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The Yen is Sold Despite Better than Expected Q1 GDP and the Greenback Pushes Above CNY7.0

Overview: Better than expected US core retail sales
and manufacturing output sent US rates higher and helped lift the greenback
during the North American…

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5 months ago

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Overview: Better than expected US core retail sales and manufacturing output sent US rates higher and helped lift the greenback during the North American session after a heavier tone in Asia and Europe. The US two-year note rose to almost 4.12% and the 10-year note yield increased to 3.57%. Both are the best levels in two weeks. The dollar traded firmer against most of the major currencies and the Dollar Index approached the one-month high set on Monday and punched through it to probe the 103.00 area today. It is the best level since April 3. Still, as the debt ceiling negotiations continue, it is becoming clear to many that one result will be tighter fiscal policy, a greater drag on the economy. Besides extended its gain against the G10 currencies, the greenback has surpassed CNY7.0 for the first time since early last December.

A weak yen helped Japanese equities extend their rally, but equities were mixed in the Asia Pacific regions. The Hang Seng slumped by more than 2% as did Chinese shares listed in Hong Kong. Europe's Stoxx 600 is trading with a heavier bias. US equity index futures are a little firmer. Despite stronger than expected Q1 GDP, the 10-year JGB yield is off nearly three basis points to 0.36%. European benchmark yields are 4-5 bp lower. The 10-year US Treasury yield is about two basis points softer slightly below 3.52%. The firmer dollar has not prevented June WTI from recovering after testing the $70 a barrel level today. Monday's lows were near $69.40 and yesterday it reached almost $71.80. Gold fell by a little more than $27 an ounce yesterday to close below $2000 for the first time since May 1. It is off around $5 today to test the $1984 area. The yellow metal forged a shelf in the $1970-$1977 area in late April and early May.

Asia Pacific

Japan, the world's third largest economy grew at an annualized rate of 1.6% in first quarter, which was twice the forecast pace by the median in Bloomberg's survey. The US economy expanded by 1.1%. Output in the eurozone and UK rose by about 0.4% at an annualized rate. Consumption rose by 0.6% quarter-over-quarter, which was stronger than expected, but it was business spending that offered the biggest surprise. It rose by 0.9% rather than contract by 0.3% as was expected. Net exports were drag of 0.3% of GDP, a little more than expected after a 0.4% contribution in Q4 22. Inventories, which cut by 0.5% in Q4 22 contributed 0.1% in Q1. The jump in the GDP deflator to 2.0% year-over-year from 1.2% in Q4 is the strongest since 2015 and will likely draw attention from the BOJ. 

Japan's April national CPI figures are due at the end of the week, and they will confirm the signals from Tokyo's readings. The headline and core (excludes fresh food) year-over-year rates likely rose (3.5% vs. 3.2% and 3.4% vs. 3.1%, respectively). These are still off the 4.3% and 4.2% peaks in the headline and core rates in January, but this largely reflects government subsidies for energy and travel. The measure that excludes fresh food and energy is still accelerating. It made the cyclical high of 3.8% in March and the median forecast in Bloomberg's survey is for a rise to 4.2% in April. Several surveys found expectations for the new leadership team at the BOJ to adjust policy in the June/July period. Governor Ueda's talk of the need for patience suggests the market may be getting a little ahead of itself.

Excluding bonus payments, hourly wages in Australia rose by 0.8% in Q1 for a 3.7% year-over-year gain. That represents the largest year-over-year increase since 2012. The year-over-year gain was 2.4% in Q4 21 and Q1 22, which was the highest since 2014. Wages rose by a quarterly average of 0.82% last year and 0.56% in the two years before the pandemic. Australia reports May consumer inflation expectations (Melbourne Institute) and employment tomorrow. Consumer inflation expectations have fallen for the past three months from 5.6% in January to 4.6% in April. The 2022 low was 4.4%. Australia created an average of nearly 35.5k jobs a month in Q1 23, the most in three quarters. They were all full-time posts (average 35.9k in Q1).

