Tag Archives: #Brexit

All We’ve Endured

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“Legal changes” have now been “secured”
Which, following all we’ve endured
Encouraged the buying
Of pounds, clarifying
The thought that soft Brexit’s assured

In the ongoing game of chicken, otherwise known as the Brexit negotiations, it seems the EU was the one who flinched. Last night, British PM Theresa May returned from a Strasbourg meeting with European Commission President Jean-Claude Juncker after obtaining potentially substantial modifications to the Irish backstop portion of the negotiated deal. If you recall, this has been the sticking point because the twin objectives of first; preventing a hard border between Ireland and Northern Ireland; and second, insuring that if the UK is outside the EU customs union, appropriate tariffs can be collected, and goods inspected were leading to opposite solutions. The Irish backstop was designed to help alleviate British concerns they would be stuck in the customs union forever. However, as it had previously been written, that did not seem to be the case. Now comes some new language, touted as legally binding, that ostensibly insures that the UK can opt out of the customs union if desired. While I am no lawyer, and thus not qualified to give a legal opinion, my reading of the plain language leaves the impression that nothing much has changed.

This morning, the UK Attorney General, Geoffrey Cox, is going over the package and will be giving his far more qualified opinion to Parliament shortly. (**FLASH – GEOFFREY COX SAYS THE LEGAL RISK OF THE NEW IRISH BACKTOP IS UNCHANGED**) The vote on the deal is still scheduled for 7:00pm this evening (3:00pm EDT) although there are some MP’s who would like a one-day delay in order to be able to read and understand it themselves. In the interim, the market has had quite a wild ride. From yesterday morning, when the pound was trading below 1.30, we have seen a more than 2.0% rally which in the past two hours has completely unwound! Thus, 1.2975 => 1.3250 => 1.3015 has been the movement in the past twenty-four hours. It seems the initial euphoria is being replaced by a more skeptical view that these changes will be enough to turn the Brexit tide in Parliament. At this point, it’s a mug’s game to try to forecast the outcome of this vote. The last I saw was that the deal would lose by 50 votes or so, a much better performance than last time, but still a loss. My gut tells me that a hard Brexit is still a possible outcome, and that there is no certainty whatsoever that Parliament will be able to prevent that.

But away from the pound, the only other currency that has shown any real movement has been the Philippine peso, which has declined a sharp 1.65% overnight. This occurred after the new President of the central bank there explained that the peso had strengthened as much as it could and that given low inflation readings, further rate cuts were on the table. At least this market movement makes sense!

Ongoing stories include the US-China trade talks, where there has been no additional progress, at least none publicized. The Chinese remain concerned that any meeting between the Presidents be just a signing ceremony rather than finalizing negotiations as they are worried that President Trump might reject a deal at the final moments with President Xi thus losing face in the process. I am confident we will hear more on this subject in the next days, and the latest signs point to a positive outcome, but here, too, nothing is certain.

The other ongoing story of note is the rapid change of tack by the world’s central banks. At this point in time, there is only one central bank that is remotely hawkish, the Norgesbank in Norway, where inflation has been running above target, and more importantly, has seen a rising trajectory. However, beyond that, the rest of the world is firmly in the dovish camp. In fact, at this point, the question seems to be just how much more dovish they will become as it grows increasingly clear that global growth is slowing rapidly. While there is the odd positive surprise on the data front, the weight of evidence is pointing to further slowing. The problem the ECB and BOJ have is that they have very little ammunition left to fight slowing growth. While the Fed could certainly cut rates if necessary, that would be quite an abrupt turn of events, given it has been barely three months since they last raised them, and would damage their credibility further. And the PBOC definitely has some room, but they continue to fight their battle against overleverage, and so are stuck between the Scylla of slowing growth and the Charibdis of excess debt. In the end, look for Scylla to win this battle.

Turning to the data story, yesterday’s Retail Sales report printed at +0.2%, after a downward revision of the December print to -1.6%. While there was significant disbelief in the December data point when it was first released, it looks like it was real. The most immediate impact was to the Atlanta Fed’s GDP Now tracker, which fell sharply and is now estimating a 0.5% GDP growth rate for Q1. As to today, CPI is due shortly, with the market expecting 1.6% headline and 2.2% core readings. The Fed remains concerned that they have been unable to generate sufficient inflation. Personally, I think we have too much inflation, but that’s just one man’s opinion.

The upshot of all this is that nothing has changed in the big picture with regard to the dollar. While risk has been embraced in the past two sessions, the dollar story remains one of relative monetary policy stances, and in that camp, the Fed reigns supreme, and by extension, the dollar!

Good luck
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Disruption and Mayhem

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Tomorrow when Parliament votes,
According to some anecdotes,
Another rejection
Will force introspection
As well as a search for scapegoats

For traders the story that’s clear
Is Brexit may soon engineer
Disruption and mayhem
And soon a new PM
Who’s not named May just might appear!

As we begin a new week, all eyes remain focused on the same key stories that have been driving markets for the past several months; the Fed, Brexit and the US-China trade talks. Ancillary issues like weakening Eurozone and Japanese growth continue to be reported but are just not as compelling as the first three.

Starting with Brexit this morning, after a weekend of failed negotiations, PM May looks on course to lose the second vote on her negotiated deal. Interestingly, the EU has been unwilling to make any concessions of note which implies they strongly believe one of two things: either the lack of a deal will force a delay and second referendum which will result in Remain winning, or they will be effectively unscathed by Brexit. I have to believe they are counting on the first outcome, as it is a purely political calculation, and in the spirit of European referenda since the EU’s creation, each time a vote went against the EU’s interest (Maastricht, Treaty of Lisbon, etc.) the government of the rejecting country ignored the result and forced another vote to get the ‘right’ result. However, in this case, it appears the EU is playing a very risky game. None of the other referenda had the same type of economic consequences as Brexit, and a miscalculation will be very tough to overcome.

