Spread & Containment
US Open – The Recovery already started, Stocks and Treasuries soar, Oil’s NFP bounce hits a wall, Gold tanks on robust labor report
US Open – The Recovery already started, Stocks and Treasuries soar, Oil’s NFP bounce hits a wall, Gold tanks on robust labor report
US stocks continue to rock and roll after a better than expected nonfarm payroll report suggest the economic recovery already began in May. It is not often you get the headline number and all the components help paint a positive picture of the economy. Payrolls unexpectedly showed 2.5 million jobs were created in May. The unemployment rate declined to 13.3% and came in much lower than consensus estimate of 19.0%. Average hourly earnings fell, which is most likely a reflection lower paying jobs came back. The average weekly hours rose strongly to 34.7 hours.
This nonfarm payroll report was supposed to provide a baseline on how bad things got and not that the recovery was already taking hold in May. Now financial markets can move forward and it will be hard to build a case against seeing US stocks return to record high territory. In the short-term, US equities will continue to ignore extremely high valuations and still grind higher. Three quarters of S&P 500 companies are technology stocks and non-cyclicals, so the coronavirus impact should be limited even if we see a second wave of new cases.
The dollar got its groove back against the euro and yen following the surprisingly strong nonfarm payroll report. Treasuries went into freefall with the 10-year yield rising 10.5 basis points to 0.930%.
The Canadian dollar is also shining bright after a surprisingly robust labor report.
The oil price rally went into overdrive after a surprisingly robust US labor market report. The economic recovery is already happening and that could do wonders for crude consumption. Earlier crude was climbing higher after OPEC+ signaled everyone is on board with extending supply quotas, with the cheaters promising they will make up their part in the coming months.
WTI crude is now facing massive resistance with the $40 level. Energy traders are completely aware that many oil producers are itching to bring back production with prices coming back so quickly. The $45 level is make-or-break for many US shale producers, and it would stun many if the Russians allowed this quick oil price rebound to go much further from here. The battle for market share will continue over the coming weeks and oil-producing nations will likely see more cheaters emerge with the expected record production cuts.
Gold traders rushed for the exits after they were stunned by the robust nonfarm payroll report. It will be hard for the Fed to remain extremely accommodative if the world’s largest economy is already in recovery mode. Gold might not get much more support from the Fed, but geopolitical risks, second wave concerns, and an eventually weaker US dollar should keep the longer-term bullish outlook intact.
Zero Young Healthy Individuals Died Of COVID-19, Israeli Data Show
Zero Young Healthy Individuals Died Of COVID-19, Israeli Data Show
Authored by Lia Onely via The Epoch Times,
Zero healthy individuals under…
Authored by Lia Onely via The Epoch Times,
Zero healthy individuals under the age of 50 have died of COVID-19 in Israel, according to newly released data.
“Zero deceased of 18–49 years of age with no underlying morbidities,” the Israel Ministry of Health (MOH) said in response to a formal request from an attorney.
Officials noted that the statement only applies to COVID-19 deaths where the MOH conducted an epidemiological investigation and had received information about the underlying diseases.
“Zero is a very, very clear number, and cannot be subject to interpretation,” Yoav Yehezkelli, a specialist in internal medicine and medical management, and former lecturer in the Department of Emergency and Disaster Management at Tel Aviv University in Israel, told The Epoch Times.
“Why were all the extreme measures of school closures, vaccination of children, and lockdowns needed?” he added.
The MOH did respond to a request for comment.
Freedom of Information Request
The information was sparked by a freedom of information request filed by attorney Ori Xabi, who has been filing several such requests as he seeks to obtain information from the MOH regarding the COVID-19 pandemic and COVID-19 policies.
Xabi asked to know the average age of people who died of COVID-19, segmented by vaccination status at the time of death; how many COVID-19 patients with no underlying morbidities under the age of 50 died; and the annual number of cardiac arrest cases between 2018 to 2022.
According to the MOH response, the average age of vaccinated COVID-19 patients who died was 80.2 years. The average for the unvaccinated was 77.4 years.
The MOH emphasized that the data they have about the underlying diseases of patients is partial since it relies on information provided by the patients or their relatives, if they chose to do so. And then, only in cases in which the MOH conducted an epidemiological investigation.
Therefore “the available information does not necessarily reflect the health status of the patient” the MOH wrote adding that they do not have access to the patients’ medical records.
It is not clear why the MOH responded to Xabi’s request using only cases where the MOH had conducted an epidemiological investigation, and which was limited to deceased patients where the families had cooperated, since in 2020 the MOH told the Israeli Knesset—the Israeli parliament—that they use an intelligence system that provides the MOH with extensive information about deceased patients that included “underlying diseases.”
