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Schedule for Week of October 22, 2023

The key reports this week are the advance estimate of Q3 GDP and September New Home sales.

Another key indicator is Personal Income and Outlays and PCE prices for September.

For manufacturing, the Richmond and Kansas City Fed manufacturing surveys wi…



The key reports this week are the advance estimate of Q3 GDP and September New Home sales.

Another key indicator is Personal Income and Outlays and PCE prices for September.

For manufacturing, the Richmond and Kansas City Fed manufacturing surveys will be released this week.

----- Monday, October 23rd -----

8:30 AM ET: Chicago Fed National Activity Index for September. This is a composite index of other data.

----- Tuesday, October 24th -----

10:00 AM: Richmond Fed Survey of Manufacturing Activity for October.

----- Wednesday, October 25th -----

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

New Home Sales10:00 AM: New Home Sales for September from the Census Bureau.

This graph shows New Home Sales since 1963. The dashed line is the sales rate for last month.

The consensus is for 679 thousand SAAR, up from 675 thousand in August.

4:35 PM: Speech, Fed Chair Jerome Powell, Introductory Remarks, At the 2023 Moynihan Lecture in Social Science and Public Policy, Washington, D.C.

----- Thursday, October 26th -----

8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for 205 thousand initial claims, up from 198 thousand last week.

8:30 AM: Gross Domestic Product, 3rd quarter 2022 (advance estimate). The consensus is that real GDP increased 4.1% annualized in Q3, up from 2.1% in Q2.

8:30 AM ET: Durable Goods Orders for September from the Census Bureau. The consensus is for a 0.6% increase in durable goods orders.

11:00 AM: Kansas City Fed Survey of Manufacturing Activity for October.

10:00 AM: Pending Home Sales Index for September. The consensus is 1.0% increase in the index.

----- Friday, October 27th -----

8:30 AM ET: Personal Income and Outlays for September. The consensus is for a 0.4% increase in personal income, and for a 0.3% increase in personal spending. And for the Core PCE price index to increase 0.3%. PCE prices are expected to be up 3.4% YoY, and core PCE prices up 3.7% YoY.

10:00 AM: University of Michigan's Consumer sentiment index (Final for October). The consensus is for a reading of 63.2.

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Evidence And Insights About Gold’s Long-Term Uptrend

Evidence And Insights About Gold’s Long-Term Uptrend

By Jesse Colombo of BullionStar

For the past few years, gold has been treading water…



Evidence And Insights About Gold's Long-Term Uptrend

By Jesse Colombo of BullionStar

For the past few years, gold has been treading water with no clear direction and causing even the most die-hard gold bugs to scratch their heads in confusion regarding the yellow metal’s next major move. Though gold surged during the most acute phase of the 2020 COVID-19 pandemic due to the unprecedented tsunami of liquidity from global central banks, it has since bounced around between $1,600 to $2,100. In this piece, I will show that gold is still in a confirmed long-term uptrend despite the choppy action of the past few years. I will also show several factors that should create a tailwind for gold in the next decade and beyond.

The Technical Backdrop

It’s helpful to take a step back and look at the big picture when the short-term picture is unclear. Gold’s monthly chart going back to the year 2000 shows that the metal is in a confirmed uptrend according to the most basic, widely accepted tenets of technical analysis. For starters, gold has been consistently making higher highs and higher lows over the past quarter-century. In addition, gold has been climbing up a long-term uptrend line that formed in the early-2000s. From a technical perspective, gold will remain in a confirmed long-term uptrend as long as it stays above that uptrend line — after all, a trend in motion tends to remain in motion.

If you look at gold’s price action of the past five years, you can see that there is a strong resistance zone overhead from $2,000 to $2,100. Gold has attempted to break above that resistance zone several times since 2020 to no avail. If gold can finally close decisively above its $2,000 to $2,100 resistance zone, that would indicate that another phase of the bull market has likely begun.

(Of course, I need to point out that gold and silver’s price discovery process has been corrupted and distorted by the explosion of “paper” or synthetic gold and silver products including futures, options, swaps, and exchange traded funds that are not fully backed by actual physical gold and silver.

Over the past couple of decades, the amount of outstanding synthetic gold and silver has ballooned relative to the amount of physical gold and silver in existence, which has suppressed physical precious metals prices. In a genuine and fair market, physical gold and silver prices would be much higher than they currently are. You can learn more about this issue here and here.)

The Role of Paper Money Debasement

There are numerous factors that drive the price of gold, but dilution of fiat or “paper" currencies is one of the most glaring. For the past five decades, all of the world’s major currencies have been downgraded to mere “paper" currencies that are unbacked by gold, which has predictably resulted in an explosion of the global money supply and the ensuing erosion of those currencies’ purchasing power.

To put it in layman’s terms, a rising money supply harms the value of currencies and results in inflation or higher living costs. When the cost of housing, groceries, car insurance, healthcare, and college education all rise together, look no further than the debasement of paper money. When currencies were backed by gold, it was impossible to dilute them the way that paper currencies are diluted because every currency unit was required to have a certain amount of gold backing it up and it’s impossible to print or conjure gold out of thin air. For that same reason, people clamor to the safety of gold when paper money is being diluted to oblivion.