While several weeks ago, it appeared that PM May had been building some support, the latest estimates are for a repeat of the 230-vote loss from late January. The question is what happens after that. And to that, there is no clear answer. The probability of a hard Brexit continues to rise, although many still anticipate a last-minute deal. But the pound has declined for nine consecutive sessions by a total of 3.0% (-0.2% overnight) and unless some good news shows up, has the opportunity to fall much further. The next several weeks will certainly be interesting, but for hedgers, quite difficult.

As to the Fed, last night Chairman Powell was interviewed on 60 Minutes along with former Fed Chairs Bernanke and Yellen. Powell explained that the economy was strong with a favorable outlook and that rates were at an appropriate level for the current situation. When questioned on the impact of President Trump’s complaints, he maintained that the Fed remained apolitical and independent in their judgements. And when asked about the stock market, he essentially admitted that they have expanded their mandate to include financial markets. Given the broad financialization of the economy, I guess this makes sense. At any rate, there is no way a Fed chair will ever describe the economy poorly or forecast lower growth as it would cause a panic in markets.

Finally, turning to the trade talks, the weekend news indicated that there has been agreement over the currency question with the Chinese accepting an effective floor to the renminbi. Although the Chinese denied that there was a one-way deal, they repeated their mantra of maintaining a stable currency. As yet, no signing ceremony has been scheduled, so the deal is not done. However, Chinese equity markets rebounded sharply overnight (after Friday’s debacle) as expectations grow that a deal will be ready soon. It continues to strike me that altering the Chinese economic model is likely to take longer than a few months of negotiations and anything that comes out of these talks will be superficial at best. However, any deal will certainly be the catalyst for a sharp equity rally, of that you can be sure. One other thing to note about China is that we continue to see softening data there. Over the weekend, Loan growth was reported at a much lower than expected CNY 703B ($79.4B), not the type of data that portends a rebound. And early this morning, Vehicle Sales were reported falling 13.8%! Again, more evidence of a slowing economy there.

In the meantime, Friday’s payroll data was a lot less positive than had been expected. The headline NFP number of just 20K (exp 180K) was a massive disappointment, and though previous months were revised higher, it was just by 12K. However, the Unemployment Rate fell to 3.8% and Average Hourly Earnings rose 3.4% Y/Y, the strongest since 2007. Housing data was also positive, so the news, overall, was mixed. Friday saw markets turn mildly negative on the US, with both equities and the dollar under pressure.

Add it all up and you have a picture of slowing global growth with the idea that monetary policy is going to tighten quickly fading from view. The critical concern is that central bankers have run out of tools to help positively impact their economies when things slow down. And that is a much larger long-term worry than a modest slowing of growth right now.

Looking at the data this week, two key data points will be released, Retail Sales and CPI. Here is the full list:

Today Retail Sales -0.1%
  -ex autos 0.2%
  Business Inventories 0.6%
Tuesday NFIB Small Biz Optimism 102.0
  CPI 0.2% (1.6% Y/Y)
  -ex food & energy 0.2% (2.2% Y/Y)
Wednesday Durable Goods -0.7%
  -ex transport 0.2%
  PPI 0.2% (1.9% Y/Y)
  -ex food & energy 0.2% (2.6% Y/Y)
  Construction Spending 0.4%
Thursday Initial Claims 225K
  New Home Sales 620K
Friday Empire Manufacturing 10.0
  IP 0.4%
  Capacity Utilization 78.5%
  Michigan Sentiment 95.5
  JOLT’s Jobs Report 7.22M

So, lots of stuff, plus another Powell speech this evening, but I think Retail Sales will be the big one. Recall, last month, Retail Sales fell 1.2% and nobody believed it. But I have to say the forecast is hardly looking for a major rebound. In the end, though, the US economy continues to be the top performing one around, and while the Fed may no longer be tightening, we are seeing easing pressures elsewhere (RBA, ECB). Today’s price action has shown little overall movement in the dollar, but the future still portends more strength.

Good luck
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Mario’s Turn

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It’s Mario’s turn to explain
Why rates should start rising again
His problem, of course
Is he can’t endorse
A rise if it leads to more pain

Markets have been quiet overnight as traders and investors await the ECB’s policy statement, and then perhaps more importantly, Signor Draghi’s press conference to be held at 8:30 this morning. The word filtering out from the ECB is that the TLTRO discussion has moved beyond the stage of IF they need to be rolled over to the stage of HOW exactly they should construct the process. Yesterday’s OECD downgrade of Eurozone growth is likely the last straw for the more hawkish ECB members, notably Germany, Austria and the Netherlands. This is especially so given the OECD slashed their forecasts for German growth by 0.8%! As it happens, Eurozone GDP data was released this morning, and it did nothing to help the monetary hawks’ cause with Q4’s estimate revised lower to 1.1% Y/Y. While the FX market has shown little overall movement ahead of the ECB meeting, European government bonds have been rallying with Italy, the country likely to take up the largest share of the new TLTRO’s, seeing the biggest gains (yield declines) of all.

Once again, the juxtaposition of the strength of the US economy and the ongoing weakness in the Eurozone continues to argue for further gradual strength in the dollar. That US strength was reaffirmed yesterday by the much higher than expected trade deficit (lots more imports due to strong demand) as well as the ADP Employment report, which not only saw its monthly number meet expectations, but showed a massive revision to the previous month, up to 300K from the initial 213K reported. So, for all the dollar bears out there, please explain the drivers for a weaker dollar. While the Fed has definitely turned far less hawkish, so has every other central bank. FX continues to be a two-sided game with relative changes the key drivers. A more dovish ECB, and that is almost certainly what we are going to see this morning, is more than sufficient to undermine any long-term strength in the euro.

Beyond the ECB meeting, however, the storylines remain largely the same, and there has been little movement in any of the major ones. For example, the Brexit deadline is drawing ever closer without any indication that a solution is at hand. Word from the EU is that they are reluctant to compromise because they don’t believe it will be sufficient to get a deal over the line. As to PM May, she is becoming more explicit with her internal threats that if the euroskeptics don’t support her deal, they will be much less pleased with the ultimate outcome as she presupposes another referendum that will vote to Remain. The pound continues to struggle in the wake of this uncertainty, falling another 0.25% overnight which simply indicates that despite all the talk of the horror of a no-deal Brexit, there is a growing probability it may just turn out that way.

