Sive Morten
Special Consultant to the FPA
- Messages
- 18,655
Fundamentals
Although overall number of events is breaking out of scale - attack on Israel and Valdai Putin's speech, just to name some, but most of them are political. But it is few to mention that relates to economy. Recent NFP numbers is a different story, because based on market reaction, it seems that nobody either listen J. Powell or trust statistics in the US. We have more and more suspicions that numbers are strongly manipulated - just take a look at recent markets reaction.
Market overview
The U.S. dollar eased against a basket of currencies on Friday, as investors assessed Friday's jobs report that showed U.S. hiring rose broadly in September but also that wage growth is slowing. The index rose as high as 106.98 earlier in the session after data showed U.S. nonfarm payrolls increased by 336,000 jobs last month. The numbers for August were revised higher to show 227,000 jobs added instead of the previously reported 187,000. Economists polled by Reuters had forecast September payrolls rising by 170,000 jobs.
The payrolls data showed monthly wage growth remained moderate, with average hourly earnings rising 0.2% after a similar gain in August. In the 12 months through September, wages increased 4.2% after advancing 4.3% in August.
"This morning's data pushed expectations for the first rate cuts further into late 2024, but failed to convince market participants of another hike this year, meaning that short-term yields - which play a dominant role in driving foreign exchange moves - remained relatively stable," Karl Schamotta, chief market strategist at Corpay in Toronto, said.
Post-payrolls, U.S. rate futures priced in a 42% chance of a rate increase by the end of the year, up from about 33% on Thursday, according to the CME's FedWatch tool.
The dollar's recent strength has been underpinned by a rapid sell-off in U.S. government bonds, which sent yields to multi-year highs. While benchmark 10-year notes reached 4.887% and 30-year yields hit 5.053%, both the highest since 2007, two-year notes rose as high as 5.151%, holding below the 5.202% level hit on Sept. 21.
Attention now turns to next week's U.S. inflation data that could offer clues to Fed action going forward. A hot report could spur worries that the Fed's rate posture may grow even more hawkish after its 'higher for longer' mantra in September spooked markets. The Fed is broadly expected to hold rates steady at its Oct 31-Nov. 1 meeting, although some traders are betting on another increase.
The Federal Reserve's stance of "higher for longer" on interest rates has become a major challenge and the economy is already showing signs that it is so, said DoubleLine Capital Chief Executive Officer Jeff Gundlach.
Since the onset of the pandemic in early 2020, Powell has made several efforts to communicate with the wider public, using venues like CBS's "60 Minutes" program or other media outside the business press to reassure that the Fed would do what it could to stabilize the economy or, more lately, to control inflation. That included, he has said, taking steps that would involve "pain," potentially in the form of unemployment for some and higher interest rates for anyone buying a home or car or financing a business.
But Monday offered a more intimate, face-to-face discussion between Powell and the people who have lived with rising prices and have navigated the fallout from the Fed's rate-hiking response. A Gallup poll last spring found that confidence in Powell, after rising alongside the Fed's support for the economy in 2020 to a level not seen since the tenure of former Fed chief Alan Greenspan, had fallen to a record low as inflation spiked and the central bank began raising interest rates at a historic pace.
Policymakers, eager to see labor market conditions easing, could draw some comfort from slowing wage growth. Average hourly earnings rose 0.2% after a similar gain in August. That lowered the annual increase in wages to 4.2%, the smallest gain since June 2021, from 4.3% in August. The moderation in wages was likely because most of the jobs added last month were in lower-paying industries.
JPMorgan’s Marko Kolanovic is bracing for a 20% sell-off to hit the S&P 500. According to the Institutional Investor hall-of-famer, high interest rates are creating a breaking point for stocks — and choosing cash at a 5.5% return in money market and short-term Treasurys is a key protection strategy right now.
The move sure seems to support a notion Rick Santelli laid out yesterday on Fast Money that bond vigilantes are back in full force. Santelli even predicted that 10 year yields could touch as high as 13%.
Meantime, as situation is becoming tough - China accelerates US debt sell-off, until it is not devalued even more. The threat of sanctions, fraud on the part of the United States (possible default) and the desire to keep the yuan from devaluing to the dollar, forces the Celestial Empire to dump the American national debt
How to understand all this stuff?