A document (pdf) from the Knesset Research and Information Center, dated June 7, 2020, stated that the MOH provided data to the Special Committee for the New COVID Virus about COVID-19 deaths—298 by that day at 4:30 p.m.—at the request of Yifat Shasha-Biton, a member of the Knesset, and the chair of that committee.
The ministry’s intelligence system has data on gender, age, district of residence, and the underlying diseases of the deceased, according to the document. The system showed that about 94 percent of the deceased were 60 years or older and that there were no deceased with zero underlying diseases.
In addition, on May 4, 2020, the Medical Directorate of the MOH in a letter (pdf) issued instructions to the heads of the hospitals and the medical departments of the Health Maintenance Organizations—national health care organizations—on how to fill out COVID-19 death notices, directing them to include underlying diseases.
In a December 22, 2020 letter (pdf) the Medical Directorate to the managers of the hospitals stated that for every COVID-19 patient who died during the acute phase or due to complications of the illness later, or people who were positive for COVID-19 who died, a death notice and a summary of the case “must be sent to the COVID war room of the MOH.”
They said the purpose was “to improve surveillance.”
“It’s a bit naive” for the MOH to say they do not have the full data and access to the death certificates said Yehezkelli, who was also a founder of a team that advises the MOH’s director general.
Yet this response from the MOH is meaningful, said Yehezkelli as “it finally reveals the truth.”
A health worker administers a dose of the Pfizer-BioNTech COVID-19 vaccine to a pregnant woman at Clalit Health Services, in Tel Aviv, Israel, on Jan. 23, 2021. (Jack Guez/AFP via Getty Images)
Studies and other data, including a study led by Stanford epidemiologist John Ioannidis, show that COVID-19 mortality, even with the original variant, was largely age-dependent.
“It was definitely a disease that actually only endangered the elderly,” Yehezkelli said.
Over the age of 60, mortality doubled every 5 years while under that age mortality was negligible, and “now we really see that it was zero under the age of 50, at least.”
The MOH’s response showed that the average age of the COVID-19 deceased is about 80 years of age, which also indicates that “this is a disease of the elderly, almost exclusively,” said Yehezkelli.
“That only means that what we were told for 3 years was not true,” he said.
There may not have been many young people who got seriously ill, yet the MOH had emphasized cases of pregnant women hospitalized in critical condition and young healthy people who died because of COVID-19. It was not the true situation, he said.
“They created a false presentation of a very severe epidemic that affects the entire population and therefore the entire population should also be vaccinated, regardless of age,” said Yehezkelli.
If we are talking about people under the age of 50 that means that no pregnant women actually died of COVID-19, he said.
The justification given for vaccinating pregnant women, young people, and children was that they too are affected by COVID-19.
It was known back then that this was not the case “and we now see it clearly,” Yehezkelli said, asserting that the MOH has “lost the public’s trust” by making a “false presentation” of the dangers of COVID-19.
Cardiac Arrest Data
In response to Xabi’s recent FOI, the MOH provided the number of cardiac arrest cases from 2018 to 2020. They added, “The information for the years 2021–2022 does not exist in the office.”
The MOH explained that “The registration of the causes of death of deceased persons is carried out, in accordance with the notification of death,” by the Central Bureau of Statistics, adding “the data for the years 2021–2022 have not yet been transferred to the Ministry of Health.”
A study published in April 2022 that analyzed the dataset of the Israel National Emergency Medical Services (EMS) found a 25 percent increase in EMS calls due to cardiac arrests among 16- to 39-year-olds between January–May 2021.
The COVID-19 vaccine rollout began in December 2020.
Retsef Levi, a professor at the Massachusetts Institute of Technology Sloan School of Management, was one of the researchers of the study.
The MOH objected to the findings of the study in a post on Twitter where they said that “there is no connection between the EMS calls that were analyzed in the study and the COVID vaccines.”
In a MOH webinar on Oct. 8, 2021, about the effectiveness and the safety of the COVID vaccines, Dr. Sharon Elroy-Pries, the head of Public Health Services at the Israel MOH said regarding Levi’s study: “This is one of the biggest fake news I have seen.”
“The National Center for Disease Control did a very comprehensive analysis—including of the data of that study, [which were] EMS calls,” she said adding that “there was nothing. No more [cases of] heart attacks. No more calls to the ER.”
She continued by saying that “in the mortality data from the beginning of 2021, you don’t see an increase in mortality except for COVID mortality. That is, if we look at excess mortality in the State of Israel we see it precisely at the peaks that were peaks of [COVID] morbidity in the State of Israel.”
“When you remove the … morbidity from COVID at all ages, one sees either the same mortality rate as in previous years, or less,” she said, adding “there is no increase in heart attacks here.”