Looking at the US-China trade talks, there has been no word since Sunday night’s WSJ story that said the two sides were moving closer to a deal. The trade data released yesterday morning was certainly significant but is really a reflection of the current global macroeconomic situation, namely that the US economy continues to be the strongest in the world and continues to absorb a significant amount of imports. At the same time, weakness elsewhere has manifested itself in reduced demand for US exports. In addition, there was probably some impact from US importers stuffing the channel ahead of worries over increased tariffs. With that concern now dismissed after the US officially stated there would be no further tariff increases for now, channel stuffing is likely to end, or at least slow significantly. Given the lack of information regarding the status of the trade talks, there is no way to evaluate their progress. The political imperatives on both sides remain strong, but there are some very difficult issues that have yet to be addressed adequately. In the meantime, the reniminbi has been biding its time having stabilized over the past two weeks after a 3.0% rally during the previous three months. That stability was evident overnight as it is essentially unchanged on the day.

Beyond those stories there is precious little to discuss today. There is a bit of US data with Initial Claims (exp 225K) along with Nonfarm Productivity (+1.6%) and Unit Labor Costs (+1.6%) all released this morning. In addition, we hear from Fed governor Brainerd (a known dove) early this afternoon. But those things don’t seem likely to be FX drivers today. Rather, it is all about Signor Draghi and his comments. The one other thing to note is that risk appetite in markets, in general, has been ebbing of late. US Equities have fallen in six of the past eight sessions and futures are pointing lower again. The same has largely been true throughout Europe, where markets are lower this morning by roughly 0.4%. fear is a growing factor in markets overall, and as we all know by now, both the dollar and the yen are the main FX beneficiaries in that scenario. It feels like the dollar has room to edge higher today, unless Draghi is quite hawkish. And that is a low probability outcome!

Good luck
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Expansion is Done

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The planet that’s third from the sun
Is learning expansion is done
At least with respect
To growth that’s subject
To what politicians have done

It ought not be much of a surprise that the dollar is regaining its footing this morning and has been doing so for the past several sessions. This is due to the fact that the economic data continue to point to the US as the last bastion of hope for global growth. Yesterday’s data showed that there is still life in the US economy as both Non-Manufacturing ISM (59.7) and New Home Sales (621K) handily beat expectations. At the same time, the data elsewhere around the world continues to show slowing growth.

For example, Australian GDP growth in Q4 printed at a lower than expected 0.2%, with the annual number falling to 2.3%. While RBA Governor Lowe continues to cling to the idea that falling unemployment (a lagging indicator) is going to save the day, the fact remains that the housing bubble there is deflating and the slowdown in China’s economy is having a direct negative impact on Australian growth. In the wake of the report, analysts throughout Asia adjusted their interest rate forecasts to two rate cuts this year even though the RBA has tried to maintain a neutral policy with an eventual expectation to raise rates. Aussie fell sharply, down 0.75% this morning and >2.5% in the past week. It is once again approaching the 0.70 level which has thus far proven to be formidable support, and below which it has not traded in three years. Look for it to crack this time.

But it is not just problems Down Under. In fact, the much bigger issues are in Europe, where the OECD has just released its latest forecasts for GDP growth with much lower numbers on the table. Germany is forecast to grow just 0.7% this year, the UK just 0.8% and of course, Italy which is currently suffering through a recession, is slated to grow just 0.2% this year! Tomorrow Signor Draghi and his ECB colleagues meet again and there is a growing belief that a decision on rolling over the TLTRO bank financing will be made. I have been pounding the table on this for several months and there has certainly been nothing lately to change my view. At this point, the market is now pricing in the possibility of the first ECB rate hike only in mid 2020 and my view is it will be later than that, if ever. The combination of slowing growth throughout the Eurozone, slowing growth in China and still absent inflation will prevent any rate hikes for a very long time to come. In fact, Europe is beginning to resemble Japan in this vein, where slowing growth and an aging population are the prerequisites for NIRP forever. Plus, the longer growth remains subpar, the more call for fiscal policy ease which will require additional borrowing at the government level. As government debt continues to grow, and it is growing all around the world, the ability of central banks to guide rates higher will be increasingly throttled. When you consider these issues it become very difficult to be bullish on the euro, especially in the long-term. But even in the short run, the euro is likely to feel pressure. While the euro has barely edged lower this morning, that is after a 0.35% decline yesterday which means it is down just over 1.0% in the past week.

In the UK, meanwhile, the Brexit debate continues but hope is fading that the PM will get her bill through Parliament this time. Thus far, the EU has been unwilling to make any concessions on the language of the Irish backstop, and despite a herculean effort by May, it is not clear she can find the votes. The vote is scheduled for next Tuesday, after which, if it fails, Parliament will look to pass some bills preventing a no-deal Brexit and seeking a delay. However, even those don’t look certain to pass. Just this morning, Governor Carney said that a no-deal Brexit would not, in fact, be the catastrophe that had been earlier forecast as many companies have made appropriate plans to handle it. While the underlying thesis in the market continues to be that there will be a deal of some sort, it feels like the probability of a hard Brexit is growing somewhat. Certainly, the pound’s recent performance would indicate that is the case. This morning it is down a further 0.3% which takes the move to -1.75% in the past week.

One last central bank story is that of Canada, where the economy is also slowing much more rapidly than the central bank had believed just a few weeks ago. Last week we learned that inflation is lower than expected, just 1.4%, and that GDP grew only 0.1% in Q4, actually falling -0.1% in December. This is not a data set that inspires optimism for the central bank to continue raising rates. Rather, it should become clear that the BOC will remain on hold, and more importantly likely change its hawkish slant to neutral at least, if not actually dovish. As to the Loonie, it is lower by 0.3% this morning and 2.0% since the GDP release on Friday.