Since we've started with NFP, let's take a look what is going on. Based on market reaction, it seems that markets are totally ignored the data. By the logic, stock indexes should fall, while dollar should raise, because of higher chances for another hike. But we do not see it at all. It seems that market finally stops accepting this information garbage. There, different agencies (state and private) do not converge in multiples. Re-updating can change the parameter exactly twice, but all forecasts are pointing a finger at the sky.
With this approach to statistics, any forecasts stop working. Well, therefore, without them, the market and economic agents in general stop responding. This is exactly what we see. Logically, oil should rise (demand is still strong), and Bitcoin, the S&P500, for example, should fall (after all, the rate will continue to be raised). In reality, there is a chaotic movement of all these indicators.
Regarding inflation, these are also stupid letters. Let me remind you that the Americans specifically changed the calculation method from an average for 2 years to an average for a year. Exactly at the moment the statistics began to build on the high base of 2022. This way you are guaranteed to get a “plateau” and a semi-victory over inflation. It's simple mathematics.
In November, last year's high base will collapse sharply and the fun will begin. New inventions and trash talks about temporary inflation and so on. All this is just anti-scientific, politicized information from a casino called the US government debt pyramid and its stock market. In fact, all these talks about higher rates for longer are aiming just one purpose - to make americans inhabit with high interest rates environment. This is a preparation of the mind. American colleagues are teaching investors that a rate of 7-8-9% on treasuries is normal. In general, everything is according to plan: we raise rates, accelerate inflation and fix investors in treasuries more reliably. Otherwise there won’t be enough anesthesia for everyone.
As we've said, the structural crisis has started in 2021. The specific of this crisis stands with slow but very stable and stubborn pace. That's why it is difficult to calculate it from the most popular statistical data, since they are mercilessly falsified. Yes, a large volume of macroeconomic data (as in our reviews) allows us to restore the picture, but I would like to see that this recession is exactly the normal picture of the economy today.
This week, as usual, data on the length of the working week in the United States were released, which turned out to be the same as last week, 34.4 hours. And these figures, with a little hesitation, have been relevant for many months. But the data on average wages for the year have changed, previously the growth was 4.3%, and became 4.2%. The weekly growth of 0.2% has not changed.
Thus, by some economists opinion, this means that the current situation in the US economy is the new normal. We see that there is a recession that began in the fall of 2021, but which is hidden in statistics. The theoretical estimate gives the magnitude of this decline in 6-8% of GDP per year, but it will be possible to verify these figures in practice only after some time. But if our hypothesis is correct (and it is very similar to the truth), then these indicators suggest that the US economy has adapted to this uniform (structural) decline, which is expressed, first of all, in a decrease in the standard of living of the population due to inflation, with a small nominal income growth.
Just using of a common sense, it is an obvious contradiction. If J. Powell is right and there is no recession, economy strong, employment strong and so on - as real wage as weekly hours have to raise and PPI should not show so miserable collapse and deflation. This is impossible on a way of economical growth. Correspondingly, we could suggest that J. Powell is either wrong or intentionally hides the truth. And all these manipulations as with CPI basis change as with seasonal adjustments of NFP indirectly confirms our suggestion.
For example, economic optimism in the US (36.3 points) is near the record bottom of 2011, expectations for six months ahead have broken through it and the worst in 23 years of data collection, financial stress has been at its peak since 2008. This is just impossible numbers with supposed raising in national economy:
United States IBD/TIPP Economic Optimism Index
Last time we already have mentioned the revision of households savings to the downside. In money in 2019, savings are estimated at $1.19 trillion per year, and before the revision — $1.44 trillion. From 2013 to 2018, the accumulated savings are now $4.7 trillion, and there were almost $6 trillion! So $1.3 Trln just vapoured out. It means that the base for domestic consumption growth is very thin, which makes almost impossible to start and support any economy growth by domestic consumption.
