(Note that these are solely the views & opinions of KVP, they do not constitute any trade or investment recommendations of any kind.)
To see this wk’s Macro Monday click here
Happy Macro Thu 31 Oct 2019
APAC Global Macro Morning Brief – Happy Synthetic Friday…
Its Synthetic Friday for some of us that worked on the Mon public holiday here in SG (Love Diwali!), and I guess NZ? And obviously if you are in places like the Dubai in the ME, then it’s the WKD + 1 = TGIF, or I suppose TGIT…
Lets start of by wishing everyone a great close to the month & even better start on Nov… the finish line of the year is visible… For the traders out there… its really the next 4-6 wks that are going to be critical. Stay focused, for a few elite macro boys & girls… their 4Q tends to be their best… why? Everyone else is tired, psychology of year end, not wanting to risk to much close to holidays, no one pats you on the back for making +$5m in Dec, but lose $1m & you got some explaining to do…
KVP would not read too much in regards to recent price action until we are mid next wk, on the other side of ISMs, Fed digestion, etc.
So post the Fed o/n, KVP was & continues to be quite unimpressed by the cross-asset moves… our John Hardy summed it up well post the decision…
“Interesting Fed meeting and press conference – mostly on the market reaction rather than the content of what the Fed said in the statement or in press conference. The meeting played as a “hawkish cut” in that there was almost no change in the statement (the one dovish dissenter last time did not dissent to the size of this cut, while the same two hawkish dissenters dissented this time, in favour of not cut) and Powell seemed to suggest in the opening statement that this level of rates is appropriate for now unless strong evidence of a deterioration.
As for the market reaction – the USD tried to rally a bit on the positioning of the cut as “done for now” but that quickly faded and is now pushing to the lows of the day as the US yield curve flattens – little change to the short end of the curve and Fed expectations, but the long end well supported and long yields falling as US yield curve flattens hard after recent steepening. At the same time, risk appetite in equity terms is shrugging off this nominally “hawkish” development – a mixed message, but the weak USD is the strongest signal from all of this.
If this move holds, looks rather bearish for USD via USDJPY (beware volatility on USDJPY overnight), EURUSD and AUDUSD, for example, and bullish precious metals.”
We now stand at a 20.7% prob of a cut for the Dec 11 meeting, which goes to 41% & 50% for Jan 29 & Mar 18. In fact if you go out to 16 Dec 2020, there is only a 74.5% change of a cut & no hike probability priced in.
Remember the two things we flagged on yest’s piece, 2020 is a half-life year for the Fed, if there is any shuffling to be done… its likely to be in the 1st half of the year. Lastly, lets wait and see where this set of ISMs falls tmr & next wk, as we have previously seen those Fed cut or hike probabilities can have magnificent reversals.
We will also know for sure over the next 2 quarters, whether the Fed is massively behind the curve (as tends to be the general consensus on both hikes & cuts by central bankers, not saying its wrong but…) or they know / see something that everybody else is missing.
People tend to forget, being a central banker is like being a CEO or head of a country or trader for that matter… you are damned if you do & you are damned if you don’t.
i.e. you will always have a directional bias, because it’s a relative world… at times to just stand still is to move ahead.
Damn that’s a line, are you sure no one has connections for KVP to help write out the APAC + EM version of Billions, which we will of of course call Trillions. KVP has a whole host of characters – which bear zero correlation to friends, frenemies, peers, associates & disassociates, honest! 🙂 So we are talking from the highs of “Mr. Vega” & “Stratos”, to the library & cigar filled archives of “the Professor”, “50-delta” & “Ninja” to the pesky dungeons of “Toxic”, to the “Wolf of Wanchizo” (that’s what WoW means right?), to Serengeti plains of the “spring in buck” & “Zulu”…to “The HAL” [Hustler At Large], to the sands of the middle east “STK” as well as “Captain Obvious”… to the Americas…”Ms. Helicopter”, “EH”, ACito…” KVP could go on… but lets get back to markets… Hollywood can wait a while longer… as well as my Netflix special… speaking of which, Eddie Murphy is coming back… empty your bladders now… because that is likely to be raw! Ok we digress again… where were we… ah BoC…
What of Bank of Canada? Links to statement & press conference.
