Sive Morten
Special Consultant to the FPA
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- 18,659
Fundamentals
Many investors have expected that last week becomes a "silence" before the next week's storm of double central banks meeting and inflation data release. But, hardly we could call it as "silence". Investors' sentiment were shaking already by long-term expectation of debt saga resolving and hazard of default, not mentioning other hits from regularly statistics that was pretty interesting as well. Recent EUR reversal tells that investors start taking bets on hawkish Fed meeting result, inspired by poor initial claims data and hawkish C. Lagarde speech. Maybe we're wrong, but I still do not throw away idea of Fed hike this month as well. Fundamentally, we do not see sharp necessity for Fed's pause, despite that unemployment is around 3.7%.
Market overview
In the beginning of the week, a strong U.S. economy is giving an unexpected boost to the dollar, frustrating bearish investors betting on its decline. Fund managers in the latest BofA Global Research survey named shorting the dollar as the market's third "most crowded" trade.
Hurd expects the dollar to remain buoyant over the very short term, but decline steadily over the next few years. Bears argue that the dollar has plenty of room to fall, as the currency remains some 15% above its post-pandemic low and the Federal Reserve is widely expected to soon end the interest rate increases that have helped support the greenback.
But the bears' view has been stymied by a run of strong U.S. data that suggests the economy remains resilient despite the barrage of Fed hikes aimed at slowing growth and containing inflation. Most investors believe the dollar will likely remain elevated until U.S. data turns decidedly weaker, allowing the Fed to cut rates.
Traders on Friday were betting that the fed funds rate - which currently stands between 5% and 5.25% - would finish 2023 at 4.988%, compared with expectations in early May to end the year at 4.188%. Higher rates tend to boost the dollar’s appeal.
A stronger dollar can be a headwind for risk assets as it helps tighten credit conditions while weighing on the profits of U.S. exporters and multinationals.
Another potentially complicating factor for dollar bears is a flood of U.S. government bond issuance expected in the remainder of the year, with the U.S. Treasury expected to begin refilling its coffers now that the debt limit has been raised.
One view holds that such a large amount of Treasuries will drain liquidity from the market, potentially creating demand for dollars, said Bipan Rai, North America head of FX strategy at CIBC.
Still, many believe it's only a matter of time until the dollar resumes a downtrend that saw it lose as much as 11.5% from its September highs.
UBS Global Wealth Management ranks the dollar as its "least preferred" currency, saying the Fed is likely to cut rates late this year or early in 2024, reducing its yield advantage over the euro and other currencies.
Federal Reserve officials indicated last week that the central bank was likely to skip an interest rate hike at its upcoming meeting, on June 13-14, while leaving the door open to a future rise in borrowing costs. In Europe, European Central Bank (ECB) President Christine Lagarde said further policy tightening was necessary, a trend that would undermine the dollar's yield advantage.
Rai, of CIBC, believes the dollar's lingering strength will give way to weakness as it becomes clearer later this year that the Fed will hold off from further rate hikes while the ECB may have more work to do.
Recent polls suggest the U.S. Federal Reserve will not raise interest rates for the first time in well over a year at its June 13-14 meeting, according to economists polled by Reuters, but a significant minority expects at least one more hike this year as the economy remains resilient. More than 90% of economists, 78 of 86, polled June 2-7 said the policy-setting Federal Open Market Committee would hold its federal funds rate at 5.00%-5.25% at the end of its meeting next week. The remaining eight expect a 25-basis-point rise.
Since the Fed's last policy meeting in May, strong economic data and comments from a few of its officials have encouraged markets to price in a hike at or before the July 25-26 meeting, with earlier expectations for rate cuts later this year receding quickly. That hawkish change in market expectations has helped boost the U.S. dollar to its highest level since March. The trouble is that inflation has not fallen quickly enough - it was running in April at 4.4% based on the Fed's preferred measure and 4.7% when stripped of volatile food and energy prices.
In the meantime, the U.S. job market has remained remarkably strong, with unemployment rising but still remaining well below 4% and wage inflation falling slowly.
The housing market, which is normally highly sensitive to interest rates, has also withstood the higher borrowing costs for much longer than many expected, with only minor price falls from the levels seen during the pandemic-related boom. U.S. Treasury Secretary Janet Yellen said on Wednesday the economy was strong amid robust consumer spending but some areas were slowing, and that she expected continued progress in bringing inflation down over the next two years.
