Tag Archives: #Argentina

Oh So Knurled

Posted on by

Most pundits assure us the world
Will end, because Trump has unfurled
A tariff barrage
Which will sabotage
World trade, which is now oh so knurled
 
But so far, the data have shown
The ‘conomy, widely, has grown
Just wait, they all say
There will come a day
When our forecasts will set the tone!

 

Market activity remains quite dull lately and yesterday was no exception.  Equity markets are generally creeping higher, but ever so slowly.  Meanwhile, all the forecasts of President Trump’s tariff policy creating imminent economic destruction have yet to prove true.  In fact, the WSJ this morning even published an article complaining explaining that things seem to be working out so far despite the tariffs as the global economy is more resilient than most economists’ models had assumed.  (I know we are all shocked that economists’ models have proven unworthy).  While this doesn’t suit the narrative they have been pushing, or that, in fact pretty much every mainstream media outlet has been pushing, at least they have been willing to recognize that the world has not yet collapsed.

Of course, the great question is can this continue or are the doomsayers correct, and we just have not yet felt the impacts of all these (terrible) policy choices that have been made?  My experience tells me that Trump’s designs for his best-case scenario will not be achieved, but neither will the worst-case scenarios painted by the punditry.  In fact, history has shown that it takes a remarkable amount of effort to completely destroy an economy and that usually takes many years of incredibly stupid policies.  

After all, it took nearly 60 years for Argentina to destroy itself with socialist policies (see chart below from latinaer.springeropen.com), and the same was true for Venezuela.  

In fact, some might say that Europe is well on its way to destroying its economy as they implement more and more central control, but it will take decades to completely collapse things.  My point is that it would be a mistake to assume that because you do, or don’t, like a political regime, that they will change the nature of an economy so quickly that it will impact your life.  Perhaps the exception to that rule is the current situation in Argentina where in one year’s time, President Milei’s free market policies have reversed decades of stagnation.  But going the other direction takes a long time to affect.

Turning back to the developed world, we are in the midst of the summer doldrums with a limited amount of data to be released and the headlines in the US focused on either Coldplay concerts or questions about the actions of the Obama government in the last days of his administration.  None of them are financial or market related (the Powell firing story has taken a breather) and while the tariff deadline looms next week, we continue to hear that more deals are on the way.

So, let’s take a quick look at what happened overnight (not much) and how things are setting up for the US session.  Yesterday’s mixed US performance, with not much movement in either direction was followed by a lack of movement in Tokyo (-0.1%) and Australia (+0.1%) although both Hong Kong (+0.5%) and Chinese (+08%) shares managed to continue their recent rally.  But arguably, things were generally worse in Asia as Korea (-1.3%), Taiwan (-1.5%) and New Zealand (-1.0%) all lagged badly with the other regional bourses showing no life whatsoever.  This feels tariffy to me.  In Europe, the DAX (-1.0%) and CAC (-0.75%) are both under pressure this morning with tariffs the clear concern.  As of now, while Commerce Secretary Lutnick has expressed confidence a deal with Europe will be done, if not, tariffs on European goods will rise to 30% next week.  I guess that has focused the minds of investors on the continent.  As to the UK, stocks there are unchanged this morning as, recall, they have already struck a deal.  Of course, the UK has many problems on its own to prevent its economy from growing.  Meanwhile, at this hour (7:10), US futures are essentially unchanged.

In the bond market, yesterday saw yields slide across the board, with Treasury yields slipping 5bps.  This morning, though, there is a little bounce in yields with Treasuries and most European sovereigns seeing yields rise 2bps.  JGB yields, though, fell -2bps last night, as the response to the LDP losing the Upper House election was quite benign.  It seems that so far, investors are not that worried about major changes in Japan

That Japan story is confirmed by the fact that the yen is essentially unchanged today.  In fact, looking at the chart of USDJPY over the past 6 months, it is hard to get excited about much.

Source: tradingeconomics.com

Remember the talk about the carry trade being unwound?  Yeah, me neither.  Arguably, there are two potential drivers of a substantial move in USDJPY, either the Fed will have to start cutting rates, and more aggressively than the 2 cuts currently priced in for the rest of the year, or the BOJ will need to start hiking rates, and quite frankly, neither seems likely anytime soon.  As to the rest of the currency market, sleepy overstates the amount of movement we are seeing this morning.  In fact, it is hard to find a currency that has moved 0.2% in either direction.  FX traders are on summer holiday.

Finally, commodity markets are a bit softer this morning on the open with oil (-0.85%) leading the way after a slide yesterday.  While the narrative discusses concerns over trade and a reduction in demand, market insiders (notably Alyosha) continue to describe the evolution of the crack spread and the fact that the futures contract is rolling over today as being far more impactful to the price right now.  Perhaps the narrative will matter again soon, but that is not the discussion in the marketplace.  As to metals, they had a very strong day yesterday and are consolidating this morning with gold (-0.3%) and silver (-0.15%) slipping slightly, although both metals are closing in on highs.  The big picture in the precious metals space remains that there is more demand and insufficient supply.

On the data front, arguably, Chairman Powell’s speech this morning is the most widely anticipated feature of the day.  However, he is merely making opening remarks at a conference on capital framework for large banks, which while important seems unlikely to touch on monetary policy.

And that’s really it for the day.  There is no reason to believe that anything remarkable will happen but in this age of White House Bingo, we can never rule out some unforeseen event.  The talk in the FX market is that the dollar’s recent countertrend rally is failing and folks are starting to put on bearish bets.  Maybe, but it is hard to get excited in either direction right now.

Good luck

Adf

Talk the Talk

Posted on by 
It seems that investors are waiting
For Powell, and so they’re debating
Will he be a hawk
And still talk the talk
Or will he be accommodating?

The punditry seems unpersuaded
Another rate hike could be slated
So, most views expressed
Say; time to invest!
And bearish ideas must be faded

It is almost as if we are still on holiday given the lack of price movement across most markets so far this week.  In fact, other than the Chinese markets (Hang Seng -1.0%), which are continuing to suffer from the ongoing implosion of their property bubble, market activity yesterday in the US, overnight through the rest of Asia and in Europe this morning has been quite muted.  Perhaps the tone has been very mildly bearish, with declines on the order of -0.25% or so, but that comes in the wake of gains as much as 10% or more through the month of November.  As such, it should be no surprise to see a bit of portfolio rebalancing.  Certainly, there is a lot more discussion about the soft/no-landing scenario and we are beginning to see S&P 500 prognostications for the end of 2024 being above 5000.  

