Leavers Cheer

The Governor, in his last meeting
Said data, of late, stopped retreating
There’s no reason why
We need to apply
A rate cut as my term’s completing

Yet all the news hasn’t been great
As Eurozone stats demonstrate
Plus Brexit is here
And though Leavers cheer
The impact, growth, will constipate

Yesterday saw a surprising outcome from the BOE, as the 7-2 vote to leave rates on hold was seen as quite a bit more hawkish than expected. The pound benefitted immensely, jumping a penny (0.65%) in the moments right (before) and after the announcement and has maintained those gains ever since. In fact, this morning’s UK data, showing growth in Consumer Credit and Mortgage Approvals, has helped it further its gains, and the pound is now higher by 0.2% this morning. (As to the ‘before’ remark; apparently, the pound jumped 15 seconds prior to the release of the data implying that there may have been a leak of the news ahead of time. Investigations are ongoing.) In the end, despite the early January comments by Carney and two of his comrades regarding the need for more stimulus, it appears the recent data was sufficient to convince them that further stimulus was just not necessary.

Of course, that pales in comparison, at least historically, with today’s activity, when at 11:00pm GMT, the UK will leave the EU. With Brexit finally completed all the attention will turn to the UK’s efforts to redefine its trading relationship with the rest of the world. In the meantime, the question at hand is whether UK growth will benefit in the short-term, or if we have already seen the release of any pent-up demand that was awaiting this event.

What we do know is that Q4 was not kind to the Continent. Both France (-0.1%) and Italy (-0.3%) saw their economies shrink unexpectedly, and though Spain (+0.5%) continues to perform reasonably well, the outcome across the entire Eurozone was the desultory result of 0.1% GDP growth in Q4, and just 1.0% for all of 2019. Compare that with the US outcome of 2.1% and it is easy to see why the euro has had so much difficulty gaining any ground. It is also easy to see why any thoughts of tighter ECB policy in the wake of their ongoing review make no sense at all. Whatever damage negative rates are doing to the Eurozone economies, especially to banks, insurance companies and pensions, the current macroeconomic playbook offers no other alternatives. Interestingly, despite the soft data, the euro has held its own, and is actually rallying slightly as I type, up 0.1% on the day.

It may not seem to make sense that we see weak Eurozone data and the euro rallies, but I think the explanation lies on the US side of the equation. The ongoing aftermath of the FOMC meeting is that analysts are becoming increasingly dovish regarding their views of future Fed activity. It seems that, upon reflection, Chairman Powell has effectively promised to ease policy further and maintain a more dovish overall policy as the Fed goes into overdrive in their attempts to achieve the elusive 2.0% inflation target. I have literally seen at least six different analyses explaining that the very modest change in the statement, combined with Powell’s press conference make it a lock that ‘lower for longer’ is going to become ‘lower forever’. Certainly the Treasury market is on board as 10-year yields have fallen to 1.55%, a more than 40bp decline this month. And this is happening while equity markets have stabilized after a few days of serious concern regarding the ongoing coronavirus issue.

Currently, the futures market is pricing for a rate cut to happen by September, but with the Fed’s policy review due to be completed in June, I would look for a cut to accompany the report as they try to goose things further.

Tacking back to the coronavirus, the data continues to get worse with nearly 10,000 confirmed cases and more than 200 deaths. The WHO finally figured out it is a global health emergency, and announced as much yesterday afternoon. But I fear that the numbers will get much worse over the next several weeks. Ultimately, the huge unknown is just how big an economic impact this will have on China, and the rest of the world. With the Chinese government continuing to delay the resumption of business, all those global supply chains are going to come under increasing pressure. Products built in China may not be showing up on your local store’s shelves for a while. The market response has been to drive the prices of most commodities lower, as China is the world’s largest commodity consumer. But Chinese stock markets have been closed since January 23, and are due to open Monday. Given the price action we have seen throughout the rest of Asia when markets reopened, I expect that we could see a significant downdraft there, at least in the morning before the government decides too big a decline is bad optics. And on the growth front, initial estimates are for Q1 GDP in China to fall to between 3.0% and 4.0%, although the longer this situation exists, the lower those estimates will fall.

