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Week Ahead: February ISM Services and Auto Sales to Show January US Data were Exaggerated

A key issue facing businesses and investors is whether the US January data reflects a reacceleration of the world’s largest economy or whether it was mostly…



A key issue facing businesses and investors is whether the US January data reflects a reacceleration of the world's largest economy or whether it was mostly a payback for extremely poor November and December 2022 data and seasonal adjustments and methodological distortions. Given the centrality of the US economy and rates, it is not simply a question for America, the Federal Reserve, and investors, but the implications are much broader. The issue is unlikely to be resolved in the week ahead, but it may begin pointing to the direction ahead. 

To believe in the now much-touted "no-landing" or "soft landing scenario" requires the bold and dangerous claim that this time is different. That the inversions of the yield curve, including the 3-month bill and its 18-month forward, which Federal Reserve Chair Powell cited partly to play down the earlier inversion of the 2-10-year curve, do not mean what they have in the past. The roughly 7.0% decline (annualized pace) of the index of leading economic indicators is giving its first false signal in a half-of-a-century. The rise of business failures, the rising default rate on car loans, and the tightening of lending criteria can be largely ignored. While this is all possible, it seems patently unlikely. Expect the February data to begin casting shade on the January-spurred optimism.

US: Our working hypothesis is that the January data will not be repeated. It was mostly a function of a bounce back from dismal November and December activity and a statistical quirk caused by benchmark, methodological, and seasonal adjustments. February data are going to look considerably softer. It already seems apparent in some survey data, including the Philadelphia Fed's February business activity outlook and the preliminary PMI. The January reports next week include durable goods orders and the advanced merchandise trade balance. They pose headline risk. More importantly, will be the ISM February services. The January report was released shortly after the employment data, and the intraday charts from that day (February 3) suggest services; ISM spurred the outsized market reaction. Auto sales, which do not receive the attention they ought to, perhaps due to the manner of release (company's report throughout the session), are expected to pull back by almost 5% after surging by a little more than 18% in January. The early estimates for February non-farm payrolls (March 10) are 200k. After the revisions, the average monthly jobs growth last year was 401k. The Treasury sells only bills next week; no coupons and the schedule of public appearances of Fed officials is light.

The Dollar Index is closing in on last month's high near 105.65.  Above, there is the 106.00-50 area that houses the (38.2%) retracement of the sell-off from last September's high (~114.80) and the 200-day moving average. The momentum indicators are stretched but have not begun to turn. Initial support now is in the 104.50-60 area.

Japan:  The market is continuing to game out the possibility of a surprise by Bank of Japan Governor Kuroda at his last board meeting on March 10, shortly before the US (and Canada's) employment report. After being surprised in December (by the widening of the 10-year yield band) and February (no action), no one wants to be surprised again. The most important high-frequency data in the coming days will be the February Tokyo CPI, which offers important insight into the national figures, which are reported will cause a longer lag. We have warned that a combination of the appreciation of the yen on a trade-weighted basis, the drop in energy and wheat prices, and government subsidies should see inflation begin falling soon. It could start with the February readings. BOJ Governor nominee Ueda told the Japanese Diet the same thing before the weekend. Ueda clearly signaled no immediate substantive policy change. A Bloomberg survey found 70% expect a rate hike by early Q3. Two other observations are notable. First, the divestment by Japanese investors of foreign bonds continues to be discussed, but so far, they have been net buyers and replaced about 20% of the bonds sold last year. Second, the correlation between changes in the exchange rate and the US 10-year yield has continued to tighten after falling sharply in December and January.

The dollar posted a bullish outside up day ahead of the weekend, sparked by Ueda's seeming commitment to the current framework and the rise in US rates. It reached JPY136.50 before the weekend, the best level since the December surprise. The JPY136.65 area corresponds to the (38.2%) retracement of the drop since last October's peak (~JPY151.95), and the 200-day moving average is a little above JPY137.00. The momentum indicators are over-extended, and the Slow Stochastic has flatlined slightly below last October's peak. The JPY135 area should now offer support, but it may take a break of JPY134 to suggest a top is in place. The risk in the next couple of weeks may extend toward JPY140.00.

