Truly Displeasing

Down Under the story’s that rates
May soon fall, which just demonstrates
That growth there is easing
Thus truly displeasing
The central bank head and his mates

The RBA Minutes were released last evening and the central bank in the lucky country is not feeling very good. Governor Lowe and his team painted two, arguably similar, scenarios under which the RBA would need to cut rates; a worsening of the employment situation or a continued lack of inflation (driven by a worsening of the employment situation). We have been hearing this tune from Lowe for the past several months and the market is already pricing in more than one full 25bp cut before the end of 2019. However, as is often the case, when these theories are confirmed the market adjusts further. And so, it should be no surprise that AUD is lower again this morning, falling 0.35% and now trading back to the lows last seen in January 2016. For a bit more perspective, the last time Aussie was trading below these levels was during the financial crisis in Q1 2009 amidst a full-on risk blowout. But the combination of slowing Chinese growth, and generic dollar strength is taking a toll on the Aussie dollar. The trend here is lower and appears to have further room to run. Hedgers take note!

In England, meanwhile, it appears
The outcome that everyone fears
A no-deal decision
Might soon be the vision
And Sterling might weaken for years

Turning to the UK, the odds of a hard Brexit seem to be increasing by the day. As the EU elections, scheduled for later this week, approach, the hardline Tories are in the ascendancy. Nigel Farage, one of the most vocal anti-EU voices, is leading his new Brexit party into the elections and they are set to do quite well. At the same time, Boris Johnson, the former Foreign Minister in PM May’s government, as well as former Mayor of London, and also a strong anti-EU voice, is now the leading candidate to replace May in the ongoing leadership struggle. The PM is still trying to push water uphill find support for her thrice defeated bill, but it should be no surprise that, so far, that support has yet to materialize. After all, it was hated three times already and not a single word in the bill has changed. At this point, her only hope is that the increasingly real threat of a PM Johnson, who has stated he will simply exit the EU quickly, may be enough to get those wavering to come to her side. Based on the FX market price action over the past three weeks, however, it is becoming clearer that her bill is going to fail yet again.

Since the beginning of the month, the pound has fallen 3.6% (-0.25% today) and is trading at levels last seen in early January. As this trend progresses, it looks increasingly likely that the market will test the post-Brexit lows of 1.1906. And, of course, if Johnson is the next PM and he does pull out of the EU without a deal, an initial move to 1.10 seems quite viable. Once again, hedgers beware. As an aside, do not think for a moment that the euro will go unscathed in a hard Brexit. It would be quite easy to see a 2%-3% decline immediately, although I suspect that would moderate far more quickly than the damage to the pound.

Turning our eyes eastward, we see that the ongoing trade war (it has clearly escalated past a spat) between the US and China continues to have ramifications in the FX markets. Not only is the yuan continuing to weaken (-0.2% today) but other currencies are starting to feel the brunt. The most obvious loser has been the Korean won (-0.15% overnight) which has fallen 5.4% in the past month. While the central bank there is clearly concerned, given the cause of the movement and the strong trend, there is very little they can do to halt the slide other than raising interest rates aggressively. However, that would be devastating for the South Korean economy, so it appears that there is further room for this to decline as well. All eyes are on the 1200 level, which last traded in the major dollar rally in the beginning of 2017.

Do you see the trend yet? The dollar is continuing its strengthening tendencies across the board this morning. Other news adding fuel to the fire was the latest revision of OECD growth forecasts, where the US data was upgraded to 2.6% for 2019 while virtually every other area (UK, China, Eurozone, Japan, etc.) was downgraded by 0.1%-0.2%. It should be no surprise that the dollar remains well-bid in this environment.

Turning to the data this week, it is quite sparse as follows:

Today Existing Home Sales 5.35M
Wednesday FOMC Minutes  
Thursday Initial Claims 215K
  New Home Sales 675K
Friday Durable Goods -2.0%
  -ex transport 0.2%

Obviously, all eyes will be on the Minutes tomorrow, but the data set is not very enticing. That said, we do hear from eight more Fed speakers across a total of ten speeches (Atlanta’s Rafael Bostic is up three times this week). Yesterday, Chairman Powell explained that while corporate debt levels are high, this is no repeat of the mortgage crisis from 2008. Of course, Chairman Bernanke was quite clear, at the time, that the mortgage situation was “contained” just before the bottom fell out. I’m not implying the end is nigh, simply that the track record of Fed Chairs regarding forecasting market and economic dislocations is pretty dismal. At this time, there is no evidence that the Fed is going to do anything on the interest rate front although the futures market continues to price for nearly 50bps of rate cuts this year. And when it comes to forecasting, the futures market has a much better track record. Just sayin’.

