Continue Restrained

Come autumn and next Halloween
The UK may finally wean
Itself from the bloc
To break the deadlock
But Parliament still must agree(n)

Meanwhile Signor Draghi explained
That growth would continue restrained
And Fed Minutes noted
That everyone voted
For policy to be maintained

There has been fresh news on each of the main market drivers in the past twenty-four hours, and yet, none of it has been sufficient to change the market’s near-term outlook, nor FX prices, by very much.

Leading with Brexit, there was a wholly unsatisfying outcome for everyone, in other words, a true compromise. PM May was seeking a June 30 deadline, while most of the rest of the EU wanted a much longer delay, between nine months and a year. However, French President Emanuel Macron argued vociferously for a short delay, actually agreeing with May, and in the end, Halloween has a new reason to be scary this year. Of course, nothing has really changed yet. May will still try to get her deal approved (ain’t happening); Euroskeptic Tories will still try to oust her (possible, but not soon) and Labour will push for new elections (also possible, but not that likely). The topic of a second referendum will be heard frequently, but as of right now, PM May has been adamant that none will not take place. So, uncertainty will continue to be the main feature of the UK economy. Q1 GDP looks set to be stronger than initially expected, but that is entirely due to stockpiling of inventory by companies trying to prepare for a hard Brexit outcome. At some point, this will reverse with a corresponding negative impact on the data. And the pound? Still between 1.30 and 1.31 and not looking like it is heading anywhere in the near future.

On to the ECB, where policy was left unchanged, as universally expected, and Signor Draghi remarked that risks to the economy continue to be to the downside. Other things we learned were that the TLTRO’s, when they come later this year, are pretty much the last arrow in the policy quiver. Right now, there is no appetite to reduce rates further, and more QE will require the ECB to revise their internal guidelines as to the nature of the program. The issue with the latter is that EU law prevents monetization of government debt, and yet if the ECB starts buying more government bonds, it will certainly appear that is what they are doing. This morning’s inflation data from France and Germany showed that there is still no inflationary impulse in the two largest economies there, and by extension, throughout the Eurozone.

At this point, ECB guidance explains rates will remain on hold through the end of 2019. My view is it will be far longer before rates rise in the Eurozone, until well into the recovery from the next recession. My forecast is negative euro rates until 2024. You read it here first! And the euro? Well, in its own right there is no reason to buy the single currency. As long as the US economic outlook remains better than that of the Eurozone, which is certainly the current case, the idea that the euro will rally in any meaningful way seems misguided. Overnight there has been little movement, and in fact, the euro has been trading between 1.12 and 1.1350 for the past three weeks and is currently right in the middle of that range. Don’t look for a break soon here either.

The FOMC Minutes taught us that the Fed is going to be on hold for quite a while. The unanimous view is that patience remains a virtue when it comes to rate moves. Confusion still exists as to how unemployment can be so low while inflation shows no signs of rising, continuing to call into question their Phillips Curve models. In fact, yesterday morning’s CPI showed that core inflation fell to 2.0% annually, a tick lower than expected and continuing to confound all their views. The point is that if there is no inflationary pressure, there is no reason to raise rates. At the same time, if US economic growth continues to outpace the rest of the world, there is no reason to cut rates. You can see why the market is coming round to the idea that nothing is going to happen on the interest rate front for the rest of 2019. Futures, which had priced in almost 40bps of rate cuts just last month, are now pricing in just 10bps (40% chance of one cut). Despite the ongoing rhetoric from President Trump regarding cutting rates and restarting QE, neither seems remotely likely at this juncture. And don’t expect either of his Fed nominees to be approved.

Finally, Treasury Secretary Mnuchin declared that the US and China have agreed a framework for enforcement of the trade agreement, with both nations to set up an office specifically designed for the purpose and a regular schedule of meetings to remain in touch over any issues that arise. But Robert Lighthizer, the Trade Representative has not commented, nor have the Chinese, so it still seems a bit uncertain. Enforcement is a key issue that has been unsolved until now, although IP protection and state subsidies remain on the table still. Interestingly, equity markets essentially ignored this ‘good’ news, which implies that a completed deal is already priced into the market. In fact, I would be far more concerned over a ‘sell the news’ outcome if/when a trade deal is announced. And of course, if talks break off, you can be certain equity prices will adjust accordingly.

