Tag Archives: #riskon

Seems Like a Crisis

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The Chinese have not finished yet
Their efforts to counter the threat
Of weaker stock prices
Which seems like a crisis
So new triple R rates were set

But one thing I don’t understand
Is while CCP’s in command
Just why do they care
‘Bout stocks anywhere
Perhaps communism ain’t grand

Yesterday, the Chinese government announced that there would be up to CNY 2 trillion of support for Chinese equity markets in their latest effort to stanch the 3-year bear market.  But apparently, that was not enough as last night Pan Gongsheng, the PBOC governor, announced they were reducing the Reserve Requirement Ratio (RRR or triple R) in order to free up additional loan capacity for the banks.  The move, a 0.50% cut in the ratio will ostensibly release another CNY 1 trillion into the economy.

There are two issues I’d like to address here.  First, given the property market in China remains under significant pressure as activity still seems to be lethargic, at best, and the economy overall is not really expanding at a significant pace, why do they think that allowing more loans will encourage people to take more loans.  After all, last week, they left the Loan Prime Rates unchanged, so were not trying to encourage more activity, and it is not clear that loan capacity has been a constraint in any manner during the past several years.  As global growth remains slow overall, it is entirely possible, if not likely, that there is just reduced demand for Chinese manufactures around the world right now.

The second issue is a bigger picture question, why does the Chinese Communist Party care at all about the stock market?  After all, a reading of Das Kapital would explain that there is no place for private ownership at all in a communist system and by extension, no place for shareholders.  The state is supposed to own everything.  My conclusion is that Xi, and the entire CCP, are full of s*it regarding their belief in communism.  In fact, I would contend that is true for every communist regime on the planet.  Rather, those in charge in communist regimes merely see it as the most effective way to command all the power and wealth personally and could care less about the concepts Marx espoused.  In the end, I would argue that the human condition is one where acquiring as much power and wealth as possible is the driving goal for most people.  While many people have much smaller ambitions, the sociopaths who rise to leadership roles in politics know no bounds as to what they believe is their due.  Just sayin!

Regardless of the underlying rationale, though, the PBOC had the desired impact as both the Hang Seng (+3.6%) and the CSI 300 (+1.4%) rallied sharply on the news.  As well, the Nikkei (-0.8%) slid a bit further as it seems there had been a growing position by CTAs and hedge funds in the long Japan/short China trade which I illustrated yesterday.  If China is rebounding, I expect that Japanese shares will have further to slide in the near-term.  As well, after another day with some record high closings in the US yesterday, European bourses are all in the green nicely this morning with the DAX (+1.3%) leading the way although the other main indices are also higher by about 1%.  The laggard here is the UK (+0.4%) and I attribute this movement to the Flash PMI data which was released this morning showing that continental growth continues to slide, hence increasing the chance of a rate cut sooner, while UK data was a bit better than expected, and well above 50 across the board, implying the BOE will lag any rate cuts going forward.  And happily, as I type at 8:00, US futures are all nicely in the green as well.

In the bond market, Treasury yields are a touch softer this morning, down 2bps, but still hanging right around the 4.10% level which has been a pivot for the past week.  European sovereigns have seen yields decline about 3bps across the board after that soft PMI data, while UK Gilts have moved the other direction on the stronger data there.  Of more interest, I think, is that JGB yields have jumped 5bps overnight and are now back above 0.70%.  It seems that there is an evolution in thinking regarding Ueda-san’s comments after the BOJ meeting Monday night, and the belief that they will be exiting NIRP in April is growing stronger.  We shall see.

Commodity prices are higher across the board this morning with oil (+0.3%) continuing to find support, arguably from the troubles in the Middle East, although some short-term issues like the shuttering of a Russian export terminal after a Ukrainian attack have also had an impact.  But metals markets are universally higher this morning as well, with gold (+0.25%) far less impressive than copper (+2.0%) or aluminum (+0.9%) as positivity from the Chinese RRR cut and the potential for stronger growth on the mainland feed through the markets.

Finally, the dollar is under pressure this morning across the board.  This is true in the G10 bloc with the euro and pound both firmer by 0.5%, while the yen (+0.8%) and CHF (+0.8%) are having even better days.  Similarly, the EMG bloc has seen gains across the board with the leader ZAR (+1.1%) on the back of those metals gains, but strength in PLN (+0.8%), CZK (+0.7%) and HUF (+0.65%) showing their high beta with respect to the euro, and gains in APAC currencies (KRW +0.4%, SGD +0.3%, CNY +0.3%) and LATAM currencies (MXN +0.6%, BRL +0.8%) as it is unanimous regarding the dollar’s weakness.

On the data front, today brings only the Flash PMI data (exp 47.9 manufacturing, 51.0 services) and the EIA oil inventories.  There are no Fed speakers due to the quiet period, so I foresee market activity focused on equity earnings releases although none of the big names are due today.  Right now, the dollar is under pressure amid ongoing belief that the Fed is going to cut ahead of other central banks.  Until that story changes, I expect that we could see a bit more dollar weakness.  But in the end, tomorrow’s GDP and Friday’s PCE data are going to really drive views.  Look for a quiet one today.

