Sive Morten
Special Consultant to the FPA
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Fundamentals
This week whole market society was waiting for inflation data that should had to shed some light on next Fed's possible step. Although we haven't got big changes in data, but still it was surprising a bit. Despite that CPI has decreased, it still has shown 0.2% growth on MoM basis, and, with crude oil rally in mind, it could be the stormcrow of coming August and September numbers. As you know we expect next inflationary spiral start right in the early fall. Second is, PPI... we've talked deflation and haven't expected any surprises. Indeed, they were not, but only in production sector where inflation jumped. What has surprised is service sector, where household financial sources are exhausting and services should fall next.
Market overview
The dollar rose against major currencies on Monday, broadly supported by Federal Reserve officials saying additional interest rate hikes are likely given that inflation remains persistently high and the labor market is still tight.
Fed Governor Michele Bowman said on Monday additional interest rate hikes will likely be needed to lower inflation to the U.S. central bank's 2% target. Bowman, in remarks prepared for delivery to a "Fed Listens" event in Atlanta, said she backed the latest rate increase last month because inflation remains too elevated, and job growth and other indications of activity show the economy has continued expanding at a "moderate pace."
New York Fed President John C. Williams said, in an interview with the New York Times published on Monday, the central bank will need to keep the restrictive stance for some time. Maintaining that stance is going to be determined by the underlying fundamentals "driving, supply and demand in the economy, inflation," he added.
Jeff Klingelhofer, portfolio manager and co-head of investments at Thornburg Investment Management, said he sees the dollar holding gains in the near to medium term.
China's imports and exports fell much faster than expected in July, data on Tuesday showed, with imports down 12.4% from a year earlier while exports contracted by 14.5%, in another sign of the country's faltering economic recovery and subdued global demand. On top of that Moody's late on Monday cut credit ratings of several small to mid-sized U.S. banks and said it may downgrade some of the nation's biggest lenders. It warned that the sector's credit strength will likely be tested by funding risks and weaker profitability. This has triggered safe haven demand, supporting US Dollar
It's been a tough few weeks (or months) for China - the world's second-largest economy: housing market turmoil is flaring up again, growth and private investment remain fragile, and consumption and services are struggling to deliver on that much hoped-for post-COVID boom. Markets have been disappointed over the lack of concrete stimulus action following the end-July Politburo meeting, and various sets of PMI data have charted a less than clear path ahead.
China's new bank loans tumbled in July and other key credit gauges also weakened , even after policymakers cut interest rates and promised to roll out more support for the faltering economy. Chinese banks extended 345.9 billion yuan ($47.80 billion) of new yuan loans in July, tumbling 89% from June to the lowest since late 2009 and falling far short of analysts' forecasts, data from the People's Bank of China showed on Friday.
Hobbled by weak demand at home and abroad, China's economic momentum has faltered in recent months despite strong bank lending in the first half. Household loans, mostly mortgages, contracted by 200.7 billion yuan in July, after rising 963.9 billion yuan in June, as a debt crisis in the property sector deepened, while corporate loans slid to 237.8 billion yuan last month from 2.28 trillion yuan in June, central bank data showed.
US consumer price index (CPI) rose 0.2% last month, matching the gain in June. The CPI climbed 3.2% in the 12 months through July, up from a 3.0% rise in June, which was the smallest year-on-year gain since March 2021. Excluding the volatile food and energy categories, the CPI gained 0.2% in July, the same as the June increase. In the 12 months through July, core CPI grew 4.7% after rising 4.8% in June.
San Francisco Federal Reserve Bank Mary Daly on Thursday also said more progress is needed to tame inflation, even though it is moving in the right direction. She is a voter on the Federal Open Market Committee in 2024. She said the July CPI numbers do not mean that the Fed can declare victory over inflation, adding that the labor market is not yet balanced.
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits increased 21,000 to a seasonally adjusted 248,000 for the week ended Aug. 5. Economists had forecast 230,000 claims for the latest week.
The U.S. producer price index (PPI) for final demand rose 0.3% in July, according to the Labor Department. This compared with economist expectations for 0.2%. And in the 12 months through July, the PPI rose 0.8% against estimates for 0.7%.
