Month: February 2024

WW International, previously known as “Weight Watchers,” crashed in premarket trading after the company revealed late Wednesday that media icon Oprah Winfrey will exit its board later this year. 

Winfrey’s exit from the WW board, which she joined in 2015, occurred about three months after an interview with People Magazine, in which she disclosed her use of a weight-loss medication as a “maintenance tool.” 

“The fact that there’s a medically approved prescription for managing weight and staying healthier, in my lifetime, feels like relief, like redemption, like a gift.”

As of 0700 ET, shares in premarket trading in New York were down 24.5% to $2.88 a share. The stock will open at a record low if the trading holds into the cash session. 

It’s important to note that 18% of the float is short. 

In an earnings release Wednesday, WW revealed that fourth quarter subscribers were 3.8 million, down from 4 million in the prior quarter and 4.1 million as of July 1. The loss of subscribers comes as a seismic shift has hit the weight-loss industry following the release of anti-obesity drugs such as Ozempic and Wegovy. 

Presumably Oprah is on Semaglutide, Tirzepatide, or Retatrutide and couldn’t live the lie of ‘counting calories’ anymore.

GOOD NEWS… One of The Fed’s favorite inflation indicators – Core PCE Deflator – dropped to +2.8% YoY in January (as expected) – the lowest since March 2021.

Headline PCE Deflator rose 0.3% MoM as expected, down at +2.4% YoY in January …

Source: Bloomberg

BUT… Services soared on a MoM basis…

However, shorter-term signals are less encouraging:

• Core PCE 3M annualized rate 2.8% from 2.0%

• Core PCE 6M annualized rate 2.6% from 2.2%

On a core basis, services costs jumped even more and Durable Goods costs flipped from deflation…

BAD NEWS… Even more focused, from The Fed’s perspective, is Services inflation ex-Shelter, and the PCE-equivalent actually ticked up on a YoY basis to 3.45%, thanks to a large 0.6% MoM jump, considerably bigger than the last few months increases…

Source: Bloomberg

Under the hood, the SuperCore, every sub-element rose MoM…

Source: Bloomberg

Income and Spending both increased with the former soaring 1.0% MoM (+0.4% exp) but the latter up only 0.2% (in line)…

Source: Bloomberg

Most notably, spending is now rising at a slower pace than incomes on a YoY basis (spending growth at the lowest since Feb 2021)…

Source: Bloomberg

On the income side, Govt wage growth slumped from a record 8.8% in Dec to 7.8% in January

Of course, private wages also dropped to 5.4% in Jan from 5.6% in Dec

January savings rate rose to 3.8% (from 3.7%)…

Finally, while the markets are exuberant at the headline disinflation, we do note that it’s not all sunshine and unicorns. The vast majority of the reduction in inflation has been ‘cyclical’…

Source: Bloomberg

Acyclical Core PCE inflation remains extremely high, although it has fallen from its highs.

Is The (apolitical) Fed really going to cut rates 4 times this year with a background of strong growth (GDP) and still high Acyclical inflation?

Core PCE lor January, the Fed s preferred gauge of inflation, will be released on Thursday, 29th February at 8:30am ET. As Newsquawk reports, the report will be key as it will be used to confirm the hot inflationary narrative seen from the other January inflation data. Following the hot CPI, PPI and US import prices, many analysts ramped up their PCE forecasts.

• The street expects Core PCE to rise 0.4% M/M (range of 0.1-0.4%) accelerating from December’s 0.2%, and the highest monthly reading in 12 months;
• The Y/Y Core PCE print is seen easing to 2.8% (range of 2 6-2.9%) from 2.9%.
• Meanwhile headline PCE is seen at 0.3% M/M (prev. 0 2%: range 0.2-0 4%) and 2.4% Y/Y (prev. 2.6%: c range of 2.2-2 7%).
• The super core metrics which are considered to be levered to wage pressures, will also be closely watched. According to Nomura, “we forecast an even larger increase in US supercore PCE inflation to 0.569% m-o-m, the fastest pace since December 2021″

In the January CPI release, services ex-housing saw a notable rise, and further pressure in the January PCE figures will add to the rise already seen in December, where Core PCE services prices ex-housing M/M rose to 0.3% from 0.1%.

Also within the report Personal Income is expected to rise by 0.4% in January from 0.3% in December with consumption seen easing to 0.2% from 0.7%: real consumption is expected to decline by 0.1%. The downbeat consumption metrics would be in fitting with the soft January’ Retail Sales report. Meanwhile, major retail earnings have seen both Home Depot (HD) and Lowe’s (LOW) note that the extreme weather in January saw an unfavorable impact.

In its preview of the core PCE report, Goldman economists said that “based on details in the PPI, CPI, and import price reports, we estimate that the core PCE price index rose 0.43% in January (vs. 0.35% previously).”

Meanwhile, as reported earlier, the market is now too dealing with a bunch of confusion around the recent BLS email communication with their “super user” market participants regarding OER inflation methodology adjustments, which then could create UPSIDE RISK to our inflation forecast…more from Nomura:

“Without any official announcement, the BLS made changes to their OER calculation methodology in January 2024 (assigning more weight to detached single-family homes) although the BLS website states that the weight for single-family homes has increased in January 2023 (as opposed to January 2024),

Rent inflation is higher for single-family homes than for apartments and other structures.(This is a bit surprising because CoreLogic, a private research firm, estimates that rent inflation for both single-family homes and other types of structures has moderated for a while.)

That’s how we reacted when we got the original email from the BLS. Then we sent a follow-up email to the BLS asking if our above interpretation was correct. We have not heard back from them but some of our clients seem to have received a response from the BLS saying that the original email should be ignored and they were looking into this.

Despite some uncertainty, there is the possibility that the recent resilience of OER inflation might not be a fluke if single-family rent is structurally higher and the BLS allocates a higher weight to single-family units in OER calculation.

At this moment, we are waiting for an official statement from the BLS, but there is some upside risk to our inflation forecast.”

* * *

Fed Views: The Fed will no doubt be watching this data closely for confirmation on the expected pick up in the M/M figures, with Fed’s Waller noting that although the data is not out yet, “an estimate factoring in producer prices is that core PCE inflation rose to a 12-month rate of 2 8 percent and three- and six- month rates rose to 2 4 percent and 2.5 percent respectively.“

Waller stated that while this is not a welcome development the Fed has made a lot of progress and the latest CPI revisions show the progress was not a mirage. Nonetheless he wants to see a couple more months of inflation data to be sure that January was a one-off and the Fed is still on the right track. The Fed Governor also warned “I see predominately upside risks to my general expectation that inflation will continue to move toward the FOMC’s 2 percent goal .” Therefore Waller supports being patient on Fed policy, concluding his latest speech with the quip. “What’s the rush?”

