Tag Archives: #Brexit

Turning To Fearing

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The deadline for Brexit is nearing
And hoping is turning to fearing
No deal’s yet in sight
But both sides delight
In claiming that they’re persevering

This morning, the two stories that have captured the FX market’s attention are Brexit and its impact on the pound and Chinese policy changes and their impact on the yuan.

Starting in the UK, the pound is under pressure this morning, down 0.55%, as comments from International Trade Secretary, Liam Fox, have rattled traders. According to Fox, the odds that there is no Brexit deal have now risen to 60%, certainly enough to qualify as “uncomfortably high”, Governor Carney’s description last week in his comments following the BOE meeting. It appears that both sides remain committed to their positions and there has been very little movement from either London or Brussels of late. Meanwhile, in the UK, the politics of the situation has resulted in the new favorite pastime of guessing who will replace PM May when she finally loses a no-confidence vote. And while March 31 is the technical deadline, the reality is that if there is no agreement in place by October, it is likely to be too late. Remember that once an agreement is reached, it needs to be enacted into law by all the nations in the EU as well as the UK, with any one of them able to derail the process. Last year I posited that the odds of reaching a deal were extremely low. I believe this is exactly what is playing out now.

The consequences for the pound are unlikely to be pretty. I expect that we will see pressure continue to increase as it becomes clear that there is no deal forthcoming. So unlike the market action right after the initial Brexit vote in June 2016, where the pound fell more than 10% overnight, and shed another 10% in the ensuing four months, I expect that this will be steady downward pressure, although the net 20% decline cannot be ruled out. After all, there will be no announcement that talks have ended, merely a lack of progress to be seen. Consider that a further 20% decline from here will put the historic low level of 1.06, set back in 1985, on the radar. And while that may well be too pessimistic, it remains extremely difficult to make a bullish pound case at this time. Unless we see a negotiating breakthrough in the next month or so, hedgers need to be prepared for a much lower pound over time.

Turning to China, late Friday night the PBOC imposed a new restriction on FX trading by reinstituting a 20% reserve requirement against short yuan forward positions. The idea here is that Chinese banks will not be willing to allocate the funds necessary to maintain those positions, and therefore will not allow clients to sell CNY forward. In 2015, during the last CNY devaluation, when capital outflows really gathered pace, this was one of the tools that the PBOC employed to stem the yuan’s weakness. What this tells me is that despite the rhetoric from the government about the trade situation and their willingness to tough it out, there is growing concern that if USDCNY reaches 7.00, citizens will start to become much more aggressive in their efforts to reduce their exposure to the yuan, and flee to other, safer currencies. Ironically, given what has started this process, this includes the dollar as well as the yen and Swiss franc. As is typical of the Chinese, they announced this change late Friday night when markets were closed. And while the initial market reaction to the news in China’s morning was for the yuan to strengthen a bit, that strength has reversed and USDCNY is now higher by 0.25%. If 7.00 is truly the pain point, I fear we are going to see some fireworks before the end of the summer.

Beyond those two stories, the dollar is firmer overall, but there is less specificity than it simply being a strong dollar day. The euro is lower by 0.25% after German Factory Orders fell a much worse than expected -4.0%, taking the Y/Y level negative for the first time in two years. But given the breadth of the dollar’s strength this morning, I would argue the euro would have declined no matter the number. As the trade rhetoric continues apace, I expect the dollar to remain well bid against all comers.

Turning to the data this week, it is far less interesting than last week’s onslaught, but we do end the week with CPI.

Tuesday JOLT’s Job Openings 6.646M
  Consumer Credit $16.0B
Thursday Initial Claims 220K
  PPI 0.2% (3.4% Y/Y)
  -ex food & energy 0.2% (2.8% Y/Y)
Friday CPI 0.2% (3.0% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)

Beyond the inflation data, we have only two Fed Speakers, and given the continued strong run of data, it remains hard to believe that we will hear any new dovishness by anyone. I am hard-pressed to derive a scenario that leads to significant dollar weakness in the short run. Until the US data turns, I believe that the Fed will continue to tighten policy and that the dollar will benefit. And that seems likely to last through at least the end of the year.

