Tag Archives: #china

Much Dissension

Posted on by

The market has turned its attention
To Draghi to see if he’ll mention
More buying of bonds
Or if he responds
To those who expect much dissension

While there were fireworks galore yesterday in London, where the UK Parliament had their last meeting before prorogation, this morning sees a much calmer market attitude overall. In brief, Boris did not fare well yesterday as he was unable to achieve his goal of a snap election while Parliament passed a law requiring him to ask for an extension on Brexit if there is no deal at the deadline. (I wonder what will happen if he simply chooses not to do so as that seems entirely feasible given the situation there). The market has absorbed the past several days’ activities with increasing amazement, but ultimately, FX traders have started to price out the probability of a hard Brexit. This is clear from the pound’s nearly 3.0% rally in the past week. While much will certainly take place during the next five weeks of prorogation, notably the party conferences, it would seem the only true surprise can be that a deal has been agreed, at which point the pound will be much higher. I don’t foresee that outcome, but it cannot be ruled out.

With Brexit on the back burner, the market is moving on to the trio of central bank meetings over the next nine days. This Thursday we hear from Signor Draghi while next week brings Chairman Powell on Wednesday and then Governor Carney on Thursday. What makes the ECB meeting so interesting is the amount of pushback that Draghi and his fellow doves have received lately from the northern European hawks. While it is never a surprise that the Germans or Austrians remain monetary hawks, it is much more surprising that Franҫois Villeroy de Galhau, the French ECB member and Governor of the Bank of France, has also been vocal in his rejection of the need for further QE at this time. The issue breaks down to whether the ECB should use its very limited arsenal early in an effort to prevent a broader economic downturn, or whether they should wait until they see the whites of recession’s eyes before acting. The tacit admission from this argument is that there is only a very limited amount of ammunition left for the ECB, despite Draghi’s continuous comments that they have many things they can do if necessary.

Unlike the FOMC or most other central banks, the ECB tries not to actually vote on policy, but rather come to a consensus. However, in this case, it may come to a vote, which would likely be unprecedented in and of itself. It would also highlight just how great the split between views remains, and implies that Madame Lagarde, when she takes the reins on November 1st, will have quite a lot of work ahead if she wants to continue along the dovish path.

In the doves’ favor is this morning’s data releases which showed French IP rebounding less than expected from last month’s disastrous reading (0.3%, -0.2% Y/Y) and Italian IP falling more sharply than expected (-0.7%). Meanwhile, after better than expected GDP data yesterday, the UK employment situation also showed a solid outcome with the Unemployment Rate falling back to 3.8% while earnings rose 4.0%, their highest rate since 2008.

And what did this do for currencies? Well, in that respect neither of these data points had much impact. The euro is lower by a scant 0.1% while the pound is essentially unchanged on the day. In fact, that is a pretty good description of the day overall, with the bulk of the G10 trading +/-0.20% from yesterday’s closing levels although the Skandies have seen more substantial weakness (SEK -0.8%, NOK -0.6%). In both cases, CPI was released at softer than expected levels (SEK 1.4%, 1.6% core; NOK 1.6%, 2.1% core) for August, which puts a crimp in the both central banks’ goal to push interest rates higher by the end of the year.

Turning to emerging markets, the largest movers have been ZAR which gained 0.5% after Factory Output fell a less than expected 1.1% and hope springs eternal for further stimulus driving bond investment. In second place was the renminbi, which has gained 0.25% overnight after the government there, in the guise of SAFE, removed barriers for investment in stocks and bonds. Clearly China has been trying to increase the importance of the renminbi within global financial markets, and allowing freer capital flow is one way to address that concern. However, this process has been ongoing for more than 20 years which begs the question, why now? It is quite reasonable to estimate that the continued pressure being applied by the US via the tariffs and trade war are forcing China to change many things that they would have preferred to keep under their own control. And while it is certainly possible they would have done this anyway, history suggests that the Chinese do not willingly reduce their control over any aspect of the economy. Just a thought. At any rate, initially this freedom is likely to see an inflow of assets as most investors and fund managers are underweight Chinese assets. The newfound ability to move funds in and out is likely to see an inflow to start, with corresponding CNY strength.

Beyond those stories though, it has been pretty dull. Treasury yields are lower by just 1bp, hardly the stuff of a risk assessment, while equity markets are slightly softer after a mixed, but basically flat, day yesterday. At this point, the market is looking toward Signor Draghi, who given futures markets are pricing a 100% chance of a 10bp cut and a 50% chance of a 20bp cut, along with a strong probability of the restarting of QE, has the chance to significantly disappoint. If that is the case, look for the euro to rally quickly, although a move of more than 1.0%-1.5% seems unlikely.

