IGM Credit, IGM FX and Rates
03 Aug 2020
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020 7017 5436 WEEK AHEAD 08-June-2018
-Fed expected to hike 25bp � many questions on economic and policy outlook ...
-� including the dot plot for this year and equilibrium funds.
-BoJ projected to leave policy on hold �
-� but might downgrade inflation outlook.
-ECB to leave policy steady � but all the talk is about QE-talk.
The 'flash' move in US Treasuries is a reminder that even the most LIQUID of markets can suffer from such VOLATILTY inducing events. It is something we have kept our eye on since the sharp moves in Italy's BTP market began. BTP bid-ask spreads are still above norm and Italian bonds remain vulnerable to not only domestic political matters, but also a significant and quick tightening in financial conditions which might adversely impact an already struggling real economy. This is far from suggesting a Euro-exit is anywhere near the card deck.
BTPs also suffer from the chatter surrounding the ECB and the high probability that the Governing Council starts talking about tapering/ending its QE program (i.e. the new purchases part, not the rollover of maturing assets) at next week's meeting (Thursday). Since the crisis, central banks have had an aversion to roiling markets via policy. So a question arises as to whether the ECB will do the same and delay affirmation of a plan until the July gathering, in part hoping that what is going on in Italy will have calmed, but also, there is a significant risk that a collective plan will not be agreed given the volume of actors in play. And then there is the Bank's historical experience of tightening at the wrong time and Chief Draghi's propensity to find dovish ground. This leads to the high probability that whenever an end-QE plan is announced, it will be laced with dovish undertones (see HERE for something we wrote). One issue, however, that surely even the most extreme advocates of easing policy can't overlook is wage dynamics.
This is a crucial input into the ECB's outlook � but so might the oil price impact on inflation and the economic growth story that recent German numbers and Italian financial conditions might undermine. Safe to say that there are a lot talking points and inputs to the decision-making process for Draghi and co to discuss. At the time of writing, 1-month EONIA 1-year out is back down at circa -29bp, ergo just 5bp worth of tightening.
European banks will want some clarity
There is a lot of talk about Japanese investor selling foreign bonds of both European and Emerging Market origination (which is positive for USTs). For instance, this from BMO:
'The likely reason for such moves was an unwind of Japanese EGB positioning given populist successes in Italy, and while the most recent data does not reflect this week's selloff on the back of ECB QE unwind headlines, that news could provide further impetus for another round of selling. Given the early trend of Japan ratcheting up exposure to Europe and away from the US, this early sign of a potential reversal of that dynamic could portend renewed buying in USTs.'
The EM sell off in part plays into the FED (Tuesday-Wednesday) which is making some headlines without any speakers. There are some concerns that the balance sheet reduction is creating a Dollar shortage (as it is happening concurrent with huge US government issuance) and could therefore induce a 'sudden-stop' and stall global economic growth. The RBI chief sounded the alarm bell first (see HERE for something we wrote) the Bank of Indonesia chief followed.
So one issue is whether Powell sticks to his guns on the Fed's role in global financial conditions (i.e. it is typically overstated). And to be fair, some the EM problems are domestic creations. The FOMC's first duty is to the US economy and on that there is insufficient evidence to suggest a 25bp rate hike will not be forthcoming. There several points at stake � which the SEP and subsequent presser will hopefully reveal:
1.The dots which in March came within a whisker of suggesting 4-hikes this year.
2.Will equilibrium funds be upwardly revised?
3.Level of concern regarding curve inversion and suggestions of an 'inversion put'.
4.Related to 3, changes to/elimination of forward guidance.
5.Inflation/economic growth outlook. Impact of fiscal space.
6.Balance sheet rundown pace to change?
This is not an exhaustive list � Jan18 Fed Funds currently sits at 2.21% versus 2.37% that would price 4-hikes. Curve flattening is still the favoured play and Ben Bernanke thinks the US economy is going off the cliff in 2020 (see Zero Hedge piece HERE) which would fit with curve inversion in H1 2019 which forward curves are flirting with a year from now.
