Mario’s Turn

Inflation was kind of a flop

As core prices didn’t much pop

Then Janet regaled

Investors but failed

To sell the idea stocks could drop


The Old Lady’s next to report

Excitement, though’s, sure to fall short

She’s clearly on hold

Til Brexit unfolds

While Carney just holds down the fort


Then lastly it’s Mario’s turn

Where euro bulls, to a man, yearn

For hints that QE

Will end more quickly

Else they’ll all wind up with heartburn!


Starting with the Fed yesterday afternoon, markets have been convulsed by central bank activities in both G10 and emerging markets. And the fun will continue until Signor Draghi finishes his press conference later this morning. So let’s recap what we have learned so far:

FOMC – raised rates 25bps, as expected, and continued to describe economic growth as moderate and risks as roughly balanced. The dot plot indicated median expectations for Fed Funds in 2020 rose to 3.25%, up from the previous reading of 2.875%, but there were two dissents on the vote compared to a unanimous decision in September. Net, it appears that when Jay Powell takes over, he will be following the same course for now, although certainly if the data starts to change, specifically the inflation data, we are likely to see an altered path.

PBOC – raised several rates by 0.05% overnight in an attempt to maintain the balance between their efforts to deleverage the economy further while still encouraging growth. They also added substantial liquidity to the market to prevent any squeeze in short term funding. It seems clear that the Chinese are going to continue to take their lead from the Fed as they navigate their own internal issues. There was virtually no impact on the currency.

SNB – the Swiss left rates unchanged as they continue to call the franc overvalued despite its 7% decline vs. the euro thus far this year. Inflation remains below target, although it is finally climbing slightly. There was no indication that they will be changing the policy rate until well after the ECB starts to raise rates, which, as of now, seems unlikely before 2019. The Swiss franc weakened slightly after the announcement as any hope of a rate change from the current -0.75% was dashed for a longer than expected period.

Norgesbank – while the Norwegians left rates on hold, as expected, they raised their forecast rates starting in Q4 2018 and beyond as they now foresee global growth continuing and driving up the global rate structure. This adjustment surprised the market and NOK has rallied by 1% this morning on the news, by far the biggest mover in the G10 bloc. This is especially in contrast to the Riksbank, who gave no indication that policy rates in Sweden would be moving any time soon.

Central Bank of Turkey – the Turks raised the Lending rate by just 50bps, half the 100bps expected by the market heading into the meeting. It seems that the Central bank is feeling the pressure from President Erdogan who has been calling for lower rates to tame rising Turkish inflation. The lira took the news poorly, tumbling 1.6% within minutes of the announcement and has remained at this new, lower level since then.

ECB – This is the last major central bank meeting of the year. Expectations are for no policy changes, with rates remaining on hold while QE continues, but there are high hopes by euro bulls that Signor Draghi will hint at QE ending completely next September, or that there might be a change in the timing of when rates start to rise. While the Eurozone economy has clearly improved significantly during the past year, the inflation conundrum there is even stronger than here in the US, with core inflation still below 1.0%, far lower than its target of ‘close to, but below 2.0%.’ As I wrote yesterday, inflation has become the key metric for virtually all central banks at this point, and until those readings start to pick up, I find it extremely difficult to believe that the ECB is going to change its stance.

Yesterday, the US core inflation data disappointed, printing at 0.1%, which served to keep alive the debate about why inflation doesn’t seem to respond to the robust employment data. Yellen had no answers at her press conference other than to say that they expect it will eventually occur. However, the soft inflation data yesterday did undermine the dollar, which was consistently weaker all session.

Interestingly, in the time I have been writing my note this morning, early further weakness in the dollar has largely abated, and except for the above mentioned central bank impacts on CHF, NOK and TRY, the dollar is virtually unchanged. This morning also brings some US data to add to the mix with Initial Claims (exp 236K) unlikely to move markets, although Retail Sales (exp 0.3%, 0.6% -ex autos) could have a bigger impact. My sense here is that stronger than expected data will be taken in stride by the markets with little impact, however weakness might be reflected in the dollar losing some additional ground. Of course, it all depends on what the ECB does. They release their policy statement at 7:45 EST and then Draghi faces the press at 8:30. I expect that until we hear from Draghi, markets will remain little changed, but then all bets are off. After all, he has been known to surprise us all.

With the last of the central bank decisions out of the way by day’s end, this will be the last poetry until January 3rd. In that spirit, and in the spirit of the season, may you all have a wonderful holiday and a happy and healthy New Year.


Until 2018…


Further Amends

First, CPI data’s released

Which ought to show prices increased

Then Janet and friends

Make further amends

With twenty-five bps at the least


Ugh! How many days in a row do I need to describe market activity as dull? Once again there has been minimal movement overnight across most markets, although at least today brings two events which might have some real impact. First thing this morning we see November CPI data released with expectations at 0.4% (2.2% Y/Y) for the headline number and 0.2% (1.8% Y/Y) for the ex food & energy print. While these numbers are lower than they were back in February, when there was much discussion of how the Fed may be forced to respond more forcefully to incipient inflation, looking back over the past two years, the trend higher remains quite clear and old concerns over deflation are a distant memory. Given yesterday’s higher than expected PPI print, I would argue that a small portion of the market is even looking for a high-side surprise.

One thing I do know is that the big picture narrative continues to downplay any significant inflationary pressures in the US, or at least assumes that the market has already priced those in. Investor surveys consistently show that higher inflation is a very low priority for most fund managers although it is likely one of the biggest risks that exists to the current ‘goldilocks’ scenario. Consider this, if measured US inflation starts to climb more rapidly than currently expected, Jay Powell may find himself pushed into a far more aggressive reduction of policy accommodation than currently forecast. Remember, too, that the futures market is currently pricing just 40bps of rate hikes next year. What if that number turns into 125bps or 150bps due to rising inflation? I assure you that will have a significant negative impact on financial asset prices! And while I am not trying to forecast an outlier event, neither is it is inconceivable.

