Still Remote

A Eurozone nation of note
Has recently had to demote
Its latest predictions
In most jurisdictions
Since factory growth’s still remote

The FX market has lately taken to focusing on economic data as the big stories we had seen in the past months; Brexit, US-China trade, and central bank activities, have all slipped into the background lately. While they are still critical issues, they just have not garnered the headlines that we got used to in Q1. As such, traders need to look at something and today’s data was German manufacturing PMI, which once again disappointed by printing at just 44.5. While this was indeed higher than last month’s 44.1, it was below the 45.0 expectations and simply reaffirmed the idea that the German economy’s main engine of growth, manufacturing exports, remains under significant pressure. The upshot of this data was a quick decline of 0.35% in the euro which is now back toward the lower end of its 1.1200-1.1350 trading range. So even though Chinese data seems to be a bit better, the impact has yet to be felt in Germany’s export sector.

This follows yesterday’s US Trade data which showed that the deficit fell to -$49.4B, well below the expected -$53.5B. Under the hood this was the result of a larger than expected increase in exports, a sign that the US economy continues to perform well. In fact, Q1 GDP forecasts have been raised slightly, to 2.4%, on the back of the news implying that perhaps things in Q1 were not as bad as many feared.

Following in the data lead we saw UK Retail Sales data this morning and it surprised on the high side, rising 1.1%, well above the expected -0.3% decline. The UK data continues to confound the Chicken Little crowd of economists who expected the UK to sink into the North Sea in the wake of the Brexit vote. And while there remains significant uncertainty as to what will happen there, for now, it seems, the population is simply going about their ordinary business. The benefit of the delay on the Brexit decision is that we don’t have to hear about it every single day, but the detriment remains for UK companies that have been trying to plan for something potentially quite disruptive but with no clarity as to the outcome. Interestingly, the pound slid after the data as well, down 0.25%, but then today’s broader theme is that of a risk-off session.

In fact, looking at the usual risk indicators, we saw weakness in equity markets in Asia (Nikkei -0.85%, Shanghai -0.40%) and early weakness in European markets (FTSE -0.1%) but the German DAX, after an initial decline, has actually rebounded by 0.5%. US futures are pointing lower at this time as well, although the 0.15% decline is hardly indicative of a collapse. At the same time, Treasury yields are slipping with the 10-year down 4bps to 2.56% and both the dollar and the yen are broadly higher. So, risk is definitely on the back foot today. However, taking a step back, the reality is that movement in most markets remains quite subdued.

With that in mind, there is really not much else to discuss. On the data front this morning we see Retail Sales (exp 0.9%, 0.7% -ex autos) and then at 10:00 we get Leading Indicators (0.4%) which will be supported by the ongoing equity market rally. There is one more Fed speaker, Atlanta’s Rafael Bostic, but the message we have heard this week has been consistent; the Fed remains upbeat on the economy, expecting GDP growth on the order of 2.0% as well as limited inflation pressure which leads to the current wait and see stance. There is certainly no indication that this is going to change anytime soon barring some really shocking events.

Elsewhere, the Trump Administration has indicated that the trade deal is getting closer and there is now talk of a signing ceremony sometime in late May, potentially when the President visits Japan to pay his respects to the new emperor there. (Do not forget the idea that the market has fully priced in a successful trade outcome and when it is finally announced, equities will suffer from a ‘sell the news mentality.) With the Easter holidays nearly upon us, trading desks are starting to thin out, however, while liquidity may suffer slightly, the current lack of market catalysts means there is likely little interest in doing much anyway. Overall, today’s dollar strength is likely to have difficulty extending, and if we see equity markets reverse along the lines of the DAX, it would not be surprising to see the dollar give back its early gains. But in the end, another quiet day is looming.

Good luck and good weekend
Adf

Given the Easter holidays and diminished activity, the next poetry will arrive on Tuesday, April 23.

