GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.

 

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ON THE ROAD: MARKETPLACE TRAFFIC © Leo Haviland May 1, 2023

“The highway is for gamblers, better use your sense

Take what you have gathered from coincidence”. “It’s All Over Now, Baby Blue”, Bob Dylan

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CONCLUSION AND OVERVIEW

Given an array of intersecting considerations, critical benchmark financial battlegrounds such as the United States Treasury 10 year note, US dollar, and the S+P 500 probably will continue to travel sideways for the near term. Price trends for commodities “in general” probably will converge with those of the S+P 500 and other key global stock marketplaces, although occasionally this relationship may display divergence. 

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In America and many other key countries around the globe, uncertainties and risks regarding numerous entangled economic and political variables and marketplaces appear especially substantial nowadays. In particular, inflationary and recessionary (deflationary) forces currently grapple in an intense and shifting fight for supremacy. 

Monetary tightening by the Federal Reserve Board and its central banking comrades has helped to slash lofty consumer price inflation levels. However, despite some deceleration, significant inflation persists. Both headline and core (excluding food and energy) inflation motor well above targets  aimed at by these monetary police officers. Yet in comparison with ongoing substantial actual consumer price inflation, inflationary expectations for longer run time spans generally have remained moderate. But monumental public debt challenges confronting America and many other leading nations nevertheless arguably signal the eventual advent of even higher interest rates. And given the Russian/Ukraine conflict and an effort by OPEC+ to support prices, how probable is it that petroleum and other commodity prices will ascend again? 

Higher interest rates have diminished worldwide GDP growth prospects and raised recessionary fears. But central bankers, Wall Street, Main Street, and politicians do not want a severe recession and will strive to avoid that eventuality. 

The United States dollar, though it has depreciated from its major high milepost reached in autumn 2022, arguably remains “too strong”. However, history shows that a variety of nations elect to engage in competitive depreciation and trade wars to bolster their country’s GDP. 

Unemployment in the United States remains low, which helps consumer confidence. Sunny Wall Street rhetoric regarding allegedly favorable long run nominal earnings prospects for American stocks sparks enthusiastic “search for yield” activity by investors and other fortune-seekers. Yet Fed and other central bank tightening and economic sluggishness may reverse this healthy unemployment situation and dim corporate earnings prospects. Consumer net worth levels and patterns are important in this context. A strong and growing household balance sheet encourages consumer spending and thereby economic growth. Consumers, the major component of American GDP, unfortunately have endured damage to their balance sheet from the fall in the stocks (S+P 500 peak in January 2022) as well as the decline in home prices since mid-2022. The recent shocking banking collapses in America and Europe warn of fragilities and uncertainties facing diverse economic arenas and the value of their assets. 

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Bruce Springsteen’s song “Born to Run” proclaims: “In the day we sweat it out on the streets of a runaway American dream”.

Persistent fierce partisan conflicts range across numerous economic, political, and other cultural dimensions. This makes it difficult for politicians to compromise (witness America’s federal legislative circus), and thus significantly to alter ongoing marketplace trends and relationships via resolute substantive action. 

However, the current US legislative traffic jam regarding raising the country’s debt ceiling, if it results in default, probably will cause the S+P 500 and related “search for yield” playgrounds to veer off their current sideways paths and tumble downhill. The risk of a default, even if brief and rapidly resolved, probably is greater than what most of Wall Street, Main Street, and the political scene believes. 

In this “game of chicken” between Republicans and Democrats (and between sects within each of these parties), each of the raging sides claims to espouse high (“reasonable”; “sensible”, “good”) principles. This brinkmanship endangers the economy. The wreck of a sizeable stock marketplace plunge and spiking recessionary fears probably will terrify politicians (and scare and infuriate their constituents), thus inspiring the nation’s leaders to overcome the legislative gridlock and enact a debt ceiling increase. 

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On the Road- Marketplace Traffic (5-1-23)

US DOLLAR AND OTHER MARKETPLACE ADVENTURES © Leo Haviland February 5, 2023

The rap music group Wu-Tang Clan sings in “C.R.E.A.M.”: “Cash, Rules, Everything, Around, Me C.R.E.A.M. Get the money Dollar, dollar bill, y’all.”

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CONCLUSION

Based upon the Federal Reserve Board’s real and nominal Broad Dollar Indices, the United States dollar probably established a major top in autumn 2022. Its subsequent decline intertwined with a fall in the yield in the US 10 year Treasury note, and the dollar depreciation and UST yield decline interrelated with and encouraged notable price climbs in the S+P 500, emerging marketplace stocks, and several other important “search for yield” playgrounds.