This brings us to the other event today, the FOMC statement and following press conference. The market has fully priced in a 25bp rate hike for today and given the last rhetoric we had from any Fed speakers, that is in line with their thoughts as well. Certainly there has been no data released in the interim that would change that view. So all eyes will be on the new dot plot as a means to anticipating the Fed’s view of the future of interest rates. The current median forecast for Fed Funds at the end of 2020 is 2.875%, which as a terminal rate would be historically low. Given that after today’s move, Fed Funds will be at 1.50%, it means there is not very much movement left ahead. This is one of the reasons that forecasts are for the dollar to decline next year and beyond. After all, both the ECB and BOJ currently have much lower rates and therefore, theoretically, far more room to raise them. In fact, there is growing talk that the ECB, when they meet tomorrow, may signal a shorter timeline between the end of QE and the first rate hikes. My point is, as expectations gel around the idea that the Fed won’t be doing much more, relative monetary policy tightness would turn to favor other currencies.

But…all this presumes that the dot plot is an accurate representation of the future. What happens if measured inflation in the US begins to pick up more rapidly? It is very easy to envision that the dot plot will be adjusted higher quite quickly in the event that we see faster inflation. This is especially true if the Average Hourly Earnings data starts to climb at a quicker pace (wages, as per the Atlanta Fed are already rising at 3.4%). In the long history of Fed Funds, 2.875% is far closer to the lows than the highs. There is no reason that Fed Funds cannot move back toward 4% or 5% if inflation persists alongside GDP growth. All I’m saying is that it is quite shortsighted to consider Fed Funds at 3.0% as ‘high’. In fact it is quite low! So do not be fooled into thinking that the ECB or BOJ have more room to raise rates than does the Fed, it is simply not true. And that is a key underlying feature of the current narrative.

Well, we shall see later today how the next step progresses, but arguably, come March, the inflation story will be far better defined. In the meantime, the overnight markets have done virtually nothing, with only one currency moving more than 0.25%, the Brazilian real. The story there has been the setting of the date in January for the corruption trial of former President, Lula da Silva, which will likely prevent him for running for President again. He is seen as the least market friendly potential candidate, and so removing him from the equation was a distinct positive for the currency. This is doubly true as the economic story there continues to improve and they seem to be making some headway on their pension reforms. But away from that, both G10 and EMG currencies have traded in tight ranges with limited news.

Once the Fed is out of the way, we hear from the BOE and ECB tomorrow, with the latter offering an opportunity for some surprises, and then I would argue that there will be very little to discuss until the new year. As such, after tomorrow’s note, there will be no poetry until January 3, 2018, when the market is back closer to full strength.


Good luck





More Heed

Both Janet and Mario need

The market to pay them more heed

As prices inflate

They’re keen to frustrate

A chance of a market stampede


Dull continues to describe the FX market as volatility remains extremely low and traders have become inured to most of the political dramas ongoing around the world. Rather, the one thing that seems to excite the investing and trading community is inflation. While the overnight activity in FX has been very modest, the one exception is the Swedish krone, which has rallied 0.75%. The jump occurred immediately after the release of the November CPI data, which rose, surprisingly, to 1.9%. With inflation in Sweden clearly trending higher for the past two years and approaching their target while growth remains robust, it appears that the Riksbank will soon be sounding somewhat more hawkish. At least that is the FX market’s expectation based on today’s rally. In fact, I would argue that inflation has become the FX market’s key indicator at this point in time, and perhaps the key indicator for all markets.

This week we hear from the Fed, the ECB and the BOE, a rare occurrence when three of the four major central banks meet nearly synchronously. While expectations for all three are baked in, with the Fed almost certain to raise rates 25bps, while both the ECB and BOE remain on hold, all the attention will be focused on the statements that will accompany the meetings. In addition, this week we see CPI data from all three currency areas as well, so there will be one more data point on which they can hang their hat. And so the real question for the market is just how might the prevailing narrative change based on the newest data and any central bank comments.

The first data release, amongst these three, was today’s UK CPI which printed at 3.1%, slightly higher than expected and high enough to require Governor Mark Carney to write a letter of explanation to the Chancellor of the Exchequer. This quaint tradition is designed to insure that the BOE keeps its eye on the mandate, which is CPI inflation of 2.0%, + or – 1.0%. The thing is, inflation in the UK has been rising steadily ever since the Brexit vote last year and the subsequent sharp decline in the pound. Given the lag with which prices adjust, it is no surprise that we are seeing inflation peak so long after the fact. And keep in mind, since the pound bottomed in January, it has rallied more than 11%, thus removing some of the pressure from its initial decline. Virtually all forecasts are for CPI in the UK to start slipping back below the 3.0% level and eventually toward its target. Of course, that assumes the pound doesn’t fall sharply again. That remains a risk if the Brexit talks turn negative. Right now, given the impetus from the UK conceding every point regarding the exit process, there is hope that the trade talks will help bolster the UK economy and the pound. Given the history of trade talks, I would be a little bit wary of a happy ending on the timeline currently envisioned. However, I don’t believe anything is going to change the BOE policy picture in the short run and it will remain on hold through at least the end of next year. There is still far too much uncertainty in the process for the economy there to overheat.