Sharon Alroy-Preis, the head of Public Health Services at the Israel Ministry of Health at the Health Committee meeting to discuss special powers to deal with COVID-19 in Jerusalem on Feb. 6, 2023. (Dani Shem Tov / Knesset)
In a February 2023 meeting of the Health Committee of the Knesset for extending the COVID special powers law, Elroy-Pries reiterated that the MOH does have access to COVID mortality data.
“COVID has killed over 12,000 people in the State of Israel,” she said at the meeting, explaining further that this figure is known since “from the beginning of the epidemic, the Medical Directorate received people’s death certificates.”
When asked about whether there is an increase in cardiac arrest cases in Israel among young people, Elroy-Pries said, “We do not see an increase in the death of young people,” adding “We’re checking it. We’re looking for it.”
Levi said to The Epoch Times that the MOH attacked him personally and the EMS, and asked “If they don’t have data for 2021 and 2022 [according to the FOI], then how can they know that they don’t have an increase [in cardiac arrests]?”
When the MOH says things that are contrary to science, said Levi, or are “contrary to the facts on a regular basis, you must ask yourself the question: are they doing it because they didn’t bother to read the science, or are they doing it even though they … read the science.”
“Both scenarios are very serious,” he added.
Vaccines Saved ‘Millions Around the World’: MOH
The MOH did not reply to a request for comment from The Epoch Times.
Yet about 2 hours after sending the request on May 25, the agency posted on its Twitter account a statement regarding Xabi’s FOI.
“Following the manipulation that has been taking place in recent days regarding one of the Ministry of Health’s [reply to] Freedom of Information requests, we will clarify that the answers to the requests submitted under the Freedom of Information Law are, naturally, answered directly to the specific question that was asked.
“In this case, the ministry was asked about mortality data and underlying diseases. The Ministry of Health ‘does not have’ access to the medical file [of patients], therefore information is only based on cases where an epidemiological investigation was carried out and the person or his family answered the question [regarding underlying morbidities]. Therefore, this is very limited information. This was of course clearly written in the answer [to the FOI].
“We will clarify: So far, 356 young people (18–49 years of age) have died of COVID.
“Of these, only about half have documentation of an epidemiological investigation (184 deceased).
“And only 7.5% (27 deceased) included an answer to the question regarding underlying diseases. The answer was provided based on this information.
“The Ministry of Health is committed to maintaining the health of all citizens and making the information available in the Ministry transparently. This is how we acted [so far] and will continue to act.
“We must not forget that the COVID epidemic has so far killed more than 12,500 people in Israel, caused severe and critical morbidity, and post-COVID symptoms that accompany some of those recovering to this day.
“The vaccination campaign began in the midst of a third lockdown that resulted from an increase in morbidity and mortality and the opening of the economy was made possible thanks to the activation of the green passport, which its purpose was to reduce the risk of infection in mass events.
“The vaccines have saved thousands of people in the state of Israel and millions around the world—the attempt to rewrite history is dangerous.”
Following an administrative appeal filed by Xabi and colleagues, the MOH committed to publishing all-cause mortality segmented by vaccination status and age by the end of this month.
This appeal is an ongoing case that followed a FOI request submitted to the MOH on Oct. 10, 2021, which was not answered within the time frame according to Israeli law, and the data provided by the agency during a number of hearings since has been incomplete.
Spread & Containment
In This “Age of Funemployment,” Is a Recession Possible?
For weekend reading, Gary Alexander, senior writer at Navellier & Associates, offers the following commentary: Come mothers and fathers throughout…
For weekend reading, Gary Alexander, senior writer at Navellier & Associates, offers the following commentary:
Come mothers and fathers throughout the land
And don’t criticize what you can’t understand
Your sons and your daughters are beyond your command
Your old road is rapidly aging… For the times they are a-changing– Bob Dylan, 1963
Bob Dylan turned 82 this week, and I guess he’s a little old fashioned now, too, since he recorded an album of Sinatra standards in 2015 (“Shadows in the Night”) and a Christmas carols album in 2009.
The times are changing in the employment market, too. Work has almost become a four-letter word…
Suzy Welch, 62, a Baby Boomer professor of management practice at NYU’s Stern School of Business and co-author with her late husband Jack of several best-selling business books, wrote a fascinating Op-Ed column in The Wall Street Journal last week (“For Gen Z, Unemployment Can Be a Blast, May 18, 2023).
She introduced her latest batch of “bright and shiny young MBA students” who spoke of their lazy, hazy plans after graduation: “I’ll work when I work. Until then, I’ll just do some funemployment.”
