Sive Morten
Special Consultant to the FPA
- Messages
- 17,149
Fundamentals
This week, guys we've got a lot of important stuff, starting with corporate earnings reports as in EU as in the US, and up to the Fed statement and GDP numbers. As already few days have passed since then, it is interesting to watch on reaction from J. Powell, J. Biden and J. Yellen - "triple-J"
. And, normally, comments should be different. But, those sentiment that stand with their statements promises nothing good. Second moment is the structure of the data, as in EU as in the US.
In the Powell's speech, guys, I would pay attention to the following important moments:
Well, on job situation we already talked previously - initial claims are stubbornly rising with the good pace and soon we will see the rising of unemployment. Wage growth we also have discussed - the real (inflation adjusted) wages have dropped. We disagree that job market is strong. More and more companies announces hiring slow:
Amazon Shrinks Staff by 100,000, Joining Netflix and Google in Hiring Slowdown
Other statements - slowdown of consumer spending and investments in fixed assets were made right before GDP report and have become a prophecy. WIth the GDP numbers it is important what particular components give negative numbers. This lets you to understand whether current drop is temporal or it is fundamental.
As J. Powell said - Inventory investments give most valuable decrease. Nobody increases inventories, expecting drop in consumer demand. Now let's take a look at details. In the structure of GDP change for the 2nd quarter, consumer spending made a positive contribution of 0.7 percentage points, where demand for goods fell by 1.08 percentage points, while demand for services increased by 1.78 percentage points, domestic private investment made a negative contribution to GDP at 2.73 percentage points, where investment in fixed assets minus 0.72 percentage points, and the change in stocks "-2.01%" .
What's wrong with the US GDP report? Domestic investments, especially investments in fixed assets, went into a collapse. Consumer spending, which forms 70% of US GDP, is slowing sharply, with retail demand for goods going into a sharp decline, and aggregate consumer demand is stabilizing services.
Since all stimulus are switched off (by far), credit conditions are deteriorating, wage and income growth are dropping in real terms, consumer sentiment is at lowest level in 50 years – therefore, a collapse in spending is inevitable, as well as in investments, which will drag US GDP to the "bottom". The crisis has begun. This explains why investing in inventory are going down.
The nationwide GDP deflator, which takes into account price changes across all economic entities, is growing by 7.5% YoY in the second quarter of 2022 compared to 6.8% in Q1 2022, 5.9% in Q4 2021 and 4% a year ago.
A noticeable acceleration of price growth is recorded, where the price impulse (the rate of price change) is the strongest since 1Q 1975. It is not only the rate of price change that matters, but how quickly these rates change. If inflation rises by 6-8%, but this growth has been consistent for many years, the economy adapts. However, if there is a rapid change from near–zero prices to record prices in 40 years, this is an inflationary shock!
In two years, there was the most rapid transition of prices to a new dimension by 6.8 percentage points – such a speed was only once in the history of the United States – in the mid-70s.
Finally, solid contribution comes from Export of hydrocarbons as the US is burning its national reserves, sending fuel and LNG to Europe. If we would take a look at GDP numbers without export - it should be around "-1.5-1.7%" which corresponds to IQ numbers when the US haven't become yet the major exporter.
With this baggage on the back, we have extreme situation in Real Estate market:
And structural disbalance in the US economy when healthy correlation of interest rates and Manufacturing is breaking. This has happened previously in 70's Stagflation stage:
Another important moment here is authorities reaction on real situation in the economy. The inadequacy of the perception of the reality of the Fed and the US Treasury is an attempt to manipulate public opinion, like the stories about "temporary inflation". Economic laws work regardless of the insane statements of politicians.
The discussion in the United States about whether it can be considered as a recession or not is very interesting. And mostly because such a way of questioning has little relation to the core of the crisis. It more sense in discussion of whether the economic downturn began in September 2021 or November. But this discussion is under way and the reason is not find theoretical truth or explain people what we have now. This real reasons are political.
This discussion makes sense only on the eve of the November elections and it has a purely political meaning. But as they discuss not the real problems and how indeed to find the solution, but absolutely scholastic and unrelated to reality trash talks suggest complete helplessness of both monetary and financial authorities, economic experts in the United States. This means that the crisis will develop according to the most negative scenario, because without understanding the current processes, it is possible to take reasonable measures to minimize its consequences only occasionally.