The premise seems to be that inflation has been defeated, and that while the Fed may wait a few more months before cutting rates, by this time next year they will be celebrated for having achieved the elusive soft-landing.  The implication is that once they are more comfortable that inflation is dead, they will start to cut rates because…?  And that is where I get lost.  If the economy continues to grow with rates at 5%, exactly why should the Fed consider cutting them?  The only reason I can see is that the pressure from the administration grows too intense as the cost of refinancing the currently outstanding and growing debt continues to rise dramatically.  The problem with this outcome, however, is that if the Fed is seen to be cutting rates under pressure from the administration to reduce financing costs, it is likely to signal to the market that fiscal policy is in complete control (yesterday’s discussion on fiscal dominance is apropos here).  Historically, when that happens, inflation is not merely, not dead, it is ready to roar.

The implications of this policy direction are unlikely to be welcome in government, in boardrooms or in households, as rising inflation and a declining currency are a toxic mix for economic success.  Let’s think this through before cheering it on.

As we progress toward the 2024 presidential election, it is abundantly clear that the federal government is going to seek to spend as much money as possible.  Not only that but I am confident they learned the lessons from the GFC and Covid that QE simply pumps up asset prices while helicopter money is far more effective in getting cash into the hands of the voters.  Given the recent surveys that show 80% of the country believes they are worse off than prior to President Biden’s election, the recipe to address this is quite clear; give more money directly to the people.  And so, you can be sure that there will be numerous fiscal giveaways as 2024 unfolds.

The problem is that these giveaways do not create organic growth in the economy, rather they are the antithesis of organic growth.  As such, tax revenues will continue to lag, and the deficit will continue to grow ever larger.  Already, the cost of funding the outstanding ~$34 trillion in debt has reached $1 trillion, more than the government spends on defense, the largest non-entitlement program.  As well, the average tenor of US Treasury debt continues to decline with almost half needing to be refinanced by the end of 2025.  If interest rates remain at 5.5% and the Treasury continues to skew toward T-bills rather than coupons, that $1 trillion bill is going to grow to $2 trillion pretty quickly.  That will require even more debt issuance to repay, and the cycle will grow ever larger and faster.

It doesn’t take much imagination to see where this could be headed and there is a history of how it has worked in the past, notably with Weimar Germany in 1921-1923 and more recently, in Zimbabwe in 2008-2009 and again in 2019, and, of course, Argentina today.  The classic response to this problem is to institute yield curve control so that those debt payments are contained.  Of course, that means that government debt will pay negative real yields, and the Fed will wind up owning most of it*.  The natural consequence here will be that the dollar will likely decline sharply, at least against ‘real’ stuff like commodities, and a little less-so against quasi-real stuff** like equities.  Versus other currencies it is much harder to tell because if the US is in this situation, other countries are likely to be in difficult straits as well, so the FX value of the dollar may not collapse.  Of course, other countries may not have the same debt dynamics as the US, and those currencies will likely hold up better than the rest.

My fear is this is the new direction of travel.  It is not a given by any stretch, but it is going to seem quite attractive to politicians of every stripe, regardless of their political affiliation or ostensible principals because, remember, to an elected politician, the most important policy is one that gets them re-elected and they will vote for anything that they believe will help them in that cause, principals be damned. 

Will this have any impact today?  Very unlikely.  But it is important to remember this possible path as we await to hear more Fed speakers, but notably Chairman Powell on Thursday morning.  Any hint that the pressure to cut is working (and I am sure there is plenty of pressure for that from Treasury and the executive branch) and we will see a massive rally in equities, bonds and commodities as the dollar declines.  At least at first.  In fact, it is for this reason that I believe that we are going to hear much more hawkish rhetoric from all the Fed speakers this week, and that Powell will be particularly so.  They understand the potential ramifications of capitulation and are not yet ready to allow it.

As to today’s markets, bond yields are within 1bp of yesterday’s closes but leaning lower right now, US equity futures are basically unchanged as are gold and the entire metals complex although oil is edging higher on the news that Saudi Arabia is pushing for another 1mm bbl/day production cut at Thursday’s OPEC+ meeting.

On the data front, yesterday’s New Home Sales data was quite weak, with both prices and volumes falling.  This morning we see Case Shiller Home Prices (exp 4.0%) and Consumer Confidence (101.0) and we hear from four Fed speakers, Goolsbee, Waller, Bowman and Barr.  Look for that hawkish tilt.  It is also supomatsu, the day when spot FX settles on month end, so I expect FX volumes to pick up a bit, but historically, this is more of a swap exercise than a directional one, and so looking for directional movement based on this would be a mistake in my view.  

If I am correct and hawkishness is the Fed mantra today, I expect the dollar will be able to edge a bit higher along with yields, but until Powell speaks, I suspect we will remain fairly muted overall.

Good luck

Adf

*There is another possibility with regards to ownership of treasury debt to prevent the Fed from owning all of it, new rules can be instituted that require banks, insurance companies and even your 401K or IRA accounts to maintain a certain percentage of assets in treasury bonds.  So, in the latter case, which has already been discussed in Washington, you could see 20% or 30% of your retirement next egg forced into negative real yielding assets for a long time.  I assure you that will not help your retirement situation!  

** I use the term quasi-real stuff as equities represent shares in a real business, so there is underlying value to that business and its assets, although not quite the same as owning the actual hard assets they represent.

Vaporized

Posted on by 
The powers-that-be are concerned
That Argentine voters have spurned
Advice they’ve provided
And rather decided
It’s time some new lessons were learned

And so, we cannot be surprised
The media pundits advised
Milei should step back
And take a new tack
Lest talking points get vaporized

It has been quite a slow session overnight.  There has been precious little new in the way of data or commentary of note with respect to the current economic story.  At the same time, the Thanksgiving holiday has trading desks thinly staffed and the Fed is noteworthy in its absence from the tape.  As such, the news cycle has been filled with the OpenAI saga, something far outside the scope of this poet, the ongoing political infighting that is a constant thrum in the background, and one very interesting thing, the mainstream response to the election of Javier Milei as president of Argentina.

Given the dearth of other news, and the fact that I believe this has the opportunity to be quite impactful going forward, I thought I would take a little time and discuss this further.

According to Wikipedia, which in this case I have no reason to disbelieve, Milei, while new to politics, is a serious economist.  He has earned two masters degrees in the subject, taught at university and is a widely published author on the subject.  The point is, he has very clear ideas on how economies work from a theoretical perspective and having grown up in Argentina during one of its earlier hyperinflations, from a practical aspect as well.

What makes all this so fascinating is the deluge of articles that have been published in the WSJ, Bloomberg, CNN, the New York Times, et al. which are quite keen to highlight that his views are highly unorthodox and will fail dramatically, dragging the nation into an even deeper hole.  In fact, I cannot find a single mainstream media source that believes his ideas will succeed.  However, 56% of the voters in Argentina, who are actually living through the economic disaster of the mainstream views, thought differently.

