Too Arcane

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
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Doves Will Despise

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
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Realistic

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
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Mostly At Peace

Ahead of the payroll release
The market is mostly at peace
But there is no sign
The recent decline
In values is set to decrease

While I apologize for the double negative, this morning’s price action is a story of consolidation of recent losses across emerging market currencies and their respective equity markets. In fact, the biggest gainers in the FX markets today are some of the currencies that have been suffering the most recently. For example, the South African rand is higher by 1.4% on the day, but still down nearly 3.0% this week. Meanwhile in Brazil, in the wake of the assassination attempt on Brazilian presidential candidate Jair Bolsonaro, the real has rebounded 1.75%, essentially recouping the week’s losses, although is still down almost 8.0% this month. The story here is that Bolsonaro, who was leading in the polls and is favored by markets due to his free-market leanings, is expected to receive a sympathy vote along with more press coverage, and has increased his odds of winning the election next month. And of course, everyone’s favorite pair of losers, TRY and ARS, are both firmer this morning as well, by 3.5% and 2.75% respectively, but both remain down substantially in the past month. And there is no sign that policy is going to change sufficiently to have any positive impact in the short term. In other words, while many EMG currencies have performed well overnight, there is little reason to believe that the unfolding crisis in the space has ended.

Turning to the biggest news of the day, the payroll report is due with the following expectations:

Nonfarm Payrolls 191K
Private Payrolls 190K
Manufacturing Payrolls 24K
Unemployment Rate 3.8%
Average Hourly Earnings 0.2% (2.7% Y/Y)
Average Weekly Hours 34.5

If forecasts are on the mark, it will simply represent a continuation of the current US expansion and cement the case for two more rate hikes by the Fed this year. In fact, we would need to see substantially weaker numbers to derail that process on a domestic basis. And given yesterday’s Initial Claims data of 203K, the lowest print since 1969, it seems highly unlikely that this data will be weak.

A second factor reinforcing the view that the Fed will remain on their current rate-raising path was a comment by NY Fed President John Williams. Yesterday, after a speech in Buffalo, he said that he would not be deterred from raising rates simply because it might drive the yield curve into an inversion. This is quite a turn of events for Williams who had historically leaned more dovish when he was at the San Francisco Fed. In addition, it is exactly the opposite from what we have recently heard from two separate Fed presidents, Atlanta’s Bostic and St Louis’ Bullard, both of who were explicit in saying they would not vote for a rate hike if that would cause an inversion. Of course, neither of them is a voter right now while Williams is, so his voice is even more important.

While it is not clear whether Chairman Powell is of a like mind on this subject, there is certainly no evidence that Powell is going to be deterred from his current belief set that further gradual rate hikes are necessary and appropriate. The one thing that is very clear is that the current Fed is focused almost entirely on the US economy, to the exclusion of much of the rest of the world. And this focus reduces the chance that Powell will respond to further emerging market instability unless it reaches a point where the US economy is likely to be impacted. As far as I can tell, the Fed’s focus remains on the impact of the recent increase in fiscal stimulus and how that might impact the inflation situation.

There is one other thing to keep in mind today, and going forward, and that is that yesterday was the last day of comment period on President Trump’s mooted tariff increase on a further $200 Billion of Chinese imports. If he does follow through by implementing these tariffs, look for significant market impact with the dollar resuming its climb and a much bigger negative impact on equity markets as investors try to determine the impact on company results. Also look for commodity prices to decline on the news.

But that is really it for the day. Ahead of the data there is little reason for much of a move. However, even after the data, assuming the forecasts are reasonably accurate, I would expect the dollar’s consolidation to continue. In the end, though, all signs still point to a stronger dollar over time.

