The MUFG Global Markets Podcast

COVID-19 patient numbers are on the rise, and the third wave of the COVID-19 pandemic has started to put limits on economic activity. The positive surprise of coronavirus vaccines showing success lasted only a few days, and fears about the growing pandemic have offset the positive news. Looking ahead, the Northern Hemisphere is heading into winter and concerns about other, non-coronavirus illnesses will likely mount. Global investors could focus more on risk aversion. Amidst a dearth of risk takers in the global financial markets, we think that the U.S. current deficit and low U.S. rates will likely support a weaker Dollar.
In this episode, MUFG’s Chief Japan Strategist, Takahiro Sekido, dissects trends in cross-border flows evident in recent data, as well as the Tokyo market’s microstructure amongst Japanese, overseas investors, and the BoJ. He also shares his outlook for Dollar/Yen, Yen swap rates, and Yen basis.
 

This week sees USD on weaker footing, and Derek Halpenny, Head of Research for Global Markets EMEA, explains why he expects 2021 to see further dollar depreciation.
Derek also looks at sentiment shifts which means Emerging Markets have seen inflows of USD 30bn in the three week period since the election; can this positive momentum from recent COVID-19 vaccine news be sustained?
Listen for analysis on this and the key market moving events for the week ahead.
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John Herrmann reviews three risk factors of interest: (1) a rapid deterioration in statistical momentum over the 4th Quarter in consumer and business spending and in total business inventories, (2) strong mobility indicators and surging COVID-19 new infection cases and (3) a fundamentally divided Senate chamber that may be united – if only for a brief moment in the 1st Quarter – to deliver a relatively forceful stimulus package (of near $1.500 trillion, or greater) to thwart risks of: surging Wave 2 COVID-19 new cases (towards 250,000 to 300,000 per day), more stringent lock-down measures, and another economic contraction. 
In this episode, MUFG’s U.S. Rates Strategist, John Herrmann, finds that the complexion of risk factors remains supportive of his models forecast for real GDP growth over the 4th Quarter, of near +6.00% q/q annualized, or near -2.10% on a 4q/4q year-over-year rate. However, these very same factors point to a potentially worrisome outcome for 1st Quarter’s real GDP growth rate, of weaker than +1.00% q/q annualized – but with some risk of an economic contraction. Again, it is ironic that the U.S. Congress can be united only by risk of a near unthinkable rate of community spread of COVID-19 (and its implications for risk of an economic contraction)! As this drama plays out, waiting in the wings, the members of the FOMC begin their review of the policy toolkit to decide how best to support, prolong, and enhance U.S. economic recovery.
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Japanese 1H corporate earnings releases have been mixed because of the COVID-19 pandemic, while investment flows among both Japanese companies and investors have been shifting in the wake of the U.S. election. Prime Minister Suga’s administration has noted the need for further economic stimulus and proposed a third supplementary budget to be combined with the FY21 budget and to span 15 months. The Jul-Sep GDP report showed a strong rebound in growth, but the forward-looking signals were decidedly mixed.
In this episode, MUFG’s Chief Japan Strategist, Takahiro Sekido, dissects the Jul-Sep GDP report and discusses its implications. He also reviews recent cross-border investment flows and shares his outlook for Dollar / Yen, Yen rate, and Dollar / Yen cross-currency basis.
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With the 4th quarter likely beginning on such a strong trajectory, in terms of income growth and personal and business spending growth, there is a risk that real GDP only declined near -1.90% YoY in all of 2020 – significantly better than the consensus estimate of -3.30% and the Federal Reserve’s projection of -3.70%! Over the course of 2021, John Herrmann forecasts that the level of real GDP will be fully recovered by Autumn 2021, and the U3 unemployment rate fully recovered by Q1-2022. John raises the question: “For how much longer can the FOMC maintain its monthly asset purchase program of $120.0 billion per month? For how much longer will the FOMC be able to convince market participants that front-end interest rates will be anchored at zero lower bound?” While John has concerns over a severe season of community spread of COVID-19 over the coming few months, the “safe place to hide” may be in the 2s-30s yield curve steepener– especially should there be any pull-back over the coming month or two.
In this week’s podcast, MUFG U.S. Rates Strategist, John Herrmann, takes us through the October monthly employment report and all of the constructive signals he sees. As a standout indicator, his “proxy” for personal income growth of private-sector production and non-supervisory workers surged +1.36% month-on-month. That gain in income points to risk of another remarkably strong retail sales spending report next week. He also explores the implications of those forecasts on his investment thesis, the 2s-30s yield curve steepener.
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In this episode, MUFG Head of Agency Mortgage Strategy and Prepayment Modeling, Glenn Schultz, gives us an overview of the most recent prepayment report and how those numbers compare to our Katana machine learning model projections.  He also discusses prepayment expectations on the 30-year 1.5 coupon, as well as the impact of the GDP forecast on delinquency rates and forbearance.