Addiction To Debt

A policy change did beget
In China, addiction to debt
Per last night’s report
Financial support
Continues, the bulls’ views, to whet

The data from China continues to surprise modestly to the upside. Last week, you may recall, the Manufacturing PMI report printed above 50 in a surprising rebound. Last night, Q1 GDP printed at 6.4%, a tick better than expected, and the concurrent data; Fixed Asset Investment (6.3%), IP (8.5%) and Retail Sales (8.7%) all beat expectations as well. In fact, the IP data blew them away as the analyst community was looking for a reading of 5.9%. While there is some possibility that the data is still mildly distorted from the late Lunar New Year holiday, it certainly seems as though the Chinese have managed to prevent any significant further weakness in their economy.

How, you may ask, have they accomplished this feat? Why the way every government does these days. As we also learned last week, debt in China continues to grow rapidly, far more rapidly than the economy, which means that every yuan of debt buys less growth. It should be no surprise that there is diminishing effectiveness in this strategy, but it should also be no surprise that this is likely to be the way forward. In the short run, this process certainly pads the data story, helping to ensure that growth continues. However, there is a clear and measurable negative aspect to this policy.

Exhibit A is real estate. One of the areas seeing the most investment in China continues to be real estate. The problem with expanding real estate debt (it grew 11.6% in Q1 compared to 6.4% growth for GDP) is that real estate investment is not especially productive. For an economy that relies on manufacturing, productivity growth is crucial. The more money invested in real estate, the less available for improved efficiencies in the economy. Longer term this will lead to slower GDP growth in China, just as it has done in all the developed world economies. However, as politics, even in China, is based on the here and now, there is no reason to expect these policies to change. Two years ago, President Xi tried to force a crackdown on excessive debt used to finance the property bubble that had inflated throughout China. However, it is abundantly clear that the priorities have shifted to growth at all costs. At this stage, I expect that we will see consistently better numbers out of China going forward, regardless of any trade resolution. If Xi wants growth, that is what the rest of the world will see, whether it exists or not.

Turning to the FX market, this implies to me that we are about to see CNY start to strengthen further. Last night saw a 0.40% rally taking the dollar down to key support levels between 6.68-6.69. I expect that we are going to see the renminbi start a more protracted move higher and at this point would not be surprised to see the USDCNY end 2019 around 6.30. That is a significant change in my view from earlier this year, but there has also been a significant change in the policy stance in China which cannot be ignored.

Elsewhere, risk overall has been ‘on’ as investors have responded to the better than expected Chinese data, as well as the continued dovishness from the central banking community, and keep buying stocks. If you recall several weeks ago, there was a conundrum as both stocks and bonds were rallying. At the time, the view from most pundits was that the stock market was wrong and that the bond market was presaging a significant slowdown in the economy. In fact, we saw that first yield curve inversion at the time in early March. However, since then, 10-year Treasury yields have backed up by 22bps and now sit above 2.60% for the first time in a month, while stock prices have continued to rally. As such, it appears that the bond market had it wrong, not the stock market. The one caveat is that this stock market rally has been on diminishing volumes which implies that it is not that widely supported. The opposing viewpoints are the bulls believe there is a big catch up rally in the wings as those who have missed out reach peak FOMO, while the bears believe that though the rally has been substantial, it has a very weak underlying basis, and will retreat rapidly.

As to the FX market, yesterday saw dollar strength, which was a bit surprising given the weaker than expected economic data (both IP and Capacity Utilization disappointed) as well as mixed to negative earnings data from the equity market. However, this morning, the dollar has retraced those gains with the pound being the one real outlier, falling slightly amid gains in virtually every other currency, as inflation data from the UK printed softer than expected at 1.9%, thus pushing any concept of tighter policy even further into the future.

On the data front, this morning brings the Trade Balance (exp -$53.3B) and then the Fed’s Beige Book is released this afternoon. We also have two more Fed speakers, Harker and Bullard, but that message remains pretty consistent. No change in policy in the near future and all efforts to determine the best way to push inflation up to the target level. What this means in practice is that there is a vanishingly small probability that US monetary policy will tighten any further in the near future. Of course, neither will policy elsewhere tighten, so I continue to view the dollar’s prospects positively with the clear exception of the CNY as mentioned above.

