Sive Morten
Special Consultant to the FPA
- Messages
- 17,433
Fundamentals
No doubts investors are waiting for the next week, when new NFP data will be released and then bumpy road to next Fed meeting starts, with new CPI and PPI data. This week we haven't got a lot of statistics, so investors were a bit boring and they have tried to catch any news or speech that have come out from media. As a result - we've got a lot of chaotic moves intraday but no clear direction in dry residual. Our trading setups also mostly were for intraday use and only partially successful. Major events of recent week are multiple PMI numbers that were mostly positive, or at least have shown some improvement compares to previous data. Especially in China - numbers are above 50 level suggesting growth. Together with some comments, like from Fed member R. Bostic, who said that Fed could take a pause in rate hike in summer. Altogether, this has given market wrong direction and suggestion that situation is improving, which, in turn, pushed US Dollar down by the end of the week.
Market overview (i.e. what market thinks)
All it took was a bit of a hint that the Federal Reserve may stick to its moderate monetary tightening path for the market to attempt a risk-on rally to end the week. While Fed officials wrestled on Thursday with whether a recent string of resilient economic data was a "blip" or a sign that even higher interest rates could be required to slow price rises. Markets took their cues from comments from Atlanta Fed President Raphael Bostic - "Slow and steady is going to be the appropriate course of action," he said, arguing for quarter point hikes.
Also helping lift sentiment was services sector data from China, reviving the optimism that a robust recovery was well underway. The Caixin/S&P Global services purchasing managers' index (PMI) rose at the fastest pace in six months to 55.0 in February from 52.9 in January. Investors will be keenly focused on China's annual parliament session on Sunday when Beijing will set its economic goals for the year.
The U.S. dollar slid from a 2-1/2-month high versus the Japanese yen on Friday, on track for its largest weekly loss since mid-January against a basket of six major currencies, as traders stepped back to gauge the path for Federal Reserve policy. Analysts said the market has for the most part priced in the prospect of a higher terminal fed funds rate after the recent run of upbeat U.S. economic data.
Cryptocurrencies, on the other hand, took a beating as the crisis surrounding Silvergate Bank worsened, with industry heavyweights such as Coinbase Global and Galaxy Digital dropping the lender as their banking partner.
The U.S. services sector grew at a steady pace in February, with new orders and employment rising to more than one-year highs. The Institute for Supply Management's (ISM) non-manufacturing index dipped to 55.1 from 55.2 in January.
Analysts polled by Reuters said recent dollar strength was likely to be temporary, and the currency will weaken over the course of the year as the global economy improves and on expectations the Fed will stop hiking interest rates well ahead of the European Central Bank.
While analysts have been predicting a weaker dollar 12 months out for over five years, their predictions only (!!!) came true in 2020 when the currency weakened more than 6.5%.
The euro was forecast to trade around $1.07, $1.08 and $1.10 in the next one, three and six months, respectively. It was then expected to strengthen around 6% to change hands at $1.12 in a year. It was last trading around $1.06 on Thursday.
Even the British pound , which dropped more than 10% last year, was expected to claw back around half of those losses in 12 months. Sterling was predicted to rise from its latest level of $1.19 to $1.22, $1.23 and $1.26 in the next three, six and 12 months, respectively.
The Bank of Japan (BOJ), meanwhile, is expected to start dismantling extraordinary stimulus measures after Governor Haruhiko Kuroda retires next month. Tokyo inflation data for February exceeded the BOJ's target for a ninth month, but the core measure did decelerate from a 42-year high.
Consumer price inflation in Japan rose from 4% year-on-year in December to 4.3% in January. The last time inflation levels were this high was more than 40 years ago. The rise is due to large increases in energy costs and raw materials, among other factors. Real wages fell in 2022 so to support consumers facing high inflation, especially on food prices, the Japanese government is subsidising electricity and gas bills. Despite inflation running well above its target, the policy rate in Japan remains negative. Market expectations had been betting that the Bank of Japan would increase rates to curb inflation, but the central bank is sticking to its yield-curve control policy. The BoJ faces a difficult trade-off between implementing monetary easing to support the population, implicitly accepting a weaker yen and increasing import costs, and the need to curb inflation. The bank’s expected next governor, Kazuo Ueda, has stated that he would maintain loose monetary policy to support economic activity, albeit admitting that it will take time for inflation to fall to the target of 2%.
