Lest Bubbles They Stoke

There is a fine fellow named Jay
Who not too much later today
Will take to the stage
And help us to gauge
How quickly Fed funds will decay

This week several Fed members spoke
And all of them sought to invoke
That growth is still fine
Thus they’ve drawn the line
On more cuts, lest bubbles they stoke

It is quite remarkable that despite ongoing unrest in Hong Kong, with the temperature there rising each week, as well as the countdown to Brexit getting shorter and shorter, the only thing that matters right now is Jay Powell’s speech this morning from Jackson Hole. It is the defining theme of today’s market activity.

Let me set the stage to begin: interest rate markets are pricing in a rate cut in September, another in October and then a chance of one in December with “certainty” of that third cut by March 2020. Given that GDP growth in the US is running at 2.1% annually, Retail Sales have consistently beaten expectations and are up more than 4% in the past year and the Unemployment Rate, at 3.7%, is a tick away from its post-WWII lows, three cuts seem like a lot of monetary stimulus. After all, despite the fact that the Fed watches the PCE Deflator as their inflation gauge of choice, we all know that inflation is running higher than its current reading of 1.4%. The government’s own evidence is from CPI readings which most recently showed prices rising at a 1.8% level, with the core reading there at 2.1%. And ask yourself if even that conveys the feel of inflation. My guess is: Not. Even. Close.

At any rate, that’s what the market is pricing. As NY walks in this morning, equity markets around the world have shown modest gains (US futures included), bonds are falling with 10-year Treasury yields back up to 1.64% and the dollar is stronger almost across the board. Arguably, expectations are for Powell to confirm that July was not a ‘one and done’ rate cut but rather the beginning of several insurance cuts. The fly in that ointment comes from the comments we heard yesterday from a series of regional Fed Presidents, all of whom said that they saw little reason to cut rates further at this time. Effectively their argument was that growth is solid, unemployment low and inflation pretty close to target. While all paid heed to the fact that the Fed funds rate was above the 10-year yield, they were unwilling to buy into the idea that the curve inversion was presaging a recession at this time. There is just not enough evidence to them.

With the Fed’s hawks in full flight, it will certainly be tricky for Powell to describe anything about the FOMC as coordinated. Remember, the Minutes showed us members who didn’t want to cut at all as well as members wanting to cut by 50bps. That’s a pretty wide dispersion of thought. All told, he has a pretty tough job today if he doesn’t want to spook the markets.

As I have no idea what he will say, let’s game out two different views; first he manages to surprise dovishly and second, more likely in my opinion, he disappoints and sounds more hawkish than the market (and President) wants.

Dovish Surprise – If he confirms the markets current pricing and, for example, doubles down saying QE is an effective tool and they will use it again, look for a sharp equity rally to begin with, as well as a bond rally and dollar weakness. Certainly that would be the initial price action. However, it is not clear how long that would last. After all, if the current claim is growth is solid, what is the reason for all the ‘insurance’? At some point, market participants will ask that very question, as well as, what does the Fed know that we don’t? The result would be a reversal of equity gains, although bonds would likely still rally. And the dollar? I think a rebound would be in order as well as strength in the yen and Swiss franc. However, even if he does manage to sound dovish, I don’t see the dollar falling more than 2%-3% before finding a floor. At this point, I cannot paint a scenario where the dollar enters a longer term downtrend. Overall, my unscientific odds on this outcome are less than 25%.

Hawkish Disappointment – This seems far more likely to be the outcome, if only because to my eyes, the market has really gotten ahead of itself with regard to rate cuts. Essentially, if Powell doesn’t confirm that July’s cut was the beginning of a new rate-cutting cycle, the market is going to be disappointed. If he pushes back at all, sounding more like Esther George or Eric Rosengren, the two dissenters, than James Bullard or Neel Kashkari, the 50bp advocates, the market will be REALLY disappointed.

In the first case, I expect we will see equity markets fall a percent or a bit more today, with Europe giving up its early gains and the US quite weak. Bonds are a tougher call here, although I expect that the initial price action would be for further weakness. Remember, despite the fact that yields are 15bps from the low point seen two weeks ago, they are still down 37bps this month. There is plenty of room to fall. As to the dollar, that will rally further against everything, the yen included. I would expect the euro to finally test, and break, 1.10, and we could easily see 1% weakness and more throughout the emerging markets.