As for today, the NFIB Small Business Optimism Index was released at a bit worse than expected 103.1, perhaps indicating the peak is behind us (certainly my view) and at 10:00 we see the JOLTS Job Opening report (exp 7.331M). But it is really shaping up to be a quiet one with everyone thinking about the ECB until Thursday morning.

Good luck
Adf

Not Making Hay

Posted on by

In China, despite what they say
The ‘conomy’s not making hay
Their exports are lagging
With industry gagging
On stuff manufactured each day

The upshot’s the PBOC
Released billions of renminbi
Reserve rates are shrinking
And everyone’s thinking
They’ll shrink further ere ought twenty

Long before trading started last evening, Chinese trade data set the tone for the markets as exports there shrank by 1.0% in USD terms, a clear indication that the trade war is starting to bite. Imports fell further (5.6%), but overall, the trade surplus was significantly smaller than expected. In the current market environment, it cannot be a surprise that the response was for a rally in Asian equity markets as the weak data presages further policy ease by the Chinese. In fact, there are numerous articles discussing just what options they have. Friday afternoon they cut the reserve ratio by a full percentage point, and analysts all over are expecting at least one more cut before the end of the year. As to direct interest rate cuts, that is far less clear given the still problematic bubble tendencies in the Chinese real estate market. The PBOC is quite concerned over allowing that bubble to blow up further, so any reductions in the benchmark rate are likely to be modest…at least until the renminbi starts to strengthen again.

Speaking of the currency, while it has remained quite stable overall, -0.2% this morning, +0.65% in the past week, it remains one of the easiest tools for the PBOC to utilize. The government there has also sought to stimulate via fiscal policy, with significant tax cuts proposed and some implemented, but thus far, those have not been effective in supporting economic growth. While I am confident that when the next GDP number prints in mid-October it will be above 6.0%, there are an increasing number of independent reports showing that growth there is much slower than that, with some estimates more in line with the US at 3.0%. At any rate, equity markets continue to believe that a trade deal will happen sooner rather than later, and as long as talks continue, look for a more positive risk attitude across markets.

The other big news this morning is from the UK, where British PM Boris Johnson met with his Irish counterpart, Taoiseach Leo Varadkar, to discuss how to overcome the Irish backstop conundrum. It is interesting to see the two attitudes; Boris quite positive, Leo just the opposite, but in the end, nothing was agreed. In this instance, Ireland is at far more risk than the UK as its much smaller economy is far more dependent on free access to the UK than vice versa. But thus far, Varadkar is holding his ground. Another Tory cabinet member, Amber Rudd, quit Saturday night, but Boris is unmoved. There was an interesting article over the weekend describing a possible way for Boris to get his election; he can call for a no-confidence vote in his government, arguably losing, and paving the way for the election before the Brexit deadline. Certainly it seems this would put parliament in an untenable position, support him to prevent the election, but that would imply they support his program, or defeat him and have the election he wants.

Of course, while all this is ongoing, the currency market is looking at the pound and trying to decide the ultimate outcome. For the past two weeks, it is clear that a belief is growing there will be no Brexit at all as the pound continues to rally. This morning it is higher by 0.6% and back to its highest level in over a month. Part of that, no doubt, was the UK GDP data, which surprised one and all by showing a 0.3% gain in July, which virtually insures there will be no technical recession yet. But the pound is a solid 3.5% from its lows seen earlier this month. I continue to believe that the EU will blink and a deal will be cobbled together with the pound rebounding much further.

Elsewhere, the dollar is softer in most cases. The continuation of last week’s risk rally has reduced the desire to hold dollars and we continue to see yields edge higher as well. Beyond the pound’s rally, which is the largest in the G10 space, AUD and NZD have pushed back up by about 0.3% on the China stimulus story, but the rest of G10 is quite dull. In the EMG bloc, ZAR is today’s big winner, +0.8%, as hopes for more global stimulus increase the relative attractiveness of high yielding ZAR denominated bonds. But otherwise, here too, things are uninteresting.

Looking to the data this week, it is an Inflation and Retail Sales week with no Fed speak as they are now in their quiet period ahead of next week’s meeting.

