Sive Morten
Special Consultant to the FPA
- Messages
- 18,125
Fundamentals
It is numerous important economic events this week and not all of them were covered by mass media. Particularly speaking - M. Draghi former ECB CEO, briefly covered but it has decisive meaning for description of EU situation. Also we shed some light on recent J. Powell comments and big mismatch of recent GDP numbers to other indicators. We will show that there is no growth in the US right now. Finally, overall data shows that structural crisis continues. Not only in the US but, in EU, and across the Globe. Inflationary expectations are raising and the Fed just doesn't know what to do. While markets right now stand in some positive euphoria about rate ceil and soon cut - it might be a kind of shock when situation gradually will change, closer to the end of the year. Next week we get inflation data and see what will happen.
Market overview
The dollar eased and global equities rebounded on Friday as Wall Street rallied on doubts that interest rates will go higher even after Federal Reserve Chair Jerome Powell cautioned that tighter monetary policy might be needed to tame inflation. Powell's remarks on Thursday that the fight to restore price stability "had a long way to go" at first roiled markets. But a softer labor market as seen in last week's unemployment report and speculation that next week's consumer prices index (CPI) will show slower inflation spurred bulls into action.
Many investors embraced the notion that U.S. rates have peaked after the Fed kept its overnight lending rate steady last week, a move that bolstered speculation the tightening cycle was over and spurred a rally in risky assets until Thursday. Thierry Wizman, global FX and interest rates strategist at Macquarie in New York, said with the decline in gasoline prices the CPI data could surprise to the downside.
Core CPI month-over-month is expected to have risen 0.3% in October, with a year-over-year increase of 4.1%, a Reuters poll showed. Both estimated gains are the same as in September. But U.S. consumer sentiment fell for a fourth straight month in November and households' expectations for inflation rose again, with their medium-term outlook for price pressures at the highest in more than a dozen years, the University of Michigan's preliminary reading of consumer sentiment showed on Friday:
U.S. Treasury yields rose sharply on Thursday after a weak 30-year bond auction. The extra yield needed to get the issue sold was the largest in several years as was the amount dealers were forced to absorb, said Dec Mullarkey, managing director for investment strategy and asset allocation at SLC Management in Boston.
Here is a bit more details on auction results, that make it clear. Investors received a yield of 4.769% - 0.051 percentage points higher than the yield in pre-auction trading. Direct and indirect bidder activity has reached its lowest level since October 2020 and November 2021, respectively. Primary dealers had to buy 24.7% of the output, which is more than double last year's average of 12%.
Futures show about a 35% probability the Fed will cut its overnight lending rate by 25 basis points by next May, according to the CME's FedWatch tool, but the market expects that rate to stay above 5% through June.
Inflationary expectations are raising not only in the US, but in EU and Australia as well. Let's keep aside Australia for awhile, in EU, it is becoming the headache for ECB as well. Euro zone consumers have raised their expectations for inflation over the next 12 months to 4%, a European Central Bank survey showed on Wednesday, in a potential headache for the ECB in its effort to rein in prices. The ECB also raised its inflation forecast for 2024 in September, mainly as a result of higher energy prices, as it raised interest rates to record highs. It now expects prices to rise by 5.6% this year, 3.2% in 2024 and 2.1% in 2025.
Meantime, with all this mess around, Moody's agency cut short-term the US credit rating forecast to "negative". The US was threatened with the loss of its last top credit rating on Friday, as Moody’s Investors Service signaled it was inclined to downgrade the nation because of wider budget deficits and political polarization. It is interesting what will happen on 17th of November, next temporal government shutdown date. So, US bonds start feeling more and more pressure and yield could start raising again.
White House Press Secretary Karine Jean-Pierre said the outlook change was a “consequence of congressional Republican extremism and dysfunction (???).” Deputy Treasury Secretary Wally Adeyemo, meanwhile, pushed back against the outlook change, saying the economy “remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”
So, I do not know how about you, guys, but even this brief excursion in recent events hardly relate to growth relations of the US economy in my mind.
So, let's go further... forecasts...
The dollar's recent weakness will linger for the rest of the year, according to a majority of FX strategists in a Reuters poll, who also said economic data will be the primary influencer of major currencies for the rest of 2023. renewed expectations the Fed is done with its rate hikes have put the dollar at a disadvantage, with the currency losing almost 2.0% from last month's peak, leaving the dollar index up around 2% for the year.
