The Week Ahead – Emperor’s and Tsar’s

The Week Ahead – Emperor’s and Tsar’s

The Week Ahead – Emperor’s and Tsar’s

Looking out the window of the A320 as i fly over the Straits of Malacca one could almost confuse it for a Bangkok traffic jam. Shipping volume as a function of global trade is booming and the Baltic Dry Index appears to confirm that. So much for trade wars and embargo’s.

The US added roughly 700,000 new jobs in the first two months of the year. This is a frightening number for the bears out there. Personally i feel unemployment could hit sub 4%. A bold call i know. ISM PMI’s over 60, consumer sentiment euphorically high. In other words the economy is red lining with no sign of abatement. Long equities short REIT’s and other interest sensitive instruments. I particularly favor European financials as a long play. EUFN may be due for a correction and should be on your watch list.

China’s parliament passed sweeping changes to the constitution Sunday, repealing presidential term limits to allow President Xi Jinping to rule indefinitely making him the defacto emperor of China. Clearly taking a page out of Czar Putin’s book. Similarly they both came into power on an anti-corruption platform. Turns out they may have enough dossiers on everyone to keep the dissenters in check. Interesting times to be alive in. Markets hardly seem fazed by these developments. Too early to anticipate what change this will illicit.


Previous week: 05 March 2018 – 09 March 2018

Italian Parliamentary Election—04 March 2018 Sunday

Major shakeup of the makeup of the Italian parliament. No coalition have sufficient seats to form a government, hence a hung parliament. The incumbent centre left coalition lost lots of seats while populist 5 star movement and centre right coalition made huge gains.,_2018

Reserve Bank Australia cash rate, rate statement—11:30 am 06 March 2018 Tuesday

Cash rate stayed unchanged at +1.50%.

Key lines from the statement:

  • Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.
  • On a trade-weighted basis, the Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
  • The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.

Reserve Bank of Canada overnight rate, rate statement—11pm 7 March 3018 Wednesday

No change (+1.25%) in overnight rate occurred. Canadian inflation continues to be under 2%. The last inflation number was +1.7% in January 2018.

Key sentences from statement:

  • Inflation is running close to the 2 per cent target and the Bank’s core measures of inflation have edged up, consistent with an economy operating near capacity. Wage growth has firmed, but remains lower than would be typical in an economy with no labour market slack. Inflation is fluctuating because of temporary factors related to gasoline, electricity, and minimum wages.
  • While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target.

US Crude oil inventories—11.30 am 28 February 2018 Wednesday

US crude inventories INCREASED by +2.408 million barrels on the expectation of +3 million increase. Baker Hughes US oil rig count decreased by 4 from 800 to 796. Oil production was 10,369k barrels per day for week ending 02/03/2018, an increase from 10,283k barrels per day in the previous week. US oil production having overtaken Saudi Arabia continues to push for new highs. The rise in rig count is attributed to the strong correlation to the price of oil. The head on battle between US and OPEC continues. Frackers are churning out their rigs while OPEC is keeping a lid on production.

Image taken from Zerohedge:

European Central Bank minimum bid rate, press conference—8.45pm 08 March 2018 Thursday

The ECB kept their monetary policies unchanged. However, a key line that was consistent in all their press conference since December 2016 was dropped.

Key sentences from press release:

  • The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.
  • Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the current monthly pace of €30 billion, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

Key sentence dropped from press release:

  • If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration.

What does this imply? By dropping this line, it implies that the ECB does not think that “the outlook [will] become less favourable” and that they do not see inflation dropping further. ECB has more confidence in the economy, hence their hawkish stance.

ECB projections: Not a big change in their projections since December 2017.

ECB GDP Projections: 2018: 2.4% (Prev. 2.3%), 2019: 1.9% (Prev. 1.9%), 2020: 1.7% (Prev. 1.7%)

ECB Inflation Projections: 2018: 1.4% (Prev. 1.4%), 2019: 1.4% (Prev. 1.5%), 2020: 1.7% (Prev. 1.7%)

Image taken from Zerohedge:

Bank of Japan policy rate, monetary policy statement, press conference—Friday 09 March 2018

All of Bank of Japan’s monetary policies were kept unchanged.

Key sentences from statement:

  • On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is around 1 percent. Inflation expectations have been more or less unchanged.
  • The year-on-year rate of change in the CPI is likely to continue on an uptrend and increase toward 2 percent, mainly on the back of an improvement in the output gap and a rise in medium- to long-term inflation expectations.
  • The Bank will continue with “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control,” aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner.

Uber-dove Mr G. Kataoka continues to oppose the opinion of the consensus. Quoting Zerohedge “There was one dissenter – same as before – this guy not only wanted more NIRP, but also more QE, clearly unaware that the BOJ already owns more than half of all Japanese govt bonds.” His dissent is as follows:

  • G. Kataoka dissented, considering that, taking account of risk factors such as the consumption tax hike and a possible economic downturn in the United States, it was desirable to achieve the price stability target in fiscal 2018, and that it was appropriate for the Bank to purchase JGBs so that yields on JGBs with maturities of 10 years and longer would broadly be lowered further.
  • G. Kataoka opposed the description, considering that the possibility of the year-on-year rate of change in the CPI increasing toward 2 percent going forward was low at this point.
  • With a view to reinforcing the inflation-overshooting commitment, Mr. G. Kataoka opposed the description, considering that, if there was a delay in the timing of achieving the price stability target due to domestic factors, the Bank should take additional easing measures and that it was necessary to include that in the text.

US February Jobs report—9.30pm 09 March 2018 Friday

The tax cuts is having an impact on job creation. A giant number with sizable upward revisions.

Name Actual (Feb) Expectation Last
Non farm employment change +313K +205K Jan: Revised from +200K to +239K (+39K)

Dec: Revised from +160K to +175K  (+15K)

Net revision: +54k

Unemployment rate 4.1% 4.1% 4.1%
Average hourly wage m/m +0.1% +0.2% Dec: Revised from +0.3% to +0.4%
Average hourly wage y/y +2.6% +2.8% Jan: Revised from +2.9% to +2.8%
Participation rate 63.0% 62.7%

A notable mention which President Trump should be proud of is the creation of manufacturing jobs. Having plateaued from 2015 to 2016, he managed to change this trajectory and is now trending upwards. 31k new manufacturing jobs created in February.

Donald Trump agrees to meet Kim Jung Un by May

From “fire and fury” to a face-to-face meeting. What a turn of events. With US-led sanctions squeezing the living daylights out of North Korea, its Supreme Leader buckled / gave in. I never expected that Kim Jung Un would even consider giving up their nuclear programme. Apparently he is willing to give them up.

Coming week: 26 February 2018 – 02 March 2018

US CPI—13 March 2018 Tuesday

Core CPI is expected to be +1.8% in the month of February.

US Retail Sales—14 March 2018 Wednesday

An increase of +0.3% in retail sales is expected in the month of February.

US Crude oil inventories—11:30 am 07 March 2018 Wednesday

Inventories will continue to build up, oil production to rise,10  and crude prices will consequently fall.

Trade Ideas

USD/JPY short (wait)

USD/JPY broke a key support at 108 last week. Retracement back up to 108 will give a good opportunity to go short with potential target at 101. The BOJ, holding over 50+% of outstanding JGBs, seemed to be planning for an exit from their QE programme. The monetary policies of the BOJ and Fed will soon be in alignment once the BOJ starts to tighten.



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