Frustrations

The global economy’s state
Continues to see growth abate
As trade between nations
Has met with frustrations
While central banks try to reflate

Markets have been extremely quiet overnight as investors and traders await the release of the US payroll report at 8:30 this morning. Expectations, according to Bloomberg, are as follows:

Nonfarm Payrolls 85K
Private Payrolls 80K
Manufacturing Payrolls -55K
Unemployment Rate 3.6%
Average Hourly Earnings 0.3% (3.0% Y/Y)
Average Weekly Hours 34.4
Participation Rate 63.1%
ISM Manufacturing 48.9
ISM Prices Paid 50.0
Construction Spending 0.2%

While the GM strike has ended, it was in full swing during the survey period and explains the expected significant decline in manufacturing jobs. One other thing having a negative impact is the reduction of census workers. Given these idiosyncratic features, we must look beyond the headline number to ascertain if the employment situation remains robust, or is starting to roll over. Consider that most analysts expect that the GM strike was worth about 50K jobs and the census situation another 20K. If we add those back to the median expectation of 85K, we wind up at essentially the 3-month average of 157K. However, it is important to remember that the 1-year average is higher, 179K, which indicates that there has been an ongoing decline in new hiring for a little while now. Some of this is certainly due to the fact that, as we have heard repeatedly, finding good employees is so difficult, especially in the service industries. But certainly, the trade situation and the fact that the US economy is growing more slowly is weighing on the data as well.

The reason this is important, of course, is that the NFP report is one of the key metrics for the Fed as they try to manage monetary policy in an uncertain world. Unfortunately for them, the Unemployment Rate is backward looking data, a picture of what has been, not what is likely to be. In truth, they should be far more focused on the ISM report at 10:00. At least that has some forecasting ability.

A quick recap of this week’s central bank activity shows us that there were 3 key meetings; the Bank of Canada, who left policy unchanged but turned dovish in their statement; the FOMC, which cut rates and declared they were done cutting rates unless absolutely necessary; and the BOJ, which left policy unchanged but hinted that they, too, could be induced to easing further if things don’t pick up soon. (I can pretty much promise the BOJ that things are not going to pick up soon, certainly not inflation.) Perhaps the most interesting market response to this central bank activity was the quietest bond market rally in history, where 10-year Treasury yields are, this morning, 15bps lower than Monday’s opening. Only Canada’s 10-year outperformed that move with a 20bp decline (bond rally). Given the rate activity, it ought not be surprising that equity markets retain their bid overall. This morning, ahead of the NFP report, US futures are pointing higher and we have seen gains in Europe (FTSE, CAC, and DAX +0.33%) as well as most of Asia (Hang Seng +0.7%, Shanghai +1.0%) although the Nikkei did fall 0.3%.

And what about the dollar? Well, in truth it is doing very little this morning, with most currencies trading within a 0.20% band around yesterday’s closing levels. The one big exception has been the Norwegian krone which has rallied sharply, 0.65%, after a much better than expected Manufacturing PMI release. Interestingly, this movement has dragged the Swedish krona higher despite the fact that Sweden’s PMI disappointed, falling to 46.0. However, beyond that, there is nothing of excitement to discuss.

We hear from five Fed speakers today, starting with Vice-chairman Richard Clarida, who will be interviewed on Bloomberg TV at 9:30 this morning before speaking at 1:00 to the Japan Society. But we also hear from Dallas Fed President Richard Kaplan, Governor Randall Quarles, SF Fed President Mary Daly and NY’s John Williams before the day is out. It seems to me that the market was pretty happy with Chairman Powell’s comments and press conference on Wednesday so I expect we will see a lot of reaffirmation of the Chairman’s thoughts.

So, all in all, it is shaping up to be a pretty dull day…unless Payrolls are a big surprise. I have a funny feeling that we are going to see a much weaker number than expected based on the extremely weak Chicago PMI data and its employment sub index, as well as the fact that the Initial Claims data seems to be edging higher these days. Of course, the equity market will applaud as they will start to price in more rate cuts, but I think the dollar will suffer accordingly.

Good luck and good weekend
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Get Out of My Face!

