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.

Outlines

00:00

📈 Market Volatility and Yen Appreciation

The speaker opens by highlighting the week's market volatility, noting significant ups and downs. A key observation is the Japanese Yen's substantial appreciation from 161 to 152 against the USD, suggesting serious deleveraging. The speaker plans to explore this in a written note, expressing uncertainty about whether this trend is a correction or the end of a cycle. They also mention buying the dip as a personal investment. The conversation then shifts to three main topics for the day: the soft landing data in the US, the acceleration of the global rate-cutting cycle with a focus on the Bank of Canada's recent actions, and an analysis by Steven Moran and Nouriel Roubini on how the US Treasury is influencing markets.

05:02

📊 US Economic Data and Global Rate Cuts

This paragraph delves into the US economic data, emphasizing the positive GDP growth of 2.8%, which counters recession fears. The speaker discusses the significance of private final sales to domestic consumers as a truer reflection of underlying demand, which remained strong at 2.6%. The paragraph also addresses the Federal Reserve's focus on inflation, with the PCE measure showing a 2.6% increase year-over-year, indicating a moderation towards the Fed's target. The global rate-cutting cycle is then examined, particularly the actions of the Swiss National Bank, the ECB, and the Bank of Canada, which has cut rates twice, with the latter's decision influenced by declining inflation and slipping growth, as evidenced by per capita GDP figures.

10:05

💵 Impact of Treasury's Issuance Strategy on Financial Conditions

The speaker discusses a paper by Steven Moran and Nouriel Roubini, which suggests that the US Treasury's issuance strategy, specifically increasing the share of Treasury bills, has eased financial conditions. The paper provides an analysis of how this strategy works similarly to QE by reducing the supply of longer-dated securities and increasing the money-like nature of Treasury bills. The authors estimate that this approach has lowered the 10-year yield by about 25 basis points, equivalent to a 100 basis points cut by the Fed. The potential future unwinding of this strategy is also considered, with concerns about how it might tighten financial conditions if the Treasury decides to reduce the share of bills in its debt issuance.

15:06

🌐 Implications of Treasury's Actions and Future Outlook

In the final paragraph, the speaker contemplates the implications of the Treasury's actions on markets and the potential future impact of an unwind. They mention the Treasury's response to criticism that it is manipulating markets, with officials asserting that their actions are routine and not intended to influence financial conditions. The speaker, however, aligns with the paper's view that the Treasury's actions have had a psychological impact on markets. The paragraph concludes with a consideration of the potential for financial turmoil if the current issuance strategy is reversed in the future, particularly if a new administration decides to adjust the balance of debt instruments.

Keywords

💡Markets

Markets in this context refers to financial markets, which include stock exchanges, bond markets, and currency markets. The video discusses the volatility experienced in these markets, particularly noting the significant fluctuation in the Japanese Yen's value. This keyword is central to the theme as it sets the stage for the discussion on economic indicators and their impact on market behavior.

💡Volatility

Volatility here refers to the rapid and unpredictable changes in the value of investments or market conditions. The script mentions 'a roller coaster in markets' and 'a lot of volatility,' indicating the instability and the potential risks and opportunities for investors in the current economic climate.

💡Japanese Yen

The Japanese Yen is the official currency of Japan. The script discusses its 'tremendous appreciation,' meaning it has increased in value relative to other currencies, specifically the US Dollar. This appreciation is a key point in the video, as it suggests significant economic activity and potential market impacts.

💡Deleveraging

Deleveraging is the process of reducing the amount of borrowed capital in an investment portfolio, often in response to market changes. The script suggests that the appreciation of the Japanese Yen might be due to 'serious deleveraging happening,' which is a critical concept in understanding market movements and investor behavior.

💡Soft Landing

A soft landing in economics refers to a slowdown in economic growth that avoids a recession. The script discusses 'soft Landing data' in the US, indicating positive economic indicators that suggest the economy is slowing at a manageable pace without entering a downturn.