Suggesting the current dollar weakening trend has further to go, a near two-thirds majority of analysts, 28 of 45. They also expect it to slip against the euro and other G10 currencies over the next 12 months, a position analysts have held all year but have been proven wrong each time. Some are sounding more confident this time they will be right.
The latest data from the Commodity Futures Trading Commission showed currency speculators were still overwhelmingly net-long on the U.S dollar, suggesting there was still plenty of support for the greenback.
Median predictions from 72 foreign exchange strategists showed the common currency trading at $1.07, $1.08 and $1.11 in the next three, six and 12 months. Those estimates are broadly unchanged from an October survey.
Asked what is the weakest level the yen will trade against the dollar by year-end, 20 analysts who answered a separate question returned a median of 152/dollar. The yen is expected to gain over 10% to change hands at 136/dollar in a year, the poll showed.
Sterling , already up around 1.5% in 2023, is forecast to gain 3.5% to $1.27 in a year. Still, GS forecasts are different - the US economy will support the dollar in 2024. It will be difficult for the euro/dollar rate to rise above 1.10, the yen will fall in price to 155, and the pound sterling will fall to 1.18.
But, all this stuff sounds correct, if there will be no other reasons for yield raising except the Fed rate. Something tells me that it will... and Moody's decision is the first bell.
"HEALTHY" ECONOMY
First we show you few charts that totally contradicts recent GDP numbers and growth of ~5%. First of all, numbers on PMI around the Globe give us the first hint. All developed countries show numbers below 50 level. We see drop of production, manufacturing, hard deflation in production sector and massive drop of consumption (retail sales) across the Globe. Unemployment starts raising. PPI of the eurozone -12.4% per year — a record decline in 42 years of statistics. This is not at all surprising given the above indicators, but such a level of deflation indicates an incredibly severe industrial crisis.
But is not all yet. The US trade deficit widened by more than expected in September, reflecting the resilience of American demand for foreign goods.
The shortfall in goods and services trade expanded 4.9% from the prior month to $61.5 billion, Commerce Department data showed Tuesday. The median estimate in a Bloomberg survey of economists had called for a $59.8 billion gap. The value of imports rose to the highest since February, while exports increased to a more than one-year high. The figures aren’t adjusted for inflation.
If we combine raising trade deficit, miserable drop in PPI, raising of unemployment and credit card debt and delinquencies - we get really bad picture, meaning that people do not have enough money to keep the same level of consumption, forced to buy cheaper export (supposedly chinese) goods and falling deeper into indentured servitude. Also this makes direct destructive impact on domestic production, making it contract and triggers awful deflation.
Meantime, Defaults of high-yield corporate bonds are accelerating and could bring a $46 billion wave of distressed debt in 2024, Bank of America says.
We suggest that BofA underestimates the problem size. With new issues of $100 billion per half year, and the entire size of the market was more than a trillion they expect 3.4% of defaults from the portfolio. As default rates rise, so will the risk premium, which will become increasingly unaffordable for issuers that refinance in the coming year. Hardly they don't understand this. Rather, they simply cannot afford to talk about the true scale of the problem.
Cash flows keep draining economy.
Private investors withdrew the maximum volume from the US stock market in two years. Retail traders sold nearly $16 billion worth of stocks last month, nearly double what they sold in September, according to S&P Global Market Intelligence. Banks lending more with BTFP programme, while the Fed keeps it QT and Reverse DRPO is decreasing, as banks withdraw cash from the Fed accounts. Obviously banks have problems with liquidity because BTFP loans are raising together with thinning amount of Reverse Repo.
Banks tightened lending standards for U.S. businesses and households in the third quarter, but the pace of change appeared to ease, and demand for loans fell broadly in a sign of the impact higher interest rates are having on the economy, the Federal Reserve reported on Monday. Analysts said the survey results were consistent with an expected economic slowdown in the final months of the year.
