MacroGuy1 Macro Report - 2022-05-02
The consequences of some kind of pause in the rate rise trajectory would be: A boost in the Nasdaq, Crypto and the tech sector.
Current World Economic Snapshot - Monday May 02, 2022
(All times expressed below are New York – Eastern Standard Time)
Economic Data
Last week, Eurozone year-on-year CPI came in as forecast at 7.5%. However, there were other mixed data points showing CPI accelerating and decelerating at the same time so the trend is hard to discern, but 7.5% is a figure that the ECB cannot ignore for long.
US PCE price indexes were also strong and there was a strong upwards surprise in the employment cost index. This would make one think that the Fed is determined to continue its program to gradually raise interest rates and perform QT over the next 2 years, however they are only taking this course because they believe that the US economy is very strong and can cope with higher borrowing costs and less market support. However, we have seen various signs that the US economy may be beginning to slow, such as many negative earnings reports during this present earnings season.
Four PMI indicators of Chinese manufacturing and services activity were released on Friday night. They were expected to show a contraction due to the COVID lockdowns, but the contraction was even worse than expected.
Monday May 2, 2022
The S&P fell to its lowest of the year today, after beginning the day in positive territory. The last week has been very volatile in markets and so the volatility index (VIX) has risen to a month’s high of 35.11. The last time it was higher than this was on the day that Powell confirmed a rate rise would be coming despite the outbreak of war in Ukraine on March 7 2022. For traders, they would see this as a good price to short the VIX since it generally trades within a range and it is now at the upper extreme.
Due to a bank holiday, there was light trading in European and US markets today. European PMI for April was positive, but as we can see below, US ISM manufacturing employment barely expanded (above 50 signifies expansion) and the PMI (an output measure) was positive but less than expected. A series of data like this will allow the Fed to slow its rate hike trajectory.
Berkshire Hathaway released pretty good results today relative to the market, and over the weekend, Munger and Buffet repeated their criticism of crypto as a general asset class - but that seems not to have had any effect on Crypto prices as their beliefs were well known in advance.
Tuesday May 3, 2022
Lagarde of the ECB will be speaking at 9am. Last week she expressed her belief that inflation is mainly due to energy costs, so for her to raise interest rates for Europe would not solve the energy cost issue. So we can expect the same dovishness and very little support for the Euro - likely it will fall more after she speaks. This could be slightly positive for Crypto when we have easy monetary policy in a large economy like Europe.
The JOLTS job openings forecast at 10am is looking excessively optimistic, so I suggest that this may disappoint and that would be positive for markets because it would provide a further excuse for the Fed to slow down rate hikes.
AMD is reporting earnings after the bell in the US. Their guidance as to the demand for GPU and CPU chips will be an interesting pointer as to the volume of activity in the Crypto mining world, and I expect them to address the crypto market specifically in their earnings call.
Wednesday May 3, 2022
This is the “Fed Day” for May. Expect markets to pause their volatility while they await the interest rate decision and press conference coming out at 2pm and then 2.30pm New York time respectively. The VIX may actually drop before the meeting and so be a good time to take profits on the drop. They have been very clear that they intend to raise rates by 0.50%, so that is priced in. Theoretically, they could change their minds during the meeting and only raise by 0.25%, which would be a boost to markets, but most likely they will stick to the 0.5% rise.
The statement and conference afterwards will be where the action is, and I expect them to repeat that they think the economy is growing well. They will hold out a bit longer before reversing course. However, they will be careful not to spook markets so the statement will probably not signal any stronger monetary tightening.
The non-farm employment change at 8.15am and the non-manufacturing PMI at 10am will only have any effect on the market if they miss significantly to the downside. That would push up markets and give the Fed support to slow the rate hike trajectory. Most likely we will not see any movement when they come out.
Conclusion
China, Japan and Europe clearly have slowing growth rates and consequently they are running looser monetary policies. It seems very unsustainable to me that policies between these central banks and the Fed can diverge so significantly for so long. The dollar index is above 103.6 at the time of writing and it is currently looking very overbought. I expect some softening in the language and actions of the Fed over the next 2 weeks, despite the fact that they have cornered themselves into a 0.50% rate rise at the next meeting. I see it likely that they will take a pause after that rate rise.
The consequences of some kind of pause in the rate rise trajectory would be:
- A boost in the Nasdaq and the tech sector
- A boost to the price of Bitcoin and other Cryptos
- A boost in the price of precious metals and other commodities
- A weaker dollar versus all currencies
- Falling treasury yields and rising bond prices
Of course, the other side of this coin is that the other central banks may decide to tighten policy and catch up with the Fed, which would make 1-4 above behave in the opposite direction, but I see the first scenario to be more probable - roughly a 70% chance.
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