2024.09.23 Weekly
Keeping this one short and to-the-point as I’ve been rather busy today, and will post some interesting charts if any later on twitter.
Data review
Atlanta Fed’s GDPNow Q3 estimate moved up to 3.0% from 2.5% as of September-17th. The biggest contributor being strong consumer spending reports, which was even strong in real (inflation-adjusted) terms.
Retail Sales for August was above expectations at 0.1% vs -0.2% and Core slightly missing 0.1% vs 0.2% expected. While the m/m pace has slowed, that has come after some strong prior month readings in Core of 0.4% in July and 0.5% in June (revised up from 0.4%) and 0.1% in May (revised up from -0.1%), maintaining a robust consumer spending picture.
Initial claims was below expectations by a fair margin at 219k vs 230k and at the lowest level since mid-May, while Continuing claims continued to ease lower. Despite a broad cooling in labour market data, Jobless claims data continues to suggest there is little stress.
September FOMC
Lastly, the FOMC delivering a 50bps cut was a surprise — to me at least, but a pleasant surprise as it is a clear recognition of inflation being beaten and labour market moving into better balance. SEP showed a big upward revision to Unemployment and downward revisions to Inflation and Fed funds rate, signaling their expectations of a soft-landing and to cut at a pace of 25bps per meeting going forward.
But there is some debate on whether it was a hawkish 50 or not. From the Fed’s perspective, I thought it was very dovish even though Powell reiterated that he thought neutral rates were likely to be even higher, because the Fed (apart from one), now seems more concerned about unnecessary damage than anything else, effectively putting the so-called ‘fed-put’ into action. As one of the more hawkish but pragmatic leaning voter stated after the meeting:
- “If the data starts coming in soft and continues to come in soft, I would be much more willing to be aggressive on rate cuts” (Chris Waller)
That ‘ready to act quickly and prepared to do more’ sort of tone is probably a good benchmark for how the rest of the committee is thinking; but for one sole-dissenter who would have preferred a slower start:
- “I see the risk that the Committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate” (Michelle Bowman)
I’d have agreed with Bowman there and why I also expected a 25bps cut due to continuously strong economic data that is seeing some reacceleration recently. Add to that a committee that is turning increasingly dovish via their SEP with a 25bps cut at every meeting through 2025, I think there is some serious risk of a potential policy mistake here.
But as we are so often told — the Fed “isn’t on a pre-committed path” and can pause if they need to, but the market doesn’t appear to have priced for that flexibility, nor any possibility that they just might pause a few more times than currently priced. Johnny Matthews is also thinking along the same lines:
- Powell and co are convinced inflation is beaten so the market has priced dramatic Fed easing. From where we sit this is fraught with risk…. The US consumer is still spending freely and, economic growth is close to 3% to name a couple of reasons why the rates market has this
This from Brax Research summarises all that quite nicely:
Upside risks
As a result of this rather dovish FOMC, this is how I see the risks:
- Higher for Longer (H4L). Funny how this works, but with the Fed opting for the bigger 50bps, this is likely to extend the forward curve — that is, we are less likely to see a rapid decline in interest rates thereby extending the easing cycle.
- Higher US yields. With the US economy running at 3-month annualised rates of 3% GDP growth, 3.85% wage growth, 2% core inflation, there is now very little odds of a recession thus putting risks to longer-term growth and inflation expectations to the upside. Front-end rates are fully loaded, likely to stay anchored, and therefore no longer a drag on the rest of the curve going forward.
- And even more upside risks. An even stronger easing bias against a positive reacceleration in economic activity could cause unwanted easing in financial conditions, especially as everything in real terms is in a stronger position than they were a few months ago and housing market is likely to see an incremental boost going forward (though there is an interesting counter-argument on Housing boost to consider: “I think the inflationistas reigniting are also over their skis. If lots of people buy/sell homes, lots of rates are being traded up from 2.75% to 5.75–6%…that’s less disposable income”).
Looking ahead
Plenty of Fed speakers on deck this week where we will get a sense of how strong their easing bias is, or whether they are retaining a high degree of optionality going forward. SEP suggests it is the former for now, but I suspect the tone could shift towards the latter going forward. I think the risks is towards more stronger data given the current trajectories and we also see more UST supply incoming, and given that the downside risks to rates isn’t so clear, it will be interesting to see if we continue to get strong auctions.
Elsewhere to name a few major event risks — flash PMI’s, RBA and SNB rate decisions, central bank speakers, and Tokyo CPI.
Views
Centred around upside risks to US growth, US yields and US Dollar:
- While I do remain medium-term bullish and continue to run some runner positions stacked from the August and September lows, I have turned tactically bearish on US equities as I can see the usual profit harvesting ahead of Elections and winter months to weigh-in. That said, this is not a ultra-high conviction view for a meaningful down-swing.
- Bullish USD vs lower-beta and select currencies such as USDJPY USDCHF GBPUSD, but not so much against the higher-betas, because similar to not having a high-conviction bearish view for equities — the Fed-put improving the US outlook will not hit the riskier assets and currencies as much for now (perhaps later when those upside risks become a serious front and centre concern).
- Bearish Gold despite its strong parabolic momentum as I see no longer see the upside appeal from recession odds dissipating, strong easing cycle already priced and potentially over-priced, and thus making real rates appear too low. Also continue to stay long Brent crude and will be happy to trade dips if presented — I generally beleive there is an ‘OPEC-put’ in the low-70s and even more so below that, and the slowdown narrative that has been driving commodities market sentiment has run its course and should greatly limit downside risks.
That’s all for now. Have great week trading!