Add it all up and you have a story that explains global growth is slowing down further. It is quite possible that monetary policy has been pushed to its effective limit with any marginal additional ease likely to have a very limited impact on the economy. If this is the case, it portends far more difficulty in markets ahead, with one of the most likely outcomes a significant increase in volatility. If the global economy is now immune to the effects of monetary policy anesthesia, be prepared for a few more fireworks. It remains to be seen if this is the case, but there are certainly some indications things are playing out that way. And if central banks do lose control, I would not want to have a significant equity market position as markets around the world are certain to suffer. Food for thought.

This morning we get one piece of data, Trade Balance (exp -$57.9B) and we hear from two more Fed speakers, Williams and Mester. Then at 2:00 the Fed’s Beige Book is released. It seems unlikely that either speaker will lean hawkish, even Mester who is perhaps the most hawkish on the FOMC. Comments earlier this week from other speakers, Rosengren and Kaplan, highlighted the idea of patience in their policy judgements as well as potential concern over things like the extraordinary expansion of corporate debt in this cycle, and how in the event the economy slows, many more companies are likely to be vulnerable. While fear is not rampant, equity markets have been unable to rally the past several sessions which, perhaps, indicates that fear is beginning to grow. And when fear is in vogue, the dollar (and the yen) are the currencies to hold.

Good luck
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A Little Less Clear

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In China, the outcome this year
For growth is a little less clear
The target has changed
To feature a range
That’s lower, but still not austere

The Chinese have reduced their target rate of GDP growth to a range of 6.0%-6.5% from last year’s “about 6.5%” goal. It is, of course, unsurprising that the Chinese met last year’s goal, on paper, as despite significant evidence from individual economic data points, given the lack of independence of the Chinese statistics agency and the political imperative for President Xi to be seen as a great economic leader, 6.6% was determined to be the appropriate representation in 2018. However, given the fact that the growth trajectory in China has been slowing steadily for the past decade, and adding the fact that global growth continues to slow, it seems that even the mighty Chinese bureaucracy can no longer be certain of a particular outcome, hence the range. There is a large group that remains skeptical of the veracity of Chinese data (myself included), and the ongoing gradual reduction in forecasts that we have seen during the past several years simply reinforces the idea that previous data was too rosy.

At the same time, further fiscal stimulus was announced with a cut in VAT and more infrastructure spending, so for now, China remains focused on fiscal support rather than adding more monetary ease and potentially reflating the credit bubble they have spent the last two years trying to deflate. Much of this forecast, naturally, depends on a successful conclusion to the trade talks with the US, and while Sunday night there was a report indicating the deal is almost done, it is not done yet. If, in fact, the mooted deal falls through, look for analyst revisions lower and even government guidance toward the lower end of this range.

As to the renminbi, China has pledged to maintain a stable currency, although they have not indicated exactly what the benchmark for stability will be. This remains a key focus for President Trump and is ostensibly part of the nascent trade agreement. While I believe that economic pressures would naturally tend toward a weaker renminbi over time, as I had forecast at the beginning of the year, the one thing I know is that if the Chinese choose to strengthen the currency in the short run, regardless of the macroeconomic factors that may exist, they will be able to do so. Wall Street analysts are slowly adjusting their forecasts toward a stronger CNY this year, and if a trade agreement is reached, that seems exactly correct. Of course, if the talks founder, all bets are off.

Meanwhile, one week before PM May is set to have another Parliamentary vote on her Brexit deal, she continues to try to get a modification to the terms of the Irish backstop. Uncertainty remains high as to the actual outcome, but it appears to me that either the deal, as written and newly interpreted, will squeak through, resulting in a short delay in order that all sides can pass the appropriate legislation, or the deal will fail and Parliament will vote to ask for a 6-9 month delay with the intent of having a new referendum. While there is still a chance that the UK leaves without a deal at the end of the month, it does seem to be a very small chance. With that in mind, a look at the pound, which has fallen ~1.5% in the past week (-0.15% overnight), and it appears that we are witnessing another ‘buy the rumor, sell the news’ outcome. As hopes grew that there would be no hard Brexit, the pound steadily rallied for a number of weeks. I have maintained that even a positive outcome has only limited further potential upside given the UK economy remains mired in a slowdown and their largest trading partner, the EU, is slowing even more rapidly. Don’t be surprised to see the pound jump initially on a positive vote next week, but it will be short-lived, mark my words.

Pivoting to the euro, this morning’s Services PMI data was mildly better than the flash projections of two weeks ago. The current market interpretation is that the slowdown in the Eurozone has stabilized. And while that may be true for the moment, it is in no way clear the future portends a resumption in growth. Meanwhile, the euro has continued its recent drift lower, with a very modest decline this morning, just 5bps, but approaching a 1% decline in the past week. The ongoing discussion about the ECB is focused on exactly what tools they have available in the event that the slowdown proves more long-lasting than currently hoped expected. I continue to believe that TLTRO’s will be rolled over with an announcement by June, but after that, the cupboard is bare. Pushing rates to an even more negative level will be counterproductive as the negative impact on banks will almost certainly curtail their lending activity. And restarting QE just months after they ended it would be seen as an indication the ECB has no idea what is going on in the Eurozone economy. Therefore, though Signor Draghi will be reluctant to discuss much about this on Thursday at his press conference, pressure on the ECB will increase when they lower their growth and inflation forecasts further. Look for the euro to continue to drift slowly lower and talk of TLTRO’s to increase.

Last night the RBA left rates on hold, which was universally expected, but the market continues to expect an eventual reduction in the overnight interest rate Down Under. The housing market bubble has been rapidly deflating, and while employment has so far held up, remember employment is a lagging indicator. With that in mind, it is not surprising that AUD has fallen -0.25% overnight, and I think the underlying trend will still point lower. This is especially true if the US-China trade talks falter given China’s status as Australia’s largest trading counterparty. Slowing growth in China means slowing growth in Australia, count on it.