Today Consumer Credit $16.0B
Tuesday NFIB Small Biz Optimism 103.5
  JOLT’s Job Openings 7.311M
Wednesday PPI 0.0% (1.7% Y/Y)
  -ex food & energy 0.2% (2.2% Y/Y)
Thursday Initial claims 215K
  CPI 0.1% (1.8% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
Friday Retail Sales 0.2%
  -ex autos 0.1%
  Michigan Sentiment 90.5

Aside from this, we hear from both the ECB and BOJ this Thursday with expectations for a rate cut and potentially more QE by Signor Draghi, while there are some thoughts that Kuroda-san will be cutting rates in Japan as well. Ultimately, nothing has changed the broad sweep of central bank policy ease. As long as everybody is easing, the relative impact of monetary policy on the currency market will be diminished. And that means that funds will continue to flow to the best performing economies with the best prospects. Despite everything ongoing, the US remains the choice, and the dollar should remain supported overall.

Good luck
Adf

No Solutions Are Near

Posted on by

There is a group that’s quite elite
And every six months they all meet
In France this weekend
They tried to pretend
That problems, worldwide, they could treat

Alas what was really quite clear
Is that no solutions are near
The trade war remains
The source of most pains
And Brexit just adds to the fear

It has been a pretty dull session overnight with the dollar somewhat softer, Treasuries rallying and equities mixed. With the G7 meeting now over, the takeaways are that the US remains at odds with most members over most issues, but that those members are still largely reliant on the US as their major trade counterparty and overall security umbrella. In the end, there has been no agreement on any issue of substance and so things remain just as they were.

And exactly how are things? Well, the US economy continues to motor along with all the indications still pointing to GDP growth of 2.0% annualized or thereabouts in Q3, continuing the Q2 pace. This contrasts greatly with the Eurozone, for example, where German GDP was confirmed at -0.1% in Q2 this morning as slowing global trade continues to weigh on the economy there. Perhaps the most remarkable thing is that Jens Weidmann, the Bundesbank president, remains firm in his view that negative growth is no reason for easier monetary policy. While every other central bank in the world would be responsive to negative output, the Bundesbank truly does see things differently. As an aside, it is also interesting to see Weidmann revert to his old, uber-hawkish, self as opposed to the show of pragmatism he displayed when he was vying to become the next ECB President. You can be sure that Madame Lagarde will have a hard time convincing him that once the current mooted measures (cutting rates further and more QE) fail, extending policy to other asset purchases or other, as yet unconsidered, tools will be appropriate.

And the rest of Europe? Well, Italy continues to slide into recession as well while the country remains without a government. Ongoing talks between Five-Star and the center-left PD party remain stuck on all the things on which weird coalitions get stuck. But fear of another election, where League leader, Matteo Salvini, is almost certain to win a ruling majority will force them to find some compromise for a few months. None of this will help the economy there. Meanwhile, France is muddling along with an annualized growth rate below 1.0%, better than Germany and Italy, but still a problem. Despite the fact that the Fed has much more monetary leeway than the ECB, the problems extant in the Eurozone are such that buying the euro still seems quite a poor bet.

Turning to the UK, PM Johnson was quite the charmer at the G7, but with just over two months left before Brexit, there is still no indication a deal is in the offing. However, I remain convinced that given the dire straits in the Eurozone economic outlook, the willingness to allow a hard Brexit will fall to zero very quickly as the deadline approaches. A deal will be cut, whether a fudge or not is unclear, but it will change the tone completely. While the pound has edged higher this morning, +0.4%, it remains quite close to its post-vote lows at 1.2000 and there is ample room for a sharp rebound when the deal materializes. For hedgers, please keep that in mind.

The other story, of course, remains the trade war, where the PBOC is overseeing a steady deterioration in the renminbi while selectively looking for places to ease monetary policy and support the economy. Growth on the mainland has been slowing quite rapidly, and while I don’t expect reported data to surprise on the downside, indicators like commodity inventories and electricity usage point to a much weaker economy than one sporting a 6.0% growth handle. Of course, the G7 did produce a positive trade story, the in-principal agreement between the US and Japan on a new trade deal, but that just highlights the other pressure on the EU aside from Brexit, namely the need to make a deal with the US. Bloomberg pointed out the internal problem as to which constituency will be thrown under the bus; French farmers or German automakers. The US is seeking greater agricultural access, and appears willing to punish the auto companies if it is not achieved. (Once again, please explain to me how the EU can possibly allow a hard Brexit with this issue on the front burner).

And that is really today’s background news. The overnight session saw modest dollar weakness overall, and it would be easy to try to define sentiment as risk-off given the strength in the yen (+0.3%), gold (+0.2%) and Treasuries (-3bps). But equities are holding their own and there is no palpable sense in the market that fear has been elevated. Mostly, trading desks remain thinly staffed given the time of year, and I expect more meandering than trending in FX today. Of course, any tweet could change things quickly, but for now, yesterday’s modest dollar strength looks set to be replaced by today’s modest dollar weakness.

