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On the Daily

By | September 10, 2021 4:29 pm | 0 Comments

Welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. We will hold off on our commentary today, pending updates over the weekend to our models. Here’s what we have been watching in economic and financial data over the last 24 hours. Let us start with our tracking of global economic momentum:

Next, we show our Market Environment Monitor, which aggregates the growth and inflation signals from major global investment markets to tell us what the current market environment is, i.e., expansion, inflation, deflation, or stagflation:

Finally, we show our proxy for capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

Until tomorrow!

On the Daily (awaiting ECB)

By | September 9, 2021 4:22 pm | 0 Comments

Welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. We will hold off on our commentary today pending the results of the ECB meeting; nonetheless, here are our data updates. Here’s what we have been watching in economic and financial data over the last 24 hours. Let us start with our tracking of global economic momentum:

Next, we show our Market Environment Monitor, which aggregates the growth and inflation signals from major global investment markets to tell us what the current market environment is, i.e., expansion, inflation, deflation, or stagflation:

Finally, we show our proxy for capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

Until tomorrow!

On the Daily

By | September 8, 2021 11:22 am | 0 Comments

Welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. Here’s what we have been watching in economic and financial data over the last 24 hours. Let us start with our tracking of global economic momentum:

Next, we show our Market Environment Monitor, which aggregates the growth and inflation signals from major global investment markets to tell us what the current market environment is, i.e., expansion, inflation, deflation, or stagflation:

Finally, we show our proxy for capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

Until tomorrow!

On the Daily: ECB Preview

By | September 7, 2021 10:23 am | 0 Comments

Welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. Here’s what we have been watching in economic and financial data over the last 24 hours:

  1. Global economic momentum trends are lower, led by US downside surprises. Today, we are waiting for UK’s monthly GDP to see if it confirms the global trend (our models imply continued slowing). Overall, it is worth noting that the divergence between the US vs. Global Economic Momentum seems to be widening- with the US at 29% and Global at 45%. Therefore, the global economic backdrop for risk seems to remain positive, but the US backdrop is tightening to more dangerous territory. The closer we get to the 25% level for US Economic Momentum, more conservative we become.
  2. This is a busy week for central bank policy. We have a slew of speakers this week from the BOE, ECB, and Fed at various different events. Further, we have the ECB making decisions on monetary policy. We don’t expect significant movement from the ECB- however, we think the meeting will offer significant clarity on what the Governing Council is thinking in light of recent hawkish comments from several members. With EU growth having peaked in our models, we don’t think the current hawkishness will be sustainable. Given the precarious nature of the EU recovery, we expect hawkishness to be persistent in commentary- but unlikely in the ECB’s policy.
  3. Looking at global markets on a trending basis, markets like rising growth/expansionary themes over contractionary ones. At the same time, the dollar continues to battle its way upwards, at the center of global capital flows. US stocks have started this week weaker- which we think of as an opportunity to add risk incrementally. The commodity complex is generally weaker, alongside a dollar bid.

Overall, it’s a busy week for markets! We will need to stay sharp this week and watch all these prospective changes. For now, we continue to think the major themes of US stocks higher and dollar surprising to the upside will continue- but we are continuously updating our views. Let us look at some of our data updates and then discuss the upcoming ECB meeting in a little more depth:

Let us start with our tracking of global economic momentum:

Next, we show our Market Environment Monitor, which aggregates the growth and inflation signals from major global investment markets to tell us what the current market environment is, i.e., expansion, inflation, deflation, or stagflation:

Then, we show our proxy for capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

Finally, let’s set the stage for this weeks’ ECB meeting. The ECB’s MPC members are debating extensively over rate guidance, revealed the July meeting minutes of the ECB. Many of them are dissatisfied with the new strategy undertaken by the central bank in July 2021, where it disclosed a shift in its inflation target from “less than equal to 2%” to a 2% target. The bank stated that this was a strategy that would be easier to communicate to the financial markets. However, many policymakers within the governing council feel that this strategy understates the risk of inflation, while others think that the rise in inflation is transitory. The Eurozone annual inflation rate is expected to surge to 3% in August 2021, from 2.2% in July, which would be the highest in almost a decade. The German HICP rose 3.4% in August, a 13- year high, as economic recovery and supply shortages put upward pressure on prices.

