Impugned

The continent east of the ‘pond’
Makes many things of which we’re fond
But data of late
Impugned their growth rate
Just when will Herr Draghi respond?

There is an ongoing dichotomy in the economic landscape that I continue to have difficulty understanding. Pretty much every day we see data that describes slowing economic activity from multiple places around the world. Sales are slowing, manufacturing is ebbing, or housing markets are backing away from their multiyear explosion higher. And all this is occurring while in the background, international trade agreements, that have underpinned the growth in global trade for the past forty years, are also under increasing pressure. And yet, equity markets around the world seemingly ignore every piece of bad news and, when there is a glimmer of hope, investors grab hold and markets rally sharply.

Arguably the best explanation is that the dramatic change in central bank policies have evolved from emergency measures to the baseline for activity. Following that line of thought and adding the recent central bank response to increased ‘volatility’ (read declines) as seen in December, it has become apparent that economic fundamentals no longer matter very much at all. While the central bankers all pay lip service to being data dependent, the only data that seems to matter is the latest stock market close. For someone who has spent a career trying to identify macroeconomic risks and determine the best way to manage them, I’m concerned that fewer and fewer investors view that as important. I fear that when the next downturn comes, and I remain highly confident there will be another economic downturn too large to ignore, we will be wistful for the good old days of 2008-09, when recession was ‘mild’.

Please excuse my little rant, but it continues to be increasingly difficult to justify market movements when looking at economic data. For example, last night we learned that PMI data throughout the Eurozone was confirmed to be abysmal in February (Germany 47.6, Italy 47.7, Spain 49.9, Eurozone overall 49.2) and has led to a reduced forecast for Eurozone GDP growth in Q1 of just 0.1%. Naturally, every equity market in Europe is higher on the news. Even the euro has edged higher, climbing 0.15% (albeit after falling 0.4% in yesterday’s session). Adding to the malaise, Eurozone core inflation unexpectedly fell to 1.0%, a long way from the ECB’s target of just below 2.0% and showing no signs of increasing any time soon.

With the March ECB meeting on the docket for next week, the discussion has focused on how Signor Draghi will justify his ongoing efforts to normalize monetary policy amid weakening growth. His problem is that he has downplayed economic weakness as temporary, but it has lingered far longer than anticipated. It is widely expected that the new economic forecasts will point to further slowing, and this will just make his task that much more difficult. Ultimately, the market is not pricing in any interest rate hikes until June 2020, and there is a rising expectation that TLTRO’s are going to be rolled over with an announcement possible as soon as April’s meeting. Draghi’s term as ECB president ends in October, and it is pretty clear that he will have never raised interest rates during his eight years at the helm. The question is, will his successor get a chance in the next eight years? Once again, I have looked at this information, compared it to the ongoing Fed discussion, and come out on the side of the euro having further to decline. We will need to see much stronger growth and inflation from Europe to change that view.

Other than that discussion, there is very little of real note happening today. Chinese Caixin PMI data was slightly better than expected at 49.9, which has been today’s argument for adding risk, but recall just yesterday how weak the official statistic was. As with everything from China, it is difficult to understand the underlying story as the data often has inconsistencies. But this has been enough to create a risk-on atmosphere with Treasuries falling (10-year yields +2bps) and JPY falling (-0.4%) while commodities and equities rally. Gold, naturally, is the exception to this rule as it has softened this morning.

Regarding trade, today’s news stories discuss documents being prepared for an eventual Trump-Xi summit later this month. If there really is a deal, that will be a global positive as it would not only clear up US-Chinese confusion, but it would bode well for all the other trade discussions that are about to begin (US-Japan, US-Europe). Hopefully, President Trump won’t feel the need to walk away from this deal.

Looking back at yesterday’s session, we saw Q4 GDP actually grew 2.6%, a bit stronger than expected, which arguably helped underpin the dollar’s performance. We also learned that the House Finance Committee is equally unconcerned over what the Fed is doing, as Chairman Powell’s testimony was a complete sleeper. So, with no oversight, the Fed will simply motor along. At this point, it would be remarkable if the Fed raised rates again in 2019, and unless Core PCE goes on an extended run higher, perhaps even in 2020. I have a feeling that we are going to see this flat yield curve for a long time.

This morning brings a bunch more data with both December and January numbers due. Looking at the January data, the only forecast I find is Personal Income (exp 0.3%) but Personal Spending, and PCE are both due as well. At 10:00 we see ISM Manufacturing (55.5) which is now biased higher after yesterday’s Chicago PMI printed at a robust 64.7, its strongest print in 18 months. With risk being embraced today, I think we are far more likely to see the dollar edge lower than not by the end of the day.

Good luck and good weekend
Adf