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Fed 50, BOE 25, and the BOJ to Stand Pat: Week Ahead

Three G7 central banks meet in the coming days, and they dominate the macro stage. The Federal Reserve’s meeting concludes on Wednesday, the Bank of England…

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Three G7 central banks meet in the coming days, and they dominate the macro stage. The Federal Reserve's meeting concludes on Wednesday, the Bank of England on Thursday, and the Bank of Japan on Friday.

The market recognizes a strong consensus has emerged at the FOMC for 50 bp hikes in June, but the unexpectedly strong CPI report before the weekend saw the market price in about a 50% chance of a 75 bp hike in July. Some Fed officials have been understandably reluctant to venture much of an opinion about the September meeting. After the CPI print, the market expects 50 bp move in September and November.

The Fed governor and regional president that are seen as the most hawkish are Governor Waller and St. Louis Fed President Bullard. Their hawkishness needs to be understood within the context of the market. Their "beef", as it were, is not with the market, who they say their views are aligned with, but with their colleagues. In March, the median dot was for the Fed funds range to be 1.75%-2.0% at the end of the year.  The Fed funds futures market is closer to 3.15%. In March, there was only one forecast around the current market expectation. The median dot for the end of 2023 was 2.75%. The market is now at 3.50%.

We suspect the two new governors' dots will be consistent with the Fed's leadership. The median forecast for this year's GDP may be reduced from 2.8% to closer to 2.5%. If the median forecast for the PCE deflator (4.3% 2022 and 2.7% 2023) is raised, it would add to a hawkish message. The median forecast was for the unemployment rate to remain at 3.5%, in the face of the tightening and be at 3.6% at the end of 2024. Some of the Fed's critics poked at this and it will be interesting to see if it changes. The University of Michigan's consumer has tanked to levels not seen during past recessions, the tech bubble, the Great Financial Crisis, or the start of the pandemic. Some economists are claiming that the US is already in a recession. The Fed cannot be happy with the new increase in consumer inflation expectations the survey picked up.

In May, the FOMC statement acknowledged the contraction in Q1 GDP but noted that household spending and business investment (final sales to domestic purchasers) remained strong. This still seems to be a fair characterization of the economy. It said jobs gains were robust. Nonfarm payrolls rose by an average of 539k in Q1 22 and have averaged 413k in the first two months of Q2. Will the Fed recognize the moderation, or is it too early considering that in April and May 2021, the job growth averaged 355k a month?  Besides technical adjustments, most of the rest of the statement is likely to be little changed.  This includes the likelihood that despite variance of views, there is an agreement about the 50 bp rate hike and no dissents are likely.

When the Fed's rhetoric began changing last September, the December 22 Fed funds futures were implying a 0.35% 2022 year-end rate. It finished last year slightly above 0.80%. On the eve of the Fed's hike on March 16, the Dec contract implied about a 1.95% year-end rate. By the eve of the May 4 hike, the implied yield was closer to 2.75%. It finished last week a little above 3%. The swaps market has a terminal rate of about 3.75%.

The Bank of England is expected to hike its base rate by 25 bp on June 16 to 1.25%. It would be the fifth hike in the cycle that began last December with a 15 bp move. The swaps market is pricing in about a one in three chance of a 50 bp increase. There are five meetings left this year and the market has 180 bp of tightening discounted. This seems particularly aggressive given that it is consistent with two 50 bp hikes and three quarter-point moves.

The tightening of US monetary policy beginning in the late 1970s when Paul Volcker become the Federal Reserve Chair is the stuff legends are made off. Using the cover of money supply growth, Volcker led the Fed into hiking rates even as unemployment was climbing. Volcker, appointed by Carter, a Democrat, helped facilitate the Reagan-era capital offensive that liberated capital mobility, spurred financial innovation, but also generated a dramatic divergence of wealth and income that some argue is a bigger threat to the US economy (and political life) than inflation. Although, there was a hope in some quarters that Powell would take up the mantle, it seems BOE governor is channeling Volcker.

The Fed has begun an aggressive tightening course, but it sees the economy as strong and plays down recession worries. US unemployment is around half the pace it was when the Fed under Volcker began hiking. As we noted, it claims that it can raise interest rates sharply and shrink the balance sheet twice as fast as it did previously with no meaningful deterioration of the labor market. The Bank of England is a different kettle of fish. In May it warned that the economy is likely to contract next year and expand by a miniscule 0.3% in 2024. It envisions unemployment rising from 3.5% this year to 4.3% next and 5.0% in 2024. The three-month year-over-year rate calculated by the ILO stood at 3.7% in March. The April estimate is due June 14.

