Sive Morten
Special Consultant to the FPA
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Fundamentals
You can see, guys, how fast political and economic events are spinning up in the world. I suspect that very soon our two weekly reports will be not enough to cover them. Despite that this was "short" week due Independence day celebration, we've got events of a really big scale - Powell speech EU, Fed minutes publication, very important US data on industrial sector, job market report, elections in UK, Iran, coming 2nd round in France, V. Orban's visit to Moscow, conflict between J.Borrel and J. Stoltengerg and some others of a smaller scale. Here I even do not mention Japan and JPY performance, while I should to... But there is one common thing for all these events that drives them - situation in global economy. In fact, it is the J. Powell's speech is a ground layer for all other events.
Market overview
The U.S. dollar index stayed slightly lower on Friday after data showed U.S. job growth slowed marginally in June while the unemployment rate rose, underscoring the view the Federal Reserve could begin cutting interest rates in September. Nonfarm U.S. payrolls increased by 206,000 jobs last month, the Labor Department report showed. Data for May was revised sharply down to show 218,000 jobs added instead of the previously reported 272,000. The unemployment rate rose to 4.1%, slightly higher than the estimated 4.0%. Futures markets are now pricing in a roughly 72% chance for a 25 basis point rate cut at the Fed's meeting in September, up from a 57.9% chance seen a week ago, according to CME's FedWatch Tool.
The euro has been bolstered by signs France could be heading for a hung parliament in elections on Sunday rather than a ruling majority for the far-right National Rally. Marine Le Pen's eurosceptic, anti-immigration National Rally (RN) topped the parliamentary election's first round with a third of the vote, opening the prospect of the far right leading a French government for the first time since World War Two. The pound firmed as the Labour party secured a landslide victory in the UK general election. The pound is now up on the year against the dollar, making it the best performing G10 currency in 2024.
On Wednesday, US economy has shown another soften data including a weak services report and ADP employment report, depicting a slowing economy, after a rise in initial applications for unemployment benefits last week. A report indicating that the U.S. services sector contracted last month and factory orders fell also weighed on the dollar.
Wednesday's data overall depicted a U.S. economy that is slowing down, undermining the dollar. The number of people receiving benefits after an initial week of aid increased to a seasonally adjusted 1.858 million in the week of June 22, the highest since late November 2021. Separately on Wednesday, the ADP Employment report showed private payrolls grew by 150,000 jobs in June after rising 157,000 May. Economists polled by Reuters had forecast private employment increasing by 160,000.
Further pressuring the dollar was a weak U.S. services report from the Institute for Supply Management. The data showed a reading of 48.8, a four-year low, from 53.8 in May.
Fed officials at their last meeting acknowledged the U.S. economy appeared to be slowing and that "price pressures were diminishing." They still advocated for a wait-and-see approach before committing to interest rate cuts, according to minutes of the two-day gathering held on June 11-12.
The yen sank to a 38-year low against the U.S. dollar and a record trough versus the euro on Wednesday, as the Japanese unit continued its downward spiral, with market participants on high alert for Japanese intervention to boost the currency. Traders were preparing for possible Japanese government currency intervention with U.S. markets off for the July Fourth holiday. Tokyo's previous two rounds of yen buying came at illiquid points in the global trading day or holiday-thinned trading.
With the greenback on the defensive, the euro remained resilient, helped by a stubbornly high inflation reading on Tuesday that suggested the European Central Bank would take its time before cutting interest rates again. The European Central Bank doesn’t yet have sufficient evidence that inflation threats have passed, President Christine Lagarde and her top economist said — feeding expectations that officials will take a break from cutting interest rates this month.
, Chief Economist Philip Lane said June’s inflation reading won’t be enough to fully evaluate closely watched services prices.