Ms. Welch said she “literally screamed in class” the first time she heard that word, shouting, “What, what, what? Are you literally saying ‘funemployment’ – like unemployment can be fun?” The class then “burst into laughter.”
Yes, of course that’s what they meant, but they were trying to keep that word secret from the older generation of up-tight Baby Boom professors, since those draft-dodging, dope-smoking hippies of the Vietnam era had now become like their parents – and their students didn’t trust anyone over 30!
For those young ones who still want to work, the older employers must also watch their step, since the old hierarchical order at work is mostly dead, if not buried. In his new book, “Generation Why” (released this month), Dr. Karl Moore of Montreal’s McGill University speaks of the new workplace rules, which sound like no rules – a dangerous minefield for managers. In his introduction, Moore makes three points.
There are three basic changes from our (Boomer) management era:
(1) Transparency over secrecy: Young workers can discover all your faults, errors, and past mistakes by surfing the Internet, so transparency is king;
(2) Credentials no longer matter as much; an MBA is the old BA, but experience trumps degrees, so all that massive college debt may be wasted; and
(3) Introverts and quieter thinkers can now lead, not just those bombastic extroverts. By Moore’s measures, 30% to 35% of C-suite leaders are now introverts. *
*To clarify terms, “C-suite” refers to anyone with “Chief” in the title, like Chief Executive Officer, Chief Operating/Chief Financial, or Chief Managing Officer. Also, here are the generally accepted birth cohorts:
Moore has a CEO Insights course at McGill for MBAs. He also takes 30 students each year to some of the fastest growing global economies to see how they do it. He calls it the “Hot Cities of the World Tour.”
They just returned from Ghana and Ivory Coast this March. In these 12-day tours, he also has a chance to dine and talk with these 30 students (Millennials and now Gen Z kids) to probe their views.
As cohorts in two colleges in Southern California in the 1970s, Moore and I emailed over this, and he told me these tours are promoted as “Taking the Future to the Future,” meaning future business leaders go to where the world is growing fastest. Some of his previous trips were to Israel, the UAE, India, and South Africa.
In his study of young workers for this book, Moore conducted over 800 interviews with under-35 workers (and shirkers) in Canada, the U.S., Japan, and all over Europe, as well as over 750 C-suite executives. Previous to his academic career, Moore also spent 11 years working in high tech firms, so he has the advantage of being a capitalist believer and doer, not just a business critic, as is so common in academia.
In the U.S., Moore writes, over one third of workers are Millennials (age 27-42), recently surpassing Gen X as the largest component of our workforce. Globally, there are 1.8 billion Millennials, about a quarter of the world, and 86% of Millennials come from developing economies, which may determine who rules the Century. Put bluntly, will the hardest workers of the world surpass our new funemployment cohort?
How Can We Have A Recession With So Many Job Openings?
A classic warning sign of a recession ahead is an inverted yield curve, which we have endured for nearly a year now without a recession. The yield curve inverted before the last four real recessions, in 1982, 1990, 2000, and 2008.
Even with the artificial 2020 recession, caused by a forced COVID-19 lockdown, the yield curve was neutral before that recession. Today, we have the most inverted yield curve since the double-dip recessions of 1979-82, yet we still stubbornly grow our GDP each quarter since mid-2022.
It’s hard (some say impossible) to have a recession with the unemployment rate at a record low, jobs continuing to expand at a solid pace, nearly 10 million jobs going begging and wages usually outpacing prices, resulting in real wage gains. Everywhere you look, you’re likely to see “HELP NEEDED” signs.
Jobs are opening even faster: The percentage of all U.S. business owners reporting job openings that they cannot fill rose by 2 points to 45% in April — maybe because “funemployment” is still widely preferable?
The labor force participation rate remained at 62.6% in April, below the pre-pandemic reading of 63.3% in February 2020, but that rate itself was historically low. It was over 64% from 1984 to 2012, peaking in 2001, when I argue (in recent columns) that we moved from a Growth economy to a Debt economy.
Funemployment Comes Home to Roost
To close on a personal note, I’ve worked every month since April 1962, age 16, first on a paper route by car, then as a night janitor to work my way through college. I commuted to work at a desk job for nearly 40 years before moving to my late parents’ home in the San Juan Islands of Washington State to work online as an editor. I tried to match the work ethic of my parents, who worked in the Great Depression.
This week marks the date when two of our five grown grandchildren arrive to live with us for the next few months, and maybe longer, as part of their funemployment option. It’s a grandparents’ dream come true, having these wonderful young ones around us – and a great help in our old age, a win-win situation.
One says, “I don’t want to sit in an office from 9 to 5 each day.” I responded, “Neither did I, nor probably 90% of those who did it, but we felt we had to.” These kids already have online and “gig” jobs, not office jobs.