Good luck
Adf

 

Badly Maligned

Posted on by

The Chinese, now, have it in mind
That they have been badly maligned
So tariffs they hiked
Which markets disliked
Though they have not yet been enshrined

Then Powell explained pretty well
That interest rates hadn’t yet fell
As far as they might
But if we sit tight
Most things ought to turn out just swell

And after the markets had closed
The President quickly imposed
More tariffs to thwart
The Chinese report
While showing he’s just as hard-nosed

It is truly difficult to keep abreast of the pace of change in market information these days. Like so many, I yearn for the good old days when a surprising data release would change trader views and result in a market move but comments and headlines typically had limited impact. These days, by far the most important newsfeed to watch is Twitter, given President Trump’s penchant for tweeting new policy initiatives. This weekend was a perfect example of just how uncertainty has grown in markets.

A quick recap of Friday shows that the Chinese decided to respond to numerous trade provocations and announced they would be raising tariffs further on $75 billion of US imports. Not surprisingly, risk assets responded negatively and we saw equity markets around the world decline while bonds, gold and the yen all rallied. Then we heard Chairman Powell’s long-awaited speech, where he explained that while the economy is in a pretty good place, given the ongoing global weakness and uncertainties engendered by the current trade war, the Fed stood ready to ease policy further. That was enough to encourage the risk-takers and we saw equity markets rebound and bonds give up most of their gains. But just as the market was getting set to close, the President tweeted that he would be raising tariffs further in response to the Chinese action, lamenting that he hadn’t acted more aggressively initially. This, of course, turned things back around and risk was quickly jettisoned into the close, resulting in equity markets ending down more than 2.4% in the US while bonds rebounded and the dollar fell. Whew!!

But that is all old news now as the weekend’s G7 meeting in Biarritz, France, resulted in more surprises all around. The first surprise was that the US and Japan have announced they have reached a trade deal “in principal” which should open Japanese markets to US agricultural imports and prevent the imposition of further tariffs on Japanese autos. Clearly a positive. But that was not enough to turn markets around and Asian sessions started off quite negatively, following the US close and understanding that the US-China trade war was getting hotter. However, an early morning Trump tweet announced that China had called the US and asked to get back to the negotiating table, something that was neither confirmed nor denied by the Chinese, but enough information to reverse markets again. So while Asian equity markets all suffered badly (Nikkei -2.2%, Hang Seng -1.9%) Europe went from down 1% to up 0.5% pretty much across the board (UK markets are closed for a holiday, the late-August banking holiday). We also saw US futures reverse course, from -1.4% to +0.5%, and Treasuries, which had traded to new low yields for the move at 1.44%, reversed course and are now back up (prices lower) to 1.52%. However, that is still lower than Friday’s close. As well, while early on there was a brief 1bp 2yr-10-yr inversion; that has now reversed to a 1bp positive slope.

And what about the dollar through all this? Well, G10 currencies are broadly softer vs. the dollar this morning, with losses ranging from -0.2% for EUR, GBP and CAD all the way to -0.8% for SEK. Even the yen is weaker, -0.45% on the day having reversed some early session (pre-tweet) gains to levels not seen since November 2016.

Of more interest, though, is the fact that CNH has fallen to new historic lows since its creation in August 2010, touching 7.1925 before bouncing slightly, and still down nearly 1% on the day. The Chinese are potentially playing with fire as stories of capital flight increase amid the renminbi’s recent declines. Obviously, 7.00 is no longer an issue, but the key unknown is at what level will money start to leak more fiercely, something nobody knows. I must admit, I did not expect to see this type of movement so quickly, but at this point, one cannot rule out even more aggressive weakness here. Certainly the options markets are telling us that is the case with implied vols rising sharply overnight (1mo +0.6 vol) and heading back toward levels seen after the 2015 ‘mini devaluation’. In fact, not surprisingly, implied volatility is higher pretty much across the board this morning as late summer illiquidity adds to the remarkable uncertainty in markets. There’s probably a bit more boost available in implied vols, at least until the next tweet changes the situation again.

Turning to this week’s calendar, there is a fair amount of data to absorb as follows:

Today Durable Goods 1.2%
  -ex transport 0.0%
Tuesday Case Shiller Home Prices 2.30%
  Consumer Confidence 129.0
Thursday Initial Claims 215K
  Q2 GDP 2.0% (2.1% prior)
Friday Personal Income 0.3%
  Personal Spending 0.5%
  PCE 0.2% (1.4% Y/Y)
  Core PCE 0.2% (1.6% Y/Y)
  Chicago PMI 47.7
  Michigan Sentiment 92.3

Clearly, all eyes will be on Friday’s PCE data as that is the number the Fed watches most carefully. Remember, we have seen two successive surprising upticks in CPI inflation, so a high surprise here could have consequences regarding the future path of interest rates. At least that’s the way things used to be, these days I’m not so sure. Wednesday we hear from two Fed speakers, Barkin and Daly, but it seems unlikely either of them will swerve far from Powell’s comments as neither is particularly hawkish. Speaking of data, we did see one piece this morning, Germany’s IFO Indices with all three pieces falling much further than expected, underscoring just how weak the economy is there. My money is on a stimulus package before Brexit, but also on a hard Brexit being averted.

