Macro

• Just as the markets were speculating about which spring month would see the first Fed rate cut of the cycle, a surprisingly high CPI report from the BLS swiftly dispelled any lingering dovish sentiment that had survived the recent NFP announcement.
• We’ve analyzed both the CPI data (see here) and the current labor market in detail (see here), and although there are signs of cooling, it’s difficult to counter the recent adjustments in the OIS curve.
• This suggests that USD assets remain the focal point, and for the foreseeable future, EM macro strategies should lean towards spread/receiving rather than expecting an NVDA-like bull run in equities

• Companies are expecting the Federal Reserve to reduce rates to ease the burden on consumers and boost confidence in markets.
• Inflation is still a concern for many companies, particularly at the high end, but the Fed cannot act until there is substantial data showing a decrease in inflation.
• The lower income consumers are trading down and experiencing financial difficulties, with subprime delinquencies reaching levels similar to 2009, which is concerning for the market. 

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• The latest data release from WCI shows the first w/w drop in US freight rates in a couple of months.
• Meanwhile Europe continues its drop in freight rates for the 3rd consecutive week now.
• Looks like the carnage in freight rates is over with seasonal effects in shipping expected to kick in 1-2 months from now based on historic import patterns from Europe and the US.

• In 2022, UAE experienced a significant rise in its GDP growth, as Real GDP reached AED 1,610.11 billion, reflecting a 7.41% increase compared to the previous year.
• Progressing onwards, the IMF has forecasted average growth rates of 3.52% for 2023 and 3.88% for 2024.
• The IMF projections affirmed continuous fluctuations in the nominal figures of Public Debt.

• UK GDP disappointed as revisions meant December’s surprisingly modest decline was consistent with a much weaker Q4, falling by 0.3% q-o-q after Q3’s 0.1% contraction.
• Although GDP is technically in recession, that definition is too easy to meet for a stagnant economy. The macro regime is not breaking into a traditional recession.
• Surveys suggest that GDP is already rebounding without the dip loosening the labour market. In our view, excess demand and inflation remain inconsistent with rate cuts.

• During the period under consideration, i.e. December 28th , 2023 to January 26th, 2024, the USD/AED exchange rate fluctuated between 3.672 and 3.673. AED is pegged to the US Dollar at 3.67.
• The MA-10 line was moving above the MA-20 line for the whole period. Both MA 10 and MA-20 lines maintained a steady upward trend throughout the entire period.
• Based on Graph 2, the PPO (red line) was moving upwards at the beginning of the period under consideration but after January 15th the movement changed. 

• The global backdrop for the start of the year is better than anticipated, with a broad-based upturn in PMIs suggesting steady or even growing global and emerging market growth.
• The US is experiencing some slowing in growth, but consumer demand is more solid, supported by strong labor markets and falling inflation.
• China’s GDP growth is expected to remain around 5.5% in the near term, but there are concerns about ongoing deflation, housing market weakness, and its impact on corporate revenues and private sector confidence. Outside of China, emerging markets in Asia and Latin America are seeing growth rebound, driven by improvements in consumer and industrial sectors.

This content is sourced through publicly available sources and has been machine generated. Information displayed is for general informational purposes only.

• Hello Everybody and welcome back for our weekly 5 Things We Watch!
• We dare say we have a diversified edition this week touching on everything from Japan to Gaza and New York Community Bank! Without further ado lets dive right into it!
• This week’s 5 topics we follow closely:
  • UK CPI
  • Gaza ceasefire
  • US CPI
  • The USD rally and the JPY
  • Banking crisis 2.0?

• Technical Indicators and Sentiment Point to Potential Risks Amidst Strong Fundamentals
• John Templeton famously stated, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.
• ” While India’s economic prospects remain strong, several technical indicators and market sentiment suggest potential exuberance in the benchmark indices.

• UK CPI inflation remained at 4% in January, undershooting expectations for an increase. However, this was primarily because of weighting changes to airfares and energy.
• The median inflationary impulse was marginally above our forecast, and the RPI, which wasn’t reweighted in January, was only 0.1pp lower than we expected.
• If sustained, these weighting changes will have an upward effect on CPI inflation later this year. So, we do not see the surprise’s reason nor cumulative effect as dovish.

• LATAM allocations hit 10-year highs in active Global equity funds.
• Notable increases in allocations include Ninety One Global Value (up 7.5%) and Ranmore Global Equity (up 6.7%), with smaller contributions from Lazard, Delaware, and JOHCM
• MercadoLibre is the driving force behind the moves higher, and remains the conviction holding in the region.

