Both Flexed Their Muscles

In China more policy ease
Did nothing to help to appease
The stock market bears
Who unloaded shares
Along with their spare RMB’s

Then tempers between Rome and Brussels
Got hotter as both flexed their muscles
The latter declared
The budget Rome shared
Was certain to cause further tussles

This morning the dollar has resumed its uptrend. The broad theme remains that tighter US monetary policy continues to diverge from policies elsewhere around the world, and with that divergence, dollar demand has increased further.

China’s weekend action is the latest manifestation of this trend as Sunday they announced a one-percentage point cut in the Required Reserve Ratio (RRR) for all banks. This should release up to RMB 1.2 trillion (~$175billion) of liquidity into the market, helping to foster further economic activity, support the equity markets and keep a lid on interest rates. At least that’s the theory. Alas for the Chinese, whose markets were closed all of last week for national holidays, the Shanghai Composite fell 3.7% on the day, as they caught up with last week’s global equity market decline. It is not clear if the loss would have been greater without the RRR cut, but one other noteworthy feature of the session was the absence of any official attempts to support the market, something we have seen consistently in the past. It ought not be surprising that the renminbi also suffered overnight, as it fell nearly 0.5% and is now trading through the 6.90 level. If you recall, this had been assumed to be the ‘line in the sand’ that the PBOC would defend in an effort to prevent an uptick in capital outflows. As it is just one day, it is probably too early to make a judgment, but this bears close watching. Any acceleration higher in USDCNY will have political repercussions as well as market ones.

Speaking of political repercussions, the other noteworthy story is the ongoing budget saga in Italy. There has been no backing down by the populist government in Rome, with Matteo Salvini going so far as to call Brussels (the EU) the enemy of Italy in its attempts to impose further austerity. The Italians are required to present their budget to the EU by next Monday, and thus far, the two sides are far apart on what is acceptable for both the country and EU rules. At this point, markets are clearly getting somewhat nervous as evidenced by the ongoing decline in Italian stock and bond markets, where 10-year yields have jumped another 15bps (and the spread to German bunds is now >300bps) while the FTSE-MIB Index is down another 2.5% this morning. Given that this is all happening in Europe, it is still a decent bet that they will fudge an outcome to prevent disaster, but that is by no means a certainty. Remember, the Italian government is as antiestablishment as any around, and they likely relish the fight as a way to beef up their domestic support. In addition to the Italian saga, German data was disappointing (IP fell -0.3% vs. expectations of a 0.4% gain), and the combination has been sufficient to weigh on the euro, which is down by 0.4% as I type.

Beyond these stories, the other big news was the Brazilian election yesterday, where Jair Bolsonaro, the right wing candidate, came first with 46% of the vote, and now leads the polls as the nation prepares for a second round vote in three weeks’ time. The Brazilian real has been the exception to EMG currency weakness over the past month, having rallied nearly 9% during the last month. It will be interesting to see if it continues that trend when markets open there this morning, but there is no question that the markets believe a Bolsonaro administration will be better for the economy going forward.

Otherwise, the stories remain largely the same. Ongoing US economic strength leading to tighter Fed policy is putting further pressure on virtually all EMG currencies throughout the world. And it is hard to see this story changing until we see the US economy show signs of definitive slowing.

Turning to the upcoming week, data is sparse with CPI being the key release on Thursday.

Tuesday NFIB Business Optimism 108.9
Wednesday PPI 0.2% (2.8% Y/Y)
  -ex food & energy 0.2% (2.5% Y/Y)
Thursday Initial Claims 206K
  CPI 02% (2.4% (Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
Friday Michigan Sentiment 100.5

As to Fed speakers, we have three regional Fed Presidents (Evans, Williams and Bostic) speaking a total of seven times this week. However, it is pretty clear from comments lasts week that there is no indication the Fed is going to relax their view that gradually tighter policy is appropriate for now. The one thing that can derail this move would be much softer than expected CPI data on Thursday, but that just doesn’t seem that likely now. Look for the dollar to continue to trend higher all week.

