Macroland’s Big Week. Let’s look at the bigger macro… | Posted by Fractal_Monk | Coins | November 2023

By Crypto Gloom On Dec 16, 2023

Let’s take a look at the bigger macro picture and how things are shaping up in tradfi. The week ending 3 November was very action-packed, with three central bank meetings and various economic data releases.

The Federal Reserve froze interest rates as expected. But the message about bond yields was received as a dovish signal by the market.

The Fed has been planning a soft landing. They need to tighten financial conditions (done through rate hikes and QT using hawkish messages) to slow the economy just enough to keep inflation under control. But not enough to cause a serious recession. But the U.S. economy is doing well (largely due to a very strong fiscal impulse), with strong GDP printing and a much stronger labor market. This will force the Fed to keep financial conditions tighter for longer until the economy slows.

The Fed has hinted several times that financial conditions have tightened significantly over the past month due to the rise in long-term bond yields (a non-critical message). When asked to comment on the dynamics, Powell tried to strike a balance, emphasizing that fiscal conditions should remain “sustainable” and that he was not confident policies were restrictive enough (a hawkish message).

Long-dated Treasuries have been selling off over the past few months due to concerns about supply growth (long-dated premiums rising), and the retreat of price-agnostic buyers has led to the reemergence of price discovery in the Treasury market (Fed, foreign central banks). This has led to a tightening of financial conditions that suits the Fed and provides more flexibility, but ensures hawkish (or at least balanced) messaging on interest rates, as markets are extremely reflexive and will reprice the premium for this period. You should. We see the Fed becoming more dovish. This is exactly what happened on Thursday. The market took this message (and did so as the hike was completed) and both bonds and stocks pulled back with a broad rally. DXY also went down to 106.19. However, the market was still pricing in the possibility of further rate hikes, with a 20% chance of a hike at the December meeting and a 25% chance in January.

But Friday’s non-farm payrolls index was decidedly dovish, and at this point the market is buying into the narrative that the hiking cycle is further over. (~5% chance of a December hike, ~9% chance of a January hike and DXY down to 105.2) As future data prints heat up again, this impulse in relaxed financial conditions will likely cause the Fed to turn hawkish again and pull back.

Economic data this week was mixed. Some prints show signs of cooling, while others show the economy is still heating up. Until the Fed sees clear signs of a slowing economy, the lofty outlook for the long-term interest rate environment will continue. That’s enough to control inflation without breaking anything.

usa home prices

U.S. home prices rose more than expected, reaching a new all-time high. (The national composite, the 10-city composite, and the seven individual city benchmarks hit record highs. Prices set new records in Atlanta, Boston, Charlotte, Chicago, Detroit, Miami, and New York.) These are the dynamics of inflation.

labor market

JOLTS job vacancies in the U.S. remain strong with 9.55 million vacancies, indicating a tight labor market. Strong demand for labor means higher demand levels in the economy (if businesses are hiring and consumers are still spending), which causes inflation. This also refers to the wage-price spiral that causes inflation. The Employment Cost Index (ECI) also rose more than expected (1.1% vs. 1% expected).

But Friday’s nonfarm payrolls data (one of the most important labor indices in the country) was dovish, with 150,000 new jobs added compared to expectations of 180,000, showing a cooling on this front (after a hot September and August). The figure was also adjusted downward.) It is more dovish.) The unemployment rate also soared to 3.9% (expected 3.8%). Markets welcomed this data, which showed signs of economic cooling (Fed policy is working and there is no need to raise it further if the economy continues to cool). This also says a lot about the efficiency of the U.S. labor market, with millions of jobs open and about 1.5 jobs available for every unemployed person!

manufacturing data

ISM Manufacturing missed estimates (46.7 vs. 49 expected), marking the 12th monthly contraction, marking the 12th monthly contraction in U.S. manufacturing over the past year. It also shows the economy is slowing and the Fed’s efforts are working, making it dovish.

U.S. Treasury Announces Refunds

This is an important data point for the bond market. U.S. Treasury bonds suffered their worst sell-off ever, falling up to 50% from their all-time highs, which had a major impact on tightening financial conditions. Bond yields also influence sentiment on other risk assets and remain bearish on stocks. Data on how many new bonds the U.S. government will sell is a very important supply-side variable whose impact on the world’s largest asset market cannot be overstated.

The data point this week was bullish bonds. The Treasury slashed its quarterly borrowing estimates for the October-December quarter, from $852 to $772, sparking a long-term bond rally. The growth in long-term bond sales was also less than market expectations.

The BoJ has been one of the most dovish central banks in the world and is a major outlier compared to other central banks in terms of hiking cycles (short-term interest rates remain negative).

Since 2016, it has been trying to rein in long-term borrowing costs to stimulate economic growth. This policy is called yield curve control (if long-term yields rise too much, the BoJ buys bonds to bring yields back under control. This is effectively printing money by other means.) The BoJ’s YCC policy is very important from a global liquidity perspective. . Japanese investors use the general liquidity available to purchase foreign assets because the yields on Japanese assets are very low. It also encouraged a large-scale global yen carry trade (borrowing the cheap yen and investing that capital in high-yield assets overseas).

The BoJ is slowly trying to normalize its policies as this dovish stance has a negative impact on the yen (by doing carry trades again, borrowing cheap yen and selling the yen to buy other assets with other currencies). The larger the interest rate differential with other countries, the greater the headwind for JPY. However, a disorderly normalization could result in a large-scale global liquidity shock, which could negatively impact other global assets if huge amounts of capital suddenly start selling off global assets and are repatriated back to Japan. So the BoJ is attempting a very delicate balancing act.

Speculation about the BoJ adjusting its yield curve control (YCC) policy and raising the 10-year JGB yield limit was rampant leading up to the meeting, but Governor Ueda’s message was more uncertain than the market would like. It takes much longer to finish). USDJPY broke above 151, its weakest level since 1990 before cutting losses!

The BoE kept rates unchanged, as expected, for a second consecutive meeting (after 14 consecutive hikes). The UK economy is facing unprecedented headwinds from high inflation and slowing growth. These stagflation dynamics have left the monetary policy committee sharply split between further hikes and holding. GBPUSD held the 1.22 level through Thursday and rebounded above 1.23 after Friday’s dovish NFP print.

Speculation about a spot BTC ETF grew after Bloomberg ETF analyst Eric Balchunas pointed to Blackrock’s move to seed an ETF in October (usually done in preparation for an ETF launch).