Tag Archives: #summerdoldrums

The World is Aghast

Posted on by

At one time, not long in the past
New York was a finance dynast
But yesterday’s vote
Does naught to promote
Its future. The world is aghast
 
As well, yesterday, Chairman Jay
Had nothing of note new to say
He’s watching quite keenly
And somewhat serenely
But rate cuts are not on the way

 

I must start this morning on the results from the NYC mayoral primary election where Zohran Kwame Mamdani won the Democratic primary and is now favored to win the general election.  His main rival was former NY state governor, Andrew Cuomo, a flawed man in his own right, but one with the usual political peccadillos (greed, grift and sexual misconduct).  Mamdani, however, is a confirmed socialist whose platform includes rent freezes, city owned grocery stores (to keep costs down) a $30/hour minimum wage (not sure how that will keep grocery prices down) and a much higher tax rate, especially on millionaires.  In addition, he wants to defund the police.  Apparently, his support was from the younger generations which is a testament to the failures of the education system in the US, or at least in NYC.

I mention this because if he does, in fact, become the mayor of NYC, and can enact much of his agenda, the financial markets are going to be interrupted in a far more dire manner than even Covid or 9/11 impacted things.  I expect that we will see a larger and swifter exodus from NYC of both successful people and companies as they seek other places that are friendlier to their needs.

Now, even though he is running as a Democrat, it is not a guarantee that he will win.  Current mayor, Eric Adams is running as an independent, and while many in the city dislike him, he may seem to be a much better choice for those somewhere in the middle of the spectrum.  As well, even if he wins, his ability to enact his agenda is not clear given his inexperience and lack of connections within the city’s power centers. Nonetheless, it is a real risk and one that needs to be monitored closely.  

As to Chairman Powell, as well as the other six FOMC members who spoke yesterday, the generic view is that while policy may currently be slightly tight, claimed to be 25bps to 50bps above neutral across all of them, they are in no hurry to adjust things until they have more clarity regarding the impact of tariffs on inflation and the economy.  They paid lip service to the employment situation, explaining that if things took a turn for the worse there, it would change the calculus, but right now, they’re pretty happy.  It can be no surprise that there were zero deep questions from the Senate committee members, and I expect the same situation this morning when he sits down in front of the House.  

Since the cease fire between Iran and Israel seems to be holding, market participants are now searching for the next catalyst for market movement.  In the meantime, let’s look at how things are behaving.  The “peace’ in the Middle East saw the bulls return with a vengeance yesterday in the US, with solid gains across all major indices, but the follow through was less robust.  While Chinese shares (Hang Seng +1.2%, CSI 300 +1.4%) both fared well, the Nikkei (+0.4%) was less excited and the rest of the region was more in line with Japan than China, mostly modest gains.  From Japan, we heard from BOJ member Naoki Tamura, considered the most hawkish, that raising interest rates was necessary…but not right away.  That message was not very well received.

However, Europe this morning is on the wrong side of the ledger with Spain’s IBEX (-1.25%) leading the way lower although other major bourses are not quite as poorly off with the DAX (-0.4%) and CAC (-0.2%) just drifting down.  NATO is meeting in The Hague, and it appears that they are finalizing a program to spend 5% of respective national GDP’s on defense, a complete turnaround from previous views.  This is, of course, one reason that European bond markets have been under pressure, but I expect it would help at least portions of the equity markets there given more government spending typically ends up in that bucket eventually.  As to US futures, at this hour (7:10) they are little changed to slightly higher.

In the bond market, US Treasury yields continue to slide, down another -1bp this morning and now under 4.30%.  Despite President Trump’s hectoring of Chairman Powell to lower Fed funds, perhaps the fact that Powell has remained firm has encouraged bond investors that he really is fighting inflation.  It’s a theory anyway, although one I’m not sure I believe.  European sovereigns have seen yields edge higher this morning, between 1bp and 2bps as the spending promises continue to weigh on sentiment.  However, even keeping that in mind, after the spike in yields seen in early March when the German’s threw away their debt brake, European yields have essentially gone nowhere.

Source: tradingeconomics.com

While this is the bund chart, all the major European bond markets have tracked one another closely.  Inflation in Europe has fallen more rapidly than in the US and the ECB’s base rate is sitting 200bps below Fed funds, so I suppose this is to be expected.  However, if Europe actually goes through with this massive military spend (Spain has already opted out) I expect yields on the continent to rise.  €1 trillion is a quite significant ask and will have an impact.

Moving to commodity markets, after its dramatic decline yesterday, oil (+0.8%) is bouncing somewhat, but that is only to be expected on a trading basis.  Again, absent the closure of the Strait of Hormuz, I suspect that the supply/demand dynamics are pointing to lower prices going forward, at least from these levels.  In the metals markets, gold (+0.15%) which sold off yesterday as fear abated, is finding its footing while silver (-0.5%) is slipping and copper is unchanged.  It feels like metals markets are looking for more macroeconomic data to help decide if demand is going to grow in the near term or not.  A quick look at the Atlanta Fed’s GDPNow estimates for Q2 show that growth remains quite solid.

Source: atlantafed.org

However, another indicator, the Citi Economic Surprise Index, looks far less promising as it has moved back into negative territory and has been trending lower for the past 9 months.

Source: cbonds.com

At this point, my take is a great deal depends on the outcome of the BBB in Congress and if it can get agreed between the House and Senate and onto President Trump’s desk in a timely manner.  If that does happen, I think we are likely to see sentiment increase, at least in the short term.  That should help all economically sensitive items like commodities.

Finally, the dollar is modestly firmer this morning, rebounding from yesterday’s declines although still trending lower.  The price action this morning is broad based with modest moves everywhere.  The biggest adjustment is in JPY (-0.6%) but otherwise, 0.2% pretty much caps the movement.  Right now, the dollar is not that interesting, although I continue to read a lot about how it is losing its luster as the global reserve currency.  There is an article this morning in Bloomberg explaining how China is trying to take advantage of the current situation to globalize the yuan, but until they open their capital markets, and not just for $50K equivalents, but in toto, it will never be the case.

On the data front, aside from Chair Powell’s House testimony, we see New Home Sales (exp 690K) and then EIA oil inventories with a modest draw expected there.  There are no other Fed speakers and certainly Powell is not going to change his tune.  To my eyes, it is setting up as a very quiet session overall.

Good luck

Adf

Waiting for Jay

Posted on by

While everyone’s waiting for Jay
And hope he’s got good things to say
No stories of note
Have lately been wrote
And bulls keep on getting their way
 
The only place that’s not been true
Is China, where, policies, new
Allow new home prices
To make sacrifices
And slide hoping sales follow through

 

Although there has been a dearth of new information to drive activity, at least with respect to hard data, equity markets are mostly trading higher as the rebound from the early August correction continues.  In the US this week, the big news won’t be out until Friday, when Chairman Powell speaks at the Jackson Hole symposium.  Elsewhere, while we do see things like both Japanese and Canadian inflation as well as the flash PMI data, so much importance has been attributed to the Powell speech, it is hard for traders to get excited about very much.  For instance, early this morning the Swedish Riksbank cut their policy rate by 25bps, as expected, and indicated that there could be another 3 cuts during 2024, but nobody really cared.  In fact, the Swedish stock market is lower on the day, simply proving that rate cuts are not a stock market panacea.

