Sive Morten
Special Consultant to the FPA
- Messages
- 18,664
Fundamentals
No doubts, guys, this was dramatic week and absolutely crazy for EUR, as price performance was absolutely mad. Yes, NFP on Friday has added more fuel to the fire, but we were ready for that mentally. In fact, in a row with NFP data, I would mention the Fed meeting, Bank falling and US Treasury borrowing announcement as major events of the week. So, let's go through them.
Market overview
The U.S. dollar index jumped to a seven-week high in a broad rally on Friday after data showed that employers added far more jobs in January than expected, reducing the chances of near-term Federal Reserve interest rate cuts. Nonfarm payrolls increased by 353,000 last month, beating economists' expectations for a gain of 180,000. Average hourly earnings increased 0.6% after rising 0.4% in December.
The dollar had weakened in recent days in line with falling Treasury yields, even after Fed Chair Jerome Powell on Wednesday said that a March rate cut was unlikely. Treasuries benefited from safe haven demand due to renewed concerns about the financial health of U.S. regional banks. But these concerns eased on Friday as U.S. regional bank stocks recovered slightly from a brutal two-day sell-off, helping send yields higher. Recent moves in the dollar and Treasury yields in large part also reflect repositioning, following a strong January for the greenback and higher Treasury yields during the month.
After the jobs report, money markets projected the Fed would lower its target rate, currently in a range of 5.25%-5.5%, by 123.8 basis points by year-end , down from 140.3 bps just before the data was released. Futures pared bets for a rate cut in March to 20.5% from 36.5% just before the report, and slashed the likelihood of a 25 or 50 bps cut in May to 61.8% from 91.6%, according to CME Group's FedWatch Tool.
The data came after the Federal Reserve on Wednesday pushed back against market expectations for an imminent rate cut, with Chair Jerome Powell warning inflation was "still too high."
The US Treasury expects to borrow $760 billion in January-March 2024, which is $55 billion less than the October estimate. US debt managers kept their estimate for the Treasury’s cash balance for the end of March at $750 billion. The smaller borrowing need was driven by higher projected net fiscal flows, and having more cash on hand at the start of the quarter than expected, the department said in a statement. Treasury officials speaking with reporters declined to offer a breakdown on the improvement in fiscal flows relative to previous expectations.
And some additional news that could be lost behind NFP and the Fed release... but we think they are very important.
The Swiss National Bank expects inflation to rise, Chairman Thomas Jordan said in an interview to be broadcast later on Monday. Jordan said it was too early to say whether the fight against inflation had been won, but he said the situation was significantly better and "looks pretty good."
Euro area policymakers were reminded that their job is potentially not yet done as inflation ticked up in December for the first time since April, rising by half a percentage point. The same has happened in the US, by the way. The looming threat of a further adverse inflation shock from the shipping disruptions in the Red Sea is a definite worry — Fathom calculations suggest that, if disruptions escalate, this could add as much as five percentage points to euro area inflation. Resurgent inflation risks would test whether euro area policymakers have truly re-anchored inflation expectations and proved their credibility following the post-COVID inflation overshoot.
Cracks are emerging. A report in today’s Financial Times finds that corporate bankruptcies are increasing at double-digit rates in most advanced economies, admittedly from low levels. Where do we go from here? As our chart shows, US company failures tend to follow movements in the US federal funds rate, with a lag of at least a year or two. There is likely to be worse to come.
The EU overnight index swaps (OIS) market now suggests that this rate will be cut by 50 basis points in the first three months of 2024, with further cuts of roughly the same size by September 2024. Notably, the forward rate for the nine-month-ahead OIS has been slashed by 40 basis points in two weeks, reflecting a strong conviction that ECB cuts will be front-loaded this year. Strong January job report from the US postpones first rate cut at least until May but the overall sentiment is that cuts are coming, and they may be led by the ECB. The reason is that Europe differs from the rest by the intensity of the energy price crisis it suffered. Prices have come down since then, with most of the improvement occurring in the countries where gas prices rose the most a year ago — like Germany. Since this has triggered massive de-industrialization and destruction of heavy industry, vast drop of consumption and outstanding producer deflation - another inflation spiral could make an opposite effect and put economy in evident recession. The Red Sea turmoil is only the part of the problem. The second one is J. Biden bill, restricting LNG export and limiting production quotas. This could totally kill EU heavy industry. Besides, as we've mentioned - the hydrocarbons stream from India is narrowing. So, EU could start cut rates ahead of the US. In fact - this is what the US would like to achieve. Because it will let dollar to provide higher rates and remain more attractive for investing:
Meantime, structural crisis stands underway. Here is brief update on some data, clearly illustrating overall situation. Here pay attention to the average weekly hours indicator. We will need it later.
