The payrolls report is designed to serve a plate of crow to analysts far and wide, including us. But see the chart. It shows wide variability, a couple of months of high payrolls punctuated by the occasional ultra-low bummer. This probably says more about statistics gathering than about the conditions being measured, but never mind. The consensus view after payrolls was that the US would struggle to reach and hold significantly higher 10-year yields. That turns out to be true. It is failing to match-and-surpass the recent high of 2.400% from May 11. Still, it’s up over 1% from a year ago.
But it’s the contrast with the Bund that counts for judging the euro’s path. There the market had gotten well ahead of itself, posting an 18-month high on Friday at 0.58%. The year before, the Bund yield had been negative at -0.2059%. So, the US yield has risen over 1% in the past year and the Bund has risen about 79 bp. On that basis, the dollar should be the winner.
But instead, it has been the euro on the upswing since last December, in some measure because the momentum in the Bund yield surpasses the choppier T-note yield. In addition, the Fed has been consistent about its tapering message, whereas questions abound about ECB sentiment and intentions. We think the Fed will hike in Sept or Dec but will definitely act, not only on rates but also on laying out a plan for gradual balance sheet contraction.
We have a lot more questions about the ECB. The market now thinks the ECB will announce a farahead tapering to begin in mid-2018 or later. That means the fate of the euro/dollar over the rest of the summer depends on how the ECB debates shapes up. Right at the moment, the euro is retreating on an overbought euro and oversold Bund. Nobody ever knows how far it will go or how long it will last.
We see the power of yield differentials at work in dollar/yen, where the differential hit a 2-month high earlier today and the dollar/yen obediently hit a 2-month low (114.30). Today the BoJ repeated it intends to keep the 10-year near zero and the resolve to get inflation above the 2% target. This was largely expected so we need to note that it was BoJ chief Kuroda saying so that propelled the yen. It’s not what central banks do, it’s what central bank chiefs say.
As a tidbit, consider this separate report about Japan’s demographics: according to Reuters, Japan's native population “fell at the beginning of this year at its fastest pace since comparable figures were kept in 1968, highlighting the demographic challenge to economic growth. As of Jan. 1, the number of Japanese people fell by a record 308,084 from a year earlier to 125,583,658, marking the eighth consecutive year of declines… The number of births fell 2.9 percent from the previous year ago to 981,202, the lowest since comparable data became available in 1974. People aged 65 or older accounted for 27.2 percent of the total population, the highest ratio on record, while the ratio of those aged 14 or younger fell to a record low of 12.7 percent, the data showed.” Even adding in foreign residents, who Japan has been courting, the total population fell 0.1%. Yes, it’s a “demographic challenge to economic growth.”
There is some talk that now matters will calm down and perhaps reverse a bit ahead of Yellen’s testimony to Congress this week. We say poppycock to that. Yellen has already said everything of any real interest.
Foreign Affairs: Trump, in Poland, reversed himself on NATO’s Article 5 (an attack on one is an attack on all). He gets credit for something, even if we suspect somebody took Trump to the woodshed. About the rest of the Trump performance at G20, the main event was the Putin/Trump meeting. The press is somewhat befuddled by conflicting statements from each party over what happened. We say there is no confusion at all. The Russians say Trump accepted Putin’s denial of hacking the US election and the two parties agreed to “move on.” Everyone has noted that Secy of State Tillerson said not that Trump was concerned about the hacking, but rather that the US public was concerned about it. Oh, dear.
The acceptance of the Putin denial is implicit permission for Russia to persist in meddling in US elections in the future. Oh, yes, the US agreed not to meddle in Russian elections and to form a joint task force to fight cyber-crime, implying Trump wants to give Russia whatever we’ve done so far. Bottom line, the consensus of opinion is that Putin won. Trump is now Putin’s poodle, much as Tony Blair was once called Bush’s poodle. That this is occurring in the formerly rabidly anti-commie Republican part is astonishing. And yet the Plubs in Congress are going along with it.
