Sive Morten
Special Consultant to the FPA
- Messages
- 18,564
Fundamentals
Very interesting week, guys. NFP data was relatively positive which was treated as open road for further tightening from the Fed, suggesting that is nothing to worry about of "economy slowdown". Other data still shows that situation is deteriorating. Some things that usually are not shown on TV.
Market overview
The U.S. dollar rose against a basket of currencies on Friday after a better-than-expected U.S. employment report pointed to a tight labor market that could keep the Federal Reserve on an aggressive path of interest rate hikes. Nonfarm payrolls increased by 390,000 jobs last month, the Labor Department said in its closely watched employment report on Friday. Economists polled by Reuters had forecast payrolls increasing by 325,000 jobs in May.
The Labor Department's closely watched employment report on Friday also showed the unemployment rate holding steady at 3.6% for a third straight month, even as more people entered the labor force. It sketched a picture of an economy that continues to expand, although at a moderate pace. The U.S. central bank's interest rate hike campaign and tightening financial conditions have caused anxiety among investors about a recession next year. Employment now is just 822,000 jobs below its pre-pandemic level.
Retail payrolls, however, dropped by 61,000 jobs. The decline was almost across the retail landscape, with general merchandise stores losing 32,700 jobs. Retailers like Walmart and Target have complained about high inflation squeezing profits. Amazon reported over-staffing at some warehouses.
Average hourly earnings for production and non-supervisory workers rose 0.6% and were up 6.5% year-on-year.
Investors have mixed views on the greenback, which is still close to two-decade highs against a basket of peers. George Saravelos, global head of forex research at Deutsche Bank, said the dollar is "pricing a safe-haven risk premium that is so extreme it rarely has persisted over time and is now in the process of unwinding."
Tuesday's bounce in the U.S. dollar suggests better support for the dollar index around its 50-day moving average, which the index has been testing over the past couple of sessions, Shaun Osborne, chief currency strategist at Scotia Bank, said in a note. The dollar index has not closed below its 50-day moving average since mid-February but has drifted closer to it over the last several sessions.
Global equity markets fell as U.S. Treasury yields reached two-week highs on Friday after data showed the American economy generated a greater-than-expected number of jobs in May, signaling the Federal Reserve will likely continue raising interest rates in its effort to curb inflation. Traders were hoping the jobs report would reveal stronger signs of weakness in the U.S. economy that would help persuade the Fed to soften its stance on inflation and interest rates to avoid triggering a recession.
U.S. Treasury yields advanced to two-week highs after the strong jobs data. Benchmark 10-year notes were up at 2.946%, while the rate-sensitive two-year year note gained and was up at 2.6606%.
Bullish analysts argue that the Fed's tightening cycle is based on a sturdier growth story than Europe's, especially after the Russian oil embargo, which might hurt the euro zone economy. For now, the euro remained weak as data on Tuesday showed euro zone inflation hit a record high in May, adding pressure on the European Central Bank as it fends off a recession and looks to curb high prices with gradual interest rate increases in coming months.
Inflation in the 19 countries sharing the euro accelerated to 8.1% in May from 7.4% in April, beating expectations for 7.7% as price growth continued to broaden, indicating that it is no longer just energy pulling up the headline figure.
Citigroup Inc Chief Executive Jane Fraser said on Friday that Europe was more likely than the United States to slip into a recession, as she joined other global bank CEOs this week to warn about the health of the global economy. Fraser, head of the third-largest and most globally focused U.S. bank, recently returned from a world tour with stops in Asia, Europe and the Middle East, where she said her conversations focused on "the three Rs."
"It's rates, it's Russia and it's recession," Fraser said, speaking at an investor conference in New York.
Goldman Sachs' President and Chief Operating Officer John Waldron said on Thursday the current economic turmoil is one of the most challenging ones he has ever faced in his career.
A minor rebound in stocks last week partly held the dollar back from retaking those levels and got many talking about a snap in the trend. But most say it's too soon to discuss that.
Indeed, a near two-thirds majority of strategists, 28 of 44, said the dollar's recent pullback would last less than three months. Among those, 16 said it would die down as early as end-June. Six said three to six months, three said six to 12 months. The remaining seven chose over a year.
The dollar's unique combination of being both a safe haven and a way to pick up yield from higher interest rates is unmatched and won't be dislodged any time soon.
