Read on the Trading Floor - 19 April 2024
Today’s focus… known unknowns, CB speak, Erdogan may have been right and much more
Macro Themes At Play
Theme 1 - Restraint, de-escalatory, limited, nerves, known unknowns, what ifs...
Theme 2 - A wave of CB speak this week, with the Fed the only one adjusting their message
Theme 3 - What if Erdogan was right?
Theme 4 - Week Ahead Previews
Further reading and listening of note
Theme 1 - Restraint, de-escalatory, limited, nerves, known unknowns, what ifs...
The market has spent the week waiting for Israel's response and overnight call levels triggered as Israeli drones have reportedly hit a military base in the middle of Iran.
The calculus is continuously evolving and the ball is back firmly in Iran's court.
#1. The west are trying their best to ease tensions
#2. Domestically, the perception from afar is both Israeli and Iranian citizens have shown support for their governments/regimes
#3. The current lack of a nuclear deterrent distorts the West's thinking on Iran/Israel relative to Ukraine/Russia
#4. Will Iran retaliate once again or show restraint?
#5. Who benefits from a war?
The current "perception" is that the Israeli strike appears to have matched Iran's in terms of target, scope and damage. The verbal response from the Iranian regime has been controlled, limited and has crucially not called for revenge (yet). So, have we seen the last step in an "escalate to de-escalate" tit for tat between the nations?
Bringing it back to the markets. The continued sense into the weekend is hedge and/or unwind now, think later... There will be a natural paralysis to add new risk into the weekend. The rising tensions in the middle east have added to the April slide in assets as Fed rhetoric has shifted on the back of the inflation story, leaders in the Mag7 have come under pressure due to individual stories (e.g. Tesla and Apple), positioning and sentiment was frothy, tax season has been well flagged, buybacks lag during earning blackouts, the probability has shifted away from a soft landing towards a rekindling of a "higher for longer" induced hard landing and of course the mkt is nervous of the known unknown risks in the middle east ... cash, gold and bonds are king as investors look for certain returns in an uncertain world?
However, if and it is a big if, we've seen peak tension between Israel/Iran and the current market consensus is correct that both sides have followed the correct playbook to de-escalate the situation with their actions, then the blowout highs in USDMXN, capitulation hammer lows in equities maybe a short-term nadir in risk sentiment.... Time for the second half of April seasonals to kick in?
Brent Donnelly am/FX - Blowoff
Capital Spectator - Is Israel’s Strike On Iran The End Or The Beginning?
Theme 2 - A wave of CB speak this week, with the Fed the only one adjusting their message
BoE - Bailey still nudging towards a June cut as the UK enter a "pronounced period" of disinflation...
As an aside, Hunt has been looking for a cut to boost household confidence before an Autumn election whilst Bailey is lucky to still be in a job according to Liz "making headlines to sell my book" Truss
Bloomberg - Jeremy Hunt Says Rate Cuts Would Lift UK Mood, Hints at Autumn Vote
FT - Liz Truss considered sacking Andrew Bailey as BoE governor after mini-Budget
BoJ / MoF - Comments vs fundamentals.
Verbal intervention continues as local authorities walk through their back catalogue of pre-intervention warnings... "JPY must match fundamentals", "decisive steps" (last used in Autumn 2022), "high sense of urgency", Ueda also indicated they're keeping a close eye on JPY and its impact on economic and price developments.
With the US economy on fire, rates selling off, inflation expectations rising, will the BoJ sell USD? BoJ are normally excellent at calling turns in the US business cycle, even though the expectations are rising that they will sell USD, the MAGA strength of the US economy is a key headwind to the rationale that they will enter the mkt sooner rather than later. Why would they not hike rates and narrow the interest rate differential story rather than selling $20bln that the mkt will easily consume, bounce back and test them again.
ECB - see you in June
Econostream - ECB’s Villeroy: Confident Enough to Cut Interest Rates in June
ECB's Isabel Schnabel - From laggard to leader? Closing the euro area's technology gap
FT - Isabel Schnabel says European Central Bank could benefit from Fed-style ‘dot plot’
Fed - we've heard from Mester, Powell, Bostic, Williams, Waller, Jefferson, Daly et al
The message from the Fed has flipped from their last meeting when the infamous dots forecast 3 cuts in 2024 to "no urgency" to cut. In the space of a quarter, they've lost confidence in their Q4 pivot and the disinflation trend. As Daly said earlier this week, "the worst thing to do is act urgently when urgency is not required." In fact, Williams went a step further and mentioned that dirty word "hike". The market had been running on the assumption that tail was dead, rates had peaked and the next move was not just a cut but a cutting cycle. Now the risk is re-ignited that we could see fresh rises if the data delivers, this sticky inflation reverberates through H2.
This is where the tensions in the middle east adds an extra layer of uncertainty. Freight disruption, commodity supply and gas prices all feed into higher inflation whilst the potential tariff war that Biden/Trump will dual over during the election campaign will also feed the inflation beast down the line.
Reuters - Fed policymakers agree: there's no urgency to cut rates
PauloMacro - It's one toe stub after another at the FOMC
SCMP - China unloads more US Treasury bills as odds of Fed rate cuts grow slim | South China Morning Post
WSJ - Fed Chair Jerome Powell Dials Back Expectations on Interest-Rate Cuts
Theme 3 - What if Erdogan was right?
For years western financial commentators laughed at Erdogan's pontification that interest rate hikes were fanning inflation in Turkey's economy. However, as the Fed pivots from the pivot, the same question is now being asked in some of the literature flowing through Harkster (your research inbox).... Are interest rates stimulating the US economy? Households simply have more money now than they did before covid....
The Macro Trading Floor - What if Hikes are Stimulative?!
Steno Research - Free Macro Nugget: Cut rates and inflation will go down
Bloomberg - Booming US Economy Inspires Radical Theory on Wall Street
Theme 4 - Week Ahead Previews
Nomura - How Long Can U.S. Strength Persist?
ABN Amro - The week ahead
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