The Week Ahead – Long Yen, Long Aussie

The Week Ahead – Long Yen, Long Aussie

Thanksgiving week certainly gave traders a lot to be thankful for. All time highs on the Nasdaq and S&P 500 combined with the mixed economic news. Real Estate sales, Mortgage applications and unemployment data came in on the positive side whilst Capital and Durable goods orders decreased. The Fed minutes provided the light relief for the week as they indicated they are still not able to calculate the actual and current inflation. Various sentiment polls are at levels not seen since the late nineties and the lack of worry is certainly a historical sign that there is need to worry. The shrinking spread between long and short dated treasury spreads is still a concern on my watch list.

It could certainly be worse as is the case in South Africa with the S&P Global Ratings agency cutting the countries debt score to junk. If Moody’s were to follow suit I believe the rand would go into free fall.

Bitcoin continues it’s upward momentum with Ethereum following suite and breaching all time highs over the week. The introduction of a futures trading contract for Bitcoin by the CME is certainly something to be aware of.

Previous week: 20 November 2017 – 24 November 2017

RBA Monetary Policy Meeting Minutes—8.30am 21 November 2017

Summary: The Phillips curve is broken in Australia and other developed countries. It is unbelievable the amount of emphasis policy makers place on this one theory.           

  • GDP growth was expected to increase and average around 3 per cent over the next few years.
  • Labour market continues to improve
  • Wage growth is lagging
  • Inflation is lagging.

Key paragraphs from RBA’s monetary policy minutes:

Point 1: The recovery in labour market conditions since late 2016 had been stronger than expected, including in Queensland and Western Australia, which suggested the adjustment of the labour market to the downturn in mining investment was nearing completion. Wage growth had been somewhat weaker than expected and had been particularly low in the mining-related parts of the economy. Underlying inflation had picked up a little and had been slightly higher than forecast, but the increase in headline inflation had been smaller than forecast.

Point 2: Turning to the immediate decision regarding the level of the cash rate, members noted that GDP growth had been stronger than expected in a number of major economies in the September quarter and that the outlook for global economic conditions had continued to improve. Accommodative financial conditions around the world had continued to support above-trend growth. Although unemployment rates had continued to fall, wage growth had been slow to increase in many economies and core inflation had remained low.

Point 3: Members noted that the outlook for growth in the Australian economy was largely unchanged from three months previously. GDP growth was expected to increase and average around 3 per cent over the next few years as the drag from mining investment diminished and export growth continued.

Point 4: Wage growth had remained low. It was expected to increase gradually over the forecast period as spare capacity in the labour market diminished and the dampening effects of compositional changes associated with the adjustment of the economy to the end of the mining investment boom abated. Members noted, however, that there was considerable uncertainty around when and how quickly wage pressures might emerge and about how much these would add to inflationary pressure. In particular, they noted that, among other factors, pressure on margins from strong competition and a faster-than-expected pick-up in productivity growth could delay the pass-through of tighter labour market conditions to inflationary pressure.

Point 5: Inflation was expected to increase, but only gradually. The forecasts had been updated to account for short-term factors, such as fluctuations in electricity and petrol prices, as well as for the effect of more frequent reweighting of the CPI in future. Members observed that any further appreciation of the exchange rate would lead to a slower-than-forecast pick-up in inflation and economic activity.

US Crude oil inventories—11.30 pm 08 November 2017 Wednesday

US crude inventories decreased by -1.86 million barrels on the expectation of -2.2 million decrease. Baker Hughes US oil rig count increased by 9 from 738 to 747. Oil production was 9658k barrels per day for week ending 17/11/2017, an increase from 9645k barrels per day in the previous week, pushing all time high production rate higher. The rise in rig count seemed to be attributed to the strong correlation to the price of oil. Oil production in US is now at an all-time high. The head on battle between US and OPEC continues.

FOMC Meeting Minutes—23 November 2017 3am Thursday

Summary: INFLATION, INFLATION, INFLATION, WAGE GROWTH, TAX CUTS. The Phillips curve is broken. Right, I forgot. The Fed said the lack of inflation is “TRANSITORY” and caused by “IDIOSYNCRTIC FACTORS”. In my humble opinion for the longest time, the market pricing in 100% rate hike in December is totally not taking the lack of inflation into account. Core PCE is currently at 1.3% when the Fed’s mandated target is 2%. The more they tighten monetary policy, the harder is it to generate inflation.