Those overarching factors were likely to keep the dollar well-bid in the near-term. The latest positioning data from the Commodity Futures Trading Commission (CFTC) showed speculators were net long on the U.S. dollar. The trend that started nearly a year ago was expected to stay in place. The value of the net long dollar position was $14.71 billion for the week ended May 31. Last week, speculators' net long position stood at $17.65 billion.
DETAILS NOT FOR TV
So, market reaction recently was logic. We've got more or less positive data, that keeps door open for the Fed to keep tightening. Correspondingly it has made pressure on stock market and supported the US Dollar. But other data shows that picture looks positive on the surface just because storm is not started yet. Some analysts start to see the problems, including E. Mask:
Tesla CEO Elon Musk has a "super bad feeling" about the economy and needs to cut about 10% of salaried staff at the electric carmaker, he said in emails seen by Reuters. A message sent to executives on Thursday laid out his concerns and told them to "pause all hiring worldwide." The dire outlook came two days after the billionaire told staff to return to the workplace or leave and adds to a growing chorus of warnings from business leaders about the risks of recession.
In a note published before the market opened on Tuesday, Morgan Stanley Equity Strategist Michael Wilson said the index could rise another 5% as
But most interesting things stand on the bond market. Last week we said that Fed intends to disguise lack of demand on the bond market by using US Treasury cash account that was around Bln 940$ last week. Take a look - this week it has dropped:
And this is not a surprise. Analysis: Treasury market faces liquidity risks as Fed pares balance sheet
May 31 (Reuters) - With the Federal Reserve set to begin letting bonds mature off its $9 trillion balance sheet, the key metric to watch will be whether Treasury volatility picks up as a result in a market already suffering bouts of low liquidity. The Fed's so-called quantitative tightening (QT) could also send yields higher. The Fed will let bonds mature off its balance sheet without replacement starting June 1 as it attempts to normalize policy and bring down soaring inflation. This follows unprecedented bond purchases from March 2020 to March 2022, meant to blunt the economic impact of business closures during the pandemic. But as the world’s largest holder of U.S. government debt reduces its presence in the market, some worry the absence of its dampening effect as a consistent, price-insensitive buyer could worsen market conditions.
Banks have reduced bond purchases this year. Some hedge funds have also reduced their presence after being burned by losses during bouts of volatility. Foreign investors have also shown less interest in U.S. debt as hedging costs rise and as an increase in foreign bond yields offers more options.
To the degree that the Fed’s retreat does impact yields, it will most likely be higher. Many analysts thought the Fed kept benchmark yields artificially low and contributed to a brief inversion of the Treasury yield curve in April.
Please, note - not me telling this, but the Reuters news and analysts of big companies. And they do know what they are taking about. Take a look at Treasuries emission in recent three months - market is almost paralyzed:
The same you could see on High Yield bonds. Previously it counts for 25% of total bonds issue, but now it is barely above the 4%:
And the same on stock market IPO's:
And, guys, we do not have any Debt ceil limits as before. Nobody just wants to buy this "toxic" debt with the real yield of "-6%". Besides, US Pension plans meet massive under financing and big risk of assets drawdown.
Making the right asset allocation decision is critical if pension funds are to generate sufficient returns to meet their liabilities. A recent analysis by Global SWF indicates that US public pension funds are only 75% funded and face a $1.3 trillion shortfall. Other public pension plans, such as the Universities Superannuation Scheme (USS) in the UK, are also suffering shortfalls. Figures from the latter’s last annual report indicates it is only 84% funded. This shortfall has created a challenge for USS, which subsequently presented scenarios requiring an increase in employee/employer contributions from just over 30% to between 42% and 56%. This issue has triggered a series of strikes by academics across the UK.
In Europe situation hardly stands better. Here is CPI data since 1997:
It is interesting that inflation hits the goods that have no relation to hydro-carbons. In some countries we have two digits inflation, such as Netherlands, Greece and some others. But, guys - QE is yet to be closed and ECB is not started to rise rates yet. Just try to understand the scale of tragedy.
Conclusion:
Despite recent NFP data, that actually changes nothing, we see that situation is taking more negative pace and goes with our major scenario. Analysts from respectable Morgan Stanley, Rabobank and others call for the same thing - don't be deceived by temporal bounce. Our suspicious confirm now - Fed uses US Treasury account to finance debt deficit and disguise big problems. Supposedly Fed has resources to keep this programme until November elections. And they have no choice. The only option that they have is a " shock therapy" to rise rates immediately to ~8%, crush consumption, devalue the US dollar for 50% and then start managing the recovery by gradual decreasing of the rate. But this is too painful and could lead to rising of political risks and social unrest, because the whole burden as usual falls upon shoulders of common people, least protected category. But nobody would sit on the hands when your children starving.
