Tag Archives: #summerdoldrums

Starting to Wane

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The rebound is starting to wane
In England, in France and in Spain
But prices keep rising
With German’s realizing
They’ve not yet transcended their pain

First, some housekeeping, I will be on my mandatory two-week leave starting Monday, so there will be no poetry after today until September 7.

Meanwhile, this morning’s market activity is bereft of interesting goings-on, with very few stories of note as the summer holiday season is clearly in full swing.  Perhaps the three most notable events were UK Retail Sales, German PPI and new Chinese legislation.  Frankly, none of them paint a very positive picture regarding either the economy or markets going forward.

Starting at the top, UK Retail Sales (-2.4% in July) fell short of expectations, with the Y/Y reading back down to +1.8% from a revised +6.8% and the universal description of the situation as the reopening rebound is over.  The spread of the delta variant continues to add pressure as closures are dotted throughout the country, and sentiment seems to be turning lower.  It ought be no surprise that the pound (-0.15%) has fallen further, taking its month-to-date losses to 2.5%.  Too, the FTSE 100 (-0.2%) is under pressure, although it does remain in a broader uptrend, unlike the pound.  However, the first indication here is that risk is being sold off, which seems a pretty good description of the day.

Next, we turn to Germany’s PPI reading (10.4% Y/Y, 1.9% M/M) which is actually the largest annual rise since January 1975, where prices were impacted by the oil crisis!  While we have all been constantly reassured that inflation is a fleeting event and there is absolutely no indication that the ECB will see this number and consider tightening policy in any way, shape or form, I suspect that the good people of Germany may see things a bit differently.  The chatter from Germany is a growing concern over rapidly rising prices with a real chance of political fallout coming.  Remember, Germany goes to the polls next month in an effort to replace Chancellor Merkel, who has been running the country for the past 16 years.  Currently no candidate looks particularly strong, so a weak coalition seems a very possible outcome.  It is not clear that a weakened Germany will be a positive for the euro, which while unchanged on the day has been trending steadily lower for the past two months and yesterday broke below, what I believe is, a key support level at 1.1704.  Look for further declines here.

And finally, the Chinese passed a stricter personal data protection law prohibiting private companies from collecting and keeping data on their customers without explicit permission, a practice that had heretofore been commonplace. This appears to be yet another attack on the tech sector in China as President Xi ensures that the Chinese tech behemoths are disempowered.  After all, similarly to the US, the value of the big platforms comes from these companies’ abilities to compile and monetize the meta-data they collect by using it for targeted advertising.  Of course, the law says nothing about the Chinese government collecting that data and maintaining it, as that is part and parcel of the new normal in China.  One cannot be surprised that Chinese equity markets continue to decline on the back of these ongoing attacks against formerly unsullied companies, with the Hang Seng (-1.85%) now lower by 21% from its peak in February, and showing no signs of stopping as international funds flow out of the country.  Shanghai (-1.1%) also fell sharply, but given this index has more SOE’s and less tech, its decline from its February peak is only 9%.  As to the renminbi, it softened a bit further and is pushing slowly back above 6.50 at this time, its weakest level since April.

Otherwise, nada.  Equity markets are in the red everywhere, with the Nikkei (-1.0%) also slipping and we are seeing losses throughout Europe (DAX -0.4%, CAC -0.3%, FTSE 100 -0.2%) as well.  US futures, too, are pointing lower, with all three indices looking at 0.4% declines.  Of course, yesterday, things looked awful at this hour and both the NASDAQ and S&P 500 managed to close higher on the day, albeit only slightly.

Bonds are definitely in the ascendancy with yields continuing to slide.  Treasury yields are lower by 1.5 bps, Bunds and OATs by 0.5bps and Gilts by 2.0bps.  The question to be asked here, though, is, does this represent confidence that inflation is truly transitory?, or is this a commentary on future economic activity?, or perhaps, is this simply the recognition that central banks have distorted these markets so much they no longer give useful signals?  Whatever the underlying driver, the reality of bonds’ haven appeal remains and given the signals from the equity market, falling bond yields are not a big surprise.

