Most read articles
The End Of An Era.
Abit sombre? Yes it is, it’s official guys, as some of you may have seen by my twitter, I have officially moved Market Macro Hub to Substack . I want to be able to interact with you, hear your thoughts, provide even more valuable actionable trade ideas and trade themes for you to grow your knowledge and portfolio. That’s the end goal at the end of the day, alpha. To achieve this we’re moving forward with Substack, Scriber has been an amazing platform to host and birth what has now become an aggressively growing macro army, and I’m proud to have your support moving forward. I’ve already moved your emails to Substack so don’t worry about having to sign up or do anything, you will be seeing all my market insights from next week coming from Substack, so make sure to favourite that email address to avoid it going to junk/spam . It will now be easier to access my research notes both on mobile via the Substack app and email of course, all you have to do is read and react! I say it time and time again, I truly appreciate your support and a huge thanks to the Scriber team for being the home for all 750+ macro heads and growing. Next milestone 1,000. See you next week MMH gang, level is going up. Joe
Feb 24, 2023 · 2 min read
Liquidity Is Back, But Not For Long.
Hey guys, Feels good to be back writing. I missed you last week, I was locked in building my macro guide titled ‘The Four Foundations Of Macro’ . It’s out in March, and I honestly can’t wait to show you guys what I’ve been working on, but most importantly, see how much and fast some of you will progress through the guide. Anyways, back to the matter. U.S CPI print came in slightly hotter, and as mentioned in my last research note , global liquidity levels have been on the rise and this isn’t as good as everyone thinks it to be. We’ll get into that below, as for now, lend me your attention. 6.4% CPI YoY, Surprised? No. Tuesday afternoon, the BLS released the inflation figures for January, and both core inflation and normal CPI came in above expectations. If you ask me, I’m not at all surprised that inflation came in hotter, from what I can see in the markets, I don’t think traders are either. Here’s why. As I mentioned in my last note , liquidity has been rising in the global economy since October ‘22 , right around the time when the Bank of England had to step in to save UK Gilt markets, and change their open market operations from quantitative tightening to quantitative easing overnight. To prevent this from spreading into the treasury market, the Fed didn’t expand their TGA account (the account the Fed conduct transactions with), but what we’ve seen happen is volatility in bond markets , particularly the repo market, come down. Now I know a lot of you may not know exactly what the repo market is and it’s functions, so I’ll try to break that down in an article at some time, I’ve broken it down in my macro guide for the go getters. Here’s a quick explanation of how bond market volatility affects financial conditions and liquidity; as volatility in the bond market rises, this increases uncertainty amongst investors and as such, less market participants leads to lower liquidity levels resulting in an increase in credit spreads from the institutions to the wider economy. So, a reduced level of volatility within the repo market/debt market, provides an environment where credit access is increased which leads to looser financial conditions. Figure 2, emphasises my point of conditions loosening, but after the most recent CPI print, and some hawkish comments made by President Loretta Mester of the Federal Bank of Cleveland, where she said she sees a “compelling economic case” for jolting Fed funds rate by another 50bps hike. As always, well known hawk James Bullard said, he wouldn’t rule out another 50bps hike at the March meeting. Another perspective I’ve observed which plays a part in the recent rise in global liquidity levels is the PBOC, the People’s Bank Of China. China’s central bank has been injecting huge amounts of liquidity into the Chinese economy after announcing it’s reopening early in December which by figure 2, you can see this provided the S&P 500 with another leg to the upside mid December ‘22. Why? Very simple, a $17 trillion economy relaxed its Covid measures, an economy that drives global synchronised growth and also plays a pivotal role in easing bottlenecks. So, when you have the Bank of England saving the Gilt market by purchasing bonds, injecting liquidity, volatility in the U.S bond market declining making liquidity widely available and the PBOC pumping the world’s leading economy (in terms of growth) with huge stimulus what else do you expect? Here are some details you didn’t know about the Chinese stimulus package. An easier chart to understand below. It’s estimated that the PBOC