Eurozone: The preliminary February CPI will be reported on March 2. The monthly reading fell for three months through January. The year-over-year pace will likely fall sharply in February and March as the jump (0.9% and 2.4%, respectively) drops out of the 12-month comparison. This and more robust February survey data set the stage for the March 16 ECB meeting. A 50 bp hike has been signaled (lifting the deposit rate to 3.0%), and the key question is what happens in Q2 and Q3. The hawks may push for another 50 bp hike at the May 4 meeting. The terminal rate is seen between 3.50% and 3.75%.

The euro was sold through $1.06 in the second half of last week and traded to about $1.0535 ahead of the weekend. Since $1.07 broke, we have been warning of risk into the $1.0460-$1.0500 area. This still seems reasonable. How the euro responds to the weaker US economic data we expect starting next week may help shape expectations about the extent of a further correction. Note, for example, that the (50%) retracement of the euro's rally from last September's low (~$0.9535) is near $1.0285, and the 200-day moving average is around $1.0330. The $1.06 area may now offer the nearby cap.

China:  The February PMI is the economic highlight. The economy appears to be recovering after a particularly weak Q4 22 when the composite PMI was stuck below the 50 boom/bust level. Of note, the manufacturing sector recovery does not seem as robust as the non-manufacturing sector. Weaker foreign demand for Chinese goods is a headwind, and the domestic economy, including construction, has helped lift the tertiary sector. In January, the non-manufacturing PMI was at 54.4 compared with 54.1 on the eve of the pandemic. Note that the National People's Congress first session is scheduled for March 5. New state appointments will be made. It is at the Congress that Xi will be formally given a third term as president. A new PBOC Governor will also be announced as will a new party secretary to the central bank. 

The yuan is a closely managed currency and official are not resisting the dollar's upward pressure. The greenback set a new two-month high near CNY6.9600 amid a wider surge ahead of the weekend. The next important area is at CNY7.0, which the dollar has not traded above since February 2. The CNY7.01 area corresponds to a (50%) retracement of the dollar's pullback from the high set earlier last November near CNY7.3275. Weakening exports, the larger discount to the US 10-year yield, and the anticipation of more Fed hikes for longer provide the fundamental fodder.

United Kingdom: Stronger than expected January retail sales (0.5% vs. median forecast in Bloomberg's survey of -0.3%) coupled with an upside surprise in the flash PMI (composite jumped to 53.0 from 48.5, the highest since last June and the first about 50 since last July) provides more fodder for arguments of a short and shallow recession. It also supports ideas that the Bank of England will deliver a quarter-point hike at next month's meeting (March 23) to bring the base rate to 4.25%. The terminal rate is seen at 4.50%, with a slight risk of 4.75%. However, the data in the coming days, primarily about financial variables (January consumer credit, mortgage lending, and money supply), are typically not the stuff that moves sterling.

The outside up day for sterling last Tuesday proved for naught. That was the peak, a little shy of $1.2150, and the drop ahead of the weekend took it to the 200-day moving average ($1.1930). Earlier this month, sterling recorded a low near $1.1915. A break of the January low (~$1.1840) would undermine the medium-term outlook and warn of a potential loss toward $1.1250 (the measuring objective of a possible double top pattern). That said, the (38.2%) retracement of the sterling's recovery from the record low last September is near $1.1650, and the next retracement (50%) is about $1.1400. The $1.2000-50 area may provide initial resistance. 

Canada:  The Canadian dollar is vulnerable on two counts. First, the Bank of Canada remains the only G10 central bank to declare it is pausing its tightening cycle. The major central banks are not there yet, though several seem one or two hikes away. Second, the Canadian dollar is particularly sensitive to the risk environment, reflected in its correlation with the S&P 500. The rolling 60-day correlation is around 0.73. By comparison, the Australian dollar is the closest, around 0.63, and the yen is about 0.25. The market has not entirely given up on another Bank of Canada hike, perhaps in Q3, but the December and Q4 GDP, the upcoming data highlight (February 28), are unlikely to be very impactful on expectations. The Bank of Canada's March 8 meeting is largely a non-event, but the February employment data on March 10 will draw attention after the dramatic 121k increase in full-time positions in January.

