Spring Next Year

Interest rates shan’t
Rise ere spring next year. But might
They possibly fall?

This morning’s market theme is that things look bad everywhere, except perhaps in the US. Starting in Tokyo, the BOJ met last night and, to no one’s surprise, left their policy rate unchanged at -0.10%. They maintained their yield curve control target of 0.00% +/- 0.20% for 10-year JGB’s and they indicated they would continue to purchase JGB’s at a clip of ¥80 trillion per year. But there were two things they did change, one surprising and one confusing.

First the surprise; instead of claiming rates would remain low for an “extended period”, the new language gave a specific date, “at least through around spring 2020”. Of course, this gives them the flexibility to extend that date specifically, implying an even more dovish stance going forward. Market participants were not expecting any change to the language, but interestingly, the yen actually rallied after the report. Part of that could be because there was significant weakness in Asian equity markets and a bit of a risk-off scenario, but I also read that some analysts see this as a prelude to tighter policy. I don’t buy the latter idea, but it does have adherents. The second thing they did, the confusing one, was they indicated they would create a lending facility for their ETF portfolio. The unusual thing here is that generally, lending securities is a way to encourage short-selling, although they did couch the idea in terms of added liquidity to the market. Given they own more than 70% of the ETF market, it is clear that liquidity must be suffering, but I wouldn’t have thought bringing short-sellers to the party would be their goal.

In South Korea, Q1 GDP shrank -0.3%, a much worse outcome than the expected 0.3% growth, and largely caused by a sharp decline in exports and IP. This is an ominous sign for the global economy, and also calls into question the accuracy of the Chinese data last week. Given the tight relationship between Korean exports and Chinese growth, something seems out of place here. The market impact was a decline in the KOSPI (-0.5%), falling Korean yields and a decline in the KRW, which fell a further 0.6% and is now at its weakest point in two years. Look for the Bank of Korea to ease policy going forward.

Turning to Europe, the Swedish Riksbank left policy rates unchanged at -0.25%, as expected, but their statement indicated that there would be no rate hike later this year, as previously expected, given the slowing growth and lack of inflation in Sweden. While I foreshadowed this earlier this week, the market response was severe, with SEK falling 1.4%, although the Swedish OMX (stock market) rallied 1% on the news. You know, bad news is good because rates remain low.

One last central bank note, the Bank of Canada has thrown in the towel on normalizing policy, dropping any reference to higher rates in the future from their statement yesterday. Upon the release of the statement, the Loonie fell a quick 1%. Although it has since recovered a bit of that, it is still lower by 0.6% from before the meeting. It seems concerns over slowing growth now outweigh concerns over excess leverage in the private sector.

The other market note was the sharp decline in Chinese stocks with the Shanghai Composite falling 2.4% as traders and investors there lose faith that the PBOC is going to continue to support the economy, especially after the better than expected GDP data last week. Even the renminbi fell, -0.3%, although it has been especially stable for the past two months as the US-China trade talks continue. Speaking of which, the next round of face-to-face talks are set to get under way shortly, but there has been little in the way of news, either positive or negative, for the past two weeks.

One other thing about which we have not heard much lately is Brexit, where the internal political machinations continue in Parliament, but as yet, there has been no willingness to compromise on either side of the aisle. Of note is that the pound continues to fall, down a further 0.2% this morning and now firmly below 1.29. While there is no doubt that the dollar is strong across the board, it also strikes that some market participants are beginning to price in a chance of a no-deal Brexit again, despite Parliament’s stated aim of preventing that. As yet, there is no better alternative.

Finally, the euro is still under pressure this morning as well, down a further 0.2% this morning, which makes 1.5% in the past week. This morning’s only data point showed Unemployment in Spain rose unexpectedly to 14.7%, another sign of slowing growth throughout the Eurozone. At this point, the ECB is unwilling to commit to easing policy much further, but with the data misses piling up, at some point they are going to concede the point. Easier money is coming to the Eurozone as well.

This morning brings Initial Claims data (exp 200K) and Durable Goods (0.8%, 0.2% ex Transport). It doesn’t seem that either of these will change any views, and as we have seen all week, I expect that Q1 earnings will be the market’s overall focus. A bullish spin will continue to highlight the different trajectories of the US and the rest of the world, and ultimately, continue to support the dollar.

Good luck