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Futures Rise Ahead Of Biggest Fed Rate Hike Since The Dot Com Bubble Burst

Futures Rise Ahead Of Biggest Fed Rate Hike Since The Dot Com Bubble Burst

May the 4th is here, and US futures are up slightly ahead of a…

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Futures Rise Ahead Of Biggest Fed Rate Hike Since The Dot Com Bubble Burst

May the 4th is here, and US futures are up slightly ahead of a key Federal Reserve meeting in which the Fed is widely expected to raise rates by 50bps, the biggest hike since the dot com bubble burst in May 2000, and to release plans for balance-sheet normalization; Chair Powell’s post-meeting press conference will provide guidance on potential for bigger rate hikes at subsequent meetings and policy makers’ assessment of the neutral rate. As DB's Jim Reid puts it, "if you're under 43, did 3 years at university and then joined financial markets then you won't have worked in an era of 50bps Fed rate hikes. This will very likely change tonight as the Fed are a near certainty to raise rates by 50bps. In fact it'll be the first time the Fed have hiked at consecutive meetings since 2006. So we enter a new era that won't be familiar to many."

In any case, investors have already priced in the Fed’s largest hike since 2000 - in fact, OIS contracts currently price in around 160bp of additional hikes over the next three policy meetings -  and they will scrutinize Chair Jerome Powell’s speech for clues on the pace of future rate increases and balance-sheet reduction. Some traders are betting on an even larger 75 basis-point hike in June. As such, even though global financial conditions are already the tightest they have ever been (according to Goldman), S&P and Nasdaq futures are both up 0.5%, while 10-year yields drifts lower, having stalled again near 3% at the European open.

"Powell’s words about how aggressively the Fed will tame inflation are likely to shape market sentiment for the next couple of weeks at least," said technical analyst Pierre Veyret at ActivTrades in London. Lyft tumbled 26% in premarket trading after the ride-hailing company’s second-quarter outlook disappointed Wall Street.

Global bonds have slumped under a wave of monetary tightening, with German 10-year yields around 1% and the U.K.’s near 2%, while US 10Y yields are circling 3%. Adding to the tightening outlook, European Central Bank Executive Board Member Isabel Schnabel said it’s time for policy makers to take action to tame inflation, and that an interest-rate hike might come as early as July. Meanwhile, Iceland’s central bank delivered its biggest hike since the 2008 financial crisis and India’s raised its key interest rate in a surprise move Wednesday.

“There is a difficult set up in general for risk assets” as valuations remain stretched despite a drop in equities, Kathryn Koch, chief investment officer for public markets equity at Goldman Sachs & Co., said on Bloomberg Television. She added that “some people think stagflation is a real risk.”

In premarket trading, Didi Global was 6% lower and Chinese technology shares slumped as the U.S. Securities and Exchange Commission is investigating the ride-hailing giant’s chaotic 2021 debut in New York.  Advanced Micro Devices jumped 5.7% in premarket trading after the chipmaker gave a strong sales forecast for the current quarter. Starbucks gained 6.6% after the coffee chain reported higher-than-expected U.S. sales, outweighing the negative impact of high inflation and Chinese lockdowns. Here are some of the biggest U.S. movers today:

  • Lyft (LYFT) shares slump 27% premarket after the ride-hailing company’s second-quarter outlook disappointed Wall Street, highlighting investors’ willingness to dump growth stocks at the first hint of trouble
  • Uber (UBER) slipped as Lyft’s results hit the more diversified peer. Uber said it rescheduled the release of its 1Q financial results and its quarterly conference to Wednesday morning from the afternoon, after rival Lyft gave a weaker-than-expected outlook
  • Airbnb (ABNB) jumps 4.5% premarket after its second-quarter revenue forecast beat estimates, with the company seeing “substantial demand” after more than two years of Covid-19 restrictions
  • Livent (LHTM) shares surge 23% premarket, with KeyBanc highlighting an increase in the lithium product maker’s 2022 Ebitda guidance
  • Match Group (MTCH) slips 6.7% premarket as analysts say the miss in the dating-app company’s guidance takes some of the shine off its revenue beat
  • Didi Global (DIDI) led a drop in U.S.-listed Chinese internet stocks after news of an SEC investigation into the ride-hailing company’s 2021 debut in New York added to investor concerns around the sector
  • Skyworks Solutions (SKWS) shares drop 2.5% premarket after the semiconductor device company gave a forecast that was below the average analyst estimate
  • Herbalife (HLF) sinks 17% premarket after slashing its full-year forecast and setting second-quarter adjusted earnings per share outlook below the average analyst estimate
  • Advanced Micro Devices (AMD) rises as much as 7.5% in premarket trading, with analysts positive on the demand the chipmaker is seeing from data centers
  • Akamai (AKAM) falls as much as 14% after analysts noted that a slowdown in internet traffic and the loss of revenue due to the war in Ukraine hit the company’s first-quarter results and full-year guidance

JPMorgan CEO Jamie Dimon said in an interview Wednesday that the Fed should have moved quicker to raise rates as inflation hits the world economy. He said there was a 33% chance of the Federal Reserve’s actions leading to a soft landing for the U.S. economy and a third chance of a mild recession.

“The Fed remains very focused on bringing inflation down, however, any further hawkish pivots will likely be tempered to some extent by the desire to achieve a soft landing,” Blerina Uruci, U.S. economist at T. Rowe Price Group Inc., wrote in a note.

In Europe, declines for retailers and most other industry groups outweighed gains for energy, media and travel and leisure companies, pulling the Stoxx 600 Europe Index down 0.6%. The DAX outperforms, dropping 0.4%, Stoxx 600 lags, dropping 0.5%. Retailers, financial services and construction are the worst performing sectors. Here are the biggest European movers:

  • Flutter Entertainment rises more than 6.9% its 1Q update matched broker expectations. Jefferies says a strong U.S. performance fuels confidence that a profitability “tipping point” is nearing.
  • Kindred shares advance after its second-biggest shareholder, Corvex Management LP, said it believes Kindred’s board should evaluate strategic alternatives including a sale or merger.
  • Fresenius SE shares rise as much as 4.2% on beating 1Q expectations. The beat was driven by the Kabi pharmaceutical division, which benefited from a positive FX impact, according to Jefferies.
  • Siemens Healthineers rises after the German health care firm upgraded its earnings guidance. The beat was driven by a “strong performance” in its diagnostics division, Jefferies says.
  • Stillfront shares rise as much as 10% after the Swedish video gaming group presented its latest earnings. Handelsbanken says the report provides good news, justifying some relief in the shares.
  • Yara and K+S climb after the EU’s proposal to sanction the largest Belarus potash companies. Yara may see higher input prices but its market share may rise in wake of a ban, analysts note.
  • Skanska falls as much as 12% after the construction group presented its latest earnings. The report was overall in-line, but construction margins were a weakness, Kepler Cheuvreux says.

Earlier in the session, Asian stocks declined for a third straight day, with the Federal Reserve’s upcoming policy decision and a U.S. regulatory probe into Didi Global weighing on sentiment. The MSCI Asia Pacific Index fell by as much as 0.5%, with Chinese internet giants Tencent and Alibaba the biggest drags. The sector declined on news that the U.S. regulators are investigating Didi’s 2021 trading debut in New York. India’s stock measures fell the most in the region as the domestic central bank hiked a key policy rate in an unscheduled decision. Benchmarks in Hong Kong and Vietnam also fell as some markets returned from holidays, while Japan and China remained closed. All eyes are now on the Fed’s interest-rate decision on Wednesday, with policy makers expected to hike by 50 basis points, the biggest increase since 2000.  

