Calendar Week 13-2023

 

At face value, all seems OK in the USA. They are getting bailouts, economic data still strong (PMIs) and stock market finished up on the week. However, pop the hood and the engine underneath tells a different story.

 

Things are breaking everywhere. Odds of a rate hike at the next FOMC in May are 25% but the short end is 125 basis points from the Feds overnight rate with the 2yr yield at 3.75%. That screams recession.

 

The stock market is seemingly blind to it, with VIX coming off recent highs too. But there is smart money seeking the safety of bonds, in particular JGB and US Treasuries. Both the Yen and Greenback were beneficiaries of the flow as funds bought up the short end of the yield curve (pushing rates lower).

 

The week ahead has some key data to follow (AUD Inflation, US GDP, CAD GDP and the Feds favourite PCE PI) however, everyone will be still nervously watching the banking system for more failures. I’d also be looking for wider corporate failures too, as lending dries up, there will be companies folding in increasing numbers.

 

This will be a recession we have to have. Or they will bring back QE and that wealth gap will get even more pronounced. In America, the top 10% own 76% of the wealth. That is 12.9M families of the 130M families in the country. In Australia it is slightly better odds but still starkly unequal, with the top 10% owning 46% of the wealth.

 

I am not a socialist by any stretch of the imagination, however I have argued against fiscal and monetary policies that unfairly target middle and lower classes, who already doing it tough. Now we have a situation where the top 10% are not affected by inflation or rate rises, in fact are most likely to be better off, whilst those who are renters or mortgage holders are getting squeezed out of disposable income.

 

Currency Guidance

 

USD – I still see choppy moves ahead as the flight out of US dollars is offset with the safe haven flow into US Treasuries, will be interesting to see if it can get back above 103, or is that now an established resistance level.

 

AUD – Failed at 0.6700 and will soon be testing support at 0.6520

 

EUR – European bank default risk has exploded as talks of Deutsche bank the next to fail. That would be scary if it did. Price in the euro is not reflecting this, yet. Technically it looks to be heading to 1.10 after finding support in the low 1.07s

 

GBP – Bouncing of 1.22 as it continues to cross the range to upper band at 1.24.

 

JPY – A little selling late Friday which to me is just profit taking, the yen should continue to strengthen as markets start to price in the coming recession.