Next week we have two major events to watch - NFP report and the National People's Congress, China's annual parliament session. Another dose of hot job growth after January's payrolls increase of 517,000 trounced estimates could stoke fears of more hawkish Fed action. Initial expectations are for a 200,000 increase in jobs in February, according to a Reuters poll.
Fed chief Powell meanwhile testifies before a U.S. Congressional committee on Tuesday. Powell has said the January jobs report showed why the battle against inflation will "take quite a bit of time". Investors expect another 25 bps hike from the Fed, but market pricing suggests a slightly higher chance for a bigger increase than had previously been the case. Powell's comments and the jobs data could help settle what the Fed does later this month.
Concerning National China Congress - it comes in weekend, and global investors turn cautious given worries over the direction of policy, economic stimulus, and regulations in the world's No.2 economy. They want to see what kind of growth targets are set and if President Xi Jinping prioritizes common prosperity over reforms. China is becoming increasingly ambitious with its 2023 growth target, aiming potentially as high as 6%.
Measures encouraging consumers to spend more and save less are also anticipated. The direction the Congress sets for the property market and infrastructure spending is also key to appetite for commodities and China's high-yield bond market. Word is also out on the next generation of leaders, such as the top candidates for posts of premier and central bank governor. Markets are watching closely.
Business activity, consumer confidence and a pick-up in tax revenues means some analysts have upgraded growth forecasts. Data on Thursday for how the economy fared in January might offer a glimmer of optimism. That said, Britain is the only G7 economy that is still smaller than before the coronavirus pandemic. The International Monetary Fund believes it will be the only G7 economy to shrink this year.
BIG PICTURE OF STRUCTURAL CRISIS
So picture above looks really "rosy", right? Especially performance of Chinese economy, who it rebounds after CV-19 restrictions, right off the bat. In Telegram we've disclosed possible reasons for that, because other statistics from region hardly supports strong PMI data. China has injected around 1Trln yuan in economy since the beginning of 2023. So, we could suggest that domestic consumption is boosted artificially. It was always a challenge to analyse China statistics, now it is becoming even more difficult.
Because, if you take a look at Hong Kong export - it collapsed for 36%. You could argue that export is external merchant indicator while PMI is internal one. But, Purchasing managers buying the same goods and with the same producers, despite where they sell them. This confirms artificially boosted domestic demands, making managers happy and rising PMI.
Besides, In S. Korea, Japan we see wide numbers of worse statistics. South Korea's factory activity contracted for an eighth month in February, a survey showed on Thursday, highlighting weak domestic and global economic conditions even though the downturn in output and orders eased slightly. The S&P Global's seasonally adjusted purchasing managers' index (PMI) for South Korean manufacturers stood at 48.5 in January, unchanged from December and remaining below the 50-mark since July, 2022.
South Korea's exports fell in February for a fifth straight month in annual terms. Outbound shipments from Asia's fourth-largest economy fell 7.5% to $50.10 billion in February. Shipments to China, in their ninth month of decline, slumped 24.2%.
Data from the Australian Bureau of Statistics (ABS) on Wednesday showed real gross domestic product (GDP) rose 0.5% in the December quarter. Australia's economy grew at its weakest pace in a year last quarter as strength in trade was offset by rising interest rates and high inflation, and all the signs are a further slowdown lies ahead. Here is we have the same washing out of savings, as mortgage payments surged 23% in the quarter as rates jumped, while household savings as a share of income shrank to a five-year low of 4.5%, from 7.1% in the September quarter.
Yet there are also signs high borrowing costs are working to restrain demand. Household consumption rose only a meagre 0.3% in the December quarter, with a drop in spending on clothing, recreation and furniture and electronics. Economic output excluding international trade actually fell 0.5% in the quarter, the first contraction since pandemic lockdowns shuttered much of the economy.
The Swiss economy showed no growth in the fourth quarter of 2022, the government said on Tuesday, as a "challenging international situation" hit manufacturing and exports.
