Sive Morten
Special Consultant to the FPA
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Fundamentals
While we see how sparkling political life is, the economy background is boring at the same degree. Formally we've got few numbers that supposedly should have had to be important, but they did not, making no impact on the markets. Still, currently some obvious divergences appear in the US statistics that should investors become cautious.
Market overview
The dollar climbed from more than three-month lows on Wednesday after data showing the U.S. economy grew faster in the third quarter than initially reported helped investors consolidate positions following four days of losses. The greenback rose against the euro and an index of six major peers, but remained on track to post its biggest monthly decline since November 2022 on growing expectations the Federal Reserve will cut interest rates in the first half of 2024.
The dollar rose on news that U.S. gross domestic product increased at a 5.2% annualized rate in the last quarter, faster than the previously reported 4.9%. It was the fastest expansion since the fourth quarter of 2021, the U.S. Commerce Department said in its second estimate of third-quarter GDP. Following the GDP data, futures increased bets of a rate cut starting in March to almost a 50% chance of easing, compared with nearly 35% late on Tuesday, the CME Group's Fed Watch tool showed.
Now The market's fixation on inflation will likely shift to labor data as the degree of the economic slowdown takes precedence over the pace of decelerating prices.
he data will have to walk a fine line to satisfy the so-called Goldilocks narrative of cooling inflation and resilient growth that has boosted asset prices. Too strong a number would undercut bets that the Fed will begin easing monetary policy sooner than expected, presenting an obstacle to the searing fourth quarter rally in stocks and bonds.
A weak number, on the other hand, could spark fears that the economy is beginning to roll over following 525 basis points of rate increases, potentially dulling risk appetite. Economists polled by Reuters expect the U.S. economy to have added 175,000 jobs in November, versus 150,000 in October.
NFP Next week expectations chart
Thursday's economic data suggested that the Federal Reserve is likely done raising interest rates and may start easing by the middle of next year, typically a dollar-negative factor. Euro weakness after a soft euro zone inflation report also partly helped boost the greenback, analysts said. Some analysts said the dollar may have benefited from month-end demand, as investors squared up positions for November, a period that featured a sharp sell-off in the U.S. currency with the market pricing in rate cuts next year. Others, however, expected a dollar sell-off at month-end with stocks' sharp gains for November. There were sell dollar signals at some of the biggest U.S. banks, analysts said.
Inflation as measured by the personal consumption expenditures (PCE) price index was unchanged in October after climbing 0.4% in September. In the 12 months through October, the PCE price index increased 3.0%. That was the smallest year-on-year gain since March 2021 and followed a 3.4% advance in September. Meanwhile, initial claims for state unemployment benefits increased 7,000 to a seasonally-adjusted 218,000 for the week ended Nov. 25. Economists had forecast 226,000 claims.
In other currencies, the euro fell after euro zone inflation eased by more than forecast this month, fuelling bets of early European Central Bank rate cuts. Consumer price growth in the 20 countries that share the euro currency dropped to 2.4% in November from 2.9% in October, well below expectations for a fall to 2.7%.
Federal Reserve Chair Jerome Powell struck a cautious tone on further interest rate moves, saying that the risk of under- or over-tightening is now more balanced.
The market viewed his comments as dovish, with investors pricing in expectations that the Fed is likely done raising rates. Powell said it was clear that U.S. monetary policy was slowing the economy as expected, with a benchmark overnight interest rate "well into restrictive territory." Powell noted, however, that the Fed is prepared to tighten policy further if deemed appropriate.
Powell's remarks came after data showed the U.S. manufacturing sector remained weak in November, affirming his comments that Fed rate hikes have started to slow the economy. The Institute for Supply Management (ISM) said its manufacturing PMI was unchanged at 46.7 last month. It was the 13th consecutive month that the PMI stayed below 50, which indicates contraction in manufacturing.
Goldman Sachs on Friday said it expected the European Central Bank to deliver its first rate cut in the second quarter of 2024, compared to a previous forecast of a cut in the third quarter. Mixed economic data across Europe failed to set the tone for the euro, with a survey showing a downturn in euro zone manufacturing activity eased slightly last month but remained deeply in the red.