This morning brings Initial Claims (exp 211K) and PPI (1.9%, 2.4% ex food & energy) and speeches from Clarida, Williams, Bullard and Bowman. But what are they going to say that is new? Nothing. Each will reiterate that the economy is doing well, still marginally above trend growth, and that monetary policy is appropriate. In the end, the market continues to wait for the next catalyst. In equities, Q1 earnings are going to start to be released this afternoon and by next week, it will be an onslaught. Arguably, that will drive equities which may yet impact the dollar depending on whether the earnings data alters overall economic views. In the meantime, range trading remains the best bet in FX.

Good luck
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A One-Year Delay

Prime Minister May wanted weeks
The EU, however, now seeks
A one-year delay
Which for PM May
Means Tories will up their critiques

Today brings two important decisions from Europe. First and foremost is the EU Council meeting called to discuss Brexit and determine how long a delay will be granted to the UK to make up their mind. (Hint: it doesn’t seem to matter, there is no clear preference for any decision!) Secondly, the ECB meets a day earlier than usual and will announce its policy decisions (there will be no changes) and at 8:30 Signor Draghi will face the press. The reason they are meeting early is so they can get to Washington for the annual IMF/World Bank meetings.

As to the first, PM May has asked for an extension to June 30, as she continues to try to force her deal down Parliament’s collective throat. However, given how unsuccessful she has been in this process, it seems more likely that the EU is going to force the UK to take a nine-month or one-year extension. In their view, this will allow the political process to play out with either a new referendum or a new election or both, but with some type of mandate finally achieved. Naturally, the hard-core Brexiteers are horrified at this outcome because the thought is that a new vote would result in canceling Brexit. This would not be the first time that a referendum in the EU went badly and was subsequently rerun in order to get the leadership’s desired outcome. Both the French and the Dutch rejected the EU Constitution in 2005 initially, but subsequently reversed the initial vote while the Danes rejected the Maastricht Treaty in 1992 but also voted a second time to approve it. So this would hardly be unprecedented.

The problem for the UK is that the only thing they have agreed on, and just barely, is that they don’t want to leave without a deal. However, if anything, there has been increased rancor amongst the MP’s and there is no clear view on how to proceed. Actually, I guess the other thing Parliament has agreed on is they HATE PM May’s negotiated deal! Meanwhile, UK data this morning was surprisingly robust with IP jumping 0.6% and GDP in February rising at a 2.0% annualized clip, both data points being far better than expected. And the pound has benefitted rising 0.2% this morning, although it still remains mired between 1.30 and 1.31with little prospect of moving until something new happens in the Brexit saga.

On to the ECB, which is still struggling to stimulate the Eurozone economy. In fact, yesterday, the IMF announced reduced forecasts for 2019 GDP growth globally, taking their expected rate down to 3.3% with Europe being one of the key weak spots. The IMF’s 2019 projection is down to 1.3% for the Eurozone, from their previous forecast of 1.5%.

It is this situation that Signor Draghi is trying desperately to address but has so far been largely unsuccessful. It seems clear that the ECB will not countenance a move to further negativity in interest rates, and the TLTRO announcement from last month has faded from view. At this point, the only thing they can do would be reopen QE, but I don’t think that is yet likely. However, do not be surprised if we continue to see the growth trajectory slow in the Eurozone, that the ECB does just that.

On that subject, it may be time to question just how much worse things are going to get in the global economy. After all, one of the key issues has been Brexit, which at this point looks like it will be delayed for a long time at the very least. As well, we continue to hear that the trade talks between the US and China are making progress, so if there is a successful conclusion there, that would be another positive for global growth. With the IMF (a frequent negative indicator) sounding increasing warnings, and some stirrings of better data (not only the UK, but Italian IP surprised on the high side today rising 0.8% in February, compared to expectations of a -0.8% outcome), and last week’s slightly better than expected Chinese PMI data, perhaps the worst is behind us. Of course, counter to that view is the global bond market which continues to price in further economic weakness based on the increased number of bonds with negative yields as well as the ongoing lethargy in US rates. It is easy to become extremely pessimistic as global policymakers have not shown great command, but this view cannot be ignored.