Good luck
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Still Under Stress

As traders are forced to assess
A bond market still under stress
Today’s jobs report
Might be of the sort
That causes some further regress

Global bond markets are still reeling after the past several sessions have seen yields explode higher. The proximate cause seems to have been the much stronger data released Wednesday in the US, where the ADP Employment and ISM Non-Manufacturing reports were stellar. Adding to the mix were comments by Fed Chairman Powell that continue to sing the praises of the US economy, and giving every indication that the Fed was going to continue to raise rates steadily for the next year. In fact, the Fed funds futures market finally got the message and has now priced in about 60bps of rate hikes for next year, on top of the 25bps more for this year. So in the past few sessions, that market has added essentially one full hike into their calculations. It can be no surprise that bond markets sold off, or that what started in the US led to a global impact. After all, despite efforts by some pundits to declare that the ECB was the critical global central bank as they continue their QE process, the reality is that the Fed remains top of the heap, and what they do will impact everybody else around the world.

Which of course brings us to this morning’s jobs data. Despite the strong data on Wednesday, there has been no meaningful change in the current analyst expectations, which are as follows:

Nonfarm Payrolls 185K
Private Payrolls 180K
Manufacturing Payrolls 12K
Unemployment Rate 3.8%
Participation Rate 62.7%
Average Hourly Earnings (AHE) 0.3% (2.8% Y/Y)
Average Weekly Hours 34.5
Trade Balance -$53.5B

The market risk appears to be that the release will show better than expected numbers today, which would encourage further selling in Treasuries and continuation of the cycle that has driven markets this week. What is becoming abundantly clear is that the Treasury market has become the pre-eminent driver of global markets for now. Based on the data we have seen lately, there is no reason to suspect that today’s releases will be weak. In fact, I suspect that we are going to see much better than expected numbers, with a chance for AHE to touch 3.0%. Any outcome like that should be met with another sharp decline in Treasuries as well as equities, while the dollar finds further support.

Away from the payroll data, there have been other noteworthy things ongoing around the world, so lets touch on a few here. First, there is growing optimism that with the Tory Party conference now past, and PM May still in control, that now a Brexit deal will be hashed out. One thing that speaks to this possibility is the recent recognition by Brussels that the $125 trillion worth of derivatives contracts that are cleared in London might become a problem if there is no Brexit deal, with payment issues needing to be sorted, and have a quite deleterious impact on all EU economies. As I have maintained, a fudge deal was always the most likely outcome, but it is by no means certain. However, today the market is feeling better about things and the pound has responded by rallying more than a penny. The idea is that with a deal in place, the BOE will have the leeway to continue raising rates thus supporting the pound.

Meanwhile, stronger than expected German Factory orders have helped the euro recoup some of its recent losses with a 0.25% gain since yesterday’s close. But the G10 has not been all rosy as the commodity bloc (AUD, NZD and CAD) are all weaker this morning by roughly 0.4%. Other currencies under stress include INR (-0.6%) after the RBI failed to raise interest rates as expected, although they explained there would be “calibrated tightening” going forward. I assume that means slow and steady, but sounds better. We have also seen further pressure on RUB (-1.3%) as revelations about Russian hacking efforts draw increased scrutiny and the idea of yet more sanctions on the Russian economy make the rounds. ZAR (-0.75%) and TRY (-2.0%) remain under pressure, as do IDR (-0.7%) and TWD (-0.5%), all of which are suffering from a combination of broad dollar strength and domestic issues, notably weak financial situations and current account deficits. However, there is one currency that has been on a roll lately, other than the dollar, and that is BRL, which is higher by 3.4% in the past week and 8.0% since the middle of September. This story is all about the presidential election there, where vast uncertainty has slowly morphed into a compelling lead for Jair Bolsonaro, a right-wing firebrand who is attacking the pervasive corruption in the country, and also has University of Chicago trained economists as his financial advisors. The market sees his election as the best hope for market-friendly policies going forward.