Quoting the Chicago Fed, “The monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment.” The current state of their dual mandate is shown from an image taken off their website. Well, what do I know?

Bloomberg’s Brendan Murray highlights the key aspects of The Fed Minutes:

  • Consistent with their expectation that a gradual removal of monetary policy accommodation would be appropriate, many participants thought that another increase in the target range for the federal funds rate was likely to be warranted in the near term if incoming information left the medium-term outlook broadly unchanged. Nearly all participants reaffirmed the view that a gradual approach to increasing the target range was likely to promote the Committee’s objectives of maximum employment and price stability.
  • A few other participants thought that additional policy firming should be deferred until incoming information confirmed that inflation was clearly on a path toward the Committee’s symmetric 2 percent objective.
  • Several participants indicated that their decision about whether to increase the target range in the near term would depend importantly on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee’s objective. A few participants cautioned that further increases in the target range for the federal funds rate while inflation remained persistently below 2 percent could unduly depress inflation expectations or lead the public to question the Committee’s commitment to its longer-run inflation objective.
  • In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy.
  • Several participants expressed concern that the persistently weak inflation data could lead to a decline in longer-term inflation expectations or may have done so already; they pointed to low market-based measures of inflation compensation, declines in some survey measures of inflation expectations, or evidence from statistical models suggesting that the underlying trend in inflation had fallen in recent years.
  • With core inflation readings continuing to surprise on the downside, however, many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected, and they discussed possible reasons for the recent shortfall. Many participants judged that the economy was operating at or above full employment and anticipated that the labor market would tighten somewhat further in the near term, as GDP was expected to grow at a pace exceeding that of potential output.
  • Overall, wage increases were generally seen as modest. A couple of participants expressed the view that, when the rate of labor productivity growth was taken into account, the pace of recent wage gains was consistent with an economy operating near full employment.
  • Several participants reported that business contacts appeared to be more confident about the economic outlook and thus more inclined to undertake capital expansion plans. In that context, it was noted that the expansion in business fixed investment could be given additional impetus if legislation involving tax reductions was enacted; a few participants judged that the prospects for significant tax cuts had risen recently.
  • With the balance sheet normalization program under way and with the balance sheet not anticipated to be used to adjust the stance of monetary policy in response to incoming information in the years ahead, members generally agreed that the statement following this meeting needed to contain only a brief reference to the program and that subsequent statements might not need to mention the program.
  • A few participants mentioned the limited reaction in financial markets to the announcement and initial implementation of the Committee’s plan for gradually reducing the Federal Reserve’s securities holdings. It was noted that, consistent with that limited response, market participants had characterized the Committee’s communications regarding the balance sheet normalization program as clear and effective. “Here’s a brownie”

Bank of Japan intends to tighten monetary policy?

Food for thought. The Bank of Japan hands are tied and is finding an out. How long can they continue to monetize their debt and yet see no sustained rise in prices? If the BOJ look at the Nikkei 225 instead of core CPI, they would actually be able to see sustained inflation.

Donald and his plan to cut taxes just overcame its second hurdle (ongoing till end of year)

The House of Representatives passed its tax bill with 227 yeas and 205 nays.

The real battle all along resides in the upper chamber; the Senate. Will the Republican-controlled Senate be able to whip up 50 votes + VP Mike Pence and pass its version of the tax cut bill? Senator Ron Johnson has already publicly declared his nay vote for the tax bill as it stands. The Senate can only allow 2 defectors from its rank and file. Other GOP senators may follow suit and vote no. To add to the monumental task of passing its tax cut bill, repealing of Obamacare’s individual mandate was added to the mix. However, I totally agree with the mainstream media’s point of the need to score a legislative victory by the GOP. Having bungled repeal and replace of Obamacare, they most definitely need to pass tax cuts. If not, there is a chance that the House and Senate may flip to Democratic control in the coming mid-term elections on 6 November 2018.