However, not every nation is using the same playbook right now, and while Japan may be the biggest outlier, attempting to tighten monetary policy, albeit not as successfully as they had hoped, China is taking a different approach to fiscal and economic policy.  As I have mentioned before and has been widely reported for the past several years, the property market in China has been under severe stress.  What has become a bit clearer in that time is that much of the Chinese growth miracle was the result of massive overinvestment in housing.  The stories about ghost cities, that were built but where nobody lived, which had made the rounds for a while turned out to be true. 

In essence, a key driver of the Chinese economy was the property market.  Cities and states would sell land to property developers, using the funds to help themselves develop infrastructure.  Meanwhile, property developers had a ready market for their homes (mostly condos in high rises) as the Chinese people felt more comfortable with property as a savings vehicle than banks or the stock market.  Looking at the performance of the Shanghai Composite below, it is no wonder that people gravitated toward property.  After a peak in the summer of 2015, the PBOC devalued the renminbi 2%, stocks fell nearly 50% in the ensuing six months, and have remained at that lower level ever since.

A graph with numbers and lines Description automatically generated

Source: tradingeconomics.com

But for the past four years, since China Evergrande, a major property developer, started to crumble, the desire of the Chinese people to own property has greatly diminished.  This has had a major impact on Chinese local government finances as the demand for property they were selling to fund themselves collapsed.  At this point, there is a glut of unfinished homes around as developers ran out of funding, so the country is in a bad spot.  Not surprisingly, one of the problems is regulatory, as Chinese city and state governments have had restrictions on new home prices, trying to prevent them from declining thus keeping the cycle of new homes funding the cities ongoing.  But recently, some major cities and states have relaxed those restrictions and suddenly, new home prices have fallen to make them competitive with resales.  Remarkably, sales volumes are picking up.  Who would have thunk?  

It is ironic that Communist China is defaulting to market pricing activity to help markets clear while in the ostensibly capitalist US, we have a major party seeking to intervene in housing markets to achieve a social goal of home ownership, regardless of the fact it will push prices higher.  At any rate, the upshot is that property prices in China continue to decline which is weighing on the share prices of those developers that have not already gone bust.  And that is dragging down the entire Chinese stock market and adding to that underperformance we see above.

But you can tell it is a slow day if that is the most interesting story I can discuss!  So, without further ado, let’s take a look at the overnight activity as we await the NY open.  While the CSI 300 (-0.7%) and Hang Seng (-0.3%) were both in the red, the rest of Asia followed the US higher with Japan (+1.8%) and Korea (+0.8%) leading the way higher.  As to European bourses, it is much less exciting as continental exchanges are all +/- 0.1% from yesterday’s close although the FTSE 100 (-0.6%) is under a bit of pressure with the energy sector weighing on the index amid the decline in oil prices.  As to US futures, they are essentially unchanged at this hour (7:20).

In the bond market, the doldrums also describe the price action with Treasury yields unchanged on the day and the same virtually true across all of Europe and Asia.  This is a situation where it is very clear that both traders and investors are waiting anxiously for Godot Powell.

While oil prices have stopped their slide this morning, they have fallen -6.0% in the past week as the slowing growth/recession story is on the minds of traders everywhere.  Concerns over supply on the back of either Ukraine/Russia or Israel/Iran are clearly no longer part of the discussion.  It feels to me like that is somewhat short-sighted, but I am not an oil trader.  In the metals markets, the barbarous relic (+0.85%) continues to pull all metals higher as it is trading at yet another new all-time high this morning ($2525/0z) and dragging silver (+1.3%) and copper (+0.2%) along for the ride.  While the silver movement makes some sense given it has precious characteristics, copper is wholly an industrial metal, so it is giving opposite signals to the oil market.  They both cannot be right.

Finally, the dollar remains under pressure, with the euro (-0.1% today, +0.75% this week) pushing toward its end 2023 highs.  Remember, back then, markets were pricing 6-7 Fed rate cuts this year, something which is clearly not going to happen.  As well, we are seeing the strength in CHF (+0.3%), SEK (+0.3% despite the rate cut and threats of more) and JPY (+0.2%). Interestingly, in the EMG space, ZAR (-0.6%) and MXN (-0.6%) are both under pressure this morning despite the rally in metals markets.  As well, I guess given the general malaise in China, it can be no surprise that the renminbi (-0.2%) has fallen.  Perhaps a more interesting thing to consider is the fact that the renminbi fixing has been right around current market levels, an indication that pressure on the PBOC to devalue has faded, and a sign that the dollar is losing some fans.  In fact, I suspect that this is a key feature of the dollar’s recent softness, and if the Fed does get aggressive, do not be surprised if the market pushes USDCNY to the other side of the +/- 2% trading band around the fix.

On the data front, there is no US data today at all, with the most interesting thing to be released being the Canadian inflation report (exp 2.5%).  We do hear from two Fed speakers this afternoon, Atlanta Fed president Raphael Bostic and Governor Michael Barr, but with Powell on the horizon, it would be hard for them to get much traction in my view.  As an aside, the Atlanta Fed’s GDPNow has fallen to 2.0% as of last Friday, down nearly 1% last week.  This, of course, is another brick in the recession story.

Net, today seems like it will be a quiet one, with markets biding their time until Friday.  Of course, given that these days, biding their time means equities will keep rallying and the dollar keep sliding, I think that seems like the best bet for now.

Good luck

Adf

A Future, Austere

Posted on by

So, what if the payroll report
Was wrong, and job numbers fall short
When they are revised
And so, they disguised
The ‘conomy’s on life support
 
Will this mean recession is here
And Jay will get rate cuts in gear?
But if that’s the case
Are stocks the right place
To hide with a future, austere?

 

After last week’s remarkable rally that has reversed so much of the negativity inspired by the BOJ/yen carry trade unwind/end of the world scenarios from just two weeks ago, this week is starting off in a fairly muted manner.  Add to this the fact that the data stream this week is limited, and you have all the makings of a quiet, summer doldrums-like, period.  Except…Thursday begins the KC Fed’s Jackson Hole symposium and Friday morning at 10:00am EDT, Chairman Powell will be speaking.  This speech often has great significance as historically, Fed chairs will give strong clues about policy changes coming at this exact opportunity.  This is not to say Powell is going to give us a schedule of his planned rate cuts, but more that he has the chance to explain his (and by extension the Fed’s) reaction function to future data releases.

It is this topic that is critical for us to monitor as lately there have been several articles regarding the nature of the annual benchmark revisions to the payroll reports that will be coming early next year.  The punch line is that expectations are growing that much of the NFP growth seen thus far in 2024, currently totaling ~1.4 million new jobs, may be erased, with estimates of downward revisions rising to 1 million or more.  For instance, in California, the Legislative Analyst’s Office, which is a non-partisan (assuming such a thing exists) group under the auspices of the California state legislature, has revised down their job growth estimates for all of 2023 to just 9K from well in excess of 100K in the initial reporting.  Given California’s status as the largest state in the union and its general importance to the economy, this is quite concerning.  

The BLS revisions will not be released until March 2025, but there have been numerous concerns registered by economists and analysts of all stripes indicating that the BLS model, specifically the birth-death portion regarding new businesses, is wildly out of sync with the reality on the ground.  One of the things that has allowed the Fed to maintain their higher for longer stance is their belief, based on the BLS data, that the employment situation is still quite solid in the US.  Of course, the recent rise in the Unemployment Rate is beginning to raise some eyebrows, but those who believe there is no recession will point to the increase in job seekers in the latest report, essentially raising the numerator rather than reducing the denominator in that data point. And maybe that is true.  However, the vibe that appears to be growing around the country is that the job situation is not as robust as the numbers might indicate.

