Sive Morten
Special Consultant to the FPA
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Fundamentals
So, holidays now stand behind and data stream once again is becoming wider. This week market mostly was watching for inflation data that has brought bad surprise to the Fed. And this makes us think that comments on January meeting next week will be not as obvious as many traders think. US Banking sector results were mixed. While Citi, BofA, WF have reported poor results, JPM, Mellon have shown good performance. We still consider this as negative factor, because JPM should not be taken in consideration. It has boosted results due SVB takeover gift.
BTC ETF approvement has triggered big sell-off, so that BTC even has dropped below 40K recently. Finally, today is Taiwan elections that will have big consequences in near term for global politics. With more data has been released this week, we could say that structural crisis is keep going as it should - without acceleration and without any pauses, slowly but stubbornly. And the fact that the US has shown inflation jump tells that it is becoming difficult to keep hiding it, so they have to let it come on surface.
Market overview
The dollar index pared gains on Friday after U.S. producer prices unexpectedly fell in December, raising expectations of an early U.S. rate cut. It was higher on the day, boosted by safety buying after U.S. and British warplanes, ships and submarines launched dozens of air strikes across Yemen overnight. The producer price index for final demand dipped 0.1% last month, after a decline in the cost of goods, while prices for services were unchanged, increasing the chances of lower inflation in the months ahead. That led traders to add to bets for a rate cut in the coming months. Fed funds futures now imply a 79% chance of a March rate cut, up from 73% on Thursday, according to the CME Group's FedWatch Tool.
Traders maintained their view that a March rate cut is likely even after consumer price inflation data on Thursday came in above economists' expectations. Last week's jobs report for December also showed strong jobs growth, though underlying details of the report were mixed.
The headline U.S. Consumer Price Index (CPI) rose 0.3% last month, for an annual gain of 3.4%, against expectations of 0.2% and 3.2%, respectively. The cost of shelter, which includes rents, hotel and motel stays as well as school housing, accounted for more than half of the increase in the CPI.
Cleveland Fed President Loretta Mester said on Thursday that the latest CPI figures means that it would likely be too soon for the central bank to cut its policy rate in March. While Richmond Fed President Thomas Barkin also said that the data did little to clarify the path of inflation.
A comparatively hawkish European Central Bank is likely to keep the dollar under pressure against the euro in the near term, though the greenback could recover later in the year as chances of a U.S. recession rise, Citigroup strategists said.
Euro zone inflation jumped as expected last month, supporting the European Central Bank's case to keep interest rates at record highs for some time, even as cooling U.S. inflation is widely expected to allow the Federal Reserve room to start cutting interest rates later this year. Consumer price data on Thursday is expected to show whether prices are continuing a cooling trend that began last year, potentially setting the stage for easier monetary policy.
Most market participants in a recent Reuters poll of strategists said the dollar will slip against major currencies in 12 months, weighed down by as the Fed rate cuts. Citi's Tobon said economic strength in Europe was the biggest risk to their call for a recovery in the dollar in the later part of the year, as it would allow the ECB to remain hawkish.
Meanwhile, benchmark 10-year Treasury yields will likely end 2024 around 3.9%, though they will "move around quite substantially over the course of the year," Jabaz Mathai, head of G10 rates and FX strategy at Citi, said in a separate discussion as part of the firm's year-ahead outlook Wednesday. Mathai sees it as unlikely that 10-year yields will test the nearly 16-year highs of 5% they reached in mid-October, he said. Instead, the primary driver of yields will be the strength of the U.S. economy and supply, which will likely hit $1.7 trillion in coupon issuance in 2024, Mathai said.
Meantime, the ECB officials can't find out what they're gonna do with the rate. Recent inflation data broadly confirmed current thinking at the European Central Bank, meaning interest rate cuts are not a near-term topic of debate, chief ECB economist Philip Lane said on Friday. Euro zone inflation jumped as expected last month, rising to 2.9% from 2.4% in November and supporting the ECB's case to keep interest rates at record highs for the time being.
