Good morning.. I wanted to get this out early as Bond markets are getting smashed. The world’s governments are embracing MMT and massive stimulus packages are being unveiled. I guess they are trying to bridge the economy while we get through this ...
Good Morning.. A surprisingly quiet session in Asia considering what I saw as rather poor Chinese data last night, especially Retail sales (again) and Fixed Asset Investment. In the past, this data would have spooked markets but it does show the rocky path ahead for all of us. The Chinese V-shaped recovery is changing shape. FX ranges were tight after what was a pretty awful 30yr US auction yesterday which turned the USD back up but can this USD bounce hold? Not for long in my view but some momentum on the downside in the USD has been lost. But I am looking for a dip in EUR and on the daily chart 1.1735 needs to hold. But EUR crosses remain pretty solid and I can see further gains in most. EURGBP still needs to close above .9050 but EURJPY has broken out to my mind. US Retail sales today will be drilled into to find what is really going on with the US consumer so beware of headlines; the devil will be in the detail. But one thing that does concern me is what looks like a loss of independence of the Fed. The government is spending like crazy and the Fed is actively monetising that debt now which means the government now has its hands on the steering wheel. This has huge implications and Fed policies are still at the heart of the USD sell-off and that is not about to change. This should also continue to support Gold, silver and other commodities. Liquidity is not great at this time of year and we could have a nervous end to the week and it’s a Friday, so “Be careful out there”..
Keep the Faith..
Dismal US 30yr auction turns the USD; US Retail Sales: Has the Fed lost its independence?
While the US 3yr and 10yr auctions went far better than expected, there was some doubt about the appetite for 30yr paper and the auction saw the lack of demand, which forced the US to pay up to get it away, which sent long end bonds tumbling and yields higher. This turned the USD which was heading back down with the DXY below 93.00 and EUR at 1.1860 and saw a small squeeze lower in JPY crosses.
Not a huge amount of damage was done to the structure of the EUR daily chart above but the narrowing bands suggest a break of the recent high at 1.1916 may be a little more difficult than I originally thought and EUR needs to hold above the mid-point at 1.1735. The MACD crossing under the ma is also a concerning sign of a stall. But I do still think that Fed policy will remain at the centre of the USD move and I am looking for a dip in EUR to buy again. However, EUR crosses remain pretty solid with EURGBP still needing to close above .9050 but EURJPY had a very strong session yesterday and I remain of the view that this has further to run.
I see no damage to the technical outlook on the EURJPY daily chart above and the trend remains in place.
The US Treasury struggled to offload $26bn of 30-year bonds at record-low interest rates. Instead, the bonds were sold at a yield of 1.4 per cent, more than 0.02 percentage points above market expectations at the time of the auction deadline. Investors submitted bids for 2.14 times the amount on offer, the lowest bid-to-cover ratio for 30-year bonds since July 2019.
Line chart of 30-year US Treasury yields, % showing Weak auction rattles investors
The question now is, is this surge in Treasury supply, especially at the long-end, likely to prompt the Fed to adjust the contours of its bond-buying programme? The Fed cannot afford to lose the long end and there is still a huge supply still to come in coming months. If markets balk at this flood of issuance, especially in the 10yr space as well, then the Fed may have to move further down the curve from bills and increase the balance sheet again. This looks very possible to me at some point and will not be good for the USD in my view. This constant debasing of the USD is a real concern as while the Fed and Treasury may feel a weaker USD is a benefit to the economy, a rapidly falling USD comes with side-effects and a loss of sentiment or faith in the USD is not going to help. There is now a potential and viable alternative out there now in the EUR and I just wonder if sovereign nations and asset managers may be looking at some re-weighting of USD exposure due to current Fed policies which seem to be in place for a number of years. This could also support the likes of gold for some time and I am sticking with the long recommendation.
The world is looking for a saviour and many look to China to see how they manage after beating the virus and unlocking their economy ahead of the rest. But data there is still mixed at best and last night again saw disappointing economic releases. We saw disappointing retail sales last month which raised questions regarding the sustainability of an economy more reliant on the consumer now than ever. Last night saw the same again this month, with Retail sales dropping 1.1% yoy (the seventh straight month of declines) versus a forecast of a 0.1% rise. Fixed asset investment (which includes spending on infrastructure and property) also fell 1.6 per cent in the first seven months of the year, defying economists’ predictions for a rebound. This is NOT good data and I am amazed global equities did not react more to this. When I last looked, the SHCMP was marginally higher and HK more or less unchanged.