• This is another heavy-hitting US inflation report and frankly the worst in a while.
• The stickier components of the basket, including rents and transportation services came in smoking hot, and without substantial deflation in various core goods categories such as cars and apparel, this would have been an outright disastrous report for the Federal Reserve.
• While we had the core goods part of the equation right, we had the re-acceleration of core services wrong.

• Prabowo, a controversial ex-general accused of human rights abuses in Jakarta and East Timor during Suharto’s era, looks likely to win the presidential election, with Jokowi’s son Gibran as running-mate. 
• Gibran’s presence has shifted the parliamentary polls by 10pp in favour of Prabowo’s party, Gerindra, likely making it the largest at the expense of PDI-P– winner of all previous elections.
• Post-Oct’24, policy is likely to become more mercurial, fiscally imprudent, growth- and inflation-oriented. Markets are likely to be turbulent after initial celebration of a decisive outcome. We urge caution. 

• Welcome to this week’s Great Game, where we cover the geopolitical topics of the hour.
• We’re gradually changing the format of the Great Game series to cover more topics and give you direct advice and projections as well as clear directions on which geopolitical issues matter for your portfolio and which don’t.
• This week we’re still focused on the Middle East – most notably the Gaza conflict which is at the center of everything.

• UK unemployment confounded market expectations by falling to 3.8% from the lowered profile in the reintroduced LFS data. It is 0.5pp less than the BoE forecast for Q4.
• Residual seasonality may unwind some of this strength in the Spring, and labour demand appears to have softened slightly despite rebounding weekly vacancies data.
• Wage growth also exceeded expectations. Underpinned by high settlements, it may persist near 6%. Strength in pay and jobs suggests the labour market is in rude health.

• Both US headline and core inflation came in higher than expected in January. Core inflation rose by 0.4% month-on-month, the strongest increase since last May. 
• The real shocker, however, came from the Core Services excluding Housing CPI. The three-month annualized inflation rate spiked to 6.7%.
• Although we have one more CPI report before the next FOMC meeting, the chance of a (temporary) correction in risky assets has increased.

• Observable crude inventories in key regions have steadily drawn down, reaching 40 million barrels below December levels.
• Global onshore crude inventory is at a record low of 4.4 billion barrels, signaling increased demand.
• Refinery runs and healthy refinery cracks and margins are drawing down on crude inventories, supported by strong gasoline cracks.

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• I am sitting here on a Saturday evening (by the time of writing) waiting for the opportunity to say hello to the second junior analyst at home as my wife’s due date is approaching fast.
• In between the frightening thoughts on how to deal with not only one but two diaper-wearing boys at home (myself excluded), I keep pondering why I receive so many questions on the timing of the first rate cut.
• Is it really that important?

• The increase in news articles mentioning tariff and trade war risks is making it difficult for cyclical currencies like the euro to factor in any potential growth outside of the US.
• US exceptionalism is evident in strong services ISM and relative equity performance, which is leading to the dollar’s dominance in capital flows.
• The Chinese yuan is facing bearish sentiment due to double-digit drawdowns in onshore equity indices, deepening deflation, weak sentiment in the housing market, and limited policy options for policymakers. Outbound travel restrictions during the Chinese New Year season also add to the pressure on the currency. However, there have been some positive signs in financial flows, such as stabilization in equity flows and increased bond purchases by foreigners. Overall, the outlook for the yuan remains bearish.

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• Gold platinum ratio (“GPR”) measures the price of gold relative to platinum. it is affected by recessions, monetary policy, and stock market returns.
• GPR has been rising since 2008, it has outperformed gold and platinum individually since 2006 and other gold spreads (gold-silver, gold-palladium, gold-copper) since 2000. 
• The outlook for both gold and platinum remains uncertain. A bullish view of the GPR looks more favorable.

• The Conservative right-wing is determined to persist despite facing challenges.
• They suffered two more by-election defeats on 15 February, further weakening their position.
• This likely ensures that the UK will not see a Tory government after the upcoming general election for at least five years.

• More deflation reported in China and the implications for markets
• Chinese authorities keep pushing liquidity into the system and focusing on the stock market
• Parts of the Chinese Economy not as bad as the doomsayers would have you believe

• The crude market is rife with subtle tit-for-tat politics, and there’s little to indicate this dynamic will change.
• We delve into the current state of the oil market and share our thoughts on our current position at this stage. First we broke USD 80, then Al Jazeera reported a ceasefire between Israel and Palestine, which was retracted 15 min later.
• The market didn’t care and pounded the sell-bottom all the way back below 78 even with (on the paper) strong jobs and PMI prints out of the US coming out in the meantime.