Mistrust is a huge power. The destruction of the US national debt is taking on a planetary character. The sell-off in Treasuries triggered a global exodus. The average price of bonds in the Bloomberg U.S. Treasury Index fell to 85.5 cents on the dollar, half a cent above the record low of 1981.
It looks so that the new collapse in the price of American government debt is not due the fact that Powell is threatening to raise the rate at least once more, but with the fact that the dynamics of the government debt have become simply uncontrollable. A trillion a month? Who will buy this if all the main buyers of the past either no longer buy or are actively pouring into the market.
The same Powell dumped a trillion worth of debt into the market in 1.5 years. This is more than the Chinese and Arabs combined. In fact, for 1.5 years they planted their own banks in a steadily falling asset, and then they came up with a number of programs with the possibility of selling this garbage at par at the expense of the Fed (read at the expense of the printing press). As a result - $0.1 trillion. the Fed's balance sheet could instantly turn into $1 or even $2 trillion when some major bank collapses again.
Yes, everybody tells about BTFP, REPO facility, to manage liquidity, but what banks should to do with corporate bonds, mortgages, loans, credit cards debt etc? They are also revalued with current rate level, increasing provisions. Besides, Fed provides loans to banks at current interest rate, but banking margin is not raising so fast to swallow 5.5% loan from the Fed. With the massive deposits drop - it is becoming a problem, and not only in the US.
So the Fed's actions to provide liquidity through BTFP are not a solution to the problem of losses and not even a solution to the problem of liquidity. This is a temporary emergency measure, no more, no less. Moreover, according to the current schedule, this measure will cease to be effective in March next year.
It means that in nearest two months we should see a lot of interesting stuff. We suggest that inflation in nearest two months should remain high and recent so called decrease in US wages is poor relief. While I'm righting this, the situation in Israel goes out of control and on Monday we could wake up in absolutely different environment - watch for gold and oil prices.
Our suggestion remains the same - they could try to hold high rates as long as possible, to keep real yield above zero level. As amount of geopolitical conflicts are raising, demand for dollar could increase. With the signs of political breakdown inside the EU (Germany-Poland, Slovakia now, Hungary etc.) and poor economical environment we do not see what factors could break downside tendency on EUR/USD by far.
Although overall number of events is breaking out of scale - attack on Israel and Valdai Putin's speech, just to name some, but most of them are political. But it is few to mention that relates to economy. Recent NFP numbers is a different story, because based on market reaction, it seems that nobody either listen J. Powell or trust statistics in the US. We have more and more suspicions that numbers are strongly manipulated - just take a look at recent markets reaction.
Market overview
The U.S. dollar eased against a basket of currencies on Friday, as investors assessed Friday's jobs report that showed U.S. hiring rose broadly in September but also that wage growth is slowing. The index rose as high as 106.98 earlier in the session after data showed U.S. nonfarm payrolls increased by 336,000 jobs last month. The numbers for August were revised higher to show 227,000 jobs added instead of the previously reported 187,000. Economists polled by Reuters had forecast September payrolls rising by 170,000 jobs.
The payrolls data showed monthly wage growth remained moderate, with average hourly earnings rising 0.2% after a similar gain in August. In the 12 months through September, wages increased 4.2% after advancing 4.3% in August.
"This morning's data pushed expectations for the first rate cuts further into late 2024, but failed to convince market participants of another hike this year, meaning that short-term yields - which play a dominant role in driving foreign exchange moves - remained relatively stable," Karl Schamotta, chief market strategist at Corpay in Toronto, said.
Post-payrolls, U.S. rate futures priced in a 42% chance of a rate increase by the end of the year, up from about 33% on Thursday, according to the CME's FedWatch tool.
The dollar's recent strength has been underpinned by a rapid sell-off in U.S. government bonds, which sent yields to multi-year highs. While benchmark 10-year notes reached 4.887% and 30-year yields hit 5.053%, both the highest since 2007, two-year notes rose as high as 5.151%, holding below the 5.202% level hit on Sept. 21.
Attention now turns to next week's U.S. inflation data that could offer clues to Fed action going forward. A hot report could spur worries that the Fed's rate posture may grow even more hawkish after its 'higher for longer' mantra in September spooked markets. The Fed is broadly expected to hold rates steady at its Oct 31-Nov. 1 meeting, although some traders are betting on another increase.