UK CPI was 9% above year ago levels in April. Last month, the BOE estimated that 80% of the overshoot in inflation is a function of the surge in energy prices and tradeable goods. Gas and electricity regulated prices jumped by nearly 55% in April and are expected to rise a little more than 40% in October. Consider that gasoline costs about GBP2 per liter, which converts to more than $11 a gallon. Between higher energy and food prices, and tax increases, the UK is experiencing a once-in-a-generation cost-of-living squeeze.

Just like Volcker-led hikes helped shape the American political discourse, BOE Governor Bailey's hikes could also impact the UK's politics. Prime Minister Johnson survived a vote of confidence over the objection of 41% of the Tory members of Parliament. Ultimately, Johnson's value to the party is that he led them into victory and regained the Conservative majority. However, this claim to fame has weakened. The Tories look set to lose two special elections on June 23 that were forced as the Tory MPs were forced to resign in separate sex scandals. Although, they do not reflect on Johnson, his government has been lambasted for the "sleaze factor."  

The latest YouGov poll gives Labour an eight-percentage point advantage (39%-31%). A full third of those survey said that Labour leader Starmer, who also, incidentally, faces his own possible "partygate" would be a better prime minister than Johnson. A quarter favored Johnson. After the special elections, the next big hurdle for Johnson will be the Conservative Party Conference in October.

The Federal Reserve has all but committed to a 50 bp rate hike next week. The Bank of England will likely move by 25 bp. The Bank of Japan, the third G5 central bank that meets in the week ahead, will stand pat. BOJ Governor Kuroda has been explicit. The rise in the CPI, with the core (excluding fresh food) poking above the 2% target, is being driven by factors that are not sustainable, like the base effect from last year's cut in the cell phone charges, and higher energy prices. Excluding fresh food and energy, prices rose 0.8% from a year ago in April. It has not been above 1% for six years. The market appears to agree with Kuroda as the 10-year breakeven (the difference between the conventional 10-year yield and the inflation-linked security) is below 90 bp.

Kuroda, whose term expires in April 2023, has renewed the BOJ's commitment to the capping the 10-year yield at 0.25%. This comes, of course, not just in the face of the rising inflation, but also while major bond yields in the US and Europe have risen sharply. As a result of the divergence of monetary policy the yen has weakened sharply.

The correlation of the change in dollar-yen exchange rate and the US 10-year yield is a little above 0.5 over the last 60 sessions and a little below in the past 30. The euro is trading at eight-year highs against the Japanese yen. The change in the cross rate and the 10-year German Bund yield is stable around 0.60 for the past 30 and 60 days.

Even if the divergence of interest rates is the key driver pushing the yen lower, there are also other considerations. For example, Japan is also experiencing a negative terms of trade shock. Consider that Japan had a current account surplus of JPY3.5 trillion in the first four months of this year, slightly more than half the surplus in the same period last year. Lenin once quipped that in battle, feel mush push; feel steel retreat, which also seems to apply to foreign exchange. That the yen's decline in being driven by economic fundamentals, and that Kuroda has no intention to alter the monetary course, and, if anything, still sees net advantages of a weak currency, the risk of intervention (steel) is low.

Although some observers have talked about the risk of intervention, it mostly seen at higher dollar levels. Some reports cite interest one-year JPY150 calls. Japanese officials' verbal intervention stepped up at the end of last week, but the concern is still over the pace of the move and not levels. Moreover, the impact of the verbal intervention was quickly blunted by the stronger than expected rise in the US CPI.

It seems that trades fall into three categories. The first is momentum or trend following. The second is mean reversion or going against the trend. The third is carry trade, which is a version of interest rate arbitrage. Sell a low yielding currency and buy a higher yielding currency. The profit or loss is derived from the different yields rather than spot movement. The short yen position now is a momentum or trend following trade and it can also be part of a carry trade.

The challenge with carry trades is that a volatility of the currencies can overwhelm the interest rate differential. For example, imagine you can borrow yen for around six basis points annualized convert into dollars for a three-month time deposit and earn around 170 bp (annualized). With the three-month volatility of the dollar-yen exchange rate implied in the options market of over 11%, one can appreciate how movement in the spot market easily negate the yield pick-up. It is why some have characterized the carry trading in the foreign exchange market as picking up pennies in front of steam roller.