I know I’m old-fashioned about work, but (with Karl Moore) I’m learning from the youth, and I know that both of these two fine youngsters will find fulfilling jobs and careers after living with us, with the caveat that retail jobs, construction, and even janitor work aren’t careers, but training ground for showing up on time, respecting rules, learning manners, and serving customer needs. They’ll find their best work.
It’s a brave new world for old fogies. But it’s comforting to know these kids will soon be old fogies, too.recession depression unemployment pandemic covid-19 yield curve lockdown recession gdp unemployment africa india japan canada europe
June 2023 Monthly
June is a pivotal month. The US debt-ceiling
political drama cast a pall over sentiment even if it did not prevent the
dollar from rallying or the S&P…
June is a pivotal month. The US debt-ceiling political drama cast a pall over sentiment even if it did not prevent the dollar from rallying or the S&P 500 and NASDAQ from setting new highs for the year. It is as if the two political parties in the US are playing a game of chicken and daring the other side to capitulate. Both sides are incentivized to take to the brink to convince their constituents that they secured the best deal possible. No side seems to really want to abolish the ceiling because it has proven to be an effective lever for the opposition to win concessions over the years. Still, a higher debt ceiling and some reduction in spending in the FY24 budget are the middle ground.
Many think that this time is different. The partisanship, they say, is so extreme that a default is possible. They can point to severe distortions in the T-bill market and the elevated prices to insure against a US default (credit default swaps). Neither side can be sure it will not be blamed for a default's expected and unexpected consequences. The risk of playing chicken is that neither driver swerves at the last minute. There are only downside scenarios in a default situation, even if it lasts for a short term and no bond payment is missed. On the other side of the debt ceiling, bill issuance will rise, and the Treasury will rebuild its account held at the Federal Reserve. This could drive up short-term rates and reduce liquidity.
In addition to fiscal policy, a monetary policy drama is also playing out. The Federal Reserve began hiking rates in March 2022, and at the May meeting, Chair Powell indicated that a pause was possible. Although he made it clear that it was not a commitment, the markets saw the quarter-point move as the last. However, a combination of stronger economic data, sticky price pressures, and some hawkish comments saw the pendulum of expectation swing toward a hike at the June 13-14 meeting (60%). Moreover effective Fed funds rate (weighted average) is about 5.08%, and the market-implied year-end effective rate is around 5.0%. It was near 4% as recently as May 4, which illustrates the extent of the interest rate adjustment. Even if the Fed stands pat in June, we expect Chair Powell to validate market expectations that another hike will likely be forthcoming (July).
There continue to be worrisome economic signs in the US, including the inverted yield curves, the precipitous decline in the index of Leading Economic Indicators, an outright contraction in M2 money supply, the tightening of lending standards, and a reduction in credit demand. However, at the same time, despite some slowing, the labor market is strong, with an improvement in prime working-age participation. Consumption rose by 3.7% in Q1 and appears off to a good start in Q2, with stronger auto and retail sales in April. Supply chain disruptions have improved, shipping costs have receded and are back within the 2019 range. The Atlanta Fed's GDP tracker sees growth of 1.9% in Q2, near the Fed's non-inflation speed limit of 1.8% and though a bit faster than Q1 (1.3%).
Another drama that has unfolded is the stress on US banks. Banks with increasing low-yielding assets did not offer competitive interest rates with prime money market funds (only invest in US government/agency paper) and the US bill market itself. While the banking system lost deposits, several of the largest banks reported increased net interest income. However, even after the deposits at small banks stabilized, pressure continued on their shares. That selling pressure seemed to be exhausting itself. June may be a pivotal period for this drama too. Still, many regional banks are exposed to the commercial real estate market, which is under pressure.
Europe avoided a tragic winter energy crisis, but the drama is that inflation is providing sticky, and the regional economy looks as if it stalled at the end of Q1. Indeed, revisions show that the German economy contracted 0.3% in Q1 after a 0.5% contraction in Q4 22. The eurozone and UK economies expanded by 0.1% quarter-over-quarter in the year's first three months. The eurozone and UK appear stuck in low gear, but the market is confident of quarter-point hikes by the European Central Bank and the Bank of England in June.
Japan has a drama of its own. The Bank of Japan is under new management, but it turns out that its extraordinary policy was not simply a function of former Governor Kuroda's idiosyncrasies. Several surveys of market participants saw June/July as the likely timing of an adjustment in the policy settings. However, Governor Ueda's call for patience suggests little sense of urgency, and some expectations are being pushed out to the end of Q3. The recent history of lifting interest rates or currency caps suggests a dramatic market response even under the best circumstances. Still, the best time to adjust the cap on the 10-year bond is when it is not being challenged. The BOJ is the last of the central banks with a negative policy rate. This is increasingly difficult to justify. The swaps market is not pricing in a positive rate until early in the second half of the fiscal year, which begins on October 1.