Helped by firmer yields, the dollar is rising against the yen for fifth consecutive session today and eighth gain in nine. The greenback is approaching the high set earlier this month slightly above JPY137.75. It is fraying the 200-day moving average (~JPY137.10). The year's high was set on March 8 near JPY137.90. The intraday momentum indicators are stretch, and the upper Bollinger Band is around JPY137.40. The Australian dollar poked briefly above $0.6700 yesterday, the middle of the two-cent trading range but was greeted with fresh sales. The Aussie finished the North American session near its session lows, just above $0.6650. Follow-through selling today took it to $0.6630, its lowest level since May 2. It found support in the European morning. Nearby resistance is seen in the $0.6650-60 area. The greenback gapped higher against the yuan and pushed above CNY7.0 for the first time since last December. Counting today, the US dollar has risen against the yuan in seven of the past eight sessions. The PBOC set the dollar's reference rate at CNY6.9748 compared with the median in Bloomberg's survey of CNY6.9743.

Europe

The eurozone reported April's CPI rose 0.6% rather than 0.7% it initially estimated. Still, the year-over-year rate rose as it previous indicated by 7.0%. It is the first year-over-year increase since last October. The 0.6% monthly increase means that in the Jan-Apr period, eurozone's CPI rose at an annualized rate of 6.3%. up from 6.0% in Q1. By comparison, US CPI has risen at an annualized pace of about 4.2% in the first four months of the year. The UK reports April CPI next week (May 24). It rose at an annualized pace of around 5.3% in Q1. There is little doubt in the market's mind that the ECB will hike by a quarter point at its meeting in mid-June (~92% discounted in the swaps market). The market is a little less confident of a BOE hike next month (~74%).

The euro extended its pullback today falling to almost $1.0820, its lowest level since April 3. There are two nearby levels of note. First, options for 1.1 bln euros at $1.0810 expires tomorrow. Second the $1.0805 area corresponds to the (50%) retracement of the rally from the March 15 low near $1.0515 to almost $1.1100 seen in late April and again in early May. A break of the $1.08 area could signal a test on the $1.0735 area (61.8%) retracement. Still, the intraday momentum indicators are stretched. The $1.0850-60 may offer initial resistance. Sterling's pullback has also been extended today. It peaked last week near $1.2680 and reached almost $1.2420 today. Support is seen in in the $1.2390-$1.2400 area. The (38.2%) retracement of its rally (that began from nearly $1.18 on March 8) is around $1.2345. Intraday momentum indicators are stretched here too and upticks in early in the North American session may run into resistance in the $1.2460-80 area.

America

There are many worrisome data points that warn of a US recession, but the resilience of the US labor market, even though it is slowing, and the consumer are notable. Retail sales account for around 40% of personal consumption expenditures. The April headline rose by 0.4%. The median forecast in Bloomberg's survey was for a 0.8% increase. Still the disappointment was mitigated by the upward revision in the March series (from -1.0% to -0.7%) and in the 0.6% rise excluding autos and gasoline sales. The core measure (excludes autos, gasoline, food services, and building materials) increased by 0.7%, (0.4% expected). The core measure in March was revised to -0.4% from -0.3%. Industrial output rose by 0.5% in April. The market had expected a flat report. The March series, however, was revised to flat from 0.4%. Manufacturing output jumped 1%. The median forecast in Bloomberg's survey was for a 0.1% gain. The March series was revised to show a 0.8% loss instead of the 0.5% decline initially reported. The net takeaway is that the US economy appears to have begun Q2 on stronger than expected footing and if an economic contraction is coming, it is not here. The Atlanta Fed's GDP tracker was revised to 2.6% from 2.7%, though it is still early for it to generate a reliable estimate. On tap today are housing starts and permits. Starts are expected to have slowed to a 1.4 mln unit pace, which would be a three-month low. Permits, a leading economic indicator, surged by almost 15.8% in February and gave back nearly half of the gain in March.