Finally, the BoJ meets (Friday). Bedeviled by a lack of inflation, despite the deluge of QE and negative rates, Chief Kuroda has recently admitted the fight to move inflation to 2% is harder than he first thought it would be. There is risk the Bank will cut inflation forecasts next week (see HERE for more). A significant issue the BoJ is yet to overcome is that
Japan's consumer can't get away from high inflation expectations and low (any at all?) real income expectations. This is an extremely spending negative combination. Add in some risk aversion and a stronger Yen means a decision to call any sort of time on QE is a nonstarter.
Elsewhere in the Central Banking World, the RBA's Lowe (Monday) and Ellis (Friday) speak. Given the recent more than decent Q1 GDP numbers, interest will be in any hint that the market is pricing a first rate hike too far into the future. This from Unicredit for instance:
'However, at present the Australian forward curve is assigning a less-than-25% probability of just a 25bp rate hike by the end of this year. Still, these expectations are too low, in our view, if the Australian economy does continue to strengthen in the coming months. In turn, this misalignment creates a significant repricing risk for the current forward-rate structure and potentially exposes the Aussie dollar to more upside potential, should new Australian macro data make it clear going forward that the RBA's current monetary policy stance has become even more accommodative.'
The NORGES BANK's Deputy Governor also talks (Thursday).
There is also the SWISS vote on Vollgeld or the sovereign money proposal. In short, the current system (as in all capitalist nations) allows for private banks to create money via the acts of lending and the borrower depositing the loan (it is the latter which actually 'creates money'). The ballot is about the abolishing this system to allow the only the SNB to create money with private banks funding lending from savings and borrowings. Should the outcome be YES (NO is favoured), this will represent a dramatic upheaval.
Also note the OPEC (Tuesday) and IEA (Wednesday) Monthly reports � the last before the next OPEC/NOPEC gathering.
And, given some of the disorderly market moves, the world could do with some united political leadership. Unfortunately, the G7 gathering (ends Saturday) in Canada is unlikely to provide any � well not the sort where the US leads. Indeed, the surprise will be a thawing of relations in what is being billed as an aggressive Trump versus all comers in an environment which the US President intrinsically mistrusts � he much prefers bilateral (the much vaunted meeting with the North Korean leader is still on � Tuesday) to multilateral. The financial markets may care about further US isolationism, but on trade barriers, UBS Paul Donovan notes:
'The US is looking isolated. This is not the isolationism and protectionism of the 1930s. In the 1930s everyone put up trade barriers against everyone else. This time the US is putting up trade barriers against everyone else, and everyone else is carrying on just as before.'
Maybe the G7 ex-US will get together � although the 'G6' (does anybody actually care if somebody does not sign the statement?) are mostly suffering from domestic issues that weaken leaders.
On that, the UK faces more BREXIT related politics as the country's Chief negotiator, Davies meets his EU counterpart to discuss 'progress' ahead of the EU Summit later this month. And there is a 12-hour session planned in the UK Parliament (Tuesday) to discuss Brexit legislation � which has left already beleaguered PM May facing a lot of criticism. By the time we get a vote, there is a good chance most folks will have forgotten why it started � and a better chance we will be none the wiser regarding the UK's stance.
On the data front � plenty of top tier stuff from US kicks off with May CPI (Monday). Consensus is for 2.7% y/y headline and 2.2% core versus 2.5% and 2.1% last time. Headline CPI has averaged over 2% y/y since the start of 2017 and core 1.9%. This data doesn't suggest the Fed is going to restrain its rate path � although one measure the FOMC does look at is the core 3-mnth annualised change which did move under 2% in April.
An upside surprise might give Breakeven rates a boost. PPI slowed in April and is expected to pick-up again in May (Wednesday). Reports of rising input costs continue � as do stories of rising trucker pay. The 2.9% y/y forecast will be a whisker short of the recent 3% top.
