The Saturday Hark Back - 23 Sept 2023
Capturing the themes of the week when there’s more time to digest them.
A slow start to the week but ultimately the Central Bank heavy data calendar of Wednesday and Thursday delivered and a September trend finally arrived yields up, usd up, equities down...
It always starts and ends with the Fed. The SEP changes from June to September indicated that they're no longer in a hurry to cut rates. The 2024 "cuts" were amended higher by 50bps from the June signal of 100bps of easing, 2026 at 2.9% remains higher than their current long run 2.5% forecast (altho this may move to 2.75% sooner rather than later as 5 members now see this as being "higher".... it looks like the long end will lose another anchor after the BoJ YCC widening).
Whether you were a surprise hodler like the BoE and SNB, or hiking as forecast like Riksbank and Norges, the message is DM CB's are not done, as they try and temper the markets animal spirits, slow any potential easing of financial conditions by forecasting with a unified front. Their core message is data dependence, "higher for longer" and potentially a lower "CB put" as the inflation fight takes precedence over growth. (Reuters: Global Central Banks unite in 'higher for longer' credo). If anything a period of below trend growth and softer employment will be welcomed to cool economies.
Yesterday's Read on the Trading Floor focused on the narrative chasing the fixed income sell off so there is no reason to repeat it here. Since then, SCMP have reported that geopolitical reasons are one of the key factors behind a "needed" reduction in China's holdings (SCMP: Calls for China to cut US Treasuries persist despite 14-year low). However, China isn't the only CB that has reduced their exposure to UST as the Fed commenced their aggressive hiking cycle. Furthermore, the reduction in China's USD exports, and their USD sell program to support the Yuan, isnt it natural for Chinese UST holdings to reduce as they've simply fewer USD to re-invest into UST. One day we may see a geo-political "dump" of UST's as a result of potential sanctions/expulsion from SWIFT, but let's leave that to the movies ... here and now the dynamics seem less sinister, sensible and forecastable. Stories will continue to percolate that this is an active China policy to reduce exposure to the US but if anything it seems for now to be inline with expected economic developments (but that conclusion doesnt get the 'clicks').
As the market focuses on 5% for US10s, there are some downside risks to the US growth profile for Q4.
The UAW strike has the potential to increase job layoffs in the supply chain, increase inflation as used cars find a fresh bid due to lack of new car supply and of course reduce US industrial output.
Plenty of "8% mortgage rates" headlines as the market spirals to decade highs... this will slow consumption, especially retail sales as boomers are landlocked on 30yr mortgages sub 4% and gen z / millennials are stuck in the rental market as they simply cannot afford to buy their first home.
Oil trending to $100 .. a tax on household consumption as covid savings dwindle and risk maintaining the Fed's higher for longer rates projection... even longer.
The well publicised end of the student loan ammnesity ...
Ultimately, we end up at the same point, which has frustrated the macro world consistently in 2023 since FinTwit started focusing on the recessionary signal of US2s10s inversion... when will the US slow, when will the recession arrive, when will the Fed cut....?
I'll leave it to the experts, JPM Global Data Pod Weekender (Making Sense) maintain their view that the US expansion continues but have less conviction for Europe where they see growth stalling amidst rising headwinds.
Finally, there has been a lot of comments on why the USD and oil are now correlated, or why it's a problem that Biden's reduction of the petroleum reserve has occured when OPEC is running a supply deficit. Decades of government policy has made the US energy independent and this is a key determinant relative to Europe and Japan. The correlation has changed, textbooks need to be re-written, the US economy is not as vulnerable to an oil price or energy shock as decades past. Visual Capitalist highlight this well (link)... "The U.S. has been the world’s biggest oil producer since 2018 and continued its dominance in 2022 by producing close to 18 million barrels per day (B/D). This accounted for nearly one-fifth of the world’s oil supply."
If anything the "bullish oil" narrative is at risk of coming too consensus after the 30% move over the past 3 or so months. When the street all starts adjusting their forecast after a large move it normally occurs at the end of the trend not the start. OPEC will clearly be running a supply deficit to end the year, however that is against the opposing forces of recession in China, Europe and potentially the US. This energy trend is now firmly a consensus trade, after surprising many with a > $20 rally as the market was short on the back of global growth concerns at the start of the summer.
JPM Global Commodities: Bullish oil cues begin to exhaust even as Russia temporarily bans motor fuel exports
Top 10 Reads of the Week on Harkster.com :
FT: Companies ease off on buybacks as rising interest rates push up costs
Brent Donnelly: Friday Speedrun
Axios: Biden to join UAW strike and picket with auto workers
Shanghai Securities News: The “afterburner” effect of macro policies shows that the toolbox “back hand” is sustainable to exert force
Bloomberg: Americans Can Barely Afford Homes - and That’s a Problem for Biden
The MacroTourist: Accepting Higher For Longer
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:
SCMP Podcast Series: Biden's chokepoint China tech policy
Odd Lots: Steven Rattner on the UAW Strike and the Challenges of Bidenomics
JP Morgan Global FX: Rates divergence to sustain dollar strength
Macro Hive: Barry Eichengreen on Fixing the Debt Problem, Dollar Demise and Tech Impacts
Have a great weekend and keep smiling!
Looking forward to next week...
Nomura Podcasts: The Week Ahead
Scotiabank: The Global Week Ahead: Hook, Line and Sinker
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Q4, looks to be Excruciating for both Consumers and Investors......Max Pain coming up ???