The Federal Reserve's stance of "higher for longer" on interest rates has become a major challenge and the economy is already showing signs that it is so, said DoubleLine Capital Chief Executive Officer Jeff Gundlach.
Since the onset of the pandemic in early 2020, Powell has made several efforts to communicate with the wider public, using venues like CBS's "60 Minutes" program or other media outside the business press to reassure that the Fed would do what it could to stabilize the economy or, more lately, to control inflation. That included, he has said, taking steps that would involve "pain," potentially in the form of unemployment for some and higher interest rates for anyone buying a home or car or financing a business.
But Monday offered a more intimate, face-to-face discussion between Powell and the people who have lived with rising prices and have navigated the fallout from the Fed's rate-hiking response. A Gallup poll last spring found that confidence in Powell, after rising alongside the Fed's support for the economy in 2020 to a level not seen since the tenure of former Fed chief Alan Greenspan, had fallen to a record low as inflation spiked and the central bank began raising interest rates at a historic pace.
Policymakers, eager to see labor market conditions easing, could draw some comfort from slowing wage growth. Average hourly earnings rose 0.2% after a similar gain in August. That lowered the annual increase in wages to 4.2%, the smallest gain since June 2021, from 4.3% in August. The moderation in wages was likely because most of the jobs added last month were in lower-paying industries.
JPMorgan’s Marko Kolanovic is bracing for a 20% sell-off to hit the S&P 500. According to the Institutional Investor hall-of-famer, high interest rates are creating a breaking point for stocks — and choosing cash at a 5.5% return in money market and short-term Treasurys is a key protection strategy right now.
The move sure seems to support a notion Rick Santelli laid out yesterday on Fast Money that bond vigilantes are back in full force. Santelli even predicted that 10 year yields could touch as high as 13%.
Meantime, as situation is becoming tough - China accelerates US debt sell-off, until it is not devalued even more. The threat of sanctions, fraud on the part of the United States (possible default) and the desire to keep the yuan from devaluing to the dollar, forces the Celestial Empire to dump the American national debt
How to understand all this stuff?
Since we've started with NFP, let's take a look what is going on. Based on market reaction, it seems that markets are totally ignored the data. By the logic, stock indexes should fall, while dollar should raise, because of higher chances for another hike. But we do not see it at all. It seems that market finally stops accepting this information garbage. There, different agencies (state and private) do not converge in multiples. Re-updating can change the parameter exactly twice, but all forecasts are pointing a finger at the sky.
With this approach to statistics, any forecasts stop working. Well, therefore, without them, the market and economic agents in general stop responding. This is exactly what we see. Logically, oil should rise (demand is still strong), and Bitcoin, the S&P500, for example, should fall (after all, the rate will continue to be raised). In reality, there is a chaotic movement of all these indicators.
Regarding inflation, these are also stupid letters. Let me remind you that the Americans specifically changed the calculation method from an average for 2 years to an average for a year. Exactly at the moment the statistics began to build on the high base of 2022. This way you are guaranteed to get a “plateau” and a semi-victory over inflation. It's simple mathematics.
In November, last year's high base will collapse sharply and the fun will begin. New inventions and trash talks about temporary inflation and so on. All this is just anti-scientific, politicized information from a casino called the US government debt pyramid and its stock market. In fact, all these talks about higher rates for longer are aiming just one purpose - to make americans inhabit with high interest rates environment. This is a preparation of the mind. American colleagues are teaching investors that a rate of 7-8-9% on treasuries is normal. In general, everything is according to plan: we raise rates, accelerate inflation and fix investors in treasuries more reliably. Otherwise there won’t be enough anesthesia for everyone.
As we've said, the structural crisis has started in 2021. The specific of this crisis stands with slow but very stable and stubborn pace. That's why it is difficult to calculate it from the most popular statistical data, since they are mercilessly falsified. Yes, a large volume of macroeconomic data (as in our reviews) allows us to restore the picture, but I would like to see that this recession is exactly the normal picture of the economy today.
