Sive Morten
Special Consultant to the FPA
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Fundamentals
This week was full of events - ECB, Powell, NFP and some other data which made trading process interesting. Also I would mention among big events is strong rally on Gold. We suggest that gold rally has deeper reasons than it might seen on the surface, but this is more the subject for gold market report, as well, as J. Powell speech. In general, you could see how data releases make markets move in opposite directions week by week, making them to loose the sense of direction totally. That's why we should not pay attention to this and keep going with our long-term view. Once again (as we've warned) - NFP was revised down for 100K+. But who will compensate investors looses that they have got on this "wrong data" a month ago? The manipulations with statistics continue. How unemployment could raise to almost 4%, if your economy is generating +250K jobs every month? How continued claims could raising and U6 unemployment stands around 7.5% and weekly hours stand at historical lows? All these questions are stay on a surface.
Market overview
The dollar traded modestly weaker against most major peers on Friday, and was on pace for its worst weekly showing against the euro this year after mixed data kept an anticipated June interest rate cut from the Federal Reserve on the table. Nonfarm payrolls increased by 275,000 jobs last month, the labor department's Bureau of Labor Statistics said in its closely watched employment report on Friday. Data for January was revised down to show 229,000 jobs created instead of 353,000 as previously reported. The unemployment rate rose to 3.9% in February after holding at 3.7% for three straight months, the data showed. Wage inflation remains stable around 4.3%.
The ECB kept rates at record highs of 4.00% on Thursday while cautiously laying the ground to lower them later this year, saying it had made good progress in bringing down inflation.
The euro got a lift this week as the dollar came under pressure after Federal Reserve Chair Jerome Powell sounded more confident about cutting interest rates in coming months. Speaking on Thursday, Powell said the Fed was "not far" from having the confidence it needed to cut rates. Currencies typically weaken if central banks lower interest rates.
Jiji news agency reported the BoJ is considering a framework that will show the outlook for upcoming government bond buying amounts. Separately, Reuters reported a growing number of BoJ policymakers could support ending negative interest rates this month on expectations that this year's annual wage negotiations will yield strong results, four sources familiar with its thinking said.
Total mess in market expectations
If you take a look over recent headlines in media, guys, you'll see total mess in expectations concerning ECB and the Fed rate level activity. Some tells that they will act together, others tell the Fed will be first, while another ones talk the opposite. Let's try to deal with this mess and find the truth. Let's start first from recent ECB meeting. In fact, C. Lagarde said nothing new, expect the one thing that we treat as most important - ECB has cut inflation forecast. Now they expect reaching of 2% not in 2026 but in 2025. In 2024 inflation has to drop from 2.7 to 2.3% by their view. So, 1:0 in favor of ECB's cut in June... At the same time, investors have been doubtful that the ECB would move before the U.S. Federal Reserve, citing historical precedents. The Fed is expected to cut its own key rate on June 12 .
Investors have started to flag the risk that the Fed might not be able to cut rates at all this year if the world's largest economy holds strong. And they don't doubt the ECB can move first given a much weaker economy. Still, some economists reckon moving before the Fed could dampen how much the ECB cuts overall. It's been a long time coming, but the remarkably tight correlation between U.S. and euro zone interest rate expectations is set to unravel.
the ECB doesn't want to lose its inflation-fighting credibility, and the Fed doesn't want to crash the economy's 'soft' or 'no landing'.
But, some analysts (we're not alone with this suggestion) think that there will be no Fed cut this year. Torsten Slok, chief economist and partner at Apollo Global Management, on Thursday highlighted the yawning chasm opening up between the U.S. and German growth outlooks for this year. Last week, citing a re-acceleration in U.S. growth and price pressures, Slok issued one of the first calls from a major financial institution that the Fed will not cut rates at all this year.
Mr. Slok points 10 reasons for this:
So, Key pillars of support — from US productivity growth and economic dynamism to a torrent of flows into American assets and homegrown technological prowess in crucial areas such as AI — reinforce the greenback’s dominant role as the world’s reserve currency despite any short-term ups and downs. These fundamentals should blunt the impact of Fed rate cuts when they do happen, and, by keeping the US economy in front of global peers, underpin the narrative of “American exceptionalism” for the foreseeable future.