Perhaps the clearest signal of this disagreement is that the Merval, Argentina’s main equity index, rose 7.1% yesterday on the news of his election.  One need not be a conspiracy theorist to understand that if Milei is successful in righting the Argentine ship by throwing out the current orthodoxies, it will call into question everything that finance ministries throughout the G10 have been claiming and doing.  As I wrote yesterday, I believe this election has the potential to signal a beginning of a significant change in the make-up of governments around the world.  Do not be surprised when there is significant support for 3rd party candidates in the US; when AfD wins an outright majority in a state election or two in Germany; and if Mexico throws the ruling PRI out of office.  As Neil Howe and William Strauss wrote in their tour de force, The Fourth Turning, this is the time when major upheavals occur.  Be prepared for more volatility in financial markets as these changes make their way into the system.  In other words, stay hedged!

Ok, back to the markets as they currently sit.  Yesterday’s strong US equity performance found limited follow-through around the world.  Asian indices were mostly slightly lower and European indices are mixed with the DAX (+0.2%) edging higher while the CAC (-0.25%) and FTSE 100 (-0.5%) are both under pressure.  As to US futures this morning, at this hour (7:30), they are ever so slightly softer, -0.1%.

In the bond market, Treasury yields edged lower yesterday amid a relatively quiet session and are a further 1bp softer this morning.  European sovereign yields are also a touch softer, somewhere between -2bps and -4bps, generally speaking, while JGB yields fell a further 5pbps overnight and are now down to 0.69%.  This is certainly a far cry from the idea of tighter Japanese policy, although the yen continues to strengthen.  Two noteworthy aspects in the Treasury market are that the 20yr auction yesterday went off without a hitch as the tail was actually negative (the highest yield was lower than the when-issued price) and dealers only took down 9.5% of the auction.  This is a far cry from the terrible 30-year auction we saw last week.  But the other thing that is not getting much press is the fact that the yield curve continues to reinvert with the 2yr-10yr spread back to -48bps this morning.  Recall, this had fallen as low as -15bps and looked like it was about to normalize just a few weeks ago.  Arguably, investors are telling us that the prognosis for future growth is declining although they are still uncertain as to when the Fed will begin cutting rates.

Oil prices, which have rallied for the past several sessions, are a touch softer this morning as the market has become confused to the key drivers.  Does OPEC+ and its production matter more than economic activity?  Are supplies tight or loose?  I expect that we are going to continue to see uncertainty and volatile price action until something clearer shows up.  As to the metals markets, gold and silver have both rallied this morning with gold creeping back toward that $2000/oz level, although not yet breaking through.  But base metals are mixed with very minor movement.  While equity investors remain convinced the soft landing is a given, the commodity space is far less certain.

Finally, the dollar remains under pressure as sliding Treasury yields weigh on the greenback.  Once again JPY (+055%) is the leading gainer in the G10 and remarkably, CNY (+0.35%) is leading the way in the EMG space.  What is quite interesting here is that the spot USDCNY rate in the market has fallen below the fixing rate for the first time since June.  You may recall that the spot rate had been hovering at the 2% band limit for quite a while.  This is another indication that the near-term outlook for the dollar remains lower.

On the data front, we get the Chicago Fed National Activity Index (exp 0.02) and Existing Home Sales (3.9M) this morning and then the FOMC Minutes at 2:00 this afternoon.  You may recall that the Statement in the beginning of the month was seen as hawkish, but the press conference was seen as dovish and they talked about how financial conditions had tightened and helped the Fed along.  But now, those conditions have eased again.  Also, we have heard from so many Fed speakers in the interim, it is hard to believe that whatever they said three weeks ago is newsworthy.

So, with more eyes on the clock ,as folks want to get away for the holiday and are worried about travel conditions, than market conditions, I suspect today, and tomorrow and Friday, will be very quiet indeed.

Good luck

Adf

Could Cause Contraction

Posted on by 
A story that’s gained lots of traction
Is Jay will soon jump into action
By cutting the rates
They charge for short dates
Cause high real rates could cause contraction

In fact, this idea ‘s gone mainstream
And it’s now a favorite theme
But history shows
The ‘conomy grows
Despite real rates high with esteem

After a spate of slightly softer than expected data in the US, it is very clear the consensus in markets is that not only is the Fed finished raising rates, but that cuts are coming soon.  At this point, based on pricing on the CME for Fed funds futures, the Fed is going to cut rates by 100 basis points next year.  While I’m certainly no PhD economist (thank goodness!), this strikes me as a mistake.  Consider the following:

  1. If the economy really does go into recession in Q1 or Q2 of next year, where GDP turns negative and the Unemployment Rate rises close to 5.0%, it strikes me that the Fed is going to cut a lot more than 100bps.  In fact, the one thing we know is that Fed funds tend to decline much more rapidly than they rise as the Fed is usually responding late to some crisis.  So, a simple model can be created that shows 100bps of rate cuts is made up of a 20% probability of no movement at all; a 60% probability of 50bps of cuts next year as they try to tweak policy at the margin, and a 20% probability of 350bps of cuts as they respond to a recession and get aggressive.  Now, you can adjust those probabilities in any number of ways, but that seems reasonable to me.  However, that is not the market narrative.  Rather, the narrative is that the Fed is going to start to cut rates because policy is already overtight (real rates are positive) and they will want to get ahead of the curve.
  2. However, exactly why will the Fed need to cut, absent a full-blown recession?  Going back to 1982, these are the highest and lowest levels for real 10Yr yields, real Fed funds (defined as Fed funds – CPI) and Y/Y GDP each quarter:
 Real 10YrReal Fed fundsGDP Y/Y
Max7.60%8.30%9.60%
Min-0.35%-7.90%-2.20%

            Data: FRED database, calculations Fxpoet

So, we have seen real yields, both short- and long-term much higher and much lower than the current situation.  But the funny thing is, the relationship between GDP growth and real interest rates, whether 10Yr or overnight, is basically zero.  In fact, I ran the numbers and came up with an R2 of just 0.03 which tells me that there is no relationship of which to speak.  My point is just because real rates have risen to a positive level in the past year does not mean that the Fed has ‘overtightened’.  It just means that they have tightened policy trying to address what they still see as too high inflation.  It also does not indicate that because real yields have risen over the past quarters, that the economy is about to crash.  That’s not to say we are going to necessarily avoid recession, but the point is it will take much more than modestly higher real interest rates to push us over the edge.  At least that’s my view.

But for now, most markets are getting quite excited about the idea that peak interest rates are behind us and that the upcoming lower interest rates are going to support risk assets, especially equities, aggressively.  I feel a lot can go wrong with that model, but then I’m just an FX guy.