The Bank of Canada declared its conditional pause in late January and the resilience of the economy, and the firmness of price pressures have fanned speculation that it may have to hike rates again. April CPI rose by 0.7%, well above expectations and lifted the year-over-year rate to 4.4% (from 4.3%). It is the first year-over-year increase since last June, but more telling is that in the first four months of year, Canada's CPI has risen at an annualized pace of 6.3%. The underlying core measures eased to 4.2%, down from about 5% in January, helping to take some of the sting out of the headline. The overnight target rate stands at 4.50%. The swaps market now has the end of Q3 rate at 4.68%, which is the same as almost a 75% chance of another quarter point hike. This is the most in a couple of months. In addition, the market had been pricing in a cut before the end of the year and this has been unwound. The swaps market implied a year-end rate of about 4.25% at the end of April it is now at 4.59%. Canada's two-year yield was near 3.60% as recently as the middle of last week. It reached 3.97% yesterday, the highest since the US banking stress emerged two months ago.

The greenback bounced off the CAD1.3400 area yesterday and settled near CAD1.3480. The gains have been extended to CAD1.3535 today. The high from last Friday and this Monday were in the CAD1.3565-70 area. Still, we look for the Canadian dollar to find a bid and see scope for the US dollar to pullback toward CAD1.3460-80. The US dollar also found a bid against the Mexican peso. It put in the multi-year low Monday near MXN17.42 and recovered to MXN17.5420 yesterday. Today, it approached MXN17.5490. In the firmer US dollar environment, and ahead of Banxico's meeting tomorrow, where many expect it standpat, further position squaring is the risk. The MXN17.62-65 may offer chart resistance. 

 

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Government

Turley: Four Biden Impeachment Articles & What The House Will Need To Prove

Turley: Four Biden Impeachment Articles & What The House Will Need To Prove

Authored by Jonathan Turley,

With the commencement of the…

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1 hour ago

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October 2, 2023

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Turley: Four Biden Impeachment Articles & What The House Will Need To Prove

Authored by Jonathan Turley,

With the commencement of the impeachment inquiry into the conduct of President Joe Biden, three House committees will now pursue key linkages between the president and the massive influence peddling operation run by his son Hunter and brother James.

The impeachment inquiry should allow the House to finally acquire long-sought records of Hunter, James, and Joe Biden, as well as to pursue witnesses involved in their dealings.

I testified this week at the first hearing of the impeachment inquiry on the constitutional standards and practices in moving forward in the investigation. In my view, there is ample justification for an impeachment inquiry. If these allegations are established, they would clearly constitute impeachable offenses. I listed ten of those facts in my testimony that alone were sufficient to move forward with this inquiry.

I was criticized by both the left and the right for the testimony. 

Steven Bannon and others were upset that I did not believe that the basis for impeachment had already been established in the first hearing of the inquiry.

Others were angry that I supported the House efforts to resolve these questions of public corruption.

Without prejudging that evidence, there are four obvious potential articles of impeachment that have been raised in recent disclosures and sworn statements:

  1. bribery,

  2. conspiracy,

  3. obstruction, and

  4. abuse of power.

Bribery is the second impeachable act listed under Article II. The allegation that the President received a bribe worth millions was documented on a FD-1023 form by a trusted FBI source who was paid a significant amount of money by the government. There remain many details that would have to be confirmed in order to turn such an allegation into an article of impeachment.

Yet three facts are now unassailable.

First, Biden has lied about key facts related to these foreign dealings, including false statements flagged by the Washington Post.

Second, the president was indeed the focus of a corrupt multimillion-dollar influence peddling scheme.

Third, Biden may have benefitted from this corruption through millions of dollars sent to his family as well as more direct benefit to Joe and Jill Biden.