Unexpected factor of EUR strength
This week few big banks have made very special statements that have appeared to be totally unexpected. We do not exclude that they could have some political background that we will consider tomorrow. Still, it discovers new driving factor for EUR/USD that could become more powerful in nearest months. Everything has started with BofA.
But it seems to me that what is more interesting is not the theses, but who voices these theses and why. The fact that Dimon has been credited with wanting to go into high politics for some time in this regard is quite remarkable, although he denies it. But what he is doing now is not the actions of the CEO of the largest bank, it is an election campaign. It may seem strange, but the financier and banker is not a Democrat, a liberal and a sweetheart, he is a Republican and sympathizes with the MAGA wing. Even if not in direct text.
In general, Trump seems to already have a candidate for Treasury Secretary. It is safe to assume that a program of decisive action is also ready. It’s no wonder he’s selling his JPMorgan shares. Apparently, in the new realities of clearing the national debt and the financial system, banks will have a hard time.
According to Reuters, the pan-European currency is quickly regaining popularity with central banks and is once again becoming the main competitor to the US dollar. Almost one in five of the heads of foreign exchange reserves of central banks in 75 countries surveyed by the London-based OMFIF expects euro reserves to grow over the next two years. Only 7% of the survey participants reported a decrease in their euro reserves.
Demand for the euro is now very high, bankers responsible for the foreign exchange reserves of central banks are sure. As a result, the euro now accounts for approximately 20% of central banks ' foreign exchange reserves, although the European currency is still very far from reaching a 60% share of the dollar. One of the main reasons that changed the attitude of central banks towards the euro was the refusal of the ECB from a negative discount rate in 2022.
The total share of the US dollar in foreign exchange reserves fell, according to the IMF, from 72% in 2000 to 59% last year. The yuan's share is gradually increasing. In Belgium, for example, non-European investors ' demand for 10-year Eurobonds doubled year-on-year in January 2024. According to the head of the kingdom's debt agency, Marik Post, most of the investors are from Asia. In two of the three bond sales by the European Financial Stability Facility (EFSF), Asian investors bought 34% and 27% of the bonds offered for sale. As for financial institutions, central banks show the greatest interest in the euro.
So the current growth of crypto, the rise of oil and the rise of gold could be considered as a consequence of the weakening of the US dollar. The people rushed not “to”, but “from”. Why? Probably a political crisis, which someone learned about a couple of months (or six months) earlier and hastily began to "pack the luggage".
But this is just suggestion, based mainly on the fact that there is no news at all on which such movements are possible and logical. Europe is too scared that the dollar will go to the bottom too quickly and is trying (albeit timidly) to untie its reserves from it.
To what extent this will work out in reality is unknown, however, attempts are still evident at the verbal level. True, in order for investors to seriously buy the euro, EU need to work a lot. Because for now the truth stands so that "whoever falls first, DB, JPM or BoFa, you need to short the euro". So not everyone still believes in the chances of the euro becoming independent. But time, as usual, will tell...
But what is really true - EU credit quality and major indicators, such as Debt/GDP looks much better than in the US, as well as budget deficit across the EU countries. Indeed, maybe EU economy performs worse than the US ones. But this mostly relates to currency relative value but not to its safety. Definitely for the reserve puproses, the 2nd option is preferable.
Collapse will come from banking sector
And this is final topic for today guys. Here I would like to start from the point that was mostly unsigned in recent J. Powell speech. Federal Reserve Chair Jerome Powell said Thursday he expects to see some banks fail due to their exposure to the commercial real estate sector, which has declined significantly in value following the shift to remote work. And this is really new turn in his speech.
The U.S. banking sector saw its profits drop by nearly half in the last quarter of 2024, as large firms began paying hefty fees to help recoup costs incurred by several bank failures last spring, the Federal Deposit Insurance Corporation reported Thursday. Let's take a look.