The chart below shows the United States M2 money supply, which is a measure of all notes and coins that are in circulation, checking accounts, travelers’ checks, savings deposits, time deposits under $100,000, and shares in retail money market mutual funds. The U.S. M2 money supply has more than quadrupled since the early-2000s, which was a major factor behind gold’s long-term uptrend that began at that time.

Though paper money is typically diluted as a function of time, this process accelerated dramatically after the Global Financial Crisis of 2007 – 2008 due to widespread government bailouts, fiscal and monetary stimulus, and quantitative easing (QE), which can be thought of as digital money printing for the purpose of propping up the economy and boosting the financial markets.

The 2020 COVID-19 pandemic resulted in an even more reckless printfest that caused nearly every measure of money supply in practically every country to go vertical in just a few months as central banks — including the U.S. Federal Reserve desperately tried to prop up their economies and financial markets during the pandemic lockdowns with trillions upon trillions of dollars worth of stimulus.

The chart below shows how gold follows the M2 money supply higher over time:

The next chart shows the ratio of gold’s price to the M2 money supply, which is helpful for seeing if gold is keeping up with money supply growth, outpacing it, or lagging it. If gold’s price greatly outpaces money supply growth (the red zone in the chart below), there is a heightened chance of a strong correction. If gold’s price lags money supply growth (the green zone in the chart below), however, there is a good chance that gold will soon experience of period of strength. Since the mid-2010s, gold has slightly lagged M2 money supply growth, which could set it up for a period of strength due to the other factors discussed in this piece.

The U.S. Dollar’s Declining Purchasing Power

As discussed earlier, a rising money supply erodes the purchasing power of paper currencies over time. The Noble Prize-winning economist Milton Friedman described this process succinctly: “Inflation is always and everywhere a monetary phenomenon…" Since the year 2000, the U.S. dollar has lost nearly half of its purchasing power largely due to reckless monetary experiments conducted by the U.S. Federal Reserve, which is supposed to be a good steward of America’s currency but has proven to be the exact opposite.

Unfortunately, the U.S. dollar’s debasement since the year 2000 wasn’t a fluke — it was just a continuation of the trend that started almost immediately after the Federal Reserve was founded in 1913. Since then, the American currency has lost a jaw-dropping 97% of its purchasing power with no end in sight. As long as the U.S. dollar remains an unbacked fiat currency, it is going to keep losing purchasing power as a function of time.

The U.S. National Debt

America’s surging national debt has been another driver of gold’s bull market since the early-2000s. A combination of costly wars in Afghanistan and Iraq, bailouts and stimulus programs during the Global Financial Crisis of 2007 – 2008, and stimulus programs during the 2020 COVID-19 pandemic caused the U.S. national debt to explode sixfold from $5.77 trillion in 2000 to $34.3 trillion in 2024.

Even more concerning is the fact that the U.S. Congressional Budget Office expects the federal debt held by the public as a percentage of GDP to surge from just below 100% currently to approximately 170% over the next couple decades:

Since the 2020 pandemic, America’s exploding national debt combined with rising interest rates have caused annual interest payments to double to nearly $1 trillion:

Now costing U.S. taxpayers a mind-boggling $1 trillion per year, federal interest payments are set to exceed both the cost of defense and Medicare this year for the first time ever:

Over the past few years, U.S. federal interest payments as a percentage of GDP have increased at the sharpest rate in at least seventy years:

As a country’s national debt burden increases, the probability of a fiscal, economic, and currency crisis increases, which was what gold has been pricing in over the past quarter century. America’s surging debts — both public and private — are ultimately setting the stage for the destruction of the U.S. dollar, which will be sacrificed by the Federal Reserve and U.S. federal government as they run the printing presses on overdrive in a desperate attempt to pay for the spiraling cost of interest, Medicare, Social Security, welfare benefits, inevitable future bailouts and fiscal stimulus programs, and all other government spending. Throughout history, every paper currency has succumbed to the same fate as governments prove unable to resist the temptation of the printing press


To summarize, gold began a powerful uptrend in the early-2000s and it is still in that same uptrend despite the choppy price action of the past few years. The factors that originally drove gold’s uptrend are still in effect and, in many cases, are accelerating. Over the next decade and beyond, we are going to see a staggering increase in debt and the money supply, which will result in terrible inflation and, ultimately, hyperinflation. Though this piece focused primarily on the U.S. monetary and fiscal situation, make no mistake — practically every major economy is in the same boat and has its own version of the charts and data shown here.

Though the paper money supply will increase exponentially in the years ahead, the supply of physical precious metals like gold and silver will remain relatively constant in comparison, which is a recipe for much higher gold and silver prices. I personally favor physical gold and silver bullion over all other investments (including gold ETFs and mining shares) in these unprecedented times.

Tyler Durden Sat, 03/02/2024 - 15:10

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What’s Next When Policy Makers Can No Longer Hide Their Sins?

What’s Next When Policy Makers Can No Longer Hide Their Sins?

Authored by Matthew Piepenburg via,

It’s almost comical to…



What's Next When Policy Makers Can No Longer Hide Their Sins?

Authored by Matthew Piepenburg via,

It’s almost comical to watch policy makers of all stripes and country codes caught in a corner yet pretending we don’t notice.