Hmm...
We have really bad feeling about all this stuff. Based on recent statistics, I would ask the only one question. Let's suppose that I'm not an economist and understand nothing in all this mind blowing data. So the question is - as higher the rate is as better economy feels? Sounds like total absurd. But this is the conclusion that any common sense man could do. Rates are high, economy is improving, what's the problem? Thus, we see some fraud right on the surface.
The length of the working week definitely indicates a decline (see charts above), and the economic growth always increases the workload of employees. Here can be no disagreement. Therefore, we can confidently say that the US continues to decline (since the fall of 2021), which is masked by both underestimation of inflation and mechanisms for translating the growth of financial asset capitalization into GDP. What the authorities will do in the event of a drop in capitalization is an open question. In any case, the continuation of the downturn will sooner or later make itself felt in terms of the state of financial markets.
Speaking about Payrolls. First is, last year (we have data only until the summer of 2023, but you could check the rest of the year) almost every month it was revised down, which is equal to ~245K jobs by the summer of 2023:
Second is, the calculation method. In December, 333 thousand jobs were created, and in January 2024 another 353 thousand - this is much higher than the long-term trend of 2010-2019 at the level of 200 thousand. The BLS revised the data and it turned out that the old data was underestimated, and the newer ones were overestimated, and the new information is interpreted so that since the end of the year there has been a significant improvement in the economic situation.
For example, According to old data, the annual increase in employment in December 2023 was 2.7 million people, and according to new data there are already 3.05 million employed (in December they were overestimated by 115 thousand, and the data for December 2022 was underestimated by 244 thousand - the statistics were revised from 2019, and significant changes from September 2022 to May 2023, where, according to new data, the number of employed is 191 thousand less on average for the period.
As a result, The US is now creating about 3 million jobs per year, and from 2017 to 2019 the average annual rate was about 2.1 million jobs. Other words, speaking under "adjustments" we should understand dragging jobs from old numbers into new numbers. Who cares now about 2022 year data? What is the deal that they have been revised down, who cares? But this is the sort of upside revision of modern data. Thus, secret stands simple. When this fraud becomes evident, collapse just will be stronger. And this is not only with the job reports.
Finally, it is useful to take a look at some secondary indicators sometimes. For example, last report we've considered U-6 Unemployment indicator. It is more representative, because it includes also those people who despear to get the job of fill the claim not in reported month, compares to common Unemployment report.
As Bloomberg reports - If you talk to American workers today, they’ll probably tell you they’re happy to be employed — but not about much else. Job cuts stands in EU as well. DB intends to cut 3.5K jobs.
Speaking about recent US Treasury "promises" to borrow less. In fact, there are questions about the US Treasury estimates. Skeptics are sure that lowering borrowing estimates is a lie designed to smooth out the situation in the debt market and prevent a jump in yields (and they are right). ️And if in three months the actual figures for the same taxes do not match, the Treasury will simply deviate from its estimates by several tens or hundreds of billions, but this will happen later, and now we need good conditions for loans.
In general, the market reacted positively to this news. It's just not clear why. If this means that the Treasury, instead of borrowing from the market in the amount of $55 billion, will spend its own funds that it has in the TGA account at the Fed, then this is not bad, because this will be an injection of liquidity into the system. If borrowings are less because the Ministry of Finance wants to spend less in a quarter, then there is nothing good in this news for the market. This will mean that the economy will miss these expenses.
Speaking about the national debt, it should be noted that Taleb also woke up and supported Dimon in his rhetoric - The US is facing a "death spiral" of rising debt. It is difficult to find a way out of the problem - a miracle must happen. The US political system makes it difficult to solve the problem
In principle, people understand. The bells are ringing, but they refuse to talk about the need to reduce budget expenditures and the deficit. They understand the consequences. But since no one offers anything concrete, especially from the market leaders, we can conclude that there is no good, or at least relatively standard, solution to this problem.
But, returning to the topic of public debt, it is worth understanding what exactly is meant by the words about the terrifying level of debt, which as a percentage of GDP is still growing. The problem is not the level of debt per se, but the huge budget deficit, that is, additional “unhealthy” government spending to which the economy has already become accustomed.