Good luck
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Uncomfortably High

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Said Carney, exhaling a sigh
The odds are “uncomfortably high”
More pain will we feel
If there is no deal
When England waves Europe bye-bye

Yesterday the BOE, in a unanimous decision, raised its base rate by 25bps. This outcome was widely expected by the markets and resulted in a very short-term boost for the pound. However, after the meeting, Governor Carney described the odds of the UK leaving the EU next March with no transition deal in hand as “uncomfortably high.” That was enough to spook markets and the pound sold off pretty aggressively afterwards, closing the day lower by 0.9%. And this morning, it has continued that trend, falling a further 0.2% and is now trading back below 1.30 again.

By this time, you are all well aware that I believe there will be no deal, and that the market response, as that becomes increasingly clear, will be to drive the pound still lower. In the months after the Brexit vote, January 2017 to be precise, the pound touched a low of 1.1986, but had risen fairly steadily since then until it peaked well above 1.40 in April of this year. However, we have been falling back since that time, as the prospects for a deal seem to have receded. The thing is, there is no evidence that points to any willingness to compromise among the Tory faithful and so it appears increasingly likely that no deal will be agreed by next March. Carney put the odds at 20%, personally I see them as at least 50% and probably higher than that. In the meantime, the combination of ongoing tightening by the Fed and Brexit uncertainty impacting the UK economy points to the pound falling further. Do not be surprised if we test those lows below 1.20 seen eighteen months ago.

This morning also brought news about the continuing slowdown in Eurozone growth as PMI data was released slightly softer than expected. French, German and therefore, not surprisingly, Eurozone Services data was all softer than expected, and in each case has continued the trend in evidence all year long. It is very clear that Eurozone growth peaked in Q4 2017 and despite Signor Draghi’s confidence that steady growth will lead inflation to rise to the ECB target of just below 2.0%, the evidence is pointing in the opposite direction. While the ECB may well stop QE by the end of the year, it appears that there will be no ability to raise rates at all in 2019, and if the current growth trajectory continues, perhaps in 2020 as well. Yesterday saw the euro decline 0.7%, amid a broad-based dollar rally. So far this morning, after an early extension of that move, it has rebounded slightly and now sits +0.1% on the day. But in the end, the euro, too, will remain under pressure from the combination of tighter Fed policy and a decreasing probability of the ECB ever matching that activity. We remain in the 1.1500-1.1800 trading range, which has existed since April, but as we push toward the lower end of that range, be prepared for a breakout.

Finally, the other mover of note overnight was CNY, with the renminbi falling to new lows for the move and testing 6.90. The currency has declined more than 8% since the middle of June as it has become increasingly clear that the PBOC is willing to allow it to adjust along with most other emerging market currencies. While the movement has been steady, it has not been disorderly, and as yet, there is no evidence that capital outflows are ramping up quickly, so it is hard to make the case the PBOC will step in anytime soon. And that is really the key; increases in capital outflows will be the issue that triggers any intervention. But while many pundits point to 7.00 as the level where that is expected to occur, given the still restrictive capital controls that exist there, it may take a much bigger decline to drive the process. With the Chinese economy slowing as well (last night’s Caixin Services PMI fell to 52.8, below expectations and continuing the declining trend this year) a weaker yuan remains one of China’s most important and effective policy tools. There is no reason for this trend to end soon and accordingly, I believe 7.50 is reasonable as a target in the medium term.

Turning to this morning’s payroll report, here are the current expectations:

Nonfarm Payrolls 190K
Private Payrolls 189K
Manufacturing Payrolls 22K
Unemployment Rate 3.9%
Average Hourly Earnings (AHE) 0.3% (2.7% Y/Y)
Average Weekly Hours 34.5
Trade Balance -$46.5B
ISM Non-Manufacturing 58.6

Wednesday’s ADP number was much stronger than expected at 213K, and the whisper number is now 205K for this morning. As long as this data set continues to show a strong labor market, and there is every indication it will do so, the only question regarding the Fed is how quickly they will be raising rates. All of this points to continued dollar strength going forward as the divergence between the US economy and the rest of the world continues. While increasing angst over trade may have a modest impact, we will need to see an actual increase in tariffs, like the mooted 25% on $200 billion in Chinese imports, to really affect the economy and perhaps change the Fed’s thinking. Until then, it is still a green light for dollar buyers.