The Argentine people have spoken
As they want to fix what’s been broken
So, starting today
The new prez, Milei
Must change more than merely a token

A brief comment on this electoral outcome.  While Argentina’s economy is quite small on the global scale, I believe this is a harbinger of far more electoral shake-ups in 2024 and 2025.  We need only go back to 2015 when the Austrian presidential election was initially called for the complete outlier candidate, a non-politician as well as a right-wing firebrand, before being overturned by the courts there.  That story preceded the Brexit vote and then, of course, the election of Donald J Trump as US President in 2016.  People were very clearly tired of the political elite explaining why the masses needed to suffer while the elite got along just fine.  

The ensuing resistance by the entrenched politicians was fierce and so we saw Trump lose his reelection bid amidst great turmoil and then the election and collapse of Liz Truss in the UK.  But it appears that things have gotten worse in the broad populace’s collective mind, with inflation remaining stubbornly high, and perceptions of opportunity shrinking.  Combining those features with a growing distrust of media and government pronouncements after the Covid situation, where vaccines did not prove as efficacious as promised and, in fact, seemed to result in at least as many harms as benefits, and people are ready for a new look.

So, be prepared for some more non-traditional electoral winners next year.  Presidential elections are due in Taiwan, Mexico and the US with major regional elections throughout Germany, Canada, South Korea, India and the UK as well as the European Parliament.  Many people are quite pissed off at the incumbents around the world so look for more fragmentation and new faces.

This implies that much of how we consider the macroeconomic picture could well change.  And that means market volatility seems likely to increase further.  Just something to keep in mind, and an even more important reason to maintain hedges for major exposures, whether FX or interest rates.

Ok, it was easy to spend time on these issues as there is really nothing else going on.  Overnight, the only news was that the PBOC left their Loan Prime rates unchanged, as expected, so not really newsworthy.  Else, the biggest news over the weekend was arguably the Argentine elections.

It should not be surprising that market movement has been quite muted with the biggest equity move in Hong Kong (+1.85%) which is just a retracement of its recent woes.  Otherwise, Japanese markets fell somewhat (-0.6%) and the rest of APAC was very muted.  In Europe, there is a mix of gains and losses with nothing more than +/- 0.25%, so no real news and US futures are essentially unchanged at this hour (7:00).

Bond yields are, overall, a touch firmer this morning with Treasury and most European sovereign yields up 3bps.  But that is after another decline on Friday, and the 10yr remains quite close to its new home of 4.50%.  The ‘inflation is dead’ theme had a lot of proponents last week, but as we head into this, holiday shortened, week with limited new economic data, I suspect that things are going to be quiet without any new trends taking hold.  The market technicians explain that 4.33% and then 4.00% are the key yield supports.  So far, the first has held and I expect we will need to see much softer data to break it.

Oil prices are rebounding further this morning, up 1.5%, as there is talk that OPEC+ may be set to cut production even further with the price now below the level when they first initiated cuts in the summer.  There seems to be a disconnect between the official supply and demand data and the price, where the data would indicate prices should be higher.  One possible explanation has been that more Iranian oil has been reaching the market than officially allowed and so weighing on prices.  Alas, that is a very hard story to prove.  As to the metals markets, precious metals are softer this morning, but still retain the bulk of their recent gains while copper (+0.4%) is higher after Chinese demand indicators started to show strength.  

Finally, the dollar is starting to edge lower this morning as NY walks in the door after a very quiet overnight session.  USDJPY is the leader here, falling -0.8%, and we are seeing a large decline in USDCNY (-0.55%) as well.  Recently, there has been a distinct uptick in the number of pundits who are calling for a sharp decline in USDJPY.  Much is predicated on reading between the lines on Ueda-san’s pronouncements and expecting that QQE is finally going to end there.  Ironically, 10yr JGB yields are down to 0.74%, well below the highs seen at the beginning of the month and do not appear to be headed higher, at least for now.  To the extent that the Japanese MOF actually does want a stronger yen, something about which I am not at all certain, one must beware the idea that they could come in and intervene now, when they are jumping on the bandwagon rather than trying to stop a rush against them.  It would certainly be a lot more effective and would likely change a lot of opinions.  The one thing I have learned in my time in the markets is that when USDJPY starts to move lower, it can do so very quickly and for quite a long way.  

Away from those two currencies, both Aussie and Kiwi are firmer by about 0.6%, benefitting from strength in the renminbi as well as most commodity prices.  Not surprisingly, NOK (+0.5%) is rallying although it is a bit more surprising that CAD is essentially unchanged on the day.  Also remarkable is that CNY is the biggest mover in the EMG space, with most other currencies just barely changed on the day.

During this holiday week, there is very little data to be released with Existing Home Sales (exp 3.9M) tomorrow along with the FOMC Minutes and then Durable Goods (-3.2%, +0.1% ex transport) on Wednesday along with the Claims data.  Happily, it appears that the FOMC has taken this week off and will not be adding to their recent commentary.

Overall, the short-term trend appears to favor softness in interest rates leading to modest strength in risk assets and weakness in the dollar.  I am not yet convinced that is the long-term view, but for this week, I think that’s a fair bet.

Good luck

Adf

Risk Were Inbred

Posted on by 
In China, the problems have spread
From property company dread
To shadow finance
Where folks took a chance
To earn more though risks were inbred

And elsewhere, the Argentine voters
Surprised governmental promoters
By choosing a man
Whose primary plan
Is ousting Peronist freeloaders

While the goal of this commentary is to remain apolitical, there are times when the politics impacts the markets and expectations for future movement so it must be addressed, though not promoted on either side.  Today, amid general summer doldrums, it seems there are more political stories around that are either having or have the potential to impact financial markets.

But first, a quick look in China where the latest problem to bubble to the surface comes from Zhongzhi Enterprise Group Company, one of the many shadow banking companies in the country.  These firms are conduits for investment by wealthier individuals and corporations who offer structured products and investments promising higher returns than the banking sector.  And they are quite large, with an estimated $2.9 trillion invested in the sector.  Well, Zhongzhi has roughly $138 billion under management and last week they apparently missed some coupon payments on several of these high-yielding investments.  While this is the first that we have heard of problems in the sector, given the terrible performance of the Chinese equity market as well as the ongoing collapse of the Chinese property market, my guess is this won’t be the last firm with a problem.  As has often been said, there is never just one cockroach when you turn on the lights.

As proof positive that there is really no difference between the Chinese and US governments, the first response by the Chinese was to set up a task force to investigate the risks at Zhongzhi and its brethren shadow banks.  That sounds an awful lot like what would happen here, no?  Anyway, depending on who is invested in Zhongzhi and whether they are politically important enough to bail out, I suspect that there will be government intervention of some sort.  Do not be surprised to hear about Chinese banks making extraordinary loans to the sector or guarantees of some kind put in place.  The last thing President Xi can afford at this time is a meltdown in a different sector of the financial space.