Good luck
Adf

 

Clearly On Hold

Though policy’s clearly on hold
Most central banks feel they’ve controlled
The story on growth
And yet they’re still loath
To change their inflation threshold

Amidst generally dull market activity (at least in the FX market), traders and investors continue to look for the next key catalysts to drive markets. In US equity markets, we are now entering earnings season which should keep things going for a while. The early releases have shown declining earnings on a sequential basis, but thus far the results have bested estimates so continue to be seen as bullish. (As an aside, could someone please explain to me the bullish case on stocks trading at a 20+ multiple with economic growth in the US at 2% and globally at 3.5% alongside extremely limited policy leeway for further monetary ease? But I digress.) Overnight saw Chinese stocks rock, with Shanghai soaring 2.4% and the Hang Seng 1.1%. European stocks are a bit firmer as well (DAX +0.6%, FTSE +0.4%) and US futures are pointing higher.

Turning to the central banks, we continue to hear the following broad themes: policy is in a good place right now, but the opportunity for further ease exists. Depending on the central bank this is taking different forms. For example, the Minutes of the RBA meeting indicated a growing willingness to cut the base rate further, and market expectations are building for two more cuts this year, down to 1.00%. Meanwhile, the Fed has no ability to cut rates yet (they just stopped raising them in December) but continues to talk about how they achieve their inflation target. Yesterday, Boston Fed president Rosengren posited that a stronger commitment to the symmetry around their 2.0% target could be useful. Personally, I don’t believe that, but I’m just a gadfly, not a PhD economist. At any rate, the idea is that allowing the economy to run hot without tightening is tantamount to easing policy further. In the end, it has become apparent the Fed’s (and every central bank’s) problem is that their economic models no longer are a good representation of the inner workings of the economy. As such, they are essentially flying blind. Previous relationships between growth, inflation and employment have clearly changed. I make no claim that I know what the new relationships are like, just that 10 years of monetary policy experiments with subpar results is enough to demonstrate the central banks are lost.

This is true not just in the US and Europe, but in Japan, where they have been working on QE for nearly thirty years now.

More ETF’s bought
Will be followed by more and
More ETF’s bought

It’s vital for the Bank of Japan to continue persistently with powerful monetary easing,” Governor Haruhiko Kuroda said. As can be seen from Kuroda-san’s comments last night in the Diet, the BOJ is a one-trick pony. While it is currently illegal for the Fed to purchase equities, that is not the case in Japan, and they have been buying them with gusto. The thing is, the Japanese economy continues to stumble along with minimal growth and near zero inflation. As the sole mandate for the BOJ is to achieve their 2.0% inflation target, it is fair to say that they have been failing for decades. And yet, they too, have not considered a new model.

In the end, it seems the lesson to be learned is that the myth of omnipotence that the central banks would have us all believe is starting to crack. Once upon a time central banks monitored activity in the real economy and tried to adjust policy accordingly. Financial markets followed their lead and responded to those actions. But as the world has become more financially oriented during the past thirty years, it seems we now have the opposite situation. Now, financial markets trade on anticipation of central bank activity, and if central banks start to tighten policy, financial markets tend to throw tantrums. However, there is no tough love at central banks. Rather they are indulgent parents who cave quite quickly to the whims of declining markets. Regardless of their alleged targets for inflation or employment, the only number that really matters is the S&P 500, and that is generally true for every central bank.

Turning to this morning’s data story, the German ZEW survey was released at a better than expected 3.1. In fact, not only was this better than forecast, but it was the first positive reading in more than a year. It seems that the ongoing concerns over German growth may be easing slightly at this point. Certainly, if we see a better outcome in the Manufacturing PMI data at the end of April, you can look for policymakers to signal an all clear on growth, although they seem unlikely to actually tighten policy. Later this morning we see IP (exp 0.2%) and Capacity Utilization (79.1%) and then tonight, arguably more importantly, we see the first look at Chinese Q1 GDP (exp 6.3%).

If you consider the broad narrative, it posits that renewed Chinese monetary stimulus will prevent a significant slowdown there, thus helping economies like Germany to rebound. At the same time, the mooted successful conclusion of the US-China trade talks will lead to progress on US-EU and US-Japanese talks, and then everything will be right with the world as the previous world order is reincarnated. FWIW I am skeptical of this outcome, but clearly equity market bulls are all-in.

In the end, the dollar has been extremely quiet (volatility measures are back to historic lows) and it is hard to get excited about movement in the near-term. Nothing has yet changed my view that the US will ultimately remain the tightest policy around, and thus continue to draw investment and USD strength. But frankly, recent narrow ranges are likely to remain in place for a little while longer yet.