Good luck and good weekend
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A Rate Hike’s in Store

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Said Mario Draghi once more
‘Through summer’ a rate hike’s in store
When pressed on the timing
That they’d end pump priming
He gave no more scoop than before

As we await this morning’s Q2 US GDP data (exp 4.1%), it’s a good time to review yesterday’s activity and why the euro has given up the ground it gained during the past week. The ECB left policy on hold, which was universally expected. However, many pundits were looking for a more insightful press conference regarding the timeline that the ECB has in mind regarding the eventual raising of interest rates. Alas, they were all disappointed. Draghi continues to use the term ‘through summer’ without defining exactly what that means. It appears that the uncertainty is whether it means a September 2019 hike or an October 2019 hike. To this I have to say, “are they nuts?” The idea that the ECB has such a precise decision process is laughable. The time in question is more than twelve months away, and there is so much that can happen between now and then it cannot be listed.

Consider that just six months ago, Eurozone growth was widely expected to continue the pace it had demonstrated in 2017, which was why the dollar was weak and falling. But instead, despite a large majority of forecasts pointing to great things in Europe, growth there weakened sharply while growth in the US leapt forward. So here we are now, six months later, with the dollar significantly stronger and a new narrative asking why Eurozone growth has disappointed while US growth is exploding higher. Of course the US story is blamed based on the tax changes and increased fiscal stimulus from the budget bill. But in Europe, we have heard about bad weather, a flu epidemic and, more recently, rising oil prices, but certainly nothing that explains the underlying disappointment. And that was only a six-month window! Why would anyone expect the ECB, who are notoriously bad forecasters, to have any idea what will happen, with precision, in fourteen months’ time?

However, that seems to have been the driving force yesterday, lack of confirmation on the timing of the ECB’s initial rate hike next year. And based on the French GDP data this morning (0.2%, below expectations of 0.3% and far below last year’s 0.7% quarterly average), it seems that growth expectations for the Eurozone may well be missed again. Personally, I am not convinced that the ECB will raise rates at all in 2019. Given the recent trajectory of growth in the Eurozone, it appears we have already seen the top, and that before we get ‘through summer’ next year, the discussion may turn to how the ECB are going to help support the economy with further QE. Given this reality, it should be no surprise that the euro suffered yesterday, and in the wake of the weak French data, that it is still lower this morning, albeit only by an additional 0.15%.

Elsewhere the pound fell yesterday after the EU rejected, out of hand, PM May’s solution for the UK to collect tariffs on behalf of the EU. That basically destroyed her attempt to find a middle ground between the Brexiteers and the Bremainers, and now calls into question her ability to remain in office. In fact, she is running out of time to come up with a deal that has a chance of getting implemented. The current belief is that if they do not agree on something by the October EU meeting, there will not be sufficient time for all 29 members to approve any deal. It is with this in mind that I continue to question the BOE’s concerns over slowing inflation. My gut tells me that if they do raise rates next week, it will need to be reversed by the November meeting after the Brexit situation spirals out of control. The pound fell 0.65% yesterday and is down a further 0.1% this morning. That remains the trend.

Another noteworthy event from Tokyo occurred last night as the BOJ was forced to intervene in the JGB market for the second time this week, bidding for an unlimited amount of bonds at 0.10% in the 5-10 year sector. And this time, they bought ~$74 billion worth. Speculation remain rife that they are going to adjust their QQE program next week, but given the fact that it has been singularly unsuccessful in achieving its aim of raising inflation to 2.0% (currently CPI there is running at 0.2%), this appears to be a serious capitulation. If they change policy without any success behind them, the market is likely to aggressively buy the yen. USDJPY is down 1.7% in the past six sessions, and while it rallied slightly yesterday, it seems to me that USDJPY lower is the most likely future outcome.