Turning to this morning’s activity, we see important US data as follows:

Personal Income 0.3%
Personal Spending 0.3%
Core PCE Deflator 1.6%
Chicago PMI 48.9
Michigan Sentiment 99.1

Source: Bloomberg

Arguably, the PCE number is the most important as that is what is plugged into Fed models. Yesterday’s GDP data also produces a PCE-type deflator and it actually fell to 1.3%. If we see anything like that you can be certain that bonds will rally further, stocks will rally, and rate cut probabilities will rise. And the dollar? In that scenario, look for the dollar to fall across the board. But absent that type of data, the dollar is likely to continue to take its cues from the equity markets, which at the moment are looking at a lower opening following in Europe’s footsteps. Ultimately, if risk continues to be jettisoned, the dollar should find its footing.

Good luck and good weekend
Adf

Another Cut’s Quite Apropos

The Chair said, ‘inflation’s too low
And there’s something you all need to know
Lest prices soon rise
We’ll not compromise
Thus another cut’s quite apropos

There are a number of discussion topics in the market this morning so let’s get right to it.

First the Fed surprised exactly nobody yesterday afternoon by leaving policy unchanged, (except for a ‘technical’ adjustment to IOER, which they raised by the expected 5bps). However, the talk this morning is all about the tone of the statement and the ensuing press conference. In the end, it appears that the Fed is leaning slightly more dovish than they had seemed to be previously, with a still greater focus on inflation. Powell and friends appear to be increasingly concerned that inflation expectations are still declining, and are terrified of an ultimate outcome similar to the past two decades in Japan. As such, it appears they are getting set to move from an inflation target to a price level target. This means that if inflation runs below target for a period of time, as it has been doing ever since it was officially announced in 2012, they will be comfortable allowing it to run above target in order to make up ground. The conclusion is that the bar to raising rates is now impossibly high, at least assuming prices don’t follow the lead of Argentina or Venezuela. And if anything, especially with the impact of the coronavirus still just being discussed and modeled, the likelihood is for more rate cuts before the end of the year.

Speaking of the coronavirus, the WHO has suddenly figured out what the rest of the world has known for a week, this is a serious problem that is spreading quickly. The death toll is over 170 and the number of cases is quickly approaching 8000. The economic impact is growing as more and more companies halt activity in China, more flights are canceled to and from all cities in China, and fear spreads further. Last night, Taiwan’s stock market reopened for the first time in a week and fell 5.75%. Meanwhile the Taiwan dollar fell 1.0%. And the renminbi? Well onshore markets are still closed, and will be so through Monday, at least, but the CNH traded below 7.00 (dollar higher) in London early this morning and remains within basis points of that level as NY walks in. As I wrote on Monday, this will be the best indicator of sentiment as it is the only thing that can actively trade that reflects opinions on the mainland. It should be no surprise that the other Asian equity markets that were open also fell sharply (Nikkei -1.7%, Hang Seng -3.1%, KOSPI -1.7%) as investors just don’t know what to do at this stage. Fear remains the key driver, and will continue to be until there is some sense that the infection rate is slowing down. To date, that has not been the case.

And finally, the Old Lady just announced no change in the base rate, which according to the futures market had been a 50:50 chance. The pound’s response was an immediate pop and it is now higher by 0.4% on the day, making it the best performing G10 currency. Data early in the month prompted a number of dovish comments from three BOE members, including Governor Carney himself, but the data we have seen recently has shown much more positive momentum in the wake of PM Johnson’s December electoral victory. Clearly, a number of fears have receded and tomorrow is the big day, when the UK officially leaves the EU. The EU Parliament voted overwhelmingly to approve the deal, as the UK’s Parliament did last week. So the UK has reclaimed its total sovereignty and now must make its own way in the world. As I have said all along, while there is a risk that no trade deal is agreed by year end, I think the odds are vanishingly small that Boris will risk his current political strength by pushing things to that level. Come summer, a short delay will be agreed and eventually a deal will be signed. Meanwhile, the US will be seeking a deal as well. Overall, I like the pound throughout the year on the twin features of an increasingly weaker USD (QE related) and the positivity of the situation on the ground there.