If he pushes back, well today may be remembered in market history as PB (Powell’s black) Friday. Equity markets would see significant losses as all the bets on further easy policy would be shed immediately. Bonds, too, would fall sharply as the idea that the Fed would no longer need to cut rates would change the entire sentiment there. And finally, the dollar would explode higher. Any ideas that the Fed has further room to cut rates than virtually all its counterparties, a key dollar bearish thesis, would be swept away and the dollar would really appreciate sharply. Think about EUR at 1.08; GBP at 1.20 (and that’s without the Brexit story); and the yen back to 108.00. However, given the risk of this type of market disruption, I do not believe this is at all likely either. In the end, a mild disappointment seems the most likely outcome, so look for stocks to close the week on a low note and the dollar on a high note.

Before he speaks at 10:00 this morning, we do see New Home Sales (exp 647K), but quite frankly, nobody cares about that today. It is all Powell, all the time.

Good luck and good weekend
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Not a Clue

The thing that we learned from the Fed
Was they’ve not a clue what’s ahead
A few wanted fifty
But others more thrifty
Suggested a quarter instead

The thing that has Powell perplexed
Is what to do when they meet next
That’s why when he speaks
Near Jackson Hole’s peaks
Investors all fear some subtext

Once again the market has wandered aimlessly ahead of tomorrow’s Jackson Hole speech by Chairman Powell. Equity markets have generally edged lower (Hang Seng -0.85%, DAX -0.1%, FTSE -0.6%) although a few managed to scrape out a gain (Nikkei +0.05%, Shanghai +0.1%). Bond markets have also been mixed with most Asian markets rallying while Europe has seen small losses. I guess it’s only fitting that 10-year Treasuries are essentially unchanged on the day. Meanwhile, the dollar continues its broad winning ways with mostly modest gains against both G10 and EMG currencies.

At this point, all eyes are on tomorrow’s Powell speech to discern the Fed’s next move. Yesterday afternoon’s FOMC Minutes painted a picture of a group with significant differences in views. We know of the two dissenters, who didn’t want to cut rates at all, and it turns out that a “couple of participants” were looking for a fifty basis point cut. In the end, it is no surprise that twenty-five was the result, although the rationale, given their stated views that downside risks to the economy had diminished, seem shaky. The market response to the Minutes was, therefore, largely nonexistent, with almost no movement subsequent to their release in any market, which, given the proximity of the new information coming from Powell ought not be that surprising. In fact, it seems unlikely that today will bring too much activity either given that the important data has already been released (European PMI’s) and Initial Claims (exp 216K) and Leading Indicators (0.3%) are unlikely to change any opinions.

A quick look at those Eurozone PMI’s shows that they were marginally better than expected although continue to paint a picture of a weakening economy with no inflationary impulse. The biggest concern was that the new orders survey in Germany fell even further, a sign that there is no recovery in sight. At their release, the euro managed to rally about 0.35%, however it has given all of those gains back in the past four hours and seems more likely to wander aimlessly than take on a direction. The release of the ECB’s Minutes did nothing to change any views, merely confirming that they are preparing further easing for next month, with a growing chance of both an interest rate cut and the restarting of Large Scale Asset Purchases, better known as QE.

Other news of note comes from Djakarta, where Bank Indonesia (BI) surprised one and all and cut 25bps last night. However, the rupiah managed to eke out a small gain on the session as investors and traders seem more focused on the positive growth story, a true rarity these days, than on the interest rate situation. Most analysts are convinced that BI is done cutting unless the global economy really tanks, rather than merely continues its recent slowdown. In China we saw the renminbi soften some 0.3% and fall to levels not seen since 2008 in the onshore market. However, there has been no obvious further deterioration of the trade situation so I don’t anticipate a significant extension unless the PBOC acts more aggressively to ease policy. And arguing in favor of less movement is the fact that the 70th anniversary of the founding of the People’s Republic is coming up on October 1st. Historically, the PBOC will go out of their way to insure financial markets are stable during that celebration and frequently they start the process several months beforehand.

Brexit is the final story that seems to be having an impact as PM Johnson is visiting Paris today after meetings in Berlin yesterday. At this point the EU continues to talk tough, but nothing has changed regarding the desperate need for the EU to prevent a shock to a weakening economy. In fact, the pound is bucking today’s dollar trend, currently trading higher by 0.15%, as traders are beginning to read between the lines and realize that a deal is more likely than currently priced. I maintain that we will see something in October that will avoid a no-deal outcome and the pound will rally sharply as that becomes a reality.