We have two forces of gravity working on Asian equities -the rising interest rates and the lockdowns and weaker growth in China,” Herald van der Linde, head of Asia Pacific equity strategy at HSBC, told Bloomberg Television. The MSCI Asia gauge has dropped more than 13% this year as rising borrowing costs, China’s Covid-19 lockdowns and rising inflation hurt prospects for corporate profits. Shanghai’s exit from a five-week lockdown that has snarled global supply chains is being delayed by infections persistently appearing in the community. “The most important decision Asian equity investors have to make throughout this year may be duration, how to position themselves if inflation is going to peak,” van der Linde added.

In rates, treasuries advanced, outperforming bunds and rising with stock futures, although price action remains subdued ahead of 2pm ET Fed policy decision. Intermediate sectors lead the advance, with yields richer by ~2bp in 5- to 10-year sectors, before Treasury’s quarterly refunding announcement at 8:30am. Yields little changed across 2-year sector, flattening 2s10s by ~1.5bp; 10-year at ~2.96% outperforms bunds and gilts by ~3.5bp. Dollar issuance slate empty so far; two borrowers priced $3.7b Tuesday taking weekly total past $8b as new-issue activity remains light; at least two borrowers stood down from announcing deals. Bund and gilt curves bear flatten. Euribor futures drop 7-8 ticks in red and green packs following comments from ECB’s Schnabel late Tuesday.

In FX, the Bloomberg Dollar Spot Index was little changed and the dollar was steady to slightly weaker against most of its Group- of-10 peers. Treasuries were steady, with the 10-year yield nudging 3%. The euro hovered around $1.0520 and European bonds fell. The pound rose past the key $1.25 level and gilts fell in line with euro-area peers, as traders braced for the FOMC rate decision later Wednesday and eyed Thursday’s Bank of England meeting. Data from the British Retail Consortium showed shop price inflation accelerated to 2.7% from a year ago in April, the most since 2011. Australia’s dollar advanced against all its Group-of-10 peers and the nation’s sovereign bonds extended losses as retail sales rising to a record high boosted bets for central bank tightening. Retail sales surged 1.6% in March to A$33.6b, more than triple economists’ forecast for a 0.5% increase.

Bitcoin is bid this morning, in contrast to the recent contained sessions, posting upside in excess of 3.0% on the session; albeit, yet to mount a test of the USD 40k mark.

In commodities, oil rallies after the European Union proposed to ban Russian crude oil over the next six months; however, sources indicate that Hungary and Slovakia will receive an extend phase-our period in order to appease their known opposition. WTI drifts 3.2% higher with gains capped near $105 so far. Spot gold steady at $1,868/Oz. Most base metals trade in the green

Looking at the day ahead, the main highlight will be the aforementioned Fed decision, along with Chair Powell’s subsequent press conference. On the data side, we’ll also get the final services and composite PMIs from around the world, UK mortgage approvals and Euro Area retail sales for March, and US data for the March trade balance, the ISM services index for April, and the ADP’s report of private payrolls for April. Finally, earnings releases include CVS Health, Booking Holdings, Regeneron, Uber, Marriott International and Moderna.

Market Snapshot

  • S&P 500 futures up 0.3% to 4,180.00
  • STOXX Europe 600 down 0.4% to 444.21
  • MXAP down 0.3% to 167.37
  • MXAPJ down 0.4% to 553.87
  • Nikkei down 0.1% to 26,818.53
  • Topix little changed at 1,898.35
  • Hang Seng Index down 1.1% to 20,869.52
  • Shanghai Composite up 2.4% to 3,047.06
  • Sensex down 1.2% to 56,318.69
  • Australia S&P/ASX 200 down 0.2% to 7,304.68
  • Kospi down 0.1% to 2,677.57
  • German 10Y yield little changed at 1.00%
  • Euro little changed at $1.0527
  • Brent Futures up 3.6% to $108.77/bbl
  • Gold spot up 0.1% to $1,870.11
  • U.S. Dollar Index little changed at 103.40

Top Overnight News from Bloomberg

  • A lot is riding on how Federal Reserve Chairman Jerome Powell parries a question he’ll surely be asked after Wednesday’s monetary policy decision: is a 75-basis-point rate hike in the cards at some stage?
  • The negative-yielding bond is nearing extinction: there’s only 100 left in the world. That’s down from over 4,500 such securities last year in the Bloomberg Global Aggregate Negative Yielding Debt index, following a surge in yields as investors bet on imminent interest-rate hikes.
  • The EU plans to ban Russian crude oil over the next six months and refined fuels by the end of the year as part of a sixth round of sanctions to increase pressure on Vladimir Putin over his invasion of Ukraine
  • The ECB should consider raising interest rates as soon as July as inflation accelerates, ERR reported, citing Governing Council member Madis Muller
  • North Korea launched what appeared to be a medium-range ballistic missile Wednesday, as Kim Jong Un ramps up his nuclear program ahead of U.S. President Joe Biden’s first visit to Seoul
  • Iceland’s central bank delivered its biggest hike since the 2008 financial crisis to try to curb inflation and rein in Europe’s fastest house-price rally. The Monetary Policy Committee in Reykjavik lifted the seven-day term deposit rate by 100 basis points to 3.75%, accelerating tightening with its largest move yet since the pandemic. The increase was within the range of outcomes indicated by recent surveys of market participants

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were cautious amid holiday closures and as markets braced for the incoming FOMC. ASX 200 was rangebound as strength in financials was offset by tech and consumer sector losses. Hang Seng underperformed amid a tech rout and after a wider than expected contraction in Hong Kong’s advanced Q1 GDP, while China’s COVID-19 woes persisted with Beijing tightening its restrictions.

Top Asian News

  • Hong Kong Plots Different Covid Path to Xi’s Zero Tolerance
  • Beijing Shuts Metro Stations and Suspends Bus Routes
  • Didi Leads Slump in U.S.-Listed Chinese Shares Amid SEC Probe
  • Record India IPO Opens to Retail Amid Fickle Markets: ECM Watch

European bourses, Euro Stoxx 50 -0.3%, are modestly softer after another subdued but limited APAC handover amid ongoing regional closures. US futures remain in tight pre-FOMC ranges, with participants also awaiting ISM Services and ADP. In Europe, sectors are mostly lower with the exception. US President Biden's administration is reportedly moving towards the imposition of human-rights related sanctions on Hikvision, according to FT sources; final decision has not been taken.

Top European News

  • Hungary Voices Objection to EU Sanctions Plan on Russian Oil
  • U.K. Mortgage Approvals Fall to 70.7k in March Vs. Est. 70k
  • European Energy Prices Jump as EU Proposes Banning Russian Oil
  • Boohoo Plunges as Online Clothing Retailer’s Growth Wilts

FX

  • DXY anchored around 103.500 awaiting FOMC and Fed chair Powell for further guidance.
  • Aussie gets retail therapy and hawkish RBA rate calls to consolidate gains made in wake of 25 bp hike; AUD/USD pivots 0.7100 and AUD/NZD 1.1050.
  • Kiwi elevated following NZ labour data showing record low unemployment and strength in wages, NZD/USD tightens grip of 0.6400 handle and closer to half round number above.
  • Loonie on a firmer footing ahead of Canadian trade as oil prices bounce, USD/CAD towards base of a broad 1.2850-00 range.
  • Indian Rupee rallies after RBI lifts benchmark rate and reserve ratio at off-cycle policy meeting, former up 40 bp to 4.40% and latter +50 bp to 4.50%.
  • Euro, Yen and Franc remain in close proximity of round and psychological numbers, circa 1.0500, 130.00 and 0.9800 respectively.
  • RBI raises its key repo rate by 40bps to 4.4% in an off-cycle meeting; Also raises the cash reserve ratio by 50bps to 4.5%. Will retain accommodative policy stands but will remain focused on the withdrawal of accommodation.