“The economy’s in a good place”
Which means we can slacken the pace
Of future rate cuts
No ifs, ands or buts
So Donald, ‘get out of my face’!

Reading between the lines of yesterday’s FOMC statement and the Powell press conference, it seems abundantly clear that Chairman Powell is feeling pretty good about himself and what the Fed has achieved. He was further bolstered by the data yesterday which showed GDP grew at a 1.9% clip in Q3, far better than the expected 1.6% pace and that inflation, as measured by the GDP deflator, rose 2.2%, also clearly around the levels that the Fed seeks. In other words, although he didn’t actually say, ‘mission accomplished’, it is clearly what he wants everybody to believe. The upshot is that he was able to convince the market that the Fed has no more reason to cut rates anytime soon. But more importantly from a market perspective, he explained at the press conference that the bar was quite high for the Fed to consider raising rates again. And that was all he needed to say for equity markets to launch to yet another new high, and for the dollar, which initially had rallied on the FOMC statement, to turn tail and fall pretty sharply. And the dollar remains under pressure this morning with the euro rising a further 0.15%, the pound a further 0.45% and the yen up 0.5%.

Of course, the pound has its own drivers these days as the UK gears up for its election on December 12. According to the most recent polls, the Tories lead the race with 34%, while Labour is at 26%, the Lib-Dems at 19% and the Brexit party at 12%. After that there are smaller parties like the DUP from Northern Ireland and the Scottish National Party. The most interesting news is that the Brexit party is allegedly considering withdrawing from a number of races in order to allow the Tories to win and get Brexit completed. And after all, once Brexit has been executed, there really is no need for the Brexit party, and so its voting bloc will have to find a home elsewhere.

Something that has been quite interesting recently is the change in tone from analysts regarding the pound’s future depending on the election. While on the surface it seems that the odds of a no-deal Brexit have greatly receded, there are a number of analysts who point out that a strong showing by the Brexit party, especially if Boris cannot manage a majority on his own, could lead to a much more difficult transition period and bring that no-deal situation back to life. As well, on the other side of the coin, a strong Lib-Dem showing, who have been entirely anti-Brexit and want it canceled, could result in a much stronger pound, something I have pointed out several times in the past. Ultimately, though, from my seat 3500 miles away from the action, I sense that Boris will complete his takeover of the UK government, complete Brexit and return to domestic issues. And the pound will benefit to the tune of another 2%-3% in that scenario.

The recent trade talks, called ‘phase one’
According to both sides are done
But China’s now said
That looking ahead
A broad deal fails in the long run

A headline early this morning turned the tide on markets, which were getting pretty comfortable with the idea that although the Fed may not be cutting any more, they had completely ruled out raising rates. But the Chinese rained on that parade as numerous sources indicated that they had almost no hope for a broader long-term trade deal with the US as they were not about to change their economic model. Of course, it cannot be a surprise this is the case, given the success they have had in the past twenty years and the fact that they believe they have the ability to withstand the inevitable economic slowdown that will continue absent a new trading arrangement. Last night, the Chinese PMI data released was much worse than expected with Manufacturing falling to 49.3 while Services fell to 52.8, both of which missed market estimates. However, the latest trade news implies that President Xi, while he needs to be able to feed his people, so is willing to import more agricultural products from the US, is also willing to allow the Chinese economy to slow substantially further. Interestingly, the renminbi has been a modest beneficiary of this news rallying 0.15% on shore, which takes its appreciation over the past two months to 2.1%. Eventually, I expect to see the renminbi weaken further, but it appears that for now, until phase one is complete, the PBOC is sticking to its plan to keep the currency stable.

Finally, last night the BOJ left policy unchanged, however, in their policy statement they explicitly mentioned that they may lower rates if the prospect of reaching their 2% inflation goal remained elusive. This is the first time they have talked about lowering rates from their current historically low levels (-0.1%) although the market response has been somewhat surprising. I think it speaks to the belief that the BOJ has run out of room with monetary policy and that the market is pricing in more deflation, hence a stronger currency. Of course, part of this move is related to the dollar’s weakness, but I expect that the yen has further to climb regardless of the dollar’s future direction.

