The Saturday Hark Back - 06 Apr 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 - MAGA US data does not support the USD
Theme 2 - Have we learnt anything from all of the Fed communique this week?
Theme 3 - High Alert
Theme 4 - Commodities
Theme 5 - The campaign trail
Theme 6 - ECB the next man up...
Theme 7 - Going long China?
Top 15 Reads of the Week on Harkster.com:
Top 5 Podcasts of the Week:
The Week Ahead
Theme 1 - MAGA US data does not support the USD
US labour force shows no seasonal weakness, ISM Services focused the market on a strong and confident economy with prices paid and employment component also higher. March marked the first monthly expansion for US manufacturing since September 2022 with the PMI rising > 50. As a result, US fixed income ended the week on the wides with 2s and 10s testing 6month range highs. However, despite the market taking 2024 pricing below the Fed dots, there was limited feedback into the USD. Will next week's CPI manage to do what NFP couldn't for the USD?
10s testing 4.35/40% and 2s 4.75/80%
Source: Tradingeconomics.com
Theme 2 - Have we learnt anything from all of the Fed communique this week?
#1. They're a few months from a cut, #2. the board needs more data to be confident, #3. there will be no cuts if there is no progress on inflation, #4. watching AHE to ensure the pace of wage gains is commensurate with hitting their 2% inflation target and #5. contrasting views on housing inflation. Effectively we're none the wiser. Everything we heard this week from the Fed we had received from their minutes and/or JPow's press conference whilst the market was already focused on the Labour market over inflation (thanks to JPow).
The Fed are simply marking to market, as the US economy continues to outperform the RoW, there is no "urgency" to cut. 3 cuts could become 2 and then 1, but as long as volatility remains low in fixed income it will be difficult for the bond vigilantes to get control of the market. That will only come if Fed become ignorant to 'sticky' inflation. With PBoC potentially buying bonds, ECB close to a cut and the BoJ still buying unlimited bonds, there is a natural dampener on duration globally. We're not at the stress levels like H2 last year when the BoJ widened their band and induced widespread fixed income vol as Japanese investors asked for more yield abroad to compensate for higher levels at home.
Reuters - Fed's Kashkari says 2024 rate cuts under threat if inflation continues to stall
Bloomberg - Fed Speeches: Latest on Remarks From Harker, Barkin, Kashkari, Others
FT - Fed’s Loretta Mester raises long-term rate outlook on strong US economy
Bloomberg - Fed’s Daly Says Three Rate Cuts Is Reasonable Baseline for 2024
Steno Research - Out of the Box: 6 reasons the Fed will be hiking rates in 2024
Bloomberg - The Fed Is Wrong About How Low Interest Rates Will Go
Steno Research - Steepener bets back on?
Bloomberg - Markets Are Seeing a Cyclical Recovery, Not a Landing
June still 50/50 despite the Fed chatter and strong NFP...
Source: CME FedWatch Tool
Theme 3 - High Alert
Tensions have escalated in the middle east as Biden/Netanyahu discuss increased aid for Gaza, Israeli embassies have been put on high alert, UAE cut ties with Israel, Israel cancelled all leave for defence forces and the fear of a retaliatory attack from Iran gas led to mounting pressure and/or, the buying of risk hedges. Crude > $91 / $92 could well be a trigger for further unwind of risk positions as the market wonders what the Iranian counter response will be, where will they hit and what will the magnitude of their attack be...
Axios - Israel warns of consequences to any attack from Iran
Axios - Biden calls for "immediate ceasefire" in tense call with Netanyahu
Axios - Israel agrees to increase humanitarian aid delivery to Gaza under U.S. pressure
Steno Research - Something for your Espresso: An eye for a head?
Theme 4 - Commodities
Commodities have taken the lead from AI as the key macro driver over the past week. Shouldn't the currencies of those producers also benefit? Steno Research and Brent Donnelly am/FX have highlighted the bubbling short USD trade as global manufacturing rebounds, XI opens his doors to US CEO's, Gold hits all-time highs streak and silver/copper join the rally. In fact, NDR's Daily Commodity Sentiment Model is at its highest (most optimistic) since March 2016.
In particular, Q2 has started with a wave of stronger than expected manufacturing PMI prints. The question is whether one should believe the soft data, will this time be different? The surveys have clearly been distorted by the covid reopening / fiscal impulse / near-shoring regime that we've passed through, but with FCI so soft, why would manufacturing not be improving? In addition, we're another quarter away from the re-opening so the surveys should also be normalising.
Steno Research - https://stenoresearch.com/watch-series/trade-alert-playing-the-last-reflation-saloon-and-nok-technicalities/
Brent Donnelly am/FX - US Unexceptionalism
NDR - NDR: Daily Commodity Sentiment Model - A Surge in Optimism
Source - NDR via Daily Chartbook
Theme 5 - The campaign trail
Biden is winning the fundraising battle over Trump whilst on this side of the pond, there is no way Rishi is making a comeback in this election if pop culture is turning on him (The Telegraph - How Rishi killed off the biggest trainer trend in one fell swoop). This is the exact opposite reaction that Obama, Trump or even Tony Blair had as they rolled a wave of social media support (or in Tony's day The Sun / Red Tops).
MS Thoughts on the Market - U.S. Elections: Potential Implications for Businesses and Consumers
Morningstar - DJT Stock: Trump Media Isn’t a Meme Stock, It’s a Cryptocurrency
FT - Joe Biden claims big campaign money lead over Donald Trump
FT - Sunak’s unpopularity comes down to simpler reasons than often thought
FT - The 2010 squeeze on resurgent Liberal Democrats tells a cautionary tale
Theme 6 - ECB the next man up...
