Welcome to the fourth edition of FX & Macro Weekly. It was a short week due to Good Friday, but we had three central bank decisions (all covered below) and lots of other stuff going on.
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 and they allow you to form your own opinion. The final section is a collection of things I read during the week that influence my thinking.
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Now let's dive in…
Table of Contents
Executive Summary (Playbook, Calendar, Levels)
Week in Review
Central Banks (RBA Rate Statement, FOMC and ECB Minutes, Speakers)
Economic Data (Daily Summary and currency reaction)
Growth and Inflation
Sectors and Flows
Sentiment and Positioning
Other Stuff I've been looking at
Playbook for next week
This is the shortest possible summary of everything you will find in the rest of this newsletter.
I've mentioned the potential risk of a liquidity-stress spillover from commodity traders into the broader markets in the last newsletters. It has been mentioned by the BOE twice in recent weeks, and now the Dallas Fed has brought it up as well as reported by Bloomberg (emphasis mine):
“Ongoing developments in commodities should be monitored for potential impacts on financial conditions broadly,” according to the note from Dallas Fed economists, including Jill Cetina, who leads surveillance and supervisory risk analysis.
“The threshold for central bank intervention in unregulated markets is high,” the economists said. “It would be prudent for firms active in commodities markets to proactively assess and further strengthen their liquidity profiles.”
“While so far, commodity trading firms appear to have obtained the credit necessary to continue their intermediation activities, the recent situation highlights some vulnerabilities,” the economists said. “A pullback in credit to a few commodity trading firms could leave remaining ones unable to meet demand for commodity intermediation, potentially creating a negative feedback loop that causes commodity prices to rise further.”
Economic Calendar for next week
Important levels to watch and look out for in the Majors
Week in Review
RBNZ Rate Decision (13.04.)
The RBNZ surprised with a 50 bps hike to 1.50% instead of the expected 25 bps hike. The full statement is below, here's my summary:
The RBNZ remains comfortable with the February outline for the OCR path
Larger hike now provides flexibility (they're calling it “stitch in time” approach)
Global economy slowing down, clear signals that global monetary and financial conditions will tighten during the year
NZ economy remains strong, capacity pressures remain, "some" economic disruptions due to Omicron
Employment above maximum sustainable level, labour shortages impacting many businesses
Ongoing inflation pressures, RBNZ core inflation at or above 3%
Mortgage demand and house prices are reduced because of higher rates
Here are some interesting bits from the Summary Record of the Meeting (emphasis is mine):
The Committee noted that net immigration is assumed to increase only slowly, eventually leading to a gradual easing in skill shortages.
House prices have fallen from their recent high levels. The Committee viewed this as a sign that house prices are moving towards a more sustainable level. Home building intentions remain at record levels, which will assist this adjustment. However, construction activity faces challenges, including access to land, rising building costs, ongoing supply chain bottlenecks, and limited access to labour. The construction sector is operating around peak capacity.
Members noted that inflation is above target and employment is above its maximum sustainable level. As such, the Committee confirmed that further increases in the OCR are needed in order to meet their mandate.
Members noted that annual consumer price inflation is expected to peak around 7 percent in the first half of 2022. The risk of more persistent high inflation expectations has increased. The Committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations and minimise any unnecessary volatility in output, interest rates, and the exchange rate in the future. The Committee agreed to a 50 basis point rise in the OCR, consistent with this least regrets analysis.
The Committee noted that the OCR is stimulatory at its current level. Members agreed that a larger rise in the OCR now is consistent with the forward path for interest rates outlined in their February Statement. Members also agreed that this ‘stitch in time’ approach is consistent with near-term financial market pricing.
BOC Rate Decision (13.04.22)
Starts QT on 25.04.22 by ending reinvestment phase, this will complement increases in the policy rate, bank expects interest rates will need to rise further
Mentions Ukraine war as major inflationary driver, Covid outbreak and property slump in China
Acknowledges hawkishness of the Fed, US growth will moderate "to a pace more in line with potential growth"
Global financial conditions have tightened
Forecasts global growth at about 3.5% this year, 2.5% next year and 3.25% in 2024
Growth in Canada is strong, economy "moving into excess demand", labour market is tight, wage growth back at pre-Covid levels and rising
Forecasts Canadian growth at 4.25% this year, 3.25% next year and 2.25% in 2024
Upside revision of inflation outlook, CPI at 5.7%, core measures have also moved higher, CPI expected to average almost 6% in H1, return to 2% target in 2024, increasing risk of inflation expectations becoming unanchored
Some interesting takeaways from their MPR:
Estimate of the neutral rate lifted from 2.25% to 2.50%
Japanese inflation just stands out:
Capacity pressures in the Canadian economy visualized:
And the contribution of supply constraints to inflation visualized (there's a similar chart for US CPI in the last section of this newsletter):
ECB Rate Decision (14.04.22)
The ECB left rates unchanged as expected, and it could hardly have been more dovish. Short summary and the complete statement below:
Acknowledges the massive impact of the Ukraine war
Inflation has increased significantly and will remain high over the coming months mainly due to energy costs, but other sectors are affected as well
Wants to maintain optionality, gradualism and flexibility in light of high uncertainty; flexibility will remain an element of monetary policy under stressed conditions if threats to monetary policy transmission jeopardizes price stability
Expects net APP purchases should be concluded in the third quarter, this has been “reinforced by incoming data”; amounts remain unchanged: 40 bln EUR in April, 30 bln EUR in May, 20 bln EUR in June; purchases for Q3 remain data-dependent
Confab, Speakers, News
Mester (Hawk) expects inflation to be above 2% next year, inflation will take “some time” to ease; rate hikes will reduce excess demand
Evans (Dove): 50 bps hike at next meeting highly likely, sees neutral rate at 2.25-2.50%, expects to be there by March 2023 but possibly earlier (December); said it's way too early to say the Fed has let its inflation mandate get out of hand (!)