Geopolitics are always dramatic. It seems clear that US officials, including President Biden, had recognized that bringing NATO to Russia's border was provocative. After relatively mild responses to Russia's invasion of Georgia and the taking of Crimea, the reaction to last year's invasion of Ukraine is a big shock to nearly everyone. The US has led a coalition that has stymied Russia by arming Ukraine with weapons, training, money, and intelligence.
Initially, China appeared to be a net loser of Russia's invasion. NATO is stronger. US leadership was again demonstrated. Parallels between Ukraine and Taiwan were drawn ubiquitously. There has been a rapprochement between South Korea and Japan, and both are boosting military spending. The US secured new bases in the Philippines. However, China is finding its own opportunities.
Just as the US thinks Russia is in a quagmire, China may think it has the US in one. President Biden has cast the defense of Ukraine as the frontline of the battle between democracy and authoritarianism. However, American public support is not particularly strong, and continued unlimited support may become a political issue in next year's election. Meanwhile, China has moved into the vacuum created by the US and European sanctions. China has secured Russia into its sphere of influence, which Beijing could not have dreamed of before the invasion. Using the swap lines with the PBOC has allowed several developing countries to pay for imports from China. It is similar to producer-financed sales in market economies. China is exploiting niches that the US and Europe have created purposefully or otherwise. Even taking into account the problematic debt that has arisen from the Belt Road Initiative, it is creating and solidifying a trade network that may be of increasing importance to China going forward.
The sharp rise in interest rates in May made for a challenging time for risk assets. Equity indices for developed and emerging market economies fell in May, but there were notable exceptions. The S&P 500 and NASDAQ rallied to new highs for the year. Germany's DAX and French CAC set record highs, while Japan's Topix and Nikkei reached their best levels since 1990. Among emerging markets, Brazil (~6%), Chile (~4%), Poland (~3%), Hungary (~6%), Taiwan (~6%), and South Korea (~2.3%) are notable exceptions.
Emerging market currencies mostly fell in May. The JP Morgan Emerging Market Currency Index fell by 1.3% after slipping about 0.35% in April. It is the first back-to-back monthly decline since a four-month drop in June through September last year. It is essentially flat on the year. Latin American currencies continue to stand out. They accounted for four of the top five emerging market currencies in May: Colombia (~5.1%), Mexico (~1.9%), Peruvian sol (~1.0%), and Chile (~0.4%). The South Korean won was the exception; its 1% gain put it in the top five.
BWCI bottomed early last November near 92.80, confirming the dollar's top. It rallied into early February to peak near 98.15. The decline into March retraced about half of the rally, while the year's low set in late May (~95.25) is within 0.75% of a critical area. This is consistent with our base case that while there may be some scope for additional dollar gains, it looks limited as the interest rate adjustment also appears to be complete or nearly so. In our analysis of the different currencies below, we have tried to quantify where the base case breaks down.
Dollar: The interest rate adjustment, where the market converges to the Fed rather than vice versa, and the knock-on effect of supporting the US dollar unfolding broadly aligns with the view sketched here last month. The two-year yield rose by around 65 bp in May to about 4.65%, the highest since mid-March. The year-end policy rate is near 5% rather than 4.5% at the end of April. We suspect that the interest rate adjustment is nearly complete, helped by what will likely be slower economic growth after the rebound in Q2. The growth profile may be almost a mirror image of 2022. Then, the economy contracted in H1 and rebounded in H2. This year, the economy appears to have grown near trend in H1 and looks set to slow in H2. The odds of a Fed hike on June 14 were around 65% before the Memorial Day holiday (May 29), and it is fully discounted for the July meeting. The Fed's economic projections will be updated. The 0.4% median forecast for growth at the March meeting seems too low and will likely be increased. At the same time, the 4.5% year-end unemployment rate seems too high. Unemployment was at 3.4% in April. The median forecast bring it down a bit. The debt ceiling wrangling does not put the US in the best light, but barring an actual default, it will not have lasting impact. Outside of the T-bill market and the credit-default swaps, investors took this peculiar American political tradition in stride. Our working hypothesis has been that the dollar was going to "correct" the selloff that began in early March as the bank stress struck. In the last full week of May, the Dollar Index exceeded the retracement target near 104.00. A move above the 104.70 area would suggest potential back toward the 200-day moving average (~105.75) and the March high near 106.00. A break below the 103.00 area would suggest a high may be in place.