The European Central Bank (ECB) will cut its key interest rates sooner than it recently thought and should not wait until May to make a decision, as there are no signs of additional pressure on inflation, ECB policymaker Mario Centeno said on Tuesday. Understand this as you like...
Here is big banks forecasts on major economical indicators by the end of 2024:
Structural crisis goes over planet
U.S. regional banks have a tougher road to growing profits in 2024 as they face pressure to pay more to depositors versus larger peers while demand from borrowers stays subdued.
Fitch Ratings says it expects rates to stay elevated and put pressure on smaller lenders to pay more to keep deposits relative to larger peers. U.S. banks' unrealized losses on available–for–sale and held–to–maturity securities totalled nearly $684 billion in the third quarter, according to the Federal Deposit Insurance Corp.
While we already have talked about poor Citi results and firing of 20K employees, Barclays slashed its workforce by around 5,000 jobs in 2023 as part of a major cost-cutting drive announced last year, the bank said on Monday.
Euro zone services activity could weaken further in the coming quarters due to rising interest rates but the impact on the sector may be more muted than on manufacturing, a European Central Bank study concluded on Tuesday. German department store giant Galeria Karstadt Kaufhof said on Tuesday it had filed for insolvency following the collapse of its parent Signa amid a real-estate crisis in the region.
The outlook for Germany's construction sector is grim for 2024, according to two prominent research institutes on Wednesday, a further bad sign for the nation's struggling property industry as it suffers its worst crisis in decades. The last time that German construction spending declined was in 2009.
The Ifo survey showed sentiment in residential construction dropped to -56.8 points in December, worse than -54.4 points in November. It was the lowest level since Ifo began tracking the index in 1991. "The prospects for 2024 are bleak," said Klaus Wohlrabe, head of surveys at Ifo.
Tim-Oliver Mueller, head of the German Construction Industry Federation, kept up the pressure on Wednesday. "Berlin, we have a problem. We are not talking about abstract things, but about affordable housing, which is urgently needed," he said.
Meantime, rising income expenses pushed the Federal Reserve system deep into a record loss last year, the central bank said in preliminary figures released on Friday. Fed income after expenses came in at a negative $114.3 billion last year, versus $58.8 billion in positive income the year before.
The benchmark Shanghai Containerized Freight Index was up over 16% week-on-week to 2,206 points on Friday. The index, which measures non-contract "spot" rates for container shipments out of China's ports, has gained 114% since mid-December.
Rates on the Shanghai-Europe route rose 8.1% to $3,103 per 20-foot container on Friday from a week earlier, while the rate for containers to the unaffected U.S. West Coast soared 43.2% to $3,974 per 40-foot containers week on week, leading ship broker Clarksons said on Friday.
In general geopolitics has raised freight rates by 120% in the last 6 weeks, that we do not see yet in inflation data:
General look at global data shows stubborn thing - production and manufacturing sector is destructing, consumption (i.e. retail sales) are dropping. All things that have relation to production - used cars, houses are becoming cheaper:
So, major indicator here is, of course, the sharp increase in consumer inflation. Its "sharp"
not only because it is almost 10% of the previous value, but also because it occurred after several months of fairly tight monetary policy (see graph of the M2 above.
This is a major blow to the Fed's leadership, which planned to start easing the policy in the very near future in the context of de-industrialization shown in charts above. if such a dovish policy were introduced, it would inevitably cause a sharp increase in inflation. The warning turned out to be in reality just as inflation began to rise before the policy eased.
In general, it can be noted that, apparently, the degree of degradation of the monetary system has increased. Because even in industrial prices, everything is not very good.
At the same time, political problems are beginning to affect the economy, and the United States and Great Britain have launched a strike on Yemen. The formal goal is to respond to the closure of the Bab-el-Mandeb Strait and to attacks on US military vessels. But as a result, the price of oil on world markets increased by 2.5% and there is every reason to believe that similar cases will continue.