Now speaking on recent EU GDP and inflation numbers. Once again - we have to take a look at background and conclusions why EU GDP stands positive at least, while it is negative in the EU? Whether situation in EU is better than in the US? Hardly this is possible, buy why we have better numbers? Eurostat reports that there is no crisis in the EU. Indeed we have 0.6% IIQ GDP data and 4.0% on YoY basis:
But we have to take in consideration that this growth has been achieved in relation to depressed economy when Europe was under impact of multiple COVID lockdowns, and current numbers shows growth of 4% particular to those, depressed numbers. This is just different starting point. Take a look at the chart above - if we take as starting point the lows of IIQ 2022, we could say that GDP has grown for 12%, but in reality it is near zero if we compare it to pre-Covid area.
The more representable data is the progress of the economy in relation to December 2019. For all Eurozone countries, growth is only 1.5% in 2.5 years .France - 0.8%, Germany - 0.9%, Italy -1%, Spain - 2.5%. Germany and Spain have not been able to get out of the COVID crisis, and hardly they will, taking in consideration current circumstances.
Despite unprecedented fiscal and monetary support from ECB, which was several times higher than in 2009, the COVID crisis has not been fully and confidently defeated. So, economy performance is balancing at the edge between plus and minus of 2019 levels.
Given the leading indicators, including the expectations of business and population, plans for purchases and investment activity, there are all signs of an impending crisis. Therefore, this was the last growth of the European economy. Now inflationary spreading, debt crisis, energy costs will impact in the second half of 2022.
Thus, we could say that this is just "old" data, which doesn't reflect the modern processes by far.
The same we could say on Inflation. Yes, it is record high again around 8.9%.
But the problem is not in Energy and Food, or better to say not only with these two. Take a look that inflation in other goods and services is growing year over year.
The overall price growth excluding energy (goods + services) is accelerating every month (YoY) – 4.1% in April, 4.6% in May, 4.9% in June and 5.4% in July. It is 0.3-0.4% per month!
Prices behave similarly, if we exclude both energy and food: 3.5% starting in April, then 3.8%, 3.7%, and 4% in July 2022, respectively. Prices for services are accelerating as well. A year ago services grew by 0.9% yoy, in April - 3.3% , now it is 3.7% .
The increase in prices for non-energy products is also accelerating every month(YoY): 3.8% from April, then 4.2%, 4.3% and 4.5% in July. From 2014 to 2021, prices for this group of goods grew by an average of 0.3% YoY! They never exceeded 2%. At the beginning of the Eurozone creation they grew by 1.7%, and at the end of 2007 the growth was 1.5%. That's all.
Therefore, the current record price increase is not a problem of energy, raw materials and food. Expenses are spreading throughout the whole economy, so the price increase becomes stable, systemic. More and more countries are exceeding 10% price growth.
Conclusion
As you could see, recent week has become very important and not because of the numbers but because of evidence of policy as ECB as the Fed. ECB has announced TPI, which is obviously another shape of QE, let's to be honest with ourselves, despite how they call and describe it. Fed makes the visuality that they execute the QT, but they are not. Second, we have ~$1 Trln quasi-QE in the US in the way of J. Biden programmes. Besides, Fed has 600 Bln reserve on the US Treasury deposit and one more rate hike until the end of the year (following from J. Powell comments). Thus, both Central Banks declare own defeating in inflation fighting.
Fed still has higher rate, and probably it will push it to 3.0% by the end of the year. Economical situation will deteriorate further in the EU, closer to the cold time with possible rising of social unrests as well, while in the US Democrats, as usual, will try to support the image and visuality of prosperity before November elections. Thus, it makes overall situation to advance in favor of the US Dollar in long-term. Since the USD advantage decreases now, market needs to adjust an expectations, as parity level have included more hawkish Fed policy. At the same time, EU problems are disguised a bit by positive GDP numbers that will change later, in IIIQ. This makes us think that our long-term target of 0.9 on EUR/USD should be reached, but further dollar growth is not obvious any more.
P.S. Take a look at today Gold Fundamental report as well, because it provides interesting forecast of the next Fed steps, and explanation why we think that only one more rate change follows.
Technicals
Monthly
Long-term picture on EUR remains bearish, MACD stands bearish as well. July has closed in the middle of the range as market now needs time to adjust expectations based on information that we've discussed above.