The implications of this are that it is entirely possible that the minority of analysts who claim we are already in a recession will turn out to have been correct, and the NBER will backdate the beginning of the recession to early this year.  As to the Fed, they will find themselves in a much different place and be forced to cut rates far more aggressively than what seems to be the current belief in the Eccles building.

Right now, the Fed funds futures market is pricing in a bit more than 200 basis points of cuts by September 2025.  While that seems like a lot, if the economy is actually in recession already, that is likely understating the case.  When it comes to the tradeoff between inflation and recession, while Powell was able to talk tough regarding recession when it didn’t seem to be coming, methinks he will have a different tone if these job numbers are revised as dramatically as some are contending.  And let’s face it, if the California government is explaining that is the case, along with some research by the Philly Fed, which is also indicating less job growth than initially reported, this could well be the 2025 story of note.

To summarize, questions regarding actual job growth vs. reported job growth are starting to be asked.  If the answers lean toward the negative end of the spectrum, the likelihood of more aggressive Fed easing rises. However, the specter of inflation looms large in the background as despite its seeming recent quiescence, it is not nearly back at the Fed’s target level.  Can the Fed cut aggressively if inflation remains above target?  Of course they can, and if the economic situation deteriorates rapidly, they almost certainly will.  But that will not solve the inflation problem.  If, and it is a big if, this is the case going forward, my longstanding contention of a significant decline in the dollar versus commodities will likely play out.  As well, I would not want to own duration in the bond market, and while stocks might start out ok, recession does not pad profit margins, it impairs them, so stocks will have trouble as well.

In the meantime, let’s look at what happened overnight.  Friday’s continuation rally in the US saw some follow through in Asia, but it was truly a mixed picture there.  Japan’s Nikkei 225 (-1.8%) fell sharply as the yen rallied more than 1%.  Remember, about 40% of the Nikkei’s profits come from international sales and activity, and as the yen strengthens, it impairs those earnings in local terms.  Elsewhere, China (+0.3%) and Hong Kong (+0.8%) fared well, but Korea (-0.85%) suffered.  The other markets showed marginal gains.  In Europe, though, Spain (+1.0%) is leading the way higher although the rest of the continent is seeing much more limited gains, on the order of +0.25%, as a lack of new data or commentary seems to be allowing for a follow-on from the US session Friday.  UK shares are unchanged and so are US futures as traders await the big Powell speech on Friday.

In the bond market, Treasury yields are lower by 1bp, and we are seeing slightly larger yield declines in Europe, with sovereign yields down by between -2bps and-4bps.  Again, a lack of data and commentary means this is trading inspired, and not based on new information.  JGB yields rose 1bp, perhaps in sync with the yen’s rise overnight.

In the commodity markets, oil (-0.9%) continues to suffer as the slow growth, slowing demand story is the driver with absolutely no concern over the potential for an increase in supply tensions based on the ongoing wars in Ukraine and Israel/Gaza.  Meanwhile, gold (-0.8%) which closed above $2500/oz on Friday for the first time ever, is consolidating a bit and dragging silver (-0.5%) with it.  Interestingly, copper (+0.5%) is holding its own despite the slowing growth story.  That seems to be much more of a technical trading story than a fundamental one, although the long-term fundamentals remain quite bullish in my view.

Finally, the dollar is under further pressure this morning, falling against all its G10 counterparts and many of its EMG counterparts as well.  it should be no surprise that CNY (+0.3%) is stronger alongside the yen, but we also saw KRW (+0.85%) really benefit and almost every EMG currency, save MXN (-0.3%), which is today’s ultimate laggard.  If the story is turning to more aggressive US rate cuts, the dollar will continue its decline.

On the data front this week, there is not much other than the Jackson Hole symposium, but here it is for you:

TodayLeading Indicators-0.3%
WednesdayFOMC Minutes 
ThursdayInitial Claims230K
 Continuing Claims1881K
 Flash Manufacturing PMI49.5
 Flash Services PMI54.0
 Existing Home Sales3.92M
FridayNew Home Sales630K

Source: tradingeconomics.com

So, as you can see, other than Powell on Friday, and three other Fed speakers (Waller, Bostic and Barr), earlier in the week, there is not much to see.  My take is the rate cut narrative is building momentum and that we are going to see further pressure on the dollar until either the data indicates no cuts are coming, or we have a more significant risk-off event where people run to dollars to hide.

Good luck

Adf

A Bummer

Posted on by

The narrative writers have turned
Their focus, as markets they’ve spurned
It’s politics now
That they all endow
With ideas we need be concerned
 
And so, if the pricing is right
Come next week, the Fed will sit tight
The rest of the summer
Could well be a bummer
For traders, with volumes quite light

 

It is not uncommon for the summer months to lack interesting new information for market participants.  While the regular monthly cycle of data continues to be released, the fact remains that there seems to be less interest overall.  This is not to say there have never been summer surprises, but the very fact we call them surprises is indicative of their relative scarcity.  

This year, especially, seems likely to have even fewer financial or economic discussions than usual given the ongoing drama in the US political cycle.  And while this poet has opinions as to how things may work out (and of course what I would like to see) that is not what this morning missive is all about.  Rather, I continue to try to find the stories that drive market activity and alert you to what is happening.  But the ongoing political narrative is now so dominant, everything else pales in comparison.  And as I wrote yesterday, while political narratives can have some market impact, it is not typically that significant.

I mention this because there were exactly zero stories of any market consequence overnight.  Much was written about the US elections and there were some ‘thought’ pieces on issues like the long-term impacts of President Xi’s iron grip on China and what that means for the economy there, but there was no data to excite, there were no comments of note and basically, it was all quite dull.  For instance, I’ll bet you were unaware that the G20 is meeting in Rio de Janeiro because it is almost impossible to find a story on the meeting.  I suspect that Thursday’s GDP and Friday’s PCE data are going to be the most exciting things that occur this week.  

Unless, of course, there is a real summer surprise.  It is earnings season with the Mega-cap tech companies set to report this week and next, but those are generally not market wide movers.  So, with that in mind, let’s take a look at the overnight market activity and call it a day.

After US equity markets showed their resilience yesterday, laughing off the concept of a rotation out of tech or the beginning of a serious correction, Asian markets mostly followed that same line of thinking if you ignore Japan (flat) and China (CSI 300 -2.1%, Hang Seng -1.0%) as the rest of the region was in the green, with some markets really enjoying a boost, notably Taiwan (+2.75%).  The Chinese story seems to be ongoing disappointment that the Third Plenum did nothing to indicate support for the economy and the 10bp rate cuts were seen as insufficient.  As to Japan, the tension between the rebound in tech shares and the strengthening in the yen led to no net movement.  In Europe, though, bourses are all following the US lead and rising nicely, led by the DAX (+1.2%) as hints by some ECB members indicate that a cut is coming in September despite Madame Lagarde’s insistence that no decisions have been made.  As to the US futures markets, at this hour (7:15) they are little changed overall.

Bond markets have seen yields decline this morning with Treasuries (-2bps) the laggard compared to Bunds (-4bps) and OATs (-3bps).  Of course, this follows yesterday’s session where yields edged higher by a few basis points and basically shows that investors are unwilling to take any directional views until we at least see the PCE data, if not until the FOMC next Wednesday.  Since the beginning of the month, Treasury yields have been choppy in a range of 4.15% – 4.30% and are currently sitting right in the middle.  There continue to be two longer term views, with the recessionistas calling for a sharp decline in yields as it becomes clear the US economy is slowing and the Fed will cut rates to stimulate, while the fiscal policy bears keep pointing to the massive deficits and issuance that accompanies those deficits, and explains that at some point, demand will not meet supply and yields will rise sharply.  My own view is that both of these outcomes will obtain, with the first recession signals helping to send yields lower before longer-term troubles emerge for the US fiscal picture.  But right now, it’s hard to get excited in either direction.

