Before I mention complete-the-cycle trade, I need to address Powell & the Fed. Seeing Fed chair Powell speaking today on a panel next to Ben Bernanke struck me how much more transparency, communication, forward guidance and all sort of other means of reaching out to the public has emerged from the Federal Reserve, compared to the Bernanke days nearly a decade ago. But even with the improved communication and policy tools (forward guidance helped lift yields before the start of rate hikes), the Fed remains in the dark and with reduced firepower. Here's why and how.

Powell highlighted today the challenges of monetary policy in terms of tools and outlook, pointing to the banking turmoil along with the effects of the sharpest monetary tightening in the history of the Fed and the threat of sticky inflation. Not to mention an unmovable debt ceiling in the face of staunch congressional dissent (even more than during the 2011 budget standoff).

As far as policy signaling from today's speech, Powell re-affirmed the message from this month's FOMC meeting: They will pause rates in June, with an emphasis that pausing does not mean cutting rates. The banking stress is far from over. Deposits flight may stabilize, but credit contraction is just starting. Add to that the jump in unemployment rate the Fed is forecasting from currently 3.40% to 4.5% in Q4 and you get an economic standstill. The latter ought to take care of the inflation part, but will it require cutting interest rates as is curently priced in by the market?  Not too fast according to the latest data. This week's release of stronger than expected gain in US retail sales, industrial production and falling jobless claims suggest that a June pause is suitable, but an autumn rate cut is far from certain. 

This week's unusual combination of rising US dollar alongside equity indices could be viewed as an exception, attributing it to the reported bi-partisan progress in debt ceiling negotiations. But that all changed about two hours ago among a breakdown in talks when Republican negotiators abruptly exited the room. The resulting rally in gold and Japanese yen was amplified by Yellen and Powell remarks indicating: i) more bank stress would mean a pause in rate hikes and; ii) more bank mergers are likely ahead (translation more bailouts).

Gold surely needed Powell's caution as the Chairman shifts from inflation-centric rhetoric to warning about banking stress. The barbarous relic is the only metal in the green this year, up 9% YTD. All energy commodities are down except for gasoline, while agricultural commodities are mainly higher, led by Sugar, save for soybeans and corn. Note that gold's 9% YTD gain is net of a 5% decline off its high. (Keep the +9% and -5% in mind for my next post). 

This week's XAUUSD close around 1980 was a crucial rebound off its 1950 support. Gold bulls, however, ought to beware of complacency regarding the debt-ceiling impasse as we approach the latest release of core PCE on Friday.  Keep an open mind with respect to fundamentals, cyclical shifts and intermarket technical inflection points.

Debt Ceiling negotiations remain ongoing into next week. Both parties are fully aware that the deadline is June 1st, which means pushing and pulling will go on into next week and onto the following week. We will hear a series of conflicting news as these can hit at any time of the trading day, even at nighttime in the US while Europe and Mideast are asleep. It can hit anytime. So BUCKLE UP 

Complete-the-Cycle Trade

One of the longest-ranging profitable trades (lasted for 2 months) I took in my career was from autumn 2015 til spring 2016. Earlier today, I realized this same pair is revealing a similar cycle turn from 7 years ago. I will be sharing this trade idea with our WhatsApp Broadcast Group early next week, highlighting its cycle attributes and the potential for 700 pips claim from the market. Hint: It is a non-USD cross. 

 

Today's release of US March jobs report may contain something for everyone (see Tweet below), but the upcoming slowdown in labour markets is inevitable. The 236K print in NFP hit the weakest level since December 2020 and the 4.2% print in average hourly earnings y/y was the lowest since June 2021. 

Slowing the Slowdown

The pullback in unemployment rate should be temporary. Here is why: Accelerating job layoffs as well as the latest upward revisions in weekly jobless claims should lead to growing momentum in jobless claims and the unemployment rate. Layoffs announcements do not translate to an immediate loss of jobs as it takes up to two or three weeks from the announcement before actual Jon's are lost. Employers will then have to pay severance pay, which could take another 2-3 weeks. Only then, will laid off workers be able to file for unemployment benefits (jobless claims), assuming they would do so. All of this reinforces the reality of the delay between announcing layoffs and actual loss of jobs. 

Don't forget the other economic reality-- Companies decide to cut jobs at the later stage of the economic cycles, i.e. well after the slowdown emerges in aggregate demand and manufacturing/services activity. Jobless claims could go from +220K to +270K within 2-3 weeks --just as the unemployment rate can jump from 3.5% to 4.0% by end of Q2.

And guess what? The pace of such developments will be rocky thanks to the phenomenon of revisions. Economic data tend to deteriorate in a non-linear fashion. Yesterday was a case in point—jobless claims appeared to have fallen, only after the prior figure was revised sharply higher, but traders focused on comparing the latest data point with consensus expectations. This is a typical aspect of evolving recessionary data—especially when media and traders' attention is placed on comparing actual vs expected data, while negative revisions of prior data points are deteriorating after the fact. Things tend to “happen fast” in markets, while macro developments tend to be interrupted, or slowed down by data adjustments and revisions, until USDJPY is below 127, 10-yr yield reaches 3.00% and gold breaks $2070.