In the EMG bloc there were two moves of note yesterday, both sharp declines. First Chile’s peso fell 1.5% after President Sebastian Pinera canceled the APEC summit that was to be held in mid-November due to the ongoing unrest in the country. Remember, Chile is one of the dozen nations where there are significant demonstrations ongoing. The other big loser was South Africa’s rand, which fell 2.9% yesterday after the government there outlined just how big a problem Eskom, the major utility, is going to be for the nation’s finances (hint: really big!). And that move is not yet finished as earlier this morning the rand had fallen another 1.1%, although it has since recouped a portion of the day’s losses.

On the data front, after yesterday’s solid GDP numbers, this morning we see Personal Income (exp 0.3%); Personal Spending (0.3%); Core PCE (0.1%, 1.7% Y/Y); Initial Claims (215K) and Chicago PMI (48.0). And of course, tomorrow is payroll day with all that brings to the table. For now, the dollar is under pressure and as there are no Fed speakers on the docket, it appears traders are either unwinding old long dollar positions, or getting set for the next wave of weakness. All told, it is hard to make a case for much dollar strength today, although strong data is likely to prevent any further weakness.

Good luck
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Flummoxed

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
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Past Its Shelf Life

The narrative most of this year
Described central banks full of fear
So rates they would cut
Which might help somewhat
But so far that hasn’t been clear

Instead every meeting’s been rife
With conflict, dissension and strife
For NIRP, the doves pine
While hawks like to whine
That policy’s past its shelf life

At the end of a week filled with numerous central bank meetings, it’s time to consider what we’ve learned. Arguably, the first thing is that groupthink in the central banking community is not quite as widespread as we previously believed. This was made evident by the three dissenting votes at the FOMC on Wednesday as well as last week’s ECB meeting, where at least five members of the council argued vociferously for no further stimulus. The funny thing is that while I understand the European monetary hawks’ zeitgeist, (German hyperinflation of the 1920’s) the fact remains that Europe is slipping into recession and arguably the ECB is correct in trying to address that. With that said, I would argue they would have been far better off extending the TLTRO’s to an even longer maturity and cut rates there, allowing banks to earn from the ECB while they lend to clients at a positive rate. Simply cutting the deposit rate to -0.50% is very unlikely to spur growth further, at least based on the fact that it has not helped yet.

At the same time, the FOMC also has a wide range of opinions on display. Not only were there two hawkish dissents, there was a dovish one as well. And based on the dot plot, after this cut, there are now ten of the seventeen members who see no further rate action in 2019. Meanwhile, the market is still pricing in a 69% probability of a cut by the December meeting. There was a comment by a famous hedge fund trader that Chairman Powell is the weakest chairman in decades, based on these dissents, but it was just three years ago, in the September 2016 meeting when Janet Yellen chaired the Fed, that there were also three dissents at a meeting, with all three seeking a rate hike, while the Fed stood pat. The point is, it is probably a bit unfair to be claiming Powell is weak because some members have different views. And in the big picture, shouldn’t we want a diversity of ideas at the Fed? I think that would make for a healthier debate.

Two other meetings stand out, the BOJ and the PBOC, or at least actions by those banks stand out. While the BOJ left policy on hold officially, they not only promised a re-evaluation of the current monetary policy framework, but last night, they significantly reduced the amount of JGB’s that they purchased in the longer maturities. The absent ¥50 billion surprised market players and helped drive the yields on the back end higher by between 3-4bps. The BOJ have made it clear that they are interested in a steeper yield curve, and that’s just what they got. Their problem is that despite decades of ZIRP and then NIRP, as well as a massive QE program, their inflation target remains as far away as ever. Last night, for example, CPI was released at 0.5% Y/Y ex fresh food, the lowest level since mid-2017. It seems pretty clear that their actions have been a failure for decades and show no sign of changing. Perhaps they could use a little dissent!

Finally, the PBOC cut its 1-year Loan Prime Rate (its new monetary benchmark) by 5bps last night, the second consecutive cut and an indication that they are trying to add stimulus without inflating any financial bubbles. While this move was widely anticipated, they did not change the level of the 5-year Rate, which was also anticipated. The overall difference here, though, is that the PBOC is clearly far less concerned with what happens to investors than most Western central banks. After all, they explicitly take their marching orders from President Xi, so the overall scope of policy is out of their hands.

