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Markets Weekly April 27, 2024

发布时间 2024-04-28 01:50:42    来源


federalreserve #marketsanalysis Inflation is Sticky US Giving Russian Reserves to Ukraine Highlights from Fed Financial Stability ...



Hello my friends, today is April 27th and this is Markets Weekly. So this week was another volatile weekend markets, but we did end the week up nicely. It looks like that 100 day moving average provided some good support for the S&P 500 and now we're right below the 20 and 50 day moving average which I'm sure many bears would like to sell at. So I think that the short term trajectory of markets is going to be heavily dependent on the big events next week. We got the Fed, we got the quarterly refunding announcement and we got non-farm payrolls. As you all know, I continue to be positive on the equity markets. So today I want to talk about three things.
大家好,今天是4月27日,这里是每周市场简报。本周市场再次波动很大,但最终我们以不错的涨幅收尾。看起来,S&P 500的100日移动平均线为市场提供了一些支撑,现在我们正好处在20日和50日移动平均线下方,我相信许多空头会想在这里开始卖出。因此我认为,市场的短期走势将在很大程度上取决于下周的重大事件。我们有美联储会议、季度退款公告和非农就业数据公布。大家都知道,我依然对股票市场持乐观态度。今天我想谈谈三件事情。

First, we have to talk about the big data prints we got the past week that seem to suggest that inflation is going to be sticky around 3% that is, as we've been discussing for months, this inflation was transitory. Secondly, so it looks like the US government is poised to seize Russian reserves and give them to Ukraine. Now I think this is a very big development in the history of the monetary system and it's going to have big impacts that will be felt for years and also have big impacts on asset prices. Let's talk about what some of those impacts could be.

And lastly, last week the Fed published its most recent semi-annual monetary financial stability report and in it is full of lots of interesting data on valuations and credit quality as the Fed staff sees it. So let's take a look inside to see what it's saying.

Starting with the big data prints. So the past week we got the first estimate of first quarter GDP and on the surface it doesn't look good. So GDP growth printed at 1.6% which was not just far below expectations but also below trend. Secondly, inflation printed above expectations and looks like it's going to be comfortably above 3%. So all in it looks like growth slowing inflation accelerating smells a little bit like stag flation. But I think below the surface it looks a little bit better.

First let's talk about GDP. So GDP obviously 1.6% of big disappointment. But the people who really study this say that this GDP print is actually stronger when you look below the surface because GDP is comprised of many different components. Some of them are quite volatile. Kind of like CPI you have headline CPI that includes things like energy that goes up and down and you also have core CPI that excludes these volatile components. When it comes to GDP data these volatile components are things like net exports and inventories. So when you exclude the stuff that's more volatile looking at the core measures let's say private final consumption it looks a lot better and frankly it is decelerating but it's still historically quite strong. And so a lot of the people who focus on this don't actually think that this was a weak GDP print.

In fact you can even make the argument that demand is quite strong in the US so much so that it's spilling over and leading to more imports and maybe the stronger dollar plays a role as well. So again it may be the GDP print is not as weak as it appears to be but the inflation print though is very clearly disappointing. So just to level set a little bit for the second half of the 2023 core PCE printed at bang on 2.0% and now it looks like it's comfortably above 3% at least for the first quarter of this year. Now this is really eliciting a very strong market reaction because if you think that you know GDP continues to be strong under the surface but inflation looks to be accelerating then obviously it's going to have big impacts on monetary policy. The Fed just can't cut as much as it wanted to.

So the reaction to this news is yields going higher, market pricing out, Fed cuts and of course equities selling off. Right now it looks like the market is pricing in just maybe one and a half a bit less than one and a half cuts this week and I think that makes sense. The Fed's projections for this year was the end of the year at about 2.6% core PCE and three cuts. If core PC looks to be above 3% this year and right now that's the trajectory you definitely can't have three cuts you can have two you can have one and something like that so I think the market is bang on for that. But note though this is a very volatile series and we could have different inflation prints, we could have weaker employment prints and there is some indication looking at say PMI data looking at way throughout that the labor market is softening we can have weak labor prints and that would completely change the calculus.
因此,对这一消息的反应是收益率上涨,市场定价出局,美联储减息,当然还有股票出售。目前看来,市场正在定价,可能本周会降息一次半,甚至不到一个半的次数,我认为这是合理的。美联储对今年的预测是年底核心PCE约为2.6%,并且有三次降息。如果今年核心PCE看起来会超过3%,而且现在看来确实如此,那肯定不能有三次降息,最多只能有两次,或者一次之类的,所以我觉得市场对此是非常准确的。但需要注意的是,这是一个非常波动的系列数据,我们可能会看到不同的通胀数据,可能会看到较弱的就业数据,looking at say PMI data looking at way throughout 工厂采购经理指数数据 经济呈现软化迹象,我们可能会看到劳动就业数据疲软,这将完全改变计算方式。

