Morning Seeds

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Morning Seeds • 12/02/2022 - 9:34 AM EST

Yen Another USD Weakness Factor

We have been getting USD weakness follow-through with a 2.5% move in the latter part of the week. While Powell's perceived dovishness has attracted significant focus, Yen and RMB strength have also been material drivers. The BOJ's Asahi Noguchi, who is at the dovish end of the spectrum, made comments yesterday about starting to see green shoots emerging toward normalized inflation, and last night Tamura Naoki called for a broader review of the monetary policy framework. We see markets as generally taking that as retrenchment and preparation for a new, more hawkish regime at the end of Kuroda's term next year. The remarkable reversal in the Yen from the highs over the past six weeks illustrates another area in which macro headwinds may be turning to tailwinds for corporate earnings.  

Carry In Focus

In just a few weeks, markets have adjusted their future rate expectations by forecasting increases in December, February, and a peak in May. 5yr notes have rallied and FCI has eased substantially, igniting the interest of CTAs in the market. Often at this point each year, investors use carry trades to set up positioning for the next year. From our perspective, it seems that many investors don’t think the Fed will ease next year and have begun to use carry trades to back that assumption. Today will be an interesting test for market strength given non-farm payroll data was released significantly higher (263k) than expected (200k) with AHE also stronger than expected.  

Consolidation Post Powell and Data

Following the large Fed Chair Powell-driven rally on Wednesday, stocks consolidated the gains on Thursday. The ISM release showed a weaker headline number breaking below the 50 level. Prices paid were down sharply as well to support the growing sentiment that the worst of Fed rate hikes are behind us. Rates vol and IG spreads were lower to help support equities moving forward. Today’s stronger-than-expected payrolls will act as the next hurdle for holding the recent strength in stocks as we enter the Fed blackout period tomorrow.  

COVID Regime Shift Digestion

Markets have digested the PRC's apparent COVID policy shift, notwithstanding uncertainty with respect to the near-term epidemiological consequences of loosening restrictions. There is some talk of "buy the rumor sell the fact," and we do anticipate ongoing volatility, but the longer-term economic consequences appear solidly constructive. Last night, the outgoing head of the PBOC Yi Gang, made comments that monetary policy was likely to be accommodative to support recovery with the ease in Covid controls. The RMB is now back to 7, which is a remarkable reversal. Going forward, we think watching for measures of COVID disease severity and whether there’s an accelerating burden on the health system instead of case counts, will be the biggest determinant of the market's read on China's openness.  

Back on the Trains

The Senate passed the House bill imposing the PEB framework on the Unions — remarkably bipartisan with 80 votes. The Senate did not pass the bill granting the extra 7 days of sick leave with sufficient margins. This was decisive and quick. The general message for 2023 labor negotiations may be that there’s no government appetite to mess with collective bargaining, especially so when supply chains and inflationary periods are effectively being held hostage. We think this is an important tone for labor negotiations such as UPS' coming up next year. Given how quickly the Senate got this done it leaves more room for the NDAA and Omnibus in the coming weeks during the lame duck. The focus early next week will be on the Georgia runoff Tuesday.