Against that backdrop, markets are betting on one or two more cuts this year — a scenario that Finland’s Olli Rehn has described as “reasonable,” though he, too, said officials can’t commit to a certain path. The Bank for International Settlements warned Sunday that central banks should be cautious in lowering rates too rapidly, to avoid inflation flaring up again.
European Central Bank policymaker Gabriel Makhlouf said on Tuesday he was comfortable with just one more interest rate cut this year as he needed more time to gain confidence inflation was headed to the ECB's 2% goal. Inflation in the 20 countries that share the euro slowed to 2.5% in June from 2.6% a month earlier.
At the same time, C. Lagarde said that "the soft landing is not guaranteed" and we understand why, because now nobody could say what will happen even on next few weeks. The euro will weaken modestly against the U.S. dollar this month before strengthening by year-end, despite financial markets pricing two more European Central Bank interest rate cuts by then, according to currency strategists polled by Reuters.
The euro would show resilience against a backdrop of heightened political uncertainty in the second-largest European Union member, according to currency strategists in a June 28-July 3 Reuters poll. The median projection from nearly 80 foreign exchange strategists was for the euro to gain nearly 1.5% to $1.09 by the end of this year and to trade at $1.10 at the end of the first half of 2025.
US DATA DETERIORATION
I'm not about debates, guys, I'm about statistics. Data for May-June shows fast deterioration, showing real problems in US manufacturing (Production) sector. We also consider it as one of the possible reasons for recent J. Powell's evident speech in Portugal. The strongfalsification adjustment of the US data in recent year was aimed on keeping positive image of economy progress. Especially in recent 6 month, started December 2023, when anticipation of the rate cut was near maximum levels. We're not sure but suggesting that the US statistic bureaus could try to mitigate negative changes in the US data, showing numbers better than they were due to expectations of future improvement of situation, which, in turn should let to smooth this difference without shocking investing society.
Now, when it becomes obvious of "no improvements", they have to link modern and passed overvalued data somehow and smooth accumulated gaps. In fact, this might be one of the reasons of strong drop in recent data. Particularly speaking (although we've mentioned everything above), everything started with the US GDP revision and forecasts for the IIQ. The Atlanta Fed revised down its forecast for US GDP growth for the 2nd quarter to 1.7% from the previous estimate of 2.2%. Suddenly, the term of "Selective recession" has been introduced by JP Morgan. The same JP Morgan makes the forecast of stock index collapse for 20+%. The Institute for Supply Management's June survey showed U.S. manufacturing missed forecasts and contracted for a third straight month, with a measure of prices paid by factories for inputs dropping to a six-month low amid weak demand for goods:
Powell starts speaking about US debt and budget deficit, although these topics are of competence of the US Treasury, not the Fed. Still, he warned that US debt growth is on an unsustainable path. The US budget deficit has never been so large with unemployment so low. The he has admitted that something needs to be done with the level of the country's national debt - maintaining the current path is impossible and unacceptable. And he is right, with the current rate level and debt load national production sector just can't function normally. This is what we see in recent data.
Austan Goolsbee, president of the Chicago Fed, noted on Monday that progress toward achieving the Fed's 2% inflation target will occur faster than many expect.
Indeed with the US ISM at lowest levels since the pandemic and record Initial claims levels, negative recent NFP results and raising of Unemployment level, it is becoming clear that it is urgently needed to do something.
New home prices in the US. Median sales price increased +4.9% year over year, which has become a new record. The US trade deficit widened in May to its largest since 2022. $-75.1 billion:
Taking it all together, the US macroeconomic environment has deteriorated even more significantly than expected and is now the weakest since December 2015
based on Bloomberg Macro-Surprise Index which is falling non-stop:
A widening of the trade deficit is expected to subtract from gross domestic product for a second straight quarter. Prior to the latest results, the Federal Reserve Bank of Atlanta’s GDPNow forecast showed trade subtracting nearly a percentage point from second-quarter growth. In fact, situation with production collapse is not unique for the US only. The same we see month by month, say, in Germany. If you check data for Italy, France, Japan etc. - you will see the same negative dynamic. This is global process.