When looking at the impact of these moves, though, at least in the currency markets, the thrust was against the grain of what was desired by the central banks. If you recall last week, the euro initially declined, but then rallied sharply by the end of the day after the ECB meeting and has largely maintained those gains. Then yesterday we saw JPY strength, with no reprieve overnight after their change of stance, while the renminbi has actually strengthened 0.2% overnight in the wake of the rate cut. As I have been writing, central banks are slowly losing their grip on the markets, a situation which I believe to be healthy, but also one that will see increased volatility over time.

Looking at the market activity overnight, the screen shows that one of the best performers was INR, with the rupee gaining 0.5%. This comes on the back of the government’s announced $20 billion stimulus plan of corporate tax cuts. While equity markets there responded joyfully, Sensex +5.3%, government bonds fell sharply, with 10-year yields rising 15bps as bond investors questioned the ability of the government to run larger deficits. But away from that, the FX market was quite dull. EMG currencies saw both gainers and losers, with INR the biggest mover. G10 currencies were pretty much the same story with NZD the biggest mover, falling 0.4% after S&P explained that New Zealand banks still had funding problems.

The other two big stories have had mixed impact, with positive trade vibes being felt as low-level talks between the US and China have been ongoing this week, while the UK Supreme Court is now done with its hearings and we all simply await the decision. At the same time, EC President Juncker sounded positive that a Brexit deal could be done although Ireland continues to claim that nothing is close. The pound rallied on Juncker’s comments, but fell back below 1.25 after Ireland weighed in. Ask yourself if you think the rest of the EU will tolerate a solo Irish dissent on getting to a deal. It ain’t gonna happen.

As to today’s session, there is no data to be released but we will hear from three Fed speakers, Williams first thing, then Rosengren and Kaplan. It will be interesting to see how they try to spin things as to the Fed’s future activities. With that in mind, the biggest surprise seems like it can come from the UK , if we hear from the Supreme Court later today. While there is no clarity when they will rule, it is not out of the question. As to the dollar, it has no overall momentum and I see no reason for it to develop any without a catalyst.

Good luck and good weekend
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Not the Nadir

The Chairman explained to us all
Preventing the ‘conomy’s stall
Required a cut
Of twenty-five but
Don’t look for, rates, further to fall

However, it’s not the nadir
For all rates, that’s certainly clear
Brazil cut a half
While BOJ staff
Will check if they’re now too austere

As I mentioned on Monday, the Fed was merely the first in a long list of major central banks meeting this week. By now we all know the FOMC cut rates by 25 bps and released a statement that was certainly more hawkish than many had hoped for expected. The vote was largely as expected, with the July dissenters, George and Rosengren, continuing to vote for no change, while this month, St. Louis Fed President James Bullard also dissented, voting for a 50bp cut. Of more interest was the dot plot, which showed five members forecasting no further cuts this year, five looking for one more cut and seven looking for two cuts. That is actually quite a bit more hawkish than expected going into the meeting. In the end, equity markets sold off initially, but rallied late in the day to close essentially unchanged. Treasuries rallied all day leading up to the meeting, but ceded those gains in the wake of the announcement and press conference while the dollar rallied against most currencies, although it has given back those gains overnight.

Powell’s explanation for cutting was that the committee was still concerned over issues like global growth, trade policy and Brexit, and so felt a cut was merited to help insure steady growth. My impression is Powell is not anxious to cut again, but arguably it will depend on how the data evolves between now and the October meeting.

Meanwhile, late yesterday afternoon the Central Bank do Brazil cut their SELIC rate by 50bps to 5.50%, a new record low for the rate, but also a widely expected move by the market. Inflation in Brazil continues to slow, and with growth extremely sluggish, President Roberto Campos Neto made clear that they expect inflation to remain quiescent and will do what they can to help bolster the economy there. Look for another 50bps this year and potentially more next year as well. It should be no surprise that the real weakened yesterday, falling 0.8%, and I expect it has further to fall as Neto was clear that a weaker currency would not deter him.

