Hi guys,

glad to back again. I know what you’re thinking, “Joe, where was the Tuesday note?”

I’ll spill the beans, I’ve been working on a ‘guide for traders learning macro’ covering the three foundational pillars of macro and a step by step process on how to acquire actionable macro knowledge FAST! It’ll be out before Christmas, just pure value.

And yes, it’ll be free. So make sure you’re following me on Twitter and Instagram to keep updated with the drop.

So that’s why I’ve been under the radar. Back to it!

We’ll dissect the global picture, signs of a deepening recession, the strong dollar and how the U.S is positioned.

As always, enjoy.

Global Macro Picture, Inflation & The Dollar

Alright, we all know the root cause for double digit inflation across Europe and the Uk is food and energy prices. For the U.S, the peak in inflation back in June was 9.1%, which since then has retreated a little over 1.4% to 7.7% annualised.

As it stands here’s the interest rate positions of the Fed, BoE & ECB:

Figure 1: Central Bank Interest Rates

Fed: 4.00%

BOE: 3.00%

ECB: 2.00%

After Jay Powell said:

“The time for moderating the pace of rate increases may come as soon as the December meeting”

Jay Powell, Fed Chair

This has given investors confidence that inflation is headed in the right direction and as a subsequent event, that it could be time to rotate towards riskier assets. So much so that we’ve seen the yield curve across the US10Y retreat to 3.5%. What’s even more worrying is the the inversion between the 2s/10s; this is viewed by many investors a reliable signal that a recession is likely to follow within a short time span (<48months); and as it stands the inversion hasn’t been this deeply inverted since 1980’s where unemployment topped 11% and inflation topped 14%!

Figure 2: UST Yields, 2s/10s Inversion (10Y-2Y = -0.797%)

What exactly does this mean?

Looking at the Treasure curve, the frontend of the curve is loaded with rate hikes which is why the yield on T-bills (debt instruments with a 12month maturity) are yielding 4.70%. Now, within a healthy economy the yield curve slope is positive, meaning that bonds with a longer maturity date pay a premium yield compared to bonds with a shorter tenure, this is simply to account for the interest rate and inflation risk associated with holding a bond paying a fixed rate over a longer period of time. As you may have guessed, a flat yield curve means you’ll be paying the same to borrow money for one year as you would for 10 or 30 years, so applying this knowledge to the current macro landscape we can speculate what investors perceive as the current global trend.

Prolonged periods of low nominal global growth and lower future interest rates as shown by the yield curve.

Inflation in commodities

If you recall my recent article on November 11th, the current macro picture pt.2, this is how my commodity screener was looking.

Figure 3: November 11th '22 - Commodity Performance YTD

VS my commodity screener today. Friday 9th December

Figure 4: Commodity performance YTD

The price inflation of major components of fuel/heating have released steam from the high prices, heating oil down 32% from November highs, WTI Crude Oil down 19%, Brent Crude Oil now in negative territory down 21% and gasoline prices down 22% YTD. So, with the declining price pressure on commodities this should continue to allow inflation to retreat back below the 4-5% margin.

Commodity shorts, particularly oil shorts, something I mentioned in that same article here.

“shorts on Crude Oil ETF.”

“We have a major level of support in the highlighted region between $62.00 per barrel and $72.00 per barrel, I’ll be eyeing up shorts as the opportunity presents itself, potential holding period not yet disclosed but as this matures I’ll keep you guys in the loop.”

Nov 11th 2022, Joe, Market Macro Hub

Figure 5: WTI Crue Oil Spot

Always good to see a trade idea play out. So stay alert on trends we notice here!

Now, onto more pressing information, the dollar and the reason behind the rally of the year.

There’s a few reasons at to why we’ve seen the USD gain so much strength this year. Here’s the layout.

The dollar is a counter-cyclical currency, meaning when the global economy weakens the dollar strengthens and when the global currency expands the dollar weakens, here’s the reason why. When the global economy weakens this is usually due to a tightening in monetary policy, a restriction in the circulation of dollars domestically and internationally, this has an appreciation affect on the dollar because economies around the world use the dollar to “access” the global liquidity system (bond market). An example, an emerging market economy such as Ghana may issue bonds in USD in order to attract greater foreign investment and activity due to the dollar being the global reserve currency. So, for emerging markets, frontier markets, mainly economies across Asia, Latin America, Eastern Europe, Africa, and the Middle East, to access the global credit system they must do so through the dollar.

Result? Take a look at 2022, in a battle against inflation the Fed were forced to hike interest rates, tighten up monetary policy. This leads to less $$ in circulation so the USD global liquidity tightens, now there’s not enough dollars in the world so countries are short on dollars for payments, leading countries to purchase more dollars due to finance dollar denominated debt resulting in the dollar to appreciate widely. So in laymen terms, global tightening/weakening leads to USD strength. A narrative for 2022.

Take a look at figure 5 to see how the dollar has faired over the year.

Figure 6: DXY Spot

Now for the opposite, here’s why the dollar weakness. As the world economy expands, the global system creates more dollars. The institutions responsible for the dollars being printing are not the central banks, it’s the high street and investment banks, the credit system that creates the excess USD; this is through physical money being injected directly into the economy which can be spent, i.e loans, commercial loans and other forms of “real economy” money, very different to what the central bank prints.

Looking forward I’ll begin to eye up the next macro trend from which we can put together some actionable trade ideas, something I know you guys want to see more of. Trust me, it’s coming

Thanks for reading through, you’re a real one ;)

As mentioned at the start of this piece I’ve been working relentlessly to make sure this macro guide I’m creating for you guys puts you on a straight narrow path to acquiring the understanding required to find macro plays and trades. I know I could easily charge for this but I want to give it out for free to you guys, so stay tuned to my Twitter and Instagram especially as I’ll be dropping the release date there.

If you’re looking forward to that, I’ve got one ask. Show some love and share on Twitter, Instagram, tag me I’ll engage! Share this with someone who can learn something and get a new perspective on markets— I’m working on much more things for you guys, you’ll see

Until next time