Right now it looks like we're going to get a more hawkish fin than before. Jip Howes pivot when he was at that conference in DC chatting with Governor Tiff Maklim of Bank of Canada was prescient and maybe he knew it. Now, so I think the Fed meeting this coming week is probably not going to be too surprising the market is already pricing in a lot of hawkishness. Okay, the second thing that I want to talk about is that the House recently passed a resolution that will allow the US to take the Russian reserves that it seized and give them to Ukraine. Now this is expected to easily sail through the Senate and be signed by President Biden so it's going to happen. Now at the end of the day this is only a few billion dollars most of Russians farm reserves are in the Eurozone. In Eurozone there's discussion that they want to do the same thing but there's I think a little bit more uncertainty. Now I think this is a really big deal because it's telling the world that your money in dollars just isn't safe. If we don't like what you do not only are we going to freeze it you know when you freeze someone's assets if there's still hope that maybe later on a new government comes and then you can release the assets or maybe you choose your modify your behavior and the assets get unfreezed but they're taking assets from one country and giving it to another.

Now I think this is kind of this is really going to have a big impact in how sovereigns like other countries especially those that are not close friends with the US think about holding their financial exposure. Now today the US is the world's global reserve currency everyone holds a bunch of treasuries a bunch of dollars but that didn't happen magically it was the effort of a lot of diplomacy and you know a lot of good management which is not the case today. Now there's a recent paper called the Treasury standard that I'll link to that details some of the efforts that went into in making the dollar the global reserve currency. The US government you know basically went around the world saying hey hey we're projecting you we're doing good things can you buy some treasuries and that was very successful we had a lot of countries let's say in the Middle East throughout the developing world you know feel comfortable buying treasuries and through the decades just became routine in buying that but now you're giving people a reason not to buy not to hold dollars not to have treasury exposure at the time when you're running a you know five six percent fiscal deficit for the foreseeable future that is to say when you really want other people to hold your dollars.

Now you know we hear a lot of news of let's say oh the US is building a new chip factory in Arizona and Texas or wherever we have Taiwan semiconductor is coming in and building factories there's a big push to build a lot of chip factories in the US. Why well naturally part of it is due to the geopolitics we want to we know that we are really reliant upon this and this resource this resource is you know close to China far away from our sphere of influence and there's some conflict over Taiwan. So it's part of a geopolitical play. Now keeping this in mind you have to think about this from let's say China's perspective right so the US is trying to diversify from China through what it's reliant upon manufacturing you know French or anything like that and China is going to be doing the same thing. It has tremendous amounts of dollar exposure now we don't exactly know just how many treasuries it holds it's a foreign reserves about three and a half trillion and we don't the exact compensation is a state secret but you know generally estimated to be you know at least a trillion dollars and that's a lot of exposure that you know just as the US diversifies manufacturing away from China China is going to have to diversify some financial exposure away from the dollar. There's not a lot of places to put that money but you know we know that they've been trying to put it in other places.

For example there was that say belt and road initiative trying to lend dollars to a lot of developing countries so basically your dollar asset goes from an asset that goes from an IOU given from the US government to an IOU given by another government which doesn't have as much credit risk. So it seems like one implication of this big diversification of foreign reserves is going to be a bid for non dollar assets like gold. So if you look at some of the data it looks like a lot of the surge in gold prices is due to increased activity trading in China and you even have some data that suggests that maybe there are a lot of people in China stockpiling things like copper. So if you have a trillion dollars of exposure and you want to diversify that a little bit one there's not a lot of things you can do but when you do it you have to do this slowly and you're going to make prices rise. Now looking at the gold market you know it's big but it's not that big it's not that liquid and you really can't hold that much money. So when we see the steady bid in gold prices even as the dollar strengthens even as real interest rates rise I'm getting the sense that you know you really do have some sovereign interest there trying to diversify the tremendous holdings and they happen to do it slowly and gradually because the market in gold is just not that deep compared to say treasuries.

