Read on the Trading Floor - 02 May 2024
Today’s focus… Fed, Bond Vigilantes and Yen repatriation
Macro Themes At Play
Theme 1 - Fed will hold then cut...
Theme 2 - Bond vigilantes warming up for an attack?
Theme 3 - Without comment, BoJ/MOF reappear...
Further reading and listening of note
Theme 1 - Fed will hold then cut...
Powell showed his natural colours and failed once again to out hawk the mkt expectations. He asked the mkt for patience, accepted the uptick in inflation but crucially closed off the risk of a hike. His prognosis that "higher for longer" would be sufficient to stem inflationary pressures has eased somewhat the tension in the fixed income space.
Following the meeting, there has been a growing theme in the research streaming through Harkster.com that the US data is already softening, complementing Powell's press conference. However, there is a fine line between moderate growth and stagflation, Powell and Co will be hoping they find the former in H1 and not the latter.
However, it wasn't all bad news for hawks. Powell did omit the March line that "our policy rate is likely at its peak for this tightening cycle." Ultimately, he tried his best to remain data dependent and not spark a mkt revolt, walking back from his Nov pivot was never going to be easy (a problem many street economists are also fighting with) and it's clearly not in his dovish nature to jump straight back to discuss hikes. The safe option for him was to beat the "data dependent" drum. "my personal forecast is that we will begin to see further progress on inflation this year. I don't know that it will be enough, sufficient [for rate cuts]. I don't know that it won't. We're going to have to let the data lead us on that."
Brent Donnelly am/FX - Yellow Flags
Geo Chen - Powell and Yellen intervene to save the day (for now)
FT - Jay Powell’s dovishness is right, but not for the reasons he believes
Epsilon Theory - Looking for an Excuse to Cut
Bloomberg - You Can’t Call Jerome Powell a Big Teaser
Saxo Markets - FOMC Meeting Takeaways: Why Inflation Risk Might Come to Bite the Fed
Steno Research - A growing acceptance of above target inflation
FT - Jay Powell’s dilemma: the US economy is too strong to cut rates
Theme 2 - Bond Vigilantes warming up for an attack?
QT was tapered a little more than expected by Powell and the sentiment around Yellen's QRA is also positive. However, the appetite for duration remains fragile...
#1. Sticker than expected inflation driven by wage pressures (Unit Labour Costs 4.7% QoQ vs exp 3.3%), PPI, PCE, service costs etc
#2. If the BoJ have to hike to protect their ccy, what will that mean for global fixed income. BoJ YCC has been an excellent dampener on global yields, western governments will have to offer a higher yield to attract Japanese savers. Those longer in the tooth will remember the trading rule that when the BoJ hike something normally breaks…
#3. The US Treasury plans to sell roughly $1 trillion in bonds from May to July,
#4. If Powell continues to run things hot, 2s10s to steepen?
#5. There are plenty of arguments/conspiracies that the Fed's actions and forward guidance indicate they have adjusted their 2% inflation target higher
#6. Trump and Biden will both bring larger budget deficits that will need funding
#7. ACB supply of USD to support their domestic ccy will limit the USD that they have to recycle back into UST. Primary Dealers will come under greater pressure to take down government auctions as int'l CB's step back.
#8. Post Russian sanctions, there has been a clear focus on the increased demand for gold as UST holdings faulter.
WSJ - The Treasury’s Market Is Getting Squeezed From All Sides
ING - US Balance of Payments: Debt complacency needs to be watched
Theme 3 - Without comment, BoJ/MOF reappear...
The real fireworks came from Asia as it appears Japanese authorities went to market again (still no comment from them). Driving USDJPY lower from 157.50 to 153 handle. After an initial bounce on the London open, we close back on a 153.00 handle, have they turned the table? Without narrowing interest rate differential this seems a correction to fade unless of course the game changes and Japanese government encourage JPY repatriations which has been reported by Reuters (Japan's ruling party considers tax breaks to spur yen repatriation, officials say). When trading against any authorities one always has to be wary of when the rules of the game are re-written.
Nikkei Asia - Yen's surge after Fed announcement stirs another intervention talk
Bloomberg - Japan Tries to Maintain Mystery on Whether it Intervened on Yen
CME Group - Is Yen Weakness Tied to Japan’s High Debt Levels?
SCMP - In Asia, US dollar’s growing strength gives rise to stability concerns, suspected rate intervention
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