Recapping, barring any further twitter activity, markets are set to open optimistically, but unless we hear confirmation from the Chinese that talks are, indeed, back on, I would not be surprised to see risk ebb lower as the day progresses. This means a stronger yen, and right now, a softer dollar, at least against the G10. Versus the EMG bloc, the dollar has further room to run.

Good luck
Adf

Up Sh*t’s Creek

Posted on by

Much time has progressed
Since last I manned a bank desk
But I have returned

Good morning all. Briefly I wanted to let you know that I have begun a new role at Sumitomo Mitsui Banking Corp. (SMBC) as of Monday morning and look forward to rekindling so many wonderful relationships while trying to assist in risk management in an increasingly uncertain world. Don’t hesitate to reach out to chat.

Said Trump well those tariffs can wait
Until it’s a much later date
That opened the door
To buy stocks and more
Now don’t you all feel simply great?

But trade is still problematique
And that’s why the view is so bleak
In Europe they’re shrinking
And China is sinking
It seems the world’s now up sh*t’s creek

Volatility continues to reign in markets as the combination of trade commentary and economic data force constant u-turns by traders and investors. Yesterday afternoon, President Trump decided to delay the imposition of tariffs on the remaining Chinese exports from the mooted September 1st start to a date in mid-December. While that hardly seems enough time to conclude any negotiations, the market reaction was swift and yesterday morning’s risk-off session was completely reversed. Stocks turned around and closed more than 1% higher. Treasuries sold off with yields jumping 5bps in the 10-year and the dollar reversed course with USDJPY rocking 1.5% higher while USDCNY tumbled more than 1%. But that was then…

The world looks less sanguine this morning, however, after data releases last night and this morning showed that the fears over a slowing global economy are well warranted. For instance, Chinese data was uniformly awful with Industrial Production falling to 4.8% growth in July, well below the 6.0% estimate and the slowest growth since they began producing data 17 years ago. Retail Sales were also much weaker than expected, rising 7.6% Y/Y in July vs. expectations of an 8.6% rise. If there were any questions as to whether or not the trade war is impacting China, they were answered emphatically last night…YES.

Then early this morning Germany released its Q2 GDP data at -0.1%, as expected but the second quarter of the past four where the economy has shrunk. Additional Eurozone data showed IP there falling -1.6%, its worst showing since February 2016. Meanwhile, inflation data continues to show a complete lack of price pressure and Eurozone Q2 GDP grew just 0.2%, also as expected but also awful. It should be no surprise that this has led to another reversal in investor psychology as the hopes engendered in the Trump comments yesterday has completely evaporated.

I would be remiss if I didn’t mention that the 2yr-10yr Treasury spread actually inverted this morning for the first time, although it had come close several times during the past months. But not only did the Treasury curve invert there, so did Gilts in the UK and we are seeing the same thing in Japan. At the same time, Bunds have fallen to yet another new low in the 10-year, trading at a yield of -0.645% as I type. The upshot is that combined with the weak economic data, the inverted yield curves have historically implied a recession was on the way. While there are those who are convinced ‘this time is different’ because of how central banks have impacted yield curves with their QE, it is all still pointing down to me.

With all that in mind, let’s take a look at markets this morning. Overnight we have seen a mixed picture in the FX market, with the yen retracing some of yesterday’s weakness, rallying 0.7%, while Aussie and the Skandies have led to the downside with all three falling 0.7% or so. As to the euro and the pound, neither has moved at all overnight. But I think it is instructive to look at the two day move, given the volatility we have seen and over that timeline, the dollar has simply rallied against the entire G10 space. Granted vs. the pound it has been a deminimis 0.1%, but CHF, EUR and CAD are all lower by 0.3% since Monday and the yen is still weaker by 0.6% snice Monday.

In the EMG space, KRW was the big winner overnight, rallying 0.8% after the tariff delay, and we also saw IDR benefit by 0.5%. CNY, meanwhile, was fixed slightly stronger and the offshore currency has held onto that strength, rising 0.35%. On the downside, ZAR is the big loser overnight, falling 1.0% as foreign investors are selling South African bonds ahead of a feared ratings downgrade into junk. We have also seen MXN retrace half of yesterday’s post trade story gain, falling 0.65% at this time.