So I'm feeling pretty positive about gold prices right now that it can really go higher than anyone expects simply because you have these real geopolitical interests at play. Now on the flip side though we could see structural weakness in charging market going forward simply because we are widely advertising to a lot of foreign investors, foreign sovereign investors who you know is a big pool of money that dollars are not reliable because if you do something we don't like we're going to weaponize against you. So I think this is you know again plays into a theme of maybe higher interest rates not just due to structurally stick your inflation but that you are going to have to have more of a risk premium in dollars that you didn't have before which is a real shame because having a reserve currency is a huge privilege and part of the reason why the US is just kind of spent without without any afterthought but that looks like it's structurally changing. It's not going to happen overnight but you know you're going to have higher commodity prices I think and you're going to have higher interest rates going forward over the years.

Okay the last thing that I want to talk about is that the Fed's latest semi annual financial stability report. Now this is a really good report because it the Fed has really good data and it's able to organize that data and present a coherent picture as to what's happening in the financial markets. Now first let's look about look at how the Fed staff is looking at valuations. Now when you look at valuations you have a textbook approach that is either a fundamental view let's say you know price earnings stuff like that or you can value it from a relative perspective let's say equities versus bonds something called the equity risk premium. Now looking at the Fed staff's work they're saying that you know valuations are stretched which is kind of no surprise anyone but also note that you know looking at these charts what is expensive can continue to become even more expensive and what is cheap can continue to become even cheaper.

So personally I don't find valuation measures to be very useful in looking at markets but in line with say perceived expensive equity markets we can also look at the corporate bond market and it also looks pretty rich as well. So the way that people usually look at corporate bond markets is what are corporate bond yields as a spread the treasuries. The wider that spread is the more premium lender is wanting to receive when it's lending to the private sector. Now corporate bond spreads are historically quite narrow so you got narrow corporate bond spreads high-tech evaluations it tells a picture that you know financial conditions are not super restrictive how which is what we all know. Now I also want to take a look at what the Fed staff is thinking about when it comes to housing. So one valuation metric of housing is to basically look at house prices with reference to rents you know kind of like a cap rate approach of looking at it and based on this measure the recalculation suggests that home prices are historically quite high which is in line what many people are thinking as well.

Now moving forward let's look at some of the measures of credit quality. So there's been a lot of discussion how the US consumer is just not doing that well. So here we provide first let's look at auto loans. So looking at auto loans we see auto loan balances really surge post pandemic as interest rates were high or low and now that they're high we can see them really plateauing but more notably though we do see that auto loan delinquencies have climbed and they are higher than they were in the pre-pandemic era. So there is definitely some segment of the consumer who are having some trouble making their payments.

Now looking at credit card debt we can see that credit card debt of course rose a lot but credit card delinquencies are also climbing they were at very low levels post pandemic but now they are really comfortably above the pre-pandemic trend. So there are definitely some people who are having some trouble making their payments.

Now part of the reason for these rising consumer delinquencies though is as we've discussed before not so much of loosening credit standards but an inflation in credit scores. Credit scores basically are pro cyclical. So when the economy is doing well you know everyone has jobs everyone makes their payments or when you know the government is sending you free checks you know you have plenty of capacity to make your payments and so your credit score goes up. Now this has led to some inflation in credit scores such that you know someone who is actually a bad credit looks like a less bad credit and so in a sense you can think of it as basically people who shouldn't be getting loans are getting loans and I think that's contributing to the higher delinquency rates.

So definitely something to focus on.

So this week is a Fed meeting week and so again I'll be back on March, I'm sorry Wednesday Wednesday to give you my FOMC debrief. But anyway that's all prepared for this week. Thanks so much for tuning in. If you're interested in my thoughts take a look at my weekly blog FedGuy.com. This week I will be writing about the implications of the policy implications of what we're hearing that President Trump wants to play a bigger role in setting monetary policy and maybe he wants to devalue the dollar as well.

Let's think about how that could happen and what that implies. And of course if you're interested in learning more about financial markets check out my online courses at centralbanking101.com. Thanks so much and I'll talk to you guys soon.