As can be seen from these discussions, the dollar is modestly higher overall this morning, although movement in any given currency has been fairly small. While President Trump continues to decry the dollar’s strength, the US remains the only large economy that is not slowing sharply. And as I have written consistently, with the Fed’s clear stance that further tightening is off the table, you can be sure that no other central bank will be looking to tighten policy anytime ahead of the Fed. The president will not get satisfaction on this front anytime soon.

Turning to this morning’s data, we see ISM Non-Manufacturing (exp 57.3) and New Home Sales (600K). We also hear from Fed uber-dove Neel Kashkari, but now that the Fed has turned dovish overall, it is not clear that he can say much that will alter impressions in the market. While throughout February, the dollar was on its back foot, taking a step back shows that it has been range trading since last October. Given the recent data situation, as well as the sentiment shifts we have seen, it does appear that the dollar can grind back toward the top of that trading range (think of the euro at 1.1200), but we are still lacking a catalyst for a substantial change.

Good luck
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At the Nonce

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In Hanoi, the talks fell apart
In London, there’s cause to take heart
The market response
Sell stocks at the nonce
But Sterling looks good on the chart

The Trump-Kim denuclearization talks in Hanoi ended abruptly last evening as North Korea was apparently not willing to give up their program completely although they were seeking full sanctions relief. It appears that many investors were quite hopeful for a better outcome as equity markets across Asia fell as soon as the news hit the tape. Not surprisingly, South Korea was worst hit, with the KOSPI falling 1.5% while the won fell 0.5%. But the Nikkei in Japan fell 0.8% and Shanghai was down by 0.5% as well. In the currency market, the yen, benefitting from a little risk aversion, gained 0.2%, while the renminbi slipped slightly, down just 0.1%

Of course, the US-China trade talks are still ongoing and the big news there was that the US has, for the time being, removed the threat of increased tariffs. It appears that real progress has been made with respect to questions on technology transfer as well as verification of adherence to the new rules. It is surprising to me that this was not a bigger story for markets, although that may well be a sign that a deal is fully priced in already. In the meantime, Chinese data continues to disappoint with the Manufacturing PMI falling to 49.2, its third consecutive print below 50.0 and the weakest number in three years. It certainly appears as though President Xi is feeling real pressure to get a deal done. Of course, the Chinese equity market has had an even more impressive performance than that of the US so far this year, so it may be fair to say they, too, have priced in a deal. While things seem pretty good on this front right now, what is becoming apparent is that any hiccup in this process is likely to result in a pretty sharp equity market correction.

Turning to the UK, it appears that PM May’s game of chicken was really being played with the hard-liners in the Tory party who appeared perfectly willing to leave the EU with no deal. In yesterday’s debates, they were conspicuous by their silence on the subject and the growing belief is that May will be able to get support for her deal (with a side annex regarding the length of the Irish backstop) approved. While this will probably result in a three-month delay before it all happens, that will simply be to ensure that the proper legislation can be passed in Parliament. In another surprising market outcome, the pound has remained unchanged today despite the positive news. As I mentioned yesterday, the pound has rallied steadily for the past several weeks, and it appears that it may have run out of steam for the time being. While an approval vote will almost certainly result in a further rally, I’m skeptical that it has that much further to run. Unless, of course, there is a significantly more dovish turn from the Fed.

Speaking of the Fed, yesterday’s Powell testimony was just as dull as Tuesday’s. Arguably, the most interesting discussion was regarding the “Powell put” as one congressman harped on the concept for much of his allotted time. In the end, Powell explained that financial markets have an impact on the macroeconomy and that the Fed takes into account all those factors when making decisions. In other words, yes there is a put, but they want us to believe that the strike price is not simply based on the S&P 500, but on global markets in general. Given the importance of this comment, it was quite surprising that equity markets yesterday did not rally, but instead fell slightly. And futures are pointing lower this morning. At the same time, the dollar is generally under pressure with the euro rising 0.4% and now trading above 1.14 for the first time in three weeks. The single currency remains, however, right in the middle of its trading range for the past four months. In other words, this is hardly groundbreaking territory.

It is hard to ascribe the euro’s strength to any data this morning, although there has been plenty of that released, because generally it was in line with expectations. But even more importantly, it continues to show there is a lack of inflationary pressure throughout the Eurozone, which would undermine any thoughts the ECB will tighten earlier than now anticipated. Perhaps the one exception to that were comments from ECB member Francois Villeroy who explained that keeping rates negative for too long could have a detrimental impact on transmitting monetary policy properly. While that is certainly true, it has not been seen as a major concern to date.

Turning to this morning’s data story, Q4 GDP growth will finally be released (exp 2.4%) as well as Chicago PMI (57.8). In addition, we hear from six Fed speakers today starting with Vice-Chair Clarida at 8:00 this morning and finishing up with Chairman Powell at 7:00 this evening. However, given we just got two days of testimony from Powell, it is not clear what else they can say that will change views.

Overall, the dollar remains under pressure, and while it rallied during yesterday’s session, it has reversed that move so far this morning. As I have consistently said, the market is highly focused on the Fed’s more dovish turn and so sees the dollar softening. However, as other central banks become more clearly dovish, and they will as slowing growth permeates around the world, the dollar should regain its footing. Probably not today though.

Good luck
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Maybe Once More

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Said Powell, by patient I mean
We won’t rush to raise in ‘Nineteen
Unless prices soar
Then maybe once more
Though not ‘til past next Halloween

To nobody’s surprise, Chairman Powell explained that while the economy in the US is in good shape, given all the other things happening around the world (Brexit, trade situation, slowing Chinese and European growth) it was prudent for the Fed to watch the data carefully before acting to change policy again. Arguably, the market heard this as a confirmation of the now growing dovish bias and so the dollar came under a bit of further pressure. Interestingly, the equity market did not hear the same cooing of doves as it struggled all day ending slightly softer.

