Wednesday, 12 June 2019

Will the Fed hike or cut by the end of next year? The market current has 4 cuts priced

Thought this was an interesting article. There were ~4 rate cuts into the end of next year priced in Fed funds futures last week.

There are well known areas of slowdown in industry (autos, prime residential, trade) plus bricks and mortar retail. But apart from that the economy is growing, so far without a wage-inflation pressure and most of the US economy is domestic services.

If the industrial slowdown sectors rebound into year end (for example as more EVs and PHEVs models are released and as supply chains reroute via Vietnam or Mexico) then there will be more pressure for the Fed to hike next year than cut adn the current slowdown will have just been a growth scare.

Next week's FOMC will be an interesting one. If the market percives the hint of a cut in September the market might then price in more than 4 cuts next year.

Thursday, 4 April 2019

Cross currents into Trump's 2020 relection bid

By the end of Sept 2020 bank excess reserves at the current pace of QE unwind will be circa $825bn, down from $2.6Tn at the peak. This has to be bearish asset prices from a crowding out standpoint and reverse portfolio channel effect

The thing about the excess reserves staying at say $500bn to $1tn is it allows the velocity of money to increase if we enter a wage/ inflation/ investment cycle, while at the same time QE unwind is negative for risky asset valuations

So what if after some industrial weakness in Q2, Trumps main street/ fiscal deficit policies are stoking a wage/ inflation/ investment cycle, the Fed is trapped as it will still be tightening for asset markets but still loose for real economy.

2020 in that scenario will see rate hikes restarted but Fed will be behind the curve so USD weak All this going into Trump's reelection will be immense pressure on Powell to stay loose Trump's history is one of spending big upfront, not getting revenues later, and then bankruptcy

Nevertheless, in the short term the Fed/ China stim/ US-China trade deal rally since December is running out of steam and up against slowing data. Q2 could see risk off and bond rally more first BB spreads look to have fully recovered and gone sideways for a month now.

A collapse in oil prices as the US goes to net exports ends the Petrodollar and puts sovereign wealth funds into the structural USD/ TSY seller

There is almost 6MMbpd of oil production capacity in DUC wells waiting for new export pipelines by end 2020 before starting production

Wednesday, 6 March 2019

Why shale will keep oil company RoEs atrocious, Gold fails to take Goldman's breakout cue, Chinese QT & London's biggest ever sale has started!

This interview is a golden nugget Chevron CEO promising a production double - ie the oil price is the only form of capital discipline and the US will go to a net oil export position soon and will have to take market share from another producer (hint, it's Iran) 

He even says their ownership of land allows them to write its fair value/ lease equivalent value down vs smaller peers that are leasing land and Chevron can therefore still operate at a lower oil price. 

All points to terrible RoEs for all but the genuinely lowest cost producers - and shale is not low cost..

US 4 week average net imports now look like they are only 700 or 800k bpd, down from 12.5 million. There have even been two weeks of net exports.  

Despite Goldman's bullish call at top of the recent range, Gold did not break out this time Maybe in late Q3 after a Q2 USD rally/ risk off phase, $1200-1220 is a decent floor to bounce off Need wages to show Fed loose for real, tight for financial economy


Chinese Quantitative Tightening? Telling local debtors to repay CNY debt quickly, in turn forcing them to sell their offshore assets.

As such London's biggest ever sale has started... Up to 68% off and much further to go... However, unlike sales at the shops, you probably want to be the last to buy (I guess the Europeans threatening to leave over Brexit will just have to stay)


Friday, 15 February 2019

China M2 turns the corner, but its time to devalue

China M2 growth is off the lows. But M2 is around 220% of GDP, so 8.5% M2 growth this year is the same as 19% of GDP. Meanwhile if GDP grows 6% real and 2% CPI, so 8% nominal, M2 is growing 2.4x as fast as GDP. FAI is still over 42% of GDP and Construction 17%.

Meanwhile CNY is one of the most expensive REER FX rates with growing BoP pressure to devalue.

Devaluing, at least on a trade weighted basis including against the Yen and Euros would be a massive boost to the corporate sector in the face of sanctions and would support higher nominal GDP, wage growth, CPI and help reduce the credit intensity of growth.

My medium term JPY/CNY target is in the 7c's and 8c's later from 6.1 now. Its also a positive risk off trade as the Yen should rally in risk off.


Wednesday, 9 January 2019

US Fed funds futures and the credit cycle

Jan 2020 Fed funds futures are currently pricing in a lower EFFR than today's one, ie pricing in a chance of a rate cut in 2019... 

The market is pricing 2.325% vs current EFFR of 2.4%... 

Meanwhile, the US labour market is blistering and corporate margins are near all-time highs. 

Perhaps the last 3 months were just about retail investors getting into a twist. Or perhaps its just post-QE valuations resetting lower in jolts. Or markets fearing a fall into the deflationary recessionary gap as the US transitions between a QE/ credit led economic cycle and a wage/ investment/ inflation cycle going forwards.

The US credit cycle is also still very strong.

As per H8 survey from end November to the 26th December bank credit grew ~11% of GDP and bank total assets (BTFD!) grew 17% of GDP annualised. That was after a strong October and November as well. 

The magic elixir of a Trillion $ late cycle deficit and still loose Fed

Monday, 10 December 2018

EURGBP near to breakout

All time high was 98.05 on EURGBP.

May has given up on her Brexit deal. I have no idea about what will happen but it wouldnt take many investors to derisk for a few months to push Sterling meaningfully lower, at least against the USD.

Friday, 7 December 2018

US oil exports, Indian loan growth

The US was a net oil exporter last week, the blue line chart is only up to the prior week. Over the next 5 to 10 years I expect the US to go to a current account surplus as well. 

It is China who is short oil and the US can take market share by disrupting the Gulf in particular Iran.

Growth also looks to be accelerating into next year in India