This leads us to the US, where not only do we see the CPI data tomorrow morning, but the FOMC announces their policy decision and has a press conference tomorrow afternoon. The current forecast for CPI is 2.2% headline, 1.8% core, which if realized will help remove some of the mystery of low inflation. It means that the idiosyncratic features that have been mentioned, things like unlimited data plans for cell phones, will be ebbing out of the data while other things, like ongoing rises in housing and medical costs reassert themselves. There continues to be a dichotomy between goods and services, where goods prices have extraordinary difficulty being raised by merchants as the spread of on-line commerce pressures prices lower. This morning’s article in the WSJ about the Amazon effect was interesting, not so much for the article as much for the comments that accompanied it which focused on how much services, like eating out or going to the doctor have risen in price despite the fact that you can buy a screwdriver for less. While there is no question that the price of many goods, both durable and non-durable, have remained quite stable, there is also no question that we continue to see rising prices for services. And remember, services make up ~80% of the economy. I might argue that your personal CPI seems a bit higher than the measured version. At any rate, the question for markets is will there be a change of tone by Chair Yellen regarding the future trajectory of interest rates. And while the Fed follows PCE, which doesn’t get released until next week, I’m pretty sure that a surprise in CPI will not go unnoticed. But will it be enough to change the story? It will have to be quite large to do so.

Finally, the ECB meets Thursday with the Eurozone CPI measures officially released on Monday morning. However, I am quite certain that the ECB will have the data ahead of time and know the outcome when they meet. So this will really be the best opportunity for the narrative to change. The current expectation there is for a 1.5% headline print with core still hanging around below 1.0%. Given that these levels remain will below the ECB target of ‘close but below 2.0%’, it strikes me that the market is getting somewhat ahead of itself with the idea that the ECB will be taking a more aggressive tone at this meeting. I have read several articles where analysts are highlighting the ongoing positive growth story and pointing to Thursday’s meeting as a time when Signor Draghi is going to hint at an even faster reduction in QE, or a more definitive endpoint. Based on Mario’s history, I find it highly unlikely that he will do anything that will be seen as more hawkish here. And in fact, if the market responds to something he says in that manner, we will hear from at least three ECB members about how the market has misinterpreted the comments. My point is that there is no evidence that the ECB is ready to move faster than they have currently committed, and positioning for that outcome would be a mistake in my view.

Regarding inflation, however, there is one wildcard that is completely out of the hands of the central bankers, commodity prices. Prices in this segment of the economy have definitely lagged that of asset prices in the financial sector over the past several years, but seem to be picking up. When you consider the strengthening in the global economy, it should not be a real surprise that this happens. After all, more growth leads to greater demand for stuff. In the end, however, price pressures from this sector are not nearly sufficient to cause any of the central banks to act right away. And so while it may be a future concern, it seems unlikely to have any near term impact on markets.

In the end, I am strongly of the opinion that the status quo will be maintained, that the big three central banks will act exactly as expected and that there will be no changes to forecasts for 2018. In other words, as much as I believe a little volatility is actually a healthy thing for markets, I fear that neither Carney nor Yellen nor Draghi will add any to the mix this week.

While I was typing, US PPI was released at 0.4% with the ex food & energy reading at 0.3%. Both of these were 0.1% higher than expected and we have seen the dollar perk up a little in the aftermath. But we will need to see a much higher print from tomorrow’s CPI to get the Fed to change its tune. And to me, that seems pretty unlikely. In the end, the lack of volatility remains a hedger’s dream, so please don’t miss out!


Good luck





Rather Dreary

While FX remains rather dreary

The market for Bitcoin’s quite cheery

With futures now started

One can’t be fainthearted

When trading, though I’d still be leery


Undoubtedly the biggest news over the weekend was the inauguration of futures trading on Bitcoin by the CBOE. It has received all the press and all the hype although actual trading volumes have not been very large. It will be interesting to see how it progresses through the day, and of course, the CME begins trading in their own contract next Sunday. My one observation is that regardless of how one would value Bitcoin fundamentally, in a market environment the ability of the price of an asset to climb exponentially for any extended length of time is extremely limited. In other words, while it may eventually be worth much more than today’s value, my gut tells me that we are due for a very significant correction at some point, something on the order of 60% or more if history is any guide. Just beware if you own any.

But away from the excitement there, FX remains in the doldrums. In the G10 space there have been two movers of note, NOK and NZD. The former fell 1.0% as CPI data released this morning was softer than expected and traders took the news as a sign that Norway will be lagging the global move toward higher rates. Inflation there continues at around 1.1%, nowhere near the targeted 2.0% and it seems that the Norges Bank has been having only limited success turning things around. On the opposite side of the spectrum, NZD rallied 1.0% as the RBNZ had a new governor named. Adrian Orr, previously the CEO of the country’s sovereign wealth fund, was a mild surprise and is seen as somewhat more hawkish than the outgoing governor, Grant Spencer. Year to date, kiwi has been the worst performing currency in the G10 and the only one to actually decline vs. the dollar. This has seen quite a buildup of short positions, and with the prospect of a more hawkish RBNZ, last night saw a great deal of short covering. It is not clear to me this will last, but another day or two of a squeeze doesn’t seem improbable.

But boy, away from those two, it is hard to get excited about anything. Perhaps the most interesting situation is that of the British pound, which continues to drift slowly lower despite the ‘breakthrough’ in the Brexit negotiations a week ago. If you recall, when the news was announced the pound jumped up as high as 1.3520. But here we are this morning, as more sober views have been incorporated, with the pound trading more than 1.2% lower and continuing to drift in that direction. As I have written repeatedly in the past, it is difficult to see a medium term positive framework for the pound.

Turning to the emerging markets, it has also been an extremely dull session. While there are more currency gainers than losers, the biggest winner has been BRL, which opened higher by just 0.35%. And if that is all you can get out of an EMG currency, it tells you that interest continues to be elsewhere rather than in FX markets.