liquidity injections in December and January totalled $450 billion , for perspective, that is around 3x the total injections in the past two years. Here’s the issue, issuance of credit is the driver of inflation, not only that but commodities are tightly linked to the activity and economy of China due to China’s huge demand for commodities. So, large stimulus packages, mass liquidity injections, record loan amounts all lead to higher commodity prices that in turn have can cause inflationary pressures around the globe. Moving forward, the Fed needs to get financial markets back in line with Fed policy. Higher for longer . Not, ‘yolo on some meme stocks, we’re done here’. As of Friday the 17th, US10yr is yielding 3.8% . It’s now being priced in that the Fed funds rate will climb through 5.3% in July vs expectations two weeks ago which perceived Fed funds rate to peak at around 4.9% . Interesting isn’t it? As always I like to end this with my thoughts and trade ideas: My trade idea for the short term, 6months to a year, is Dollar shorts and Yen longs; I’ll cover that in detail but from the breakdown above it’s clear the dollar has been on the backfoot and still has room to the downside in my views. Here’s where we are currently on the index 104.00, after a year like last year where the dollar returned a staggering 12% I fancy my odds looking short on the dollar. Guys, that’s the end of the article for today. Really appreciate your consistency if you’re a loyal reader, or if you are new, I appreciate your readership. I’m running full steam to get my new macro guide out to you guys by the end of March this year , that’s the launch season so bookmark it. I can guarantee this will get your knowledge above 90% of traders in less than 90% of the time , more about this to come in March. (P.S you’ll have first grabs with a promotion as well) Until next time, Joe
Feb 17, 2023 · 5 min read
Cue The Reddit Traders. Jay Powell
Hey guys, Glad to be back, I know I missed you with an article last week- we’re in the middle of transferring over to Substack (happening soon) and also building my next macro guide titled The Four Foundations Of Macro , which will be out in March. I’m pouring out a lot of time and attention into this one. Major value jam-packed. It won’t be free. As for now, there’s a clear disconnect between financial conditions and the Fed’s economic outlook, so let’s take a dive. “A Soft Landing” - Jay Powell Pretty explanatory right? Well, you would think so but what sticks out most is his choice of words which is why both markets and investors perceived this press conference to be rather dovish compared to what we were expecting Jay Powell to deliver. In December we received the Summary of Economic Projections from the Fed, and according to that economic projection, unemployment was forecasted to rise 110bps over the next 12months starting in 2023. Shown below in figure 1. The word “some” doesn’t present the full picture to the markets but rather a disconnection in his tone and overall economic policy moving forward. Why do I say that? Well, there has never been a period where unemployment has risen by 100bps or more without a recession occurring over the same time span. Something I actually highlighted in my last piece. Jay Powell’s dovish tone came as a surprise to me and to many other market participants especially after his December press conference where he emphasised the importance of seeing “ non-housing-related core services” decline steadily whilst maintaining interest rates higher for longer. However, it wasn’t all doves; he reiterated how: But the market completely disregarded this comment, showing clear signs that investors and market participants believe that the end of the tightening cycle is nearing upon markets, meaning high beta assets/stocks are the play to make. Signal the reddit traders, again. During the questioning at the press conference there were a few questions that stood out to me as important, mainly this one from form Chris Rugaber: In other words, isn’t the disconnect between financial conditions and the current economic policy clear enough for you Jay Powell? Well let’s take a look at one of my favour indexes, the NFCI (National Financial Conditions Index). I’ve put a link here to this index here, so that you can get a better look. But what I want you to focus on is the latter end of the index which is circled. Since October 2022, this index shows us that financial conditions in the U.S have been loosened significantly, credit and leverage are both increasing alongside appetite for risk, to make things worse the press conference held on Wednesday only added to concerns that financial markets/conditions don’t believe there will be a hard landing or a recession. Take a look at chart above, this is exactly in line with figure 3, the NFCI. Since October 2022, national