GS MORNING- FOMC, USDJPY Update, QRA Recap, Rich Privo’s Latest and BoE Chatterbox - Adam Crookpdf
GS MORNING- FOMC, USDJPY Update, QRA Recap, Rich Privo’s Latest and BoE Chatterbox - Adam Crookpdf
Page 1 of 5
Tyler Durden shared this file. Want to do more with it?
  1. Highlights from GS Research, Trading, and Sales:1)FOMC,2)USDJPY Update,3)QRA Recap4)Rich Privo’s Latest and5)BoE Chatterbox 1. US ECONOMICHighlights from GS Research, Trading, and Sales:1)FOMC,2)USDJPY Update,3)QRA Recap4)Rich Privo’s Latest and5)BoE Chatterbox1. US ECONOMICS (MERICLE) -May FOMC Recap: Powell Pushes Back Against Talk of Rate Hikes–LINKBOTTOM LINE:The May FOMC meeting was mostly uneventful but dovish overall. While the Committee added a hawkish acknowledgment of the “lack of further progress” on inflation so far this year to its statement, Chair Powell offered a dovish message in his press conference: strong pushback against the possibility of rate hikes: “it is “unlikely” that the next policy rate move will be a hike, confident that policy is restrictive, and that the FOMC would need to see evidence that policy is not sufficiently restrictive in order to hike and is not seeing that. If progress on inflation stalled, the FOMC would respond by holding off on rate cuts, suggesting that the bar to hike is high.”We have left our forecast unchanged and continue to expect two rate cuts this year in July and November.FX STRATEGY (CAHILL):FOMC intended to be slightly hawkish last night delivering the message that they’ve not made progress on inflation and are likely to be on hold for longer. JP noting that ‘they will be sufficient restrictive’ rather than are sufficiently restructure so choices are 1) hold for longer or 2) cut. Indeed the bar to hike is much higher than bar to cut. Problem is the market has gone way beyond that. Our US team is a better indicator of how the Fed are thinking about things rather than the market so now the question is whether the Fed can gain confidence in the data. Despite this, we think it’s difficult to see a sustained USD sell-off as we wait for the rest of the data.FX SPOT TRADING (BRAUTEN-SMITH):The intention from the BOJ/MOF seems strange here, and I get the sense they don’t have a clear handle on market positioning in JPY. Indeed Macro investors have been using the dip in USDJPY as an opportunity to get long, but plays have been expressed in leverage format rather than outright cash. Ultimately BOJ/MOF are now at the mercy of the Fed, US data and UST. If we start to see a LHS drift in USD similar to price action yesterday morning, perhaps the BOJ can be bailed out. On the Fed, it’s clear that they have put the idea of potential hikes to bed. Would be cautious here on stale USD long positioning getting squeeze, particularly in the likes of EUR$.1.0735/40 big levels to
  2. the topside, followed by 1.0770 thereafter. Definitely not committed to USD longs here and think asymmetry is to USD downside but tentatively watch price action together.G10 VOL TRADING (GRIMSVED):The Fed last night was potentially a bit of a vol killer here. Removing right tail distribution for cuts with a path to both cuts and no cuts, but no path to hike. Flow wise we’ve mostly seen unwinds of EUR$ downside options in the frontend and mid-dates and we think this theme can continue further, particularly if we get a soft print from NFP. This could be a green light to throw in the towel on EURUSD downside and given where the positioning is we could see some demand for topside gamma demand instead.2. FX SALES (DOOLING) –USDJPY: post FOMC suspected intervention roundBOTTOM LINE:The 4th wave this week. EBS volumes from 4.15 –5.00pm nyc --> 33bn USDJPY . 157.60 to 153.00 low. Had actually been a quite volume day up until that point with ‘only’ 50bn total for the day (Can see how sharp the spike is on chart below (purple line yesterday)). We think MoF/BOJ was 20 -25bn of that volume. Higher percentage than prior rounds (where we have benchmarked 40%) given the illiquid period of the day. USDJPY spot tickets executed yesterday were value 7th May (slightly longer on account of holiday). Given the Japan holiday –we think there is a good chance that we get this projection today.Flowson our side were heavily skewed toward Retail (net buyers of 700-750 USD) and Macro (850-900 USD) demand on the move lower. Similar pattern to Monday. Estimates of Monday and today’s intervention already seem to be in line with what we saw over months in Sept/Oct 2022 (Mon 32-35bn + today 20-25bn vs 63bn total in 2022)Volumes overnightsuggest no further action. As of 7:45 am LDN EBS volumes were running around 7.5bn since midnight LDN. So slightly above recent averages but no big spikes.FX STRATEGY (CAHILL):On JPY intervention, I think this is a case of the BOJ/MOF trying to put a stamp on intervention earlier in the week, perhaps in a more efficient way. The idea is for them to buy themselves time. The longer they can hold out, longer-term securities become short-term and short-term then become more available cash.CHART 1:EBS Volume traded
  3. Source: GS FICC and Equity as of May 2024. Past performance not indicative of future results. All references to "we/us/our" refer to the views and observations of the desk.3. RATES RESEARCH -2Q24 Treasury Refunding Recap–LINKBOTTOM LINE:Treasury’s 2Q24 refunding announcement contained no major surprises. Treasury announced privately held marketable borrowing of $243bn/847bn for Q2/Q3, while coupon auction sizes largely remained unchanged from the previous refunding cycle in line with our expectations, except for slight increases in TIPS auction sizes.Going forward:we continue to expect Treasury to maintain the current nominal coupon auction sizes for some time and slightly raise TIPS auction sizes over time in line with previous guidance, while managing any variation in financing needs via bills issuance. This should reduce uncertainty around the duration supply outlook. Incorporating Treasury's quarter-end TGA targets and our updated QT assumptions, we now expect $500bn of net coupon issuance to the private sector and $253bn in net bill redemptions for Q2, and $542bn/$214bn of net coupon/bill supply in Q3. Given elevated deficit projections, this should see bills as a share of outstanding USTs to remain above the TBAC-recommended 15-20% range for the foreseeable future.
