Soft-landing & War.
Analysis of the current scenario with forward data expectations.
First of all, I want to decline some rumors that have been notified by some close friends; I have nothing to do with a cryptocurrency called Quant. Second of all, I post research for free, I’ve never asked anyone to pay to read what I write; there was a moment where there was a Monero wallet address added at the end of two substack posts, which weren’t a requirement in order to read the posts, it was added if people wanted to, but it wasn’t implemented in the forward posts from those two posts. Third of all, this is my hobby, not my job, because I don’t get paid, and I do the research for fun and hedge with my own money.
United States:
The United States economy is at its strongest moment in decades, given a strong job market and a resilient consumer, whose sentiment has notably risen. The soft-landing narrative remains, although some key data in the Beige Book showed discrepancies with job market statistics but remarked on the resilience of the consumer.
Figure 1. Lowest Jobless Claims Since September 2022.
Figure 2. Consumers’ Sentiment At The Highest Level Since July 2021.
Figure 3. “cooling labor market“ cited in the Federal Reserve’s Beige Book.
Markets ( DIA 0.00%↑ SPY 0.00%↑ QQQ 0.00%↑ ) reacted within the range of expectations, but the tsy market ( TLT 0.00%↑ ) has been and still is focused on the government’s spending and geopolitical developments; the stopgap measure taken by politicians, which is the “Further Additional Continuing Appropriations and Other Extensions Act, 2024,“ ( §2872 ) cleared the previously mentioned worries over the plausible govt shutdown that was a market meltdown catalyst; the stopgap measure is once again a kick the can measure that politicians will have to either extend or let the govt shutdown on March of this year.
Figure 4. President Biden Signs The “Further Additional Continuing Appropriations and Other Extensions Act, 2024,” ( §2872 ).
Figure 5. Markets React To President Biden’s Signing Of The “Further Additional Continuing Appropriations and Other Extensions Act, 2024,” ( §2872 ) That Averted A Govt Shutdown.
Markets ( DIA 0.00%↑ SPY 0.00%↑ QQQ 0.00%↑ ) are still betting on the most optimistic outcome, which is the soft-landing outcome; this is reflected in markets’ performance. Markets’ dovishness has shifted hawkish, it’s likely that the FOMC will maintain a hawkish hold until after inflation reaches the price stability goal; markets have undone the previously priced six rate cuts for this year to just five rate cuts this year; this is due to the strong statistical data releases that make the FOMC’s dual mandate not be affected; and consequently, the FOMC is likely to stay focused on the price stability mandate of the dual mandate due to the fact that inflation is near but has not yet reached the FOMC’s price stability goal while the job market is at its strongest point in decades.
Figure 6. Market-Priced Rate Changes:
Figure 7. FOMC officials’ Rate Projections:
Figure 8. FOMC officials’ Personal Consumption Expenditures (PCE) Inflation Projections:
Figure 9. United States’ Personal Consumption Expenditures (PCE) Inflation Is Almost At The FOMC’s Price Stability Goal.
A dovish rate cut in the current scenario would undo the progress made by the FOMC on price stability; hence, it is unlikely to be a rate cut until at least the FOMC’s price stability goal is achieved; therefore, expectations are for a hawkish hold until there is a drastic shift in the current strong statistics. As previously shown, the geopolitical scenario is making supply-side inflationary factors rise, which monetary policy can’t control through the rates. Hawkishness among FOMC officials prevails, which is something that markets ( DIA 0.00%↑ SPY 0.00%↑ QQQ 0.00%↑ ) should be attentive to due to the fact that there is a big contrast between the market-priced dovish rate stance and FOMC officials’ hawkish stances.
Figure 10. FOMC Hawk & Dove Officials:
It wouldn’t be a surprise if there weren’t any rate cuts, as there really is no need for rate cuts when the labor market is strong. Keeping a hawkish rate higher than the price stability goal ensures safe growth by setting the access to speculation higher than the rate of inflation; without price stability, the value of the currency depreciates.
If you ask, Where should rates be? The next charts show where rates should be based on seven simple monetary policy rules that use data from the Survey of Professional Forecasters, forecasts from the Congressional Budget Office, and forecasts from the Federal Reserve Bank of Cleveland Staff Small Bayesian Vector Autoregression model.
Figure 11. Summary of Federal Funds Rates Based on Seven Simple Policy Rules.
Table 1 provides a summary of the results across all the simple policy rules and all forecasts using quartiles. With the median funds rate as well as the 25th and 75th percentiles and the maximum and minimum at each point in time.
Figure 12. Federal Funds Rates Based on Forecasts from the Survey of Professional Forecasters and Seven Simple Policy Rules.
Table 2a provides the results from seven simple monetary policy rules conditional on forecasts from the Survey of Professional Forecasters. The Survey of Professional Forecasters provides forecasts for Personal Consumption Expenditures (PCE) inflation, core Personal Consumption Expenditures (PCE) inflation, and the unemployment rate. Because they do not estimate the output gap, construct a proxy for the output gap using Okun’s coefficient and the unemployment gap. The forecast horizon is shorter than that of other forecasts included here, extending 4 quarters into the future, which limits results coming from the rules.