Fixed Income

  • Bonds attempt to nurse some losses before FOMC and a busy agenda in the run up, including ADP, Quarterly Refunding details and the services ISM.
  • Bunds back from a 152.44 low to 153.00+, Gilts edging towards 118.00 from 117.55 and 10 year T-note fractionally above par within a 118-17+/06 range.
  • German Green issuance well received as cover climbs from prior sale and retention dips, albeit with the average yield sharply higher.

Commodities

  • WTI and Brent are bolstered amid the EU unveiling the sixth round of Russian sanctions, seeing a complete import ban on all Russian oil, benchmarks firmer by circa. USD 3.5/bbl
  • However, sources indicate that Hungary and Slovakia will receive an extend phase-our period in order to appease their known opposition.
  • US Energy Inventory Data (bbls): Crude -3.5mln (exp. -0.8mln), Gasoline -4.5mln (exp. -0.6mln), Distillate -4.5mln (exp. -1.3mln), Cushing +1.0mln.
  • India is looking for Russian oil at under USD 70/bbl on a delivered basis in order to compensate for additional components incl. securing financing, via Bloomberg sources; adding, that India has purchased over 40mln/bbl of Russian crude since late-Feb.
  • OPEC+ sees the 2022 surplus at 1.9mln, +600k BPD from the prior forecasts, according to the JTC report.
  • Several OPEC+ officials expected the current oil pact to continue, according to Argus Media.

US Event Calendar

  • 07:00: April MBA Mortgage Applications, prior -8.3%
  • 08:15: April ADP Employment Change, est. 382,000, prior 455,000
  • 08:30: March Trade Balance, est. -$107.1b, prior -$89.2b
  • 09:45: April S&P Global US Services PMI, est. 54.7, prior 54.7
  • 09:45: April S&P Global US Composite PMI, est. 55.1, prior 55.1
  • 10:00: April ISM Services Index, est. 58.5, prior 58.3
  • 14:00: May Interest on Reserve Balances R, est. 0.90%, prior 0.40%
  • 14:00: May FOMC Rate Decision; est. 0.75%, prior 0.25%

DB's Jim Reid concludes the overnight wrap

I feel like I aged 20 years after the first half of the Champions League semi-final last night. Luckily the second half was less stressful and Liverpool are through to the final. I don't think I got those 20 years back though.

Talking of age, if you're under 43, did 3 years at university and then joined financial markets then you won't have worked in an era of 50bps Fed rate hikes. This will very likely change tonight as the Fed are a near certainty to raise rates by 50bps. In fact it'll be the first time the Fed have hiked at consecutive meetings since 2006. So we enter a new era that won't be familiar to many.

In terms of what to expect later, our US economists are also calling for a 50bps hike in their preview (link here), which follows the comment from Chair Powell before the blackout period that “50 basis points will be on the table” at this meeting. Looking forward, they further see Powell affirming market pricing that further 50bp hikes are ahead, and our US economists believe this will be the first of 3 consecutive 50bp moves, which will eventually take the Fed funds to a peak of 3.6% in mid-2023. We’re also expecting an announcement that balance sheet rundown will begin in June, with terminal cap sizes of $60bn for Treasuries and $35bn for MBS, with both to be phased in over 3 months. See Tim’s preview on QT (link here) for more info on that as well.

While the Fed might have already begun their hiking cycle 7 weeks ago now, the sense that they’re behind the curve has only grown over that time. For example, the latest inflation data from March showed CPI hitting a 40-year high of +8.5%, meaning that the Fed Funds rate was beneath -8% in real terms that month, which is lower than at any point during the 1970s. Meanwhile the labour market has continued to tighten as well, with unemployment at a post-pandemic low of 3.6% in March, and data out yesterday showed that the number of job openings hit a record high of 11.55m (vs. 11.2m expected) as well. That means the number of vacancies per unemployed worker stood at a record high of 1.94 in March, which speaks to the labour shortages present across numerous sectors at the minute.

Ahead of the decision later on, the S&P 500 surrendered an intraday gain of more than +1% to finish the day +0.48% higher, in another New York afternoon turnaround. Energy (+2.87%) and financials (+1.26%) did most of the work keeping the index afloat after dipping its toes in the red late in the day, while only two sectors ultimately finished lower, staples (-0.24%) and discretionary (-0.29%). A sizable 35 S&P 500 companies reported earnings before the close, but there weren’t any standout results to drive an index-wide response. Indeed, the mega-cap FANG+ index only slightly underperformed the broader index at +0.11%. In Europe the STOXX 600 was up +0.53%, closing before the New York reversal. In line with the turnaround, overall volatility remained elevated, with the VIX index (-3.09pts) closing just below the 30 mark.

Ahead of today’s FOMC decision US Treasuries continued their recent back-and-forth price action. The 10yr yield ended ever so slightly lower at -0.1bps. That masks continued rates volatility, however, with the 10yr as much as -8bps lower intraday after having moved above 3% in the previous session for the first time since 2018. The back-and-forth was matched by real yields, as 10yr real yields were as many as -11bps lower before closing down just -0.1bps, comfortably in positive territory for only the second day since March 2020 at 0.14%. The curve flattened as short-end rates moved higher, with 2yr yields gaining +5.1bps, after most tenors were lower earlier in the session.

In Europe, yields on 10yr bunds moved above 1% in trading for the first time since 2015 shortly after the open. Yields did then swing lower, but subsequently recovered to be down just -0.2bps at 0.961%. However, bunds were one of the stronger-performing European sovereigns yesterday, and the spread of both Italian (+2.2bps) and Spanish (+1.1bps) 10yr yields over bunds widened to fresh post-Covid highs in both cases, at 191bps and 106bps respectively.

Asian equity markets are mixed in a holiday thinned session ahead of the Fed’s key rate decision later. The Hang Seng (-0.90%) is trading in negative territory as a decline in Chinese listed tech stocks is weighing on sentiment. Elsewhere, the Kospi (-0.15%) and S&P/ASX 200 (-0.08%) are fractionally lower. Meanwhile, markets in Japan and mainland China are closed today for holidays. Oil prices are slightly higher amid rising prospects of an EU embargo of Russian crude oil. As I type, Brent and WTI futures are c.+1% up to trade at $106.09/bbl and $103.53/bbl respectively.

Early morning data showed that Australia’s retail sales rose for the third consecutive month, advancing +1.6% m/m in March and going past market estimates for a + 0.5% gain. It followed a +1.8% rise in February.

Looking at yesterday’s other data releases, US factory orders grew by a stronger-than-expected +2.2% in March (vs. +1.2% expected). And over in Europe, German unemployment fell be -13k in April (vs. -15k expected), whilst the Euro Area unemployment rate in March fell to 6.8%, which is the lowest since the single currency’s formation. Finally, Euro Area PPI in March soared to 36.8% (vs. 36.3% expected), which is also a record since the single currency’s formation.

To the day ahead now, and the main highlight will be the aforementioned Fed decision, along with Chair Powell’s subsequent press conference. On the data side, we’ll also get the final services and composite PMIs from around the world, UK mortgage approvals and Euro Area retail sales for March, and US data for the March trade balance, the ISM services index for April, and the ADP’s report of private payrolls for April. Finally, earnings releases include CVS Health, Booking Holdings, Regeneron, Uber, Marriott International and Moderna.