Ron Johnson: Firm Nay

Ron Johnson says no to both bills proposed by the House and Senate. I take his word for what it is worth.

15 November 2017: “These businesses truly are the engines of innovation and job creation throughout our economy, and they should not be left behind. Neither the House nor Senate bill provide fair treatment, so I do not support either in their current version.”

Lisa Murkowski (Alaska): Lean Yea

Lisa Murkowski supports repealing of individual mandate of Obamacare. She is also in support of drilling for oil and gas in her home state of Alaska. Both are included in the tax bill. Voting against the tax bill would imply she is not in favour for oil drilling in her home state. The authors of the tax bill really did forced her hand.

21 November 2017: “I have always supported the freedom to choose. I believe that the federal government should not force anyone to buy something they do not wish to buy in order to avoid being taxed. That is the fundamental reason why I opposed the Affordable Care Act from its inception and also why I cosponsored a bill to repeal the individual mandate tax penalty starting as early as 2013. And that is why I support the repeal of that tax today.”

17 November 2017 : “I have consistently said that passing Alexander/Murray is important to stabilizing the individual market and it may be particularly so if the individual mandate is repealed as included in the draft reported by the Senate Finance Committee last night. However, one should not assume this is a precondition for my support for the tax bill. Like many of my colleagues, I am reviewing the good work of the Finance Committee over the Thanksgiving Holiday. I plan to look at the entire package before coming to any conclusion on the legislation.”

From CNN: “That’s because the tax plan, due to arcane Senate rules, will be combined with a bill that would open up Alaska’s Arctic National Wildlife Refuge, or ANWR, to oil and gas drilling. Drilling in ANWR is an issue that’s long been near to Murkowski, in part because her father, Frank Murkowski, a former Republican senator and governor, also advocated for drilling but was unsuccessful. Proponents of opening up ANWR say it would significantly help Alaska’s economy, and adding it to tax reform will help give the package more revenue to pay for tax cuts. Opponents argue that drilling there would be harmful to fish and wildlife in Alaska’s Coastal Plain.”

“For many of us, we believe that [ANWR] is one of the best places that we can go for responsible development, and we should have done this some time ago,”

Susan Collins: Lean Nay

One of the nay votes that prevented the passage of the repeal and replace bill of Obamacare. Though she thinks that the tax code ought to be overhauled, she is displaced that repealing of the individual mandate in Obamacare was added to tax reform / cut. I do think her distaste for the repeal efforts of Obamacare will outweigh cutting of taxes.

19.11.17 Senator Collins on ABC’s This Week:

STEPHANOPOULOS: Can you vote for the bill that passed the Senate Finance Committee?

COLLINS: I want to see changes in that bill. And I think there will be changes. … So, there are provisions of both bills that I like. But I think the bill needs work.

STEPHANOPOULOS: You can’t vote for it as written?

COLLINS: I haven’t reached that conclusion yet, because I think there are going to be further changes. But the biggest mistake was putting in a provision from the Affordable Care Act into the Senate bill that is not in the House bill. And I hope that will be dropped or, that bills have been introduced by Senators Alexander and Murray and Bill Nelson and myself will be adopted to mitigate the impact of those provisions.

STEPHANOPOULOS: Sounds like you still have a lot of questions about this bill. One other feature pointed out by the Congressional Budget Office this week is that if this bill passes, with the increase in the deficit that it accommodates, over $1.5 trillion, there will be at least $25 billion in Medicare cuts next year.

COLLINS: I have talked to my colleagues about that, because that’s obviously something that I cannot support. I do believe that’s going to be dealt with as part of the budget negotiations that are ongoing right now. There are ways to reform our entitlement programs, but that is not one of them. The whole idea of across-the-board cuts or sequestration, or offsets that affect some of our most vulnerable citizens or our seniors is not something that I can support.

“I have data that demonstrates for certain middle-income individuals and couples, who do not qualify for subsidies under the ACA … that the premium increase will outweigh the tax cut that they get,” she said. “I suspected this, based on what I know about insurance markets, but now I have the actual data.”

“I am going to wait and evaluate what is in the bill. I do believe our taxes need to be overhauled. … I just don’t know why we had to complicate it by bringing up the ACA.”

