A first glance at the US shutdown's economic impact
The University of Michigan Index is one of the key data releases unaffected by the US government shutdown, and the latest results point to a US economy dealing with multiple bearish factors.
Summary of last week:
• Economic data: No doubt about it, we are seeing much more splotchy economic data across the board – compared to c. 4-6-9 months ago… when there was a clear consistent uplift in global data. Big ? Is this mean-reversion in an overall upward trend, or signs of a more structural slowdown?
• $200bn: Friday Asia started off with a lot of fuss over the $200bn annual reduction pledged by China to lower its deficit with the US – yet a lack of details/conviction from the market, saw a mixed reception.
• RBNZ: Combination of soft inflation trend and more dovish statement spooked an already weak cross, to the delight of AUDNZD bulls
• Fixed income: Big levels hit this week on US govies before yields retracting from week highs… US10-yrs hit 3.126% & 30-yrs hit 3.261%
• Forex: Another big week in the DXY with +1.19% big moves in a weaker euro and yen. Same in EM FX with ZAR, BRL and MXN seeing moves of +4.1%, +3.8% & +2.7% resp.
• Commodities: Oil keeps grinding higher. Gold big break sub the pivotal $1300 lvl with -2.0% for the week, could we now see long-overdue silver outperformance?
• Equities: US and Asia mainly down, part of Europe bucking the trend upwards with CAC being outlier at +130bp. Overall US equities continue their sideways shuffle on lower volumes
• Vol: +6% for the week, at 13.42 which was down for the week high of 15.01. Avg 2018 VIX is 17.03
• Key Focus: FOMC Mins + Flash PMIs + OPEC Meeting
• Central Banks (SGT): NG 14.00%e/p (22) FOMC mins (24) UA 17.00%e/p (24) SA 6.50%e/p (24) SK 1.50%e/p (24)
• Fed Speakers (SGT): Harker (22/25) Dudley (24) Kashkari (24) Bostic (21/24/25) Powell (Fri 25, @ 21:20) Evans/Kaplan/Bostic @ Dallas Fed (Fri 25, @ 23:45)
• Other Few hols in EZ Monday(21), BOE’s Carney (24/25) RBA’s Lowe (23), Ingves (25)
• US: fpmi mfg 56.6 e serv. 54.9 e, Rich. Index., Durable Goods FOMC mins CH: Leading Index EZ: fpmi mfg 56.2 e/p serv. 54.7 e/p, ECB mins JP: TB, fpmi 53.6e 53.8p, Tokyo Core CPI 0.6%e/p UK: CPI Report Hearings, CPI 2.5%e/p CORE 2.2%e 2.3%p, RS, GDP 1.2%e/p NZ: RS, Visitors, Credit Spending AU: L-Index, Constr. Work
Thoughts on market positioning/sentiment: [similar tones to last week]
• Jun 12 – US / NK Summit in Singapore. Noble peace prize for President Trump? Multi-generational occurrence if peace and denuclearisation in the Korean peninsula is confirmed. The noise on them pulling out because of military drills is just noise
• Jun 13 – Next Fed Hike. Will be less about hike and more about if there are more hawkish adjustments to be made. Repricing on the equity side of things. Lets see what minutes and Fed speak tell us. Last week saw very big levelshit on both US 5s, 10s, & 30s… net-net multi-year technical levels suggesting further risks to yields breaking out higher
• Volatility: Complacent in equities, thinking inexpensive to buy protection and long for ways of getting long vol (strangles, straddles). VIX sub 13.00 vs. 17.03 YTD avg. Worth noting we are getting close to officially entering summer, when volumes should drop even further on the equity side.
• EQ: US equities seem stuck in a sideways shuffle, only real trend in equity universe has been in some of the exporters over the last few wks, DAX & NKY… these two indices have just finished 8 consecutive wks of moving higher – the yen has been weak 8 of those 8 wks, whilst the euro has been weak 7 of those 8 wks
• Economic Data Trend: JP post 8 consecutive quarters of growth (best streak in 28yrs) was broken last week and previous figs. revised lower… This is constructive for DollarYen bulls and potentially puts the pressure back on the Bank of Japan
Global Citi Economic Surprise Index is still trending lower, with the US holding up much better than its Japanese and European counterparts…. If this is mean reversion, we should start seeing evidence of a bounce back over the next 1-2Q… otherwise something is seriously wrong in the underlying direction of global growth & inflation
• EM Pressure: Seeing a lot of stress in the likes of Argentina, Turkey, South Africa… that near-term pain for EM likely continues for a while…
• EURUSD 1.17695: Failed to break back above 1.2000, further 20D crossing dwn through 200D is another bearish signal, RSI is back to trending lower after having failed to break to the topside last week. Feel like 1.1500 is very feasible over the c. 3 weeks run to the Jun 13 Fed hike
• AUD 0.7507 & NZD 0.69168: Both continue to try to bottom vs. the USD. NZD RSI turning back up. Would use spikes to potentially re-engage Aussie shorts from 0.7550 / 0.7600 & on Kiwi from 0.7000 & higher
• DAX 13065: Really a Dollar strength & Euro weakness story, the DAX alongside the Nikkei (cash) is up for 8 consecutive weeks. If the chart can hold these key 13,000 lvls then its really all about 13,250 & 13,500
• NKY 22930: Similar theme to DAX, really a Dollar strength & yen weakness story, the DAX alongside the Nikkei (cash) is up for 8 consecutive weeks. If the chart can hold these key 23,000 levels then its really all about the next 500 to 1,000 points
• US 5-10-30yr bonds, 2.8881 / 3.0559 / 3.1974: Very big week last week, with key multi-year level breaks seen across these three maturities… significance is that it potentially opens us up to much more upside from a yields perspective. 5yr at levels not seen since 2009, 10s since 2011, 30s since 2014
• Gold $1293: That $1300 was a big level and now its all hulk smash down to $1250 / $1235 (200D), whilst at best we may get a pop back to $1300 or $1315… a move back over $1330 would negate this bearish turn in gold. Note RSI & MACD just starting their descent on the weekly, with the Jun 13 Fed meeting likely creating tailwinds for gold bears
• NOKSEK 1.0772: Looks like we have bottomed from recent sharp pullback (c. 1.1026 to 1.0664), all about taking out 1.10 again before putting 1.12 & 1.15 in sight
• Brent Crude $78.51: Weekly Charts suggesting that the multi-quarter H&S development has played out with Brent getting over $80 last wk. Whilst the weekly still shows upside momentum in the RSI & MACD… the daily chart suggests we could see a pullback to consolidation – key lvls to watch are last wk’s low of $76.55 & the 75.91 (20D)
Macro Monday Cross-Asset Book:
• Added to NOKSEK post the recent big pullback. Opened an outright short on gold from $1293 targeting $1250 / $1235
• Looking to potentially add to Aussie shorts from 0.7550 / 0.7600 & up… and on Kiwi above 70c… As well as Gold @ $1300
• Need to also think about a port hedge… as book has big factor exposure to USD longs... generally gold is the natural hedge…