Children In Charge

I’m reminded of the kid with his hand in the cookie jar while pretending his parents can’t see him—denying his guilt despite the crumbs falling from his face.

Again: It’s almost comical.

But there’s really nothing funny at all about major economies crawling into recession (Germany, Japan, UK, China) or denying recession (USA) while our mental midgets from DC to the EU play with bonds, inflation currency and war like kindergarteners with gas and matches.

Can’t Hide the Debt Cookie Crumbs

Speaking of kids caught with crumbs on their face while denying responsibility, it seems that even our central bankers can’t keep hiding the facts of now “unsustainable debt” (Powell) with clever lies, such as they had tried to do in the past:

In short, the days of hiding bad math behind empty words are now coming to an end, as most recently evidenced by another comical treasury market auction (below).

Keep It Simple: Debt & Bonds

As we’ve repeated ad nauseum, “the bond market is the thing,” and its survival, like a diesel V8 engine, lives and dies on liquidity/grease—i.e. dollars.

After trillions in outright grotesque QE grease following the bond crisis of 2020 and a hidden TBTF bank bailout (disguised as pandemic relief), the combined efforts of the Fed and Treasury Dept (i.e., the yin and yang of Powell and Yellen) to provide backdoor liquidity to this thirsty market are both tragic and remarkable.

Despite Powell’s headline tightening since 2022, the level of direct Fed liquidity is still tens of billions per month, and the hundreds of billions provisionally drawn from the reverse repo markets, the Treasury General Account (TGA), the Bank Term Funding Program (BTFP) are just QE by another pathway.

In addition to these tricks, tack on Yellen’s desperate attempt to issue trillions from the short end of the yield curve to take supply (and price) pressure off the sacred U.S. 10-Year, we can trace more examples of open desperation and backdoor liquidity by another name.

But at some point, all these liquidity tricks (as well as liquidity) run dry.

And when this “grease” runs out, that is when the bond engine stalls and the global financial system, led by a broke(n) U.S.A, starts its slow stall to the side of the proverbial road as the engine hisses, coughs and then dies.

Stated otherwise, the kids in DC are running out of cookies and jars (i.e., liquidity), and their lies and excuses are getting harder to hide.

Don’t believe it? Just look at the unloved US bond market.

A Very Telling & Embarrassing Treasury Auction

Having issued too many IOU’s (T-Bills) from the short end of the yield curve, Yellen’s Treasury Dept recently tried to auction off some IOUs from the longer end, namely the US 20Y UST.

Folks: It was embarrassing.

Foreign bidders for Uncle Sam’s 20-Year bond dropped to under 60% (they were 74% of the bidders in November).

This means that primary dealers (i.e., big banks) were forced to fill the gap by purchasing almost 22% of Uncle Sam’s increasingly unloved bar-tab of 20Y IOUs…

In simple speak, this is an open sign that the bond market is cracking. In fact, however, it has been cracking for a while…

Memories are short, as many have already forgotten the extreme dysfunction on the short end of the curve in Q1 of 2023 (not to mention the bank failures that followed, and with more to come, as warned…).

A similar disfunction is now openly obvious on the long-end of the bond curve, at least for those paying attention.

When bonds are unloved, their prices begin to fall, and their yields, which move inversely to price, start to rise, which means their interest rates rise too—adding more pressure (and cost) on Uncle Sam’s ability to repay the same.

Fiscal Dominance—More Than Just a Term of Art

This moment of interest expense “uh-oh” for DC is what the St. Louis Fed described in June of last year as “Fiscal Dominance,” namely that point where rising rates (and debt costs) get so high (i.e., dysfunctional), that the only option (and source) for more “greasy liquidity” (i.e., USDs) to support those ugly bonds is with money “clicked” out of thin air.

In short: More QE to the moon is inevitable, not debatable.

This QE inevitability is inherently inflationary, and this by the way, is the end-game for the Dis-United States, even if we experience a dis-inflationary recession somewhere in the middle of this tragic playing field.

Dollar Debasement—Right Before Our Eyes

Needless to say, such fake liquidity in the from an increasingly weaponized (and hence unloved) USD, places even more negative pressure on a DXY, which at the time of the aforementioned (and embarrassing) auction, was at 104, down from its 110+ levels of Q3 2022…

In the last four years of increasing bond dysfunction in the wake of drying liquidity, DC has shown five times in a row that it will come quickly and aggressively to the rescue to provide more fake grease (again, from the TGA, the BTFP, the repo markets etc.) to “save” the bond market at the expense of the currency.

Soon, we’ll just see plain ol’ QE, which will debase the USD even more, regardless of its “relative strength” to other equally, if not more, debased global currencies.

Such currency debasement, again, fits the pattern of all nations slowly dying from their own debt sins.

For now, of course, the markets are expecting Powell’s promised rate cuts to become actual rate cuts.

As a result, these markets are just giddy in anticipation and have recently hit all-time-highs on Powell words rather than Fed actions.

These already dangerously bloated markets will rise even further whenever the Fed has no choice but to hit the QE red button at the Eccles Building.

Tread Carefully You Top-Chasers

For those few, very few, who know how to trade nose-bleed tops without getting burned when net-incomes/margins trend south, the speculation and momentum trade juices are flowing.

