Sive Morten
Special Consultant to the FPA
- Messages
- 18,805
Fundamentals
This was really great week guys, no big news at all. Among the major events I would point Initial claims data collapse, which actually has triggered rally on Thursday. And signing free trade agreement between Serbia and China. Also imposing new export barriers on China EVs from the US. The recent two are not economical but still seem important. Among economical news I would mention more publications in mass media materials concerning crisis and breaking of "old global order".
Still next week hardly will be boring. We will get CPI and some other important data.
Market overview
The dollar weakened against most currencies on Thursday after economic data showed more signs of softening in the U.S. labor market, while the pound rebounded from earlier lows after the Bank of England opened the door for an interest rate cut. Weekly initial claims for state unemployment benefits increased 22,000 to a seasonally adjusted 231,000, the highest level since the end of last August and above the 215,000 expected by economists in a Reuters poll:
The data followed last week's weaker-than-anticipated U.S. payrolls report and other data that showed job openings fell to a three-year low in March.
Market participants have looked towards a softening labor market as a sign that consumers will begin to slow spending and in turn help cool inflation. Data next week will include readings on consumer prices (CPI), producer prices (PPI) and retail sales.
The greenback showed little reaction to comments from Federal Reserve Bank of San Francisco President Mary Daly, who said she still sees a "really healthy" labor market and inflation that remains too high.
The BoE's Monetary Policy Committee had voted 7-2 to keep the central bank's key policy rate at a 16-year high of 5.25%, with Deputy Governor Dave Ramsden joining Swati Dhingra in voting for a cut to 5%. BoE Governor Andrew Bailey said it was possible the central bank would need to cut rates by more than investors expect.
The dollar inched higher on Friday following a reading on U.S. consumer sentiment as investors sorted through a batch of comments from Federal Reserve officials, with the focus beginning to turn toward key inflation readings next week. The greenback pared declines and turned modestly higher after the University of Michigan's preliminary reading on consumer sentiment came in at 67.4 for May, a six-month low and below the 76.0 estimate of economists polled by Reuters. In addition, the one-year inflation expectation climbed to 3.5% from 3.2%.
Also supporting the dollar were comments from Dallas Federal Reserve President Lorie Logan, who said it was not clear whether monetary policy was tight enough to bring inflation down to the U.S. central bank's 2% goal, and it was too soon to be cutting interest rates. That ran counter to earlier comments from Atlanta Federal Reserve President Raphael Bostic, who said the Fed likely remained on track to cut rates this year even if the timing and extent of the policy easing was uncertain. In addition, Chicago Federal Reserve President Austan Goolsbee said he believes U.S. monetary policy is "relatively restrictive."
Following last week's softer than expected U.S. payrolls report and a Fed policy announcement, markets have been pricing in about 50 basis points (bps) of cuts this year, with a 62.2% chance for a cut of at least 25 basis points in September, according to CME's FedWatch Tool
Global central banks that moved together to battle inflation are starting to scatter, with European rate setters turning dovish while the U.S. Federal Reserve stays cautious about cutting too soon. Following the most aggressive global monetary tightening cycle in decades, here's where leading central banks stand and what they are expected to do next:
The European Central Bank is growing more confident about cutting interest rates as euro zone inflation continues to ease, three ECB policymakers said on Monday. ECB policymakers Philip Lane, Gediminas Simkus and Boris Vujcic said separately that the latest inflation and growth data cemented their belief that inflation will head back to the central bank's 2% target by the middle of next year. The ECB has all but promised a rate cut on June 6 and money markets are almost fully pricing in three cuts this year.
German commercial property prices fell 9.6% in the first three months of 2024 compared with a year earlier, the VDP banking association said on Wednesday, as the nation's property industry suffers its worst crisis in decades. The continuing decline in values of commercial real estate follows a 10.2% drop for all of 2023. The latest drop is less severe than the 12.1% drop for the fourth quarter, which was the biggest ever.
Meantime, U.S. banks reported renewed weakening in demand for industrial loans and a decline in household demand for credit in the first quarter of the year, according to a Federal Reserve survey of senior loan officers published on Monday. he net share of large and medium-sized banks reporting tightening standards for commercial and industrial loans ticked up to 15.6%, from 14.5%, the survey showed. A rising share of banks reported weaker demand for C&I loans.
Fitch Ratings on Tuesday downgraded embattled regional lender New York Community Bancorp and its bank subsidiary, Flagstar Bank, to 'BB' from 'BB+'. The ratings agency said the downgrade reflects its assessment that NYCB has a weaker earnings and profitability profile coupled with the execution risk associated with its restructuring plan.
The U.S. Federal Reserve Board has issued an enforcement action with First Citizens Bank of Butte in Montana, the board said in a statement on Tuesday.
