This Is What A Currency Crisis Looks Like
Something Incredibly Dangerous Is Happening
If you were looking for recessionary signals this week, you had plenty of catalysts to choose from. The PCE price index, the Fed’s preferred inflation measure, saw both the headline and core rates rising by 0.3% month-over-month, roughly in line with expectations, while the annualized headline rate rose from 2.5% to 2.7% in March. This essentially confirms the trends we saw in the BLS numbers a couple of weeks ago - inflation is back on the rise! The economy seems to be stuck in this 3-4% range on inflation and that’s not going to be enough to motivate the Fed to begin easing conditions. Best guess is that the first rate cut might come in December (there’s not enough evidence to cut in the near-term and Powell will probably want to avoid making adjustments around the election). That’ll keep putting structural pressure on yields to keep moving higher beyond the 50 basis increase the 10-year yield has seen over the past month.
This week’s disappointing Q1 GDP reading managed to shake the markets and for good reason. The “strong and resilient” economy narrative is that one thing that’s been propping up asset prices and distracting people from the warnings that are emerging. If that starts to go, the markets may struggle to find positive catalysts that would justify sending risk asset prices higher. Consumer spending and the labor market are the two likeliest candidates, but the Q1 GDP reading was a significant miss. If this is a sign that inflation and high interest rates and monumental consumer debt are finally starting to take their toll, this might not be the last quarter where the economy has this issue.
It’s impossible to talk about the week passed without mentioning the yen and the Bank of Japan. The central bank, as expected, made no changes to its policy positions, but did indicate that rate hikes could still be on the table later this year and raised its inflation expectations for fiscal year 2024. Those factors should have been interpreted as hawkish and helped support the yen. Instead, the complete opposite happened. The yen started the week hovering around the 154.5 level and finished it testing the 158 mark. Plus, if you look at the minute by minute chart, you’ll see multiple flash crashes, suggesting the BoJ might have been testing the market for an imminent intervention. If you want to see what a currency crisis looks like, this might be the best example you’ll find. Getting some hawkish markers and then completely falling through the floor indicates a currency that is volatile and untethered to rational behavior. That makes it incredibly dangerous to the entire financial system.
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