Good luck
Adf

Others to Blame

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Apparently, President Xi
Is not very happy to see
That stocks made in China
Have lost all their shine-a
So, feels he must buy by decree
 
The upshot is two trillion yuan
Is what he will spend, whereupon
He’ll then get to claim
Twas others to blame
Though it’s his ideas that keep on
 
Last night the BOJ meeting was the non-event that was widely expected.  There was no change in policy and when looking at their forecasts, if anything they lowered their inflation views a touch for next year, thus reducing the chance of a policy change even more.  The follow-on commentary was not very inciteful either, explaining that they are prepared to take additional easing measures if necessary but uncertainties on the price outlook are high.  In other words, we still don’t know how to achieve our goal of sustainable 2% inflation so we’re going to watch a bit longer.
 
The punditry has decided that Ueda-san is going to adjust policy at the April meeting after the spring wage negotiations have been completed, but personally, i don’t believe he feels a compelling need to do anything absent a major decline in the yen from current levels.  After all, the economy is still ticking over nicely and the stock market has been rallying consistently for a year and is back at 34-year highs, approaching the 1989 bubble peak.  However, if USD/JPY were to trade back above 150 again and start to move more quickly, I suspect that might be the catalyst the BOJ and Ueda-san need to change their tune.
 
Arguably, of far more interest last night was the news that China is now considering a support package for the stock market there!  (For a communist country, it is quite ironic how much Xi Jinping cares about the most capitalistic institution there is, the stock market.)  The headline number is CNY 2 trillion (~$278 billion) which will be sourced from Chinese state-owned companies (SOEs) overseas and ostensibly will flow into the offshore market for Chinese shares as well as the Hang Seng in Hong Kong.  The below chart, courtesy of Weston Nakamura’s excellent substack is quite explanatory as to why Xi may be feeling some pressure.

 

The dramatic widening of the spread between Hong Kong and Japanese shares has been remarkable in the first three weeks of 2024, a substantial acceleration of what we have seen since November of last year.  My sense is Xi is taking it personally that the world is dismissing China as a serious global player as evidenced by the fact that nobody wants to invest there at all.  Obviously, there are sanction and tariff issues as well as a comprehensive effort by many western companies to reduce their reliance on China as part of their individual supply chains, but I guess this has become too much to bear for President Xi. 

While this mooted number is twice as large as the previous discussions, it remains to be seen if it will be effective beyond the knee-jerk response by the Hang Seng today (+2.6%).  After all, the Chinese property market is still a disaster, and all the other problems remain intact.  Chinese share prices have been falling for 3 years now, and my sense is it will take real policy changes rather than a buying spree by SOEs to change any views.  Perhaps communist-based stock markets are an oxymoron after all.

Away from those two stories though, not very much is ongoing.  Mainland Chinese shares also rose, but far less, just 0.4%, while Japanese shares were essentially unchanged on the day after the BOJ’s meeting.  In Europe, equity markets are a touch softer, although only about -0.2% or so across the board and after yet another positive day in the US yesterday, US futures are pointing slightly higher at this hour (7:45), about 0.2%.

In the bond market, yesterday’s price action is being reversed with yields across the US (+2bps) and Europe (+2bps across virtually all nations) backing up a bit.  As there continues to be a lack of data on which to trade, this price action seems almost like a classic risk-on take, with equities higher, the dollar softer, and bonds falling in price as well.  However, given that the movement is just 2bps, I would not get excited about any new information here.

In the commodity markets, oil (-0.75%) is slipping a bit this morning, but has been performing pretty well over the past week on the back of the ongoing tensions in the Middle East.  However, we are seeing positive price action in the metals space this morning with gold (+0.2%) and copper (+0.5%) both pushing a bit higher.

Finally, the dollar is mixed this morning, with no consistency across either the G10 or EMG blocs.  CNY (+0.3%) has rallied on the strength of the financing package while ZAR (+0.8%) is benefitting from the metals complex rally, as is CLP (+0.35%) and AUD (+0.25%).  However, the euro (-0.2%) is sliding along with several EMG currencies, notably PLN (-0.75%) and MXN (-0.5%), as idiosyncratic stories drive markets this morning rather than a broad dollar narrative.

The only marginal piece of data this morning is the Richmond Fed Manufacturing Index (exp -11), yet another manufacturing index that has been performing quite poorly.  Interestingly, there was a Twitter (X?) thread this morning from Anna Wong (@annaeconomist), a senior economist at Bloomberg, describing some potential reasons as to why the Initial Claims data, which has been running far lower than the recessionistas expect due to eligibility issues and the fact that UI pays so little, people would rather driver for Uber than collect.  This is another indirect sign that the economy is not nearly as positive as many, especially the soft-landing proponents and equity bulls, would have you believe.  Food for thought.

As to the rest of the day, given the lack of other data as well as the anticipation of the Thursday and Friday info on GDP and PCE, I anticipate a quiet session overall.  Momentum remains higher in stocks, but bonds are uncertain, and the dollar is mixed.  Don’t look for too much movement in either direction here today.