But as I recently warned with evidence rather than hyperbole, today’s S&P, which is little more than a glorified tech ETF lead by 5 names, is the most dangerous bubble I’ve ever seen, traded or studied.

That Clever Pet Rock

Gold, meanwhile, will clearly get, and is already getting, the last laugh as stock bubbles inflate and bond markets scream for more debased USD grease.

The recent 20Y bond auction, above, with its foretelling of rising yields, should have been a massive headwind for that “yield-less pet rock.”

But as I argued from Vancouver in January, gold is breaking away from the standard correlations to rate, currency and inflation/deflation indicators.


For the simple reason that the overall system is now so openly broken, cracked, and dis-trusted that gold’s historically trusted (as well as speculator-ignored) role as a provider of real value (and 52-week highs) in world of diluted yet inflated currencies and bubble assets is becoming more obvious.

Again, this easily explains why central banks are stacking (and TRUSTING) this pet rock and dumping Uncle Sam’s IOUs at record levels.

That is, the world’s central banks (and leaders) see a US Humpty Dumpty about to fall off a wall, and when it does, gold will do far more to protect investors and sovereigns than bad IOUs and bubble assets measured in paper “money.”

Not surprisingly, the 0.5% of global financial assets allocated to gold are and will be rewarded not because they are just “contrarian for contrarian’s sake,” but because this remarkably small/informed minority are wise enough to think ahead rather just follow the sell-side sirens (and the crowd).

Which Needle Will Pop the Red Debt Ballon?

For now, and in the surreal backdrop of spiking markets and a Main Street on its knees and waiting for the “wealth effect” of a feudalistic rather that capitalistic financial system, all we can do is stare at the greatest debt bubble in history and guestimate which needle will “pop” it…

Will it be spiking rates colliding with the white swan of unprecedented global debt? A derivative market implosion? A geopolitical black swan? Another war? A collapsing Japan? China? America? A fractured/fragile EU? An immigration-lead fracturing of social order?

Who knows.

With so many needles pointed at a now historically unfathomable (and mathematically unpayable) red debt balloon, the actual needle that pricks us is rarely the one we see coming…

A Bank Needle?

As in 2008, the next crisis may come from where most crises are born, namely behind the glass doors of our stupid (and system-protected) banks…

The commercial real estate (CRE) crisis, of which I warned as far back as 2020, is anything but a minor matter.

The CRE losses on non-performing loans (NPLs) now exceeds the loss reserves at many of the largest US banks (Citi, Goldman, Wells, Morgan Stanley, JP Morgan etc.)

The Fed’s Real Mandate

Ironically, however, I don’t worry about these silly banks, because their Rich Uncle Fed’s real mandate is not inflation and employment, but making sure the foregoing banks, from which the Fed was un-naturally spawned, do not fail.

Bank regulators, who are just former bank executives, will meet FOMC and Treasury “experts” in DC and paste-together more back-room extend and pretend programs (which is how all failed banks deal with their failing loans and leadership) to provide the bigger boys with needed “grease” (i.e., liquidity) to stay alive (via forced yet subsidized UST, MBS and syndicated CRE/ABS purchases) as the Fed, once again, decides between saving the banking system or the currency.

Needless to stay, the suspense is hardly killing any of us who know how DC and Wall Street work.

In other words, expect more mouse-clicked trillions to save Uncle Fed’s spoiled banking nephews in a NYC which has slowly become not only a den of thieves, but a half-way house for millions of illegals which we like to call “asylum seekers” …

Ah, the American Dream, ah, the city that never sleeps…and the nightmare that never ends for every inflation-braced Main Street from Sea to Shining Sea.

Big Trouble in Little China

Of course, the US is not alone with yet another real estate cancer. China’s CRE crisis is arguably and mathematically worse.

But is that any real consolation to those facing an increasingly debased Greenback and unloved UST?

Are we supposed to be happy that our currency and bonds, though awful, are still better (for now, at least) than China’s?

Well, if our Dollar and IOU are so relatively special, why are the yields on our 10Y UST spiking 200 basis points above the CGB (Chinese Government Bond) yields?

Well, unlike the US, China is not pretending to be above total control over its markets and people, a trend which will come to the West once its childish leaders are forced into a debt corner.

History’s Sad Pattern

As I’ve warned for years, the syllogism from debt-crisis to market-crisis to currency and inflation crisis, followed by social unrest and then increased centralization from the extreme left or right is a pattern as old as history itself.

China has no shame about overt capital controls or state-owned banking.

But are our Fed-supported TBTF banks any less “centralized” just because their CEO’s get paid like capitalists despite being bailed out like state-sponsored entities?

We have had Wall Street socialism for years, but have put a nice “free market” lipstick on what is in essence just an “insider” pig.

Based on the trends above, and the pattern just described, the slow-drip toward more currency debasement, inflation and centralized (and capital) controls (think CBDC) in the wake of social unrest (from truckers and tractors fighting their “lords” from NYC to Berlin) is not only here and now, but the tragic road ahead.

This pattern of centralization, sadly, is just history and math. The cycles will play out. And gold, though no cure-all for all the overt and covert sins of our failed leadership, will at least be a cure for our failed currency.

