Markets Weekly July 27, 2024

Summary

In this week's market analysis, the focus is on the Japanese Yen's significant appreciation, US soft landing data, global rate cuts, and a discussion on how the US Treasury's debt issuance impacts financial conditions. The US GDP growth of 2.8% and PCE inflation at 2.6% suggest a strong economy with moderating inflation. Meanwhile, Canada's rate cuts and per capita GDP decline signal a potential recession. The paper by Steven Moran and Nouriel Roubini highlights the Treasury's role in easing financial conditions, with potential implications for future policy adjustments.

Takeaways

• 📈 The Japanese Yen has appreciated significantly from about 161 to 152 on the USD JPY exchange rate, possibly due to deleveraging.
• 🤔 The speaker is uncertain if the Yen's appreciation is a correction or the end of a trend, and has bought the dip to see how it unfolds.
• 📊 US GDP data showed a strong 2.8% annual rate for Q2, contradicting recession fears and suggesting a healthy economy.
• 💡 Private final sales to domestic consumers, a more accurate measure of underlying demand, remained strong at 2.6%, indicating continued growth.
• 🛑 The Atlanta Fed's GDPNow model, based on recent data, also suggests the US economy is performing above trend.
• 💰 The Fed's preferred inflation measure, PCE, showed a 2.6% year-over-year increase, which is moderating towards the Fed's 2% target.
• 🌐 Global rate cuts are accelerating, with the Bank of Canada cutting rates for the second time, following similar moves by the Swiss National Bank and the ECB.
• 📉 Canadian GDP growth is positive but per capita GDP is declining, indicating a potential recession for the average citizen.
• 🏦 High interest rates in Canada are affecting household spending as people renew mortgages at higher rates, contributing to economic slowdown.
• 📈 The Bank of Canada anticipates further rate cuts, which may lead to a depreciation of the Canadian dollar against the USD.
• 🏛 A paper by Steven Moran and Nouriel Roubini suggests that the US Treasury's issuance strategy has been easing financial conditions, potentially impacting market dynamics.

Q & A

What significant event in the Japanese Yen caught the speaker's attention?

The speaker noticed a tremendous appreciation in the Japanese Yen, which appreciated from about 161 to as low as 152 on the USD JPY exchange rate over the past couple of weeks.

What is the speaker's hypothesis regarding the appreciation of the Japanese Yen?

The speaker hypothesizes that there was some serious deleveraging happening, which led to the appreciation of the Japanese Yen.

What economic data did the US release recently that supports a soft landing scenario?

The US released GDP data for the second quarter, which came out at a strong 2.8% annual rate, and the PCE inflation data, which is the Federal Reserve's preferred measure of inflation, showed a year-over-year rate of 2.6%, indicating moderating inflation towards the Fed's target.

How does the speaker describe the current state of the US economy based on the recent GDP and PCE data?

The speaker describes the US economy as continuing to do well with no immediate signs of recession, showing strong growth and inflation coming down, which aligns with a soft landing scenario.

What recent monetary policy actions have been taken by the Bank of Canada?

The Bank of Canada has cut interest rates for the second time in the past week, following an earlier rate cut earlier in the year.

What are the implications of the Bank of Canada's rate cuts on the Canadian economy?

The rate cuts are aimed at addressing slowing growth and declining living standards on a per capita basis, as the Canadian economy is not technically in a recession but per capita GDP has been shrinking.

What concerns are driving the Bank of Canada's decision to cut rates?

The Bank of Canada is concerned about declining per capita GDP, increasing mortgage renewals at higher rates, and a weakening labor market, which are signs that the economy may be heading towards a recession.

How does the speaker summarize the impact of the US Treasury's actions on financial conditions?

The speaker summarizes that the US Treasury's issuance of more treasury bills and fewer coupons has a similar impact to QE, easing financial conditions by decreasing the supply of long-term bonds and effectively increasing the money supply.

What is the potential future impact of the Treasury unwinding its current issuance strategy, according to the paper by Steven Moran and Nouriel Roubini?

The paper suggests that if the Treasury were to unwind its current strategy of issuing more bills, it could lead to a sizable increase in long-term yields, potentially tightening financial conditions.

What is the estimated impact of the Treasury's issuance strategy on the 10-year yield according to the paper?

The paper estimates that the Treasury's increased share of bill issuance has lowered the 10-year yield by about 25 basis points, equating to about 100 basis points worth of cuts by the Fed.

What is the speaker's view on the potential for the Treasury's current strategy to continue indefinitely?

The speaker is uncertain about the indefinite continuation of the Treasury's current strategy, noting that it could lead to financial turmoil if and when there is a need to unwind the strategy in the future.