Commodity prices remain under pressure generally, with oil (-0.8%) continuing its recent decline.  After a massive rally from last November through its peak in early July, crude has fallen 17% as of this morning.  In this case, while I understand the story regarding weakening economic growth, it seems to me the long term picture here remains quite positive as the Biden administration’s efforts to end oil production in the US, or at the very least starve it of future growth, means that supply is going to lag demand for years to come.  That implies higher prices are on the way.  As to the rest of the space, gold (+0.25%) continues to trade in its 1775-1805 range since mid-June with the exception of the two-day blip lower that was quickly erased.  Copper’s recent downtrend remains intact although it has bounce 0.3% this morning, and the rest of the industrial metals are either side of unchanged.

The dollar is broadly stronger this morning, with CAD (-0.7%) the weakest of the G10 currencies, clearly suffering from oil’s decline but also, seemingly, from self-inflicted wounds regarding its draconian Covid policies.  The Loonie has now fallen 4.25% this month with half of that coming in just the last two sessions.  But we are seeing continued weakness throughout the commodity bloc here with NOK (-0.45%) and AUD and NZD (both -0.3%) continuing their recent declines.  On the plus side, only CHF (+0.2%) has shown any strength of note.

Emerging market currencies are also under pressure this morning led by ZAR (-0.6%) and MXN (-0.4%) as softer commodity prices weigh heavily here.  We also continue to see weakness in some APAC currencies, with IDR (-0.35%) and KRW (-0.3%) suffering from concerns over the ongoing spread of the delta variant and the corresponding investor funds outflow from those nations.  On the flipside, PHP (+0.35%) was the only gainer of note in the region after the government loosened some Covid restrictions.

There is no economic data today and only one Fed speaker, Dallas Fed President Kaplan.  Of course, Kaplan has been the most vocal calling for tapering, so we already know his view, and after the Minutes from Wednesday, it seems he has persuaded many of his colleagues.  But once again I ask, if the economy is slowing, which I believe to be the case, will the Fed really start to remove accommodation?  I don’t believe that will be the case.  However, for now, the market is likely to bide its time until next week’s Jackson Hole speech by Powell.  Beware summer choppiness due to lack of liquidity and look for the current dollar uptrend to continue while I’m away.

Good luck, good weekend and stay safe
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Nothing Will Thwart

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Inflation continues to be
The problem the Fed will not see
The latest report
Shows nothing will thwart
Their views that it’s transitory

Perspective is a funny thing; it has the ability to allow different people to see the same events in very different ways.  For example, yesterday’s CPI report, which printed at 5.4% headline and 4.3% ex food & energy, was fodder for both those with an inflationary bias and those who are in the transitory camp.  As predicted here yesterday morning, any number that was not higher than the June report would be touted as proof inflation is transitory.  And so it has been.  The highlighted facts are the month on month reading was ‘only’ 0.5%, much lower than the previous three months’ readings of 0.9%.  Of course, that is true, but it ignores the fact that a monthly rate of 0.5% annualizes to 6.16%, still dramatically higher than the target.  As well, there was much ink spilled on the fact that used car prices, which had admittedly been rising remarkably quickly due to the unusual circumstances of the semiconductor shortage impeding new car production, fell back to a more normal pace of growth.  The problem with that story is despite one of the ostensible key reasons inflation had been misleadingly higher, used car prices, ceasing to be an issue, inflation still printed at 5.4%!  Clearly there are other things at work here.

Another aspect of perspective comes in the form of the averaging concept, which is the Fed’s latest ruse in rationalizing higher inflation.  For instance, those in the transitory camp, which seems to include the entire FOMC, but also much of the punditry, remain hostile to the idea of inflation settling in at a rate of 1.8%, slightly below the Fed’s target, but are entirely sanguine about that same statistic running at 2.8% for a while to help make up for lost time.  It is this distorted lens that seems to drive the description of inflation as ‘too-low’.  From up here in the cheap seats, inflation cannot be too low.  The idea that we are all better off with prices rising is wrong on its face.

And the idea that wage increases drive inflation also needs to be reconsidered.  After all, if that were the case, we would all be rooting for inflation as that means our wages would be rising quickly.  However, as we know simply by living our lives, and as has been demonstrated by the data, wage increases are broadly lagging inflation.  In fact, yesterday, as part of the Bureau of Labor Statistics data dump, Real Average Hourly and Weekly Earnings showed Y/Y declines of -1.2% and -0.7% in July.  It is no secret that inflation destroys the real value of your earnings, and yet the Fed continues to target a higher level of inflation than had been seen during the past decade and remains comfortable that the current sharply higher numbers are inconsequential in the long run.