Tyler Durden Sat, 03/02/2024 - 10:30

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March 2024 Monthly

Rarely are officials able
to achieve the proverbial economic soft-landing when higher interest rates help
cool price pressures without triggering a significant…



Rarely are officials able to achieve the proverbial economic soft-landing when higher interest rates help cool price pressures without triggering a significant rise in unemployment or a contraction. Yet, without declaring victory, the Federal Reserve's confidence that this will be achieved has risen. Still, its increased confidence is unlikely to lead to a rate cut this month. 

To appreciate where things stand begins with recognizing that what has characterized the first two months of the year is a reaction and correction to what happened in Q4 23. 

The decline in interest rates in the last few months of 2023, in turn, helped lift the stock market. The S&P 500 rallied 11.25% in Q4 23, it best quarterly performance in three years. Much focus is on the narrow breadth of the market, as the Magnificent 7 (Apple, Amazon, Nvidia, Tesla, Microsoft, Meta, and Alphabet) which has replaced the FANG (Facebook, Amazon, Apple, Netflix, and Google) lead the way. Yet, the Russell 2000, which is an index of the shares of the 2000 smallest companies, gained 13.5% in Q4 23.

Falling interest rates knocked a leg out from the under the dollar. The greenback fell against all the major currencies in Q4 23. JP Morgan’s Emerging Market Currency Index had its best quarter of the year, rising 2.35% against the dollar in the last three months of 2023.

As is common in the capital markets, the pendulum of sentiment swings dramatically. Since the start of the year, the pendulum has swung back and this is true of Europe, Canada, and the United States. The market now recognizes the first cut will come later and the magnitude of rate cuts this year well be less aggressive than thought likely at the end of last year. 

The first Fed rate cut has been pushed out of March and a rate cut is no longer fully discounted until July. The market has converged with the median in the Federal Reserve's December Summary of Economic Projections that anticipated three cuts would be appropriate this year. As recently as mid-January, the Fed funds futures market had 6 1/2 cuts discounted. The market has reduced the extent of ECB cuts to about 95 bp (from 160 bp at the end of January and 190 in late 2023). The Bank of England is now expected to cut rates twice and possibly three times this year (65 bp), which is about 105 bp less than was discounted at the end of last year. The extent of Bank of Canada rate cuts this year has been more than halved to around 75 bp from 160 bp in late December 2023. We suspect that the interest rate adjustment is nearly over.

Paradoxically, equities have continued to rally. The S&P 500 and NASDAQ have set new record highs, though the Russell 2000 is lagging. Lower interest rate expectations were previously cited by the bulls, and now the idea that economic activity may be stronger said to be inflaming the animal spirits. Japan's Nikkei has surpassed the 1989-1990 highs to reach new records. Europe's Stoxx 600 also set record-highs last month. 

The US Q4 23 GDP grew by 3.2% at an annualized rate. Most economists had expected something closer to 2%. Moreover, the strong pace was achieved with moderating price pressures. The GDP deflator was halved to 1.6% (from 3.3%). Also, unit labor costs, which are a key competitive metric, combining labor compensation and productivity, fell in H2 23. To say the same thing, productivity gains more than offset the increase in wages/salaries and benefits.

A combination of stronger than expected US economic data and guidance by Federal Reserve officials encouraged the market to temper its aggressiveness. The economy appears a reasonably a strong start to the new year. In early February, the government reported that the economy grew over 350k jobs in January, which was nearly twice what economists expected. In the three months through January, US businesses created almost 750k jobs, the most in a three-month period since September-November 2022.

Not only were there more people working, but they were getting paid more. Average hourly earnings rose by 0.6% in January. That was twice as much as economists expected and the most in two years. The year-over-year rate stood at 4.5%. It continues to exceed the Consumer Price Index, which helps underpin demand.

The strength of the consumer is a key factor that helped avoid a recession that looked likely. Government deficit spending is arguably another crucial factor. The US budget deficit was around 6.5% of GDP last year. Some funds, such as within the Chips Act provisions, are slowly being distributed. More actual spending is in the pipeline.

The US deficit was twice the size of the Eurozone’s (3.3%), and larger than the UK’s (4.5%), Japan’s (5.2%), and Canada’s (1.2%) budget shortfalls. Projecting this year’s deficit requires making numerous assumptions, but many economists expect the deficit to be around 6% of GDP. That may still be twice as high as the Eurozone’s and higher than most others.

The Eurozone and UK are experiencing economic stagnation, and this looks likely to persist through most of the year. Inflation in both areas is likely to fall sharply in the coming months and this will allow the central banks to begin cutting interest rates. Japanese inflation is also falling, and the core rate slipped looks poised to below the 2% target. Despite the moderation in prices and an economy that looks weak at the start of 2024 after contracting in the past two quarters, we expect the Bank of Japan to raise its overnight interest rate from below zero (-0.10%) in April, though there is a risk could be at this month’s meeting (March 19).

China’s economy is underperforming Beijing’s expectations regardless of what the official data may show. There are promises of more supportive measures. At the same time, what China does appear to be doing well, like EV and battery production, solar panels, and processed rare earths, threatens its trading partners. An index of the 300 largest stocks on the Shanghai and Shenzhen exchange fell to five-year lows in early February before staging an impressive 13%+ rally, encouraged by formal and informal help from Beijing.