Return to normalcy is shaking up the consensus among ECB policymakers regarding a looser monetary policy. A flurry of comments since the last week of August 2021 has particularly been on the hawkish side:

  • Governing Council member and Austrian central bank governor Robert Holzmann said in an interview on August 31 that Europe is now in a situation where the ECB can think about reducing its pandemic-related special programs. He also said that in the meeting in September, a slowdown of the PEPP purchase in Q4 will “definitely” be discussed.
  • The Governor of the Bank of France and governing council member Francois Villeroy de Galhau has remarked that the ECB should consider the improvement in financing conditions since the last meeting. According to him, the ECB certainly has more room in its monetary policy strategy to adjust monthly purchases according to the financing conditions, “unlike the US Fed.” He stressed tapering but didn’t think that any urgency was needed.
  • Both Villeroy de Galhau and Holzmann have not been in favor of raising the interest rates. A premature rate hike could mean an earlier end to net purchases without an extraordinarily high and persisting inflation rate. It will also remove all hopes of increasing APP buying to provide a financial cushion when PEPP purchases end in March 2022.
  • Bundesbank President and Chairman of the Board of the Bank for International Settlements, Jens Wiedmann, said that inflation might overshoot the ECB’s expectations faster than expected.

Therefore, there is s significant number of voices in the Governing Council that are becoming more hawkish and concerned about the looseness of financial conditions. However, given our views of peak growth and inflation, alongside clearly deteriorating economic momentum, our view is that hawkish concerns are likely to be transitory in the EU. Further, we think the hawkish contingent is likely to be in the minority in the Governing Council. Therefore, we expect the commentary to be marginally more hawkish, but not policy. This should keep global liquidity flowing and support our preferred exposure (US stocks ) over the intermediate-term.

On the Daily

By | September 2, 2021 5:44 pm | 0 Comments

Welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. Here’s what we have been watching in economic and financial data over the last 24 hours. Let us start with our tracking of global economic momentum:

Next, we show our Market Environment Monitor, which aggregates the growth and inflation signals from major global investment markets to tell us what the current market environment is, i.e., expansion, inflation, deflation, or stagflation:

Finally, we show our proxy for capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

Until tomorrow!

On the Daily

By | August 31, 2021 5:21 pm | 0 Comments

Welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. Here’s what we have been watching in economic and financial data over the last 24 hours:

  1. Global economic momentum continues to trend lower, led by the US, UK, and China. EU data in aggregate surprised to the upside, as did Japanese data. In particular, EU inflation data was stronger than expected by consensus, though not surprising to us. US Consumer Confidence and Chicago PMI data both surprised to the downside, adding to negative momentum. Overall, we remain on track for a “grinding higher” in US risk assets. Still, we are getting extremely close to depressed levels of economic momentum, so we need to watch carefully.
  2.  Post Jackson Hole, it seems to be a busy time for ECB Governing Council members, some of whom (Knot & Holzmann) have come out with significant hawkish commentary in the face of yesterday’s HICP report. Nonetheless, it is worth noting that the Governing Council has deemed current inflation as transitory, and we don’t think they are entirely wrong. We expect inflationary pressures in Europe to peak in the next few months, followed by a downtrend back towards historical norms. We don’t think that the ECB will be hasty in their policy decisions, especially given the adoption of a new policy framework; therefore, we think the sequencing of relative monetary policy will remain the same- i.e., the Fed taper before the ECB.
  3. Markets today seem to have taken the fall in economic momentum negatively. Major stock markets are down, energy & agricultural commodities are down, and gold was bid. We continue to think we are in a “grinding higher” environment for high-quality cashflows. Still, we are getting closer to the “danger zone” for economic momentum, which will weigh on global markets and likely result in a dollar bid. Not yet, though!