If the rise in US 10-year yields is the key to understanding the depreciation of the yen against the dollar, to ask when the greenback peaks is to ask when US rates peak. That in turn depends to a great extent on the terminal rate for Fed funds. If the target rate peaks at 3.50%-3.75% as many think now and is priced into the swaps market, then arguably the 10-year yield has "value" as it approaches 3.20%. 

The momentum indicators for dollar-yen corrected lower last month but have risen sharply over the past couple of weeks. The MACD is still accelerating higher but the Slow Stochastic is over-extended and can turn lower with a setback in spot. The dollar closed above its upper Bollinger Band (two standard deviations above the 20-day moving average) every session last week. Speculators in the futures market already have a substantial short yen position (short about 94.5k contracts, JPY12.5 mln per contract, or roughly $93k per contract, or about $8.8 bln overall). They have not been net long since March 2021. Market sentiment, with the talk of JPY150 calls, seems extreme.

The surge in US and German rates warns that the BOJ efforts to cap the 10-year bond yield at 0.25% will be challenged again in the coming days. It has been successful so far and it has not cost it much money. Defending the cap is has been negative for the yen as it drives home the point that monetary policy has not changed and is the heart of divergence that is driving the exchange rate. 


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Military Agrees To Pay $1.8 Million To Settle Lawsuits From COVID Vaccine Mandate

Military Agrees To Pay $1.8 Million To Settle Lawsuits From COVID Vaccine Mandate

Authored by Ryan Morgan via The Epoch Times (Emphasis ours),

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October 14, 2023

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Military Agrees To Pay $1.8 Million To Settle Lawsuits From COVID Vaccine Mandate

Authored by Ryan Morgan via The Epoch Times (Emphasis ours),

In a settlement agreement submitted on Oct. 3, Defense Secretary Lloyd Austin, Army Secretary Christine Wormuth, Air Force Secretary Frank Kendall, and Navy Secretary Carlos Del Toro agreed to settle the pair of lawsuits—known as U.S. Navy SEALs 1-26 v. Biden and Colonel Financial Management Officer, et al. v. Austin—which challenged the legal basis of the military-wide vaccine mandate.

A soldier watches a colleague receive his COVID-19 vaccination from Army Preventive Medicine personnel in Fort Knox, Ky., on Sept. 9, 2021. (Jon Cherry/Getty Images)

The two cases were brought by servicemembers from all U.S. military branches, including numerous officers and several members of the elite U.S. Navy SEALs. The Navy SEAL plaintiffs initially filed their lawsuit nearly two years ago in October 2021 after President Joe Biden ordered that all U.S. troops and other executive branch employees be vaccinated against COVID-19.

Military servicemembers have raised numerous objections to the military COVID-19 vaccine mandate, including claims that the various military branches routinely rejected requests for religious accommodations to the mandates. Plaintiffs have also raised health concerns over the relatively condensed timeline under which the various COVID-19 vaccines were developed and then granted approval by the U.S. Food and Drug Administration (FDA).

While the various COVID-19 vaccines were originally made available to the general public under emergency use authorizations, the FDA eventually granted full approval to the Pfizer–BioNTech vaccine version, later marketed as Comirnaty. President Biden introduced the vaccine mandate shortly after the FDA granted full approval for Comirnaty, but the lawsuits argued that the FDA-approved vaccine often wasn't actually available to servicemembers, meaning that the military vaccine mandate effectively required service members to take versions of the COVID-19 vaccines that didn't have full FDA approval.

Last year, Republican lawmakers introduced a provision in the 2022 National Defense Authorization Act (NDAA) that repealed the military's vaccine mandate. President Biden ultimately signed the 2022 NDAA into law, despite objecting to the provision reversing his military vaccine mandate.

Liberty Counsel, a religious liberty nonprofit that represented military plaintiffs in the two cases, celebrated the Oct. 3 settlement agreement.

"The military COVID shot mandate is dead," Liberty Counsel founder and Chairman Mat Staver said in a statement. "Our heroic service members can no longer be forced to take this experimental jab that conflicts with their religious convictions."

The $1.8 million settlement will be split between the two cases, with $900,000 being paid out for SEAL 1-26 v. Biden and the same amount being paid to the plaintiffs in Colonel Financial Management Officer, et al. v. Austin.

"Through our daily work with service members in every branch, we have had the privilege of knowing some of the finest people who love God and love America," Mr. Staver said. "These heroes should not have been mistreated by our own government. At the same time, we have come to realize that many of the high-ranking members of leadership, the Pentagon, and the Biden administration need to be replaced. Collectively, they dishonored the brave men and women who defend our freedom. We stand ready to defend our defenders of freedom if any religious discrimination occurs in the future.”