Good luck
Adf

 

Worries ‘Bout Debt

In DC this weekend they met
The World Bank and IMF set
They bitched about Trump
Explained there’s no slump
But did express worries ‘bout debt

Markets are on the quiet side this morning as they consolidate the gains seen on Friday. Risk continues to be in vogue and so haven currencies; dollars, Swiss francs and Japanese yen, remain under modest pressure. That said, the FX market remains broadly range bound, at least within the G10 space.

The annual World Bank / IMF meetings were held this past weekend in Washington D.C. and all the global economic glitterati were present. Arguably there were three key themes; central bank independence is paramount to successful policy and there is great concern over President Trump’s ongoing, and increasingly strident, complaints about the Fed. Secondly there continues to be broad concern over the slowing growth trajectory that was highlighted by the IMF reducing their global growth forecast yet again last week, this time down to 3.3% in 2019 from their 3.7% estimate last October. Finally, there was evidence that the massive growth in debt around the world is starting to make a few policymakers more nervous.

Of course, the question is will policymakers actually change anything that they do given their concerns? As to the first, the only hope they have is to raise the issue frequently enough so that it gains a broad consensus amongst the non-economic set. Frankly, if you asked the proverbial man on the street who was Fed Chair, or the names of any of the other governors, I would wager less than one in ten people would know any of the answers. At the same time, with the President’s constant haranguing, the Fed remains an excellent scapegoat for any weakness in the US economy going forward. As much as it galls the establishment, there is no reason to believe that this behavior is going to change throughout the rest of the Trump presidency and probably well beyond that.

Regarding the second issue, slowing growth, once again given the current stance of virtually the entire global economic central bank community, it is unclear they have any ability to do anything else. After all, the whole group is already set at ultra-easy money, with limited ability to move any further. But perhaps more importantly, it is questionable whether the central banks are the actual drivers of economic growth, as much as they would like to think they are. Arguably, economic growth comes from a combination of consumer demand and production of those goods and services demanded. The last time I checked, the Fed neither consumed very much nor produced anything (other than hot air and paperwork). All I’m saying is that the ongoing belief that central banks control the economy might be faulty. What they do control is money and financial assets, but as we have seen during the past decade, a strong rally in financial assets does not necessarily translate into strong growth.

Finally, regarding the massive increase in debt that we have seen during the past decade, they are absolutely right to be concerned about this process. As Rogoff and Reinhart explained in their classic book, This Time is Different, excessive debt is the one thing that has consistently been shown to have a negative effect on economic growth. And while the definition of excessive may be uncertain, it is abundantly clear that debt/GDP ratios >100% is excessive.

Add it all up and it seems unlikely that there is going to be a surge in economic growth in the near future, or even the medium term. Thus, when comparing the situations across the globe, the current status is likely to remain the future status.

Turning to the upcoming week, we have a fair amount of data as well as another group of Fed speakers.

Today Empire Manufacturing 6.7
Tuesday IP 0.2%
  Capacity Utilization 79.1%
Wednesday Trade Balance -$53.5B
  Fed Beige Book  
Thursday Initial Claims 205K
  Philly Fed 10.4
  Retail Sales 0.9%
  -ex autos 0.7%
  Business Inventories 0.4%
Friday Housing Starts 1.23M
  Building Permits 1.30M

In addition to this, we hear from five more Fed speakers, although none of them are the big guns like Powell or Williams. And as I have repeatedly described, the Fed story is already well known and unlikely to change unless the data really starts to adjust. Add to this the fact that now Brexit is a back-burner issue and there remains scant information on the US-China trade talks and quite frankly, this week in FX is going to be all about US equity market earnings data. If the data is good and risk is embraced, the dollar will suffer and vice versa.