The worst thing is if, against the backdrop of high rates, lending to the real sector and investments fall. That's what we see. Because this means that in reality the economy is shrinking and is supported only by incentives. And, in principle, this will lead to the budget deficit growing faster than GDP growth. And we’re not just talking about the increase in public debt as a percentage of GDP. It will grow in any case, that is, even in order for GDP not to fall, the public debt must be increased.
That is, in fact, it is the problems in the economy that scare everyone, and not the national debt as such. National debt is a consequence, not a cause. But it is not politically correct to explain in detail what exactly is wrong. It is better to speak in such a way that it is understandable only to those who need it. For now - personal spending equals to the quarterly budget earnings. Sounds very handy - get 1st quarter income, paid to creditors and could spend another three quarters for yourself...
Conclusion:
Today we haven't considered the FOMC meeting. I just do not want to overload the report, to keep it comfortable and interesting to read. Maybe we will take a look briefly on this subject tomorrow in gold report. There are not too many things to talk about. March meeting should be much more interesting. As a result of current situation - our conclusion is evident. All these stuff that you've seen this week is a big fraud. There is no such growth as in jobs as in GDP, all of them are blown artificially by statistician "tweaks and tricks", "adjustments" and "revisions" as to the numbers as to the methodology. We suggest that until US Treasury has resources - they could keep playing these games cheating markets.
When this game might be over? By our view, the US financial system has ~$1.4 Trln of cash reserves (0.6 Repo + 0.8 TGA account). Since J. Yellen has announced changes in borrowing structure in favor of mid and long term bonds (5 year and above - as we've suggested in our previous report), the US financial system will meet hard stress test in late spring early summer when they need to issue ~ 500 Bln of new bonds until summer (318 + 447 in IQ and IIQ of 2024). It is also a big question what will happen with small and mid sized banks after March 11, when BTFP programme will be over, as banks' paper loss stands on the peak once again. Because more long-term issues from the Fed will raise long-term yields, increasing paper losses on banks' balances.
Fed will try to last time as long as they could with the first rate cut to keep attractive US assets and national currency and to avoid collapse in election year, postponing inflation shock on 2025 or late 2024, giving ruined economy in the hands of new administration (supposedly Republicans). It means that EUR/USD action in nearest 2-3 months probably will reflect " not quite real" background, skewed in favor of the US Dollar. Second task that the US is trying to achieve - be better than the rivals, EU in particular. This is where all recent political efforts are taken. Crisis in EU should start earlier than in the US.
No doubts, guys, this was dramatic week and absolutely crazy for EUR, as price performance was absolutely mad. Yes, NFP on Friday has added more fuel to the fire, but we were ready for that mentally. In fact, in a row with NFP data, I would mention the Fed meeting, Bank falling and US Treasury borrowing announcement as major events of the week. So, let's go through them.
Market overview
The U.S. dollar index jumped to a seven-week high in a broad rally on Friday after data showed that employers added far more jobs in January than expected, reducing the chances of near-term Federal Reserve interest rate cuts. Nonfarm payrolls increased by 353,000 last month, beating economists' expectations for a gain of 180,000. Average hourly earnings increased 0.6% after rising 0.4% in December.
The dollar had weakened in recent days in line with falling Treasury yields, even after Fed Chair Jerome Powell on Wednesday said that a March rate cut was unlikely. Treasuries benefited from safe haven demand due to renewed concerns about the financial health of U.S. regional banks. But these concerns eased on Friday as U.S. regional bank stocks recovered slightly from a brutal two-day sell-off, helping send yields higher. Recent moves in the dollar and Treasury yields in large part also reflect repositioning, following a strong January for the greenback and higher Treasury yields during the month.
After the jobs report, money markets projected the Fed would lower its target rate, currently in a range of 5.25%-5.5%, by 123.8 basis points by year-end , down from 140.3 bps just before the data was released. Futures pared bets for a rate cut in March to 20.5% from 36.5% just before the report, and slashed the likelihood of a 25 or 50 bps cut in May to 61.8% from 91.6%, according to CME Group's FedWatch Tool.
The data came after the Federal Reserve on Wednesday pushed back against market expectations for an imminent rate cut, with Chair Jerome Powell warning inflation was "still too high."
The US Treasury expects to borrow $760 billion in January-March 2024, which is $55 billion less than the October estimate. US debt managers kept their estimate for the Treasury’s cash balance for the end of March at $750 billion. The smaller borrowing need was driven by higher projected net fiscal flows, and having more cash on hand at the start of the quarter than expected, the department said in a statement. Treasury officials speaking with reporters declined to offer a breakdown on the improvement in fiscal flows relative to previous expectations.
And some additional news that could be lost behind NFP and the Fed release... but we think they are very important.