Yesterday morning’s overall dollar malaise reversed during the US session and has carried over to this morning’s trade. And while most movement so far this morning is modest, averaging in the 0.1%-0.2% range, it is nearly universally in favor of the buck.

This morning brings the aforementioned GDP data as well as Michigan Sentiment (exp 97.1, down a full point from last month), although the former will be the key number to watch. Yesterday’s equity market session was broadly able to shake off the poor earnings forecast of a major tech firm, and this morning has a different FANG member knocking it out of the park. My point is that risk aversion is not high, so this dollar strength remains fundamental. At this point, I look for the dollar to continue to benefit from the current broad narrative of diverging monetary policy, and expect that we will need to see some particularly weak US data to change that story.

Good luck and good weekend
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Gone Terribly Wrong

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Said Powell, the ‘conomy’s strong
And hence we’ll keep moving along
Our rate-raising path
Until the bond math
Proves that we’ve gone terribly wrong

The dollar responded by soaring
In markets no one would call boring
The question, of course
Is will the Fed force
The rest of the world to trade-warring?

The dollar is much stronger this morning after a combination of things helped underpin the current theme of the US economy leading global growth. Yesterday Chairman Powell was certainly upbeat, calling the US economy quite strong and indicating that the Fed, while not on autopilot, believes that their current path of gradual rate increases is the correct one. When pressed on how the current trade issues would impact the Fed’s actions, Powell demurred indicating that it was still too early to know what would occur. He did, however, highlight that historically nations that were open to trade fared better economically than those that chose a different, more protectionist path. After his testimony, the dollar turned in a solid performance rising 0.5% vs. the euro, 1.0% vs. the pound and 0.3% vs. the yen. The greenback’s strength was also evident in the emerging market space with USDCNY rising 0.3% by the end of the day. But that was yesterday and we are more interested in what is happening today.

The economic news of note this morning comes from the UK, where CPI failed to rise as expected and printed at 2.4%. The market’s immediate response was to sell the pound off further, another 0.7%, as futures markets reduced the probability that the BOE will raise rates next month. While that probability is still a touch over 70%; that is down 10 points from yesterday’s estimates. Obviously, despite the extremely low levels of interest rates in the UK (the base rate is 0.75%) and despite a continued robust employment picture, inflation in both wages and goods remains quiescent. In other words, the case for the August rate hike remains somewhat suspect, and that is before the discussion of the impact of Brexit. Speaking of Brexit, the Parliamentary maneuvers are apparently becoming quite rough as PM May is fighting to hold onto power. Apparently, though she won several key votes today, the tactics used resulted in some very hard feelings amongst MP’s on both sides of the aisle and could well result in less ability for the PM to continue in power going forward. In the end, given the recent data releases and the potential for Brexit to lead to a full-blown political crisis in the UK, it is still difficult for me to believe that the BOE moves next month. I feel like the combination of reaffirmation by the Fed and the disintegrating case in the UK means the pound is soon going to breach 1.30 and start to trade at much lower levels.

But it was not just the UK where inflation data disappointed, the EU also saw final CPI data for June released and the core number was revised downward to 0.9%, although the headline number of 2.0% was reaffirmed. While one data point will not be enough to change views, there is no question that Signor Draghi will have an increasingly difficult time remaining confident that inflation will be converging on the ECB’s target of ‘close to but below 2.0%.’ And remember, oil prices, which have been supporting the headline number, are now falling sharply, so it would not be surprising to see Eurozone CPI data print still lower next month. In the end, I continue to look for the euro to break its recent trading range to the downside. This morning has helped my cause with the euro declining a further 0.4% on top of yesterday’s fall.

But the story is similar everywhere in the world. Disappointing Chinese data has helped to twist the PBOC into tighter knots as they seek to reduce excess leverage in the economy while supporting growth. As I have highlighted time and again, the renminbi is going to be the relief valve for this process and is almost certain to head to 7.00. Of course, another key risk here is that President Xi decides that the only way to combat the mooted $200 billion of US tariffs is to actively weaken the currency, which would result in a much larger move, and likely one that was far less smooth. All I’m saying is that for those with CNY exposure, care must be taken. Paying the points to hedge here is, I believe, a very prudent step at this time.