Since it was a "job market" week, there are a few more charts on this subject that could surprise you. In fact, how unemployment is calculated:
That is, unemployment is the share of unemployed people in the labor force. But what's even more interesting is that the workforce includes immigrants:
That is, with a significant increase in the labor force solely due to immigrants, unemployment increases. This means that it is the indigenous, previously most solvent, population who are losing their jobs.
Now we're coming to most interesting point - inflation. You could argue what interesting could be around it as it is gradually decreasing. But, particularly inflation might become a cornerstone of our expectations of rate cut in July. Sounds like absurd, right? Who will cut rate, if inflation is raising? But this is the paradox of modern world. I will explain.
Now inflation is on a way to 2%, which is acknowledge by J. Powell himself and other Fed members. Otherworlds speaking, this is the gold moment that might be used to achieve most desirable Fed's thing - cut the rate, providing some relief to budget, boosting stock market right at the eve of elections. Now the Fed could do it reasonably and rationally. But very soon they could loose this background.
As we already said, The second inflationary spiral is unavoidable. One of the reasons is US gasoline prices which start moving higher again and J. Biden starts selling reserves, which has reached minimal levels. The federal government has completed the sale of 1 million barrels of gasoline from the Northeast Gasoline Supply Reserve (NGSR) ahead of the July 4 holiday, the White House said in a statement released to The Epoch Times on Tuesday. Last month, the government announced it would release 42 million gallons of gasoline from storage in Maine and New Jersey to help lower fuel prices ahead of the typically busy summer driving season.
Crude oil is raising again on geopolitical uncertainty, while S. Arabia frees market for Russia supply. So in order to get out of the coming recession, negative rates will be needed. Moreover, the nominal ones are negative. Because if, since 2008, 12 years of pumping the banking system with liquidity, a zero rate and colossal support for demand due to the state budget deficit did not lead to any economic growth (despite artificially positively skewed data), then in order to begin to recover in the event of a breakdown in recession, it will be necessary some new mega-stimulus, of which the only ones that come to mind are an even higher state budget deficit and a negative rate. So Powell, apparently, is already hinting hysterically... ECB's Head Lagarde: a “soft landing” for the European economy is not guaranteed. This one is also about the recession. Eurozone - Manufacturing PMI (June) = 45.8 (previously 47.3), so the industry in the Eurozone continues to go downhill.
So, with new spiral of inflation right around the corner, now they still have the last chance to provide relief and to cut rate, while statistics still show slowdown of inflation. Without this cut, nobody could assure that economy and stock market will be OK in a few months. If they miss this moment, it will be much harder to explain people why they cut rate when inflation ticks higher. This could raise some suspicious and loose of confidence among investors, suggesting shadow of recession. While now it could be done without big bad consequences. And the Fed can't wait, because next meeting will be only in September. So, we seriously treat surprising rate cut in July.
The main political event of the week was the discussion about the departure of US President Biden from at least the position of a presidential candidate. And as a maximum — from his post. But weekly data show that for at least two months there has been a significant deterioration in industrial production worldwide. Especially in the USA. So it is possible that various kinds of political events, including the visit of Hungarian leader Orban to Moscow and the implicit conflict between the foreign policy leader of the European Union J. Barrel and the (outgoing) NATO Secretary J. Stoltenberg on this issue are actually not political events, but economic ones.
Because it is based on this problem.The situation is similar with the speech of the head of the Fed, who began to actively talk about the unacceptability of accumulated debt. Which cannot be reduced (since it stimulates domestic demand in the United States), but the dangerous impact of which, on the other hand, can be reduced by reducing the cost of its maintenance. Reducing the rate, of course. Especially considering that a rate cut may stimulate the industrial sector. In general, the main conclusion from the current situation is that it seems that problems in the economy in general and industry in particular have begun to have a direct impact on politics.
