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Markets Weekly May 4, 2024

发布时间 2024-05-05 01:13:41    来源


federalreserve #marketsanalysis US Labor Market Softening QRA Debrief Japan Finally Intervenes (twice!) 00:00 - Intro 1:10 - US ...



Hello, my friends. Today is May 4th, and this is Markets Weekly. So this past week was another roller coaster weekend markets, but we did end the week up. And I continue to be positive on the equity markets. So let's see how that turns out. Today, I wanna talk about three things.

First, we have to talk about the big data point of the past week, the non-forms payroll report. But in addition to that, we also got a lot of other data on the labor market as well. So let's give an update as to what's going on in the US labor market.

Secondly, this past week, we got the quarterly refunding announcement, which is when the Treasury tells the public how it's going to finance itself. Now the QRA was not market moving, but it's always interesting. So let's debrief what happened there.

And lastly, now we've talked about the yen a few times in the past, but it looks like finally, this time around, the Ministry of Finance put their money where their mouth is and actually intervened not once, but twice in the market this week. So let's see what happened. Alright, starting with employment data. So the big data point of the past week was the non-forms payroll print. Now we've gone over this a few times in the past. So as you guys all know, we got to look beyond the headlines. Now looking at the headline print though, starting there, the headline print was fewer jobs created than expected. So that was a disappointment. But looking deeper, it was how it continues to be a disappointment. Looking at average hourly earnings, again, lower than expected, and looking at the unemployment rate, again, higher than expected.
最后,我们之前已经多次谈论过日元,但这一次似乎最终,财政部付诸行动,本周在市场上实际干预了不止一次,而是两次。让我们来看看发生了什么。 好的,先从就业数据说起。过去一周最重要的数据点是非农就业数据。我们之前已经多次讨论过这个数据。大家都知道,我们得看看更深层次的内容。不过首先从头条数据说起,就业数据少于预期创造的工作岗位,这是令人失望的。但更深入之后,令人失望的地方还在继续。平均小时工资再次低于预期,而失业率也再次高于预期。

So all in all, it was a weak print following a series of stronger than expected prints. The market took one look at this and knew exactly what to do. Now the market priced in, more chances of fit cuts, and the equity market, of course, likes red cuts and so it went to the moon. The dollar also seemed to weaken a bit as well.

Now there are people thinking that, well, maybe this suggests that the economy is slowing. Maybe we go into a recession and that's bearish, but in my experience, red cuts are much more impactful when it comes to equity markets.

Now in addition to the big non-forms payroll print, we also got some other labor market data as well. Now we got jolts, which tells you the amount of job openings available to in the US. The more the higher the jolts, that means there's more demand for labor because there's lots of job postings. Now over the past few years, jolts surged after the pandemic, but has steadily been moderating towards pre-pandemic levels. And we can see at a per-job-sicker basis, jolts is moderated a lot in approaching its pre-pandemic levels. So again, it seems like the labor market is softening.

Now one point, one other data point that I think the Fed has been focusing on a lot is wage growth. Now this past week, we got the employee compensation index, which is the Fed's favorite measure of wage growth because it takes into account things like benefits and the composition of the labor market. Now the ECI printed higher than expected.

Now usually you can think of this as inflationary because if you have to pay higher wages, maybe you turn around and you pass that through to higher consumer prices. But that alone though is not itself inflationary. For example, maybe wages are higher but productivity is also higher as well. Let's say I hire someone to work at a factory and I give them $100 an hour. Okay, let's say a year later, I paid the same person $200 an hour but they're actually making twice as much stuff as before. So per unit of production, it's actually not more expensive.

Now we also got productivity figures for the past quarter and they were disappointing. So all in all, we have higher wage growth, lower productivity, together it's an inflationary mixture. And that did lead to some reaction in the markets but ultimately it seems like the North Farm payroll sprint was the dominant force. Now if we continue to go forward with weaker employment data, I suspect that the market is going to price in more and more rate cuts and that's what I'm going to write about this week, how one path to get rate cuts, in a aside from slowing in fation would be through the Fed's mandate of full employment.