But for today, it is all about payrolls. Based on what we have heard from Chairman Powell lately, there is no reason to believe that the Fed is going to adjust its policy trajectory any time soon, and if they do, it is likely only because they need to move tighter, faster. Today’s data could be a step in that direction. All of this points to continued strength in the dollar.

Good luck and good weekend
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Conditions Have Tightened

The Treasury market is frightened
As risk of inflation has heightened
So 10-year yields jumped
The dollar got pumped
And credit conditions have tightened

The dollar rallied yesterday on the back of a sharp rise in US Treasury yields. The 10-year rose 13bps, jumping to its highest level since 2014. The 30-year rose even more, 15bps, and both have seen those yield rallies continue this morning. The catalyst was much stronger than expected US data, both ADP and ISM Non-Manufacturing were quite strong, and further comments by Chairman Powell that indicated the Fed would remain data dependent and while they didn’t expect inflation to rise sharply, effectively they are prepared to act if it does.

Adding to the inflation story was the Amazon news about raising the minimum wage at the company to $15/hour, and don’t forget the trade war with China, where tariffs will clearly add upward pressure on prices. All this makes tomorrow’s payroll report that much more important, as all eyes will be on the Average Hourly Earnings number. We have a fairly recent analogy of this type of market condition, the first two weeks of February this year, when the January AHE number jumped unexpectedly, and within a week, equities had fallen 10% while the dollar rallied sharply as risk was jettisoned with abandon. While I am not forecasting a repeat of those events, it is best to be aware of the possibility.

And quite frankly, that has been THE story of the market. It cannot be that surprising that the dollar has been the big beneficiary, as this has turned into a classic risk-off scenario. EMG currencies are under increasing pressure, and even the G10 is suffering, save the yen, which has rallied slightly vs. the dollar. At this point, there is no obvious reason for this trend to stop until tomorrow’s data release. If AHE data is firm (current expectations are for a 0.3% rise on the month translating into a 2.8% Y/Y rise), look for this bond rout to continue, with the concurrent impact of a stronger dollar and weaker equities. But since that is not until tomorrow, my sense is that today is going to be a session of modest further movement as positions get squared ahead of the big news.

Good luck
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Goldilocks Ain’t Dead Yet

The Chairman said, no need to fret
Our low unemployment’s no threat
To driving up prices
And so my advice is
Relax, Goldilocks ain’t dead yet

Chairman Powell’s message yesterday was that things were pretty much as good as anyone could possibly hope. The current situation of unemployment remaining below every estimate of NAIRU while inflation remains contained is a terrific outcome. Not only that, there are virtually no forecasts for inflation to rise meaningfully beyond the 2.0% target, despite the fact that historically, unemployment levels this low have always led to sharper rises in inflation. In essence, he nearly dislocated his shoulder while patting himself on the back.

But as things stand now, he is not incorrect. Measured inflationary pressures remain muted despite consistently strong employment data. Perhaps that will change on Friday, when the September employment report is released, but consensus forecasts call for the recent trend to be maintained. Last evening’s news that Amazon was raising its minimum wage to $15/hour will almost certainly have an impact at the margin given the size of its workforce (>575,000), but the impact will be muted unless other companies feel compelled to match them, and then raise prices to cover the cost. It will take some time for that process to play out, so I imagine we won’t really know the impact until December at the earliest. In the meantime, the Goldilocks economy of modest inflation and strong growth continues apace. And with it, the Fed’s trajectory of rate hikes remains on track. The impact on the dollar should also remain on track, with the US economy clearly still outpacing those of most others around the world, and with the Fed remaining in the vanguard of tightening policy, there is no good reason for the dollar to suffer, at least in the short run.