The Swiss National Bank expects inflation to rise, Chairman Thomas Jordan said in an interview to be broadcast later on Monday. Jordan said it was too early to say whether the fight against inflation had been won, but he said the situation was significantly better and "looks pretty good."
Euro area policymakers were reminded that their job is potentially not yet done as inflation ticked up in December for the first time since April, rising by half a percentage point. The same has happened in the US, by the way. The looming threat of a further adverse inflation shock from the shipping disruptions in the Red Sea is a definite worry — Fathom calculations suggest that, if disruptions escalate, this could add as much as five percentage points to euro area inflation. Resurgent inflation risks would test whether euro area policymakers have truly re-anchored inflation expectations and proved their credibility following the post-COVID inflation overshoot.
Cracks are emerging. A report in today’s Financial Times finds that corporate bankruptcies are increasing at double-digit rates in most advanced economies, admittedly from low levels. Where do we go from here? As our chart shows, US company failures tend to follow movements in the US federal funds rate, with a lag of at least a year or two. There is likely to be worse to come.
The EU overnight index swaps (OIS) market now suggests that this rate will be cut by 50 basis points in the first three months of 2024, with further cuts of roughly the same size by September 2024. Notably, the forward rate for the nine-month-ahead OIS has been slashed by 40 basis points in two weeks, reflecting a strong conviction that ECB cuts will be front-loaded this year. Strong January job report from the US postpones first rate cut at least until May but the overall sentiment is that cuts are coming, and they may be led by the ECB. The reason is that Europe differs from the rest by the intensity of the energy price crisis it suffered. Prices have come down since then, with most of the improvement occurring in the countries where gas prices rose the most a year ago — like Germany. Since this has triggered massive de-industrialization and destruction of heavy industry, vast drop of consumption and outstanding producer deflation - another inflation spiral could make an opposite effect and put economy in evident recession. The Red Sea turmoil is only the part of the problem. The second one is J. Biden bill, restricting LNG export and limiting production quotas. This could totally kill EU heavy industry. Besides, as we've mentioned - the hydrocarbons stream from India is narrowing. So, EU could start cut rates ahead of the US. In fact - this is what the US would like to achieve. Because it will let dollar to provide higher rates and remain more attractive for investing:
Meantime, structural crisis stands underway. Here is brief update on some data, clearly illustrating overall situation. Here pay attention to the average weekly hours indicator. We will need it later.
Hmm...
We have really bad feeling about all this stuff. Based on recent statistics, I would ask the only one question. Let's suppose that I'm not an economist and understand nothing in all this mind blowing data. So the question is - as higher the rate is as better economy feels? Sounds like total absurd. But this is the conclusion that any common sense man could do. Rates are high, economy is improving, what's the problem? Thus, we see some fraud right on the surface.
The length of the working week definitely indicates a decline (see charts above), and the economic growth always increases the workload of employees. Here can be no disagreement. Therefore, we can confidently say that the US continues to decline (since the fall of 2021), which is masked by both underestimation of inflation and mechanisms for translating the growth of financial asset capitalization into GDP. What the authorities will do in the event of a drop in capitalization is an open question. In any case, the continuation of the downturn will sooner or later make itself felt in terms of the state of financial markets.
Speaking about Payrolls. First is, last year (we have data only until the summer of 2023, but you could check the rest of the year) almost every month it was revised down, which is equal to ~245K jobs by the summer of 2023:
Second is, the calculation method. In December, 333 thousand jobs were created, and in January 2024 another 353 thousand - this is much higher than the long-term trend of 2010-2019 at the level of 200 thousand. The BLS revised the data and it turned out that the old data was underestimated, and the newer ones were overestimated, and the new information is interpreted so that since the end of the year there has been a significant improvement in the economic situation.
For example, According to old data, the annual increase in employment in December 2023 was 2.7 million people, and according to new data there are already 3.05 million employed (in December they were overestimated by 115 thousand, and the data for December 2022 was underestimated by 244 thousand - the statistics were revised from 2019, and significant changes from September 2022 to May 2023, where, according to new data, the number of employed is 191 thousand less on average for the period.
As a result, The US is now creating about 3 million jobs per year, and from 2017 to 2019 the average annual rate was about 2.1 million jobs. Other words, speaking under "adjustments" we should understand dragging jobs from old numbers into new numbers. Who cares now about 2022 year data? What is the deal that they have been revised down, who cares? But this is the sort of upside revision of modern data. Thus, secret stands simple. When this fraud becomes evident, collapse just will be stronger. And this is not only with the job reports.