Technically, to give even minor bullish hints, EUR has to climb above 1.10 area. Until price is flirting below OP target - situation remains clearly bearish, as it could be treated as the way to XOP. Without strong technical support levels market could change the direction only by big shift in fundamentals. And recent pullback is mostly the fruit of fundamentals change rather than technicals factors.
With the drop below OP, it is the only direction to XOP, as market enters new extension mode. Our major target that we could calculate is 0.9, nearest local target is 0.9750, which is 1.27 butterfly extension. Downside action shows good thrust and appearing of B&B "Sell" here is definitely welcome.
As we've suggested, downside action probably should slowdown a bit, and EUR could show higher pullback, but recent changes are not enough to break the downside trend as advantage still stands on the US side.
Weekly
Weekly picture brings no additional information by far. Trend remains bearish, recent week is inside one. Next supposed upside target is 1.0446-1.0460 K-resistance area:
Daily
Daily chart also brings no new patterns. Trend stands bullish here. We have Overbought level around the same 1.04 area and weekly K-resistance, that in general confirms our suggestion:
Intraday
While market is trying to keep upside performance, we intend to follow it. Bears now nothing to do - either wait when AB-CD will be done, or fails. Now neither former nor latter has happened yet. For tactical upside trading, we probably could use "C" point as invalidation one and totally rely on CD leg to consider position taking:
Situation is interesting for the bears as well - in the case of inability of upside progress and "C" lows breakout, EUR could form the downside butterfly. Meantime, EUR has completed our Friday setup - hits minor 1H OP and pullback to 5/8 support in a way of ab=cd retracement. If you've got position there - very good. If not, here is how it could be used. In fact, this gives us an advantage. For the bullish market it means OP downside retracement is over and EUR should keep going higher. This in turn, gives another option for position taking - to focus only on most recent upside swing and watch for minor pullback for position taking with the stops below 1.014 lows.
Bullish market has to not break it down. If this happens then EUR is not bullish, and upside continuation start looking suspicious.
This week, guys we've got a lot of important stuff, starting with corporate earnings reports as in EU as in the US, and up to the Fed statement and GDP numbers. As already few days have passed since then, it is interesting to watch on reaction from J. Powell, J. Biden and J. Yellen - "triple-J"
. And, normally, comments should be different. But, those sentiment that stand with their statements promises nothing good. Second moment is the structure of the data, as in EU as in the US.In the Powell's speech, guys, I would pay attention to the following important moments:
- The growth of consumer spending has slowed significantly.
- Investments in fixed assets of the business seem to have declined in the 2nd quarter.
- Wage growth is growing.
- Job growth is slower, but still steady.
- Another unusually large increase may be appropriate at the next meeting
- It will probably be appropriate to slow down the pace of increases as rates become more restrictive
Well, on job situation we already talked previously - initial claims are stubbornly rising with the good pace and soon we will see the rising of unemployment. Wage growth we also have discussed - the real (inflation adjusted) wages have dropped. We disagree that job market is strong. More and more companies announces hiring slow:
Amazon Shrinks Staff by 100,000, Joining Netflix and Google in Hiring Slowdown
Other statements - slowdown of consumer spending and investments in fixed assets were made right before GDP report and have become a prophecy. WIth the GDP numbers it is important what particular components give negative numbers. This lets you to understand whether current drop is temporal or it is fundamental.
As J. Powell said - Inventory investments give most valuable decrease. Nobody increases inventories, expecting drop in consumer demand. Now let's take a look at details. In the structure of GDP change for the 2nd quarter, consumer spending made a positive contribution of 0.7 percentage points, where demand for goods fell by 1.08 percentage points, while demand for services increased by 1.78 percentage points, domestic private investment made a negative contribution to GDP at 2.73 percentage points, where investment in fixed assets minus 0.72 percentage points, and the change in stocks "-2.01%" .
What's wrong with the US GDP report? Domestic investments, especially investments in fixed assets, went into a collapse. Consumer spending, which forms 70% of US GDP, is slowing sharply, with retail demand for goods going into a sharp decline, and aggregate consumer demand is stabilizing services.
