Global Macro Strategist
Summary: Trump likely looking to force the Fed's hand for a more aggressive cut on their Sep 18 meeting - yet bear in mind despite some vocal members of the Fed arguing for 50-75bp cuts, on the actual FOMC members we had two abstainers last time who though the Fed did not need to cut by 25bp. A lot on in the wk ahead from Final PMIs, US ISMS, US NFP & AHE, Aus 2Q GDP & of course rate decision from the likes of the RBA & BoC. All on the backdrop of the next episode between the US & China
Macro Monday WK 36: Trump To Force Fed’s Hand…
Mon 2 Sep 2019
So much for helmets on, seat belts strapped & get in the tank – US & EZ equities had one of their best wks last wk!
Largely due to China keeping the door open for a Sep trade talks meeting. Again, getting a sense of déjà vu that has been a theme of this entire bull market cycle, what does it take to take this market down – the answer seems to be nothing. The likely take away from all this is perhaps summarized in three viewpoints:
1. Just wait, give it time – the equity bull market does not realize the pilot has bailed & the engines have fallen out the craft… or
2. The Meta-Trend (which we have been obsessed with on MM) is for the secular trend in global yields to keep falling to new all-time lows, in turn structurally dampening volatility & in turn synthetically causing the asset inflation in the usual suspects (Equities, RE, PE, VC) etc.
Basically the theme of too much excess liquidity from QE (plus lack of real structural Fiscal Policy response) is not only still much in effect (the Tapering was but a head fake), its going to take on a whole new level… or
3. Just buy the dip, its worked beautifully since 2009… we’ve had c. only 3, -19% to -20% peak to trough pullbacks in the S&P 500 during that period
On top of which 2/10s inversion suggests US recession in the next 18-24 months if history is anything to go buy. Very dynamic, challenging & interesting times – times like these I envy my long-only / have to be invested cousins.
Wishing everyone a phenomenal, smooth, profitable & lucky wk up ahead.
Summary of Prior Week:
- Geo Politics: Going into the labor day long wkd in the US, Sun saw the latest round of Tariffs implementation date
- Did Dudley totally lose it last wk? Yet he has a great point, independence may operate in a vacuum, yet the economy is far from a vacuum. This is the issue globally, MP is a slave to a lack of political will & constructive policies
USD & Yuan: Pace of USDCNY fixing decelerated post +34bp move on Tue 7.057 to 7.081. Fri fixing was at 7.0879, c. +6% from the c. 6.70 lvls in 1H19
- FI: Pretty much only heading one way on G10 countries, but yields were wider on some EM names for the wk. 2nd wkly close with US 2/10s inverted
- FX: Resurgence in USD strength as we get a close on EURUSD below the big 1.10 level, as the cross finished -138bp with Laggard expected to cont. Draghi’s QE for life campaign
- CMD: +5.5% & +9% on Silver & Platinum, yet Nickel stole the show with a +14% uplift for the wk, now +68% YTD
- EQ: Big wk up on EQ, most of this really caused by Thu when CH comments on being open to Sep mtg, not looking to retaliate (for now) on Trumps latest +5% Tarif increase, yet also stating they got the batman tool belt
- Vol: Seeing big VIX moves for very small moves in US equities (Aug 30, 27, 22). So whilst down c. -4.5% for the wk, we did have a +6.2% move on Fri to 19.00 – possibly linked to the long wkd?
COT Report: [@Ole_S_Hansen]
- The Paradox continues – cont. decline in net USD long positioning, as the dollar index breaks to new highs. And the US trade weighted index makes all-time new highs!
- Same trend, net-exposure in commodities continues to fall off a cliff, down over another 50%. Note silver net-long positioning not yet at one year highs… it will almost certainly get there & join its cousin gold.
