In China they’ve reached a crossroad
As growth has decidedly slowed
The knock-on effects
Are not too complex
Watch markets, emerging, erode

Once again, the overnight data has disappointed with signs of further slowing in the global economy rampant. The headline was in China, where their big three data points; Fixed Asset Investment (5.2%), Industrial Production (4.7%) and Retail Sales (7.2%) all missed expectations badly. In fact, all of these are at or near historic low levels. But it was not just the Chinese who exposed economic malaise. Japanese GDP printed at just 0.2% in Q3, well below the expected 0.9% outcome. And how about Unemployment in Australia, which ticked higher to 5.3%, adding to concern over the economy Down Under and driving an increase in bets that the RBA will cut rates again next month. In fact, throughout Asia, all the data was worse than expected and that has had a negative impact on equity markets as well as most commodity markets.

Of course, adding to the economic concern are the ongoing protests in Hong Kong, which seemed to take a giant step forward (backward?) with more injuries, more disruption and the resulting closure of schools and work districts. Rumors of a curfew, or even intervention by China’s armed forces are just adding to the worries. It should be no surprise that we have seen a risk off attitude in these markets as equity prices fell (Nikkei -0.75%, Hang Seng -0.95%) while bonds rallied (Treasuries -5bps, JGB’s -3bps, Australian Treasuries -10bps), and currencies performed as expected with AUD -0.75% and JPY +0.3%. Classic risk-off.

Turning to Europe, Germany managed to avoid a technical recession, surprising one and all by releasing Q3 GDP at +0.1% although they did revise Q2 lower to -0.2%. While that is arguably good news, 0.4% annual growth in Germany is not nearly enough to support the Eurozone economy overall. And the bigger concern is that the ongoing manufacturing slump, which shows, at best, slight signs of stabilizing, but no signs of rebounding, will start to ooze into the rest of the data picture, weakening domestic activity throughout Germany and by extension throughout the entire continent.

The UK did nothing to help the situation with Retail Sales falling 0.3%, well below the expected 0.2% rise. It seems that the ongoing Brexit saga and upcoming election continue to weigh on the UK economy at this point. While none of this has helped the pound much, it is lower by 0.1% as I type, it has not had much impact overall. At this point, the election outcome remains the dominant story there. Along those lines, Nigel Farage has disappointed Boris by saying his Brexit party candidates will stand in all constituencies that are currently held by Labour. The problem for Boris is that this could well split the Tory vote and allow Labour to retain those seats even if a majority of voters are looking for Brexit to be completed. We are still four weeks away from the election, and the polls still give Boris a solid lead, 40% to 29% over Labour, but a great deal can happen between now and then. In other words, while I still expect a Tory victory and Parliament to pass the renegotiated Brexit deal, it is not a slam dunk.

Finally, it would not be appropriate to ignore Chairman Powell, who yesterday testified to a joint committee of Congress about the economy and the current Fed stance. It cannot be a surprise that he repeated the recent Fed mantra of; the economy is in a good place, monetary policy is appropriate, and if things change the Fed will do everything in its power to support the ongoing expansion. He paid lip service to the worries over the trade talks and Brexit and global unrest, but basically, he spent a lot of time patting himself on the back. At this point, the market has completely removed any expectations for a rate cut in December, and, in fact, based on the Fed funds futures market, there isn’t even a 50% probability of a cut priced in before next June.

The interesting thing about the fact that the Fed is clearly on hold for the time being is the coincident fact that the equity markets in the US continue to trade at or near record highs. Given the fact that earnings data has been flattish at best, there seems to be a disconnect between pricing in equity markets and in interest rate markets. While I am not forecasting an equity correction imminently, at some point those two markets need to resolve their differences. Beware.

Yesterday’s CPI data was interesting as core was softer than expected at 2.3% on the back of reduced rent rises, while headline responded to higher oil prices last month and was higher than expected at 1.8%. As to this morning, PPI (exp 0.3%, 0.2% core) and Initial Claims (215K) is all we get, neither of which should move the needle. Meanwhile, Chairman Powell testifies to the House Budget Committee and seven more Fed speakers will be at a microphone as well. But given all we have heard, it beggar’s belief any of them will change from the current tune of everything is good and policy is in the right place.

As to the dollar, it is marginally higher overall this morning, and has been trading that way for the past several sessions but shows no signs of breaking out. Instead, I expect that we will continue to push toward the top end of its recent trading range, and stall lacking impetus for the next leg in its movement. For that, we will need either a breakthrough or breakdown in the trade situation, or a sudden change in the data story. As long as things continue to show decent US economic activity, the dollar seems likely to continue its slow grind higher.

Good luck
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