💡GDP

GDP stands for Gross Domestic Product, which is a measure of a country's economic output. The script mentions a '2.8% annual rate' for the US GDP, indicating strong economic performance and contributing to the discussion on whether the US is experiencing a soft landing.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The script discusses the PCE inflation measure, which is the Federal Reserve's preferred method for tracking inflation, and notes its moderation, which is a key factor in the economic outlook.

💡Rate Cutting

Rate cutting refers to a central bank's decision to lower interest rates to stimulate economic activity. The script mentions an 'acceleration in the global rate-cutting cycle,' with specific examples from the Bank of Canada, indicating a global trend that could impact economic growth and market conditions.

💡Treasury

In the context of this script, the Treasury refers to the financial agency responsible for issuing government debt and collecting taxes. The discussion around the Treasury 'goosing the markets' suggests that their actions, such as debt issuance strategies, may be influencing financial conditions and market behavior.

💡Monetary Policy

Monetary policy is the process by which a central bank or monetary authority manages the supply of money to control inflation and stabilize the economy. The script discusses how different monetary policies, such as rate cuts by the Bank of Canada and the US Treasury's debt issuance strategies, affect economic conditions and market expectations.

💡QE (Quantitative Easing)

Quantitative Easing (QE) is a monetary policy where a central bank creates new money to buy government bonds or other securities to stimulate the economy. The script compares the Treasury's actions to QE, suggesting that their debt issuance strategies might have similar effects on interest rates and financial conditions.

Highlights

The Japanese Yen's significant appreciation from 161 to 152 on the USD JPY, possibly due to deleveraging.

Speculation on whether the Yen's movement is a correction or the end of a trend, with the author's personal investment in the dip.

Discussion of three key topics: US soft landing data, global rate cutting acceleration, and the Treasury's market influence.

US GDP growth at 2.8% annual rates, suggesting a strong economy without immediate recession signs.

Private final sales to domestic consumers showing strong underlying demand at 2.6%.

Atlanta Fed's GDPNow casting indicating GDP continues to be above trend.

PCE inflation at 2.6% year-over-year, moderating towards the Fed's target.

Core PC inflation on a month-over-month basis at 0.2%, suggesting a blip in the first quarter.

Market expectations of three rate cuts this year and a potential September cut from the Fed.

Bank of Canada's second rate cut in anticipation of further cuts, influenced by Swiss National Bank and ECB.

Inflation in Canada nearing the target range, with growth slipping away.

Canada's GDP growth hides per capita decline, indicating a potential recession for the average citizen.

Interest rate hikes affecting Canadian households' ability to spend, contributing to economic slowdown.

Labor market weakness in Canada, with a declining percentage of unemployed finding jobs.

Potential depreciation of the Canadian dollar against the USD if rate cuts continue.

Paper by Steven Moran and Nouriel Roubini on Treasury's impact on financial conditions through debt issuance.

Treasury's increased bill issuance compared to coupons, easing financial conditions similar to QE.

Estimate that Treasury's actions have lowered the 10-year yield by about 25 basis points.

Concerns about the future unwinding of the Treasury's bill issuance strategy and its potential market impact.