Meantime the price of insurance against US default has gone up again. Finally, take a look at this chart. This is non popular indicator of average weekly hours. It is very conservative, very rare changing and that's why barely looked by investors. Still it provide us vital information - you could see that it constantly decreasing since 2021. Not too fast, but still... In recent month it has dropped for 0.1. On the chart you also could see how it should behave, when economy is raising - take a look at post-covid recovery. So, I would ask you - if we have 5% economy growth in last quarter and ~2-2.5% average growth in last few quarters, how the length of working week could decline. Especially when unemployment by official statistics were raising until last month. This conservative indicator just can't decrease during raising economy. It is impossible. As a bottom line - this indicator with others that we've shown you above tell, that there is no growth in the US economy.
This, in turn, means, that yields could get other reasons to raise, besides of the Fed rate level, which could bring crash of hopes on the markets in nearest 1-2 months and, at ultimate case, another rate hike from the Fed.
M. Draghi Speech
Mr. Draghi has saved EU in previous crisis, worked in Goldman Sachs, alma-mater of all globalist. Draghi guarantees a recession for the European economy and sees stagflation, and most importantly, in his opinion, the agonizing death of the eurozone is quite real. Draghi voiced all this at the Financial Times economic conference this week. He actually saved all this Euro-junk at the height of the European debt crisis and Brexit 2011-2016. In general, he is a tough guy.
In his opinion, the Eurozone will be hit by a recession at the end of this year. He voiced three key points for understanding the future of the EU:
Either Europe will solve problems together and become a stronger union, a union capable of shaping its foreign and defense policies, not just economic ones... or, he added, if the European Union is not a single market, it simply will not survive...”
Draghi rightly notes that over the past 20 years, the European economy has been rapidly losing competitiveness not only in relation to the United States, but also in relation to Japan, South Korea and, of course, China. Well, his execution almost sounds like a sentence that Europe has lost its presence in many technological areas.
It makes no sense to discuss for the hundredth time anti-Russian sanctions that are killing the EU, because the United States has already created a dual market for oil and gas, and Europe is doomed to high prices that accelerate inflation. There is no point in saying again that while solving its problems and striking at China, the United States is in passing killing the European economy, pumping out industry and the last capital of the middle class. The main problem preventing the EU from functioning normally is that the union is poorly structured. With a single currency, budgetary, fiscal and even customs policies are different everywhere.
But in order to change something globally in the EU, especially if this does not imply the Maastricht Treaty, the unanimous consent of all countries is required. And soon, quite possibly, some countries will have their deliberative rights taken away (for starters, Hungary and Slovakia). The EU single market never emerged. It took decades to reach a simple trade agreement with Canada because several tiny EU countries demanded changes that Canada did not accept. They will also now defend themselves from the United States... For a long time and without success. For now - EU has no army of your own, no Constitution, no longer practically a single labor market, no single debt market, no single information field, no single executive body, they themselves do not know who is in charge: Charles Michel or von der Leyen...
In a word, smart Europeans already understand everything, but they can’t do anything. It’s interesting that the EU doesn’t even have a serious political force capable of turning this “ship” around anywhere. The problem is that there is no one to even follow...
Just as a confirmation of M. Draghi worlds, Italy is back on the worry list with many investors concerned about growing fiscal risks steering clear of big exposure to the euro zone's third-largest economy. Moody's, which rates Italy just one notch above junk with a negative outlook, reviews the sovereign on Nov. 17. Fitch's latest review is due after Friday's market close. A Moody's downgrade is the bigger risk given its Italy outlook and such a move could see the closely-watched 10-year bond yield gap over Germany pop to 250 bps, with potential ramifications across the periphery. Italian stocks meanwhile are trading at a 50% discount to world stocks, the widest gap since 1988. Italian debt is one among most popular in EU for collateral purposes...
CONCLUSION
So, it is a lot of bla-bla-bla above, let's keep it simple. We think that well anticipated dovish turn from the Fed is overestimated and very soon yields could get other reasons to go higher, besides of the Fed policy. Charts above show that the US statistics is strongly "adjusted (better to say falsified). Second - situation in EU doesn't suggest EUR appreciation in near term, so we're skeptic, concerning trend change, that suggested by big banks. EUR is loosing role of 2nd reserve currency too fast. Periphery countries start playing larger role in political life, blocking initiatives of the core countries. Spain and Germany political situation could lead to big political crisis. So, taking it all together it seems a bit too early to suggest major reversal of US Dollar upward trend.