That's why they have chosen the way that leads to the same result but slowly. It is a kind of boiling the frog. If you put the frog in the boiling water - it jums out, but if you put it in cold water and start slowly heating it up, the frog keep sitting until cooking totally. Besides Fed could extend the process even longer if it will mix QT with occasional liquidity injections as we see it now. Situation could be less dramatical if everything around would be good. But with current situation on international arena and breaking of all chains of commodities supply, makes situation worse.
This makes us think that we see temporal bounce in major trend - nothing more. Our fundamental view provides no reasons to suggest the bearish reversal on the US Dollar, at least within nearest 4-6 months.
To be continued.
Very interesting week, guys. NFP data was relatively positive which was treated as open road for further tightening from the Fed, suggesting that is nothing to worry about of "economy slowdown". Other data still shows that situation is deteriorating. Some things that usually are not shown on TV.
Market overview
The U.S. dollar rose against a basket of currencies on Friday after a better-than-expected U.S. employment report pointed to a tight labor market that could keep the Federal Reserve on an aggressive path of interest rate hikes. Nonfarm payrolls increased by 390,000 jobs last month, the Labor Department said in its closely watched employment report on Friday. Economists polled by Reuters had forecast payrolls increasing by 325,000 jobs in May.
The Labor Department's closely watched employment report on Friday also showed the unemployment rate holding steady at 3.6% for a third straight month, even as more people entered the labor force. It sketched a picture of an economy that continues to expand, although at a moderate pace. The U.S. central bank's interest rate hike campaign and tightening financial conditions have caused anxiety among investors about a recession next year. Employment now is just 822,000 jobs below its pre-pandemic level.
Retail payrolls, however, dropped by 61,000 jobs. The decline was almost across the retail landscape, with general merchandise stores losing 32,700 jobs. Retailers like Walmart and Target have complained about high inflation squeezing profits. Amazon reported over-staffing at some warehouses.
Average hourly earnings for production and non-supervisory workers rose 0.6% and were up 6.5% year-on-year.
"It will take a slowdown in annual wage growth to closer to 4% before the Fed can claim it is making significant progress towards its inflation goal," said Michael Pearce, a senior U.S. economist at Capital Economics in New York.
"The economy is miles away from being wrecked on the shores of recession with the economy continuing to hire workers at this fast of a clip," said Christopher Rupkey, chief economist at FWDBONDS in New York. "It is not slowing enough to put the inflation fire out. The Fed's work is not done."
"We had a pretty solid nonfarm payrolls number," said Minh Trang, senior currency trader at Silicon Valley Bank in Santa Clara, California. "The strong jobs data is supportive of the expectations of additional rate hikes going into the second half of the year," Trang added.
"The report should provide some comfort that the economy has the momentum to absorb the rate hikes the Fed expects to deliver in coming months," said David Kelly, chief global strategist at J.P. Morgan Asset Management in New York. "However, increases in labor supply and moderation in wage growth also suggest that the economy can settle in to a path of slow and steady growth with low inflation if the Fed has the patience to let it."
Investors have mixed views on the greenback, which is still close to two-decade highs against a basket of peers. George Saravelos, global head of forex research at Deutsche Bank, said the dollar is "pricing a safe-haven risk premium that is so extreme it rarely has persisted over time and is now in the process of unwinding."
Tuesday's bounce in the U.S. dollar suggests better support for the dollar index around its 50-day moving average, which the index has been testing over the past couple of sessions, Shaun Osborne, chief currency strategist at Scotia Bank, said in a note. The dollar index has not closed below its 50-day moving average since mid-February but has drifted closer to it over the last several sessions.
We think the USD is unlikely to rally significantly and still consider price action to reflect the early stages of a broader reversal in the recent USD bull trend." Osborne said.
Global equity markets fell as U.S. Treasury yields reached two-week highs on Friday after data showed the American economy generated a greater-than-expected number of jobs in May, signaling the Federal Reserve will likely continue raising interest rates in its effort to curb inflation. Traders were hoping the jobs report would reveal stronger signs of weakness in the U.S. economy that would help persuade the Fed to soften its stance on inflation and interest rates to avoid triggering a recession.
U.S. Treasury yields advanced to two-week highs after the strong jobs data. Benchmark 10-year notes were up at 2.946%, while the rate-sensitive two-year year note gained and was up at 2.6606%.