So no change as expected, rates stay at 1.75% & USDCAD was higher at +0.55% to 1.3159 – this is combination of the Fed in current one & done mode, and Poloz talking about considering joining the race to the bottom party that we have seen from other central bankers globally. So they considered an insurance cut (vs. global headwinds) but passed on it (due to domestic tailwinds & strong inflation, with latest CORE coming in-line at 2.1% for Sep, similar in line to the Aug numbers).
“Governing Council considered whether the downside risks to the Canadian economy were sufficient at this time to warrant a more accommodative monetary policy as a form of insurance against those risks, and we concluded that they were not” -Poloz, Bank of Canada Governor
So this is interesting from at least two points: BoC now leaving door open to a cut in the future (lowered growth forecasts to 1.7%(1.9%) for 2020) and they now also have the juiciest policy rate across all developed markets with the Fed sitting now at 1.50%
KVP continues to think there is a massive trade on the CA asset complex, not sure exactly what it is… yet initial instincts of them eventually joining the party… hence delayed yield compression to the US… likely still stands. Or to put it another way, if KVP was running a real money long-horizon strategy (puts feet up on mahogany desk & checks his golfing afternoon schedule), there should be a CA duration allocation – both CORE to hold for the next 3-5 yrs, basically into a likely Global Recession to serious slowdown. As well as tactical clip, to position around. On the more tactical/hedge fund side of things, not to sure at the moment to be honest. Yet, watch Poloz closely. The risk is actually that Fed blinks before BoC.
One last thought on price action overnight, yes cable grinding back over 1.2900 +0.31% is now the direction that makes a lot more sense to KVP.
Its easy to look at this & think what a move from 1.20, yet the high likely probability is we are north of 1.35 / 1.40 before end of Jan… And again, the real money folks (Corporates, Pension Funds, Blue Chip AMs, SWFs) will not be able to participate until there is a decisive conclusion. If you are just looking at the CoT profile or different banks FX exposure on sterling, you are missing the bigger picture. Think about the +3yrs of the world being underweight UK assets from equities, to bonds, to property & land (London, Cambridge, Oxford), to private investments & unlisted companies, etc. Obviously you need to measure that vs. the slowing economy (negative credit pulse that my colleagues keep going on about), plus election risks. Interestingly enough 3m & 1y ATM volatility has not changed much over the last wk, we are still around the 10.125 & 8.55 lvls (Bloomberg source), where as the 1M has collapsed by 21% to 7.85 due to the extension to Jan 31 & Dec 12 election date. For those that look for the few times a year where KVP is waving the flag on high conviction asymmetrical direction, consider this being the equivalent of 8 flags being raised.
Watch out for the action backed econ data from the US this Friday, including; NFP, AHE & ISM mfg. The better than expected GDP o/n was a pretty big beat at 1.9%a 1.6%e 2.0p, whilst ADP gave a mixed picture beat on expectations, yet net-net negative given big revisions on previous number.
Profitable positioning everybody & happy Synthetic Friday. Catch you on next wk’s Macro Monday (08:30 SGT, 20:30 ET), six left for the year!
- AU: Building Approvals smash at 7.6%a 0.1%e plus upward revisions to -0.6%p
- CH: Continued misses on PMIs with Mfg. at 49.3a 49.9e & Serv 52.8a 53.7 – the deceleration in services continues, as does the contraction in manufacturing
- EZ: Flash CPI 1.0%e 1.0%p
- US: Challenger Jobs Cuts, Personal Spending, Personal Income, Weekly Unemployment Claims 215ke 212kp, Chicago PMI, Core PCE Index
- CA: Monthly GDP, House Prices
- Other: SNB’s Jordan speaking 23:30 SGT (11:30 ET)
- To catch this wk’s Macro Monday Click here… & replay of the call here
- Don’t forget to bookmark & check our Daily SaxoStrats calls from the European morning session c. 09:00 CET
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