It can be no surprise that Chinese equity markets were under pressure again last night, with both the Hang Seng and CSI 300 falling sharply, nor that the renminbi has fallen to its weakest levels since the dollar’s overall peak last October.  I maintain that 7.50 is in the cards here and that it is simply a matter of time before we get there.  In the end, a weaker CNY is the least painful way for China to support its economy, especially since it is a big help to its export industries which remain the most important segment of the economy.  Later this week we will see the monthly Chinese data on investment and activity so it will be interesting to see how things are ostensibly progressing there.  However, this data must always be consumed with an appropriate measure of salt (or something stronger) as there is no independent way to determine its veracity.

Meanwhile, on the other side of the world, a presidential primary in Argentina resulted in a huge surprise with Javier Milei, a complete outsider and ostensible free market advocate, winning the most votes, more than 30%.  The election comes in October and the ruling Peronist party is at risk of being eliminated in the first round.  What struck a chord in the country was his plan to dollarize the economy and close the central bank as well as to shut down numerous government agencies.  Inflation there remains above 115% so it can be no surprise that someone who promised to change the process garnered a lot of support.

I raise this issue because in Germany, the AfD (Alternative für Deutschland) party is currently polling at >21%, the second largest party in the country, and that has a lot of people very concerned.  Like Senor Milei, the AfD’s platform is based on destruction of much of the current government setup.  Because this party is on the right, and given Germany’s dark history with the far right, the latest idea mooted has been to ban the party completely.  Now, certainly the idea of a resurrection of the Nazi party is abhorrent to everyone except some true extremists, but simply banning the party seems a ridiculous idea.  After all, the members will either create a new party with the same support or take over a smaller existing party and drive the platform in the desired direction.  

Support for Marine LePen in France continues to grow, as does support for right of center parties throughout Europe, especially Eastern Europe.  And of course, here in the US, the upcoming election has fostered even more polarization along partisan lines with the Republican party seeming to gain a lot of support of late.  All this implies that there is a chance of some real changes in the financial world that will accompany these political changes.  At this point, it is too early to determine how things will play out, but as we are currently in the Fourth Turning, as defined by historian Neil Howe, the part of civilization’s cycle when there is great unrest, I expect there will be a lot more change coming.  Food for thought.  And it is for this reason that hedging exposures is so critical.

Ok, last week’s inflation readings were mixed, with CPI a bit softer than forecast while PPI was a bit firmer.  But the one consistency was that Treasury yields rose regardless of the situation.  After a further 5bp rise on Friday, 10yr yields are unchanged at 4.15% this morning, an indication that inflation concerns remain front of mind for most investors.  I expect that the peak yields seen back in October will be tested again soon.  As to European sovereigns, while yields there are down a tick this morning, the trend there remains higher as well.

Equity markets, too, have had some trouble of late, sliding a few percent over the past several weeks.  While the move lower has been modest so far, there is clearly concern over a technical break lower should the indices break below their 50-day moving averages.  With yields heading higher, I fear that is the path of least resistance for now.

Oil prices are a touch softer this morning but remain well above $80/bbl and appear to be consolidating before their next leg higher.  Supply is still a consideration and given economic activity continues to outperform, I suspect higher is still the path going forward.  Metals prices are little changed this morning despite some incipient dollar strength, so keep that in mind as well.

Finally, the dollar is much stronger against its Asian counterparts and modestly stronger against most others this morning.  Continuing rises in US yields offer support for the greenback and increased turmoil elsewhere, along with the US economy seemingly outperforming all others have been the hallmarks of the dollar’s strength.  I don’t see that changing soon.

Data this week brings the following:

TuesdayRetail Sales0.4%
 -ex autos0.4%
 Empire Manufacturing-0.7
 Business Inventories0.1%
WednesdayHousing Starts1445K
 Building Permits1468K
 IP0.3%
 Capacity Utilization79.1%
 FOMC Minutes 
ThursdayInitial Claims240K
 Continuing Claims1700K
 Philly Fed-10.5

Source: Bloomberg

While Retail Sales will be watched for their economic portents, I think the Minutes will be the most interesting part of the week, especially as we have now had at least two FOMC voters, Harker and Williams, talk about cutting rates next year.  

For today, while US equity futures have edged higher so far, I feel like the dollar has legs for now.  This will be confirmed if yields continue to rise.

Good luck

Adf

Flummoxed

Posted on by

Kuroda flummoxed
As inflation fails to rise
How low can rates go?

You know things are tough in Japan, at least for the BOJ, when a sales tax hike, that in the last go-round increased inflation by nearly two percentage points, had exactly zero impact on the latest CPI readings. Last night’s Tokyo CPI data was released at 0.4%, unchanged from the September data and well below the 0.7% expected. And that’s an annual number folks, not the monthly kind. It seems that the government’s efforts to help young families by reducing tuition for pre-school and kindergarten to zero was enough to offset the impact of the rise in the Goods and Services Tax, essentially the Japanese VAT. However, the upshot is that CPI inflation, at least in Tokyo which is seen as a harbinger for the nation as a whole, remains nonexistent. Now for the average Japanese family, one would think that is a good thing. After all, who wants the prices of the stuff they need to buy rising all the time. But for the BOJ, who doggedly continues to believe that unless inflation rises to 2.0% the economy will implode, it is merely the latest sign that central banks are out of ammunition.

The yen’s response to this ongoing futility was to rise ever so marginally, not quite 0.1%, but that has not changed its more recent trend. In the past two months, the yen has weakened a solid 4.4%. But the picture changes if you step a bit further back for more perspective. Over the past six months, since late April, the yen has actually strengthened nearly 3.0%. So, which is it; is the yen getting stronger or weaker? In fact, I would argue that it is doing neither, but rather the yen is in a major long-term consolidation pattern (a triangle formation for the technicians out there) and that barring a major exogenous shock like a GFC2, the yen is likely to continue trading in an even narrower range going forward, perhaps for as long as the next year. The thing is, these triangle patterns tend to resolve themselves with a very significant break-out move when they end. At this stage, there is no way to discern which direction that will follow, and , as I said, it is probably a year away, but it is quite realistic to expect that the doldrums we have experienced in the yen for the past many years is likely to end. Perhaps the US presidential election will be the catalyst to cause a change, at least the timing will be right.

For hedgers, the best advice I can offer is to extend the tenor of your hedges as much as you can. This is especially true for receivables hedgers, where the carry is in your favor. But the reality is that even a payables hedger needs to consider the benefits of hedging in an extremely low volatility environment as opposed to waiting until a breakout, which may result in the yen jumping higher by as much as 5%-10%, completely outweighing the current cost of carry.