Imports prices (for May Thursday) will become more of a focus as tariffs hit home, especially the pass through (effective tax) on the consumer. Which leads us to retail sales for May (also Thursday). Another decent, if not sparkling, gain is expected in the control group of 0.3% m/m after the (upwardly revised) 0.5% from April.
Industrial production is also projected to expand in May (Friday). 0.3% m/m expectation is slower than previous 0.7%, but an expansion all the same. Supporting, the June Empire the same day. All-in-all, an economy humming along nicely.
Also note the May NFIB (Tuesday) seen just short of the February peak. April TICS (Friday) will garner interest. Of all the talk about foreigners selling � there isn't exactly much evidence at present to anything approaching a mass exit. Indeed, turmoil in Europe/EM might just support USTs.
Not much from JAPAN � with April core-machinery orders (Monday), May PPI (Tuesday � seen a tad faster at 2.1% y/y).
April EUROZONE industrial production is projected to contract 0.6% m/m (Tuesday). This is not the sort of data to suggest the ECB is about to tighten! Whether this is a 'soft-patch' is another matter, but if the forecast is reality it will be 4/5 months with a negative outturn. Note final May CPI (Thursday) and April trade (Friday). The June ZEW (Tuesday) will garner attention � the expectations component seen further into negative territory.
An unusually heavy UK slate starts with April trade and industrial production (Monday). The trade deficit is seen narrower � which should help the keep the 12-month moving average at its best level since prior to the Brexit vote.
Key is whether this trend continues. IP is expected to expand at 0.1% m/m once more.
The labour market report (Tuesday) should reveal a still relatively tight jobs market although the recent rise in jobless claims might be cause for concern if continued. The proxy that seems to be used for pay, average earnings, isn't forecast to show any quicker growth. This despite what the BoE's Ramsden thinks.
Inflation is projected to remain at 2.4% y/y headline and 2.1% core in May (Wednesday), a pause at least in the slowdown.
Both input and output PPI are expected to accelerate � but the BoE doesn't care � right?
Finally, retail sales are forecast to expand at a significantly slower m/m rate of 0.3% ex-fuel in May � certainly nothing spectacular here.
The Citi UK Economic Surprise Index has begun to pick-up.
CPI will provide the main talking point in SWEDEN. CPIF is projected to accelerate to 2.1% y/y in May (Thursday).
NORWEGIAN CPI is also projected to quicken in May (Monday) to 2.5% y/y headline and 1.4% core.
The CANADIAN diary includes April new house prices (Thursday), May existing home sales (and April manufacturing sales (Friday).
Labour market numbers are the AUSTRALIAN focus (Thursday). The unemployment rate is seen a steady 5.6% with employment expected to expand another 19k. Note the may NAB and April home loans (Tuesday) and June Westpac consumer confidence (Wednesday).
IGM Credit, IGM FX and Rates
By Tim Cheung 03 Aug 2020
Xinhua News Agency reported the Politburo held a meeting on the economy on 30 July (Thursday). The CCP also held a meeting with non-CCP political parties and non-political representatives. President Xi chaired both meetings. Compared to the meeting held on 17 April, we note some changes in wording were made to the remarks on monetary and fiscal policies in the 30 July meeting. 30 July meeting (as per Xinhua News Agency): - "While requiring full implementation of macro policies, the meeting called for pursuing a more proactive and effective fiscal policy that delivers solid outcomes, and a more flexible and appropriate monetary policy that targets sound results, according to the meeting". 17 April Meeting (as per Xinhua News Agency): - "Monetary policies should be more flexible and balanced and instruments such as reserve requirement ratio cuts, interest rate reductions and reloans should be fully leveraged to ensure reasonable and sufficient liquidity and a lower interest rate in the loan market, the meeting said, stressing the need to channel capital into the real economy, especially medium-sized, small and micro enterprises".
Topics Industry News