Lets us take a walk through some of the data underlying these observations. Let us start with our tracking of global economic momentum:

Next, we show our Market Environment Monitor, which aggregates the growth and inflation signals from major global investment markets to tell us what the current market environment is, i.e., expansion, inflation, deflation, or stagflation:

Finally, we show our proxy for capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

Putting this all together, we continue to like US stocks (a little while longer). Here is our Trading Tools report to help with the same:

Recall:

  • Trading Range:  These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
  • Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
  • Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
  • Implied Volatility Discount/Premium:  This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here. You need to know the fundamental developments in markets that are driving these moves! Head to https://www.fxdd.com/mt/en to get access to our research and analysis.

 

On the Daily

By | August 30, 2021 7:32 pm | 0 Comments

Happy Monday, and welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. Here’s what we have been watching in economic and financial data over the last 24 hours:

  1. Global Economic Momentum continued to decline this morning, largely led by downside surprises in the US and EU. In the US in particular, Pending Home Sales data surprised the downside, increasing pressure on the downwards trajectory for US economic momentum. While we continue to like risky assets (i.e., US stocks), we’re starting to think about 2022 and have concerns, especially given how elevated economic growth forecasts have gotten. We will be writing about this extensively for our clients in Monetary Monitor, so we highly recommend you stay abreast of those developments.
  2. Watching the speech, we were indeed a little perplexed by the market reaction. Following the Jackson Hole Symposium last week, US stocks rallied strongly, i.e., giving the implication that markets largely thought of Powell’s speech as dovish. Indeed, Powell did not tee up a taper announcement in September, but he did indicate a strong possibility of a taper by the end of the year (which we have been talking about since January). Therefore, we think we are still on track regarding our outlook for the eventual withdrawal of USD policy support by the end of the year/early next year.
  3. Overall, markets have accepted the incremental dovishness with jubilation, with assets pricing, and expansionary global economic backdrop with a 100% probability on an MoM basis. Coincidentally, global markets have largely experienced outflows in favor of the US dollar. Against this backdrop, our preferred exposure, i.e., US stocks, continue to look attractive and benefit from inflows and trend strength.  We continue to think this will be the best hiding place going into a taper (though we may change our mind on exposure during the taper, stay tuned!).

Lets us take a walk through some of the data underlying these observations. Let us start with our tracking of global economic momentum:

Next, we show our Market Environment Monitor, which aggregates the growth and inflation signals from major global investment markets to tell us what the current market environment is, i.e., expansion, inflation, deflation, or stagflation:

Finally, we show our proxy for capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

Until tomorrow!

On the Daily

By | August 27, 2021 10:42 am | 0 Comments

We will be taking a break from publication today to review incremental information coming out of Jackson Hole to update our outlook. We will return next week with updated views.

On the Daily

By | August 26, 2021 3:02 pm | 0 Comments

Welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. Here’s what we have been watching in economic and financial data over the last 24 hours:

  1. US initial claims data came in modestly higher than expectations today, continuing the trend in decelerating US data. Annualized US QoQ GDP came in at 6.6% for Q2 (backward-looking measure).
  2. The ECB released its MPC minutes, which revealed the ECB has been predominantly focused on adjustments around its new 2% symmetric inflation target. ECB’s Villeroy commented on price pressures in the EU, largely continuing to the global central bank narrative of transitory inflation. We received some marginally hawkish commentary from Bullard, Kaplan, and George (all non-voting members) in the US, suggesting that taper discussion is likely to be a major discussion at the FOMC’s next meeting.
  3. Markets have taken the combination of these factors in a risk-off fashion. US stocks and global stocks are down (barring the Nikkei), commodities are broadly lower, and the dollar is up once again. On a more medium-term note, markets continue to price rising growth and inflation, consistent with economic recovery.

Lets us take a walk through some of the data underlying these observations. Let us start with our tracking of global economic momentum:

We show our proxy for capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:

Finally, we show our Market Environment Monitor, which aggregates the growth and inflation signals from major global investment markets to tell us what the current market environment is, i.e., expansion, inflation, deflation, or stagflation:

Until tomorrow!