Good luck
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Their Canard

At last both the Germans and Brits
Realized, nations both, would take hits
If Brexit was hard
So now their canard
Is claiming, details, they’ll omit

The tone of the market changed early yesterday afternoon when a story hit the tape about Brexit indicating that both sides had moved closer to finding an agreement. While some might say this is simply a muddle-through effort (and I would be one of those) the facts seem to be that both sides are willing to move forward with far less specificity than had previously been demanded. In a nutshell, the prior stance had called for a Brexit agreement that was explicit as to the solutions for things like the Irish border issue when the UK leaves the EU. In essence, while both sides agree a transition period is necessary, the EU especially, was demanding to know the details of how things would eventually fall out. Of course, the UK couldn’t discuss those given the amount of internal dissention amongst the May government on the issue. But now, the Germans have said that those details could wait until after the March 2019 exit, and that the future trade agreement can be negotiated in more detail then. This opens the door for a more wishy-washy Brexit agreement, which is likely the only type that can be approved by both the UK Parliament and the EU’s 28 other members.

The market impact was immediate with the pound gapping higher by 1% when the story was released, and although it has given back a portion of those gains, it remains higher overall today. The euro, too, jumped at the same time, albeit not quite as far, with an immediate bump of 0.5%, most of which it has retained. The real question, though, seems to be; is this a temporary situation, or has there been a fundamental change in the FX market?

Certainly there is a valid argument that a positive turn in the Brexit negotiations should lead to further pound strength. After all, while the dollar has appreciated a solid 6% against a basket of currencies since April, the pound has fallen more than 10% over that time. It is not unreasonable to assume that the difference is attributable to the steadily deteriorating views on a positive Brexit outcome. If the Brexit situation becomes less fraught, then a rebound in the pound would be a natural outcome. While one day does not make a trend, we will watch this closely going forward.

But aside from the news on Brexit, the main theme in the markets continues to be the ongoing meltdown in EMG currency and equity markets. Yesterday saw some of the worst behavior we have witnessed in this move, and the term contagion was bandied about in many analyses. This morning, things have settled down a bit, and actually we are seeing several of the worst hit currencies claw back a small portion of recent losses. For example, ZAR, which had fallen nearly 6.0% yesterday, is higher by 0.75% this morning. MXN, which lost 2.5% yesterday at its worst, has since regained about half of that with 0.5% coming this morning. Meanwhile, both TRY and ARS, the leaders of the pack when it comes to collapsing currencies, are both higher by a bit over 1% this morning. Of course, relative to their 20+% declines in the past month, this is small beer. However, the point is that the market feels far more stable this morning than yesterday’s situation.

Despite this morning’s stability, though, the broader issues remain. I assure you that neither Turkey nor Argentina have solved their macroeconomic problems. Inflation remains rampant in both nations and will continue to do so for a while. India, Brazil and Indonesia still have large C/A deficits and the Fed has not yet changed its tune. They will raise rates by 25bps later this month, and the odds are still quite high they will do so again in December. This tells me that today’s price action is a breather as traders and investors prepare themselves for tomorrow’s payroll report. Remember, one of the things we learned from Powell’s Jackson Hole speech was that the Fed is closely watching the data and has concerns about an overheating economy. If tomorrow’s data shows higher than expected hourly earnings, or a dip to 3.7% Unemployment, those could well be the signals that add urgency to their tightening process.

Meanwhile, looking ahead to the rest of the US session, we get quite a bit of data as follows:

ADP Employment 190K
Initial Claims 214K
Nonfarm Productivity 3.0%
Unit Labor Costs -0.9%
Factory Orders -0.6%
ISM Non-Manufacturing 56.8

This week’s ISM data was very strong, and the Trade Deficit has blown out as US growth outpaces that of pretty much every other developed nation. So as far as the data story goes, there is no reason to believe that the Fed is going to pause in the near term, despite concerns over the shape of the yield curve. And given that stance, I remain a firm believer in the dollar’s potential. Until the Fed changes its tune, I see no reason to change mine.

Good luck
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Investor Frustrations

There once was a wide group of nations
Whose growth was built on weak foundations
Their policy actions
Are seen as subtractions
Increasing investor frustrations

Boy, I go away for a few days and world virtually collapses!!!

