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Insight
14 February 2025
· Jon Webb
Given that it’s Valentine’s Day, some of you may be feeling warm and fuzzy courtesy of a significant other. Of course, others might be married. But for those of you who are following the latest economic data, the warm fuzzy feeling may apply doubly. Consumer spending data could definitely give the impression all is right with the world if BofA’s Moynihan’s data applies across the board, “The bank’s retail customers are spending about 6% more money in the first 40 days of this year compared with the same period in 2024”. (Let’s go ahead and blame the weather/fires for the latest retail sales reading.)
Newsletter
13 February 2025
· Jon Webb
Our FX systems started the year with ashort USD bias (against the general consensus for a stronger USD). For the first three weeks this bias worked well as fears of blanket US tariffs did not materialize, however, in the final week of January, tariffs were announced on Mexico, Canada and China leading to some renewed USD strength. Nevertheless, so far, the measures that have been taken (with some already suspended for now) have not been as bad as feared. Looking forward to this month, we note the signals are more mixed for the USD though our hedge ratios remain negative USD for the largest currencies: EUR, GBP and JPY.
Insight
7 February 2025
· Jon Webb
Another week into Trump 2.0 and you’d be forgiven for starting to tune out some of the news around the administration. After all, nothing screams kabuki more than touting “yuge” concessions from the Canadian and Mexican governments that were already in the works… Admittedly it’s two birds with one stone (that was going to be thrown anyway) for the US’s neighbors, but it does make it hard to take the threat of tariffs seriously. That being said, while some of the spectacle is certainly theater, like a bullfight it does come with horns as markets and political actors react to the latest news.
Insight
31 January 2025
· Jon Webb
If you’re wondering what the crashing sound is in the background, it’s the bull in the China shop discussed last week as the Trump Administration works up a full head of steam. Will it go through with 25% tariffs on the US’s neighbors? Is there going to be a giant sucking sound in some parts of the economy courtesy of a potential funding freeze on federal grants and loans? Will there be a squeeze in citrus prices due to missing workers in California? The age-old shoulder shrug of “time will tell” certainly applies, but some people aren’t taking the uncertainty sitting down.
Insight
24 January 2025
· Jon Webb
Trying to understand the Global Economic Impacts of Trump’s Second Term. So far, he has signed more executive orders on his first day than the last ten presidents combined. As of this writing in the middle of the Friday trading day, US markets initially seem impressed, with the S&P reaching an all-time high earlier this week and the Nasdaq 100 and Solactive 200 both higher. There is a bit of pullback today, but we are higher for the week overall. And US markets aren’t alone, Japanese and European equities have had their best performance this year. Maybe Japan and Europe aren’t going to be affected by the Trump tariffs? Last time we looked, they made a whole lot of automobiles, but what do we know?
Newsletter
17 January 2025
· Jon Webb
Our FX models for USD against EUR, GBP, AUD, NZD and NOK, which were largely USD positive last year, reversed in January. In particular, our reversion models are suggesting some strength in these currencies against USD in the near term. Nevertheless, the continued outperformance of the US economy, alongside sluggish growth in Europe, suggests that any USD reversal will not be sustained.
Insight
7 January 2025
· Jon Webb
Ah! The start of the new year. The new calendar offers so much possibility! A moment of change that seems to come just as we have spent time following traditions and celebrating holidays that have managed to survive. It’s a comforting reminder that while “progress” is relentless, amid the seasonal ebb and flow there are still some things we can rely on. A missed Fed inflation and rates projection, a TFTD that is once again arriving after the end of the year (mea culpa encore), and… a return to the wisdom of Whitney Houston?
Insight
6 June 2024
· Jon Webb · 1 PDF
There is a window emerging for position reduction in the widely held JPY carry trade. Positions are crowded at the same time that the rationale for the extension of the current benign regime is diminishing (carry, carry-to-vol, policy divergence, etc). There is no sense of danger within analyst expectations or embedded in option pricing. While we lack an immediate catalyst, sometimes price can be its own trigger. With USDJPY around 156 and an easily defined stop loss, the risk reward of engaging with JPY strength is compelling. Escalator / liftshaft price action provides significant convexity. Crowded JPY shorts would also need to be covered in the event of a risk-off catalyst coming from other asset classes. Owning USDJPY puts can be an attractive portfolio hedge for investors concerned about general market complacency or for more active tactical FX managers and traders.
Insight
25 April 2024
· Jon Webb
In lieu of this week’s Thoughts From The Divide, we wanted to share Julian's latest interview with Ted Oakley, Managing Partner at Oxbow Advisors.
Insight
23 March 2024
· Jon Webb
The rest of the world isn’t quite experiencing the same economic momentum as the US (the latest S&P Flash PMI noted that “input costs rose at the fastest pace in six months, while firms increased their selling prices to the largest extent since April last year”), making cuts a more palatable choice for them, but we feel for the Fed, who wants to be the odd man out?