Friday's data suggested to Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute in St. Louis, that the Fed will need to keep rates higher for longer and he said "it puts additional rate hikes back on the table for this year. We think there's some reassessment of inflation going on with investors looking further under the hood. Disinflation has been very rapid in the past months at the top level but that may be leveling out here a little," Christopher said."
On the U.S. Treasuries side, benchmark 10-year notes were up 8.4 basis points at 4.166%, from 4.082% late on Thursday. The 30-year bond was last up 3.9 basis points to yield 4.2717%. The 2-year note was last up 7.6 basis points to yield 4.8968%. In commodities, oil prices rose for their longest weekly gaining streak since a run that ended June 10, 2022, after forecasts for tightening supplies from the International Energy Agency (IEA).
The European Central Bank is on the back foot again and this time the bad news doesn't come from Greece, Italy or any of the usual suspects in the bloc's poorer south. The club's biggest member and supposed powerhouse, Germany, has been hit by a toxic mix of weak trading with key partner China, a slump in its large manufacturing and construction sectors and even some existential questions about a business model predicated on cheap fuel from Russia.
Trouble in Germany is hobbling growth in the euro zone as a whole and threatening to push it into a recession, rather than the "soft landing" of moderate growth and inflation that the ECB had pencilled in and the United States is still hopeful of achieving. This is forcing a change of tune at the ECB -- from ruling out a pause in its steepest and longest streak of interest rate hikes to openly talking about one as soon as next month.
And the market thinks the central bank may even have to undo some of those increases sooner rather than later. "If the government does not take decisive action, Germany is likely to remain at the bottom of the growth table in the euro area," said Ralph Solveen, an economist at Commerzbank.
This puts the ECB in a situation where it must contemplate wrapping up its tightening cycle before witnessing the sustained drop in core inflation it said it wanted to see.
After declaring in June the ECB was "not even thinking about pausing" its rate hikes, Lagarde changed tack in her latest press conference, going as far as saying she didn't think the central bank had more ground to cover "at this point in time". But markets even doubt the high-for-longer scenario, with substantial rate cuts priced in for the second half of next year.
Data on Aug 16 could confirm that growth picked up in Q2. A preliminary estimate in late July showed GDP expanded by 0.3% in the second quarter versus the first. A number of indicators are pointing to a slowdown, including a measure of business activity, which has skidded into recession territory and yet unemployment is at a record low. Money markets show traders think the European Central Bank might raise interest rates one last time this year, before it starts cutting in the spring. The GDP figures could offer a steer on what kind of message investors might get next month from ECB President Christine Lagarde.
WHAT ALL THESE DATA MEANS?
Gasoline price has done their dirt deed. Taking into account the drought, the shortage of oil and the resumption of rising housing prices, we are entering a new inflationary spiral against the background of a record high rate, which is gradually "folding" the banks. It seems that in the US, the bottom of inflation has passed. Supposedly it was expected around 5-6%, but in principle, the Core CPI is somewhere a little below 5% and has stabilized.
We have early warning signals: ️gas has danced in Europe again, the problems with logistics begins, as US-China line, as China-Europe line. Food prices started back in June, and rice in general has risen by 50% well, mother oil is also growing, after Grandpa Jay Bi stopped selling oil from SPR.
In general, we are going almost strictly according to the schedule of 2021 - then in the summer, too, everything started like this and peaked in the summer of the next 2022, after which the decline began. As a matter of fact, the second wave has now started in the USA with a lag of 1 year 10 months- 2 years. So the middle of 2024 may turn out to be the peak in inflation, although it will be more difficult to bring it down - the SPR is half empty, and it is an election year, it is necessary to scatter money to voters. So we will have to see double-digit dollar inflation in the coming year.
As interest rates remain high and consumers run out of excess savings, the next falling market to fall in the second half of 2023 will be the services sector. This is one of the reasons why spreads on high-yield bonds have not yet expanded following the decline in the manufacturing index, as it usually happens. We already see this in recent PPI data, showing that inflation has jumped due to service sector.
