When Bad Means Good

May 10, 2021 — Mitul Kotecha

Bad meant good on Friday as weaker than expected US April jobs data helped to dampen concerns over inflation risks and higher rates. At a time when markets were becoming increasingly fearful of rising inflation risks the softer US jobs data will act as a balm on such fears. It also complicates matters ahead of bipartisan talks between President Biden and congressional leaders this week. Democrats will likely use the data to outline their case for more stimulus to boost growth, while Republicans will highlight that excessive unemployment benefits are holding back hiring.  

US Payrolls increased by 266,000 in April, well below the 1 million consensus and the unemployment rate rose to 6.1% from 6.0%, above the 5.8% consensus.  The data supports the view of most Fed officials that progress has not been “substantial” enough for them to start signaling tapering.  Unsurprisingly Markets pushed back the pricing of the first rate hike from early-2023 to May 2023 in the wake of the weaker US jobs data. The US dollar (USD) took a hit and looks likely to kick off the week on the back foot.  High yielding currencies will likely benefit the most.  

This week inflation releases will come under scrutiny, with CPI data in the US (Wed), China (Tue) and India (Wed) in focus, albeit for different reasons.  In the US, base effects will likely push inflation higher, with a sharp pick up in core CPI in particular likely.  A similar story is expected in China, but base effects will likely act in the opposite direction in India.  Other highlights this week include a likely modest decline in US retail sales (Fri), further easing in China’s credit aggregates (9-15 May) and a material improvement expected to be revealed in Australia’s Federal Budget (Tue).  Last but not least, central banks in Mexico and Philippines (both Thu) are expected to leave policy unchanged.

Separately, markets will digest the outcome of UK local elections, especially those in Scotland, which revealed that pro-independence parties (SNP and Scottish Greens) gained a majority in the Scottish parliament. A constitutional battle with the Conservative UK government looms though UK Prime Minister Boris Johnson is showing no signs of acceding to demands for a new Scottish referendum.  There will also be focus on the aftermath of the ransomware attack on the Colonial Pipeline in the US, which has already pushed energy prices higher.  And finally, the much anticipated (among Krypto traders) appearance of Elon Musk on SNL hit Dodgecoin, after he called it “a hustle”. 

Posted in Asia, Asian currencies, Biden, Bond markets, Brexit, central banks, China, Commodities, COVID-19, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, India, Indonesia, Interest rates, Japan, Monetary Policy, Trade, UK, US, US administration. Tags: , , , , , , , , , , , , , . Leave a Comment »

India Risks, Highlights For The Week Ahead

April 26, 2021 — Mitul Kotecha

It was a strong end to last week for US markets, with S&P 500 up over 1%, helped by stronger than expected new home sales and April US Markit purchasing managers indices (PMI) data. As risk assets rallied the US dollar and US Treasuries sold off.  There are plenty of event risks this week. Also, there will be deluge of US earnings releases this week including most tech heavyweights while markets will likely remain nervous over President Biden’s tax plans.  Geopolitical risks will also remain on the forefront. 

Even as the progress on the vaccination front continues the renewed increases in virus cases in many countries, particularly in India, where the situation has deteriorated markedly, threatens to delay recovery. The acceleration in virus cases has been dramatic, with Prime Minister Modi noting how it has “shaken the nation”. Virus cases hit 349,000 on Saturday and show no sign of receding. The toll on the health system in India has been massive, but the variants also holds risks to the rest of the world while it will also lead to a major disruption in India’s vaccine exports, threatening vaccination programs in several countries.  

Friday’s economic data round was broadly firm. Alongside the US releases noted above, Euro area April PMIs were generally better than expected, with G10 manufacturing PMIs pointing to strengthening momentum overall.  Separately, Russia’s central bank, the CBR surprised with a bigger than expected 50bp rate hike.  Today’s data releases include the April German IFO business confidence survey; consensus expectations forecast an increase to 97.8 from 96.6 previously. In the US, durable goods orders are forecast to rise in March by 2.5% m/m following a weather-related 1.2% m/m drop in February.

The focus over the rest of the week will turn to central bank decisions in Japan, Sweden and Hungary (all on Tue) and the Federal Reserve FOMC (Wed).  Although the Bank of Canada’s shift last week will prompt a little more nervousness about G10 central bank tapering the policy meetings are likely to be largely uneventful, this week. Nonetheless, the Fed tone is likely to be more positive than in March, while in contrast the Bank of Japan may sound more cautious amid a third state of emergency in Tokyo. 