And those are the three big stories of the morning. We did get some data, notably the German employment report which showed the Unemployment Rate remained unchanged at 5.0%, while the number of people unemployed fell by…2k. This was better than the expected 5k increase in unemployment, but can we step back for a moment and consider what this actually means. Do you know how many people are employed in Germany? I didn’t think so. But the answer is 41.73 million. So, this morning’s data, showing a net change of 7k vs. expectations represents exactly a 0.0167% improvement. In other words, IT DOESN’T MATTER. And I think we need to consider this issue on a regular basis. So much is made of a number being better or worse than expected when most of the time it is well within the margin of error of any estimate. Nonetheless, the euro has edged higher this morning, by just 0.15%, but my goodness it has been stable of late. And quite frankly, in the short term, barring a massive uptick in coronavirus cases which changes broad risk sentiment, I see no reason for it to do much. Ultimately, I still like the single currency to edge higher throughout the year on the back of my weaker dollar call.

This morning brings two more data points in the US, with Initial Claims (exp 215K) and Q4 GDP (2.0%) released at 8:30. However, unless the GDP number is significantly different from expectations, the market focus will remain on the coronavirus issue. Equity markets in Europe are under pressure (DAX -1.1%, CAC -1.4%) and US futures are pointing in the same direction, with all 3 indices leaning about 0.75% lower. Meanwhile, Treasury yields continue to fall with the 10-year now at 1.56%, its lowest level in three months. With no Fed speakers on the docket, today is a risk day, and that arrow is pointing lower. Look for EMG currencies to suffer, while the yen benefits.

Good luck
Adf

Throw Her a Bone

Next week at the ECB meeting
We’re sure to hear Christine entreating
The whole Eurozone
To throw her a bone
And spend more, lest growth start retreating

In England, though, it’s now too late
As recent releases all state
The ‘conomy’s slowing
And Carney is knowing
Come month end he’ll cut the base rate

The dollar is finishing the week on a high note as it rallies, albeit modestly, against virtually the entire G10 space. This is actually an interesting outcome given the ongoing risk-on sentiment observed worldwide. For instance, equity markets in the US all closed at record highs yesterday, and this morning, European equities are also trading at record levels. Asia, not wanting to be left out, continues to rally, although most markets in APAC have not been able to reach the levels seen during the late 1990’s prior to the Asian crisis and tech bubble. At the same time, we continue to see Treasury and Bund yields edging higher as yield curves steepen, another sign of a healthy risk appetite. Granted, commodity prices are not uniformly higher, but there are plenty that are, notably iron ore and steel rebar, both crucial signals of economic growth.

Usually, in this type of market condition, the dollar tends to decline. This is especially so given the lack of volatility we have observed encourages growth in carry trades, with investors flocking to high yield currencies like MXN, IDR, BRL and ZAR. However, it appears that at this juncture, the carry trade has not yet come back into favor, as that bloc of currencies has shown only modest strength, if any, hardly the signal that investor demand has increased.

This leaves us with an unusual situation where the dollar is reasonably well-bid despite the better risk appetite. Perhaps investors are buying dollars to jump on board the US equity train, but I suspect there is more to the movement than this. Investigations continue.

Narrowing our focus a bit more, it is worthwhile to consider the key events upcoming, notably next week’s ECB and BOJ meetings and the following week’s FOMC and BOE meetings. Interestingly, based on current expectations, the Fed meeting is likely to be far less impactful than either the ECB or BOE.

First up is the BOJ, where there is virtually no expectation of any policy changes, and in fact, that is true for the entire year. With the policy rate stuck at -0.10%, futures markets are actually pricing in a 5bp tightening by the end of the year. Certainly, Japan has gone down the road of increased fiscal stimulus, and if you recall last month’s outcome, the BOJ essentially admitted that they would not be able to achieve their 2.0% inflation target during any forecastable timeline. With that is the recent history, and given that inflation remains either side of 1.0%, the BOJ is simply out of bullets, and so will not be doing anything.

The ECB, however, could well be more interesting as the market awaits their latest thoughts on the policy review. Madame Lagarde has made a big deal about how they are going to review procedures and policy initiatives to see if they are designed to meet their goals. Some of the things that have been mooted are a change in the inflation target from “close to but below 2.0%” to either a more precise target or a target range, like 1.5% – 2.5%. Of even more interest is the fact that they have begun to figure out that their current inflation measures are inadequate, as they significantly underweight housing expense, one of the biggest expenses for almost every household. Currently, housing represents just 4% of the index. As a contrast, in the US calculation, housing represents about 41% of the index! And the anecdotes are legion as to how much housing costs have risen throughout European cities while the ECB continues to pump liquidity into markets because they think inflation is missing. Arguably, that has the potential to change things dramatically, because a revamped CPI calculation could well inform that the ECB has been far too easy in policy and cause a fairly quick reversal. And that, my friends, would result in a much higher euro. Today however, the single currency has fallen prey to the dollar’s overall strength and is lower by 0.25%.