More than one-third of respondents in the poll, 32 of 86, say the Fed will hike at least once more this year, including the eight who say that will happen in June and 24 who expect a rate rise in July after a pause. Only one predicted a hike in both June and July. Markets are pricing around a 60% chance of a rate cut this year.
The European Central Bank, in turn, will hike its key interest rates by 25 basis points on June 15 and again in July before pausing for the rest of the year as inflation remains sticky, according to a clear majority of economists polled by Reuters. ECB President Christine Lagarde said on Monday it was too early to call a peak in core inflation and reaffirmed rates would need to be increased again. The central bank is forecast to raise its deposit rate again by a quarter percentage point on June 15 to 3.50%, according to all 59 economists polled in the latest Reuters survey.
About three-quarters of economists, 43 of 59, forecast another 25 basis point rate hike in July, a stance hardly changed from a May poll. That would take it to a terminal rate of 3.75%, in line with market expectations.
European Central Bank interest rate hikes could take longer than usual to pass through to the real economy and their impact may be more muted than usual, ECB board member Isabel Schnabel said in a newspaper interview.
Still U.S. investment bank Morgan Stanley said on Monday that it expected the European Central Bank (ECB) to end its interest-rate hiking cycle in July at 3.75%.
Currently we do not see big reasons to consider what will happen after July. The major thing that we get from current market sentiment is twofold - market expects Fed's pause and 25 b.p. ECB move. That's what we really need to know. It seems that only first point is under question. If we (and Citi strategist) will appear to be right and Fed hikes, upside USD rally will wash out all bearish stops around.
Goldman Sachs Group Inc. is planning for a period of sluggish growth and higher inflation, the bank's president John Waldron said on Thursday, calling it "a mini-stagflation scenario." (I'm not sure about "mini"). Despite the U.S. economy showing resilience, concerns remain among investors that a recession could happen in an environment of stubborn inflation and high borrowing costs.
Global equity funds posted outflows for the eighth consecutive week in the seven days leading up to June 7, as concerns over stubbornly high inflation and sluggish economic growth prompted investors to pull back from riskier assets. Hit by a slowdown in global demand, Chinese exports shrank much more than expected in May, while imports also declined due to sluggish domestic consumption. Factory activity also contracted in the U.S. and Europe.
In contrast, global money market funds recorded a net inflow of $55.91 billion, the largest weekly influx since April 5. Global bond funds attracted inflows of $4.02 billion, continuing the trend of net buying for the twelfth consecutive week.
Data for commodity funds showed that precious metal funds faced outflows for the second consecutive week, with a total net amount of $545 million. Energy funds saw withdrawals of $58 million.
U.S. jobless claims has become the major bearish driver last week, rose more than expected in the latest week, though the market was generally viewed as consolidating ahead of key inflation data and the Federal Reserve’s interest rate decision next week. The number of Americans filing new claims for unemployment benefits surged to the highest level in more than 1-1/2 years last week with a 28,000-claim jump to a seasonally adjusted 261,000. Economists polled by Reuters had forecast 235,000 claims for the latest week.
The Institute for Supply Management (ISM) said its non-manufacturing PMI fell to 50.3 last month from 51.9 in April. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the non-manufacturing PMI edging up to 52.2.
The Treasury market seemed to agree (with Fed's pause), as yields tumbled on concerns that the spike in new U.S. jobless benefits claims suggested a potential recession could be on the horizon.
Still last week in an almost carbon copy of a surprise rate rise in Australia and Canada caught markets off guard on Wednesday by hiking interest rates to a 22-year high of 4.75% due to an overheating economy and stubbornly high inflation.
Markets are pricing in a 64% chance of the Fed standing pat next week, compared with 78% just a day earlier, the CME FedWatch tool showed. Traders largely expect a 25 basis point hike in July though.
The dollar bounced off two-week lows on Friday as investors awaited inflation data and the Federal Reserve's interest rate decision next week for any new clues on how high the U.S. central bank is likely to hike rates.
Finally, signs that U.S. inflation continued to cool in May would likely be welcomed by markets, after strong jobs data bolstered the case for those betting rate hikes are easing price pressures without badly hurting growth. Headline consumer prices are expected to rise by 0.3% on a monthly basis, after a 0.4% increase in April.
Also it will be interesting to see what we get in China - May new home price data is due Thursday, after a private survey showed new home prices fell for the first time in four months in May and home sales slumped. Other data released on Thursday could shed light on rising unemployment and cautious consumer sentiment, which have also hurt the economy. As each data point bolsters expectations for fresh stimulus, peak pessimism on China's economy has perhaps passed.
