The Saturday Hark Back - 04 May 2024
Capturing the themes of the week when there’s more time to digest them.
The Hark Back
The key narratives that drove markets last week:
Theme 1 - Stagflation or Goldilocks?
Theme 2 - Without comment, MOF / BoJ call the top in US2s
Theme 3 - BoJ leads ACB's vs USD Strength
Theme 4 - Commodities rolling over?
Theme 5 - Sunak Survives (because nobody wants the top seat)
Theme 6 - Who pays the QE bill?
Theme 6 - European data keeps ECB in play for June
Theme 7 - Last week's AI stories
Theme 8 - Did you buy the dip in SPX?
Top 10 Reads of the Week on Harkster.com
Top 5 Podcasts of the Week
Week Ahead Preview
Theme 1 - Stagflation or Goldilocks?
The week started with the bond vigilantes on the front foot given the re-acceleration of inflation in Q1, uber hot wage prints (ECI and Unit Labour Costs), sticky services inflation, moderate growth, PPI pressures and the Fed speakers reacting to the stalled trajectory of inflation. However, that's where things ended and with bond vigilantes ready to attack, looking to take US2s to through 5% we ran into softer than expected activity surveys and a moderate NFP data set. Thus last weeks stagflation is this week's goldilocks. Moderate growth and inline to softer inflation would suffice to keep assets performing in Q2 especially if the Fed are unwilling to run things hot.
QRA - Yellen knows how to delicately tell the market more supply is coming, but all will be ok.
Fed - On hold or cutting... JPow did an excellent job to acknowledge the pop in spot inflation but at the same time lower the probability of a hike. 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.
ISM Manufacturing PMI drops back into contraction (Mfg: 49.2 vs exp 50.0 and prior 50.3) but there were worryingly price spikes (Prices: 60.9 vs exp 55 and prior 55.8)
AHE - softer than expected (0.2% vs exp 0.3% MoM) given the hot ECI/ULC prints. Thus a September cut is back on the cards as the weaker than expected headline NFP (175k vs exp 243k) increases the probaility of a pre-election move.
Finally, Cleveland Inflation Nowcast released on Friday has MoM PCE at 0.0% for May and Core PCE at 0.23%.
As a result we end the week US 2s rallying and confirming a failure at 5.00%.
Source Tradingeconomics.com
Steno Research - Time for liquidity bets
ING - Weaker US jobs numbers boost expectations of a September rate cut
Apollo - Goods Inflation Rising
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
Saxo Markets - FOMC Meeting Takeaways: Why Inflation Risk Might Come to Bite the Fed
Steno Research - A growing acceptance of above target inflation
Theme 2 - Without comment, MOF / BoJ call the top in US2s
The real fireworks came from Asia as it appears Japanese authorities went multiple times to market in thin holiday conditions (still no comment from them). Following the BoJ, the erratic spot moves we saw lower on Friday and then on the Wellington open through 160.00 heightened the chance they would supply USD and stop the "one way bet" on JPY weakness. 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).
Have the BoJ / MOF nailed the turn in the US economy again? Just like their USD supply in Sept/Oct 2022 was when US data dropped lower. They've most certainly benefited from US2s rolling over and failing at 5% and breaking the 2024 uptrend. Extreme length in USD positioning is getting squeezed by the moderate data and of course the MOF supply. It will be interesting to monitor the IMM positioning next week. This week the MOF won the battle, but the war will only be won if US data does turn south and the Fed cuts.
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?
MacroHive - G10 FX Weekly: MoF Makes Selling USD/JPY Rallies Compelling
Brent Donnelly am/FX - USDJPY Chartfest
Reuters - Explainer: What are Japan's tactics based on latest suspected yen intervention?
Bloomberg - Point72’s Drossos Says Japan Disrupting One-Way Bets Against Yen
Theme 3 - BoJ leads ACB's vs USD Strength
As the USD strengthens, Asian central banks will be forced to run down reserves. Selling USD back into the market to steam ccy deprecation and maintain their fixing pegs. As a result, this closes a natural feedback loop into UST. There have been many pieces written on gold accumulation and China's demand for UST waning since the game changed on reserves when Russia rolled tanks into Ukraine. However, all ACB's will have fewer USD to park in USTs as they're forced to increase their intervention policy. As a result, what happens in FX has an impact in fixed income. Furthermore, if BoJ are forced to hike rates aggressively (15bps in July and 25bps in Oct), what impact will it have on US duration? If the Japanese are getting 40bps more at home, they would want at least that abroad. A hiking BoJ with US hitting a stagflationary patch will be an ugly combination for global assets.
ING - Rates Spark: What’s brewing in Japan should in the end push rates up
SCMP - In Asia, US dollar’s growing strength gives rise to stability concerns, suspected rate intervention
Theme 4 - Commodities rolling over?
Is there some good news ahead for inflation? Cocoa, Oil, lumber, coffee.. pick a chart that was soaring like an alt-coin through Q1 and in to April have all hit gravity and are reverting back to trend. H2 base effects do turn into a headwind for inflation given the deflationary reset we saw at the end of last year. However global central banks will be happy that the exuberant input prices that were flooding through the economy in April have for now eased.