The Federal Reserve will cut rates more aggressively than markets are currently pricing in as a mild U.S. recession arrives in the first half of next year, economists at Deutsche Bank projected on Monday. In an outlook report, the Deutsche Bank economists projected 175 basis points in rate cuts in 2024. With the Fed rate currently at 5.25%-5.5%, that would reduce the rate to 3.5%-3.75% by the end of the year.
Deutsche Bank expects two quarters of negative economic growth in the first half of 2024, which leads to a "pretty sharp rise" in the unemployment rate to 4.6% by the middle of next year from 3.9% now, said Brett Ryan, the bank's senior U.S. economist, in an interview with Reuters.
In the report released on Monday, the bank said it expected a "mild recession" in the first half of 2024. DB expects an initial cut of 50 basis points at the Fed's June 2024 meeting, followed by 125 bps of additional cuts over the rest of the year.
Fed members opinions are also stands different. Here you could read statements by C. Waller, L. Mester, and M. Bowman
US DOLLAR FORECASTS
So, this is real mess stand around expectations of next Fed step. Investors are rush to bet on first rate cut, and start making forecasts one braver another. The rise in U.S. rate cut expectations for next year seems to have prompted hedge funds to cool their optimism on the dollar, potentially weakening a key plank of support for the currency in the coming months.
The latest Commodity Futures Trading Commission (CFTC) data shows that funds cut their net long dollar position against a range of major and emerging currencies to $4.5 billion in the week ending Nov. 14 from $10 billion the week before. The $5.5 billion week-on-week swing is the biggest since July and second largest this year, and comes as interest rate futures markets had moved to price in up to 100 basis points of Fed rate cuts by the end of next year.
Funds expanded their net long euro position by $2.9 billion, or nearly 21,000 contracts, the sixth increase in a row and the biggest since July. That position is now worth nearly $18 billion, the most in three months and well up from $11 billion only two weeks ago.
Five funds shared their views on the fate of the dollar:
AQR CAPITAL MANAGEMENT (AUM $95 Bln)
Key trade: Long dollar, short Swiss franc
Managing director Jonathan Fader believes that an end to U.S. rate hikes does not necessarily imply dollar weakness. Over the last 40 years, the dollar has tended to average steady or a bit stronger in the months following a final hike, says Fader, who is "constructive" on the currency. Fader believes the best way to capitalise on ongoing dollar strength would be to buy the greenback against currencies exposed to negative price trends, weaker economic fundamentals and dovish monetary policy, such as the Swiss franc.
Dollar performance around first rate cut chart
FLORIN COURT CAPITAL (AUM $1.8Bln) Doug Greenig, Florin Court's chief investment and executive officer, reckons the dollar will slowly decline as geopolitical tensions disperse power to different parts of the world. He expects the U.S. economy to slow sharply which, alongside falling inflation, will likely hurt the dollar against some emerging market currencies.
Meantime, U.S. banks reported Wednesday a slowdown in profits in the third quarter of the year, as lower noninterest income and higher realized losses on bank investments took a toll. The U.S. Federal Deposit Insurance Corporation reported bank profits at $68.4 billion in the most recent quarter, down 3.4% from the prior quarter. Year over year, bank profits were down 4.6%, due in large part to banks setting aside more funds in provision expenses for potential loan losses, which were up 33.2% in the last four quarters.
While the Federal Reserve will need nearly four more years to cover a historic operating loss and start sending profits again to the U.S. Treasury, according to new research from the Federal Reserve Bank of St. Louis. Some private sector analysts see the net loss peaking in the $150 billion to $200 billion range, possibly hitting that mark in 2025. Earlier this year, the New York Fed estimated the central bank would return to profitability in 2025, which would allow it to start paying down the deferred asset.
Fed operation loss chart
EU MEETS NOT BETTER CONDITIONS
First political turmoil in Spain and Portugal and now upheaval in Germany and the Netherlands heralds fresh uncertainty ahead of a jam-packed 2024 election year.
After November's constitutional court blow, Germany faces a 17 billion-euro ($18.54 billion) hole in next year's budget. No date has been set for the budget, so news from Berlin remains in focus and a fiscal correction means the economy is at risk of shrinking for a second straight year. And coalition talks are stumbling in the Netherlands after far-right, anti-EU Geert Wilders's shock election win. Turmoil in two EU heavyweights is unwelcome just as the bloc seeks more cash from members and finance ministers meet to iron out new fiscal rules on Friday.