Tyler Durden Wed, 05/04/2022 - 07:50

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Futures, Commodities Jump After China Cuts Quarantine

Futures, Commodities Jump After China Cuts Quarantine

US stock futures rebounded from Monday’s modest losses and traded near session highs…

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Futures, Commodities Jump After China Cuts Quarantine

US stock futures rebounded from Monday's modest losses and traded near session highs after China reduced quarantine times for inbound travelers by half - to seven days of centralized quarantine and three days of health monitoring at home -  the biggest shift yet in a Covid-19 policy that has left the world’s second-largest economy isolated as it continues to try and eliminate the virus. The move, which fueled optimism about stronger economic growth and boosted appetite for both commodities and risk assets, sent S&P 500 futures and Nasdaq 100 contracts higher by 0.6% each at 7:15 a.m. in New York, setting up heavyweight technology stocks for a rebound. Mining and energy shares led gains in Europe’s Stoxx 600 and an Asian equity index erased losses to climb for a fourth session. 10Y TSY yields extended their move higher rising to 3.25% or about +5bps on the session, while the dollar and bitcoin were flat, and oil and commodity-linked currencies strengthened.

In premarket trading, the biggest mover was Kezar Life Sciences which soared 85% after reporting positive results for its lupus drug. On the other end, Robinhood shares fell 3.2%, paring a rally yesterday sparked by news that FTX is exploring whether to buy the company. In a statement, FTX head Sam Bankman-Fried said he is excited about the firm’s business prospects, but “there are no active M&A conversations with Robinhood." Here are some of the other most notable premarket movers"

  • Playtika (PLTK US) shares rallied 11% in premarket trading after a report that private equity firm Joffre Capital agreed to acquire a majority stake in the gaming company from a Chinese investment group for $21 a share.
  • Nike (NKE US) shares fell 2.3% in US premarket trading, with analysts reducing their price targets after the company gave a downbeat forecast for gross margin and said it was being cautious in its outlook for the China market.
  • Spirit Airlines (SAVE US) shares rise as much as 5% in US premarket trading after JetBlue boosted its all-cash bid in response to an increased offer by rival suitor Frontier in the days before a crucial shareholder vote.
  • Snowflake (SNOW US) rises 3.3% in US premarket trading after Jefferies upgraded the stock to buy from hold, saying its valuation is now “back to reality” and offers a good entry point given the software firm’s long-term targets.
  • Sutro Biopharma (STRO US) shares rise 34% in US premarket trading after the company and Astellas said they will collaborate to advance development of immunostimulatory antibody-drug conjugates, which are a modality for treating tumors and designed to boost anti-cancer activity.
  • State Street (STT US) shares could be in focus after Deutsche Bank downgraded the stock to hold, while lowering EPS estimates and price targets across interest rate sensitive coverage of trust banks and online brokers.
  • US bank stocks may be volatile during Tuesday’s trading session after the lenders announced a wave of dividend increases following last week’s successful stress test results.

Stock rallies have proved fleeting this year as higher borrowing costs to fight inflation restrain economic activity in a range of nations. European Central Bank President Christine Lagarde affirmed plans for an initial quarter-point increase in interest rates in July, but said policy makers are ready to step up action to tackle record inflation if warranted. Some analysts also argue still-bullish earnings estimates are too optimistic. Earnings revisions are a risk with the US economy set to slow next year, though China emerging from Covid strictures could act as a global buffer, according to Lorraine Tan, Morningstar director of equity research.

“You got a US slowdown in 2023 in terms of growth, but you have China hopefully coming out of its lockdowns,” Tan said on Bloomberg Radio.

In Europe, stocks are well bid with most European indexes up over 1%. Euro Stoxx 50 rose as much as 1.2% before drifting off the highs. Miners, energy and auto names outperform. The Stoxx 600 Basic Resources sub-index rises as much as 3.5% led by heavyweights Rio Tinto and Anglo American, as well as Polish copper producer KGHM and Finnish forestry companies Stora Enso and UPM- Kymmene. Iron ore and copper reversed losses after China eased its quarantine rules for new arrivals, while oil gained for a third session amid risks of supply disruptions. Iron ore in Singapore rose more than 4% after being firmly lower earlier in the session, while copper and other base metals also turned higher. Here are the biggest European movers:

  • Luxury stocks climb boosted by an easing of Covid-19 quarantine rules in the key market of China. LVMH shares rise as much as 2.5%, Richemont +3.1%, Kering +3%, Moncler +3%
  • Energy and mining stocks are the best-performing groups in the rising Stoxx Europe 600 index amid commodity gains. Shell shares rise as much as 3.8%, TotalEnergies +2.7%, BP +3.4%, Rio Tinto +4.6%, Glencore +3.9%
  • Banco Santander shares rise as much as 1.8% after a report that the Spanish bank has hired Credit Suisse and Goldman Sachs for its bid to buy Mexico’s Banamex.
  • GN Store Nord shares gain as much as 4.2% after Nordea resumes coverage on the hearing devices company with a buy rating.
  • Swedish Match shares rise as much as 4% as Philip Morris International’s offer document regarding its bid for the company has been approved and registered by the Swedish FSA.
  • Wise shares decline as much as 15%, erasing earlier gains after the fintech firm reported full- year earnings. Citi said the results were “mixed,” with strong revenue growth being offset by lower profitability.
  • UK water stocks decline as JPMorgan says it is turning cautious on the sector on the view that future regulated returns could surprise to the downside, in a note cutting Severn Trent to underweight. Severn Trent shares fall as much as 6%, Pennon -7.7%, United Utilities -2.3%
  • Akzo Nobel falls as much as 4.5% in Amsterdam trading after the paint maker announced the appointment of former Sulzer leader Greg Poux-Guillaumeas chief executive officer, succeeding Thierry Vanlancker.
  • Danske Bank shares fall as much as 4%, as JPMorgan cut its rating on the stock to underweight, saying in a note that risks related to Swedish property will likely create some “speed bumps” for Nordic banks though should be manageable.

In the Bavarian Alps, limiting Russia’s profits from rising energy prices that fuel its war in Ukraine have been among the main topics of discussion at a Group of Seven summit. G-7 leaders agreed that they want ministers to urgently discuss and evaluate how the prices of Russian oil and gas can be curbed.

Earlier in the session, Asian stocks erased earlier losses as China’s move to ease quarantine rules for inbound travelers bolstered sentiment. The MSCI Asia Pacific Index rose as much as 0.6% after falling by a similar magnitude. The benchmark is set for a fourth day of gains, led by the energy and utilities sectors. BHP and Toyota contributed the most to the gauge’s advance, while China’s technology firms were among the biggest losers as a plan by Tencent’s major backer to further cut its stake fueled concern of more profit-taking following a strong rally.   A move by Beijing to cut quarantine times for inbound travelers by half is helping cement gains which have made Chinese shares the world’s best-performing major equity market this month. The nation’s stocks are approaching a bull market even as their recent rise pushes them to overbought levels.

Still, the threat of a sharp slowdown in the world’s largest economy may pose a threat to the outlook. “US recession risk is still there and I think that’ll obviously have impact on global sectors,” Lorraine Tan, director of equity research at Morningstar, said on Bloomberg TV. “Even if we do get some China recovery in 2023, which could be a buffer for this region, it’s not going to offset the US or global recession.”  Most stock benchmarks in the region finished higher following China’s move to ease its travel rules. Main equity measures in Japan, Hong Kong, South Korea and Australia rose while those in Taiwan and India fell. Overall, Asian stocks are on course to complete a monthly decline of about 4%.   

Meanwhile, the People’s Bank of China pledged to keep monetary policy supportive to help the nation’s economy. It signaled that stimulus would likely focus on boosting credit rather than lowering interest rates.