Good luck
Adf

A Future Upgrade

The data from China conveyed
A story that can be portrayed
As Q1 was weak
But policy tweaks
Imply there’s a future upgrade

In a relatively dull session for news events, Chinese data was the biggest story. The trade surplus there expanded dramatically, rising to $32.6B, much larger than any expectations, as not only did exports grow more robustly (+14.2%) but imports fell sharply (-7.6%). On the surface this suggests that the global situation may have seen its worst days, as demand for Chinese goods was strong, but the domestic economy there continues to be plagued by weakness. However, a few hours later, Chinese money supply and loan data was released with a slightly different message. Here, M2 grew more than expected at an 8.6% rate, while new loans also expanded sharply (+13.7%) implying that the PBOC’s efforts at stimulating the economy are starting to bear fruit. The loan data also implies that growth going forward, in Q2 and beyond, is likely to rebound further. In fact, the only negative piece of news was that auto sales continue to decline in China, falling 5.2% in March, the ninth consecutive year/year decline in the series. The market response to this was muted in the equity space, with Shanghai virtually unchanged, but the renminbi did benefit, rising 0.2% in the wake of the release.

Away from those data points, the news has been sparse. Interestingly, the dollar has been under pressure across the board since yesterday’s close with the euro now higher by 0.6%, both the pound and yen by 0.3% and Aussie leading the way amid firmer commodity prices, by 0.7%. In fact, despite the Shanghai equity performance, today has all the other earmarks of a risk-on session. Equity markets elsewhere in Asia were firm (Nikkei +0.75%, Hang Seng +0.25%), they are higher in Europe (FTSE and CAC +0.4%, DAX +0.6%) and US futures are pointing higher as well (DJIA +0.7%, S&P +0.5%). At the same time government bond yields are rising with 10-year Treasury yields now higher by 5bps. Much of this movement has occurred early this morning after JP Morgan released better than expected results. So, for today, all seems right with the world!

Away from those data releases, there has been far less of interest. Yesterday we heard from NY Fed President Williams who explained that the rate situation was appropriate for now and that there was no reason for the Fed to act in the near future. While growth seems solid, the continuing lack of measured inflation shows no signs of changing and so rates are likely to remain on hold for an extended period. In a related story, a WSJ survey of economists described this morning shows expectations for the next Fed move to have been pushed back to Q4 2020, with a growing likelihood that it will be a rate cut. In other words, expectations are for an extended period of time with no monetary policy changes. If that is the case, then markets will need to find other catalysts to drive prices. Who knows, maybe equity prices will start to reflect company fundamentals again! Just kidding!

Actually, this situation will drive the market to be even more focused on the economic data as essentially every central bank around the world has indicated the current policy pause is designed to observe the data and then respond accordingly. So, if weakness becomes evident in a country or region, look for the relevant central bank(s) to ease policy quickly. At the same time, if inflation does start to pick up someplace, policy tightening will be discussed, if not implemented right away. And markets will respond to these discussions given the lack of other catalysts.

For now however, Goldilocks has been revived. Rates have almost certainly peaked for this cycle, and policy stability may well lead us to yet further new highs in the equity space. Perhaps the central banks have well and truly killed the business cycle and replaced it with a permanent modest growth trajectory. Personally, I don’t believe that is the case, as evidenced by the diminishing impact of each of their policies, but the evidence over the past several years is working in their favor, I have to admit.

This morning’s only data point is Michigan Consumer Sentiment, which is expected to decline slightly from last month’s 98.4 to 98.0 today. We also hear from Chair Powell again, but that story is old news. With risk being acquired, look for the dollar to continue to falter for the rest of the session, albeit probably not by much more. Things haven’t changed that much!

Good luck and good weekend
Adf

 

Continue Restrained

Come autumn and next Halloween
The UK may finally wean
Itself from the bloc
To break the deadlock
But Parliament still must agree(n)

Meanwhile Signor Draghi explained
That growth would continue restrained
And Fed Minutes noted
That everyone voted
For policy to be maintained

There has been fresh news on each of the main market drivers in the past twenty-four hours, and yet, none of it has been sufficient to change the market’s near-term outlook, nor FX prices, by very much.