When discussing the balance sheet, he indicated that it was a hot topic at the FOMC, and that they were carefully studying the timing of the eventual end of the current policy of QT. But by far, the single most gratifying thing he said was, “It is widely agreed that federal government debt is on an unsustainable path.” He later added, “The idea that deficits don’t matter for countries that can borrow in their own currencies is just wrong.” (my emphasis). This was a none too subtle rebuttal to any thoughts that MMT has any validity. The Senators did not really ask many interesting questions, but today he heads to the House, where a certain freshman representative from the Bronx, NY, is grasping at the idea that as long as the US borrows in dollars, we can always pay them back by printing whatever we need with no consequence. You can be certain that she will spend her entire allotment of time on that particular issue, although I suspect she will not come off looking like she either understands the issues nor will have convinced the Chairman.

At any rate, while the questions are likely to be more entertaining, they will almost certainly not be any more meaningful as today Representatives will get their moments of preening on camera. Certainly nothing has happened between yesterday and today that will have changed the Chairman’s views.

In Parliament there’s a new view
Postponement’s the right thing to do
Three months or one year?
No answer is clear
As both sides, the other, eschew

Turning to the other key market story, Brexit, the only thing that is clear is that it remains extremely confusing. As of this morning, it appears that PM May has changed her tune regarding a delay and is now willing to accept a short one of three months. Her problem is that she has lost so much influence from the continuing morass it is no longer clear she will get what she wants. There now appears to be a growing movement for a longer delay, on the order of nine months, which would give the Bremainers the chance to organize a new referendum. That, of course, is the last thing the hard-liners want, another vote, as it could reverse the outcome. At the same time, all of this is contingent upon the EU agreeing to a delay. Now, they have said they will do so if there is a clear path outlined for what the UK is trying to accomplish, but as is obvious from this discussion, that is not the case.

The market, however, is in the process of reinterpreting the outcome. It appears that the new worst case is seen as acceptance of the already negotiated deal with a small possibility of no Brexit at all. It seems the idea of a hard Brexit is receding from view. We can tell because the pound continues to rally this morning, up another 0.45% today which takes the move to +2.5% since Friday when this chain of events took form. This is the highest the pound has traded since last July, when it was on its way down from the previous bout of optimism. One telling sign of the potential outcome is that the hardest of hard-liners, Jacob Rees-Mogg, has backed down on his adamant demands of the removal of the Irish backstop, instead saying an annex addressing the situation could be acceptable. To me this indicates the hard-liners have lost. While I am no insider, it looks very much to me like there will be a three-month delay and acceptance of the current deal. As to the pound in that case, it will depend if Governor Carney can keep his word regarding concerns over inflation. My view there is that slowing global growth will prevent any further policy tightening, and the pound will quickly run out of Brexit steam.

Elsewhere, data from the Eurozone shows that the economy continues to slow, albeit at a less intimidating rate. A series of Eurozone sentiment and confidence indicators all printed lower than last month, but not quite as low as had been feared expected. But the euro has been the beneficiary of the current focus on Fed dovishness and has been trading higher for the past two weeks. Of course, the extent of that move has been just 1.2%, with the single currency unchanged this morning. So, while the headlines are accurate to say the dollar has been slumping, the reality is that the movement has been quite limited.

Away from those stories, the FX market has seen relatively few events of note. INR is softer this morning by 0.5% after Pakistan’s air force allegedly shot down two Indian fighter jets in an escalation of tensions in the Kashmir region. That may well be weighing on global risk sentiment as well, but not in too great a manner. President Trump’s meeting with Kim Jong-Un has not seemed to impact the KRW, although a positive outcome there would almost certainly help the won significantly. And past that, nada.

On the data front this morning we see Factory Orders (exp 0.5%) and then Chairman Powell sits down in front of the House. The current trend remains for the dollar to soften as the market’s focus continues to be on the Fed turning dovish. As time passes, we will see every central bank turn dovish, and at that time, the dollar is likely to find more support. But for now, a slowly ebbing dollar remains the most likely outcome.

Good luck
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The Clear Antidote

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Said Corbyn, the clear antidote
To Brexit is hold a new vote
Meanwhile the EU
Said they would push through
Delay, while they secretly gloat

For traders the news was elating
With Sterling bulls now advocating
The lows have been seen
And Twenty-nineteen
Will see the pound appreciating

The pound has topped 1.3220 (+1.0%) this morning as a result of two key stories: first Labour leader Jeremy Corbyn has agreed to back a second referendum. This increases the odds that one might be held, assuming there is a delay in the current process which dovetails nicely with the other story, that PM May is mooted to be about to announce a delay in the process. The EU has already essentially agreed that they will allow a delay with the question, as I discussed yesterday, really about the length of time to be agreed.

The two sides of this debate are either a short, three-month, delay, whereby PM May believes she can get the current deal approved or a long, twenty-one-month delay, which would allow enough time for a second referendum where the current belief is that the outcome will be different. Regarding the second referendum, while the press posits it is a slam-dunk the vote would be to remain, the latest polls show remain currently leads 53-47, hardly a landslide, and arguably well within the margin of error. If memory serves, that was the expectation leading up to the first vote! At any rate, I would contend the FX market is pricing in a very high probability of the UK ultimately remaining in the EU. What that says to me is that the upside for the pound is limited. Certainly, in that event, an initial boost is likely, but after that, I would argue a slow decline is the probable path.

As to the trade story, yesterday’s ecstasy seems to have abated somewhat as investors have not yet seen or heard anything new to encourage further expectations. The result has been that equity markets have slipped a bit, and now everybody is waiting for the next announcement or tweet to boost sentiment again. My gut tells me the market is far too sanguine about a successful conclusion to this process, but I am one voice in a million. However, for today, this doesn’t appear to be having a significant impact.