Overall, the dollar is slightly softer this morning, down 0.15% vs. the euro and 0.35% vs. AUD (RBA Governor DeBelle sounded slightly less dovish in a speech last night) as well as lesser amounts vs. other currencies. We are seeing similar magnitude gains in many EMG currencies, but overall, the pattern seems to be that the dollar softens overnight and regains its footing in the US session.

This morning brings CPI data (exp 1.8% and 2.1% ex food & energy) and then the FOMC Minutes from March are released at 2:00. We also hear from Randall Quarles, although, as I continue to say, at this point, there seems little likelihood of a change in view by any of the FOMC’s members. I see no reason for the recent pattern to change, so expect that the dollar will stabilize, and likely rebound slightly as the day progresses. But despite the EU meeting and the ECB meeting, it seems unlikely there will be much new information to change anybody’s view when the bell rings this afternoon.

Good luck
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Much Darker Moods

Five decades of trade under GATT
Resulted in policies that
Increased global trade
While tariffs did fade
And taught us the term, technocrat

Then followed the WTO
And new rules that they did bestow
The Chinese then joined
(And some say purloined)
Much IP which helped them to grow

But in the past year attitudes
Have shifted to much darker moods
So trade growth is slowing
As nations are showing
A willingness to stir up feuds

It seemed that half the stories in the press today were regarding trade issues around the world, notably the ongoing US-China trade talks, but also the struggle for the EU and China to put together a communique after a locally hyped trade summit between the two. Shockingly the EU is also unhappy with Chinese IP theft and their subsidies for state-owned companies that compete with European companies. Who would have thunk it? But in their ongoing efforts to maintain the overall world trade order, they found some things on which they could agree in order to prevent the meeting from becoming a complete fiasco.

In addition, today we hear from the IMF with their latest global economic updates that are widely touted to have an even more pessimistic view than the last one which, if you recall, produced substantial downgrades in economic growth forecasts. IMF Managing Director Christine LaGarde has been quite vocal lately about how all the trade spats are slowing global growth and she continues to exhort everyone to simply get back to the old ways. Alas, the trade toothpaste is out of the tube and there is no putting it back. It will likely be several more years before new deals are inked and the new trading framework fleshed out. In the meantime, expect to see periodic, if not frequent, discussions on the benefits of free trade and the good old days.

The question remains, however, if the good old days was really ‘free’ trade. Arguably, the fact that there are now so many ongoing trade issues globally is indicative of the fact that, perhaps, freedom was in the eye of the beholder. And those voters who saw their jobs disappear due to the ‘benefits’ of free trade, have clearly become a lot more vocal. Like virtually everything else in life, the case can be made that trade sentiment is cyclical, and there is a strong argument that we have seen peak trade for this cycle. The reason this matters for the FX market is that restrictions on trade will result in changing fortunes for economies and changing flows in currencies. It is still far too early to ascertain the direct impact on many currencies, although given the increasing probability that this will reduce risk appetite, it would be fair to assume the yen and dollar will be beneficiaries over time.

The Brexit saga, meanwhile, continues to rush toward the new deadline this Friday without any resolution in sight. Not surprisingly, trade plays a big role in this process, as the ability to negotiate new trade deals for the UK was a key selling point in the vote to leave. While PM May’s minions continue to have discussions with Labour to find some kind of compromise, they have thus far come up short. At the same time May is heading to Brussels to meet with Frau Merkel and Monsieur Macron in an effort to find some support for her request for another extension to June 30. At the same time, the Euroskeptics in her Tory party back home are trying to figure out how to oust her from Number 10 Downing Street, although, like the Brexit process, they have been unable to arrive at a coherent solution. With all this drama ongoing, and the emergency EU summit scheduled for tomorrow, the pound continues to hover around the 1.30 level. The one notable thing about the pound has been the reduction in market liquidity as fewer and fewer traders are willing to run positions with the potential for a bombshell announcement at any time. And seriously, who can blame them? The situation remains the same here where clarity in either direction will result in a sharp movement, but until then, flat is the best way to be!