So, the structural crisis continues, structural inflation remains quite high and a rate hike, apparently, will not reduce it. Moreover, a decrease in demand in the context of a rate increase leads to economic degradation (construction is falling, retail sales are declining, industry is shrinking and even the service sector is beginning to shrink), which categorically requires easing monetary policy. Recall, how it has started, first - we've got outstanding jump in inflation. Once, the first shock starts exhausting, structural crisis starts spreading over all economy sphere and across the Globe. Now we see drop in Industrial production, GDP, manufacturing and consumption of durable goods across the Globe:
This is a consequence of the rate increase, and if the increase continues, the US industry will fall even more. And if the rate is not raised, then inflation will grow … Then we're going further:
Regional data shows the same signs of slowing:
Then structuring crisis, after slowdown in production and due high inflation comes to households, crushing consumption...
...and bing! It comes to Real Estate market. Despite price collapse, demand for real estate among population remains low, due to very high interest rate. And we have this picture not only in the US, but in other countries.
So, the question is - whether we will rise rate further? The average interest rate on the most popular U.S. home loan remained last week at its highest level since November. The average contract rate on a 30-year fixed-rate mortgage increased by 9 basis points to 6.71% for the week ended Feb. 24, data from the Mortgage Bankers Association (MBA) showed on Wednesday, a third weekly rise in mortgage rates after several weeks of declines.
But this is not all yet. Recent Inflation data shows that inflation is not going to decrease. Last US PMI data and recent inflation data, especially on core Inflation in EU, France and Spain in particular, shows that inflation remains stubbornly high, despite all central banks efforts. It means that we've passed only the first spiral of inflation, and it seems that market is coming to the 2nd spiral, where inflation will be concentrated not in energy sector, but in services, food, rent and other all time classic spheres:
Once markets have achieved closure after first spiral, they immediately are coming to the 2nd stage. Situation categorically requires easing monetary policy. But, instead of that ECB starts QT, rising rate expectations to 4%. While Fed Reserve starts psychological preparation of market society to significantly higher rate level.
British consumer price inflation hit a 41-year high of 11.1% in October and is still in double digits, but last month the BoE forecast it would drop below 4% by the end of this year. However, Citi said public expectations for inflation in 12 months time rose to 5.6% in February from 5.4% in January, while expectations for the long term rose to 3.8% from 3.5%.
Meantime, EU economy shows bad signs. Amount of EU companies' bankruptcies applications are rising like mushrooms after the rain, while Germany economy shows collapse in classic industries. It seems that average indicator holds stable only due high tech sector. Just the results of the energy crisis, which allegedly turned out to be completely non-critical.
Note that the European Union is not the USA, bankruptcies occur less frequently here. And again the same question arises: how to raise the rate in such a situation? And if in a couple of weeks the data shows an increase in inflation, what to do? There is no good answer, you can only continue to make a good face at a bad game.
In conclusion, it can be noted that all the optimistic statements of politicians of developed countries and international structures have no real basis. The crisis continues, enters the next cycle (we will find out exactly in two weeks when the February inflation data will be released). Moreover, extremely unpleasant symptoms appear.
Meantime, investors are running into cash. According to BofA statistics, stock funds outflow was -$7.4 billion, which is a biggest outflow in 2 months, while cash funds have shown inflow of $68.1 billion - the largest in 3 years. Markets are starting to get nervous about "stubborn" inflation and hawkish global central banks. High rates already discredit stocks risk premiums where yield now stands lower than short-term bills. Liquidity drought due QT programmes together with high rates makes difficult to finance borrowing, which makes additional pressure on risky assets - just look at Bitcoin. Investors are spooked with Fed resolve and commitment to go up to the end whatever cost will be:
Views differ right now, the majority suggests that dollar strength will be limited, somewhere to 106 by DXY quote. Analysts at Capital Economics, on the other hand, believe an expected slowdown in global growth and souring risk appetite will send investors flocking to the dollar, a popular destination during uncertain times, and push the currency back to its highs later this year.
Right at the final here is our 2 cents on market expectations. As it was two weeks ago when we warned about too optimistic view, as right now we think that market undervalues Fed commitment and we suggest that rates will go higher and maybe significantly higher. This makes us think that recent dollar strength is not temporal and could continue through the year. At least right now positives signs are too few and unstable to make the opposite conclusion.