All told, at this point there is no reason to think the dollar is going to reverse any of its recent strength, and in fact, seems likely to add to it going forward.

Good luck
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Mostly Mayhem

There once was a female PM
Whose task was the fallout, to stem,
From Brexit, alas
What then came to pass
Was discord and mostly mayhem

And so, because progress has lumbered
Theresa May’s days are now numbered
The market’s concern
Is Boris can’t learn
The problems with which he’s encumbered

In the battle for headline supremacy, at least in the FX market’s eyes, Brexit has once again topped the trade war today. The news from the UK is that PM May has now negotiated her own exit which will be shortly after the fourth vote on her much-despised Brexit bill in Parliament. The current timing is for the first week of June, although given how fluid everything seems to be there, as well as a politician’s preternatural attempts to retain power, it may take a little longer. However, there seems to be virtually no possibility that the legislation passes, and Theresa May’s tumultuous time as PM seems set to end shortly.

Of course, that begs the question, who’s next? And that is the market’s (along with the EU’s) great fear. It appears that erstwhile London Mayor, Boris Johnson, is a prime candidate to win the leadership election, and his views on Brexit remain very clear…get the UK out! In the lead up to the original March 31 deadline, you may recall I had been particularly skeptical of the growing sentiment at the time that a hard Brexit had been taken off the table. In the end, the law of the land is still for the UK to leave the EU, deal or no deal, now by October 31, 2019. It beggars belief that the EU will readily reopen negotiations with the UK, especially a PM Johnson, and so I think it is time to reassess the odds of the outcome. Here is one pundit’s view:

  May 16, 2019 May 17, 2019
Soft Brexit 50% 20%
Vote to Remain 30% 35%
Hard Brexit 20% 45%

Given this change in the landscape, it can be no surprise that the pound continues to fall. This morning sees the beleaguered currency lower by a further 0.3% taking the move this month to 3.2%. And the thing is, given the nature of this move, which has been very steady (lower in 9 of the past 10 sessions with the 10th unchanged), there is every reason to believe that this has further room to run. Very large single day moves tend to be reversed quickly, but this, my friends is what a market repricing future probability looks like. The most recent lows, near 1.25 in December look a likely target at this time.

Of course, the fact that the market seems more focused on Brexit than trade doesn’t mean the trade story has died. In fact, equity markets in Asia suffered, as have European ones, on the back of comments from the Chinese Commerce Ministry that no further talks are currently scheduled, and that the Chinese no longer believe the US is negotiating in good faith. As such, risk is clearly being reduced across the board this morning with not merely equity weakness, but haven strength. Treasury (2.37%) and Bund (-0.11%) yields continue to fall while the yen (+0.2%) rallies alongside the dollar.

In FX markets, the Chinese yuan has fallen again (-0.3%) and is now trading at 6.95, quite close to the supposed critical support (dollar resistance) level of 7.00. There continues to be a strong belief in the market, along with the analyst community, that the PBOC won’t allow the renminbi to weaken past that level. This stems from market activity in 2015, when the Chinese surprised everyone with a ‘mini-devaluation’ of 1.5% one evening in early August of that year. The ensuing rush for the exits by Chinese nationals trying to save their wealth cost the PBOC $1 trillion in FX reserves as they tried to moderate the renminbi’s decline. Finally, when it reached 6.98 in late December 2016, they changed the capital flow regulations and added significant verbal suasion to their message that they would not allow the currency to fall any further.