As I mentioned, I don’t think the FOMC meeting will be very interesting at all, as there is a vanishingly small chance they change policy given the economy keeps chugging along and inflation has been fairly steady, if not rising to their own 2.0% target. The BOE meeting, however, has the chance to be much more interesting. This morning’s UK Retail Sales data was massively disappointing, with December numbers printing at -0.8%, -0.6% excluding fuel. This was hugely below the expected outcomes of +0.8% and +0.6% respectively. Apparently, Boris’s electoral victory did not convince the good people of England to open their wallets. And remember, this was during Christmas season, arguably the busiest retail time of the year. It can be no surprise that the futures market is now pricing a 75% chance of a rate cut and remember, earlier this week we heard from three different BOE members that cutting rates was on the table. The pound, which has been rallying for the entire week has turned around and is lower by 0.2% this morning with every chance that this slide continues for the next week or two until the meeting crystalizes the outcome.

The other noteworthy news was Chinese data released last night, which showed that GDP, as expected, grew at 6.0%, Retail Sales also met expectations at 8.0%, while IP (+6.9%) and Fixed Asset Investment (+5.4%) were both a bit better than forecast. The market sees this data as proof that the economy there is stabilizing, especially with the positive vibe of the just signed phase one trade deal. The renminbi has benefitted, rallying a further 0.3% on the session, and has now gained 4.6% since its weakest point in early September 2019. This trend has further to go, of that I am confident.

On the data front this morning, we have Housing Starts (exp 1380K), Building Permits (1460K), IP (-0.2%), Capacity Utilization (77.0%), Michigan Sentiment (99.3) and JOLT’s Job Openings (7.25M). So plenty of news, but it is not clear it is important enough to change opinions in the FX market. As such, I expect that today’s dollar strength is likely to continue, but certainly not in a major way.

Good luck and good weekend
Adf

Feelings of Disquietude

In Germany, growth was subdued
In England, inflation’s now food
For thought rates will fall
As hawks are in thrall
To feelings of disquietude

This morning is a perfect lesson in just how little short-term movement is dependent on long-term factors like economic data. German GDP data was released this morning showing that for 2019 the largest economy in the Eurozone grew just 0.6%, which while expected was still the slowest rate in six years. And what’s more, forecasts for 2020 peg German GDP to grow at 0.7%, hardly enticing. Yet as I type, the euro is the best performer in the G10 space, having risen 0.2%. How can it be that weak data preceded this little pop in the currency? Well, here is where the short-term concept comes in; it appears there was a commercial order going through the market that triggered a series of stop-loss orders at 1.1140, and lo and behold, the euro jumped another 0.15%. My point is that any given day’s movement is only marginally related to the big picture and highly reliant on the short term flows and activities of traders and investors. So forecasts, like mine, that call for the euro to rally during this year are looking at much longer term issues, which will infiltrate trading views over time, not a prescription to act on intraday activity!

Meanwhile, the pound has come under modestly renewed pressure after CPI in the UK surprisingly fell to 1.3% with the core reading just 1.4%. This data, along with further comments by the most dovish BOE member, Michael Saunders, has pushed the probability of a UK rate cut at the end of the month, as measured by futures prices, up to 65%. Remember, yesterday this number was 47% and Friday just 25%. At this point, market participants are homing in on the flash PMI data to be released January 24 as the next crucial piece of data. The rationale for this is that the weakness that we have seen recently from UK numbers has all been backward-looking and this PMI reading will be the first truly forward looking number in the wake of the election in December. FYI, current expectations are for a reading of 47.6 in Manufacturing and 49.4 in Services, but those are quite preliminary. I expect that they will adjust as we get closer. In the meantime, look for the pound to remain under pressure as we get further confirmation of a dovish bias entering the BOE discussion. As to Brexit, it will happen two weeks from Friday and the world will not end!

