Goldilocks "Just Right" Porridge

The US labour market seems to be in a comfortable zone—not too hot and not too cold. Reminiscent of Goldilocks's "just right" porridge.

February's addition of 275,000 jobs is noteworthy but unlikely to spur any immediate shifts in the Federal Reserve's 3-cut thinking. Although the headline was much higher than anticipated, the increase in permanent job losses and the uptick in the unemployment rate to 3.9% signal some normalization on the US jobs front. Additionally, and significantly in the market’s inflation preview, wage growth moderated during the period.

Perhaps the post-NFP market downswing was due to bullish investors anticipating a report that might prompt faster interest-rate cuts. Indeed, there was a lot of hype around alternative employment measures that pointed to a sub-150 headline print; it’s conceivable that traders were banking on a lower-than-consensus number. So, with no joy on the headline front, the street quickly pivoted to more pressing concerns about the upcoming US inflation report. And rightly so, as favourable price trends could be crucial to sustain the broader rally wagon momentum. Nevertheless, achieving the coveted 2% inflation target will likely be a fickle final mile, which might limit, if not continue, to create downward pressure on the global index to start the week.

Still, even as the Federal Reserve persists in advocating patience regarding inflation concerns, it continues to dangle the rate cut carrot, which is a compelling “ everything rally “ prospect. However, if rate relief fails to materialize by early summer, many investors across various asset classes may find themselves neck-deep in hurt.

In any case, the stock market experienced a relatively tough day on Friday. Notably, Nvidia shares declined for the first time this March, although they remain significantly up by over 75% since the beginning of the year.

As the Tech rally screeched to a halt, market participants pondered a familiar question: Are equities in a bubble?

At this juncture, the narratives around concentration risk, bubbles, and market frothiness have been discussed extensively, almost to the point of exhaustion. While market leader multiples are elevated, they don't reach the levels seen during the dot-com bubble, the COVID-era surge, or even midway through last year when considering forward multiples. It's worth noting that Nvidia, for instance, became relatively cheaper as its stock price rose due to a significant increase in profits and profit expectations.



The latest inflation data from China, released on Saturday, revealed that consumer price inflation surpassed expectations while producer price deflation intensified once more.

Annual consumer inflation climbed to 0.7%, marking its highest level in almost a year. This uptick suggests that the economy is undergoing a reflation process, and policymakers may be gaining ground in their efforts to combat deflationary pressures.

The producer price index declined by 2.7% year-on-year, surpassing expectations and marking the 17th consecutive month of annual price declines. This ongoing trend indicates persistent deflationary pressures in the pipeline, hinting at soft consumption demand.

Deflation remains a significant concern among investors regarding China's economic landscape. Another concern is the escalating trade tensions between the United States and China. On Friday, Bloomberg reported that Washington is considering imposing sanctions on several Chinese tech companies, adding to the geopolitical uncertainties surrounding the two nations.

Capital outflows from China have been a consistent trend for some time. However, analysts at the Institute of International Finance suggest this trend may be reversing. In February, China experienced its first equity inflow in six months, marking its most significant influx of capital in over a year. This shift in capital flows could indicate changing investor sentiment and potentially signal renewed confidence in China's markets.

The clamour for increased fiscal and monetary stimulus has once again intensified recently. While no one advocates for the massive stimulus measures seen during the Great Recession, the fiscal measures announced alongside the growth target reveal a relatively modest approach. The official budget deficit target of around 3.0% of GDP remains unchanged from last year, despite a slight increase in the special government bond issuance to CNY4.0 trillion from CNY3.9 trillion. However, authorities will likely need to implement more substantial measures in the coming months.

Beyond increased government spending, it is evident that the Chinese economy requires structural reforms to encourage citizens to spend rather than save. This necessitates implementing long-term solutions, including establishing a robust social safety net, a higher labour share of income, and improved retirement benefits. However, none of these changes are imminent in the near term, highlighting the challenges associated with implementing such reforms.

The global landscape at the Asian market opening on Monday appears to be a mixed bag. On one hand, indications suggest potential interest rate cuts in the U.S. and euro zone beginning in June. However, there are also indications that the impressive rally on Wall Street is losing momentum as investors turn to US inflation data.

Last week, the S&P 500 and Nasdaq closed lower. While this marked only the third weekly decline in 19 for both indices, it occurred despite a significant drop in Treasury yields, which is most unusual in a post-Covid investment world.



For those currently betting on a BoJ hawkish pivot, the main upside risk for the USD in the coming week could stem from another surprise in inflation figures for February. But if you are a Yen trader, you are probably hoping for a hotter print to leg into more USDJPY shorts at higher levels.

With all the rate hike smoke signals emanating from the Bank of Japan( BoJ) and the recent run of news leaks and data flow supporting that narrative, the Overnight Index Swap (OIS) market now implies close to a 100% probability of a 10 bp rate hike at next weeks BoJ meeting. This represents a notable shift from around a 30-35 % probability just a week ago; hence, the Yen rallied big time versus the dollar last week.

Given these pre-BOJ bullish Yen developments, attention should now turn to potential details of the policy announcements and, specifically, the BoJ policy guidance as to whether they signal that this is the first hike in a series to come and whether they will announce a policy change regarding the balance sheet. Reports from JIJI Press on Friday suggested that the Bank of Japan (BoJ) might replace its Yield Curve Control (YCC) policy with a plan to purchase JPY 6 trillion in Japanese Government Bonds (JGBs) per month.

A March rate hike is strongly being considered and almost entirely priced, and yes, there is a chance of some unlikely disappointment if the BoJ stays the course; however, in this “odds on” rate hike environment, it is hard to ignore the significant portion of legacy YEN shorts that remain in carry trade funding positions and outright US dollar longs. So if the hawkish stars align, where the BoJ proceeds with a rate hike, signals further increases in the future, and potentially addresses YCC policy, there is potential for USDJPY to reverse this year’s rally fully.

The prevailing sentiment is leaning towards the notion that when the Bank of Japan eventually departs from its negative rate policy, it is anticipated to convey an air of confidence that deflation is in the rearview window, and this interest rate hike will not be an isolated occurrence, potentially bolstering the Japanese Yen further. Simultaneously, if the anticipated June rate cuts by the Federal Reserve are maintained or even advanced due to more relaxed inflation readings this week, it could exert significant downward pressure on the USDJPY before the BoJ meeting.



Oil prices closed 1% lower on Friday and experienced even steeper weekly declines. Market sentiment remained cautious due to concerns about soft demand from China despite the decision by the OPEC+ producer group to extend supply cuts.

US economic leading indicators are softening, which is not great for oil demand; on the other hand, the market is very confident about a June cut. , which could keep the macro bears honest.

The range trade mentality persisted last week despite positive trade data from China and the reportedly strong demand for oil in India. However, the market remained cautious due to a continued build-up in US crude inventories.

Price discovery is akin to slogging through a quagmire. Still, we remain skeptical of OPEC members complying with voluntary cuts as US production soars, albeit it shows signs of peaking. Compliance could be the issue even if they eventually follow through with a year-long extension.

One important consideration is the political calendar, which may exert influence over oil and rate market dynamics or, at minimum, political posturing could become intertwined with commentary.


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