The Boock Report

I usually find the day after a Fed meeting as the better expression of the markets message in response, not the day of. That is because many hedges are unwound in the last few hours of trading on Fed day. Assume heading into this week particularly, with only a few weeks left in the year, a lot of puts and other hedges were put on ahead of CPI and Powell. I’m sure a lot was unwound late yesterday at the same time the natural reaction to what Powell said was taking place. That likely explained the big ups and downs before the market closed. 

While we were reminded that we very well might see a 5 handle in the fed funds rate sometime next year, even though the market still doesn’t believe it if we look at the fed funds futures contract table, higher for longer is the real message we should take and I believe the curve inversion reaction after some steepening on CPI day reflects that. Also today does the US dollar rally after the recent weakness, pullback in gold back below $1,800 and selloff in the S&P futures. 

I saw the Bill Ackman tweet as I’m sure you did on the point that the Fed is likely going to have to accept a 3% inflation target at some point because of the difficulty in getting to 2% because of structural reasons. I do agree with the big challenge in sustainably achieving 2% for reasons you’ve heard me write about for a while and that the Fed will likely acquiesce to a new target if the unemployment rate gets close to 5%. Where I completely disagree with Ackman is in his point that somehow a 3% inflation rate will be just fine for economic growth. He should tell the US consumer that a 3% annual deterioration in their standard of living will be just fine for them. Inflation is mud in the gears of business and is a tax, plain and simple, and a tax on those who can least afford it. 

Fighting inflation too today saw rate hikes from the Brits, the Swiss, the Taiwanese, the Norwegians, and in the Philippines. At 8am we’ll get one from the ECB. There were no surprises and most likely that the ECB goes 50 bps.

With respect to the BoE, a place where actual dissent takes place, 6 voted for the 50 bps hike to 3.5% as expected while 2 wanted just 25 bps and 1 voted for 75 bps (Catherine Mann). The BoE is also a place where they are comfortable predicting a recession, unlike other central banks. They said “The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response. The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target.” The BoE is also shrinking their balance sheet via outright sales and natural maturities.

The pound is weak but along with many other currencies today vs the dollar. Gilt yields are falling in response to the rate move. Thanks to heavy exposure to energy and other commodity stocks, the FTSE 100 is actually higher by 1% year to date and remains cheap. The UK economy is challenged by a cost of living crisis and will continue to in 2023 and the Sunak/Hunt budget will only make it worse. 

Because of the almost 180 turn by the Chinese in their approach to Covid, the economic data seen for November can be considered old news but still was pretty weak. Retail sales fell 5.9% y/o/y vs the forecast of down 4%. IP was higher by just 2.2% y/o/y vs the estimate of up 3.5%. Fixed asset investment was also light relative to expectations. Lockdowns and the mess with closed loop situations such as from Foxconn (which today announced it’s over) definitely polluted the data. As did the continued challenges with residential real estate. Chinese stocks sold off after the recent sharp run higher. China’s reopening will be a major story in 2023 as the Chinese consumer is unleashed just as the rest of the world was over the past few years.

Goosed by the weak yen, although less so over the past month with its rally, Japanese exports jumped 20% y/o/y, about as expected, and imports grew by 30% y/o/y vs the estimate of up 27%. Kuroda has just a few months left and the potential big news in 2023 could be if there is any pivot away from YCC by his successor. The 10 yr JGB yield continues to be stuck on .25%, seemingly ready to bust out at any moment if the BoJ backs off. 

Australia, a great proxy on China and commodity prices, reported better than expected jobs data for November and an unchanged unemployment rate of 3.4%. Treasury yields there jumped in response with the 10 yr yield up 9 bps to a two week high and the 2 yr was higher by 7 bps. 

French business confidence in December was unchanged from November and 1 pt above the estimate. At 102, it has held this level for a 4th month. The key for the French economy is getting all their nuclear plants back on line as it provides about 70% of its energy. The euro is weak with the across the board dollar strength. French bond yields are little changed with the CAC down 1%.