Following last week’s dollar weakness and concurrent reinvigoration of the reflation trade (perhaps temporary), Nomura’s Charlie McElligott is out with his latest daily missive which, as usual, offers a quick “lay of the land”, so to speak.
Earlier on Monday, Mario Draghi, speaking in Brussels, struck a relatively hawkish tone, adding to the policy convergence impetus which played into last week’s dollar pullback.
“[The] stable profile of inflation forecasts conceals a slowing contribution from the non-core components of the general index, and a relatively vigorous pickup in underlying inflation,” Draghi said, adding that “overall, recent developments vindicate the Governing Council’s earlier assessments of the medium-term inflation outlook.”
That bit about a “relatively vigorous” pickup in inflation is amusing because, well, because “vigorous” isn’t an adjective that usually comes with a qualifier.
DRAGHI SEES RELATIVELY VIGOROUS PICK-UP IN UNDERLYING INFLATION
If this is what "relatively vigorous" means, then I guess "outright vigorous" would easily get us to 1.25 pic.twitter.com/jrYMuojQve
— Walter White (@heisenbergrpt) September 24, 2018
Draghi’s upbeat comments lifted 10Y yields in the US and Germany and as the above-mentioned McElligott writes, “this too keeps pressure on German Bunds and global fixed-income—UST 10Y yields again bleeding higher in sympathy to highs of session.”
Charlie goes on to note that the further upside pressure on crude in light of OPEC+ recalcitrance in the face of Trump’s demands for lower oil prices could continue to feed into the reflation narrative, especially if the dollar weakens. That’s something we mentioned on Sunday evening in our week ahead preview. Here’s McElligott:
Crude is +2.3% with Brent at highs since Nov 2014, as 1) Iranian supply continues tumbling and 2) OPEC not bowing to POTUS’ demands for a production increase—along with the broad “Commodities Bump” from the recently weaker USD, this is again driving higher “Inflation Expectations.
Further +++ note on “Inflation Expectations”—proxy “Industrial Metals” are looking like “ground zero” for another CTA “pain trade,” as Metals have been a placeholder “Max Short” and just another “Long USD” expression—now, this is at-risk of being “squeezed,” with BCOMIN +6.8% in two weeks.
Oh, and in case you’re wondering what to make of the sudden plunge in Indian equities, Charlie reminds you that this is yet another example of a “Fed-induced Tightening Tantrum”.
India has been forced to hike this year in an effort to stay out ahead of the Fed and as with other EM central banks that have adopted a similarly cautious approach, it’s a trade off: You can hike to protect the currency, but that plays into the very same tightening of financial conditions that’s causing the problems in the first place, with ramifications for the local economy and domestic equities. Volatility in Indian stocks soared to its highest levels since February on Friday, as a rollercoaster session rocked confidence.
“Since the last week of August, India’s NIFTY 50 equities index is -6.7% and MSCI India Small Caps -8.7% MTD, as the worst corporate credit liquidity crunch in years is battering Indian money markets with escalating borrowing costs and thus refinancing risks”, McElligott writes, adding that this is “thanks to diminished global liquidity off the back of the Fed’s normalization push as the RBI has too been forced to hike rates against the weakening Rupee.”
Much like Bank Indonesia’s efforts to combat rupiah weakness with rate hikes, the RBI’s efforts have been to no avail for the rupee.