Outlook for Week 21/2023
"'I don't know' is not a failure but a necessary step towards enlightenment.” - Annie Duke
Welcome to issue #56 of fx:macro!
This newsletter is quite long, so there's a Summary section at the top. Everything you find there is derived from data and news I show in detail in the second and third parts of the newsletter (Week in Review and Market Analysis). I encourage you to go through those parts because they are basically the reasoning behind the conclusions I present in the Summary. If you're short on time or just don't like long newsletters then just skip them.
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Table of Contents
Summary (Playbook, Calendar, Levels, FX Drivers, Downloads)
Week in Review: a) Central Banks, b) Economic Data
Market Analysis: a) Growth and Inflation, b) Yields, c) Central Banks and the US Dollar, d) Sectors and Flows, e) Sentiment and Positioning, f) Market Risks, g) Various
Top 3 Macro Charts of the Week
Playbook for next week
This is the shortest possible summary of everything you will find in the rest of this newsletter.
Please check out this article about what this summary aims to provide and what its limitations are.
I don’t have a single currency I’m bullish on but five with a neutral bias. This is a pretty good reflection of how I view the markets right now: a lot of things seem to contradict each other, and nothing is really clear. It’s a pretty tough environment, in my opinion.
Economic Calendar for next week
Important levels to watch and look out for in FX futures
For an explanation check out this link.
Downloads and Links
Difftext of the Summary from last week: diffchecker.com
Central bank speaker recap for the week:
Week in Review
RBA Minutes (16.05.23)
Here are the highlights from the RBA Minutes:
Confab, Speakers, News
Jefferson (Neutral). Weekend: Inflation is still high, little progress on core inflation is bad news, the full impact of the Fed's rapid rate hikes is likely still ahead, disinflation has been slower and more uneven than the Fed would have liked, the uncertainty around the effect of bank stress and credit shock could be larger than expected. Thu: A year is not long enough to feel the full effect of interest rate hikes so far, inflation is too high, growth has slowed considerably but outlook is not for a recession, evidence so far points to only a modest incremental tightening of credit conditions to recent bank stress, uncertain how tighter credit will influence household and business spending.
Bullard (Hawk). Weekend: Market-based inflation expectations are back down to levels consistent with the 2% inflation target, policy is not at the low end of sufficiently restrictive. Thu: Leaning towards a June hike but keeping an open mind, higher rates are insurance against inflation, rates are at the low end of sufficiently restrictive with the top seen above 6%, better and more prudent to be in the middle of the zone, fall in treasury yields is offsetting banking sector tightening.
Bostic (Neutral). Mon: If I was voting now I would hold rates in June, we may have to go up further on rates, have to keep a possible rate hike on the table, rate cuts are not part of his baseline, appropriate policy is to wait and see the effects of tightening, does not see inflation coming down quickly, the math on inflation and the economy will work in the Fed's favour in the months ahead, there is still a long way to go in the battle against inflation, expects inflation to be in the high 3s at year-end, there is some risk of a recession but if we fall into one it will not be long or deep. Tue: Still some way to go until inflation is beaten, wages didn't fully catch up to inflation in 2022.
Goolsbee (Neutral). Mon: There is still a lot of impact from prior hikes that's still to come, his vote to hike at the last meeting was a "close call", inflation is improving but not that rapidly, the effect of banking stress isn't small and we need to take it into account. Tue: Has not decided anything for the June meeting, would be a mistake to commit to a rate move when more data is coming, not sure if we've put enough restraint on the economy yet, far too premature to be talking about rate cuts, starting to see some slowing in activity, there's still some potential for a soft landing, wages are not a leading indicator of inflation.
Kashkari (Hawk). Mon: The Fed has more work to do, we should not be fooled by a few months of good data, inflation is much too high but starting to come down.
Barkin (Neutral). Mon: Not giving a June meeting decision because there is still data to come and because of the uncertainty around the debt ceiling, very comfortable with a data-dependent approach but not yet convinced that inflation is on a steady path lower, sees no barrier to higher rates if inflation persists, demand may need to cool even more for inflation to reach the 2% target, policymakers should be sensitive to financial stability risks but that should not take precedence over the fight against inflation. Tue: I like the optionality implied in the statement, comfortable with more hikes if this is what's needed, businesses are reluctant to let staff go, deposit flows are stable at the banks in my district, the number one lesson from the 1970s is don't quit too soon.
Barr (Neutral). Mon: The US banking system remains sound and resilient, all deposits in the banking system are safe. Tue: We are carefully looking at commercial real estate risk. Thu: No inherent conflict between monetary policy and supervision by the Fed.
Mester (Hawk). Tue: I don't think we're at a hold rate yet, would like policy rate to get to a point where it could equally be a potential increase or decrease, I don't put it in terms of a pause but instead a hold, rate are not at a sufficiently restrictive level.
Williams (Neutral). Tue: Inflation is gradually moving in the right direction, it does take a while to feel the impact of policy, current banking situation is nothing like the 2008 banking crisis, the banking system is sound and resilient. Fri: New work has shown even with pandemic the natural interest rate remains low, pandemic impact on the natural rate has proven modest.
Logan (Neutral). Tue: Central banks should review post-GFC stress episodes, may need to travel more slowly when conditions are uncertain, gradual policy adjustments can be helpful in mitigating financial stability risks. Thu: Data at this time does not support skipping a rate hike at the June meeting, incoming data could yet show that it is appropriate to skip a meeting, it is a long way from here to 2% inflation, concerned about whether inflation is falling fast enough, recognizes arguments against tightening policy too much or too fast, effect of banking stress is comparable to a 25-50 bps rate increase.
Collins (Neutral). Thu: Falling minority unemployment rates are promising for the economy.
Powell (Neutral). Fri: Has not made any decision on whether rates are sufficiently restrictive, the risks of doing too much or too little are becoming more balanced, we haven't made any decisions yet about the extent to which additional policy firming will be appropriate, inflation is far above the Fed's objective, we are strongly committed to returning to 2% goal, policy rate may not have to rise as far as otherwise due to tightening bank credit conditions, positive supply shocks during globalization probably did help keep inflation low but are unlikely to be repeated, the banking system is strong and resilient, our guidance today is limited to factors that go into policy decision.
European Central Bank
De Guindos (Dove). Sun: We have now entered the home stretch of our monetary policy tightening path, we are returning to normalcy with 25 bps steps. Wed: Concerns are mounting about the outlook for commercial real estate loans, Eurozone banks may benefit less from higher rates than expected. Thu: There is still scope to keep raising rates but most of the tightening has already been done, does not know what the end point is going to be.
Kazimir. Sun: The ECB may need to keep raising rates longer than previously thought, convinced there are more meetings ahead where we will decide on raising rates, would also be satisfied with a 50 bps hike but 25 bps is a return to normal, the key point is that core inflation is still creeping up and that's proof we haven't solved the problem yet.
Makhlouf. Tue: We have lost a degree of trust, that affects what we should be doing with our decision making, we should do more in terms of thinking about the audience we're talking to.
Holzmann (Hawk). Tue: We need to go beyond a 4% interest rate to fight inflation, would have preferred a 50 bps hike at the May meeting, core inflation is unlikely to slow much more this year, hikes above 25 bps are probably not possible now, we shouldn't pause hikes until we reach 4%.
De Cos (Dove). Wed: The ECB is getting near the end of its tightening cycle, transmission of monetary policy remains strong.
Rehn (Neutral). Wed: Need to see core CPI slow substantially.
Lagarde (Dove). Fri: ECB will be courageous to take needed decisions to bring inflation back to 2%, we are heading towards more delicate decisions going forward, we should not trade off price stability and financial stability, will do whatever is necessary to deliver price stability.
Schnabel (Neutral). Fri: The ECB can continue to do whatever is needed to bring inflation back to 2% in a timely manner, wage growth has picked up substantially and as a result there are concerns about second-round effects on inflation, financial stability is a precondition for price stability and vice versa, we have a clear mandate of price stability, inflation expectations are stubbornly high, it seems fiscal policy is too expansionary.
Bank of England
Pill. Mon: The BoE raised rates last week because we thought there was too much momentum in the economy, there is too much demand for inflation to return to 2%, we need to avoid inflation getting stuck at 4-5%, the risk is that second-round effect keeps inflation above the target.
Bailey (Neutral). Wed: If there were to be evidence of more persistent price pressures then further tightening would be required, there are signs that the labour market is loosening a little, we have good reasons to expect inflation to fall sharply beginning with the April number to be released on May 24th, there has been greater resiliency in the economy than expected, we expected a shallow and long recession in November and now we are forecasting modest but positive growth, inflation risks are skewed significantly to the upside. Thu: QT is not an active policy tightening instrument, I do not envisage the balance sheet returning to pre-financial crisis level.
Ramsden (Hawk). Thu: QT has some effect on the economy but fairly small, QT will be gradual and predictable, likely to have several years to go for QT, investors expect more inflation pain in the UK than in the US.
Bank of Canada
Macklem. Thu: Far too early to be thinking of interest rate cuts, using conditional pause to see whether we've raised rates enough, a number of things have to happen before inflation is getting down to 2% target, April CPI data was stronger than expected, expects inflation to continue coming down.
Rogers. Thu: Financial institutions need to adapt as adjustment to higher rates continues, we will continue to monitory the financial system closely for signs of stress.