Since all stimulus are switched off (by far), credit conditions are deteriorating, wage and income growth are dropping in real terms, consumer sentiment is at lowest level in 50 years – therefore, a collapse in spending is inevitable, as well as in investments, which will drag US GDP to the "bottom". The crisis has begun. This explains why investing in inventory are going down.
The nationwide GDP deflator, which takes into account price changes across all economic entities, is growing by 7.5% YoY in the second quarter of 2022 compared to 6.8% in Q1 2022, 5.9% in Q4 2021 and 4% a year ago.
A noticeable acceleration of price growth is recorded, where the price impulse (the rate of price change) is the strongest since 1Q 1975. It is not only the rate of price change that matters, but how quickly these rates change. If inflation rises by 6-8%, but this growth has been consistent for many years, the economy adapts. However, if there is a rapid change from near–zero prices to record prices in 40 years, this is an inflationary shock!
In two years, there was the most rapid transition of prices to a new dimension by 6.8 percentage points – such a speed was only once in the history of the United States – in the mid-70s.
Finally, solid contribution comes from Export of hydrocarbons as the US is burning its national reserves, sending fuel and LNG to Europe. If we would take a look at GDP numbers without export - it should be around "-1.5-1.7%" which corresponds to IQ numbers when the US haven't become yet the major exporter.
With this baggage on the back, we have extreme situation in Real Estate market:
And structural disbalance in the US economy when healthy correlation of interest rates and Manufacturing is breaking. This has happened previously in 70's Stagflation stage:
Another important moment here is authorities reaction on real situation in the economy. The inadequacy of the perception of the reality of the Fed and the US Treasury is an attempt to manipulate public opinion, like the stories about "temporary inflation". Economic laws work regardless of the insane statements of politicians.
The discussion in the United States about whether it can be considered as a recession or not is very interesting. And mostly because such a way of questioning has little relation to the core of the crisis. It more sense in discussion of whether the economic downturn began in September 2021 or November. But this discussion is under way and the reason is not find theoretical truth or explain people what we have now. This real reasons are political.
This discussion makes sense only on the eve of the November elections and it has a purely political meaning. But as they discuss not the real problems and how indeed to find the solution, but absolutely scholastic and unrelated to reality trash talks suggest complete helplessness of both monetary and financial authorities, economic experts in the United States. This means that the crisis will develop according to the most negative scenario, because without understanding the current processes, it is possible to take reasonable measures to minimize its consequences only occasionally.
Now speaking on recent EU GDP and inflation numbers. Once again - we have to take a look at background and conclusions why EU GDP stands positive at least, while it is negative in the EU? Whether situation in EU is better than in the US? Hardly this is possible, buy why we have better numbers? Eurostat reports that there is no crisis in the EU. Indeed we have 0.6% IIQ GDP data and 4.0% on YoY basis:
But we have to take in consideration that this growth has been achieved in relation to depressed economy when Europe was under impact of multiple COVID lockdowns, and current numbers shows growth of 4% particular to those, depressed numbers. This is just different starting point. Take a look at the chart above - if we take as starting point the lows of IIQ 2022, we could say that GDP has grown for 12%, but in reality it is near zero if we compare it to pre-Covid area.
The more representable data is the progress of the economy in relation to December 2019. For all Eurozone countries, growth is only 1.5% in 2.5 years .France - 0.8%, Germany - 0.9%, Italy -1%, Spain - 2.5%. Germany and Spain have not been able to get out of the COVID crisis, and hardly they will, taking in consideration current circumstances.
Despite unprecedented fiscal and monetary support from ECB, which was several times higher than in 2009, the COVID crisis has not been fully and confidently defeated. So, economy performance is balancing at the edge between plus and minus of 2019 levels.
Given the leading indicators, including the expectations of business and population, plans for purchases and investment activity, there are all signs of an impending crisis. Therefore, this was the last growth of the European economy. Now inflationary spreading, debt crisis, energy costs will impact in the second half of 2022.
Thus, we could say that this is just "old" data, which doesn't reflect the modern processes by far.
The same we could say on Inflation. Yes, it is record high again around 8.9%.
But the problem is not in Energy and Food, or better to say not only with these two. Take a look that inflation in other goods and services is growing year over year.
The overall price growth excluding energy (goods + services) is accelerating every month (YoY) – 4.1% in April, 4.6% in May, 4.9% in June and 5.4% in July. It is 0.3-0.4% per month!