Looking ahead to the rest of the week, we have some important data, notably CPI, but of even greater interest we hear from both the Fed on Wednesday and the ECB on Thursday. While I don’t anticipate any surprises on the rate front (Fed +25bps, ECB unchanged) all eyes will be on their respective forecasts for how 2018 will play out on the rate front. But ahead of that, here is the week’s data:


Today JOLTS Job Openings 6.1M
Tuesday NFIB Small Biz Confidence 104.0
  PPI 0.3%
  -ex food & energy 0.2%
  Monthly Budget Statement -$134.5B
Wednesday CPI 0.4% (2.2% Y/Y)
  -ex food & energy 0.2%
  FOMC Rate Decision 1.50% (+0.25%)
Thursday ECB Rate Decision -0.4% (unchanged)
  Initial Claims 239K
  Retail Sales 0.3%
  -ex autos 0.7%
Friday Empire Manufacturing 18.3
  IP 0.3%
  Capacity Utilization 77.2%

Certainly, an unexpected CPI print right before the FOMC announcement will lead to questions about how next year plays out, especially if it is stronger than expected. I would argue that market concerns are the Fed may move faster than their current rhetoric, and certainly faster than the market is pricing rather than slower. In the end, the dollar is going to find itself beholden to the changing trajectories of the FOMC and the ECB. It seems to me that the dollar’s weakness this year has been a result of the improvements in GDP growth elsewhere in the world and the idea that other central banks will be adjusting policy more rapidly than previously expected. This week’s meetings will help us all understand if that narrative remains appropriate, or if a new one is in the making.


Good luck



Crumbled Like Chalk

There once was a Minister Prime

Who found herself quite pressed for time

Without an accord

She’d be headed toward

The opposite of what’s sublime


So PM May crumbled like chalk

In order to break the deadlock

Hence now the UK

More cash will they pay

As backbenchers grumble and squawk


Undoubtedly, the biggest story overnight was the operation to remove British PM May’s spine the announcement that the UK and EU had agreed the framework for the settlement of the Brexit bill. At approximately 1:30 this morning, EU Commission President Jean Claude Juncker announced the fact to the world and explained he would be sending the details to each of the remaining EU nations for approval. This opens the way for the beginning of talks about the trade deal that the UK is desperate to put together with the EU. In essence, the UK caved on all the issues, although the money seems like the least of the problems. From what I’ve read, it appears that she just sold out Northern Ireland by agreeing that there would be no hard border between the two nations on the island, and, critically, that unless other arrangements are made to avoid that hard border, “the United Kingdom will maintain full alignment” with EU rules needed to maintain economic and political cooperation between Northern Ireland and Ireland. In other words, Northern Ireland will not have left the EU despite Belfast’s stated desire to do so. Needless to say, there will be much more of this story going forward as the details of the deal are worked out and the trade agreement begins to take shape. The pro-Brexit crowd is already quite worked up over the issue and it wouldn’t surprise me if May loses control, and her position, during the next few months. In fact, I kind of expect another election in the UK before the end of 2018. PM Corbyn anyone?

However, for our purposes the impact was pretty much as expected, the pound jumped sharply on the announcement, rising 0.5% and trading to 1.3520, its highest level since mid September. Interestingly, since the initial burst, the pound has actually given back all those gains and is now lower on the day, albeit by just 0.1%. I guess, in the end, the market was expecting a deal to occur. Going forward, this is certainly a benefit for the pound, but I expect there will be more than a few hiccups before everything is settled.

Aside from that news, a look at the dollar shows another day of broad-based but modest gains. The euro has traded down to three-week lows and feels as though there is further room for decline. Data from the Eurozone was mixed with French IP’s gains offset by weaker German trade data but I don’t get the feeling that is the issue. Of perhaps more importance is the ongoing stalemate in Germany regarding a new governing coalition with more talk of the creation of a minority government. Chancellor Merkel does not want that as it will result in a weaker administration, something that the rest of Europe is also loathe to see. However, younger members of her own party are clearly sharpening their knives and seem ready to push Merkel out if they can. I guess twelve years at the top has taken its toll on the next generation. At any rate, if Germany does wind up with a minority government, that is not likely going to help the euro. At the end of the day, though, political stories have had a limited impact on currencies lately, with the central bankers still the drivers. Next week we hear from both the Fed and the ECB, and it is their actions that remain the market’s key focus.

But before we get to the Fed next week, let’s look at today’s payroll data. Expectations are as follows:


Nonfarm Payrolls                 195K

Private Payrolls                    195K

Mfg. Payrolls                         15K

Unemployment Rate             4.1%

Average Hourly Earnings    0.3% (2.7% Y/Y)

Average Weekly Hours        34.4

Wholesale Inventories        -0.4%

Michigan Sentiment              99.0


Certainly if the data is close to expectations, there will be nothing to change the FOMC’s collective mind about raising rates next week. In fact, we would need to see a dramatic fall in NFP or a significant rise in the Unemployment rate for that to be the case, neither of which seems likely. In fact, what seems more possible would be an earnings uptick such that the ‘mystery’ of missing inflation starts to be answered. If we were to see more robust growth there then I think we might hear a bit more hawkishness from the FOMC next week. Remember, futures markets continue to price in just 40bps of tightening for all of 2018, a far cry from the 75bps the Fed is discussing. As we saw this year, the futures market and the Fed will converge at some point, with my continued belief being that the Fed is now on a path where they will raise rates every quarter for the next two years. In fact, the most interesting thing about next week’s FOMC is likely to be the forecasts and the dot plot. Strong data today combined with the ongoing positive global growth news could well result in higher terminal rate expectations. In other words, the Fed is likely to see a higher long-term equilibrium rate in the US, something that will certainly give the dollar a boost. So today’s data is quite important in the big picture. FWIW, my view is that we will see a headline number of 200K, but I am expecting to see the Earnings number higher. Anecdotal observation shows me that companies are paying lower wage workers more in order to get them and keep them, and that has to feed through to the data eventually.