However, that does not mean it won’t fall periodically, and today is one of those days. After a weeklong rally, the dollar appears to be consolidating those gains. The euro has been one of today’s beneficiaries as news that the Italian government is backing off its threats of destroying EU budget rules has been seen as a great relief. You may recall yesterday’s euro weakness was driven by news that the Italians would present a budget that forecast a 2.4% deficit, well above the previously agreed 1.9% target. The new government needs to spend a lot of money to cut taxes and increase benefits simultaneously. But this morning, after feeling a great deal of pressure, it seems they have backed off those deficit forecasts for 2020 and 2021, reducing those and looking to receive approval. In addition, Claudio Borghi, the man who yesterday said Italy would be better off without the euro, backed away from those comments. The upshot is that despite continued weakening PMI data (this time services data printed modestly weaker than expected across most of the Eurozone) the euro managed to rally 0.35% early on. Although in the past few minutes, it has given up those gains and is now flat on the day.

Elsewhere the picture is mixed, with the pound edging lower as ongoing Brexit concerns continue to weigh on the currency. The Tory party conference has made no headway and time is slipping away for a deal. Both Aussie and Kiwi are softer this morning as traders continue to focus on the interest rate story. Both nations have essentially promised to maintain their current interest rate regimes for at least the next year and so as the Fed continues raising rates, that interest rate differential keeps moving in the USD’s favor. It is easy to see these two currencies continuing their decline going forward.

In the emerging markets, Turkish inflation data was released at a horrific 24.5% in September, much higher than even the most bearish forecast, and TRY has fallen another 1.2% on the back of the news. Away from that, the only other currency with a significant decline is INR, which has fallen 0.65% after a large non-bank lender, IL&FS, had its entire board and management team replaced by the government as it struggles to manage its >$12 billion of debt. But away from those two, there has been only modest movement seen in the currency space.

One of the interesting things that is ongoing right now is the fact that crude oil prices have been rallying alongside the dollar’s rebound. Historically, this is an inverse relationship and given the pressure that so many emerging market economies have felt from the rising dollar already, for those that are energy importers, this pain is now being doubled. If this process continues, look for even more anxiety in some sectors and further pressure on a series of EMG currencies, particularly EEMEA, where they are net oil importers.

Keeping all this in mind, it appears that today is shaping up to be a day of consolidation, where without some significant new news, the dollar will remain in its recent trading range as we all wait for Friday’s NFP data. Speaking of data, this morning brings ADP Employment (exp 185K) and ISM Non-Manufacturing (58.0), along with speeches by Fed members Lael Brainerd, Loretta Mester and Chairman Powell again. However, there is no evidence that the Fed is prepared to change its tune. Overall, it doesn’t appear that US news is likely to move markets. So unless something changes with either Brexit or Italy, I expect a pretty dull day.

Good luck
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Southeast of France

The nation that’s southeast of France
Seems willing to leap at the chance
Of increasing spending
While also descending
Into a black hole of finance

Today’s markets have been dominated by a renewed fear that Italy may become Quitaly, quitting the euro in an effort to regain control of their finances. This view came about when Claudio Borghi, the chairman of the lower house budget committee (analogous to the House finance committee in the US), said that the euro was “not sufficient” to solve Italy’s fiscal issues. That was seen as an allusion to the idea that if Italy ditched the euro and returned to the lire, they would have more flexibility to implement the fiscal policies they wanted. In this case, flexibility can be understood to mean that Italy would be able to print and spend more money domestically, while allowing the lire to depreciate. The problem with the euro, as Italy sees it, is since they don’t control its creation, they cannot devalue it by themselves. There can be no surprise that the euro declined, falling 0.6% after a 0.3% decline yesterday. Of course, Italian stock and bond markets have also suffered, and there has been a more general feeling of risk aversion across all markets.