  4. CHART 1:We believe Treasury will keep current coupon sizes for the foreseeable future, with the exception of modest TIPS increasesGross issuance by auction month, in $bnSource: Goldman Sachs Global Investment Research4. EQ TRADING (PRIVOROTSKY) -Fed & FCI. Energy Pullback. Quits Cycle Lows–LINKOn commodities:Decent pull back in energy (growth?) with Brent having broken the 85 level and traded as low as 83.5. Gasoline cracks are weakening and you can see the abrupt reversal in RBOB. Having stayed away on the last leg of the rally remain of the view that oil will be supported by geopolitics and we are finally beginning to get levels that are worth adding.On rates:think it’s clear that the Fed is still going to be as accommodative as it can be on the first signs of slowing data. Positioning is very one sided (cta max short) and if you look a 10 year inflation swaps relative to the nominal price they havealready rolled over (growth?). Maybe we need to consider being a little but more open to owning duration again...particularly in the belly and the front if there is a view that growth might now be slowing. The rest of the data wasn’t great ISM, was a slightmiss with prices paid moving higher. Jolts lower and the quit rate making new cycle lows all point to a decelerating labour market (see below).Think open debate on whether the narrative has shifted away from inflationary boom to inflation + slowing growth (dreaded stagflation). I’m note sure I fully buy it, China is in recovery mode (HSI breakout) , Dupont was up high single digits with a beat + raise, Sabic telling you they are seeing good demand and quite a few shot cycle industrials are trading a the highs of the year (SKF for one). Think there is just too much fiscal spend going on in the background and that is structurally underpinning growth.Objectively the survey data is coming weaker and as is economic surprise but I don't think we can put a lot of weight on the manufacturing
  5. survey outputs...they have just been too noisy.Let’s keep it simple 2 yr is <5%, I don’t think the Fed is trying to tighten FCI (that bear thesis went out the window yday)...if growth is slowing a little that's pretty supportive for risk.5. UK ECONOMICS–BoE ChatterBox–LINKBailey and Ramsden increasingly confident in the inflation outlook... Governor Bailey argued that the UK is disinflating at full employment, and indicated that he sees “strong evidence now that that process is working its way through”. He downplayed the upside surprise in the March inflation print, referring to the difference between the outturn and the BoE's forecasts as “very small” and stating that the data are “pretty much on track for where we thought we would be” at the time of the February projections. Deputy Governor Ramsden was similarly optimistic on disinflation, stating that he had become “more confident in the evidence” that risks of inflation persistence are abating and arguing that the risks relative to the February forecasts are now “tilted to the downside”....but Pill remains more cautious. Chief Economist Pill, however, was more cautious on the inflation outlook, arguing that there has been “little news” on the Bank’s key persistence indicators in recent months. He stated that his views had consequently not changed since his speech in early March, when he argued that “the time for cutting Bank Rate remained some way off”. He indicated that this “relatively cautious” approach was underpinned by an assessment that cutting rates too early was a greater risk than easing too late. At the same time, Pill did reiterate that policy would remain restrictive after a cut.Contrasting views on divergence. Bailey and Ramsden emphasized differences in UK inflation dynamics relative to the US, with both noting that the latter faces a stronger demand backdrop. Greene, conversely, argued that the UK economy faces greater risks of inflation persistence than theUS, given that it has faced both an energy shock and a tight labour market. She argued that BoE rate cuts should consequently “still be a way off as well”. In a similar vein, Mann argued that services inflation was more persistent than in the US or the Euro Area, making it “hard to argue” that the BoE would move ahead of the Fed or the ECB.
We use cookies to provide, improve, protect and promote our services. Visit our Privacy Policy and Privacy Policy FAQs to learn more. You can manage your personal preferences, including your ‘Do not sell or share my personal data to third parties’ setting using the “Customize cookies” button below.