Japanese stocks gained as investors adjusted positions heading into the end of the quarter.  The Topix Index rose 1.1% to 1,907.38 as of the market close in Tokyo, while the Nikkei 225 advanced 0.7% to 27,049.47. Toyota Motor contributed most to the Topix’s gain, increasing 2.2%. Out of 2,170 shares in the index, 1,736 rose and 374 fell, while 60 were unchanged. “As the end of the April-June quarter approaches, there is a tendency for institutional investors to rebalance,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley. “It will be easier to buy into cheap stocks, which is a factor that will support the market in terms of supply and demand.”

India’s benchmark stock gauge ended flat after trading lower for most of the session as investors booked some profits after a three-day rally.  The S&P BSE Sensex closed little changed at 53,177.45 in Mumbai, while the NSE Nifty 50 Index gained 0.1%.  Six of the the 19 sector sub-gauges compiled by BSE Ltd. dropped, led by consumer durables companies, while oil & gas firms were top performers.  ICICI Bank was among the prominent decliners on the Sensex, falling 1%. Out of 30 shares in the Sensex index, 17 rose and 13 fell.

In rates, fixed income sold off as treasuries remained under pressure with the 10Y yield rising as high as 3.26%, following steeper declines for euro-zone and UK bond markets for second straight day and after two ugly US auctions on Monday. Yields across the curve are higher by 2bp-5bp led by the 7-year ahead of the $40 billion auction. In Europe, several 10-year yields are 10bp higher on the day after comments by an ECB official spurred money markets to price in more policy tightening. WI 7Y yield at around 3.32% exceeds 7-year auction stops since March 2010 and compares with 2.777% last month. Monday’s 5-year auction drew a yield more than 3bp higher than its yield in pre-auction trading just before the bidding deadline, a sign dealers underestimated demand. Traders attributed the poor results to factors including short base eroded by last week’s rally, recently elevated market volatility discouraging market-making, and sub-par participation during what is a popular vacation week in the US. Focal points for US session include 7-year note auction at 1pm ET; a 5-year auction Monday produced notably weak demand metrics.

The belly of the German curve underperformed as markets focus  on hawkish comments from ECB officials: 5y bobl yields rose 10 bps near 1.46%, red pack euribors dropped 10-13 ticks and ECB-dated OIS rates priced in 163 basis points of tightening by year end.

In FX, Bloomberg dollar spot index is near flat as the greenback reversed earlier losses versus all of its Group-of-10 peers apart from the yen while commodity currencies were the best performers. The euro rose above $1.06 before paring gains after ECB Governing Council member Martins Kazaks said the central bank should consider a first rate hike of more than a quarter-point if there are signs that high inflation readings are feeding expectations. Money markets ECB raised tightening wagers after his remarks. ECB President Lagarde later affirmed plans for an initial quarter-point increase in interest rates in July but said policy makers are ready to step up action to tackle record inflation if warranted. The ECB is likely to drain cash from the banking system to offset any bond purchases made to restrain borrowing costs for indebted euro-area members, Reuters reported, citing two sources it didn’t identify.

Elsewhere, the pound drifted against the dollar and euro after underperforming Monday, with focus on quarter-end flows, lingering Brexit risks and the UK economic outlook. Scottish First Minister Nicola Sturgeon due to speak later on how she plans to hold a second referendum on Scottish independence by the end of next year. The yen gave up an Asia session gain versus the dollar as US equity futures reversed losses. The Australian dollar rose after China cut its mandatory quarantine period to 10 days from three weeks for inbound visitors in its latest Covid-19 guidance. JPY was the weakest in G-10, drifting below 136 to the USD.

In commodities, oil rose for a third day with global output threats compounding already red-hot markets for physical supplies and as broader financial sentiment improved. Brent crude breached $117 a barrel on Tuesday, but some of the most notable moves in recent days have been in more specialist market gauges. A contract known as the Dated-to-Frontline swap -- an indicator of the strength in the key North Sea market underpinning much of the world’s crude pricing -- hit a record of more than $5 a barrel. The rally comes amid growing supply outages in Libya and Ecuador, exacerbating ongoing market tightness.

Oil prices also rose Tuesday as broader sentiment was boosted by China’s move to cut in half the time new arrivals must spend in isolation, the biggest shift yet in its pandemic policy. Meanwhile, the G-7 tasked ministers to urgently discuss an oil price cap on Russia. 

Finally, the prospect of additional supply from two of OPEC’s key producers also looks limited. On Monday Reuters reported that French President Emmanuel Macron told his US counterpart Joe Biden that the United Arab Emirates and Saudi Arabia are already pumping almost as much as they can.

In the battered metals space, LME nickel rose 2.7%, outperforming peers and leading broad-based gains in the base-metals complex. Spot gold rises roughly $3 to trade near $1,826/oz

Looking to the day ahead now, data releases include the FHFA house price index for April, the advance goods trade balance and preliminary wholesale inventories for May, as well as the Conference Board’s consumer confidence for June and the Richmond Fed’s manufacturing index. From central banks, we’ll hear from ECB President Lagarde, the ECB’s Lane, Elderson and Panetta, the Fed’s Daly, and BoE Deputy Governor Cunliffe. Finally, NATO leaders will be meeting in Madrid.

Market Snapshot

  • S&P 500 futures up 0.5% to 3,922.50
  • STOXX Europe 600 up 0.6% to 417.65
  • MXAP up 0.4% to 162.36
  • MXAPJ up 0.4% to 539.85
  • Nikkei up 0.7% to 27,049.47
  • Topix up 1.1% to 1,907.38
  • Hang Seng Index up 0.9% to 22,418.97
  • Shanghai Composite up 0.9% to 3,409.21
  • Sensex down 0.3% to 52,990.39
  • Australia S&P/ASX 200 up 0.9% to 6,763.64
  • Kospi up 0.8% to 2,422.09
  • German 10Y yield little changed at 1.62%
  • Euro little changed at $1.0587
  • Brent Futures up 1.4% to $116.65/bbl
  • Gold spot up 0.3% to $1,828.78
  • U.S. Dollar Index little changed at 103.89

Top Overnight News from Bloomberg

  • In Tokyo’s financial circles, the trade is known as the widow- maker. The bet is simple: that the Bank of Japan, under growing pressure to stabilize the yen as it sinks to a 24-year low, will have to abandon its 0.25% cap on benchmark bond yields and let them soar, just as they already have in the US, Canada, Europe and across much of the developing world
  • Bank of Italy Governor Ignazio Visco may leave his post in October, paving the way for the appointment of a high profile executive close to Premier Mario Draghi, daily Il Foglio reported
  • NATO is set to label China a “systemic challenge” when it outlines its new policy guidelines this week, while also highlighting Beijing’s deepening partnership with Russia, according to people familiar with the matter
  • The PBOC pledged to keep monetary policy supportive to aid the economy’s recovery, while signaling that stimulus would likely focus on boosting credit rather than lowering interest rates

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were mixed with the region partially shrugging off the lacklustre handover from the US. ASX 200 was kept afloat with energy leading the gains amongst the commodity-related sectors. Nikkei 225 swung between gains and losses with upside capped by resistance above the 27K level. Hang Seng and Shanghai Comp. were pressured amid weakness in tech and lingering default concerns as Sunac plans discussions on extending a CNY bond and with Evergrande facing a wind-up petition.

