The Week Ahead – The North Remembers

The Week Ahead – The North Remembers


After a weekend fighting the Koreans in sub zero temperatures I am glad to be back in that seething cauldron of barely organised chaos i call home, Bangkok. For those that aren’t aware, I occasionally compete in Brazilian Jiu Jitsu competitions and having never visited Korea before this was an ideal opportunity to travel, train and compete. My expectation was of a less developed Japan however I now feel like Seoul was reflective of an advanced China. Its how I expect Shanghai or Beijing to be in 10-15 years. More on my Korean investment thesis in time.

November is appearing to be a tough month for the S&P 500. Or so say the doomsayers predicting catastrophe at every slight sell off. The index has risen 31 of the 47 weeks this year. The bond market is starting to look a little shaky particularly the 30yr Treasury which is reflecting a pick up in inflation expectations. Regardless, the Nasdaq Composite reached a new historical high on Thursday but failed to maintain it.

Building permits and housing starts both surprised to the upside as did the growth in mortgage applications and retail sales which adds to the pick up in inflation. All important leading indicators in my opinion. The weeks selling could just be a natural pause in an uptrend though it bears keeping an eye on though I am still cautiously committed to the long side.

I would also like to congratulate Edmund, our research analyst for graduating this upcoming week from Singapore’s Nanyang Technological University. His tireless work and effort is what makes this weekly report possible. A huge kudos to an outstanding and exemplary young man.

Previous week: 13 November 2017 – 17 November 2017

UK CPI y/y—5.30pm 14 November 2017 Tuesday

UK CPI stayed pat at +3.0% for the month of October, a touch under consensus expectations of +3.1%. September’s CPI was +3.0% as well. UK inflation going forward will be the main driver in BOE’s policy making process.

US CPI m/m—9.30pm 15 November 2017 Wednesday

Core CPI for the month of October came in a touch better than expected. Headline CPI dipped a touch from +2.2% to +2.0%.

Name Actual Consensus Last
Headline CPI m/m +0.1% +0.1% +0.5%
Headline CPI y/y +2.0% +2.0% +2.2%
Core CPI m/m +0.2% +0.2% +0.1%
Core CPI y/y +1.8% +1.7% +1.7%

US Retail Sales m/m—9.30pm 15 November 2017 Wednesday

US retail sales is steady as a rock.

Name Actual Consensus Last
Headline Retail Sales m/m +0.2% +0.0% +1.9% (Revised from +1.6%)
Headline Retail Sales y/y +4.6% +4.8%
Core Retail Sales m/m +0.3% +0.3% +0.6%
Core Retail Sales y/y +1.8% +1.7% +1.7%

US Crude oil inventories—11.30 pm 08 November 2017 Wednesday

US crude inventories increased by +1.854 million barrels on the expectation of -2.4 million decrease. Baker Hughes US oil rig count increased by 0 from 738 to 738. Oil production was 9645k barrels per day for week ending 10/11/2017, an increase from 9620k barrels per day in the previous xweek, 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.

Compelling speech by Deputy Governor of BOE Ben Broadbent at London School of Economics

Parsing briefly through his speech at LSE, the dovish individual (1 to hike, 71 to maintain, 1 to reduce bank rate) stuck a hawkish stance.

Key sentences:

  • In March, eight months ago, it said in its Monetary Policy Summary that, if demand growth remained resilient, “monetary policy may need to be tightened sooner” than the market expected. Similar points were made in the intervening months. Yet, even as inflation rose, and the rate of unemployment fell further, interest-rate markets continued to under-weight the possibility that Bank Rate might actually go up this year.
  • But I suspect there was something else at work as well – and that’s Brexit. There’s been a persistent strain of opinion that EU withdrawal is something that necessarily means lower interest rates, or at least that it’s a reason to avoid putting them up. If so, then I think the belief has been overdone.
  • However, my main point is that, given all the moving parts, even the marginal impact of EU withdrawal on the appropriate level of UK interest rates is ambiguous. As the MPC said ahead of the referendum, in May 2016, the impact of a leave vote on monetary policy would depend on what it did to “demand, supply and the exchange rate”.
  • The combination of low unemployment and weak wage growth might qualify as one, but I think low productivity growth can explain quite a bit of that particular puzzle. We’ve had only limited data since productivity flattened out, a few years ago, and if you estimate a Phillips curve only over that period the resulting estimates are bound to be imprecise. But, to my mind, the basic judgement in the MPC’s forecast – that, for given productivity growth, less slack leads to faster wage growth – still looks reasonable.


The effects of Brexit on inflation, and ultimately on the appropriate level of interest rates, are altogether more uncertain and more complex. They’re certainly too complex to justify the simple assertion that Brexit necessarily implies low interest rates. The MPC eased policy in August 2016 not because of the referendum result but because of the steep fall in measures of business and consumer confidence that followed it. We made the judgement that the risks to demand were such that, even allowing for the weaker exchange rate and any immediate effects on supply, Bank rate should be reduced.

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.

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. Just a gut feeling.

“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: 20 November 2017 – 24 November 2017

US Crude oil inventories—11.30 pm 22 November 2017 Wednesday

Another draw in inventories?

FOMC Meeting Minutes—23 November 2017 3am Thursday

Nothing burger.

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 - Long Yen, Long Aussie The Week Ahead - Stranger Things and a view on BTC