No doubts investors are waiting for the next week, when new NFP data will be released and then bumpy road to next Fed meeting starts, with new CPI and PPI data. This week we haven't got a lot of statistics, so investors were a bit boring and they have tried to catch any news or speech that have come out from media. As a result - we've got a lot of chaotic moves intraday but no clear direction in dry residual. Our trading setups also mostly were for intraday use and only partially successful. Major events of recent week are multiple PMI numbers that were mostly positive, or at least have shown some improvement compares to previous data. Especially in China - numbers are above 50 level suggesting growth. Together with some comments, like from Fed member R. Bostic, who said that Fed could take a pause in rate hike in summer. Altogether, this has given market wrong direction and suggestion that situation is improving, which, in turn, pushed US Dollar down by the end of the week.
Market overview (i.e. what market thinks)
All it took was a bit of a hint that the Federal Reserve may stick to its moderate monetary tightening path for the market to attempt a risk-on rally to end the week. While Fed officials wrestled on Thursday with whether a recent string of resilient economic data was a "blip" or a sign that even higher interest rates could be required to slow price rises. Markets took their cues from comments from Atlanta Fed President Raphael Bostic - "Slow and steady is going to be the appropriate course of action," he said, arguing for quarter point hikes.
Also helping lift sentiment was services sector data from China, reviving the optimism that a robust recovery was well underway. The Caixin/S&P Global services purchasing managers' index (PMI) rose at the fastest pace in six months to 55.0 in February from 52.9 in January. Investors will be keenly focused on China's annual parliament session on Sunday when Beijing will set its economic goals for the year.
The U.S. dollar slid from a 2-1/2-month high versus the Japanese yen on Friday, on track for its largest weekly loss since mid-January against a basket of six major currencies, as traders stepped back to gauge the path for Federal Reserve policy. Analysts said the market has for the most part priced in the prospect of a higher terminal fed funds rate after the recent run of upbeat U.S. economic data.
Cryptocurrencies, on the other hand, took a beating as the crisis surrounding Silvergate Bank worsened, with industry heavyweights such as Coinbase Global and Galaxy Digital dropping the lender as their banking partner.
The U.S. services sector grew at a steady pace in February, with new orders and employment rising to more than one-year highs. The Institute for Supply Management's (ISM) non-manufacturing index dipped to 55.1 from 55.2 in January.
Analysts polled by Reuters said recent dollar strength was likely to be temporary, and the currency will weaken over the course of the year as the global economy improves and on expectations the Fed will stop hiking interest rates well ahead of the European Central Bank.
While analysts have been predicting a weaker dollar 12 months out for over five years, their predictions only (!!!) came true in 2020 when the currency weakened more than 6.5%.
The euro was forecast to trade around $1.07, $1.08 and $1.10 in the next one, three and six months, respectively. It was then expected to strengthen around 6% to change hands at $1.12 in a year. It was last trading around $1.06 on Thursday.
Even the British pound , which dropped more than 10% last year, was expected to claw back around half of those losses in 12 months. Sterling was predicted to rise from its latest level of $1.19 to $1.22, $1.23 and $1.26 in the next three, six and 12 months, respectively.
"I think you're going to see people saying, 'well, what do I want to buy if I don't want to be in dollars? I think the dollar's topped out but I'm not confident in that.Where do I want to be?'" said Gavin Friend, senior markets strategist at NAB. I think Europe would be one of those, UK would be one of those because it's been so cheap," he said.
The Bank of Japan (BOJ), meanwhile, is expected to start dismantling extraordinary stimulus measures after Governor Haruhiko Kuroda retires next month. Tokyo inflation data for February exceeded the BOJ's target for a ninth month, but the core measure did decelerate from a 42-year high.
Consumer price inflation in Japan rose from 4% year-on-year in December to 4.3% in January. The last time inflation levels were this high was more than 40 years ago. The rise is due to large increases in energy costs and raw materials, among other factors. Real wages fell in 2022 so to support consumers facing high inflation, especially on food prices, the Japanese government is subsidising electricity and gas bills. Despite inflation running well above its target, the policy rate in Japan remains negative. Market expectations had been betting that the Bank of Japan would increase rates to curb inflation, but the central bank is sticking to its yield-curve control policy. The BoJ faces a difficult trade-off between implementing monetary easing to support the population, implicitly accepting a weaker yen and increasing import costs, and the need to curb inflation. The bank’s expected next governor, Kazuo Ueda, has stated that he would maintain loose monetary policy to support economic activity, albeit admitting that it will take time for inflation to fall to the target of 2%.