With that, I expect the dollar’s recent modest uptrend to continue for now, as there is nothing obvious to derail it.


Good luck






Two Nations’ Concerns

The tale of two nations’ concerns

Has taken surprising new turns

Frau Merkel can’t find

Enough folks aligned

With her, while some others she spurns


In England Prime Minister May

Keeps searching for ways to allay

The Irish up north

So she can go forth

And get EU members to play


The dollar is having another fine day in the markets as the political confusion elsewhere in the world seems to be outweighing the political confusion here at home. The story from Germany continues to be the inability of Chancellor Merkel to form a working coalition government after the September elections. Three months on, and in the wake of the unsurprising failure to bring the Green Party and Free Democrats together, she is now wooing the SPD. The center-left Social Democrats had vowed to remain in opposition immediately after losing badly in the election. They felt that their previous time spent as the junior partner in government resulted in a loss of identity. But now, Merkel’s options are limited. She has rejected outright, along with the rest of the parties, working with AfD, the far-right party that won nearly 12% of the vote. She has refused to create a minority government, as she believes it will be too unstable. And nobody really wants new elections as, first, polls show the results would be similar to September’s outcome and not advance the process; and second, a bigger concern that any new election would allow AfD to garner an even larger minority, something which is anathema to everyone who doesn’t actually support AfD. While she currently manages a caretaker government, the loss of German leadership in the Eurozone seems to be taking a toll. While the bloc’s data has remained generally quite good, the lack of initiative for the future seems to be an issue. Even though the euro is only lower by 0.1% this morning, this marks five consecutive sessions of decline totaling roughly 1.5%.

Next week both the Fed and ECB meet and expectations remain that the Fed will raise rates 25bps while the ECB will make no changes at all. I think the bigger questions are what updated forecasts will look like from both banks, including any tips to changes in policy trajectory. And there is one more thing to consider, market technicals are starting to point to a lower euro in the short term. Essentially, the short-term trend has reversed course from its recent upward trajectory and is now pointing to further losses in the currency. Keep an eye as we head into the ECB meeting next week.

Meanwhile, poor Ms. May finds herself at odds with nearly everybody else in the UK. Ostensibly, she will be presenting modified language to her Northern Irish allies shortly, in an effort to smooth over the Irish border issue I discussed yesterday. The thing is, the positions of Ireland and Northern Ireland seem irreconcilable. Ireland refuses to accept any type of border, which given the UK’s pending exit from the customs union will be impossible unless the North agrees to the same rules as the EU. At the same time Northern Ireland refuses to do just that, adamantly preferring to stay within the UK.   Keep in mind that these two sides have been at odds since the early 1600’s over myriad different issues. It cannot be a surprise that changing the status quo in what had been the most peaceful period in 400 years might rekindle age-old differences. While there is still a chance of some fudged agreement, I would estimate there is at least a 50% probability that this issue is never resolved and Brexit occurs with no trade deal and limited prospect of one in the near future. Once again, I will reiterate that the pound will suffer with this outcome and that current levels remain attractive for hedgers despite the pound’s nearly 2% decline from recent highs. The combination of uncertainty and creeping inflation will continue to undermine the currency.

But the dollar’s strength is broader today, with the biggest losers being the commodity bloc. It appears that oil prices may have topped for now, as the OPEC-Russia accord seems to be fully priced and recent data showed significant increases in product in storage. But we have also seen softness in the metals space and agricultural prices are under pressure. In other words, whatever stuff you mine, drill or grow, you’re getting less money for it today. With that as a backdrop, it can be no surprise that the leading G10 decliners are AUD and NZD while in the emerging markets, BRL, ZAR and MXN are leading the way lower. All of these would fit within the commodity sphere.

As to the data front, yesterday saw the ADP number exactly at the expected 190K, although Productivity and Labor Costs were both a touch soft. This morning we see Initial Claims (exp 240K) and then Consumer Credit ($17.0B) this afternoon. Neither of these will cause even a minor fluctuation. Tomorrow, however, we get the payroll report and that has the potential to be far more interesting. While the Fed’s move next week is baked in the cake, there is still ample opportunity for the market to price more movement for 2018, an area where Fed rhetoric remains well ahead of the futures market. As to the rest of today, I see no reason for the dollar to reverse its recent modest uptrend.


Good luck




As many’ve already observed

The market’s becoming unnerved

While risk is forsaken

More gains will be taken

So overall wealth is preserved


The dollar is broadly higher this morning as market participants are starting to become a little nervous. Three consecutive lower closes in the equity markets have led to a risk-off scenario. My observation is that there may have been an actual change in sentiment lately based on the following idea: throughout the raging bull market in equities, even on days when prices opened lower, by the end of the day we consistently saw traders ‘buy the dip’ thus preventing the market from closing lower. Every decline in the market was seen as a buying opportunity. But during this short run, and I grant it is short, just three days so far, early gains have melted into late losses. To me this implies that one of the great supports for the bull market may be losing its potency. As I’ve written before, markets don’t always need an obvious catalyst to change their direction or sentiment. Oftentimes, it is only clear long after a move as to what was the cause.   A fourth consecutive lower close in the equity markets (and futures are lower as I type) just might signal a trend change. If the narrative to date has been: risk remains in vogue because of the so-called goldilocks scenario (solid growth with low inflation allows for continued low interest rates and ever higher equity prices), then every signal that something there is changing, most likely low interest rates, could well force a change in that narrative. And that, my friends, offers the opportunity for a much more significant risk-off move. I’m not saying it is happening, just that we need to watch it very carefully.