rates could not keep pace with the dramatic swing higher in the US. Germany's
two-year yield rose by about 20 bp in May, less than half what the US
experienced. Yet, the euro's roughly 2.75% decline in May was not only a dollar
story. The proverbial bloom came off the rose. The fact that with a combination
of preparedness and good luck (low oil/gas prices and a mild winter), the
eurozone avoided an energy crisis. The positive economic impulses carried into
February, but by the end of March, economic growth stalled, or worse. After a
second look, Germany contracted by 0.3% in Q1 (initially estimated at zero)
after a 0.5% decline in economic output in Q4 22. The European Central Bank
started later than most G10 countries to begin adjusting monetary policy, and
institutional rigidities may make price pressures more resistant. The ECB meets
on June 15 and the market is confident of a quarter-point hike that would lift
the deposit rate to 3.50%. The staff will also update its economic forecasts. The
terminal rate is seen at 3.75% in late Q3 or early Q4. On June 28, European
banks are due to pay back the ECB around 475 bln euros of loans (Targeted
Long-Term Refinancing Operations). They account for around 6% of the assets on
the ECB's balance sheet and almost 45% of the outstanding TLTRO loans. The
sheer magnitude of the maturity could prove disruptive, and some banks may look
to find replacement funding. The ECB's balance sheet has been reduced by about
3% this year and the repayment of the TLTRO would do more with a single blow. Recall
that end of the of last year, European banks returned almost 492 bln euros. The
euro overshot our $1.0735 objective. We suspect the euro's downside correction
is nearly over, but a break of the $1.0680 area may signal losses back to the
March low near $1.05.
(May 26, indicative closing prices, previous in parentheses)
Spot: $1.0725 ($1.1020)
Median Bloomberg One-month Forecast $1.0890 ($1.0960)
One-month forward $1.0740 ($1.1040) One-month implied vol 6.8% (7.5%)
Japanese Yen: Rising US rates seemed to have dragged the greenback higher against the Japanese yen. The gains in May took it a little through JPY140, the highest level since the end of November, and beyond the halfway marker of the drop from last October's high near JPY152. Just as there may be some more room for the US 10-year yield to climb above 3.80%, there may be scope for the dollar to rise further against the yen. The next important chart area is around JPY142.50. Underlying price pressures in Japan continue to rise, and the weakness of the yen only adds to the pressure on the BOJ to adjust its monetary settings. The economy expanded by 0.4% in Q1, well above expectations, and in late May, the government upgraded its monthly economic assessment for the first time in ten months. Several surveys found many see a window of opportunity in June or July for the BOJ to adjust monetary policy. Most of the speculation has focused on yield-curve-control (YCC), which caps the 10-year yield at 0.50%. We do not think it will be abandoned entirely, and targeting a shorter-dated yield may be considered. It could lift the overnight target rate to zero from -0.10%. If experience is any guide, when it comes, the timing will likely surprise, and it is bound to be disruptive. It will likely weaken the correlation between the exchange rate and US yields. Lastly, there is much talk about a snap election in Japan over the summer as Prime Minister Kishida looks to secure his mandate and support for him, and the cabinet has risen recently. He hosted the G7 summit and brandished leadership. Politically, it may be the most opportune time before September 2024 LDP leadership contest, while the economy is relatively strong, the stock market is near 30-year highs, and he is perceived favorably.
Spot: JPY140.60 (JPY136.30)
Median Bloomberg One-month Forecast JPY133.45 (JPY133.05)
One-month forward JPY139.95 (JPY135.75) One-month implied vol 10.8% (9.5%)
British Pound: May was a month of two halves for sterling. In the first half of the month, it extended its recovery off the for the year set on March 8 near $1.1800. Sterling peaked on May 10 at around $1.2680, its best level since June 2022 and an impressive recovery from last September's record low of about $1.0350. In the second half of May, sterling trended lower and fell back to almost $1.2300. Our base case is that the move is nearly over, with the $1.2240 area likely to hold back steeper losses. However, if this area goes, another cent decline is possible in this benign view. Stubborn inflation and a firm labor market have produced a dramatic interest rate adjustment in the UK that may lend sterling support. The year-end policy rate is seen above 5.50%. This is a 70 bp increase since the middle of May. The two-year and 10-year Gilt yields were mostly flat in the first half of May and soared around 75 bp in the second half. The 10-year breakeven (the difference between the inflation-protected security and the conventional bond) rose a little more than 10 bp in the last couple of weeks. The Bank of England meets on June 22, the day after the May CPI is published. The market is debating whether a 25 bp or 50 bp hike will be delivered. We lean toward the smaller move unless the incoming data surprises.