Leading with Brexit, there was a wholly unsatisfying outcome for everyone, in other words, a true compromise. PM May was seeking a June 30 deadline, while most of the rest of the EU wanted a much longer delay, between nine months and a year. However, French President Emanuel Macron argued vociferously for a short delay, actually agreeing with May, and in the end, Halloween has a new reason to be scary this year. Of course, nothing has really changed yet. May will still try to get her deal approved (ain’t happening); Euroskeptic Tories will still try to oust her (possible, but not soon) and Labour will push for new elections (also possible, but not that likely). The topic of a second referendum will be heard frequently, but as of right now, PM May has been adamant that none will not take place. So, uncertainty will continue to be the main feature of the UK economy. Q1 GDP looks set to be stronger than initially expected, but that is entirely due to stockpiling of inventory by companies trying to prepare for a hard Brexit outcome. At some point, this will reverse with a corresponding negative impact on the data. And the pound? Still between 1.30 and 1.31 and not looking like it is heading anywhere in the near future.

On to the ECB, where policy was left unchanged, as universally expected, and Signor Draghi remarked that risks to the economy continue to be to the downside. Other things we learned were that the TLTRO’s, when they come later this year, are pretty much the last arrow in the policy quiver. Right now, there is no appetite to reduce rates further, and more QE will require the ECB to revise their internal guidelines as to the nature of the program. The issue with the latter is that EU law prevents monetization of government debt, and yet if the ECB starts buying more government bonds, it will certainly appear that is what they are doing. This morning’s inflation data from France and Germany showed that there is still no inflationary impulse in the two largest economies there, and by extension, throughout the Eurozone.

At this point, ECB guidance explains rates will remain on hold through the end of 2019. My view is it will be far longer before rates rise in the Eurozone, until well into the recovery from the next recession. My forecast is negative euro rates until 2024. You read it here first! And the euro? Well, in its own right there is no reason to buy the single currency. As long as the US economic outlook remains better than that of the Eurozone, which is certainly the current case, the idea that the euro will rally in any meaningful way seems misguided. Overnight there has been little movement, and in fact, the euro has been trading between 1.12 and 1.1350 for the past three weeks and is currently right in the middle of that range. Don’t look for a break soon here either.

The FOMC Minutes taught us that the Fed is going to be on hold for quite a while. The unanimous view is that patience remains a virtue when it comes to rate moves. Confusion still exists as to how unemployment can be so low while inflation shows no signs of rising, continuing to call into question their Phillips Curve models. In fact, yesterday morning’s CPI showed that core inflation fell to 2.0% annually, a tick lower than expected and continuing to confound all their views. The point is that if there is no inflationary pressure, there is no reason to raise rates. At the same time, if US economic growth continues to outpace the rest of the world, there is no reason to cut rates. You can see why the market is coming round to the idea that nothing is going to happen on the interest rate front for the rest of 2019. Futures, which had priced in almost 40bps of rate cuts just last month, are now pricing in just 10bps (40% chance of one cut). Despite the ongoing rhetoric from President Trump regarding cutting rates and restarting QE, neither seems remotely likely at this juncture. And don’t expect either of his Fed nominees to be approved.

Finally, Treasury Secretary Mnuchin declared that the US and China have agreed a framework for enforcement of the trade agreement, with both nations to set up an office specifically designed for the purpose and a regular schedule of meetings to remain in touch over any issues that arise. But Robert Lighthizer, the Trade Representative has not commented, nor have the Chinese, so it still seems a bit uncertain. Enforcement is a key issue that has been unsolved until now, although IP protection and state subsidies remain on the table still. Interestingly, equity markets essentially ignored this ‘good’ news, which implies that a completed deal is already priced into the market. In fact, I would be far more concerned over a ‘sell the news’ outcome if/when a trade deal is announced. And of course, if talks break off, you can be certain equity prices will adjust accordingly.

This morning brings Initial Claims (exp 211K) and PPI (1.9%, 2.4% ex food & energy) and speeches from Clarida, Williams, Bullard and Bowman. But what are they going to say that is new? Nothing. Each will reiterate that the economy is doing well, still marginally above trend growth, and that monetary policy is appropriate. In the end, the market continues to wait for the next catalyst. In equities, Q1 earnings are going to start to be released this afternoon and by next week, it will be an onslaught. Arguably, that will drive equities which may yet impact the dollar depending on whether the earnings data alters overall economic views. In the meantime, range trading remains the best bet in FX.