Good luck

Adf

Quite Restrictive

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The Fed keeps on spinning the tale
They’re watching like hawks so that they’ll
Be able to jump
In case Donald Trump
Does not look like going to jail
Be able to act
And not be attacked
If ‘flation forecasts start to fail
 
Twas Bostic’s turn yesterday to
Explain that the policy skew
Is still quite restrictive
Though that’s not predictive
Of what they may finally do
 
Atlanta Fed President Raphael Bostic was the latest FOMC member to regale us with his views on current policy settings amid two speeches yesterday.  The essence of his comments lines up with what we have heard for the past two weeks; policy is sufficiently restrictive to help drive inflation down to their 2% target, but they will be vigilant if that is not the outcome.  One of the things that he mentioned, and that has been a really popular chart crime over the past few months, at least for the doves, is he discussed annualizing the most recent three months of PCE data and the most recent 6 months of PCE data as proof that they are doing a good job.  In fact, in one of his two presentations, he used the following chart:

Unquestionably, if you look at the orange line, which represents the annualized value of the past 3 months, it shows that PCE is “now” running below their target.  But let me ask you a question, looking back to H1 of 2022, when inflation was peaking.  Both the 3-month and 6-month changes were well above the annual number at the time.  Do any of you remember the focus on those short-term nonsense numbers?  Me neither.  My point is the only number that matters is the actual annual one as that is their target.  Any indication that it is flattening or turning higher, just like the CPI data did earlier this month, is going to put paid to this story.  While I have no idea where next week’s data is going to print, we must be wary of the narrative spin on the actual data.  If we know one thing about the Fed, by definition, they are reactive.  That is what following the data means.  If they were predictive, they would move before the data, but they never do that. 
 
So, all this talk of cutting before inflation gets too low is not monetary policy.  However, we cannot rule out a cut based on the political implications as they view rate cuts as a way to boost the economy and try to ensure the current president is re-elected rather than the likely Republican candidate gets back in.  Alas, for now, we will have to live with the spin.  Today we hear from two more Fed speakers, SF’s Mary Daly and Governor Michael Barr.  I suspect we will hear exactly the same message from both.  Too early for cuts, but they are ready when the time comes.
 
Meanwhile, across the pond, the preponderance of ECB speakers has been very clear that March is off the table for a rate cut but June seems to be what they see as likely.  Here, too, they see the trend as their friend, but inflation readings are still nowhere near their 2.0% target.  However, it is clear that the pain of higher rates is having a much larger impact on Europe than on the US as GDP data continues to deteriorate.  Germany is in recession and much of the rest of the continent is on its way.  The benefit for Madame Lagarde is that the Europeans did not inject nearly as much stimulus during the Covid years as the US, so it is likely the Eurozone economy is following a better-known path.  In the end, though, they are very anxious for the Fed to get started as they really want to start cutting rates, I believe, but with inflation still far above target and the Fed still holding on, they would have no rational explanation for their actions.
 
One last thing to note is CPI in Japan was released last night and it fell to 2.6% headline and 2.3% core.  Any idea that the BOJ was going to need to tighten policy in the near-term to fight too high inflation has been dissipating quickly.  It turns out that they may have been correct to leave policy unchanged as now they do not need to do anything to be in the right spot.  The market response mostly made sense as the yen weakened with the dollar now above 148, while the Nikkei rose another 1.4% and is pushing those recent 30+ year highs.  The weird thing, though, was the JGB market which saw yields rally 4bps, back to their highest level in a month.  I have been unable to find any solid explanation for this move as certainly it is not fundamental.
 
Anyway, let’s look at the rest of the overnight session to see how things are feeling as we close the week.  After a solid US equity session yesterday, most of Asia had a good go of things with rallies pretty much everywhere except China and Hong Kong.  The equity markets in both those nations have been under significant pressure lately and show no signs of turning.  While the market is not the economy, President Xi has already called for the end of short sales and is now leaning on domestic institutions to not sell at all.  With the property market already in the tank, a rapidly declining stock market is not a good look for the concept of prosperity for all.  Europe, though, is modestly higher this morning and US futures are also in the green following yesterday’s session.
 
In the bond markets, Treasury yields are little changed on the day, but remain above the 4.10% level that some are calling a key technical spot.  European sovereigns, though, are all rallying more aggressively with yields falling between 3bps and 7bps despite what are continuous calls for the ECB to maintain tight policy for longer than the market is pricing.  Perhaps investors are feeling better about inflation prospects if the ECB holds the line.
 
After a rally yesterday, oil prices are essentially unchanged this morning.  The unrest in the Red Sea continues with the Houthis firing more missiles and fewer and fewer ships willing to transit the area while yesterday’s tit-for-tat Iran-Pakistan missile attacks are now merely history.  The fact that oil remains below $74/bbl implies it is not really pricing any possibility of a larger Middle East conflict.  That seems pretty hubristic to me as the probabilities seem to be far larger than zero.  As to the metals markets, both precious and base metals are firmer this morning in sync with softer yields and a softer dollar. 
 
Speaking of the dollar, while it is ever so slightly lower on a DXY basis this morning, it continues to hold the bulk of its gains for the past month.  Versus G10 currencies, the picture is mixed with GBP (-0.2%) underperforming after absolutely abysmal Retail Sales data was released this morning, but the rest of this bloc is higher by about 0.2% or so on average.  In the EMG space, the direction is broadly for currency strength, but the movement remains modest at best, on the order of 0.1%-0.3%.  In other words, not much is going on here.
 
On the data front, yesterday brought a mixed picture with Housing data slightly better than expectations, although starts fell compared to last month.  Initial Claims printed at 187K, their lowest in a very long time, but Philly Fed was at a worse than expected -10.6, not as bad as Empire State, but still not too bullish!  Today brings Michigan Sentiment (exp 70.0) and Existing Home Sales (3.82M) as well as the above-mentioned Fed speakers.  After today, the Fed is in their quiet period, so we will have to make up our own minds as to what the data means.
 
