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Week 16/2022

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Week 16/2022

FXMacroGuy
Apr 16, 2022
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Week 16/2022

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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.

If you like this newsletter, please consider subscribing and sharing it. I'm also on Twitter @fxmacroweekly.

Now let's dive in…

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Table of Contents

  1. Executive Summary (Playbook, Calendar, Levels)

  2. Week in Review

    1. Central Banks (RBA Rate Statement, FOMC and ECB Minutes, Speakers)

    2. Economic Data (Daily Summary and currency reaction)

  3. Market Analysis

    1. Growth and Inflation

    2. Yields

    3. Central Banks

    4. Sectors and Flows

    5. Sentiment and Positioning

    6. Market Risks

    7. Various

  4. Other Stuff I've been looking at


Executive Summary

Playbook for next week

This is the shortest possible summary of everything you will find in the rest of this newsletter.

Playbook for next week

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

Economic calendar for next week

Important levels to watch and look out for in the Majors

Source: CME

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Week in Review

Central Banks

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.

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BOC Rate Decision (13.04.22)

The BOC delivered a semi-surprise by hiking 50 bps to 1% instead of 25 bps. They also released their Monetary Policy Report. My summary and the full statement below:

  • 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:

Percentage change of inflation y/y
  • 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):

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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

Federal Reserve

  • 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 (!)

  • Brainard (Dove):

    • 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

  • Williams (Dove):

    • 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

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Economic Data

Monday, 11.04.22

  • 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

G8 currency strengths, 11.04.22

Tuesday, 12.04.22

  • 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.

G8 currency strengths, 12.04.22

Wednesday, 13.04.22

  • 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

G8 currency strengths, 13.04.22

Thursday, 14.04.22

  • 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:

G8 currency strengths, 14.04.22

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Market Analysis

Growth and Inflation

The Atlanta Fed GDPNow stands at 1.1% for Q1.

Source: Atlanta Fed

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)

Source: NY Fed

PMIs show:

  • 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.

Source: Bloomberg

Citi Economic Surprise Indexes:

  • USD with a new high, GBP still at the top

  • EUR slowly moving lower, AUD weaker as well

G8 CitiFX Economic Surprise Indexes, source: Refinitiv

Emerging Markets are starting to underperform the G10:

CitiFX Economic Surprise Indexes: Global, G10, EM; source: Refinitiv

5y5y Inflation Expectations barely making new highs, but the chart is looking bullish…

Source: FRED

… and the Inflations Expectations ETF has made a new high:

Inflation Expectations ETF

Citi Inflation Surprise Indexes remain similar to last week:

  • USD, AUD and NZD lower

  • EUR, CAD and CHF higher

G8 CitiFX Inflation Surprise Indexes, source: Refinitiv

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Yields

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

G8 + CNY 2s and 10s, 1 month
Major 10s, source: tradingeconomics.com

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.

2s10s

Central Banks

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.

FOMC target rate probabilities, above: current week, below: previous week; source: CME

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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.

G8 currency strength, 1 month

ETF flows looking bearish again: heavy flows out of equities and high-yield credit.

Source: etf.com

As for stock sectors, the outperformance of Metals and Energy continues, Semiconductors and Tech are the laggards.

Relative sector performance, 3 months

For weeks now this looks fairly consistent, and for weeks now it says the same thing: we're very late in the business cycle.

Source: finviz,com

International equities look broadly similar to last week. Commodity indexes at the top: Canada, Brazil, Australia, UK. Europe and Asia at the bottom.

Relative stock market performances, 3 months

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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)

Source: Dukascopy

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

Source: dailyfx.com

And another sentiment source: buy the FTSE, sell the JPY.

Source: forexclientsentiment.com

Fintwit Macro Sentiment continues to deteriorate:

https://chartstorm.substack.com/p/weekly-twitter-survey?s=r

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!)

Source: CFTC

Market Risks

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.

VIX and MOVE

High-yield spreads have moved up again, but they're somewhere in no-man's land right now. Reason enough to remain concerned.

Source: FRED

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.

Source: vixcentral.com

Fear & Greed Index shows just a tad of fear:

Source: CNN

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Various

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.

G8 vs. 25-delta risk reversals

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Other Stuff I've been looking at

Twitter avatar for @WallStJesus
JE$US @WallStJesus
SocGen Multi Asset Risk Indicator
Image
10:41 PM ∙ Apr 9, 2022
45Likes10Retweets

Emerging market debt is up significantly:

https://macroops.substack.com/p/lifes-a-garden-you-dig

… and hedge funds betting short on EMs: remember the diverging Citi Economic Surprise Indexes for EMs and G10 from above?

Twitter avatar for @AlessioUrban
🅰🅻🅴🆂🆂🅸🅾 @AlessioUrban
hedge funds - big short on emerging markets
Image
9:26 AM ∙ Apr 11, 2022
362Likes94Retweets

Monetary easing in China showing up in an increasing credit impulse, which should support the economy down the road:

Bild
https://twitter.com/PkZweifel/status/1513528399603589124
Twitter avatar for @donnelly_brent
ʎllǝuuop ʇuǝɹq @donnelly_brent
BofA Survey shows collapsing growth expectations... And max long commodities.... an extremely aggressive stagflation bet. I doubt both views will be vindicated from here. The best cure for high commodity prices is collapsing demand. Or, demand holds and commods rally. Not both.
Image
7:48 PM ∙ Apr 12, 2022
24Likes1Retweet

How CPI “performed” historically around peaks:

https://ritholtz.com/2022/04/10-monday-am-reads-345/

Composition of the US Core CPI:

Image
https://twitter.com/RollinFrederic/status/1514145988889522176

To put some things into perspective, here's Commodities/SPX ratio:

https://twitter.com/alvoviedo/status/1513861428423368704

Durable goods have become relatively more expensive to services during the pandemic, and this trend may have reversed:

https://apricitas.substack.com/p/inflation-hits-85-driven-by-a-18?s=r

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Wow, you've made it through the entire thing… congrats! 🙂

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Week 16/2022

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