A key event this week will be President Biden’s address to a joint session of Congress.  After the hit to markets in the wake of the news of a proposal to hike taxes, markets will look for any further details.  Key data releases this week include Australia Q1 CPI inflation (Wed), US Q1 advance GDP (Thu), China’s April purchasing managers indices data (Fri) and Euro area Q1 GDP (Fri).  

Posted in Asia, Asian currencies, Australia, Bank of Japan, Biden, Bond markets, Canada, central banks, China, coronavirus, COVID-19, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, FX, Hungary, India, Interest rates, Japan, Monetary Policy, Politics, Russia, Trade, UK, US, US administration. Tags: , , , , , , , , , , , , , , . Leave a Comment »

Inflation Debate Rages On

March 29, 2021 — Mitul Kotecha

Good morning, last week ended on a solid note for global equity markets, capped by strong gains in US stocks and in particular a surge towards the end of the session on Friday.  The S&P 500 is on track for its best month since November though in the next few days, month and quarter end rebalancing will continue to hold risks, which could result in increased volatility.  Another imponderable is potential follow through from huge equity sale block trades at the end of last week reportedly from Archegos Capital, which hit US media companies and Chinese tech stocks. All of this suggests risks of higher volatility in the days ahead.  

US interest rate markets came under renewed pressure, with yields backing up over the week, while the US dollar (USD) had a firmer week, with the USD index (DXY) ending above its 200-day moving average and technical indicators pointing to further gains this week.  CFTC IMM speculative positioning data (in the week to 23 March) shows that net aggregate USD short positions have been pared back further as USD sentiment continues to improve.  Positioning in most currencies vs. USD fell while Japanese yen (JPY) short positions increased further.  The oil market and container costs could be pressured higher by the continued delay in dislodging the stricken Ever from the Suez Canal, which seems to have made little progress over the weekend.

Attention this week will turn to a few key data and events.  Important among these will be President Biden’s speech in Pittsburgh (Wed) where he will likely give further details on his infrastructure plan and how it will be funded.  Key US data include the March ISM manufacturing survey (Thu) and March non-farm payrolls (Fri).  Solid outcomes for both are expected.  In Asia, focus will be on March purchasing managers indices (PMIs) across the region (Thu) including in China (Wed) where broadly positive readings are likely.  There will also be attention on the going malaise in Turkey’s markets since the sacking of the central bank (CBRT) governor while Europe continues to struggle with fresh virus waves, lockdowns, and vaccine reluctance as well as tensions over vaccine exports to the UK.

As President Biden gives his speech this week the debate about a potentially sharp rise in inflation rages on.  The Fed has tried to calm fears by highlighting that any rise in inflation over the coming months will likely be transitory.  However, with massive stimulus in the pipeline, economic recovery taking shape and the Fed set to keep policy very accommodative for years to come, market fears have risen as well as warnings from the likes of former Treasury Secretary Larry Summers.  Consumer inflation expectations remain largely subdued but the debate will not end quickly, and bond markets will be on tender hooks.  In the next few months inflation will turn up but this will largely be due to base effects as the collapse in activity in prices in Q1 last year falls out of the equation.  However, the jury is out on whether this will turn to more persistent inflation, something that could have a much more severe impact on markets and force central banks to belatedly tighten policy. 

Posted in Asia, Asian currencies, Biden, Bond markets, Brexit, central banks, China, Commodities, coronavirus, COVID-19, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Interest rates, Monetary Policy, Trade, Turkey, UK, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Skittish Markets Amid Higher Yields

February 28, 2021 — Mitul Kotecha

The US and to some extent global bond market rout over recent weeks has caused particular pain to crowded growth/momentum stocks.  US 10 year Treasury yields have now risen by around 50 basis points this year, bringing back memories of the 2013 Taper Tantrum and 2016 spike in US yields following the election of Donald Trump as President.  Improving data and falling virus cases have helped fuel the move higher in yields, with the rise in yields hitting equity markets globally and in particular technology stocks as investors focus on the cost of funding amid relatively high valuations in some growth/momentum stocks. 

US rates markets stabilised somewhat at the end of last week after taking a drubbing over much of the week. The rally in interest rate markets on Friday helped to buoy equities, albeit to a limited extent with the Nasdaq managing to eke out gains.  Commodity prices dropped sharply while the US dollar continued to firm up.  Even so market volatility measures such as the VIX (equity volatility) remain elevated.

Currency volatility measures have moved higher too, but not to the same degree as equities or rates.  Emerging markets (EM) FX volatility has reacted even less than developed market FX volatility.  Perhaps this is the next shoe to fall, but so far EM FX have looked relatively well composed despite the rout in rates markets, partly due to a more limited US dollar (USD) reaction than would be expected.  The sharp spike in US yields does not bode well for EM currencies, however.  Higher market volatility, pressure on yield differentials and a slide in growth/momentum stocks could hurt EM assets and it will be very hard for the USD to continue to ignore higher yields. 