Bank of Japan
Ueda. Weekend: I told the G7 meeting that Japan is maintaining ultra-loose monetary policy to sustainably and stably achieve the 2% inflation target, consumer inflation will begin to slow towards the middle of the fiscal year, many G7 central bank governors appeared to feel the impact of past rate hikes has yet to show fully. Fri: No change to BOJ stance of patiently maintaining easy policy, appropriate to take time in determining when to modify policy, will not hesitate to take additional easing steps if needed, will maintain stimulus measures with YCC, Japan's inflation likely to slow back below 2% in the middle of the current fiscal year and then likely to rebound thereafter, current inflation is due to external cost-push factors and not strengthening demand, tightening monetary policy would hurt the economy, inflation expectations must heighten for inflation to hit 2% sustainably, a US debt default could cause market turmoil and will likely affect a wide array of financial transactions.
Kishida (PM). Mon: The need for the government and the BOJ to closely coordinate economic policy is rising.
Goto (EconMin). Mon: Governor Ueda explained how the BOJ will keep ultra-loose policy to sustainably and stably achieve price target, among the key points of the meeting was for the government and the BOJ to work closely together, the government believes it is meaningful for the BOJ to conduct a review of past monetary policy.
Growth and Inflation
The Atlanta Fed GDPNow model ticked up to 2.9%:
The NY Fed Weekly Economic Index is at 0.80:
Citi Economic Surprise Indexes:
USD, EUR, CHF and JPY are falling
GBP has stalled
AUD is going up
NZD remains weak
The Global CESI is falling further:
New PMIs will be released this week, so there haven't been any changes to the Bloomberg PMI heatmap yet:
The US is unchanged
Canada has improved
The Eurozone and Switzerland are weaker, the UK remains unchanged
Australia is weaker, Japan is unchanged
China and South Korea aren't improving, Hong Kong and Vietnam have weakened
Breakeven inflation rates traded sideways with the 5-year still below the 10-year breakeven rate:
5y5y forward inflation expectations have traded higher but remain within their range:
RINF also traded higher this week:
Citi Inflation Surprise Indexes:
Updated monthly, so no change to last week
USD, NZD and CHF are lower
EUR, CAD and JPY are sideways
GBP and AUD are up
See chart and table below:
UK yields look strongest
EUR/DE yields look weakest
NZ yields had quite a run higher over the last week
2-year, 10-year yields and 2s10s:
2s and 10s have gone higher in tandem over the last one or two weeks
The US yield curve has flattened further and the Aussie curve is approaching inversion
Global 2s10s spreads:
Central Banks and the US Dollar
The latest FOMC meeting probabilities according to FedWatch:
The June meeting is priced for a hold at about 83% with the remainder for a 25 bps hike, that’s similar to last week
The July meeting is now priced a bit more hawkishly compared to last week: 81% for no change and 19% for a 25 bps hike, and a similar shift shows up for the September meeting
The first rate cut has been pushed back from September to November
The implied Fed Funds Rate is at the hawkish side of the previous weeks’ range:
… and rate cuts are being pushed further out:
Sectors and Flows
The 1-month and 1-week outperformer is NZD
JPY is weak on all timeframes
EUR has weakened over the last month
Everything else is just somewhere in the middle
Equity sector performance:
Semiconductors, Tech and Consumer Discretionary have outperformed the S&P 500
Metals/Mining, Energy and Utilities are the underperformers
Similar data, different chart:
Tech and Communication Services are by far the best performing sectors
This week has seen some reflationary sector moves including Financials doing well
Sector breadth has weakened: only about half of sectors have a positive 30-day performance:
Sector thumbnail charts:
Financials and Energy are still struggling
Real Estate isn't looking pretty, either
International stock markets:
The US has both the strongest and the weakest market at the same time with the Nasdaq and the Russell 2000, respectively
Japanese indexes are going strong
The German DAX and the EuroStoxx are also performing well
Hang Seng and the FTSE are at the bottom of the chart
Sentiment and Positioning
The AAII Bull-Bear spread has barely moved and remains neutral:
Bullish sentiment in AUD, CAD, JPY
Bearish sentiment in CHF
Different sentiment source:
EURCHF and USDCHF are the two currency pairs with the most bullish sentiment
GBPJPY, EURJPY, USDJPY and AUDJPY are the four pairs with the most bearish sentiment
Commitment of Traders and futures performance:
Equity futures were all positive this week, the Relative Strength (RSL) of the NQ is at 1.11, the ES is somewhat more neutral at 1.03, and the RTY and YM are both below 1. Positioning is still bullish for the ES.
Treasury futures are all down this week, positioning is still more bullish than bearish, especially towards the shorter end of the curve.
Currency futures had a mixed week with DX positive, 6E negative and 6N the outperformer. Commercial/Large Trader positioning is still bullish DX and newly bullish for 6A. 6E and 6B as well as 6S are still at/near bearish extremes.