Looking at today’s session, in addition to the second leg of Chairman Powell’s testimony, this time to the House Financial Services Committee, we see Housing Starts (exp 1.32M) and Building Permits (1.30M) at 8:30. However, all eyes will be on Powell to see if he has anything else to add to yesterday’s bullish sentiment. The data story continues to underpin my view that the dollar has further to run against all its counterparts. Today should not prove any different than yesterday.

Good luck
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Dashing Hopes

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Said Trump when he landed in London
Your Brexit deal needs to be undone
Because as it stands
We’ll never shake hands
On trade, dashing hopes ere they’ve begun

On Thursday, PM Theresa May has had yet another trying day. President Trump came to town and wasted no time skewering her recently outlined Brexit framework indicating that if the UK heads down her preferred road (you remember, trade in goods to remain within the EU umbrella, but services to be wide open) that the US would not be able to sign a free trade deal. Trump’s point, albeit indelicately made, is that a comprehensive trade deal with the UK will be impossible because the EU will be involved. And, as you may remember, Trump has several issues with the way the EU approaches trade. This was a terrible blow to May because she has clearly been counting on a deal with the US to help offset the changed status with the EU.

It should be no surprise that the pound did not take the news well and as I type, it is lower by 0.6% today and 1.7% this week. And this is despite the fact that Governor Carney virtually promised to raise rates at next month’s BOE meeting. We are still a long way from any resolution on the Brexit situation, and I continue to believe that uncertainty over the outcome will weigh on Pound Sterling. The pound remains some 12.5% below its levels prior to the Brexit vote two years ago. While it is still well clear of the lows seen at the beginning of last year (1.2000 or so) given my belief that there will be no Brexit deal signed, I expect that the market will return to those lows over time. Higher rates or not, confidence in the UK right now is somewhat lacking.

The other big news overnight was the Chinese data releases that showed that the trade surplus rose sharply to $41.6 billion with the US portion rising to a record $29 billion. This may be a timing issue with many companies anxiously shipping product ahead of the imposition of tariffs. But it also could simply reflect that the Chinese economy is slowing down, thus import growth is ebbing, while the US economy continues to power ahead and lead the global economy. In the end, I am certain that the Trump administration will look at these numbers and feel further justification in their stance on trade.

But on top of the trade data, Chinese Money Supply growth continues to ebb, a sign that economic activity on the mainland is slowing. Other indications of a Chinese slowdown are that the government’s campaign to reduce excess leverage seems to have gone into reverse. There have been several stories about how Beijing is now looking for local governments to insure they spend allocated money rather than worry about cutting back on new allocations. It seems that there is a growing fear that real GDP growth (not necessarily what is reported) is slipping more quickly than President Xi is prepared to accept. With this in mind, it is no surprise that the renminbi is under further pressure this morning, down 0.45%, and is now trading back at levels not seen since last August. And it has further to fall. I expect that we will be testing 7.00 before the year is over.

One last noteworthy item was yesterday’s CPI release, where headline CPI printed at 2.9%, its highest since 2012, and the ex food & energy number printed at 2.3%. What this tells us is that wage gains are barely keeping up with inflation, and so consumers are not really benefitting from the recent modest uptick we have seen there. We heard from both Chairman Powell and Philly President Harker yesterday and both indicated they were comfortable with the Fed’s current trajectory. Both also indicated that while the trade situation has not yet impacted the economy in any meaningful way, they could foresee how that might come about and cause the Fed to rethink their strategy. As of now, I remain in the four hikes this year camp, and will need to see a substantial change to the economic data to change that view.

Turning to the overnight FX performance, the dollar has continued its recent uptrend, rising against almost all its counterparts in both the G10 and the EMG. In fact, the dollar has risen every day this week, completely unwinding last week’s decline. There was a modest amount of data from the Eurozone, all pointing to the ongoing lack of inflation in the region, which continues to undermine the ECB’s case to normalize policy quickly. We also continue to see issues throughout emerging markets with TRY, for example, plummeting 6% this week as the market responds to President Erdogan’s cabinet moves. Remember, he installed his son-in-law as FinMin and ousted all the market friendly ministers in the cabinet. As I have written before, this currency has much further to fall.