Next week we have to keep a close eye on CPI numbers. They could keep going down by some momentum. If we get low inflation again, chances on the Fed's July move will increase significantly. It means that big action could start on EUR/USD right in a few weeks.
You can see, guys, how fast political and economic events are spinning up in the world. I suspect that very soon our two weekly reports will be not enough to cover them. Despite that this was "short" week due Independence day celebration, we've got events of a really big scale - Powell speech EU, Fed minutes publication, very important US data on industrial sector, job market report, elections in UK, Iran, coming 2nd round in France, V. Orban's visit to Moscow, conflict between J.Borrel and J. Stoltengerg and some others of a smaller scale. Here I even do not mention Japan and JPY performance, while I should to... But there is one common thing for all these events that drives them - situation in global economy. In fact, it is the J. Powell's speech is a ground layer for all other events.
Market overview
The U.S. dollar index stayed slightly lower on Friday after data showed U.S. job growth slowed marginally in June while the unemployment rate rose, underscoring the view the Federal Reserve could begin cutting interest rates in September. Nonfarm U.S. payrolls increased by 206,000 jobs last month, the Labor Department report showed. Data for May was revised sharply down to show 218,000 jobs added instead of the previously reported 272,000. The unemployment rate rose to 4.1%, slightly higher than the estimated 4.0%. Futures markets are now pricing in a roughly 72% chance for a 25 basis point rate cut at the Fed's meeting in September, up from a 57.9% chance seen a week ago, according to CME's FedWatch Tool.
The euro has been bolstered by signs France could be heading for a hung parliament in elections on Sunday rather than a ruling majority for the far-right National Rally. Marine Le Pen's eurosceptic, anti-immigration National Rally (RN) topped the parliamentary election's first round with a third of the vote, opening the prospect of the far right leading a French government for the first time since World War Two. The pound firmed as the Labour party secured a landslide victory in the UK general election. The pound is now up on the year against the dollar, making it the best performing G10 currency in 2024.
On Wednesday, US economy has shown another soften data including a weak services report and ADP employment report, depicting a slowing economy, after a rise in initial applications for unemployment benefits last week. A report indicating that the U.S. services sector contracted last month and factory orders fell also weighed on the dollar.
Wednesday's data overall depicted a U.S. economy that is slowing down, undermining the dollar. The number of people receiving benefits after an initial week of aid increased to a seasonally adjusted 1.858 million in the week of June 22, the highest since late November 2021. Separately on Wednesday, the ADP Employment report showed private payrolls grew by 150,000 jobs in June after rising 157,000 May. Economists polled by Reuters had forecast private employment increasing by 160,000.
Further pressuring the dollar was a weak U.S. services report from the Institute for Supply Management. The data showed a reading of 48.8, a four-year low, from 53.8 in May.
Fed officials at their last meeting acknowledged the U.S. economy appeared to be slowing and that "price pressures were diminishing." They still advocated for a wait-and-see approach before committing to interest rate cuts, according to minutes of the two-day gathering held on June 11-12.
The yen sank to a 38-year low against the U.S. dollar and a record trough versus the euro on Wednesday, as the Japanese unit continued its downward spiral, with market participants on high alert for Japanese intervention to boost the currency. Traders were preparing for possible Japanese government currency intervention with U.S. markets off for the July Fourth holiday. Tokyo's previous two rounds of yen buying came at illiquid points in the global trading day or holiday-thinned trading.
With the greenback on the defensive, the euro remained resilient, helped by a stubbornly high inflation reading on Tuesday that suggested the European Central Bank would take its time before cutting interest rates again. The European Central Bank doesn’t yet have sufficient evidence that inflation threats have passed, President Christine Lagarde and her top economist said — feeding expectations that officials will take a break from cutting interest rates this month.
, Chief Economist Philip Lane said June’s inflation reading won’t be enough to fully evaluate closely watched services prices.