Three Latin American nations
Have populist administrations
Brazil, on the right
Of late’s shining bright
But fear’s grown ‘round Argie’s relations

For the past two weeks, the story in Brazil has been one of unadulterated joy, at least for investors. The real has rallied more than 5.0% in that time as President Jair Bolsonaro, the right-wing firebrand, has been able to push pension reform through congress there. That has been warmly received by markets as it implies that Brazil’s long-term finances are likely to remain under control. The pension system had been massively underfunded and was far too generous relative to the government’s ability to pay. Correcting these problems is seen as crucial to allowing Brazil to move forward with other investments to help the nation’s economy and productivity. Again, a glance at the charts shows that USDBRL has formed a triple top formation and is already accelerating lower. Quite frankly, it would not surprise to see BRL strengthen to 3.70 before this movement is over.

Turning to Mexico, it too has performed extremely well over the past two months, rallying more than 5% during that time. It is interesting that the markets have been extremely patient with AMLO as, since his initial action to cancel the Mexico City Airport construction, which was seen in an extremely negative light, his policies have been far less disruptive than most investors feared. Clearly, Mexico has been a beneficiary of the ongoing US-China trade war as companies seek low cost manufacturing sites near the US and given the (still pending) USMCA trade agreement, there is more confidence that companies will be able to set up shop there with fewer repercussions.

However, as with the yen, I might argue that what we have seen over the past five years is an increasingly narrowing consolidation in the peso’s exchange rate, albeit with a tad more volatility attached. And the thing about this pattern is its culmination is likely to occur much sooner than that in the yen. A quick look at MXN’s PPP shows that the peso remains significantly undervalued vs. the dollar, and in truth vs. most currencies. All this points to the idea that barring any surprisingly anti-business actions from AMLO, the peso may be setting up for a much larger rally, especially with the carry benefits that continue to exist.

Argentina, on the other hand, with newly elected left-wing President Fernandez, has its work cut out for itself. If you recall, the preliminary vote back in August, saw the peso decline more than 35%, and while it was choppy for a bit, the price action of late has been for steady depreciation. It is too early to know what Fernandez will do, but given the dire straits in the Argentine economy, with inflation running north of 50% while growth is shrinking rapidly and the debt situation is untenable, it seems the path of least resistance is for ARS to continue to weaken.

A quick look at the majors sees the dollar generally firmer this morning as there is a mild risk-off sentiment in markets. However, the news moments ago that the Labour party agreed to an early election has helped bolster the pound specifically, and risk in general. I expect that the pound will now be reacting to the polls as it becomes clearer if Boris can win with a majority, or if he will go down to defeat and perhaps an even more beneficial outcome for the pound will arise, the withdrawal of Article 50. My money remains on a Johnson victory and a Brexit with the recently negotiated deal.

This morning we get two minor pieces of data, Case Shiller Home Prices (exp 2.10%) and Consumer Confidence (128.0). Yesterday we did see a weak Dallas Fed manufacturing index print, but equity markets made new highs. I can see little reason, beyond the ongoing Brexit story, for traders to alter their positions ahead of tomorrow’s FOMC meeting, and so anticipate another quiet day in the market.

Good luck
Adf

So Despised

Posted on by

Is anyone truly surprised
That Parliament, once authorized
To find a solution
Found no substitution
For May’s deal that they so despised?

One of the more confusing aspects of recent market activity was the rally in the pound when Parliament wrested control of the Brexit process from PM May. The idea that a group of 650 fractious politicians could possibly agree on a single idea, especially one so fraught with risks and complexities, was always absurd. And so, predictably, yesterday Parliament voted on seven different proposals, each designed to be a path forward, and none of them even came close to achieving a majority of votes. This included a vote to prevent a no-deal Brexit. In the meantime, PM May has now indicated she will resign regardless of the outcome, which, arguably, will only lead to more chaos as a leadership fight will now consume the Tories. In the meantime, there is still only one deal on the table, and it doesn’t appear to have the votes to become law. As such, while I understand that the idea of a hard Brexit is anathema to so many, it cannot be dismissed as a potential outcome. It should not be very surprising that the FX market is taking the idea a bit more seriously this morning, although only a bit, as the pound has fallen a further 0.4%, which makes the move a total of 1.0% lower in the past twenty-four hours.

One way to look at the pound’s value is as a probability weighted price of three potential outcomes; no deal, passing May’s deal and a long delay. Based on my views that spot would trade to 1.20, 1.38 or 1.40 depending on those outcomes, and assigning probabilities of 40%, 20% and 40% to those outcomes, spot is actually right where it belongs near 1.3160. But that leaves room for a lot of movement!

Meanwhile, elsewhere in the FX market, volatility is making a comeback. Between Turkey (-5.0%), Brazil (-3.0%) and Argentina (-3.0%), it seems that traders are beginning to awaken from their month’s long hiatus. Apparently, the monetary policy anesthesia that had been administered by central banks globally is wearing off. As it happens, each of these currencies is dealing with local specifics. For instance, upcoming elections in Turkey have President Erdogan on the defensive as his iron grip on power seems to be rusting and he tries to crack down on speculators in the lira. Meanwhile, recently elected Brazilian president Bolsonaro has seen his honeymoon end quite abruptly with his approval ratings collapsing and concerns over his ability to implement key policies seen as desirable by the markets, notably pension reform. Finally, Argentine president Macri remains under pressure as the slowing global growth picture severely restricts local economic activity although inflation continues to run away to unsustainable levels (4% per month!) and the peso, not surprisingly is suffering.

As to the G10, activity there has been less impressive although the dollar’s tone this morning is one of strength, not weakness. In fact, risk continues to be jettisoned by investors as can be seen by the continuing rally in government bonds (Treasury yields falling to 2.35%, Bund yields to -0.07%, JGB’s to -0.09%) while equity markets were weak in Asia and have gained no traction in Europe. Adding to the impression of risk-off has been the yen’s rally (0.2% overnight, 1.0% in the past week), a reliable indicator of market sentiment.

Turning to the data, yesterday saw the Trade Balance shrink dramatically, to -$51.1B, a much lower deficit than expected, and sufficient to positively impact Q1 GDP measurement by a few tenths of a percent. This morning we see the last reading on Q4 GDP (exp 1.8%) as well as Initial Claims (225K). Given the backward-looking nature of Q4 data, it seems unlikely today’s print will impact markets. One exception to this thought would be a much weaker than expected print, which may convince some investors the global slowdown is more advanced than previously thought with equities selling off accordingly. But a better number is likely to be ignored. We also hear from (count ‘em) six more Fed speakers today (Quarles, Clarida, Bowman, Williams, Bostic and Bullard), but given the consistency of recent comments by others it seems doubtful we will learn anything new. To recap, every FOMC member believes that waiting is the right thing to do now and that they should only respond when the data indicates there is a change, either rising inflation or a significant slowing in the economy. Although the market continues to price rate cuts before the end of the year, as yet, there is no indication that Fed members are close to believing that is necessary.