What must be established is the President’s knowledge of or participation in this corrupt scheme. The House now has confirmed over 20 calls made to meetings and dinners with these foreign clients. It has confirmation of visits to the White House and dinners and events attended by Joe Biden. It also has confirmation of trips on Air Force II by Hunter to facilitate these deals, as well as payments where the President’s Delaware home address was used as late as 2019 for transfers from China.

The most serious allegations concern reported Washington calls or meetings by Hunter at the behest of these foreign figures. At least one of those calls concerned the removal or isolation of a Ukrainian prosecutor investigating Burisma, an energy company paying Hunter as a board member. A few days later, Biden withheld a billion dollars in an approved loan to Ukrainian in order to force the firing of the prosecutor.

The House will need to strengthen the nexus with the president in seeking firsthand accounts of these meetings, calls, and transfers.

However, there is one thing that the House does not have to do. While there are references to Joe Biden receiving money from Hunter and other benefits (including a proposed ten percent from one of these foreign deals), he has already been shown to have benefited from these transfers.

There is a false narrative being pushed by both politicians and pundits that there is no basis for an inquiry, let alone an impeachment, unless a direct payment or gift can be shown to Joe Biden. That would certainly strengthen the case politically, but it is not essential legally. Even in criminal cases subject to the highest standard, payments to family members can be treated as benefits to a principal actor. Direct benefits can further strengthen articles of impeachment, but they would not be a prerequisite for such an action.

For example, in Ryan v. United States, the Seventh Circuit U.S. Court of Appeals upheld the conviction of George Ryan, formerly Secretary of State and then governor of Illinois, partly on account of benefits paid to his family, including the hiring of a band at his daughter’s wedding and other “undisclosed financial benefits to him and his family and to his friends.” Criminal cases can indeed be built on a “stream of benefits” running to the politician in question, his family, or his friends.

That is also true of past impeachments. I served as lead counsel in the last judicial impeachment tried before the Senate. My client, Judge G. Thomas Porteous, had been impeached by the House for, among other things, benefits received by his children, including gifts related to a wedding.

One of the jurors in the trial was Sen. Robert Menendez (D-N.J.), who voted to convict and remove Porteous. Menendez is now charged with accepting gifts of vastly greater value in the recent corruption indictment.

The similarities between the Menendez and Biden controversies are noteworthy, in everything from the types of gifts to the counsel representing the accused.  The Menendez indictment includes conspiracy charges for honest services fraud, the use of office to serve personal rather the public interests. It also includes extortion under color of official right under 18 U.S.C. 1951. (The Hobbs Act allows for a charge of extortion without a threat of violence but rather the use of official authority.)

Courts have held that conspiracy charges do not require the defendant to be involved in all (or even most) aspects of the planning for a bribe or denial of honest services. Thus, a conspirator does not have to participate “in every overt act or know all the details to be charged as a member of the conspiracy.”

Menendez’s case shows that the Biden Administration is prosecuting individuals under the same type of public corruption that this impeachment inquiry is supposed to prove. The U.S. has long declared influence peddling to be a form of public corruption and signed international conventions to combat precisely this type of corruption around the world.

This impeachment inquiry is going forward. The House just issued subpoenas on Friday for the financial records of both Hunter and James Biden. The public could soon have answers to some of these questions. Madison called impeachment “indispensable…for defending the community” against such corruption. The inquiry itself is an assurance that, wherever this evidence may lead, the House can now follow.

Tyler Durden Mon, 10/02/2023 - 15:00

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International

How the Polen Capital Global Small and Mid Cap Fund finds under-explored high quality companies

In this video insight, I am joined by Rob Forker, the portfolio manager of the Polen Capital Global Small and Mid Cap Fund. We discuss Polen Capital’s…

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2 hours ago

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October 2, 2023

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In this video insight, I am joined by Rob Forker, the portfolio manager of the Polen Capital Global Small and Mid Cap Fund. We discuss Polen Capital’s strategy of selecting elite companies from a pool of 8000 global stocks based on their five guide rails. Rob also highlights Polen’s approach to investing across the growth spectrum, balancing slower-growing, stable companies like Cochlear with high-growth firms like Globant. Despite the challenging market conditions, Rob remains confident in their strategy, believing that earnings growth will ultimately drive long-term stock price appreciation.