In the commodity space, oil (-0.3%) remains under pressure although today’s decline is far less severe than we’ve seen in the past several sessions.  Rumors of OPEC increasing production in Q4 seem to be one driver as well as forecasts for inventory builds in the US this week.  Gold (+0.6%) continues to find buyers and remains above $2400/oz as Asian demand, from both central banks and individuals remains a key driver.  Copper (-1.0%) on the other hand continues to suffer, down more than -6.0% this month, as the slowdown in China’s economy weighs on demand for the red metal.

Finally, the dollar, which has been written off more times than I can count, is firmer again, back above 104.00 on the DXY.  For all the discussion about how the dollar is set to decline, a quick look at the DXY over the past year tells me that there is no discernible downtrend at all (nor is there an uptrend).  

Source: tradingeconomics.com

There has been an uptick in the long-term ‘dollar will die’ narrative, but certainly that has not had any impact on the ordinary activity that we watch regularly.  As to today’s activity, NOK (-0.5%) is leading the G10 lower although we are seeing declines averaging -0.25% elsewhere with one exception, JPY (+0.5%) which is bucking the trend.  From a currency perspective, one might think it is a risk off day, with investors flocking to havens, but given equity market strength, that is clearly not the case.  As to the EMG bloc, ZAR (-0.9%) continues to demonstrate impressive volatility overall, suffering on weakness in commodity markets and the CE4 are also soft, tracking the euro’s decline.

On the data front, we see Existing Home Sales (exp 3.99M) at 10:00 this morning and that is all she wrote.  It is difficult to get excited about today’s market and I suspect that absent some terrible earnings data that causes a real stock market decline, tomorrow when we wake up, things will be close to where they are now.

Good luck

Adf

Birds of a Feather

Posted on by

We all know that birds of a feather
Eventually will flock together
So, yesterday’s color
From Williams and Waller
Implied cuts are when and not whether

 

As I described yesterday morning, and have been observing since Chairman Powell’s Congressional testimony, all the members of the FOMC are on the same page.  Yesterday it was NY Fed president John Williams and Governor Chris Waller who explained that [Williams] “It is not really a story about a ‘last mile’ or some part that’s particularly sticky.”  [Different inflation measures are] “all moving in the right direction and doing that pretty consistently,” and [Waller] “The time to lower the policy rate is drawing closer.  Right now, the labor market is in a sweet spot.  We need to keep the labor market in this sweet spot.”

This is the same message Powell gave us in his testimony and on Monday.  It is what we have heard from Barkin, Kugler, Daly and Goolsbee so far this week and are likely to hear from Daly and Williams again today and Bowman and Bostic before they all go quiet ahead of the July 31st meeting.  While there are those who are calling for a cut at the July meeting (Goldman Sachs analysts explained their reasons and in this morning’s WSJ, pundit Greg Ip did the same), and, even though I think it is an interesting risk/reward opportunity, with less than a 5% probability currently priced into the market, I do not believe that the FOMC is going to cut even if next week’s PCE data is extremely soft.  

Consider, though, that between now and the September FOMC meeting, we will receive two more each of CPI, PCE and payroll reports as well as hear all the talk from the Jackson Hole Symposium.  If, and it’s a big if, the economy shows that it is slowing more rapidly than currently seems to be the case, I would not rule out a 50bp cut then, although that is clearly not my base case.

I think it says a great deal about the market’s narrative overall that the ECB is meeting as I write and will release their policy statement and actions, if any, shortly and it is not a top ten topic of conversation right now. There is no expectation of movement, and the market has lined up for a September cut there as well.  In other words, everything remains all about the Fed.

Well, the Fed and the US stock market.  Since its high print a week ago, the NASDAQ is down by 4% with some of its key constituents (NVDA -14.3%, MSFT -5.1%, GOOGL -5.6%) having fallen much further.  At the same time, the DJIA has rallied 3.7% as the new discussion is a rotation from growth to value stocks as the latter will ostensibly be better served by the Fed’s now-imminent rate cuts.  At least, that’s the story that has become the universal belief set.  It certainly sounds good and is logical so let’s go with it.  However, I guess the question we need to answer is, can it continue?  

Can it continue for another day or two?  Certainly, given positioning that exists and the fact this new idea has developed some momentum, it can go a bit further.  But is this the beginning of an entirely new trend?  Somehow, I do not see that being the case.  Remember, the Magnificent-7 story had evolved from an idea into a cult, not dissimilar to the Bitcoin story.  People believed and were rewarded for doing so.  Plus, they had the benefit of feeling like they were taking part in the cutting edge of technology and economic activity.  But buying the Dow Jones, the very definition of old-line manufacturing and traditional service companies, is not something that inspires that same fervor.  My take is this narrative will soon end.  The thing for which we must all watch out, though, is that investors have now seen that their golden stocks, specifically NVDA, can go down, and go down quickly.  The thing about momentum is that once it gets going in either direction, it can continue for quite a while.  Stay alert.

Ok, let’s see how all this has impacted markets elsewhere in the world.  In Asia, the Nikkei (-2.4%) continued its recent struggles even though the yen (-0.5%) has slipped a bit overnight.  But just like in the US, the momentum in the Nikkei seems to be pointing lower for now as it tracks the NASDAQ.  Meanwhile, Chinese stocks showed modest gains with the rest of the region showing wildly disparate outcomes, (Korea -0.7%, Taiwan -1.6%, India +0.8%, Indonesia +1.3%) so it is hard to take a consistent message from here.  However, European bourses are all in the green this morning as they resemble the DJIA far more than the NASDAQ.  Granted, the gains have been modest (CAC +0.5%, FTSE 100 +0.7%, DAX +0.2%) but that is better than the red they have been showing lately.  Lastly, US futures at this hour (7:15) are reverting to the DJIA under pressure while the NASDAQ futures are higher by 0.4%.

In the bond market, yields are edging higher, pretty much by 2bps across the board in both Treasuries and European sovereigns.  However, I would contend that price action here has been a mere consolidation over the past several sessions after a sharp decline in yields since the beginning of the month.  In truth, during the past 3 sessions, there has been no net movement.

Commodity markets are mostly little changed this morning as oil, which rallied yesterday on further inventory draws according to the EIA, is unchanged and gold and silver are also unchanged this morning.  The one outlier is copper (-1.8%) which is continuing its recent declines as it seems the market is calling into question the demand side of the story.  While supply is currently adequate, Chinese economic weakness has been a major drag on the perception of demand.  I suspect that will change over time, but right now, the chart looks awful.

Source: tradingeconomics.com

Finally, the dollar is rebounding a bit this morning with modest gains against most of its G10 counterparts, although other than the yen, those gains are on the order of 0.1% to 0.2%.  In the EMG bloc, it is basically the same story, very modest USD gains with no outliers of which to speak.  One broader picture comment is that there have been several analysts who have discussed the dollar selling off sharply recently and how that is a harbinger of the end of the dollar’s dominance as the world’s reserve currency.  To put things in context, using the DXY as our proxy (which is very imperfect), for the past year, the DXY has traded between 101 and 107 and this morning it is trading at 103.8.  This is neither the story of a major move in either direction, nor of a trend of any consequence.  In order for things to change, we will need to see the Fed change its policy at a much different pace than the rest of the world’s central banks, and that is not yet an obvious outcome.