Median Bloomberg One-month Forecast $1.2400 ($1.2480)
One-month forward $1.2355 ($1.2575) One-month implied vol 8.0% (7.6%)
Canadian Dollar: The Canadian dollar fell by about 0.60% against the US dollar in May, making it the best performer in the G10. The Swiss franc was second with twice the loss. After testing April's low (~CAD1.3300) in early May, the US dollar recovered and set the month's high (~CAD1.3650) in late May. While interest rate developments can help explain the broader gains in the greenback, the exchange rate with Canada seems to be more sensitive lately to the general risk environment (for which we use the S&P 500 as a proxy) and oil. The price of July WTI collapsed from around $76.60 at the end of April to a little below $64 on May 4. It worked its way back up to almost $75 on May 24 before stalling. There has been a significant interest rate adjustment in Canada over the last few weeks. The 2-year yield rose by nearly 60 bp. At the end of April, the market was pricing in a cut before the end of the year and now it is fully discounting a hike. The Bank of Canada meets on June 6. The swaps market has a 33% chance of a hike and a hike is fully discounted by the end of Q3. At the end of April, a June hike was seen as less than a 10% risk. A move above CAD1.3700 could signal a return to this year's high set in March near CAD1.3860.
Spot: CAD1.3615 (CAD 1.3550)
Median Bloomberg One-month Forecast CAD1.3405 (CAD1.3475)
One-month forward CAD1.3605 (CAD1.3540) One-month implied vol 6.0% (5.8%)
Australian Dollar: The surprising quarter-point hike by the Reserve Bank of Australia saw the Australian dollar fray the upper end of the $0.6600-$0.6800 range that has dominated since late February. Disappointing employment data, concerns about the pace of China's recovery, and the sharp selloff of the New Zealand dollar (following the central bank's hike that could be the last one) weighed on the Australian dollar. It recorded the lows for the year slightly below $0.6500. There is little meaningful chart support ahead of $0.6400, but a move back above $0.6600 would suggest a low is in place. The squeeze on households can e expected to increase in the coming months as mortgages taken on in the early days of the pandemic will begin to float at higher rates. The RBA meets on June 6 and there seems to be little chance of a hike, though the market is not convinced that the tightening cycle is finished. A small hike (~15 bp) is possible in Q3. The first estimate of Q1 GDP is due the day after the RBA meeting, but we assume officials will have some inkling. Although there is some talk of the risk of a contraction, it likely grew slowly.
Median Bloomberg One-month Forecast $0.6785 ($0.6710)
One-month forward $0.6525 ($0.6625) One-month implied vol 10.3% (10.1%)
Mexican Peso: Between the central bank's pause and the broader dollar's strength, the peso fell on profit-taking after it reached a new seven-year high in the middle of May. However, the considerations that have driven it higher remain intact, suggesting its high is not in place. Those forces include the attractive carry (11.25% policy rate) and a relatively low vol currency (especially among the high-yielders), the near-shoring and friend-shoring that has seen portfolio and direct investment inflows, and, partly related, the healthy international position, with record exports and stronger worker remittances. The dollar fell to almost MXN17.42 in mid-May and its bounce stalled near MXN18.00. A break of the MXN17.60 area may signal a retest of the lows, but in the medium term, there is potential toward MXN17.00. While Mexico's government has not facilitated an investor-friendly environment, the market appears to be rewarding the strong and independent central bank and Supreme Court.
Spot: MXN17.6250 (MXN18.00)
Bloomberg One-Month Forecast MXN18.1675 (MXN18.26)
Chinese Yuan: China is notoriously opaque in terms of information and economic data. The market's general sense is that Beijing will take more measures to ensure growth stays on track with weak price impulses. The low CPI (0.3% year-over-year in April) is partly a function of weak demand, but the overcapacity in some sectors, such as autos, also is deflationary. A reduction in required reserves is possible. The expected policy divergence is more important to investors than modest swings in China's large and persistent trade surplus. As the dollar moved to new highs for the year in mid-May above CNY7.00, PBOC officials expressed concern about the volatility and one-way market. And the yuan's losses have been extended further. The next important chart area is near CNY7.10. Still, the yuan remains correlated with the euro and yen, and their weakness helped drag the yuan to new lows for the year. Chinese assets may not be particularly attractive to foreign asset managers, but the yuan is being used more to settle trade (and not just with Russia and Hong Kong). Its share of the SWIFT messages rose to 2.3% in April, the most in six months.
Spot: CNY7.0645 (CNY6.9185)
Median Bloomberg One-month Forecast CNY6.8625 (CNY6.8570)
One-month forward CNY7.0500 (CNY6.9060) One-month implied vol 5.4% (4.9%)
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