Bank lending to businesses across the euro zone fell for the first time since 2015 last month, data from the European Central Bank (ECB) showed on Tuesday, as growth faltered with little prospect for a meaningful recovery. Banks have already turned to cost cuts to try to weather the downturn, which in a people-intensive business means job losses.
In General we already pointed massive drop in consumption across the EU, including major economies, such as France and Germany that are officially stand in recession. And drop of EU inflation in current situation is just a sign of economy slowdown, which is not positive. With this background DAX rally looks absolutely crazy: Here are few charts, updating PMI, consumption and unemployment numbers of structural crisis:
Structural crisis updating charts
WHAT"S WRONG WITH THE US DATA?
So, the US GDP shows "Chinese" growth pace, above 5%, which seems phenomenal for current situation and record high interest rates. In one of our previous reports we already pointed on some inconsistencies of different indicators. Mostly it relates to growth level, continues claims and working hours. With healthy growing economy, continues claims can't constantly raise while weekly hours should not dropping right? This is just simple logic and common sense. But, the US statistics agencies do not hesitate to public this crap. And what is even more outstanding - investors take it as the truth of last resort.
Today we show you another fact that makes us to have big doubts on the reality of recent GDP data. This is tax gathering pace. The US budget deficit soared in 2023. It is almost doubled. It increased from 3.9% of GDP in FY 2022 to 7.5% in 2023 (inc.student loan forgiveness program). The reason for the growing deficit is the fall in budget revenues (in other words, tax collection). Expenses remained at the same level. "The Treasury is emptying, my lord." It's time to start saving. Adjusted for inflation, the United States has generally been sitting on falling tax revenues for 1.5 years.
Here is a table showing US federal tax collections by quarter:
Taxes gathering sheet
As you can see, after the peak of 2022 Q2, there is a relentless downward decline. If we add inflation here, we will get a drop in real tax collection by about 10%.
Despite all the miracles of GDP growth from American statisticians, the treasury has been earning less and less money for 1.5 years in a row. This is a vivid illustration of the same “inflated US GDP” that various kinds of marginal economists talk about.
The fact is that a huge portion of federal taxes is a percentage of stock market growth. If the stock market doesn't rise, then there are no taxes. At the beginning of 2022, the tax harvest was collected for the abnormal 2021 from the point of view of the bubble. Let me remind you that now both the SP500 and the Nasdaq, and the crypto are trading below their 2021 peak.
This is what creates a stalemate with saving money in the very near future. Biden would really like to speed up the market before the elections, but for this it is necessary to give relaxations on the monetary policy and, as a result, get a quick depreciation of the dollar and a new wave of inflation. So the guys went to cut expenses.
Returning back to GDP growth - could you explain me how could GDP show 5+% growth while tax gathering is constantly dropping?
Today, the US public debt is $33.7 trillion. The US national debt increases monthly by $604 billion per month, which is about $20 billion per day or $833 million every hour. If this trend continues (and now there is no reason to say that it will change), then by the end of next year the national debt will reach $41 trillion. Such an explosive growth in the money supply has already led to the fact that the United States is experiencing the strongest wave of real inflation in its entire history, and most importantly, the international bond market is beginning to slowly collapse in anticipation of an increase in unrealized losses.
Today, the international bond market is about $128 trillion , with the total volume of unrealized paper losses amounting to about 60% or $77 trillion . Already, 20-year Treasuries have lost about 53% in price, and this happened in just three years. The American authorities are already preparing for the worst; after the last financial crisis, they introduced a special rule, according to which, in a crisis situation, banks can individually requisition private accounts over $250 thousand.
At the same time, in parallel with all this, the American authorities are already directly planning to drain the dollar and the entire global financial system along with it. This year they launched a new generation of payment systems - Fed now, which should become a new foundation for making payments and settlements. In parallel, they began to rapidly develop their CBDC, in an attempt to create an alternative to the fiat dollar over the next few years.
Some most radical analysts suggest that the next 2–3 years will be especially interesting. We will see the third world war, the collapse of the global financial system, and maybe even the collapse of NATO. There have never been such opportunities in the world; the main thing is not to miss the moment and survive the approaching storm....