financial conditions have been loosening, alongside that yields have been declining across different maturities with the 10Y now yielding 3.3885% at the time of writing. The question from Chris correctly stated that lower yields across USTreasuries have influenced mortgage rates also leading them lower which is contrary to the Fed’s current mandate which is to strip demand from the market and bring financial conditions back down. The short end of the curve has received the most steepening due to the immediate hiking, but in the derivatives and futures markets traders are betting on two more hikes from the Federal Reserve before rate cuts come in towards the end of the year. If you ask me, their bets are justified, but I still think there’s some way to go before we see any form of rate cuts; something which Jay Powell reaffirmed but markets shrugged off with ease. However, comments like the one below give risk assets a boost as you’re indirectly telling market participants there will be a soft landing, nothing to worry about, which isn’t the case. My view is simple, we’re in a deflationary environment but financial markets and conditions need to be brought back into place quickly if we wish to return to a stable level of inflation, easing financial conditions creates a bedrock for a rebound in inflation and for asset valuations to become unjustified. As for now, I have no change in perspective, a weaker dollar remains my outlook, and even though I’m not a buyer of ‘Fed pivot’ at this moment, equities remain a positive allocation of capital. As always, thanks for reading until the end MMH crew. I’m working extremely hard to get this macro guide across to you and finish my website which will have some more free resources/material. The Four Foundations of Macro FX will be out end of March, I’ll do a promotion for the early birds who get this guide within the first 72hours, after the price will remain unchanged! More info to come. Until next time
Feb 3, 2023 · 5 min read
The Deflation Trade.
What’s going on MMH gang? Hope you’re all doing great; welcome back to Market Macro Hub . Quick announcement: I mentioned in my last piece that I will be transitioning to Substack to provide a better service to you all and be able to communicate with you guys, that’s happening in the next two weeks so you will see my market notes coming from a Substack email instead! You won’t need to do anything, just a heads up ; ) Back to markets: This week and last week, two major events were on my radar: Last week Thursday U.S CPI print reaffirmed what markets were thinking and Tuesday just gone the BOJ held rates negative and preserved YCC. As always, welcome all new & existing subscribers, and lend me your attention from here: Risk Is Back. Global Deflation And Slow Growth Last week, Thursday the 12th, U.S CPI print came in line with expectations at 6.5% , now this is positive news for both the economy and the Federal Reserve. Since June of 2022, the U.S has been in a deflationary period, successive declines in CPI prints, leading up to the 6.5% reading we saw last week. In December’s Fed minutes, we heard a very specific statement from Jay Powell, on where his focus would be looking forward: An explanation of what this means: Alright, so we know what the Fed’s focus will be on. The labour market and driving unemployment 110bps higher to 4.6% from current levels of 3.5%. This is where it gets interesting, historically, the U.S economy has never been able to withstand a sharp rise in unemployment by 100bps or more and not fall into a recession; so it’s clear what the Fed mandate is, even if they’re not saying it. I know what you’re probably thinking, if the U.S is clearly headed for a recession, then why the risk on mood in markets? Good question. Here’s why, investors have priced in short term rates exceeding 4.5% in the upcoming months, shown by the UST yield curve below; but what they didn’t price in was the reopening of the second largest economy in the world and the secondary affects of this, neither the BoJ subduing global yields by not moving away from its monetary policy stance. China reopening its economy isn’t just good for the resumption of trade and global consumption, on the 13th of Jan 2023, we heard from Governor Xuan Changneng at a press conference: Here’s what the market interpreted that to be. We will provide additional stimulus and liquidity to markets. Cue the bulls. We all know what stimulus did to the U.S economy in 2020-21, now we’re going to see China’s economy experience “support” from the PBOC, however, it will not be as extreme as the U.S stimulus package. A Chinese support/stimulus package is one of the things investors wouldn’t have been able to price into markets which is why we’re seeing Chinese equities rebound, and developed equity markets in the green. This could be conceived as a temporary