Read on the Trading Floor - 13 Feb 2024
Today’s focus… Fed expectations repricing, XBT inflows, Ceasefire in the middle east and much more
Macro Themes At Play
Theme 1 - It was too early to declare victory on inflation
Theme 2 - Both sides of the Fed mandate are running stronger than expected
Theme 3 - Swiss inflation supports the markets bearish CHF view
Theme 4 - XBT hits a two-year high
Theme 5 - De-escalation in the Middle East?
Further reading and listening of note
Theme 1 - It was too early to declare victory on inflation
March is dead in the water and now the market has been forced to push the first cut from May back into June. Narrowing the spread between market pricing and the SEP dots as well as Fed rhetoric of 3 cuts this year. The inflation trend is softer, it's just not as soft as expected. The market called for 2.9% and has instead been hit with a 3.1% YoY which is softer than the prior 3.4% but just not soft enough for those betting on a March or even a May cut. If headline disappointed, core was worse as it remained at 3.9%. The MoM reading of core also rose 0.4%, the fastest monthly rise since last May.
Inflation is being driven by a re-acceleration of core services... hotel stays, airfares, medical care, owners equivalent, health insurance and transport services all kept the MoM supported (UBS CIO First Take - January CPI print with Brian Rose). Without the substantial deflation in second hand cars, apparel and other core goods sectors this would have been a truly shocking print for the market and the data dependent Fed.
In fact, the Fed are stuck in a world with mixed messages... as core remains sticky but their PCE deflator does not. "The Fed's favoured measure of inflation, the core PCE deflator, may be cooling nicely, but the mixed messages mean the Fed can't relax, with little inclination for imminent rate cuts"... (ING - Sticky US inflation reaffirms Fed caution on rate cuts). Powell and Co are extremely lucky that the economy is not screaming out for cuts. It would be much harder to buy time if the US had hit the recession so many expected by now.
As one would expect US fixed income market have repriced as the 3month trend in US2s is now well and truly broken. The US economy just isn't ready for cuts as much as the financial world wants them. 10s is up 11bps to 4.28% whilst 2s also sold off +13bps to north of 4.6% as the Fed. There will be cuts just not this side of Easter.
Source: Tradingeconomics.com
Calculated Risk - YoY Measures of Inflation: Services, Goods and Shelter
WSJ - Inflation Tracker: At 3.1%, See the Items Keeping Prices High
Steno Research - USD inflation review: Powell has to invent a new measure..
UniCredit - US CPI: A disappointing January report
Theme 2 - Both sides of the Fed mandate are running stronger than expected
The committee's confidence in the incoming data bringing inflation back to target will be dented. In fact, questions will now be asked if we're in danger of entering a "sticky" inflation regime as we commence down the "last mile" of the fight against inflation. Real wage gains, potential election year give aways, energy prices rising, housing market stabilising, strong consumer spending in Nov and Dec and of course the bumper NFP as the solid jobs market remains at historically strong levels .... The economy is cooling, still making progress towards their 2% target, just not at the pace the market had expected. This is the second straight inflation print to surprise to the upside as domestic price pressures are far from tamed. There was always going to be a high bar for the Fed to cut when the US economy was chugging along at 3% growth in Q1, now inflation has closed that window.
E-piphany by Mike Ashton - Inflation Guy’s CPI Summary (Jan 2024)
Was there any good news? Super core has drifted sub 3%, back on a 2 handle which will give the Fed some glimmer of hope but with
Source: FT
Theme 3 - Swiss inflation supports markets bearish CHF view
A trade the market has liked in February has been the contrasting divergence between the inflation outlooks that the SNB and Fed are fighting. The former has seen an aggressive deceleration in price pressure today with headline now at 1.3% vs the expected 1.7%. Core was also 1.2%, well below the 1.6% forecast. Expectations will build into the March SNB quarterly meeting that the SNB will look to adjust their FX policy and no longer look for Franc appreciation.
Source: Tradingeconomics.com
Theme 4 - XBT hits a two-year high
Steady ETF inflows, cleaner positioning after the Grayscale induced supply that force a dip below 40k and of course the natural gravitational pull towards the halving... Crypto is back and the market is chasing the golden ticket to a funded retirement .... (The Pomp Letter - Can The Average Person Retire By Buying Bitcoin Today?)
The Wolf of All streets - The Wolf Den #902 - $50000
Unchained - BTC's Two Year High
The Bitcoin Layer - $100k Bitcoin Is Closer Than You Think
Theme 5 - De-escalation in the Middle East?
Biden is pushing for a 6-week ceasefire as CIA/Mossad set to meet along with Egyptian and Qatari officials. This would be a positive surprise to the global outlook as many fear a prolonged regional crisis will maintain elevated freight costs and potentially postpone G10 CB cuts.
FT - CIA and Mossad chiefs to hold talks on Hamas hostage deal
Reuters - US, Jordan throw their weight behind Gaza ceasefire effort ahead of new talks
Steno Research - Why Gaza Ceasefire is Coming Within 2 Weeks
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