Offsides

The PPI data revealed
Inflation has clearly not healed
Will Jay and the Fed,
When looking ahead
Now tell us one cut’s been repealed?

So, now here we are at the Ides
Of March, as opinion divides
Some still say a cut
Will come in June, but
Some others think, no that’s offsides

Once again, the inflation data did nothing to help the case for a rate cut anytime soon in the US.  This time the PPI data showed that prices rose far more than expected in February, 0.6% at the headline level and 0.3% at the core level.  The rises, when broken down, were across the spectrum of goods and services.  The point is despite what appears to be an overriding desire to cut rates by June, the data is not cooperating for Jay and his friends.  Will this be enough to dissuade them?  We still have 3 more months before the critical time and the market, despite itself, is now putting all its eggs in the June basket, having reduced the May probability to just 7%.  Clearly, it remains highly dependent on how the data progresses, and not just the inflation data, but also the employment data, but for now, I find it hard to make the case that the Fed should be cutting rates anytime soon.

Of course, there remains a large contingent of analysts, economists and pundits who believe that the Fed should cut next week, or May at the latest, as they are already doing grave damage to the economy.  You may recall the immediate response by the Nick Timiraos article to the hotter than expected CPI data.  Well, this morning, we have Bloomberg with an article that claims a solid majority of the forty-nine economists they surveyed continue to look for the first cut in June and three cuts this year.  It certainly appears there is a great effort to convince us that those rate cuts are coming, although as I have maintained, if the Fed is truly data dependent, the data is not pointing to cutting rates as the appropriate move at this time.  This argument discussion will continue for the foreseeable future, that is the only certainty.

Wages have blossomed
Will Ueda-san enjoy
The view, and end NIRP?

The preliminary indication from the Shunto wage negotiations shows that the average wage increases in Japan this year will be 5.28%, the largest rise in decades.  Apparently, Toyota accepted the union’s demands fully and didn’t even offer a counter!  When comparing this outcome to the most recent CPI readings in Japan, which showed a headline rate of 2.2% and a Core of 2.0%, it certainly appears that there could be some wage driven price increases upcoming.  As has been mentioned repeatedly, this was seen as a key issue for the BOJ ahead of their meeting this coming Monday night (Tuesday in Japan) in terms of being a sufficient catalyst for the BOJ to finally raise their overnight interest rate from its current -0.10%.  

Now, while Ueda-san’s own words have seemed more circumspect, the growing consensus amongst the analyst community in Tokyo is that the move will happen next week with no need to wait until the April meeting.  But a funny thing has been ongoing in markets while this consensus has been building, the yen has been falling.  While there was essentially no movement overnight, since Monday, when the discussion began to heat up, the yen has declined more than 1.5% in value, almost as though the market is selling the news ahead of the news.  Perhaps of more interest is the fact that 2-year JGB yields have fallen this week by 2bps, which while not a great deal overall, represents a reversal of the gradual increase that has ostensibly been driven by the upcoming BOJ policy tightening.  I have a funny feeling that while NIRP may well turn into ZIRP next week, as the market looks ahead, there is much less tightening perceived in the future.  I have maintained that a move beyond +0.2% would be highly unlikely this year, and possibly next year.  As such, when considering the FX rate, USDJPY remains far more beholden to the Fed and US interest rates than to whatever the BOJ does at the margins.  Let’s face it, if the BOJ hikes rates to 0.2% by December, but Fed funds remains at 5.5%, it is still a very difficult case to buy yen.

And those have been the key stories driving things since I last wrote.  A look at the overnight session shows that Asian equity markets were mixed with the Nikkei sliding a bit, while the Hang Seng fell sharply (-1.4%), perhaps on fears of increased tech stress between China and the US.  However, the CSI 300 managed a small gain despite weak Loan data and the rest of the bloc saw a lot of red on the screen, following the US session losses yesterday.  In Europe this morning, it is the opposite reaction with green across the screen led by Spain (+1.1%) but modest strength everywhere as inflation data from Italy and France seemed to show more moderation.  Meanwhile, at this hour (7:30), US futures are edging higher by 0.3%, essentially unwinding yesterday’s losses.

In the bond market, yesterday’s PPI data saw bonds sell off aggressively in the US with yields across the entire curve rising 10bps.  This morning, Treasury yields have backed off 2bps, but remain at 4.27%, above what is perceived to be a trading pivot level of 4.20%.   European yields also rose yesterday, albeit not quite as aggressively as US yields, and this morning they are essentially unchanged.  

In the commodity markets, oil (-0.5%) is giving back a bit of its recent gains but WTI remains above $80/bbl and Brent crude above $85/bbl.  Apparently, the IEA has revised its global oil demand figures higher by more than 1 million bbl/day and despite the fact that there is ample spare capacity in OPEC, the market is tightening right now.  Gold, which sold off yesterday on the rising rates / higher dollar situation, is rebounding a bit this morning, +0.3%.  Interestingly, copper (+1.3%) did not sell off on the interest rate or dollar story and is now back at its highest levels in nearly a year and firmly above $4.00/Lb.  Something is going on here which seems to be a positive hint for growth.

Finally, the dollar, which rocked yesterday, rising almost 0.65% across the board with some significant gains vs. specific currencies, is essentially unchanged overall this morning, holding onto those gains.  In fact, there are a few currencies that are still feeling pressure like KRW (-0.5%) and NZD (-0.5%) but there has been a modest bounce in ZAR (+0.4%) on the back of the strong metals complex.  Net, the DXY is unchanged on the day, back above the 103 level.

We finish the week with some more secondary data as follows:  Empire State Manufacturing (exp -7.0), IP (0.0%), Capacity Utilization (78.5%) and Michigan Sentiment (76.9).  Now, we have seen secondary data have an impact recently, and given the quiet period prevents any Fedspeak, market participants are looking for any clues they can find.  It will be very interesting to see if today’s data indicates that the economy is continuing at its above trend growth rate or implies things are fading.  My observation is manufacturing continues to struggle overall, and sentiment on the economy isn’t great, so I would look for weakness rather than strength.  In that case, perhaps bonds rally further, and the dollar unwinds some of yesterday’s gains.

Good luck and good weekend
Adf