In the meantime, the latest Brexit news covers a new plan to allegedly solve the Irish border issue. It seems that PM May is going to offer up the idea that the UK remains in the customs union while allowing new checks on goods moving between Northern Ireland and the UK mainland. The problem with this idea, at least on the surface, is that it will require the EU to compromise, and that is not something that we have seen much willingness to embrace on their part. Remember, French President Macron has explicitly said that he wants the UK to suffer greatly in order to serve as a warning to any other members from leaving the bloc. (Funnily enough, I don’t think that either Matteo Renzi or Luigi Di Maio, the leaders of the League and Five-Star Movement respectively in Italy, really care about that.)

For now, the market will continue to whipsaw around these events as hopes ebb and flow for a successful Brexit resolution. While it certainly doesn’t seem like anything is going to be agreed at this stage, my suspicion remains that some fudge will be found. The one caveat here is if PM May is ousted at the Conservative Party conference that begins later this week. PM Boris Johnson, for instance, will tell the Europeans to ‘bugger off’ and then no deal will be found. In that case, the pound will fall much further, but that seems a low probability event for right now. With all of that in mind, the pound has fallen 0.6% this morning and is back below 1.30 for the first time in three weeks.

In fact, the dollar is higher virtually across the board this morning, with AUD also lower by 0.6% after the RBA left rates unchanged at 1.50% while describing potential weakening scenarios, including a slowdown in China. Even CAD is lower, albeit only by 0.15%, despite the resolution of the NAFTA replacement talks yesterday.

Emerging markets have fared no better with, for example, IDR having fallen nearly 1.0% through 15,000 for the first time in twenty years, despite the central bank’s efforts to protect the rupiyah through rate hikes and intervention. We have also seen weakness in INR (-0.6%), ZAR (-1.3%), MXN (-0.6%), TRY (-1.9%) and RUB (-0.7%). Stock markets throughout the emerging markets have also been under pressure and government bond yields there are rising. In other words, this is a classic risk-off day.

Yesterday’s ISM data was mildly disappointing (59.8 vs. 60.1 expected) but continues to point to strong US economic growth. Since there are no hard data points released today (although we do see auto sales data) my sense is the market will turn its focus on Chairman Powell at 12:45, when he speaks at the National Association of Business Economics Meeting in Boston. His speech is titled, The Outlook for Employment and Inflation, obviously the exact issues the market cares about. However, keeping in mind the fact that Powell has been consistently bullish on the economy, it seems highly unlikely that he will say anything that could derail the current trend of tighter US monetary policy. Combining this with the renewed concerns over Europe and the UK, and it seems the dollar’s rally may be about to reignite.

Good luck
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Compromising

It cannot be very surprising
That Canada is compromising
Their views about trade
Thus now they have made
A deal markets find stabilizing

This morning, as the fourth quarter begins, arguably the biggest story is that Canada and the US have agreed terms to the trade pact designed to replace NAFTA. Canada held out to the last possible moment, but in the end, it was always clear that they are far too reliant on trade with the US to actually allow NAFTA to disintegrate without a replacement. The upshot is that there will be a new pact, awkwardly named the US-Mexico-Canada Agreement (USMCA) which is expected to be ratified by both Canada and Mexico quite easily, but must still run the gauntlet of the US Congress. In the end, it would be shocking if the US did not ratify this treaty, and I expect it will be completed with current estimates that it will be signed early next year. The market impact is entirely predictable and consistent with the obvious benefits that will accrue to both Canada and Mexico; namely both of those currencies have rallied sharply this morning with each higher by approximately 0.9%. I expect that both of these currencies will maintain a stronger tone vs. the dollar than others as the ending of trade concerns here will be a definite positive.

There is another trade related story this morning, although it does not entail a new trade pact. Rather, Chinese PMI data was released over the weekend with both the official number (50.8) and the Caixin small business number (50.0) falling far more sharply than expected. The implication is that the trade situation is beginning to have a real impact on the Chinese economy. This puts the Chinese government and the PBOC (no hint of independent central banking here) in a difficult position.