The US dollar has risen sharply against the Canadian dollar over the past two weeks. It recorded a low near CAD1.3275 on February 14 and surged to CAD1.3665 ahead of the weekend. Last month's high was set early by CAD1.3685. The December peak was slightly above CAD1.3700, which also marks the (61.8%) retracement of the greenback's downtrend since peaking in the middle of last October (~CAD1.3975). The momentum indicators are getting stretched, but the cautionary signal is that the US dollar closed above its upper Bollinger Band (two standard deviations above the 20-day moving average) found near CAD1.3615. Support is seen in the CAD1.3500-20 band.

Australia:  When the Reserve Bank of Australia meets on March 7, it will have Q4 GDP and January CPI (March 1) in hand. It will also see the January trade figures (March 6). The markets favor another 25 bp hike, but it is not completely discounted. The Australian dollar was the weakest G10 currency last week, falling by about 2.25%, bringing the month's loss to nearly 4.75%. It will be the first monthly loss since last October. A possible head and shoulder topping pattern has been formed, though we are less convinced. Yet, the measuring objective would roughly correspond to the (61.8%) retracement objective of the rally off the mid-October low (~$0.6170) that is found around $0.6550. The January low was set on the second trading day of the year, slightly below $.6690. The low set before the weekend was slightly below $0.6810. The lower Bollinger Band is near $0.6735, and the Aussie closed below it for the first time since last July. The $0.6780-$0.6800 may limit initial attempts at recovery.

Mexico:  The Mexican peso has performed impressively. It traded at its best level in five years, and pullbacks have thus far been limited. Its 2.25% gain makes the peso the best-performing currency this month and it leads the emerging market currencies here in 2023 with a 5.8% gain. Attractive interest rates and stocks (the Bolsa is up about 8.5% this year, while Brazil's Bovespa is off nearly 3%, and the MSCI Emerging Market equity index is up about 3.4%). Direct investment inflows also appear to be helping to underpin the peso. Mexico reports the January trade balance (February 27), when it typically (past 11 years) deteriorates. It did report its first monthly trade surplus in nine months in December. Worker remittances will be reported on March 1 and remain an essential source of capital inflows, averaging $4.8 bln in 2022 (~$4.3 bln in 2021). The US dollar carved a base last week at five-year lows against the Mexican peso around MXN18.30. Previous support near MXN18.50 has become resistance and checked the greenback's pre-weekend bounce, and once again, the greenback was sold into the modest bounce. A move above the MXN18.53 area could signal a correction toward MXN18.65-MXN18.68. The momentum indicators have stalled in oversold territory. We have not given up on our call for the greenback to test important support around MXN18.00 and the 2018 low (~MXN17.94).  


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Defense Stocks Fall As Paralyzed House With No Speaker Puts US Ukraine Aid At Risk

Defense Stocks Fall As Paralyzed House With No Speaker Puts US Ukraine Aid At Risk

On Tuesday evening, Kevin McCarthy, a Republican, was voted…



Defense Stocks Fall As Paralyzed House With No Speaker Puts US Ukraine Aid At Risk

On Tuesday evening, Kevin McCarthy, a Republican, was voted out (216-to-210 vote) as the Speaker of the US House of Representatives. Hardline Republicans were angered by McCarthy's willingness to fund Ukraine's war while arguing that the money could have been better spent to protect the southern border and restore law and order in imploding major US cities. The historic ouster of the speaker has weighed on defense stocks as traders anticipate challenges for the new speaker in securing further funding for Ukraine.

"The conservative revolt that ousted McCarthy has left the chamber in a state of paralysis until a new speaker is found. That raises the chances of a US government shutdown next month and a delay in further Ukraine assistance," Bloomberg said. 

In a note to clients, Goldman's Alec Phillips said: 

All other things equal, the leadership change raises the odds of a government shutdown in November, though with several weeks left until the deadline, many outcomes are possible. With many policy disputes remaining and a $120bn difference between the parties on the preferred spending level for FY2024, it is difficult to see how Congress can pass the 12 necessary full-year spending bills before funding expires Nov. 17. The next speaker is likely to be under even more pressure to avoid passing another temporary extension—or additional funding for Ukraine—than former Speaker McCarthy had been.

On Wednesday morning, European defense stocks, such as Rheinmetall, Saab, BAE Systems, and Leonardo, slid in the cash market. Bloomberg said this was because of the oustering of McCarthy. 

German arms manufacturer Rheinmetall dropped as much as 4.8%. 