Overall the dollar is under modest pressure this morning (EUR +0.15%, JPY +0.15%, CAD +0.2%), and in truth was in similar shape yesterday. The thing is, the magnitude of the movement has been so limited, I am reluctant to give it any credence with regard to a trend. In fact, since the dollar’s rally peaked last summer, we have been essentially trendless. I expect that this will remain the case until one of the big stories we have been following; trade, Brexit or central banking, has a more distinctive outcome than the ongoing uncertainty we have seen lately. Well, I guess that’s not completely correct, the central bank story has been one of universal dovishness, but the result is that no currency benefits at the expense of any other.

Turning to the data this week, prices are the focus with CPI tomorrow, and we also see the FOMC Minutes and hear from the ECB. And boy, do we have a lot of Fed speakers this week!

Today NFIB Small Biz Optimism 101.8 (released)
  JOLTs Job Report 7.55M
Wednesday CPI 0.3% (1.8% Y/Y)
  -ex food & energy 0.2% (2.1% Y/Y)
  FOMC Minutes  
Thursday ECB Rate Decision -0.4% (unchanged)
  Initial Claims 211K
  PPI 0.3% (1.9% Y/Y)
  -ex food & energy 0.2% (2.4% Y/Y)
Friday Michigan Sentiment 98.0

We have nine Fed speeches including Chairman Powell three separate times although there is absolutely no indication that any views are changing within the Mariner Eccles Building. However, with the increasing drumbeat of pressure from the White House for the Fed to ease policy further and restart QE, it will be very interesting to see how Powell responds. While early indications were that he seemed impervious to that pressure, these days, that doesn’t seem to be the case.

Ultimately, there is no reason to believe that the FX market, or frankly any market, is going to see much movement today given the lack of new catalysts. As I wrote above, we need a resolution to shake things up, and right now, those are in short supply.

Good luck
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Preventing a Crash

How long can the world’s central banks

Keep garnering government thanks

For printing the cash

Preventing a crash

While policy choices shoot blanks

Hyper short note today as I am in transit.

In a nutshell there is no further clarity on Brexit as Labour and the Tories have yet to sit down and speak at length. The only vote that Parliament has passed was to prevent a hard Brexit. But they still have no idea what to do as an alternative other than the much reviled May plan.

Trade talks continue with no notable progress as the Chinese remain unwilling to accept a one-sided deal, but the US remains highly concerned over the Chinese willingness to comply with all the features that are in any deal. Maybe soon, maybe not.

Meanwhile, though equity markets are a touch softer this morning, virtually every weekend story was about how the central banks’ new collective dovishness should continue to support stock prices forever, or at least until 2020 or 2021 or longer.

And the dollar, while slightly softer remains at the top end of its range with no good reason to sell off.

At some point I assure you that the market will begin to ignore the latest round of central bank anesthesia, but not today.

It looks like a quiet session shaping up for today. Frankly I expect that Wednesday is the next time we will see some activity between the EU meeting and the FOMC Minutes.

Good luck

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Fleeing the Scene

The latest news from the UK
Is that they have sought a delay
Til midsummer’s eve
When, they now believe,
They’ll duly have something to say

But Europe seems not quite so keen
To grant that stay when they convene
It should be a year
Unless it’s quite clear
The UK is fleeing the scene

Despite the fact it is payroll day here in the US, there are still two stories that continue to garner the bulk of the attention, Brexit and trade with China. In the former, this morning PM May sent a letter to the EU requesting a delay until June 30, which seems to ignore all the points that have been made about a delay up until now. With European elections due May 23, the EU wants the UK out by then, or in for a much longer time, as the idea that the UK will vote in EU elections then leave a month later is anathema. But May seems to believe that now that she is in discussions with opposition leader Jeremy Corbyn, a solution will soon be found and the Parliament will pass her much reviled deal with tweaks to the political codicil about the future. The other idea is a one-year delay that will give the UK time to hold another referendum and get it right this time determine if it is still the people’s will to follow through with Brexit given what is now generally believed about the economic consequences. The PM is due to present a plan of some sort on Wednesday to an emergency meeting of the EU, after which time the EU will vote on whether to grant a delay, and how long it will be. More uncertainty has left markets in the same place they have been for the past several months, stuck between the terror of a hard Brexit and the euphoria of no Brexit. It should be no surprise the pound is little changed today at 1.3065. Until it becomes clear as to the outcome, it is hard to see a reason for the pound to move more than 1% in either direction.