And that’s really all for today. Bloomberg will be interviewing several FOMC members in Jackson Hole, so that should offer some background color, but at this point, it is all about Chairman Powell tomorrow. Until then, tight ranges are the most likely outcome.

Good luck
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They Just Might

This afternoon traders will learn
About how the Fed did discern
A rate cut was right
And how they just might
Keep cutting despite no downturn

As we look forward to the first truly interesting information of the week, this afternoon’s release of the FOMC Minutes from the July meeting, markets have a better attitude this morning than they did yesterday. As has been the case for the past decade, all eyes remain on central bank activity with the Fed in the lead. If you recall, at the July meeting when the Fed cut the Fed funds rate by 25bps, there were two dissenting votes, Boston’s Rosengren and Kansas City’s George. Monday, Eric Rosengren reiterated that he saw no reason to cut rates given the recent economic data and the outlook for continued solid growth. At the same time, yesterday we heard from San Francisco Fed President Mary Daly, a non-voter, that the cut was the right thing to do despite the growth prospects as continued low inflation and the opportunity to improve the labor market further called for more action. Of course, Chairman Powell will be on the wires Friday morning from Jackson Hole and the market is quite anxious to hear what he has to say, but until then, this afternoon’s Minutes are the best thing available for the market to try to discern the FOMC’s overall attitude.

With that as a backdrop, this morning’s market activity can more readily be described as risk-on as opposed to yesterday’s risk-off flavor. At this point, though, all we have seen is a retracement of yesterday’s losses in equities and gains in the bond market. As to the dollar, it is modestly softer this morning, but that too is simply a retracement of yesterday’s price action.

Clearly it has not been the data which is fueling market movements as there was just not much to see overnight. The little bit released showed continued weakness in Japanese consumer activity (Department Store Sales -2.7%) while UK public finances were modestly less worrisome than forecast. But neither one of those was ever going to move the market. Instead the stories that are of most interest have included Germany’s failed 30-year bund auction, where only €824 million of the €2 billion offered were bought. The interesting thing here was that the coupon was set at 0.00% and the yield that cleared was -0.11%. So the question being asked is; have we reached a limit with respect to what bond investors are willing to buy? While I am surprised at the poor outcome, given my view, as well as the growing consensus, that the ECB is going to restart QE next month and absorb up to €50 billion per month of paper, I believe this will be seen as a temporary phenomenon, and that going forward, we will see far more interest at these levels and even lower yields.

On a different note, Brexit has seen a little more headline activity as yesterday German Chancellor Merkel seemed to start the concessionary talk on behalf of the EU by explaining they need “practical solutions” to solve the Irish impasse. As soon as those words hit the tape the pound rebounded sharply from its lows rallying more than a penny and closed higher on the day by 0.3%. However, this morning, Irish Deputy PM Coveney complained that British PM Johnson was trying to ‘steamroll’ Ireland into accepting new terms and that the result of this was a hard Brexit was far more likely. Funnily enough I don’t remember the Irish complaining when the EU was ‘steamrolling’ former PM May into a completely unacceptable deal for the Brits. At any rate, the latest comments have taken a little steam out of the pound’s rally and it has given back yesterday’s gains. In the end though, I think Germany’s word is going to be far more important than Ireland’s and if Johnson and Merkel have a successful discussion today, the Irish are going to have to accept any deal that is brokered. If anything, yesterday’s commentary and price action have simply reinforced my view that the EU will blink and that the pound is destined to trade much higher before the end of the year.

And in truth, away from those stories it is hard to find anything of interest in the G10 space. In the emerging markets, this morning sees strength virtually across the board as risk appetite everywhere improves. ZAR is leading the way, up 1.1% after a better than expected CPI print of just 4.0%, well below the 4.3% market expectation encouraged inflows to the local bond market where 10-year yields have fallen by 10bps this morning (to a still robust 8.96%). But we have also seen a stronger RUB (+0.95%) on firmer oil prices; and KRW (+0.5%), as traders reduce long dollar positions despite weaker than expected trade data, where exports fell a troubling -13.3% in the first 20 days of the month.

It should be no surprise that European equity markets are firm (DAX and FTSE 100 +1.1%) and that US equity futures are firmer as well, with all three indices seeing gains on the order of 0.6%.

Ahead of the Minutes we will see Existing Home Sales (exp 5.39M) but remember this has been the one area of the economy that has suffered recently. Given the continued decline in yields, and correspondingly in mortgage rates, one would think the housing market would stabilize, but we shall see. And then it is a collective breath-holding until 2:00pm when the Minutes come out. Ahead of that I don’t anticipate much movement at all. After that…

Good luck
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Don’t Be a Cheapskate

Said Trump, though the ‘conomy’s great
The Fed needs to still cut its rate
A full point will do
And more QE too
Come on Jay, don’t be a cheapskate!

It appears market participants are a little less upbeat this morning, although overall, there has been limited market movement. Yesterday’s risk-on events saw modest follow through in Asia, but European equity markets have languished while demand for haven bonds and yen has increased. There have been relatively few interesting stories with, arguably, the most noteworthy being President Trump’s call for the Fed to cut rates 100bps and restart QE in order to really supercharge the US economy. While the ongoing pressure continues to weigh on markets in the background, and certainly informs views that the Fed will cut rates further this year, there is no expectation that Mr. Trump’s wishes will be met. Quite frankly, it is hard to even see any market reaction to what he said. My observation is that with respect to interest rates, the president is turning into the boy who cried wolf.

Of more interest to markets, I believe, was an interview with Boston Fed President Eric Rosengren yesterday, where he continued to push back on market expectations regarding any rate cuts in September. If you recall he was one of the two dissents at the July 31st meeting and his views haven’t changed. In essence, he sees the economy performing reasonably well and strongly believes that as long as the data remains solid, cutting rates is not necessary. He dismissed the idea that Fed rate cuts will help the rest of the world, and he highlighted that both employment and inflation are in pretty good places. However, his comments did nothing to change market expectations for the Fed’s next meeting. In fact, this morning there is a 21% probability of a 50bp cut, which is ever so slightly higher than yesterday’s levels, while 25bps remains fully priced.

As to the dollar’s reaction to this, yesterday saw steady dollar strength across the board, and while this morning’s market is slightly more mixed, there is no indication that the dollar is going to fall back anytime soon. I guess if the Fed did listen to the President and cut 100bps next month, the initial dollar reaction would be a sharp sell-off. However, after a while my sense is that market participants might wonder why they changed tack and start to shed risk quickly causing a reversal. In the end, though, I don’t think we need to worry very much about that scenario.

In the G10 space, this morning’s biggest loser is the pound, which has fallen 0.45% and is back below 1.2100 near the lows seen at the beginning of the month. This is a reaction to PM Johnson’s latest move where he sent a letter to the EU explaining that the Irish backstop, as currently configured, remains unacceptable, and that a better strategy would be a legally binding pledge that neither side would impose a hard border going forward while they deal with the trade questions. Of course, the EU rejected this out of hand, but Johnson is headed to Berlin and Paris next week to pick up the conversation. From a political perspective, I would contend that Johnson has far more to lose than the EU, as he has staked his entire PMship on leaving the EU on October 31. In addition, come September, when the ECB meets and puts forward its latest economic forecasts, it will be abundantly clear that Europe is sliding into a recession across the board. There is no way they can afford the hit from Brexit on top of an already very weak economic situation. It is this train of thought that informs my view that the EU is going to blink first and there will be some deal cobbled together to save face. At that time I expect the pound to rally sharply, pretty quickly getting back to the 1.30-1.35 area, but in the meantime, the pound will remain under pressure.

One thing to consider for GBP payables hedgers is that despite the fact that implied volatility remains higher in GBP than other G10 currencies, it is still low on a historic basis, and the skew remains heavily bid for puts, meaning purchased calls can be quite attractive.

Away from those two stories though, there is precious little else to discuss. Much has been made of Germany issuing a new 30-year bund with a 0.00% coupon, but that is more the novelty of the process than anything else. There has been a dearth of economic data to help drive decisions and here in the dog days of August, it appears more people are on holiday than in the office.

A quick look at this morning’s movers shows a very modest risk-off flavor with both JPY and CHF rising 0.2% alongside a modest rally in Treasuries and bunds with both seeing yields lower by 4-5bps. Gold is also stronger this morning, but equity markets are essentially flat, which if there was a true risk-off move, seems out of place.