And for the most part, it worked for the next 15 months. However, clearly the situation has changed given the ongoing trade negotiations, and arguably given the deterioration in the relationship between the US and China. While the Chinese have pledged to avoid currency manipulation, it is not hard to argue that their current activities in maintaining yuan strength are just that, manipulation. Given the capital controls in place, meaning locals won’t be able to rush for the doors, it is entirely realistic to believe the PBOC could say something like, ‘we believe it is appropriate for the market to have a greater role in determining the value of the currency and are widening the band around the fix to accommodate those movements.’ A 5% band would certainly allow a much weaker renminbi while remaining within the broad context of their policy tools. In other words, I am not convinced that 7.00 is a magic line, perhaps more like a Maginot Line. If your hedging policy relies on 7.00 being sacrosanct, it is time to rethink your policy.

Overall, the dollar is firmer pretty much everywhere, with yesterday’s broad strength being modestly extended today. Yesterday’s US data was much better than expected as Housing starts grew 5.6% and Philly Fed printed at a higher than expected 16.6. Later this morning we see the last data of the week, Michigan Sentiment (exp 97.5). We also hear from two more Fed speakers, Clarida and Williams, although we have already heard from both of them earlier this week. Yesterday Governor Brainerd made an interesting series of comments regarding the Fed’s attempts to lift inflation, highlighting for the first time, that perhaps their models aren’t good descriptions of the economy any more. After a decade of inability to manage inflation risk, it’s about time they question something other than the market. While I am very happy to see them reflecting on their process, my fear is they will conclude that permanent easy money is the way of the future, a la Japan. If that is the direction in which the Fed is turning, it will have a grave impact on the FX markets, with the dollar likely to suffer the most as the US is, arguably, the furthest from that point right now. But that is a future concern, not one for today.

Good luck and good weekend
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Another Bad Day

Consider Prime Minister May
Who’s having another bad day
Her party is seeking
Her ouster ere leaking
Support, and keep Corbyn at bay

The pound is now bearing the brunt
Of pressure as sellers all punt
On Brexit disaster
Occurring much faster
Thus moving back burner to front

While the rest of the world continues to focus on the US-China trade situation, or perhaps more accurately on the volatility of US trade policy, which has certainly increased lately, the UK continues to muddle along on its painfully slow path to a Brexit resolution of some sort. The latest news is that the Tory party is seeking to change their own parliamentary rules so they can bring another vote of no-confidence against PM May as a growing number in the party seek her resignation. Meanwhile, the odds of a deal with the Labour party continue to shrink given May’s unwillingness to accept a permanent membership in a customs union, a key demand for Labour. This is the current backdrop heading into the EU elections next week. The Brexit party, a new concoction of Nigel Farage, is leading the race in the UK according to recent polls, with their platform as, essentially, leave the EU now! And to top it all off, PM May is seeking to bring her much despised Brexit bill back to the floor for its fourth vote in early June. In other words, while it has probably been a month since Brexit was the hot topic, as the cracks begin to show in UK politics, it is coming back to the fore. The upshot is the pound has been under very steady pressure for the past two weeks, having fallen 2.7% during that time (0.2% overnight), and is now at its lowest point since mid-February.

When the delay was agreed by the EU and the UK, pushing the new date to October 31, the market basically assumed that either Labour would come on-board and a deal agreed, or that a second referendum would be held which is widely expected to point to Remain. (Of course, that was widely expected in the first referendum as well!) However, given that politics is such a messy endeavor, there is no clarity on the outcome. I think what we are observing is the market pricing in much higher odds of a hard Brexit, which remains the law of the land given there are no other alternatives at this time. Virtually every pundit believes that some deal will be struck preventing that outcome, but it is becoming increasingly clear that the FX market, at least, is far less certain of that outcome. For the FX market punditry, this has created a situation where not only trade politics are clouding the view, but local UK politics are doing the same.

Speaking of trade politics, while there is continued bluster on both sides of the US-China spat, the lines of communication clearly remain open as Treasury Secretary Mnuchin seems likely to head back to Beijing again soon for further discussions. At the same time, President Trump has delayed the decision on imposing 25% tariffs on imported autos from Europe and Japan while negotiations there continue, thus helping kindle a rebound in yesterday’s equity markets. As to the FX impact on this news, it was ever so mildly euro positive, with the single currency rebounding a total of 0.2% from its lows before the announcement. Of course, part of the euro’s rally could be pinned on the much weaker than expected US Retail Sales and IP data released yesterday, but given the modesty of movement, it really doesn’t matter the driver.

