shanghai, fell sharply, as did other tech companies in China, hence the dichotomy between the Hang Seng and Shanghai indices.  But excluding Chinese tech, stocks were in demand.  The same is true in Europe where the screen is entirely green (DAX +1.1%, CAC +0.8%, FTSE 100 +0.8%) as it seems there is little concern about a passthrough of inflation, but great hope that reopening economies will perform well.  US futures are also looking robust this morning, with all three major indices higher by at least 0.5% as I type.

Funnily enough, despite the risk appetite in equities, bond prices are rallying as well, with 10-year Treasury yields lower by 1.7bps, and European sovereigns also seeing modest yield declines of between 0.5 and 1.0 bps. Apparently, as concerns grow over the possibility of a technical US default due to a debt ceiling issue, the safety trade is to buy Treasuries.  At least that is the explanation being offered today.

On the commodity front, oil (WTI +0.8%) is leading the way higher although we are seeing gains in many of the industrial metals as well, notably aluminum (+1.6%), which seems to be feeling some supply shortages.  Copper (-0.45%), surprisingly, is softer on the day, but the rest of that space is firmer.  I mentioned Uranium last week, and as an FYI, it is higher by 5% this morning as more and more people begin to understand the combination of a structural shortage of the metal and the increasing likelihood that any carbonless future will require nuclear power to be far more prevalent.

Finally, the dollar is broadly, although not universally, stronger this morning.  In the G10, only NOK (+0.2%) and CAD (+0.1%) have managed to hold their own this morning on the strength of oil’s rally.  Meanwhile, CHF (-0.7%) is under the most pressure as havens lose their luster, although the rest of the bloc has only seen declines of between -0.1% and -0.3%.  In the EMG bloc, THB (-0.75%) and KRW (-0.6%) lead the way lower as both nations saw equity market outflows on weakness in Asian tech stocks.  But generally, almost all currencies here are softer by between -0.2% and -0.4%.  the exceptions are TRY (+0.3%) and RUB (+0.25%) with the latter supported by oil while the former is benefitting from hope that the central bank will maintain tight policy to fight inflation.

On the data front, we have both CPI and Retail Sales leading a busy week:

Today Monthly Budget Statement -$175B
Tuesday NFIB Small Biz Optimism 99.0
CPI 0.4% (5.3% Y/Y)
-ex food & energy 0.3% (4.2% Y/Y)
Wednesday Empire Manufacturing 18.0
IP 0.4%
Capacity Utilization 76.4%
Thursday Initial Claims 320K
Continuing Claims 2740K
Retail Sales -0.8%
-ex auto -0.1%
Philly Fed 19.0
Friday Michigan Sentiment 72.0

Source: Bloomberg

With no recent stimulus checks, Retail Sales are forecast to suffer greatly.  Meanwhile, the CPI readings are forecast to be a tick lower than last month, but still above 5.0% for the third consecutive month.  Certainly, my personal experience is that prices continue to rise quite rapidly, and I would not be surprised to see a higher print.  Mercifully, the Fed is in its quiet period ahead of next week’s FOMC meeting, so we no longer need to hear about when anybody thinks tapering should occur.  The next information will be the real deal from Chairman Powell.

The tapering argument seems to be the driver right now, with a growing belief the Fed will reduce its QE purchases and US rates will rise, at least in the back end.  That seems to be the genesis of the dollar’s support.  As long as that attitude exists, the dollar should do well.  But if the data this week points to further slowing in the US economy, I would expect the taper story to fade along with the dollar.

Good luck and stay safe
Adf

A Charade

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The news there was movement on trade
Twixt China and us helped persuade
Investors to buy
Though prices are high
And it could well be a charade

We also learned wholesale inflation
Was lower across the whole nation
Thus fears that the Fed
Might still move ahead
Aggressively lost their foundation

The dollar is little changed overall this morning, although there are a few outlier moves to note. However, the big picture is that we remain range bound as traders and investors try to determine what the path forward is going to look like. Yesterday’s clues were twofold. First was the story that Treasury Secretary Mnuchin has reached out to his Chinese counterpart, Liu He, and requested a ministerial level meeting in the coming weeks to discuss the trade situation more actively ahead of the potential imposition of tariffs on $200 billion of Chinese imports. This apparent thawing in the trade story was extremely well received by markets, pushing most equity prices higher around the world as well as sapping a portion of dollar strength in the FX markets. Remember, the cycle of higher tariffs leading to higher inflation and therefore higher US interest rates has been one of the factors underpinning the dollar’s broad strength.