For the third day in a row, US equity futures dropped and bonds fell as investors braced for a print of the Federal Reserve’s favorite inflation metric, which will help identify the path forward for interest rates. As of 7:45am, futures contracts for the emini S&P 500 and the Nasdaq 100 both retreated by about 0.2%, off the worst levels of the session. European stocks fluctuated during another crowded day on the earnings calendar, while Asia closed modestly higher. MegaCaps are mixed with NVDA -1.3% and AAPL -0.7%, the largest movers pre-mkt. Bond yields are up 3-6bps as the yield curve bear flattens; the US Dollar is weaker while the yen holds most of the advance spurred by strongest signal yet from Bank of Japan that the end is near for its negative interest-rate policy. The commodity complex is also lower; oil is flat, while bitcoin continues to surge and was last seen around $63,000. Today’s macro data focus includes PCE/Core PCE, jobless claims, and regional activity indicators. While PCE has been de-risked due to the CPI print, there is still potential for volatility given positioning in the bond market. Month-end rebalancing is thought to provide additional pressure on stocks irrespective of PCE.

In premarket trading, cloud software giant Snowflake shares plunge 23% after the company gave a forecast for first-quarter product revenue that is weaker than expected. Analysts noted that the shares were pressured by a combination of CEO Frank Slootman stepping down and a conservative guide. Peers also decline, with MongoDB down 4.2%, and DataDog sliding 3.0%. Elsewhere, WW International, fka as Wight Watchers, shares crasjed 25% after the “health and wellness” company issued full-year revenue guidance that missed expectations. The company also said Oprah Winfrey has decided to not stand for re-election at its annual shareholders meeting in May, having served on the board since 2015. Here are some other notable premarket movers:

• C3.ai (AI US) shares jump 17.58% after the software firm’s third-quarter revenue beat estimates, showing that demand remains robust for its artificial intelligence-related products. Analysts highlighted strength in its subscription revenues, and demand from government clients.
• CRH (CRH US) shares gain 6.3% in New York premarket trading after the building-materials firm reported “excellent” full-year  results, according to Davy, with UBS highlighting the firm’s strong growth prospects in 2024.
• Duolingo (DUOL US) shares soar 20% after full-year revenue guidance from the language-learning software company beat expectations, while fourth-quarter earnings per share also surpassed forecasts. A number of analysts lifted their price targets on the stock, noting robust growth in user numbers.
• HP Inc. (HPQ US) shares fall 3.4% after the computer hardware company reported first-quarter results that missed expectations on key metrics amid ongoing weakness in the market for personal computers.
• Macy’s (M US) shares dip 0.6% after the department store chain was downgraded to market perform from outperform at TD Cowen, which said the company’s restructuring plans will take some time to drive upside to guidance.
• Monster Beverage (MNST US) shares advance 5.6% after the energy-drink maker reported fourth-quarter gross margin that beat consensus estimates. Analysts saw the results as solid overall, highlighting the gross margin beat in the quarter, as well as the strong start to the first-quarter.
• Okta (OKTA US) shares rise 29% after the application software company reported fourth-quarter results that beat expectations. Analysts view the results as a relief in the wake of a recent breach.
• Paramount Global (PARA US) shares advance 3.9% after the media company reported results that were seen as mixed, although revenue in its direct-to-consumer (DTC) streaming business beat expectations.
• Salesforce (CRM US) shares fall 1.8% after the application software company gave a full-year revenue forecast that was weaker than expected, though analysts said it could be conservative. It also initiated a dividend of 40c/share and increased the share buyback authorization by $10b.

Thursday’s core PCE report, where the core print is expected to rise 0.4% MoM and 2.8% YoY, will likely validate recent commentary from Fed officials showing no rush to ease monetary policy and underscore the twists and turns on the route to the central bank’s 2% inflation target. A higher-than-anticipated reading could undermine expectations for three quarter-point rate cuts by year-end.

“The market always needs to focus on something, and with earnings out of the way and the rates outlook priced in, inflation is the next catalyst,” said Beata Manthey, equity strategist at Citigroup Inc. “It’ll depend on how bad or good the print is today, but when we look at the fundamentals, earnings have shown they’re delivering.”

Stocks are rounding off a strong February, with the S&P 500 and the Nasdaq 100 up more than 4% after excitement around artificial intelligence drove a tech-powered, record-breaking run on Wall Street. MSCI’s global equity index is rising for a fourth month, its longest winning streak since 2021.

For Ulrich Urbahn, head of multi-asset strategy and research at Berenberg, trading on the final day of February is likely to be influenced more by month-end rebalancing than by data, as inflation trends have already been priced into markets following this month’s consumer and producer price reports.

“The focus on PCE ‘because that’s what the Fed cares about’ is valid,” Urbahn said. “But it’s mostly already baked in the cake. Markets will be more affected by some rebalancing flows as equities have hugely outperformed bonds this year.”

New York Fed President John Williams said Wednesday the central bank has “a ways to go,” in its battle against inflation and Atlanta Fed chief Raphael Bostic urged patience in regard to policy tweaks. Meanwhile, traders are currently pricing around 80 basis points of easing by year-end — almost in line with what officials in December indicated as the likeliest outcome. That would equate to three cuts in 2024 — as the Fed moves have historically been increments of 25 basis points. To put things in perspective, swaps were projecting almost 150 basis points of cuts this year at the start of February.

“Fedspeak and economic data so far this week suggest that central bankers remain data-dependent, which raises volatility around key economic data releases, and that inflation seems to be re-accelerating in the short term, which may make it harder to reach the 2% inflation goal,” Kathleen Brooks, research director at XTB, wrote in a note.

European stocks fluctuated during another crowded day on the earnings calendar as traders reduced bets on how fast and far the European Central Bank will lower interest rates this year after a flurry of inflation readings from the region. Moncler SpA rallied after the Italian luxury company beat profit expectations. Air France-KLM slumped after a fourth-quarter loss. The Stoxx 600 added 0.1% with construction, media and retail shares the best performers. Here are the most notable movers:

• Haleon rises as much as 9%, the most since Dec. 2022, after delivering results that were better than feared, following the weak numbers posted by rival Reckitt yesterday
• Universal Music Group gains as much as 6.5%, the most since July, after the Amsterdam-listed music and entertainment group impressed with its fourth-quarter earnings
• Moncler shares rise as much as 6.3%, to the highest since June, after the Italian luxury company reported results that beat estimates
• Eiffage gains as much as 5.4%, the most since March 2022, as Morgan Stanley flags the infrastructure company’s strong cash generation and in-line earnings performance
• AMS-Osram shares plunge 45% after a major customer — believed by analysts to be Apple — canceled the Swiss chipmaker’s key project around microLED
• Howden Joinery rises as much as 8.5%, the most since Dec. 2020, after 2023 results broadly met estimates
• Drax climbs as much as 8.6% after the UK renewable energy company’s results, which analysts say look solid. Morgan Stanley highlights Drax’s long-term guidance and positive impact
• Argenx falls as much as 4.5% after it reported full-year results that analysts said weren’t surprising
• Beiersdorf shares fall as much as 6.1%, their steepest drop since May 2022, after the Nivea maker reported results that RBC described as “disappointing”
• Technip Energies shares reverse an earlier gain to slip as much as 3.6%, after the France-based engineering and technology company posted a 2023 Ebit beat but issued guidance that missed

In FX, the dollar steadied, while the yen was the best-performing G-10 currency, rising 0.4% versus the greenback, the most in more than a week,  after Bank of Japan Board Member Hajime Takata sent one of the strongest signals yet that the end is near for its negative interest rate policy.