Regarding the trade story, what I read as mixed messages from the White House and Beijing has naturally been construed positively by the market. Both sides claim that progress is being made, but the key sticking points remain IP integrity, timing on the removal of tariffs by the US, and the ability of unilateral retaliation by the US in the event that China doesn’t live up to the terms of the deal. The latest thought is it will take another four to six weeks to come to terms on a deal. We shall see. The one thing we have learned is that the equity markets continue to see this as crucial to future economic growth, and rally on every piece of ‘good’ news. It seems to me that at some point, a successful deal will be fully priced in, which means that we are clearly setting up a ‘buy the rumor, sell the news’ type of dynamic going forward. In other words, look for a positive announcement to result in a short pop higher in equity prices, and then a lot of profit taking and a pretty good decline. The thing is, since we have no real idea on the timing, nor where the market will be when things are announced, it doesn’t help much right now in asset allocation.

As a side note, I did read a commentary that made an interesting point about these negotiations. If you consider communism’s tenets, a key one is that there is no such thing as private property. So, the idea that China will agree to the protection of private property when it contradicts the Chinese fundamental ruling dicta may be a bit of a stretch. Maybe they will, but that could be quite a hurdle to overcome there. Food for thought.

Now, on to payrolls. Here are the latest consensus forecasts:

Nonfarm Payrolls 180K
Private Payrolls 170K
Manufacturing Payrolls 10K
Unemployment Rate 3.8%
Average Hourly Earnings 0.3% (3.4% Y/Y)
Average Weekly Hours 34.5

A little worryingly, the ADP number on Wednesday was weaker than expected, but the month-by-month relationship between the two is not as close as you might think. Based on what we have heard from Fed speakers just yesterday (Harker, Mester and Williams), the FOMC believes that their current stance of waiting and watching continues to be appropriate. They are looking for a data trend that either informs coming weakness or coming strength and will respond accordingly. To a wo(man), however, these three all believe that the economy will have a solid performance this year, with GDP at or slightly above 2.0%, and that it is very premature to consider rate cuts, despite what the market is pricing.

Meanwhile, the data story from elsewhere continues to drift in a negative direction with Industrial Production falling throughout Europe, UK House Prices declining and UK productivity turning negative. In fact, the Italian government is revising its forecast for GDP growth in 2019 to be 0.1% all year and all eyes are on the IMF’s updated projections due next week, which are touted to fall even further.

In the end, the big picture remains largely unchanged. Uncertainty over Brexit and trade continue to weigh on business decisions and growth data continues to suffer. The one truism is that central bankers are watching this and the only difference in views is regarding how quickly they may need to ease policy further, except for the Fed, which remains convinced that the status quo is proper policy. As I continuously point out, this dichotomy remains in the dollar’s favor, and until it changes, my views will remain that the dollar should benefit going forward.

Good luck
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Still Some Doubt

One vote from six hundred is all
That set apart sides in this brawl
So hard Brexit’s out
But there’s still some doubt
That hard Brexit they can forestall

Well, Parliament finally found a majority yesterday regarding Brexit. In a cross-party vote, by 313-312, Parliament voted to not leave the EU without a deal in hand. While they still hate the deal on the table, there are now discussions between PM May and opposition Labour leader Corbyn as to how they can proceed. There is lots of talk of a customs union solution, which would essentially prevent the UK from making trade deals on its own, one of the key benefits originally touted by the pro Brexit crowd. But time is still running out with PM may slated to speak to the EU next Wednesday and explain why the UK should be granted another delay. Remember, it requires a unanimous vote of the other 27 members to grant that delay.