While the market awaits Chairman Powell’s speech on Friday, I expect that we will continue to chop back and forth. Remember, there is very little new data, and if I am correct about President Trump’s tweets on interest rates losing their impact, ask yourself what else can move things. Arguably, very little. The big picture trend of steady dollar strength remains my base case and will do so until something finally changes.

Good luck
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We’ve Just Begun

This week we’re all waiting for Jay
To finally come out and say
A quarter is done
And we’ve just begun
To cut, lest the world goes astray

After a wild week of trading last week, with significant back and forth in all markets, we are starting this week with a calmer feel. Friday’s rebound has resumed with today’s trading and risk is back in favor. Equity markets were strong in Asia (Nikkei +0.7%, Hang Seng +2.2%, Shanghai +2.1%) and are firmer in Europe as well (DAX +1.0%, CAC +1.0%, FTSE +1.0%). At the same time, government bond yields have rebounded with 10-year Treasuries up 6bps and German bunds +5bps. Gold is softer, as is the yen and the dollar and generally everybody is feeling better.

At this point there seem to be two market drivers of note that are reinvigorating the optimists; a belief that Chairman Powell will be describing further rate cuts (plural) when he opens the Fed symposium in Jackson Hole on Friday, and the news that Germany’s FinMin, Olaf Scholz, has hinted that Germany could produce a stimulus of up to €50 billion if the country slips into recession. This was made all the more important as the Bundesbank this morning warned that after negative growth in Q2, Germany looked like it was going to experience negative growth in Q3 as well, leading to that recession in question. Further pressure in Europe was clear as the final July CPI data was released at just 1.0%, 0.1% lower than the initial estimate and adding to the urgency for the ECB to act aggressively next month. However, despite the prospect of further policy ease by the ECB, the euro has rallied slightly, up 0.1%, on the generally better risk outlook.

While the market’s overall optimism is impressive, it appears to me that faith in central banks’ ability to correct every flaw in the economy is misplaced. If we have learned nothing else during the past decade it is that central bankers are always reactive, never proactive, and that they rely entirely on models which no longer appear to represent even a semblance of economic reality. But rely on them they do, and so as we have seen with leadership throughout history, central banks are fighting the last war, not the current one.

At any rate, there is no reason to believe that they are going to change their collective mindset in the near future, so all we can do is try to anticipate what their actions will be, not what they should be.

With that in mind, the key question this week is; what will Chairman Powell tell us on Friday? Futures markets are currently pricing full certainty of a 25bp rate cut and a 20% probability of a 50bp rate cut at the September meeting. Given the strength of US economic data we have seen lately, (Retail Sales +0.7, both Empire State and Philly Fed stronger than expected) as well as the fact that there were two dissents at the July meeting when they cut rates, that seems a bit aggressive. However, the narrative has evolved into the idea that increased globalization has turned the Fed’s mission into a global role rather than a US focused one, given the likelihood that recession elsewhere in the world will ultimately drag the US down as well. The one thing that is becoming clearer by the day is that the rest of the world is sliding into a recession, which in the new zeitgeist implies that the Fed needs to act.

The follow-on question then becomes, if Powell does sound more dovish, how will markets react? Certainly the initial move will be an equity market rally, and in truth, I expect that we will see bonds rally as well. And the dollar? Well here it gets trickier. On the one hand, a more dovish Fed implies the interest rate premium in the US will shrink and the dollar should slip alongside. However, the flipside is that an equity and bond market rally will continue to draw investment into US securities and drive demand for the dollar, offsetting any losses due to lower yields. As I have consistently maintained throughout the entire cycle, the idea that the dollar will fall if the Fed starts easing aggressively is likely misplaced as they will not be doing so in a vacuum. Rather, if the Fed is cutting, you can be sure that everybody else is doing so as well.

Proof of this has been abundant with the ECB ‘threatening’ powerful and impactful action at the next meeting, the Norgesbank halting their rate hiking cycle and the actions of a half dozen EMG central banks (Mexico, Philippines, India, et al.) cutting rates with more in store. In the end, nothing has occurred to change my view that the dollar trends stronger rather than weaker over time.

Data this week is quite limited with just Housing and the FOMC Minutes which means that Friday’s Powell speech will be that much more impactful.