However, in the end, whether we agree or disagree with the Fed’s current policy stance and its impacts, the reality is we are not going to have any say in the matter.  All we can do is strive to understand their reaction functions and manage our risks accordingly.  Ultimately, I continue to see the biggest risk as a significantly higher rate of inflation in the US, which will eventually drive nominal yields somewhat higher and real yields still lower than current levels.  That cannot be good for the dollar but will likely help the prices of ‘stuff’.  In the end, be long anything on the periodic table, as that will maintain its value.

The summer doldrums continue as market movement remains fairly limited across equities, bonds, commodities and currencies.  This is not to say there aren’t individual things that move or are trending, just that the broader picture is one of a decided lack of activity.

Last night, for instance, Asian equity markets (Nikkei -0.2%, Hang Seng -0.5%, Shanghai -0.2%) were all lower, but only just.  European markets are more mixed, with both gainers (DAX +0.4%, CAC +0.2%) and losers (FTSE 100 -0.1%) but as can be seen, the movements are not terribly exciting.  This morning saw the release of a plethora of UK data led by Q/Q GDP (+4.8%) and then many of its details showing Consumption by both the government and the population at large grew dramatically, while businesses slowed down somewhat, with IP and Construction both lagging estimates.  I guess investors were generally unimpressed as both the stock market and the pound (-0.1%) have edged somewhat lower after the reports.  Finally, US futures are either side of unchanged again, with the NASDAQ continuing to lag in the wake of the recent rise in US 10-year yields.

Speaking of yields, after the very sharp rise seen in the previous five sessions, yesterday’s Treasury price action was far less exciting and this morning we see the 10-year yield higher by just 1.0 basis point after a decline of similar magnitude Wednesday.  European sovereigns show Bunds (+0.8bps) and OATs (+0.7bps) modestly softer while Gilts (+2.5bps) seem to believe that the UK data was actually better than other market impressions.

Commodity prices are mixed this morning as oil (-0.2%) has given up early gains, along with gold (-0.1%) and the agricultural space.  Copper, however, is bucking the trend and higher by 0.8%.

Lastly, the dollar can only be characterized as mixed this morning, with some weakness in AUD and NZD (-0.25% each) and some strength in NOK (+0.2%) and otherwise a lot of nothing in between.  It is hard to make a case that there is much market moving news in any of these currencies as the UK was the only country with significant new information.

Emerging market currencies are also split, with KRW (-0.4%) continuing to lag the rest of the space as concern grows over the semiconductor manufacturing sector leading to continued equity market outflows and currency sales.  I would imagine that the recent rantings by Kim Jong-Un’s little sister about increased nuclear activity cannot be helping the situation there, but it is not getting headline press in financial discussions.  Otherwise, PLN (-0.3%) is the next weakest currency in the bloc today which seems to be a reaction to some legislation passed that would ostensibly restrict media and speech in the country.  On the plus side, TRY (+1.0%) is today’s champion as traders and investors respond to the central bank’s moderately more hawkish than expected statement after leaving interest rates unchanged (at 19.0%!) as widely expected.  Otherwise, there is nothing noteworthy in the space.

Data today brings the weekly Initial Claims (exp 375K) and Continuing Claims (2.9M) data as well as PPI (7.2%, 5.6% ex food & energy).  However, with CPI already having been released, this data seems relatively insignificant.  There are no scheduled Fed speakers as most FOMC members seem to be going on vacation ahead of the Jackson Hole conference in two weeks’ time.

For now, the dollar seems to be tracking yields pretty well, so if we see movement in the bond market, look for the dollar to follow.  Otherwise, we are likely to remain rangebound for the time being.

Good luck and stay safe
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They’ll See the Light

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In China, a new rule applies
Which helped stocks close on session highs
The news was released
Insurers increased
The size of their equity buys

Meanwhile, Brussels has been the sight
Of quite a large policy fight
Four nations refuse
Their cash to misuse
But in the end, they’ll see the light

Once upon a time, government announcements were focused on things like international relations, broad economic policies and the occasional self-kudos to try to burnish their reputation with the electorate, or at least with the population.  But that ideal has essentially disappeared from today’s world.  Instead, as a result of the ongoing financialization of economies worldwide, there are only two types of government announcements these days; those designed to explain why the current government is the best possible choice, and those designed to prop up the nation’s stock market.  Policy comments are too hard for most people to understand, or at least to understand their potential ramifications, so they are no longer seen as useful.  But, do you know what is seen as useful?  Explaining that institutions should buy more stocks because a higher stock market is good for everyone!