John McCain: Lean Yea

John McCain cares greatly about the process of how bills gets debated in committee hearings before it gets unveiled to the full Senate. He cares more of the process rather than the policy itself.

“I applaud Chairman Hatch and the Senate Finance Committee in taking another step forward in providing much-needed tax relief for hard working American families. I am pleased that the Finance Committee has followed the regular order by holding numerous hearings and spending four days debating the bill and considering amendments in committee. As Chairman of the Senate Armed Services Committee, I value the process of moving important pieces of legislation through regular order. I am hopeful that when we return from the Thanksgiving recess to consider tax reform on the Senate floor, we will see this process continue, with both sides of the aisle having sufficient opportunity to debate the merits of tax reform and offer amendments.”

Bob Corker: Lean Yea

His disapproval of the tax cut bill stems not from him being a fiscal hawk but rather his distaste for President Trump. Although he is no longer beholden to donors and lobbyists because he is no longer running for reelection and hence can vote however he want, he is still an Establishment Republican and will be a good little boy and fall in line.

“I’m still working with folks to see if there’s some way to be assured as it relates to the deficit issue that we’re not going to create harm. There’s other senators who themselves want to ensure that we’re doing something to strengthen our country relative to the deficits. I’m not a yes, I’m not a no.”

Rand Paul: Lean Yea

A staunch fiscal hawk. With repealing of individual mandate in Obamacare, it will help reduce the deficit hole caused by cutting taxes. Though he may be one of the most right wing politicians, I believe that if the Senate includes repealing of the individual mandate, Rand Paul will eventually get there and be a yea vote.

Jeff Flake: Lean Yea

A fiscal hawk. He is not in approval of raising the national debt as seen from his However, his statement was made before the addition of repealing of the individual mandate in Obamacare (14 Nov) which would reduce the deficit and hence national debt. With the addition of the repeal of indivual mandate, he should be able to get to a yea vote. A first term senator since 2013 from a red state (Arizona) but not seeking reelection in 2018.

09 November 2017: “I remain concerned over how the current tax reform proposals will grow the already staggering national debt by opting for short-term fixes while ignoring long-term problems for taxpayers and the economy. We must achieve real tax reform crafted in a fiscally responsible manner. I look forward to working with my colleagues during a full and robust debate on the Senate floor to deliver on that goal.”

Joe Manchin (D-West Virginia): Firm Nay

02 November 2017: “My test for a good tax reform proposal is simple: does it enable working West Virginians to keep more of their hard-earned money, does it help West Virginia businesses create jobs, and does it do these things without exploding our debt. The tax reform proposal unveiled today does not pass this test and does not reflect the goals President Trump and I have discussed over the last several months. It puts investors ahead of workers, raises rates on the small businesses who create most of our jobs, and dramatically increases our national debt. None-the-less, I believe tax reform is something we must do, so in the coming days, I will do what West Virginians do best – bring people together and find common ground so that we can get something done. I am hopeful that my Republican colleagues will listen to my feedback and work with me to improve this package.”

Joe Donnelly (D-Indiana): Lean Nay

“As I have said, tax reform should create jobs, protect jobs, invest in American workers, and benefit middle class families. I will carefully review the Senate proposal released today and continue to engage with my colleagues and the White House on behalf of Hoosiers as the Senate works on tax reform.”

Heidi Heitkamp (D-North Dakota): Firm Nay

31 October 2017: “I’ve long said I’m eager to work with Republicans and Democrats on a tax reform package that simplifies the tax system and reduces taxes on hard-pressed middle income families and small businesses. But I’m very concerned by reports that Republicans intend to reduce the tax-free contributions that working Americans put into their 401K plans to save for retirement. Taking that step would raise taxes on North Dakota families and reduce their retirement savings. Men and women in rural America are working hard and playing by the rules, but it’s getting more and more difficult for them to make an honest living while saving for retirement. That’s just wrong, and we can’t allow actions that will take away families’ safety net.”

Edmund’s Senate tax cut whip count. On a knife’s edge.