The enforcement action addresses issues with board management, anti-money laundering and suspicious activity reporting, according to a written agreement between the Fed and the First Citizens Bank of Butte.
OTHER RESULTS OF THE WEEK
Despite that there were no any official releases, there are still some interesting publications that could become bricks in the wall of overall situation in the US economy, or easier speaking in the wall of crisis. For example, Legendary analyst of financial and geopolitical cycles Martin Armstrong says:
Armstrong is also predicting a big turn on or about May 7th. Armstrong predicts a recession will start then and go on until 2028. GDP will continue to fall, and inflation will continue to rise. Armstrong says it is the perfect storm for a dreaded “stagflation economy.” This was 54 min interview and he spoke on many subjects including politics, Ukraine etc, so you could watch by the link above.
Here we're interested only with economy topic and this is another one confirmation of our (and not only our) view that the US economy stands in structural crisis that will last for 8-10 years, if no negative acceleration happens. The forecasts for the American default are spinning up . We shouldn't rely on them too much, but I would still pay attention that everyone usually laughs about it for a long time at first, and then suddenly it turns out that "everyone has known this for a long time." In fact, it is still very easy to technically avoid default, but apparently not just politically, because you need to print a lot and apparently they cannot decide who will be the beneficiary of the "last issue".
Such a large budget deficit in the United States, as it is now, was usually observed during periods of recession. That is, only fiscal stimulus keeps the economy from falling into the red. But the economy is still moving towards a recession - this can be seen, first of all, from the labor market data and other indicators are also getting worse.
The logical question is: if the budget deficit is already record high, how will the economy need to be stimulated when the recession hits? Especially if inflation remains high (although a recession itself should be a disinflationary factor, but not always) and the Fed will have to pretend that they continue to fight inflation at a high rate. Increase the budget deficit and public debt. Yellen, apparently, is actively preparing for this, having accumulated almost 1 trillion dollars in a TGA account, so that you don’t have to immediately and suddenly borrow money from the market. We've covered this topic last week.
But we are still seeing a reduction in demand for government debt against the backdrop of rising inflation. Even at the current level of borrowing, not to mention the future one. So the Fed, whether at high or low rates, will still have to step in and buy treasuries.
But only reducing the rate to zero or even minus can help restore the economy and solve the problem of public debt. Because this is not a question of liquidity, it is a question of the cost of money in comparison with the return on investment in the real sector of the economy, despite the fact that before, when the rate was at zero, there were no booming investments and economic growth, which means a normal return on investment is possible only with a zero Fed rate, and development - with a negative rate (although this did not work for rapid growth in Japan, Sweden, or Switzerland). It’s just not clear who in such a situation will need this debt, except for central banks.
Regarding economic growth and statistical fraud... Healthy economic growth is always accompanied by an increase in energy consumption. No, of course, if production is declining and services are growing, then it's not a fact. But we do not see such a strong decline in the share of production in the US GDP.
But what we see is that there is no increase in automobile fuel consumption (Ok-ok everyone started buying EV), even a decrease, nor an increase in electricity consumption (What EV? Data centers?) not really since 2005 (before the crisis). At least, the growth is significantly lower than the population growth even over the last 15, not even 19, years by 11.7%. While they pictured the GDP growth during this period is 2 times. So what kind of economic growth are we talking about?
And finally, the topic of households savings and consumer sentiment. Somehow this topic was ignored by big media, although the changes that we see there are radical and epic.
San Francisco Fed:
Latest Fed Credit Conditions Survey SLOOS:
If we consider these news together with recent Michigan sentiment indicator, then direction of this process becomes more or less clear. Recent ISM Services PMI (Apr) = 49.4 ( previously 51.4). Actually, services, which is ~70% of GDP were holding GDP positive for quite a long time turns to negative area. Let's see how the Fed will slow down its balance sheet reduction from June on sentiment. This is already push higher inflation expectations (chart above), but not expectations in the manufacturing or services sector. This means only one thing - Inflation.
CONCLUSION:
First thing guys, we should be ready that "the Image of prosperity" should stay until the end of 2024 because of $1Trln US Treasury reserves. It could fade and disguise any problems for some time and many investors will believe it. Also it means that stock market hardly collapses in the same period. For EUR/USD trading it means that USD should keep dominant role because of "rosy picture" that suggests no necessity to cut the rate. But this "Crime of the century" can't last forever. This is good time to go out of the US assets, because when this "prosperous time" will come to the sudden end - there will be a lot of screams "Let me out!" but it will be hard to do something.
Indicators that we've considered today point that situation inside the US economy is becoming tighter and it comes already down to households finances. Hardly we will get big relief in inflation data as well. Until the ECB June's rate cut, EUR/USD mostly will be driven by the US statistics. Then, in June, EUR could get a new downside impulse if the ECB decides to continue. Other words speaking, despite that June's cut already 99% is priced-in, I do not see fundamental reasons for EUR upside reversal.