Once again, the pound is leading the way lower, down 0.6%, as PM May’s lunch yesterday clearly gave the market indigestion. The Northern Irish are not willing to compromise their views and neither are the Dubliners. All the hope that was seen last week regarding the next steps in Brexit are fading quickly, and from what I’ve read this morning, it seems hard to believe that a solution will be found by the end of the week. Another delay in opening the trade negotiations will certainly weigh further on the pound, and as I have been writing all along, support a move back down toward 1.30 as a start. In fact, it seems increasingly likely that PM May will lose her support and perhaps force yet another election in the near term, further reducing chances for a satisfactory outcome. This will not help overall market risk sentiment, I assure you.

But the fading risk sentiment is manifesting itself in Japan as well, where the yen has rallied 0.4% after another down day by the Nikkei, its third of the past four sessions during which it has fallen nearly 4%. We are seeing similar price action in Europe, with lower equity prices and the euro declining for the past four sessions and this despite substantially better than expected German Factory Order data (+0.5% vs. -0.2% expected). I’m sensing a trend! Remember, as we approach year-end with equity markets having shown gains globally, it would not be surprising to see some profits taken, removing risk from portfolios. Historically, the dollar has benefitted in these times.

Turning to the emerging markets, the story is similar, with the dollar broadly higher and movement a little more pronounced than we have witnessed lately. South African rand is the leader on the downside, falling 0.9%, in what has clearly been a straight risk-off move. But KRW is lower by 0.7% after another weak close in the KOSPI has encouraged further unwinding of risk. And while the losses haven’t been quite as large elsewhere, all of EEMEA and most of APAC are under pressure. Here’s the thing, remember how much momentum helped risk appetite on the way up? I assure you it can hurt that much, and more, on the way down. Again, I am not saying this is the turn, but at this point, you cannot rule it out either.

To the extent that data matters, which I don’t feel is the case right now, there are three releases this morning: ADP Employment (exp 190K); Nonfarm Productivity (3.3%); and Unit Labor Costs (0.2%). We also hear from the Bank of Canada today at 10:00, but there is no expectation of a policy move there.

As I survey the markets, the story today is going to be whether or not we have a fourth consecutive lower close in equities. Breaking the current streak will likely result in further benign activity across equities and FX, but if the streak continues then I would look for it to begin to accelerate somewhat, bringing further risk-off sentiment and dollar gains.

Remember, markets can be very perverse, rising and falling significantly without any obvious catalyst. But once momentum starts to take over, then very little can stop those moves. We have observed upward momentum in asset prices for a long time. If it turns, we can expect downward momentum to last for a while as well. For hedgers, that should help inform your decision-making process. In markets that are moving, price taking is the only way to insure execution. And that is very different than what we have experienced for the past eight years!


Good luck








Ere lunching in Brussels Ms May

Much progress had tried to downplay

The Irish condition

While long on ambition

Was not prepared for light of day


It turns out Ms May was correct

Her allies, the deal, did reject

And, too, there’s the question

Of legal digression

Thus both sides are still circumspect


In what cannot be very surprising to any onlookers, the enthusiasm for a deal between the UK and EU regarding the Irish border fell apart yesterday almost immediately after it had seemingly been agreed. Apparently, PM May’s supporters in the DUP, the Northern Irish Democratic Union Party, who remain critical to her maintaining her leadership role, are adamant that they want a physical border to be put in place between Northern Ireland and Ireland. Meanwhile, the Irish are adamant that no such border should be allowed to exist. The framework agreement had ostensibly agreed to the Irish demand and essentially created a border between Northern Ireland and the rest of the UK. However, the Northern Irish would have none of that and rejected the deal. At the same time, both Scotland and Wales, asked for the same treatment as Northern Ireland with regard to the EU, as, if you recall, both of those nations had voted to remain in the bloc. While PM May continues to sound hopeful, it seems pretty clear that one side is going to have to cave, and if history is any guide on these two nations, that is not going to happen. (Perhaps they can create a Heisenberg-type border, one that is either there or not there depending on when you look!) Not to be forgotten, the issue over the ECJ’s eventual jurisdiction of EU citizens living in the UK post-Brexit has also not yet been resolved. This one is much harder for me to understand. How an unrelated judicial system should be able to have sway over things impacting residents in a different country is beyond me. Consider if the EU, as part of a trade agreement with the US, demanded that EU citizens living in the US would be subject to ECJ rulings, not US Supreme Court rulings. It’s the same thing, and the height of hubris on the European’s part in my view.

At any rate, if you recall when I wrote yesterday morning, the pound had rallied sharply after word that a compromise had been reached. Well not surprisingly, the pound is today’s worst performer, having given up most of those gains yesterday afternoon in NY and then continuing its decline this morning. Right now, the pound is lower by 0.4% on the day, which has also seen UK PMI data released at somewhat weaker than expected levels. While Services growth remains decent, it appears to be slowing at the same time pricing pressures continue to increase. If you are Governor Carney, you remain stuck between rising prices and slowing growth, situations that require exactly opposite monetary policies. It is not an enviable position.

Away from the pound, however, the dollar is actually a bit softer overall, albeit not very much. The reality is that there has been very little direction in FX trading across the board for the past several weeks, with daily gyrations largely offsetting the previous day’s movements. If I were to highlight a broad theme it is the uncertainty that exists over the potential pace of monetary accommodation withdrawal by the world’s central banks. Certainly that continues to be the single most important question to be answered. Just how quickly will the central banks withdraw QE, and how will they respond if markets get unruly. And remember, over the course of the next two years, we are likely to see new central bank heads at all the big banks, adding further uncertainty. But that is an issue for another day, as trading today has certainly not been directly impacted.