Iran seized its former tanker, but then captured by the United States. Israel continues attacks on the Gaza Strip and there are fears that it may shift its activity to Lebanon … In general, the economic crisis caused a political one, which increased economic problems, and we are waiting for the next round of the political crisis … The year started off with fun …
Some thoughts on recent data
Started US/UK coalition war against Yemen promises nothing good to the global trade. Europe will feel the logistical blow the most. In “normal” times, maritime import logistics accounts for about 7% of the cost of goods, but now this figure can easily exceed 20% . In Covid 2021, when the Evergreen accident occurred in the Suez Canal, this figure reached 25%. In general, if Western countries fail to quickly resolve the issue with Yemen, then inflation in an already unhappy Europe will begin to rise, and population consumption will rapidly fall. That's why we keep our skeptic position that ECB will be later than the Fed on rate cut...
Second moment is inflation, of course. First is, we do not see yet the war impact in data, which should appear in few months. Previously we already said that it might be few waves of inflation. War definitely will boost the starting of the 2nd wave. Besides, the fact that the US has re-started oil purchasing from Russia well above 60$ ceil indirectly confirms this.
It is expected collapse on stock market this year. Mostly it will relate to the Fed policy. But even now we see acceleration of stock selling by insiders. Anti-monopoly probe against Apple also has a special meaning. If reversal on stock market will happen and shares drop - people start loosing its wealth and turn to savings even harder, cutting consumption. This is, by our opinion, one of the major factors of recession.
The discrepancy between the annual growth rates of real gross domestic income (GDI) and GDP in the third quarter. 2023 looks completely indecent.
GDI (all income from goods and services produced) and GDP (all their value) should in theory be the same [income = expenses], but may differ due to different data sources or “ statistical inconsistency.
Sometimes the gap between GDI and GDP is recorded during periods of recession, but not on such a scale. GDI is often more correct, and its YoY reduction always confirms the beginning of a recession in the economy. In this case, after the fact. We are waiting for the start of the American reporting season based on the results of the fourth quarter. last year, it will be interesting.
Finally, concerning the US economy... alternative indicator of employment that is based not on a survey of employers but on survey of households shows absolutely different things. Most probable that everything stands not as bad and the truth somewhere in between, but still, this is not a good sign at all.
All these data that we've considered tells that the US statistics now is strongly manipulated. Real recession is disguised by "paper" results of stock market, inflation is hidden and undervalued. Using of different revisions and adjustments make it look like everything is more or less good. But close look shows obvious inconsistencies that we've discussed many times.
Speaking about China, in two words, amid weak domestic demand, fears are growing that China will try to exit the crisis through exports, adding to trade tensions. Morgan Stanley sees the situation as China's "longest and deepest" deflation since the 1998 Asian financial crisis, when countries in the region overheated and entered a recession that took years to recover from. As we've said the segregation of two largest economies has turned to active stage. Despite all government efforts, China can't restart economy engine. Big cash boost from PBoC doesn't help to re-fresh demand, export is dropping. The US and China is two sides of the same medal. It means that China will meet stagnation or stagflation with near zero growth level.
It seems that the Fed plan is falling apart. It was really beautiful - try to reach the half of the year and then start rate cut to avoid inflation jump on 2024, put everything on new President team. But now they haven't even started rate cut, but inflation already starts raising again. This breaks everything. Some hints on new reality could be announced as soon as on 30-31st of January. And we probably should forget that ECB will be later to the Fed on rate cut. It means that any EUR rally right now will be temporal and not reliable, at least on long term charts. As we've mentioned above, the logistics problems will boost EU economy slowdown, while Middle East crisis doesn't hurt China - US shipping at all. We'll see...