Ultimately, the same key stories are at the fore in markets. Brexit, as discussed above, slowing global growth and the monetary policy actions being taken to ameliorate that, and the US-China trade talks, which are resuming but have made no new progress. One of the remarkable features of markets lately has been the resilience of equity prices despite a constant drumbeat of bad economic news. Investors have truly placed an enormous amount of faith in central banks (specifically the Fed and ECB) to be able to come to the rescue again and again and again. Thus far, that faith has been rewarded, but keep in mind that the toolkit continues to dwindle, so that level of support is likely to diminish. In the end, I continue to see the dollar as a key beneficiary of the current policy mix, as well as the most likely ones for the near future.

Good luck
Adf

 

Too Arcane

Posted on by

The Fed took the time to explain
Why ‘Neutral’ they’ll never attain
Though theories suppose
O’er that rate, growth slows
Its measurement is too arcane

If one needed proof that Fed watching was an arcane pastime, there is no need to look beyond yesterday’s activities. As universally expected, the FOMC raised the Fed funds rate by 25bps to a range of 2.00% – 2.25%. But in the accompanying statement, they left out the sentence that described their policy as ‘accommodative’. Initially this was seen as both surprising and dovish as it implied the Fed thought that rates were now neutral and therefore wouldn’t need to be raised much further. However, that was not at all their intention, as Chairman Powell made clear at the press conference. Instead, because there is an ongoing debate about where the neutral rate actually lies, he wanted to remove the concept from the Fed’s communications.

The neutral rate, or r-star (r*) is the theoretical interest rate that neither supports nor impedes growth in an economy. And while it makes a great theory, and has been a linchpin of Fed models for the past decade at least, Chairman Powell takes a more pragmatic view of things. Namely, he recognizes that since r* cannot be observed or measured in anything like real-time, it is pretty useless as a policy tool. His point in removing the accommodative language was to say that they don’t really know if current policy is accommodative or not, at least with any precision. However, given that their published forecasts, the dot plot, showed an increase in the number of FOMC members that are looking for another rate hike this year and at least three rate hikes next year, it certainly doesn’t seem the Fed believes they have reached neutral.

The market response was pretty much as you would expect it to be. When the statement was released, and initially seen as dovish, the dollar suffered, stocks rallied and Treasury prices fell in a classic risk-on move. However, once Powell started speaking and explained the rationale for the change, the market reversed those moves and the dollar actually edged higher on the day, equity markets closed lower and Treasury yields fell as bids flooded the market.

In the end, there is no indication that the Fed is slowing down its current trajectory of policy tightening. While they have explicitly recognized the potential risks due to growing trade friction, they made clear that they have not seen any evidence in the data that it was yet having an impact. And given that things remain fluid in that arena, it would be a mistake to base policy on something that may not occur. All told, if anything, I would characterize the Fed message as leaning more hawkish than dovish.

So looking beyond the Fed, we need to look at everything else that is ongoing. Remember, the trade situation remains fraught, with the US and China still at loggerheads over how to proceed, Canada unwilling to accede to US demands, and the ongoing threat of US tariffs on European auto manufacturers still in the air. As well, oil prices have been rallying lately amid the belief that increased sanctions on Iran are going to reduce global supply. There is the ongoing Brexit situation, which appears no closer to resolution, although we did have French President Macron’s refreshingly honest comments that he believes the UK should suffer greatly in the process to insure that nobody else in the EU will even consider the same rash act as leaving the bloc. And the Italian budget spectacle remains an ongoing risk within the Eurozone as failure to present an acceptable budget could well trigger another bout of fear in Italian government bonds and put pressure on the ECB to back off their plans to remove accommodation. In other words, there is still plenty to watch, although none of it has been meaningful to markets for more than a brief period yet.

Keeping all that in mind, let’s take a look at the market. As I type (which by the way is much earlier than usual as I am currently in London) the dollar is showing some modest strength with the Dollar Index up about 0.25% at this point. The thing is, there has been no additional news of note since yesterday to drive things, which implies that either a large order is going through the market, or that short dollar positions are being covered. Quite frankly, I would expect the latter reason is more compelling. But stepping back, the euro has traded within a one big figure range since last Thursday, meaning that nothing is really going on. The same is true for most of the G10, as despite both data and the Fed, it is clear very few opinions have really changed. My take is that we are going to need to see material changes in the data stream in order to alter views, and that will take time.

In the emerging markets, we have two key interest rate decisions shortly, Indonesia is forecasts to raise their base rate by 25bps to 5.75% and the Philippines are expected to raise their base rate by 50bps to 4.50%. Both nations have seen their currencies remain under pressure due to the dollar’s overall strength and their own current account deficits. They have been two of the worst three performing APAC currencies this year, with India the other member of that ignominious group. Meanwhile, rising oil prices have lately helped the Russian ruble rebound with today’s 0.2% rally adding to the nearly 7% gains seen in the past two plus weeks. And look for the Argentine peso to have a solid day today after the IMF increased its assistance to $57 billion with faster disbursement times. Otherwise, it is tough to get very excited about this bloc either.

On the data front, this morning brings the weekly Initial Claims data (exp 210K), Durable Goods (2.0%, 0.5% ex transport) and our last look at Q2 GDP (4.2%). I think tomorrow’s PCE data will be of far more interest to the markets, although a big revision in GDP could have an impact. But overall, things remain on the same general trajectory, solid US growth, slightly softer growth elsewhere, and a Federal Reserve that is continually tightening monetary policy. I still believe they will go tighter than the market has priced, and that the dollar will benefit accordingly. But for now, we remain stuck with the opposing cyclical and structural issues offsetting. It will be a little while before the outcome of that battle is determined, and in the meantime, a drifting currency market is the most likely outcome.

Good luck
Adf

 

Doves Will Despise

Posted on by

Come two o’clock later today
The Fed will attempt to convey
How high rates may rise
Though doves will despise
The idea that more’s on the way

Ahead of the conclusion of the FOMC meeting today, very little has happened in the FX markets, and in fact, in most markets. At this point, given the fact that the Fed remains one of the key drivers to global monetary policy, and the still significant concern that the ongoing divergence in Fed policy with that of the rest of the world can have negative consequences, pretty much every investor is awaiting the Fed statement and Chairman Powell’s press conference. It is a foregone conclusion that they will raise the Fed Funds rate by 25bps to 2.00% – 2.25%.