Much of China’s recent growth has been fueled by significant increases in leverage. Last year, the PBOC unveiled a campaign to seek to reduce this leverage, changing regulations and even beginning to tighten monetary policy. But now they are caught between a desire to add stability to the system by reducing leverage further (needing to tighten monetary policy); and a desire to address a slowing domestic economy starting to feel the pinch of the trade war with the US (needing to loosen monetary policy). It is abundantly clear that they will loosen policy further as the political imperative is to insure that GDP growth does not slow too rapidly during President Xi’s reign. The problem with this choice is that it will build up further instabilities in the economy with almost certain future problems in store. Of course, there is no way to know when these problems will manifest themselves, and so they will likely not receive much attention until such time as they explode. A perfect analogy would be the sub-prime mortgage crisis here ten years ago, where leading up to the collapse; every official described the potential problem as too small to matter. We all know how that worked out! At any rate, while the CNY has barely moved this morning, and in fact has remained remarkably stable since the PBOC stepped in six weeks ago to halt its weakening trend, it only makes sense that they will allow it to fall further as a pressure release valve for the economy.

Away from those two stories though, the FX market has been fairly dull. PMI data throughout the Eurozone was softer than expected, but not hugely so, and even though there are ongoing questions about the Italian budget situation, the euro is essentially unchanged this morning. In the past week, the single currency is down just under 2%, but my feeling is we will need to see something new to push us away from the 1.16 level, either a break in the Italy story or some new data or comments to alter views. The next big data print is Friday’s payroll report, but I expect we might learn a few things before then.

In the UK, while the Brexit deadline swiftly approaches, all eyes are now focused on the Tory party conference this week to see if there is a leadership challenge to PM May. Given that the PM’s ‘Chequers’ proposal has been dismissed by both the EU and half the Tory party, it seems they will need to find another way to move forward. While the best guess remains there will be some sort of fudge agreed to before the date, I am growing more concerned that the UK is going to exit with no deal in place. If that is what happens, the pound will be much lower in six-months’ time. But for today, UK Manufacturing PMI data was actually a surprising positive, rising to 53.8, and so the signals from the UK economy continue to be that it is not yet collapsing.

Away from those stories, though, I am hard pressed to find new and exciting news. As this is the first week of the month, there is a raft of data coming our way.

Today ISM Manufacturing 60.1
  ISM Prices Paid 71.0
  Construction Spending 0.4%
Wednesday ADP Employment 185K
  ISM Non-Manufacturing 58.0
Thursday Initial Claims 213K
  Factory Orders 2.0%
Friday Nonfarm Payroll 185K
  Private Payroll 183K
  Manufacturing Payroll 11K
  Unemployment Rate 3.8%
  Average Hourly Earnings 0.3% (2.8% Y/Y)
  Average Weekly Hours 34.5
  Trade Balance -$53.5B

On top of the payroll data, we hear from eight Fed speakers this week, including more comments from Chairman Powell tomorrow. At this point, however, there is no reason to believe that anything is going to change. The Fed remains in tightening mode and will raise rates again in December. The rest of the world continues to lag the US with respect to growth, and trade issues are likely to remain top of mind. While the USMCA is definitely a positive, its benefits will only accrue to Mexico and Canada as far as the currency markets are concerned. We will need to see some significant changes in the data stream or the commentary in order to alter the dollar’s trend. Until then, the dollar should maintain an underlying strong tone.