It is numerous important economic events this week and not all of them were covered by mass media. Particularly speaking - M. Draghi former ECB CEO, briefly covered but it has decisive meaning for description of EU situation. Also we shed some light on recent J. Powell comments and big mismatch of recent GDP numbers to other indicators. We will show that there is no growth in the US right now. Finally, overall data shows that structural crisis continues. Not only in the US but, in EU, and across the Globe. Inflationary expectations are raising and the Fed just doesn't know what to do. While markets right now stand in some positive euphoria about rate ceil and soon cut - it might be a kind of shock when situation gradually will change, closer to the end of the year. Next week we get inflation data and see what will happen.
Market overview
The dollar eased and global equities rebounded on Friday as Wall Street rallied on doubts that interest rates will go higher even after Federal Reserve Chair Jerome Powell cautioned that tighter monetary policy might be needed to tame inflation. Powell's remarks on Thursday that the fight to restore price stability "had a long way to go" at first roiled markets. But a softer labor market as seen in last week's unemployment report and speculation that next week's consumer prices index (CPI) will show slower inflation spurred bulls into action.
Many investors embraced the notion that U.S. rates have peaked after the Fed kept its overnight lending rate steady last week, a move that bolstered speculation the tightening cycle was over and spurred a rally in risky assets until Thursday. Thierry Wizman, global FX and interest rates strategist at Macquarie in New York, said with the decline in gasoline prices the CPI data could surprise to the downside.
Core CPI month-over-month is expected to have risen 0.3% in October, with a year-over-year increase of 4.1%, a Reuters poll showed. Both estimated gains are the same as in September. But U.S. consumer sentiment fell for a fourth straight month in November and households' expectations for inflation rose again, with their medium-term outlook for price pressures at the highest in more than a dozen years, the University of Michigan's preliminary reading of consumer sentiment showed on Friday:
U.S. Treasury yields rose sharply on Thursday after a weak 30-year bond auction. The extra yield needed to get the issue sold was the largest in several years as was the amount dealers were forced to absorb, said Dec Mullarkey, managing director for investment strategy and asset allocation at SLC Management in Boston.
Here is a bit more details on auction results, that make it clear. Investors received a yield of 4.769% - 0.051 percentage points higher than the yield in pre-auction trading. Direct and indirect bidder activity has reached its lowest level since October 2020 and November 2021, respectively. Primary dealers had to buy 24.7% of the output, which is more than double last year's average of 12%.
Futures show about a 35% probability the Fed will cut its overnight lending rate by 25 basis points by next May, according to the CME's FedWatch tool, but the market expects that rate to stay above 5% through June.
Inflationary expectations are raising not only in the US, but in EU and Australia as well. Let's keep aside Australia for awhile, in EU, it is becoming the headache for ECB as well. Euro zone consumers have raised their expectations for inflation over the next 12 months to 4%, a European Central Bank survey showed on Wednesday, in a potential headache for the ECB in its effort to rein in prices. The ECB also raised its inflation forecast for 2024 in September, mainly as a result of higher energy prices, as it raised interest rates to record highs. It now expects prices to rise by 5.6% this year, 3.2% in 2024 and 2.1% in 2025.
Meantime, with all this mess around, Moody's agency cut short-term the US credit rating forecast to "negative". The US was threatened with the loss of its last top credit rating on Friday, as Moody’s Investors Service signaled it was inclined to downgrade the nation because of wider budget deficits and political polarization. It is interesting what will happen on 17th of November, next temporal government shutdown date. So, US bonds start feeling more and more pressure and yield could start raising again.
White House Press Secretary Karine Jean-Pierre said the outlook change was a “consequence of congressional Republican extremism and dysfunction (???).” Deputy Treasury Secretary Wally Adeyemo, meanwhile, pushed back against the outlook change, saying the economy “remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”
So, I do not know how about you, guys, but even this brief excursion in recent events hardly relate to growth relations of the US economy in my mind.
So, let's go further... forecasts...
The dollar's recent weakness will linger for the rest of the year, according to a majority of FX strategists in a Reuters poll, who also said economic data will be the primary influencer of major currencies for the rest of 2023. renewed expectations the Fed is done with its rate hikes have put the dollar at a disadvantage, with the currency losing almost 2.0% from last month's peak, leaving the dollar index up around 2% for the year.
