And what he sees is a bit concerning for the multitudes but enticing for the opportunistic.
From Marc to Market, April 12:
Where We Stand
I am on vacation, and then on a business trip that will interrupt the commentary until the weekly note on April 30. The May monthly analysis will be published the following week after the FOMC meeting and April employment report. I wanted to weigh in on a few key market issues before leaving.
New Divergence: The continued robust US jobs growth (276k average in Q1 24 and 251k average in 2023) and above-trend growth allow the Federal Reserve to remain focused on inflation. And for good reason: CPI has consistently been reported this year above expectations. The headline rate stands at six-month highs. Fed Chair Powell has drawn attention to the core services excluding housing, and it rose at around an 8% annualized pace in Q1. For all practical purposes, the Eurozone and UK are nearly stagnant, and price pressures are moderating quicker than in the US. The widening two-year premiums capture this divergence. The US pays around 200 bp more than Germany to borrow for two years. Last year's peak was about 205 bp. The US pays nearly 60 bp more than the UK for two-year money. That is the most in a year. One is paid to be long dollars. The next targets may be near $1.06 for the euro and $1.2400-50 for sterling.
Japanese Yen: The threat of intervention helped cap the dollar near JPY152 last year and in recent weeks. However, the US CPI proved too much and the dam burst. Stop-loss and option-related buying lifted the dollar beyond JPY153. Resistance, or where economists might talk about supply, is difficult to assess given that these levels have not been seen in 34 years. We have talked about JPY155. The high in 1990 was slightly above JPY160. We argue that Japanese officials made a tactical mistake by not intervening in the thin markets around Easter. That could have knocked the dollar down before what had been expected to be a solid US jobs report and a sticky CPI. We also argued that the likelihood of Japanese intervention during the first state visit in nine years was slim. Intervention to knock down the dollar, which ostensibly is important in the efforts to restrain prices, would be a diplomatic insult. Japanese officials stress the pace of the move rather than a particular level. One-month implied volatility is near 9%. When the BOJ intervened in Sept-Oct 2022, it was around 14%-17%. Three-month implied volatility is also near 9%. During the last bout of intervention, it was 13%-14%. Actual, or historical volatility over the past month is around 6%. It was around twice as high around the time of the 2022 intervention.
Chinese Yuan: If Chinese officials stopped managing the yuan, it would likely fall sharply. It is off almost 2% this year. Among the other major currencies, it it virtually tied with sterling as the best performer. The point is that Beijing is resisting the pressure from a strong dollar. It is not seeking export advantage through the exchange rate. Before the recent holiday, another way that the approved band can be defended was illustrated. Without resorting to overt or covert intervention, trades on the electronic platform that would imply a price outside of the band were blocked. China has the resources to mount a more serious defense of the yuan, but why should it? It is a story about a strong US dollar. The resilience of the yuan has meant that it has strengthened against many of China's trading partners. The tolerance, though, has limits. We suspect the dollar can move back into its previous range CNY7.25-CNY7.30.
Surplus Capacity....
....MUCH MORE