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However, for the near term, the Broad Dollar Indices (“BDI”) probably will appreciate some, thereby retracing some of the tumble from their autumn pinnacles. Why?

First, the Federal Reserve recently reemphasized its devotion to its monetary tightening agenda in its battle to return inflation to its two percent objective. This sentinel also has not ruled out further Federal Funds rate increases. It continues to reduce the size of its bloated balance sheet. Moreover, this noble guardian signals an intent to maintain policy rates for quite some time at heights sufficient to bring inflation down to acceptable levels. Unemployment figures remain very low (the Fed stresses “the labor market remains extremely tight”), further suggesting the likelihood that Fed policy will remain moderately hawkish for an extended time. See the 2/1/23 FOMC statement and the Fed Chairman’s Press Conference.

Also, the dollar’s weakness since autumn 2022, and the rally in key global stock marketplaces such as the S+P 500, has not been matched by a sustained rally in commodities “in general”. All else equal, a weaker US dollar tends to boost the nominal price of dollar-denominated assets. Marketplace history is not marketplace destiny. However, despite occasional divergence, over the long run commodities in general have moved in similar time and price patterns with the S+P 500. Yet commodities in recent months, despite occasional rallies, have remained comparatively weak. Even the petroleum complex, despite vigorous OPEC+ efforts to support the price and embargoes on Russia imports, has shown merely intermittent strength; it resumed its slump . This relative feebleness in commodities despite dollar depreciation hints that at least for the near term, the dollar probably will not decline much further in the near term.

In addition, as of January 2023, the real broad Dollar Index (a monthly average) borders important support, April 2020’s 113.4 summit. The nominal BDI (daily data) has retreated around ten percent from its autumn 2022 pinnacle, an important “correction” distance.

Consider recent US rhetoric about the importance of democracy relative to autocracy. For example, see the White House’s “National Security Strategy” (10/12/22). Is that wordplay and related American global policy actions on topics such as the Ukraine/Russia conflict and the Taiwan/China relationship an effort to keep the dollar fairly strong?

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US Dollar and Other Marketplace Adventures (2-5-23)

WALL STREET MARKETPLACES: FASTEN YOUR SEAT BELTS © Leo Haviland December 5, 2022

In the classic American film, “All About Eve” (Joseph Mankiewicz, director), the actress Margo Channing (played by Bette Davis) declares: “Fasten your seat belts. It’s going to be a bumpy night.”

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OVERVIEW

In general, from around the beginning of calendar 2022 until mid-October, as American and other key global government interest rates continued to rise (enlist the United States Treasury note as a benchmark), the S+P 500 (and other advanced nation and emerging marketplace stock playgrounds) declined. Growing fears regarding substantial and persistent consumer price (and other) inflation by the Federal Reserve and its central banking allies and the linked policy response of raising Federal Funds and similar rates played key roles in the yield climbs and stock price falls. Bear trends for other “search for yield” assets such as corporate bonds and United States dollar-denominated emerging marketplace corporate debt converged with those of the S+P 500 and emerging marketplace stocks. Commodities “in general” (“overall”) of course do not always trade “together” in the same direction around the same time as the S+P 500. Nevertheless, in broad brush terms since around late first quarter 2022, their downward price and time trends converged. A very strong US dollar encouraged the relationships of higher US Treasury yields, descending stock prices, and eroding prices for commodities “in general”.

However, the US 10 year note yield achieved an important high on 10/21/22 at 4.34 percent. Using the Federal Reserve Board’s nominal Broad Dollar Index as a weathervane, the dollar peaked at 128.6 on 9/27/22 and 10/19/22. The S+P 500 established a trough in its bear trend with 10/13/22’s 3492. Based on the S+P GSCI, commodities in general attained an important low on 9/28/22 at 591.8, holding at 591.1 on 11/28/22. Note the roughly similar times (and thus the convergence) of these marketplace turns, which thereafter reversed, at least temporarily, the preceding substantial trends.

What key changes in central bank policy and marketplace inflation yardsticks encouraged the recent slump in the UST 10 year yield, the depreciation in the US dollar, and the jump in the S+P 500 and the prices of related hunt for yield (adequate return) battlefields? First, various members of the Federal Reserve leadership hinted that future rate increases would slow in extent (be fifty basis points or less rather than 75bp). See the Financial Times summary of officials leaning that way (11/12-13/22, p2). The Fed probably will tolerate a brief recession to defeat inflation, but it (and of course the general public and politicians) likely would hate a severe one. In today’s international and intertwined economy, further substantial price falls (beneath October 2022 lows) in the stock and corporate debt arenas (and other search for yield interest rate territories), and even greater weakness than has thus far appeared in home prices, plus a “too strong” US dollar, are a recipe for a fairly severe recession. Hence the Fed’s recent rhetorical murmurings aim to stabilize marketplaces (and encourage consumer and business confidence and spending) and avoid a substantial GDP drop.