This week, as usual, data on the length of the working week in the United States were released, which turned out to be the same as last week, 34.4 hours. And these figures, with a little hesitation, have been relevant for many months. But the data on average wages for the year have changed, previously the growth was 4.3%, and became 4.2%. The weekly growth of 0.2% has not changed.
Thus, by some economists opinion, this means that the current situation in the US economy is the new normal. We see that there is a recession that began in the fall of 2021, but which is hidden in statistics. The theoretical estimate gives the magnitude of this decline in 6-8% of GDP per year, but it will be possible to verify these figures in practice only after some time. But if our hypothesis is correct (and it is very similar to the truth), then these indicators suggest that the US economy has adapted to this uniform (structural) decline, which is expressed, first of all, in a decrease in the standard of living of the population due to inflation, with a small nominal income growth.
Just using of a common sense, it is an obvious contradiction. If J. Powell is right and there is no recession, economy strong, employment strong and so on - as real wage as weekly hours have to raise and PPI should not show so miserable collapse and deflation. This is impossible on a way of economical growth. Correspondingly, we could suggest that J. Powell is either wrong or intentionally hides the truth. And all these manipulations as with CPI basis change as with seasonal adjustments of NFP indirectly confirms our suggestion.
For example, economic optimism in the US (36.3 points) is near the record bottom of 2011, expectations for six months ahead have broken through it and the worst in 23 years of data collection, financial stress has been at its peak since 2008. This is just impossible numbers with supposed raising in national economy:
United States IBD/TIPP Economic Optimism Index
Last time we already have mentioned the revision of households savings to the downside. In money in 2019, savings are estimated at $1.19 trillion per year, and before the revision — $1.44 trillion. From 2013 to 2018, the accumulated savings are now $4.7 trillion, and there were almost $6 trillion! So $1.3 Trln just vapoured out. It means that the base for domestic consumption growth is very thin, which makes almost impossible to start and support any economy growth by domestic consumption.
Mistrust is a huge power. The destruction of the US national debt is taking on a planetary character. The sell-off in Treasuries triggered a global exodus. The average price of bonds in the Bloomberg U.S. Treasury Index fell to 85.5 cents on the dollar, half a cent above the record low of 1981.
It looks so that the new collapse in the price of American government debt is not due the fact that Powell is threatening to raise the rate at least once more, but with the fact that the dynamics of the government debt have become simply uncontrollable. A trillion a month? Who will buy this if all the main buyers of the past either no longer buy or are actively pouring into the market.
The same Powell dumped a trillion worth of debt into the market in 1.5 years. This is more than the Chinese and Arabs combined. In fact, for 1.5 years they planted their own banks in a steadily falling asset, and then they came up with a number of programs with the possibility of selling this garbage at par at the expense of the Fed (read at the expense of the printing press). As a result - $0.1 trillion. the Fed's balance sheet could instantly turn into $1 or even $2 trillion when some major bank collapses again.
Yes, everybody tells about BTFP, REPO facility, to manage liquidity, but what banks should to do with corporate bonds, mortgages, loans, credit cards debt etc? They are also revalued with current rate level, increasing provisions. Besides, Fed provides loans to banks at current interest rate, but banking margin is not raising so fast to swallow 5.5% loan from the Fed. With the massive deposits drop - it is becoming a problem, and not only in the US.
So the Fed's actions to provide liquidity through BTFP are not a solution to the problem of losses and not even a solution to the problem of liquidity. This is a temporary emergency measure, no more, no less. Moreover, according to the current schedule, this measure will cease to be effective in March next year.
It means that in nearest two months we should see a lot of interesting stuff. We suggest that inflation in nearest two months should remain high and recent so called decrease in US wages is poor relief. While I'm righting this, the situation in Israel goes out of control and on Monday we could wake up in absolutely different environment - watch for gold and oil prices.
Our suggestion remains the same - they could try to hold high rates as long as possible, to keep real yield above zero level. As amount of geopolitical conflicts are raising, demand for dollar could increase. With the signs of political breakdown inside the EU (Germany-Poland, Slovakia now, Hungary etc.) and poor economical environment we do not see what factors could break downside tendency on EUR/USD by far.