The Nikkei Average surged on November 9 as investors reacted positively to the new U.S. administration as it began to lay the groundwork for the next four years. Still there are many unknowns about the policy stance of the new U.S. administration, and the risk of the COVID-19 pandemic flaring up again continues to smolder. Coincidently, the Bank of Japan continues to buy assets and will certainly maintain monetary easing. Japanese companies and investors have not yet reacted to these developments judging by Dollar / Yen cross-currency basis and Yen swap rates that have moved only slightly.
In this episode, MUFG’s Chief Japan Strategist, Takahiro Sekido, analyzes the October monetary base data and discusses USD fund-supplying operations as well as the “Summary of Opinions” from the October BoJ meeting. He also updates his views for Dollar / Yen, yen rate, and Dollar / Yen cross-currency basis.

How are the markets reacting to Joe Biden’s U.S. presidential win and Trump’s efforts to contest the victory?
In this episode, Derek Halpenny, Head of Research, Global Markets EMEA and International Securities, outlines the key areas of focus for investors, including positive equity market gains, expectations of diminished tensions globally, continued USD weakness and outlook for emerging market flows. He also looks forward to Trump’s lame duck session of Congress.
Will a fiscal stimulus package finally be agreed? Listen now for more. 
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MUFG's John Herrmann is expecting a more moderate increase in headline payrolls for the month of October but another large drop in the unemployment rate. Perhaps a "deep dive" into the October employment is in order?! Separately, as the U.S. election concludes, it is pretty clear we didn't get the "Blue Wave" many expected. At the same time, it does appear likely that Biden will take the presidency (albeit with a much tighter margin than expected). What do all these developments mean for this week's FOMC meeting? Throw in a sharp rebound in growth in the third quarter against an equally sharp rebound in COVID-19 infections and one's investment thesis is "muddy" at best...
In this episode, MUFG U.S. Rates Strategist, John Herrmann, previews the October employment report, including his forecasts for non-farm payrolls and the unemployment rate. He also discusses the rebound in the broad economy in the context of the October FOMC meeting.
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Japan's major life insurance companies recently released investment plans for the second half of fiscal year 2020. MUFG's Takahiro Sekido notes three themes: (1) a return to JGBs; (2) an interest in alternative investments and spread product; and (3) careful selection of foreign bonds that lack appeal when considering the need for improved asset efficiency and despite low FX hedging costs. Concurrently, the start of the second half of the fiscal year has seen uneventful price action in Japanese financial markets with JGBs, Dollar/Yen, and Dollar/Yen cross-currency basis all flat. Japanese investors were doing little more than adjusting positions ahead of the U.S. presidential election, so there was nothing to drive a JPY weakening. At the same time, cross-currency basis was favorable for JGB buying, and overseas investors turned to JGBs as a short-term USD asset management product, and fund flows did not push JPY higher. These mixed flows kept Dollar/Yen in a narrow range on the eve of the U.S. elections.
In this episode, MUFG Chief Japan Strategist, Takahiro Sekido, discusses Japanese lifers’ investment plans for the second half of fiscal year 2020 and their implications on JGBs, Dollar/Yen, and Dollar/Yen cross-currency basis.
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With a sharp acceleration in the number of COVID-19 cases globally, and a raft of new restrictions for several major European economies, the outlook is darkening for Q4. Lee Hardman, currency analyst at MUFG, notes that despite the doom and gloom, there may be some light at the end of the tunnel. With positive Brexit talks suggesting a trade deal is nearing agreement between the UK and the EU, sterling seems to be performing well.
Elsewhere, the hotly debated US election is finally coming to a head. While Joe Biden is ahead in the polls, Donald Trump still has a narrow path to re-election. Lee believes this would be a surprise for markets, but it’s certainly within the realm of possibilities.
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It’s a busy week in Japanese financial markets! An extraordinary Diet session was convened on October 26 and will last for 41 days through December 15. On October 22, committees comprised of both the ruling and opposition sides confirmed nine bills and one treaty to be addressed during this session. Prime Minister Yoshihide Suga, in his policy speech at the start of the session, proclaimed that his Cabinet is one that works for the people. Later this week, the BoJ will conclude its October policy meeting. Understanding the administration’s priorities as well as the next moves from the BoJ are key for any investor!
In this episode, MUFG’s Chief Japan Strategist, Takahiro Sekido, discusses Suga administration’s policy challenges, the October BoJ meeting, and gives a Yen Samurai primary market update. He also details implications, and his views for Dollar / Yen, Dollar / Yen cross-currency basis, and Yen rate.
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The shocking acceleration of new COVID-19 cases in Europe are prompting countries such as Spain and Italy to introduce new measures such as curfews – but what does this mean for the economy?
In this episode, Derek Halpenny, Head of Research for Global Markets EMEA, explains why previous hopes for a ‘V’ shaped recovery are now being replaced with fears of a double dip recession and gives his market forecast ahead of the upcoming ECB meeting on Thursday.
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MUFG's John Herrmann has revised his tracking estimate for 3Q-2020 real GDP growth to +35.5% q/q SAAR (previously, +39.7%). Although lower, the forecast is still higher than Bloomberg consensus of +32%. If John's forecasts prove accurate, they suggest that the level of real GDP may be fully recovered to its pre-pandemic level by July or August of 2021. That outcome would be 6 to 9 months sooner than the FOMC’s projections and the consensus estimates. Could such a rapid recovery to real GDP, to the unemployment rate, and to inflation influence investor sentiment and positioning to further steepen the 2s-30s Treasury yield curve towards 191bps over the medium-term? Fiscal stimulus remains the wild card but you might be surprised to learn that likely offers upside to these forecasts!?
In this episode, MUFG U.S. Rates Strategist, John Herrmann, takes listeners through the details of his tracking estimate for 3Q-2020 GDP. He discusses his more medium-term outlook and the role fiscal stimulus plays. He also explores the implications of those forecasts on his investment thesis, the 2s30s yield curve steepener.

