Category: Forex

Tame Wage Pressure Suggests Inflation Pickup Only Temporary

Data in February showed core PCE inflation is up 1.7%, which would be just below the Fed’s target of 2%.  However, Deutsche Bank economist Joseph Lavorgna believes that the recent pickup in core inflation is temporary because it has not occurred alongside any noticeable increase in wage pressures.

He highlights that average hourly earnings, the employment cost index and worker compensation have all been trending sideways.

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Calm Before the Volatility Storm?

BlackRock’s Global Chief Investment Strategist, Richard Turnill, warned that markets have become eerily quiet recently.  Now the firm is preparing portfolios for higher volatility.

U.S. equity market volatility is hovering around its lowest level since August 2015 and is well below its long-term average. This unusual calm follows declining market concerns about sliding oil prices, and the health of China’s economy and European banks. We do not expect this to last, and see a return to the higher-volatility regime that was the norm prior to QE.

The firm views Gold as a effective hedge if volatility spikes due to rising U.S. inflation fears.  They also like TIPS and similar instruments. Foreign-currency exposure can act as a diversifier as well.

 

China Remains High-Bid on U.S. Takeovers

The Chinese continue to have a huge appetite for U.S. companies and are paying up for the privilege.  Just days after Terex said it will entertain an offer from Chinese rival Zoomlion, China’s Anbang now has the upper-hand to gain control of hotel giant Starwood Hotels & Resorts Worldwide (NYSE: HOT).

Starwood determined Monday that a revised $82.75 in cash, non-binding proposal from a Anbang Insurance Group-consortium is reasonably likely to lead to a “Superior Proposal” over its current merger agreement with Marriott International, Inc. (NASDAQ: MAR).

Of course, all of this is being driven by easy financing from China‘s mother banks.

 

PIMCO Warns Against ‘Helicopter Money’

PIMCO’s Andrew Bosomworth discussed how monetary policy is divided into three phases: conventional, unconventional and monetisation.

  • Conventional: policy rate changes, liquidity provision, reserve requirements
  • Unconventional: negative interest rates, large-scale asset purchases
  • Monetisation: full subordination to fiscal policy, helicopter money

Obviously, currently the ECB is in the unconventional phase and the U.S. Fed is trying to get back to the Conventional phase.

While unconventional methods appear to be ‘pushing on a string’ to create the right amount of inflation for a ‘beautiful deleveraging’, Bosomworth warns against monetisation, or ‘helicopter money.’

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Dollar Gains for Fifth Session on Tough Fed Talk

Oh that pesky dollar… With tough talk out of fed heads this week, that they could be raising rates again as soon as April, the dollar is higher for the fifth consecutive day against a basket of major currencies.

DOLLAR

Dollar strength is impacting oil, gold and other commodities as well as the broader equity market.

The implied probability of a rate hike at the Fed’s April 27th meeting jumped to 13.9% from 11.5% the prior day, according to the CME Group’s FedWatch tool. It was at just 1.9% last month.

fedprobablity032416

 

 

China to World: Please Coordinate Your Forex Policies So We Can Screw You

This takes some cojones… the head of the biggest currency manipulator in the world wants global coordination on currency policy.

Talk about having your cake and eating it too.

From Reuters:

BOAO, China (Reuters) – China’s central bank governor said on Thursday there should be increased global coordination on foreign exchange policies.

Speaking at an annual forum in Boao, on the southern Chinese island of Hainan, the governor, Zhou Xiaochuan, also said China opposed competitive currency depreciation, citing earlier remarks by Premier Li Keqiang.

Head of Goldman Sachs Inflation Trading Placed on Leave

What’s the vampire squid up to now?

The Journal is reporting this afternoon that Goldman Sachs (NYSE: GS) put its head of U.S. inflation trading, Josh Schiffrin, on leave while it reviews certain trades.

“Goldman’s compliance executives are seeking to determine whether Mr. Schiffrin’s desk may have violated the firm’s policies in booking certain inflation trades, in which government bonds and their derivatives are used as hedges,” the article stated.

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Goldman Sachs: Get Long Cash as Rally Might Fade

Goldman Sachs portfolio strategist, Christian Mueller-Glissmann, is getting more bullish on cash to position for and take advantage of expected elevated volatility.

“We upgrade cash to Overweight over 3 months to position for and take advantage of more volatility. With the potential for cross-asset correlations with oil to increase again should oil prices decline sharply, the potential for diversification is limited. Similarly, rateshock risk is difficult to diversify. Within cash we have a preference for the USD. We remain Underweight government bonds over 3- and 12-month horizons as inflation continues to pull yields higher and we still expect three Fed rate hikes this year. Over the near term, central bank easing, the dovish Fed, and lower oil prices might support bonds but we do not think US 10-year yields will trade below 1.75% for long.”

Continue reading “Goldman Sachs: Get Long Cash as Rally Might Fade”

Most Currencies Show Strong Gains Versus the Dollar

Below is a chart from Oppenheimer that shows that most currencies have gained against the dollar this year.

Chief Investment Strategist John Stoltzfus notes much of the gains against the dollar can be attributed to the US Federal Reserve’s consideration of the current state of the global economy in setting its current monetary policy.

After the FOMC meeting last week Fed Chair Janet Yellen reiterated that the US central bank will continue to give significant weight to the condition and recovery progress of economies outside of the US.

The Fed has acted much as we had expected it to and reminded us often of the market adage “don’t fight the Fed”.

They said investors should not be surprised if the market pauses sooner than later to seek a catalyst before it moves much higher from present levels. First quarter earnings season unofficially starts in a few weeks when Alcoa presents 1Q results on April 11th after the market close.

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