Bank regulators led by the Federal Reserve in July unveiled the "Basel III" proposal to overhaul how banks with more than $100 billion in assets calculate the cash they must set aside to absorb potential losses. The agencies said it would increase aggregate capital by around 16% for the roughly three dozen affected lenders. That figure is expected to fall sharply as regulators embark on a sweeping rewrite of the draft, the people said.
Federal Reserve Chairman Jerome Powell said Wednesday the central bank and other regulators will be making significant changes to a contentious plan to raise large bank capital requirements. Powell also did not rule out reproposing the rule to solicit further feedback, a step that could significantly delay the project and potentially push it into a new presidential administration.
So, the US do not want to play on common rules of Basel III requirements to banking capital, trying to make EU backs play by them. While the US banks should get big relief from this obligation.
US banks far more exposed than Europeans to property crunch, says Morgan Stanley. Morgan Stanley analysts said in a research note that regional U.S. banks looked most exposed, alongside German regional lenders - which unlike bigger European banks had been increasing their exposure.
This week was full of events - ECB, Powell, NFP and some other data which made trading process interesting. Also I would mention among big events is strong rally on Gold. We suggest that gold rally has deeper reasons than it might seen on the surface, but this is more the subject for gold market report, as well, as J. Powell speech. In general, you could see how data releases make markets move in opposite directions week by week, making them to loose the sense of direction totally. That's why we should not pay attention to this and keep going with our long-term view. Once again (as we've warned) - NFP was revised down for 100K+. But who will compensate investors looses that they have got on this "wrong data" a month ago? The manipulations with statistics continue. How unemployment could raise to almost 4%, if your economy is generating +250K jobs every month? How continued claims could raising and U6 unemployment stands around 7.5% and weekly hours stand at historical lows? All these questions are stay on a surface.
Market overview
The dollar traded modestly weaker against most major peers on Friday, and was on pace for its worst weekly showing against the euro this year after mixed data kept an anticipated June interest rate cut from the Federal Reserve on the table. Nonfarm payrolls increased by 275,000 jobs last month, the labor department's Bureau of Labor Statistics said in its closely watched employment report on Friday. Data for January was revised down to show 229,000 jobs created instead of 353,000 as previously reported. The unemployment rate rose to 3.9% in February after holding at 3.7% for three straight months, the data showed. Wage inflation remains stable around 4.3%.
"The market had been getting a little worried, I think, that the Fed was stepping back from being in a position to cut rates soon, particularly given the recent inflation reports," said Stuart Cole, chief economist at Equiti Capital. "Today's report should provide some optimism that, even if the scale of loosening will not be as strong as considered at the turn of the year, things are still moving in the right direction to allow the Fed to cut this year," he said. "In the short term at least, I think the dollar will be trading on a softer footing," Cole added.
The ECB kept rates at record highs of 4.00% on Thursday while cautiously laying the ground to lower them later this year, saying it had made good progress in bringing down inflation.
"We are making good progress towards our inflation target and we are more confident as a result - but we are not sufficiently confident," ECB President Christine Lagarde told a press conference. While the policymakers did not discuss cuts for this meeting, they are just beginning to discuss the dialling back of their restrictive stance, Lagarde said.
That discussion signals "the ECB is getting closer and closer to that starting point for dialling back stimulus," said Bipan Rai, North America head of FX strategy at CIBC.
The euro's strength on Thursday had more to do with the dollar's broad weakness than any big change in investors' attitude toward the common currency, analysts said. We're viewing it as mainly a function of dollar dynamics," Simon Harvey, head of FX analysis at MonFX, said. Long positioning that was built pre-Powell on a higher for longer Fed stance has been flushed out of markets over the past 24 hours," he said.
The euro got a lift this week as the dollar came under pressure after Federal Reserve Chair Jerome Powell sounded more confident about cutting interest rates in coming months. Speaking on Thursday, Powell said the Fed was "not far" from having the confidence it needed to cut rates. Currencies typically weaken if central banks lower interest rates.
"We are waiting to become more confident that inflation is moving sustainably to 2%. When we do get that confidence, and we're not far from it, it will be appropriate to begin to dial back the level of restriction so that we don't drive the economy into recession," Powell said in a hearing before the Senate Banking Committee.
"(Friday's data) really kind of solidifies what Chair Powell was saying this week, about the confidence he had in the potential to begin the rate cutting cycle this year," said Lindsey Bell, chief strategist at 248 Ventures in Charlotte, North Carolina.
Jiji news agency reported the BoJ is considering a framework that will show the outlook for upcoming government bond buying amounts. Separately, Reuters reported a growing number of BoJ policymakers could support ending negative interest rates this month on expectations that this year's annual wage negotiations will yield strong results, four sources familiar with its thinking said.
"The yen is rising as speculation mounts that the BoJ will buck the global central bank trend and hike interest rates later this month," said Kathleen Brooks, research director at XTB. "In the short term, a powerful downtrend seems to be building for USD/JPY, and we believe that this pair could test 145.00," she added.
Total mess in market expectations
If you take a look over recent headlines in media, guys, you'll see total mess in expectations concerning ECB and the Fed rate level activity. Some tells that they will act together, others tell the Fed will be first, while another ones talk the opposite. Let's try to deal with this mess and find the truth. Let's start first from recent ECB meeting. In fact, C. Lagarde said nothing new, expect the one thing that we treat as most important - ECB has cut inflation forecast. Now they expect reaching of 2% not in 2026 but in 2025. In 2024 inflation has to drop from 2.7 to 2.3% by their view. So, 1:0 in favor of ECB's cut in June... At the same time, investors have been doubtful that the ECB would move before the U.S. Federal Reserve, citing historical precedents. The Fed is expected to cut its own key rate on June 12 .
Investors have started to flag the risk that the Fed might not be able to cut rates at all this year if the world's largest economy holds strong. And they don't doubt the ECB can move first given a much weaker economy. Still, some economists reckon moving before the Fed could dampen how much the ECB cuts overall. It's been a long time coming, but the remarkably tight correlation between U.S. and euro zone interest rate expectations is set to unravel.
the ECB doesn't want to lose its inflation-fighting credibility, and the Fed doesn't want to crash the economy's 'soft' or 'no landing'.
But, some analysts (we're not alone with this suggestion) think that there will be no Fed cut this year. Torsten Slok, chief economist and partner at Apollo Global Management, on Thursday highlighted the yawning chasm opening up between the U.S. and German growth outlooks for this year. Last week, citing a re-acceleration in U.S. growth and price pressures, Slok issued one of the first calls from a major financial institution that the Fed will not cut rates at all this year.
"The bottom line is that the Fed will spend most of 2024 fighting inflation," he wrote on March 1. "As a result, the Fed will not cut rates this year and rates are going to stay higher for longer."
Mr. Slok points 10 reasons for this:
- The US economy is not slowing down, but accelerating again. Expectations for its growth rate are also rising;
- Trend inflation indicators are moving up;
- The most basic inflation, monitored by Fed Chairman Jerome Powell, is also rising;
- The US labor market remains strong, with wage growth rates of 4-5% YoY;
- Surveys of small businesses indicate that they plan to increase selling prices;
- Surveys in the manufacturing industry show that prices paid — another leading indicator of inflation — are rising;
- A similar trend is observed in the service sector;
- Surveys of small businesses indicate that more and more such employers are planning to raise wages;
- Landlords are raising rates, in addition, housing prices are rising;
- Financial conditions continue to improve.
- Considering all of the above, the strong US labor market report for January and the inflation surprise in the same month do not look surprising. Moreover, this trend is likely to continue. Accordingly, the Fed will spend this year fighting inflation and will not lower interest rates.
"We see the risks as skewed to the downside for EURUSD this year, with the European growth/inflation/fiscal mix more conducive to a larger ECB cutting cycle relative to the Fed," Deutsche analysts wrote in a recent note.
While the U.S. economy has remained resilient, "there is no significant evidence Europe and China are picking up," said Thierry Wizman, global FX and rates strategist at Macquarie, who has become more neutral on the dollar after his bearish outlook last year. "That's the reason people have had this change of heart" on the dollar, he said.
So, Key pillars of support — from US productivity growth and economic dynamism to a torrent of flows into American assets and homegrown technological prowess in crucial areas such as AI — reinforce the greenback’s dominant role as the world’s reserve currency despite any short-term ups and downs. These fundamentals should blunt the impact of Fed rate cuts when they do happen, and, by keeping the US economy in front of global peers, underpin the narrative of “American exceptionalism” for the foreseeable future.
“There’s zero alternative,” said Themistoklis Fiotakis, head of foreign-exchange strategy at Barclays Plc in London. “Dollar strength is about longer-term macro factors. It’s not a cycle, it’s a trend.”
The repricing of Fed expectations has been “a huge adjustment,” said Candice Bangsund, a portfolio manager at Montreal-headquartered asset manager Fiera Capital. “Expectations have moved a lot in the bond market and obviously that flows into currency markets as well.”
“If US growth remains the highest among the major developed markets and the dollar interest rates don’t fall that much, there is certainly no reason for the dollar to weaken,” said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Asset Management Co. in Tokyo.
Unexpected factor of EUR strength
This week few big banks have made very special statements that have appeared to be totally unexpected. We do not exclude that they could have some political background that we will consider tomorrow. Still, it discovers new driving factor for EUR/USD that could become more powerful in nearest months. Everything has started with BofA.
Here we have to pay attention to who has said this. Next one is CEO Jamie Dimon, who in late January and early February went on a series of interviews ( 1, 2, 3) on the topic that the current US national debt is a disaster. You can read many interesting theses in these articles. And the fact that such a budget deficit as now, outside of a recession, is unprecedented. And that the state is accumulating debt, but is doing it not productively. And that the deficit will have to be reduced and this is a problem He allows 10 years before real problems arise.Uncontrolled debt can lead to financial disaster, wreaking havoc not only in the United States, but throughout the world. Keeping the US dollar in reserves is now seen by other countries as a threat that could undo years of financial stability.
But it seems to me that what is more interesting is not the theses, but who voices these theses and why. The fact that Dimon has been credited with wanting to go into high politics for some time in this regard is quite remarkable, although he denies it. But what he is doing now is not the actions of the CEO of the largest bank, it is an election campaign. It may seem strange, but the financier and banker is not a Democrat, a liberal and a sweetheart, he is a Republican and sympathizes with the MAGA wing. Even if not in direct text.
In general, Trump seems to already have a candidate for Treasury Secretary. It is safe to assume that a program of decisive action is also ready. It’s no wonder he’s selling his JPMorgan shares. Apparently, in the new realities of clearing the national debt and the financial system, banks will have a hard time.
According to Reuters, the pan-European currency is quickly regaining popularity with central banks and is once again becoming the main competitor to the US dollar. Almost one in five of the heads of foreign exchange reserves of central banks in 75 countries surveyed by the London-based OMFIF expects euro reserves to grow over the next two years. Only 7% of the survey participants reported a decrease in their euro reserves.
Demand for the euro is now very high, bankers responsible for the foreign exchange reserves of central banks are sure. As a result, the euro now accounts for approximately 20% of central banks ' foreign exchange reserves, although the European currency is still very far from reaching a 60% share of the dollar. One of the main reasons that changed the attitude of central banks towards the euro was the refusal of the ECB from a negative discount rate in 2022.
Now, thanks to the positive rate (in the euro area), bankers want to replace some of the dollars in their reserves with euros",- explains OMFIF Senior economist Taylor Pierce. So, the central bank of Romania plans to keep the share of euros in its foreign exchange reserves at the level of 40-75%. Now it is about 59%.
The total share of the US dollar in foreign exchange reserves fell, according to the IMF, from 72% in 2000 to 59% last year. The yuan's share is gradually increasing. In Belgium, for example, non-European investors ' demand for 10-year Eurobonds doubled year-on-year in January 2024. According to the head of the kingdom's debt agency, Marik Post, most of the investors are from Asia. In two of the three bond sales by the European Financial Stability Facility (EFSF), Asian investors bought 34% and 27% of the bonds offered for sale. As for financial institutions, central banks show the greatest interest in the euro.
