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 17^th 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 12^th 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?

• ING - FX Daily: DXY closing in on year’s high ahead of Fed

• FT - The Fed is stuck, and so are stocks

• 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

• BNYM - Intervention Risks Add To Focus On Treasuries

• FT - Why the US dollar is the world's problem

• 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

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Top Pieces

Discovered on Harkster.com

1. FT - UK house prices fall unexpectedly for second month in a row

2. S&P Global - UK Manufacturing slips back into contraction as output and new orders both decline

3. FT - The second coming of Ed Miliband

4. WSJ - Amazon Gets More Fuel for AI Race

5. Axios - AI hits trust hurdles with U.S. military

6. The NY Times - The Marijuana Industry Hopes for New Highs

7. Bloomberg - Amazon Posts Strongest Cloud Sales Growth in a Year on AI Demand

8. Axios - Netanyahu warns Israel will invade Rafah if Hamas doesn't take hostage deal

9. FT - Microsoft to power data centres with big Brookfield renewables deal

10. Reuters - Bank of England tweaks lifetime loss estimate for QE programme

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