Swedish aerospace and defense company Saab fell 3%. 

British multinational arms, security, and aerospace company BAE Systems slid 3.5%

And Italian defense contractor Leonardo was down 2%. 

In the US, uncertainty over funding will likely weigh on defense stocks. The S&P 500 Aerospace & Defense Index has been running into resistance for much of this year. 

Washington's endless stream of taxpayer funds to Ukraine has benefited the military-industrial complex. Now, it appears that the pipeline of easy money is in question due to the ouster of McCarthy. 

Tyler Durden Wed, 10/04/2023 - 08:50

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Something “Big & Stupid” Is Coming…

Something "Big & Stupid" Is Coming…

Authored by James Rickards via,

With debt levels reaching all-time highs in…



Something "Big & Stupid" Is Coming...

Authored by James Rickards via,

With debt levels reaching all-time highs in major developed and developing economies, and with debt-to-GDP ratios also in record territory (not including contingent liabilities such as Social Security, health care and other entitlements, which make matters worse), it seems time to consider just how nations will deal with this problem.

The debt crisis may not be imminent, but it is unavoidable. When it happens, it may present the greatest financial disaster of all time. It’s never too soon for investors to consider the fallout.

When you issue debt in a currency you print, there’s no need for default in the sense of non-payment.

You can just have the central bank buy the debt (by printing money). This is the situation today in the U.S., Japan, the U.K. and the European Monetary Union (the countries that use the euro). They all have huge debt burdens, but they all have central banks that can simply buy the debt by printing money to avoid default.

Non-Payment Is Not the Issue

There are many bad consequences to printing money and storing up debt on central bank balance sheets, but non-payment of debt is not one of them. This is the mantra of the Modern Monetary Theorists (MMT) and their thought leader Stephanie Kelton.

In my view, MMT is garbage as economic policy, but the no-default tenet is valid. George Soros says the same thing.

That said, we are well past the point where the debt can be managed with real growth. That threshold is about a 90% debt-to-GDP ratio. A 60% debt-to-GDP ratio is even more comfortable and can be managed.

Unfortunately, the major reserve currency economies are all well past the 90% ratio as are those of many smaller countries. The U.S. ratio is 134%, an all-time high. The U.K. ratio is 102%. France is 111%. Spain is 112%. Italy is 145%.

China reports a figure of 77% but this is highly misleading because it ignores provincial debt for which Beijing is ultimately responsible. China’s actual figure is over 200% when provisional debt is included.

The champion debtor is Japan at 261%. The only major economy with a halfway respectable ratio is Germany at 67%. It’s Germany’s misfortune that they are probably responsible for the rest of Europe through the ECB Target2 system.

All these countries are headed for default. But we must consider the different ways to conduct a default.

There are three basic ways to default: non-payment, inflation and debt restructuring. You can take non-payment off the table for the reason mentioned above — you can always just print the money.

The same goes for restructuring. Inflation is clearly the best way to default. You pay back the money in nominal terms, but it’s worth very little in real terms. The creditor loses and the debtor countries win.

Nice and Easy Does It

The key to inflating away the real value of debt is to go slowly. It’s like stealing money from your mother’s purse. If she has $50 and you take $40, she’ll notice. If you take one dollar, she won’t notice. But a dollar stolen every day adds up over time.

This is what the U.S. did from 1945–1980. At the end of World War II, the U.S. debt-to-GDP ratio was 120% (about where it is now). By 1980, the ratio was 30%, which is entirely manageable.

Of course, nominal debt and GDP soared, but nominal GDP went up faster than nominal debt, so the ratio fell. If you can keep inflation around 3% and interest rates around 2% and exert fiscal discipline (which we did under Eisenhower, Kennedy, Nixon and Ford), the nominal GDP will grow faster than nominal debt (due to the Fed capping rates).

If you improve the ratio by, say, 2% per year and keep it up for 35 years (1945–1980), you can cut the ratio by 70%. That’s what we did.

The key was to do it slowly (like stealing from your mom’s purse). Almost no one noticed the decline in the real value of money until we got to the blow-off stage (1978–1981). But by then it was mission accomplished.