Approximately 8,400 U.S. military servicemembers were involuntarily separated from the military as a result of the COVID-19 vaccine mandate.

The majority of servicemembers received a general discharge, as opposed to a more favorable honorable discharge. Servicemembers separated under a general discharge can be barred from rejoining the military and don't have full access to educational benefits under the GI Bill.

Tyler Durden Sat, 10/14/2023 - 14:00

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Bibi & Khamenei Trade Social Media Threats As IDF Readies For Air, Ground, & Naval Offensive Against Gaza “Very Soon”

Bibi & Khamenei Trade Social Media Threats As IDF Readies For Air, Ground, & Naval Offensive Against Gaza "Very Soon"

Update (1330ET):…

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October 14, 2023

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Bibi & Khamenei Trade Social Media Threats As IDF Readies For Air, Ground, & Naval Offensive Against Gaza "Very Soon"

Update (1330ET): The Israeli military has announced it is prepared for a coordinated air, ground and naval offensive in the Gaza Strip "very soon," according to reports from AP.

In a nationally broadcast address Saturday night, Rear Adm. Daniel Hagari issued a new appeal to residents to move to the southern Gaza Strip.

“We are going to broadly attack Gaza City very soon,” he said.

He accused Hamas of trying to use civilians as human shields.

Meanwhile, the social media rhetoric between leaders has gone to '11'...

Iran's Supreme Leader Khamenei expects a "complete victory"...

Calling on all Muslims to join the fight...

Israeli PM Netanyahu made his views very clear:

Live feeds below on Gaza: 

*  *  *

Israeli media is reporting a "greenlight" has been given for the expected major Israeli offensive on the Gaza Strip as massive convoys of Palestinian civilians have been observed fleeing to the southern part of the densely populated strip. So far there has been limited ground incursions by the army into the strip, targeting Hamas operatives and reportedly to gain intelligence on the whereabouts of hostages. 

The United Nations has issued a report saying at least 423,000 Palestinians have already been internally displaced within Gaza and this massive figure is expected to ratchet further. Likely it has surpassed a half-million as of Saturday, following the Israeli-issued evacuation order, which included dropping thousands of leaflets and warnings over Gaza City. 

Via The Guardian

The UN said it "considers it impossible for such a movement to take place without devastating humanitarian consequences." Middle East Eye and other regional sources have said over 700 Palestinian children were killed in one week of fighting. As of Friday Israel authorities tallied that over 1,300 Israelis were killed by the Hamas terror attacks on the southern settlements and the music festival, and rocket fire, with at least 3,200 wounded. 27 among the dead were Americans.

Middle East Eye on Saturday reports the following of the mounting Palestinian death toll in both Gaza and the West bank as follows:

Israel has killed at least 2,215 people in Gaza over the past week, according to the Palestinian health ministry. Of those killed, 724 are children and 458 are women. Some 8,714 people have been wounded in the besieged enclave in that time, it added. 

Meanwhile, Israeli forces have killed 54 people and wounded 1,100 others in the occupied West Bank.

According to a review of the last hours of developments, the population is about to run out of water as the remaining supply dwindles after Israel cut off external supply sources: 

  • UN agency for Palestinian refugees says its shelters in Gaza “are not safe anymore” as it warns water running our for besieged enclave’s residents.
  • More than 320 Palestinians have been killed in the past 24 hours, including many women and children killed in Israeli air raids on convoys fleeing Gaza City, according to health officials.
  • The rising toll comes as Israel continues bombing Gaza a day after telling 1.1 million residents to head south ahead of a looming ground offensive following Hamas’s attack inside Israel last week.
  • At least 2,215 Palestinians have been killed and 8,714 wounded in Israeli air attacks on Gaza. The number of people killed in Israel has reached 1,300, with more than 3,400 wounded.
  • In the occupied West Bank, the number of Palestinians killed by Israeli fire in the past week has topped 50. More than 1,000 have been wounded and hundreds arrested.

The fate of the estimated 100 to 200 hostages in Hamas captivity still remains largely unknown, but Hamas in statements which have been underreported in Western press has claimed that over two dozen of the hostages have been killed by the IDF's ongoing aerial bombardment of the Gaza Strip: 

Hamas' Izz al-Din al-Qassam Brigades said nine more captives were killed in indiscriminate Israeli shelling in the last 24 hours, including a number of foreigners. 