In rates, Treasury yields rose, with the more policy sensitive two-year note up five basis points. 10-year TSY yields last traded around 4.31% near session high, outperforming gilts by around 3bp in the sector; the UK curve cheaper on the day by as much as 7bp in 5-year sector. Yields in Europe climbed after mixed readings on price pressures from France and Spain, with German inflation coming in on the softer side of expectations (CPI printed 0.4% MoM, vs exp. 0.5%, and 2.5% YoY, vs exp 2.6%). Traders reduced bets on how fast and far the European Central Bank will lower interest rates this year after a flurry of inflation readings from the region – Bloomberg Economics still expect euro-area headline inflation to slow on Friday. Short-end bonds are leading a selloff in European government debt. German two-year yields rise 7bps to 2.99%. IG dollar issuance slate empty so far; seven names priced $14.4b Wednesday, taking weekly volume past $50b; issuers paid about 6bps in new-issue concessions on order books said to be 3.8x oversubscribed. Robust calendar could materialize Thursday if inflation readings are benign. US January personal income and spending data at 8:30am New York time include PCE inflation gauge with potential to alter corresponding outlook for Fed.

In commodities, oil prices are little changed, with WTI trading near $78.50. Spot gold falls 0.2%. Bitcoin jumps ~3% and is above $62,000.

Bitcoin continues to march higher and back above the $62k level, after it was revealed that yesterday’s record volume surge across the ETF sector led to a record net inflows as demand for crypto just won’t slow. Meanwhile, Ether continues to outperform, printing a peak incrementally above USD 3.5k. Elsewhere, Coinbase said all services on Coinbase.com have been restored; after some users reported a zero balance on their accounts.

Looking to the day ahead now, the US economic data calendar includes weekly jobless claims (8:30am), February MNI Chicago PMI (9:45am, three minutes earlier to subscribers), January pending home sales (10am) and February Kansas City Fed manufacturing activity (11am). Fed speakers scheduled include Bostic (10:50am), Goolsbee (11am), Mester (1:15pm, 3:30pm) and Williams (8:10pm). Elsewhere, there’s the February flash CPI inflation prints from Germany and France, along with German unemployment for February, UK mortgage approvals for January, and Canada’s Q4 GDP. From central banks, we’ll hear from the Fed’s Bostic, Goolsbee, Mester and Williams.

Market Snapshot

• S&P 500 futures down 0.3% to 5,065.00
• STOXX Europe 600 little changed at 495.04
• MXAP up 0.4% to 172.73
• MXAPJ up 0.2% to 524.61
• Nikkei down 0.1% to 39,166.19
• Topix little changed at 2,675.73
• Hang Seng Index down 0.2% to 16,511.44
• Shanghai Composite up 1.9% to 3,015.17
• Sensex little changed at 72,263.43
• Australia S&P/ASX 200 up 0.5% to 7,698.70
• Kospi down 0.4% to 2,642.36
• German 10Y yield little changed at 2.49%
• Euro little changed at $1.0847
• Brent Futures down 0.4% to $83.32/bbl
• Gold spot up 0.0% to $2,035.55
• U.S. Dollar Index down 0.16% to 103.81

Top Overnight News

• The Supreme Court’s decision to take up Donald Trump’s bid for immunity from criminal prosecution raises the prospect that a trial to hold him accountable for trying to overturn the 2020 election could face a lengthy delay — potentially until after the November election
• An Illinois judge barred Trump from appearing on the Republican presidential primary ballot, marking the third state to impose such a ban on the former president for his role in the insurrection at the US Capitol on Jan 6.
• Ben Bernanke’s global savings glut is drying up. Long-term interest rates worldwide may be heading higher as a result.
• China banned a top-performing quant fund from the stock-index futures market and vowed tighter oversight of high-speed trading, expanding a crackdown on computer-driven investment strategies that some have blamed for exacerbating market turmoil
• Wall Street traders bracing for key inflation data waded through mixed economic figures and remarks from Federal Reserve speakers for clues on the interest-rate outlook.

Earnings

• Covestro (1COV GY) – Q4 (EUR): adj. EBITDA 132mln (exp. 99mln), Revenue 3.35bln (exp. 3.44bln). Decides not to pay a dividend. Expects economic conditions to remain challenging in 2024. Guides Q1 EBITDA 180-280mln (exp. 204mln). Guides initial FY24 EBITDA 1-1.6bln (exp. 1.36bln), Revenue 14-15bln (exp. 14.7bln). Shares +1.8% in European trade
• IAG (IAG LN) – FY (EUR): Revenue 29.5bln (exp. 29.4bln), adj. Net 2.66bln (exp. 2.29bln), adj. Operating 3.5bln (exp. 3.5bln). 92% booked for Q1 and 62% for H1. Positive outlook for 2024, expect to generate significant cashflow throughout the year. Shares +1.2% in European trade
• MTU Aero (MTX GY) – FY23 (EUR): Adj. Revenue 6.3bln (prev. forecast 6.1-6.3bln), Adj. EBIT 818mln (prev. forecast 800mln), Adj. Net Income 594mln (exp. 600mln). Outlook: FY Revenue 7.3-7.5bln, Adj. EBIT margin 12%. Shares -0.5% in European trade
• Snowflake (SNOW) – Q4 2024 (USD): Adj. EPS 0.35 (exp. 0.18), Revenue 774.7mln (exp. 760.4mln); Q1 product revenue view 745-750mln (exp. 769.5mln), FY25 product revenue view 3.25bln (exp. 3.46bln). (Newswires) Shares -22.8% in pre-market trade
• Salesforce (CRM) – Shares slipped by 1.6% in afterhours trade as it provided light guidance for the FY. Q4 adj. EPS 2.29 (exp. 2.26), Q4 revenue USD 9.29bln (exp. 9.22bln). Increases share repurchase authorisation by USD 10bln. Initiated a common stock dividend of USD 0.40/shr. Sees Q1 adj. EPS between USD 2.37-2.39 (exp. 2.20), and Q1 revenue between USD 9.12bln-9.19bln (exp. 9.19bln); sees FY25 revenue between USD 37.7bln-38.0bln (exp. 38.6bln). Shares -1.8% in pre-market trade

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were choppy at month-end after the lacklustre handover from the US ahead of PCE price data. ASX 200 eventually shrugged off the initial indecision and briefly climbed above 7,700 to eke a fresh record high. Nikkei 225 briefly dipped below the 39,000 level amid a firmer currency and hawkish comments from BoJ’s Takata, although the index gradually recovered all of its losses in late trade. Hang Seng and Shanghai Comp. were positive with outperformance in the latter which momentarily reclaimed the 3,000 level amid lower yields and after the PBoC voiced support for Shanghai’s high-level opening up financially, while it was also reported that China is to crack down on illegal activity to maintain market order. Conversely, the gains in Hong Kong were limited with earnings on the radar.

