This isn’t a standard journal per se. I just want somewhere to file important events news etc for reference and my own trading, though I may post some trades
slowing inflation could make her rethink future policy
Data consistent with rebound this quarter
Time for balance sheet policy change coming in clearer view
Global outlook brighter, risk balance more favorable
Further policy tightening likely appropriate soon
US GDP growth expected to rebound in second-quarter
Can’t say yet how big Fed balance sheet should be in future
Lack of progress in core inflation source of concern
Debt limit uncertainty may influence risk outlook
May want to delay rate hikes if inflation continues to slow
High corporate debt level warrants vigilance
soft inflation may prompt rate rethink if it persists
Lax auto loan underwriting also a concern
The caveat on rates due to slow core inflation is interesting. But for the time being, it seems all systems are go for a June hike (with the Friday employment report being the final vote).
Brainard is a permanent voting member on the Federal Reserve Board of Governors.
Fib rejection, Stochs cross
“If you remember nothing else I’ve shared with you today, I hope you’ll remember this: The last thing we want to do is to fuel unnecessary or avoidable volatility or disruption – whether we’re talking about domestic markets or international markets,” Williams said in remarks prepared for delivery Monday to the Symposium on Asian Banking and Finance, co-hosted with the Monetary Authority of Singapore.
With the economy at full employment and inflation expected to reach the Fed’s 2-percent goal by next year, the Fed needs to keep raising U.S. interest rates gradually or risk overheating the economy, Williams said.
As SocGen’s Kit Juckes writes in his daily FX note, the currency market has been a “mess to end May”, noting that the month is ending on mixed note, but the themes of the month are pretty clear: the Euro and its satellite currencies were the big winners this month, benefitting from decent economic data, reduced political risk and a focus on the ECB’s timorous exit from crisis policy settings. The big losers were the Brazilian real (politic) and Sterling (politics). In between that lot, the ZAR benefited from political optimism, NZD from higher milk prices, AUD suffered from weak iron ore prices and JPY has held up reasonably well, just as the dollar has struggled somewhat under the weight of depressed bond yields.
Looking at the Euro specifically, Juckes writes that the common currency rally is being slowed down by the build-up of big long positions, the gap between how far the currency has gone and the move in relative yields, and the rhetoric of the ECB President. All of which argue for buying a corrective dip which hasn’t really happened yet. The pull-backs so far have been modest, testimony to the underlying strength of the upward trend. EUR/JPY has disappointed of late, after rallying sharply from mid-April to mid-May, but it remains the most attractive Euro long other than EUR/GBP.
“If You Blinked, You Missed The Euro Correction” | Zero Hedge
Iron Ore And The Australian Dollar
The correlation between the Australian dollar and iron ore prices.
Iron ore is back to Oct 2016 level.
Aussie is trading heavy.
This Great Graphic, from Bloomberg, shows the correlation between the price of iron ore and the Australian dollar on a rolling 60-day basis over the past year. The correlation is a little more than 0.81. The relationship is the tightest since last August. This is purely directional.
NZD Farm gate milk prices
The Five Great Debates
- The Fed debate
The market is juggling with three options: Here they are with the probabilities in parentheses: No hike on June 14 (10%). It would take a string of weak data between then and now; A hike with similarly hawkish bias (35%). Fed officials have begun to worry about the data; A hike with a dovish bias (55%). The market is shifting towards this option and that’s what is weighing on the US dollar. It would be signaled by something in the statement indicating that the Fed will need to see stronger evidence of growth and inflation before continuing to remove stimulus.
- The great inflation debate
This feeds into the first theme. Eurozone inflation at 1.4% y/y compared to 1.5% on Wednesday missed expectations. Central banks are divided on whether slightly better growth and a tighter jobs market will producer inflation. The latest buzz phrase in economics circles is ‘global overcapacity’ which is fancy way of saying that globalization, technology and offshoring can keep prices and wages down. The Fed is holding on tight to models that show a tight domestic economy will mean domestic inflation but they may one day have to rethink it.
- The China mystery
Yesterday’s PMIs were both slightly stronger than expected but the opacity of Chinese policy and the latest drop in metals prices has planted a deep seed of doubt. The latest move is rapid yuan strengthening. Skeptics say it’s a government-orchestrated squeeze on shorts designed to improve stability. We’re watching closely.
- The ECB shift debate
A leak on Tuesday indicated the ECB could move to a neutral stance and take away references to doing more as soon as next week. That was followed by today’s disappointing eurozone data slate. In the bigger picture, the suspicions is that Draghi wants to setup a September taper announcement but doesn’t want to spark EUR/USD strength or excessive run-up in yields.
- Oil’s toils
More Libyan production sent oil sharply lower Wednesday but it bounced on tighter US inventories in the API report. Every oil authority talks about a great inventory balancing that’s coming before year end while every analyst has doubts. Russia’s deputy finance minister might have tipped his hand Wednesday, saying to expect $40-$50 oil for seven years with risks of prices falling below. We’re left with the question: Who or what could boost crude right now?
GBP SKEW
The Great Graphic, created on Bloomberg, shows the options skew (three-month 25 delta risk reversal) in the white line, and sterling is the yellow line. The takeaway is that the market appears to be more nervous than the relatively firm sterling in the spot market suggests. Typically, on might expect those with sterling exposure to sell calls (and receive funds) rather than buy puts (new expenditure). The buyers of puts might not be buying insurance as much as taking a punt on the direction of sterling.