By the way, recent CPI 0.2% jump interrupts 12-month sequence of CPI decreasing. Besides, The Fed will keep an eye on its new favorite - the consumer price index for basic Ex-Shelter services, which accelerated again in July (+0.2% mom and from +3.9% to +4.0% YoY). Another indirect sign of coming inflation jump - inflationary expectations that have increased again this month.
High interest rates start spreading and impact in all spheres of US economy. Interest coverage by EBITDA profit continues to decline. And this is not all the old cheap loans have been refinanced, as I mentioned earlier.So over the next few years, while keeping rates at a high level and as old loans are refinanced with new, more expensive ones, the cost of servicing loans by companies will continue to grow, the opportunity to attract additional loans for development will dry up and everything will slowly slide into depression. Although it will probably break sooner where it is thin.
Meantime, financial sphere - we do not see any big changes. Although this week the Fed has paused QT and its balance has slightly increased for ~ $1.3 Bln, demand for Money market funds is stable. And special credit loans and TARP programme show stable demand:
Recently many analysts and officials (JP Morgan an example) repeat the same mantras - "no recession on horizon". But, if there is no recession, there will be inflation. That's the beauty of the current situation. If there is no recession (this year, in principle, it can't happen even theoretically, only in I-IIQ 2024) - the price of oil and raw materials in general will grow due to high demand and a certain deficit and should increase inflation (as we expect it). High inflation means a high rate (and a deterioration in the credit quality of companies and the population, which means a decrease in demand - which is we see now already). High inflation and the rate - a drop in demand. Falling demand - stimulating demand and budget deficit. The budget deficit is the growth of the money supply (but it depends on the aggressiveness of the Fed to reduce the balance sheet) and inflation. In general, a vicious circle. Just note that we have not seen any significant improvements in demand in July, even against the background of huge borrowings and injections from the Ministry of Finance. And the problem is - demand is falling for some, and budget money is coming to others. So some industries may suffer more. In theory, the situation could be solved by a sharp increase in the production of raw materials, but here the eco-test spoils all fruits, and trillions of money and years of time will not come from anywhere quickly.
This week whole market society was waiting for inflation data that should had to shed some light on next Fed's possible step. Although we haven't got big changes in data, but still it was surprising a bit. Despite that CPI has decreased, it still has shown 0.2% growth on MoM basis, and, with crude oil rally in mind, it could be the stormcrow of coming August and September numbers. As you know we expect next inflationary spiral start right in the early fall. Second is, PPI... we've talked deflation and haven't expected any surprises. Indeed, they were not, but only in production sector where inflation jumped. What has surprised is service sector, where household financial sources are exhausting and services should fall next.
Market overview
The dollar rose against major currencies on Monday, broadly supported by Federal Reserve officials saying additional interest rate hikes are likely given that inflation remains persistently high and the labor market is still tight.
Fed Governor Michele Bowman said on Monday additional interest rate hikes will likely be needed to lower inflation to the U.S. central bank's 2% target. Bowman, in remarks prepared for delivery to a "Fed Listens" event in Atlanta, said she backed the latest rate increase last month because inflation remains too elevated, and job growth and other indications of activity show the economy has continued expanding at a "moderate pace."
New York Fed President John C. Williams said, in an interview with the New York Times published on Monday, the central bank will need to keep the restrictive stance for some time. Maintaining that stance is going to be determined by the underlying fundamentals "driving, supply and demand in the economy, inflation," he added.
Jeff Klingelhofer, portfolio manager and co-head of investments at Thornburg Investment Management, said he sees the dollar holding gains in the near to medium term.
China's imports and exports fell much faster than expected in July, data on Tuesday showed, with imports down 12.4% from a year earlier while exports contracted by 14.5%, in another sign of the country's faltering economic recovery and subdued global demand. On top of that Moody's late on Monday cut credit ratings of several small to mid-sized U.S. banks and said it may downgrade some of the nation's biggest lenders. It warned that the sector's credit strength will likely be tested by funding risks and weaker profitability. This has triggered safe haven demand, supporting US Dollar
It's been a tough few weeks (or months) for China - the world's second-largest economy: housing market turmoil is flaring up again, growth and private investment remain fragile, and consumption and services are struggling to deliver on that much hoped-for post-COVID boom. Markets have been disappointed over the lack of concrete stimulus action following the end-July Politburo meeting, and various sets of PMI data have charted a less than clear path ahead.