This was really great week guys, no big news at all. Among the major events I would point Initial claims data collapse, which actually has triggered rally on Thursday. And signing free trade agreement between Serbia and China. Also imposing new export barriers on China EVs from the US. The recent two are not economical but still seem important. Among economical news I would mention more publications in mass media materials concerning crisis and breaking of "old global order".
Still next week hardly will be boring. We will get CPI and some other important data.
Market overview
The dollar weakened against most currencies on Thursday after economic data showed more signs of softening in the U.S. labor market, while the pound rebounded from earlier lows after the Bank of England opened the door for an interest rate cut. Weekly initial claims for state unemployment benefits increased 22,000 to a seasonally adjusted 231,000, the highest level since the end of last August and above the 215,000 expected by economists in a Reuters poll:
The data followed last week's weaker-than-anticipated U.S. payrolls report and other data that showed job openings fell to a three-year low in March.
Market participants have looked towards a softening labor market as a sign that consumers will begin to slow spending and in turn help cool inflation. Data next week will include readings on consumer prices (CPI), producer prices (PPI) and retail sales.
The greenback showed little reaction to comments from Federal Reserve Bank of San Francisco President Mary Daly, who said she still sees a "really healthy" labor market and inflation that remains too high.
The BoE's Monetary Policy Committee had voted 7-2 to keep the central bank's key policy rate at a 16-year high of 5.25%, with Deputy Governor Dave Ramsden joining Swati Dhingra in voting for a cut to 5%. BoE Governor Andrew Bailey said it was possible the central bank would need to cut rates by more than investors expect.
The dollar inched higher on Friday following a reading on U.S. consumer sentiment as investors sorted through a batch of comments from Federal Reserve officials, with the focus beginning to turn toward key inflation readings next week. The greenback pared declines and turned modestly higher after the University of Michigan's preliminary reading on consumer sentiment came in at 67.4 for May, a six-month low and below the 76.0 estimate of economists polled by Reuters. In addition, the one-year inflation expectation climbed to 3.5% from 3.2%.
Also supporting the dollar were comments from Dallas Federal Reserve President Lorie Logan, who said it was not clear whether monetary policy was tight enough to bring inflation down to the U.S. central bank's 2% goal, and it was too soon to be cutting interest rates. That ran counter to earlier comments from Atlanta Federal Reserve President Raphael Bostic, who said the Fed likely remained on track to cut rates this year even if the timing and extent of the policy easing was uncertain. In addition, Chicago Federal Reserve President Austan Goolsbee said he believes U.S. monetary policy is "relatively restrictive."
Following last week's softer than expected U.S. payrolls report and a Fed policy announcement, markets have been pricing in about 50 basis points (bps) of cuts this year, with a 62.2% chance for a cut of at least 25 basis points in September, according to CME's FedWatch Tool
Global central banks that moved together to battle inflation are starting to scatter, with European rate setters turning dovish while the U.S. Federal Reserve stays cautious about cutting too soon. Following the most aggressive global monetary tightening cycle in decades, here's where leading central banks stand and what they are expected to do next:
The European Central Bank is growing more confident about cutting interest rates as euro zone inflation continues to ease, three ECB policymakers said on Monday. ECB policymakers Philip Lane, Gediminas Simkus and Boris Vujcic said separately that the latest inflation and growth data cemented their belief that inflation will head back to the central bank's 2% target by the middle of next year. The ECB has all but promised a rate cut on June 6 and money markets are almost fully pricing in three cuts this year.
German commercial property prices fell 9.6% in the first three months of 2024 compared with a year earlier, the VDP banking association said on Wednesday, as the nation's property industry suffers its worst crisis in decades. The continuing decline in values of commercial real estate follows a 10.2% drop for all of 2023. The latest drop is less severe than the 12.1% drop for the fourth quarter, which was the biggest ever.
Meantime, U.S. banks reported renewed weakening in demand for industrial loans and a decline in household demand for credit in the first quarter of the year, according to a Federal Reserve survey of senior loan officers published on Monday. he net share of large and medium-sized banks reporting tightening standards for commercial and industrial loans ticked up to 15.6%, from 14.5%, the survey showed. A rising share of banks reported weaker demand for C&I loans.
Fitch Ratings on Tuesday downgraded embattled regional lender New York Community Bancorp and its bank subsidiary, Flagstar Bank, to 'BB' from 'BB+'. The ratings agency said the downgrade reflects its assessment that NYCB has a weaker earnings and profitability profile coupled with the execution risk associated with its restructuring plan.
The U.S. Federal Reserve Board has issued an enforcement action with First Citizens Bank of Butte in Montana, the board said in a statement on Tuesday.
The enforcement action addresses issues with board management, anti-money laundering and suspicious activity reporting, according to a written agreement between the Fed and the First Citizens Bank of Butte.