Transcript:

David:

Hi I’m David Buckland, and welcome to this week’s video insight. Today, I’m being accompanied by Rob Forker. For those who don’t know, Rob is the portfolio manager of Polen Capital’s global small and mid-cap fund.

Rob, you have about 8000 stocks to choose from in the global space in the small to mid-cap area, and you have to go all the way down to try and get the best 35 stocks or approximately 35 stocks in the world. How do you do it?

Rob:

It’s a hard task, but one we enjoy doing. So, finding the best of the best is what we’re all about. We want to find the most elite companies we can find globally wherever they reside, Australia, continental Europe, America, Japan, wherever. The way we do it is we apply our proven five guardrails that we’ve been executing at Polen Capital for almost 35 years. Those are:

  1. Real organic revenue growth,
  2. High end or improving margins,
  3. High returns,
  4. Abundant cash flow,
  5. And a strong balance sheet.

And at the end of the day, what we’re looking for is companies that have strong earnings, have strong cash flow, and a fortress like balance sheet because those are quality companies that can be durable over the long term.

David:

And it’s interesting that out of your portfolio of, I think it’s 33 stocks at the moment, the average market capitalization is about 8.5 billion Australian dollars, which actually would put it in the top 60 on the ASX and be similar sized to something like Qantas (ASX: QAN) or Mirvac (ASX: MGR) so it’s interesting that, for Australians, that seems quite big, but by global standards, they’re still categorized as a small or medium sized type businesses.

Rob:

Yeah, no question, so we find companies of course globally, and small cap, mid cap is a bit of an art as to how you define it but what we believe is that the inefficiency of the asset class is clear. So, a typical company that we’re looking at in our class has 7 to 8 analysts. For reference, Apple has 55. And so, the beauty of what we do is that we’re looking at under explored companies that we believe have a secret sauce. Now it’s our job to figure out what that secret sauce is, but what we do, as an example, is look at the companies that have no self-side coverage. So, this is an opportunity and one that we relish in.

David:

That’s good. Now, one of the interesting graphs we get from Polen Capital is investing across the growth spectrum. On one side of the spectrum. You’ve got these very sexy, very high growth companies, but are earning money. And on the other side of the spectrum, a little bit more ballast in the portfolio. Can you just explain for the small mid cap global audience? Investing across the growth spectrum and how you think about it.

Rob:

Yeah, so on the safety side, these are to consumer staples companies or healthcare companies where they’re a lit little bit slower growing, low double digit earning. So, it’s still great, but slower going. Cochlear (ASX: COH) would be a great example, a fortress in market share and their constant research and development (R&D), typically grows earnings at 12-14 per cent.

On the far end, we call these growth companies, they typically grow earnings 30 – 40 per cent. An example would be Globant, which is an IT consulting firm at the forefront, of what they do. They’re basically a mini-Accenture. And so those type of companies are growing faster.

We want both because we appreciate the safety and the growth elements that can help you in bad times and give you outsized returns in good times.

David:

So, if we look at the fundamentals of the total portfolio let’s just sort of spend a minute or two on that.

Rob:

Absolutely so, when you put it all together, this is a portfolio that trades at roughly 25 times earnings on a 12-month basis.

We believe earnings growth is nearly 20 per cent per annum.

David:

For some years?

Rob:

Yeah, where we forecast out 5 years in our investment time horizon. We want to think and act like owners when looking at these great companies, and what they can do over the long term.

The balance sheet is nearly net cash, so no balance sheet risk to speak of. As I mentioned, strong cash flows. We want companies that self-fund, which is quite unique in this space. Many small cap managers own unprofitable companies where they’re betting that things will get great.