Good luck
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When Tax Cuts Arrive

The euro has taken a dive
As Italy tries to revive
Its still quite weak growth
By managing both
More spending when tax cuts arrive

It was just earlier this week that pundits were sounding the death knell for the dollar, as they explained the market has already fully priced in Fed rate hikes while other markets, both developed and emerging, were just beginning their turn towards tighter policy. In fact, the convergence trade was becoming all the rage; the idea that as the dollar started to slide, emerging market economies would see reduced pressure on their fundamentals (it would become easier to repay dollar debt) while commodity prices could rebound (most emerging markets are commodity exporters) and so both stock and bond prices in those markets would benefit. At the same time, other developed markets would see a similar, albeit lesser, impact and so market sentiment would get markedly better. Or not.

Yesterday, the market learned that the Italian budget question, something that had been set aside as not really impactful, has become impactful. The announcement by the ruling coalition that they would be targeting a 2.4% budget deficit next year, well above earlier estimates of 1.8% but still below the EU’s 3.0% target, has raised numerous red flags for investors. First, the new budget will do nothing to address Italy’s debt/GDP ratio, which at 131% is second only to Greece within the EU. One of the reasons that the EU wanted that lower target was to help address that situation. The potential consequence of that issue, a larger debt/GDP ratio, is that the ratings agencies may lower their country credit ratings for Italy, which currently stand at Baa2 by Moody’s and BBB by S&P. And given that those ratings are just two notches above junk, it could put the country in a precarious position of having a much more difficult time funding its deficit. It should be no surprise that Italian government bond yields jumped, with 2-year yields spiking 46bps and 10-year yields up 31bps. It should also be no surprise that the Italian stock markets fell sharply, with the FTSE-MIB down 4.1% as I type. And finally, it should be no surprise that the euro is lower, having fallen more than 1.5% since this news first trickled into the market yesterday morning NY time. While this could still play out where the coalition government backs off its demands and markets revert, what is clear is that dismissing Italian budget risk as insignificant is no longer a viable option.

But it’s not just the euro that is under pressure; the dollar is generally stronger against most of its counterparts. For example, the pound is down 0.3% this morning and 1% since yesterday morning after UK data showed weakening confidence and slowing business investment. Both of these seem to be directly related to growing Brexit concerns. And on that subject, there has been no movement with regard to the latest stance by either the UK or the EU. Politicians being what they are, I still feel like they will have something signed when the time comes, but it will be short on specifics and not actually address the issues. But every day that passes increases the odds that the UK just leaves with no deal, and that will be, at least in the short term, a huge pound Sterling negative.

Meanwhile, the yen has fallen to its lowest level vs. the dollar this year, trading through 113.60 before consolidating, after the BOJ once again tweaked its concept of how to manage QE there. Surprisingly (to me at least) the movement away from buying 30-year bonds was seen as a currency negative, despite the fact that it drove yields higher at the back of the curve. If anything, I would have expected that move to encourage Japanese investors to repatriate funds and invest locally, but that is not the market reaction. What I will say is that the yen’s trend is clearly downward and there is every indication that it will continue.

Looking at the data story, yesterday we saw US GDP for Q2 confirmed at 4.2%, while Durable Goods soared at a 4.5% pace in August on the back of strong aircraft orders. For this morning, we are looking for Personal Income (exp 0.4%); Personal Spending (0.3%); PCE (0.2%, 2.3% Y/Y); Core PCE (0.1%, 2.0% Y/Y); and Michigan Sentiment (100.8). All eyes should be on the Core PCE data given it is the number the Fed puts into their models. In addition, we hear from two Fed speakers, Barkin and Williams, although at this stage they are likely to just reiterate Wednesday’s message. Speaking of which, yesterday Chairman Powell spoke and when asked about the flattening yield curve explained that it was something they watched, but it was not seen as a game changer.

In the end, barring much weaker PCE data, there is no reason to believe that the Fed is going to slow down, and if anything, it appears they could fall behind the curve, especially if the tariff situation starts to impact prices more quickly than currently assumed. There is still a tug of war between the structural issues, which undoubtedly remain dollar negative, and the cyclical issues, which are undoubtedly dollar positive, but for now, it appears the cyclicals are winning.

Good luck and good weekend
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