Sep 29, 2022·edited Sep 29, 2022Liked by Alfonso Peccatiello (Alf)
A brief comment on the UK mortgage market – the reason so many loans are <5 yr fixed is because we only have the option of 2 or 5 year fix! Only very recently have we had 10 year fixed rate mortgages available, and only from a few lenders.
Mortgage products >5 years just don't really exist in the UK.
Alfonso, thank you so much for your comprehensive and brilliant analysis.
As you point out, the bond market is anticipating that the central banks are overtightening and ultimately interest rates will need to be lowered in order to restore health to the global economy.
However, lower rates are not possible until inflation comes under control. Of course, global wealth destruction will be helpful in suppressing demand and inflation, and we may be in a deflationary world in just a few quarters.
I am wondering what is the long game is in the United States with respect to interest rates. Unlike Paul Volcker who could raise interest rates In an economy that was 30% debt to GDP, Powell is constrained by 100% debt to GDP. In addition the average maturity of US debt is just five years and 30% of US debt is provided by foreigners, inferior positions relative to Volcker’s situation.
Is it possible that the United States implements yield curve control? With 30 trillion in debt, a 5% borrowing cost would result in the United States having interest expense is the largest line item on its annual budget.
But, isn’t yield curve control inflationary? (It was in the US in the 40s).
I’m wondering if yield curve control (perhaps under a different name) is the most likely outcome, once the fed funds rate exceeds inflation.
Alfonso potresti fare una analisi simile sulla situazione Russa?
L'epilogo di Putin potrebbe essere non troppo diverso da quello di Ceausescu: deposto e processato con le accuse tra le altre di "distruzione dell'economia nazionale"
The framework is obviously right but reality is that YTD all currencies, other than the RUB, have been hit by USD strength. take NOK, with Norway being the most solid country in the world, still down 22% pretty much like the GBP. Take SEK, excellent current account, no twin deficit, AAA and is down 24%. the Swiss Franc itself is down 6-7% vs the USD. The EUR 15% down. And people are not buying dollar because of the current account position of the US or the fiscal discipline or the low leverage. i think we are seeing investors looking at strategic relative growth differentials and the US are much better placed than anyone else in terms of returns and RISKS (financial, economic, geopolitical, energy, etc...)
The reason why I excluded the USD from the analysis and rather looked at relative strength/weaknesses across currency blocks is because if there is a global growth slowdown and deleveraging process ongoing the US Dollar will always beat any other rival - it's the denominator of the problem, and hence it naturally appreciates.
Of course there is a time inconsistency problem: those fundamental indicators tend to matter over the medium term, while in the short-term drivers can be different.
i agree Alf. my point was more related to the current momentum and sentiment that definitively overlooks fundamentals, at least for some currencies like NOK and CHF. Also some EMs ccys, despite being in much better shape than in the past, have been hammered so badly. Will see in a few months because i fear the FED is going to overshoot: FCI have been tightening, QT is doing some of the work...if FF will go to 4.5% or higher is not gonna be fun for equities, high yield and even lower IG.
I disagree with your conclusions, you are talking about the tail wagging the dog. The US looks better placed because it has printed itself so much into excess before starting the tightening cycle. The US also loves to distract by pointing to the tough winter we're going to have in Europe, but Europe will do just fine. There is plenty of gas in Groningen, Netherlands , Italy's new government will get gas from Putin one way or the other, there's wood pellets, coal and petrol as alternatives.
The impact could be felt in the heavy industries but nothing life or death.
I think that US businesses are going to collapse under the strong USD. Most SPY companies derive a major part of their revenues in non-USD currencies.
Who's going to buy planes from Boeing when Airbus was already winning the majority of orders before the Euro lost 18%?
Meta and Alphabet are losing both on the currency and the volume front in all markets outside the US.
McDonald's and Coca Cola should get used to lower USD denominated revenues from its franchises.