China's new bank loans tumbled in July and other key credit gauges also weakened , even after policymakers cut interest rates and promised to roll out more support for the faltering economy. Chinese banks extended 345.9 billion yuan ($47.80 billion) of new yuan loans in July, tumbling 89% from June to the lowest since late 2009 and falling far short of analysts' forecasts, data from the People's Bank of China showed on Friday.
Hobbled by weak demand at home and abroad, China's economic momentum has faltered in recent months despite strong bank lending in the first half. Household loans, mostly mortgages, contracted by 200.7 billion yuan in July, after rising 963.9 billion yuan in June, as a debt crisis in the property sector deepened, while corporate loans slid to 237.8 billion yuan last month from 2.28 trillion yuan in June, central bank data showed.
US consumer price index (CPI) rose 0.2% last month, matching the gain in June. The CPI climbed 3.2% in the 12 months through July, up from a 3.0% rise in June, which was the smallest year-on-year gain since March 2021. Excluding the volatile food and energy categories, the CPI gained 0.2% in July, the same as the June increase. In the 12 months through July, core CPI grew 4.7% after rising 4.8% in June.
San Francisco Federal Reserve Bank Mary Daly on Thursday also said more progress is needed to tame inflation, even though it is moving in the right direction. She is a voter on the Federal Open Market Committee in 2024. She said the July CPI numbers do not mean that the Fed can declare victory over inflation, adding that the labor market is not yet balanced.
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits increased 21,000 to a seasonally adjusted 248,000 for the week ended Aug. 5. Economists had forecast 230,000 claims for the latest week.
The U.S. producer price index (PPI) for final demand rose 0.3% in July, according to the Labor Department. This compared with economist expectations for 0.2%. And in the 12 months through July, the PPI rose 0.8% against estimates for 0.7%.
Friday's data suggested to Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute in St. Louis, that the Fed will need to keep rates higher for longer and he said "it puts additional rate hikes back on the table for this year. We think there's some reassessment of inflation going on with investors looking further under the hood. Disinflation has been very rapid in the past months at the top level but that may be leveling out here a little," Christopher said."
On the U.S. Treasuries side, benchmark 10-year notes were up 8.4 basis points at 4.166%, from 4.082% late on Thursday. The 30-year bond was last up 3.9 basis points to yield 4.2717%. The 2-year note was last up 7.6 basis points to yield 4.8968%. In commodities, oil prices rose for their longest weekly gaining streak since a run that ended June 10, 2022, after forecasts for tightening supplies from the International Energy Agency (IEA).
The European Central Bank is on the back foot again and this time the bad news doesn't come from Greece, Italy or any of the usual suspects in the bloc's poorer south. The club's biggest member and supposed powerhouse, Germany, has been hit by a toxic mix of weak trading with key partner China, a slump in its large manufacturing and construction sectors and even some existential questions about a business model predicated on cheap fuel from Russia.
Trouble in Germany is hobbling growth in the euro zone as a whole and threatening to push it into a recession, rather than the "soft landing" of moderate growth and inflation that the ECB had pencilled in and the United States is still hopeful of achieving. This is forcing a change of tune at the ECB -- from ruling out a pause in its steepest and longest streak of interest rate hikes to openly talking about one as soon as next month.
And the market thinks the central bank may even have to undo some of those increases sooner rather than later. "If the government does not take decisive action, Germany is likely to remain at the bottom of the growth table in the euro area," said Ralph Solveen, an economist at Commerzbank.
This puts the ECB in a situation where it must contemplate wrapping up its tightening cycle before witnessing the sustained drop in core inflation it said it wanted to see.
After declaring in June the ECB was "not even thinking about pausing" its rate hikes, Lagarde changed tack in her latest press conference, going as far as saying she didn't think the central bank had more ground to cover "at this point in time". But markets even doubt the high-for-longer scenario, with substantial rate cuts priced in for the second half of next year.