Top Asian News

• US limits the sales of Americans’ data to China and other rivals with President Biden signing an executive order restricting the ability of data brokers to sell sensitive information abroad, according to WSJ.
• BoJ Board Member Takata said Japan’s economy is at an inflexion point of changing the ‘norm’ that people think wages and prices are not rising, while he added achievement of the price target is coming into sight despite the uncertainty of the economic outlook. Takata also said need to consider taking a flexible response including exit from monetary stimulus and that momentum is rising in this spring’s wage talks with many companies offering higher-than-2023 wage hikes. BoJ Board Member Takata later stated that he would call for a gear shift in policy and not go backwards but added he has not made up his mind yet on a monetary policy decision when asked about whether to end negative interest rates in March or April, while he is not thinking of raising interest rates one after another and said gradual steps will be needed amid mixed circumstances surrounding small firms.
• RBNZ Governor Orr said as aggregate demand has slowed, it has been harder to pass on cost increases and he is confident the current level of the OCR is restricting demand, while the inflation outlook is very balanced. Orr said the economy has developed as they expected and the latest data confirmed inflation is slowing, while he added the easing of interest rates won’t happen anytime soon.

European bourses, Stoxx600 (+0.1%) are mixed and trade has remained rangebound throughout the session; the DAX 40 (+0.4%) outperforms, and continues to trade towards/at ATHs. European sectors are mixed; Construction & Materials takes the top spot, lifted by gains in CRH (+7.3%) post-earnings. Tech is found at the bottom of the pile, with many of the chip names continuing to underperform. US Equity Futures (ES -0.3%, NQ -0.3%, RTY +0.1%) are mostly lower, with trade continuing the downbeat price action seen in the prior session. In terms of individual movers, Salesforce (-1.9%) slipped on its results, which although reported strong metrics, its FY25 guidance missed analyst expectations.

Top European News

• ECB’s Vasle said the ECB is looking at a rate-cutting phase if there are no big surprises and the timing of cuts depends on inflation.
• ECB will continue to put a ‘floor’ underneath market interest rates in the years ahead, though banks will have a greater role in determining how much liquidity they want, via Reuters citing sources.
• UK appoints Clare Lombardelli as the the next BoE Deputy Governor for monetary policy; replaces Broadbent who leaves at the end of June.
• ECB’s Holzmann says a serious discussion at the ECB on rate reductions is unlikely before June, via Politico [published Feb. 28th]

FX

• DXY is a touch softer as a by-product of JPY strength. DXY has ventured to a low of 103.75, stopping shy of the 200DMA at 103.69 and yesterday’s low at 103.60. The fate for the index today will almost certainly be determined by US PCE metrics.
• EUR marginally gains vs. the USD amid a slew of EZ data with (on balance) firmer regional CPIs taking focus ahead of tomorrow’s EZ-wide metrics. EUR/USD mounted yesterday’s best at 1.0840.
• JPY is the standout outperformer across the majors following “hawkish” BoJ comments overnight. This has given JPY some reprieve with USD/JPY pulling back to a low of 149.62 (matches 21DMA) from a high of 150.69. A hot core PCE release could reverse the pair’s fortunes and bring attention back to the YTD peak at 150.88.
• Differing fortunes for the antipodes with AUD/USD back on a 0.65 handle after bottoming out yesterday at 0.6488 post-USD strength. NZD/USD remains above yesterday’s 0.6082 trough but is unable to reclaim 0.61 status.
• PBoC set USD/CNY mid-point at 7.1036 vs exp. 7.1938 (prev. 7.1075).

Fixed Income

• The bearish narrative continues for Bunds; French CPI sparked some initial downside, though further hotter-than-expected releases from Spain and Germany (state), firmly guided the hawkish direction. Bunds have been drifting lower and are now at a fresh YTD low at 131.62, with the 10yr yield above 2.5%.
• USTs are driven by EGBs so far but also potentially positioning into the US January PCE data, which will be gauged to see if it conforms to the hotter narrative of other January pricing metrics; currently holds just above 110-00.
• Gilt price action conformed with EGBs into the latest BoE mortgage data with no reaction to the numbers despite lending and approvals printing below/above their respective forecast ranges. EGB-driven action has similarly pushed Gilts to a fresh YTD low at 96.83.

Commodities

• Crude benchmarks are under modest pressure but are comparably contained when judged against Wednesday’s whipsaw price action; currently holds around the USD 82/bbl mark.
• Spot gold is incrementally softer initially benefitting from a weaker Dollar, though now off best levels; USD 2032/oz 50-DMA remains untested with the current low at USD 2034/oz.
• Base metals are bid and deriving support from USD downside, the overall European risk tone and strength in China.

Geopolitics

• Japan’s top currency diplomat Kanda said using frozen Russian assets for Ukraine must be based on international law and he thinks EU’s proposal is along those lines, while he added that Japan strongly condemned Russia’s invasion of Ukraine at the G20 and that the G7 discussed ways to make use of frozen Russian assets for Ukraine reconstruction.
• Russian President Putin says “don’t they understand there is danger of nuclear conflict?”; on talk of NATO troops in Ukraine, says consequences for the intruders will be more tragic and we have weapon which is able to hit targets on their territory.
• Ukraine sees a risk of Russia breaking through its defences by the summer unless allies increase supplies of ammunition, according to Bloomberg sources

US Event Calendar

• 08:30: Feb. Initial Jobless Claims, est. 210,000, prior 201,000
  • Feb. Continuing Claims, est. 1.87m, prior 1.86m
• 08:30: Jan. Personal Income, est. 0.4%, prior 0.3%
  • Jan. Personal Spending, est. 0.2%, prior 0.7%
  • Jan. Real Personal Spending, est. -0.1%, prior 0.5%
• 08:30: Jan. PCE Deflator MoM, est. 0.3%, prior 0.2%
  • Jan. PCE Core Deflator YoY, est. 2.8%, prior 2.9%
  • Jan. PCE Core Deflator MoM, est. 0.4%, prior 0.2%
  • Jan. PCE Deflator YoY, est. 2.4%, prior 2.6%
• 09:45: Feb. MNI Chicago PMI, est. 48.0, prior 46.0
• 10:00: Jan. Pending Home Sales (MoM), est. 1.5%, prior 8.3%
  • Jan. Pending Home Sales YoY, est. -4.4%, prior -1.0%
• 11:00: Feb. Kansas City Fed Manf. Activity, est. -2, prior -9