Top Asian News

  • China is to cut quarantine time for international travellers, according to state media cited by Reuters.
  • Shanghai Disneyland (DIS) will reopen on June 30th, according to Reuters.
  • PBoC injected CNY 110bln via 7-day reverse repos with the rate at 2.10% for a CNY 100bln net daily injection.
  • China's state planner official said China faces new challenges in stabilising jobs and prices due to COVID and risks from the Ukraine crisis, while the NDRC added they will not resort to flood-like stimulus but will roll out tools in its policy reserve in a timely way to cope with challenges, according to Reuters.
  • China's state planner NDRC says China is to cut gasoline and diesel retail prices by CNY 320/tonne and CNY 310/tonne respectively from June 29th.
  • BoJ may have been saddled with as much as JPY 600bln in unrealised losses on its JGB holdings earlier this month, as a widening gap between domestic and overseas monetary policy pushed yields higher and prices lower, according to Nikkei.

European bourses are firmer as sentiment picked up heading into the cash open amid encouraging Chinese COVID headlines. Sectors are mostly in the green with no clear theme. Base metals and Energy reside as the current winners and commodities feel a boost from China’s COVID updates. Stateside, US equity futures saw a leg higher in tandem with global counterparts, with the RTY narrowly outperforming. Twitter (TWTR) in recent weeks provided Tesla (TSLA) CEO Musk with historical tweet data and access to its so-called fire hose of tweets, according to WSJ sources.

Top European News

  • UK lawmakers voted 295-221 to support the Northern Ireland Protocol bill in the first of many parliamentary tests it will face during the months ahead, according to Reuters.
  • Scotland's First Minister Sturgeon will set out a plan today for holding a second Scottish Independence Referendum, according to BBC News.
  • ECB’s Kazaks Says Worth Looking at Larger Rate Hike in July
  • G-7 Latest: Leaders Want Urgent Evaluation of Energy Price Caps
  • Ex- UBS Staffer Wants Payout for Exposing $10 Billion Swiss Stash
  • SocGen Blames Clifford Chance in $483 Million Gold Suit
  • GSK’s £40 Billion Consumer Arm Picks Citi, UBS as Brokers
  • Russian Industry Faces Code Crisis as Critical Software Pulled

ECB

  • ECB's Lagarde said inflation in the euro area is undesirably high and it is projected to stay that way for some time to comeFragmentation tool, via the ECB.
  • ECB's Kazaks said 25bps in July and 50bps in September is the base case, via Bloomberg TV. Kazaks said it is worth looking at a 50bps hike in July and front-loading hikes might be reasonable. Fragmentation risks should not stand in the way of monetary policy normalisation. If necessary, the ECB will come up with tools to address fragmentation.
  • ECB's Wunsch said he is comfortable with a 50bps hike in September; adds that 200bps of hikes are needed relatively fast, and anti-fragmentation tool should have no limits if market moves are unwarranted, via Reuters.
  • Bank of Italy said Governor Visco's resignation is not on the table, according to a spokesperson cited by Reuters.

Fixed Income

  • Bond reversal continues amidst buoyant risk sentiment, hawkish ECB commentary and supply.
  • Bunds lose two more big figures between 146.80 peak and 144.85 trough, Gilts down to 112.06 from 112.86 at best and 10 year T-note retreats within 117-01/116-14 range

FX

  • DXY regroups on spot month end as yields rally and rebalancing factors offer support - index within 103.750-104.020 range vs Monday's 103.660 low.
  • Euro continues to encounter resistance above 1.0600 via 55 DMA (1.0614 today); Yen undermined by latest bond retreat and renewed risk appetite - Usd/Jpy eyes 136.00 from low 135.00 area and close to 134.50 yesterday.
  • Aussie breaches technical and psychological resistance with encouragement from China lifting or easing more Covid restrictions - Aud/Usd through 10 DMA at 0.6954.
  • Loonie and Norwegian Krona boosted by firm rebound in oil as France fans supply concerns due to limited Saudi and UAE production capacity - Usd/Cad sub-1.2850 and Eur/Nok under 10.3500.
  • Yuan receives another PBoC liquidity boost to compliment positive developments on the pandemic front, but Rand hampered by latest power cut warning issued by SA’s Eskom

Commodities

  • WTI and Brent futures were bolstered in early European hours amid encouragement seen from China's loosening of COVID restrictions.
  • Spot gold is uneventful, around USD 1,825/oz in what has been a sideways session for the bullion since the reopening overnight.
  • Base metals are posting broad gains across the complex - with LME copper back above USD 8,500/t amid China-related optimism.

US Event Calendar

  • 08:30: May Advance Goods Trade Balance, est. -$105b, prior -$105.9b, revised -$106.7b
  • 08:30: May Wholesale Inventories MoM, est. 2.1%, prior 2.2%
    • May Retail Inventories MoM, est. 1.6%, prior 0.7%
  • 09:00: April S&P CS Composite-20 YoY, est. 21.15%, prior 21.17%
  • 09:00: April S&P/CS 20 City MoM SA, est. 1.95%, prior 2.42%
  • 09:00: April FHFA House Price Index MoM, est. 1.4%, prior 1.5%
  • 10:00: June Conf. Board Consumer Confidenc, est. 100.0, prior 106.4
    • Conf. Board Expectations, prior 77.5; Present Situation, prior 149.6
  • 10:00: June Richmond Fed Index, est. -5, prior -9

DB's Jim Reid concludes the overnight wrap

It's been a landmark night in our household as last night was the first time the 4-year-old twins slept without night nappies. So my task this morning after I send this to the publishers is to leave for the office before they all wake up so that any accidents are not my responsibility. Its hopefully the end of a near 7-year stretch of nappies being constantly around in their many different guises and states of unpleasantness. Maybe give it another 30-40 years and they'll be back.

Talking of unpleasantness, as we near the end of what’s generally been an awful H1 for markets, yesterday saw the relief rally from last week stall out, with another bond selloff and an equity performance that fluctuated between gains and losses before the S&P 500 (-0.30%) ended in negative territory.

In terms of the specific moves, sovereign bonds lost ground on both sides of the Atlantic, with yields on 10yr Treasuries up by +7.0bps following their -9.6bps decline from the previous week. That advance was led by real rates (+9.6bps), which look to have been supported by some decent second-tier data releases from the US during May yesterday. The preliminary reading for US durable goods orders surprised on the upside with a +0.7% gain (vs. +0.1% expected). Core capital goods orders also surprised on the upside with a +0.8% advance (vs. +0.2% expected). And pending home sales were unexpectedly up by +0.7% (vs. -4.0% expected). Collectively that gave investors a bit more confidence that growth was still in decent shape last month, which is something that will also offer the Fed more space to continue their campaign of rate hikes into H2. This morning 10yr USTs yields have eased -2.45 bps to 3.17% while 2yr yields (-4 bps) have also moved lower to 3.08%, as we go to press.

Staying at the front end, when it comes to those rate hikes, if you look at Fed funds futures they show that investors are still only expecting them to continue for another 9 months, with the peak rate in March or April 2023 before markets are pricing in at least a full 25bps rate cut by end-2023 from that point. I pointed out in my chart of the day yesterday (link here) that the median time historically from the last hike of the cycle to the first cut was only 4 months, and last time it was only 7 months between the final hike in December 2018 and the next cut in July 2019. So it wouldn’t be historically unusual if Fed funds did follow that pattern whether that fits my view or not.

Over in Europe yesterday there was an even more aggressive rise in yields, with those on 10yr bunds (+10.9bps), OATs (+11.0bps) and BTPs (+9.1bps) all rising on the day as they bounced back from their even larger declines over the previous week. That came as investors pared back their bets on a more dovish ECB that they’d made following the more negative tone last week, and the rate priced in by the December ECB meeting rose by +8.5bps on the day.