So, holidays now stand behind and data stream once again is becoming wider. This week market mostly was watching for inflation data that has brought bad surprise to the Fed. And this makes us think that comments on January meeting next week will be not as obvious as many traders think. US Banking sector results were mixed. While Citi, BofA, WF have reported poor results, JPM, Mellon have shown good performance. We still consider this as negative factor, because JPM should not be taken in consideration. It has boosted results due SVB takeover gift.
BTC ETF approvement has triggered big sell-off, so that BTC even has dropped below 40K recently. Finally, today is Taiwan elections that will have big consequences in near term for global politics. With more data has been released this week, we could say that structural crisis is keep going as it should - without acceleration and without any pauses, slowly but stubbornly. And the fact that the US has shown inflation jump tells that it is becoming difficult to keep hiding it, so they have to let it come on surface.
Market overview
The dollar index pared gains on Friday after U.S. producer prices unexpectedly fell in December, raising expectations of an early U.S. rate cut. It was higher on the day, boosted by safety buying after U.S. and British warplanes, ships and submarines launched dozens of air strikes across Yemen overnight. The producer price index for final demand dipped 0.1% last month, after a decline in the cost of goods, while prices for services were unchanged, increasing the chances of lower inflation in the months ahead. That led traders to add to bets for a rate cut in the coming months. Fed funds futures now imply a 79% chance of a March rate cut, up from 73% on Thursday, according to the CME Group's FedWatch Tool.
Traders maintained their view that a March rate cut is likely even after consumer price inflation data on Thursday came in above economists' expectations. Last week's jobs report for December also showed strong jobs growth, though underlying details of the report were mixed.
The headline U.S. Consumer Price Index (CPI) rose 0.3% last month, for an annual gain of 3.4%, against expectations of 0.2% and 3.2%, respectively. The cost of shelter, which includes rents, hotel and motel stays as well as school housing, accounted for more than half of the increase in the CPI.
Cleveland Fed President Loretta Mester said on Thursday that the latest CPI figures means that it would likely be too soon for the central bank to cut its policy rate in March. While Richmond Fed President Thomas Barkin also said that the data did little to clarify the path of inflation.
A comparatively hawkish European Central Bank is likely to keep the dollar under pressure against the euro in the near term, though the greenback could recover later in the year as chances of a U.S. recession rise, Citigroup strategists said.
Euro zone inflation jumped as expected last month, supporting the European Central Bank's case to keep interest rates at record highs for some time, even as cooling U.S. inflation is widely expected to allow the Federal Reserve room to start cutting interest rates later this year. Consumer price data on Thursday is expected to show whether prices are continuing a cooling trend that began last year, potentially setting the stage for easier monetary policy.
Most market participants in a recent Reuters poll of strategists said the dollar will slip against major currencies in 12 months, weighed down by as the Fed rate cuts. Citi's Tobon said economic strength in Europe was the biggest risk to their call for a recovery in the dollar in the later part of the year, as it would allow the ECB to remain hawkish.
Meanwhile, benchmark 10-year Treasury yields will likely end 2024 around 3.9%, though they will "move around quite substantially over the course of the year," Jabaz Mathai, head of G10 rates and FX strategy at Citi, said in a separate discussion as part of the firm's year-ahead outlook Wednesday. Mathai sees it as unlikely that 10-year yields will test the nearly 16-year highs of 5% they reached in mid-October, he said. Instead, the primary driver of yields will be the strength of the U.S. economy and supply, which will likely hit $1.7 trillion in coupon issuance in 2024, Mathai said.
Meantime, the ECB officials can't find out what they're gonna do with the rate. Recent inflation data broadly confirmed current thinking at the European Central Bank, meaning interest rate cuts are not a near-term topic of debate, chief ECB economist Philip Lane said on Friday. Euro zone inflation jumped as expected last month, rising to 2.9% from 2.4% in November and supporting the ECB's case to keep interest rates at record highs for the time being.