Jackson Hole: A Primer

By | August 25, 2021 3:43 pm | 0 Comments

All eyes are set on the annual Economic Policy Symposium in Jackson Hole, Wyoming, starting on August 26, 2021. The two-day event, hosted by The Federal Reserve Bank of Kansas City, will be a modified in-person program this year, attended by global central bankers, finance ministers, economists, and financial market participants. Before delving into the meeting, let us set the stage.

The US Fed had cut short-term interest rates to near-zero levels in March 2020 and restarted its large-scale asset purchase program. Since July 2020, the central bank has been buying $40 billion of agency mortgage-backed securities and $80 billion of Treasury securities each month to support the Committee’s “maximum employment and price stability goals.” Since the US economy rebounded in mid-2021, officials have been hinting at tapering these bond purchases. In June 2021, Chairman Powell acknowledged that the bank is assessing the composition and pace of its asset purchases since the economy has been moving toward the Fed’s macroeconomic goals. The US economy added 943K jobs in July 2021, the highest in 11 months, as rapid vaccinations drove higher business re-openings. The unemployment rate also dipped to its lowest level since March 2020, at 5.4%. On the other hand, inflationary pressures have been hounding the markets for some time. In July 2021, consumer price inflation remained unchanged from June’s 13-year high, at 5.3%. The combination of these factors leads many market participants to believe that the economy is nearing a place where monetary accommodation can be removed, which brings us back to Jackson Hole.

The Jackson Hole Symposium is one of the most anticipated events in the financial markets calendar and is often the cause of a volatility surge in its aftermath. For instance, last year at the 2020 symposium, the US Fed had made the historic announcement of a shift in its monetary policy framework, which had rattled the global markets. The Fed Chairman, Jerome Powell, laid the central bank’s foundations to tolerate inflation above the 2% target. This essentially meant the continuation of monetary policy support for longer than previously discounted. As a result, US stocks rallied through the event, while other global stocks ceded gains, and the dollar fell.

This year, it is quite possible we could have the inverse of the 2020 moves. After the last FOMC minutes on August 19th, markets have largely discounted a tightening liquidity environment because of the FOMC’s seemingly general consensus that a taper of asset purchases is possible by the end of 2021. As we highlighted from the last FOMC minutes:

“Participants expressed a range of views on the appropriate pace of tapering asset purchases once economic conditions satisfied the criterion laid out in the Committee’s guidance. Many participants saw potential benefits in a pace of tapering that would end net asset purchases before the conditions currently specified in the Committee’s forward guidance on the federal funds rate were likely to be met. At the same time, participants indicated that the standards for raising the target range for the federal funds rate were distinct from those associated with tapering asset purchases and remarked that the timing of those actions would depend on the course of the economy. Several participants noted that an earlier start to tapering could be accompanied by more gradual reductions in the purchase pace and that such a combination could mitigate the risk of an excessive tightening in financial conditions in response to a tapering announcement. “

To us, the above tells us two things. The first is that the full-employment and price stability goals don’t need to be met for the Fed to move its balance sheet policy; they simply need to make “substantial further progress,” which is a purposely ambiguous term. The second is that the Fed could consider tapering sooner rather than later to have a much more gradual taper process. Overall, a taper is very much in the cards for 2021, with significant potential for September as the announcement date. As we have said before, and we shall say again today, we think that high-quality US stocks are likely to be the best hiding place during a time of US liquidity withdrawal. We, therefore, continue to think of it as an optimal exposure given fundamental and market dynamics.

However, we think the removal of policy liquidity by the Fed (or its communication) will be considered a net negative for asset prices (and US stocks). Therefore, we think that there is significant potential for Jackson Hole to be a hawkish event that bids up the dollar, a move that markets seem to be sniffing out over the last month. Overall, the optimal approach going into the event is likely to be to protect US stock exposure and wait for the signal from the Fed. Either way, we think the environment will be conducive to US stocks vs. the RoW stocks, so we should really only be concerned with managing event risk here.

 

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