On the data front this morning, we get the weekly Initial (exp 230K) and Continuing (1860K) Claims data as well as Philly Fed (2.9) and the Leading Indicators (-0.3%).  I think we already know what the Fed speakers are going to tell us, as per the opening monologue, so absent some new piece of news, today is shaping up to be a very dull one.  The summer doldrums are clearly here.

Good luck

Adf

Not Yet Diktat

Posted on by

The punditry’s now all atwitter
That joblessness is a transmitter
Of lower inflation
Thus, Powell’s flirtation
With turning into a rate slitter

But so far, the confidence that
Inflation is falling toward flat
Has not yet arrived
And could be short-lived
So, rate cuts are not yet diktat

As expected, Chairman Powell’s testimony to the Senate Banking Committee was THE story of the day yesterday.  However, it was not that interesting a story despite scads of digital ink spilled on the subject.  What was everybody so excited about?  Well, here are some key quotes and you can be the judge.  In his opening remarks, he explained, “Elevated inflation is not the only risk we face,” and “The latest data show that labor-market conditions have now cooled considerably from where they were two years ago—and I wouldn’t have said that until the last couple of readings.”  Scintillating, I know!

What does it mean?  The quick and dirty is that the Fed has become a bit more evenhanded in their views that the employment side of their mandate may soon force decisions that conflict with the inflation side of their mandate.  So, if the Unemployment Rate continues to rise going forward, even if inflation does not continue its recent downward trajectory, the Fed may decide employment is now more important and respond.

Doves everywhere are clamoring for the Fed to cut before it’s too late and the labor market collapses.  Meanwhile, hawks will explain that at 4.1%, while that is higher than the recent past, the Unemployment Rate remains quite well behaved, especially in the context of NFP results that have averaged 222K over the past six months.

But we really know that this was a nothingburger because a look at markets showed that nothing happened.  The major equity indices all closed +/- 0.15% while 10-year Treasury yields were unchanged from the morning and higher by 2bps from Monday.  Neither did the dollar or commodities move in any substantial way from their early morning levels.   So, now Powell will speak to the House Financial Services Committee today, give identical testimony and fend off whatever inane questions they ask there.  But he was clear that there would be no indications of the timing of any policy changes and that is certain to be true today as well.

And truly, that was the entire session yesterday.  There was no data released and aside from Powell, nobody cared about what other speakers said.  And as you can see above, Powell didn’t really say that much.  So, let’s take a look at the overnight session to see if there was anything interesting at all.

In equity markets, the one place that is trying to hang with the US tech sector is Japan, where the Nikkei rallied another 0.6% overnight and is now higher by 30% this year, second only to the NASDAQ’s 34% rise.  While some of this is excitement about tech, I believe a larger proportion of the gains is due to the yen’s ongoing weakness as many of the companies in the index have their JPY earnings benefit greatly from their export sales.  Elsewhere in the time zone, though, equities were under modest pressure with Chinese, Hong Kong and Australian shares all sliding a bit.  The news of note here was Chinese inflation data, which showed limited price pressures as consumption on the mainland remains lackluster, at best.

Europe, however, is in a much better mood as all the major indices around the continent are higher this morning led by Spain’s 1.0% rise but followed closely by France (+0.9%) and Germany (+0.75%).  Here, too, there has been a lack of data, so I guess the narrative has become that despite the electoral outcomes, investors have overcome their concerns that the new governments will destroy their respective economies.  I guess the one truth is that the new governments will try to spend as much money as possible as quickly as possible, and so support economic activity.  Meanwhile, the recent pattern in the US, higher NASDAQ, lower DJIA and limited movement in the S&P is playing out in the futures this morning as well.

In the bond market, Treasury yields have slipped back 2bps overnight, trading at the same levels as Monday, but there has been a much more aggressive bond rally in Europe with sovereign yields falling between 6bps and 9bps this morning.  It appears that investors are counting on the Fed to maintain its inflation fight, thus helping reduce global inflation pressures, and are responding to declining inflation from China as a rationale to add duration to their portfolios.  While the direction of travel is no surprise given the Treasury yield decline, it is a bit surprising the movement is this large.

In the commodity markets, oil (-0.2%) continues under pressure as the combination of relief that Hurricane Beryl had limited impacts and the potential for a cease-fire in Gaza have oil traders questioning the recent price action.  Arguably, a bigger concern is that slowing economic activity may begin to reduce demand, but that is not the main story today.  In the metals markets, both gold and silver are edging higher this morning while copper is essentially unchanged.  I continue to believe that the Fed is going to be the key driver in this space as if they do cut rates sooner than currently forecast, it seems likely that commodity prices will rise while the dollar declines.

But the dollar is not yet declining in any meaningful way with the DXY still trading above 105.00.  The big outlier today is NOK (-0.95%) which is not only suffering on oil’s recent declines but is also responding to this morning’s inflation data which showed more significant progress on returning it to target.  Core inflation printed at 3.4%, down from 4.1% last month and below the 3.6% estimates.  This has encouraged traders to believe the Norgesbank is going to cut rates sooner than previously expected, hence the krone’s decline.  As to the rest of the G10, NZD (-0.9%) is also under pressure as the RBNZ was less hawkish than anticipated last night, although they did leave rates unchanged.  After those two, though, the G10 is dead.  One thing to note is that USDJPY is back at 161.50, just a few pips below the most recent dollar highs seen last week, although, given the very calm nature of the move, we have not heard much from the MOF on the subject.

As to the EMG bloc, MXN (+0.45%) is continuing its rally after yesterday’s higher than expected CPI data from south of the border has traders looking for continuing policy tightness, pushing back any thoughts of an early ease.  Elsewhere, ZAR (-0.4%) continues its wild back and forth, so much so that it is difficult to pin any fundamentals to the movement.

There is no data of note today so all eyes will be on Chairman Powell when he testifies at 10:00 to the House.  In addition to Powell, we will hear from Governors Bowman and Cook as well as Chicago Fed president Goolsbee.  But really, can anything they say overshadow Powell?  I think not.

It is shaping up as another dull day as it seems unlikely Powell will tell us anything new.  As such, I would look for a quiet session as we all await tomorrow’s CPI data.

Good luck
Adf

The Fat Lady

Posted on by

Is the fat lady
Starting to sing?  Listen for
More threats to be sure

 

Tell me if you’ve heard this one before, “It’s desirable for exchange rates to move stably. Rapid, one-sided moves are undesirable. In particular, we’re deeply concerned about the effect on the economy.”

Or this one, “We are watching moves with a high sense of urgency, analyzing the factors behind the moves, and will take necessary actions.”

Of course, the answer is yes, these are essentially verbatim of what Shunichi Suzuki, Japanese FinMin, said earlier this week, as well as several times back in April prior to their last bout of intervention.  It is probably step 3 on the 7-step program that leads to eventual intervention by the MOF/BOJ.   And those are his direct comments from last night in the wake of USDJPY trading to yet another new high (160.88) for the move.  The last time the currency was that weak vs. the dollar was in 1986.  

