Both Driver and Bane

Though Brexit and China remain
For markets, both driver and bane
The rest of the globe
Is worth a quick probe
Since some things are clearly germane

The markets are beginning to demonstrate Brexit fatigue as each day’s anxieties are no longer reflected in price movements. Broadly, a hard Brexit is still going to be bad and result in a significant decline in the pound, and a signed deal should see the pound rally somewhat, but the political machinations are just getting annoying at this point. Yesterday’s news was the House of Commons voted to seek a delay, although there has been no definition of how long that delay should be. It seems PM May is going to bring her deal to the floor one more time to see if she can get it passed this time:

Although her rep’s suffered much harm
The PM has rung the alarm
It’s time to get real
And vote for her deal
Perhaps the third time is the charm

The threat to the Brexiteers is a long delay opens the way for a reversal of the process, so this deal is better than that outcome. Of course, as I have written before, a delay requires unanimity from the rest of the EU and given the uncertainty of what can be gained by a delay at this time, it still appears there is a real risk of a hard Brexit, despite Parliament’s vote yesterday.

The latest news is a delay
In Brexit is what’s on the way
But will that resolve
The issues involved
Don’t count on it in any way

As to the pound, yesterday it fell, today it is rallying, but in general, it is still stuck. For the past three plus weeks it has traded between 1.30 and 1.33, albeit visiting both sides several times. Let’s move on.

The China trade story continues in slow motion as hopes of a late March meeting between President’s Xi and Trump have now faded to late April. Of note overnight was a new law passed by the Chinese government that alleges to address IP theft and international investment. While that certainly appears to be in response to US concerns, the lack of an enforcement mechanism remains a significant obstacle to concluding the process. However, it does appear to be a tacit admission that IP theft has been a part of the program in the past, despite vehement protestations on the part of the Chinese. But for now, this issue is headed to the back burner and will only matter to markets again when a deal seems imminent, or the talks collapse.

So what else is happening in the world? Well, global growth remains under pressure with data around the world indicating a slowdown is essentially universal. German production, US housing, Japanese inflation, you name it and the data is weaker than expected, and weaker than targeted. What this means is that pretty much every central bank around the world, at least in the developed world, has stopped thinking about policy normalization and is back on the easy money bus.

While Chairman Powell takes the brunt of the criticism for his quick volte-face last December, we have seen it everywhere. ECB President Draghi will have spent eight years at the helm and only cut rates and added monetary stimulus, all to achieve average growth of a whopping 1.5% or so with inflation remaining well below the target of 2.0% throughout his tenure. And, as he vacates the seat, he will leave his successor with further ease ongoing (TLTRO’s) and no prospect of a rate hike for years to come. But hey, perpetual debt-fueled slow growth and negative interest rates should be great for the stock market! What could possibly go wrong?

Meanwhile, the BOJ finds itself in exactly the same place as the ECB, lackluster growth, virtually no inflation and monetary policy set at extreme ease. Last night, Kuroda-san and his friends left policy unchanged (although two BOJ members voted for further ease) and said that the 2.0% inflation target remained appropriate and they were on track to achieve it…eventually. Alas, unless anti-aging medicines are available soon, I don’t think any of us will ever see that outcome. The yen’s response was to sink slightly further, falling 0.2%, and it is trading near its weakest levels of the year. However, in the big scheme of things, it remains right in the middle of its long-term trading range. My point is that we will need a stronger catalyst than more of the same from Kuroda to change things.

Other noteworthy currency stories are the weakness in HKD, as a glut of cash pouring into the island territory has driven interest rates there down significantly and opened up a carry trade opportunity. The HKMA has already spent close to $1 billion supporting the currency at the floor of its band over the past two weeks and seems likely to spend another $5-$7 billion before markets are balanced again.

Sweden has watched its krone depreciate steadily as slowing growth has caused a change in the Riksbank’s tune. In December, it was assumed they would be raising rates and exiting NIRP given the growth trajectory, which led to some modest currency strength. However, the reality has been the growth has never appeared and now the market has priced out any rate hikes. At the same time, FX traders have all unwound those long krone positions and pushed down the SEK by more than 4% this year. While it has rallied 0.4% overnight, it remains the key underperformer in the G10 this year. in fact, there is talk that the Riksbank may need to intervene directly in FX markets if things get much worse, although given the lack of inflation, it seems to me that is excessive.

So you see, there is a world beyond Brexit! As to today’s session, we see a bit more data from the US including: Empire Manufacturing (exp 10.0); IP (0.4%); Capacity Utilization (7.4%); JOLT’s Job Openings (7.31M); and Michigan Sentiment (95.3). This is a nice array of data which can help give an overall assessment as to whether the economy is continuing to sag, or if there are some possible bright spots. But unless everything is extraordinarily strong, I imagine that it will have limited direct impact and the dollar, which has been broadly under pressure today (after a rally yesterday) will continue to slide a little. Right now, there is no strong directional view as traders await the next central bank pronouncements. With the Fed, that comes next week. Until then, look for range trading.

Good luck and good weekend
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Cause For Concern

Once more to Great Britain we turn
And so we ask, ‘what did we learn?’
May’s Deal lacks appeal
But No-Deal they feel
Is still quite a cause for concern

Where’s Howie Mandel when you need him to say, “Deal…or No Deal?”

In yet another loss for beleaguered British PM May, the House of Commons yesterday approved a bill ruling out a no-deal Brexit for the UK. Of course, the day before they defeated the only Brexit deal on the table. Like a spoiled child, they cannot figure out what they want, but they know they want something. The next step is to request an extension of the deadline, which is now just 15 days away. However, even on that subject there is no clarity. The length of that extension has been open to debate with many different answers. For the pro-Brexit crowd, those willing to see a no-deal outcome, they want as short a delay as possible. Anything beyond six months is likely to allow a second referendum, with the current polls showing that Bremain would be the winner. Naturally, those who want to remain are seeking the longest extension possible.

But it is important to remember that the other 27 members of the EU need to approve the extension unanimously, which when it comes to EU activities is certainly the exception, not the rule. For example, what if Hungary, which is currently at odds with the EU over other issues, decides to vote against an extension simply to tweak the rest of the bloc’s collective nose? My point is that an extension, while pretty likely, is hardly guaranteed. And we have already heard from a number of different EU members on the importance of a rationale for an extension. Ultimately, now that Parliament has taken control of the process from PM May, they have to decide what they want to do, not merely what they want to avoid. And thus far, that information has been lacking.

Turning to the market reaction, the pound rallied sharply yesterday, a full 2.0%, as traders and investors gained confidence that the UK would not be crashing out of the EU without a deal. Of course, given the current lack of alternatives, that remains a fraught situation. This morning, it has ceded about 0.65% of those gains between profit-taking and a dawning realization that just because they voted not to leave without a deal, that hasn’t actually solved the problem. In the end, there is much more to this process and this story, with the potential for both a bigger rally, if somehow the UK comes up with a viable solution, or a much bigger decline, if the delay doesn’t help solve the problem.

The other noteworthy news has been the postponement of a meeting between President’s Xi and Trump to sign any trade deal. While there had been recent indications that progress was being made, apparently it has not been enough progress to schedule a meeting. In the end, as I have written repeatedly, it is difficult for China to agree to not steal IP and force technology transfers when they have maintained, all along, that they don’t do that to begin with. In addition, yesterday President Trump indicated he was in “no hurry” to sign a deal, so this cloud is likely to hang over the global economy for a while yet.

As evidence of that cloud, Chinese data last night pointed to further slowing in the economy there as IP fell to a 5.3% growth rate, the slowest since 2002! While Retail Sales remained unchanged at 8.2%, auto sales continue to decline, falling -2.8% in the January-February period from year ago levels. (The Chinese statistics agency combines Jan and Feb every year to try to smooth the impact of the Chinese New Year, which typically floats in that period.) Interestingly, the combination of these two stories, trade disappointment and weak data, has led to the renminbi slipping 0.5% this morning, a pretty big move for the currency.

Away from those two stories, we continue to see signs of slowing growth around the developed world with rising Swedish Unemployment (6.6% vs. 6.3% previously) and a continued lack of inflationary pressure from both Germany (1.5%) and France (1.3%). This has helped reverse the euro’s recent modest strength with the single currency lower by 0.25% this morning.

In fact, the dollar is having a strong day virtually everywhere, with Aussie and Kiwi both falling more than 0.5% after the weak Chinese data raised concerns over their key export market. Meanwhile, even the yen is lower by 0.45%, as the economic story there continues to point to slowing growth and the possibility of yet more monetary policy ease. The problem for Kuroda-san is there are precious few things left to do. After all, he already has negative interest rates and owns 43% of the JGB market, as well as 10% of the equity market, all while maintaining a cap on the yield of the 10-year JGB. Barring explicit monetization of the debt, meaning relieving the Japanese government of the obligation to repay the debt on their balance sheet, the list is short. However, if they do go to explicit monetization, you can be sure the yen will fall sharply.

Equity markets, however, remain oblivious of all the potential problems that exist and continue to focus on a single thing, easy money. Slowing growth and weaker profitability are meaningless in the new world. The only thing that matters is free cash. My observation on this phenomenon is that it has diminishing returns. And despite ongoing efforts to prop up the economy by central banks everywhere, equity markets, while well off the lows seen in December, have not been able to take the next step higher. To my untrained eye, it appears that the top has been put in, and that lower is the most likely direction over time. But perhaps not today, where equities continue to hang in there and US futures are pointing slightly higher.

Today’s data is just Initial Claims (exp 225K) and New Home Sales (620K), neither of which is likely to have a significant impact. With no Fed speakers, the market is going to be focused on the UK, with their next vote to extend the Brexit deadline, but away from that, has no obvious catalysts. Given the dollar’s decline yesterday, and the rebound thus far today, my money is on a modest continuation of the rebound, at least for the rest of the day.

Good luck
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Disruption and Mayhem

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
Adf

It All Went to Hell

First Mario cooed like a dove
Then trade data gave things a shove
It all went to hell
As stock markets fell
While folks showed the dollar some love

It was a rocky day in markets yesterday as risk appetite was severely impaired. The ECB wound up being more dovish than many had expected by extending the guidance on interest rates and definitively rolling over the TLTRO program. And yet, this morning many analysts are complaining they didn’t do enough! The details are that interest rates will now remain where they are (-0.4% deposit rate) until at least the end of the year, well past “through the summer” as the guidance had been previously. Of course, for some time now, my own view has been that rates will remain unchanged well into 2020. In addition, the ECB said that there would be a new round of TLTRO’s initiated in September, but that the maturity of these new loans would only be two years, and the terms are not yet decided, with some indications they may not be as favorable as the current crop.

All of this followed in the wake of the ECB revising lower their 2019 GDP growth forecast from 1.7% to 1.1%. But remember, the OECD is looking for even slower growth at just 1.0%. “We never thought we were behind the curve,” said Signor Draghi, and “in any event today we are not behind the curve, for sure.” These comments are not nearly as impactful as “whatever it takes” from 2012, that’s the only thing for sure! Several other ECB members were quick to express that there was no expectation of a recession this year, but the market seems to have a less positive view. The market response to the surprisingly increased dovishness was negative across the board, with equity markets selling off in Europe (~-0.6%) and the US (-0.8%) while government bonds rallied (Treasuries -4.5bps) and the dollar strengthened materially, rising 1.2% vs. the euro.

But wait, there’s more! Overnight, Chinese trade data was released, and it turns out that exports fell -20.7% from a year ago! Now, in fairness, part of this has to do with the timing of the Chinese New Year, which was earlier this year than last, but even when stripped out of the data, the underlying trend showed a -4.7% decline. It appears that the US tariffs are really starting to bite.

Adding to the negative China sentiment were two more things. First, comments by Terry Branstad, the US ambassador to China, indicated that a trade deal was not so close (shocking!) and that the mooted meeting between President’s Trump and Xi later this month may well be postponed further. Second, in a huge surprise to Chinese investors, China Citic Securities issued a sell rating on one of the most popular stocks in the market there. The immediate response was for that particular stock, People’s Insurance Company (Group) of China, a state-owned insurer, to fall the daily 10% limit. This led the way for the Shanghai Index to fall 4.4% as investors now believe that the Chinese government is not merely willing to see equity markets fall, but actually interested in having it occur as they try to deflate the bubble that blew up during the past several months.

Needless to say, this information did not help assuage investor feelings anywhere, with the rest of Asia suffering on the day (Nikkei -2.0%, Hang Seng -1.9%) while Europe is also going down that road with the Stoxx 600 currently lower by -0.8%. And US futures? They too are under pressure, -0.4% as I type following yesterday’s -0.8% declines. [As an aside, can someone please explain to me why global index purveyors like MSCI are willing to include Chinese shares in their indices? Given the clear government market manipulation that exists there, as well as the foreign investment restrictions, the idea that they represent a true valuation of a company is laughable.]

So that is the backdrop as we head into the US session with employment data the first thing we’ll see. Expectations are currently as follows:

Nonfarm Payrolls 180K
Private Payrolls 170K
Manufacturing Payrolls 11K
Unemployment Rate 3.9%
Average Hourly Earnings 0.3% (3.3% Y/Y)
Average Weekly Hours 34.5
Housing Starts 1.197M
Building Permits 1.289M

The data of late has pretty consistently shown the US economy holding its own relative to everywhere else in the world. Meeting expectations today would simply reinforce that view. Now, Fed speakers this week (Brainerd, Williams and Clarida) have been consistent in their comments that given the current situation and outlook, there is no need to raise rates further. And yet, that is still relatively hawkish compared to the ECB who has actually added more stimulus. Chairman Powell speaks this afternoon as well, but it would be remarkable if he were to change the message. In the end, the relative story remains the same; the US is still the best performing economy (although it is showing signs of slowing) and the dollar is likely to continue to benefit from that reality.

Good luck and good weekend
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Mario’s Turn

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

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
Adf

A Little Less Clear

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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