Lingering Issues

Some pundits now have the impression
That we will soon be in recession
The data of late
Has spurred the debate
And could remove Powell’s discretion

Meanwhile, we just heard from Herr Draghi
That “lingering” issues made foggy
The future of growth
So he and Jay both
Will soon ease ere things turn too quaggy

Some days, there is far more to discuss than others, and today is one of those days. Markets are trying to digest all of the following information: weaker US data, weaker Eurozone data, dovish comments from Signor Draghi, confirmation the RBA is likely to cut rates again, increased likelihood that Boris Johnson will be the next PM in the UK, and increased tensions in the Middle East.

Starting at the top, yesterday’s Empire State Manufacturing survey printed at a much worse than expected -8.6, which represented a 26.4-point decline from May’s survey and the largest fall on record. It was a uniformly awful report, with every sub-index weak. While by itself, this report is generally second tier data, it is adding to the case that the US economy is slowing more rapidly than had previously been expected and is increasing market expectations that the Fed will act sooner rather than later. We will see how that turns out tomorrow.

Then this morning, the German ZEW Survey was released at -21.1, a 19-point decline and significantly worse than expected. This is seen as a potential harbinger of further weakness in the German economy adding to what has been a run of quite weak manufacturing data. Although auto registrations in the Eurozone ticked ever so slightly higher in May (by 0.04%), the trend there also remains sharply downward. All in all, there has been very little encouraging of late from the Continent.

Then Signor Draghi got is turn at the mike in Sintra, Portugal, where the ECB is holding its annual summer festivities, and as usual, he did not disappoint. He explained the ECB has plenty of tools left to address “lingering” risks in the economy and hinted that action may be coming soon. He expressly described the ability for the ECB to cut rates further as well as commit to keep rates lower for even longer. And he indicated that QE is still available as the only rules that could restrict it are self-imposed, and easily changed. Arguably, this had the biggest impact of the morning as Eurozone equities rocketed on the prospect of lower rates, bouncing back from early losses and now higher by more than 1.0% on the day across the board. German bunds have plumbed new yield depths, touching -0.30% while the euro, to nobody’s surprise, has weakened further, ceding modest early gains to now sit lower by -0.3%. This is proof positive of my contention that the Fed will not be easing policy in isolation, and that if they start easing, you can be sure that the rest of the world will be close behind. Or perhaps even ahead!

Adding to the news cycle were the RBA minutes, which essentially confirmed that the next move there will be lower, and that two more rate cuts this year are well within reason as Governor Lowe tries to drive unemployment Down Under to just 4.5% from its current 5.2% level. Aussie has continued its underperformance on the news, falling a further 0.1% this morning and is now back to lows last touched in January 2016. And it has further to fall, mark my words.

Then there is the poor old pound, which has been falling sharply for the past week (-1.75%) as the market begins to price in an increased chance of a no-deal Brexit. This is due to the fact that Boris Johnson is consolidating his lead in the race to be the next PM and he has explicitly said that come October 31, the UK will be exiting the EU, deal or no deal. Given the EU’s position that the deal on the table is not open for renegotiation, that implies trouble ahead. One thing to watch here is the performance of Rory Stewart, a dark horse candidate who is gaining support as a compromise vs. Johnson’s more hardline stance. The point is that any indication that Johnson may not win is likely to see the pound quickly reverse its recent losses.

And finally, the Middle East continues to see increased tensions as Iran announced they were about to breach the limits on uranium production imposed by the ill-fated six-nation accord while the US committed to increase troop deployment to the area by 1000 in the wake of last week’s tanker attacks. Interestingly, oil is having difficulty gaining any traction which is indicative of just how much market participants are anticipating a global economic slowdown. OPEC, too, has come out talking about production cuts and oil still cannot rally.

To recap, bond, currency and commodity markets are all forecasting a significant slowdown in economic activity, but remarkably, global stock markets are still optimistic. At this point, I think the stock jockeys are on the wrong side of the trade.

As to today, we are set to see Housing Starts (exp 1.239M) and Building Permits (1.296M) at 8:30. Strong data is likely to have little impact on anybody’s thinking right now, but weakness will start to drive home the idea that the Fed could act tomorrow. Overall, the doves are in the ascendancy worldwide, and rightly so given the slowing global growth trajectory. Look for more cooing tomorrow and then on Thursday when both the BOJ and BOE meet.

Good luck