Once again, China leads the way in this vein, with Friday night’s announcement that henceforth, Insurers should can allocate as much as 45% of their assets to equities, up from the previous cap of 30%.  Some quick math shows that this new regulation has just released an additional $325 billion of new buying power into the Chinese stock market, or roughly 4% of the total market capitalization in the country.  It cannot be a surprise that the Shanghai Exchange rallied 3.1% last night, which was, of course, exactly the idea behind the announcement.  In fact, lately, the Chinese have been really working to manipulate the stock market there, apparently seeking a steady move higher, probably something like 1% a day, but have been having trouble reining in the exuberance of the large speculative community there.  So, all of their little nudges higher result in 3%-5% gains, which they feel could be getting out of hand, and so they need to squash them occasionally.  But for now, they are back on the rally bandwagon, so look for some steady support this week.

Interestingly, however, this was clearly not seen as a global risk-on signal as equity activity elsewhere has been far more muted.  The rest of Asia was basically flat (Nikkei +0.1%, Hang Seng -0.1%) and Europe has seen a mixed session as well, with small gains by the DAX (+0.3%) and losses by the CAC (-0.3%).  In other words, investors realize this is simply Chinese activity.  PS, US futures are basically unchanged on the day as well.

At the same time, there is a critical story building out of Europe, the outcome of the EU Summit. This began with high hopes on Friday as most people expected the Frugal Four to quickly cave into the pressure to give more money away to the PIGS.  However, after three full days of talks, there is still no agreement.  Remember, their concern is that the EU plan to give away €500 billion in grants to countries most in need (read Italy, Spain and Greece), is simply delaying the inevitable as they will almost certainly waste these funds, just like they have each wasted funds for decades.  And the frugal four nations were not interested in throwing their money away.  But in the end, it was always clear that with support from Germany and France, a deal would get done in some form.  The latest is that “only” €390 billion will be given as grants, so a 22% reduction, but still a lot of free cash.

While no one has yet signed on the dotted line, you can be sure that by the end of the day, they will have announced a successful conclusion to the process.  The funny thing is that regardless of the outcome of the Summit, it seems to me that the entire package, listed at €750 billion, is actually pretty small.  After all, the CARES act here had a price tag of $3.2 trillion, four times as large, and the EU economy is going to suffer just as much as the US.  But that is not the way the market is looking at things.  Rather, they have collectively decided that this package is a huge euro positive and have been pushing the single currency higher steadily for pretty much the entire month of July (+2.5%), with it now sitting just pips below the spike high seen in March, and back to levels last seen, really, in January 2019.  How much further can it rise?  Personally, I am skeptical that it has that much more room to run, but I know the technicians are really getting excited about a big breakout here.

As to the rest of the FX market, activity has been fairly muted with the dollar slightly softer against most G10 and EMG counterparts.  On the G10 side, NOK and SEK lead the way higher, both up by 0.45%, as in a broad move, these higher beta currencies tend to have the best performance.  JPY is a touch softer on the day, and a number of currencies, CAD, NZD, CHF, are all within just basis points of Friday’s close.

We are seeing similar price action in the emerging markets, with one notable loser, IDR (-0.5%) as traders there continue to price in further policy ease by the central bank after last week’s 25bp rate cut. On the plus side, the CE4 are leading the way higher, with gains between 0.3% and 0.6%, simply tracking the euro with a bit more beta.  But really, there is not too much of note to discuss here.

On the data front, it is an extremely quiet week upcoming as follows:

Wednesday Existing Home Sales 4.80M
Thursday Initial Claims 1.293M
  Continuing Claims 16.9M
  Leading Indicators 2.1%
Friday PMI Manufacturing 52.0
  PMI Services 51.0
  New Home Sales 700K

Source: Bloomberg

In addition, there are no Fed speakers on the docket as it seems everybody has gone on holiday.  So, once again, Initial Claims seems to be the key data point this week, helping us to determine if things are actually getting better, or we have seen a temporary peak in activity.  With the ongoing spread of what appears to be a second wave of Covid, there is every chance that we start to see the rebound in data seen for the past two months start to fade.  If that is the case, it strikes me that we will see a bit more risk-off activity and the dollar benefit.  But that is a future situation.  Today, the dollar remains under modest pressure as traders respond to the perceived benefits of striking a deal at the EU.

Good luck and stay safe

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