For now, the market seems quite comfortable buying dips and as evidenced by the Fed funds futures market, is still pricing a 55% chance of a March cut.  While that probability is shrinking slowly, there are still 6 cuts priced in for the year.  At this point, my thesis of the market fighting the Fed for the first half of the year before capitulating to higher inflation prospects and higher yields amid slowing growth remains my best guess.  But that is just me.  Absent something really surprising from Daly or Barr, I suspect that there will be limited price movement going into the weekend.
 
Good luck and good weekend
Adf
 

Jay’s Coronation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck

Adf

Sufficiently

Posted on by 
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

Posted on by 
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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Now Estranged

Posted on by 
“Something appears to be giving”
Said Waller, the true cost of living
So, bonds rallied hard
The dollar was scarred
But stocks were quite unreactive-ing

The narrative clearly has changed
With hawks on the Fed now estranged
Is everything better?
As world’s largest debtor
We need low rates to be arranged

Fed Governor Chris Waller, one of the erstwhile hawks on the FOMC was covered in white feathers yesterday as he explained his latest perception that the Fed was on a path to achieving their 2% inflation goal as Q3’s expansive GDP was clearly an outlier and the data he cited showed economic growth slowing toward trend just below 2%.  The other Fed speakers on the day did not back him up specifically, and in fact, Governor Bowman explained her base case was the Fed needed to hike still further to be certain inflation was under control.  However, the market only had eyes for Waller and has heard the following message from the Fed, ‘we have finished hiking, and the next move will be a cut.’  Although this had been a building narrative, until yesterday there had been consistent pushback from virtually every Fed speaker with the higher for longer mantra.  However, the current belief set is that higher for longer has just been buried and that lower rates are in our future.  Let the celebrations begin because the Fed has achieved the much discussed, though rarely achieved, soft-landing.

However…it is still a bit premature, to my mind, to celebrate accordingly.  In fact, just yesterday the Case Shiller Home Price Index showed an annual rise of 3.9%, which although 0.1% less than forecast, also shows that the widely claimed decline in house prices due to higher yields, has not materialized.  And consider, if yields are set to go lower, the idea that house prices are going to fall and feed into lower inflation seems absurd unlikely.

But logic has never been an important part of any market narrative, and this time is no different.  The fact that declining bond yields (Treasuries fell 6bps yesterday and a further 5bps in the aftermarket) and the fact that the dollar, as measured by the DX, fell 0.5% led by USDJPY falling nearly 1.5% to its lowest level since September, has eased financial conditions thus supporting economic activity and inflation, is of no importance to the narrative.  Once again, we have heard from some big-name traders, Bill Ackman in this case, claiming that the Fed is now going to cut well before the market is pricing, predicting the first cut in March 2024. The market response to this has been for Fed funds futures to price a 40% chance of a March cut and a 75% chance of one at the May meeting.

And maybe all this is correct.  However, as I wrote yesterday, I believe that we are going to see a significant additional amount of federal government largesse to help prop up the economy, and that is not going to push inflationary pressures lower, the opposite in fact.  As is always the case, nothing matters until it matters, and right now, the only thing that matters is that the narrative is all-in on rate cuts coming soon to a screen near you.  While we could easily see further short-term weakness in equity markets as portfolios rebalance after a huge equity rally this month, it certainly seems like a push higher in risk assets is on the cards into Christmas.

As we consider the price action from yesterday and overnight, the thing that really stands out is that the US equity markets did so little on this very clear change in tone from a key Fed speaker.  Had you told me this was going to be Waller’s attitude prior to the session, I would have expected US equity markets to rally by 1+% each, with the NASDAQ really embracing the idea of lower rates.  But while the three major indices all closed in the green, it was only at the margin, +0.1% – +0.3% with a very late day rally.  Yes, futures are pointing higher this morning, up about 0.3% across the board, but again, this is somewhat unimpressive.  Perhaps the market has already priced in this idea, hence the 10% rally in November.

There is another wrinkle in this narrative as well, and that is that APAC shares are underperforming in both China and Japan.  Regarding the former, the Hang Seng (-2.0%) fell again as continuing concerns over Chinese corporate growth and profitability weigh on the index with Meituan reporting poor results.  On the mainland, despite hopes that the government was going to do more to support the property market, thus far it has been all talk, and no action and investors are getting tired of waiting.  Europe, however, is having a better go of it this morning, excluding the UK, where continental indices are all nicely higher, at least 0.5% with some as much as 0.9%.  

Not surprisingly, European debt markets are rallying as European sovereigns are following the US lead, ignoring the pleas from ECB speakers that higher for longer remains the path forward.  As such, we are seeing further declines on the order of 4bps – 6bps across the continent, matching US yield declines for the past two days.  Yields in Asia, though, are quite interesting with some very different narratives playing out there.  Starting with Japan, which saw yields fall 9bps last night, back to their lowest level since September, we heard from BOJ member Seiji Adachi that it was premature to consider exiting ultra-loose monetary policy amid global economic uncertainties and the end of the aggressive rate hikes in the US.  That seems counter to what had been the building narrative regarding Ueda-san’s next move.  Australia saw yields decline 14bps but in New Zealand, the decline was much more muted, just 2bps, after the RBNZ left rates on hold, as expected, but was far more hawkish in their statement than expected and hinted at potential further rate hikes.  

