There once was a time in the past
Where weakness in growth, if forecast
Resulted in prices
That forewarned a crisis
And traders sold what they’d amassed

But nowadays weakness is seen
As something akin to caffeine
‘Cause central bank measures
Will add to their treasures
It’s like a brand new cash machine

Chinese growth data was weak last night, falling to its lowest quarterly rate in the twenty-seven years that China has measured growth on a quarterly basis. The outcome of 6.2%, while expected, confirms that the ongoing trade situation with the US is having an increasingly negative impact on GDP worldwide. Naturally, not unlike Pavlov’s dogs, the market response was to rally on the theory that the PBOC would be adding more stimulus soon. After all, every other central bank in the world (save Norway’s) is preparing to ease policy further as growth worldwide continues to slow down. And so far, the Pavlovian response of buying stocks on bad news continues to be working as evidenced by the fact that equity markets throughout Asia rose. However, the magnitude of that rise has been quite limited, with gains of between 0.2% and 0.4% the norm. in fact, that market response is actually a bad sign for the central banks, because it demonstrates that the effectiveness of their policies is expected to be much less than in the past. Diminishing returns is a normal outcome for the repeated use of anything, and monetary policy is no different. The implication of this outcome is that despite the growing certainty that the Fed, ECB, BOJ, PBOC, BOE and more are going to ease policy further, equity markets seem unlikely to benefit as much as they have in the past. And if when a recession finally arrives, look for a change of heart in the equity community. But in the meantime, party hearty!

Speaking of further policy ease, it seems the market is chomping at the bit for next week’s ECB meeting, where there are two schools of thought. The conservative view is that Signor Draghi will sound quite dovish and indicate a 10bp cut is coming in September. But that is not nearly as exciting a view as the more aggressive analysts are discussing, which is a 20bp cut next week and the introduction of QE2 in September. Interestingly, despite all this certitude about ECB rate cuts, the euro is actually slightly higher this morning (albeit just 0.1%). It appears that traders are betting on the fact that if Draghi is aggressive, the Fed will have the opportunity the following week to match and outperform the ECB. Remember, the Fed has 250bps of rate cuts before it reaches ZIRP while the ECB is already negative. Despite the recent academic work explaining that negative rates are just fine and helping the situation, it still seems unlikely that we are going to see -2.0% anywhere in the world anytime soon. Ergo, the relative policy stance implies the Fed will ease more and the dollar will suffer accordingly. Just not today. Rather, today, the dollar is little changed overall, with some gains and some losses, but few large moves.

And those have been the real stories of note over what was a very quiet weekend. This week we see a fair amount of data, including Retail Sales, but more importantly, we hear from five more Fed speakers, including Chairman Powell tomorrow, in a total of nine speeches.

Given the importance of the consumer to the US economy, the Retail Sales data is probably the most important data point. Certainly, a weak outcome will result in rate cut euphoria, but it will be interesting to see what happens if there is a strong print. But otherwise, this seems more like a week where Fed speakers will dominate, as we hear from NY’s John Williams twice, as well as a mix of other governors and regional presidents. In the end, though, Powell’s comments are key, as I expect he will be looking to fine tune his message from last week’s congressional testimony.

It remains clear that the Fed has the most room to ease policy, and as long as that is the case, the dollar should remain under pressure. However, given the fact that the US economy continues to outperform the rest of the developed world, I don’t anticipate the dollar’s decline to be extreme, a few percent at most.

For today, there is precious little else to really drive things, so look for more of the recent choppiness that we have observed in markets, with no real directional bias.

Good luck
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