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Market Stories by Fathom, 11/04/2024

Good morning. Since our last update, three significant events have unfolded.


Firstly, we received a slew of global data from ISM and IFO, affirming the resurgence of global manufacturing, particularly in the US and to a lesser extent, China. This revitalization of economic activity has spurred a rebound in commodities, with oil prices reaching new cycle highs, up 20% for the year. Apart from expected OPEC production constraints, attacks on Russian refiners and pipelines have further propelled equilibrium higher.


Secondly, yesterday's above-consensus US CPI print suggests that the January and February figures were not anomalies. The ongoing economic resilience and robust labor market raise doubts about the Fed's ability to execute three rate cuts this year. Market sentiment now indicates expectations of fewer than two rate cuts. Additionally, the revelation in the minutes of an intention to lower the pace of QE exacerbated concerns, evidenced by a disappointing 39-billion-dollar 10-year auction, reflecting saturation in the US duration market. The implications of higher US rates are reverberating globally, potentially prompting the ECB to recalibrate its expected rate cut trajectory to prevent further euro devaluation and imported inflation.


Thirdly, two geopolitical events unfolded: Israel's attack on an Iranian embassy and its temporary cessation of the Gaza Strip march. Escalating tensions in the Middle East are exerting upward pressure on energy prices and are muting risk appetite. Meanwhile, Treasury Secretary Yellen's visit to China garnered attention, particularly given her remarks on industrial capacity. Behind closed doors, discussions may revolve around a potential Chinese intervention to assist with the colossal TSY auctions, perhaps mitigating bilateral tensions in anticipation of the Q3 elections.


In macroeconomics, the term "Fiscal Dominance" is gaining traction, denoting a scenario in which high and consistent government fiscal deficits and elevated Debt-to-GDP ratios significantly influence central banks' monetary policies. The burden of interest expenses constrains central banks' ability to manage inflation expectations through aggressive and volatile rate decisions, leaving the currency as the release valve (JPY is the paradigm). Should currency options be limited (due to size, scope, or governance), alternative assets such as commodities, hard assets, and cryptocurrencies may serve as outlets.


In equity markets, a notable rotation from growth to value and from broad market indices to commodity-related themes has occurred. The upcoming reporting season will shed more light on earnings expectations, which currently exhibit greater dispersion (Commodities sector up, Industrial up, Staples down, Health care down). Key economic indicators remain positive, but inflationary pressures persist due to ongoing fiscal spending, global remilitarization, trade restructuring, and the capital requirements of the emerging green economy, as noted in J. Dimon's annual letter (an annual must-read for me). 


Alexandros Tavlaridis

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