Then overnight we heard from a number of central banks with Bank Indonesia cutting the expected 25bps top 5.25%, while the HKMA also cut in order to keep step with the US. Both currencies, IDR and HKD, were virtually unchanged overnight as the market had fully priced in the moves. Arguably of more importance was the BOJ meeting, where they left policy unchanged, but where Kuroda-san explained that the BOJ would undertake a full review of policy by the October meeting to insure they were doing everything they could to support the economy. There were a number of analysts who were expecting a rate cut, or at least further QE, and so the disappointment led to a 0.5% rally in the yen.

When Europe walked in, there were three central bank meetings scheduled with the Swiss maintaining policy rates but adjusting the amount of reserves exempt from the deposit rate of -0.75%. While Swiss banks have been complaining about this, given there was already a tiered system it was not anticipated that things would change. The upshot is that the franc is firmer by 0.6% in the wake of the announcement, although traders are a bit on edge given the SNB was clear that intervention remained on the table.

The biggest surprise came from Norway, which hiked rates 25 bps to 1.50%. While several of the Norwegian banks were calling for the hike, the market at large did not believe the Norgesbank would raise rates while the rest of the world was cutting. But there you go, the situation there is that the economy is doing fine, inflation is perking up and because of the government’s ability to tap the oil investment fund, they are actually utilizing fiscal policy as well as monetary policy in their economic management. With all that in mind, however, they were pretty clear this is the last hike for the foreseeable future. NOK rallied 0.5% on the news, but it has given all those gains back and now sits unchanged on the day.

Finally, in what is no surprise at all, the BOE just announced that policy remains unchanged for the time being as all eyes turn toward Brexit and what will happen there. The UK also released Retail Sales data which was bang on expectations and so the pound remains beholden entirely to the Brexit situation.

Speaking of Brexit, today is the third day of hearings at the UK Supreme Court regarding the two lawsuits against the Johnson government’s decision to prorogue parliament for five weeks. If you recall, late Tuesday when word got out that the justices seemed to be very hard on the government, the pound rallied. Interestingly, this morning there are stories all over the press about how the likelihood of a no-deal Brexit seems to be growing quickly. Everybody is tired of the process and thus far, neither side has blinked. I maintain the EU will blink as the economic damage to Germany, the Netherlands and Ireland adding to the entire EU’s economic malaise will be too much to tolerate. But we shall see. As I have been typing, the pound has been edging lower and is now down 0.2% on the day, but in the big picture, that is the same as unchanged.

Turning to this morning’s US data, we start with Philly Fed (exp 10.5) and Initial Claims (213K) and then at 10:00 see Existing Home Sales (5.38M). Yesterday’s housing data, starts and permits, were much better than expected, which given the sharp decline in mortgage rates and still robust employment situation, should not be that surprising. As to Fed speakers, there is no one on tap for today, but three (Williams, Rosengren and Kaplan) due to speak tomorrow. Equity futures are pointing slightly lower right now and if I had to guess, the dollar is more likely to rally slightly than not as the day progresses although large moves are not on the cards.

Good luck
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QT Anyone? (or The Three Hawksketeers)

As summer recedes
JGB rates have collapsed
QT anyone?

As we approach the unofficial end of summer with the Labor Day holiday weekend, it seems the BOJ is finally responding to the fact that their yield curve control policy has been dismissed by the market for basically all of August. A brief history shows that ordinary QE had lost its ability to impact the Japanese economy by September 2016, by which time the BOJ owned about 40% of JGB’s outstanding and thus destroyed any sense of it being a true market. At that point, they introduced yield curve control in an attempt to insure that 10-year yields didn’t rise prematurely. Initially they set a range of +/-0.10% around zero, where if the 10-year traded outside the range they would step in and push it back. Last year they widened that range to +/-0.20%, and up until the beginning of this month, things were working smoothly.