So there are two ways to deal with excessive debt: fiscal discipline and inflation. From 1945–1980, the U.S. did just that. If you run inflation at 3% and interest rates are 2%, you melt the real value of debt. If you exert fiscal discipline relative to GDP, you decrease the nominal debt-to-GDP ratio.

We did both.

The reason the debt-to-GDP ratio is back up to 134% is that Bush45, Obama, Trump and Biden ignored the formula. Since 2000, fiscal policy has been reckless so the formula doesn’t work. The problem isn’t really “money printing” (most of the money the Fed prints just comes back to the Fed as excess reserves, so it doesn’t do anything in the real economy).

The problem is that nominal debt is going up faster than nominal GDP, so the debt-to-GDP ratio goes up. This dynamic will be made much worse by the huge increase in interest rates over the past 18 months.

You can’t borrow your way out of a debt crisis. We have also been unable to generate much inflation. Inflation ran below 2% for almost all of the 2009–2019 recovery.

Japan Writ Large

Looking at the global picture, it’s important to understand that Japan is just a bigger version of the U.S. They don’t have fiscal discipline and they can’t get inflation to save their lives. The only way out for Japan is hyperinflation, which will come but not yet.

Japan can probably keep the debt game going for a while. The crash will come when the currency collapses. When I started in banking, USD/JPY was 400. Those were the days!

A debt crisis is on the way. Something big and stupid (in the words of the brilliant analyst Stephanie Pomboy) is coming from policymakers to address the issue. But the solution won’t be a policy and it won’t be a plan. A crisis will just happen almost overnight and seem to come from nowhere.

But it will come.

Tyler Durden Wed, 10/04/2023 - 09:45

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UK Has Run Out Of Vital Weapons To Give Ukraine

UK Has Run Out Of Vital Weapons To Give Ukraine

The hits just keep coming: a senior British military source has told The Telegraph that…



UK Has Run Out Of Vital Weapons To Give Ukraine

The hits just keep coming: a senior British military source has told The Telegraph that the UK has depleted available military equipment to give to Ukraine. Unlike the US or Poland at this point, it's not a question of funding or political will, but the British military has simply run out of vital arms and ammo to give, apparently.

"We’ve given away just about as much as we can afford," the official told the paper, explaining that all along the UK had encouraged other allies to keep arming Kiev.

Getty Images

"We will continue to source equipment to provide for Ukraine, but what they need now is things like air defense assets and artillery ammunition, and we’ve run dry on all that," the official added.

The shortage was revealed after controversial remarks given by recent Defence Secretary Ben Wallace

The comments come after Ben Wallace revealed that he asked Rishi Sunak to spend £2.3 billion more on support for Ukraine before he resigned as defence secretary last month.

Mr Wallace warned that the UK had been overtaken by Germany as the biggest European military donor to Ukraine as he called for the 50 per cent increase on funding that the UK has committed so far.

And now the public spat is yet another setback for the pro-Ukraine war cause, as The Telegraph underscores in saying, "The Western alliance has suffered a series of blows in recent days, with support for Ukraine dropped from a US stop-gap budget bill, election success for a pro-Russian party in Slovakia and rows between Poland and Kyiv over grain supplies."

These trends suggest NATO support and unity is fracturing, given also the most powerful country in the world is in a severe political fight, with the fate of future billions for Ukraine on the line. Biden still tried to 'assure' allies in phone calls on Tuesday.

And now the UK's resolve could be fracturing too. Prime Minister Rishi Sunak's reaction was that he would not waver:

Last night a senior military source told The Telegraph that the onus should not be on the UK to provide the “billions” Mr Wallace has called for.

“Giving billions more doesn’t mean giving billions of British kit,” they said, adding that the UK had a role to play in “encouraging other nations to give more money and weapons”.

...On Monday Mr Sunak was forced to insist that the UK’s commitment to Ukraine would not “waver” in the light of Mr Wallace’s comments.

The last months have seen Ukraine undertake a series of high-risk major operations against Russian-controlled Crimea, including significant strikes on the naval port of Sevastopol - including docked ships, submarines, and even the headquarters of Russia's Black Sea Fleet.

The latter strike reportedly used UK-made Storm Shadow cruise missiles. They are effective, and yet such an advanced UK-made missile is clearly in short supply, not to mention very expensive, at over $3 million per unit.

Tyler Durden Wed, 10/04/2023 - 09:30

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