Looking ahead to this morning’s session, there is little in the way of data that is likely to drive markets so we should continue to see sentiment as the key market mover. Right now, sentiment is not very positive so I expect risk to be jettisoned as can be seen in the equity futures with all down solidly so far. As to the dollar, I like it vs. the EMG bloc, maybe a little less vs. the G10.

Good luck
Adf

 

Fears Have Been Slaked

Posted on by

For several days markets have quaked
As muck about trade has been raked
But Wednesday’s retracement
And China’s emplacement
Of yuan means some fears have been slaked

Yesterday was a session for those with strong stomachs. Equities plummeted (DJIA -589) early as did bond yields (10-year Treasury yields fell to 1.59%) with both markets pointing to an imminent recession. But then, as sometimes happens, things turned around inexplicably. There was no data to drive the change, as there was really no data yesterday. The only Fed comments were from Chicago’s Evans, a known dove, who said that the recent escalation in trade tensions could well warrant further rate cuts. But we already knew that and had heard it on Tuesday from two other Fed speakers.

However, the fear that was rampant at the opening (gold exploded through $1500/oz, USDJPY traded below 105.50) just as quickly dissipated and through the rest of the session, equities rallied back to flat, Treasury prices fell such that yields actually closed the day higher than the day before, and both the dollar and yen reversed early gains and settled slightly lower on the day. Gold, however, maintained most of its gains.

Price action like that, which can be quite unsettling, tends to be indicative of a great deal of uncertainty in markets. In fact, that is what markets do best, with bulls and bears fighting it out for supremacy. But the ultimate conclusion has to be that recent market trends are being questioned. As I wrote yesterday, and has been widely mentioned elsewhere as well, there is a fundamental difference of opinion between the stock and bond markets, where bonds investors see a much gloomier economic future than stock investors. In fact, it is fair to say, that stock investors are so fixated on the potential benefits of lower interest rates that they seem to be forgetting why those lower rates are being contemplated, slowing growth. At some point, this conundrum will be resolved, either as Treasury yields rebound amid stronger growth indications, or with lower stock prices as the economic data defines a worse economic situation than currently expected. While my view, alas, remains the latter is more likely, it is still an open question as to how things play out.

The end result, however, is that as I have written frequently in the past, volatility in markets is going to be with us for some time to come. Today, though, it is not as evident as it was yesterday. Equity markets around the world have shown modest gains, generally on the order of 0.5%, while bond prices have been fairly stable along with the dollar. In fact, the dollar has done very little overall.

There has been much made of the fact that the PBOC fixed USDCNY at 7.0039, above the 7.00 level and its weakest fix since 2008. However, market expectations were for a fix at an even higher level, ~7.0130, so despite the optics on the surface, this was seen as an attempt to mitigate the recent anxiety. Ultimately, the PBOC is likely to allow a very gradual depreciation of the yuan going forward as they find themselves caught between competing problems. On the one hand, slowing growth indicates the need for a weaker yuan to help support exporters. However, the flip side is that the huge increase in USD borrowings by Chinese companies, especially in the local property sector, means that a weaker yuan will crimp their ability to service and repay that debt, potentially leading to larger systemic issues. Clearly the PBOC wants to avoid anything like that, so slow and steady seems the most likely outcome.

And in fact, that is probably what we are going to see in a number of currencies as the impacts of the growing trade conflict widens around the world. The dollar will continue to be a key destination for investment as long as the US economy, even if it is slowing somewhat, remains stronger than economies elsewhere. Yesterday we saw the aggressive actions of three Asian central banks, and last night the Philippines cut rates by 25bps as well. Markets are pricing in cuts pretty much everywhere in the world so the fact that the Fed is likely to produce at least two more cuts is hardly a reason to avoid the dollar. In fact, US rates continue to trade above every other developed market rate and, as such, remain attractive to foreign investors. There is no evidence that situation will change in the near-term, and so support for the dollar is likely to remain firm.

A quick look at today’s price action shows what I would describe as consolidation of recent moves. Looking across the board, the dollar has had a strong week against most currencies. The two exceptions have been the yen, which has rallied 1.25% on increased market fears, and the euro, which surprisingly has rallied about 1.0% this week. But otherwise, the dollar has been ascendant vs. virtually everything else. As long as economic uncertainty remains the driving force in markets, and that seems like a pretty good bet, the dollar should continue to perform well.

On the data front, the only thing to be released is Initial Claims (exp 215K) and there are no Fed speakers on the calendar. That implies that the FX market will take its cues from elsewhere, with equities the leading candidate. In the current framework, stronger equities means less risk and less reason to hold dollars, so given Europe’s modest rebound and US futures pointing higher, that seems like a reasonable expectation for today, a modestly softer buck.

Good luck
Adf

 

A Half Point’s Preferred

Posted on by

Said Williams, the Fed must be swift
When acting if growth is adrift
The market inferred
A half point’s preferred
Which gave all stock markets a lift

If there was any doubt that markets are still entirely beholden to the Fed, they should have been removed after yesterday’s price action. First, recall that a number of emerging market central banks cut interest rates, some in a complete market surprise (South Korea), while others were anticipated (Indonesia, South Africa, Ukraine) and yet all of those currencies strengthened on the day. It is always curious to me when a situation like that occurs, as it forces a deeper investigation as to the market drivers. But this investigation was pretty short as all the evidence pointed in one direction; the Fed. Yesterday afternoon, NY Fed President John Williams gave an, ostensibly, academic speech about how central banks should respond to economic weakness and highlighted that they should act quickly and aggressively in such cases. Notably, he said, “take swift action when faced with adverse economic conditions” and “keep interest rates lower for longer.” The market interpretation of those comments was an increased expectation for a 50bp rate cut by the Fed at the end of the month. Stocks reversed early losses, bonds rallied, with yields falling 4bps and the dollar fell as much as 0.5%. While a spokesperson for the NY Fed made a statement later trying to explain that Williams’ speech was not about policy, just academic research, the market remained convinced that 50bps is coming to a screen near you on July 31! We shall see.

The problem with the 50bp theme is that the economic data of late has actually been generally, although not universally, better than expected. Consider that last week, both core CPI (2.1%) and PPI (2.3%) printed a tick higher than expectations; Retail Sales were substantially stronger at 0.4% vs. the 0.1% expected; and both the Empire State and Philly Fed indices printed stronger than expected at 4.3 and 21.8 respectively. Also, the jobs report at the beginning of the month was much stronger than expected. Of course, there have been negatives as well, with IP (0.0%), Housing Starts (-0.9%) and Building Permits (-6.1%) all underperforming. In addition, we cannot forget the situation elsewhere in the world, where China printed Q2 GDP at 6.2%, its lowest print in the 27 years they have been releasing quarterly data, while Eurozone data continues to suffer as well. The implication is that if you assume there is a case for a rate cut at all, the case for a 50bp rate cut relies on much thinner gruel.

At this point, even if we continue to see stronger than expected US data, I believe that Powell and company are locked into a rate cut. Given that futures markets have fully priced that in, as well as the fact that the equity markets are unquestionably counting on that cut, disappointment would serve to truly disrupt markets, potentially impinging on financial conditions and certainly draw the ire of the White House. None of these consequences seem worthwhile for the potential benefit of leaving 25bps of dry powder in the magazine. Add to this the fact that we have heard from several Fed members; Bostic, Kaplan and George, none of whom are enthused about a rate cut at all. Now, of those three, only Esther George is a current voter, but one dissenting vote will not be enough to sway a clearly dovish FOMC. Add it all up and I think we see 25bps when the dust settles. Of course, if that’s the case, it is entirely realistic to see equity prices ‘sell the news’ unless Powell is hyper dovish in the press conference.

And in truth, that is the entire story today. Virtually every story in the financial press focuses on rate cuts, whether the question about the Fed, or the discussion of all the other central banks that have already acted. There is an ongoing argument about whether the ECB actually cuts rates next week, or if they simply prepare the market for a cut in September and the reinstitution of QE in January. Most analysts are opting for the latter, believing that Signor Draghi will wait and see, but if they know they are going to cut, why wait? I think there is a much better chance of immediate action than is being priced into the market.

On the Brexit front, the voting by Tory members continues, and by all accounts, Boris is still in the lead and due to be the next PM. That will continue to pressure the pound, as unless there is further movement by the EU, the chances of a no-deal Brexit will continue to rise. In fact, next week will be quite momentous as we hear from the ECB and get the UK voting results on Thursday.

Away from these stories, most things fall into the background. For example, China Minsheng Group, a major Chinese conglomerate, is defaulting on a $500 million bond repayment due in August. Clearly, this is not a positive event, but more importantly speaks to two specific issues, the lack of US dollar liquidity available in emerging markets as well as the true nature of the slowdown in the Chinese economy. This will be used as further ammunition for the camp that believes the Chinese significantly overstate their economic data.