2 CENTS ON STRUCTURAL CRISIS
Today we will show you just few charts to illustrate the dynamic and that everything goes constantly. We've got few new data. Based on the charts below, we could make some conclusions. First is - the industrial production is falling across the board and with solid tempo - 8-12% on average. Even in Germany last month the drop was around 10%. And this happens on the background of industrial deflation as PPI is dropping as in EU as in US and China.
Thus, the picture of the economic downturn is relatively clear: the PPI index describes the prices of final goods in technological chains. If final prices fall, then assembly companies actively reduce purchases, this goes down the chains and a clear decline begins.
Contrary to all the stories in various kinds of "expert" sources that say that the situation is changing for the better, even official data do not show this. In reality, as we remember, industrial inflation is seriously underestimated in the sectors where it exists today, so the real economic downturn is significantly higher.
As we have repeatedly noted, during a structural crisis, after a sharp decline in a particular industry (-10% in Germany last month), there comes a time of relative stability (like in Germany now), when may even be a small increase. At the same time, the decline is shifting to other industries. And if attention is not focused on these moments of the recession, then there is a feeling that everything is fine, there is a small increase, there ... and in Germany — after a sharp decline in industry, the situation seems to have settled down and the indicators will be quite tolerable for several months. But the recession will break out somewhere else.
Speaking on US trading deficit, we see a clear process when cheap Chinese imports compensate for the decline in living standards for households. Drop of demand for domestic US goods leads to more production deflation and accelerate production drop.
Taking in consideration the outflow of deposits from American banks, then the picture becomes even more alarming:
Because against the background of how the Treasury sweeps all available liquidity from the market, banks need to somehow maintain their own financial indicators. And if they start raising deposit rates (which is already happening), the cost of loans will also increase. That is, a new wave of economic recession is ahead… In general, the picture looks quite alarming, despite the appointed summer. Let's see what next week will show us, will the Fed risk raising the rate …
Many investors have expected that last week becomes a "silence" before the next week's storm of double central banks meeting and inflation data release. But, hardly we could call it as "silence". Investors' sentiment were shaking already by long-term expectation of debt saga resolving and hazard of default, not mentioning other hits from regularly statistics that was pretty interesting as well. Recent EUR reversal tells that investors start taking bets on hawkish Fed meeting result, inspired by poor initial claims data and hawkish C. Lagarde speech. Maybe we're wrong, but I still do not throw away idea of Fed hike this month as well. Fundamentally, we do not see sharp necessity for Fed's pause, despite that unemployment is around 3.7%.
Market overview
In the beginning of the week, a strong U.S. economy is giving an unexpected boost to the dollar, frustrating bearish investors betting on its decline. Fund managers in the latest BofA Global Research survey named shorting the dollar as the market's third "most crowded" trade.
Hurd expects the dollar to remain buoyant over the very short term, but decline steadily over the next few years. Bears argue that the dollar has plenty of room to fall, as the currency remains some 15% above its post-pandemic low and the Federal Reserve is widely expected to soon end the interest rate increases that have helped support the greenback.
But the bears' view has been stymied by a run of strong U.S. data that suggests the economy remains resilient despite the barrage of Fed hikes aimed at slowing growth and containing inflation. Most investors believe the dollar will likely remain elevated until U.S. data turns decidedly weaker, allowing the Fed to cut rates.
Traders on Friday were betting that the fed funds rate - which currently stands between 5% and 5.25% - would finish 2023 at 4.988%, compared with expectations in early May to end the year at 4.188%. Higher rates tend to boost the dollar’s appeal.
A stronger dollar can be a headwind for risk assets as it helps tighten credit conditions while weighing on the profits of U.S. exporters and multinationals.
Another potentially complicating factor for dollar bears is a flood of U.S. government bond issuance expected in the remainder of the year, with the U.S. Treasury expected to begin refilling its coffers now that the debt limit has been raised.
One view holds that such a large amount of Treasuries will drain liquidity from the market, potentially creating demand for dollars, said Bipan Rai, North America head of FX strategy at CIBC.
Still, many believe it's only a matter of time until the dollar resumes a downtrend that saw it lose as much as 11.5% from its September highs.
UBS Global Wealth Management ranks the dollar as its "least preferred" currency, saying the Fed is likely to cut rates late this year or early in 2024, reducing its yield advantage over the euro and other currencies.