Touring the rest of the world, there is very little of note to address. The Eurozone PMI data was right on expectations and points to continued GDP growth in the 0.5%-0.6% area. At the same time, Eurozone Retail Sales were a bit on the soft side, which has not helped the single currency this morning. Both Swedish and Norwegian data also continue to point to solid growth, and in those cases, the currencies have benefitted today. But again, the movements just aren’t very large.

Emerging market currencies have also been uninspiring with BRL the biggest gainer thus far, opening firmer by 0.55%, as the market continues to applaud what appears to be a turn in the economic trend there to one of more robust growth. Market participants, though, remain on tenterhooks regarding the ongoing pension discussion there. Unlike some nations, Brazil is attempting to address its state pension issues, a laudable goal although one that is fraught with short-term potential problems. (But that we addressed these issues back in the 1980’s!) From what I have read, I believe they will be successful in making needed changes to insure long-term solvency of the system, which will only help the currency going forward. But there were no nuclear tests, no comments of note and no new news to drive this bloc otherwise.

We continue to see equity rotation out of tech stocks into financials and industrials as investors are looking for those sectors that they believe will benefit most from tax reform in the US. My concern is that given the tech sector’s outsized role in driving broad indices higher, if this process continues, we could well see those broad indices retrace a significant amount of their YTD gains. And that might change a few minds regarding things like market volatility and next steps by the Fed.

In the meantime, we await the Trade Balance this morning (exp -$47.2B) and then the ISM Non-Mfg reading at 10:00 (exp 59.0). A strong reading for the latter could well add to flattening pressure on the yield curve, which has now fallen to 57bps in the 2y-10y spread. Historically, a bear flattening (when short term rates rise faster than long term rates) has been beneficial for the dollar. If I had to forecast today’s movement, I like the dollar to outperform by the end of the day, just not very far.


Good luck






Further Disorder

From Brussels the market has learned

The talks about Brexit have turned

Further disorder

At Ireland’s border

May soon have both sides unconcerned


In what cannot be very shocking

To pounds, many traders are flocking

But elsewhere the buck

Has had all the luck

As stocks in the US keep rocking


This weekend’s press focused on the still glacial pace of Brexit negotiations and the increasing odds that no compromise would be reached regarding the Irish border before the key EU meeting at the end of next week. While PM May and the EU’s Michel Barnier are scheduled for lunch to discuss things today, hopes were not high that sufficient progress had been made to move the process on to the trade situation. The biggest problem had been the resolution of the Irish border that I discussed on Friday, but it seems that questions over the European Court of Justice’s role in legal questions for EU citizens in the UK had also resurfaced. With this as the backdrop, it was no surprise to have seen the pound cede some of Friday’s gains. In fact, at its nadir, the pound had given up about 0.75% of that move. But then, the following headline hit the tape: *BARNIER TOLD MEPS BREAKTHROUGH IS LIKELY TODAY: LAMBERTS.* Philippe Lamberts is a Belgian MEP and his comment was all the pound needed to regain all of its lost ground and then some, with it now sitting 0.4% higher than Friday’s close. While no details have been released, the fact that progress continues to be made is seen as a key support for Sterling.   And today, support for currencies other than the dollar has been rare.

In fact, the dollar is having its best overall day in a while, having rallied against virtually every currency aside from the pound. It seems that investors continue to pour money into the US equity markets, as evidenced by their regular record setting performances, and, of course, in order for foreign investors to by US equities, they need first to convert their cash into dollars. While I remain uncomfortable that equity markets can maintain their momentum, clearly I remain in a minority.

But something else supporting the dollar this morning is Treasury yields, with the 10-year higher by ~4bps and the 2-year, which typically has much smaller movements, rising by 2.5bps. Concerns continue to grow in the market that the yield curve is getting set to invert soon, and as I’m sure you are all aware by now, an inverted yield curve has historically been a harbinger of a recession. The Fed continues to be puzzled by the flattening as their models consistently point to a strong correlation between short end rates and the long end. Thus as they push the front end higher, they expected to see the back move up alongside it. The thing is, as long as they and their central bank brethren continue to buy bonds, demand for safe fixed income assets will remain, and those yields are unlikely to rise very much. Which is, of course, the reason they are so concerned over the shrinking of their balance sheet. While the conundrum of rising front end rates and falling back end rates may be somewhat concerning, although arguably quite logical as I just highlighted, a situation where back end rates are rising more rapidly than the front will be of much greater concern. That means they are no longer in control, and based on the history of the past decade, that is what they fear most, lack of control.

How might that come about? Consider the reality of your personal inflation, as opposed to the measured sort on which they focus. There are many inflation indicators (e.g. NY Fed’s Underlying Inflation Gauge (UIG) that just printed at 2.96%, its highest level since 2006!) that are pointing to inflation being much higher than the Core PCE reading the Fed worships. And it is entirely possible that we are going to see real price pressures make a far more sudden appearance in the CPI or PCE readings than the Fed seems to currently anticipate. I assure you if PCE jumps to 1.9% in Q1 of next year, they will not be happy. Inflation is something that can only be addressed with a lag, and a surprisingly sharp rise would force a much more aggressive Fed policy response. For a group that has preached gradualism, having their hand forced will be very problematic for their policies and for the current benign attitude toward market risk. In other words, things will could get messy. And as I have consistently highlighted, messy markets tend to drive people into dollars.