While gains in US risk assets may help Asian markets at the beginning of this week any follow through will be dampened by the release of a weaker than expected China manufacturing and services purchasing managers index (PMI) data. The manufacturing PMI dropped to its weakest since May 2020 while the services PMI fell to its lowest since the Feb 2020 COVID related collapse.  I would however, be wary of over interpreting the data given the usual seasonal weakness around Chinese New Year holidays.  Services in particular was impacted by reduced travel over the holidays.  

Other high frequency indicators show that China’s growth momentum remains positive and growth this year is likely to be solid.  More information on the official outlook and forecasts will come from China’s National People’s Congress beginning Friday, which will present the annual work report for 2021 and the release of China’s 14th 5-year plan.  Once again, a growth target for this year will likely be excluded though targets for economic variables are likely while the annual average growth target is likely to be lowered, possibly down to around 5% from “over 6.5%” for the previous 5 years.  

Data on tap this week largely consists of a slew of February PMIs while in the US the February ISM manufacturing survey will be released, with confidence likely boosted optimism about COVID and fiscal stimulus.  Over the rest of the week key releases include US jobs data (Fri), Eurozone February CPI inflation (Tue), Turkey CPI (Wed), UK Spring Budget (Wed), Australia Q4 GDP (Wed) and monetary policy decisions in Australia (Tue), Malaysia (Wed) and Poland (Wed).  None of these central banks are expected to shift policy. 

Posted in Asia, Asian currencies, Australia, Biden, Bond markets, central banks, China, Commodities, coronavirus, COVID-19, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Interest rates, Malaysia, Monetary Policy, Poland, Politics, Trade, Trump, Turkey, UK, US, US administration. Tags: , , , , , , , , , , , , . Leave a Comment »

Finally, Back To The Economy

November 8, 2020 — Mitul Kotecha

The election of President Elect Biden marks a new dawn for the US and the world.  The world had held its breath since Tuesday’s US election, wondering whether there would be four more years of the same or change.  A new Democratic President elect together with a split Congress, is arguably one of the best outcomes that markets could have hoped for, notwithstanding the fact that President Trump refuses to accept defeat. 

While the Senate is still up for grabs it seems more likely than not to stay in Republican hands; the Georgia run offs on 5 January could result in 50-50 in the Senate and effective Democrat control via Vice President elect Harris, but the probability of this is small.  As such, there seems little prospect that a Republican led Senate -– will be pliable to President elect Biden’s biding. 

Why is this good for markets?  It means that policies and members of Biden’s cabinet will likely veer towards more centrist as opposed to leftish aims.  It will for example, be difficult for Biden to hike taxes, which will take out some of the sting from a likely smaller fiscal package than Democrats had hoped for. And limited fiscal spending may keep the onus on the Fed to provide liquidity, underpinning markets further.  

Now that the Presidency has been decided, attention will turn at least in part, back to Covid and the economy.  Neither look encouraging.  Covid cases in the US have reached record levels.  US October jobs data released at the end of last week revealed an above consensus 638,000 increase in non- farm payrolls though the level of payrolls is still down a sizable 10.1mn from the level in February and the fading CARES Act spending alongside surge in Covid cases indicates risks to any further improvement going forward.

Top tier data is limited this week in the US, with inflation (CPI) as the main release on tap (Thurday).  Nonetheless, risk assets/equities are likely to continue to take on a positive tone in the wake of the election outcome. The USD is likely to remain under pressure as risk assets rally. 

A Biden presidency, split Congress bodes well for Asia.  The US stance on China would likely be more nuanced and US stance on trade would likely be more supportive.  As revealed in China’s October trade data over the weekend, exports are holding up particularly well even ahead of a Biden presidency; exports rose by a very healthy 11.4% y/y in October.  

The USD is likely to depreciate in the months ahead in the wake of a Biden win/split Congress, while US rates are likely to remain suppressed, which all point to Asian FX strength.  Fundamentals also point positively for Asia. Much of the region is recovering well from Covid related weakness, led by China, which now appears to be firing on all cylinders.

Posted in Asia, Asian currencies, Biden, Bond markets, central banks, China, COVID-19, Currencies, Economics, emerging markets, equity markets, Federal Reserve, Fiscal/Budget, FX, Interest rates, Monetary Policy, Trump, US, US administration. Tags: , , , , , , , , , , , , , , . Leave a Comment »
« Older posts
Newer posts »