David:

Have to go back to the market for equity, on a regular basis.

Rob:

We don’t want to do that. We don’t want to buy what will be quality. We buy what’s proven to be quality today. And this is the beauty of the menu that we have of nearly 8000 companies. We can be choosy. We want to own elite companies.

David:

And I guess the elephant in the room Rob, we launched this in Australia although the fund out of America is actually, well, Boston where Rob’s based is actually a bit older than that, but we actually pick the timing to perfection in terms of the bigger the market, so October 2021. So, it’s coming around for its, it’s two year anniversary. It’s been a very, very rough ride for the early investors.

Yours truly as one of them.

Let’s just give it give it some context. It’s obviously been a very rough 24 months. Do you want to sort of just spend a few minutes on that?

Rob:

Yeah, and yours truly as well. So, I eat my own pudding, I’m an investor and my children are investors you know, I am betting on the success of this strategy as many of you are. The elephant in the room is that 2022 was bruising, just literally awful.

We weren’t certainly the only ones that had the bruising. This was a global phenomenon, particularly in small to mid caps. This year, what’s been surprising is the bounce back has not been there. The strategy is certainly not doing poorly, but it hasn’t had the type of returns that that many of the large cap strategies have had, small cap in general has been toward left behind. What we focus on is the fundamentals of the business.

We believe that earnings growth for our companies was 12 per cent last year. We believe that earnings growth will also be very strong closer to that 15 to 20 per cent level that I was talking about. And that’s what we are focused on. Price to earnings (P/E) multiples as Roger and many astute investors talk about, P/E multiples are confidence, they go up and down. But we believe over the long term that stock prices follow earnings growth, and that’s what we think will happen over the long term. But certainly, are, we didn’t want to start this way. And it would have been better had we not, but this is where we are in there in lies the opportunity.

David:

Alright. Ladies and gentlemen, that’s all we have time for this week. As many of you know, we’ve had a very, very good relationship with Polen Capital for about 2 and a half years now. Rob, Damon, and many members of the team come out pretty much on a 6 monthly basis. And, we have been blessed to partner with an organization of such great quality.

The Polen Capital Global Small and Mid-Cap Fund owns shares in Globant. This article was prepared 25 September 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Globant, you should seek financial advice.

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International

EUR/CHF: Swiss franc looking like a key safe-haven trade for Europe

European stocks drop to their lowest level in more than six months Swiss franc stronger against most European counterparts (NOK and SEK firmer) Overnight…

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2 hours ago

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October 2, 2023

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  • European stocks drop to their lowest level in more than six months
  • Swiss franc stronger against most European counterparts (NOK and SEK firmer)
  • Overnight index swaps still not

A global bond market selloff European equities sharply lower and triggered some safe-haven flows towards the Swiss franc.  The EUR/CHF daily chart shows prices have tentatively fallen towards the lowest levels since September 21st.  Risk aversion is clearly in place given US lawmakers were able to tentatively avoid a shutdown but stocks are still selling off.

Earlier in London, the final PMI readings showed Germany and France heavily remain in contraction territory.  German manufacturing activity posted its 15 straight contraction, but did deliver a 3-month high.  France manufacturing PMI posted its 8th straight contraction and worst reading since May 2020.

The global growth outlook seems poised to deteriorate and that should lead to gloomier prospects for Europe.  As soft landing hopes disappear in the US, the chances of a de-risking moment grow.  If European bond yields continue to rise, the Swiss franc should outperform in the short-term.

EUR/CHF Daily Chart

As financial conditions continue to get uglier across Europe and that is starting to lead to more safe-haven flows towards the franc.  Short-term downside seems like it could target the 0.9500 region.  If bearish momentum remains in place, price action could fall towards the 0.9265 level which is the 78.6% Fibonacci retracement of the 2015 low to 2018 high move.

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