Weak economic impulses and the elevated geopolitical tensions make for a poor international backdrop. The risks are set to escalate. US aid to Ukraine may be in jeopardy, but Kyiv’s F-16, now with trained pilots, give it the capability to project deep into Russia. Meanwhile, a secondary consequence of Israel and the Hamas conflict is the loss of control of the Red Sea. Shipping costs have risen, especially between Europe and Asia. Oil prices have become more volatile, but net-net have risen by slightly more than 7% since the end of last year, while gyrating in about a $10-range below $80 a barrel. The average retail price of gasoline in the US is nearly 7% higher than at the end of last year, after falling nearly 20% in the last four months of 2024.

At first, Fed interest rate cuts may be explained not so much an easing policy as maintaining the same level of restraint as inflation falls. In effect, without a cut in the nominal interest rate, the real interest rate, would be too high to navigate a soft-landing. It is the real rate, economists argue, that is the key signal for businesses, investors, and policymakers. Later, as growth slips below 2%, the rate cuts will begin providing more monetary support to the economy. In Europe, labor markets have remained strong, giving officials more time for price pressures to moderate. The Swiss National Bank meets on March 21. With core inflation at 1.2% in January and growth weak, there is a reasonable risk that the SNB delivers the first rate cut among the high-income countries.

Lastly, we note three regularities during presidential election years. First, in the past 18 presidential cycles, going back to 1952, the economy has contracted twice (1980 and 2020). Second, the S&P 500 has fallen three times (1960, 2000, and 2008). Third, the Dollar Index (DXY), a basket of leading currencies, has mostly risen in the dozen presidential election years since the end of Bretton Woods. The record was perfect from 1976 through 2000. However, in the five elections since, the Dollar Index has falling in three times (2004, 2012, and 2020). 

Most emerging market currencies fell against the dollar in February. The Mexican peso led with around a 0.9% gain, closely followed by the Peruvian sol. A few Asian currencies (Indonesian rupiah, South Korean won, Philippine peso, and Indian rupee) appreciated by about 0.15% to 0.40%. The Polish zloty was the only currency from central Europe to have gained (about 0.20%). The JP Morgan Emerging Market Currency Index fell by about 1.2% to bring the year's loss to slightly more than 3%. The MSCI Emerging Markets Currency Index rose by 0.20% after falling nearly 1% in January.

Rising by 4.6%, the MSCI Emerging Markets Index for equities, recouped what was lost in January. It outperformed the MSCI World Index of developed markets, which rose by about 4.1% in February. The premium emerging market bonds pay over US Treasuries, measured by the JP Morgan Emerging Bond Index narrowed slightly below 310 bp in February from 336 bp at the end of January. It is the tightest spread since May 2021.

Bannockburn's World Currency Index, a GDP-weighted basket of the currencies of the last dozen economies fell by about 0.65% in February. This reflected the weakness of all the foreign currencies but the Mexican peso, South Korean won, and Indian rupee, which together account for slightly more than 8% of the BWCI. All the G10 currencies in the index fell, led by the yen's 2% slump. 

BWCI fell to a 20-day low in early Q4 23. It rebounded by about 2.25% in November and December 2023 and reached a four-month high at the end of the year. As the greenback recovered in January and February, BWCI fell by about 1.75%. It snapped a six-week slide by rising in the final week of the month. Now that market expectations have converged with Federal Reserve's projections from the end of last year, and official comments still seem to endorse those view, we suspect the key driver in recent weeks has largely run its course. Weak economic data may reinforce the cap on rates, sap the dollar's strength and allow the BWCI to recover.


U.S. Dollar:  The market, as it did a few times last year, ran well ahead of the Federal Reserve, only to converge later. That adjustment now appears over. Official comments do not suggest a meaningful change in views since the December's Summary of Economic Projections, which anticipated 75 bp of cuts this year. The Fed's forecast will be updated at the March 20 meeting. There will also be an update on the unwinding of the balance sheet. It appears money market funds and others have born most of the adjustment with bank reserves little changed. Still, some tapering before stopping seems likely, perhaps beginning in Q2. Meanwhile, even though the January job growth was nearly twice the forecast, economic activity is slowing, and this may also help cap yields and the dollar in the weeks ahead.  The Fed's facility launched last year (Bank Term Funding Program) will stop new loans (one-year) on March 11. The focus has shifted away from the systemically important banks and toward regional banks, where commercial real estate exposure is significant. The index of shares of large US banks is essentially is up a little less than 1% while the index of regional bank shares is off 10% this year. The Dollar Index rose from around 100.60 in late December to 105.00 in mid-February. The recovery appears over, and in the pullback, we anticipate in March, the Dollar Index could fall toward 102.00.