Federal Reserve officials indicated last week that the central bank was likely to skip an interest rate hike at its upcoming meeting, on June 13-14, while leaving the door open to a future rise in borrowing costs. In Europe, European Central Bank (ECB) President Christine Lagarde said further policy tightening was necessary, a trend that would undermine the dollar's yield advantage.
Rai, of CIBC, believes the dollar's lingering strength will give way to weakness as it becomes clearer later this year that the Fed will hold off from further rate hikes while the ECB may have more work to do.
Recent polls suggest the U.S. Federal Reserve will not raise interest rates for the first time in well over a year at its June 13-14 meeting, according to economists polled by Reuters, but a significant minority expects at least one more hike this year as the economy remains resilient. More than 90% of economists, 78 of 86, polled June 2-7 said the policy-setting Federal Open Market Committee would hold its federal funds rate at 5.00%-5.25% at the end of its meeting next week. The remaining eight expect a 25-basis-point rise.
Since the Fed's last policy meeting in May, strong economic data and comments from a few of its officials have encouraged markets to price in a hike at or before the July 25-26 meeting, with earlier expectations for rate cuts later this year receding quickly. That hawkish change in market expectations has helped boost the U.S. dollar to its highest level since March. The trouble is that inflation has not fallen quickly enough - it was running in April at 4.4% based on the Fed's preferred measure and 4.7% when stripped of volatile food and energy prices.
In the meantime, the U.S. job market has remained remarkably strong, with unemployment rising but still remaining well below 4% and wage inflation falling slowly.
The housing market, which is normally highly sensitive to interest rates, has also withstood the higher borrowing costs for much longer than many expected, with only minor price falls from the levels seen during the pandemic-related boom. U.S. Treasury Secretary Janet Yellen said on Wednesday the economy was strong amid robust consumer spending but some areas were slowing, and that she expected continued progress in bringing inflation down over the next two years.
More than one-third of respondents in the poll, 32 of 86, say the Fed will hike at least once more this year, including the eight who say that will happen in June and 24 who expect a rate rise in July after a pause. Only one predicted a hike in both June and July. Markets are pricing around a 60% chance of a rate cut this year.
The European Central Bank, in turn, will hike its key interest rates by 25 basis points on June 15 and again in July before pausing for the rest of the year as inflation remains sticky, according to a clear majority of economists polled by Reuters. ECB President Christine Lagarde said on Monday it was too early to call a peak in core inflation and reaffirmed rates would need to be increased again. The central bank is forecast to raise its deposit rate again by a quarter percentage point on June 15 to 3.50%, according to all 59 economists polled in the latest Reuters survey.
About three-quarters of economists, 43 of 59, forecast another 25 basis point rate hike in July, a stance hardly changed from a May poll. That would take it to a terminal rate of 3.75%, in line with market expectations.
European Central Bank interest rate hikes could take longer than usual to pass through to the real economy and their impact may be more muted than usual, ECB board member Isabel Schnabel said in a newspaper interview.
Still U.S. investment bank Morgan Stanley said on Monday that it expected the European Central Bank (ECB) to end its interest-rate hiking cycle in July at 3.75%.
Currently we do not see big reasons to consider what will happen after July. The major thing that we get from current market sentiment is twofold - market expects Fed's pause and 25 b.p. ECB move. That's what we really need to know. It seems that only first point is under question. If we (and Citi strategist) will appear to be right and Fed hikes, upside USD rally will wash out all bearish stops around.
Goldman Sachs Group Inc. is planning for a period of sluggish growth and higher inflation, the bank's president John Waldron said on Thursday, calling it "a mini-stagflation scenario." (I'm not sure about "mini"). Despite the U.S. economy showing resilience, concerns remain among investors that a recession could happen in an environment of stubborn inflation and high borrowing costs.
Global equity funds posted outflows for the eighth consecutive week in the seven days leading up to June 7, as concerns over stubbornly high inflation and sluggish economic growth prompted investors to pull back from riskier assets. Hit by a slowdown in global demand, Chinese exports shrank much more than expected in May, while imports also declined due to sluggish domestic consumption. Factory activity also contracted in the U.S. and Europe.
In contrast, global money market funds recorded a net inflow of $55.91 billion, the largest weekly influx since April 5. Global bond funds attracted inflows of $4.02 billion, continuing the trend of net buying for the twelfth consecutive week.
Data for commodity funds showed that precious metal funds faced outflows for the second consecutive week, with a total net amount of $545 million. Energy funds saw withdrawals of $58 million.