Next week we have two major events to watch - NFP report and the National People's Congress, China's annual parliament session. Another dose of hot job growth after January's payrolls increase of 517,000 trounced estimates could stoke fears of more hawkish Fed action. Initial expectations are for a 200,000 increase in jobs in February, according to a Reuters poll.
Fed chief Powell meanwhile testifies before a U.S. Congressional committee on Tuesday. Powell has said the January jobs report showed why the battle against inflation will "take quite a bit of time". Investors expect another 25 bps hike from the Fed, but market pricing suggests a slightly higher chance for a bigger increase than had previously been the case. Powell's comments and the jobs data could help settle what the Fed does later this month.
Concerning National China Congress - it comes in weekend, and global investors turn cautious given worries over the direction of policy, economic stimulus, and regulations in the world's No.2 economy. They want to see what kind of growth targets are set and if President Xi Jinping prioritizes common prosperity over reforms. China is becoming increasingly ambitious with its 2023 growth target, aiming potentially as high as 6%.
Measures encouraging consumers to spend more and save less are also anticipated. The direction the Congress sets for the property market and infrastructure spending is also key to appetite for commodities and China's high-yield bond market. Word is also out on the next generation of leaders, such as the top candidates for posts of premier and central bank governor. Markets are watching closely.
Business activity, consumer confidence and a pick-up in tax revenues means some analysts have upgraded growth forecasts. Data on Thursday for how the economy fared in January might offer a glimmer of optimism. That said, Britain is the only G7 economy that is still smaller than before the coronavirus pandemic. The International Monetary Fund believes it will be the only G7 economy to shrink this year.
BIG PICTURE OF STRUCTURAL CRISIS
So picture above looks really "rosy", right? Especially performance of Chinese economy, who it rebounds after CV-19 restrictions, right off the bat. In Telegram we've disclosed possible reasons for that, because other statistics from region hardly supports strong PMI data. China has injected around 1Trln yuan in economy since the beginning of 2023. So, we could suggest that domestic consumption is boosted artificially. It was always a challenge to analyse China statistics, now it is becoming even more difficult.
Because, if you take a look at Hong Kong export - it collapsed for 36%. You could argue that export is external merchant indicator while PMI is internal one. But, Purchasing managers buying the same goods and with the same producers, despite where they sell them. This confirms artificially boosted domestic demands, making managers happy and rising PMI.
Besides, In S. Korea, Japan we see wide numbers of worse statistics. South Korea's factory activity contracted for an eighth month in February, a survey showed on Thursday, highlighting weak domestic and global economic conditions even though the downturn in output and orders eased slightly. The S&P Global's seasonally adjusted purchasing managers' index (PMI) for South Korean manufacturers stood at 48.5 in January, unchanged from December and remaining below the 50-mark since July, 2022.
South Korea's exports fell in February for a fifth straight month in annual terms. Outbound shipments from Asia's fourth-largest economy fell 7.5% to $50.10 billion in February. Shipments to China, in their ninth month of decline, slumped 24.2%.
Data from the Australian Bureau of Statistics (ABS) on Wednesday showed real gross domestic product (GDP) rose 0.5% in the December quarter. Australia's economy grew at its weakest pace in a year last quarter as strength in trade was offset by rising interest rates and high inflation, and all the signs are a further slowdown lies ahead. Here is we have the same washing out of savings, as mortgage payments surged 23% in the quarter as rates jumped, while household savings as a share of income shrank to a five-year low of 4.5%, from 7.1% in the September quarter.
Yet there are also signs high borrowing costs are working to restrain demand. Household consumption rose only a meagre 0.3% in the December quarter, with a drop in spending on clothing, recreation and furniture and electronics. Economic output excluding international trade actually fell 0.5% in the quarter, the first contraction since pandemic lockdowns shuttered much of the economy.
The Swiss economy showed no growth in the fourth quarter of 2022, the government said on Tuesday, as a "challenging international situation" hit manufacturing and exports.