But the other piece of news that seemed to impact the dollar was a bit more surprising, PPI. Generally, this is not a data point that FX traders care about, but given the overall focus on inflation and the fact that it printed lower than expected (-0.1%, 2.8% Y/Y for the headline number and -0.1%, 2.3% Y/Y for the core number) it encouraged traders to believe that this morning’s CPI data would be softer than expected and therefore reduce some of the Fed’s hawkishness. However, it is important to understand that PPI and CPI measure very different things in somewhat different manners and are actually not that tightly correlated. In fact, the BLS has an entire discussion about the differences on their website (https://www.bls.gov/ppi/ppicpippi.htm). The point is that PPI’s surprising decline is unlikely to be mirrored by CPI today. Nonetheless, upon the release, the dollar softened across the board.

This morning, however, the dollar has edged slightly higher, essentially unwinding yesterday’s weakness. As the market awaits news from three key central banks, ECB, BOE and Bank of Turkey, traders have played things pretty close to the vest. Expectations are that neither the BOE or the ECB will change policy in any manner, and in fact, the BOE doesn’t even have a press conference scheduled so there is likely to be very little there. As to Draghi’s presser at 8:30, assuming there is no new guidance as expected, questions will almost certainly focus on the fact that the ECB staff economists have reduced their GDP growth forecasts and how that is likely to impact policy going forward. It will be very interesting to hear Draghi dance around the idea that softer growth still requires tighter policy.

But certainly the most interesting meeting will be from Istanbul, where current economist forecasts are for a 325bp rate rise to 22.0% in order to stem the decline of the lira as well as try to address rampant inflation. The problem is that President Erdogan was out this morning lambasting higher interest rates as he was implementing new domestic rules on FX. In the past, many transactions in Turkey were denominated in either USD or EUR (things like building leases) as the financing was in those currencies, and so landlords were pushing the FX risk onto the tenants. But Erdogan decreed that transactions like that are now illegal, everything must be priced in lira, and that existing contracts need to be converted within 30 days at an agreed upon rate. All this means is that if the currency continues to weaken, the landlords will go bust, not the tenants. But it will still be a problem.

Elsewhere, momentum for a Brexit fudge deal seems to be building, although there is also talk of a rebellion in the Tory party amongst Brexit hardliners and an incipient vote of no confidence for PM May to be held next month. Certainly, if she is ousted it would throw the negotiations into turmoil and likely drive the pound significantly lower. But that is all speculation as of now, and the market is ascribing a relatively low probability to that outcome.

FLASH! In the meantime, the BOE left rates on hold, in, as expected, a unanimous vote, and the Bank of Turkey surprised one and all, raising rates 525bps to 24.0%, apparently willing to suffer the wrath of Erdogan. And TRY has rallied more than 5% on the news, and is now trading just around 6.00, its strongest level since late August. While it is early days, perhaps this will be enough to help stabilize the lira. However, history points to this as likely being a short reprieve unless other policies are enacted that will help stabilize the economy. And that seems a much more daunting task with Erdogan at the helm.

Elsewhere in the EMG bloc we have seen both RUB and ZAR continue their recent hot streaks with the former clearly rising on the back of rising oil prices while the latter is responding to a report from Moody’s that they are unlikely to cut South Africa to a junk rating, thus averting the prospect of wholesale debt liquidation by foreign investors.

As mentioned before, this morning brings us CPI (exp 0.3%, 2.8% Y/Y for headline, 0.2%, 2.4% Y/Y for core). Certainly, anything on the high side is likely to have a strong impact on markets, unwinding yesterday’s mild dollar weakness as well as equity market strength. This morning we hear from Fed governor Randy Quarles, but he is likely to focus on regulation not policy. Meanwhile, yesterday we heard from Lael Brainerd and she was quite clear that the Fed was on the correct path and that two more rate hikes this year were appropriate, as well as at least two more next year with the possibility of more than that. So Brainerd, who had been one of the most dovish members for a long time, has turned hawkish.

All in all, traders will be focused on two things at 8:30, CPI and Draghi, with both of them important enough to move markets if they surprise. However, the big picture remains one where the Fed is the central bank with the highest probability of tightening faster than anticipated, while the ECB, given the slowing data from Europe, seems like the one most likely to falter. All that adds up to continued dollar strength over time.

Good luck
Adf