Balance sheet reduction could start in June after decision in May
Runoff could be equivalent to 2-3 additional hikes, but estimates are uncertain
Looks at core CPI to assess path of monetary policy; today's weak core CPI print was encouraging
Wants to move to neutral “expeditiously”
Barkin (Neutral) rates should move to neutral “rapidly” and then tighten further if needed; tradeoff between employment and stable prices, Fed may see upward inflationary pressures in post-pandemic world
Bullard (Hawk) said it was “fantasy” to believe neutral would bring inflation down, feels behind the curve (!)
Waller (Hawk) wants go get above neutral in H2, supports 50 bps hike in May and possibly in June and July, expects March CPI to have been peak inflation but is prepared to act if inflation keeps going
50 bps at next meeting is reasonable, sees neutral at 2-2.5%, may need to go above that depending on inflation
Expects balance sheet reduction to start in July after decision in May
Fed needs to move “expeditiously” to bring monetary policy back to normal
Job openings must be brought down to a level consistent with maximum employment (!)
Mester (Hawk): inflation high, labour market tight, wants to bring demand and supply into balance without crashing the economy
Reuters poll: economists believe in two back-to-back 50 bps hikes, FFR expected to be at 2.00-2.25% by the end of the year, 2.50-2.75% at the end of next year
European Central Bank
Lagarde at the post-statement press conference:
APP likely to end in Q3, could be early or late Q3, timing will be assessed in June
Decision on rates can be made “some time after” APP has ended (could be weeks, could be months)
Sources after the statement and press-conference:
July hike still possible, growing consensus of a 25 bps hike in Q3
Members differed of assessment of some of the risks, but decision was unanimous
Bank of Canada
Macklem/Rogers at the post-statement press conference:
50 bps hike is a message that policy needs to be normalized quickly
Current estimate of neutral rate at 2-3%, might need to take rates “modestly” higher to cool demand
Do not see need to actively sell bonds “at this time”
About 40% of bonds on BOC balance sheet mature within 2 years
Concerned about broadening of inflation: two thirds of inflation components rising above 3%
BOC will “act forcefully” if needed, does have an inflation target and not an interest rate target
Bank of Japan
Kuroda on Monday: BOJ will ease monetary policy further without hesitation if needed, will maintain uber-loose policy to sustainably achieve 2% inflation target, expects inflation to pick up; and again on Wednesday: BOJ will maintain powerful monetary easing to underpin economic recovery
Uchida said the BOJ will maintain powerful easing to support the economy; inflation to be around 2% from April but mostly due to energy prices
Chinese CPI came in above expectations, PPI (not shown) at 8.3% vs. 8.1% above consensus as well
UK data was weak with GDP, Manufacturing and Industrial Production below expectations; the GBP was immediately a tad weaker, but not much changed overall
NZD Business Confidence came in weaker while Visitor Arrivals beat expectations. NZD was weaker.
AUD Business Confidence was surprisingly strong, AUD followed to the upside. Here's the chart I found most interesting in the survey: the RBA still says they're not seeing sufficient wage growth, but Labour Costs approach 3% and the rate of change is impressive:
Overall labour cost growth reached 2.7% in quarterly terms in March - well above the previous peak of 2% in late 2006. That brings the three-month average to 2.1% for January-March 2022, also above the previous peak of 1.8% (Chart 2). Labour costs rose fastest in construction but rose at around 2% or more on average in most sectors.
GBP Retail Sales below expecations, Unemployment Rate in line. The Pound did not show much of a reaction
German Final CPI was in line with the forecast and the Eurozone ZEW Economic Sentiment surprised to the upside. A bit of strength in the EUR was short-lived.
US CPI beat the consensus while the Core CPI was below the forecast range. USD was markedly weaker.
The initial reaction to the RBNZ surprise hike was a knee-jerk reaction higher for the NZD, but the strength was lost almost immediately and NZD was the weakest currency of the day
UK CPI and Core CPI surprised to the upside, GBP was stronger (and ended up being the strongest currency for the day)
US PPI also came in above expectations, USD was initially weaker
The BOC semi-surprised with a 50 bps hike, CAD showed strength throughout the rest of the day
New Zealand Manufacturing PMI improved, but no reaction from NZD
Aussie Labour Market Report disappointed with Employment Change below the forecast range, AUD was weaker
ECB Rate Statement was dovish, the EUR sold off
US Initial Jobless Claims came in below consensus while UoM Consumer Sentiment was above the forecast range; USD was stronger on the first one and weaker on the latter, but action was certainly overshadowed by the ECB
UoM Consumer Inflation Expectations have flattened out:
Growth and Inflation
The Atlanta Fed GDPNow stands at 1.1% for Q1.
