After almost believing Janet Yellen was indeed a monetary policy maverick and the market would never go down again we were quite surprised to see the first down week in a very long time. Global Macro as a thematic investment strategy has been off the hook this week with the major news being the Saudi purge, the severity of which should not be underestimated. Two informative reads on the subject below.
Core Logic reported that US house prices were up 7% year on year however it’s this Friday’s building permits release that holds my interest as a significant leading indicator.
The major issue, in my estimation, is the nearing of an inverting yield curve in the bond markets. Something to be watched closely over the coming months.
Previous week: 06 November 2017 – 10 November 2017
RBA Cash Rate, Rate Statement—11.30 am 07 November 2017 Tuesday
The cash rate stayed at +1.50% with the implication that global uncertainty remains elevated and Chinese growth is on shaky ground.
The Reserve Bank of Australia rate statement comparison between November v October:
Key distinction highlighted below:
- Conditions in global economy continuing to improve
VS have improved
- In other major economies, monetary policy has become a bit less accommodative
VS there is no longer an expectation of additional monetary easing.
- The Bank’s forecasts for growth in the Australian economy are largely unchanged. The central forecast is for GDP growth to pick up and to average around 3 per cent over the next few years.
- Business conditions are positive and capacity utilisation has risen vs Business conditions are at a high level and capacity utilisation has increased.
- One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.
VS Against this, slow growth in real wages and high levels of household debt are likely to constrain growth in household spending.
- Employment has continued to grow strongly over recent months. Employment has increased in all states and has been accompanied by a rise in labour force participation.
- Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing. The Bank’s central forecast remains for inflation to pick up gradually as the economy strengthens.
VS Inflation also remains low and is expected to pick up gradually as the economy strengthens.
- An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
Summary: The lack of inflation and wage growth are holding the RBA back from raising interest rates.
RBA Monetary Policy Statement—Friday 8.30am 10 November 2017
The RBA’s inflation target is 2-3%. The RBA is now forecasting that inflation will reach the lower bound of 2% by June 2019, which means they are pushing back their target date from Dec 2017. The reason given was re-weighting of CPI.
Forecasts by RBA in November Monetary Statement:
Forecasts by RBA in August Monetary Statement:
Underlying inflation forecasts revised slightly lower for 2018 and cut by half a percentage point for 2019, mainly to allow for upcoming re-weighting of CPI. “The assessment of pricing pressures in the near term has not changed,” the RBA said.
Quarterly GDP growth to ease slightly in third quarter, then to average about 3% over next couple of years, led by resource exports and more positive business investment
Household consumption likely slowed in third quarter after weak retail data; weak income growth and high debt levels are constraints
Labor market conditions have “strengthened considerably” and forward indicators suggest “above-average employment growth” will continue.
“Taken at face value, today’s forecasts suggest scope to ease should activity, the labor market, and wages growth disappoint,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. “Persistently sub-target inflation would be harder to ignore in such circumstances. We are a little surprised by the muted reaction from the market.”
“It is our view that the decision to lower the forecasts to below the bottom of the band in 2018 and at the bottom of the band in 2019 has significant policy implications,” said Bill Evans, chief economist at Westpac in Sydney, referring to inflation. “These forecasts no longer portray a central bank that expects to raise rates.”
“This morning’s statement is mostly a ’steady as she goes’ document. The Bank remains constructive about the domestic economic outlook but is in no rush to change the stance of monetary policy,” said Justin Fabo at Macquarie Bank Ltd. “Australia’s economy is behind other developed economies in the cycle so the bank has ample scope to watch how inflation developments play out abroad.”
US Crude oil inventories—11.30 pm 08 November 2017 Wednesday
US crude inventories increased by +2.24 million barrels on the expectation of -2.45 million decrease. Baker Hughes US oil rig count increased by 9 from 728 to 738. Oil production was 9620k barrels per day for week ending 11/03/2017, an increase from 9553k barrels per day in the previous week. 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.
Images from Zerohedge:
RBNZ Cash Rate, Rate Statement, Press Conference—4.00 am 09 November 2017 Thursday
Cash rate stayed unchanged at +1.75%. The devil’s in the details. The mainstream media did accurately pick up the changes RBNZ made in their projections.
Reserve Bank of New Zealand rate statement comparison between November v September:
- Commodity prices are relatively stable.
- The exchange rate has eased since the August Statement and, if sustained, will increase tradables inflation and promote more balanced growth.
- Employment growth has been strong and GDP growth is projected to strengthen, with a weaker outlook for housing and construction offset by accommodative monetary policy, the continued high terms of trade, and increased fiscal stimulus.
- Annual CPI inflation was 1.9 percent in September although underlying inflation remains subdued.
VS Annual CPI inflation eased in the June quarter, but remains within the target range. Headline inflation is likely to decline in coming quarters, reflecting volatility in tradables inflation.
- Overall, CPI inflation is projected to remain near the midpoint of the target range and longer-term inflation expectations are well anchored at 2 percent.
The most important takeaway from the comparison in statements is the deletion of the phrase “Headline inflation is likely to decline in coming quarters” in the November statement vs September’s. This implies that the RBNZ is no longer expecting inflation to decline, which is a bullish.
The devil’s in the details. The timing of achieving the 2% inflation target has been shifted forward from March 2019 to June 2018. The timing of the next rate hike have been shifted forward by one quarter from September 2019 to June 2019. Since the start of the year, the RBNZ have been predicting a hike only in September 2019 (See 3rd image).
Forecasts made in November 2017:
Forecasts made in August 2017:
Donald and his plan to cut taxes just overcame its second hurdle (ongoing till end of year)
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% of it happening.
A stable, transparent government undergirds a strong, stable economy. Venezuela’s government is anything but. Despite having the largest oil reserves (larger than Saudi Arabia), its corrupt government have neglected its people. If anything else, Venezuela is a prime case study for governments to learn how not to govern.
Coming week: 05 November 2017 – 11 November 2017
UK CPI y/y—5.30pm 14 November 2017 Tuesday
The expectation is for inflation to creep up to +3.1% in October 2017 from +3.0% in September.
US CPI m/m—9.30pm 15 November 2017 Wednesday
CPI m/m is expected to be +0.1% for month of October. Core CPI m/m is expected to be +0.2% for month of October. CPI y/y is expected to be +2.0% for month of October. Core CPI y/y is expected to be +1.7% for month of October.
US Retail Sales m/m—9.30pm 15 November 2017 Wednesday
Retail Sales m/m is expected to be +0.0% for month of October. Core Retail Sales m/m is expected to be +0.3% for month of October.
US Crude oil inventories—11.30 pm 08 November 2017 Wednesday
Another draw in inventories?
USD/JPY is now right at resistance at 114.
JPY’s side of the argument:
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)|
|Risks are balanced||4-4||3-6||1-3|
BOJ’s October CPI dot plot: https://www.boj.or.jp/en/mopo/outlook/gor1710b.pdf
BOJ’s July CPI dot plot: https://www.boj.or.jp/en/mopo/outlook/gor1707b.pdf
USD’s side of the argument:
After selling off hard for some time, NZD/USD is now at a crucial support zone at 0.68.
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 Investing.com:
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.”
Given all the frenzied action in the BTC market recently i thought i would add this analysis from a succesful futures trader and a mate of mine. Emptor caveat.