Wednesday Existing Home Sales 5.39M
  FOMC Minutes  
Thursday Initial Claims 216K
  Leading Indicators 0.2%
Friday New Home Sales 645K

So for now, barring any news on the trade front, which seems to have slipped to the back burner, or Brexit, which is there as well, I expect a generally quiet week with a positive risk vibe and a marginally softer dollar. Anticipation of easier policy from Powell is the latest key for markets, but until we hear directly from him, I expect limited activity overall.

Good luck
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Under Stress

The week that just passed was a mess
With both bulls and bears under stress
As equities fell
Most bonds performed well
And dollars? A roaring success

Pundits have been searching for adjectives to describe the week that is ending today. Tumultuous strikes me as an accurate reflection, but then stormy, tempestuous and volatile all work as well. In the end though, the broad trends have not changed at all. Equities continue to retreat from their mid-summer highs, bonds continue to rally sharply while yield curves around the world flatten and the dollar continues to march higher.

So what is driving all this volatility? It seems the bulk of the blame is laid at the feet of President Trump as his flipping and flopping on trade policy have left investors and traders completely confused. After all, late last week he declared tariffs would be imposed on the rest of Chinese imports not already subject to them, then after market declines he decided that a portion of those tariffs would be delayed from September until December. But then the Chinese struck back saying they would retaliate and now the President has highlighted he will be speaking directly with President Xi quite soon. On the one hand, it is easy to see given the numerous changes in stance, why markets have been so volatile. However, it beggars belief that a complex negotiation like this could possibly be completed on any short timeline, and almost by definition will take many more months, if not years. There is certainly no indication that either side is ready to capitulate on any of the outstanding issues. So the real question is, why are markets responding to every single tweet or comment? To quote William Shakespeare, “It is a tale told by an idiot, full of sound and fury signifying nothing.” Alas, there is every indication that this investor and trader behavior is going to continue for a while yet.

This morning we are back in happy mode, with the idea that the Presidents, Trump and Xi, are going to speak soon deemed a market positive. Equity markets around the world are higher (DAX +1.0%, CAC +1.0%, Nikkei +0.5%); bond markets have been a bit more mixed with Treasuries (+2bps) and Gilts (+4.5bps) selling off a bit but we continue to see Bunds (-1.5bps) rally. In fact we are at new all-time lows for Bund yields with the 10-year now yielding -0.73%!

As to the dollar, it is still in favor, with only the pound showing any real life in the G10 space, having rallied 0.65% this morning with the market continuing to be impressed with yesterday’s Retail Sales data there. In fact, if we look over the past week, the pound is the only G10 currency to outperform the dollar, having rallied more than 1.0%. On the flip side, the Skandies are this week’s biggest losers with both SEK and NOK down by 1.35% closely followed by the euro’s 1.1% decline, of which 0.3% has happened overnight.

The FX market continues to track the newest thoughts regarding relative central bank policy changes and that is clearly driving the euro. For example, yesterday, St Louis Fed President Bullard, likely the most dovish FOMC member (although Kashkari gives him a run), sounded almost reticent to continue cutting rates, and ruled out the idea that an intermeeting cut was necessary. While he supported the July cut, and will likely vote for September, he again ruled out 50bps and didn’t sound like more made sense. At the same time, Finnish central bank president Ollie Rehn, a key ECB member, explained that come September, the ECB would act very aggressively in order to get the most bang for the buck (euro?). The indication was not only will they cut rates, and possibly more than the 10bps expected, but QE would be restarted and expanded, and he did not rule out movement into other products (equities anyone?) as well. In the end, the market sees that the ECB is going to basically do everything else they can right away as they watch the Eurozone economy sink into recession. Meanwhile, most US data continues to point to a much more robust growth situation.

Let’s look at yesterday’s US data where Retail Sales were very strong (0.7%, 1.0% ex autos) and Productivity, Empire Manufacturing and Philly Fed all beat expectations. Of course, confusingly, IP was a weaker than expected -0.2% and Capacity Utilization fell to 77.5%. Adding to the overall confusion is this morning’s Housing data where Starts fell to 1191K although Permits rose to 1336K. In the end, there is more data that is better than worse which helps explain the 2.1% growth trajectory in the US, which compares quite favorably with the 0.8% GDP trajectory on the continent. As long as this remains the case, look for the dollar to continue to outperform.

Oh and one more thing, given the problems in the Eurozone, do you really believe the EU will sit by and watch the UK exit without changing their tune? Me either!