• The past week saw insights on Bank Mandiri, Thai Credit Bank IPO, Digital Core REIT placement, and a look at Singapore’s most defensive High ROE and low PER stocks. 
• There were also macro insights on Thailand, looking at its economic malaise and the direction of policy rates, and the Philippines looking at its recent inflation figures.
• The Week That Was in ASEAN@Smartkarma is filled with an eclectic mix of differentiated, substantive, and actionable insights, macro and equity bottom-up, from across Southeast Asia.

• Cocoa Reaches All-Time High – First Time since 1960 A long-held commodity price record has fallen: The price of NY cocoa futures has surged to almost $5,400 a ton, surpassing the $5,379 peak in place since 1977 ( roughly 46 years ago).
• Cocoa was one of the few commodities that hadn’t set a fresh nominal price record in the 2000s.
• The current rally is fuelled by the El Nino weather phenomenon which is causing drier temperatures in West Africa, where three-quarters of the world’s cocoa is produced – this fundamental weather event has now led to a short squeeze situation in the cocoa futures market.

• Happy Monday, and welcome to our weekly positioning update!Markets seem to be back to normal dynamics, with US indices slowly drifting higher with S&P 500 passing the historic 5000 USD level, despite most economic data prints surprising to the upside, almost forcing risk-asset investors to believe that the economy has survived higher interest rates for good.
• Although rates traders have made what looks like a u-turn in the # of cuts priced in for 2024, the promise from central bankers that policy rates will come down has been anchored in expectations, and the cocktail of slightly better than expected economic data and the perception that central bankers will cut interest rates (albeit slightly slower) anyway produces a perfect environment for risk assets to perform and drift higher.
• With USD liquidity looking to continue its upward trajectory, equities are still a buy given the current narrative – momentum is king.

• The US economy is displaying signs of re-acceleration, thereby delaying any possible return to below-trend growth.  Fed Chairman Powell has reminded investors that monetary policy conduct remains data dependent. 
• Stronger economic growth will positively impact corporate profit expectations and US equities. Valuations are priced to perfection versus inflation. Prematurely lowering interest rates could provoke an equity market valuation bubble.
• Labour market weakness is required for the Fed to invoke easier policy.  The Fed closed opportunities for banks to engage in interest rate arbitrage via the Bank Term Funding Programme.

• We reiterate our view that long-term investors in China are likely to face subpar returns coupled with high volatility.
• China hasn’t even tried to reverse the imbalances from long-standing past economic policies.
• Real-Time market signals indicate further weakness in China, which investors should avoid. In the short run, the Chinese stock market looks washed out.

• Keynes once said that markets can stay irrational longer than you can stay solvent.
• I love this quote because it speaks about the power of narratives, and my own humble readaption of that would be:‘‘Narratives can dominate macro longer than you can remain solvent’’.
• This is why today we are going to cover the two strongest narratives out there: China is doomed; AI is the new revolution and US tech will dominate forever.

• January 2024 another strong month for Global Liquidity which hits US$171.7 trillion
• US Fed and China’s PBoC are in the forefront of adding liquidity
• Global Liquidity Cycle trough in October 2022. Next peak late-2025

• EIA forecasts oil prices to gain during the first half of 2024 due to the Red Sea conflict and inventory withdrawals.
• Downward pressure from lukewarm oil demand and oversupply to keep prices low in 2025.
• US commercial crude oil inventories grew by 1.3% on a weekly basis but are 4% below the five year average for this time of year.

• Patrick Ceresno will be a panelist in a session on the nuclear renaissance.
• The S&P 500 March futures were up 298 basis points at the close on February 7.
• The US dollar index was up 52 basis points, trading at 104.5.

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• China is injecting liquidity into the markets, but ironically, with investors sick and tired of negative returns, much of this liquidity is finding its way everywhere except China.
• The downturn in commercial real estate is becoming a global phenomenon. A growing number of companies is grappling with bad real estate loans, leading to a sharp increase in provisions.
• The most recent Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reveals yet another trend that the recession is already behind us.

• The BCRP reduced the reference rate by 25bps to 6.25% in response to favourable inflation data and a downward trend in global inflation, indicating an adaptive and data-driven approach to monetary policy.
• Future policy adjustments will hinge on a comprehensive analysis of inflation trends, economic activity indicators, and external economic risks, maintaining a balanced approach towards achieving the inflation target.
• The Bank’s vigilance towards climate risks and international conflicts underscores its proactive stance in mitigating potential inflationary pressures and stabilizing economic growth.