If we believe the US intelligence community that they do, indeed, have proof it was Russia and Russia alone doing the hacking, it’s a big fat question why Trump does not accept it. One answer is Trump refusing to give anyone else any credit for his electoral win. Putin is thought to be exploiting Trump’s childish vanity. Dissident Kasparov said on TV that Putin wanted Trump to win and helped him to win because he judges Trump a childish fool he can manipulate.
Trump seems not to care that Putin lied to his face. Since Trump probably lied to Putin, too, Trump probably thinks they are square. Instead of the one thing we wanted, we got some cockamamie ceasefire deal in Syria, which should have been last on the list of priorities. Sorry, Syria, but N. Korea is, at the moment, more dangerous. Now we need to watch for whether Trump tries to roll back sanctions against Russia, including the seized properties.
What was the one thing we wanted? The equivalent of Reagan’s “Mr. Gorbychev, tear down this wall.” But maybe Putin didn’t win, after all. Trump may not have come off as strong and promoting America First, but Trump lies and changes his stance all the time. The word is erratic. Putin may not have gotten what he thinks he got. And what does he want? For Russia to appear one of the top players on the global stage. Okay, Trump gave him that, even though Russia is half the size of California, $1.2 trillion vs. $2.5 trillion. California would be the 6th largest nation if it were a country. Russia has vast natural resources, but hardly any industrial base and a corrupt, dysfunctional financial system. Quick, name a Russian invention that has caught fire globally.
But beyond being able to strut upon the global stage, Putin wants the US and West to end sanctions, to accept that he can keep Crimea, and he would also like the US to stop the trend toward oil selfsufficiency, including the ability to export to Europe, so far Russia’s captive.
The irony is that if Khruschev was right and Russia “buries” the US, where will Russia get things like i-phones and movies when we’re gone? Another irony is that if the US impeaches Trump or gets rid of him some other way, we will get Dimbulb Pence. This might be preferable to Putin. And Putin has a long game. Cozying up to Christian evangelicals is one of Russia’s latest ploys. Nearly a majority now view Russia favorably. You have to ask yourself “why”?
Gold: We are puzzled that nuclear threats from a batshit-crazy Asian dictator, Putin playing Trump at G-20, and the Trump threat to world trade, plus the delay in getting the Trump Bump, are not driving gold higher. Much higher. But on Friday we had gold at $1221 and today, $1207.
An expected decline is nonsensical if we are looking at gold as the best proxy for rising global risk. It makes more sense if we consider that inflation is nowhere in sight, except in economists’ models. And yet expectations of rising rates and contracting the Fed balance sheet in the US, and tapering in the eurozone, are raising real yields. In this context, since gold famously has no yield, a slipping price makes perfect sense. But just wait. Complacency is wrong. The probability of something Big and Bad, perhaps catastrophic, is not all that low. We are saving our pennies against the day we see one of those projected lows. Fear is almost always more powerful than hopeful expectations. What is a gold buyer giving up? Not even 1% in Europe and less than 3% in the US.
The current consensus about inflation is that it’s not high and not rising. But that’s not strictly true. You don’t have to torture the data too much to see that inflation is off the lows and well over the Fed’s 2% target during the first half. Trading economics forecasts 2% this year, rising to 2.5% by 2020. But wait a minute. Average hourly wages are rising at about 2.5% p.a. The inflation forecast therefore means zero real wage growth—in an environment of skilled labor shortages, not to mention demographic change. We may not get an oil price boost to inflation, but if Trump ever gets around to infrastructure, wages will rise by more. It’s not only gold bugs that will start talking about actual inflation, just not today. Or tomorrow.
On Wednesday, the Atlanta Fed publishes its inflation expectations report. Expectations have been running at 2% for several months now. On Friday we get the CPI, along with retail sales, industrial production and consumer sentiment Friday is the day.
By Barbara Rockefeller
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