Suggesting the current dollar weakening trend has further to go, a near two-thirds majority of analysts, 28 of 45. They also expect it to slip against the euro and other G10 currencies over the next 12 months, a position analysts have held all year but have been proven wrong each time. Some are sounding more confident this time they will be right.
The latest data from the Commodity Futures Trading Commission showed currency speculators were still overwhelmingly net-long on the U.S dollar, suggesting there was still plenty of support for the greenback.
Median predictions from 72 foreign exchange strategists showed the common currency trading at $1.07, $1.08 and $1.11 in the next three, six and 12 months. Those estimates are broadly unchanged from an October survey.
Asked what is the weakest level the yen will trade against the dollar by year-end, 20 analysts who answered a separate question returned a median of 152/dollar. The yen is expected to gain over 10% to change hands at 136/dollar in a year, the poll showed.
Sterling , already up around 1.5% in 2023, is forecast to gain 3.5% to $1.27 in a year. Still, GS forecasts are different - the US economy will support the dollar in 2024. It will be difficult for the euro/dollar rate to rise above 1.10, the yen will fall in price to 155, and the pound sterling will fall to 1.18.
But, all this stuff sounds correct, if there will be no other reasons for yield raising except the Fed rate. Something tells me that it will... and Moody's decision is the first bell.
"HEALTHY" ECONOMY
First we show you few charts that totally contradicts recent GDP numbers and growth of ~5%. First of all, numbers on PMI around the Globe give us the first hint. All developed countries show numbers below 50 level. We see drop of production, manufacturing, hard deflation in production sector and massive drop of consumption (retail sales) across the Globe. Unemployment starts raising. PPI of the eurozone -12.4% per year — a record decline in 42 years of statistics. This is not at all surprising given the above indicators, but such a level of deflation indicates an incredibly severe industrial crisis.
But is not all yet. The US trade deficit widened by more than expected in September, reflecting the resilience of American demand for foreign goods.
The shortfall in goods and services trade expanded 4.9% from the prior month to $61.5 billion, Commerce Department data showed Tuesday. The median estimate in a Bloomberg survey of economists had called for a $59.8 billion gap. The value of imports rose to the highest since February, while exports increased to a more than one-year high. The figures aren’t adjusted for inflation.
If we combine raising trade deficit, miserable drop in PPI, raising of unemployment and credit card debt and delinquencies - we get really bad picture, meaning that people do not have enough money to keep the same level of consumption, forced to buy cheaper export (supposedly chinese) goods and falling deeper into indentured servitude. Also this makes direct destructive impact on domestic production, making it contract and triggers awful deflation.
Meantime, Defaults of high-yield corporate bonds are accelerating and could bring a $46 billion wave of distressed debt in 2024, Bank of America says.
We suggest that BofA underestimates the problem size. With new issues of $100 billion per half year, and the entire size of the market was more than a trillion they expect 3.4% of defaults from the portfolio. As default rates rise, so will the risk premium, which will become increasingly unaffordable for issuers that refinance in the coming year. Hardly they don't understand this. Rather, they simply cannot afford to talk about the true scale of the problem.
Cash flows keep draining economy.
Private investors withdrew the maximum volume from the US stock market in two years. Retail traders sold nearly $16 billion worth of stocks last month, nearly double what they sold in September, according to S&P Global Market Intelligence. Banks lending more with BTFP programme, while the Fed keeps it QT and Reverse DRPO is decreasing, as banks withdraw cash from the Fed accounts. Obviously banks have problems with liquidity because BTFP loans are raising together with thinning amount of Reverse Repo.
Banks tightened lending standards for U.S. businesses and households in the third quarter, but the pace of change appeared to ease, and demand for loans fell broadly in a sign of the impact higher interest rates are having on the economy, the Federal Reserve reported on Monday. Analysts said the survey results were consistent with an expected economic slowdown in the final months of the year.