Euro: Economic activity in the region has stagnated since late 2022, and while things do not appear to have gotten worse, growth impulses seem faint at best. Unemployment, however, remains near record lows despite the tightening of the monetary policy and the lack of growth. This seems to embolden the European Central Bank to wait until inflation falls further toward target before easing monetary policy. And prices pressures are set to fall sharply in the coming months that will likely lead to a sub-2% rate in the second quarter. The preliminary February rate stood at 2.6%, down from 2.8% at the end of last year and 8.5% in February 2023. The ECB will update its forecasts in March. In December, it had forecast this year's growth at 0.8% and inflation at 2.7%. Both seem to be vulnerable to downward revisions. The European Parliament elections in June will increasingly dominate the officials’ bandwidth. Immigration challenges and farm prices have emerged as key issues. The euro fell from about $1.1140 late last year to around $1.07 in mid-February. A recovery may have begun, perhaps there may be scope toward $1.0950-$1.1000 area, but suspect a new, higher trading range is more likely than a sustained uptrend.

(As of March 1, indicative closing prices, previous in parentheses)
Spot: $1.0835 ($1.0855) Median Bloomberg One-month forecast: $1.0880 ($1.0875) One-month forward: $1.0865 ($1.0850)   One-month implied vol: 5.5% (6.2%) 

Japanese Yen: Japan continues to have a negative policy rate, debt-to-GDP of over 250% and central bank's balance sheet more than 125% of GDP, an exchange rate that is extremely undervalued and yet inflation core inflation, has fallen back to 2%. Moreover, the economy contracted in Q3 23 and Q4 23, and is off to a weak start to 2024, with a 7.5% decline in January's industrial output. Nevertheless, we still the Bank of Japan is committed to lifting the target rate from -0.10%, which is likely in April, after the results of the spring wage round (March 15) and as the government subsidies for electricity and gas for households end, ahead of the income tax cut. Bank of Japan Governor Ueda has emphasized the rise of services prices, but we suspect that the negative rate is seen to hamper monetary policy. He appears committed to lift rates barring some new shock. Officials will try to convince businesses and investors that exiting negative interest rates is not the beginning of tightening sequence. Monetary policy settings are still very accommodative. The effective overnight rate has been hovering near -0.05%, or about half as negative as the target. The BOJ owns almost 2/3 of the equity ETFS, which account for around a quarter its assets. The Nikkei rallied more than 28% in 2023 and is up about 19.25% here in 2024. Even for unhedged, dollar-based investors, the return is half again as much as the S&P has generated in the first two months of the year. The exchange rate remains sensitive to US interest rates. If US 10-year yields continue to rise, the JPY152 area, which capped the dollar in the last two years, will be challenged again. Japanese official verbal intervention has injected a note of caution into the market. One the one hand, the dollar rose in the first eight weeks of the year before the small (~0.25%) loss in the weekend ending March 1. This speaks to a one-way market. On the other hand, the two-year low in the benchmark three-month volatility reflects an orderly market.

Spot: JPY150.10 (JPY148.15) Median Bloomberg One-month forecast: JPY148.45 (JPY145.65) One-month forward: JPY149.45 (JPY147.45) One-month implied vol: 7.7% (8.2%) 

British Pound: The US jobs data and the CPI pushed sterling out of the $1.26-$1.28 trading range in February. The low was set after the employment report near $1.2520. However, sterling recovered and finished the month in the old range. The British economy contracted for the second consecutive quarter in Q4 24, meeting the Bank of England's definition of a recession. The market looked past it, and sterling settled higher on the day of the GDP report (February 15). Chancellor of the Exchequer Hunt delivers the Spring Budget on March 6. The prime minister and chancellor have been hinting at tax cuts ahead of what is expected to be an election later this year. The most impactful cuts would for the national health system or income taxes. Depending on the spending cuts that may also be announced, many look for GBP15-GBP20 bln of tax cuts. The personal allowance has been frozen since 2021, and un-freezing them may have a greater impact than a small tax cut. Also, there has been some suggestion that the fuel duty increase scheduled to start later in March could be scrapped, but the Tory's would receive less recognition for canceling a tax hike than a tax cut. Meanwhile, inflation is likely to fall sharply in the coming months as the large jump in February-May 2023 (11.4% an annualized pace) drops out, and even with conservative assumptions, the year-over-year pace is likely to fall below 2%. This may encourage the market to bring forward the first rate cut, which the overnight index swaps do not have fully discounted until August. Sterling, as we saw in Q4 23, need not be adversely impacted by the shift in expectations. With the downside break worth less than a cent, sterling could test the upper end of the old range, seen near $1.28. The high from late last year was almost $1.2830.

Spot: $1.2655 ($1.2705) Median Bloomberg One-month forecast: $1.2670 ($1.2655) One-month forward:  $1.2660 ($1.2735) One-month implied vol: 5.8% (6.6%) 


Canadian Dollar:  Unlike Japan and the UK, Canada managed to avoid contracting for the second consecutive quarter in Q4 23. It grew by around 1.1% at an annualized, offsetting in full the revised 0.5% contraction (from -1.1% initially) in Q3 23. The economic impulses will likely remain subdued through mid-year but without the economy contracting, the central bank does not have much of a sense of urgency to cut rates. Still, like the eurozone and UK, Canadian inflation rose sharply early last year (6% annualized in the first five months of 2023), In the five months through January, Canada's CPI actually declined slightly (not risen slower). Even if that pace is not maintained, and CPI rises by an average of 0.2% a month from February through May, it may slip below 2%. The underlying rates softened in January after stagnating in Q4 23. The swaps market does not have the first cut fully discounted until July and it has a little more than three cuts fully discounted this year. At the end of January, the market had the first cut priced in for June and anticipated 100 bp in cuts in 2024. The Bank of Canada meets on March 6 and there is practically no chance of a rate cut. The Canadian dollar has fallen every week but one so far this year and the advancing week was about 0.02%. Two-thirds of this year's 2.1% depreciation of the Canadian dollar took place in January. The US dollar rose to its best level since mid-December in late February, slightly above CAD1.3600.   A move above CAD1.3625 signals another leg up, but in lieu of that a consolidative phase is likely that can re-test the CAD1.3450 area seen in late January/early February. Benchmark three-month implied volatility is near 5%, a four-year low. It was flirting with 4% before the pandemic.