Bullish analysts argue that the Fed's tightening cycle is based on a sturdier growth story than Europe's, especially after the Russian oil embargo, which might hurt the euro zone economy. For now, the euro remained weak as data on Tuesday showed euro zone inflation hit a record high in May, adding pressure on the European Central Bank as it fends off a recession and looks to curb high prices with gradual interest rate increases in coming months.
Inflation in the 19 countries sharing the euro accelerated to 8.1% in May from 7.4% in April, beating expectations for 7.7% as price growth continued to broaden, indicating that it is no longer just energy pulling up the headline figure.
Citigroup Inc Chief Executive Jane Fraser said on Friday that Europe was more likely than the United States to slip into a recession, as she joined other global bank CEOs this week to warn about the health of the global economy. Fraser, head of the third-largest and most globally focused U.S. bank, recently returned from a world tour with stops in Asia, Europe and the Middle East, where she said her conversations focused on "the three Rs."
"It's rates, it's Russia and it's recession," Fraser said, speaking at an investor conference in New York.
But Fraser said in Europe, "the energy side was really having an impact on a number of companies in certain industries that are not even competitive right now. Because of the cost of electricity and the cost of energy, some of them are shutting down operations. So Europe definitely felt more likely to be heading into a recession than you see in the U.S.," Fraser added.
"It feels like the ECB is a few months behind where the Fed has been in getting its arms around inflation and without quite the same flexibility that U.S. has," Fraser said, referring to the European Central Bank.
Goldman Sachs' President and Chief Operating Officer John Waldron said on Thursday the current economic turmoil is one of the most challenging ones he has ever faced in his career.
"This is among if not the most complex, dynamic environment I've ever seen in my career. We've obviously been through lots of cycles, but the confluence of the number of shocks to the system, to me is unprecedented," he told a banking conference.
A minor rebound in stocks last week partly held the dollar back from retaking those levels and got many talking about a snap in the trend. But most say it's too soon to discuss that.
"I can read reports on the screen that talk about the return of risk and stock market analysts are again enthusiastic. I don't buy it...they're just little bright spots amongst what is a bout of poor news, and a selloff in the dollar will be relatively short-lived in this environment," said Jane Foley, head of FX strategy at Rabobank.
Indeed, a near two-thirds majority of strategists, 28 of 44, said the dollar's recent pullback would last less than three months. Among those, 16 said it would die down as early as end-June. Six said three to six months, three said six to 12 months. The remaining seven chose over a year.
The dollar's unique combination of being both a safe haven and a way to pick up yield from higher interest rates is unmatched and won't be dislodged any time soon.
"USD provides safety, yield and growth," said Jamie Fahy, global macro and asset allocation strategist at Citi, adding "the Fed still seem like the stand-out hawks" versus its peers the European Central Bank, Bank of England and Bank of Japan.
Those overarching factors were likely to keep the dollar well-bid in the near-term. The latest positioning data from the Commodity Futures Trading Commission (CFTC) showed speculators were net long on the U.S. dollar. The trend that started nearly a year ago was expected to stay in place. The value of the net long dollar position was $14.71 billion for the week ended May 31. Last week, speculators' net long position stood at $17.65 billion.
DETAILS NOT FOR TV
So, market reaction recently was logic. We've got more or less positive data, that keeps door open for the Fed to keep tightening. Correspondingly it has made pressure on stock market and supported the US Dollar. But other data shows that picture looks positive on the surface just because storm is not started yet. Some analysts start to see the problems, including E. Mask:
Tesla CEO Elon Musk has a "super bad feeling" about the economy and needs to cut about 10% of salaried staff at the electric carmaker, he said in emails seen by Reuters. A message sent to executives on Thursday laid out his concerns and told them to "pause all hiring worldwide." The dire outlook came two days after the billionaire told staff to return to the workplace or leave and adds to a growing chorus of warnings from business leaders about the risks of recession.
"Elon Musk has a uniquely informed insight into the global economy. We believe that a message from him would carry high credibility," Adam Jonas, an analyst Morgan Stanley, said in a report.
In a note published before the market opened on Tuesday, Morgan Stanley Equity Strategist Michael Wilson said the index could rise another 5% as
The market has already had one rally that faded this year, with the S&P 500 rising some 11% in March before giving up all of those gains."it's not surprising we are now seeing some relief given how oversold the market had become. We remain firmly in the bear market camp but relief rallies can happen at any time, and it appears we are now in the midst of one," said Wilson. He projects the S&P 500 will be around 3,400 by mid August, which would be an 18% decline from Friday's close.