The improvement in the diffusion index and large manufacturers’ expectations contained in the September Tankan survey was welcome news. That, however, comes at a time when the coronavirus pandemic may be re-accelerating globally, not to mention amid the uncertainty of the U.S. election and additional fiscal stimulus. Recent data shows an evolution in Japanese investment into foreign bonds while global affluent fund flows keep key currencies and interest rates in a narrow range. Risk aversion could result in Yen-strengthening stresses if the uncertainty ahead of the U.S. election grows. Investors should be watchful of growing JPY strengthening pressures against other key currencies.
In this episode, MUFG’s Chief Japan Strategist, Takahiro Sekido, discusses Japanese companies’ views of the economy as memorialized in the September BoJ Tankan survey, cross-border flows, and his views for Dollar / Yen, Dollar / Yen cross-currency basis, and Yen rate.

Safe haven currencies – USD, JPY and CHF – have outperformed in recent weeks as markets become more cautious about the global economic outlook, particularly in light of the sharp surge of COVID-19 cases in Europe, and the lack of optimism for agreement on a fiscal stimulus package ahead of the US election.
The pound is also one of the better performing currencies, despite more Brexit chaos following failed talks on a UK/EU trade agreement at last week's EU summit. Why is this? Lee Hardman, currency analyst at MUFG, explains on this week’s podcast.
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Brace yourselves. MUFG's John Herrmann just revised down his already low (U3) unemployment rate forecast to plunge to 6.25% by year-end 2020 (currently, 7.9%) and to 4.0% by year-end 2021 (our previous forecast, 4.6%). That only increases the gap between MUFG, the consensus, and "official" estimates like the FOMC and the IMF. Our updated forecasts are at least 150 bps lower than either the consensus estimate or the FOMC’s projections – not to mention that our forecasts are lower (by at least 40 bps) than every other estimate in the entire Bloomberg survey! As we are well aware, now, John Herrmann's growth expectations are similarly more optimistic. How will the FOMC and the yield curve react if MUFG's forecasts play out? Over the coming six to twelve months, as market and FOMC participants recalibrate their own expectations for the U.S. economy, might Treasury markets undergo a “mini” taper tantrum by late spring or early summer 2021?
In this episode, MUFG U.S. Rates Strategist, John Herrmann, reviews his revised unemployment rate forecast as well as discusses GDP and inflation forecasts. He also explores the implications of those forecasts on his investment thesis, the 2s-30s yield curve steepener.
 

With three weeks until Election Day on November 3, millions of Americans are already voting – in person and by mail. Polls show a sustained and recently growing lead by former Vice President Biden, but the impact of the COVID-19 pandemic on how votes will be cast and counted remains unclear. A win by President Trump cannot be ruled out.
In this episode, Jordan Heiber, Deputy Representative in MUFG’s Washington DC Office, looks at the state of the race, the risk that we may not know the outcome on election night, and the policies and priorities that investors should expect from Washington in 2021.