Central Bank Speakers

• 10:50: Fed’s Bostic Participates in Fireside Chat
• 11:00: Fed’s Goolsbee Gives Remarks on Monetary Policy
• 13:15: Fed’s Mester Speaks on Financial Stability and Regulation
• 15:30: Fed’s Mester Speaks to Yahoo Finance
• 20:10: Fed’s Williams Participates in Moderated Discussion

DB’s Jim Reid concludes the overnight wrap

Happy February 29. I’m hearing lots about how this day happens every four years, but strictly speaking that’s not true. The rule is it’s a leap year if it’s divisible by 4, unless it’s divisible by 100, but not if it’s also divisible by 400. Make sense? So 1700, 1800 and 1900 weren’t leap years, 2000 was a leap year, but 2100 won’t be one. In other words, you get one every 97/400 years rather than 1/4, as the earth’s rotation around the sun is actually a bit less than 365.25 days. This might seem trivial (and you may be right), but the previous Julian calendar hadn’t adjusted for this and had a leap day every four years, hence the shift to the modern Gregorian calendar from the 16th century onwards. But when countries made the adjustment, it meant the date shifted forward. So in Britain, the recorded date went from 2 September 1752 one day to 14 September 1752 on the next, skipping over the 11 calendar days in the middle.

If we missed the next 11 days right now, we’d skip over an awful lot, including the next US jobs report, an array of US primary elections on Super Tuesday, the ECB’s policy decision, Fed Chair Powell’s congressional testimonies, and the UK budget. But today, the main focus will be on the PCE inflation data from the US, which is the measure of inflation that the Fed officially targets, and is therefore closely watched in markets. Readers will remember that a couple of weeks ago, the CPI and PPI inflation reports both surprised on the upside, and the components that feed into the core PCE reading are pointing to a strong print for January. As a result, o ur US economists are expecting core PCE to come in at +0.36% for the month, which if realised would be the strongest monthly print since another +0.36% reading in February last year. So that’s one to look out for as investors seek to gauge the timing of potential rate cuts from the Fed.

Ahead of that, markets in Asia have put in a mixed performance overnight. Chinese equities have advanced, including the CSI 300 (+1.11%) and the Shanghai Comp (+1.00%), and the Shanghai Comp is currently on track to record its best monthly performance since November 2022. But other indices have been more negative, and the Hang Seng is down -0.02%, the Nikkei is down -0.02%, and the KOSPI (-0.49%) has posted larger declines. Futures have also been subdued, with those on the S&P 500 up just +0.05% after yesterday’s decline.

In Japan, sentiment wasn’t helped by the latest industrial production data, which showed a decline of -7.5% in January (vs. -6.8% expected), which is the biggest monthly decline since May 2020. Nevertheless, investors have continued to grow in confidence that the end of the negative interest rate policy could be near, following comments from the BoJ’s Hajime Takata, who said that “my view is that the price target is finally coming into sight”. That’s helped the Japanese Yen to strengthen +0.44% against the US Dollar overnight, whilst 2yr government bond yields are up +2.3bps to 0.18%, which is their highest level since 2011. Moreover, overnight index swaps are now pricing in a 33% chance of a move away from negative interest rates at the next meeting in April, up from 21% the previous day.

Ahead of that yesterday, markets were mostly in a holding pattern, with the S&P 500 (-0.17%) still experiencing little movement since Nvidia’s earnings last week. The latest decline means the index is still on track for a weekly loss, and there were larger falls for the NASDAQ (-0.55%) and the Magnificent 7 (-0.58%). Meanwhile in Europe, the story was also one of losses yesterday, with the STOXX 600 down -0.35%. That said, the DAX (+0.25%) continued to outperform, posting a 6th consecutive advance and closing at a fresh all-time high.

Over on the rates side, the moves were also modest in scope yesterday, though yields did extend moderate declines during the US session. This came even as central bank speakers continued to echo the recent consensus on policy, suggesting that rate cuts are likely to happen over the coming months, but not yet. For instance, Boston Fed President Collins said that it “will likely become appropriate to begin easing policy later this year”, but also that “I want to see more evidence of a sustained trajectory to price stability”. Separately, New York Fed President Williams said that they still had “a ways to go on the journey to sustained 2% inflation”. Meanwhile at the ECB, we heard from Slovakia’s Kazimir, who said in a Reuters interview that for a rate cut, “June would be my preferred date, April would surprise me and March is a no go”. Lithuania’s Simkus made similar comments, saying that “June is really the month to consider the rate cut”. And later in the evening, Germany’s Nagel said that “we can’t make any mistakes in the final stretch of the journey”, suggesting it would be “fatal” if rates were eased too early only for inflation to rebound.

That backdrop saw expectations for rate cuts tick up a little yesterday. For the Fed, investors still expect that June is the most likely meeting for a cut, with futures pricing in a 77% chance of a cut by June (up from 73% the day before). In turn, that helped yields on 2yr Treasuries fell -5.6bps, while 10yr yields were down -3.9bps to 4.265%. Over in Europe the bond rally was more marginal, with yields on 10yr bunds (-0.6bps), OATs (-1.2bps) and BTPs (-1.8bps) all seeing modest declines.

Although yields were falling yesterday, there were fresh signs of an increase in market expectations for US inflation, with the 2yr breakeven up +2.6bps to 2.77%, which is their highest level since March last year. 2yr zero-coupon inflation swaps were also up +3.9bps to 2.43%, the highest since October, so we’re seeing that across several instruments. That came as Brent crude (+0.04%) closed at its highest level since early November, at $83.68/bbl. Moreover, it’s clear that higher oil prices are filtering through into the real economy, and data from the AAA showed US gasoline prices remained at $3.294 per gallon on Wednesday, in line with their level on Tuesday and their highest level since November.

On the data side, yesterday saw a very modest downgrade to US GDP growth in Q4, with the second estimate coming in at an annualised +3.2% (vs. +3.3% first estimate). The release also showed that core PCE prices grew a bit faster than thought in Q4, at an annualised rate of +2.1% (vs. +2.0% first estimate). However, the revisions still left annual GDP growth for 2023 at +2.5%, in line with the initial estimate.

Finally in US political news, congressional leaders agreed a deal yesterday evening to avoid a partial government shutdown that would have started after March 1. The deal would extend funding to March 8 for several departments, and others to March 22.

To the day ahead now, and data releases from the US include PCE inflation for January, personal income, personal spending and pending home sales for January, the weekly initial jobless claims, and the MNI Chicago PMI for February. Elsewhere, there’s the February flash CPI inflation prints from Germany and France, along with German unemployment for February, UK mortgage approvals for January, and Canada’s Q4 GDP. From central banks, we’ll hear from the Fed’s Bostic, Goolsbee, Mester and Williams.

Authored by Simon White, Bloomberg macro strategist,

Stocks, bonds, commodities and other real assets are dramatically unpriced for a resurgence in inflation.

If fortune favors the prepared, then no market is going to have much luck. A re-acceleration in inflation is increasingly on the cards (see here), an eventuality that is materially underpriced across asset classes. That means portfolios are cheap to hedge, as well as leaving markets subject to outsized moves when they do price in inflation’s return.

