Since the unemployment data, I have tried to write an appropriate blog but “all my words came back to me in shades of mediocrity” so I refrained from adding to the stream of vapid commentary that fills the Internet. But let’s proceed as the markets provided movement based on some sense of heightened inflation expectations. There is certainly money flowing into commodity based investments as OIL, COPPER, GOLD, and a litany of other natural resources have become a repository for money concerned with investments other than crypto currencies. The U.S. employment data was well within the range of expectations. The important average hourly earnings and the average work week were close to the consensus forecasts. The Canadian data beat estimates for the second consecutive month. The consensus was for an unemployment rate of 6% and addition of 2,000 jobs. The actual data was 5.7% unemployed and almost 80,000 new jobs, with two-thirds being part-time.
The Canadian dollar rallied more 1% as the market now anticipates that the BoC will be forced to mirror the FED in raising rates. The Bank of Canada has the privilege of focusing solely on the overnight interest rate since it never embarked on a QE, so it has no balance sheet to unwind. As commodity prices tumbled from 2014-2016, the Canadian economy slowed, the BoC lowered interest rates to 25 and 50 basis points, which caused the Loonie to depreciate by 45%. This allowed the Canadian economy to stabilize as its industries benefited from a very weak currency. Now that the Canadian economy has stabilized, employment is at record highs and the Bank of Canada will have to contend with an overheated real estate market due to foreign buyers and interest rates far too low for the economy’s strength. Watch the Canadian DOLLAR on the crosses as one of my favorite looking charts is the Canada/Swiss and euro/Canada. The Cad/Swiss weekly chart is very interesting as it appears to be gathering momentum. This is a very difficult CROSS to trade so use sizable corrections for the lowest risk entry levels against very well-defined support.
Speaking of the Swiss franc I want to go back to several posts I wrote in 2017 in which I presented the Swiss National Bank (SNB) with the ALCHEMIST AWARD for using its printing press to print Swiss francs in order to keep the Swiss weak against the euro. The SNB would sell francs into the market while purchasing EUROS and several other major currencies, swapping the newly minted currencies for global equities (ALCHEMY INDEED). The SNB announced today that it made a balance sheet profit of $55 billion on its portfolio, which is equivalent to 8% of the Swiss GDP. Yakov Smirnoff would say, “What A Country.” In a Dow Jones article by Brian Blackstone, he notes the SNB can’t sell stocks because it would result in a strengthening of the Swiss franc. The appreciation of global stocks has been a windfall for the SNB while the huge equity portfolio also provides a significant cash flow to the bank as it holds many dividend-paying stocks. (It is one of the largest holders of APPLE.) The SNB OUGHT TO BEGIN TO UNWIND SOME OF ITS GAINS OR AT THE VERY LEAST STOP THE PRINTING OF MONEY as at some point they will fall afoul of the IMF and other global actors.
The SWISS are a crypto-currency posing as a nation-state. I have included a chart of the SNB stock price since it’s a publicly held equity. You can draw your own conclusions about the power of the Swiss printing press. Creating value out of nothing indeed.
The EUR/CHF cross which has been the cause of the SNB policy is very close to the self-imposed 2015 floor of 1.20. I know that if the Swiss were to actually begin quantitative tightening by unloading some of its global equities the CAD/CHF cross will NOT WORK. I advise all to watch any sudden movement in the euro/Swiss cross as a signal that the SNB is shifting course. If I ran the SNB instead of Thomas Jordan I would be swapping out of equities and into a basket of hard assets, or diversification while the global ducks are quacking.
***Tuesday, the yield curves in the U.S. steepened as the long-end of the curve–30-, 10-year debt and the ultra-long bonds–all came under heavy selling pressure. As a result, there was enough concession for the three-year Treasury auction. Rick Santelli graded the sale an “A-” and he doesn’t grade on a curve. As the airwaves are filled with talk of incipient inflation it seems Bill Gross and others are announcing the end of the 35-year BOND BULL. The charts are certainly looking suspect on the 10- and 30-year Treasuries as the FED‘s balance sheet unwind accelerates and the ECB has reduced its monthly purchases to a “measly” 30 BILLION EUROS. There was also news out of Japan overnight that Japanese wages rose at a quickened rate, thus leading to an expectation that the BOJ would reduce its bond purchases.
The fact is the BOJ has already reduced its QE purchases. It owns the majority of all Japanese bonds so it can keep its Yield Curve Control (YCC) project in place with much less asset allocation. The YEN rallied in response against all major currencies as many market participants are short YEN believing the BOJ will be proceeding with QQE for longer than the other central banks. In my December 29 appearance with Rick I warned that the YEN short was a crowded trade and fraught with danger as the euro strengthening against the YEN was a problem for European exporters (think Mercedes/Lexus). The EURO/YEN cross strengthened by 10% in 2017 as Europe was the conduit for global money flows. So all of today’s news put pressure on the global bonds.
On Monday, I had my regular poolside chat with a group of successful “retired” business people where we discuss the world financial/political tapestry. They pinned me down and forced me to give them a target for my year-end close in the 10-YEAR TREASURY. So, in respect to one of the blog regular BIGMAN, I will state here that my year-end target is 3.4%. If I am correct I will buy the bottle of PAPPY VAN WINKLE to celebrate. My target is not based on inflation but rather on the incoming FED Chair Jerome Powell. In last weeks FOMC transcript from September 2012, the meeting results revealed that Powell was very uncomfortable with increasing the FED’S QE program because he worried about the size of the balance sheet and how would the FOMC be able to exit from the massive build-up of assets.
I think Chair Powell is still concerned about the size of the balance sheet and will be in favor of increased Quantitative Tightening while be careful to keep the fed funds rate around the zero real yield rate of 2%. This will lead to a STEEPENING of the 2/10 and 5/30 curves. It seems that Jerome Powell does not JUST LOOK AT MODELS BUT ACTUALLY ENGAGES MARKET PARTICIPANTS IN ORDER TO GET A SENSE OF MARKET SENTIMENT. Chair Powell will hear that many financial people are concerned about the recent flattening of the curve and will be RETICENT to raise the FED FUNDS rate pressuring a flatter curve. The continued large-scale asset purchases from other central banks provides an opportunity for the FED’s SOMA to offload more debt with less volatility, a classic case of FEEDING THAT DUCK MARIO DRAGHI WHILE HE IS QUACKING. Powell, please utilize PRAXIS (theory into practice). On Wednesday I will expound further on my STEEPENING scenario utilizing the fabulous piece from January 7 by Chris Whalen titled, “Bank Earnings and Volatility.”