Against that backdrop, markets are betting on one or two more cuts this year — a scenario that Finland’s Olli Rehn has described as “reasonable,” though he, too, said officials can’t commit to a certain path. The Bank for International Settlements warned Sunday that central banks should be cautious in lowering rates too rapidly, to avoid inflation flaring up again.
European Central Bank policymaker Gabriel Makhlouf said on Tuesday he was comfortable with just one more interest rate cut this year as he needed more time to gain confidence inflation was headed to the ECB's 2% goal. Inflation in the 20 countries that share the euro slowed to 2.5% in June from 2.6% a month earlier.
At the same time, C. Lagarde said that "the soft landing is not guaranteed" and we understand why, because now nobody could say what will happen even on next few weeks. The euro will weaken modestly against the U.S. dollar this month before strengthening by year-end, despite financial markets pricing two more European Central Bank interest rate cuts by then, according to currency strategists polled by Reuters.
The euro would show resilience against a backdrop of heightened political uncertainty in the second-largest European Union member, according to currency strategists in a June 28-July 3 Reuters poll. The median projection from nearly 80 foreign exchange strategists was for the euro to gain nearly 1.5% to $1.09 by the end of this year and to trade at $1.10 at the end of the first half of 2025.
US DATA DETERIORATION
I'm not about debates, guys, I'm about statistics. Data for May-June shows fast deterioration, showing real problems in US manufacturing (Production) sector. We also consider it as one of the possible reasons for recent J. Powell's evident speech in Portugal. The strong
Now, when it becomes obvious of "no improvements", they have to link modern and passed overvalued data somehow and smooth accumulated gaps. In fact, this might be one of the reasons of strong drop in recent data. Particularly speaking (although we've mentioned everything above), everything started with the US GDP revision and forecasts for the IIQ. The Atlanta Fed revised down its forecast for US GDP growth for the 2nd quarter to 1.7% from the previous estimate of 2.2%. Suddenly, the term of "Selective recession" has been introduced by JP Morgan. The same JP Morgan makes the forecast of stock index collapse for 20+%. The Institute for Supply Management's June survey showed U.S. manufacturing missed forecasts and contracted for a third straight month, with a measure of prices paid by factories for inputs dropping to a six-month low amid weak demand for goods:
Powell starts speaking about US debt and budget deficit, although these topics are of competence of the US Treasury, not the Fed. Still, he warned that US debt growth is on an unsustainable path. The US budget deficit has never been so large with unemployment so low. The he has admitted that something needs to be done with the level of the country's national debt - maintaining the current path is impossible and unacceptable. And he is right, with the current rate level and debt load national production sector just can't function normally. This is what we see in recent data.
Austan Goolsbee, president of the Chicago Fed, noted on Monday that progress toward achieving the Fed's 2% inflation target will occur faster than many expect.
Indeed with the US ISM at lowest levels since the pandemic and record Initial claims levels, negative recent NFP results and raising of Unemployment level, it is becoming clear that it is urgently needed to do something.
New home prices in the US. Median sales price increased +4.9% year over year, which has become a new record. The US trade deficit widened in May to its largest since 2022. $-75.1 billion:
Taking it all together, the US macroeconomic environment has deteriorated even more significantly than expected and is now the weakest since December 2015
based on Bloomberg Macro-Surprise Index which is falling non-stop:
A widening of the trade deficit is expected to subtract from gross domestic product for a second straight quarter. Prior to the latest results, the Federal Reserve Bank of Atlanta’s GDPNow forecast showed trade subtracting nearly a percentage point from second-quarter growth. In fact, situation with production collapse is not unique for the US only. The same we see month by month, say, in Germany. If you check data for Italy, France, Japan etc. - you will see the same negative dynamic. This is global process.