Good luck
Adf

 

A One-Year Delay

Prime Minister May wanted weeks
The EU, however, now seeks
A one-year delay
Which for PM May
Means Tories will up their critiques

Today brings two important decisions from Europe. First and foremost is the EU Council meeting called to discuss Brexit and determine how long a delay will be granted to the UK to make up their mind. (Hint: it doesn’t seem to matter, there is no clear preference for any decision!) Secondly, the ECB meets a day earlier than usual and will announce its policy decisions (there will be no changes) and at 8:30 Signor Draghi will face the press. The reason they are meeting early is so they can get to Washington for the annual IMF/World Bank meetings.

As to the first, PM May has asked for an extension to June 30, as she continues to try to force her deal down Parliament’s collective throat. However, given how unsuccessful she has been in this process, it seems more likely that the EU is going to force the UK to take a nine-month or one-year extension. In their view, this will allow the political process to play out with either a new referendum or a new election or both, but with some type of mandate finally achieved. Naturally, the hard-core Brexiteers are horrified at this outcome because the thought is that a new vote would result in canceling Brexit. This would not be the first time that a referendum in the EU went badly and was subsequently rerun in order to get the leadership’s desired outcome. Both the French and the Dutch rejected the EU Constitution in 2005 initially, but subsequently reversed the initial vote while the Danes rejected the Maastricht Treaty in 1992 but also voted a second time to approve it. So this would hardly be unprecedented.

The problem for the UK is that the only thing they have agreed on, and just barely, is that they don’t want to leave without a deal. However, if anything, there has been increased rancor amongst the MP’s and there is no clear view on how to proceed. Actually, I guess the other thing Parliament has agreed on is they HATE PM May’s negotiated deal! Meanwhile, UK data this morning was surprisingly robust with IP jumping 0.6% and GDP in February rising at a 2.0% annualized clip, both data points being far better than expected. And the pound has benefitted rising 0.2% this morning, although it still remains mired between 1.30 and 1.31with little prospect of moving until something new happens in the Brexit saga.

On to the ECB, which is still struggling to stimulate the Eurozone economy. In fact, yesterday, the IMF announced reduced forecasts for 2019 GDP growth globally, taking their expected rate down to 3.3% with Europe being one of the key weak spots. The IMF’s 2019 projection is down to 1.3% for the Eurozone, from their previous forecast of 1.5%.

It is this situation that Signor Draghi is trying desperately to address but has so far been largely unsuccessful. It seems clear that the ECB will not countenance a move to further negativity in interest rates, and the TLTRO announcement from last month has faded from view. At this point, the only thing they can do would be reopen QE, but I don’t think that is yet likely. However, do not be surprised if we continue to see the growth trajectory slow in the Eurozone, that the ECB does just that.

On that subject, it may be time to question just how much worse things are going to get in the global economy. After all, one of the key issues has been Brexit, which at this point looks like it will be delayed for a long time at the very least. As well, we continue to hear that the trade talks between the US and China are making progress, so if there is a successful conclusion there, that would be another positive for global growth. With the IMF (a frequent negative indicator) sounding increasing warnings, and some stirrings of better data (not only the UK, but Italian IP surprised on the high side today rising 0.8% in February, compared to expectations of a -0.8% outcome), and last week’s slightly better than expected Chinese PMI data, perhaps the worst is behind us. Of course, counter to that view is the global bond market which continues to price in further economic weakness based on the increased number of bonds with negative yields as well as the ongoing lethargy in US rates. It is easy to become extremely pessimistic as global policymakers have not shown great command, but this view cannot be ignored.

Overall, the dollar is slightly softer this morning, down 0.15% vs. the euro and 0.35% vs. AUD (RBA Governor DeBelle sounded slightly less dovish in a speech last night) as well as lesser amounts vs. other currencies. We are seeing similar magnitude gains in many EMG currencies, but overall, the pattern seems to be that the dollar softens overnight and regains its footing in the US session.

This morning brings CPI data (exp 1.8% and 2.1% ex food & energy) and then the FOMC Minutes from March are released at 2:00. We also hear from Randall Quarles, although, as I continue to say, at this point, there seems little likelihood of a change in view by any of the FOMC’s members. I see no reason for the recent pattern to change, so expect that the dollar will stabilize, and likely rebound slightly as the day progresses. But despite the EU meeting and the ECB meeting, it seems unlikely there will be much new information to change anybody’s view when the bell rings this afternoon.

Good luck
Adf