(BLOG) Morning Brief- Thursday, Sept 6th

crypto chaos

1. EM FX

The weakness in EM seems to be moving from idiosyncratic situations to contagion. The huge currency losses in some EM markets are not without historical precedent. Losses in 2008 and 2015 exceeded 15%. Bottom line: it feels bad, but it could easily get worse.

Why it Matters

Emerging markets had another rough day yesterday. Stocks bonds and currencies of major EM markets fell. Indonesia seems to be the new source of volatility, where 10Y yields spiked 22 bp. The JP Morgan EM currency index is now down close to 14% YTD.

2. Inverted Curve

The yield curve is already inverted…if you look at forward OIS rates. The 1m OIS rate 3 years forward is lower than the 1m OIS rate 1 year forward. The market is pricing a return to rate cuts not long after the tightening cycle is expected to conclude.

Why it Matters

The market is priced for 2-3 more increases in the fed funds rate. That would put real rates in the 50 bp range, assuming a 2.3% median economist forecast for CPI for 2019 and 2020. A 50 bp real rate may not look like tight monetary policy, but if Japan and Europe are still at negative nominal rates, its’ enough to continue to attract capital flows.

3. Retail Sales

The increase in weekly retail sales, measured via the Johnson Redbook Index, rose to the highest level in the last 5 years. The cutoff period for most retailers was Saturday, Sept 1, so most of the Labor Day shopping activity is not reflected in this number, which makes it even more impressive.

Why it Matters

If you are looking for clues for a slowdown in the US economy, you are not going to find it in retail sales. Consumer spending drives economic activity and for now at least, consumers are still spending.

4. Ethereum

The second largest cryptocurrency, Ethereum, hit a new YTD low yesterday of $245 on expectations of further regulations for crypto. Ethereum is down 70% from the high established earlier this year.

Why it Matters

The idea of having anonymous trading of a “currency” is just too much for regulators to handle. The government will not tolerate money laundering, tax evasion, and transactions in illicit goods and services. The appeal of cryptocurrencies is fading.


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