Stepping back a bit, the dollar’s longer-term trend remains higher. Versus the euro, it remains 5% higher than May 2018, while the broader based Dollar Index (DXY) has rallied 3.5% in that period. And the thing is, despite yesterday’s US data, the US situation appears to be far more supportive of growth than the situation virtually everywhere else in the world. Global activity measures continue to point to a slowing trend which is merely being exacerbated by the trade problems.

Turning to market specifics, Aussie is a touch lower this morning after weaker than expected employment data has helped cement the market’s view that the RBA is going to cut rates at least once this year with a decent probability of two cuts before December. While thus far Governor Lowe has been reluctant to lean in that direction, the collapse in housing prices is clearly starting to weigh elsewhere Down Under. I think Aussie has further to decline.

However, away from that news, there has been much less of interest to drive markets, and so, not surprisingly, markets remain extremely quiet. Something that gets a great deal of press lately has been the decline in volatility and how selling vol has turned into a new favorite trade. (As a career options trader, I would caution against selling when levels have reached a nadir like this. It is not that they can’t decline further, clearly they can, but in a reversal, the pain will be excruciating).
As to the data story, aside from the Australian employment situation, there has been nothing of note overnight. This morning brings Initial Claims (exp 220K) and Housing Starts (1.205M) and Building Permits (1.29M) along with Philly Fed (9.0) all at 8:30. I mentioned the weak Retail Sales and IP data above, but we also saw Empire Manufacturing which was shockingly high at 18.5, once again showing that there is no strong trend in the US data. While there are no Fed speakers today, yesterday we heard from Richmond President Barkin and not surprisingly, he said he thought that patience was the right stance for now. There is no doubt they are all singing from the same hymnal.

Arguably, as long as we continue to get mixed data, there is no reason to change the view. With that in mind, it is hard to get excited about the prospects of a large currency move until those views change. So, for the time being, I believe the longer-term trend of dollar strength remains in place, but it will be choppy and slow until further notice.

Good luck
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Uncertainty Reigns

Concerns over trade still remain,
For bullish investors, a bane
They want to believe
That Trump will achieve
His goals, so investments can gain

But right now uncertainty reigns
Resulting in stock market pains
When risk is reduced
Then bonds get a boost
While euros and pounds feel the strains

The one thing we know for sure is that the trade situation continues to be a major topic on investor minds, whether those investors are of the equity or fixed income persuasion. Despite the ostensible good news that Chinese vice-premier Liu He would still be coming to Washington later this week to continue the trade talks with Mnuchin and Lighthizer, it seems the market has become a bit less convinced that a deal is coming soon. As I have written several times over the past few weeks, it seems clear the market had fully priced in a successful completion of the trade talks and an (eventual) end to tariffs. But the President’s tweets on Sunday has caused a serious reconsideration of that pricing. Arguably, the 2% decline we have seen in US equity indices over the past two sessions is not nearly enough to offset the full risk, but it is a start. Ironically, I think the constant reiteration by financial heavyweights like Christine Lagarde and Mario Draghi, of how important it is to avoid a trade war, has set up a situation where in the event no deal is reached, the market reaction will be worse than if they had never piped up in the first place.

At any rate, the increased tensions have certainly reduced risk appetites across the board. Not only have equity markets suffered (Nikkei -1.5%, Shanghai -1.1% after yesterday’s US declines) but Treasury yields continue to fall. This morning 10-year Treasury yields have fallen to 2.43%, their lowest since late March and essentially flat to the 3-month T-Bill. Expect to hear more discussion about an inverted yield curve and the omens of a recession in the near future.

Away from the trade situation, it seems most other market stories are treading water. For example, the Brexit situation has been back page news for the past two weeks. PM May continues to negotiate with opposition leader Jeremy Corbyn, but there is no consistency to the reports of progress. Labour wants to join the customs union which is something the pro-Brexiteers are fiercely against. Depending on the source of the article you read, a deal is either imminent or increasingly unlikely, which tells me that nobody really knows anything. The pound, which had seen some strength last week, especially on Friday when rumors of a deal were rife, has fallen a further 0.45% this morning and is back near the 1.30 level. It seems increasingly likely to me there will be no solution before the EU elections, and that there will be no solution before the October 31 deadline. Parliament remains riven and leadership there has been completely absent. I expect this to be exhibit A in the long tradition of muddling through by European nations.