Finally, the last G10 currency of interest today is the Swiss franc, which is vying with the euro for top performer, also higher by 0.2% this morning, as concern has grown over its ability to continue its intervention strategy in the wake of the US adding Switzerland back to the list of potential currency manipulators. Now, the SNB has been intervening for the past decade as they fight back against the franc’s historic role as a safe haven. The problem with that role is the nation’s manufacturing sector has been extraordinarily pressured by the strength of the franc, thus reducing both GDP and inflation. It seems a bit disingenuous to ask Switzerland to adjust their macroeconomic policies, as the US is alleged to have done, in order to moderate CHF strength given they already have the lowest negative interest rates in the world and run a large C/A surplus. But maybe that’s the idea, the current administration wants the Swiss to be more American and spend money they don’t have. Alas for President Trump, that seems highly unlikely. A bigger problem for the Swiss will be the fact that the dollar is likely to slide all year as QE continues, which will just exacerbate the Swiss problem.

Turning to the emerging market bloc, today’s biggest mover is BRL, where the real is opening lower by 0.5% after weaker than expected Retail Sales data (0.6%, exp 1.2%) point to ongoing weakness in the economy and increase the odds that the central bank will cut rates further, to a new record low of just 4.25%. While this still qualifies as a high-yielder in today’s rate environment, ongoing weakness in the Brazilian economy offer limited prospects for a reversal in the near-term. Do not be surprised to see BRL trade up to its recent highs of 4.25 before the bigger macro trend of USD weakness sets in.

And that’s been today’s currency story. I have neglected the signing of the phase one trade deal because that story has been so over reported there is exactly zero I can add to the discussion. In addition, the outcome has to be entirely priced into the market at this point. Equity markets have had difficulty trading higher during the past two sessions, but they certainly haven’t declined in any serious manner. As earnings season gets underway, investors seem to have turned their attention to more micro issues rather than the economy. Treasury yields have been edging lower, interestingly, despite the general good feelings about the economy and risk, but trying to determine if the stock or bond market is “correct” has become a tired meme.

On the data front, this morning brings PPI (exp 1.3%, 1.3% core) but given that we saw CPI yesterday, this data is likely to be completely ignored. We do get Empire Manufacturing (3.6) and then at 2:00 the Fed releases its Beige Book. We also hear from three Fed speakers, Harker, Daly and Kaplan, but at this point, the Fed has remained quite consistent that they have little interest in doing anything unless there is a significant change in the economic narrative. And that seems unlikely at this time.

And so, this morning the dollar is under modest pressure, largely unwinding yesterday’s modest strength. It seems unlikely that we will learn anything new today to change the current market status of limited activity overall.

Good luck
Adf

Growth Can Be Spurred

In England this morning we heard
From Vlieghe, the BOE’s third
Incumbent to say
That given his way
He’d cut rates so growth can be spurred

The pound is under pressure this morning after Gertjan Vlieghe became the third MPC member in the past week, after Carney and Tenreyo, to explain that a rate cut may be just the ticket at this point in time. Adding these three to the two members who had previously voted to cut rates, Haskel and Saunders, brings the number of doves to five, a majority on the committee. It can be no surprise that the pound has suffered, nor that interest rate markets have increased the probability of a 25bp rate cut at the January 30 meeting from below 25% last week to 50% now. Adding to the story was the release of worse than expected November IP (-1.2%) and GDP (-0.3%) data, essentially emphasizing the concerns that the UK economy has a long way to go to recover from the Brexit uncertainty.

However, before you turn too negative on the UK economy, remember that this is backward-looking data, as November was more than 6 weeks ago, and in the interim we have had the benefit of the resounding electoral victory by Boris Johnson. This is not to say that the UK economy cannot deteriorate further, just that there has been a palpable change in the tone of commentary in the UK as Brexit uncertainty has receded. Granted, the question of the trade deal with the EU, which is allegedly supposed to be signed by the end of 2020, remains open. But it is very difficult for market participants to look that far ahead and try to anticipate the outcome. And if anything, Boris has the fact that he was able to renegotiate the original Brexit deal in just six weeks’ time working in his favor. While previous assumptions had been that trade deals take years and years to negotiate, it is clear that Boris doesn’t subscribe to that theory. Personally, I wouldn’t bet against him getting it done.