People are not queuing up to buy iphone 14's, and those who do buy one are leaving less revenue for Apple.
Tesla's backlog is collapsing week after week because they're ramping up production at the same time as demand is declining as interest rates on leases and auto loans are soaring at the same time as liquidity is drying up and electricity prices are soaring while gas prices are being suppressed.
I'd be surprised if we end October above 250 on the SPY.
Well, currencies are a matter of fundamentals but of confidence as well. we have heard for years about the looming end of the USD but it never happened. actually there is no alternative for countries that needs to recycle current account surpluses: the US excesses are desperately needed by countries that save too much. And the US being the strongest economy attracts that capital.
US companies have been living with EURUSD at 0.80 after the launch of the EUR and with EURUSD at 1.60. and yes, export might suffer but import would benefit, feeding trough lower inflation.
Actually if there is a potential issue is a Fed tightening too much into an economy that has already felt the pinch of higher rates, wider credit spreads, lower equity and stronger USD. FCI are much tighter.
Lastly, i wish i could share your positive assessment on energy in Europe. true that stocks are ok for the winter but energy is needed all year long with peaks and through. After winter comes spring with the need to replenish. Coal doesn't go well with net zero targets. and in any case the energy costs are hitting spending / government finances. Let me add that from what i hear the gas extraction in Groeningen has been causing so many micro earthquakes that people look quite feed up.
Counterargument on the Swiss Franc: If the SNB wants inflation more than an ever-stronger currency, then the SNB wants the Franc to drop and is not a great long side if paired with a defended G7 currency.
Have been a fervent reader of your stuff for quite some time now and, while i do love it, as a 30y FX veteran, i cannot let you write CHFGBP !! Sterling is quoted directly vs the Swissy man 😉
I’m guessing your friend Andreas Steno has been having a heart attack too.
In the tactical portfolio, how do you size positions and how do you set stop loss and take profit? I try to understand from the excel screenshot but don't completely get it. is it explained somewhere?
I talked about that in some previous articles, but don't worry - soon I'll be releasing a ton of news including much more details about my process and how I calculate inputs.
yes, that would be super helpful. i've been sitting the past 4 hours over excel trying to reverse engineer the numbers :D will try to read all the articles to see what i can find.
Always a great perspective Alf. I think the US 30 fixed rate mortgage is something that few appreciate as it is atypical. One of the things I have noticed is that most other countries have short term mortgages reset periodically. With inflation and mortgage rates spiking this is problematic for global real estate and implicitly FX.
Yes but with some relevant different nuances. Didn't have time to go through, but I released a piece on Putin vs Europe war that looks a bit into that.
As always much appreciated. Brilliant insight into the fundamentals that might drive prices in the near future. Interestingly BNP published a report earlier this year. Stating an increased risk of wide spread civil unrest in the U.K if wealth discrepancies continue to grow. And sadly I think this winter we will see that play out. Terrible, just terrible.
Impressive analyis, even though I am not familiar at all with the FX market. I really enjoy reading about what is happening around the world. Great insights. Appreciated.
With the big ranking difference between EUR and DKK, do you think there is a chance that DKK would be forced to break away from the hard peg to EUR, and what would that look like?
A brief comment on the UK mortgage market – the reason so many loans are <5 yr fixed is because we only have the option of 2 or 5 year fix! Only very recently have we had 10 year fixed rate mortgages available, and only from a few lenders.
Mortgage products >5 years just don't really exist in the UK.
Indeed
Alfonso, thank you so much for your comprehensive and brilliant analysis.
As you point out, the bond market is anticipating that the central banks are overtightening and ultimately interest rates will need to be lowered in order to restore health to the global economy.
However, lower rates are not possible until inflation comes under control. Of course, global wealth destruction will be helpful in suppressing demand and inflation, and we may be in a deflationary world in just a few quarters.