period where risk appetite has returned to markets. Similar to a phase in markets called Goldilocks , where economic conditions are neither too hot or too cold, steady growth and controlled inflation- a perfect environment to be long risk assets. The only difference here is we are not in goldilocks-like conditions, we’re in a deflationary regime within markets, growth outlook is meek , the most recent December PMI print for the U.S hit the lowest readings since May 2020 and inflation is now declining consistently. The Deflation Trade This table below shines the light on how financial markets tend to perform during the different market conditions and cycles. For those who may not know, nominal returns is the return before adjusting for inflation and real returns as you can tell factors in the inflation figure to the reading. We can see from the annualised real returns, bonds historically have been the better portfolio allocation for weathering deflationary periods, returning 8.4% net inflation annually, outperforming equities and cash. So bonds would usually be the choice of capital but in this climate I feel as if investors still have appetite for more risk in the immediate time frame of H1 2023. This leads straight into the recent BoJ policy meeting on Tuesday, where Gov Kuroda decided to leave interest rates unchanged at -0.1% and maintain YCC band on 10Y JGBs at 0.5%. Market participants were expecting Kuroda to fold and abandon the YCC policy. As a result the Yen took a 2% dive overnight see figure 5. Bold move not to budge, but I believe Japan at some point will have to abandon the YCC policy or widen the band as Kuroda did last December; that time for me is April 2023 when Gov Kuroda leaves his post as the Governor of the Bank of Japan. When the new BoJ Gov is chosen, I suspect they will be faced with a fork in the road, abandon the outdated YCC policy or hold tight. As many investors & funds believe, the removal of YCC seems most probable, and has a large scale effect on global bond yields and borrowing costs. Due to the low yield of bonds in Japan, institutional investors invest their capital in foreign bonds listed in the U.S and Europe mainly. Total holdings of foreign bonds by private Japanese institutional investors reached c $3 trillion at their peak in 2022. Japan is the single largest holder of U.S debt holding over $1.23 trillion U.S treasuries, accounting for more than 10% of total U.S debt. So it’s clearly no exaggeration to say that Japanese flows have a huge significance to global bond yields. Take a look at figure 6 to see the size of bond holdings by Japanese institutional investors. *OFC = Offshore Financial Centre Drivers of Japanese Outflows: With all that said, if the new Governor of the BoJ decided to abandon YCC, Japanese bond yields would soar, leaving very little incentive for Japanese institutions to hold foreign bonds when they can receive a yield in local bonds. If Japanese investors were to leave foreign debt, European and U.S bond markets would be in a heap of a mess with yields soaring as outflows from Japan repatriate. Looking at figure 7, as long as YCC is in play and yields across all maturities are subdued below 2% we won’t have to worry about that. Short term I’m bullish on risk assets as markets react to stimulus from the PBOC, lower inflation prints from the U.S and a number of readings such as retail sales which also came out negative for the U.S. Wow, that’s the end of this piece. I had a lot to uncover and still so much more, but I’ll save that for next week. As mentioned guys, my new macro guide/economic e-book is in the works; it’s going to 10X better than my previous guide, as it won’t be free. This one is for the serious macro heads trying to get ahead and want a clear connection to macro releases and markets; I’m also working on another mini booklet which will be free so stay up to date! Until next time Joe
Jan 20, 2023 · 7 min read
China Is Back. Prep The Bulls
Hey guys, Welcome back to Market Macro Hub. It’s been a hectic week, I’m building something for you guys which is coming soon, you’ll love it, guaranteed. As you can tell by the title, China is back, and that’s huge for global markets; in this piece we’ll look at: As always, lend me your attention: China’s Detrimental Position In Global Macro People don’t pay China the respect they deserve when looking at the global economy as a whole. By the end of this article, you’ll be more attentive to China than before. With a GDP of $14.72 trillion , China is one of the worlds largest and most powerful economies. Second in fact, only to the U.S, with a GDP of ($20.89 trillion) , but first when it comes to consumption of commodities, producing electrical goods and driving global synchronised growth. Let’s get into China’s influence on the worlds economy, starting with non other than the U.S. As you may or may not be aware of, the ISM indicator is one of the best indicators of where the U.S economy is headed, with a near direct correlation with U.S equities, as shown below. Let’s go back to figure 1, you can see clearly that when Chinese ISM drops, U.S ISM has a lag of 2-4 months before it falls in line with the direction of China’s ISM strength or weakness. 