- Final PMIs, US NFP & AHE | RBA | BoC | AU 2Q GDP
Central Banks (SGT):
- #WK 36 – RBA 1.00% e/p (03) CL 2.00% e/p (04) BoC 1.75% e/p (04) RU 7.00%e 7.25%p (6) KZ 9.00%p (9)
- #WK 37 – MA 3.00% p (12) TU 19.75%p (12) ECB -040p (12)
- #WK 38 – BZ 6.00% p (19) FED 2.00%p 2.25%p (19) SNB –0.75%p (19) NO 1.25%p (19) BoE 0.75%p (19) BoJ 0.75%p (19) SA 6.50%p (19) ID 6.50%p (19
Fed Speakers (SGT):
- Rosengren, Williams, Kashkari, Evans, Powell (7, 00:30 - Zurich on Economic Outlook)
- Yest was start of CH tariffs from Fri Aug 23, which included the counter tariffs from Team Trump, US Sep 2 Hol (Labor Day – long wkd), Carney (4)
- Expect more Trump comments on stronger USD & Fed not helping
- US: Mfg. PMI 50.0e 49.9p, ISM Mfg. 51.2e/p, Beige Book, ADP, Serv. PMI 51.0e 50.9p, ISM Non-mfg. 54.0e 53.7p, Factory Orders, US NFP, US AHE
- CH: Over the wkd official PMIs came in at 49.5a 49.6e for MFG & 53.8a 53.7e serv., Caixin Mfg. 49.8e 49.9p, Caixin Serv. 51.7e 51.6p
- EZ: Mfg. 47.0e/p Serv. 53.3e, GER mfg. 43.6e/p, GER Serv. 54.4e/p, GER Factory Orders, EZ 2QF GDP 1.1%e/p
- JP: Capital Spending, Mfg. 49.5e/p, Monetary Base, ACE, Leading Indicators
- UK: Mfg. 48.0e/p, Serv. 51.0e 51.4p, Inflation Report Hearings
- NZ: Milk Auction, ANZ CMD prices
- AU: AIG mfg. Index 53.1a 51.3p, RS, CA, 2Q GDP 1.4%e 1.8%p, TB
Potential Ripple Effects (Slide 10) – Reflections on wk ahead & state of markets…
- There is a lot on this wk & a lot to discuss, however the most important thing is that Trump is forcing the Fed’s hand…
- Trade War escalation is still the theme song of the markets. The Olive branch that China left open from Wed/Thu last wk… suggest a Sep mtg is still open (for now)
- Trumps wants Americans talking about him on Labor day wkd! And we all know he has painted the Fed as a scape goat for strong USD (he partially not wrong)
- Dudley intentions were sound, yet execution & unintended consequences from it… are going to have the opposite effect… ongoing institutional dilution of the Fed
- Now a 50bp cut could be a given in KVP’s book (still only seeing 16% on -50bp with 84% on -25bp)… Really all about how the next 16days play out (plus ECB Sep 12)
- Note whilst some Fed members have been vocal about 50bp & 75bp cuts, in rgds to actual FOMC voting members two abstained for no cuts last time
- Again forget tariffs… whether they get worse or resolved… remember the meta trade is for lower global yields…
- If you think USTs at 1.50%, bunds at -70bp & JGBs -27bp are tight. Then KVP askes you think where yields are, once the US / World is in a global recession? And where do you think gold 1533 & silver 18.62 are?
- Think about where we are on the tail end of the longest expansion recorded in modern times. Again not saying we cannot see a squeeze from 1.50% to 2.00% in USTs (even though currently struggle to see what can bring that about), but structurally this puppy is only heading one way
- So again think business cycle, massive QE already in the system, the fact that soon it will be in the US government’s interest to keep rates forever going lower given the growing deficit (think Japan), think BoJ ahead of the curve – with over 100% of their BS larger than Japan GDP (V.s say Fed or ECB), think that Lagarde’s IMF already put our a white paper on negative rates & many Central Bankers now see it as a viable pathway that is a natural tool they can use, think that the rhetoric on longer dated 50-100yr bonds continues to tick up – not just the US, yet now even Sweden is talking about it.
- Think that it’s a relative world, so if you are not playing the race to the bottom game, you will one day wake up with one of the strongest currencies in the world & interest rates higher that everyone else, which may be likely to choke the economy
- Further yield curve inversion as 2/20s close for two consecutive weeks in inverted territory – generally this signals a 18-24 period before a US recession sets in if history is any guide (perhaps budget around a 1-2yr timeframe, so basically 2021 all else being equal… note its never all else being equal!)
- Then why are Equities still up here? After all… YTD in USD we have SPX +17% Nasdaq +20%, China +21%, ASX +12%, Nikkei +7%, DAX +8.4%...
- Early days, still 4m to go to the end of the year & plenty of volatility left: Hong Kong, Further tariffs on US/CH, SK/JP, ME, US tariffs on EZ, BREXIT
- Meta trend & trade is all about the Fed being forced to cut, pushing yields further down, dampening vol & inflating other assets (for now)
Greater China Focus (GST: slides 11 to 13) – Focus on RMB Market, Fixing & Trend
- Last wk saw one of the biggest Day on Day jumps on the PBOC fixing for the year
- Likely trend on USDCNH will be dictated more by Trump, than by China
Chartography & Price Action
- Just three charts this wk – first shows precious US 2/10 yield curve inversions & their relationship with US GDP (note out Chief Economist & CIO Jakobsen prefers the 3m/10 as being more robust). Second shows the key wkly close sub the important 1.1000 lvl on the EURUSD cross. And the third shows DXY breaking out higher & now approaching levels not seen since 2017! And yes, our 4Q Outlook will focus squarely on the USD!