Meanwhile, US equity markets continue to power ahead, well at least the big tech names continue to do so and that has been sufficient to drive the averages higher overall. However, market breadth continues to narrow which is always an ominous trend. Treasury yields have been stable in the 10-year space, but the 2-year continues to march higher and that spread is down to 26bps, edging ever closer to inversion. While I believe that the signaling effect this time is not quite the same due to the massive distortions in bond markets brought about by QE, I am in a minority view there.

In the end, the big trends remain intact, which means to me that the dollar is going to continue its march higher. Hedgers keep that in mind as you start to think about your 2019 hedging needs.

Today’s only data is Michigan Sentiment (exp 98.2) and then we hear from Atlanta Fed President Rafael Bostic. But given what we just heard from Harker and Powell (and Brainerd and Williams earlier in the week), there is no indication that the Fed is going to change its tune in the near future. The trend is your friend, and right now that trend is for the dollar to continue to rally.

Good luck and good weekend
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Now In Disarray

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The saga of Minister May
Improved not one whit yesterday
When Boris resigned
Pound Sterling declined
And her party’s now in disarray

The news from the UK continues to dominate market headlines as less than twenty-four hours after the resignation of the Brexit Minister David Davis, Boris Johnson, a Brexit hardliner and Foreign Minister also resigned from PM May’s cabinet. While PM May replaced both men quickly, the problem is one of appearances in that she seems to be losing control over her government. The market’s immediate reaction was to sell the pound (it fell 0.7% yesterday after the news and has maintained those losses) as concerns over a leadership challenge and potentially a new election were brought to the fore. However, since then, it seems things have quieted down a bit and there is even talk that this could be a Sterling positive as it may result in a softer Brexit with less economic impact. In the meantime, this morning’s data showed that GDP has been rebounding from Q1’s flat reading, with the monthly May reading rising 0.3% and although IP data was soft (-0.4% in May), Construction was strong (+1.6%) and it appears that Governor Carney will still have enough ammunition to justify a rate increase next month. The risk to that outlook is if a leadership challenge emerges in Parliament and PM May is deposed. In that event, market participants may take a dimmer view of the near future depending on who replaces her.

Away from the British Isles, however, there is less excitement in the G10 economies. The big US news remains political with President Trump naming Brett Kavanaugh to replace retiring Supreme Court Justice Anthony Kennedy. However, on the economic front, there has been precious little news or commentary. In fact, until Thursday’s CPI reading, I expect the US story to be benign unless something surprising happens in the Treasury auctions beginning today, where the US is raising $69 billion via 3yr, 10yr and 30yr auctions.

From Germany we saw the ZEW surveys disappoint with the Sentiment Index falling to -24.7, its lowest print since December 2011 during the European bond crisis. This has encouraged a reversal in the euro, which is down 0.3% this morning after a week of gains. As well, the other, admittedly minor, Eurozone data also pointed to modest Eurozone weakness, thus giving the overall impression that the recent stabilization on the continent may be giving way to another bout of weakness. However, we will need to see more important data weaken to confirm that outcome. Certainly, Signor Draghi is convinced that the worst is behind them, but he has always been an optimist.

In the emerging markets, Turkey has once again stolen the headlines as President Erdogan named his son-in-law as Minister of Finance and Economics, thus following through on his threat promise to take firmer control over monetary policy. In the cabinet reshuffle he also removed the last vestiges of central banking experience so I would look for inflation in Turkey to start to really take off soon, and the currency to fall sharply. And that is despite the fact that it fell 3% yesterday after the announcement. In fact, I would look for more moves of that nature and a print above 5.00 in the not too distant future.

But other than that, while the dollar is stronger this morning, it is not running away. The broad theme today seems to be modest profit taking by traders who had been running short dollar positions, and so a bit of further strength would be no surprise. On the data front, the NFIB Small Business Optimism Index was released earlier at 107.2, stronger than expected and still showing that small businesses remain confident in the economic situation for now. The JOLTs jobs report comes at 10:00 and should simply confirm that the employment situation in the US remains robust. My gut tells me that modest further dollar strength is on tap for today, but really, barring a political bombshell, I expect that things will be very quiet overall. It is the middle of summer after all.