The Weekly Economic Index from the NY Fed sees four-quarter GDP growth at 4.41%. Interesting bit from the comment:
The decline in the WEI for the week of April 9 (…) is due to decreases in (…) fuel sales (relative to the same time last year)
Strength in the US, Canada, Switzerland, Japan
Weakness in the Eurozone, UK and China
Asia is concerning: China and South Korea (!) are weakening, Hong Kong looks deolate.
Remember Switzerland when you look at the relative stock market performances below.
Citi Economic Surprise Indexes:
USD with a new high, GBP still at the top
EUR slowly moving lower, AUD weaker as well
Emerging Markets are starting to underperform the G10:
5y5y Inflation Expectations barely making new highs, but the chart is looking bullish…
… and the Inflations Expectations ETF has made a new high:
Citi Inflation Surprise Indexes remain similar to last week:
USD, AUD and NZD lower
EUR, CAD and CHF higher
I'm looking at the chart and table below:
US 2s below recent highs while 10s made a new high (bull steepening)
DE 2s still positive, Swiss 2s were briefly positive
DE, GB, CA and CHF look strongest
NZ looks weak, JP even more so, CN reflects PBOC easing and expectations
Similar to last week: most of the 10s are near decision levels. Next resistance in the US 10s is around 3.2%, so about 40 bps to go from here
The move in the US 2s10s was crazy, the yield curve at these points is as steep as six weeks ago. The German curve has steepened as well (also a bull steepener), reflecting the dovishness of the ECB.
Things have calmed down a bit on the STIR side: pricing is now 91% for a 50 bps hike in May, followed by two more 50 bps hikes (as last week). The path has become steeper in the front while relaxing in the back, i.e. more front-loading, i.e. getting closer to neutral more quickly.
Sectors and Flows
AUD is the strongest currency over one month, but losing momentum, while CAD is catching up, NZD is lagging considerably. JPY is abysmal and EUR weak as well. USD is gaining strength as well.
ETF flows looking bearish again: heavy flows out of equities and high-yield credit.
As for stock sectors, the outperformance of Metals and Energy continues, Semiconductors and Tech are the laggards.
For weeks now this looks fairly consistent, and for weeks now it says the same thing: we're very late in the business cycle.
International equities look broadly similar to last week. Commodity indexes at the top: Canada, Brazil, Australia, UK. Europe and Asia at the bottom.
Sentiment and Positioning
Sentiment is similar to last week: very bullish for EUR, GBP and JPY (albeit a few percentage points less bullish than the week before)
Similar method, different data, similar results:
EUR is a short, especially vs. GBP, USD and CHF, but it's a long vs. JPY
USD is a long vs. EUR and GBP (less vs. CAD)
JPY is a short vs. everything
Gold and Silver are still shorts, the FTSE is still a long
And another sentiment source: buy the FTSE, sell the JPY.
Fintwit Macro Sentiment continues to deteriorate:
Some interesting moves in the Commitment of Traders data:
Commercials reduced their equity net positions in by more than 1.5 SD in SPX, NDX and the R2k, which could be a bearish sign
Positioning in the Ultra 10y Notes is still very bullish
Positioning in JPY continues to be very bullish as well, GBP has improved a considerably and Commercials are significantly long while Large traders are significantly short (COT index >0.90 and <0.10, respectively)
Crude Oil is still very bullish
Softs and Grains show bearish signs
Here's the data from the COT/TIFF report:
Dealer positioning in the USD isn't extreme, but it turned south again this week
JPY still at an extreme high, i.e. bullish (not timing-wise, though!)
VIX and MOVE still signalling that something is not right with the current (stock and bond) market. Interesting to see that MOVE has been rising since September last year.
High-yield spreads have moved up again, but they're somewhere in no-man's land right now. Reason enough to remain concerned.
The VIX term structure is broadly unchanged, spot VIX has moved closer to VX1, but settlement is going to be next week. The curve is still comparatively flat.
Fear & Greed Index shows just a tad of fear:
Some interesting divergences from the options market. 25-delta risk reversals are pricing EUR, GBP, AUD and NZD higher. That's a bit different from the CME data: so while the risk reversals are bearish in absolute terms, they have not moved with price. The options market is telling us that the dollar has moved too far.
Other Stuff I've been looking at
Emerging market debt is up significantly:
… and hedge funds betting short on EMs: remember the diverging Citi Economic Surprise Indexes for EMs and G10 from above?
Monetary easing in China showing up in an increasing credit impulse, which should support the economy down the road:
How CPI “performed” historically around peaks:
Composition of the US Core CPI:
To put some things into perspective, here's Commodities/SPX ratio:
Durable goods have become relatively more expensive to services during the pandemic, and this trend may have reversed: