Tag Archives: #centralbanks

Much Darker Moods

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Five decades of trade under GATT
Resulted in policies that
Increased global trade
While tariffs did fade
And taught us the term, technocrat

Then followed the WTO
And new rules that they did bestow
The Chinese then joined
(And some say purloined)
Much IP which helped them to grow

But in the past year attitudes
Have shifted to much darker moods
So trade growth is slowing
As nations are showing
A willingness to stir up feuds

It seemed that half the stories in the press today were regarding trade issues around the world, notably the ongoing US-China trade talks, but also the struggle for the EU and China to put together a communique after a locally hyped trade summit between the two. Shockingly the EU is also unhappy with Chinese IP theft and their subsidies for state-owned companies that compete with European companies. Who would have thunk it? But in their ongoing efforts to maintain the overall world trade order, they found some things on which they could agree in order to prevent the meeting from becoming a complete fiasco.

In addition, today we hear from the IMF with their latest global economic updates that are widely touted to have an even more pessimistic view than the last one which, if you recall, produced substantial downgrades in economic growth forecasts. IMF Managing Director Christine LaGarde has been quite vocal lately about how all the trade spats are slowing global growth and she continues to exhort everyone to simply get back to the old ways. Alas, the trade toothpaste is out of the tube and there is no putting it back. It will likely be several more years before new deals are inked and the new trading framework fleshed out. In the meantime, expect to see periodic, if not frequent, discussions on the benefits of free trade and the good old days.

The question remains, however, if the good old days was really ‘free’ trade. Arguably, the fact that there are now so many ongoing trade issues globally is indicative of the fact that, perhaps, freedom was in the eye of the beholder. And those voters who saw their jobs disappear due to the ‘benefits’ of free trade, have clearly become a lot more vocal. Like virtually everything else in life, the case can be made that trade sentiment is cyclical, and there is a strong argument that we have seen peak trade for this cycle. The reason this matters for the FX market is that restrictions on trade will result in changing fortunes for economies and changing flows in currencies. It is still far too early to ascertain the direct impact on many currencies, although given the increasing probability that this will reduce risk appetite, it would be fair to assume the yen and dollar will be beneficiaries over time.

The Brexit saga, meanwhile, continues to rush toward the new deadline this Friday without any resolution in sight. Not surprisingly, trade plays a big role in this process, as the ability to negotiate new trade deals for the UK was a key selling point in the vote to leave. While PM May’s minions continue to have discussions with Labour to find some kind of compromise, they have thus far come up short. At the same time May is heading to Brussels to meet with Frau Merkel and Monsieur Macron in an effort to find some support for her request for another extension to June 30. At the same time, the Euroskeptics in her Tory party back home are trying to figure out how to oust her from Number 10 Downing Street, although, like the Brexit process, they have been unable to arrive at a coherent solution. With all this drama ongoing, and the emergency EU summit scheduled for tomorrow, the pound continues to hover around the 1.30 level. The one notable thing about the pound has been the reduction in market liquidity as fewer and fewer traders are willing to run positions with the potential for a bombshell announcement at any time. And seriously, who can blame them? The situation remains the same here where clarity in either direction will result in a sharp movement, but until then, flat is the best way to be!

Overall the dollar is under modest pressure this morning (EUR +0.15%, JPY +0.15%, CAD +0.2%), and in truth was in similar shape yesterday. The thing is, the magnitude of the movement has been so limited, I am reluctant to give it any credence with regard to a trend. In fact, since the dollar’s rally peaked last summer, we have been essentially trendless. I expect that this will remain the case until one of the big stories we have been following; trade, Brexit or central banking, has a more distinctive outcome than the ongoing uncertainty we have seen lately. Well, I guess that’s not completely correct, the central bank story has been one of universal dovishness, but the result is that no currency benefits at the expense of any other.

Turning to the data this week, prices are the focus with CPI tomorrow, and we also see the FOMC Minutes and hear from the ECB. And boy, do we have a lot of Fed speakers this week!

Today NFIB Small Biz Optimism 101.8 (released)
  JOLTs Job Report 7.55M
Wednesday CPI 0.3% (1.8% Y/Y)
  -ex food & energy 0.2% (2.1% Y/Y)
  FOMC Minutes  
Thursday ECB Rate Decision -0.4% (unchanged)
  Initial Claims 211K
  PPI 0.3% (1.9% Y/Y)
  -ex food & energy 0.2% (2.4% Y/Y)
Friday Michigan Sentiment 98.0

We have nine Fed speeches including Chairman Powell three separate times although there is absolutely no indication that any views are changing within the Mariner Eccles Building. However, with the increasing drumbeat of pressure from the White House for the Fed to ease policy further and restart QE, it will be very interesting to see how Powell responds. While early indications were that he seemed impervious to that pressure, these days, that doesn’t seem to be the case.

Ultimately, there is no reason to believe that the FX market, or frankly any market, is going to see much movement today given the lack of new catalysts. As I wrote above, we need a resolution to shake things up, and right now, those are in short supply.

Good luck
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Trembling With Fear

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The one thing increasingly clear
Is markets are trembling with fear
As stock markets tumble
Most central banks fumble
Their message, then get a Bronx cheer

Being a central banker has become much more difficult recently, especially in the wake of yesterday’s global equity market rout. It seems that policies that they have collectively promulgated, QE and ZIRP/NIRP are now quite long in the tooth, and no longer having the positive impact desired. Let’s recap quickly.

The Great recession in 2008 called for an extraordinary monetary response by central banks around the world, and rightly so. The deepest recession since the Great Depression saw liquidity across many markets completely dry up. Even FX, arguably the most liquid market of them all, had structural problems. So the combination of QE and USD swap lines offered by the Fed to the rest of the world’s central banks was an appropriate response to help untangle the mess. Alas, fiscal policy never chipped in to the recovery and central banks took it upon themselves to do all the lifting, thus relieving governments of the need to make hard decisions. In hindsight, this was a key mistake!

Fast forward ten years to today and the situation, remarkably, is that most of that extraordinary monetary stimulus is still sloshing around the world as other than the Fed and the Bank of Canada (who raised rates yesterday and indicated they would be quickening the pace of doing so in the future), no other major central bank has done anything of note. The ECB, the BOJ and the PBOC are all still adding liquidity to their systems, while the BOE has raised rates just 25bps, net, from the lows established after the crisis. And the same is true of peripheral nations like Switzerland, Sweden and Australia, where interest rates remain at their post crisis nadirs (-0.75%, -0.50% and 1.50% respectively).

The problem for these central banks is that growth is starting to slow on a global basis. Whether it is the increased trade friction between the US and China, concerns over Brexit or simply that the US recovery (which still arguably drives most of the global economy) is now the longest on record and due to end, the situation is increasingly fraught. And that’s the rub. If interest rates are already negative, what can central banks do to stimulate the economy in the event of a recession? The answer, of course, is not much. More QE and even deeper negative interest rates are unlikely to have the same positive impact the first efforts had, in fact they could have the opposite effect by generating greater concern amongst investors and causing a more severe sell-off in markets. But politically, no central bank will be able to sit by and do nothing if a recession does appear. As I said, central banking has become much more difficult lately.

That is all a preamble to discuss what is going on in markets right now. FX is a backburner issue with equities front and center around the world. While European markets have stabilized at this time, one session of stability is not sufficient to declare an end to the rout. In the end, markets remain beholden to broad sentiment, the narrative if you will, and for the past ten years that narrative was that continued low inflation combined with steady growth would allow the central banks to maintain ultra easy monetary policy with no negative side effects. But in the past year, the cracks in that narrative have grown to the point where it is no longer seen as viable. First, inflation has begun to creep higher in certain areas around the world, notably the US and China. At the same time, growth data appears to have peaked last quarter. Tomorrow we will see the first estimate of Q3 GDP growth in the US (exp 3.3%), which is already considerably lower than Q2. In addition, we have seen Chinese growth slow more than expected and German growth fall to 0.0% in Q3. The combination of rising inflation and slower growth has put central banks in a bind forcing them to choose which issue to address first. The problem is by addressing one they are likely to exacerbate the other. So as the Fed fights threats of higher inflation, it impedes growth. Meanwhile, China has opted to support growth, thus feeding faster inflation. In the end, as the next recession looms closer, central banks will find themselves with fewer policy arrows in their quiver.

But this is an FX note, so let’s take a quick look at the market this morning. The dollar is a touch softer, with both the euro and the pound higher by 0.15% while we are seeing similar moves in most emerging market currencies. Activity in the market seems muted relative to the excitement in equities, but my sense is this will not last. Rather, if the equity sell-off continues, the dollar should find itself in a much stronger position. As to the stories that have been driving things in FX, the Italian budget, Brexit, central bank policies, there have been no real changes in the past twenty-four hours. The possible exception is that the interest rate futures market in the US has removed one price hike from the Fed’s expected path as concern grows that a continues slide in the stock market will lead to weaker growth and less need to keep driving rates higher. It seems that the Fed realizes that it began its tightening process far too late (thank you Chair Yellen!) and is now desperately trying to catch up so they can respond to the next downturn. But hey, the ECB is MUCH further behind.

Looking forward to today’s session, we start with the ECB meeting, where they announced no change in policy rates, but we still await Signor Draghi’s press conference at 8:30. It will be interesting if he continues to characterize the Eurozone economy risks as balanced, or if the downside risks are now elevated. If the latter, look for the euro to decline sharply! We also get US data including Durable Goods (exp -1.0%, ex transport +0.5%) and the Goods Trade Balance (-$74.9B). Yesterday’s New Home Sales data was awful, just 553K, well below expectations, and another sign that parts of the economy here are rolling over. I still don’t believe that the data turn has been enough to change the Fed’s mind about a December rate hike, but if numbers start to fall, watch out. Tomorrow’s GDP print will be quite important to the market. But today, I think the ECB dominates the story.

Good luck
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