Turning to the commodity markets, oil continues to rebound, rallying another 1.8% this morning and recouping all its recent losses as confusion still reigns over the OPEC+ meeting tomorrow, or perhaps to be delayed again.  As well, it seems that a massive early winter storm closed ports in the Baltic and so oil shipments have been interrupted there for the time being.  Gold, though, has been the big story in commodity markets as it exploded higher yesterday after the Waller comments, jumping $30/0z (1.5%) to levels last seen in May and once again approaching its all-time highs of $2085/oz.  The market technicians are getting quite excited as they see a break there as having potential for a much larger run higher.  A case can be made that this is not a vote of confidence in the Fed’s anticipated future handling of inflation, but for now, we can simply attribute it to lower interest rates around the world.

Finally, the dollar has taken a straight-right to the chin and is reeling against virtually all its counterparts, both G10 and EMG. While we have seen a bit of a rebound this morning, since Monday’s close, EUR (+0.3%), GBP (+0.5%) and JPY (0.65%) have all rallied nicely, and that is after giving up some of those gains overnight.  We saw similar movement in the EMG bloc with CNY (+0.3%), PLN (+0.3%) and BRL (+0.8%) all responding positively to the Waller comments.  As I have been saying recently, if the Fed is truly done, then the dollar is likely to suffer, at least until such time as the other central banks fall in line.

On the data front, in addition to the Case Shiller Home Prices yesterday, we saw Richmond Fed Manufacturing which disappointed at -5.0 (exp 1.0), yet another sign that growth is waning.  It is data like this that has Waller in the mindset that slowing growth will lead to lower inflation.  Of course, rising home prices would certainly be a crimp in that theory.  Today we see the second look at Q3 GDP (exp 5.0%) with Real Consumer Spending expected at +4.0%.  We also get the Fed’s Beige Bok at 2:00pm and Cleveland Fed president Mester speaks at that time.  It will be interesting to hear if Mester, a very clear hawk, confirms the Waller thoughts or tries to push back alongside Governor Bowman.

For now, while the dollar has bounced slightly this morning, as long as the narrative remains the Fed is done and that cuts are coming soon, you have to believe the dollar is going to fall further from here.  If pressed, I would suggest USDJPY has the furthest to decline, but the fact that we have already had pushback from the BOJ implies that they are not that unhappy it remains weak.  After all, it supports their corporate sector and helps keep inflation higher, which remains one of their goals.

Good luck

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More Fun Than Blondes

Posted on by 
In just the past week we have seen
That traders have changed their routine
They’re confident bonds
Have more fun than blondes
‘Cause rate cuts are what they now glean

Despite this, most central bank threads
Explain rate cuts ain’t in their heads
They all still maintain
Inflation’s not slain
And so now, they’re at loggerheads

There is only one story that continues to drive market activity lately, and that is bond yields.  They have become the best barometer of market sentiment we’ve seen in quite a while and the reaction function is quite clear; lower yields mean a soft landing, is coming and with it, central bank rate cuts to prevent a hard one.  While the US continues to lead the way, we are seeing yields decline around the world.  In essence, the bond markets worldwide have declared victory on behalf of the central banks.  In fact, as I look at my screen this morning, of the major economies in the world, only two, Mexico and South Africa, have seen 10yr yields climb today and that has been by 1.5bps and 0.5bps respectively.  In other words, virtually unchanged, while the rest of the world has seen declines of between 3bps and 7bps with even JGB yields lower by 5bps.

There are more and more adherents to the soft landing story as recent inflation readings have been declining steadily while economic activity is not slipping nearly as quickly.  Of course, this view is not universal as there remains a camp that points to underlying pieces of the economic puzzle like slowing bank lending growth or sliding manufacturing and are still looking for a more dramatic downturn in economic activity.  But generally, between the cheerleaders in finance ministries around the world and CNBC talking heads, all is right with the world.

Of course, if you are a central banker right now, all this positivity is working at cross purposes to your view that inflation is not actually dead and there is still further to go.  This is why we continue to hear that although progress has been made, it’s too early to take the victory lap.  We heard it from Cleveland Fed President Loretta Mester yesterday and from Austrian Central Bank chief and ECB Council Member Robert Holzmann this morning.  And we have been hearing it consistently for the past week, policy is somewhat restrictive, but we need to stay here until we are sure inflation is heading back to target.

Now, I am old enough to remember when the idea of tighter financial conditions doing the Fed’s job for them was a thing.  But in the month that has passed since that was first mooted, financial conditions are actually looser now than then.  The point is that the feedback loop between the data and the market response is now so dramatic, and occurring so rapidly, that the central bank reaction function is falling further behind the curve.  I have neither heard nor read a single thing in the past several days that implies there is a possibility the central banks are not done.  

But whether more rate hikes will do anything for inflation is no longer the issue, my sense is central banks want to make sure they are seen as in control.  I know things have been great lately with equities and bonds on fire and everybody’s 401Ks growing, but Jay doesn’t really care about your portfolio, and absent a complete collapse in economic activity in the next month, I would not be surprised by a December rate hike.  There is clearly no certainty on this, and the Fed funds futures market is currently pricing in just a 0.3% chance of it occurring.  I also know the Fed does not like to surprise markets, but I think the Fed fears the appearance of losing control more than anything else.  