Bitcoin ended the week with a small gain, its RSL is still solidly above 1. Positioning looks bearish but the number of Commercials is low, and Small Specs are more important to watch here if you believe COT data for Bitcoin at all.
Energy futures also had a positive week with NG up about 14%. Positioning is neutral.
Metals are barely changed. Positioning in HG has become bullish while it remains bearish in GC.
Grains are all lower for the week, RSL metrics are well below 1 for ZC, ZW, ZS, ZL and ZM. Positioning is bullish for every future except for ZM.
Softs were mixed, positioning is bearish in CC and SB, and bullish in OJ.
COT/TFF Dealer net positions for currency futures:
6E is still at lows
6C is still near highs
Citi PAIN indexes:
Combined COT/PAIN charts:
The strength in CHF is not confirmed by Non-Commercials/Large Traders
Credit spreads are trading sideways:
The Credit Spread Index isn’t going anywhere either:
Currency volatility has ticked up a bit for JPY and CNY but it remains low overall and on a downward trajectory:
The VIX term structure looks unremarkable except for the fact that the premium of VX1 over VIX is nearly 3 points:
VIX is below 17, MOVE is still elevated at 127 but it’s not moving higher
VVIX is at 95 and bid when compared to VIX
VIX/VIX3M is steep at 0.84
Skew metrics are all diverging to the upside when overlaid on VIX
Like last week, I’m not too sure what to make of it all. It’s not looking overtly bad: the market doesn’t care too much about the elevated MOVE, and skew steepening when volatility is falling in a market nobody seems to trust is what I’d expect to happen.
The CNN Fear & Greed Index remains in Greed territory:
The NYSE Advance/Decline Line is once again diverging from the S&P 500:
The percentage of index components above their 200-day moving averages has deteriorated further in the S&P 500 but it has improved for the Nasdaq 100. It still doesn’t look healthy overall when compared to previous bull runs:
The 50-day MA metric is looking even worse:
25-delta risk reversals:
The move higher in USDCNY isn’t confirmed by the risk reversal
Trend metrics are intact for the ES, NQ and YM but the RTY and the Dow Jones Transportation Index are still looking weak
Distribution days are still too high
Volatility metrics are unremarkable as is breadth (only looking for exhaustion to the downside here) and put/call ratios
Links to relevant central bank releases in previous editions of this newsletter:
FOMC Statements: 19/2023 | 13/2023 | 06/2023 | 50/2022 | 45/2022 | 39/2022 | 31/2022 FOMC Meeting Minutes: 15/2023 | 09/2023 | 02/2023 | 47/2022 | 42/2022 | 34/2022 | 28/2022 | 25/2022 Crib Sheets: 05/2023 | 50/2022 | 37/2022
Rate Statements: 19/2023 | 12/2023 | 06/2023 | 50/2022 | 44/2022 | 37/2022 | 30/2022 Meeting Minutes: 17/2023 | 10/2023 | 04/2023 | 47/2022 | 35/2022 | 28/2022 | 21/2022 Economic Forecasts: 21/2022 Crib Sheets: 11/2023 | 05/2023 | 50/2022 | 43/2022 | 36/2022
Rate Statements: 20/2023 | 13/2023 | 06/2023 | 50/2022 | 45/2022 | 39/2022 | 32/2022 | 25/2022 Financial Stability Reports: 28/2022 Crib Sheets: 05/2023 | 50/2022 | 37/2022
Rate Statements: 19/2023 | 15/2023 | 11/2023 | 07/2023 | 50/2022 | 45/2022 | 41/2022 |37/2022 | 32/2022 | 28/2022 Meeting Minutes: 17/2023 | 09/2023 | 51/2022 | 47/2022 | 43/2022 | 39/2022 | 34/2022 | 30/2022 | 26/2022 | 21/2022 Statements on Monetary Policy: 19/2023 | 07/2023 | 45/2022 | 32/2022 Crib Sheets: 40/2022 Financial Stability Reports: 41/2022
Rate Statements: 15/2023 | 09/2023 | 47/2022 | 41/2022 | 34/2022 Meeting Minutes: 07/2023 Crib Sheets: 40/2022
Rate Statements: 15/2023 | 11/2023 | 05/2023 | 50/2022 | 44/2022 | 37/2022 Crib Sheets: 43/2022 | 36/2022 Summary of Deliberations: 18/2023
Rate Statements: 13/2023 | 50/2022 | 44/2022 | 39/2022 | 25/2022 Crib Sheets: 50/2022 | 37/2022
Rate Statements: 18/2023 | 11/2023 | 04/2023 | 51/2022 | 39/2022 | 30/2022 | 25/2022 Summary of Opinions: 20/2023 | 13/2023 | 05/2023 | 52/2022 | 46/2022 | 41/2022 | 31/2022 Crib Sheets: 43/2022
Photo Credit: Midjourney with the prompt: trade, forex, crypto