Inflation complacency can be seen clearly in one chart. CPI fixing swaps foresee a continued steady decline in headline inflation in the US back toward 2% through this year. Not only that, most of the swaps have been falling in recent months as spot inflation has eased. The implied probability of a return of inflation is dwindling to zero.

But it’s not just fixing swaps predicting a return to inflation utopia. Across markets, there are indications that are not only underpricing a revival in price growth, they appear to be ignoring the possibility altogether:

• nominal yields with negative inflation risk premium

• real yields with low downside skew

• low expectation of much higher short-term rates

• high exposure to equity sectors with steep duration

• low exposure to the sectors best placed to weather inflation

• commodity volatility that’s very subdued

• ownership in commodities that is at histrocial lows

The charts will do most of the talking. Start with nominal yields. We can decompose them (via the DKW model) into a real expected short-rate, real term-premium, expected inflation and inflation term-premium (aka risk premium).

The drop in the 10-year yield from its October high has been driven by a fall in the real expected short-rate, as well as a decline in expected inflation. But there is nothing built into the price for inflation’s volatility rising again, as it typically does when price pressures increase. In fact, the inflation risk-premium is more negative than it was in the years leading up to the pandemic.

Real yields too are bereft of any risk premium for inflation. If the Federal Reserve does not immediately react to rising inflation (as happened in 2021, and I suspect will happen this year if and when inflation starts to pick back up), real yields are likely to experience downside volatility, i.e. call skew for TIPS should rise. Again there is no sign of market nerves here.

As the chart above shows, TIPS call skew has tended to lead inflation over the last few years, and thus there is little in the way of rising price growth expected soon. The inflation-bond market may have this one wrong.

Short-term rates don’t look any better. The market is still expecting lower rates over the next year, which might make sense from a weighted-average perspective given that when things go wrong (e.g. a recession) they go violently wrong. But there is little likelihood priced in for much higher rates – the distribution for SOFR rates has a clear downwards skew.

Overall, bond investors just aren’t anticipating more inflation, with the number of investors who say they are short USTs in JPMorgan’s Treasury survey plumbing its series lows.

Stocks are also very much on Team Transitory (and we can make similar arguments for credit). There continues to be a bias toward high-duration sectors (which are more likely to fare worse when inflation is high), such as tech and telcos, with these strongly outperforming the index.

On the flipside, the sectors with historically the best record when inflation is elevated are those with low duration such as energy and staples, which continue to lag heavily behind.

Bonds, and stocks in the main, are assets to avoid (or short) when inflation is troublesome, but commodities and other real assets are havens. But here as well, there is no sign investors are making hay while the disinflation sun is shining. Commodity ownership relative to stocks and bonds continues to fall, and now represents only a measly 1.7% of the total.

That’s not just down to valuation effects, given commodities are now 30% lower than their 2022 peak, but due to real outflows from the asset class (using commodity ETFs as a proxy).

It could be the calm before the storm. Implied volatility in several commodities, mainly in metals, has been falling and is near 10-year lows. Lead, copper, nickel and most notably gold and silver are within ten percentage points of their vol troughs over the last decade.

Again, why own real assets over financial assets when you think inflation is yesterday’s story? That’s reflected in BofA’s Global Fund Manager Survey from December, showing the biggest underweight in commodities versus bonds since the post-GFC equity-market bottom in March 2009.

Source: Bank of America

Just maybe though there is one market sensing price growth is returning and is moving to hedge it. I mentioned above TIPS skew did not appear to be anticipating an inflation-driven lurch lower in real yields. But inflows into TIPS ETFs as a whole are slowly picking up. This had a good call in the pandemic, starting to rise about three months before CPI started its ascent in 2020 (when inflation leading indicators were already rising, as they are today).

Either way, there are precious few signs a re-acceleration in inflation is being priced in even as much of a tail-risk across markets. Fortune favors the hedged — and at the moment, that’s exceedingly cheap to do.

There was a collective gasp of surprise two weeks ago when not only did CPI and core CPI both come in far hotter than expected, but the closely watched sticky Super Core inflation – Core CPI Services Ex-Shelter index – soared 0.7% MoM (the biggest jump since Sept 2022…

… and while we correctly warned that the inflation print would come in red hot (see “CPI Preview: “There’s A Genuine Risk” Inflation Will Come In Hotter Than Expected“) most on Wall Street did not, and were scrambling to come up with justifications for why they were again collectively wrong, with Goldman being of particular note, as the bank attributed the spike to what it called a “January effect” and then assured its clients that “while some of the OER strength could persist if driven by the rebound in the single-family market, we continue to expect inflation in non-housing services to normalize in February and March now that the start-of-year price increases have been implemented.“

Now the reason why Goldman, and so many others, scrambled to goalseek a narrative that sees the Fed cutting rates in March… or May…. or June (as Goldman now does, after previously forecasting both the former months as the start date of the Fed’s easing cycle)… or whenever, is because that’s the only thing that will validate the very bullish year-end S&P price targets by various banks which have been aggressively raised in recent weeks as the Wall Street lemming crew chased the momentum ignition sparked by a few AI-linked companies. But there is another reason why the Fed needs to cut: if it does not the odds of the market maintaining its upward glidepath into the November election, not to mention the so-called “strength” Bidenomics, are as dead as the dodo.

In other words, the real shock is not that inflation printed high – everyone knows how high prices are and in which direction they are moving – it is that Biden’s Department of Labor Statistics admitted to this fact. So two weeks later, the BLS has realized precisely the error that it made, and as Bloomberg reported today, the US Labor Department’s statistical agency “sowed confusion” on Wall Street this week with an email about a key factor behind the jump in January’s CPI index

A Tuesday email to a group of data “super users”, seen by Bloomberg, suggested a surge in a measure of rental inflation — which left analysts puzzled — was caused by an adjustment to how subcomponents of the index are weighted.

Adding to the speculation that the data has been rigged and we are witnessing yet another conspiracy in action, one recipient said the BLS Statistics tried to retract it and that they were told to disregard its contents.

As we explained at the time, the spike in owners’ equivalent rent was a major factor behind the strength of the overall January CPI figure given its outsize weight in the index. Specifically, while Rent inflation rose 0.36% MoM, Owner-Equivalent rent jumped 0.56% and shelter inflation surged 0.63% sequentially, the biggest increase since February 2023. Whatever the reason, the cascade from the higher-than-expected CPI numbers eventually led Fed officials to warn there would be a delay to widely anticipated interest-rate cuts.

Which, however, is bad news for Biden as explained above, hence the following bizarre email sent out by the BLS:

It wasn’t immediately clear who or what is a BLS “super user”, but it was obvious that the BLS is now in damage control mode, trying to “justify” why it allowed the January CPI print to come in red hot. The implication is simple: now that the BLS knows what “caused” the spike it won’t allow the same mistake twice.