Another interesting tidbit is that the UK government has 10,000 police on standby for potential riots this weekend as there is some talk that Parliament may simply cancel Brexit completely. You may recall that late last year, the European Court of Justice ruled that the UK could do that unilaterally, and so that remains one option. This follows from the train of thought that now that the law states they cannot leave the EU without a deal, if there is no deal to which they can agree, then not leaving is the only other choice. Arguably, the most interesting thing about this has been the market’s reaction. The pound is actually a touch softer this morning, by just 0.1%, but that was after a very modest 0.2% rally yesterday. It continues to trade just north of 1.30 and market participants are clearly not yet convinced that a solution is at hand. If that were the case, I would expect the pound to have rallied much more significantly. If Brexit is canceled, look for a move toward 1.38-1.40 initially. The thing is, it is not clear that it will maintain those levels given the ongoing economic malaise. Ultimately, if we remove Brexit from the calculations, the pound is simply another currency that needs to compare its economic fundamentals to those in the US and will be found wanting in that category as well. I expect a slow drift lower after an initial jump.

Turning to the US-China trade discussions, today Chinese vice-premier Liu He is scheduled to meet with President Trump, a sign many believe means that a deal is quite near. From the information available, it seems that the sticking points continue to be tariff related, with the US insisting that the current tariffs remain in place until the Chinese demonstrate they are complying with the deal and only then slowly rolled back. The US is also seeking the ability to unilaterally impose tariffs in the future, without retaliation, in the event that terms of the deal are not upheld by China. Naturally, China wants all tariffs removed immediately and doesn’t want to agree to unilateral action by the US. One side is going to have to back down, but I could see it being a split where tariffs remain for now, but unilateral action is not permitted. In the end, one of the key issues has always been the fact that the Chinese tend to ignore the laws they write when it is deemed to suit the national interest. Will this time be different? History shows that this time is never different, but we shall see.

Certainly, equity markets cannot get enough of the idea that this trade deal is coming as it continues to rally, especially in China, on the prospects of a successful conclusion. While markets today are generally little changed, Shanghai did manage another 1% jump last night. I guess the real question here is if a deal is agreed and President’s Trump and Xi meet and sign it sometime later this month, what will be the next catalyst for the equity market to rally? Will growth really rebound that quickly? Seems unlikely. Will the central banks add more stimulus? Also unlikely if they see these headwinds fade. In other words, can risk-on remain the market preference indefinitely?

Turning to the actual data, once again Germany showed that the slump there is real, and possibly worsening. Factory Orders fell 4.2% in February, much worse than the expected 0.2% gain and the steepest decline in two years. It is also the third decline in the past four months, hardly the sign of an economy rebounding. In fact, German growth forecasts were cut significantly today by its own Economy Ministry, taking expectations for 2019 down to 0.8% GDP growth for the year, less than half the previous forecast. But despite the lousy data, the euro is basically unchanged on the day and actually over the past week. Traders are looking for a more definitive catalyst, arguably something new from a central bank, before they make their next move. Ultimately, as the German data shows, I think it increasingly unlikely that the ECB can tighten policy in any way for a long time yet, and that bodes ill for the since currency.

There has been one noteworthy mover overnight, the Indian rupee has fallen a bit more than 1% after the RBI cut rates by 25bps at their monthly meeting last night. While this was widely anticipated, the RBI came out much more dovish than expected, indicating another cut was on the way and that they would ‘…use all tools available to it to ensure liquidity in the banking system…’ which basically means that easier money is on the way. I expect that the rupee will have a bit further to fall from here.

But otherwise, it was a pretty dull session overnight. The only data this morning is Initial Claims (exp 216K), but with payrolls tomorrow, that is unlikely to quicken any pulses. We also hear from both Loretta Mester and John Williams, but the Fed story is carved in stone for now, no policy changes this year. Yesterday’s softer than expected ISM Non-Manufacturing data will simply reconfirm that there is no reason for the Fed to start tightening again. All told, it doesn’t feel like much is going to happen today as the market starts to prepare for tomorrow’s NFP report. Unless Brexit is canceled, look for a quiet session ahead.

Good luck
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Feeling Distress

The dollar is feeling distress
As Treasury prices compress
The data released
Shows growth has increased
Thus risk is now ‘cool’ to possess

Risk is back in fashion this morning as better than expected Chinese Services PMI data (54.4 vs. exp 52.3) and better than expected German Services PMI data (55.4 vs exp 54.9) have combined with renewed optimism on the US-Chinese trade talks to revive risk taking by investors. If you recall, it was just last month that the PMI data was pointing to a global slowdown, which was one of the keys to market activity. It was part and parcel of the yield curve inversion as well as the dollar’s modest strength as investors fled most other countries for the least bad option, the US markets. But it seems that not only have markets responded positively to the complete u-turn by global central bankers, so have purchasing managers. In the end, everybody loves easy money, and the fact that virtually every nation has reversed early signs of policy tightening has played well on Main Street as well as on Wall Street.