Now, perhaps I can help him analyze the factors behind the moves.  Why look, the entire interest rate complex in Japan remains significantly below the same metrics anywhere else in the world, but from a G10 perspective, specifically vs. the US.  As well, the commentary from the various Fed speakers we have heard just this week continues to indicate higher for longer remains the play.  Recall, Governor Bowman even suggested the possibility of raising rates if circumstances dictated.  I might suggest to Suzuki-san, that as long as the BOJ maintains ZIRP, and continues to hold 50% of the JGB market, the yen will remain under pressure. 

The question remains, just how high can USDJPY go?  And the answer remains much higher.  I continue to believe that we will need to see a quick move to 163, at least, before the MOF tries to slow things down again, meaning by Monday latest.  If, instead, the market simply hangs around at this new level, I expect more jawboning but no action.  The one caveat is that next Thursday is July 4th, when all banks in NY will be closed and market liquidity will be extremely suspect.  It would not be a surprise if they were to take advantage of those thin markets and aggressively sell dollars then.  It would certainly have an outsized impact.  We shall see.

Today’s likely to be at peace
As folks eye tomorrow’s release
Of PCE data
And so, options’ theta
Is vanishing like Credit Suisse

The truth is, away from the yen story, there is very little of consequence ongoing as the market sets its sights on tomorrow’s PCE data.   This evening’s Presidential debate will certainly be interesting and likely be entertaining, but it is not clear it will impact markets.  And while we continue to see gyrations in various markets, the big themes remain stable.  The Fed is not about to change its stripes as we have heard repeatedly since the FOMC meeting, the economy continues to move along, albeit at a somewhat slower pace than Q1, but not showing any hint of recession at this stage, and the geopolitical situation is constant with Russia/Ukraine and Israel/Gaza continuing to wreak havoc and destruction mostly in the background.  As such, I expect that we are going to be subject to more idiosyncratic movements in markets for now.
 
So, let’s look at what happened overnight.  After yesterday’s very limited equity moves in the US, most of Asia was in the red led by the Hang Seng (-2.1%) as tech shares were under pressure.  But the Nikkei (-0.8%) and Shanghai (-0.75%) also fell with the former a bit surprising given both the weaker yen and the surprisingly better than expected Retail Sales data released, while the latter seemed to respond to declining Industrial Profit data that was released.  As it happens, Australia shares were also softer as inflation data there continues to show stubborn strength squashing any ideas of an RBA rate cut soon.  In Europe, red is also the most common color with the CAC (-0.5%) and IBEX in Spain (-0.5%) leading the way lower.  Most other markets are softer although the DAX (+0.1%) is bucking the trend, despite lacking an obvious catalyst for the move.  And let’s face it, 0.1% is not really relevant to anything.  At this hour (7:00), US futures are pointing slightly lower ahead of the weekly Claims data.
 
In the bond markets, yields in the US backed up by 5bps and have stayed there this morning.  in Europe, the markets closed before the US move finished, so this morning, yields across the continent are higher by 3bps or so as they catch up to the US.  In Asia, the movement was stronger with JGBs +5bps and Australian bonds +10bps on the back of the US move as well as Australia’s growing inflation concerns (Consumer Inflation Expectations rose to 4.4%).  It strikes me, looking at the chart below, that yields have been in a wide range, about 90 basis points, for the past year and that we are currently pretty much in the middle of that range.  It is hard to get too excited about things until we break this range in my view.

Source: tradingeconomics.com

In the commodity space, oil (+0.35%) is rebounding slightly this morning after weakness in the wake of larger than expected inventory data released yesterday, with an over 6-million-barrel increase compared to expectations of a 5.5-million-barrel drawdown.  As to the metals markets, gold (+0.7%), which suffered on the back of the strong dollar yesterday, is rebounding and taking silver with it, although the industrial metals remain under pressure.

Finally, the dollar, which was king of the hill yesterday, with the Dollar Index trading back above 106 for a while, is softening a touch this morning, probably about 0.2% or so against its major counterparts.  However, while that is the general result today, there is one outlier, ZAR (-1.15%) which continues to demonstrate remarkable volatility amidst the political situation with no cabinet yet named.  Perhaps the driver this morning was the softening inflation picture enticing traders to believe that SARB may be considering rate cuts soon.

On the data front, this morning brings the weekly Initial (exp 236K) and Continuing (1820K) Claims data along with Durable Goods (-0.1%, +0.2% ex Transport), final Q1 GDP (1.4%) and its components of note like Final Sales (1.7%) and its Price Index (3.3%).  Remarkably, there are no Fed speakers due today either.  I think we need to keep a close eye on the employment situation as it has been slowly worsening overall.  It wasn’t that long ago when Initial Claims were pegged at 212K every week.  Now they have grown by more than 20K and any lurch higher will be noticed.  Next week’s NFP is going to be critical with the potential for a significant impact as it will be released the day after the July 4th holiday, a day when trading desks will be very lightly staffed.

For today, it is hard to get excited about anything, but if we continue to see the slow deterioration of US data, that will eventually feed into the rate picture and the dollar’s value as well.

Good luck

Adf

Cash in a Flash

Posted on by

A century has passed us by
Since T+1 rules did apply
But starting today
That is the new way
So, what does this new rule imply?
 
For buyers, they’ll need to have cash
At hand, else their trades will all crash
While sellers get paid
Next day and can trade
Or else have their cash in a flash
 
The problem is those overseas
Are likely to feel quite a squeeze
‘Cause getting the bucks
May soon be the crux
Of trading, and cause much unease

 

Today is, in fact, quite momentous as North American equity markets (US, Canada and Mexico) are all converting to T+1 settlement.  This means that if you buy a stock today in your Fidelity (or other) account, you need to pay for it tomorrow.  Since 2017, that timeline was two business days, and prior to that it was three business days (1987-2017) and five business days (1929-1987).  Obviously, technology played an important part in the process as the electronification of trading and back-office systems allowed more information to be processed more quickly and removed the need to physically deliver share certificates.

Now, while this is an interesting historical fact, the importance of the change comes from the potential impact on the foreign exchange markets.  In the US equity market (which remember represents nearly 70% of global equity market values), most traders have cash or access to funding in their accounts and so this is of limited consequence.  But, for foreign investors, it is a much bigger deal.  

Consider a European fund manager who is investing throughout a given day and then is reconciling their position at the end of the day to determine how many dollars they need to settle the transactions.  Prior to today, they could find out, and execute the FX trade to buy those dollars any time during the next day with full confidence the funds would flow on a timely basis.  However, starting today, their timeline to determine the balances due and execute the transactions will be reduced to a matter of hours.  And not just any hours, but probably the worst hours to transact FX during the 24-hour session.  Given that equity markets in the US close at 4:00pm, and most bank trading desks leave around 5:00pm, the prime time for those executions is going to be in the twilight of the FX market, when the global day rolls over and only Wellington, NZ banks are even awake.  Liquidity during this time period is notoriously limited and the opportunity for outsized moves is significant.

None of this is likely to have an impact today, necessarily, but it could well have an impact as soon as Thursday or Friday when the month comes to an end and there are significant equity rebalancing flows.  In fact, thinking it through, Friday afternoons that happen to be month ends, like this week, are going to be subject to the most stress as there is no market and Sunday evening is going to potentially be subject to a lot of same-day FX settlement, which is not the strongest suit for that market.  

I bring this up for two reasons; first, it is well worth understanding and may impact market characteristics going forward, and second, there is absolutely nothing else happening today!  There has been almost no new information in the macroeconomic sense since Friday’s Michigan Sentiment numbers were released as yesterday brought only modestly softer than anticipated German Ifo results.  At the same time, with the ECB slated to meet next week, the plethora of ECB speakers have clearly agreed that there will be a 25-basis point cut next week, but there is still a lot of uncertainty as to when the next cut may arrive.  Meanwhile, Fed speakers will not shut up at all, but continue to promulgate the same message they have been pushing forward, higher for longer until they have confidence inflation is going to achieve their target.  Arguably, that makes Friday quite interesting as the PCE data will be released.