Table 2b provides the formulae used to calculate each policy rule based on forecasts from the Survey of Professional Forecasters.
Figure 13. Federal Funds Rates Based on Forecasts from the Congressional Budget Office and Seven Simple Policy Rules.
Table 3a provides the results from seven simple monetary policy rules conditional on forecasts from the Congressional Budget Office (CBO). The Congressional Budget Office (CBO) provides forecasts for Personal Consumption Expenditures (PCE) inflation, core Personal Consumption Expenditures (PCE) inflation, the unemployment rate, and the output gap.
Table 3b provides the formulae used to calculate each policy rule based on forecasts from the Congressional Budget Office (CBO).
Figure 14. Federal Funds Rates Based on Forecasts from the FRBC Staff Small BVAR Model and Seven Simple Policy Rules.
Table 4a provides the results from seven simple monetary policy rules conditional on forecasts from a small statistical Bayesian Vector Autoregression model consulted by staff at the Federal Reserve Bank of Cleveland (FRBC BVAR). Because the Cleveland Fed staff consult a variety of forecasting models, the FRBC BVAR model forecast does not necessarily represent the official forecast of Cleveland Fed staff or the president of the Cleveland Fed. The Bayesian Vector Autoregression model consulted by staff at the Federal Reserve Bank of Cleveland (FRBC BVAR) provides forecasts for Personal Consumption Expenditures (PCE) inflation, core Personal Consumption Expenditures (PCE) inflation, and the unemployment rate. Because it does not provide an estimate of the output gap, construct a proxy for the output gap using Okun’s coefficient and the unemployment gap.
Table 4b provides the formulae used to calculate each policy rule based on forecasts from the Bayesian Vector Autoregression model consulted by staff at the Federal Reserve Bank of Cleveland (FRBC BVAR).
The previously shown statistics are in line with market expectations, but are far more dovish than what FOMC officials projected in the last Summary of Economic Projections. Next week’s Purchasing Managers Index (PMI) data releases on Wednesday, the Gross Domestic Product (GDP) growth data release on Thursday along with the Core Personal Consumption Expenditures (PCE) inflation data release on Friday should indicate if monetary policy should be adjusted from its current stance, as monetary policy is data-dependent.
Figure 15. Expectations Over This Week’s Data Releases:
A 1.5 sigma reaction should be expected over Wednesday’s data, a 2.5 sigma reaction should be expected over Thursday’s data, and a 1.5 sigma reaction should be expected over Friday’s data, only if data releases are within the range of consensus/forecasts shown in the previous figure. The FOMC rate decision two weeks from now is expected to maintain the current rate, and markets ( DIA 0.00%↑ SPY 0.00%↑ QQQ 0.00%↑ ) should be attentive to Jerome Powell’s press conference after the rate decision, given the fact that it’ll likely indicate the forward monetary policy stance from the current one. The partisan conflict index has eased, which indicates that the level of disagreement between officials has lowered; therefore, the monetary policy stance shouldn’t generate uncertainty.
Figure 16. Expectations Over The FOMC Day:
Figure 17. Partisan Conflict Index.
It’s remarkable that since the rate hiking cycle paused in September of last year’s FOMC meeting, the dollar and yields ( TMV 0.00%↑ ) have eased in sync while emerging and developed markets continued to rally along with major indexes (DIA 0.00%↑ SPY 0.00%↑ QQQ 0.00%↑ ).
Figure 18. Ascent Broad Index.
[ Left Y-axis: Index data. (🟦) | Right Y-axis: Volatility of the index. (🟥) ]
Europe:
Next week’s European Central Bank’s rate decision on Thursday is expected to be a hawkish hold given the fact that the Euro-Zone statistics indicate no need for rate cuts, although markets expect rate cuts in the coming rate decisions.
Figure 19. Market Expectations Over The European Central Bank’s Monetary Policy Rate:
Figure 20. Economists' Expectations Over The European Central Bank's Monetary Policy Rate:
Figure 21. Expectations Over The European Central Bank’s Rate Decision:
Lagarde: European Central Bank Will Likely Cut Rates In The Summer:
Source: Bloomberg
Last year, European countries took measures towards ensuring key commodity supply from Norway replacing Russia’s natural gas supply which has and will keep ensuring stability in the Euro Area; that key supply of energy sector commodities to the Euro Area has reduced supply and demand-driven price pressures, which has helped the European Central Bank address inflationary pressures more accurately, as mentioned before.
United Kingdom:
The United Kingdom’s inflation is still quite higher than the Bank of England’s price stability goal, the Bank of England previously forecasted that inflation was going to reach the Bank of England’s price stability goal in the fourth quarter of 2025, the next Monetary Policy Report issue by the Bank of England after the rate decision should indicate the forward rate stance and price stability expectations based on forecasts.
Figure 22. The Bank of England Forecasts That Inflation Will Reach The Bank of England’s Price Stability Goal In The Fourth Quarter of 2025.