The European Central Bank (ECB) will cut its key interest rates sooner than it recently thought and should not wait until May to make a decision, as there are no signs of additional pressure on inflation, ECB policymaker Mario Centeno said on Tuesday. Understand this as you like...
Here is big banks forecasts on major economical indicators by the end of 2024:
Structural crisis goes over planet
U.S. regional banks have a tougher road to growing profits in 2024 as they face pressure to pay more to depositors versus larger peers while demand from borrowers stays subdued.
Fitch Ratings says it expects rates to stay elevated and put pressure on smaller lenders to pay more to keep deposits relative to larger peers. U.S. banks' unrealized losses on available–for–sale and held–to–maturity securities totalled nearly $684 billion in the third quarter, according to the Federal Deposit Insurance Corp.
While we already have talked about poor Citi results and firing of 20K employees, Barclays slashed its workforce by around 5,000 jobs in 2023 as part of a major cost-cutting drive announced last year, the bank said on Monday.
Euro zone services activity could weaken further in the coming quarters due to rising interest rates but the impact on the sector may be more muted than on manufacturing, a European Central Bank study concluded on Tuesday. German department store giant Galeria Karstadt Kaufhof said on Tuesday it had filed for insolvency following the collapse of its parent Signa amid a real-estate crisis in the region.
The outlook for Germany's construction sector is grim for 2024, according to two prominent research institutes on Wednesday, a further bad sign for the nation's struggling property industry as it suffers its worst crisis in decades. The last time that German construction spending declined was in 2009.
The Ifo survey showed sentiment in residential construction dropped to -56.8 points in December, worse than -54.4 points in November. It was the lowest level since Ifo began tracking the index in 1991. "The prospects for 2024 are bleak," said Klaus Wohlrabe, head of surveys at Ifo.
Tim-Oliver Mueller, head of the German Construction Industry Federation, kept up the pressure on Wednesday. "Berlin, we have a problem. We are not talking about abstract things, but about affordable housing, which is urgently needed," he said.
Meantime, rising income expenses pushed the Federal Reserve system deep into a record loss last year, the central bank said in preliminary figures released on Friday. Fed income after expenses came in at a negative $114.3 billion last year, versus $58.8 billion in positive income the year before.
The benchmark Shanghai Containerized Freight Index was up over 16% week-on-week to 2,206 points on Friday. The index, which measures non-contract "spot" rates for container shipments out of China's ports, has gained 114% since mid-December.
Rates on the Shanghai-Europe route rose 8.1% to $3,103 per 20-foot container on Friday from a week earlier, while the rate for containers to the unaffected U.S. West Coast soared 43.2% to $3,974 per 40-foot containers week on week, leading ship broker Clarksons said on Friday.
In general geopolitics has raised freight rates by 120% in the last 6 weeks, that we do not see yet in inflation data:
General look at global data shows stubborn thing - production and manufacturing sector is destructing, consumption (i.e. retail sales) are dropping. All things that have relation to production - used cars, houses are becoming cheaper:
So, major indicator here is, of course, the sharp increase in consumer inflation. Its "sharp"
not only because it is almost 10% of the previous value, but also because it occurred after several months of fairly tight monetary policy (see graph of the M2 above.
This is a major blow to the Fed's leadership, which planned to start easing the policy in the very near future in the context of de-industrialization shown in charts above. if such a dovish policy were introduced, it would inevitably cause a sharp increase in inflation. The warning turned out to be in reality just as inflation began to rise before the policy eased.
In general, it can be noted that, apparently, the degree of degradation of the monetary system has increased. Because even in industrial prices, everything is not very good.
At the same time, political problems are beginning to affect the economy, and the United States and Great Britain have launched a strike on Yemen. The formal goal is to respond to the closure of the Bab-el-Mandeb Strait and to attacks on US military vessels. But as a result, the price of oil on world markets increased by 2.5% and there is every reason to believe that similar cases will continue.