Softer oil = softer 10s
oilprice.com - Oil Prices Fall to 7-Week Low as Market Pressures Mount
Source: Tradingeconomics.
Theme 5 - Sunak Survives
The polls have the Cons lower than when Liz Truss was competing against a lettuce. The local elections were bad, but no worse than expected. However it seems they gave very little for the right wing to galvanise around and take on No 10.
I'm no Dominic Cummings but given the Cons are getting squeezed by Labour and of course Reform, wouldn't the next leader be better off letting Rishi lose the election and then rebuild from the ashes on the opposition bench. Afterall, nobody wants to be a "new boiler" in number 10 for just a few months before Starmer comes in. Although if one does accept the post there are of course the Public Duty Costs Allowance (PDCA) that is currently set at £115k (BBC - Will Liz Truss get a pension? The perks former prime ministers get).
Telegraph - I won’t be installed in No10 ‘like a new boiler’, says Mordaunt
FT - Sunak’s instincts are leading the Tories to ever worse defeat
FT - Tory plot to topple Rishi Sunak fizzles despite crushing election losses
Telegraph - The Tories must change course, or be wiped out
Theme 6 - Who pays the QE Bill?
On both sides of the Atlantic, the role of the tax payer, the central bank and politicians are intertwined and key to the campaign trail. Nobody complained about the money CB's made governments during the the boom times of QE, but now the bill has finally arrived after the historic hiking cycles of the past few years. Thus CB independence is under threat as nobody wants to admit that they need to hike taxes to take money out of the system during MMT.
Reuters - Bank of England tweaks lifetime loss estimate for QE programme
Telegraph - Jeremy Hunt urged to review Bank of England’s independence
Fed Guy - Chair Trump
Theme 7 - Last week's AI stories
The Next Economy by Florian Kronawitter - Service-as-a-Software
Bloomberg - Amazon Posts Strongest Cloud Sales Growth in a Year on AI Demand
FT - Microsoft to power data centres with big Brookfield renewables deal
FT - The Financial Times and OpenAI strike content licensing deal
Morningstar - Markets Brief: AI Leaders Excel in Earnings Season...
Bloomberg - Meta's AI Spending Plan Spurs Pushback From Investors
ZeroHedge - Unit Labor Costs Soar In Q1 As 'AI Productivity Boom' Fails To Show Up
Theme 8 - Did you buy the dip in SPX?
Expectations are everything in trading. The equity market feared JPow would confirm a hike was back on the cards, he didn't and instead stuck to "higher for longer". A term that last year caused shudders across the PM world, was taken as "dovish" relative to a hike and the risk that the Fed were not done. With Fed showing their dovish core, equities seem to be more about scarcity than products. If you struggle with sales in China, well just buy your stock back... what a simple game! Apple have shaved ~40% of shares from supply since 2013 - same year QE kicked in. Similarly Tesla, another beaten down member of the Mag 7 enjoyed an excellent week as Musk's FSD partnership with Baidu as well as agreeing to sufficient data security measures with Premier Li have added fuel to last week's post earnings rally.
Apple Shares Outstanding...
Source: @SamanthaLaDuc
Bloomberg - Apple Rallies on Upbeat Forecast, Record-Setting Stock Buyback
Compounding Quality - Adobe
WSJ - Cheaper Teslas? China Says 'You Ain't Seen Nothing Yet'
FT - Elon Musk’s Tesla strikes deal with China’s Baidu for driver assistance
Top 10 Reads of the Week on Harkster.com:
Nordea - CNY: Still preferring stability?
Oxford Economics - South Africa: Elections 2024 | ‘ANC & friends’ election scenario
FT - There are two Donald Trumps — but which is the real one?
Bloomberg - Record Cash Demand Spurs Speculation BOE Will End Bond Sales
Apollo Academy - US and Europe Decoupling
Nikkei Asia - China's EV overcapacity spurs global fears of more price cuts
Quoth the Raven - If Treasury Bonds Hit 5%, You're Gonna See Some Serious Shit
WSJ - Back to the '90s? Jamie Dimon Raises the Prospect of 8% Interest Rates
The majority of these links appear in our new "HarksterPro - Intraday Market Colour" channel. If you click on "Select Channels", you should find under "Added Recently" our latest additions to the app. @HarksterHQ will use this new channel to flag good articles/sources of content as well as headlines/market moving events.
Top 5 Podcasts of the Week:
The Macro Trading Floor - A New Fed Put?
The Rest is Politics - How to buy the White House
The Market Huddle - The Rules Are Changing (guest: Warren Pies)
UBS - Around the Horn: Monthly Fixed Income Roundtable with UBS Asset Management
The Week Ahead
Looking forward to next week...
ING - Asia week ahead: China’s trade data and an upcoming RBA decision take the spotlight
ABN Amro - The week ahead: 6 - 10 May 2024
Newsquawk - Week Ahead 6th-10th May: Highlights include RBA, BoE, BoJ SOO, ECB Minutes, UK GDP and Canada jobs
Nomura - The Fed Pushes Back
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