• Hello everyone and welcome back to yet another assessment of our macro book- and as per usual accompanied by our current macro outlook!We knock on the door to a week with yet another US CPI release- this time revised:The revision we received today proved not to be the unpleasant surprise everyone feared given the 2023 revision and Waller & Powell both having flagged it and as a result, our expectations of a soft print remain unchanged- for elaboration see here.
• While it might feel like we’re repeating ourselves, our belief in the USD and US risk assets being the best options out there hasn’t budged.
• That said, we’ve been tossing around a few ideas and topics internally over the last week: Markets haven’t continued the dramatic price movements since last Friday’s (some might label it as “fake”, see here) NFP blowout, but it’s noteworthy that short-term expectations are significantly outstripping those further along the curve.

• Welcome to a short and sweet preview of the US CPI report on Tuesday.
• The revisions for 2023 came in just a few moments ago, and they barely moved the needle.
• But December was revised down a tad, in contrast to what one should have expected given the pattern seen.

• Banco de México maintained the overnight interbank interest rate at 11.25%, aligning with the consensus forecast, indicating a cautious approach in the face of a slight increase in headline inflation and persistent core inflation.
• The decision reflects concerns over the slight uptick in headline inflation, persistent core inflation levels, and the influence of both domestic economic performance and global economic conditions on future inflation trajectories.
• The central bank signals a readiness to adjust the monetary policy stance in future meetings based on the inflation outlook and economic developments, emphasizing the balance of risks, which remains biased to the upside.

• Software / China’s software service providers bet on AI amid funding chill
• PE /Exclusive: Young Chinese PE investor dies from mental health issues, sources say
• Property /: Embattled developer R&F offloads London project for debt relief

• 2023 was a challenging year, there was a lot of volatility in both long and short books.
• We reserve the bulk of the letter for an extended discussion of our investments in lithium and the outlook for the sector in the coming years.
• Despite dire headlines related to EVs, we remain optimistic about a lithium rebound and skeptical that supply can grow as robustly as projected.

• Welcome back to another ‘5 Things We Watch’, where we cover some of the things we look at in the current macro landscape.
• This week will be all about inflation technicalities, as both BLS and Eurostat will update the inflation weightings for 2024 on Friday for US CPI and German HICP, respectively.
• The US is looking VERY solid when scraping the headline numbers on everything from the labor market to PMIs, but some of the strength is simply manufactured in a spreadsheet, leaving us with an iffy gut feeling about what will come later this year.

• This week will bring about a tonne of revisions- and weight updates in inflation numbers from the statistical bureaus on both sides of the pond.
• The following tradable conclusions are relevant to mention upfront:– There are no reasons to expect seasonal adjustments to lead to a large upside surprise in January inflation in 2024.
• – January key figures, as in 2023, have led to a hawkish repricing of the central bank outlook based on weaknesses in SA filters.

• China’s CPI declined by 0.8% year-on-year in January 2024, falling short of the consensus forecast by 0.3 percentage points.
• The decline in CPI is much lower than the previous month.
• This trend is below the one-year average, indicating a period of unusually weak inflation.

• Main takeaways:We ponder whether the influx of migrants is crucial for the U.S. labor market to maintain its current momentum, especially as employment among native-born workers appears stagnant.
• The surge in part-time employment and the increase in individuals holding multiple jobs likely indicate that workers are clocking fewer hours, which in turn erodes their actual earnings and, consequently, their spending power.
• The ongoing political conflict surrounding immigration could significantly, albeit with some delay, affect both the labor and financial markets.

• Last week was far from boring, but just when I thought we’d hit calm waters last Friday, the CBRT had me on edge. Another Governor jumping ship, signaling a return to Erdoganomics? Thankfully, no.

• Surprisingly, the markets remained pretty chill, considering everything. Maybe the prepared statement did its job in calming nerves. But it was the quick and ready appointment of Karahan that really threw water on any doubts about the future of the disinflation effort.

• The latest leaks from the infamous anonymous sources in the know unveil that disagreements about the policy path were essentially Erkan’s undoing (see here) and perhaps that is why many observers are growing even more optimistic about Turkey

• UK wage growth has slowed, but settlements in the critical January round are similar in 2024 to 2023. These deals prevent wage growth from slowing to target-consistent rates.
• Employers intend to increase pay by less in 2024 than last year’s plans while still exceeding 2022’s. Actual rises are state-dependent and have exceeded past intentions.
• We expect economic resilience to keep wage growth persistently elevated, encouraging the BoE to delay its first rate cut until Feb-25, beyond the MPC’s likely current view.