Elsewhere in the FX markets, the RBNZ did cut rates last night by 25bps, unlike their Australian brethren who stayed on hold. Kiwi is softer by 0.25% this morning on the back of the news and has helped drag the Aussie with it. Of course, part of the malaise in these currencies is the ongoing uncertainty over the trade talks, as well as the suspect Chinese data.

Speaking of that data, last night China released much worse than expected trade results with exports falling 2.7% and imports rising just 4.0% resulting in a trade surplus of ‘just’ $13.8B, well below expectations. It seems that the tariffs are starting to have a real impact now that inventories need to be replenished. Aside from the impact on the Shanghai exchange noted above, the renminbi also drifted modestly lower, -0.1%, and continues to push toward levels last seen in January. One thing of which I am confident is that if the trade talks fall apart completely, CNY will weaken sharply and test the 7.00 level in short order. Part of the recent stability in the currency has been due to a general malaise in the FX market as evidenced by the extremely low volatility across the board. But part of it, no doubt, is the result of the PBOC managing the currency and absorbing any significant selling in order to demonstrate they are not manipulating the currency lower to enhance their trade. But that will surely end if the talks end unsuccessfully.

Away from those stories it is much more about a modest risk-off scenario today with both JPY and CHF stronger by 0.2%, while EMG currencies are suffering (MXN -0.4%, TRY -0.5%). However, the overall market tone is, not unlike the Fed, one of patience for the next catalyst to arrive. Given the dearth of important data until Friday’s CPI, that should be no real surprise.

In fact, this morning there are no data releases in the US although we do hear from Fed Governor Lael Brainerd at 8:30. Yesterday’s comments from Governor Clarida were generally unenlightening, toeing the line that waiting was the best idea for now and that there were no preconceived notions as to the next rate move. As such, I expect Brainerd to be on the same page, and the FX market to continue to tread water at least until Friday’s CPI.

Good luck
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Rather Wrong

While Powell said growth may be strong
He still thinks it seems rather wrong
That prices won’t rise
So it’s no surprise
That rates will go lower ‘ere long

After the FOMC left policy largely unchanged yesterday (they did tweak the IOER down by 5bps) and the statement was parsed, it appeared that the Fed’s clear dovish bias continues to drive the overall tone of policy. Growth is solid but inflation remains confusingly soft and it appeared that the Fed was moving closer to the ‘insurance’ rate cut markets have been looking hoping for to prevent weakness from showing up. Stocks rallied and so did bonds with the yield on the 10yr falling to 2.45% just before the press conference while stock markets were higher by 0.5% or so. But then…

According to Powell the story
Is price declines are transitory
So patience remains
The thought in Fed brains
With traders stuck in purgatory

Powell indicated that the majority view at the Fed was that the reason we have seen such weak price data lately is because of transitory issues. These include reduced investment management fees in the wake of the sharp equity market declines in Q4 of last year and the change in the way the Fed gathered price data at retail stores where they now collect significantly greater amounts of data digitally, rather than having ‘shoppers’ go to stores and look at price tags. The upshot is that while he was hardly hawkish in any sense of the word, trying to maintain as neutral a stance as possible, he was far more hawkish than the market had anticipated. Not surprisingly, markets reversed their earlier moves with 10yr yields shooting higher by 6bps, closing higher than the previous day’s close, while equity markets ceded all their early gains and wound up falling about 0.7% on average between the three major indices.

What about the dollar? Well, it followed the same type of trajectory as other assets, softening on the dovish ideas throughout the session before rallying a sharp 0.55% in the wake of Powell’s press conference opening statement. Since then, it has largely maintained the rebound, although this morning it is softer by about 0.1% across the board.