Transcripts

hello my friends today is July 27th and

this is Markets weekly so this past week

what a roller coaster in markets we got

some sbow down days and some up days as

well a lot of volatility what really

caught my eye was the tremendous

appreciation in the Japanese Yen if you

look back you'll see that over the past

couple weeks it appreciated from about

161 to as low as 152 on the USD JPY

cross so my best guess is that there was

some serious deleveraging happening and

that's what I'll write about in my note

this week now is this the end or is this

a correction I have no idea personally I

bought the dip and so we'll see how that

turns out in the coming weeks but today

I want to talk about three things first

let's talk about the really good soft

Landing data we got in the US the past

week and secondly let's talk about an

acceleration in the global rate cutting

cycle where Bank of Canada cut for the

second time the past week and lastly uh

Steven Moran and noral rubini came out

with some interesting work that details

how the treasury has been goosing the

markets and to what extent so let's talk

a little bit about their

findings okay starting out with soft

Landing so this past week we got two

really important data set data prints uh

one of course GDP for the second quarter

and the other the PC in inflation which

is the fed's favorite measure of

inflation now GDP came out and it was

great

2.8% annnual rates now recall on the

first quarter we got kind of a softest

GDP print and many people were thinking

that you know we're falling into

recession and so forth but this 2.8%

totally blows out out of the

water I think economists tend to think

that the underlying potential growth

rate of the US is about about 2% it's

really hard to say now since we've had

so much migration and when you add more

people the potential growth rate for the

economy increases in the uh short term

so but in any case 2.8% definitely

definitely suggests that US economy

continues to do well there is no

immediate sign of recession now one of

the things that the professional uh

forecasters look look at when they look

at these GDP data is the private final

sales domestic consumers a because they

think that is a more accurate measure of

underlying demand kind of like looking

at core CPI instead of CPI now the last

time around when we had a weak headline

GDP print uh they were suggesting that

the underlying private sell private

final sales to uh domestic consumers

what was pretty good so that headline

print was

misleading and they were right now this

time around when you look at the same

number it's still suggesting very strong

underlying private final demand at 2.6%

now that suggests that going forward the

GDP is probably going to be fine looking

at the Atlanta fed now GDP casting again

we only have a few weeks of data it's

also suggesting that so far based on

everything that we see GDP continues to

be above Trend so things are going well

when it comes to growth on the south

Landing part now what about the other

part inflation and that's been the fed's

focus for the past few years much less

so today as inflation has come down well

pce the fed's favorite inflation measure

U printed at 2.6% year-over-year again

that is above the 2% Target but if you

look at the trend over the past few

months or past few quarters inflation is

definitely moderating towards the fed's

Target now on a month over Monon basis

core PC printed at

0.2% now look at this data ser over the

past few months you'll notice that so we

had of course the inflation surprise

first quarter where on a month- over

Monon basis core PC spiked and kind of

freaked everyone out but since then it's

been definitely moderating suggesting

that that Spike up in the first quarter

could have been a blip so looking at

this core PC measure I think that the

FED is going to take a lot of comfort in

it and indeed the market right now is

pricing in about three cuts um this year

and as we have a Fed meeting this this

week I think the expectation is widely

that the FED is going to try to guide

the market towards a September cut so

when you're thinking about soft Landing

again growth is strong inflation coming

down things are looking pretty good so

far but that's not the case in all other

countries and so that takes us to our

next topic what's happening in Canada so

as you recall this month the Swiss

National Bank kicked off the global rate

cutting cycle by cutting rates they have

since cut again uh the ECB joined and

cut rates as well with the market

thinking that they're going to do so

again this year um and Bank of Canada

also cut rates earlier in the year and

again for the second time this past week

with Governor Tiff mlam thinking that

they're going to do it

again so what is driving this second

rate cut in anticipated series of rate

Cuts in Canada so let's look at the data

first so according to the bank's latest

monetary policy report you can see that

inflation really has been coming down

towards their uh Target to their target

range very well it's it it's been

gliding towards where they want so I can

understand from their perspective

there's really no need for policy to be

as restrictive as it has been but more

importantly though there are worrying

signs that growth is slipping away now

when you look at their aggregate numbers

GDP growth is about 1.5% so it's

positive it's not a recession but that

really hides some important per capita

