Weekly Investment View: Brent to Rise, Long AUD/NZD Still Makes Sense

This Week

Dominique argues the CPI beat today confirms no Fed cut in March and aligns with disinflation entering a slower ‘last-mile’ phase; Mirza takes a cautious stance towards the outperformance in EMFX, maintaining a low risk profile; Henry shifts his call for the first BoE cut from May to June after today’s labour market data; Ben argues long AUD/NZD still makes sense as RBNZ hawkishness is unlikely to outlast RBA hawkishness; Viresh thinks Brent can keep rising in the near term with seasonals in support, John remains market-weight on equities as high valuations raise the risk of volatility on any major earnings disappointment.

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Table 1: Current Trades
*Total returns using daily close price. Positions are sized such that impact of any one trade on portfolio is no larger than 50 bps.
Asset Class	Date entered	Trade	Rationale	Entry	Stop Loss	Target	Current Price	P&L*
FX	30-Jan-24	Long EUR/GBP	Click here	0.854	0.846	0.877	0.850	-0.4%
	30-Jan-24	Short EUR/USD	Click here	1.083	1.095	1.055	1.071	1.1%
	24-Jan-24	Short 3m USD/TWD NDF	Click here	31.000	31.500	30.000	31.110	-0.4%
	24-Jan-24	Short GBP/USD	Click here	1.276	1.290	1.235	1.260	1.3%
	24-Jan-24	Long EUR/CHF	Click here	0.943	0.925	0.970	0.948	1.3%
	15-Jan-24	Long EUR/PLN	Click here	4.360	4.295	4.480	4.334	-1.1%
	09-Jan-24	Sell 3m PHP/IDR	Click here	279.000	285.000	265.000	279.761	0.3%
	06-Dec-23	Long 6M 32.0 EUR/TRY Digital Put	Click here	31.350		< 32.00	32.943	-0.2%
	10-Oct-23	Long EUR/CZK	Click here	24.650	24.000	25.600	25.379	2.2%
Rates	01-Feb-24	Pay 2Y EUR vs. receive 2Y GBP Swaps	Click here	132 bps	155 bps	90 bps	139 bps	-7 bps
	31-Jan-24	Short 10y USTs	Click here	3.99%	3.70%	4.40%	4.28%	29 bps
	31-Jan-24	Short 30y USTs	Click here	4.23%	3.95%	4.65%	4.44%	21 bps
	11-Jan-24	Long 10y Spain vs. BTP and Bund	Click here	30 bps	36 bps	12 bps	30 bps	0 bps
	11-Jan-24	Pay Apr-24 ECB ESTR	Click here	3.60%	0.000	3.90%	3.77%	16 bps
	08-Jan-24	5y10y MXN TIIE Steepener	Click here	-10 bps	-30 bps	40 bps	-3 bps	7 bps
	05-Jan-24	Receive 10y SOFR Swap Spread	Click here	-39 bps	-30 bps	-60 bps	-37 bps	-2 bps
	20-Nov-23	Receive BRL DI F27 (from F25)	Click here	10.45%	10.50%	9.00%	9.92%	54 bps
	17-Nov-23	Long 1y1y vs 2y3y SOFR	Click here	-40 bps	-25 bps	0 bps	-20 bps	22 bps
	28-Sep-23	US 5s10s Steepener	Click here	-7 bps	0.000	15 bps	4 bps	11 bps
Com-mod.	30-Jan-24	Long Gold	Click here	2033.4	1990.0	2180.0	2025.8	-0.4%
Source: Macro Hive

Dominique Dwor-Frecaut – US Macro

Today’s CPI was higher than expected, as Sam’s model predicted. Importantly, disinflation is not broadening – core services was up 66bp from 38bp in December. This is the opposite of what the Fed wants to see. Overall, the print vindicated Powell’s no cut in March and aligns with disinflation entering a slower ‘last-mile’ phase.

Other than CPI, retail sales will get the most attention this week – it could surprise on the upside. Elsewhere, import prices and PPI could be equally important for the inflation and Fed outlook. The Fed is very focused on core PCE, and the CPI provides us with only a partial picture on PCE. We will need the PPI to get an estimate of PCE, notably in medical and financial services.

Longer term, January import prices will reveal the impact of higher global shipping cost indices, which peaked in January (Chart 1). I have been expecting the Red Sea disruption to have only limited impact on US inflation, and that is what the consensus view implies: it shows January core import prices falling by 0.1% MoM from no change in December.

More broadly, less elastic global supply chains have not translated into positive core goods inflation. I suspect it reflects a combination of excess global capacity, including with global shippers and Chinese exporters, as well as the private sector’s ability to work its way around more complex supply chains. The latter is shown by, e.g., a higher inventories-to-sales ratio but falling inventory volatility.