So, with nothing else of note, let’s take a quick run through the overnight session.  Quiet continues to be the best descriptor of things with Japanese shares virtually unchanged although Chinese shares fell (CSI 300 -0.7%) despite ongoing talk of further government support for the property market there.  Elsewhere in the region, markets were mixed with an equal number of gainers (Taiwan, Indonesia, Singapore) and laggards (India, Australia, New Zealand) with most of the rest very little changed.  It was not very exciting!  In Europe, while the screen is red, other than the CAC in Paris (-0.6%) the movement has been extremely limited.  Meanwhile, US futures are currently basically unchanged ahead of the open.

Bond markets, too, have been quiet overall with Treasury yields unchanged since Friday, and European sovereigns mostly edging higher by between 1bp and 2bps.  The exceptions here are the UK (-3bps) despite (because of?) a better-than-expected Retail Sales print. In Asia, while JGB yields did not move overnight, yesterday they did trade to a new high of 1.02%, although the impact on the yen remains di minimus.

In the commodity markets, oil has bounced from last week’s lows after Israel’s recent military activities in Rafah have some concerned that an escalation in that conflict is on its way and may include other parties.  Meanwhile, gold and silver prices, both of which rallied sharply yesterday, are consolidating those gains and remain well above the trading bottoms put in last week.  Copper, too, is rebounding although there is a lot of discussion in the market about how it has been massively overbought by speculators and has further to decline.  Regardless of the short-term trading implications, I believe there is no question that the long-term view here must be very bullish as there simply is not going to be enough supply for all the demands coming our way, especially given the still strong view amongst many that the energy transition must happen ASAP.

Finally, the dollar is a touch softer this morning, but only a touch.  While the greenback has been pretty steadily declining all month, the entire movement has been less than 2%, at least based on the DXY.  As to USDJPY, it remains in a very tight range between 156.50 and 157.00 lately as traders clearly remain comfortable running short positions, but the rush to add to those positions has faded. As to the other currency that continues to be questioned, the CNY continues to edge lower a few basis points each day, as the PBOC weakens its value in the daily fixing by a similar amount.  Nothing has changed my view that the renminbi will drift lower, but it is clear that the PBOC is going to control it all the way.

On the data front, it is a very quiet start to the week, but things get interesting toward the end.

TodayCase-Shiller Home Prices7.3%
 Consumer Confidence95.9
WednesdayFed’s beige Book 
ThursdayInitial Claims218K
 Continuing Claims1800K
 Q1 GDP1.3%
FridayPersonal Income0.3%
 Personal Spending0.3%
 PCE0.3% (2.7% Y/Y)
 Core PCE0.3% (2.8% Y/Y)
 Chicago PMI 
Source: tradingeconomics.com

In addition to this, we hear from seven more Fed speakers over nine venues this week and unless PCE collapses, and only one speaker comes after the release, it seems highly unlikely that they will change their tune.  Recall, the Minutes last week were seen as far more hawkish than Powell’s press conference immediately following the meeting, and that confused the soft-landing crowd.  As of this morning, the Fed funds futures market is pricing in about a 50% probability of a cut in September and a total of just 34bps of cuts now for the full year.

My view remains that the Fed is unlikely to cut anytime soon as the data will not give them confidence their inflation target is in view.  With that in mind, I foresee the best opportunity for a surprise as more aggressive rate cuts elsewhere in the world which will support the dollar.  Just not today.

Good luck

Adf

Bears Will Riposte

Posted on by

With CPI later this week

And many Fed members to speak

The news of the day

Is China’s array

Of debt issues they will soon seek

 

However, what matters the most

For markets is Wednesday’s signpost

If CPI’s cool

The bulls will still rule

But hot and the bears will riposte

 

While we all await Wednesday’s CPI data with bated breath, there are, in fact, other things happening in the world that can have an impact on markets and economies as well as on the narrative.  The story that seems to be getting the most press today is the leaked plans of China’s ultra-long bond issuance that was first hinted at two weeks ago.  The details show they are planning to issue, as soon as next Friday, the first tranche of 20-year bonds, with 50-year bonds coming in June and then the lion’s share of the issuance, 30-year bonds, due by November.  The total amount to be issued is CNY 1 trillion split as CNY 300 billion of 20-yr, CNY 600 billion of 30-yr and CNY 100 billion of 50-yr.

The reason this story is getting so much press is that the natural consequence of this issuance is that the national government is going to be spending that money on numerous projects, mainly infrastructure it seems, in an effort to ensure they achieve President Xi’s 5% GDP growth target for 2024.  This has knock-on implications for inflation, as it is unlikely that China’s disinflationary impulse can extend greatly with all this additional spending, and for markets as there will be clear impacts on Chinese interest rates, the CNY exchange rate and Chinese equity markets.  After all, CNY 1 trillion (~$138 billion) is a lot of money to push through in a short period of time so there will undoubtedly be some leakage from real economic activity into financial actions, and ultimately, that money will impact the performance of many companies to boot. 

A funny thing about leaked information is often the timing of those leaks.  After all, I’m pretty sure that it was no accident that this news managed to escape into the wild on the day after China’s loan data showed some pretty awful results.  For instance, what they term Total Social Financing, which is defined as a broad measure of credit and liquidity in the economy, FELL CNY 200 billion in April, the first decline in the history of the series since it began in 2002.  As well, New Yuan loans fell to CNY 730 billion, far below forecasts of CNY 1.2 trillion and down substantially from March’s data.  While this was not a historic low amount, it was definitely in the lower decile of readings and an indication that economic activity is just not doing much there.

As it happens, given the news was more about the specific timing than the idea of the issuance, the impact on the yuan was limited as it has barely moved.  Onshore Chinese equity markets did erase some early losses to close flat on the day after the news leaked into the market and Hong Kong shares rallied nicely, up 0.80%. 

But in truth, beyond this story, there has been very little of interest as all eyes turn to Wednesday morning’s CPI release.  I will offer my views on how that may play out tomorrow, so for now, let’s just quickly survey the overnight session and take a look at what is on deck this week, especially given the number of Fed speakers we shall hear.

Away from the Chinese markets, the only other equity market in Asia with a major move was Taiwan’s TAIEX (+0.7%), clearly benefitting on the idea that some of that money would head across the Strait, with the rest of the region +/- 0.2% or less.  Again, waiting for CPI is still the major idea.  This is true in Europe as well, although the bias is for very small losses, on the order of -0.2% or less, rather than the small gains seen in Asia.  Not surprisingly, US futures are virtually still asleep at this hour (6:45) and unchanged from Friday’s levels.

In the bond market, yields are edging lower by 2bps pretty much across the board, with Treasuries leading the way and virtually every European sovereign following suit by the same amount.  As always, the US market remains the dominant player here.  In Japan, though, yields crept higher by 3bps after the BOJ explained that they would be reducing their QQE purchases to ¥425 billion, from ¥475 billion last month.  Perhaps they really are trying to tighten policy!