Next week brings the Fed’s Jackson Hole symposium and key speeches, notably by Chairman Powell. As to today, there is no reason to expect the dollar to do anything but continue its gradual appreciation.

Good luck and good weekend
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Up Sh*t’s Creek

Much time has progressed
Since last I manned a bank desk
But I have returned

Good morning all. Briefly I wanted to let you know that I have begun a new role at Sumitomo Mitsui Banking Corp. (SMBC) as of Monday morning and look forward to rekindling so many wonderful relationships while trying to assist in risk management in an increasingly uncertain world. Don’t hesitate to reach out to chat.

Said Trump well those tariffs can wait
Until it’s a much later date
That opened the door
To buy stocks and more
Now don’t you all feel simply great?

But trade is still problematique
And that’s why the view is so bleak
In Europe they’re shrinking
And China is sinking
It seems the world’s now up sh*t’s creek

Volatility continues to reign in markets as the combination of trade commentary and economic data force constant u-turns by traders and investors. Yesterday afternoon, President Trump decided to delay the imposition of tariffs on the remaining Chinese exports from the mooted September 1st start to a date in mid-December. While that hardly seems enough time to conclude any negotiations, the market reaction was swift and yesterday morning’s risk-off session was completely reversed. Stocks turned around and closed more than 1% higher. Treasuries sold off with yields jumping 5bps in the 10-year and the dollar reversed course with USDJPY rocking 1.5% higher while USDCNY tumbled more than 1%. But that was then…

The world looks less sanguine this morning, however, after data releases last night and this morning showed that the fears over a slowing global economy are well warranted. For instance, Chinese data was uniformly awful with Industrial Production falling to 4.8% growth in July, well below the 6.0% estimate and the slowest growth since they began producing data 17 years ago. Retail Sales were also much weaker than expected, rising 7.6% Y/Y in July vs. expectations of an 8.6% rise. If there were any questions as to whether or not the trade war is impacting China, they were answered emphatically last night…YES.

Then early this morning Germany released its Q2 GDP data at -0.1%, as expected but the second quarter of the past four where the economy has shrunk. Additional Eurozone data showed IP there falling -1.6%, its worst showing since February 2016. Meanwhile, inflation data continues to show a complete lack of price pressure and Eurozone Q2 GDP grew just 0.2%, also as expected but also awful. It should be no surprise that this has led to another reversal in investor psychology as the hopes engendered in the Trump comments yesterday has completely evaporated.

I would be remiss if I didn’t mention that the 2yr-10yr Treasury spread actually inverted this morning for the first time, although it had come close several times during the past months. But not only did the Treasury curve invert there, so did Gilts in the UK and we are seeing the same thing in Japan. At the same time, Bunds have fallen to yet another new low in the 10-year, trading at a yield of -0.645% as I type. The upshot is that combined with the weak economic data, the inverted yield curves have historically implied a recession was on the way. While there are those who are convinced ‘this time is different’ because of how central banks have impacted yield curves with their QE, it is all still pointing down to me.

With all that in mind, let’s take a look at markets this morning. Overnight we have seen a mixed picture in the FX market, with the yen retracing some of yesterday’s weakness, rallying 0.7%, while Aussie and the Skandies have led to the downside with all three falling 0.7% or so. As to the euro and the pound, neither has moved at all overnight. But I think it is instructive to look at the two day move, given the volatility we have seen and over that timeline, the dollar has simply rallied against the entire G10 space. Granted vs. the pound it has been a deminimis 0.1%, but CHF, EUR and CAD are all lower by 0.3% since Monday and the yen is still weaker by 0.6% snice Monday.

In the EMG space, KRW was the big winner overnight, rallying 0.8% after the tariff delay, and we also saw IDR benefit by 0.5%. CNY, meanwhile, was fixed slightly stronger and the offshore currency has held onto that strength, rising 0.35%. On the downside, ZAR is the big loser overnight, falling 1.0% as foreign investors are selling South African bonds ahead of a feared ratings downgrade into junk. We have also seen MXN retrace half of yesterday’s post trade story gain, falling 0.65% at this time.

Looking ahead to this morning’s session, there is little in the way of data that is likely to drive markets so we should continue to see sentiment as the key market mover. Right now, sentiment is not very positive so I expect risk to be jettisoned as can be seen in the equity futures with all down solidly so far. As to the dollar, I like it vs. the EMG bloc, maybe a little less vs. the G10.

Good luck
Adf