• The Reserve Bank of India (RBI) has opted to maintain the Policy Rate at 6.5%, in line with economic forecasts, signalling a cautious approach to balancing growth and inflation within its target range.
• Despite a recent uptick in inflation, the MPC’s decision reflects confidence in the underlying strength of the domestic economy and the effectiveness of previous monetary policy adjustments.
• Future policy decisions on interest rates will hinge on inflation trends, the impact of global economic developments, and ensuring the transmission of monetary policy while supporting sustainable economic growth.

• Software / China’s software service providers cut costs, prices as investors pull back
• Regulator /: China names new chief of securities watchdog amid stock slump
• Stocks /: CSRC vows to crack down on malicious short selling to stabilize stock market

• Early weakness in European shipping demand, while US demand remains strong
• The freight rate story is more likely to impact USD-flation than EUR-flation
• Expect another spike in freight rates when spring volumes arrive

• The relationship between total debt-to-GDP and bond yields is negative.
• The rationale is simple: central banks implementing extreme monetary policy to push yields down artificially.
• The combination of structurally low-interest rates, higher inflation, and growing worries about debt sustainability requires a portfolio shuffle.

• Depressed Soybean crush margin to deal a further blow to Soybean demand.
• The outlook for Soy Meal and Soy Oil is better than the outlook for Soybean.
• Important production guidance updates from CONAB and USDA this week. Expectations point to lower production and lower consumption. 

• Rate cuts / In Depth: China set for interest rate cuts to support economy
• Funds /: China’s star fund manager under investigation, sources say
• Corruption /: Ex-chief of China Merchants Bank receives suspended death sentence

• Chair Powell recently noted that more “in-depth discussions” on QT are forthcoming
• Market participants differ on the likely timing of ending QT and desired level of “ample reserves”
• Non-Monetary considerations and broad market conditions can potentially sway the QT debate  

• Elections in Indonesia and India are expected to maintain policy continuity in terms of the economy.
• The election outcome in South Africa is likely to result in further deterioration in governance.
• In Mexico, MORENA is predicted to retain the presidency but may not achieve its target two-thirds majority in the legislature.

• Sharp Bond Yield Drop: 10- and 30-year bond yields plunged to their base targets of 2.41% and 2.61%, falling by 3.2 and 5 basis points, respectively.
• These Base Targets were set in our previous Notes on China.
• Downside Trigger: The CSI 1000 and ChiNext indices fell sharply due to “Snowball Structures” exceeding their limits, typically triggered when the index drops 20% or more.

• PE / Cover Story: Private equity in China heads for exits amid three-year stock slump

• Military /: China’s top legislature confirms ousted military officials violated ‘discipline and law’

• PMI /: China services activity maintains growth, but at slower pace, Caixin PMI shows

• Welcome to this week’s Great Game! This week we attempt to add some nuance and layers to the understanding of the US-Iran conflict while adding my two cents to the ongoing oil debate.
• Main points of the week: as predicted last week, the US retaliated quite softly against Iranian attacks and both sides seem content with the current level of escalation.
• The risk of war is over.

• On 6 February, FSC announced numerous changes to the M&A disclosure and evaluation requirements in Korea. 
• These measures are aimed at strengthening investor protection benchmarking global standards. The Korean financial authorities will start to implement these changes in 3Q 2024. 
• The method for calculating merger prices in M&As between non-affiliated companies will be upgraded. To guarantee fairness in merger prices, a third-party review will be mandatory.

• Philippines CPI inflation in January 2024 decreased by 1.1 percentage points, reaching 2.8%, which is 0.3pp below the predicted 3.1%.
• About one-third of this decrease was in the core inflation, which declined by 0.6pp.
• The core inflation rate stood at 3.8% year-on-year.

• The RBA’s decision to hold the policy rate steady at 4.35% reflects its cautious approach in light of moderating inflation, particularly in the goods sector, against persistent services inflation and high domestic cost pressures.
• Economic outlook uncertainties, including global risks, domestic demand dynamics, and labour market tightness, influence the RBA’s policy deliberations, with a continued focus on returning inflation to the target range in a balanced and data-driven manner.
• The RBA emphasizes the priority of inflation targeting within its mandate, indicating that while recent trends show inflation easing, the potential for further interest rate hikes persists, contingent on incoming data and a rigorous assessment of evolving risks.

• The recent performance of the US economy prompts a reassessment of long-held market sentiments.
• As we witness an intersection of sturdy growth, moderating inflation, and evolving liquidity dynamics, investors and policymakers alike stand at a crossroads.
• This month’s ‘Macro Regime Indicator’ questions the endurance of the current (US) economic strength and its implications for inflation and asset allocation.