So the current growth of crypto, the rise of oil and the rise of gold could be considered as a consequence of the weakening of the US dollar. The people rushed not “to”, but “from”. Why? Probably a political crisis, which someone learned about a couple of months (or six months) earlier and hastily began to "pack the luggage".
But this is just suggestion, based mainly on the fact that there is no news at all on which such movements are possible and logical. Europe is too scared that the dollar will go to the bottom too quickly and is trying (albeit timidly) to untie its reserves from it.
To what extent this will work out in reality is unknown, however, attempts are still evident at the verbal level. True, in order for investors to seriously buy the euro, EU need to work a lot. Because for now the truth stands so that "whoever falls first, DB, JPM or BoFa, you need to short the euro". So not everyone still believes in the chances of the euro becoming independent. But time, as usual, will tell...
But what is really true - EU credit quality and major indicators, such as Debt/GDP looks much better than in the US, as well as budget deficit across the EU countries. Indeed, maybe EU economy performs worse than the US ones. But this mostly relates to currency relative value but not to its safety. Definitely for the reserve puproses, the 2nd option is preferable.
Collapse will come from banking sector
And this is final topic for today guys. Here I would like to start from the point that was mostly unsigned in recent J. Powell speech. Federal Reserve Chair Jerome Powell said Thursday he expects to see some banks fail due to their exposure to the commercial real estate sector, which has declined significantly in value following the shift to remote work. And this is really new turn in his speech.
“This is a problem we’ll be working on for years more, I’m sure. There will be bank failures,” he said during a Thursday hearing on the Fed’s monetary policy in the Senate Banking Committee. It’s not a first-order issue for any of the very large banks. It’s more smaller and medium-sized banks that have these issues. We’re working with them. We’re getting through it. I think it’s manageable, is the word I would use,” he said.
The U.S. banking sector saw its profits drop by nearly half in the last quarter of 2024, as large firms began paying hefty fees to help recoup costs incurred by several bank failures last spring, the Federal Deposit Insurance Corporation reported Thursday. Let's take a look.
- Net profit of 4,587 commercial banks and savings institutions decreased by $30 billion (-43.9% QoQ) to $38.4 billion.
Quarterly net profit of regional banks -9.9% QoQ. - The share of unprofitable creditors increased to 10.9%, the maximum since Q4 2017.
- Higher non-interest expenses: +18.9%
- Lower interest income: -8.8%
- A sharp jump in default reserves (mainly CRE loans): +26.5% !!! (the highest figure since the fourth quarter of 2010)
- At the end of the year, the net profit of the entire sector is minus 2.3%.
Bank regulators led by the Federal Reserve in July unveiled the "Basel III" proposal to overhaul how banks with more than $100 billion in assets calculate the cash they must set aside to absorb potential losses. The agencies said it would increase aggregate capital by around 16% for the roughly three dozen affected lenders. That figure is expected to fall sharply as regulators embark on a sweeping rewrite of the draft, the people said.
"The opposition to the Basel III Endgame proposal is coming from every sector of our economy," said Kevin Fromer, CEO of the Financial Services Forum, which represents global banks. "We would hope the agencies are hearing these concerns and are working to find a way forward that will support our economy."
Federal Reserve Chairman Jerome Powell said Wednesday the central bank and other regulators will be making significant changes to a contentious plan to raise large bank capital requirements. Powell also did not rule out reproposing the rule to solicit further feedback, a step that could significantly delay the project and potentially push it into a new presidential administration.
"We do hear the concerns and I do expect there will be broad material changes to the proposal," he told the House Financial Services Committee. "I’ll add that I’m confident that the final product will be one that has broad support at the Fed and in the broader world."
So, the US do not want to play on common rules of Basel III requirements to banking capital, trying to make EU backs play by them. While the US banks should get big relief from this obligation.
US banks far more exposed than Europeans to property crunch, says Morgan Stanley. Morgan Stanley analysts said in a research note that regional U.S. banks looked most exposed, alongside German regional lenders - which unlike bigger European banks had been increasing their exposure.