So maybe recession is much further away than had recently been feared. Of course, we continue to see our share of weak data with this week already producing subpar Retail Sales (-0.2%, -0.4% ex autos) and weak Durable Goods Orders (-1.6%, +0.1% ex transport). This makes an interesting contrast to the stronger than expected ISM data (55.3) and Construction Spending (+1.0%). But investors clearly see the glass half-full as equities respond positively, and maybe more impressively, Treasury yields have backed up 14 bps in the past week. This means the yield curve is no longer inverted and we are already hearing a lot of dismissals about how that was an aberration and not a precursor of a recession. You know, ‘This time is different!’

The one thing that remains clear is there is a concerted effort by central bankers everywhere to focus on the good, ignore the bad and try to keep the global economy going. I guess that’s their collective job, so kudos are due as they have recently proven quite nimble in their responses. Of course, the fact that they seem to be inflating new debt bubbles with the potential for very serious consequences when they pop cannot be ignored forever.

Prime Minister May’s at a loss
And so now the aisle she’ll cross
It’s Labour she’ll ask
To help with the task
Of proving her deal’s not just dross

The other market surprise was the news that after a seven-hour cabinet meeting, PM May has given up on the Tories to help her pass the Brexit deal and has now reached out to Labour leader, Jeremy Corbyn, to see if they can come up with something that can garner a majority of votes in Parliament. Yesterday, Parliament tried to come up with their own plan for a second time, and this time handily rejected 11 suggestions. The problem for May is that Labour, itself, is split on what it wants to do, with a large portion looking for another referendum, while it has its own significant portion of Leavers. Quite frankly, the view from 3000 miles away is that this initiative is not going to result in any better solution than the already rejected ones. And while everyone abhors the idea of a hard Brexit, apparently nobody abhors it enough to concede their own viewpoint. However, the market continues to wear its rose-colored glasses and the pound has rebounded 0.5% today and more than 1.1% since yesterday morning. The pound continues to be completely driven by the Brexit saga, as it rallied despite a very poor Services PMI outturn of 48.9.

Away from those stories, market optimism has been fanned by the hints that the US-China trade talks are continuing to make progress. Chinese vide-premier, and lead negotiator, Liu He, is in Washington today and tomorrow to resume the conversation. Meanwhile, central banks continue to back away from any further policy tightening, even in marginal countries where it had been expected. Poland is the latest to sound more dovish than previous comments, and markets are also now pricing in further rate cuts in both India and South Africa. The point is that the market addiction to easy money is growing, and there does not appear to be a single central banker anywhere who can look through the short-term and recognize, and respond to, long term concerns.

But in the meantime, stocks continue to rally. Today, after the Chinese data, we saw the Nikkei jump 1.0%, and Shanghai rally 1.25%. Then after the Eurozone data, the DAX rocketed 1.85% and even the CAC, despite the weak French data, rallied 1.0%. I guess the fact that there are still weak areas in Europe implies that Signor Draghi will never be tempted to raise rates. And not to be outdone, US futures are pointing to a 0.5% rise at the open.

This morning’s data brings ADP Employment (exp 170K) and then ISM Non-Manufacturing (exp 58.0). If things hold true to form, look for a better ISM number, although the ADP will be quite interesting. Remember, last month’s NFP number was shockingly weak so there are still questions about that. Friday, we will learn more, especially with the revisions.

And the dollar? Well, as is often the case on days where risk is accumulated, the dollar is under broad pressure, down 0.3% vs. the euro, NOK and SEK. It is also under pressure vs. EMG currencies with INR (+0.7%) and PHP (+0.6%) leading the way in Asia, while the CE4 are all higher by roughly 0.3%. There is no reason to think this pressure will abate today, unless we see something quite surprising, like the US-China trade talks falling apart. In other words, look for modest further dollar weakness as the session progresses.

Good luck
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