ECB's survey of median expectations for inflation over the next 12 months decreased to 3.1% from 3.3%. Now at its lowest level since Feb '22 and the start of Russia’s invasion of Ukraine. The 3yr ahead remained unchanged at 2.5%. (ECB Consumer Expectations Survey results – February 2024). Along with German inflation printing lower and in line with expectations (down to 2.2% from prior 2.5%), following on from the gap down in French data, the Q2 cut from the ECB after the SNB already cut has energised the RV rates trade (REC EU2s vs PAID US2s). However, it's been a fixed income play rather than an FX trade. Despite soft Eurozone inflation and bumper NFP, EURUSD has drifted back into range
ECB members have guided us to a Q2 cut and the data has backed it up. In the US it's hard to argue the same regime has occurred. The resilient US data has the Fed back pedalling a little (Waller/Powell) whilst Bostic has already indicated that 1 cut maybe enough. As a result, ING highlight that the rate spread (around 145bps) is now at the most supportive for the USD since Dec 2022. This week's data once again softened the case of hawks to hold out much longer. April still feels a touch early for most ECB watchers, but the market will keep a probability of an early cut.
Econostream - ECB’s Holzmann: ‘Quite Likely’ We’ll Cut Rates in June, if Data Justify It
Bloomberg - Euro-Zone Economy: ECB Should Put Rate Cuts on Its April Agenda
ING - Eurozone inflation drop is encouraging, but don’t expect an April rate cut
Bloomberg - Rate Cuts: Points of Return’s Year of Descending Dangerously — Divergence
Macro Musings - Isabel Schnabel on the ECB and its New Operational Framework
I enjoyed reading this article in the FT, Southern growth spurt creates two-speed eurozone economy. It reminds me of a time in 2012-14 when the world was focused on the PIIGS, Athens was on fire as locals protested and the breakdown of the Euro felt a real possiblity. Here we are a decade on and its the southern states outperforming Germany. Everything goes in cycles, you just have to be around long enough and/or remain solvent enough to see them ....
Theme 7 - Going long China?
On a day when Tesla miss, Xiaomi it's cheaper alternative has hit the headlines as it's $30k car looks a gamechanger in the EV sector and will further compress pricing in the sector. Xi's QE comments are also garnering a lot of attention, the market after all loves a QE story let alone the big fiscal impulse that everyone has been hoping for from the East. The headwinds for Chinese assets are steadily reducing and some funds have started to rotate or rebalance away from the long India / Short China trade.
The MacroTourist by Kevin Muir - HUKOU REFORM: THE NEXT CHINESE STIMULUS?
Bloomberg - Xiaomi SU7 EV Is Proving a Winner With Investors in Hong Kong
Bloomberg - Xi’s Speech Suggests PBOC May Start Trading Government Bonds
SCMP - Xi Jinping to China’s central bank: restart treasury-bond trade, after 2-decade hiatus
SCMP - China’s central bank keeps ‘cautious’ in bond trade despite Xi Jinping’s mandate
Bloomberg - Investors Who Bought India, Sold China Are Starting to Unwind the Trade Strategy
Nikkei Asia - Biden and Xi discuss TikTok, South China Sea and de-risking in call
SCMP - Janet Yellen in China: overcapacity high on the agenda as secretary takes swipe at exports
FT - Tesla shares sink after sales fall more than expected in first quarter
Top 15 Reads of the Week on Harkster.com:
FT - Global supply of equities shrinks at fastest pace in decades
The NY Times - Want to Invest in SpaceX or Stripe? There’s a Fund for That
Coindesk - Crypto AI Projects Would Need to Buy Chips Worth Their Entire Market Cap to Meet Ambitions
Saxo Bank - The Ai and obesity rally is defying gravity
Man Institute - Honey, I Shrunk the Trend-Following
Morningstar - 10 Best-Performing UK Dividend Stocks for the Quarter
Nordea - Major forecasts: On track
Russell Clark - MARCH NEWSLETTER AND REVIEW - A good month for inflationary assets.
FT - In charts: the quarter when central banks wrong-footed the markets
Man Group - Views from the Floor - Going Against the Grain
Bloomberg - Crash or Soar? Traders Are Preparing for Stock Market Extremes
Compound Quality - 10 Quality Stocks
Bloomberg - BOJ Governor Ueda Says Chance of Hitting Japan Price Target to Rise From Summer
ING - Bank of Canada preview: Why the BoC could open the door to a June rate cut
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:
Odd Lots - Steve Eisman on the Three Big Macro Stories of Our Time
Unchained - Is the SEC Preparing for a Fight Against Ethereum?
Real Vision - Is Crypto Leading the Market Lower? | with Tony Greer
HSBC - Under the Banyan Tree - Nvidia, Bitcoin and enough cement to turn Britain into a carpark
Unchained - Is the SEC Preparing for a Fight Against Ethereum?
The Week Ahead
Looking forward to next week...
Macro Hive - The Week Ahead: Could the BoE Add Dot Plots?
Nomura - The Week Ahead – US CPI, ECB Meeting and FOMC Minutes
ABN Amro - The week ahead
👏 If you found this briefing helpful, please show the desk some appreciation by giving it a ‘Like’ or a ‘Comment’ at the bottom of the page.
The information provided in this post is for general information purposes only. No information, materials, services, and other content provided in this post constitute solicitation, recommendation, endorsement or any financial, investment, or other advice. Seek independent professional consultation in the form of legal, financial, and fiscal advice before making any investment decision.