Figure 23. Next Two Week’s Data Release Expectations:
The United Kingdom’s markets are far more hawkish than the European and American markets; the market-priced neutral rate is at 3.5%, the stance and monetary policy measures by the Bank of England’s Monetary Policy Committee members indicate that the Bank of England is somewhat hawkish.
Figure 24. Market Expectations Over The Bank of England’s Monetary Policy Rate:
Figure 25. Bank of England Monetary Policy Committee Hawks & Doves:
The last United Kingdom’s Gross Domestic Product (GDP) data was within the range of expectations, but the United Kingdom’s economy is still at risk of a technical recession despite a robust rebound in the Gross Domestic Product (GDP) statistics lifted by services sector.
Figure 26. United Kingdom’s Gross Domestic Product Growth (GDP) Was Lifted Up By Services Sector.
Asia:
China:
The Chinese economy is stabilized through the People’s Bank of China’s monetary policy measures; Chinese markets don’t reflect the health of China’s economy. Chinese markets’ flows are to bonds and to emerging markets, not to stocks; Chinese government’s measures towards trying to stop the Chinese stock market rout have not had much effect and have made the rout spread to non-mainland markets.
Figure 27.
China’s Gross Domestic Product (GDP) is quite reliant on very few factors, which are the industrial output statistics and retail sales statistics; this is due to the fact that China is a major supplier of goods to the world, supply disruptions caused by the pandemic in early 2020 made the Chinese economy contract, while the global bullwhip effect in late 2020 made the Chinese economy expand in early 2021 and stabilize in late 2021. Geopolitical-driven factors have led to disruptions in China’s industrial output activity since early 2022; the onshoring of production by the United States and friendshoring of production by Europe have also made China’s retail data be compressed until supply and demand of goods equilibred in early 2023, the previously mentioned correlated factors to China’s Gross Domestic Product (GDP) growth are now in sync without lagged effects, this is reflected in the next chart.
Figure 28. China’s Gross Domestic Product (GDP) Growth Is Adhered To China’s Industrial Output And Retail Sales.
The People’s Republic of China’s government, led by 习近平, is ensuring that the Chinese economy doesn’t enter into a recession, although China is facing a lost decade-like scenario, which may be why the government has set a plan for it, that plan is a 30 trillion yuan plan called “silver economy“ that will not only ensure that the rapidly-aging population is taken care of, but also create and mobilize state and private sector jobs, which consequently stimulates the Chinese economy.
Markets might be hedging BRICS Alliance through Indian markets instead of Chinese markets in order to prevent geopolitical-driven shocks, as India is a neutral country of the BRICS Alliance; these flow changes have made Hong Kong, which was the fourth largest stock market in the world be overtaken by India, as can be seen in the next chart.
Figure 29. Market’s Might Be Hedging BRICS Alliance Through India And Not Through China Given The Market Flows.
As mentioned before, the New Year speech by 习近平 was hawkish; China’s stance is towards reunifying China from separatists, as it’s theirs.
(…) “China will surely be reunified, and all Chinese on both sides of the Taiwan Strait” (…)
The elections in Taiwan developed as expected, it’s highly likely that China will react to every provocative action by separatists, as China warned before the elections. China wouldn’t lose anything in the long run but gain control over the world’s supply of semiconductors, which is quite essential for quite literally everything as there are very few things that don’t use semiconductors, as explained before. The next figure shows how China might move forward over Taiwan.
Figure 30. Potential Landing Beaches For Amphibious Vehicles & Taiwan’s Industrial, Military, and Logistics Sites Map:
To conclude, expectations over China remain the same.
Japan:
The Japanese economy is behaving within the range of expectations; Japan’s Prime Minister Fumio’s measures are ensuring that the Japanese economy doesn’t enter into a recession, which is something that remains plausible. Japanese markets remain cheap relative to historical data and remain cheap in dollar terms.
Figure 31. Japanese Stocks Are Quite Cheap:
Japan’s inflation is almost at the Bank of Japan’s price stability goal, markets reflect confidence in the Japanese government’s measures towards ensuring price stability and growth.
Figure 32. Deutsche Bank Japan Gross Equity Futures Index.
[ Left Y-axis: Index data. (🟦) | Right Y-axis: Volatility of the index. (🟥) ]
Figure 33. Deutsche Bank Japan Gross Equity Futures CTA Index.
[ Left Y-axis: Index data. (🟦) | Right Y-axis: Volatility of the index. (🟥) ]
Market expectations are for a rate hike in April of this year, it’s quite remarkable that the Bank of Japan’s projections ( note: the document is in Japanese; I don’t know how to find it in English, I can read, speak and write in nine languages, it may be a curse or gift that I sometimes can’t find the official data releases in English. ) are quite hawkish.
Figure 34. No Rate Hike Until April Of This Year.
Figure 35. Bank of Japan’s Gross Domestic Product (GDP) and Consumer Price Inflation Projections:
Markets should be attentive to the fact that inflation and the Japanese government’s debt to Gross Domestic Product (GDP) are quite elevated which isn’t something good, although the rate hike in April should make inflation ease.
Figure 36.
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