Then the global bond rally gathered steam and JGB’s were not exempt with 10-year yields falling to -0.30% at one point earlier this week, well below the lower bound. Remarkably, the BOJ did nothing, calling into question their commitment to yield curve control. As it turns out, last night they finally acted, reducing the quantity of bonds to be purchased monthly going forward by a significant ¥50 trillion. JGB yields did rally 3bps initially, but closed the session only 1bp higher and still well below the lower bound. As I have been writing, this is simply further proof that the central banks have run out of effective monetary policy tools. As to the impact on the yen, overnight has seen a very modest strengthening of just 0.15%. For the month, however, the increase in risk aversion has seen the yen outperform every other currency in the world, rallying 2.1% against the dollar, and more against most others. While I continue to view the dollar in a positive light going forward, I also continue to see further gains for the yen against all comers.

The hawks at the ECB fear
That not only rate cuts are near
So this week they’ve shrieked
Though rates might be tweaked
That QE has no place this year

Meanwhile, from Europe we had the third of the Three Hawksketeers in the ECB on the tape overnight, Klaas Knot the President of the Dutch central bank. In line with his German colleagues Sabine Lautenschlager and Jens Weidmann, he said that while a cut in interest rates could make sense here, there is absolutely no cause for the reinitiation of QE at this time. That is to be used in dire emergencies (perhaps like a hard Brexit?). This sets up quite a battle for Signor Draghi at his penultimate meeting next month, where other ECB members, Finland’s Ollie Rehn notably, have already called for ‘impactful’ actions implying he wants to over deliver on market expectations.

The market response to the Knot comments was muted at best with Bunds and Dutch bonds seeing yields actually fall 0.5bps in today’s trade. However, that could also be a response to this morning’s Eurozone CPI data where the headline printed at 1.0%, as expected but still miles from their target of “just below 2.0%”. Of more concern though was the core number which surprisingly fell to 0.9%, adding to the case for further stimulus, at least in the ECB’s collective modeling minds. And the euro? Well it has continued its slow and steady decline this month, falling another 0.2% and now trading at its lowest level since May 2017. It continues to be very difficult to make a case for the euro to rebound significantly anytime soon. And despite the Three Hawksketeers, I am more and more convinced that QE starts up again next month. Look for further declines in the single currency.

On the trade front, everybody seems willing to take the over on a positive outcome which has supported stocks nicely. On Brexit, there have been three lawsuits filed against PM Johnson’s move to prorogue Parliament for five weeks, but the first ruling that came down this morning went in Boris’s favor. The pound is little changed on the day, even after marginally weaker than expected house price data, but for the month it is actually a touch higher, 0.2%, which just shows that the market really was focused on a hard Brexit last month. There have been several EU officials stating that prorogation should have no impact on negotiations, and some even see it my way as a strong lever to get a deal.

For all you hedgers, consider this: a 1-year ATMF option costs a bit more than 5 cents. While that is certainly higher than it was before Brexit occurred, I would contend that October will be a binary event, with a no-deal outcome driving a quite severe decline, likely to at least 1.10, while a deal should take us back to 1.30-1.35 quickly. In either case, 5 cents seems like a reasonable price to pay. And obviously, shorter term options will cost less with the same movement available.

And that’s really it for today. The dollar continues to largely grind higher vs. its EMG counterparts, and, quite frankly, its G10 counterparts as well. Equity markets remain in their trade euphoria clouds, and bond markets seem a bit more cautious. Yesterday saw US Q2 GDP revised down to 2.0%, as expected, but the consumer spending measurement was an even stronger than expected 4.7%. This morning the BEA releases Personal Income (exp 0.3%), Personal Spending (0.5%) and PCE (1.4%, 1.6% core) all at 8:30. We also see Chicago PMI (47.5) at 9:45 and Michigan Sentiment (92.3) at 10:00. The Fed is mercifully quiet going into the weekend so barring a shocking outcome in PCE or a White House tweet, the best bet is a continued slow grind higher in the dollar.

