The Market’s Malaise

Said Trump we might wait sixty days
Before, Chinese tariffs, we raise
Since talks have gone well
There’s no need to sell
Thus ended the market’s malaise

The US-China trade talks continue to dominate the news cycle with the latest news being President Trump’s comments that a sixty-day delay before imposing further tariffs is being considered. While this had been mooted by many analysts, including me, it still was sufficient to help boost the equity market in the US yesterday afternoon. Interestingly, it also seemed to boost the dollar, which rallied throughout yesterday’s session. Clearly, if the Chinese trade situation gets settled, which I continue to believe is quite difficult, it is a net positive for the global economy. But don’t forget that the President is also looking at tariffs on the European auto sector, as well as is maintaining tariffs on imported aluminum and steel, so all is not clear yet. But certainly, the China story has received top billing of late.

The other big story, Brexit, has had less press lately (at least outside the UK) as the ongoing machinations of the British Parliamentary process remain obscure to almost everyone else. The current argument seems to be that a bloc of EU skeptics wants to ensure that the option of a no-deal Brexit remains on the table as a negotiating tactic. You can’t really blame the EU for getting frustrated as the UK has not yet provided a united front as to their demands. But with that said, ultimately it will come down to the Irish backstop and how that can be tweaked to get enough support by the UK. It’s still a game of chicken. Elsewhere in the UK, MPC member Gertjan Vlieghe, one of the more dovish by reputation, commented that a hard Brexit was unlikely to require higher rates as Governor Carney had mentioned previously. That has been my stance all along, and I continue to see the UK leaning toward cutting rates as growth continues to ebb there.

Speaking of ebbing growth, German GDP in Q4 printed at 0.0%, no growth at all. If you recall, Q3 growth there was -0.2%, so they barely avoided a technical recession. While many analysts continue to point to a series of one-off circumstances that drove the poor performance, it remains pretty clear that the underlying growth impulse is under downward pressure. We saw this when the IMF and the European Commission both significantly reduced their forecasts for 2019 GDP growth in Germany, as well as throughout the Eurozone. Today’s data did nothing to change any views on that issue. Regarding the impact on the euro, while it is unchanged today, that is after a 0.5% decline yesterday and a more than 2% decline this month. In the end, the relative situation continues to favor the dollar over the euro in my view.

Japan released GDP data last night as well, with Q4 growth rebounding to a 1.4% annual rate after a sharp decline in Q3. Here, too, Q3 was blamed on idiosyncratic features, but the underlying features of this report show slowing consumption and softening external demand. The yen has been moving in lock-step with the euro, having fallen pretty steadily all month and is down a bit more than 2.0% as well. The difference between the euro and the yen, however is that the yen retains its haven status, and if the deterioration of economic growth continues and we start pushing toward recession, I see the yen outperforming going forward.

Stepping back and looking at the broad picture of the dollar this morning, it is modestly higher, with gains against some EMG currencies (INR, RUB, BRL), but weakness against both Aussie and Kiwi. In the end, the major currencies have done little although it seems the dollar continues to have legs, even in the short term.

On the data front, yesterday’s CPI data came in just a touch firmer than expected, with the core number unchanged at 2.2% rather than the expected 0.1% decline. This morning brings PPI, which nobody is really going to care about given we already got CPI, and Retail Sales, which have been delayed by the shutdown. Expectations there are for a 0.2% rise with a 0.1% rise ex autos. Yesterday we also heard from three Fed speakers, all of whom expressed confidence the economy was solid, and today we hear from one more. As I have recently written, the Fed message has been very consistent lately, growth is solid, inflation pressures remain tame and there is no reason to raise rates further. As long as that remains the case, it will support asset markets, and likely the dollar.

Good luck
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