Fundamentals
While we see how sparkling political life is, the economy background is boring at the same degree. Formally we've got few numbers that supposedly should have had to be important, but they did not, making no impact on the markets. Still, currently some obvious divergences appear in the US statistics that should investors become cautious.
Market overview
The dollar climbed from more than three-month lows on Wednesday after data showing the U.S. economy grew faster in the third quarter than initially reported helped investors consolidate positions following four days of losses. The greenback rose against the euro and an index of six major peers, but remained on track to post its biggest monthly decline since November 2022 on growing expectations the Federal Reserve will cut interest rates in the first half of 2024.
The dollar rose on news that U.S. gross domestic product increased at a 5.2% annualized rate in the last quarter, faster than the previously reported 4.9%. It was the fastest expansion since the fourth quarter of 2021, the U.S. Commerce Department said in its second estimate of third-quarter GDP. Following the GDP data, futures increased bets of a rate cut starting in March to almost a 50% chance of easing, compared with nearly 35% late on Tuesday, the CME Group's Fed Watch tool showed.
Now The market's fixation on inflation will likely shift to labor data as the degree of the economic slowdown takes precedence over the pace of decelerating prices.
he data will have to walk a fine line to satisfy the so-called Goldilocks narrative of cooling inflation and resilient growth that has boosted asset prices. Too strong a number would undercut bets that the Fed will begin easing monetary policy sooner than expected, presenting an obstacle to the searing fourth quarter rally in stocks and bonds.
A weak number, on the other hand, could spark fears that the economy is beginning to roll over following 525 basis points of rate increases, potentially dulling risk appetite. Economists polled by Reuters expect the U.S. economy to have added 175,000 jobs in November, versus 150,000 in October.
NFP Next week expectations chart
Thursday's economic data suggested that the Federal Reserve is likely done raising interest rates and may start easing by the middle of next year, typically a dollar-negative factor. Euro weakness after a soft euro zone inflation report also partly helped boost the greenback, analysts said. Some analysts said the dollar may have benefited from month-end demand, as investors squared up positions for November, a period that featured a sharp sell-off in the U.S. currency with the market pricing in rate cuts next year. Others, however, expected a dollar sell-off at month-end with stocks' sharp gains for November. There were sell dollar signals at some of the biggest U.S. banks, analysts said.
Inflation as measured by the personal consumption expenditures (PCE) price index was unchanged in October after climbing 0.4% in September. In the 12 months through October, the PCE price index increased 3.0%. That was the smallest year-on-year gain since March 2021 and followed a 3.4% advance in September. Meanwhile, initial claims for state unemployment benefits increased 7,000 to a seasonally-adjusted 218,000 for the week ended Nov. 25. Economists had forecast 226,000 claims.
In other currencies, the euro fell after euro zone inflation eased by more than forecast this month, fuelling bets of early European Central Bank rate cuts. Consumer price growth in the 20 countries that share the euro currency dropped to 2.4% in November from 2.9% in October, well below expectations for a fall to 2.7%.
Federal Reserve Chair Jerome Powell struck a cautious tone on further interest rate moves, saying that the risk of under- or over-tightening is now more balanced.
The market viewed his comments as dovish, with investors pricing in expectations that the Fed is likely done raising rates. Powell said it was clear that U.S. monetary policy was slowing the economy as expected, with a benchmark overnight interest rate "well into restrictive territory." Powell noted, however, that the Fed is prepared to tighten policy further if deemed appropriate.
Powell's remarks came after data showed the U.S. manufacturing sector remained weak in November, affirming his comments that Fed rate hikes have started to slow the economy. The Institute for Supply Management (ISM) said its manufacturing PMI was unchanged at 46.7 last month. It was the 13th consecutive month that the PMI stayed below 50, which indicates contraction in manufacturing.
Goldman Sachs on Friday said it expected the European Central Bank to deliver its first rate cut in the second quarter of 2024, compared to a previous forecast of a cut in the third quarter. Mixed economic data across Europe failed to set the tone for the euro, with a survey showing a downturn in euro zone manufacturing activity eased slightly last month but remained deeply in the red.
