Global Macro Weekly: Zero Equilibrium insights.

- By Chinedu Okoye 

Policy moves and data (on which some policy statements were based on) has rocked the market this week. The Fed Statement on interest rate policy sent the USD on a downward spiral with Gold and major USD peers amongst the beneficiaries.

We present the most profound and effectual Macro policy moves and data out of the US and China, as both the PBOC and the Fed step into monetary easing territory. We reference reporting from Financial Times, Bloomberg and Reuters and offer the Zero Equilibrium perspective ("Our View").

1.0 • Fed's Preferred inflation measure held steady at 2.5% in July - Financial Times:

  a. PCE come in t 2.5% below consensus of 2.6%: Not only is Unemployment slowing but Consumers are still spending as both Core and Headline PCE rose 0.2% in July.

  b. Core PCE came in at 2.6% below a consensus of 2.7%..

  c. Rate cuts expectations are locked in with debates about how deep and frequent the cuts will be. We believe it will be data dependent and not as steep or as quick.

  d. Bond market reaction at the top already with yields rising (prices falling). 

(Chart from the FT Article on Reference)

1.1 Our View:

This to us at Zero Equilibrium presents opportunities for investors to lock in high yields at low bond prices as a rotation out of fixed income is expected after the cut.

2.0 • China's PBOC Purchased $5.6 billion worth of long-dated Chinese Bonds, Thursday - Bloomberg:

Sequel to the above, Bloomberg also reported on Friday that the Authorities may allow house owners to refinance their mortgages to boost consumption as the house price slump has eroded consumer confidence:

2.1 Our view:

Three aims and objectives are behind these move;

  a. The bond purchases was to stabilize the bond market and reduce rates as well or prevent them from rising them,

  b. It allows homeowners to refinance their mortgages at cheaper more stable rates.

  c. The PBOC retains the right and firepower to stem any market over heating in the future by selling said bonds in market.

3.0 • US Consumer spending solid in July as inflation rises moderately - Reuters:

  a. Consumer spending increases 0.5%

  b. Personal Income rise 0.3%

  c. Personal Savings fall 2.9%

3.1 Our View:

Even though jobs numbers can in at 114k, lower than expected and taking Unemployment rates to 4.3%, a 25 bps cut will not spur spending as much, but a deeper (50 bps) and more frequent cut subsequently, emboldens the consumer and risks restarting inflation.

This the Fed will more likely cut deeper should subsequent numbers for the year show accelerated signs of cooling.m, say if unemployment hits 5%>.

Summary:

In light of the above we posit that;

1. USD weakness would accelete into Q2 2025 and every gain is a shorting opportunity especially against the British Pound.

2. The Fed will most likely deliver slow and steady cuts, and depending on the data, the depth and frequency may be different from what's being priced in.

    A lower frequency with mild (25 bps as opposed to 50) cuts would be bullish for US Treasuries (specifically the 2yr).

3. China's PBOC moves is taken as a signal for further willingness to provide stability and possibly intervene in the markets in the future. But the bond purchases puts the PBOC in amongst its G-10 peer in easing territory.

4. Gold remains stable above $2,500/ounce and is expected to hit the $2,700 market by years end.

5. Emerging Markets and Developing Economies are expected to see an influx of capital inflows into government securities and a currency gain on the USD for more stable economies.

6. DXY is expected to breach the 100. Mark before the end of Q1 2025.

DISCLAIMER: THIS IS NOT INVESTMENT ADVICE. THE ARTICLE IS INTENEDED TO PROVIDE UNIQUE PERSPECTIVES AND INSIGHTS TO FINANCIAL MARKETS ENTHUSIASTS AND ECONOMISTS.