China’s V-shaped recovery is changing shape and may be an indication of what lies ahead for the economies in the west as we continue to try and unlock. The data may look like a v-shaped recovery initially but the reality maybe something quite different as the data settles down and the reality of what damage ongoing, higher unemployment can do becomes evident. Again, for me, the consumer and unemployment go hand in hand and are central to any recovery.
In the US we have Retail Sales data today and looking at card spending, we may see some disappointment in the data. Bank of America provided its monthly card spending update yesterday to give a glimpse into not only consumer behaviour in the first week of August but also all of July. According to the bank, total card spending, as measured by aggregated BAC credit and debit cards, increased 2.1% yoy for the 7-day period ending August 8th which is an improvement from the -3.0% yoy pace last week. One explanation posited by BofA’s economists is that “the timing of the pay period likely held back spending last week and created a boost this week. Smoothing through, the story remains the same: card spending is moving sideways in a choppy fashion.” It is also important to find out just what they are spending on. There is a danger that prices are starting to rise which eats deeper into the budget and leaves less for discretionary spending. Footfall suggests many consumers are still unwilling to venture out and get back to some form of normality. Back to school spending may have helped this data released today but BofA forecasts retail sales ex-auto to increase by just 0.3% mom, which would be a material miss to consensus expectations of a 1.3% increase.
It is worth noting at this point, that millions of potential consumers just had their benefit cheques cut in half as Congress cannot agree on a new package and Trump signs an executive order to help plug the gap. Some of this concern may not be captured in the data today but it will if a deal is not found soon. The cutting of these benefits highlights near-term downside risks to consumer spending, particularly for lower income households, which have been a critical engine of the recovery despite being disproportionately more likely to lose a job during the pandemic (a testament to the effectiveness of the income supplement). Consumer spending by lower-income households has significantly outpaced middle and higher income. In fact, by mid-June spending by lower-income households had already completely normalised. However, around the end of July, consumer spending fell more for lower-income households, no doubt impacted by the sharp decline in unemployment benefits that occurred during this time.
Meanwhile, the Fed, with the unofficial backing of the government has rewritten its mandate and is now actively monetising debt so that the US government can continue spending and bailing out the unemployed. Whether it is morally correct or possibly illegal for the Fed to do this is not the point. The point is that this will come with consequences. The Fed is actively seeking inflation through debasing the USD and they may succeed at some point if the government is now free to keep spending and drive cash straight to the consumer. The flood of money forced into the financial markets, may one day, end up in the broader economy and then we will have a problem. US government debt is so huge that the Fed has to abandon its mandate of not monetising debt and help keep the economy afloat; they will do whatever it takes and they are! At some point, markets must realise that the government can’t support the debt burden without going back to the central bank to print more and more money and here we are.
What this means is that the government, or fiscal policy, is now driving Fed actions. This is a huge shift. IF inflation does indeed make a comeback then the central bank’s ability to manage it could be severely hobbled by this new mandate to monetise the debt to whatever extent is necessary from the government. The Fed may have just lost its independence!
Long EURGBP @ .9030.. Stop at .8950ish.
Long Gold @ $1875 Stop at $1820
Long EURJPY ´126.00 Stop at 125.10.
Brought to you by Maurice Pomery, Strategic Alpha Limited.
Strategic Alpha Report Disclaimer
Doo Prime endeavor to ensure the reality, adequacy, reliability and accuracy of all the information provided, but do not guarantee its accuracy and reliability. All the information, analyses, comments, statements, and/or data provided in this report is for information purposes only. Client’s use of any contents of the report as the basis for the transaction, the client shall fully aware of the risks and agreed to bear all the risks. Client shall cautiously judge the accuracy of the information. Doo Prime has no liability for any loss caused by any inaccuracy or omissions of the contents and subjective reasons of Client.
This information is powered by Strategic Alpha. Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice.