In Europe, the ‘conomy’s woes
Continue while some juxtapose
Their weak PMIs
With US’s rise
Expecting the buck, higher, goes
 
Meanwhile, out of China we learned
The government there is concerned
Again, they cut rates
Which just illustrates
Their efforts, thus far, have been spurned

 

As we start a new week leading into month and quarter end, the market dialog continues to be about whether a recession is imminent or has been avoided completely.  As we have seen during the past months, it remains easy to choose the data that supports your view, in either direction, and make your case.  Ultimately, my take on that is very few opinions have been changed because as soon as one positive (negative) data point is printed, the opposite arrives within 24 hours.

However, let’s look at what we learned overnight.  The first story is that the PBOC cut their 14-day reverse repo rate by 10bps, another sign that the government there recognizes things are not really up to snuff.  In fact, most pundits were surprised that they didn’t cut the loan prime rates in the wake of the Fed’s rate cut last week.  Overall, this action is not that surprising, and most analysts are anticipating further rate cuts going forward, likely following the Fed lower every step of the way.  Perhaps the best indicator that more policy ease is coming is the fact that the yield on longer-term Chinese government debt has fallen to record lows (30-year at 2.15%, 10-year at 2.045%).

While the CSI 300 (+0.35%) did finally manage a bounce in the wake of the rate cut, perhaps there is no better picture of the situation in China than the chart of that stock index, which has been falling steadily since 2021.  I realize that the stock market is not the economy, especially in a command economy like China’s, but it appears quite clear that the many problems that have manifest themselves in China as the property bubble continues to unwind have been reflected in investor appetite, or lack thereof, to own potential future growth on the mainland.  The below chart speaks volumes I believe.  It ought to be no surprise that the renminbi (-0.25%) suffered a bit after the rate cut as well.

Source: tradingeconomics.com

As to the other noteworthy story, the Flash PMI data out of Europe was, in a word, dreadful.  Both manufacturing and services readings were below last month’s readings and below forecasts as the European growth story continues to suffer.  Given Europe’s reliance on imported energy overall, the recent rebound in oil and product prices are clearly impacting the economies there.  As well, there appears to be a growing divergence of opinion as to how different nations in the Eurozone want to move forward.  

For instance, this weekend’s elections in the German state of Brandenburg once again saw AfD make huge strides and massively complicate the coalition math, the third state to have that outcome this month.  As well, one of the keys to European convergence is the Schengen Agreement which allows for open borders within the EU.  However, the immigration situation there has now resulted in several nations closing their borders, not merely with the outside world, but internally as well as they try to cope with the massive influx of immigrants and asylum seekers that have been coming to the continent.  My point is if nations cannot agree on critical policies of this nature, it will become that much more difficult to arrive at common economic policies that are universally accepted.

Remember, last week Mario “whatever it takes” Draghi released his report on how the Eurozone could improve things with suggestions including more Eurozone debt (as opposed to individual national debt) and more government focused investment in areas where Europe lags, notably technology.  I guess the first step to correcting a problem is recognizing it exists, so credit is due that the Eurozone leadership has figured out things aren’t great for their citizens.  Alas, I fear Signor Draghi’s prescriptions, if enacted, are unlikely to solve many problems.

But that’s really all we have from the weekend, so let’s see how markets fared ahead of the US open.  Japan was closed for Vernal Equinox Day, a delightfully quaint holiday, while we’ve already discussed the mainland. The rest of Asia was generally positive, although Australian shares slid from recent all-time highs as investors await the RBA rate tonight with no change expected.  In Europe, it is a mixed picture, which given the PMI data, is better than I would have expected.  In fact, Germany (+0.5%) is the leading gainer there, although I cannot figure out any sensible catalyst driving that move.  The rest of the continent is +/-0.2%, so nothing really to note.  As to US futures, overall, they are slightly firmer at this hour (7:00), maybe 0.15%.

In the bond market, Treasury yields have edged higher by 1bp, continuing their rise from last week just ahead of the FOMC decision and now 13bps off the lows.  My sense is that yields will continue to slowly grind higher as a more aggressive Fed will open the door for a rebound in inflation.  As to European sovereigns, all are seeing yields slide between 2bps and 4bps this morning as it becomes clearer that the growth situation there is fading.

Oil prices (+0.3%) continue their slow rebound from the lows seen two weeks ago, although this looks much more like market internals and positioning than fundamental news.  Some claim that the escalation between Israel and Hezbollah is behind this, but given how little the market has seemed to care about the entire situation there for the past year, virtually, that doesn’t make much sense to me.  As to the metals markets, gold is unchanged this morning, sitting on its new all-time high although we have seen a retracement in both silver (-1.7%) and copper (-0.7%), though both remain in uptrends for now.

Finally, the dollar is mixed this morning with the euro (-0.4%) feeling the weight of the lousy PMI data but the commodity bloc mostly performing well (AUD +0.3%, NZD +0.25%, CAD +0.2%).  One exception here is NOK (-0.3%) and we are seeing far more weakness in EMG currencies as well (PLN -0.6%, HUF -0.9%, MXN -0.4%, KRW -0.5%).  The outlier here is ZAR (+0.25%) where investors are becoming increasingly comfortable with the pro-business attitude of the recently elected government and inward investment continues to grow.

On the data front this week, there is plenty as well as a number of Fed speakers

Today	Chicago Fed Nat’l Activity	-0.6
	Flash Manufacturing PMI	48.5
	Flash Services PMI	55.3
Tuesday	Case-Shiller Home Prices	5.8%
	Consumer Confidence	103.8
Wednesday	New Home Sales	700K
Thursday	Initial Claims	225K
	Continuing Claims	1832K
	Durable Goods	-2.6%
	-ex Transport	0.1%
	Q2 GDP	3.0%
	GDP Final Sales	2.2%
Friday	Personal Income	0.4%
	Personal Spending	0.3%
	PCE	0.1% (2.3% Y/Y)
	Core PCE	0.2% (2.7% Y/Y)
	Michigan Sentiment	69.3

Source: tradingeconomics.com

Given the Fed’s pivot to employment from inflation, I suspect there will be a lot of scrutiny on the Claims data, especially since last week’s numbers were so surprisingly low.  If the labor market is behaving better, the need for rate cuts diminishes.  In addition to the data, we also hear from 7 Fed speakers including Chairman Powell Thursday morning.  As well, Treasury Secretary Yellen speaks on Thursday, no doubt to explain how great a job she has done.

Summing it all up, we continue to see signs of weakness elsewhere in the world while thus far, the headline data in the US continues to hold up reasonably well.  While I have consistently explained that as the Fed starts cutting rates, the dollar would suffer, the decline may be quite gradual if the rest of the world is in worse shape than the US.

Good luck

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