But for now, the pound is the worst performer of the session, and given today’s news, that should be no surprise. However, I maintain my view that current levels represent an excellent opportunity for payables hedgers to add to hedges.

The other mover of note in the G10 space is the yen, which has fallen 0.4% after traders were able to take advantage of a Japanese holiday last night (Coming-of-age Day) and the associated reduced liquidity to push the dollar above a key technical resistance point at 109.72. Stop-loss orders at that level led to a quick jump at 4:00 this morning, and given the broad risk-on attitude in markets (equity markets worldwide continue to rebound from concerns over further Middle East flare ups), it certainly feels like traders are going to push the dollar up to 110, a level not seen since May. However, the other eight currencies in the G10 have been unable to generate any excitement whatsoever and are very close to unchanged this morning.

In the EMG space, Indonesia’s rupiah is once again the leader in the clubhouse, rising a further 0.7% after the central bank reiterated it would allow the currency to appreciate and following an announcement by the UAE that it would make a large investment in the nation’s (Indonesia’s) sovereign wealth fund. The resultant rally, to the rupiah’s strongest level in almost a year, has been impressive, but there is no reason to believe that it cannot continue for another 5% before finding a new home. This is especially true if we continue to hear good things regarding the US-China trade situation. Trade has also underpinned the second-best performer of the day in this space, KRW, which has rallied 0.5%, on the trade story.

While those are the key stories thus far this session, we do have a full week’s worth of data to anticipate, led by CPI, Retail Sales and Housing data.

Tuesday NFIB Small Biz Optimism 104.9
  CPI 0.3% (2.4% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
Wednesday PPI 0.2% (1.3% Y/Y)
  -ex food & energy 0.2% (1.3% Y/Y)
  Empire Manufacturing 3.5
  Fed’s Beige Book  
Thursday Initial Claims 218K
  Philly Fed 3.0
  Retail Sales 0.3%
  -ex autos 0.5%
  Business Inventories -0.1%
Friday Housing Starts 1380K
  Building Permits 1460K
  IP -0.1%
  Capacity Utilization 77.0%
  Michigan Sentiment 99.3
  JOLTS Job Openings 7.264M

Source: Bloomberg

So clearly there is plenty on the docket with an opportunity to move markets, and we also hear from another six Fed speakers. While you and I may be concerned about rising prices, it has become abundantly clear that the Fed is desperate to see them rise further, so the only possible reaction to a CPI miss would be on the weak side, which would likely see an equity rally on the assumption that even more stimulus is coming. Otherwise, I think Retail Sales will be the data point of choice for the market, with weakness here also leading to further equity strength on the assumption that the Fed will add to their current policy.

And it is hard to come up with a good reason for any Fed speaker to waver from the current mantra of no rate cuts, but ongoing support for the repo market and a growing balance sheet. And of course, that underlies my thesis that the dollar will eventually fall. Just not today it seems!

Good luck
Adf

Removal of Tariffs

According to some in Beijing
Removal of tariffs’ the thing
That ought to diminish
And fin’lly help finish
The problems the trade war did bring

Another day, another story about progress in the trade talks. Given the complete lack of movement actually seen, a cynic might conclude that both sides have realized just talking about progress is probably as effective as making progress, maybe more so. After all, making progress requires both sides to make actual decisions. Talking about progress just hints that those decisions are being made. And let’s face it; the one thing at which politicians have proven especially inept is making decisions. At any rate, the news early this morning was that part of the elusive phase one deal would be simultaneous rollbacks of the current tariff schedules. If true, that is a great leap forward from simply delaying the imposition of new tariffs. But the key is, if true. At this point, it has become difficult to recognize the difference between actual progress and trial balloons. The one thing going for this story is it was put out by the Chinese, not President Trump. Of course, that could simply be a negotiating tactic trying to force Trump’s hand.

It should be no surprise that the market reacted quite positively to the story, with equity markets in Asia turning around from early losses to close higher on the day. While the Nikkei just clawed back to +0.1%, the Hang Seng finished higher by 0.6% and Australia’s ASX 200 gained 1.0% on the day. Europe has followed the trend with the DAX leading the way, +0.75%, and the rest of the Continent showing gains of between 0.2% (CAC) and 0.6% (IBEX). And of course, US futures turned higher on the news, now showing gains of approximately 0.5% across all three.