The BLS is “currently looking into this data, and we may have additional communication regarding the rent and OER data soon,” an economist at the agency told Bloomberg in an emailed statement.

As Bloomberg explains, an increase in the weighting of single-family homes within the OER measure relative to multifamily units would tend to give it a temporary boost because supply of single-family homes has been restrained, keeping prices elevated, whereas multifamily supply has surged in recent years.

Furthermore, the acceleration in OER puzzled analysts because the rate of increase in a similar, though smaller, CPI component known as rent of primary residence continued to decelerate in January. The two typically move up and down together, and some suggested the larger OER move should be seen as a fluke.

Putting the puzzles pieces together, Pantheon Macro economist Ian Shepherdson wrote in a note to clients that if the weighting explanation proves correct, it could keep OER inflation readings elevated for the next several months.

“Prudence suggests” that “we should expect OER to rise at the January pace for the next five months, at which point it should revert to the rate of increase of primary rent,” he said.

Alternatively, if the BLS purposefully adjusted a weighting factor in an adverse way early in the year, it would then have many months in which it would be able to smooth out the negative January impact, allowing the monthly CPI print to come in well below where it would otherwise be. Of course, such an explanation would be rather conspiratorial and would suggest that the BLS is in cahoots with the Biden admin as it seeks to mitigate any potential upside price shocks in the months leading to the November election. Almost as conspiratorial as the BLS “accidentally” sending out an email to its “super users”, and the promptly seeking to retract it….

By Garfield Reynolds, Bloomberg markets live reporter and strategist

The recent euphoria around stocks may fizzle, as a key indicator of risk appetite seems to be peaking.

This has been a strangely quiet week after the Nvidia-fueled euphoria that took the S&P 500 index and other major gauges to record peaks last Friday. Perhaps this is just a calm moment while investors rebalance into the end of a hectic month, and stocks will storm higher once that is out of the way. Especially if Thursday’s reading on the key inflation gauge the Federal Reserve monitors passes without undue incident.

Still, there is a heavy feeling about the risk rallies that mostly kicked off in November, as investors enter uncharted territory and wonder how high will be too high this time round. In that context the way that a classic proxy for risk appetite has also lost momentum underscores the air of mild angst that seems to be in the air.

The Australian dollar is retreating from its own peak against the Japanese currency — near a 10-year high at 99.06 yen also reached on Friday. Looking simply at foreign-exchange drivers, the Aussie-yen rate looks unlikely to extend its advance too far. Australia’s central bank has probably stopped hiking interest rates and may move to reduce them this year, while the Bank of Japan is seen ending its negative rate regime soon.

That means further gains in stocks and other risk assets would be leaving the Aussie-yen rate behind. Not an impossible task, but perhaps a challenging one.

The Vanguard Group is expanding a pilot program that gives investors in index funds the power to choose a proxy-voting philosophy when the money manager votes on their behalf. It’s the latest move in trend among the world’s “Big Three” index fund managers — BlackRock, Vanguard and State Street — to defuse controversy surrounding voting on shareholder proposals that push the woke environmental, social and governance (ESG) agenda. 

Vanguard took its first steps in this direction last spring, letting investors choose from four proxy voting options: 

• Vanguard-Advised Funds Policy: Shares are voted “in a manner that seeks to maximize long-term shareholder returns.” 

• Company Board-Aligned: The fund investor’s proportionate share of votes on each measure is cast in alignment with the recommendations of the company’s board of directors

• Glass Lewis ESG: Glass Lewis is a proxy advisor; in this option, the investor’s shares go all-in on the woke agenda that emphasizes “climate action,” diversity, “equity” and social issues

• “Not Voting”: The investor’s proportionate shares are left un-voted on all proposals

Far too much power is concentrated in the hands of “shareholder services” companies like ISS and Glass Lewis, because so much of the market is passive/index funds, which outsource shareholder voting decisions to them.

ISS and Glass Lewis effectively control the stock market.

— Elon Musk (@elonmusk) January 24, 2023

“We recognize that our investors have diverse perspectives, and we are committed to further engagement and exploration in this area to ensure our clients’ needs are met,” said Vanguard at the time. 

Last year’s initial foray spanned three Vanguard equity-index funds. In early February of this year, Vanguard added two more. Here’s the updated roster of funds covered by the voluntary, opt-in program (the two new funds are listed last):   

• Vanguard S&P 500 Growth Index Fund

• Vanguard Russell 1000 Index Fund

• Vanguard ESG U.S. Stock ETF

• Vanguard Mega Cap Index Fund

• Vanguard Dividend Appreciation Index Fund

Like you, we’re scratching our heads about why an ESG ETF would be among the first in the pilot, given investors in that fund have already made their proxy-voting philosophy clear by simply choosing the fund.   

The end of 2023 brought a major milestone, as total index-fund assets under management surpassed actively managed funds for the first time. The decades-long rise of passive investing has put the Big Three indexers in a position of major power to steer corporate agendas — and has put them in the crosshairs of angry investors and Republican officials who think shareholder returns should be the only consideration when voting proxies. 

Overlaying a woke agenda on a passive investment strategy makes for bizarre situations. For example, an explicitly-ESG mutual fund would likely steer clear of fossil fuel companies altogether. However a regular index fund is compelled to invest in them. If that same fund embraces an ESG proxy-voting strategy, that means it buys a fossil fuel company’s shares because it has to, only to turn around and start pressuring the company to get out of the fossil fuel business.  

That’s what happened on a particularly dark day for rational investment markets: In 2021, BlackRock, Vanguard and State Street all voted to install three dissident directors on Exxon’s board who were pursuing seats with the explicit aim of forcing Exxon to reduce its carbon footprint. Their votes put them over the top. 

As the madness of the ESG agenda was increasingly drawn to public attention, fund managers have been buffeted by divestments, lawsuits, anti-ESG legislation and retail investor complaints and redemptions. 

Vanguard has been leading the Big Three away from the ESG precipice. In December 2022, the company withdrew from the Net Zero Asset Managers Initiative, a coalition that once had 300 asset managers signed on to reduce greenhouse gases and lower the earth’s temperature by 1.5 degrees Celsius by 2050. “[Vanguard is] not in the game of politics,” CEO Tim Buckley told the Financial Times at the time. In mid-February of this year, JPMorgan and State Street quit the Climate Action 100+ pact, while BlackRock reduced its involvement in the initiative. 

State Street and BlackRock have also rolled out “pass-through voting” initiatives similar to Vanguard’s, but with eligible funds that account for larger swaths of their assets. BlackRock offers six proxy-vote policies to choose from. 

These are promising developments, but with index funds counting large corporate and pension funds among their investors, it remains to be seen who will prevail in the proxy-policy tug-of-war. 

French President Emmanuel Macron’s words at the start of the week which opened the door to European ‘boots on the ground in Ukraine’ elicited shock, dismay and caution even from within the Western allies. NATO itself scrambled to assure the world that it has no plans to deploy troops inside Ukraine, with Secretary General Jens Stoltenberg rejecting the idea in remarks, given it would certainly mean automatic WW3.