So, the structural crisis continues, structural inflation remains quite high and a rate hike, apparently, will not reduce it. Moreover, a decrease in demand in the context of a rate increase leads to economic degradation (construction is falling, retail sales are declining, industry is shrinking and even the service sector is beginning to shrink), which categorically requires easing monetary policy. Recall, how it has started, first - we've got outstanding jump in inflation. Once, the first shock starts exhausting, structural crisis starts spreading over all economy sphere and across the Globe. Now we see drop in Industrial production, GDP, manufacturing and consumption of durable goods across the Globe:
This is a consequence of the rate increase, and if the increase continues, the US industry will fall even more. And if the rate is not raised, then inflation will grow … Then we're going further:
Regional data shows the same signs of slowing:
Then structuring crisis, after slowdown in production and due high inflation comes to households, crushing consumption...
...and bing! It comes to Real Estate market. Despite price collapse, demand for real estate among population remains low, due to very high interest rate. And we have this picture not only in the US, but in other countries.
So, the question is - whether we will rise rate further? The average interest rate on the most popular U.S. home loan remained last week at its highest level since November. The average contract rate on a 30-year fixed-rate mortgage increased by 9 basis points to 6.71% for the week ended Feb. 24, data from the Mortgage Bankers Association (MBA) showed on Wednesday, a third weekly rise in mortgage rates after several weeks of declines.
But this is not all yet. Recent Inflation data shows that inflation is not going to decrease. Last US PMI data and recent inflation data, especially on core Inflation in EU, France and Spain in particular, shows that inflation remains stubbornly high, despite all central banks efforts. It means that we've passed only the first spiral of inflation, and it seems that market is coming to the 2nd spiral, where inflation will be concentrated not in energy sector, but in services, food, rent and other all time classic spheres:
Once markets have achieved closure after first spiral, they immediately are coming to the 2nd stage. Situation categorically requires easing monetary policy. But, instead of that ECB starts QT, rising rate expectations to 4%. While Fed Reserve starts psychological preparation of market society to significantly higher rate level.
British consumer price inflation hit a 41-year high of 11.1% in October and is still in double digits, but last month the BoE forecast it would drop below 4% by the end of this year. However, Citi said public expectations for inflation in 12 months time rose to 5.6% in February from 5.4% in January, while expectations for the long term rose to 3.8% from 3.5%.
Meantime, EU economy shows bad signs. Amount of EU companies' bankruptcies applications are rising like mushrooms after the rain, while Germany economy shows collapse in classic industries. It seems that average indicator holds stable only due high tech sector. Just the results of the energy crisis, which allegedly turned out to be completely non-critical.
Note that the European Union is not the USA, bankruptcies occur less frequently here. And again the same question arises: how to raise the rate in such a situation? And if in a couple of weeks the data shows an increase in inflation, what to do? There is no good answer, you can only continue to make a good face at a bad game.
In conclusion, it can be noted that all the optimistic statements of politicians of developed countries and international structures have no real basis. The crisis continues, enters the next cycle (we will find out exactly in two weeks when the February inflation data will be released). Moreover, extremely unpleasant symptoms appear.
Meantime, investors are running into cash. According to BofA statistics, stock funds outflow was -$7.4 billion, which is a biggest outflow in 2 months, while cash funds have shown inflow of $68.1 billion - the largest in 3 years. Markets are starting to get nervous about "stubborn" inflation and hawkish global central banks. High rates already discredit stocks risk premiums where yield now stands lower than short-term bills. Liquidity drought due QT programmes together with high rates makes difficult to finance borrowing, which makes additional pressure on risky assets - just look at Bitcoin. Investors are spooked with Fed resolve and commitment to go up to the end whatever cost will be:
Views differ right now, the majority suggests that dollar strength will be limited, somewhere to 106 by DXY quote. Analysts at Capital Economics, on the other hand, believe an expected slowdown in global growth and souring risk appetite will send investors flocking to the dollar, a popular destination during uncertain times, and push the currency back to its highs later this year.
Right at the final here is our 2 cents on market expectations. As it was two weeks ago when we warned about too optimistic view, as right now we think that market undervalues Fed commitment and we suggest that rates will go higher and maybe significantly higher. This makes us think that recent dollar strength is not temporal and could continue through the year. At least right now positives signs are too few and unstable to make the opposite conclusion.