Looking ahead, markets are going to continue to focus on the interplay between the data releases and the central bank comments. Nothing has changed with regard to the overarching dovish bias evident in almost all central banks, but in order for them to act, rather than merely talk, the data will have to be clearly deteriorating. And lately, the best description of the data releases has been mixed. For example, yesterday saw a huge ADP Employment number, 275K, boding well for tomorrow’s NFP report. However, ISM Manufacturing fell sharply to 52.8, well below last month’s 55.3 reading as well as far below the 55.0 market expectation. So, which one is more important? That’s the thing. As long as we see strength in some areas of the economy along with weakness in others, the Fed is almost certainly going to sit on the sidelines. That is, of course, unless the inflation data starts to move more aggressively in either direction. I think it is far better than even money that Fed funds are 2.25%-2.50% on December 31.

But what about other places? Well, the ECB seems stuck between a rock and a hard place as Q1 data has been disappointing overall and they are running out of tools to fight a slowdown. Given the current rate structure, the question being debated in the halls in Frankfurt is just how low can rates go before having a net detrimental impact on the economy. If we see any further weakness from the Eurozone, we are going to find out. That brings us to this morning’s PMI data, where Bloomberg tried hard to put a positive spin on what remains lousy data. Germany (44.4), Italy (49.1) and France (50.0) remain desultory at best. The Eurozone print (47.2) is hardly the stuff of dreams, although in fairness, it was better than analysts had been expecting. So perhaps we are seeing the beginnings of a stabilization in the decline, rather than a continuing acceleration of such. But that hardly gives a rationale for tighter policy. The ECB remains stuck on hold on the rate front and is certainly going to see significant uptake of their new TLTRO’s when they come out. It remains difficult to see a reason for the euro to rebound given the underlying economic weakness in the Eurozone, especially with the ECB committed to negative rates for at least another year.

What about the UK? Well, the BOE met this morning and left rates on hold by a unanimous vote. They also released new economic forecasts that showed reduced expectations for inflation this year, down to 1.6%, with the out years remaining essentially unchanged. They indicated that the delay in Brexit would have a limited impact as they continue to plan on a smooth transition, and their growth forecasts changed with 2019 rising to 1.5% on the back of the inventory led gains in Q1, although the out years remain unchanged. Here, too, there is no urgency to raise rates, although they keep trying to imply that slightly higher rates would be appropriate. However, the market is having none of it, pricing a 30% chance of a 25bp rate cut before the end of next year. The pound chopped on the news, rallying at first, but falling subsequently and is now sitting at 1.3050, essentially unchanged on the day.

Of course, Brexit continues to influence the pound’s movements and recent hints from both PM May and Labour Leader Corbyn indicate that it is possible they are going to agree a deal that includes permanent membership of a customs union with the EU. Certainly, verification of that will help the pound rally back. But boy, if I voted for Brexit and this is what they delivered, it would be quite upsetting. In essence, it destroys one of the main benefits of Brexit, the ability to manage their own trade function. We shall see how it plays out.

This morning brings more data, starting with Initial Claims (exp 215K), Nonfarm Productivity (2.2%) and Unit Labor Costs (1.5%) at 8:30, then Factory Orders (1.5%) at 10:00. The onslaught of Fed speakers doesn’t start until tomorrow, so that’s really it for the day. Equity futures are rallying this morning as the idea that the markets fell yesterday seems more like a mirage than a market response to new information. In the end, you cannot fight city hall, and though Powell tried to sound tough, I didn’t see anything to change the view that the Fed remains biased toward cutting rates as their next move.

Good luck
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Continue Restrained

Come autumn and next Halloween
The UK may finally wean
Itself from the bloc
To break the deadlock
But Parliament still must agree(n)

Meanwhile Signor Draghi explained
That growth would continue restrained
And Fed Minutes noted
That everyone voted
For policy to be maintained

There has been fresh news on each of the main market drivers in the past twenty-four hours, and yet, none of it has been sufficient to change the market’s near-term outlook, nor FX prices, by very much.