For equities, the major indices generally fluctuated between gains and losses through the day. The S&P 500 followed that pattern and ultimately fell -0.30%, which follows its best daily performance in over 2 years on Friday Quarter-end rebalancing flows seem set to drive markets back-and-forth price this week. Even with the decline yesterday, the index is +6.36% higher since its closing low less than a couple of weeks ago. And over in Europe, the STOXX 600 (+0.52%) posted a decent advance, although that masked regional divergences, including losses for the CAC 40 (-0.43%) and the FTSE MIB (-0.86%).

Energy stocks strongly outperformed in the index, supported by a further rise in oil prices that left both Brent crude (+1.74%) and WTI (+1.81%) higher on the day. G7 ministers reportedly agreed to explore a cap on Russian gas and oil exports, with the official mandate expected to be announced today, but it would take time for any mechanism to be developed. The impact on global oil supply is not clear: if Russia retaliates supply could go down, if this enables other third parties to import more Russian oil supply could go up. Elsewhere, political unrest in Libya and Ecuador could simultaneously hit oil supply. In early Asian trading, oil prices continue to move higher, with Brent futures up +1.13% at $116.39/bbl and WTI futures gaining +1% to just above the $110/bbl level.

Asian equity markets are struggling a bit this morning. The Hang Seng (-1.00%) is the largest underperformer amid a weakening in Chinese tech stocks whilst the Nikkei (-0.15%), Shanghai Composite (-0.15%) and CSI (-0.19%) are trading in negative territory in early trade. Elsewhere, the Kospi (-0.05%) is just below the flatline. US stock futures are slipping with contracts on the S&P 500 (-0.12%) and NASDAQ 100 (-0.18%) both slightly lower.

In central bank news, the People’s Bank of China (PBOC) Governor Yi Gang pledged to provide additional monetary support to the economy to recover from Covid outbreaks and lockdowns and other stresses. In a rare interview conducted in English, the central bank chief did caution though that the real interest rate is low thereby indicating limited room for large-scale monetary easing.

Turning to geopolitical developments, the G7 summit continued in Germany yesterday, and in a statement it said they would “further intensify our economic measures against Russia”. Separately, NATO announced that it will increase the number of high readiness forces to over 300,000, with the alliance’s leaders set to gather in Madrid from today. And we’re also expecting a new round of nuclear talks with Iran to take place at some point this week, something Henry mentioned in his latest Mapping Markets out yesterday (link here), which if successful could in time pave the way for Iranian oil to return to the global market.

Finally, whilst there were some decent May data releases from the US, the Dallas Fed’s manufacturing activity index for June fell to a 2-year low of -17.7 (vs. -6.5 expected).

To the day ahead now, and data releases include Germany’s GfK consumer confidence for July, French consumer confidence for June, whilst in the US there’s the FHFA house price index for April, the advance goods trade balance and preliminary wholesale inventories for May, as well as the Conference Board’s consumer confidence for June and the Richmond Fed’s manufacturing index. From central banks, we’ll hear from ECB President Lagarde, the ECB’s Lane, Elderson and Panetta, the Fed’s Daly, and BoE Deputy Governor Cunliffe. Finally, NATO leaders will be meeting in Madrid.

Tyler Durden Tue, 06/28/2022 - 08:00

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Bonds

Is Bitcoin Really A Hedge Against Inflation?

The long-standing claim that bitcoin is a hedge against inflation has come to a fork in the road as inflation is soaring, but the bitcoin price is not.

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The long-standing claim that bitcoin is a hedge against inflation has come to a fork in the road as inflation is soaring, but the bitcoin price is not.

This is an opinion editorial by Jordan Wirsz, an investor, award-winning entrepreneur, author and podcast host.

Bitcoin’s correlation to inflation has been widely discussed since its inception. There are many narratives surrounding bitcoin’s meteoric rise over the last 13 years, but none so prevalent as the debasement of fiat currency, which is certainly considered inflationary. Now Bitcoin’s price is declining, leaving many Bitcoiners confused, as inflation is the highest it’s been in more than 40 years. How will inflation and monetary policy impact bitcoin’s price?

First, let’s discuss inflation. The Federal Reserve’s mandate includes an inflation target of 2%, yet we just printed an 8.6% consumer price inflation number for the month of May 2022. That is more than 400% of the Fed’s target. In reality, inflation is likely even higher than the CPI print. Wage inflation isn’t keeping up with actual inflation and households are starting to feel it big time. Consumer sentiment is now at an all-time low.

(Source)

Why isn’t bitcoin surging while inflation is running out of control? Although fiat debasement and inflation are correlated, they truly are two different things that can coexist in juxtaposition for periods of time. The narrative that bitcoin is an inflation hedge has been widely talked about, but bitcoin has behaved more as a barometer of monetary policy than of inflation.

Macro analysts and economists are feverishly debating our current inflationary environment, trying to find comparisons and correlations to inflationary periods in history — such as the 1940s and the 1970s — in an effort to forecast where we go from here. While there are certainly similarities to inflationary periods of the past, there is no precedent for bitcoin’s performance under circumstances such as these. Bitcoin was born only 13 years ago from the ashes of the Global Financial Crisis, which itself unleashed one of the greatest monetary expansions in history up until that time. For the last 13 years, bitcoin has seen an environment of easy monetary policy. The Fed has been dovish, and anytime hawkishness raised its ugly head, the markets rolled over and the Fed pivoted quickly to reestablish calm markets. Note that during the same period, bitcoin rose from pennies to $69,000, making it perhaps the greatest-performing asset of all time. The thesis has been that bitcoin is an “up and to the right asset,” but that thesis has never been challenged by a significantly tightening monetary policy environment, which we find ourselves at the present moment.

The old saying that “this time is different,” might actually prove to be true. The Fed can’t pivot to quell the markets this time. Inflation is wildly out of control and the Fed is starting from a near-zero rate environment. Here we are with 8.6% inflation and near-zero rates while staring recession straight in the eyes. The Fed is not hiking to cool the economy … It is hiking in the face of a cooling economy, with already one quarter of negative gross domestic product growth behind us in Q1, 2022. Quantitative tightening has only just begun. The Fed does not have the leeway to slow down or ease its tightening. It must, by mandate, continue to raise rates until inflation is under control. Meanwhile, the cost-conditions index already shows the biggest tightening in decades, with almost zero movement from the Fed. The mere hint of the Fed tightening spun the markets out of control.

(Source)

There is a big misconception in the market about the Fed and its commitment to raising rates. I often hear people say, “The Fed can’t raise rates because if they do, we won’t be able to afford our debt payments, so the Fed is bluffing and will pivot sooner than later.” That idea is just factually incorrect. The Fed has no limit as to the amount of money it can spend. Why? Because it can print money to make whatever debt payments are necessary to support the government from defaulting. It’s easy to make debt payments when you have a central bank to print your own currency, isn’t it?

I know what you’re thinking: “Wait a minute, you’re saying the Fed needs to kill inflation by raising rates. And if rates go up enough, the Fed can just print more money to pay for its higher interest payments, which is inflationary?”

Does your brain hurt yet?

This is the “debt spiral” and inflation conundrum that folks like Bitcoin legend Greg Foss talks about regularly.

Now let me be clear, the above discussion of that possible outcome is widely and vigorously debated. The Fed is an independent entity, and its mandate is not to print money to pay our debts. However, it is entirely possible that politicians make moves to change the Fed’s mandate given the potential for incredibly pernicious circumstances in the future. This complex topic and set of nuances deserves much more discussion and thought, but I’ll save that for another article in the near future.

Interestingly, when the Fed announced its intent to hike rates to kill inflation, the market didn’t wait for the Fed to do it … The market actually went ahead and did the Fed’s job for it. In the last six months, interest rates have roughly doubled — the fastest rate of change ever in the history of interest rates. Libor has jumped even more.