According to CNN, “Macron had told reporters at a news conference that while he and the other 21 European leaders present did not agree on deploying military personnel, the prospect was discussed openly.” Even typically hawkish countries Poland and the UK distanced themselves from such a possibility. 

However one tiny NATO country did step up to back Macron’s words. The Netherlands has said it won’t rule out sending Western troops to Ukraine. Dutch Chief of Defense, General Onno Eichelsheim, told an Amsterdam-based news outlet that while it’s a possibility it is “not yet opportune” to do so.”I think you should keep all options open to see how you can best support Ukraine,” Eichelsheim said.

According to more from the Dutch interview: 

Ukraine has not asked the Netherlands to send troops and there is no point in discussing it at the moment, Eichelsheim added. If Western militaries were to go to Ukraine, it would have to be in a coalition, the Dutch military chef said. “This could either happen via NATO or via an alliance of 10-15 countries.”

“It would be very odd if one or two countries did it,” he added.

Indeed, President Putin’s ominous response to Macron’s words seized precisely on the question of NATO Article 5…

“If Ukraine joins NATO, you won’t even have time to blink your eye when you execute Article 5,” Putin said, which suggests that possibly a nuclear response could be on the table.

Vladimir Putin… “If Ukraine joins NATO, you won’t even have time to blink your eye when you execute Article 5”…🇷🇺🇺🇦 pic.twitter.com/4Z7Rdt9k6t

— Pelham (@Resist_05) February 27, 2024

Moscow has since warned of major direct conflict with the West. According to more from the Kremlin response: “The very fact of discussing the possibility of sending certain contingents to Ukraine from Nato countries is a very important new element…in that case, we would need to talk not about the probability, but about the inevitability (of a direct conflict).”

Already there’s clear evidence of a significant amount of Western mercenaries and foreign fighters among Ukraine’s ranks:

#Breaking! #US SOLDIERS CAPTURED IN #Ukraine BY #Russian FORCES!

WATCH: One of the prisoners cries and shouts, “Don’t Shoot.”

US siding with #Israel in the #Gaza war. #Russia is with #Iran and #Palestinian resistance!

This is a setback for @netanyahu
as well! pic.twitter.com/EOzgddbkks

— @Misra_Amaresh (@misra_amaresh) February 25, 2024

Some countries, including France, the US, and UK have also in the past made statements which seem to confirm that they already have military ‘advisers’ on the ground in Ukraine. Certainly Western intelligence services have been there for years, even for the past decade at least.

* * *

Below is a note analyzing the scramble that Macron’s provocative words set off this week, courtesy of Rabobank…

President Macron’s remarkable public speech saying Europe will “do everything needed” to stop Russia winning in Ukraine, and “not ruling out” sending troops, of course, saw President Putin immediately reply that the latter would mean war with Russia; and, of course, Germany then stated they oppose this course of action. Macron may have then tweeted a video saying Europe needs to be prepared to act militarily without the US vis-à-vis Ukraine, but its inability to do so was laid bare.

You might think this doesn’t matter in a markets Daily. You’d be wrong. To translate it to someone limited to the narrow world of finance, imagine if a central bank promised to do “whatever it takes”, but when a crisis hit said, “except QE.” Markets would crash, and headlines would be of crushing humiliation and total loss of credibility. Europe just experienced the same in realpolitik. After all, France is not only a member of the UN Security Council –alongside a UK whose aging submarine nuclear deterrent may or may not work– but the only EU state with a serious military; and it just displayed that, within an EU mechanism that’s the only way to scale up to make it a serious global player, it cannot be taken seriously at all.

Promising to send troops, but no new weapons, was always a dangerously contradictory, escalatory action that invited Putin to show that he wouldn’t blink, and Europe would – which it did. The only actual breakthroughs from Macron were promises of an unspecified quantity of long-range missiles at an undisclosed future date, and a U-turn on using new EU funds for Ukraine to purchase foreign ammunition in light of the fact that Europe cannot manufacture it itself at the required scale, the latter pragmatism a scandalous reflection of its military incapacity.

To bring it back it back to markets, if a central bank (in)acted like Macron, everyone would know the final bill would be vastly higher than it originally looked like being. The same is true for the EU in terms of any dreams of any “Strategic Autonomy” in an ever-more ‘geopolitical’ world. That world was watching, and face-palming or laughing; as a result, you could, literally, be talking about needing to spend many tens, perhaps many hundreds, of billions more on EU defence to try to reinstall an element of real deterrence. In short, when it comes to violence, reputations matter more than they do in the world of central banking.

Yet Macron just displayed, again, that most Western leaders have never been physically worried about their own safety in a world of streetfighters, who look at their ‘whatever it tales’ and say ‘whatever’. That’s as even the Financial Times carries an opinion piece warning that Europe needs to consider a wider range of potential future geoeconomic threats, including from the US under Trump, not just from Russia and China. (And the US author ignored Iran; and, as the Wall Street Journal puts it, ‘While the World Was Looking Elsewhere, North Korea Became a Bigger Threat: Kim enlarged his nuclear arsenal and built ties to Russia, no longer aiming for reunification with South Korea. The US and its allies are alarmed.’)

By Charles Kennedy of OilPrice.com

Russia has started diverting its LNG cargoes away from the Suez Canal and is using the longer route to China via the Cape of Good Hope in Africa, amid a higher risk of Houthi attacks in the Red Sea, according to LSEG data cited by Reuters on Wednesday.  

The longer route from Russia’s Yamal LNG project to China via Africa instead of the Suez Canal adds around 10 days to the travel time for LNG cargoes to reach their destinations in China and return to Russia, tying up more LNG tankers for longer periods at sea.  

This adds to recent struggles of Russia’s top LNG exporter, Novatek, which has yet to begin shipments from its new export project, Arctic 2 LNG, due to a lack of ships amid tightened U.S. sanctions on the project. 

Two of the world’s biggest LNG exporters, the United States and Qatar halted shipments via the Red Sea and the Suez Canal earlier this year. Qatar paused LNG cargo journeys through the Suez Canal in the middle of January, but it assured customers and the market that its LNG output is uninterrupted and Europe should expect longer delivery times.

“While the ongoing developments in the Red Sea area may impact the scheduling of some deliveries as they take alternative routes, LNG shipments from Qatar are being managed with our valued buyers,” QatarEnergysaid in January.

Now Russia is also avoiding the Red Sea, per LSEG data quoted by Reuters. Several tankers have already used the longer route to China, while vessels that delivered in December LNG to China from Yamal via the Suez Canal are now heading back to Russia via the Cape of Good Hope, according to the data.

Last month, some tankers transporting Russian fuels started to avoid the Suez Canal route to Asia as ship-tracking data showed operators of vessels carrying Russian oil products may have reached the risk tolerance for passing close to Houthi missiles in the Red Sea and the Gulf of Aden.