Needless to say, a lot has happened since I last wrote on Thursday, with a number of emerging market currencies and their respective equity markets really coming under pressure. It was the usual suspects; Turkey, Argentina, Indonesia, Brazil, Mexico, Russia and China, all of whom had felt significant pressure at various times during the year. But this new wave seems a bit more stressful in that prior to the past few days, each one had experienced a problem of its own, but since Friday, markets have pummeled them all together. This appears to be the contagion that had been feared by both investors and policymakers. The thing is, the unifying theme to pretty much all these markets is the stronger dollar. As the dollar resumes its strengthening trend, both companies and governments in those nations are finding it increasingly difficult to handle their debt loads. And given the near certainty that the Fed is going to continue its steady policy tightening alongside consistently stronger US economic data, the dollar strengthening trend seems likely to remain in tact for a while yet.

Could this be one of the ‘unexpected’ consequences of ten years of QE, ZIRP and NIRP? Apparently, despite assurances from esteemed central bankers like Ben Bernanke, Janet Yellen and Mario Draghi (as dovish a triumvirate as has ever been seen), there ARE negative consequences to dramatically changing the way monetary policy is handled, massively expanding balance sheets and driving real interest rates to significant negative levels. While there is no doubt that developed economy stock markets have benefitted generally, it seems like some of those risks are becoming more apparent.

These risks include things like the central bankers’ loss of control over markets. After all, markets around the world have basically danced to the tune of free money for the past decade. As that tune changes, investor behavior is sure to change as well. Another systemic risk has been the increasing inability of investors to adequately diversify their portfolios. If every market rises due to exogenous variables, like zero interest rates, then how can prudent investors manage their risk? Many took comfort in the fact that market volatility had declined so significantly, implying that systemic risk was reduced on net. However, what we have observed in 2018 is that volatility is not, in fact, dead, but had merely been anaesthetized by that free money.

The worrying thing is there is no reason to believe that this process is going to end soon. Rather, I fear that it may just be beginning. There are a significant number of excesses to wring out of the markets, and however much central bankers around the world try to prevent that from happening, they cannot hold back the tide forever. At some point, and it could be coming sooner than you think, markets are going adjust despite all the efforts of Powell, Draghi, Carney, Kuroda and their brethren. Never forget that the market is far bigger than any one nation.

We are already seeing how this can play out in some of the above-mentioned countries. Argentina, for example, has short-term interest rates of 60%, inflation of ‘only’ 31%, and therefore real interest rates are now +29%! But the economy is back in recession, having shrunk 6.7% last quarter, and the current account deficit remains a significant problem. So despite jacking rates to 60%, the currency has fallen 22% this week and 120% this year! And they are following orthodox monetary policy. Turkey, on the other hand, has been unwilling to bend to orthodoxy (when it comes to monetary policy) and has kept rates low such that real interest rates are near zero and heading negative as inflation continues its climb (17.9% in September) while rates remain on hold. So the fact that the lira is down 9% this week and 95% this year should be less surprising.

The point is that the market is losing its taste for discrimination and is beginning to treat all currencies under the rubric ‘emerging markets’ as the same. And they are selling them all. As long as the Fed continues its grind higher in rates, there is no reason to believe that this will end. And if these declines are steady, rather than sharp crashes, it will go on for a while. Chairman Powell will have no reason to stop if a few random EMG markets trend lower. If, however, the S&P 500 starts to suffer, that may be a different story, and one we will all watch with great interest!

In the meantime, turning to G10 currencies, the dollar is stronger here as well this morning, although it has fallen back from its best levels of the morning. In fact, while the pound has been consistently undermined (-0.3% today, -1.5% since Thursday) by what seems to be a worsening saga regarding Brexit, the euro has stabilized for now, although it is down about 1% since Thursday as well. Apparently, CAD is not taking the ongoing NAFTA negotiations that well, as it has fallen 2% since Thursday amid pressure on PM Trudeau to cave into US demands. The BOC meets today and while there had been previous expectations that they may raise rates, that has been pushed back to October now in view of the NAFTA process. This is despite the fact that inflation in Canada is running at 2.9%, well above target.

In the end, as long as the Fed continues along its recent path, expect market volatility to increase further, with more and more dominoes likely to fall.

As to today, the only noteworthy data is the Balance of Trade, where expectations are for a $50.3B outcome, not exactly what the president is hoping for, I’m sure. And as far as the dollar goes, there is no reason to believe that its recent strength is going to turn around anytime soon.