2020 and November 2020 (China) are two examples where China both bottomed and peaked to which U.S followed suit in line with the moves in China. So, if U.S ISM leads U.S equities markets, and U.S ISM is led by China, it’s pretty clear the effect a China re-opening would have on U.S equities, risk on sentiment. This is known as the 2nd order effect , which refers to the indirect or secondary consequences of changes within one country’s economy and what that means on a global scale. With that being said there’s more to the story than a China reopening, the Western world is currently experiencing a slowdown, or better know as disinflationary periods as interest rates rise across Europe & the U.S, so a clear bet or trade idea to long U.S equities may be premature. Needless to say, China’s trade presence is renowned worldwide; an economy such as Australia ( the largest exporter of Iron ore globally), stands to benefit the most from a Chinese reopening. Australia’s largest trading partner is China, which accounts for more than 26% of Australian trade. Investors are looking at Chinese stocks as a good allocation of capital, and as a result the Australian dollar is receiving a lift higher as Australia is set to see a boost in trade activity and demand for its commodities. China’s top three commodity imports: Commodity longs? In short, yes. WTI Crude and Copper are two commodities that are directly linked to periods of global expansion and growth, the more global economic activity, the greater demand for commodities such as oil to transport goods, for copper to be used in the manufacturing and making of goods. At the time of writing spot WTI is trading at the $78.00 per barrel handle, and it’s safe to say that oil trading within the high $80’s region isn’t a wishful thought at all, something I’ll be looking at myself as an opportunity. Copper is another commodity that will see additional uplift due to the reopening of China; although Europe and U.S are both experiencing slowdowns my ideology behind commodity longs are simple. The largest global consumer of commodities have reopened there economy and are set to see an increase in both trade and activity, an example of this scenario would be the reopening of Europe and U.S where Covid restrictions were relaxed in 2021; SPX delivered 28% incl dividend. Now, surprisingly Gold is making a comeback amidst the China reopening. You would expect oil to have such a move to the upside but there’s more to the story once again than a China re-opening. Gold is affected by many factors, but mainly, treasury yields , inflation and the dollar . The $1900.00 mark has been broken through by the yellow metal, levels not seen since April 2021. Recent U.S CPI came out inline with expectations dropping to 6.5% for the month of December; treasury yields , both front end and long end bonds have been declining as investors reduce expectations of aggressive federal funds rate for the future. Gold and bond yields have an inverse correlation, as bond yields decline, gold rises due to the yield attainable in bonds; but as bond yields decline gold receives some allocation. If we continue to see treasury yields fall this will add further strength and investor sentiment towards Gold ; as investors reposition away from Treasuries the yellow metal is a prime allocation of capital; however as 2023 is still a year of the unknown when it comes to future central bank decisions so it’s worth seeing how the Fed meeting in February goes and what tone will be set out for the future of global central bank activity. Guys, that’s it for today thanks for reading; I hope you was able to take away some knowledge and trade ideas within the commodity space as China reopens! Big announcement: I will be moving Market Macro Hub to Substack in the upcoming weeks, as we grow, I want to be able to interact more with you guys and even offer a premium level of service for those who are either wanting to learn at more about the global macro space and or those who want more actionable suggestions such as this piece here. More about that soon… But for now, I’ll make the transition smooth for you so no need to worry or do anything for now! As always, I appreciate you sharing these macro breakdowns on your social media, Twitter and other platforms, it allows other people like you to gain an advantage and access clear cut information. No jargon. I’ll be with you guys next week, until then, have a good one MMH crew! Joe
Jan 13, 2023 · 6 min read