Finally, it is useful to take a look at some secondary indicators sometimes. For example, last report we've considered U-6 Unemployment indicator. It is more representative, because it includes also those people who despear to get the job of fill the claim not in reported month, compares to common Unemployment report.
As Bloomberg reports - If you talk to American workers today, they’ll probably tell you they’re happy to be employed — but not about much else. Job cuts stands in EU as well. DB intends to cut 3.5K jobs.
Speaking about recent US Treasury "promises" to borrow less. In fact, there are questions about the US Treasury estimates. Skeptics are sure that lowering borrowing estimates is a lie designed to smooth out the situation in the debt market and prevent a jump in yields (and they are right). ️And if in three months the actual figures for the same taxes do not match, the Treasury will simply deviate from its estimates by several tens or hundreds of billions, but this will happen later, and now we need good conditions for loans.
In general, the market reacted positively to this news. It's just not clear why. If this means that the Treasury, instead of borrowing from the market in the amount of $55 billion, will spend its own funds that it has in the TGA account at the Fed, then this is not bad, because this will be an injection of liquidity into the system. If borrowings are less because the Ministry of Finance wants to spend less in a quarter, then there is nothing good in this news for the market. This will mean that the economy will miss these expenses.
Speaking about the national debt, it should be noted that Taleb also woke up and supported Dimon in his rhetoric - The US is facing a "death spiral" of rising debt. It is difficult to find a way out of the problem - a miracle must happen. The US political system makes it difficult to solve the problem
In principle, people understand. The bells are ringing, but they refuse to talk about the need to reduce budget expenditures and the deficit. They understand the consequences. But since no one offers anything concrete, especially from the market leaders, we can conclude that there is no good, or at least relatively standard, solution to this problem.
But, returning to the topic of public debt, it is worth understanding what exactly is meant by the words about the terrifying level of debt, which as a percentage of GDP is still growing. The problem is not the level of debt per se, but the huge budget deficit, that is, additional “unhealthy” government spending to which the economy has already become accustomed.
The worst thing is if, against the backdrop of high rates, lending to the real sector and investments fall. That's what we see. Because this means that in reality the economy is shrinking and is supported only by incentives. And, in principle, this will lead to the budget deficit growing faster than GDP growth. And we’re not just talking about the increase in public debt as a percentage of GDP. It will grow in any case, that is, even in order for GDP not to fall, the public debt must be increased.
That is, in fact, it is the problems in the economy that scare everyone, and not the national debt as such. National debt is a consequence, not a cause. But it is not politically correct to explain in detail what exactly is wrong. It is better to speak in such a way that it is understandable only to those who need it. For now - personal spending equals to the quarterly budget earnings. Sounds very handy - get 1st quarter income, paid to creditors and could spend another three quarters for yourself...
Conclusion:
Today we haven't considered the FOMC meeting. I just do not want to overload the report, to keep it comfortable and interesting to read. Maybe we will take a look briefly on this subject tomorrow in gold report. There are not too many things to talk about. March meeting should be much more interesting. As a result of current situation - our conclusion is evident. All these stuff that you've seen this week is a big fraud. There is no such growth as in jobs as in GDP, all of them are blown artificially by statistician "tweaks and tricks", "adjustments" and "revisions" as to the numbers as to the methodology. We suggest that until US Treasury has resources - they could keep playing these games cheating markets.
When this game might be over? By our view, the US financial system has ~$1.4 Trln of cash reserves (0.6 Repo + 0.8 TGA account). Since J. Yellen has announced changes in borrowing structure in favor of mid and long term bonds (5 year and above - as we've suggested in our previous report), the US financial system will meet hard stress test in late spring early summer when they need to issue ~ 500 Bln of new bonds until summer (318 + 447 in IQ and IIQ of 2024). It is also a big question what will happen with small and mid sized banks after March 11, when BTFP programme will be over, as banks' paper loss stands on the peak once again. Because more long-term issues from the Fed will raise long-term yields, increasing paper losses on banks' balances.
Fed will try to last time as long as they could with the first rate cut to keep attractive US assets and national currency and to avoid collapse in election year, postponing inflation shock on 2025 or late 2024, giving ruined economy in the hands of new administration (supposedly Republicans). It means that EUR/USD action in nearest 2-3 months probably will reflect " not quite real" background, skewed in favor of the US Dollar. Second task that the US is trying to achieve - be better than the rivals, EU in particular. This is where all recent political efforts are taken. Crisis in EU should start earlier than in the US.