Prices behave similarly, if we exclude both energy and food: 3.5% starting in April, then 3.8%, 3.7%, and 4% in July 2022, respectively. Prices for services are accelerating as well. A year ago services grew by 0.9% yoy, in April - 3.3% , now it is 3.7% .
The increase in prices for non-energy products is also accelerating every month(YoY): 3.8% from April, then 4.2%, 4.3% and 4.5% in July. From 2014 to 2021, prices for this group of goods grew by an average of 0.3% YoY! They never exceeded 2%. At the beginning of the Eurozone creation they grew by 1.7%, and at the end of 2007 the growth was 1.5%. That's all.
Therefore, the current record price increase is not a problem of energy, raw materials and food. Expenses are spreading throughout the whole economy, so the price increase becomes stable, systemic. More and more countries are exceeding 10% price growth.
Conclusion
As you could see, recent week has become very important and not because of the numbers but because of evidence of policy as ECB as the Fed. ECB has announced TPI, which is obviously another shape of QE, let's to be honest with ourselves, despite how they call and describe it. Fed makes the visuality that they execute the QT, but they are not. Second, we have ~$1 Trln quasi-QE in the US in the way of J. Biden programmes. Besides, Fed has 600 Bln reserve on the US Treasury deposit and one more rate hike until the end of the year (following from J. Powell comments). Thus, both Central Banks declare own defeating in inflation fighting.
Fed still has higher rate, and probably it will push it to 3.0% by the end of the year. Economical situation will deteriorate further in the EU, closer to the cold time with possible rising of social unrests as well, while in the US Democrats, as usual, will try to support the image and visuality of prosperity before November elections. Thus, it makes overall situation to advance in favor of the US Dollar in long-term. Since the USD advantage decreases now, market needs to adjust an expectations, as parity level have included more hawkish Fed policy. At the same time, EU problems are disguised a bit by positive GDP numbers that will change later, in IIIQ. This makes us think that our long-term target of 0.9 on EUR/USD should be reached, but further dollar growth is not obvious any more.
P.S. Take a look at today Gold Fundamental report as well, because it provides interesting forecast of the next Fed steps, and explanation why we think that only one more rate change follows.
Technicals
Monthly
Long-term picture on EUR remains bearish, MACD stands bearish as well. July has closed in the middle of the range as market now needs time to adjust expectations based on information that we've discussed above.
Technically, to give even minor bullish hints, EUR has to climb above 1.10 area. Until price is flirting below OP target - situation remains clearly bearish, as it could be treated as the way to XOP. Without strong technical support levels market could change the direction only by big shift in fundamentals. And recent pullback is mostly the fruit of fundamentals change rather than technicals factors.
With the drop below OP, it is the only direction to XOP, as market enters new extension mode. Our major target that we could calculate is 0.9, nearest local target is 0.9750, which is 1.27 butterfly extension. Downside action shows good thrust and appearing of B&B "Sell" here is definitely welcome.
As we've suggested, downside action probably should slowdown a bit, and EUR could show higher pullback, but recent changes are not enough to break the downside trend as advantage still stands on the US side.
Weekly
Weekly picture brings no additional information by far. Trend remains bearish, recent week is inside one. Next supposed upside target is 1.0446-1.0460 K-resistance area:
Daily
Daily chart also brings no new patterns. Trend stands bullish here. We have Overbought level around the same 1.04 area and weekly K-resistance, that in general confirms our suggestion:
Intraday
While market is trying to keep upside performance, we intend to follow it. Bears now nothing to do - either wait when AB-CD will be done, or fails. Now neither former nor latter has happened yet. For tactical upside trading, we probably could use "C" point as invalidation one and totally rely on CD leg to consider position taking:
Situation is interesting for the bears as well - in the case of inability of upside progress and "C" lows breakout, EUR could form the downside butterfly. Meantime, EUR has completed our Friday setup - hits minor 1H OP and pullback to 5/8 support in a way of ab=cd retracement. If you've got position there - very good. If not, here is how it could be used. In fact, this gives us an advantage. For the bullish market it means OP downside retracement is over and EUR should keep going higher. This in turn, gives another option for position taking - to focus only on most recent upside swing and watch for minor pullback for position taking with the stops below 1.014 lows.
Bullish market has to not break it down. If this happens then EUR is not bullish, and upside continuation start looking suspicious.
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