Qassam has previously announced the death of 17 captives in Israeli air stikes in Gaza over the past week. 

Sky News and others are also reporting, based on Israeli sources, that bodies of hostages have been recovered after some of the initial IDF infantry cross-border raids which began Friday into Saturday:

Raids carried out on the Gaza Strip by Israeli forces discovered human remains of those who had been missing since Hamas's attack last weekend, local media is reporting.

According to Haaretz, armed forces entered an enclave where it is thought up to 200 people were being held hostage by Hamas, and retrieved the bodies of several people.

Items belonging to the missing people were also discovered. 

The US said Friday it chartered its first successful evacuation flight, with talk of more to come.

TOI: A military official at the forensic center at the Military Rabbinate's headquarters in Ramle stands in front of the remains of the victims of Hamas's October 7 shock onslaught in Israel, October 13, 2023. Flash90

There are Americans (many of them likely dual nationals) among the population of Gaza, which Washington says it is trying to facilitate safe exit for as Israeli airstrikes continue. Dangerously, the lone Raffah border crossing into Egypt has at this point been bombed several times. 

But regional media is reporting there's been a diplomatic breakthrough on this front, as Israel, Egypt, and the United States have forged an agreement to let foreigners residing in Gaza pass through the Rafah border crossing into Egypt.

Scene from the frontlines as the IDF build-up outside Gaza continues:

Huge civilian convoys have been witnessed fleeing to the southern half of Gaza, creating bottlenecks...

The Times of Israel cites a senior Egyptian official as follows:

The official says Israel has agreed to refrain from striking areas the foreigners would pass through on their way out of the besieged Palestinian territory. He adds that Qatar was involved in the negotiations and the participants received approval from the Palestinian terror groups, Hamas and Islamic Jihad.

The agreement  does not deal with hostages being held by Hamas.

A second official at the Egyptian side of the Rafah crossing point says they received “instructions” to reopen it on Saturday afternoon for foreigners coming from Gaza.

But Egypt is by and large not letting Gazans exit, even erecting bigger concrete barriers of extra border protection, amid what's setting up to be a catastrophic humanitarian crisis as the Israeli pressure ratchets.

The IDF says it is about to attack the northern half of the Gaza Strip with "great force" - while the US and other countries are urging for caution regarding Palestinian civilians. Below is rare footage of an elite Israeli rescue squad in action (intentionally blurred by IDF sources):

Washington has still all the while said it "stands with Israel" - and has not tried to actually halt the unrelenting IDF bombardment of civilian areas.

Meanwhile, things continue ratcheting in south Lebanon, with reports of new strikes being exchanged between Israel and Hezbollah, and other pro-Palestinian factions.

Tyler Durden Sat, 10/14/2023 - 13:40

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Watch: Leftist Activists Across The US Call For “Intifada” In Support Of Palestinians

Watch: Leftist Activists Across The US Call For "Intifada" In Support Of Palestinians

It is perhaps one of the strangest political alliances…

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October 14, 2023

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Watch: Leftist Activists Across The US Call For "Intifada" In Support Of Palestinians

It is perhaps one of the strangest political alliances in existence today - The political left's infatuation with Muslim extremism and supporting Islamic causes, despite the fact that the majority of leftists would likely be imprisoned or worse in Islamic countries for their beliefs. 

Regardless of a person's position on the Israeli/Palestinian conflict, it cannot be denied that Muslim culture is inherently hostile to progressive concepts like women's rights, gay rights, diversity and inclusion, sexual revolution, etc.  Opposition to trans ideology in particular is one of the few areas, in fact, where orthodox Muslims and conservatives in the US tend to find common ground.  In other words, Muslims have little or nothing in common with the political left in the west.  

Where the movements seem to intersect is up for debate, but it is clear that leftist activists are quick to jump on any opportunity to provoke violent deconstruction.  The past couple days have given rise to a series of leftist rallies, mostly in blue enclaves and university environments, all across the US.  People bearing rainbow flags and Palestinian flags are calling for "one solution" - A violent intifada.

The rallies all appear to be tied to far-left groups from Antifa to LGBT groups.

From Portland, Orgeon...

...to New York.

Even BLM wants in on the Intifada...

How leftist activists plan to reconcile their support of Islamic extremism with their own ideological taboos remains to be seen.  Furthermore, with the majority of Democrat politicians including Biden publicly in favor of Israel, one wonders if there will be a considerable split in the Democrat party if the conflict continues to escalate beyond the borders of Gaza.

Tyler Durden Sat, 10/14/2023 - 13:25

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