Meantime the price of insurance against US default has gone up again. Finally, take a look at this chart. This is non popular indicator of average weekly hours. It is very conservative, very rare changing and that's why barely looked by investors. Still it provide us vital information - you could see that it constantly decreasing since 2021. Not too fast, but still... In recent month it has dropped for 0.1. On the chart you also could see how it should behave, when economy is raising - take a look at post-covid recovery. So, I would ask you - if we have 5% economy growth in last quarter and ~2-2.5% average growth in last few quarters, how the length of working week could decline. Especially when unemployment by official statistics were raising until last month. This conservative indicator just can't decrease during raising economy. It is impossible. As a bottom line - this indicator with others that we've shown you above tell, that there is no growth in the US economy.
This, in turn, means, that yields could get other reasons to raise, besides of the Fed rate level, which could bring crash of hopes on the markets in nearest 1-2 months and, at ultimate case, another rate hike from the Fed.
M. Draghi Speech
Mr. Draghi has saved EU in previous crisis, worked in Goldman Sachs, alma-mater of all globalist. Draghi guarantees a recession for the European economy and sees stagflation, and most importantly, in his opinion, the agonizing death of the eurozone is quite real. Draghi voiced all this at the Financial Times economic conference this week. He actually saved all this Euro-junk at the height of the European debt crisis and Brexit 2011-2016. In general, he is a tough guy.
In his opinion, the Eurozone will be hit by a recession at the end of this year. He voiced three key points for understanding the future of the EU:
Either Europe will solve problems together and become a stronger union, a union capable of shaping its foreign and defense policies, not just economic ones... or, he added, if the European Union is not a single market, it simply will not survive...”
Draghi rightly notes that over the past 20 years, the European economy has been rapidly losing competitiveness not only in relation to the United States, but also in relation to Japan, South Korea and, of course, China. Well, his execution almost sounds like a sentence that Europe has lost its presence in many technological areas.
It makes no sense to discuss for the hundredth time anti-Russian sanctions that are killing the EU, because the United States has already created a dual market for oil and gas, and Europe is doomed to high prices that accelerate inflation. There is no point in saying again that while solving its problems and striking at China, the United States is in passing killing the European economy, pumping out industry and the last capital of the middle class. The main problem preventing the EU from functioning normally is that the union is poorly structured. With a single currency, budgetary, fiscal and even customs policies are different everywhere.
But in order to change something globally in the EU, especially if this does not imply the Maastricht Treaty, the unanimous consent of all countries is required. And soon, quite possibly, some countries will have their deliberative rights taken away (for starters, Hungary and Slovakia). The EU single market never emerged. It took decades to reach a simple trade agreement with Canada because several tiny EU countries demanded changes that Canada did not accept. They will also now defend themselves from the United States... For a long time and without success. For now - EU has no army of your own, no Constitution, no longer practically a single labor market, no single debt market, no single information field, no single executive body, they themselves do not know who is in charge: Charles Michel or von der Leyen...
In a word, smart Europeans already understand everything, but they can’t do anything. It’s interesting that the EU doesn’t even have a serious political force capable of turning this “ship” around anywhere. The problem is that there is no one to even follow...
Just as a confirmation of M. Draghi worlds, Italy is back on the worry list with many investors concerned about growing fiscal risks steering clear of big exposure to the euro zone's third-largest economy. Moody's, which rates Italy just one notch above junk with a negative outlook, reviews the sovereign on Nov. 17. Fitch's latest review is due after Friday's market close. A Moody's downgrade is the bigger risk given its Italy outlook and such a move could see the closely-watched 10-year bond yield gap over Germany pop to 250 bps, with potential ramifications across the periphery. Italian stocks meanwhile are trading at a 50% discount to world stocks, the widest gap since 1988. Italian debt is one among most popular in EU for collateral purposes...
CONCLUSION
So, it is a lot of bla-bla-bla above, let's keep it simple. We think that well anticipated dovish turn from the Fed is overestimated and very soon yields could get other reasons to go higher, besides of the Fed policy. Charts above show that the US statistics is strongly "adjusted (better to say falsified). Second - situation in EU doesn't suggest EUR appreciation in near term, so we're skeptic, concerning trend change, that suggested by big banks. EUR is loosing role of 2nd reserve currency too fast. Periphery countries start playing larger role in political life, blocking initiatives of the core countries. Spain and Germany political situation could lead to big political crisis. So, taking it all together it seems a bit too early to suggest major reversal of US Dollar upward trend.