Iran seized its former tanker, but then captured by the United States. Israel continues attacks on the Gaza Strip and there are fears that it may shift its activity to Lebanon … In general, the economic crisis caused a political one, which increased economic problems, and we are waiting for the next round of the political crisis … The year started off with fun …
Some thoughts on recent data
Started US/UK coalition war against Yemen promises nothing good to the global trade. Europe will feel the logistical blow the most. In “normal” times, maritime import logistics accounts for about 7% of the cost of goods, but now this figure can easily exceed 20% . In Covid 2021, when the Evergreen accident occurred in the Suez Canal, this figure reached 25%. In general, if Western countries fail to quickly resolve the issue with Yemen, then inflation in an already unhappy Europe will begin to rise, and population consumption will rapidly fall. That's why we keep our skeptic position that ECB will be later than the Fed on rate cut...
Second moment is inflation, of course. First is, we do not see yet the war impact in data, which should appear in few months. Previously we already said that it might be few waves of inflation. War definitely will boost the starting of the 2nd wave. Besides, the fact that the US has re-started oil purchasing from Russia well above 60$ ceil indirectly confirms this.
It is expected collapse on stock market this year. Mostly it will relate to the Fed policy. But even now we see acceleration of stock selling by insiders. Anti-monopoly probe against Apple also has a special meaning. If reversal on stock market will happen and shares drop - people start loosing its wealth and turn to savings even harder, cutting consumption. This is, by our opinion, one of the major factors of recession.
The discrepancy between the annual growth rates of real gross domestic income (GDI) and GDP in the third quarter. 2023 looks completely indecent.
GDI (all income from goods and services produced) and GDP (all their value) should in theory be the same [income = expenses], but may differ due to different data sources or “ statistical inconsistency.
Sometimes the gap between GDI and GDP is recorded during periods of recession, but not on such a scale. GDI is often more correct, and its YoY reduction always confirms the beginning of a recession in the economy. In this case, after the fact. We are waiting for the start of the American reporting season based on the results of the fourth quarter. last year, it will be interesting.
Finally, concerning the US economy... alternative indicator of employment that is based not on a survey of employers but on survey of households shows absolutely different things. Most probable that everything stands not as bad and the truth somewhere in between, but still, this is not a good sign at all.
All these data that we've considered tells that the US statistics now is strongly manipulated. Real recession is disguised by "paper" results of stock market, inflation is hidden and undervalued. Using of different revisions and adjustments make it look like everything is more or less good. But close look shows obvious inconsistencies that we've discussed many times.
Speaking about China, in two words, amid weak domestic demand, fears are growing that China will try to exit the crisis through exports, adding to trade tensions. Morgan Stanley sees the situation as China's "longest and deepest" deflation since the 1998 Asian financial crisis, when countries in the region overheated and entered a recession that took years to recover from. As we've said the segregation of two largest economies has turned to active stage. Despite all government efforts, China can't restart economy engine. Big cash boost from PBoC doesn't help to re-fresh demand, export is dropping. The US and China is two sides of the same medal. It means that China will meet stagnation or stagflation with near zero growth level.
It seems that the Fed plan is falling apart. It was really beautiful - try to reach the half of the year and then start rate cut to avoid inflation jump on 2024, put everything on new President team. But now they haven't even started rate cut, but inflation already starts raising again. This breaks everything. Some hints on new reality could be announced as soon as on 30-31st of January. And we probably should forget that ECB will be later to the Fed on rate cut. It means that any EUR rally right now will be temporal and not reliable, at least on long term charts. As we've mentioned above, the logistics problems will boost EU economy slowdown, while Middle East crisis doesn't hurt China - US shipping at all. We'll see...
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Anyway, on EUR it seems our plan is working nice, market is breaking K-support area now. Besides, we see corresponding action as on DXY as on the US yields that are going higher as well. So, for now we do not change anything.