Read on the Trading Floor - 01 May 2024
Today’s focus… ACBs vs USD strength
Macro Themes At Play
Theme 1 - Price Pressures and Softer Sentiment in US data (don't say Stagflation)
Theme 2 - Fed Preview
Theme 3 - BoJ leads ACB's vs USD Strength
Further reading and listening of note
Theme 1 - Price Pressures and Softer Sentiment in US data (don't say Stagflation)
#1. Bumper ECI: 1.2% vs exp 1.0% and prior 0.9%. Biggest QoQ jump in a year and outside of the Bloomberg forecast range.
Interesting point from The Gryning Times in today's publication (Wage Gains)..."as Jerome Powell has said in the past, wage gains should equal productivity gains plus inflation (a formula of non-inflationary wage growth)."
Source: Bloomberg via ZeroHedge
#2. ADP beat expectations: 192k vs exp 175k and prior 208k.
#3. JOLTs continue to normalise: 8.49M relative to exp 8.69M and prior 8.81M
#4. ISM Manufacturing PMI drops back into contraction but (worryingly) prices spike
Mfg: 49.2 vs exp 50.0 and prior 50.3
Prices: 60.9 vs exp 55 and prior 55.8
Over to you Gov Powell, how credible/dovish can you be relative to the robust US activity data and Q1 uptick in inflation?
Theme 2 - Fed Preview
Guided by 3 hot inflation prints, robust activity data and the shift in tone from committee members, Powell will deliver an incrementally hawkish message. However, it's not in Powell's nature to out-hawk mkt expectations. Will the excessive USD longs be disappointed with a message that simply marks the board to market?
I personally can't see him committing to the next move being a hike, instead he will acknowledge that there is more work to do on inflation, progress has slowed (due to seasonal Q1 factors) but is still ongoing and of course bang the "data dependent" drum. Once inflation is still believed to return to 2% over the forecast horizon, why should he deviate with every pop in spot inflation?
Thus, my base case is a repeat of his Apr 17th comments “the recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence.” Inflation is elevated but there is enough for him to indicate that it is still moving toward the central bank’s 2% target, especially if they keep rates high “as long as needed.” Policy will be steered by inflation as the jobs mkt moderates.
There will be no SEP, the dot plot with 3 hikes won't be updated until June 12th meeting. Finally, expectations are for a QT adjustment given the discussion had started during the March meeting according to the minutes. Implementation most likely to start in June however it could be immediate.
Harkster Fed Preview - it's not in Powell's nature to out-hawk mkt expectations
ZeroHedge - Ahead Of The Fed - Will Powell's 'Inner Dovishness' Shine Through?
Steno Research - 5 THINGS WE WATCH AHEAD OF THE FOMC MEETING
Brent Donnelly am/FX - Fear Of Missing Cuts
Theme 3 - BoJ leads ACB's vs USD Strength
As the USD strengthens, Asian central banks will be forced to run down reserves. Selling USD back into the market to steam ccy deprecation and maintain their fixing pegs. As a result, this closes a natural feedback loop into UST. There have been many pieces written on gold accumulation and China's demand for UST waning since the game changed on reserves when Russia rolled tanks into Ukraine. However, all ACB's will have fewer USD to park in USTs as they're forced to increase their intervention policy. As a result, what happens in FX has an impact in fixed income. Furthermore, if BoJ are forced to hike rates aggressively (15bps in July and 25bps in Oct), what impact will it have on US duration? If the Japanese are getting 40bps more at home, they would want at least that abroad. A hiking BoJ with US hitting a stagflationary patch will be an ugly combination for global assets.
Steno Research - POSITIONING WATCH – PREPARE FOR FURTHER ACTION IN JPY PAIRS
Bloomberg - BOJ Accounts Suggest Japan Intervened Monday to Support Yen
ING - Rates Spark: What’s brewing in Japan should in the end push rates up
👏 If you found this briefing helpful, please show the desk some appreciation by giving it a ‘Like’ or a ‘Comment’ at the bottom of the page.
Top Pieces
Discovered on Harkster.com
FT - UK house prices fall unexpectedly for second month in a row
S&P Global - UK Manufacturing slips back into contraction as output and new orders both decline
The NY Times - The Marijuana Industry Hopes for New Highs
Bloomberg - Amazon Posts Strongest Cloud Sales Growth in a Year on AI Demand
Axios - Netanyahu warns Israel will invade Rafah if Hamas doesn't take hostage deal
FT - Microsoft to power data centres with big Brookfield renewables deal
Reuters - Bank of England tweaks lifetime loss estimate for QE programme
Stay informed throughout the day with our new commentary channel (‘Intraday Market Colour’) highlighting key notes, topics du jour, and HarksterHQ’s market updates around key data points and headlines.
Available on the Harkster Research Platform.
The information provided in this post is for general information purposes only. No information, materials, services, and other content provided in this post constitute solicitation, recommendation, endorsement or any financial, investment, or other advice. Seek independent professional consultation in the form of legal, financial, and fiscal advice before making any investment decision.
after observing the BOJ for 40+ years, I would estimate the odds of Ueda-san being as aggressive as you suggest, 40bps total before the end of the year, are as close to nil as possible. it just aint gonna happen.i could see 15bps in December if inflation there is still perking along