INSIDE
Insights, Perspectives & Trends
Tier 1 data…
The Radar Screen
On Top of the Radar
Tier 1 data…
Week#02/52: Jan 07 - 13 is here and with it our new Global Macro/Market Notes. Just to be clear, in these notes we try to make sense of short-term financial markets movements in the context of hard data, facts, and reason to help us Navigate Global Macro/Markets.
In this week’s Insights & Trends my focus is on the bets for the Fed's next move and Tier 1 data that will be released until March 20th. On Thursday, U.S. consumer inflation will come into the spotlight.
As always, questions, comments, opinions, and debate are always welcomed. Investing is a team sport.
Best Regards, LeoC.
Insights & Trends
Tier 1 Data
One of the best instruments that reflects in real time the expectations of market participants about future changes in the federal funds rate in the US, are futures contracts traded on the CME Group in Chicago.
As the very short-term risk-free interest rate, the federal funds rate sets the floor for other interest rates across the economy. Increases in the federal funds rate increase borrowing costs for a wide variety of new loans and increase bond yields. On the other hand, when the federal funds rate falls, other interest rates tend to decrease as well. Lower interest rates promote faster economic growth, while higher rates often slow it down.
By March 20, 2024, we'll have two more reports on labor market conditions and three more reports on U.S. consumer inflation.
Currently, resilient economic fundamentals have caused a divergence from the consensus on the Fed's next steps, risking the creation of a scenario where the pullback in the Fed's interest rate easing bets could trigger a sell-off in risk assets and further strengthen the dollar.
The Radar Screen
On Top The Radar
Underlying US price pressures probably continued to recede as 2023 ended, backing up optimism at the Federal Reserve about the path for inflation. The consumer price index excluding food and fuel, a measure favored by economists as a better indicator of underlying inflation, is seen increasing 3.8% in December from a year earlier.
That would mark the smallest annual advance since May 2021, and illustrates the progress the Fed has made on squelching inflation that during 2022 clocked in at the fastest pace in 40 years.
While price growth is still above the central bank’s goal, the latest readout from officials’ December meeting showed policymakers acknowledge that interest rates have likely peaked, along with a willingness to lower borrowing costs this year. At the same time, officials “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably,” according to the meeting minutes.
What Bloomberg Economics Says:
“We expect deflation in core-goods prices to continue weighing on headline and core — but if firms are successful in destocking inventory, that source of disinflation will abate in months ahead. Ultimately, core CPI inflation will likely prove sticky above the Fed’s 2% average inflation target through 2024, even as the pace of housing inflation slows.”
—Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou, economists.
The government’s CPI report on Thursday will be followed the next day by the producer price index. The measure of wholesale inflation, excluding food and energy, is also seen cooling on an annual basis.
US central bankers speaking in the coming week include New York Fed President John Williams and the Atlanta Fed’s Raphael Bostic.
Preview of Global Economics[1]: Week 02
[1] Source: Bloomberg Week Ahead. Adjustments for translation in Portuguese (via google), comprehension and interpretation: Brazen Capital Research
Economic Calendar for the Week
ASIA Week Ahead: China Prices, Trade and Credit; Korea Rates
Asia’s week ahead will offer 2024’s first major reports on the health of China’s recovery. The results may not be encouraging. We expect price data to show a third month of outright deflation. Soft trade and credit figures will likely underline how weak demand is. The reports should bolster the argument for more policy support, including rate cuts that we expect to resume as soon as this month.
Elsewhere, the Bank of Korea will probably stay in its holding pattern. It’s in no rush to cut rates out of concern that the private sector has borrowed too heavily — putting financial stability at risk.
CPI data from Tokyo and Australia will show inflation slowing.
EMEA Week Ahead: UK Monthly GDP, German Industry Malaise
UK GDP is poised to rebound in November though the bounce is unlikely to be large enough to prevent the economy from entering a very mild technical recession at the end of 2023. The bigger picture, however, is that with real incomes on the rise and interest rates set to fall, the UK’s outlook for 2024 is brighter.
How pronounced is the weakness of the German economy? November production data will offer more insight into the state of its industry, where activity may have picked up slightly before a likely further deterioration in December.
Elsewhere, the National Bank of Poland is likely to keep the reference rate steady at 5.75% for the third meeting in a row. We expect the cutting cycle to resume later in 1Q24.
USA Week Ahead: CPI to Show Hard Last Mile for Disinflation
Any thoughtful examination of the December jobs report and ISM Services survey shows the labor market is sending concerning signs, if not outright recessionary signals. If the sharp plunge in the ISM Services employment index is correct, the labor market is weaker than at the worst point of the 2001 recession. Jobless claims data (Thurs.) in coming weeks will be particularly signaling – as this is about the time of year when firms lay off temporary workers.