I am wondering what is the long game is in the United States with respect to interest rates. Unlike Paul Volcker who could raise interest rates In an economy that was 30% debt to GDP, Powell is constrained by 100% debt to GDP. In addition the average maturity of US debt is just five years and 30% of US debt is provided by foreigners, inferior positions relative to Volcker’s situation.
Is it possible that the United States implements yield curve control? With 30 trillion in debt, a 5% borrowing cost would result in the United States having interest expense is the largest line item on its annual budget.
But, isn’t yield curve control inflationary? (It was in the US in the 40s).
I’m wondering if yield curve control (perhaps under a different name) is the most likely outcome, once the fed funds rate exceeds inflation.
Thank you so much for your time and insights.
Excellent comments - I'll try to cover this possibility in one of my next articles!
+1. can not wait for your next article
Alfonso potresti fare una analisi simile sulla situazione Russa?
L'epilogo di Putin potrebbe essere non troppo diverso da quello di Ceausescu: deposto e processato con le accuse tra le altre di "distruzione dell'economia nazionale"
The framework is obviously right but reality is that YTD all currencies, other than the RUB, have been hit by USD strength. take NOK, with Norway being the most solid country in the world, still down 22% pretty much like the GBP. Take SEK, excellent current account, no twin deficit, AAA and is down 24%. the Swiss Franc itself is down 6-7% vs the USD. The EUR 15% down. And people are not buying dollar because of the current account position of the US or the fiscal discipline or the low leverage. i think we are seeing investors looking at strategic relative growth differentials and the US are much better placed than anyone else in terms of returns and RISKS (financial, economic, geopolitical, energy, etc...)
Ciao Daniele!
The reason why I excluded the USD from the analysis and rather looked at relative strength/weaknesses across currency blocks is because if there is a global growth slowdown and deleveraging process ongoing the US Dollar will always beat any other rival - it's the denominator of the problem, and hence it naturally appreciates.
Of course there is a time inconsistency problem: those fundamental indicators tend to matter over the medium term, while in the short-term drivers can be different.
i agree Alf. my point was more related to the current momentum and sentiment that definitively overlooks fundamentals, at least for some currencies like NOK and CHF. Also some EMs ccys, despite being in much better shape than in the past, have been hammered so badly. Will see in a few months because i fear the FED is going to overshoot: FCI have been tightening, QT is doing some of the work...if FF will go to 4.5% or higher is not gonna be fun for equities, high yield and even lower IG.
I disagree with your conclusions, you are talking about the tail wagging the dog. The US looks better placed because it has printed itself so much into excess before starting the tightening cycle. The US also loves to distract by pointing to the tough winter we're going to have in Europe, but Europe will do just fine. There is plenty of gas in Groningen, Netherlands , Italy's new government will get gas from Putin one way or the other, there's wood pellets, coal and petrol as alternatives.
The impact could be felt in the heavy industries but nothing life or death.
I think that US businesses are going to collapse under the strong USD. Most SPY companies derive a major part of their revenues in non-USD currencies.
Who's going to buy planes from Boeing when Airbus was already winning the majority of orders before the Euro lost 18%?
Meta and Alphabet are losing both on the currency and the volume front in all markets outside the US.
McDonald's and Coca Cola should get used to lower USD denominated revenues from its franchises.
People are not queuing up to buy iphone 14's, and those who do buy one are leaving less revenue for Apple.
Tesla's backlog is collapsing week after week because they're ramping up production at the same time as demand is declining as interest rates on leases and auto loans are soaring at the same time as liquidity is drying up and electricity prices are soaring while gas prices are being suppressed.
I'd be surprised if we end October above 250 on the SPY.
Well, currencies are a matter of fundamentals but of confidence as well. we have heard for years about the looming end of the USD but it never happened. actually there is no alternative for countries that needs to recycle current account surpluses: the US excesses are desperately needed by countries that save too much. And the US being the strongest economy attracts that capital.
US companies have been living with EURUSD at 0.80 after the launch of the EUR and with EURUSD at 1.60. and yes, export might suffer but import would benefit, feeding trough lower inflation.