Insight
14 March 2024
· Jon Webb
With the Fed in blackout, the market has been left to its own devices to digest this week’s onslaught of economic data. The inflation data was particularly indigestible. CPI numbers came in hotter than expectations, with both Core and Headline higher than forecasts on a YoY basis at 3.8% and 3.2%, respectively: only slightly worse than expected, but worse than expected. The market also had to deal with PPI that was substantially hotter than expected: the month on month came in at 0.6%, double the consensus forecast. Under the surface, goods inflation appeared to once again be rearing its head, accounting for “about two-thirds of the rise in the headline PPI”, courtesy of “a 1.2% surge in goods prices, the biggest increase since August 2023”. (The Houthis are not helping). While the Fed may have taken a temporary vow of silence, Yellen is under no such constraint. Speaking in an intervie…
Insight
1 March 2024
· Jon Webb
In April of last year, Huw Pill caught flack for saying that Brits “need to accept that they’re worse off”. This was followed by John Authers coming to the defense of the pilloried BoE chief economist. As we wrote, Authers noted that the comments were taken out of context and explained that the BoE’s Chief Economist was describing how “after a few external shocks, inflation becomes a collective action problem” where “ideally everyone would take a share of the hit, and then they can move on. Human nature isn’t like that, and as a result, economics isn’t like that”. Now, roughly a year later, the BoE’s Catherine Mann has picked up Mr. Authers’ baton (alternative article, link). It turns out that people who can maintain their standard of living will tend to do just that! Bemoaning the “challenge” of bringing inflation back to target, Mann said there was “a lack of consumer discipline” to r…
Insight
23 February 2024
· Jon Webb
Along with the release of the January Fed minutes this week, there was a deluge of Fed Speak, with Jefferson, Harker, Waller, and Cook all opining on the outlook for cuts. Most of the refrain was along the lines of Powell’s need for “confidence”, with Waller saying that he needed “to see at least another couple more months of inflation data” and Cook echoing the idea, saying that “as we gain greater confidence that disinflation is ongoing and sustainable, that changing outlook will warrant a change in the policy rate”. Harker pushed back on immediate cuts, asking for markets to “just give us a couple of meetings”, following up by saying, “I would caution anyone from looking for it right now and right away”. But while there may be some pushback on timing, that cuts are coming appears to be very much fait accompli in the mind of the Fed.
Insight
15 February 2024
· Jon Webb
While there is likely some argument within the Administration as to whether supply chain shocks are both necessary and sufficient or simply necessary (mirrored by the Fed’s own divergence in views), it’s clear that Yellen and the White House are not too concerned about the Philips Curve, nor seem to put stock in John Cochrane’s “fiscal theory of the price level”. After all, Yellen is still quoted as saying that the US is on a responsible fiscal path, despite the deficit (which is, as Mosler notes, the public’s surplus). Or perhaps they think that with some proper cajoling, the greedflation genie can be put back in the bottle (at least temporarily) as CEO’s find a renewed sense of civic virtue and community? We wouldn’t hold our breath.
Insight
12 February 2024
· Jon Webb · 1 PDF
Japan is likely to come into increasing focus this year. With bond yields now being allowed to rise as the BoJ’s Yield Curve Control experiment comes to an end, the BoJ’s roadmap to ending NIRP (if things go to plan), the multi-decade underperformance of Japanese equities still fresh in asset allocators’ minds (despite some promising upside momentum) and a chronically weak currency, (especially on a real effective, inflation-adjusted trade-weighted basis), there is plenty of potential for disruption.
Insight
2 February 2024
· Jon Webb
Another FOMC presser come and gone and this week, there’s no doubt that Powell and friends intend to cut. Granted, Powell rejected the mechanical characterisation of “adjustment cuts”, saying that higher real rates coming from dropping inflation “doesn’t mean we can mechanically adjust policy”. Sure, right, noted. Being cynical, some part of us wondered if this has anything to do with worries about the threat AI poses to high wage, high status careers like Doctor, Lawyer or FOMC governor.
Insight
12 January 2024
· Jon Webb
For those of us who regularly follow the “wonksphere” on social media, it’s been hard to ignore the pushback against the doom and gloom that economic sentiment surveys have consistently reported. Commentators like Stancil and Sahm have bitterly complained about the disconnect between the public’s negative perceptions relative to the hard economic data, which is ostensibly pretty good. In this, they have been carrying water for policymakers like Lael Brainard, who have attempted to burnish the Administration’s economic achievements to push back against the negative perception of the economy. The most obvious of those achievements is the decline in inflation – see, we told you it was transitory!
Insight
2 January 2024
· Jon Webb
While we may have missed getting out our Thoughts From The Divide year-in-review piece before the new year (mea maxima culpa), we did manage to spend some time going through our “best of” and “greatest hits” in anticipation of the changing of the calendar. As usual, there were some repeated themes and tropes, but at the highest level, what struck us was that last year seemed very much governed by the timeless question from the underrated philosopher of science, Whitney Houston: “How will I know?” (closely followed by her observation that “crack is whack”)
Insight
15 December 2023
· Jon Webb
If the saying is that we’re always fighting the last war, Chair Powell and his Fed comrades appear to be shellshocked. Not so long ago, when asked about where the FOMC’s collective thinking was, Mr Powell went with the rather cumbersome formulation “not thinking about thinking about” rate hikes. This time around, when asked about the various ins and outs of potential rate cuts, Powell said point blank that “the next question… is when it will become appropriate to begin dialing back the amount of policy restraint that’s in place… that’s really the next question, and that’s what people are thinking about and talking about”.
Insight
9 December 2023
· Jon Webb
Last week’s excitement in bond markets came courtesy of Governor Waller offering a mechanical rationale for rate cuts. Simply, “If inflation goes down, you would lower the policy rate.” This came, of course, in the context of warnings about financial conditions and other caveats, but as is so often the case, what the markets heard was “so you’re telling me there’s a chance?”. That doesn’t mean that we disagree with the market’s read of where the Fed’s head is. Fed Governors don’t make too many boo-boos with their messaging, and when they do, it’s often an error of timing rather than content. The market has now priced cuts down to “around 4% by the end of 2024” and while that seems perhaps overdoing the enthusiasm a tad, we suspect that the market has gotten the gist about right.