Waiting for the Fed

Flat start seen in Europe ahead of Fed chair Jay Powell’s testimony in Congress and the Budget statement in London. US stocks wobbled yesterday again with the S&P 500 down a more decisive 1% as Apple extended its decline and tech came under the cosh.

The Nasdaq composite dropped 1.65%, with Tesla, Meta, Amazon and Microsoft all declining 2-3%, though Nvidia held up. Bitcoin and gold both hit records before retreating, whilst the dollar and Treasury yields declined.

Budget Day

What to expect from Wonky Wednesday? For policy wonks at the Treasury, it’s their big day out. Pre-election personal tax giveaways have been well leaked – eg NI cut by 2p again. There could be a more eye-catching income tax cut. A cut to income tax would be a bit of a rabbit – whether enough to swerve election wipeout remains to be seen.

The risk is that, somewhat against character, Hunt announces a bunch of tax cuts that upset the markets. We have seen before that bond vigilantes are hunting in their packs again. I don’t think this is really going to happen and Hunt will lean again on fiscal drag to do the lifting, a particular bugbear when inflation and wage growth ought to have seen the levels change a lot since 2020.

The tax rate will beat the post-war high of 37.2% of GDP in 26/27 or 28/29 depending on what Hunt does today – it will be breached no matter what, largely because of fiscal drag. We note that the IFS has warned the debt ratio will remain in the 90s whatever happens.

In other words, it’s totally meaningless tinkering unless they get a grip on the bigger stuff. At least Truss and Kwarteng had a go, albeit more Ronald McDonald than Ronald Reagan; the rest are cowards.

Either way taxes and debt will remain historically high, productivity and growth historically low; financing wars, financing an ageing population, financing immigration – it's all squeezing the middle until the pips squeak.

This is not how to get Tory-leaning voters to come out for you. Debt debasement trades are flying with gold and bitcoin surging to record highs – of course that is more about the US than the UK, but the underlying message is that debt is starting to matter as countries run higher structural deficits.

I talked yesterday with David Buik about whether deficits matter – it will be out tomorrow on our next episode of Overleveraged. And Episode 7 on what’s wrong with the UK Stock Market – and what the Chancellor might do about it today, is available still.

Checking the Market Reaction

6-month gilt yields 5.324% this morning, steady and close to its lowest in about 10 months after being very quiet since December. Sterling is on the front foot, but this looks to be less about domestic fiscal policy considerations and more about the US dollar as Treasury yields fell again, notching the largest decline in a month.

GBPUSD trades around 1.27 this morning having yesterday hit 1.2735, the highest since early Feb. Further soft readings from the US ISM services PMI helped the market extend the gains made since Friday’s Mfg PMI. The FTSE 250 and FTSE 100 both trade a tad firmer early doors ahead of the speech – there could be some sector-specific shenanigans to watch out for, but the indices ought to move on the macro.

Look for what the market makes of the extent of fiscal easing and what this means for the Bank of England in terms of the start of its easing cycle vis-à-vis sterling etc.

Super Tuesday

Trump dominated and is well on his way to the Republican nomination. He is quickly getting to the 1,215 nominations and is a shoo-in now. 

 Powell testimony on Capitol Hill – prepare to hear from Jay Powell and whether May is live. Of critical importance is how the Fed views the path of inflation and what its reaction function will be. The market wants to know when the Fed thinks it will cut and how much slicing is in order.

Markets price a 1/3 chance the Fed doesn’t cut in June, with four 25bps cuts expected this year, whilst May cut chances stand at just one in four.

Clearly with the surge in crypto markets and stocks at all-time highs, financial conditions are hardly tight. Chicago Fed NFC down to levels last seen two years ago despite the hikes.

And the easy bit of the inflation fight is over. The NY Fed's measure of inflation persistence - the esoteric multivariate core trend - rose to 3% in January from an upwardly revised 2.6% in December, the highest in nine months. It just underlines the easy bit of the disinflation process is probably over.

Elsewhere…

Tech took a bit of a hit again. Apple’s China iPhone sales are down 24% in the first six weeks of 2024 largest economy, Counterpoint Research report says. China exposure has always been a risk for the outlook; markets are selling that now. 
 

Mentioned the possible head and shoulders on Apple and the breakdown continues after breaking its 200-day line decisively – looking to see if the Oct low is breached around $165. It’s not the only of the Mag 7 to suffer this year – Tesla –28% YTD, Alphabet –5%. TSLA fell another 4% yesterday after a suspected arson attack halted activity at its Berlin factory. 

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