Actually if there is a potential issue is a Fed tightening too much into an economy that has already felt the pinch of higher rates, wider credit spreads, lower equity and stronger USD. FCI are much tighter.
Lastly, i wish i could share your positive assessment on energy in Europe. true that stocks are ok for the winter but energy is needed all year long with peaks and through. After winter comes spring with the need to replenish. Coal doesn't go well with net zero targets. and in any case the energy costs are hitting spending / government finances. Let me add that from what i hear the gas extraction in Groeningen has been causing so many micro earthquakes that people look quite feed up.
Ciao Alfonso and the Macro compass community !
Thanks a lot for the materials provided on this space, either article and comments !
Once again, I need your knowledge! Could you share ideas for books, courses, conferences, ... to learn more about forex and its ecosystem?
Welcome, Flavio!
On Twitter (@MacroAlf) I published a thread with plenty of good books to look at - try and find it :)
Hint: Within the last 6 months.
Counterargument on the Swiss Franc: If the SNB wants inflation more than an ever-stronger currency, then the SNB wants the Franc to drop and is not a great long side if paired with a defended G7 currency.
Great content. More please.
I regularly publish once a week, Michael - more coming your way! :)
The SNB wants less (!) inflation as it's an orthodox Central Bank that sees Swiss CPI already exceeding its target. Hence they want a stronger CHF.
Have been a fervent reader of your stuff for quite some time now and, while i do love it, as a 30y FX veteran, i cannot let you write CHFGBP !! Sterling is quoted directly vs the Swissy man 😉
I’m guessing your friend Andreas Steno has been having a heart attack too.
Fair point :)
Why CHF and not NOK against the GBP? :)
Because NOK is short-term much more correlated to oil prices :)
In the tactical portfolio, how do you size positions and how do you set stop loss and take profit? I try to understand from the excel screenshot but don't completely get it. is it explained somewhere?
Hi Etienne!
I talked about that in some previous articles, but don't worry - soon I'll be releasing a ton of news including much more details about my process and how I calculate inputs.
yes, that would be super helpful. i've been sitting the past 4 hours over excel trying to reverse engineer the numbers :D will try to read all the articles to see what i can find.
I'm remaining a bit cautious on that CHFGBP long. I'm seeing price come down into the 0.8511 price area. From there, I feel like we could go long.
Nonetheless, Alf, thank you so much for this break down. I'm loving these world-class reviews!
Welcome!
As always, I might be wrong :)
Does "short BTP/Bund spread" mean betting on the spread getting more narrow, or wider? Not sure if I get the "short spread" meaning correctly ^^
It means I expect it to go wider :)
Yes impressive Alf. Thank you.
Thanks, Mark!
Always a great perspective Alf. I think the US 30 fixed rate mortgage is something that few appreciate as it is atypical. One of the things I have noticed is that most other countries have short term mortgages reset periodically. With inflation and mortgage rates spiking this is problematic for global real estate and implicitly FX.
Smart remark!
EUR: the analysis would be similar to GBP, I assume?
Yes but with some relevant different nuances. Didn't have time to go through, but I released a piece on Putin vs Europe war that looks a bit into that.
As always much appreciated. Brilliant insight into the fundamentals that might drive prices in the near future. Interestingly BNP published a report earlier this year. Stating an increased risk of wide spread civil unrest in the U.K if wealth discrepancies continue to grow. And sadly I think this winter we will see that play out. Terrible, just terrible.
It's gonna be tricky out there.
Impressive analyis, even though I am not familiar at all with the FX market. I really enjoy reading about what is happening around the world. Great insights. Appreciated.
Welcome!
With the big ranking difference between EUR and DKK, do you think there is a chance that DKK would be forced to break away from the hard peg to EUR, and what would that look like?
Excellent question - it's politically a very remote possibility, but the odds are not 0%.