No Longer Panacea?

Next Fiscal Year end
Kuroda will bless us with
Thought’s on QE’s end

Is easy money
No longer panacea?
Can markets survive?

Much has served to roil markets in the past twenty-four hours, notably the announcement by President Trump of the imposition of tariffs on imported steel and aluminum. But that wasn’t all. Chairman Powell was back in front of the cameras, once again affecting his plainspoken message that the economy seems pretty good right now and that he expects that situation to continue driving inflationary pressures higher, hence the need for tighter monetary policy.

But that’s not all! Overnight we heard from the BOJ’s Kuroda-san. If you recall, Kuroda was just reappointed to a second term in the seat, unlike the change at the Fed and the impending one at the ECB. His surprise was to offer a timeline as to when the BOJ would consider changes to its own QQE program. Apparently, the BOJ’s crystal ball points to March 2019 as the time when inflation will be at or finally approaching their 2.0% target. My one comment about this is that every central bank has been a notoriously bad forecaster when it comes to specific levels of particular data points. I see no reason why the BOJ suddenly has better insight than its history of failure in this situation. But in fairness, last night we also saw Japanese data released that was encouraging, with Tokyo core CPI rising a more than expected 0.9% in February while the Unemployment Rate fell to 2.4%, its lowest level since 1993. Adding up all the activity resulted in a much stronger yen. From early yesterday afternoon, in the wake of the tariff announcement, the yen has appreciated nearly 2% and is now trading at its strongest level since October 2016. And my take is it has further to run. The yen continues to be seen as a haven asset and in the new market paradigm, where volatility is no longer banished, many investors will find that comforting. This is also why we have seen US Treasuries perform so well recently, their haven status is extremely attractive in uncertain times.

True to form for havens, the Swiss franc, too, has performed extremely well, rallying 0.75% since yesterday’s close and 1.5% since its nadir ahead of the tariff announcements. In fact, the dollar has been under consistent pressure since the tariffs.
However, the weakness has not been universal. For example, CAD has fallen by 0.25% overnight as the market recognizes that Canada is actually the largest exporter of steel and aluminum to the US, and would be quite significantly impacted by the tariffs. But we have also seen USD strength against MXN, +0.75%, and BRL, +0.4%, both of which seem to be suffering on the combination of reduced risk appetite and declines in the commodity space. Ironically, despite all the Administration rhetoric regarding China, the renminbi is essentially unchanged on the day.

In an environment where policy adjustments are coming fast and furious on both the fiscal and monetary sides of the equation, there is no way to forecast the day-to-day outcomes and likely movements in markets. (If there ever were!) But as I mentioned yesterday, the one thing of which we can be sure is that trade tensions will lead to higher inflation, which means that we are likely to see monetary policy tighten even further going forward. I continue to believe the US will be in the vanguard of this movement and the dollar will benefit accordingly.

I would be remiss if I did not touch on one other thing, the elections in Europe this weekend. Italy heads to the polls to select a new government on Sunday and at this point, there is no clear favorite amongst the parties to take a majority. The anti-establishment Five Star Movement is the leader, but is not seen likely to win an absolute majority by itself and the other parties have refused to work with them. Ultimately, the outcome seems likely to be a broad coalition that will not be able to effect much needed policy changes in the labor, regulatory and pension spheres, thus leave Italy lagging the rest of Europe in growth. But we cannot forget Germany, where the SPD ballots, to determine if they want to join with Chancellor Merkel once again in a grand coalition, are also to be counted. Given the SPDs dreadful election performance back in September, there is a large bloc that wants nothing to do with a repeat of the past four years. However, the aphrodisiac of power is strong, and I expect them to approve the deal in a close vote. After all, these are politicians, and the only thing worse than not being elected, would be passing up the chance at power if you were elected. In the end, I don’t expect that the euro will be significantly impacted by the weekend news. Its future will continue to be determined by monetary policy and economic outcomes.

This morning’s only data point is Michigan Confidence (exp 99.5), and it wouldn’t surprise me greatly if a big surprise impacted markets. Looking at other catalysts, equity futures continue to point lower, European equity markets are falling and there seems to be a general pall cast over the markets right now. I expect that after several days of strength, today’s mixed picture will resolve itself in the dollar falling a bit further into the weekend. Remember, next week brings both the ECB meeting and US payroll data, so there is plenty on the horizon to keep us interested.

Good luck and good weekend