However, until such time as they sound increasingly forceful, or the data starts to show inflation is not collapsing, it is hard to fight this move.  We have come a very long way in a very short period of time with respect to 10-year Treasury yields, a 60 basis point decline in slightly less than a month.  Be careful in assuming this will continue in a straight line.  As well, the fact that the yield curve’s inversion remains at -40bps is quite interesting.  Given the market is pricing 100bps of rate cuts by the end of 2024, I would have expected the front end of the curve to have fallen further in yield.

But that is where things stand as we get ready for another weekend and then, next week’s Thanksgiving holiday.  So, a quick tour of the overnight session shows that Chinese equities remain under pressure, especially in Hong Kong (-2.1%) as whatever they are doing over there is not solving their problems.  However, Japan is benefitting with modest gains and Europe is higher this morning across the board, about +0.8%.  As well, after a mixed day yesterday, US futures are pointing slightly higher, +0.2% or so at this hour (8:30).

We know the bond story so a look at commodities shows oil bouncing a bit, +1.3%, although it has been a horrific week and month for the black sticky stuff, down -15% in the past month.  Gold and silver, however, are huge beneficiaries of the decline in yields as they continue to rally and base metals are holding their own as well on the softer yield story.

Finally, it should be no surprise that the dollar remains under pressure, down 0.2% broadly (the DXY).  In the G10, JPY (+0.85%) is the leader followed by AUD (+0.5%) but all of them are firmer.  While there is a little more divergence in the EMG bloc, the broad trend remains for a softer dollar and as long as US yields remain under pressure, the dollar is likely to do so as well.  The one place I would watch carefully is the yen, as there is a growing belief it is set to rebound sharply.  On the plus side is the fact that US yields are falling, and the rate narrative is changing rapidly.  But remember, Japanese yields are also declining, and their recent GDP data was terrible, -2.1% in Q3, so the idea that the BOJ is going to tighten policy soon seems shaky at best.  There are many technical support levels on the way down, but do not be surprised of a test of 142.00 in the coming weeks if the current zeitgeist continues.

On the data front, Housing Starts (1.372M) and Building Permits (1.487M) were both released this morning pretty much on target and put paid to the idea that the housing market is collapsing. For the rest of the day, we have 5 more Fed speakers, but I doubt we hear anything new.  One other thing to remember is that Sunday, Argentina goes to the polls and the chances for the upstart candidate, Javier Milei, seem pretty good as the people there are fed up with the current government.  That could have some repercussions both financially and politically around the world, especially the latter, as it would be another step away from the current ruling class.  The point is, I do not believe that everything is better, and while right now things look good, there is more volatility in store.  Be careful and stay hedged, it is your best protection.

Good luck and good weekend

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Markets No Longer Have Fear

Posted on by 
The CPI data made clear
That markets no longer have fear
But Jay and his team
Will still push the theme
That cuts in Fed funds just ain’t near

As such markets have been persuaded
It’s time for the Fed to be faded
The bulls are on top
And they just won’t stop
Til new record highs have been traded

By now, you are all well aware that yesterday’s CPI data came in a bit softer than the forecasts with the headline printing at 3.2% Y/Y while the core printed at 4.0% Y/Y.  Both of these were 0.1% lower which doesn’t seem to be that big a difference.  But the bulls are stampeding on the idea that if you look at the recent trend, the annualized rate for the past 6 months is lower still (3.0% and 3.1% respectively) and the implication is that inflation is dead and the Fed has achieved the impossible, reducing inflation without causing a recession.  And maybe they have, but boy, that is a lot to take away from a single data point that printed a smidge lower than expectations.

Two weeks ago, in the wake of the last FOMC meeting, I wrote (Bulls’ Fondest Dreams) that the Fed changed their tune and despite all the pushback we have received from Fed speakers in the interim, they definitely saw the end of the hiking path coming into view.  Yesterday’s data seemed to confirm this view, at least in the markets’ eyes.  As such, we saw a massive rally in both stocks and bonds, with 10-year yields falling 20 basis points at one point in the day before closing lower by about 17bps.  They are 2bps higher this morning on the bounce.  Interestingly, European sovereign yields also fell quite sharply despite the lack of local news as the price action once again proved that the 10yr Treasury yield is the only bond price that really matters in the world.

So, to me the question is now, is this view correct?  Has the Fed actually threaded the needle and successfully reduced inflationary pressures without causing a meaningful economic slowdown?  If so, Chairman Powell will rightly be hailed as a brilliant central banker, even if there was some luck involved.  How can we know, and more importantly, when will we be certain this is the case?

I think it is important to try to separate the markets and the economy as the two are really quite different.  The economy is where we all live.  From an individual perspective, I would contend it is a combination of one’s employment situation(and whether there is concern over losing one’s job or finding a new one), the true cost of living, meaning the ability to afford the mortgage/rent as well as put food on the table, and then to see if there is any additional money left to either save or spend on desires rather than necessities.  It seems abundantly clear that from this perspective, there is a large segment of the population that doesn’t feel great about things.  This was made clear in an FT survey that showed just 14% of those surveyed thought things had gotten better economically under the Biden Administration’s policies.

