Market buzz: Growth and inflation highlights ahead

Outlook: After a quiet week last week and catch-up sleep, this week is full of stuff, mostly about growth and inflation.  On Tuesday we get Germany’s Gfk and US’ Case Shiller. Overnight, it’s the RBNZ. Wednesday is a killer day, including CPI in Germany and US Q3 GDP (second estimate). Thursday brings various European countries’ GDP and flash CPI’s), plus the biggie, the US PCE price index. This is followed on Friday by final PMI’s in the eurozone, the ISM PMI, and a timely speech by Fed chief Powell.  By Friday our heads will be spinning.

It's scary that on Friday, perhaps influenced by the holiday, the VIX hit its lowest close since pre-Covid in 2020. It’s back up today but just a warning—extreme complacency as shown by VIX is an invitation to panic if and when something high-risk appears. One very likely source of new fear—respiratory disease from China, which claims (so far) that it’s not half as bad as the pre-Covid Covid. Since nobody much trusts what China has to say on viruses, this has potential. Another Chinese source: failures, forced or otherwise, in the property and shadow banking sectors. The optimists are looking for fiscal and monetary easing. They may get crackdowns instead.

The happy-days crowd is pulling in its horns a little and now the total amount of Fed cuts for next year is back down to about 75 bp, although some big banks are still talking about massively more. See the CME FedWatch tool for Dec 2024, more than a year away. It’s the epitome of a normal distribution curve.

Forecast: The rise again in yields is unfortunately not enough and not long-lasting enough to have an effect on the dollar. There is a small amount of risk-off out there—China, even Turkey with a new 5 point rise in the overnight rate to 40%--but not enough to favor the dollar. We await pullback Tuesday to see if some kind of stand-off is in play.

Tidbit: Black Friday sales rose a stunning 7.5% y/y to a record $9.8 billion. Today is Cyber Monday with more sales expected. Everybody and his brother is pushing “sales” that are not, just a cut from previously inflated prices or gimmicks to get rid of excess inventory. The NYT has a buyers’ advice column named Wirecutter that says most deals stink and “don’t get snookered by a subpar TV deal. But American materialism is endless.

Record sales are interesting in the context of rising delinquencies and defaults on credit cards, something the gloomsters are citing to bolster their never-ending forecast of recession. But on the other side of the coin, Wall Street is eying record amounts at money market funds that they would like to see flow to stocks and bonds. In this light, money market investments are “savings” and thus available for consumption, or conceivably, more available than stock and bond holdings.

Tidbit: The WSJ says we can stop worrying about Japan remaining the world’s biggest buyer of US sovereign debt. Granted, “Japanese banks, pension funds and insurers have been repatriating their money. Their holdings of U.S. bonds amounted to $550 billion at the end of 2022, from $840 billion two years prior. They have also dumped the bonds of the top-five eurozone countries, with their holdings dropping to $170 billion from $290 billion.

But the carry trade, which became less worthwhile last year, is back, according to data from the MoF. Japan is again a net buyer of international debt. This may be because hedging costs have cheapened slightly since the summer, as Treasury yields have risen relative to U.S. rates.” According to the WSJ, some big Japanese institutions avoid owning foreign currencies and use derivatives to hedge out the exchange-rate risk. They don’t care about the headline gap between U.S. and Japanese rates, but instead the gap after hedging costs.

“As the unhedged pickup of Treasurys over Japanese bonds has hit new highs, the hedged pickup has become deeply negative and plumbed new lows. This is because of how this hedging is done, usually by rolling over three-month foreign-exchange swaps, which is an implicit bet on the shape of the U.S. yield curve. Since U.S. rates have risen more than Treasury yields—the yield curve has inverted—hedging costs have skyrocketed. Appearances aside, this popular carry trade has been a money-losing strategy since July 2022.”

But now that non-Japanese yield curves are un-inverting and steepening, that could “offset whatever policy tightening the BOJ might deliver, especially since the Federal Reserve and the European Central Bank may have finished raising rates and could even start cutting them at some point.”

Tidbit: The Economist’s “World Ahead in 2024” has a few items of interest, but a good 70% of the articles are about politics. The editor’s 10-point overview has just one item on economics (it’s all uncertainties). A little fun: 2024 will bring more elections than ever before—70 of them, covering more than half the world’s population. Canada is a standout—a 4th term for Trudeau would be the first in over 100 years. And there’s the usual overload of AI stories. (You don’t need to read The New Yorker this week—it’s all AI for those who don’t know what it is and won’t learn from the magazine issue, either.)

The top story in the opinions section is how terrible, awful, really bad it would be for the US and for the world if Trump were to win.

But a section on the UK Treasury is noteworthy. Given economic and currency crises (of the latter, 1969, 1976, 1992 and 2016), it’s good to have a definition of “sound money.” Sound money arises from controlling inflation and disciplined spending. The simplicity is stunning. It’s also all you need.

In the UK, the Bank of England does the first part and the Treasury works with the government to do the second part. While the “government” entails consultation with Parliament, it’s really the prime minister and his inner circle.

Of course they have an eye on the next election, but the wrangling and cattle rustling is nowhere near as bad as in the US Congress’ management of the power of the purse. We doubt it’s as corrupt, either. The UK has lobbying, but not like the poison in Washington--$4.2 billion in 2022. We can’t get a reliable number for the UK. Banks spent £92 million and others include breweries and tech for a possible total of as much as £1.2 billion. 

One issue The Economist deems important is that nobody is in charge of promoting growth. Die-hard conservatives like it that way—let capitalism be. If and when the government sponsors growth-promoting investments (mainly infrastructure), it does consider growth, but chiefly in terms of jobs. There’s a lot to think about here. 

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