And finally, the third in our trio of key stories, the Fed, will get new impetus today when Chairman Powell sits down in front of the Senate Banking Committee this morning at about 9:45 to offer his semi-annual testimony on the state of the economy. Based on all we have heard lately, the Fed’s current stance appears to be that the economy remains solid, with some very positive aspects, notably the employment situation, and some softer concerns (housing and autos) with confusion over the consumption numbers after the latest Retail Sales data. There is clearly a camp in the Fed that believes further rate hikes are appropriate later this year, and a camp that would prefer to wait until inflation data is already running above target. It would be surprising if the opening comments were committal in either direction, but I expect that a number of Senators will try to dig into that very issue. However, given just how much we have heard from various Fed speakers over the past several weeks, it seems highly unlikely that we will learn much that is truly new.

One thing to watch for is any hint that there is a change in the stance on the balance sheet. As it stands right now, expectations are for a continued running down of assets for a little while longer this year before halting. However, and this is probably more a concern for tomorrow’s House testimony than today’s in the Senate, questions about MMT and the ability of the Fed to simply print funds and buy Treasuries without end may well cause a market reaction. Any indication that the Fed is considering anything of this nature would be truly groundbreaking and have some immediate market impacts, notably, significant dollar weakness, and likely immediate strength in both equities and bonds. Please understand I am not expecting anything like this but given the number of adherents that have gravitated to this concept, I do expect questions. Fortunately, thus far, there has not been any indication the Fed is considering anything like this.

On the data front today we see December Housing Starts (exp 1.25M) and Building Permits (1.29M) as well as the Case-Shiller House Price Index (4.5%) and finally, the only current data of note, February Consumer Confidence (124.7). Much of the data this week is out of date due to the government shutdown last month. But in the end, the morning will be driven by PM May and her Parliamentary speech, and the rest of the session will be devoted to the Fed and Chairman Powell. The dollar has been modestly offered for the past week, trading to the low end of its trading range, but we will need something new to force a breakout. As of now, it is not clear what that will be, so I anticipate another session of modest movement, perhaps this time edging toward strength in the greenback.

Good luck
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Tariffs Can Wait

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Said Trump, for now tariffs can wait
Since talks with the Chinese are great
When this news emerged
The stock market surged
While dollars and bonds did deflate

In what cannot be a very great surprise, last evening President Trump announced that there has been substantial progress in the trade negotiations with China and that the mooted tariff increases on March 2nd are going to be delayed indefinitely while the talks continue. It was pretty clear that neither side really wanted to see tariffs rise again, but if the reports are accurate, there has been some real movement in terms of the negotiations. Given the focus by all markets on this story, the reactions cannot be a great surprise. That said, the fact that Shanghai closed higher by 5.6% and other global markets are higher by just 0.2%-0.4% hints at just how much more important this issue is for China than for the US.

But in fairness, there was another driver for Chinese stocks, the ‘official’ end of the deleveraging campaign of the past two years. Despite the fact that Chinese debt levels have barely slowed their growth, the fact that the economy has clearly been under pressure from slowing global growth, and the fact that the trade situation has clearly hampered recovery attempts has led to a decision to open the credit spigots again. Two years ago, the Chinese recognized that their financial structure was wobbling due to significant growth in off balance sheet leverage. After a two-year effort to reduce those risks, the imperative of supporting the broad economy is now far more important than worrying about some arcane financial statistics. In the end, every government, whether liberal or totalitarian, can only address structural issues for short periods of time before the pressure grows too great to support growth in any way they can. As to the renminbi, it has strengthened a bit further, rising 0.3% and now trading at its strongest levels since last July. If, as has been reported, the trade deal includes a currency portion, it seems appropriate to look for the renminbi to trade back toward the 6.20 level, another 5%-7% stronger, over time.

Though wily, Prime Minister May
Might soon find she’s nothing to say
‘bout any new terms
As Parliament firms
Support for a Brexit delay

Of the other two stories that have been market drivers, let’s discuss Brexit first. PM May met with other EU leaders in Egypt over the weekend and there are now two competing theories as to what might happen. May has postponed the vote on her deal until March 12, basically daring Parliament to vote no and cause a no-deal Brexit. At the same time, while talk in Parliament has been about voting for a three-month extension, the EU has now discussed a 21-month extension as the only alternative under the theory that three months is not enough time to get anything done. Of course, for the pro-Brexit forces, 21 months is unpalatable as well since that would give enough time to hold a second referendum, which based on all the recent polling, would result in a remain vote. The pound has drifted higher by 0.2% this morning, back to the high end of its recent trading range, but until there is more clarity on the outcome, it will remain locked in a fairly narrow range. For the past seven months, the pound has traded in a range of 1.25-1.32. It seems unlikely to break out until a more definitive outcome is clear with Brexit.

Finally, regarding the third major market driver, the Fed, there were several stories in the WSJ over the weekend about how the Fed is now reevaluating its inflation target. It seems that they have become increasingly unhappy with their inability to achieve the 2.0% target, as measured by PCE. The prevailing view is that because they have been so successful at moderating inflation, people’s inflation expectations have now fallen so much that inflation cannot rise. That feels a little self-serving to me, especially since the ‘feel’ of inflation appears much higher than what is measured. At least in my world. Ask yourself if it feels like inflation is running at 1.8%, as you consider things like education, the cost of health insurance and property taxes. The point, however, is that they seem to be laying the ground to maintain easier monetary policy for a much longer period. If they are not constrained by inflation rising above their target, then rates can stay lower for longer. Frighteningly, this seems to be the Fed’s attempt to embrace MMT. In the end, if the Fed modifies their policy targets in this manner, it will be a decided dollar negative. In fact, I will need to reevaluate the premises underlying my market views. Unless, of course, all the other major central banks do the same thing, which is a fair bet.