But most interesting things stand on the bond market. Last week we said that Fed intends to disguise lack of demand on the bond market by using US Treasury cash account that was around Bln 940$ last week. Take a look - this week it has dropped:
And this is not a surprise. Analysis: Treasury market faces liquidity risks as Fed pares balance sheet
May 31 (Reuters) - With the Federal Reserve set to begin letting bonds mature off its $9 trillion balance sheet, the key metric to watch will be whether Treasury volatility picks up as a result in a market already suffering bouts of low liquidity. The Fed's so-called quantitative tightening (QT) could also send yields higher. The Fed will let bonds mature off its balance sheet without replacement starting June 1 as it attempts to normalize policy and bring down soaring inflation. This follows unprecedented bond purchases from March 2020 to March 2022, meant to blunt the economic impact of business closures during the pandemic. But as the world’s largest holder of U.S. government debt reduces its presence in the market, some worry the absence of its dampening effect as a consistent, price-insensitive buyer could worsen market conditions.
Banks have reduced bond purchases this year. Some hedge funds have also reduced their presence after being burned by losses during bouts of volatility. Foreign investors have also shown less interest in U.S. debt as hedging costs rise and as an increase in foreign bond yields offers more options.
To the degree that the Fed’s retreat does impact yields, it will most likely be higher. Many analysts thought the Fed kept benchmark yields artificially low and contributed to a brief inversion of the Treasury yield curve in April.
“The risk is the market is unable to absorb the additional supply and you do have a big adjustment in valuations,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities in New York. “We will still see more long-end supply than we did pre-COVID for quite some time, so all else being equal that should pressure rates a bit higher and the curve a bit steeper.”
Please, note - not me telling this, but the Reuters news and analysts of big companies. And they do know what they are taking about. Take a look at Treasuries emission in recent three months - market is almost paralyzed:
The same you could see on High Yield bonds. Previously it counts for 25% of total bonds issue, but now it is barely above the 4%:
And the same on stock market IPO's:
And, guys, we do not have any Debt ceil limits as before. Nobody just wants to buy this "toxic" debt with the real yield of "-6%". Besides, US Pension plans meet massive under financing and big risk of assets drawdown.
Making the right asset allocation decision is critical if pension funds are to generate sufficient returns to meet their liabilities. A recent analysis by Global SWF indicates that US public pension funds are only 75% funded and face a $1.3 trillion shortfall. Other public pension plans, such as the Universities Superannuation Scheme (USS) in the UK, are also suffering shortfalls. Figures from the latter’s last annual report indicates it is only 84% funded. This shortfall has created a challenge for USS, which subsequently presented scenarios requiring an increase in employee/employer contributions from just over 30% to between 42% and 56%. This issue has triggered a series of strikes by academics across the UK.
In Europe situation hardly stands better. Here is CPI data since 1997:
It is interesting that inflation hits the goods that have no relation to hydro-carbons. In some countries we have two digits inflation, such as Netherlands, Greece and some others. But, guys - QE is yet to be closed and ECB is not started to rise rates yet. Just try to understand the scale of tragedy.
Conclusion:
Despite recent NFP data, that actually changes nothing, we see that situation is taking more negative pace and goes with our major scenario. Analysts from respectable Morgan Stanley, Rabobank and others call for the same thing - don't be deceived by temporal bounce. Our suspicious confirm now - Fed uses US Treasury account to finance debt deficit and disguise big problems. Supposedly Fed has resources to keep this programme until November elections. And they have no choice. The only option that they have is a " shock therapy" to rise rates immediately to ~8%, crush consumption, devalue the US dollar for 50% and then start managing the recovery by gradual decreasing of the rate. But this is too painful and could lead to rising of political risks and social unrest, because the whole burden as usual falls upon shoulders of common people, least protected category. But nobody would sit on the hands when your children starving.
That's why they have chosen the way that leads to the same result but slowly. It is a kind of boiling the frog. If you put the frog in the boiling water - it jums out, but if you put it in cold water and start slowly heating it up, the frog keep sitting until cooking totally. Besides Fed could extend the process even longer if it will mix QT with occasional liquidity injections as we see it now. Situation could be less dramatical if everything around would be good. But with current situation on international arena and breaking of all chains of commodities supply, makes situation worse.
This makes us think that we see temporal bounce in major trend - nothing more. Our fundamental view provides no reasons to suggest the bearish reversal on the US Dollar, at least within nearest 4-6 months.
To be continued.