Good luck and good weekend
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Boris is Fumbling

The British pound Sterling is tumbling
As traders think Boris is fumbling
His chance to succeed
By forcing, at speed
Hard Brexit with some Tories grumbling

It’s official, the only story of note in the FX markets today is Brexit. Despite central bank meetings and key data, the number one discussion is about how far the pound will fall in the event of a hard Brexit and how high the likelihood of a hard Brexit has become. Since Friday morning, the pound is down by 2.5% and there doesn’t appear to be a floor in the near term. It seems that traders have finally decided that BoJo was being serious when he said the UK would leave the EU with or without a deal come October 31. As such, today’s favorite analyst pastime is to guess how low the pound can fall with a hard Brexit. So far, there has been one estimate of parity with the dollar, although most estimates talk about 1.10 or so. The thing is, while Brexit will clearly be economically disruptive, it seems to me that the warnings of economic activity halting are vastly overstated for political reasons. After all, if you voted Remain, and you are in the media (which was largely the case) then painting as ugly a picture as possible suits your cause, whether or not it is based on factual analysis or fantasy.

But let’s discuss something else regarding the potential effects of a hard Brexit; the fears of a weaker currency and higher inflation. Are these really problems? Is not every developed country (and plenty of emerging ones) in the world seeking to weaken their currency through easier monetary policy in order to gain a competitive advantage in trade? Is not every developed country in the world complaining that inflation is too low and that lowered inflation expectations will hinder central bank capabilities? Obviously, the answer to both these questions is a resounding ‘YES’. And yet, the prospects of a weaker pound and higher inflation are seen as devastatingly bad for the UK.

Is that just jealousy? Or is that a demonstration of central bank concern when things happen beyond their control. After all, for the past decade, central banks have basically controlled the global economy. Methinks they have gotten a bit too comfortable with all that power. At any rate, apocalyptic scenarios rarely come to pass, and in fact, my sense is that while the pound can certainly fall further in the short run, we are far more likely to see the EU figure out that they don’t want a hard Brexit after all, and come back to the table. While a final agreement will never be finished in time, there will be real movement and Brexit in name only as the final details are hashed out over the ensuing months. And the pound will rebound sharply. But that move is still a few months away.

Away from Brexit, there has been other news. For example, the BOJ met last night and left policy rates on hold, as universally expected, but lowered their inflation forecast for 2019 to 1.0%, which is a stretch given it’s currently running at 0.5%. And their 2.0% target is increasingly distant as even through 2022 they see inflation only at 1.6%. At the same time, they indicated they will move quickly to ease further if necessary. The problem is they really don’t have much left to do. After all, they already own half the JGB market, and have bought both corporate bonds and equities. Certainly, they could cut rates further, but as we have learned over the past ten years, ZIRP and NIRP have not been all that effective. With all that said, the yen’s response was to rise modestly, 0.15%, but basically, the yen has traded between 107-109 for the past two months and shows no signs of breaking out.

We also saw some Eurozone data with French GDP disappointing in Q2, down to 0.2% vs. 0.3% expected, and Eurozone Confidence indicators were all weaker than expected, noticeably Business Confidence which fell to -0.12 from last month’s +0.17 and well below the +0.08 expected. This was the weakest reading in six years and simply highlights the spreading weakness on the continent. Once again I ask, do you really think the EU is willing to accept a hard Brexit with all the disruption that will entail? As to the euro, it is essentially unchanged on the day. Longer term, however, the euro remains in a very clear downtrend and I see nothing that will stop that in the near term. If anything, if Draghi and friends manage to be uber-uber dovish in September, it could accelerate the weakness.

Away from the big three, we are seeing weakness in the Scandies, down about 0.5%, as well as Aussie and Kiwi, both lower by about 0.25%. Interestingly, the EMG bloc has been much less active with almost no significant movement anywhere. It appears that traders are unwilling to do anything ahead of tomorrow’s FOMC statement and Powell’s press conference.

On the data front this morning we see Personal Income (exp 0.4%), Personal Spending (0.3%), Core PCE (0.2%, 1.7% Y/Y), Case-Shiller Home Prices (2.4%) and Consumer Confidence (125.0). Arguably, the PCE data is most important as that is what the Fed watches. Also, given that recent CPI data came in a tick higher than expected, if the same thing happens here, what will that do to the insurance cut narrative? The point is that the data of late has not warranted talk of a rate cut, at least not the US data. But will that stop Powell and company? The controlling narrative has become the Fed must cut to help the rest of the world. But that narrative will not depreciate the dollar very much. As such, I remain generally bullish the dollar for the foreseeable future.

Good luck
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