U.S. jobless claims has become the major bearish driver last week, rose more than expected in the latest week, though the market was generally viewed as consolidating ahead of key inflation data and the Federal Reserve’s interest rate decision next week. The number of Americans filing new claims for unemployment benefits surged to the highest level in more than 1-1/2 years last week with a 28,000-claim jump to a seasonally adjusted 261,000. Economists polled by Reuters had forecast 235,000 claims for the latest week.
The Institute for Supply Management (ISM) said its non-manufacturing PMI fell to 50.3 last month from 51.9 in April. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the non-manufacturing PMI edging up to 52.2.
The Treasury market seemed to agree (with Fed's pause), as yields tumbled on concerns that the spike in new U.S. jobless benefits claims suggested a potential recession could be on the horizon.
Still last week in an almost carbon copy of a surprise rate rise in Australia and Canada caught markets off guard on Wednesday by hiking interest rates to a 22-year high of 4.75% due to an overheating economy and stubbornly high inflation.
Markets are pricing in a 64% chance of the Fed standing pat next week, compared with 78% just a day earlier, the CME FedWatch tool showed. Traders largely expect a 25 basis point hike in July though.
The dollar bounced off two-week lows on Friday as investors awaited inflation data and the Federal Reserve's interest rate decision next week for any new clues on how high the U.S. central bank is likely to hike rates.
Finally, signs that U.S. inflation continued to cool in May would likely be welcomed by markets, after strong jobs data bolstered the case for those betting rate hikes are easing price pressures without badly hurting growth. Headline consumer prices are expected to rise by 0.3% on a monthly basis, after a 0.4% increase in April.
Also it will be interesting to see what we get in China - May new home price data is due Thursday, after a private survey showed new home prices fell for the first time in four months in May and home sales slumped. Other data released on Thursday could shed light on rising unemployment and cautious consumer sentiment, which have also hurt the economy. As each data point bolsters expectations for fresh stimulus, peak pessimism on China's economy has perhaps passed.
2 CENTS ON STRUCTURAL CRISIS
Today we will show you just few charts to illustrate the dynamic and that everything goes constantly. We've got few new data. Based on the charts below, we could make some conclusions. First is - the industrial production is falling across the board and with solid tempo - 8-12% on average. Even in Germany last month the drop was around 10%. And this happens on the background of industrial deflation as PPI is dropping as in EU as in US and China.
Thus, the picture of the economic downturn is relatively clear: the PPI index describes the prices of final goods in technological chains. If final prices fall, then assembly companies actively reduce purchases, this goes down the chains and a clear decline begins.
Contrary to all the stories in various kinds of "expert" sources that say that the situation is changing for the better, even official data do not show this. In reality, as we remember, industrial inflation is seriously underestimated in the sectors where it exists today, so the real economic downturn is significantly higher.
As we have repeatedly noted, during a structural crisis, after a sharp decline in a particular industry (-10% in Germany last month), there comes a time of relative stability (like in Germany now), when may even be a small increase. At the same time, the decline is shifting to other industries. And if attention is not focused on these moments of the recession, then there is a feeling that everything is fine, there is a small increase, there ... and in Germany — after a sharp decline in industry, the situation seems to have settled down and the indicators will be quite tolerable for several months. But the recession will break out somewhere else.
Speaking on US trading deficit, we see a clear process when cheap Chinese imports compensate for the decline in living standards for households. Drop of demand for domestic US goods leads to more production deflation and accelerate production drop.
Taking in consideration the outflow of deposits from American banks, then the picture becomes even more alarming:
Because against the background of how the Treasury sweeps all available liquidity from the market, banks need to somehow maintain their own financial indicators. And if they start raising deposit rates (which is already happening), the cost of loans will also increase. That is, a new wave of economic recession is ahead… In general, the picture looks quite alarming, despite the appointed summer. Let's see what next week will show us, will the Fed risk raising the rate …
In general, the big banks want to gain liquidity (in bank reserves in the Fed), arrange a banking crisis, buy up all the member banks of the Fed in order to get a controlling stake. Control does not give them ability to manage the Fed directly. But! Then, following the banking crisis, the state arranges the reform of the Fed and banks have the rights to manage the Fed. That's what the control share is for. Then the Fed introduces CBDC and the evil banks get control of everyone. And the main villain here is JP Morgan. In my opinion, it's cyberpunk and dystopian beautiful. 
