MACRO MORNING NOTE October 12, 2017

SBA’s Alastair Williamson concludes the Macro Morning Note from Baltimore, Maryland. 

Global stock markets are mixed this morning with S&P futures -19bps. We’ve seen this before, equity futures go red before the cash session, then magical bid steps in 10am-11:30am and new highs are seen. Asia climbed in the overnight, but not so much Europe. WTI declined -91bps to the midpoint of the 50 handle following a bearish API report on Wednesday (holiday). Earnings season will commence today with JPM and Citigroup with expectations of bank warning on revenue declines. The reflation trade in the United States seems to have stalled as dovish minutes from the Fed prior session have sent US10Y 2.33 and US Dollar 93.04.

September minutes from the FOMC didn’t shed much color on timing next rate hike—despite a >80% probability in Dec’17. Officials did express concerns about low inflation is not transitory and how it is not transitory.

Over to Europe, where the continued lack of progress on Brexit talks from the European Union sent the GBP/USD tumbling -58bps to the midpoint 1.31 handle. For the most part, European stock markets are mixed except of the UK100 +35bps on weak GBP/USD. The region had a lack of news, but a EUR/USD at the midpoint of 1.18 handle is the thought for regional equity stress. The political crisis in Catalonia was walked back this week, but a new crisis has developed in Turkey involving the United States.

We will be keeping a watchful eye on Q3 bank earnings from JPM and Citigroup. Expectations have been managed lower ahead of releases, with executives calling for lower revenue warnings. *Update, that is exactly what JPM reported this morning:

  • Fixed Income revenue $3.2B, down 27% YoY, “driven by low volatility and tighter credit spreads”
  • JPM Markets revenue $4.5B, down 21% YoY

The reflation trade continues to fade with dovish FOMC minutes from Sept 19-20 meeting. Headlines via Zerohedge: 

  • All participants thought it would be appropriate for the Committee to maintain the current target range for the federal funds rate
  • Many participants expressed concern that the low inflation readings this year might reflect not only transitory factors
  • Overall, the available information suggested that, although the storms would likely affect the quarterly pattern of changes in real GDP at least through the second half of the year:
  • Members judged that storm-related disruptions and rebuilding would affect economic activity in the near term, but past experience suggested that the hurricanes were unlikely to materially alter the course of the national economy over the medium term
  • Higher prices for gasoline and some other items in the aftermath of the hurricanes would likely boost inflation temporarily
  • Interpreting the next few inflation reports would likely be complicated by the temporary run-up in energy costs and in the prices of other items affected by storm-related disruptions and rebuilding
  • A few participants thought that additional increases in the federal funds rate should be deferred until incoming information confirmed that the low readings on inflation this year were not likely to persist
  • A couple of those participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability.
  • It was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted
  • All agreed that they would closely monitor and assess incoming data before making any further adjustment to the federal funds rate
  • Many participants continued to believe that the cyclical pressures associated with a tightening labor market or an economy operating above its potential were likely to show through to higher inflation over the medium term
  • Most participants had not assumed enactment of a fiscal stimulus package in their economic projections or had marked down the expected magnitude of any stimulus

Interest rate probabilities for Dec’17 are as following:

US Event Calendar

  • 8:30am: PPI Final Demand MoM, est. 0.4%, prior 0.2%; Ex Food and Energy MoM, est. 0.2%, prior 0.1%; Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.2%
    • 8:30am: PPI Final Demand YoY, est. 2.6%, prior 2.4%; Ex Food and Energy YoY, est. 2.0%, prior 2.0%; Ex Food, Energy, Trade YoY, prior 1.9%
  • 8:30am: Initial Jobless Claims, est. 250,000, prior 260,000; Continuing Claims, est. 1.93m, prior 1.94m
  • 9:45am: Bloomberg Consumer Comfort, prior 49.9

Over to Asia, where stocks reached a 10-year high on Thursday, riding the central bank driven bull market. The mainstream narrative is a ‘global synchronized growth’ spurt at the expense of high debt/GDP ratios and years of low global growth.  MSCI Asia-Pacific shares ex-Japan advanced +55bps to the highest level since 2007. The Nikkie225 taged 20,994.40 highest level since 1996 with a strong Yen. Considering the BOJ owns a majority of the ETFs and the nationalization of stocks is the country’s only strategy as debt/GDP ratio >300% with stagnation. South Korea’s KOSPI moved up +55bps to record highs with Hong Kong Hang Seng. We don’t expect voltiality in the region until after China’s Communist Meeting this month.

As Reuters explains, global equities now appear to be taking geopolitical developments such as the secessionist push in Spain and tensions on the Korean peninsula in their stride, to reach those record top. 

In commodities, WTI reversed overnight after a bearish API report on Wednesday (holiday). WTI/RBOB slide on private data reports of crude build. Here is what API had to say, 


  • Crude +3.1mm (-2.4mm exp)
  • Cushing +1.216mm – 8th weekly build in a row
  • Gasoline -1.575mm (+200k exp)
  • Distillates +2.029mm – biggest in 5 months

In precious metals, gold and silver remained higher with a weak dollar in play. Copper advanced +59bps to the 3.11 level.

Copper/Gold Ratio verse US10Y

FTSE All World Index new highs extremely overbought

Central Banks have killed volatility, but will eventually reverse most likely after China’s Communist Meeting..

CRB and BCOM (weekly) rejecting 50sma forming compression

In terms of Commodities/Stocks Ratio— Now is not the time to be in commodities…

EEM/SPY Ratio (monthly) attempting golden cross

Weakest link on Stocks Above 200 day moving average overlaid w/ 50sma is Nasdaq…

Visualizing the extremes in valuations for S&P500

SPY/VIX Ratio hitting extremes


Compression UST10Y