Okay, the second thing that I want to talk of this week is the quarterly refunding announcement. Now this QRA was not market moving and I don't think many people expected it to be. Now the last year, the past two quarterly refunding announcements were market moving because they surprised the market in their amount of expected debt issuance. So treasury markets interest rates like anything else based on losses supply and demand. When the treasury surprises the market by selling more debt than expected, again, higher supply means lower prices for treasuries, which means higher interest rates. And that's what we saw last year. But at the last quarterly refunding announcement, treasury very clearly telegraphs everyone that they're going to increase coupon sizes one more time, that is to say the past week and then going to hold sizes for the next several quarters. And so because the market already understood that coupon sizes would go up this QRA, but probably stay around this level for the next few quarters, it was not a surprise. And that's exactly what happened. At this latest QRA, the treasury again affirmed that it doesn't expect to increase coupon sizes for the next several quarters. So I would expect the QRA to be very uneventful for the next year. But the QRA does more than just announce to the public the financing plans of the treasury. Oftentimes they also include these interesting presentations based on topics of interest. So we get to see what the treasury is interested in. So there are two presentations this time. One of them was the introduction of a benchmark six week treasury bill.

So right now treasury bills come in standard sizes, four weeks, eight weeks, 13 weeks, half a year year and so forth. Right now treasury wants to introduce a new one, that's going to be six weeks and 10 or. Based on their research, that seems to be a sweet spot because money market funds would want to buy it. It does an impact their WAM, their weighted average maturity constraints too much. And six weeks seems to be about the length of time between fed meetings. So if you were buying a six week bill, you would have less concern that maybe the fed would certainly high grades or cut rates and this give you mark to market gains or losses. So in a sense, it would be less sensitive to fed meetings, meeting to meeting. So it looks like that's going to happen. And the second presentation was the treasury trying to brainstorm what additional treasury products they could put out.
目前国库券有标准尺寸,包括四周、八周、13周、半年等。现在国库正在考虑推出一种新的产品,为期六周或十周。根据他们的研究,这似乎是一个甜蜜点,因为货币市场基金愿意购买。这不会对他们的WAM(加权平均到期限)约束产生太大影响。六周似乎是联邦会议之间的时间间隔。如果您购买六周的国库券,您就不太担心联邦会议可能会升息或降息,这可能会给您带来按市值计算的盈亏。因此,在某种意义上,这将使其对联邦会议 less敏感,由会议到会议。看起来这将成为现实。第二个展示是国库在尝试想出什么其他国库产品他们可以推出。

Historically speaking, the treasury periodically goes into these brainstorming sessions and new products sometimes arise out of it. Looking at this chart, you can see that in the not too distant past, the treasury brainstormed about floating rate notes and indeed launched them shortly after. Now we have two year floating rate notes that are indexed through the three month treasury bill yield. Now, it seems like the two top ideas coming out of this brainstorm session is first, callable bonds and secondly, green bonds. A callable bond would simply be a bond that the treasury could buy back in case interest rates decline. It'd be like a mortgage, right? So if you have a mortgage in the US and then mortgage risk decline, you can refinance it at the lower rate. So a callable bond would be like that for the treasury. The interesting thing is that the treasury actually has issued callable bonds in the past. So if they did again in the future, it'd simply be a return to something they've already done before.

Now something totally new that they're also thinking about is maybe green bonds. Now, green bonds, as we all know, it's probably would depend a lot on who ends up in the White House, but green bonds have been more and more popular with investors due to the ESG craze. We even see many other foreign governments issue this. So maybe the treasury would take advantage of the craze and issue some green bonds. Again, this is completely a political decision that would depend on who's in the White House. Now, the last thing that I'll point out in the QRA is that you always want to look at the chart in particular. What this chart shows you is the expected fiscal deficit for the foreseeable future, as well as how much financing the treasury is getting if they keep coupon sizes constant. So as you can see, given the expected deficit and the current coupon sizes, treasury is going to be well financed for another year.

So that's why the treasury doesn't think it needs to increase coupon issuance. But beyond that though, based on the current expected deficit and the current coupon sizes, the treasury is going to have to increase coupon sizes again sometime next year. And when that happens, it's probably going to impact markets simply because markets are want to know just the size of the expected increase and where along the curve the increases come where increases in say the 30 year or other long radiated tenors will have bigger market impacts. But that's the next year. So for the first year, both future, I'd expect the QRA to be pretty boring or at least uneventful. Always interesting though.

Okay, the last thing that I want to talk about is the Ministry of Finance intervening in the currency market. So just to level sit a little bit, over the past year, more than a year, the yen has been depreciating significantly against the dollar. The driver of this depreciation is no secret. In Japan, they recently raised rates, but they raised from negative to zero. On the other hand, in the US, we've been increasing interest rates and interest rates are about 5.5%. So if you're an investor in Japan, obviously you want to move out of the yen and to dollars where you can get a high return for your cash. So that's been leading to a pretty strong depreciation in the yen. Now the authorities in Japan are aware of this and they are okay with a yen depreciation provided that happens in an orderly way. So over the past few weeks, the Ministry of Finance over there has been giving stern warnings trying to talk down speculators, telling them that they don't want the yen to continue to depreciate in such a rapid manner. That seemed to scare the speculators a little bit, but they immediately realized that the Ministry of Finance guy is all talking and not doing anything, and so they continue to push the trade.