Second, US consumer price inflation for October 2022 stood at “only” 7.7 percent year-on-year. This rate fell short of expectations for that month and declined from heights exceeding eight percent in the several preceding months. This sparked hopes that American (and maybe even global) inflation would continue to decline even more in the future, and that the Federal Reserve and other central bank guardians would engage in less fierce tightening trends.

Of course the Fed policy hints and US consumer inflation statistics do not stand apart from other variables. Might China ease its restrictive Covid-fighting policy, thus enabling the country’s GDP to expand more rapidly?

Trends for commodities in general (employ an index such as the broad S+P GSCI) and the petroleum complex in particular sometimes have diverged substantially for a while from that of the S+P 500. After all, petroleum, wheat, and base metals have their own supply/demand and inventory situations. The broad S+P GSCI has battled to stabilize during autumn 2022 in response to the determined effort by OPEC+ to rally petroleum prices via production cuts. And over the long run, the S+P 500 and commodities tend to trade together. OPEC+’s ability to successfully defend a Brent/North Sea crude oil price around 83 dollars per barrel (nearest futures continuation) depends substantially on interest rate and stock levels and trends, as well as the extent of US dollar strength.

The “too strong” US dollar during calendar 2022 encouraged price declines in assorted search for yield asset classes, including emerging marketplace stocks and debt instruments as well as commodities. The depreciation of the US dollar in the past couple of months thus interrelated with (confirmed) the price rallies in the S+P 500 and other marketplaces. Yet the Federal Reserve probably will remain sufficiently enthusiastic in comparison with other central banks in its fight against inflation, which should tend to keep the dollar strong, even if it stays beneath its calendar 2022 high.

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Investors in (and other owners of) stocks and other search for yield realms and their financial and media friends joyously applauded recent price rallies. However, to what extent will these bullish moves persist?

US consumer price and other key global inflation indicators remain very high relative to current central bank policy rates. Not only does the US CPI-U all items year-on-year percentage increase of 7.7 percent for October 2022 substantially exceed UST 10 year yields over four percent, but so does October 2022’s 6.3 percent year-on-year increase in the CPI-U less food and energy.

Imagine consumer price inflation staying at only 4.5 percent. To give investors a 50 basis point return relative to inflation, the UST 10 year should yield five percent. Thus the Fed will continue to push rates higher in its serious war against excessive inflation, and eventually the rising UST yield pattern probably will reappear eventually, persisting until there are signs of much lower inflation or a notable recession.

Although marketplace history is not marketplace destiny, history reveals that significant climbs in key US interest rate signposts (such as the UST 10 year) tend to precede substantial falls in US stock benchmarks such as the S+P 500. Thus the S+P 500 probably will resume its decline, although it will be difficult for it to breach its October 2022 depth by much in the absence of a sustained global recession. So a return to rising UST rates, all else equal, probably will keep the dollar fairly powerful from the long run historic perspective, although the dollar will find it challenging to surpass its recent high by much (if at all) for very long.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Wall Street Marketplaces- Fasten Your Seat Belts (12-5-22)

CRITICAL CONDITIONS IN FINANCIAL MARKETPLACES © Leo Haviland November 13, 2022

The Rolling Stones sing in “All Down the Line”:
“We’ll be watching out for trouble, yeah
(All down the line)
And we’d better keep the motor running, yeah
(All down the line)”

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OVERVIEW AND CONCLUSION

Financial marketplace trends entangle in diverse fashions, which of course can change, and sometimes dramatically. Convergence and divergence (lead/lag) relationships between them can and do evolve, sometimes significantly. An increasing reversal of a given ongoing prior set of patterns between one or more key interest rate, stock, currency, and commodity marketplaces thus can attract growing attention and accelerate price moves in the new directions.

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In general, since around the beginning of calendar 2022, as American and other key global government interest rates continued to rise (enlist the United States Treasury note as a benchmark), the S+P 500 (and other advanced nation and emerging marketplace stock playgrounds) declined. Growing fears regarding substantial and persistent consumer price (and other) inflation by the Federal Reserve and its central banking allies and the linked policy response of raising Federal Funds and similar rates played key roles in the yield climbs and stock price falls. Bear trends for other “search for yield” assets such as corporate bonds and United States dollar-denominated emerging marketplace corporate debt converged with those of the S+P 500 and emerging marketplace stocks. Commodities “in general” (“overall”) of course do not always trade “together” in the same direction around the same time as the S+P 500. Nevertheless, in broad brush terms since around late first quarter 2022, their downward price and time trends converged. A very strong US dollar encouraged the relationships of higher US Treasury yields, descending stock prices, and eroding prices for commodities “in general”.