At the same time, the jobs report showed wages growing briskly, compensating for reduced hours worked — which we see as reflecting recent wage settlements between unions and employers. Minimum-wage hikes to start the new year could further elevate wages in January. All of that means there’s a hard last mile before inflation reaches the Fed’s 2% target. We expect core CPI (Thurs.) to show that disinflation continues to be very slow in supercore categories, while PPI data (Fri.) will reflect renewed supply-chain bottlenecks.
Astute readers may ask: If the labor market is so weak, why would wages grow so rapidly?
We see only three possible outcomes in coming months that would be internally consistent. Most likely, firms will find themselves unable to pass on high labor costs to consumers (NFIB, Tues.) — as they did during the pandemic — and will resort to layoffs to reduce costs. Alternatively, they could pass on the costs — but that could cause inflation expectations to unanchor, and the Fed might have to hike more or keep rates higher for longer. The least likely outcome, in our opinion, is a productivity boom without additional layoffs.
LATAM Week Ahead: December Inflation Data; Peru to Cut Rates
In Brazil, the December CPI print will likely show inflation closed 2023 within the target band after missing it in 2021 and 2022.
In Argentina, an outsize monthly CPI print in December will underscore the impact of the currency devaluation early in President Javier Milei’s term.
In Mexico, the inflation rate is poised to rise again in December, mainly due to non-core prices and base effects. The results should still be consistent with central bank forecasts and our expectation for price gains to resume their downtrend in 2024. Persistent core services inflation is a concern.
In Colombia, inflation likely slowed again in December, but remained well above the 3% +/- 1 percentage point target. Base effects and weak domestic demand signal more room to moderate.
In Peru, we expect the central bank to cut interest rates by another 25 basis points and maintain a cautious tone. Tight monetary conditions, decelerating inflation and increasing economic slack support our expectation for additional cuts this year.
COMMODITIES Week Ahead:
METALS WEEKLY AGENDA: Saudi Minerals Forum; China Metals Data
China publishes first batch of December trade data, including steel, iron ore and copper imports. Saudi Arabia hosts the Future Minerals Forum in Riyadh.
AGRI WEEKLY AGENDA: WASDE, IGC Grains Report, Palm Stockpiles
The World Agricultural Supply & Demand Estimates from the US Department of Agriculture will be released on Friday. The International Grains Council’s monthly report and the Malaysian Palm Oil Board’s data on stockpiles, exports and production will also be published during the week.
Corporate Highlights: Week 02
Relevant Public Information (AMERICAS, EMEA, ASIAPAC)
Positioning
Strategic Allocation as of 09/29/23 and Tactical Allocation as of 11/22/23
As we stepped into the autumn of 2023, the markets seemed to be repeating a familiar, somewhat eerie pattern. September, often seen as the jinxed month in financial circles, with 7 out of the last 11 years down, did not disappoint in its reputation for volatility. Rising interest rates nudged both stock and bond prices lower, pushing equity markets towards correction territory (a drop of more than 10% on the S&P500 since its recent peak on July 27th) until the very end of October.
As we moved towards the middle of the Q4, there has been some evidence that the US economy might be on a better footing than many anticipated. While the most recent earnings season was surprising to market participants, analysts were busy upgrading their estimates for 2024 and 2025.
Although nowcasts for US GDP growth estimates have recently declined, consumer and producer’s inflation are arguably trending lower while employment remains resilient. Assuming US credit conditions do not deteriorate too much further, investors could quickly reprice real rates, which then could trigger a favorable reevaluation of stocks and bonds.
Another potential catalyst for a 'risk-on' trading environment might come from the Federal Reserve itself. Although not our base case, it is plausible that the ‘higher for longer’ rhetoric could be tested. With easing supply chain issues reducing inflation pressures and the geopolitical and electoral landscape evolving, the Fed might be quicker than expected to react to market sentiment shifts and signs of weakness in the job market. With that in mind, the Fed has many tools to boost market confidence such as adjusting forward guidance, slowing down or even stopping quantitative tightening, before resorting to cutting rates.
In relation to international markets, we are less “cautiously optimistic”. To be fair, a temporary reversal in the US dollar strength would be beneficial for emerging market (EM) assets; as such, we have adjusted our positions accordingly. Another potential risk to our cautiously optimistic scenario is oil. Geopolitical concerns and a decrease in global supply could push oil prices higher, potentially hurting consumer demand. A hedge against this scenario is on top of the radar, but we have not yet pulled the trigger because we believe the expected global economic slowdown will counterbalance, for now, the price pressure from disruptive events.