numbers so one way you can grow your GDP

which is really just the amount of goods

and services produced in the economy is

simply by adding more people more people

even if uh they're not doing super

important things know they're producing

stuff and so you produce more goods and

services now Canada increased its

population by 3% in a year and it's

growing at 1.5% so on a per capita basis

it's actually shrinking

1.5% so even though they are not

technically in a recession the average

citizen is definitely in a recession

because their living standards are

declining now an interesting chart they

show is that per capita GDP has actually

been declining for four quarters so it's

I think

putting a lot of um pressure on

households now one thing you notice

that's really interesting about Canada

is that their interest rates so again

the way that monetary policy works of

course is through interest rates for a

lot of the people there if you have a

mortgage you have to renew it say once

every 5 years so in a sense you're

somewhat on a floating rate standard so

as we've been in this rate hike cycle

for a few years more and more people who

took really low rate mortgages a few

years ago are now having to renew their

mortgages at much higher rates and that

is pinching their wallets and reducing

their ability uh to spend money on other

things so again there there seems to be

uh heading towards a recession and so

that is that is causing Bank of Canada I

think to be a bit more cautious on

growth so with inflation really close to

their target and growth slowing

obviously they're going to be projecting

a easier monetary policy now looking at

the later labor market and you add a

whole bunch of people in even as your

demand is slowing that's that is

foreshadowing a pretty weak labor market

so far has been fine but Bank of Canada

has this really interesting statistic

showing that uh the percentage of

unemployed people each month that are

able to find a job is declining really

rapidly and it's approaching uh pretty

low pretty low percentages if you look

at this time series so again they seem

to be

very worried that the economy is heading

towards the wrong direction so what does

that mean for their markets now I think

the biggest impact is probably going to

be in their currency now Governor Tiff

mckam and chpw had a conference in

Washington a few months ago and someone

asked Governor MLM you just do whatever

the FED does right do you guys just copy

the fed and Governor MLM was very clear

that no they do their own monetary

policy and they have an escape valve

which is the currency so when uh when

they have different economic conditions

so things slow in Canada but are fine in

the US they can cut rates and that will

be buffered By changes in their currency

which will continue to act as a source

of easing making their exports more uh

competitive and if you look at CAD USD

you'll notice that it's been surging so

the Canadian currency has been

depreciating over the past few days now

it seems like there seems to be some

kind of U soft Silling around 1.39 I

don't know if we're going to punch

through we've definitely been hanging

around that level for the past few

quarters but if the Canadian rate

cutting cycle proceeds whereas the US

economy continues to do well uh you can

easily imagine that the Canadian um

dollar depreciate further against the

USD so we'll see how that goes um okay

now the last thing I want to talk about

is this really interesting paper by

Steven Moran who used to work at the US

Treasury also a great follow on Twitter

and noral rubini also known as Dr Doom

famed for his uh forecasting of the

subprime crisis in the 200 uh in 2008

during the great financial crisis so

what they're writing about here is

something we've talked about over the

past year and many people have also

noted um that when the treasury seems to

be doing something with their issuance

that is in a sense easing Financial

conditions now in their paper they

provide a very clear description of how

this works and also they have an

estimate as to how much they think this

is impacting the markets so at a high

level now when you when the FED is doing

QE what they're doing well they're doing

a couple things one of course is that

they're buying a whole lot of uh longer

dated treasury Securities and by

decreasing the supply of Treasury

Securities in the market you know basic

supply and demand uh if you decrease the

supply of something the price of

something Rises and so in Bond terms

that means it puts downward pressure on

interest rates and the FED is totally

open that's what they expect to do right

doing QE buying longer dated bonds fewer

longer dated bonds available for private

sector uh investors and so that puts

down more pressure on interest rates the

second thing the FED does is that the

way the way that it purchases this is it

basically prints a whole bunch of money

and so during times of QB the money

supply increases and if you are

monetarist you would think that has

something to do with economic ity uh to

be clear that perspective has been very

wrong for decades and decades um but in

any case these are the two common

Channel people think of when they think

of

QE supply of duration and money

supply now this new paper suggests that

when the US Treasury is changing the

composition of its debt issuant issuing

more treasury bills fewer coupons that

has a very similar impact So This Is How