(Source)

This record rate-increase has included mortgage rates, which have also doubled in the last six months, sending shivers through the housing market and crushing home affordability at a rate of change unlike anything we’ve ever seen before.

30-year mortgage rates have nearly doubled in the last six months.

All of this, with only a tiny, minuscule, 50 bps hike by the Fed and the very beginning of their rate hike and balance sheet runoff program, merely started in May! As you can see, the Fed barely moved an inch, while the markets crossed a chasm on their own accord. The Fed’s rhetoric alone sent a chilling effect through the markets that few expected. Look at the global growth optimism at new all-time lows:

(Source)

Despite the current volatility in the markets, the current miscalculation by investors is that the Fed will take its foot off the brake once inflation is under control and slowing. But the Fed can only control the demand side of the inflationary equation, not the supply side of the equation, which is where most of the inflationary pressure is coming from. In essence, the Fed is trying to use a screwdriver to cut a board of lumber. Wrong tool for the job. The result may very well be a cooling economy with persistent core inflation, which is not going to be the “soft landing” that many hope for.

Is the Fed actually hoping for a hard landing? One thought that comes to mind is that we may actually need a hard landing in order to give the Fed a pathway to reduce interest rates again. This would provide the government the possibility of actually servicing its debt with future tax revenue, versus finding a path to print money to pay for our debt service at persistently higher rates.

Although there are macro similarities between the 1940s, 1970s and the present, I think it ultimately provides less insight into the future direction of asset prices than the monetary policy cycles do.

Below is a chart of the rate of change of U.S. M2 money supply. You can see that 2020-2021 saw a record rise from the COVID-19 stimulus, but look at late 2021-present and you see one of the fastest rate-of-change drops in M2 money supply in recent history. 

(Source)

In theory, bitcoin is behaving exactly as it should in this environment. Record-easy monetary policy equals “number go up technology.” Record monetary tightening equals “number go down” price action. It is quite easy to ascertain that bitcoin’s price is tied less to inflation, and more to monetary policy and asset inflation/deflation (as opposed to core inflation). The chart below of the FRED M2 money supply resembles a less volatile bitcoin chart … “number go up” technology — up and to the right.

(Via St. Louis Fed)

Now, consider that for the first time since 2009 — actually the entire history of the FRED M2 chart — the M2 line is potentially making a significant direction turn to the downside (look closely). Bitcoin is only a 13-year-old experiment in correlation analysis that many are still theorizing upon, but if this correlation holds, then it stands to reason that bitcoin will be much more closely tied to monetary policy than it will inflation.

If the Fed finds itself needing to print significantly more money, it would potentially coincide with an uptick in M2. That event could reflect a “monetary policy change” significant enough to start a new bull market in bitcoin, regardless of whether or not the Fed starts easing rates.

I often think to myself, “What is the catalyst for people to allocate a portion of their portfolio to bitcoin?” I believe we are beginning to see that catalyst unfold right in front of us. Below is a total-bond-return index chart that demonstrates the significant losses bond holders are taking on the chin right now. 

(Source)

The “traditional 60/40” portfolio is getting destroyed on both sides simultaneously, for the first time in history. The traditional safe haven isn’t working this time around, which underscores the possibility that “this time is different.” Bonds may be a deadweight allocation for portfolios from now on — or worse.

It seems that most traditional portfolio strategies are broken or breaking. The only strategy that has worked consistently over the course of millennia is to build and secure wealth with the simple ownership of what is valuable. Work has always been valuable and that is why proof-of-work is tied to true forms of value. Bitcoin is the only thing that does this well in the digital world. Gold does it too, but compared to bitcoin, it cannot fulfill the needs of a modern, interconnected, global economy as well as its digital counterpart can. If bitcoin didn’t exist, then gold would be the only answer. Thankfully, bitcoin exists.

Regardless of whether inflation stays high or calms down to more normalized levels, the bottom line is clear: Bitcoin will likely start its next bull market when monetary policy changes, even if ever so slightly or indirectly.

This is a guest post by Jordan Wirsz. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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Economics

Why Government Anti-Inflation Plans Fail

Why Government Anti-Inflation Plans Fail

Authored by Daniel Lacalle,

Governments love inflation. It is a hidden tax on everyone and a transfer…

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Why Government Anti-Inflation Plans Fail

Authored by Daniel Lacalle,

Governments love inflation. It is a hidden tax on everyone and a transfer of wealth from bank deposits and real wages to indebted governments that collect more receipts via higher indirect taxes and devalue their debts. That is why we cannot expect governments to take decisive action on inflation.

To curb inflation effectively, interest rates must rise to a neutral level relative to inflation, to reduce the excessive increase in credit and new money from negative real rates. Additionally, central banks must end the repurchase of bonds, exchange traded funds and mortgage-backed securities as this would immediately reduce the quantity of currency in circulation. Finally, and most important of all, governments need to cut deficit spending which is ultimately financed by more debt and monetized with newly created central bank reserves. These three measures are crucial. One or two would not be enough.

However, governments are unwilling to cut deficit spending. The increase in outlays from 2020 due to extraordinary circumstances has been largely consolidated and is now annual structural expenditures. As we have seen in previous crises, many of the one-off and temporary measures become permanent, driving mandatory spending to a new all-time high.

Citizens are suffering the elevated inflation and consumer confidence is plummeting to historic lows in the economies that massively increased money supply growth throughout the pandemic, fuelling inflationary pressures through money printing well above demand and demand-side state expenditure plans financed with newly created currency. What do governments implement when this happens? More demand-side policies. Spending and debt.

Imagine for a second that we believed the myth of cost-push inflation and the argument that inflation comes from a supply shock. If that were the case, governments should implement supply-side measures, cutting spending and reducing taxes.

Reducing taxes does not drive inflation higher because it is the same quantity of currency, only a bit more in the hands of those who earn it. Cutting taxes would only be inflationary if demand for goods and services would soar due to higher consumer credit and demand, but that is not the case. Consumers would only have less difficulties to purchase daily essential goods and services that they acquire anyway. And some would save, which is good. That same money in the hands of government, which weighs more than 40% in the economy, will inevitably be spent and more, with rising public debt.

One unit of currency in the hands of the private sector may be consumed or invested-saved. The same unit in the hands of government is going to current spending and will be multiplied by adding debt, which means more currency in circulation and higher risk of inflation. Currency supply does not drive more currency demand. It is the opposite. If inflation ends up destroying the private sector consumption ability and the economy goes into recession, demand for currency will fall further from supply growth, keeping inflation elevated for longer.

The rules of supply and demand apply to currency the same as to everything else.

Rising discontent is leading governments to present bold and aggressive anti-inflation plans, yet almost none of those are supply-side measures but demand-side ones. Furthermore, the vast majority imply more spending, higher subsidies, rising debt, and increased money supply, which means higher risk of inflation.

Giving checks with newly printed money creates inflation. Providing more checks to reduce inflation is like stopping a fire with gasoline.

The Bank of International Settlements recently said that “leading economies are close to tipping into a high-inflation world where rapid price rises are normal, dominate daily life and are difficult to quell”. However, it is only difficult to quell because governments and central banks keep elevated levels of deficit and monetization. In the 70s media and analysts repeated constantly how difficult it was for governments to cut inflation, but they never explained that you cannot reduce price pressures destroying the purchasing power of the currency that governments monopolize.

Prices do not rise in unison for the same amount of currency. Anti-inflation plans as they have been presented in numerous countries are inflationary and hurt those that they pretend to help. Governments should stop helping with other people’s money and supporting by demolishing the purchasing power of their currency. The best way to reduce inflation is to defend real wages and deposit savings.

Tyler Durden Mon, 06/27/2022 - 14:45

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