As to this week, we have a combination of ongoing political stuff, with hopes high that a tax package will come closer to reality, as well as that the government won’t shut down on Friday. And this doesn’t even include the ongoing investigations and recent bombshells about potential election issues. We also have a decent amont of data, culminating on Friday with the monthly payroll report:


Today                                                Factory Orders                                    -0.4%

Durable Goods                                    -1.0%


Tuesday                                    Trade Balance                                                -$47.4B

ISM Non-Manufacturing                        59.0


Wednesday                                    ADP Employment                                    190K

Nonfarm productivity                                    3.3%

Unit Labor Costs                                    0.2%


Thursday                                    Initial Claims                                                240K

Consumer Credit                                    $16.75B


Friday                                                Nonfarm Payrolls                                    198K

Private payrolls                                    200K

Manufacturing Payrolls                        17K

Unemployment Rate                                    4.1%

Avg Hourly Earnings                                    0.3%

Avg Weekly Hours                                    34.4

Michigan Sentiment                                    99.0



In addition, a number of central banks meet this week, including Australia and Canada, although neither is expected to change policy or even hint at it.

For the past week, the dollar has made no headway in either direction. Barring an extraordinary outcome from Congress, or some new significant political bombshell, I feel like the ongoing consolidation in the euro will continue. FX markets are not the primary focus of investors, except perhaps in the UK where the Brexit situation remains fluid. But otherwise, its bitcoin, equities and bonds, in that order!


Good luck





Bubble and Squeak

The pound has been buoyant of late

As progress in the key debate

Implies that next week

(O’er bubble and squeak?)

A deal just might break the stalemate


For the past month, the pound has been on a tear, rising nearly 3.0%. Expectations continue to build that a preliminary agreement over the first items in the Brexit negotiation will set the stage for opening trade discussions. Those first three items are: 1) the disposition of EU citizens living in the UK and their rights going forward; 2) the divorce bill; and 3) the eventual status of the border between Ireland and Northern Ireland. The first of these was addressed some time ago, and seems no longer to be an issue. It was at the beginning of this week when stories made the rounds about a breakthrough on the divorce bill, where ostensibly the headline number was increased substantially from the initial talk of £20 billion, but the timeline of the payout was extended so greatly that it appears the present value of the number is little changed. Which brings us to the third issue.

It appears that market participants have been pretty sanguine about the resolution of the Irish border issue, because it was not something that was getting much press. However, it may well be the most intractable problem of all. Consider that the border in question will be the only land border between the UK and the EU once Brexit has been completed. Consider also the long history of violence that exists there, and the fact that one of the key features of the Good Friday Agreement of 1998, which established the peace between the UK and Ireland, was the fact that there was no visible border left between the two nations. This worked because both sides were members of the EU and therefore part of the same trade and customs union. But Brexit will change that. This is especially problematic because PM May relies upon the votes of the Northern Irish DUP party for her majority in Parliament, and they are adamant about maintaining their sovereignty, which means they want a border. Meanwhile Ireland is adamant that no visible border should be erected. If May caves to the Irish demand, she may well lose her majority and potentially a no-confidence vote. Whatever the outcome of a new election, I assure you that the timing would not be perceived as a positive for the pound. A change in government with just fifteen months left in the Brexit timeline would be a significant problem for the process and certainly would weigh on the currency. On the flipside, if May sticks by the Northern Irish demands, then trade talks will slip further into the future, if they are to come about at all. This, definitively, would be bad for the pound given that its recent rally has been based on progress in this area. In other words, there are several compelling cases to be made that the pound is a bit overextended on the high side. Hedgers beware! While the overnight decline has been small, it would be easy to foresee a breakdown over this issue resulting in a retracement of all the recent gains and then some. I might consider some GBP options here as they remain inexpensive, especially for puts given the recent change of tone. For example, a 3-month 1.3250 put costs just over a penny.

As to the rest of the market, the overnight session can best be characterized as mixed. In the G10 space, no currency has moved more than 0.3% (NZD’s short-covering rally) while no other currency moved even 20bps. Something that has gotten a little press has been the surprising rise in EONIA fixings the past two days. This jump of 6bps each day has opened a substantial gap between the ECB’s base rate and market transactions. Given the timing, at the end of the month, my sense is that there was a short squeeze for funding at some bank, but that it is not a long-term issue. However, it does highlight the flaws in looking at market probabilities for future central bank rate activity. I would contend that there has been absolutely no change in the zero probability of a rate hike later this month by the ECB, yet if calculated off the futures markets, that number has risen to 23% because of this move. Look for it to disappear at today’s fix. However, if EONIA fixes near yesterday’s rate of -0.24% again, then something else may be afoot, and will need to be investigated.

Also demonstrating how lackluster FX has been overnight is the fact that across the 24 EMG currencies of note, none have moved more than 0.35%, with both gainers and losers about equally split. For movement that small, it is hardly worth looking for rationales. Rather, that is just part and parcel of the ordinary price activity.

Turning to the data front, yesterday’s US data showed PCE was ever so slightly firmer than expected, Personal Income and Spending were right in line and Chicago PMI fell a bit less than expected, to a still very high 63.9, from its previous reading of 66.2. Clearly, equity markets were enthused by the data as we saw a remarkably powerful rally in the Dow, taking us to new highs there. However, the story overnight that the Senate vote on a tax bill would be delayed has dented some of that enthusiasm and thus equity futures are all pointing to a lower opening this morning following European shares lower. Meanwhile, we have ISM Manufacturing data to be released at 10:00. Expectations are for a print of 58.3, with the Prices Paid index coming at 67.0. This would highlight continued robust performance from the manufacturing sector in the US. The Eurozone data released this morning showed strength continues there as well, which means global growth remains in solid shape at this time.

As to the future of the dollar, other than the pound, which I feel has gotten way ahead of itself, it is hard to make the case for significant movement without a new catalyst. That could be finalized tax legislation, a breakdown in equity markets, or more likely, something that we would not even consider important at this time. Remember this though, nothing matters to markets until it MATTERS to markets. Highlighting the current keys doesn’t necessarily tell us about what will drive things in the future. And that is why FX markets, in particular, seem so perverse.


Good luck and good weekend