Mirza Baig – Emerging Markets

Emerging markets have been resilient to rising US Treasury yields and a resurgent dollar (Chart 2). Positive growth news has helped more cyclical currencies like KRW and TWD as recession risks receded, while the overall vol environment has remained low and conducive for carry trades. This has kept high yielders like MXN and BRL popular vs alternate funders like EUR and CHF.

We have not participated in the recent outperformance and continue to maintain a low overall beta to EM. This is because US FCIs appear too loose relative to the hot data the economy is printing, and the green shoots people are noticing in EM manufacturing PMIs could be skewed by heavy concentration in the AI/tech related sectors. We remain patient for more compelling valuations.

Henry Occleston – Eurozone & UK Macro

The UK unemployment rate dropped again in December to 3.8%. We had warned this was a risk, but it is impossible to say whether it is methodological changes feeding in or actual labour market tightening. Wage growth was also stronger than expected. While the MoM is volatile, this supports a longer BoE pause. I now shift my expectation for the first cut from May to June. Although there will be no new MPR then, the BoE will have a view of considerable extra data (Table 2).

UK labour market data remains in flux given volatility in the LFS data (even after the recent correction). The ONS have warned LFS data should be used with caution and alongside other labour market indicators.

The drop in the unemployment rate is not necessarily a sign the situation has materially changed from the previous period. That said, overwhelming evidence now suggests the labour market is stronger than the market, BoE, and I had previously estimated.

Wage growth also beat expectations at +5.8% YoY in headline and +6.2% in regular pay. Most importantly, it was +6.2% in private regular pay (I had been looking for +6.1%), constituting a rise in pay momentum.

Overall, on the pay side, MoM volatility is insufficient to change my expectation that wage growth can undershoot MPR expectations. However, alongside the strong labour market data, it suggests the BoE can delay cutting until after May.

The market is only pricing a cut by August, so we see value sticking in the 2Y GBP receiver vs 2Y EUR.

Ben Ford – $-Bloc & Scandies

Attention across the G10 periphery will be placed Down Under, centered on Thursday.

First, in Australia, the Labour Force Survey is expected to show the unemployment rate hitting 4.0% for the first time since February 2022, driven by an increase to the participation rate. Overall, for the RBA the message should be unchanged: the unemployment rate remains below NAIRU (Chart 3).

Second, in New Zealand, watch Governor Orr. ANZ now expect a February and April hike, and Governor Orr would be the man to walk us into one if they were going to tighten policy later this month. We still think they will not tighten this month and that, despite being stopped out at 1.0650, long AUD/NZD will make sense as RBNZ hawkishness is unlikely to outlast RBA hawkishness.

Viresh Kanabar – Commodities

There are currently two big themes playing out in the oil market: widening refining margins and the Chinese economy.

First, refining margins are widening, particularly for gasoil in Europe (which is suffering from a supply shortage). The rapid rise in shipping and insurance costs has closed arbs from Asia and the Middle East, lifting prices. This increase has incentivised domestic Refiners to increase purchases of crude in the physical market.

The ICE gasoil crack is now $8/bbl higher than last month at $33/bbl, while the US equivalent is up $7/bbl. This buying has contributed to steeper backwardation in the futures market, with the prompt spread widening to $0.54 from $0.32 a month ago.

This tightness is also visible in the physical market where week 1 to 3 CDFs on European Dated Brent vs first-month BFOET are now backwardated by more than $1.0/bbl versus around $0.5/bbl last month.

The other theme is the ongoing development of the Chinese economy. Jet fuel demand in January looks strong, with flight miles averaging 15mn a day (c.15.5k flights a day) for the time first ever. However, the early reading for January imports is more disappointing at around 11.3mn b/d (slightly less than 2023’s average). The muted oil demand has been driven by the teapots, who have elected to further draw down their crude inventories rather than buy in the open market as narrowing discounts begin to eat into refinery margins.

With Brent currently trading at $82/bbl, we think it can continue rising in the near term and highlight that February is seasonally one of the best months for oil.

John Tierney – US Equities

What matters more – that the major indices keep breaking records or that smaller caps are going nowhere fast? The S&P 500 and NASDAQ 100 are up 5.3% and 6.8% year to date, but the equally weighted S&P 500 and Russell 2000 have gained less than 1% (Chart 5).

On balance we remain market-weight equities – but high valuations raise the risk of volatility on any major earnings disappointment.

Earnings reports reveal American luxury goods sales are booming in China – but less so industrial goods. Media companies reported a slowdown in advertising, and travel companies saw softening bookings during Q4. This suggests people were getting cautious – but recent economic data suggest that mindset may be fading.

Consumer discretionary and consumer staples companies will be in focus this week, and crypto players will be watching Coinbase. Zillow should provide colour on home sales going into the spring selling season.

(The commentary contained in the above article does not constitute an offer, a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)