OTHER RESULTS OF THE WEEK
Despite that there were no any official releases, there are still some interesting publications that could become bricks in the wall of overall situation in the US economy, or easier speaking in the wall of crisis. For example, Legendary analyst of financial and geopolitical cycles Martin Armstrong says:
Armstrong is also predicting a big turn on or about May 7th. Armstrong predicts a recession will start then and go on until 2028. GDP will continue to fall, and inflation will continue to rise. Armstrong says it is the perfect storm for a dreaded “stagflation economy.” This was 54 min interview and he spoke on many subjects including politics, Ukraine etc, so you could watch by the link above.
Here we're interested only with economy topic and this is another one confirmation of our (and not only our) view that the US economy stands in structural crisis that will last for 8-10 years, if no negative acceleration happens. The forecasts for the American default are spinning up . We shouldn't rely on them too much, but I would still pay attention that everyone usually laughs about it for a long time at first, and then suddenly it turns out that "everyone has known this for a long time." In fact, it is still very easy to technically avoid default, but apparently not just politically, because you need to print a lot and apparently they cannot decide who will be the beneficiary of the "last issue".
Such a large budget deficit in the United States, as it is now, was usually observed during periods of recession. That is, only fiscal stimulus keeps the economy from falling into the red. But the economy is still moving towards a recession - this can be seen, first of all, from the labor market data and other indicators are also getting worse.
The logical question is: if the budget deficit is already record high, how will the economy need to be stimulated when the recession hits? Especially if inflation remains high (although a recession itself should be a disinflationary factor, but not always) and the Fed will have to pretend that they continue to fight inflation at a high rate. Increase the budget deficit and public debt. Yellen, apparently, is actively preparing for this, having accumulated almost 1 trillion dollars in a TGA account, so that you don’t have to immediately and suddenly borrow money from the market. We've covered this topic last week.
But we are still seeing a reduction in demand for government debt against the backdrop of rising inflation. Even at the current level of borrowing, not to mention the future one. So the Fed, whether at high or low rates, will still have to step in and buy treasuries.
But only reducing the rate to zero or even minus can help restore the economy and solve the problem of public debt. Because this is not a question of liquidity, it is a question of the cost of money in comparison with the return on investment in the real sector of the economy, despite the fact that before, when the rate was at zero, there were no booming investments and economic growth, which means a normal return on investment is possible only with a zero Fed rate, and development - with a negative rate (although this did not work for rapid growth in Japan, Sweden, or Switzerland). It’s just not clear who in such a situation will need this debt, except for central banks.
Regarding economic growth and statistical fraud... Healthy economic growth is always accompanied by an increase in energy consumption. No, of course, if production is declining and services are growing, then it's not a fact. But we do not see such a strong decline in the share of production in the US GDP.
But what we see is that there is no increase in automobile fuel consumption (Ok-ok everyone started buying EV), even a decrease, nor an increase in electricity consumption (What EV? Data centers?) not really since 2005 (before the crisis). At least, the growth is significantly lower than the population growth even over the last 15, not even 19, years by 11.7%. While they pictured the GDP growth during this period is 2 times. So what kind of economic growth are we talking about?
And finally, the topic of households savings and consumer sentiment. Somehow this topic was ignored by big media, although the changes that we see there are radical and epic.
San Francisco Fed:
Latest Fed Credit Conditions Survey SLOOS:
If we consider these news together with recent Michigan sentiment indicator, then direction of this process becomes more or less clear. Recent ISM Services PMI (Apr) = 49.4 ( previously 51.4). Actually, services, which is ~70% of GDP were holding GDP positive for quite a long time turns to negative area. Let's see how the Fed will slow down its balance sheet reduction from June on sentiment. This is already push higher inflation expectations (chart above), but not expectations in the manufacturing or services sector. This means only one thing - Inflation.
CONCLUSION:
First thing guys, we should be ready that "the Image of prosperity" should stay until the end of 2024 because of $1Trln US Treasury reserves. It could fade and disguise any problems for some time and many investors will believe it. Also it means that stock market hardly collapses in the same period. For EUR/USD trading it means that USD should keep dominant role because of "rosy picture" that suggests no necessity to cut the rate. But this "Crime of the century" can't last forever. This is good time to go out of the US assets, because when this "prosperous time" will come to the sudden end - there will be a lot of screams "Let me out!" but it will be hard to do something.
Indicators that we've considered today point that situation inside the US economy is becoming tighter and it comes already down to households finances. Hardly we will get big relief in inflation data as well. Until the ECB June's rate cut, EUR/USD mostly will be driven by the US statistics. Then, in June, EUR could get a new downside impulse if the ECB decides to continue. Other words speaking, despite that June's cut already 99% is priced-in, I do not see fundamental reasons for EUR upside reversal.