They think of it so if you're saying if

you say have to issue a a trillion

dollars in debt um well the US Treasury

by simply issuing let's say a higher

fraction of that in short dated bills

rather than coupons you are also

decreasing the amount of uh coupons the

amount of longer bonds that the private

investors have to digest mechanically

that's very similar to QE right fewer

supply of duration downward pressure on

interest rates so that's pretty clear as

well the other point that they make is

that treasury bills you know that that's

really basically kind of like money so

if you think about it a treasury bill is

just an IOU from the United States

government kind of like a dollar bill

that pays interest now this is this

analogy is especially apt because Trey

Bells have very very few interest rate

risk and also they are very liquid so as

just like the FED is printing a whole

bunch of money to buy to buy coupon

treasuries you know when you're issuing

more bills you are mechanically in a

sense increasing the money supply again

it's not technically money in the sense

that you can't use it to go and buy

stuff at Denny's but it's money like and

so when the treasury is doing this they

are basically um doing a form of

Q in effect so looking at what the

treasury has done over the past few

quarters you'll note that uh the

treasury guides having about 15 to 20 %

of its issuance in bills over the past

few quarters it's act it's gradually

increased its share of bills so that it

sits comfortably above

20% now their paper looks not just at

the overall outstanding bills as a share

of over outstanding but also looks at

the flow of issuance over the past few

quarters and notes that the issuance

over the past few quarters has been

highly disproportionately in treasury

bills suggesting that the treasury is uh

has been having an impact

on financial conditions now the way that

you estimate just how much of an impact

though again this is going to the realm

of econometric models which uh for

reference only but looking at different

ways that theyve you can interest you

can estimate this uh they come up with

an estimate let's say about 25 basis

points on the 10year so they're thinking

that what the treasury did increasing

the share of Bill issuance has lower the

10year yield by about 25 basis points

and they equate that to about 100 basis

points worth of cuts by the FED now

again this is all for reference only but

the overall idea has been that yeah the

treasury is doing this and they are in

fact easing Financial conditions and

this in part explains why despite High

interest rates the economy continues to

be strong and financial assets have gone

through the

roof um again we we've talked about this

I think a couple weeks ago when uh say

treasury official Jos Frost gave a

speech explaining why he's doing

responding to push back that he's been

getting that he's goosing the markets so

the treasury is respond is the treasury

is thinking that yeah we're not doing

that much so you know we're just doing

something routine and treasury secretary

Yellen actually explicitly responded to

this paper uh in U in commentary saying

that it's not our intention to use

Financial conditions and I I I don't

know if that's true or not uh but I

think I I agree with this paper that

it's definitely having an impact on

markets if at the very least

psychologically because there are

certain Market participants who believe

uh it's it's uh easing Financial

conditions now one other really

important thing about this Market is the

potential future unwind oh just the side

so uh in addition their estimate of the

size of this issuance is um about 800

billion in uh Missing coupons that is to

say that if treasury were faithful to

its 15 to 20% uh share of bills they

would have been increasing coupon sizes

but and if they did that they would have

been issuing 800 billion more coupons

and so again that's that's a big number

um what they're worried about though is

that in the future obviously you can't

well you shouldn't continue to be

increasing bills as a share of total

debt one day if we have a new treasury

secretary or things change what is going

to happen when that new treasury

secretary needs to unwind this and get a

bill share back down to about know 15 to

20% now they're thinking that when that

happens you could have a sizable

increase in Long rated yields maybe 30

basis points and that could be uh very I

think that would tighten Financial

conditions going forward if we have

maybe next year or maybe in a future

administ ation when they finally want to

wind down uh

what this Administration has done so

that seems to be again keep in mind that

um Dr Doom is well known for for having

concerns so for all I know this could

continue indefinitely I think if you

look across the world U many many

countries have large share of floating a

large share of short data debt as part

of their as part of their um overall

debt St but but we'll see if they want

to remain faithful to 15 20% definitely

definitely there could be some Financial

troil in that process okay so that's all

I prepared for today thanks for tuning

in this week is an fomc week and I will

be back on Wednesday to give you my

thoughts on the fomc meeting again if

you're interested in hearing my thoughts

don't forget to check out my blog u.com

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subscribe to this Channel all right talk

to you guys soon