Spot: CAD1.3560 (CAD 1.3455) Median Bloomberg One-month forecast: CAD1.3515 (CAD1.3475) One-month forward: CAD1.3555 (CAD1.3445) One-month implied vol: 4.9% (5.0%) 


Australian Dollar:  The Australian dollar recorded the low of the year so far with the US January CPI on February 13 slightly below $0.6450. This seems to have completed the pullback after the six-cent rally in the last two months of 2023. Provided the $0.6490 area holds, there may be scope back to $0.6600-$0.6625. Since the start of the year, changes in the exchange rate have been highly correlated with changes in gold (near 0.80, the upper end of where the correlations over the past five years. Reserve Bank Governor Bullock did not rule out higher rates, but the derivative's market clearly expects the next move to be a cut. The market is nearly a 75% chance of a cut in June, while a quarter-point move is not fully discounted until September. At the end of January, the market had nearly a 70% chance of a May cut and a 95% chance of a June cut. Still the slight tick-up in the January monthly CPI to 3.6% from 3.4%, the two-year low print in December will reinforce the cautious approach by the RBA when it meets on March 19. February's employment report is due the next day. Growth will likely remain subdued in 0.2%-0.3% a quarter here in H1 24. 

Spot: $0.6530 ($0.6575) Median Bloomberg One-month forecast: $0.6575 ($0.6635) One-month forward: $0.6535 ($0.6585)    One-month implied vol: 7.9% (9.0%)

Mexican Peso:  
The Mexican economy eked out a 0.1% expansion in Q4 23. Based only a small set of high-frequency data points for the new year, it looks economic activity has increased a little. Inflation is continuing to moderate. The central bank appears to have adopted what could be considered an easing bias. Still, with the market pushing out expectations for the first Fed cut, Banxico may not sense a great urgency to cut. However, there is another consideration. If it does not cut on March 21, the next opportunity would be May 9. The national election is June 2. This may be too close to shift policy for comfort. The short-dated cetes (T-bills) already seem to be anticipating a cut. The dollar traded between approximately MXN16.9950 to MXN17.2855. It is the narrowest monthly range in almost a decade. This is also reflected in the options market, where implied volatility has fallen to four-year lows, below 9%. The peso was the strongest currency in February, gaining about 0.9% against the US dollar.  In region, the Peruvian sol was second with about a 0.35% gain and the Brazilian real was virtually flat. Still, we remain concerned that market positioning leaves it vulnerable to a sell-off ahead of the election.

Spot: MXN17.02 (MXN17.16) Median Bloomberg One-Month forecast: MXN17.12 (MXN17.33) One-month forward: MXN17.11 (MXN17.25) One-month implied vol: 7.4% (10.3%)


Chinese Yuan:  Officials succeeded in maintaining a steady yuan (against the dollar) and stopping the six-month rout of the CSI 300. Beijing did not push hard to strengthen the currency but did manage to keep it in a narrow range (approximately CNH7.1765-CNY-7.1995). That is the narrowest monthly range since July 2015. Although the reference rate that the People's Bank of China sets daily allows the dollar to trade a little above CNY7.24, the CNY7.20 has proved a formidable cap. We suspect it is tactical and not strategic on the part of officials. That means that if the dollar continues to appreciate against the other major currencies, especially the Japanese yen, the risk is that the dollar breaks higher against the yuan too. It is difficult to know the intent of officials, but above CNY7.20 could signal a return to the previous range (roughly CNY7.25-CNY7.30). Reports that China's sovereign wealth funds and large asset managers were buying equities encouraged others to do so as well. The CSI 300 rose 7% in the holiday-shortened month, the biggest rally since January 2023, and offset the January decline in full. Starting March 5, two important conferences begin. They are the country's legislature, a 3000-person strong National People's Congress and an advisory group, Chinese People's Political and Consultative Conference. This year's growth target (5%?) is expected to be announced. There will be personnel changes, and new economic pronouncement. We think more stimulus and "reforms" will be forthcoming. At the same time, economic tensions with the US and Europe are high and Chinese forces have continued to be aggressive toward Taiwan, the Philippines, Japan's the Senkaku Islands/Diaoyutai Qundao (disputed by both China and Taiwan), as well as Nepal and Bhutan.

Spot: CNY7.1970 (CNY7.1775) Median Bloomberg One-month forecast: CNY7.1815 (CNY7.1640) One-month forward: CNY7.1070 (CNY7.0950) One-month implied vol 4.8% (4.7%) 




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