The Federal Reserve will cut rates more aggressively than markets are currently pricing in as a mild U.S. recession arrives in the first half of next year, economists at Deutsche Bank projected on Monday. In an outlook report, the Deutsche Bank economists projected 175 basis points in rate cuts in 2024. With the Fed rate currently at 5.25%-5.5%, that would reduce the rate to 3.5%-3.75% by the end of the year.
Deutsche Bank expects two quarters of negative economic growth in the first half of 2024, which leads to a "pretty sharp rise" in the unemployment rate to 4.6% by the middle of next year from 3.9% now, said Brett Ryan, the bank's senior U.S. economist, in an interview with Reuters.
In the report released on Monday, the bank said it expected a "mild recession" in the first half of 2024. DB expects an initial cut of 50 basis points at the Fed's June 2024 meeting, followed by 125 bps of additional cuts over the rest of the year.
Fed members opinions are also stands different. Here you could read statements by C. Waller, L. Mester, and M. Bowman
US DOLLAR FORECASTS
So, this is real mess stand around expectations of next Fed step. Investors are rush to bet on first rate cut, and start making forecasts one braver another. The rise in U.S. rate cut expectations for next year seems to have prompted hedge funds to cool their optimism on the dollar, potentially weakening a key plank of support for the currency in the coming months.
The latest Commodity Futures Trading Commission (CFTC) data shows that funds cut their net long dollar position against a range of major and emerging currencies to $4.5 billion in the week ending Nov. 14 from $10 billion the week before. The $5.5 billion week-on-week swing is the biggest since July and second largest this year, and comes as interest rate futures markets had moved to price in up to 100 basis points of Fed rate cuts by the end of next year.
Funds expanded their net long euro position by $2.9 billion, or nearly 21,000 contracts, the sixth increase in a row and the biggest since July. That position is now worth nearly $18 billion, the most in three months and well up from $11 billion only two weeks ago.
Five funds shared their views on the fate of the dollar:
AQR CAPITAL MANAGEMENT (AUM $95 Bln)
Key trade: Long dollar, short Swiss franc
Managing director Jonathan Fader believes that an end to U.S. rate hikes does not necessarily imply dollar weakness. Over the last 40 years, the dollar has tended to average steady or a bit stronger in the months following a final hike, says Fader, who is "constructive" on the currency. Fader believes the best way to capitalise on ongoing dollar strength would be to buy the greenback against currencies exposed to negative price trends, weaker economic fundamentals and dovish monetary policy, such as the Swiss franc.
Dollar performance around first rate cut chart
FLORIN COURT CAPITAL (AUM $1.8Bln) Doug Greenig, Florin Court's chief investment and executive officer, reckons the dollar will slowly decline as geopolitical tensions disperse power to different parts of the world. He expects the U.S. economy to slow sharply which, alongside falling inflation, will likely hurt the dollar against some emerging market currencies.
Meantime, U.S. banks reported Wednesday a slowdown in profits in the third quarter of the year, as lower noninterest income and higher realized losses on bank investments took a toll. The U.S. Federal Deposit Insurance Corporation reported bank profits at $68.4 billion in the most recent quarter, down 3.4% from the prior quarter. Year over year, bank profits were down 4.6%, due in large part to banks setting aside more funds in provision expenses for potential loan losses, which were up 33.2% in the last four quarters.
While the Federal Reserve will need nearly four more years to cover a historic operating loss and start sending profits again to the U.S. Treasury, according to new research from the Federal Reserve Bank of St. Louis. Some private sector analysts see the net loss peaking in the $150 billion to $200 billion range, possibly hitting that mark in 2025. Earlier this year, the New York Fed estimated the central bank would return to profitability in 2025, which would allow it to start paying down the deferred asset.
Fed operation loss chart
EU MEETS NOT BETTER CONDITIONS
First political turmoil in Spain and Portugal and now upheaval in Germany and the Netherlands heralds fresh uncertainty ahead of a jam-packed 2024 election year.
After November's constitutional court blow, Germany faces a 17 billion-euro ($18.54 billion) hole in next year's budget. No date has been set for the budget, so news from Berlin remains in focus and a fiscal correction means the economy is at risk of shrinking for a second straight year. And coalition talks are stumbling in the Netherlands after far-right, anti-EU Geert Wilders's shock election win. Turmoil in two EU heavyweights is unwelcome just as the bloc seeks more cash from members and finance ministers meet to iron out new fiscal rules on Friday.