Data on Aug 16 could confirm that growth picked up in Q2. A preliminary estimate in late July showed GDP expanded by 0.3% in the second quarter versus the first. A number of indicators are pointing to a slowdown, including a measure of business activity, which has skidded into recession territory and yet unemployment is at a record low. Money markets show traders think the European Central Bank might raise interest rates one last time this year, before it starts cutting in the spring. The GDP figures could offer a steer on what kind of message investors might get next month from ECB President Christine Lagarde.
WHAT ALL THESE DATA MEANS?
Gasoline price has done their dirt deed. Taking into account the drought, the shortage of oil and the resumption of rising housing prices, we are entering a new inflationary spiral against the background of a record high rate, which is gradually "folding" the banks. It seems that in the US, the bottom of inflation has passed. Supposedly it was expected around 5-6%, but in principle, the Core CPI is somewhere a little below 5% and has stabilized.
We have early warning signals: ️gas has danced in Europe again, the problems with logistics begins, as US-China line, as China-Europe line. Food prices started back in June, and rice in general has risen by 50% well, mother oil is also growing, after Grandpa Jay Bi stopped selling oil from SPR.
In general, we are going almost strictly according to the schedule of 2021 - then in the summer, too, everything started like this and peaked in the summer of the next 2022, after which the decline began. As a matter of fact, the second wave has now started in the USA with a lag of 1 year 10 months- 2 years. So the middle of 2024 may turn out to be the peak in inflation, although it will be more difficult to bring it down - the SPR is half empty, and it is an election year, it is necessary to scatter money to voters. So we will have to see double-digit dollar inflation in the coming year.
As interest rates remain high and consumers run out of excess savings, the next falling market to fall in the second half of 2023 will be the services sector. This is one of the reasons why spreads on high-yield bonds have not yet expanded following the decline in the manufacturing index, as it usually happens. We already see this in recent PPI data, showing that inflation has jumped due to service sector.
By the way, recent CPI 0.2% jump interrupts 12-month sequence of CPI decreasing. Besides, The Fed will keep an eye on its new favorite - the consumer price index for basic Ex-Shelter services, which accelerated again in July (+0.2% mom and from +3.9% to +4.0% YoY). Another indirect sign of coming inflation jump - inflationary expectations that have increased again this month.
High interest rates start spreading and impact in all spheres of US economy. Interest coverage by EBITDA profit continues to decline. And this is not all the old cheap loans have been refinanced, as I mentioned earlier.So over the next few years, while keeping rates at a high level and as old loans are refinanced with new, more expensive ones, the cost of servicing loans by companies will continue to grow, the opportunity to attract additional loans for development will dry up and everything will slowly slide into depression. Although it will probably break sooner where it is thin.
Meantime, financial sphere - we do not see any big changes. Although this week the Fed has paused QT and its balance has slightly increased for ~ $1.3 Bln, demand for Money market funds is stable. And special credit loans and TARP programme show stable demand:
Recently many analysts and officials (JP Morgan an example) repeat the same mantras - "no recession on horizon". But, if there is no recession, there will be inflation. That's the beauty of the current situation. If there is no recession (this year, in principle, it can't happen even theoretically, only in I-IIQ 2024) - the price of oil and raw materials in general will grow due to high demand and a certain deficit and should increase inflation (as we expect it). High inflation means a high rate (and a deterioration in the credit quality of companies and the population, which means a decrease in demand - which is we see now already). High inflation and the rate - a drop in demand. Falling demand - stimulating demand and budget deficit. The budget deficit is the growth of the money supply (but it depends on the aggressiveness of the Fed to reduce the balance sheet) and inflation. In general, a vicious circle. Just note that we have not seen any significant improvements in demand in July, even against the background of huge borrowings and injections from the Ministry of Finance. And the problem is - demand is falling for some, and budget money is coming to others. So some industries may suffer more. In theory, the situation could be solved by a sharp increase in the production of raw materials, but here the eco-test spoils all fruits, and trillions of money and years of time will not come from anywhere quickly.
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