Read on the Trading Floor - 19 Dec 2023
Today’s focus… #CCYWARS, where have all the bears gone?
Macro Themes At Play
Theme 1 - BoJ hold the line
Theme 2 - Wage agreements and Energy prices
Theme 3 - Fed speak or damage limitation ...
Theme 4 - The market isn't allowing the verbal pushback to spoil a good party ....
Theme 5 - When there are no bears left we should be worried
Further reading and listening of note from Harkster.com
Theme 1 - BoJ hold the line
There was a chance Ueda would surprise but as outlined in the Harkster BoJ Preview the odds were stacked in favour of them remaining on hold, waiting for the spring Shinto wage agreements. Their forward guidance remained the same - "continue expanding the monetary base until the year-on-year rate of increase in observed CPI exceeds 2% and stays above the target in a stable manner."
Good news for US10s... Japanese buyers are still around, Ueda didn't offer any more yield or reasons for cash to stay at home. It was particularly interesting to see how many times Ueda mentioned the Fed. #ccywars to reappear in 2024 as CB's fight deflation? It will be hard for the BoJ to hike at the same time as the Fed's first spring cut?
Bloomberg - BOJ Stays Mum on Rate Hike Timing as Stand-Pat Decision Hits Yen
Reuters - BOJ keeps ultra-loose policy, focus shifts to exit timing
Nikkei - BOJ stands pat, keeps easing bias amid tightening expectations
- - Should the BoJ end Negative Rates?
Bloomberg - BOJ Set to Stay Outlier as 2024 Hike Seen in Contrast to Fed
ZeroHedge - Yen Plunges After BOJ's Ueda Admits It's "Difficult To Exit Negative Rates", Shattering Normalization Hopes
Theme 2 - Wage agreements and Energy prices
For CB's (well for those that have yet to pivot like the Fed), all it will take is an oil bull market (are we at range lows sub $70?) as well as decent wage gains in Q1 2024 to get headline inflation higher.
In Japan, the Shinto wage agreements have not been reached. They normally take place in the spring, and like the ECB / BoE, are a key component for a decision to change track.
FT - Hawkish ECB rate-setter says wage ‘slowdown’ key to timing of policy shift
FT - Bank of England awaiting clarity on wage growth before interest rate cuts, says deputy governor
Former ECB-er Vitor Constancio thinks markets are wrong...
Source: Vitor Constâncio on X:
This week we've already seen attacks in the Red Sea impact the price of oil, combined with record low positioning is there a bull case brewing for oil into Q1? Why is the market so bearish on oil when a "no landing" scenario is arriving in the US.
Steno Research - Energy Cable #50: Oil back in fashion - Steno Research
Bloomberg - Hedge Funds Slash Bullish Bets on Crude Oil to Record Low
Theme 3 - Fed speak or Damage limitation ...
Mester / Williams / Bostic / Goolsbee .. they've all pushed back on market pricing although Daly did point to a more balanced outlook, a focus on not just inflation but a softening jobs market. (WSJ Fed Official Says Rate Cuts Could Be Needed Next Year to Prevent Overtightening)
Unfortunately for the Fed, the genie is out of the bottle and there is no going back. Lagarde was steadfast in her point of view that the ECB had not even discussed cuts, whereas Powell made it clear that they had started to talk about rate cuts. As a result, we've flipped from a curve with a 25bps hike and 50bps of cut to no more hikes and 75bps of cuts... Bloomberg - Fed Chair Jerome Powell’s Pivot Is a Pretty Big Gamble
Source: @johnauthers
Theme 4 - The market isn't allowing the verbal pushback to spoil a good party ....
Its euphoria in assets with Vix @ 12.5, CNN Fear and Greed (Extreme Greed = 79) and unprofitable stocks outperforming. The rest of the market caught up with Mag7 rather than the latter gapping down. It’s an everything rally, that shorts detest (FT - This is a Bad Santa Rally)
The race to raise forecasts = the chase is on
Bloomberg - Fed’s Policy Pivot Is Forcing Stock-Market Skeptics to Become Believers
Bloomberg - Bond Market in 2024: Fed Moves Force Rethink on Predictions
Torsten Slok - "The Fed pivot combined with a one standard deviation decline in VIX, a 60-basis point tightening in IG spreads since March, and a $20 decrease in oil prices since September will boost GDP growth by 1.5% over the coming quarters, see chart below."
Source: Apollo Academy - Fed Pivot Pushing the US Economy Back to No Landing Scenario
Theme 5 - When there are no bears left we should be worried
A warning from
... the soft landing is consensus and almost priced, the risk is now it doesn't arrive - Always Reflexivity
Source - The Next Economy by Florian Kronawitter
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