Since it was a "job market" week, there are a few more charts on this subject that could surprise you. In fact, how unemployment is calculated:
That is, unemployment is the share of unemployed people in the labor force. But what's even more interesting is that the workforce includes immigrants:
That is, with a significant increase in the labor force solely due to immigrants, unemployment increases. This means that it is the indigenous, previously most solvent, population who are losing their jobs.
Now we're coming to most interesting point - inflation. You could argue what interesting could be around it as it is gradually decreasing. But, particularly inflation might become a cornerstone of our expectations of rate cut in July. Sounds like absurd, right? Who will cut rate, if inflation is raising? But this is the paradox of modern world. I will explain.
Now inflation is on a way to 2%, which is acknowledge by J. Powell himself and other Fed members. Otherworlds speaking, this is the gold moment that might be used to achieve most desirable Fed's thing - cut the rate, providing some relief to budget, boosting stock market right at the eve of elections. Now the Fed could do it reasonably and rationally. But very soon they could loose this background.
As we already said, The second inflationary spiral is unavoidable. One of the reasons is US gasoline prices which start moving higher again and J. Biden starts selling reserves, which has reached minimal levels. The federal government has completed the sale of 1 million barrels of gasoline from the Northeast Gasoline Supply Reserve (NGSR) ahead of the July 4 holiday, the White House said in a statement released to The Epoch Times on Tuesday. Last month, the government announced it would release 42 million gallons of gasoline from storage in Maine and New Jersey to help lower fuel prices ahead of the typically busy summer driving season.
Crude oil is raising again on geopolitical uncertainty, while S. Arabia frees market for Russia supply. So in order to get out of the coming recession, negative rates will be needed. Moreover, the nominal ones are negative. Because if, since 2008, 12 years of pumping the banking system with liquidity, a zero rate and colossal support for demand due to the state budget deficit did not lead to any economic growth (despite artificially positively skewed data), then in order to begin to recover in the event of a breakdown in recession, it will be necessary some new mega-stimulus, of which the only ones that come to mind are an even higher state budget deficit and a negative rate. So Powell, apparently, is already hinting hysterically... ECB's Head Lagarde: a “soft landing” for the European economy is not guaranteed. This one is also about the recession. Eurozone - Manufacturing PMI (June) = 45.8 (previously 47.3), so the industry in the Eurozone continues to go downhill.
So, with new spiral of inflation right around the corner, now they still have the last chance to provide relief and to cut rate, while statistics still show slowdown of inflation. Without this cut, nobody could assure that economy and stock market will be OK in a few months. If they miss this moment, it will be much harder to explain people why they cut rate when inflation ticks higher. This could raise some suspicious and loose of confidence among investors, suggesting shadow of recession. While now it could be done without big bad consequences. And the Fed can't wait, because next meeting will be only in September. So, we seriously treat surprising rate cut in July.
The main political event of the week was the discussion about the departure of US President Biden from at least the position of a presidential candidate. And as a maximum — from his post. But weekly data show that for at least two months there has been a significant deterioration in industrial production worldwide. Especially in the USA. So it is possible that various kinds of political events, including the visit of Hungarian leader Orban to Moscow and the implicit conflict between the foreign policy leader of the European Union J. Barrel and the (outgoing) NATO Secretary J. Stoltenberg on this issue are actually not political events, but economic ones.
Because it is based on this problem.The situation is similar with the speech of the head of the Fed, who began to actively talk about the unacceptability of accumulated debt. Which cannot be reduced (since it stimulates domestic demand in the United States), but the dangerous impact of which, on the other hand, can be reduced by reducing the cost of its maintenance. Reducing the rate, of course. Especially considering that a rate cut may stimulate the industrial sector. In general, the main conclusion from the current situation is that it seems that problems in the economy in general and industry in particular have begun to have a direct impact on politics.
Next week we have to keep a close eye on CPI numbers. They could keep going down by some momentum. If we get low inflation again, chances on the Fed's July move will increase significantly. It means that big action could start on EUR/USD right in a few weeks.