Leading with Brexit, there was a wholly unsatisfying outcome for everyone, in other words, a true compromise. PM May was seeking a June 30 deadline, while most of the rest of the EU wanted a much longer delay, between nine months and a year. However, French President Emanuel Macron argued vociferously for a short delay, actually agreeing with May, and in the end, Halloween has a new reason to be scary this year. Of course, nothing has really changed yet. May will still try to get her deal approved (ain’t happening); Euroskeptic Tories will still try to oust her (possible, but not soon) and Labour will push for new elections (also possible, but not that likely). The topic of a second referendum will be heard frequently, but as of right now, PM May has been adamant that none will not take place. So, uncertainty will continue to be the main feature of the UK economy. Q1 GDP looks set to be stronger than initially expected, but that is entirely due to stockpiling of inventory by companies trying to prepare for a hard Brexit outcome. At some point, this will reverse with a corresponding negative impact on the data. And the pound? Still between 1.30 and 1.31 and not looking like it is heading anywhere in the near future.

On to the ECB, where policy was left unchanged, as universally expected, and Signor Draghi remarked that risks to the economy continue to be to the downside. Other things we learned were that the TLTRO’s, when they come later this year, are pretty much the last arrow in the policy quiver. Right now, there is no appetite to reduce rates further, and more QE will require the ECB to revise their internal guidelines as to the nature of the program. The issue with the latter is that EU law prevents monetization of government debt, and yet if the ECB starts buying more government bonds, it will certainly appear that is what they are doing. This morning’s inflation data from France and Germany showed that there is still no inflationary impulse in the two largest economies there, and by extension, throughout the Eurozone.

At this point, ECB guidance explains rates will remain on hold through the end of 2019. My view is it will be far longer before rates rise in the Eurozone, until well into the recovery from the next recession. My forecast is negative euro rates until 2024. You read it here first! And the euro? Well, in its own right there is no reason to buy the single currency. As long as the US economic outlook remains better than that of the Eurozone, which is certainly the current case, the idea that the euro will rally in any meaningful way seems misguided. Overnight there has been little movement, and in fact, the euro has been trading between 1.12 and 1.1350 for the past three weeks and is currently right in the middle of that range. Don’t look for a break soon here either.

The FOMC Minutes taught us that the Fed is going to be on hold for quite a while. The unanimous view is that patience remains a virtue when it comes to rate moves. Confusion still exists as to how unemployment can be so low while inflation shows no signs of rising, continuing to call into question their Phillips Curve models. In fact, yesterday morning’s CPI showed that core inflation fell to 2.0% annually, a tick lower than expected and continuing to confound all their views. The point is that if there is no inflationary pressure, there is no reason to raise rates. At the same time, if US economic growth continues to outpace the rest of the world, there is no reason to cut rates. You can see why the market is coming round to the idea that nothing is going to happen on the interest rate front for the rest of 2019. Futures, which had priced in almost 40bps of rate cuts just last month, are now pricing in just 10bps (40% chance of one cut). Despite the ongoing rhetoric from President Trump regarding cutting rates and restarting QE, neither seems remotely likely at this juncture. And don’t expect either of his Fed nominees to be approved.

Finally, Treasury Secretary Mnuchin declared that the US and China have agreed a framework for enforcement of the trade agreement, with both nations to set up an office specifically designed for the purpose and a regular schedule of meetings to remain in touch over any issues that arise. But Robert Lighthizer, the Trade Representative has not commented, nor have the Chinese, so it still seems a bit uncertain. Enforcement is a key issue that has been unsolved until now, although IP protection and state subsidies remain on the table still. Interestingly, equity markets essentially ignored this ‘good’ news, which implies that a completed deal is already priced into the market. In fact, I would be far more concerned over a ‘sell the news’ outcome if/when a trade deal is announced. And of course, if talks break off, you can be certain equity prices will adjust accordingly.

This morning brings Initial Claims (exp 211K) and PPI (1.9%, 2.4% ex food & energy) and speeches from Clarida, Williams, Bullard and Bowman. But what are they going to say that is new? Nothing. Each will reiterate that the economy is doing well, still marginally above trend growth, and that monetary policy is appropriate. In the end, the market continues to wait for the next catalyst. In equities, Q1 earnings are going to start to be released this afternoon and by next week, it will be an onslaught. Arguably, that will drive equities which may yet impact the dollar depending on whether the earnings data alters overall economic views. In the meantime, range trading remains the best bet in FX.

