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
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