On Monday, we saw the USD JPI reach as high as 160 yen to the dollar, which is multi-decade highs. Now that 160 level seems to be the line in the sand for Japan, and the Ministry of Finance seems to have it intervened. In a short period of time, we saw that yen appreciate rapidly against the dollar. Now, many rumors, it seems like the market is coming to the consensus that the Ministry of Finance intervened. Now on Monday, that was also a holiday in Japan, so liquidity was thin. It would have been a very good time to intervene because when liquidity is thin, for a given amount of dollars, market price moves a lot more, so you get the most bang for your buck when you intervene when liquidity is low. But as you can see in this chart, as the yen appreciated rapidly, in the next two days, it began to depreciate again.

And so that seemed to prompt the second intervention from the Ministry of Finance on Wednesday after market close. Again, after market close, there's liquidity in the US session, and in Japan, they're all sleeping. Again, a good time for the Ministry of Finance to intervene. This time though, the yen strengthened a lot and seemed to stay strong for at least the next two sessions. Now, I don't know if it's going to remain strong. I suspect it won't, simply because the interest rate differentials are so large. But over the week though, the interest rate differentials did close a little bit. The FOMC meeting and non-form spiroprint led the markets to price in a little bit more chance of rate cuts this year. And so we can see that in the two year note yield, which declined notably this week. So that seems to be giving the yen some support.

In the future, if we continue to have week employment prints or if the markets continue to price in more rate cuts, I think that will continue to narrow with the interest rate differential and go a long way towards, I think, strengthening the yen much more so than any intervention can do. But let's see if that actually happens. Now, the market participants are speculating based on reports that the Bank of Japan, okay, so the Ministry of Finance along with the Bank of Japan probably spent about $160 billion worth to intervene. Now, one way they tried to piece this out, again, this is a lot of this speculation and we won't know more until more official data is released, is by looking at Fed weekly data.

So Japan being close friends with the US keeps a lot of its dollars at the Fed. Now, usually foreign central banks keep their dollars either in the form of treasuries held in custody at the Fed or in the foreign repo pool, where it's basically like an RFP for foreign central banks. They get a good return or as a unsecured deposits, basically like a checking account. What we see in the official data is there is a decline in the foreign repo pool followed by a rise in unsecured deposits that's subsequently unwound. So it looks like what happened is that the Ministry of Finance, again, they direct policy, Bank of Japan is probably where the person who actually keeps the money took money out of the foreign repo pool, put it in their checking account at the Fed and then withdrew it to intervene.

But we'll know more as more official data comes out. So one last thing that I'll go over is that this is definitely not a currency crisis. I go over a number of examples of that in my course, Markets 101, but usually looking at say Thailand, for example, a currency crisis would happen if a country has a lot of foreign currency non-nominated debts and then their government is not able to support the currency. So in the late 1990s, a lot of Thai companies bought a lot of dollars and the Thai currency began to depreciate uncontrollably. Now the government at the time didn't have enough foreign reserves to protect their currency and so they had to let the currency go.

All these companies borrowed in dollars then saw their debt burden increase significantly. So there's a huge solvency crisis as well and that all ended very badly. In the case of Japan, now their government has tremendous amounts of foreign reserves. They can support the currency not indefinitely, but they can definitely provide a lot of support if they wanted to or at the end of the day, they could always adjust their industry policy. Now looking at the balance sheet of companies there, I'm sure there are companies there with dollar denominated debt, but also though, Japan has tremendous, tremendous amounts of foreign currency assets.

And Japan is a country that has a large current at cloud surplus. Every year Japanese companies are selling lots of stuff to the US, to other countries earning a lot of foreign currency and then reinvesting that in foreign currency assets. So they don't have any solvency concerns on account of a weaker yen.

The Ministry of Finance just doesn't like disorder and I'm sure many people in Japan are complaining about rising import costs as well. All right, so that's all I prepared for this week. Thanks so much for tuning in. If you're interested in my thoughts, check out my blog at thefedguy.com or if you're interested in learning more about markets, check out my online courses at centralbaking101.com.

Talk to you all next week.