So the big question is just what the dot plot will look like, especially since today is the first time we will see their 2021 forecasts. Economists and analysts have slowly accepted that the Chairman is on a mission here, and that rates are going to continue to rise by 25bps every quarter at least through June 2019. That would put Fed Funds at 2.75% – 3.00%, a level that is currently seen as ‘neutral’. But what is still uncertain is how the Fed itself expects the economy to evolve beyond the end of the previous forecast period. Any indication that their models point to faster growth would be quite surprising and have a market impact. In fact, the most recent Fed forecasts have been for the economy to peak soon and begin to slow back to a 2.0% GDP growth rate by 2020. It is changes in this trajectory that will be of the most interest. That and Chairman Powell’s comments and answers at the press conference. But at this point, all we can do is wait.

Looking around the rest of the world, we see that central banks everywhere continue to have their policy dictated by the Fed. Two examples are Indonesia and the Philippines, both of whom are expected to raise rates this week (Indonesia by 25bps, Philippines by 50bps) as both of these nations continue to run current account deficits and have seen their currencies erode in value faster than any of their Asian peers other than India. The nature of these two countries, which is quite common in the emerging market sphere, is that currency weakness passes through quickly to higher inflation, and so the dollar strength that we have seen since the beginning of Q2 has already had a significant impact. It is this issue that has prompted a number of emerging market central bankers to caution Chairman Powell of the negative consequences of the current Fed policy trajectory. However, Powell has dismissed these out of hand and the Fed continues on its course.

The other notable movement in the EMG bloc was in Argentina, where the central bank president resigned after just three months on the job. Luis Caputo was both liked and respected by markets and the FX market responded by pushing the peso lower by 2.5% on the news. Of course, in the broad scheme of things, this is not very much compared to the currency’s 50% decline this year.

Pivoting to the G10, FX movement has been modest overall, with the biggest movers AUD and NZD, both of which seem to be benefitting from the recent revival in commodity prices. There has been no new Brexit news and so the pound remains relatively unscathed. Meanwhile, after Monday’s excitement in the euro following Signor Draghi’s “relatively vigorous” comments, it seems that ECB member Peter Prâet was trotted out to explain that there was no change in the committee’s view and that rates would not be rising until much later next year. Ultimately, however, the euro is essentially unchanged on the day, with the market having drawn that conclusion shortly after the comments were made.

Yesterday’s US data showed that Consumer Confidence was approaching all time highs but House prices seemed to display some weakness. This is the perfect mix for the Fed, lessening price pressures along with optimism on economic growth. I assure you this will not deter the Fed from continuing on its path. Before the FOMC meeting ends this afternoon, New Home Sales data will print, expected to be 630K, which looks right about in line with the longer term trend, albeit showing some softness from the situation earlier this year.

I see no reason to expect that the market will move significantly before the FOMC, and of course, can only watch with the rest of the market to see what actually comes from the meeting as well as what the Chairman says. Until then, look for a quiet session.

Good luck
Adf

 

Realistic

Posted on by

As far as the market’s concerned
The mood out of Brussels has turned
They’re quite optimistic
A deal is “realistic”
By early November, we’ve learned

Michel Barnier, the EU negotiator for Brexit has lately changed his tune. Last month, ostensibly at the direction of his political masters, he was playing hardball, shooting down every UK proposal as inadequate and saying there was no negotiating room on the EU’s positions. Not surprisingly, the pound came under pressure during this period, trading to its lowest level in more than a year and approaching the post-vote lows. But a funny thing happened during the past week, Europe suddenly figured out they didn’t really want a no-deal Brexit. The first inkling came from comments by German officials who indicated that compromises were available. That changed the tone of the negotiations and suddenly, as I mentioned last week, it seemed that a deal was more likely. Those comments last week helped the pound rally more than 1%. Then yesterday morning Barnier explained that a deal is both “realistic” and “possible” within 6-8 weeks. It should be no surprise that the pound rallied yet again on the news, jumping another 1% during the US session and maintaining those gains ever since.

Regular readers will know that I have been quite bearish on the pound for two reasons; first is the fact that I continue to see the dollar strengthening over the medium term as the Fed’s tighter monetary policy leads all developed nations and will continue to do so. But the other reason was that I have been quite skeptical that a Brexit deal would be agreed and that the initial concern over damage to the UK economy would undermine the currency. However, this change in tone by the EU over Brexit is almost certainly going to have a significant positive impact on the pound’s value vs. both the euro and the dollar. And even though any deal is likely to be short on details, I expect that we will see the pound outperform the euro for the next several months at least. So any dollar strength will be less reflected vs. the pound than the euro, while any dollar weakness should see the pound as the top performer. The thing is, the details of the deal still matter a great deal, and at some point in the future, the UK and the EU are going to need to figure out how they are going to deal with the Irish border situation, even if they have kicked that particular can further down the road for now.

While on the topic of the UK, I would be remiss if I didn’t mention that the employment situation there remains robust. Unemployment data was released this morning showing the Unemployment Rate remained at 4.0%, the lowest level since 1975, while wage growth accelerated to 2.9%. The latter potentially presages further inflation, as measured productivity in the UK remains quite soft at 1.5% per annum. If this continues, higher wages amid low productivity, the BOE may find itself forced to raise rates regardless of the Brexit situation. Yet another positive for the beleaguered pound. Perhaps the bottom is in after all.

However, away from yesterday’s news on the pound, the FX markets have been quite uninteresting in the past twenty-four hours. Arguably, the dollar is a touch stronger, but the movement has been minute. Even the emerging market bloc has been less active with perhaps the most notable feature the fact that INR continues to trade to new historic lows (dollar highs) every day. As to the group of currencies that has led the turmoil, TRY, ARS and ZAR, all of them are slightly firmer this morning as they continue to consolidate their losses over the past month. In addition, we hear from the central banks of both Argentina (today) and Turkey (tomorrow), with more attention focused on the latter than the former. Recall that Argentine interest rates are already the world’s highest at 60% and no move is anticipated. However, Turkey’s meeting is anxiously awaited as the market is looking for a 300bp rate hike to help stem rising inflation and the currency’s weakness. The problem is that Turkish President Erdogan has been quite adamant that he is strongly against higher interest rates and given his apparent control over the central bank, it is by no means assured that they will act according to the market’s expectations. Be prepared for another leg lower in the lira if the Bank of Turkey disappoints.

As to today’s session, the NFIB Small Business Index was released at 108.8, stronger than expected and a new record high for the release. Despite the trade concerns and the political circus in Washington, small businesses have never been more confident in their future. I will admit that this almost seems like whistling past the graveyard, but for now everything is great. Later this morning we see the JOLTs Job report (exp 6.68M), which should simply reconfirm that the employment situation in the US remains robust.

And that’s really it for today. Equity futures are flat although the 10-year Treasury is continuing its recent trend lower (higher yields), albeit at a slow rate. There is certainly no evidence that the Fed is going to change its path, but for today, it seems unlikely that we will see much movement in either direction beyond what has already occurred. Barring, of course, any surprising new comments.

Good luck
Adf