If the week ahead isn’t defined by domestic terrorism, mass murder and a harrowing Nasdaq crash, it’ll be a marked improvement from last week, so we’ve got that going for us.
I feel like it’s my civic duty to point out the fact that, as Kate Woodsome, supervising editor of video Op-Eds at the Washington Post, put it over the weekend, the U.S. “would be issuing travel warnings against countries with the kind of violence and instability” we’re currently witnessing. This was the front page of the Washington Post on Saturday:
This is an absolute, unmitigated train wreck.
The only thing that looked good
To quote a “wise” man, “the only thing that looks good is the stock market and if you raise interest rates even a little bit, that’s gonna come crashing down.” Let’s turn back the clock two years, shall we?
“Lordy”, whoever that guy is was exactly right, because now that the Fed is no longer “doing political things”, that “big fat ugly bubble” is popping, which is why October is on pace to be the worst month for U.S. stocks since 2009.
I wonder what that guy would say now that the Fed is back to “doing their job”. One can only assume he’d be proud that the central bank has been depoliticized and is now acting in strict accordance with its mandate. I guess we’ll never know, though, as nobody has heard from whoever that guy is since.
Give me data or give me death
Speaking of the data-dependent Fed, Jerome Powell will have some fresh numbers to look at as he ponders whether to keep it “so tight” or whether to start “doing political things” in the interest of rescuing Trump’s stock market. We’ll get PCE, consumer confidence, ECI, ISM and September payrolls in the week ahead or, more to the point, everything the Fed needs to confirm their hawkish bias.
ECI is already at a cycle high and it looks like folks think that’s where it’s likely to stay – for now. “We believe wage growth will continue to firm given tight labor markets and strong momentum at the low end, and we look for strength in the underlying wage measures in the Q3 employment cost index”, Goldman writes, before tempering their forecast a bit by noting “the possibility of a drag on the headline measure from benefit growth following a 4-year high pace in Q2.” Long story short, Goldman thinks the YoY pace will stay at 2.8%, as does Barclays. Credit Suisse sees it ticking up to a new cycle high at 2.9%. Here’s where we stand now:
On October payrolls, Goldman is looking for 210k on the headline, reflecting “rebounding employment in North and South Carolina following Hurricane Florence, more than offsetting the likely drag from Hurricane Michael in the Florida panhandle and parts of Georgia.” Barclays and BofAML are at 200k, Credit Suisse at just 175k. This comes after a September report where the headline miss was more than compensated for by sharp upward revisions and a downtick in the unemployment rate to 3.7%.
As ever, all eyes will be on average hourly earnings for signs of a pickup in wage growth and depending on what ECI shows, the AHE print might be seen as even more critical. Barclays sees AHE rising 0.3% MoM and “a strong 3.2% YoY driven in part by base effects.” BofAML flags the same base effect tailwind in predicting a YoY rate of 3.0%, but the bank sees MoM printing just 0.1%. Goldman concurs with BofAML.
As a reminder, we’re still “30° of separation” from the typical 90° wage growth acceleration that occurs in late-stage recoveries when the Phillips curve snaps back to life.
The data will be set against a dollar which rose to its highest levels since June 2017 on Friday (notably, the BBDXY hit a higher high for an eighth consecutive session before trimming gains).
Positioning there is still stretched, but as Goldman notes, “traders reduced USD net long positioning by roughly $1 billion in the week ending October 23, prior to the equity volatility later in the week [and] the largest move occurred against JPY as traders–primarily leveraged funds–cut net shorts”.
In the week through Tuesday, specs slashed their net shorts in Treasurys – the massive 10Y short that’s been grabbing headlines for months was pared to its least short since August (when Jeff Gundlach predicted a massive squeeze that never materialized).
Moving away from the U.S., Brazil will be in the spotlight this week after Jair Bolsonaro emerged victorious in the runoff, as expected. He’s pretty fired up apparently. “I make you my witnesses that this government will be a defender of the constitution, of democracy and of freedom,” he told folks in Rio de Janeiro on Sunday. “This is a promise, not from a party, not the words of a man, it’s an oath to God.”
The market has thus far embraced Bolsonaro and Brazil’s hard-Right turn. Brazilian equities have bucked the recent trend in global equities, rallying on election optimism and erasing a mid-year swoon. You can see the outperformance versus U.S., European and Chinese equities in the chart (blue line is the IBOV, annotations apply to it).
Folks are bullish, but for their part, Barclays is sounding a more cautious tone. While the bank acknowledges the euphoria gives BCB some breathing room, they note that while “market-friendly announcements, such as potentially granting independence to the central bank, will likely boost short-term momentum for BRL, in the medium term, the rally in Brazilian assets [likely] cannot be sustained, as the fragmented Congress may make it more challenging to pass crucial reforms.” We’ll see.
How about a little Kuroda?
The BoJ is on deck this week and the conversation is the same as it ever was. In July, the moribund JGB market briefly showed signs of life amid rumors of an imminent policy tweak and the bank did indeed deliver that tweak at the July meeting. Things went back to “normal” shortly thereafter, with JGB volatility dying back down, but late last month, everyone got another reminder of just how unprepared the market is for BoJ tapering when yields spiked following an unexpected cut to super-long bond purchases.
As ever, there are concerns about whether further signs of normalization could conspire with generalized risk-off sentiment to spark unwanted yen strength. “The BoJ’s policy tweak in July and continued reduction in JGB purchases have kept markets attentive for the next policy change [and] this Wednesday’s BoJ MPM, Outlook Report, and JGB rinban purchase plans for November could provide another stepping stone for future policy normalization and further JPY gains, especially amid fragile global risk sentiment, in our view”, Barclays wrote on Sunday.
For their part, Goldman is zeroing in on any discussions of financial stability. “Amid relative calm expected for the upcoming MPM, our focus is on BOJ Governor Kuroda’s views regarding the contents of the latest October 2018 issue of the Financial Systems Report”, Goldman said last week, adding that “the BOJ left largely unchanged its assessment that it sees no particular concerns at least for now regarding banks’ profitability and lending and share prices overheating, [so] at least for the time being, it would appear that the BOJ does not see the cumulative side effects on the financial system of the ultra-low-interest rate policy as triggering interest rate hikes.”
The BoE is up as well and as you might imagine, the Brexit overhang and risks to Theresa May’s government are still clouding the outlook. Forward-looking indicators have been soft, which further muddies the waters. The UK autumn budget is also due this week (Monday).
In Europe, watch for more headlines around Italy. Draghi generally played things cool during last week’s ECB presser, but there’s no end in sight to the budget standoff between Rome and Brussels. Friday’s S&P decision is marginally positive, I suppose.
Folks will be watching for signs that China is prepared to step in and arrest any further slide in the yuan towards the dreaded 7-handle (reports out late last week indicated Beijing may be prepared to sell reserves to defend the closely watched psychological level). Also watch for any news out of Saudi Arabia on the Jamal Khashoggi murder. That is still the most important geopolitical flashpoint, at least until the U.S. midterms.
Speaking of the midterms, they’ll be no shortage of shrill rhetoric from both Republicans and Democrats in the U.S. this week ahead of the vote – especially in light of last week’s rather unfortunate events.