Good luck
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Still No Solution

On Wednesday it suddenly seemed
That Brexiteers might be redeemed
The EU’d just hinted
A deal could be printed
Like nothing initially dreamed

But subsequent comments made clear
No breakthrough was actually near
There’s still no solution
(Just feared retribution)
On solving the Irish frontier

Yesterday saw the British pound rocket around 10:00am when EU Brexit negotiator, Michel Barnier, hinted that there was a chance for a deal with the UK that was different than EU deals with its other near neighbors. The market heard this as the first real attempt at a compromise on the EU side, and so within minutes, the pound was 1.2% higher and back above 1.30 for the first time in almost a month. Certainly, if this is true, it marks a serious breakthrough in the talks and is quite positive. Everything we have heard from the UK so far is that they are willing to adhere to EU rules regarding the trade in goods, but are looking for a different deal in services. Prior to the Barnier comments, the EU had been firm in their stance that it was an all or none decision. Suddenly, it seemed like a deal could occur. On that basis, the pound’s rally certainly makes sense, as the prospects for a no-deal Brexit had lately been clearly weighing on the pound. Alas, subsequent comments by the EU have poured cold water on this thought process as Barnier has reiterated there is no ability to cherry-pick the preferred parts of EU policy. Interestingly, the pound has barely given back any of the gains it managed in the wake of the first statement, as it is actually down less than 0.1% as I type.

Given the data released earlier this morning, which was not all that positive (Consumer Credit declined more than expected, Mortgage Lending declined much more than expected and Mortgage Approvals fell more than expected) it seems hard to justify the ongoing strength of the pound. Two possible explanations are 1) the market had built up significant short positions in the pound and while yesterday’s sharp rally forced covering, nobody has looked to reinstate them yet, or 2) investors and traders continue to believe that the UK will get a special deal and so further weakness in the pound is not warranted. Occam’s Razor would suggest that the first explanation is the correct one, as the second one would seem to require magical thinking. And while there is plenty of magical thinking going around, financial markets are one place where it is difficult to retain those thoughts and survive. My gut tells me that once the Labor Day holiday has passed, we will see the pound start to sell off once again.

The other noteworthy story this morning is that there is even more stress in those emerging market currencies that have been feeling stressed during the past month. Today it is Argentina’s turn to lead the way lower, with the peso falling an impressive 7.5% after President Macri announced that he had asked the IMF to speed up disbursements of the $50 billion credit line. The market saw that as desperation, which is probably correct despite strenuous denials by the Argentine government. Meanwhile, the Turkish lira is down by 3.5% because…well just because. After all, nothing has changed there and until the central bank starts to focus monetary policy on solving the nation’s problems, TRY will continue to fall. Overnight we saw INR fall to a new historic low, down 0.4% and now pushing to 71.00, albeit not quite there yet. ZAR is under pressure this morning, down nearly 2% as its current account deficit situation is seen as a significant weight. And despite the positive of completing NAFTA negotiations with the US, MXN has fallen 0.5%. So while the dollar is generally little changed vs. its G10 counterparts, the stress in the EMG bloc remains palpable. Ultimately, I expect the dollar to resume its uptrend, but not until next week, after the holiday.

As to this morning’s data, after yesterday’s upward revision of Q2 GDP, all eyes are on the PCE data this morning. Expectations run as follows: Initial Claims (214K); Personal Income (0.3%); Personal Spending (0.4%); PCE (0.1%, 2.2% Y/Y); and Core PCE (0.2%, 2.0% Y/Y). Again, the biggest market reaction is likely to be caused by an unexpected outturn in Core PCE, which is the number most Fed members seem to regard as the key. A high print should support the dollar, as the implication will be the Fed may be forced to tighten more aggressively, while a low print should undermine the buck as traders back off on their estimates of how quickly the Fed acts. Remember, many traders and investors took Powell’s Jackson Hole speech as dovish, although I’m not so sure that is an accurate take.

At any rate, that pretty much sums up the day. I will be on vacation starting tomorrow and thus there will be no poetry until September 5th.

Thanks and have a good holiday weekend
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