So risk is in vogue once again. Treasuries and Bunds have both sold off sharply, with yields in the 10-year space higher by roughly 6bps in both markets. And the dollar, as would be expected, is under further pressure this morning.

A trade truce cannot come soon enough for Germany, which once again released worse than expected data. This morning’s miss was IP, which fell 0.6% in September, and is down 4.3% Y/Y. So while yesterday’s Factory Orders seemed positive, they also seem like the outlier, not the trend. However, given the dollar’s overall performance this morning, it should be no surprise that the euro has edged higher, rising 0.1% as I type. But a step back for some perspective shows that the euro has actually done essentially nothing for the past month, trading within a range barely exceeding 1.0%. It will take more than just the occasional positive or negative economic print to change this story.

And perhaps there is a story brewing that will do just that. Several weeks ago there was a Bloomberg article about inflation in the Eurozone, specifically in Spain, that highlighted the dichotomy between the low rate of measured inflation, which in Spain is running at 1.0%, and the fact that the cost of home ownership and rent is rising at a double digit pace. It turns out that the European CPI measurements have rent as just 6.5% of the index and don’t even include the costs of home ownership. In contrast, those represent more than 30% of the US CPI measurement! And housing costs throughout Europe are rising at a much faster rate, something on the order of 3.0%+ over the past five years. In other words, a CPI basket constructed to include what Europeans actually spend their money on, rather than on some theoretical construct, would almost certainly have resulted in higher CPI readings and potentially would have prevented the poisonous negative interest rate conundrum.

With this in mind, and considering Madame Lagarde’s review of ECB policy, there is a chance, albeit a small one, that the ECB will consider changing the metric, and with a change in the metric, the need for further QE and NIRP will diminish greatly. That would be hugely euro positive! This is something to watch for going forward.

The other big news that just hit the tape was from the Bank of England, where while rates were left unchanged, two members of the MPC voted to cut rates by 25bps in a complete surprise. Apparently, there is growing concern inside the Old Lady that the recent weakening data portends further problems regardless of the election outcome. Of course, regarding the election, the fact that both the Tories and Labour are promising huge new spending plans, the need for low rates is clear. After all, it is much easier to borrow if interest rates are 0.5% than 5.0%! The pound, which had been trading modestly higher before the news quickly fell 0.4% and is now back toward the lower end of its recent trading range. Sometimes I think central banks do things simply to prove that they matter to the markets, but in this case, given the ongoing economic malaise in the UK, it does seem likely that a rate cut is in the offing.

As to the rest of the market, some of the biggest gainers this morning are directly related to the US-China trade story, with the offshore renminbi trading higher by 0.6% and back to its strongest level in three months’ time. In addition we have seen NOK rally 0.85%, which seems to be on the back of stronger oil and the fact that easing trade tensions are likely to further support the price of crude. Combining this with the fact that the krone has been mysteriously weak given its fundamentals, relatively strong economic growth and positive interest rates, it looks like a lot of short positions are getting squeezed out.

Finally, I would be remiss if I didn’t mention the Brazilian real, which yesterday tumbled 2.0% after a widely anticipated auction of off-shore oil drilling rights turned into a flop, raising just $17 billion, far less than the $26 billion expected. In fact, two of the three parcels had no bids, and no oil majors were involved. While they will certainly put them up for auction again, the market’s disappointment was clear. It should also be no surprise that the real is rebounding a bit on the open, currently higher by 0.5%.

On the data front this morning the only thing of note is Initial Claims (exp 215K) and there are two more Fed speakers on the agenda, Kaplan and Bostic. However, the plethora of speakers we have heard this week have all remained on message, things are good and policy is appropriate, but if needed we will do more.

And that’s really it. I expect we will continue to hear more about the trade talks and perhaps get a bit more clarity on the proposed tariff rollbacks. But it will take a lot to turn the risk story around, and as such, I expect the dollar will continue to be under pressure as the session progresses.