Good luck
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A One-Year Delay

Prime Minister May wanted weeks
The EU, however, now seeks
A one-year delay
Which for PM May
Means Tories will up their critiques

Today brings two important decisions from Europe. First and foremost is the EU Council meeting called to discuss Brexit and determine how long a delay will be granted to the UK to make up their mind. (Hint: it doesn’t seem to matter, there is no clear preference for any decision!) Secondly, the ECB meets a day earlier than usual and will announce its policy decisions (there will be no changes) and at 8:30 Signor Draghi will face the press. The reason they are meeting early is so they can get to Washington for the annual IMF/World Bank meetings.

As to the first, PM May has asked for an extension to June 30, as she continues to try to force her deal down Parliament’s collective throat. However, given how unsuccessful she has been in this process, it seems more likely that the EU is going to force the UK to take a nine-month or one-year extension. In their view, this will allow the political process to play out with either a new referendum or a new election or both, but with some type of mandate finally achieved. Naturally, the hard-core Brexiteers are horrified at this outcome because the thought is that a new vote would result in canceling Brexit. This would not be the first time that a referendum in the EU went badly and was subsequently rerun in order to get the leadership’s desired outcome. Both the French and the Dutch rejected the EU Constitution in 2005 initially, but subsequently reversed the initial vote while the Danes rejected the Maastricht Treaty in 1992 but also voted a second time to approve it. So this would hardly be unprecedented.

The problem for the UK is that the only thing they have agreed on, and just barely, is that they don’t want to leave without a deal. However, if anything, there has been increased rancor amongst the MP’s and there is no clear view on how to proceed. Actually, I guess the other thing Parliament has agreed on is they HATE PM May’s negotiated deal! Meanwhile, UK data this morning was surprisingly robust with IP jumping 0.6% and GDP in February rising at a 2.0% annualized clip, both data points being far better than expected. And the pound has benefitted rising 0.2% this morning, although it still remains mired between 1.30 and 1.31with little prospect of moving until something new happens in the Brexit saga.

On to the ECB, which is still struggling to stimulate the Eurozone economy. In fact, yesterday, the IMF announced reduced forecasts for 2019 GDP growth globally, taking their expected rate down to 3.3% with Europe being one of the key weak spots. The IMF’s 2019 projection is down to 1.3% for the Eurozone, from their previous forecast of 1.5%.

It is this situation that Signor Draghi is trying desperately to address but has so far been largely unsuccessful. It seems clear that the ECB will not countenance a move to further negativity in interest rates, and the TLTRO announcement from last month has faded from view. At this point, the only thing they can do would be reopen QE, but I don’t think that is yet likely. However, do not be surprised if we continue to see the growth trajectory slow in the Eurozone, that the ECB does just that.

On that subject, it may be time to question just how much worse things are going to get in the global economy. After all, one of the key issues has been Brexit, which at this point looks like it will be delayed for a long time at the very least. As well, we continue to hear that the trade talks between the US and China are making progress, so if there is a successful conclusion there, that would be another positive for global growth. With the IMF (a frequent negative indicator) sounding increasing warnings, and some stirrings of better data (not only the UK, but Italian IP surprised on the high side today rising 0.8% in February, compared to expectations of a -0.8% outcome), and last week’s slightly better than expected Chinese PMI data, perhaps the worst is behind us. Of course, counter to that view is the global bond market which continues to price in further economic weakness based on the increased number of bonds with negative yields as well as the ongoing lethargy in US rates. It is easy to become extremely pessimistic as global policymakers have not shown great command, but this view cannot be ignored.

Overall, the dollar is slightly softer this morning, down 0.15% vs. the euro and 0.35% vs. AUD (RBA Governor DeBelle sounded slightly less dovish in a speech last night) as well as lesser amounts vs. other currencies. We are seeing similar magnitude gains in many EMG currencies, but overall, the pattern seems to be that the dollar softens overnight and regains its footing in the US session.

This morning brings CPI data (exp 1.8% and 2.1% ex food & energy) and then the FOMC Minutes from March are released at 2:00. We also hear from Randall Quarles, although, as I continue to say, at this point, there seems little likelihood of a change in view by any of the FOMC’s members. I see no reason for the recent pattern to change, so expect that the dollar will stabilize, and likely rebound slightly as the day progresses. But despite the EU meeting and the ECB meeting, it seems unlikely there will be much new information to change anybody’s view when the bell rings this afternoon.

Good luck
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