The prospect of economic growth in the UK is darkening, with figures showing a less than impressive level of growth for August. In this episode, Lee Hardman, currency analyst, outlines the rocky road ahead for the pound.
The markets are currently pricing in an optimistic scenario for Brexit negotiations ahead of the EU leaders' summit on Thursday, but will this positive momentum be dampened by the surge of COVID-19 cases in the UK?
Listen now for Lee’s forecasts for GBP and USD as Biden continues to take the lead in the election polls.
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Total U.S. nonfarm payrolls gained only +661.0K mom in September, weaker than John Herrmann's forecast and the consensus estimate. In contrast, private nonfarm payrolls gained +877.0K mom, stronger than his forecast and the consensus estimate. As John previewed, the Bureau of Labor Statistics did, in fact, under-count total education staffing, especially at K-12 public schools.
The especially “poor” September Repose/Collection Rate (just 70.4%) points to risk of a +225.0K to +325.0K upward revision to the September total nonfarm payroll outcome over the coming two monthly reports. The October monthly report likely may see a large gain in education payrolls as well. Lastly, the September report saw yet another big move down in the unemployment rate – spot on to John’s forecast of 7.9%. This decline partially reflects some 772.8K individuals who incorrectly reported themselves as “employed, but absent from work (other reasons)” – which suggests that the U3 rate for the month of September really may be as high as 8.3%. How is an investor to interpret these mixed messages?!
In this episode, MUFG U.S. Rates Strategist, John Herrmann, reviews a mixed September employment report, including his forecasts for non-farm payrolls and the unemployment rate versus the actual results. He also puts this in perspective versus the 38% rebound in growth he's expecting to occur in the 3rd quarter and discusses the steepening of the 2s-30s Treasury yield curve towards 191.1 bps target over the coming eighteen months.
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MUFG’s Glenn Schultz discusses MUFG’s proprietary machine learning prepayment model and walks listeners through the relevant issues that mortgage investors should be paying attention to while surveying the prepayment landscape.
In this episode, MUFG Head of Agency Mortgage Strategy and Prepayment Modeling, Glenn Schultz, breaks down the impact of technology, the new adverse delivery fee, hardship forbearance, and delinquency buyout extension on prepayment rates going forward. He also dives into MUFG’s rate forecast and what this means for the 30-year mortgage rate going into 2021.
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U.S. politics is still front of mind following President Trump’s diagnosis of COVID-19 last week. This development sent shockwaves through the markets, and could have repercussions for the upcoming election.
Derek Halpenny, Head of Research for Global Markets EMEA, gives his analysis of the situation and considers whether Biden has an advantage going forwards.
Also this week, Derek looks at possible scenarios for the UK’s economic recovery based on past data from the 2008 financial crisis. Spoiler alert: it’s far from optimistic. Listen here.
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MUFG's John Herrmann is expecting yet another better than consensus gain in headline payrolls in the month of September. He's also expecting a larger than expected fall in the unemployment rate...sound familiar?! Undercounting of education workers represent down-side risk to his forecast, although this would likely be caught in subsequent monthly revisions. Lastly, with the flurry of announcements about pending corporate layoffs, for how much longer can this good news last? John outlines the path forward.  
In this episode, MUFG U.S. Rates Strategist, John Herrmann, previews the September employment report, including his forecasts for non-farm payrolls and the unemployment rate. He also discusses, more generally, why he's more optimistic on employment and growth than the consensus, the Fed, and other official forecasts.
 
 

Japanese Prime Minister Yoshihide Suga’s administration is only weeks old, but it is already clear the new administration will continue Abenomics and push for the structural reforms that were never enacted. The Tokyo markets underwent structural changes during the nearly eight years of Abenomics, and overseas investors have been making more JPY cross-currency arbitrage trades while Japanese companies and investors have been acquiring more overseas assets. What is in store for Tokyo markets under “Suganomics”? More locally, stock prices have dropped, and the JPY has strengthened recently as the coronavirus pandemic has flared up again in Europe. Speculation has been simmering in the market that Prime Minister Suga will dissolve the Lower House and hold a general election. What is in store for USDJPY, JPY rate, and USDJPY cross-currency basis?
In this episode, MUFG Chief Japan Strategist, Takahiro Sekido, tests market reaction to the Bank of Japan’s exchange traded funds purchases during Abenomics and takes a look at USDJPY, JPY rates, and JPY basis as “Suganomics” enjoys its honeymoon period.