However, if this poet has learned nothing else in his time trading in, and observing, financial markets, it is that policymakers do not care one whit about those issues.  Despite periodic attempts to seem down-to-earth, the reality is they all exist within a policy bubble with no concerns about the rent or their next meal.  In this bubble exist only numbers like yesterday’s CPI or today’s Retail Sales (exp -0.3% headline, 0.0% ex autos).  GDP, to them, is not a measure of people’s confidence or belief in the state of the current world, it is a policy variable that they are trying to manage or manipulate so they can make positive pronouncements.

There is obviously quite a gulf between those two views of the world and the markets are the connection, trying to interpret the reality on the ground through the lens of the data.  Well, the policymakers must be thrilled today because the extraordinary bullishness that is now evident across all risk markets, in their minds, means that their jobs are secure.  When things are going well, reelection/reappointment are the expected outcomes.  However, that FT survey was clearly a warning shot across the bow of their Good Ship Lollipop that everything was going to be great going forward.

So, what’s it going to be?  As I wrote after the FOMC meeting, I believe the market is prepped to rally through the rest of the year.  After yesterday’s data, that seems even clearer.  But do not forget that one of the key rationales for the Fed’s change of heart was that the market was doing the Fed’s work for them, tightening policy by raising rates and watching risk assets drift lower, thus tightening financial conditions.  Let me tell you, financial conditions loosened a lot yesterday, and if this rally continues, you can be certain that Powell and friends will grow more concerned about a rebound in inflation.  The market has completely removed any probability of a December rate hike, or any further rate hikes by the Fed as of yesterday with the first cut now priced for May 2024.  At this stage, it seems probable that the October PCE data will be on the soft side so much will depend on the next NFP and CPI readings, both of which are released before the next FOMC meeting.

And there is one more thing that must be remembered when it comes to the bond market.  The US is still going to issue an enormous amount of debt going forward between refinancing ($8.3 trillion though 2024) the current debt and the new $2 trillion budget deficit that needs to be funded for next year.  Can bonds continue to rally in the face of that much supply?  Maybe they can, but it would seem to require a reengagement of foreign buyers rather than relying entirely on domestic savers.  Either that or the Fed will need to end QT and possibly even restart QE.  In the latter case, inflation would almost certainly become a major issue again.  The point is, while everyone is feeling great this morning, there are still numerous perils to be navigated in order to maintain economic growth with a low inflation regime.  I hope Jay and all the central bankers are up to the task, but a little skepticism seems in order.

Ok, the overnight session can be summed up in one word: BUY!  Equity markets everywhere rallied with strong gains in Asia (Hang Seng +3.9%) and Europe, after rallying yesterday, continuing higher by nearly 1% this morning.  US futures are also all green this morning, generally +0.5% at this hour (7:30).

Bond markets have mostly held onto yesterday’s impressive gains with some trading activity, but movements all within a basis point or two from yesterday’s close.  The exception was Asian government bond markets, where prices rallied sharply, and yields tumbled there as well, following the US lead.

Metals prices are ripping higher again this morning, with gold, silver, and copper all up nicely after strong gains yesterday.  The outlier here is oil, which is a touch lower (-0.4%) this morning after a very lackluster session yesterday.  Now, in fairness, it has been creeping higher for the past several sessions, but compared to other markets, oil is remarkably quiet right now.

Finally, the dollar got smoked yesterday, with the euro rallying 1.5% and similar moves across the other European currencies.  Meanwhile, AUD rallied more than 2% yesterday as the combination of rocketing metals prices and a broadly weaker dollar were just the ticket for the currency.  In the EMG bloc, ZAR (+3.0%) and MXN (+1.5%) were the big winners yesterday although, interestingly, most of the APAC currencies had much more muted runs, on the order of 0.5%-1.0% gains.  This morning, price activity is much more subdued as FX traders are trying to get their bearings again.  It was, however, a 3-sigma day, a rare occurrence.

On the data front, as well as Retail Sales, we also see PPI (exp 2.2% headline, 2.7% ex food & energy) and the Empire Manufacturing Survey (-2.8) along with EIA oil information where inventory builds are forecast.  There is only one Fed speaker, vice chairman of supervision Michael Barr, and I don’t expect he will be able to sway any views today.

For now, the die is cast, and the bulls are in the ascendancy.  We will need to see some very big changes in the data trajectory for the current momentum to stall, and quite frankly, I don’t see what that will be for now.  So, go with the flow here, higher stocks, lower yields and a softer dollar seem to be the trend for now.  There will be some trading back and forth, but you can’t fight City Hall.

Good luck

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No Longer a Threat

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Opinions are already set
The Fed is no longer a threat
Today’s NFP
Will help all to see
That buying stocks is the best bet

At least that’s the narrative tale
The talking heads want to prevail
The question’s, will Jay
Have something to say
If finance conditions, up, scale

To conclude what has already been a tumultuous week, this morning brings the monthly payroll report, a key piece of evidence for the Fed to determine the health of the economy.  Expectations for the readings are as follows:

Nonfarm Payrolls180K
Private Payrolls158K
Manufacturing Payrolls-10K
Unemployment Rate3.8%
Average Hourly Earnings0.3% (4.0% Y/Y)
Average Weekly Hours34.4
ISM Services53.0

Source: tradingeconomics.com

Apparently, the whisper number is a bit above 200K, but we also must pay close attention to the revisions.  Recall last month had a blowout 336K result, which was much larger than expected.  If that number retains its strength, it would certainly be indicative of a still healthy labor market.  This matters a great deal as after Powell’s press conference on Wednesday and the surprising QRA that shortened the duration of upcoming Treasury bond issuance, the market is all in on the goldilocks story, solid growth with low inflation.  The corollary to this is that the market is looking for the Fed to back off the current rate policy and begin to reduce the Fed funds rate, thus helping all the DCF models pump up the value of equities.