Bank lending to businesses across the euro zone fell for the first time since 2015 last month, data from the European Central Bank (ECB) showed on Tuesday, as growth faltered with little prospect for a meaningful recovery. Banks have already turned to cost cuts to try to weather the downturn, which in a people-intensive business means job losses.
In General we already pointed massive drop in consumption across the EU, including major economies, such as France and Germany that are officially stand in recession. And drop of EU inflation in current situation is just a sign of economy slowdown, which is not positive. With this background DAX rally looks absolutely crazy: Here are few charts, updating PMI, consumption and unemployment numbers of structural crisis:
Structural crisis updating charts
WHAT"S WRONG WITH THE US DATA?
So, the US GDP shows "Chinese" growth pace, above 5%, which seems phenomenal for current situation and record high interest rates. In one of our previous reports we already pointed on some inconsistencies of different indicators. Mostly it relates to growth level, continues claims and working hours. With healthy growing economy, continues claims can't constantly raise while weekly hours should not dropping right? This is just simple logic and common sense. But, the US statistics agencies do not hesitate to public this crap. And what is even more outstanding - investors take it as the truth of last resort.
Today we show you another fact that makes us to have big doubts on the reality of recent GDP data. This is tax gathering pace. The US budget deficit soared in 2023. It is almost doubled. It increased from 3.9% of GDP in FY 2022 to 7.5% in 2023 (inc.student loan forgiveness program). The reason for the growing deficit is the fall in budget revenues (in other words, tax collection). Expenses remained at the same level. "The Treasury is emptying, my lord." It's time to start saving. Adjusted for inflation, the United States has generally been sitting on falling tax revenues for 1.5 years.
Here is a table showing US federal tax collections by quarter:
Taxes gathering sheet
As you can see, after the peak of 2022 Q2, there is a relentless downward decline. If we add inflation here, we will get a drop in real tax collection by about 10%.
Despite all the miracles of GDP growth from American statisticians, the treasury has been earning less and less money for 1.5 years in a row. This is a vivid illustration of the same “inflated US GDP” that various kinds of marginal economists talk about.
The fact is that a huge portion of federal taxes is a percentage of stock market growth. If the stock market doesn't rise, then there are no taxes. At the beginning of 2022, the tax harvest was collected for the abnormal 2021 from the point of view of the bubble. Let me remind you that now both the SP500 and the Nasdaq, and the crypto are trading below their 2021 peak.
This is what creates a stalemate with saving money in the very near future. Biden would really like to speed up the market before the elections, but for this it is necessary to give relaxations on the monetary policy and, as a result, get a quick depreciation of the dollar and a new wave of inflation. So the guys went to cut expenses.
Returning back to GDP growth - could you explain me how could GDP show 5+% growth while tax gathering is constantly dropping?
Today, the US public debt is $33.7 trillion. The US national debt increases monthly by $604 billion per month, which is about $20 billion per day or $833 million every hour. If this trend continues (and now there is no reason to say that it will change), then by the end of next year the national debt will reach $41 trillion. Such an explosive growth in the money supply has already led to the fact that the United States is experiencing the strongest wave of real inflation in its entire history, and most importantly, the international bond market is beginning to slowly collapse in anticipation of an increase in unrealized losses.
Today, the international bond market is about $128 trillion , with the total volume of unrealized paper losses amounting to about 60% or $77 trillion . Already, 20-year Treasuries have lost about 53% in price, and this happened in just three years. The American authorities are already preparing for the worst; after the last financial crisis, they introduced a special rule, according to which, in a crisis situation, banks can individually requisition private accounts over $250 thousand.
At the same time, in parallel with all this, the American authorities are already directly planning to drain the dollar and the entire global financial system along with it. This year they launched a new generation of payment systems - Fed now, which should become a new foundation for making payments and settlements. In parallel, they began to rapidly develop their CBDC, in an attempt to create an alternative to the fiat dollar over the next few years.
Some most radical analysts suggest that the next 2–3 years will be especially interesting. We will see the third world war, the collapse of the global financial system, and maybe even the collapse of NATO. There have never been such opportunities in the world; the main thing is not to miss the moment and survive the approaching storm....