In the commodity markets, oil (+0.6%) is edging higher after a generally rough week last week.  There has been no new news here, so this is all simply trading machinations.  Of more interest are the metals markets with copper (+0.9%) continuing its recent rally as it responds to the Chinese infrastructure spending news.  However, precious metals are under pressure today with gold (-0.75%) having a great deal of difficulty finding a bid as the market argument of whether inflation is picking up or not remains untested.

Finally, the dollar is mostly little changed with only a few currencies showing any life this morning, all in the EEMEA bloc.  ZAR (+0.4%) is firmer despite gold’s decline, as traders focus on hints that the SARB is going to maintain its tight monetary policy for even longer, not following the ECB when they cut in June.  Meanwhile, CZK (+0.5%) rallied on stronger than expected CPI data with the M/M number coming at +0.7% and talk that the central bank will be holding firm for longer than previously anticipated.

Looking at this week’s data and commentary, there is much ground to cover although we start off slow with nothing today:

TuesdayNFIB Small Biz Optimism88.1
 PPI0.3% (2.2% Y/Y)
 -ex food & energy0.2% (2.4% Y/Y)
WednesdayCPI0.4% (3.4% Y/Y)
 -ex food & energy0.3% (3.6% Y/Y)
 Empire State Mfg-10
 Retail Sales0.4%
 -ex autos0.2%
ThursdayInitial Claims220K
 Continuing Claims1790K
 Housing Starts1.41M
 Building Permits1.48M
 Philly Fed7.7
 IP0.1%
 Capacity Utilization78.4%
FridayLeading Indicators-0.3%
Source: tradingeconomics.com

In addition to all that, we hear from, count ‘em, 11 Fed speakers during the week, including Chair Powell Tuesday morning (before CPI although he will probably know the number).  As well, he speaks again next Sunday afternoon.  I maintain they all speak too much and too often, and we would be far better off if they simply adjusted policy as they saw fit and ended forward guidance!

But we know they will never shut up, so we must deal with it as it comes.  As to today, it is hard to get excited about anything happening of note given the perceived importance of the rest of the week.  So, look for a quiet day today, a perfect day to initiate some hedges amid benign market conditions.

Good luck

Adf

Not Harebrained

Posted on by

While here in the States there’s no chance
That rate cuts, by June, will advance
In England, we learned
They’re growing concerned
The ‘conomy’s still in a trance

So yesterday, Bailey explained
By June, a rate cut’s not hairbrained
But, closer to home
The Frisco Fed gnome
Said cutting rates will be restrained

You can tell that very little continues to happen in the macro world when the key stories that are in the discussion regard secondary players and their commentary.  While it is true that Andrew Bailey is the governor of the Bank of England, the reality is that the UK is just a secondary player on the world stage.  However, after their meeting yesterday, much digital ink has been spilled over the potential for the BOE to cut rates at the June meeting.  Prior to this meeting, it seemed that the BOE was tracking the Fed rather than the ECB, but that idea has now been dispelled.  Governor Bailey indicated that come June, a rate cut “is neither ruled out nor a fait accompli.”  However, he did comment that cuts were likely “over the coming quarters” and the market took him up on the news, with yields sliding and stocks rallying.

A key to the discussion is the fact that the BOE will see two more CPI reports between now and the next meeting on June 20th.  As well, both the ECB and the Fed will have met and potentially acted before they next meet.  As such, despite the fact that the BOE’s own forecasts showed improvement in both GDP and CPI over the next 3 years with current policy, the market is all-in on the cuts for June.  Well, maybe not all-in, but has increased the probability to 50%, up from just under one-third prior to the meeting.  Regarding the pound, if we continue to hear more dovish cooing from the Old Lady, especially given the fact that the Fed is clearly on hold, I expect it could drift back toward 1.20 over time.

Which brings us to the Fed, and an unscheduled appearance by San Francisco Fed president, Mary Daly, yesterday afternoon.  The two key comments she made were as follows: “There’s considerable, now, uncertainty about what the next few months of inflation will be and what we should do in response,” and “It’s far too early to declare that the labor market is fragile or faltering.”  In essence, this is repeating everything that we have heard consistently since the FOMC meeting last week.  I would boil it down to ‘as much as we are desperate to cut rates, neither prices nor the labor market are falling quickly enough to allow us to do so soon.’

Add it all up and you get a picture of a still tight Fed with no indication of a policy ease in the next quarter, at least, while another major central bank elsewhere has opened the doors to cutting rates.  Arguably, this should be a positive for the dollar except for the fact that this has been known, and the basic narrative for a while, so is already in the price.  If these policy divergences maintain for a much longer time, through the end of the year or beyond, then perhaps we will see more aggressive dollar strength.  But for now, I think the FX markets are going to be a dull affair.  The caveat here is if we see US data move away from its current trajectory, either picking up and pushing price pressures higher, or falling more rapidly resulting in a worse employment situation.

One last thing on the prospects for the US economy; there is still a large contingent of analysts who have been parsing the data and looking at secondary indicators and sub-indices of headline data, and who believe that a recession is much closer than the market is currently pricing.  Things like credit card delinquencies and the growing number of bankruptcies, as well as the discrepancy between the establishment and household surveys in the employment data have reached levels consistent with recessions in the past.  While last year I expected that would be the case, at this point, I believe that the ongoing massive fiscal spending (budget deficits >6% of GDP) and the ongoing availability of cheap energy continuing to draw investment into the US will prevent any substantive downturn for the rest of the year, at least.

As to market activity, yesterday’s higher than expected Initial Claims data (231K, highest since October) got the bulls all excited and drove a risk rally in stocks in the US which has been followed all around the globe.  Asian markets saw gains in Japan (+0.4%), Hong Kong (+2.3%) and almost everywhere else in the region except China which was flat on the day.  Meanwhile, European bourses are all green as well, led by the UK (+0.7%) on the back of stronger GDP data as well as the hopes for lower rates in the near future.  But the entire continent is higher as well, mostly on the order of 0.5%.  As to US futures, higher by 0.25% at this hour (7:30).

In the bond market, while Treasury yields drifted lower yesterday after that claims data, this morning they are higher by 1 basis point.  In Europe, though, sovereign yields are slipping 2bps to 3bps as traders and investors get more convinced of rate cuts coming soon.  Overnight, JGB markets did nothing.

In the commodity markets, Wednesday’s declines are a distant memory as we have seen oil (+0.7%) rally again this morning despite modest inventory builds which may be being offset by concerns that Israel is ignoring the recent pressure to stop its Rafah incursion.  However, the precious metals are not ignoring that story with both gold and silver higher by more than 1% this morning and copper rising 2.4%.  The day-to-day vagaries of these markets remain confusing, but the long-term trend, I believe, remains strongly intact, and that is higher prices going forward.

Finally, the dollar is little changed this morning but maintaining its gains from earlier in the week.  Looking across my screen, no currency has moved more than 0.3% in either direction, a clear sign that very little of note is happening.  As I wrote above, absent a major change in policy, I think the dollar is range bound for now.

On the data front, this morning brings only Michigan Sentiment (exp 76) and then a few more Fed speeches from Kashkari, Bowman, Goolsbee and Barr.  Regarding the data, I believe it will need to be a big miss in either direction to get much market reaction.  Regarding the Fedspeak, given the consistency with which every speaker has thus far explained they lack the confidence that 2% is in view, I see very little is likely to be newsworthy.

For today, don’t look for much at all.  For the longer term, the dollar’s future depends on how much longer the Fed maintains its relative tightness, and if that spread widens because either the Fed brings hikes back on the table or other central banks cut more aggressively.  But for now, as we enter the summer, I don’t see much at all.

Good luck and good weekend
Adf