But even though I have been highlighting the importance of the NFP number for the past two years as a key for the FOMC, it is not clear to me that today’s is so important.  I only say this because the Fed just met two days ago, and we will see another NFP before they meet again.  Arguably, this one will get lost in the fog of memory.  

If that is the case, then it is probably a good time to recap what we have seen this week and how it has affected market sentiment.  The bulls are on a roll right now as we have seen a significant pullback in Treasury yields with 10yr down to 4.66%, down 36bps from their peak back on October 23rd.  While that is certainly a large move in a short period of time, it is in line with the types of movement we have been seeing all year, so hardly unprecedented.  But Powell’s comments, which have been read as dovish despite his best efforts to prevent that view, and the bond market movement have many market participants licking their chops for a massive equity rally going forward.

Interestingly, one of the things the talking heads have been using to pump their story has been the tightening in financial conditions that were a result of declining stock and bond prices.  The whole issue of tighter financial conditions doing the Fed’s work for them has been a key story for the past several weeks since it was first mentioned by Dallas Fed President Lorrie Logan.  However, the big rally in both stocks and bonds, as well as the decline in the dollar, are all critical features in the calculation of those financial conditions, and they are all pointing to easier conditions.  The point is, if tighter conditions was a reason for the Fed to have stopped tightening further, the fact that they are now easing implies the Fed may feel the need to raise rates again in December, although that is clearly not the consensus view.

At any rate, right now, momentum is on the bulls’ side, and it is tough to overcome.  Certainly, the economic data continues to point to a resilient economy which implies, to me at least, that the Fed will not feel any urgency to cut rates soon.  There has also been a great deal of discussion regarding the fact that the average time the Fed has held rates at a peak before cutting is just 7 months.  We are now three months into the most recent hold, and, by definition, since the next meeting is not until December, we will be at 5 months then.  My observation about Chairman Powell, though, is at this point he is unconcerned with statistics of that nature and is far more focused on achieving their objective of 2% inflation.  

One last thing about inflation before we touch on markets.  There has been a growing chorus that deflation is on its way because M2 money supply growth is currently declining.  However, for the economics majors out there, recall that the key monetary equation is M*V = P*Q.  P = prices, and Q = quantity of goods, or, combined economic output.  M = Money supply and V = Velocity of money.  It is the last piece that is often ignored but remains quite important.  My good friend @inflation_guy, has just published a piece which is well worth reading.  The essence is that while M2 may be declining, V is rising rapidly, offsetting that impact and creating conditions for much stickier inflation than many believe.  I have a feeling the Fed is going to stay on hold, if not tighten further, for a much longer time than currently anticipated.  While this week’s news has clearly been seen as bullish, the long-term trends have not yet changed in my view.

Ok, so a quick look at markets shows that after another gangbusters day in the US, where all three major indices were higher by 1.7% or more, Asian markets followed suit, with virtually every index there higher by at least 1.0%.  Europe, however, has been more circumspect with markets essentially unchanged this morning, just +/- 0.1% on the day.  US futures are ever so slightly softer at this hour (7:30) down about -0.15% on average, as investors and traders await this morning’s data.

At this point, bonds seem to be taking a rest after a huge price rally / yield decline over the past several sessions and we are seeing very little movement on the day with Treasuries and European sovereigns all within 1 basis point of yesterday’s closing.  Even JGB yields slid a bit yesterday but remain above 0.90% as of now.  As to the shape of the yield curve, that inversion is starting to show its head again, with the current 2yr-10yr spread back to -32bps.  Remember, two days ago that was at -18bps.  Broadly speaking, yield curve inversions are not signs of economic strength.

In the commodity space, oil is creeping back higher, up 0.4% this morning although still lower on the week.  Gold is basically unchanged this morning, continuing to hang out just below $2000/oz, which continues to surprise me given the sharp decline in yields, at least nominal yields.  As to the rest of the space, base metals are mixed amid small changes this morning and foodstuffs, something I have not mentioned in a while, have actually been declining with the FAO’s world food price index falling to its lowest level in more than 2 years last month.  It may not seem that way in the grocery store, but perhaps future price rises will be more muted.

Finally, the dollar is generally biding its time ahead of the data, although leaning lower overall.  In the G10, the average gain of a currency is about 0.2% while in the EMG bloc we have seen a few outliers, notably KRW (+1.2%) but a more general rise of 0.4% or so.  You already know that my view has changed given the seeming change in the underlying drivers.  For now, and likely through the end of the year at least, I think the dollar will be under pressure.

Aside from the data this morning, we get our first Fed speaker, Supervision Vice-Chair Michael Barr, this afternoon, but the topic is the Community Reinvestment Act, which makes it unlikely he will swerve into monetary policy.  So, as is often the case, the data will see a flurry of activity at 8:30 and then I suspect the recent trends will reassert themselves in a slower session overall.  We will need to see an extraordinarily strong NFP print to help reverse the dollar’s current malaise.

Good luck and good weekend

Adf