At any rate, with the trade discussion today’s biggest story, risk appetite has returned, and we are seeing higher equity markets along with a weaker dollar and falling bonds. That said, the dollar’s decline is not substantial, on the order of 0.2% overall, although it has fallen against most of its counterparts. Turning to the data story, this week brings a fair amount of information, as well as Congressional Testimony by Chairman Powell and a number of other Fed speakers:

Tuesday Housing Starts 1.25M
  Building Permits 1.29M
  Case-Shiller Home Prices 4.5%
  Consumer Confidence 124.7
Wednesday Factory Orders 0.5%
Thursday Initial Claims 220K
  Q4 GDP 2.3%
  Chicago PMI 57.0
Friday Personal Income 0.3%
  Personal Spending -0.2%
  PCE 0.0% (1.7% Y/Y)
  Core PCE 0.2% (1.9% Y/Y)
  ISM Manufacturing 55.5
  Michigan Sentiment 95.7

In addition to Powell’s testimony, he speaks again Thursday morning, and is joined by five other Fed speakers throughout the week. Unless the data is extraordinarily strong, it is clear that there will be no discussion of further rate hikes. In fact, given this new focus on the inflation target, I expect that will be the topic of note amongst the group of them. And as all signs point to this being yet another way to justify easy money, look for a consensus to quickly build. If I am correct about the Fed’s turn regarding how they view inflation, the dollar will suffer going forward. This will force me to change my longer term views, so this week will be quite important to my mind. For today, however, it seems evident that risk appetite will help push the dollar somewhat lower from here.

Good luck
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Carefully Looking Ahead

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The Minutes explained that the Fed
Was carefully looking ahead
But so far it seems
The hawks’ fondest dreams
Of hiking again might be dead

As well, when it comes to the size
Of the Fed’s balance sheet, in their eyes
It’s likely to stay
Quite large like today
Not shrink while they, debt, monetize

Markets are little changed this morning after a lackluster session yesterday when the Fed released their Minutes from the January meeting. Overall, the tone of the Minutes seemed to be slightly less dovish than the tone of the Powell press conference that followed the meeting, as well as much of the commentary we have heard since then. Apparently, Cleveland’s Loretta Mester is not the only one who believes rates will need to be raised further this year, as the Minutes spoke of “several’ members with the same opinion. Of course, that was offset by “several” members who had the opposite view and felt that there was no urgency at all to consider raising rates further this year. Patience continues to be the watchword at the Mariner Eccles building, and I expect that as long as the economic data does not differ dramatically from forecasts, the Fed will be quite happy to leave rates on hold. They specifically mentioned the potential problems that could derail things like slowing global growth, a poor outcome in the US-China trade talks or a disruptive Brexit. But for now, it appears they are comfortable with the rate setting.

The balance sheet story was of even more interest to many market participants as the gradual running off of maturing securities has seemingly started to take a bite out of available liquidity in markets. And in fact, this seems to be where the Fed minutes indicated a more dovish stance in my eyes. While there is still a thought that rates might be raised later this year, it was virtually unanimous that shrinking the balance sheet will end this year, leaving the Fed with a much larger balance sheet (~$3.5-$4.0 trillion) than many had expected. Recall, prior to the financial crisis the Fed’s balance sheet was roughly $900 billion in size. To many, this is effectively a permanent injection of money into the economy and so should support both growth and inflation going forward. However, the risk is that when the next downturn arrives (and make no mistake, it Will arrive), the Fed will have less room to act to support the economy at that time. This is especially true since even with another one or two rate hikes, Fed Funds will have topped out at a much lower level than it has historically, and therefore there will be less rate cutting available as a policy tool.

Adding it up, it seems rate guidance was mildly hawkish and balance sheet guidance was mildly dovish thus leaving things largely as expected. It is no surprise market activity was muted.

This morning, as the market awaits the ECB Minutes, we see the dollar little changed overall, although there have been some individual currency movements. For example, AUD has fallen 0.7% (and dragged NZD down -0.5%) after a well-respected local economist changed his rate view to two RBA rate cuts later this year due to the rapidly weakening housing market. Prior to this, the market had anticipated no rate movement for at least another 18 months, so this served as quite a change. And all this came despite strong Australian employment data with the Unemployment rate remaining at 5.0% and job growth jumping by 39K.

Meanwhile, mixed data from Europe has leaned slightly bullish as surprisingly strong French Composite PMI data (49.9 vs 49.0 expected) offset surprisingly weak German Manufacturing PMI data (47.6 vs 49.7 expected). I guess the market already knows that Germany is slowing more rapidly than other nations in the Eurozone (except for Italy) due to the ongoing trade friction between the US and China. But despite the ongoing Gilets Jaune protests, the French economy managed to find some strength. At any rate, the euro has edged higher by 0.15% after the reports. At the same time, the pound has also rallied 0.15% after releasing the largest budget surplus on record (since 1993), and perhaps more importantly, on some apparent movement by the EU on Brexit. PM May is hinting that she may be able to get a legally binding way to end the backstop in a codicil to the Brexit negotiations, which if she can, may allow cover for the more euro skeptical members of her party to support the deal. There is no question the pound remains completely beholden to the Brexit story and will continue to do so for at least another month.

Pivoting to the trade talks, there are several stories this morning about how negotiators are preparing a number of memos on separate issues with the idea they will be brought together at the Trump-Xi meeting to be held in the next several weeks. There is no question that the market continues to view the probability of a deal as to be quite high, but I keep looking at the key issues at stake, specifically with regards to IP and the coercion alleged by US companies, and I remain skeptical that China will back away from that tactic. The Chinese do not view the world through the same eyes as the US, or the Western World at large. As per an article in the WSJ this morning, “We must never follow the Western path of constitutionalism, separation of powers and judicial independence,” Mr. Xi said in an August speech. That comment does not strike me as a basis for compromise nor enforcement of any deal that relies on those issues. But for now, the market continues to believe.

And that’s pretty much the stuff that matters today. We do get most of our data for the week this morning with Initial Claims (exp 229K), Durable Goods (1.5%, 0.3% ex transport), Philly Fed (14.0) and Existing Home Sales (5.00M). While individually, none of them have a huge impact, the suite of information if consistently strong or weak, could well lead to some movement given the broad sweep of the economy covered. There are no Fed speakers on the docket today, and so it doesn’t appear that there is much reason to expect real movement today. Equity markets around the world have seen limited movement and US futures are flat to slightly lower. Treasury yields are slightly firmer but remain at the bottom end of their recent trading range. Overall, it seems like a dull day ahead.

Good luck
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