Attack the Week (ATW)

August 7, 2023

Monday Thoughts

I have been travelling to the beautiful Cornish coast over the past weekend. It’s about a 6-hour ride with stops from London. While staying relatively remote, I was struggling to get any telephone reception. This was especially annoying as Friday’s payroll numbers were released during a lunch break. I might have hated it at first, but much to my wife’s joy, I quickly realised that constant connectivity is indeed sometimes counterproductive. Gotta have a regular detox; I can highly recommend it.

Source: Paper Alfa Himself

Over the weekend, however, I found time to finish up my possibly lengthiest piece to date on technical analysis. I think it’s a fundamental cornerstone note for all my readers to dig into. It’s not only about my journey but about the process of building a solid framework. Hopefully, this will prove useful for anyone interested.

As laid out in Friday’s Paper Charts, I anticipated a bounce in bonds which promptly showed after a somewhat weaker NFP print. As usual, a bounce does not constitute a strong condition for a reversal to move into a trend change. As such, this week’s inflation data will certainly feature as the main contender on anyone’s release calendar.

Bloomberg consensus expects headline YoY inflation to rise 3.3% in July from 3.0% prior. This rise would require an unchanged monthly headline at 0.2%. The core number is also expected to hold at 0.2% MoM or 4.8% YoY. I see the risk to this figure somewhat tilted to the upside and, as such, will have a strong impact on what I still see as a subdued % probability for a FOMC September hike (13%).

Wage growth, meanwhile, is settling well above the pre-pandemic trend.

It is also important to remember that the road to 2% inflation is, at this juncture, still unlikely to show up on the horizon. I opined on this in “Inverse optimal control” and what, therefore, the consequences for the monetary policy will likely be. The market is slowly waking up to the fact that a higher inflation threshold is on the cards while growth might finally be slowing. Not generally a good mix for risk assets. More on this in another note.

Overall, the large vol impulse from last week’s bear steepening transcended into both FX & equity markets.

Bear-steepening curves tend to be more violently impacting risk markets than any other move. This was seen both across equity and higher-yielding EM FX crosses, as also highlighted in last week’s chart pack.

As for a quick comparison between developed market central bank reaction functions, do you think it is wise for those with negative real policy rates to abandon their respective rate hiking cycles? Possible, but that comes with trade-offs and consequences.

Now, let’s dig into the rest of the charts and data that will attract attention.