Name Yay / Nay
Ron Johnson (R) Firm Nay
Lisa Murkowski (R) Lean Yea
Susan Collins (R) Lean Nay
John McCain (R) Lean Yea
Bob Corker (R) Lean Yea
Rand Paul (R) Lean Yea
Jeff Flake (R) Lean Yea
Joe Manchin (D) Firm Nay
Joe Donnelly (D) Lean Nay
Heidi Heitkamp (D) Firm Nay

//The Senate released its tax reform bill. Bloomberg did a good comparison between the House and Senate tax bill.

//The House of Representatives released its tax reform bill. So very pro big corporate. Corporate top tax rate from 35% to 20%. A transfer of wealth from main street to wall street.

//The House of Representatives took a step closer towards cutting/reforming taxes.

//Nothing is more important to the Republicans than cutting taxes. Unlike healthcare, it seemed that republicans in the House of Representatives and Senate are hell bent to get the votes to reduce the tax rate (for the wealthy). I believe they will get the votes needed in the House of Representatives and the Senate to pass the tax cut bill before the turn of the New Year. The market is already pricing in a successful passage of the tax cut bill through Congress in the capital markets.

//The betting market thinks that tax cut (both individual and corporate) will not be done by 2017. PredictIt is putting the odds at 20-30% of it happening.

Coming week: 27 November 2017 – 01 December 2017

US Crude oil inventories—11.30 pm 29 November 2017 Wednesday

Another draw in inventories?

OPEC Meetings—29 November 2017 Wednesday

How shall they curtail the gain in market share by the American Fracker?

Trade Ideas

AUD/USD long to watch

AUD/USD is currently at the upwards sloping trend line at 0.756.

USD/JPY short

USD/JPY sold off from the resistance level at 114.

JPY’s side of the argument:

From written above, the members of the Bank of Japan (excluding uber-dove Mr Kataoka) are now more confident that their policies will succeed in generating inflation and meeting their 2% target by FY 2019. The probability of further loosening of monetary policy will be pretty slim. No change in monetary policy is expected for the foreseeable future.

//When digging deeper and comparing the estimates made by BOJ members in July and October 2017, it is noteworthy that fewer members now see downside risk to inflation, implying that they are more confident that their policies will be successful in increasing inflation to 2%.

CPI y/y FY 2017 (July v Oct) FY 2018 (July v Oct) FY 2019 (July v Oct)
Downside risks 5-4 6-2 8-6
Upside risks 0-1 0-1 0-0
Risks are balanced 4-4 3-6 1-3

BOJ’s October CPI dot plot:

BOJ’s July CPI dot plot:

USD’s side of the argument:

  • The Federal Reserve is very far from reaching their 2% PCE core inflation target. It is currently at 1.3% and moving away from the 2% target. The 100% rate hike probability for December’s meeting seemed to totally dismiss any concerns by the Fed for the lack of inflation.
  • Donald Trump is (and had always been) a wild card. He (and the GOP) failed to repeal and replace of Obamacare. He may just fail to pass his tax cut / reform plan (which has much greater implications to corporate profitability). However, I am still of the opinion that Republicans will fall in line and support the tax cut bill.
  • Donald’s beef with Kim. The ongoing escalation of tensions with DPRK led to buying of safe havens like US Treasuries, Japanese Yen, and Gold. Lowering of yields in US Treasuries will make it hard for the US Dollar to rally.
  • The Federal Reserve is tightening their monetary policy (argument for USD strength).
  • The tax cut that the capital markets is pricing in for months now is not in alignment with what the betting markets are predicting. The betting markets are predicting that Republicans will fumble and screw up the passage of the tax cut / reform bill just like their sad attempt of repealing and replacing Obamacare. PredictIt have the passage of the tax cut bill at a measly 20%.

Image of US core PCE year on year taken from

Image of corporate tax cut odds by PredictIt:

Fed’s rate hike odds is now at 100% (125 – 150 bps 91.5% and 150 – 175 bps 8.5%) for December’s meeting. Basically a rate hike in December has already been priced in. But, the issue is whether there is a chance of a surprise from the Fed by them choosing to stand pat and not hiking in December. This is especially so when September’s CPI was another miss and also when the Fed mentioned that low inflation may be due to persistent factors too.

“Nevertheless, many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted.”

The Week Ahead - Flattening yield curve and XAG The Week Ahead - The North Remembers