Good luck
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The Winsome Ms. May

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The lady who leads the UK
Last night had a terrible day
Dave Davis resigned
And strongly maligned
The PM, the winsome Ms. May

Arguably the biggest news over the weekend was the sudden resignation last night of the UK Brexit Minister, David Davis, who decided he couldn’t countenance the outcome of Friday’s Cabinet meeting. The crux of that agreement was that the UK would continue to abide by EU food and manufacturing regulations after Brexit becomes final in March. Davis, who had campaigned for Brexit and was always seen as more of a hard-liner, thought this was too much of a concession, and heeded PM May’s general call to leave if he couldn’t get on board. While Dominic Raab, another pro-Brexit voice, quickly replaced him, the resignation has simply highlighted the ongoing uncertainties within the UK on the subject.

Markets, however, have remained surprisingly subdued on the news. It appears that traders are far more focused on how the BOE responds to the Brexit story than on the Brexit story’s daily twists and turns. And as of now, there has been no change in the view that the Old Lady is going to raise rates next month come hell or high water. Futures markets continue to price a more than 80% probability of that occurring. So in the end, despite a key political shakeup, the pound has actually rallied 0.45% and is now more than 2.2% clear of the nadir reached at the end of June. Perhaps the mindset is that PM May now has greater control over the cabinet and so is in a stronger position going forward which means that a soft Brexit will be the outcome. At least, that’s the best I can come up with for now.

Otherwise, the weekend has been extremely quiet. With that in mind I think a recap of Friday’s events is in order. The employment report was probably as good as it gets, at least from the Fed’s perspective. NFP increased a better than expected 213K and last month’s number was revised higher to 244K. The Unemployment Rate actually ticked higher to 4.0%, but that was because the Participation Rate rose as well, up to 62.9%, which while better than last month remains well below the longer-term historical trend. But for now, it demonstrates to the Fed that there is still some slack in the labor market, which means there is less concern that wage increases are going to spur much higher inflation. And the AHE data proved that out, rising 2.7% Y/Y, in line with both expectations and recent history. It seems the Fed is going to continue to focus on the shape of the yield curve rather than rising inflation, at least for now. If, however, we start to see some sharply higher inflation data (CPI is released this Thursday), that may begin to change some thinking there.

The other data Friday showed that the Trade deficit shrank to -$43.1B, it’s smallest gap since October 2016. This is somewhat ironic given that Friday was also the day that the US imposed tariffs on $34 billion of Chinese goods. It is too early to determine exactly how the trade situation will play out, although virtually every economist has forecast it will be a disaster for the US, and if it expands potentially for the world. That said, the equity markets have clearly spoken as Chinese stocks have fallen more than 20% in the past months, while US stocks have edged slightly higher. This story, however, has much further to go with there likely being many new twists and turns going forward.

Here in the middle of the summer, it is a light data week, with Thursday’s CPI clearly the highlight.

Today Consumer Credit $12.7B
Tuesday NFIB Small Biz Optimism 105.6
  JOLT’s Job Openings 6.583M
Wednesday PPI 0.2% (3.2% Y/Y)
  -ex food & energy 0.2% (2.6% Y/Y)
Thursday CPI 0.2% (2.9% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
Friday Michigan Sentiment 98.2

We also hear from four Fed speakers and we are at the point between meetings where there has been enough data for some views to have changed. However, my sense is there will be more discussion of the yield curve than of the economy as that has once again become a hot topic amongst a number of the regional Presidents.

Broadly the dollar has been under pressure overnight, continuing last week’s corrective price action. There has been some indication that data elsewhere in the world, especially in the Eurozone, has started to pick up again. If that trend continues, then I expect that the dollar will remain on its back foot. After all, its recent strength had been predicated on the idea that the US was continuing to show economic strength, diverging from the rest of the world’s near-term prospects. A change in that narrative will clearly change the FX story. However, it is not a foregone conclusion that is the outcome. I remain convinced that the dollar is likely to be the leader for quite a while yet.

Good luck
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