Good luck
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Hawks Must Beware

The BOE finally sees
That Brexit may not be a breeze
So hawks must beware
As rates they may pare
For doves, though, this act’s sure to please

Two stories from the UK are driving the narrative forward this morning, at least the narrative about the dollar continuing to strengthen. The first, and most impactful, were comments from BOE member, Michael Saunders, who prior to this morning’s speech was seen as one of the more hawkish members of the MPC. However, he explained that regardless of the Brexit outcome, the continuing slowdown in the UK, may require the BOE to cut rates soon. The UK economy has been under considerable pressure for some time and the data shows no signs of reversing. The market has been pricing in a rate cut for a while, although BOE rhetoric, especially from Governor Carney, worked hard to keep the idea of the next move being a rate hike. But no more. If Saunders is in the cutting camp, you can bet that we will see action at the November meeting, even if there is another Brexit postponement.

And speaking of Brexit postponements, Boris won a court victory in Northern Ireland where a lawsuit had been filed claiming a no-deal Brexit was a breach of the Good Friday accords that brought peace to the country. However, the court ruled it was no such thing, rather it was simply a political act. The upshot is this was seen as a further potential step toward a no-deal outcome, adding to the pound’s woes. In the meantime, Johnson’s government is still at odds with Parliament, and is in the midst of another round of talks with the EU to try to get a deal. It seems the odds of that deal are shrinking, although I continue to believe that the EU will blink. The next five weeks will be extremely interesting.

At any rate, once Saunders’ comments hit the tape, the pound quickly fell 0.5%, although it has since regained a bit of that ground. However, it is now trading below 1.23, its weakest level in two weeks, and as more and more investors and traders reintegrate a hard Brexit into their views, you can look for this decline to continue.

Of course, the other big story is the ongoing impeachment exercise in Congress which has caused further uncertainty in markets. As always, it is extremely difficult to trade a political event, especially one without a specific date attached like a vote. As such, it is difficult to even offer an opinion here. Broadly, in the event President Trump was actually removed from office, I expect the initial move would be risk-off but based on the only other impeachment exercise in recent memory, that of President Clinton in 1998, it took an awful long time to get through the process.

Turning to the data, growth in the Eurozone continues to go missing as evidenced by this morning’s confidence data. Economic Confidence fell to its lowest level in four years while the Business Climate and Industrial Confidence both fell more sharply than expected as well. We continue to see a lack of inflationary impulse in France (CPI 1.1%) and weakness remains the predominant theme. While the euro traded lower earlier in the session, it is actually 0.1% higher as I type. However, remember that the single currency has fallen more than 4.4% since the end of June and nearly 2.0% in the past two weeks alone. With the weekend upon us, it is no surprise that short term positions are being pared.

Overall, the dollar is having a mixed session. The yen and pound are vying for worst G10 performers, but the movement remains fairly muted. It seems the yen is benefitting from today’s risk-on feeling, which was just boosted by news that a cease-fire in Yemen is now backed by the Saudis. It is no surprise that oil is lower on the news, with WTI down 1.1%, and equity market have also embraced the news, extending early gains. On the other side of the coin, the mild risk-on flavor has helped the rest of the bunch.

In the EMG space it is also a mixed picture with ZAR suffering the most, -0.35%, as concerns grow over the government’s plans to increase growth. Meanwhile, overnight we saw strength in both PHP and INR (0.45% each) after the Philippine central bank cut rates and followed with a reserve ratio cut to help support the economy. Meanwhile, in India, as the central bank removes restrictions on foreign bond investment, the rupee has benefitted.

But overall, movement has not been large anywhere. US equity futures are pointing higher as we await this morning’s rash of data including: Personal Income (exp 0.4%); Personal Spending (0.3%); Core PCE (1.8%); Durable Goods (-1.0%, 0.2% ex transport); and Michigan Sentiment (92.1). We also hear from two more Fed speakers, Quarles and Harker. Speaking of Fed speakers (sorry), yesterday vice-Chairman Richard Clarida gave a strong indication that the Fed may change their inflation analysis to an average rate over time. This means that they will be comfortable allowing inflation to run hot for a time to offset any period of lower than targeted inflation. Given that inflation has been lower than targeted essentially since they set the target in 2012, if this becomes official policy, you can expect prices to continue to gain more steadily, and you can rule out higher rates anytime soon. In fact, this is quite dovish overall, and something that would work to change my view on the dollar. Essentially, given the history, it means rates may not go up for years! And that is not currently priced into any market, especially not the FX market.

The mixed picture this morning offers no clues for the rest of the day, but my sense is that the dollar is likely to come under further pressure overall, especially if risk is embraced more fully.

Good luck and good weekend
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