However, the US 10 year note yield achieved an important high on 10/21/22 at 4.34 percent. Using the Federal Reserve Board’s nominal Broad Dollar Index as a weathervane, the dollar peaked at 128.6 on 9/27/22 and 10/19/22. The S+P 500 established a trough in its bear trend with 10/13/22’s 3492. Based on the S+P GSCI, commodities in general attained an important low on 9/28/22 at 591.8. Note the roughly similar times (and thus the convergence) of these marketplace turns, which thereafter reversed, at least temporarily, the preceding substantial trends.

What key changes in central bank policy and marketplace inflation yardsticks encouraged the recent slump in the UST 10 year yield, the depreciation in the US dollar, and the jump in the S+P 500 and the prices of related hunt for yield (adequate return) battlefields? First, various members of the Federal Reserve leadership hinted that future rate increases would slow in extent (be fifty basis points or less rather than 75bp). See the Financial Times summary of officials leaning that way (11/12-13/22, p2). The Fed probably will tolerate a brief recession to defeat inflation, but it (and of course the general public and politicians) likely would hate a severe one. In today’s international and intertwined economy, further substantial price falls (beneath recent lows) in the stock and corporate debt arenas (and other search for yield interest rate territories), and even greater weakness than has thus far appeared in home prices, plus a “too strong” US dollar, are a recipe for a fairly severe recession. Hence the Fed’s recent rhetorical murmurings aim to stabilize marketplaces (and encourage consumer and business confidence and spending) and avoid a substantial GDP drop.

Second, US consumer price inflation for October 2022 stood at “only” 7.7 percent year-on-year. This rate fell short of expectations for that month and declined from heights exceeding eight percent in the several preceding months. This sparked hopes that American (and maybe even global) inflation would continue to decline even more in the future, and that the Federal Reserve and other central bank guardians would engage in less fierce tightening trends.

Of course the Fed policy hints and US consumer inflation statistics do not stand apart from other variables. Might China ease its restrictive Covid-fighting policy, thus enabling the country’s GDP to expand more rapidly?

The trends for commodities in general (employ an index such as the broad S+P GSCI) and the petroleum complex in particular sometimes have diverged substantially for a while from that of the S+P 500. After all, petroleum, wheat, and base metals have their own supply/demand and inventory situations. The broad S+P GSCI stabilized in early autumn 2022 due to a determined effort by OPEC to rally petroleum prices via production cuts. And over the long run, the S+P 500 and commodities tend to trade together. OPEC+’s ability to successfully defend a Brent/North Sea crude oil price around 83 dollars per barrel (nearest futures continuation) depends substantially on interest rate and stock levels and trends, as well as the extent of US dollar strength.

The “too strong” US dollar during calendar 2022 encouraged price declines in assorted search for yield asset classes, including emerging marketplace stocks and debt instruments as well as commodities. The recent depreciation of the US dollar thus has interrelated with (confirmed) the price rallies in recent days in the S+P 500 and other marketplaces. Yet the Federal Reserve probably will remain sufficiently vigorous in comparison with other central banks in its fight against inflation, which should tend to keep the dollar strong, even if it stays beneath its recent high.

****

Investors in (and other owners of) stocks and other search for yield realms and their financial and media friends joyously applauded recent price rallies. However, to what extent will these bullish moves persist?

US consumer price and other key global inflation indicators remain very high relative to current central bank policy rates. Not only does the US CPI-U all items year-on-year percentage increase of 7.7 percent for October 2022 substantially exceed UST 10 year yields over four percent, but so does October 2022’s 6.3 percent year-on-year increase in the CPI-U less food and energy.

Imagine consumer price inflation staying at only 4.5 percent. To give investors a 50 basis point return relative to inflation, the UST should yield five percent. Thus the Fed will continue to push rates higher in its serious battle against inflation, and eventually the rising UST yield pattern probably will reappear, persisting until there are signs of much lower inflation or a notable recession.

Although marketplace history is not marketplace destiny, history reveals that significant climbs in key US interest rate signposts (such as the UST 10 year) tend to precede substantial falls in US stock benchmarks such as the S+P 500. Thus the S+P 500 probably will resume its decline, although it will be difficult for it to breach its October 2022 depth by much in the absence of a sustained global recession. So a return to rising UST rates, all else equal, probably will keep the dollar fairly powerful from the long run historic perspective, even though the dollar will find it challenging to exceed its recent highs by much (if at all) for very long.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Critical Conditions in Financial Marketplaces (11-13-22)