Read on the Trading Floor - 10 April 2024
Today’s focus… Fed vs ECB
Macro Themes At Play
Theme 1 - Fed's cutting window closing?
Theme 2 - If the Fed don't cut in June, the POTUS election complicates the arithmetic
Theme 3 - As the Fed's window closes, the ECB's opens
Further reading and listening of note
Theme 1 - Fed's cutting window closing?
The fixed income market has been drifitng wider through April as the strength of the US data pushed back against the Fed's 3 cut mantra. 4.5% has been named in many a piece as a "trigger" level, a risk level for fixed income moves to finally feed into VAR models and encourage/expedite equity de-risking. The 3bps tail for this evenings auction will also worry investors and bond vigilant’s may soon reappear on FinTwit after their Q1 hibernation as 10s close > 4.55%. Will the Tax window also encourage equity selling?
As was always the risk, the Fed's Dec pivot is in question as inflation remains "sticky" in line with a stronger economy, gdp growth chugging along between 2 to 3% and of course a resilient labour market. Jamie told us earlier this week that the soft landing was in question. Given JPM's data insight and view into the financial piping of US corporates and households, it pays to listen. Although @EpsilonTheory has been highlighing the lack of momentum in the disinflation trend for 9months. Along with the more recent rise in commodities, the expected rise in food prices ... the job is most certainly not done.
Source: @EpsilonTheory
Where does this leave the Fed? in no rush to cut, less likely to ease this side of July 4th but still very much data dependent, waiting for the incoming data to guide them to their first cut. Key for the markets is the Fed (for now) do not have to worry about stagflation, the US economy has so far weathered the storm of higher real rates, the jobs market has yet to materially weaken. Thus until we see an aggressive gap lower in the US growth profile, the Fed can buy time to get inflation back to target without inflicting too much pain on asset prices.
Yardeni Research - The Last Mile
NY Times - Housing Costs Continued to Rise Faster than Before the Pandemic
The Inflation Guy - This Month's CPI Report - A Potential Pony Situation
Advisor Perspectives - Inflation Since 1872: A Long-Term Look at the CPI
Steno Research - US CPI REVIEW: INFLATION IS ACCELERATING, NO RETURN TO 2% IN SIGHT
The Boock Report - 10 yr auction was bad
Theme 2 - If the Fed don't cut in June, the POTUS election complicates the arithmetic
The following was first published by colleague in The Morning Hark - Apr 09
"We have 6 FOMC meetings left for the year: May, June, July, September, November, December.
The under/over is around 3 cuts for the year although Fed chatter is diluting these at every turn!
The FT quoted Bespoke Investment Group’s study on US election year Fed moves and found that in election years the Fed held steady at 71% of their meetings as opposed to 67% in other years. If that is narrowed down to the more sensitive months of an election year between May and November the numbers become even more diverse at 81% versus 65%. If we only talk about rate cuts, within those months, then the Fed has cut rates at only 3% of those meetings as opposed to 14% in other years.
We can take May out straight away so that leaves 5 meetings and if the above stats are to be repeated its a long call that we get any cuts between June - November which leaves a December Santa rate cut just in time for the year end rally!"
Theme 3 - As the Fed's window closes, the ECB's opens
There is a chance but it seems premature that they cut tomorrow. However there is also no reason for Lagarde to move the markets expectations away from June. Growth on this side of the atlantic is anemic compared to the fiscal / AI dominace of the US. Germany is in recession, inflation is gapping lower in France, commerical real estate in Dublin is being marked down by 40/50%, China is eating into German car market etc etc... The mix of slower growth and inflation regime will allow the ECB to cut in Q2, if not sooner...
FT - Big investors buy European bonds over US Treasuries as economies diverge
Livesquawk - ECB Expected To Wait Until June To Start Rate Cuts, Small Possibility Of Surprise Move
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