Turning to this morning’s activity, the only data point is the Michigan Sentiment data (exp 98.5) and we get one more Fed speech, from uber-dove James Bullard. The dollar is stronger today, after yesterday’s afternoon selloff, having risen 0.35% vs. the euro and with gains also against the yen (0.3%), Aussie (0.25%) and most emerging market currencies (MXN 0.3%, ZAR 0.6%, CNY 0.1%). My sense is that yesterday afternoon’s price action was a bit overdone on the dollar, and so we will see more of that unwound ahead of the weekend. Look for modest further USD strength.

Good luck and good weekend
Adf

 

Akin to Caffeine

Posted on by

There once was a time in the past
Where weakness in growth, if forecast
Resulted in prices
That forewarned a crisis
And traders sold what they’d amassed

But nowadays weakness is seen
As something akin to caffeine
‘Cause central bank measures
Will add to their treasures
It’s like a brand new cash machine

Chinese growth data was weak last night, falling to its lowest quarterly rate in the twenty-seven years that China has measured growth on a quarterly basis. The outcome of 6.2%, while expected, confirms that the ongoing trade situation with the US is having an increasingly negative impact on GDP worldwide. Naturally, not unlike Pavlov’s dogs, the market response was to rally on the theory that the PBOC would be adding more stimulus soon. After all, every other central bank in the world (save Norway’s) is preparing to ease policy further as growth worldwide continues to slow down. And so far, the Pavlovian response of buying stocks on bad news continues to be working as evidenced by the fact that equity markets throughout Asia rose. However, the magnitude of that rise has been quite limited, with gains of between 0.2% and 0.4% the norm. in fact, that market response is actually a bad sign for the central banks, because it demonstrates that the effectiveness of their policies is expected to be much less than in the past. Diminishing returns is a normal outcome for the repeated use of anything, and monetary policy is no different. The implication of this outcome is that despite the growing certainty that the Fed, ECB, BOJ, PBOC, BOE and more are going to ease policy further, equity markets seem unlikely to benefit as much as they have in the past. And if when a recession finally arrives, look for a change of heart in the equity community. But in the meantime, party hearty!

Speaking of further policy ease, it seems the market is chomping at the bit for next week’s ECB meeting, where there are two schools of thought. The conservative view is that Signor Draghi will sound quite dovish and indicate a 10bp cut is coming in September. But that is not nearly as exciting a view as the more aggressive analysts are discussing, which is a 20bp cut next week and the introduction of QE2 in September. Interestingly, despite all this certitude about ECB rate cuts, the euro is actually slightly higher this morning (albeit just 0.1%). It appears that traders are betting on the fact that if Draghi is aggressive, the Fed will have the opportunity the following week to match and outperform the ECB. Remember, the Fed has 250bps of rate cuts before it reaches ZIRP while the ECB is already negative. Despite the recent academic work explaining that negative rates are just fine and helping the situation, it still seems unlikely that we are going to see -2.0% anywhere in the world anytime soon. Ergo, the relative policy stance implies the Fed will ease more and the dollar will suffer accordingly. Just not today. Rather, today, the dollar is little changed overall, with some gains and some losses, but few large moves.

And those have been the real stories of note over what was a very quiet weekend. This week we see a fair amount of data, including Retail Sales, but more importantly, we hear from five more Fed speakers, including Chairman Powell tomorrow, in a total of nine speeches.

 

Today Empire Manufacturing 2.0
Tuesday Retail Sales 0.2%
  -ex autos 0.2%
  IP 0.2%
  Capacity Utilization 78.2%
  Business Inventories 0.3%
Wednesday Housing Starts 1.262M
  Building Permits 1.30M
  Fed’s Beige Book  
Thursday Initial Claims 216K
  Philly Fed 5.0
  Leading Indicators 0.1%
Friday Michigan Sentiment 98.5

Given the importance of the consumer to the US economy, the Retail Sales data is probably the most important data point. Certainly, a weak outcome will result in rate cut euphoria, but it will be interesting to see what happens if there is a strong print. But otherwise, this seems more like a week where Fed speakers will dominate, as we hear from NY’s John Williams twice, as well as a mix of other governors and regional presidents. In the end, though, Powell’s comments are key, as I expect he will be looking to fine tune his message from last week’s congressional testimony.

It remains clear that the Fed has the most room to ease policy, and as long as that is the case, the dollar should remain under pressure. However, given the fact that the US economy continues to outperform the rest of the developed world, I don’t anticipate the dollar’s decline to be extreme, a few percent at most.

For today, there is precious little else to really drive things, so look for more of the recent choppiness that we have observed in markets, with no real directional bias.

Good luck
Adf

Totally Thwarted

Posted on by

The data that China reported
Showed growth there somewhat less supported
Meanwhile in Hong Kong
The protesting throng
Has bullish views totally thwarted

Once again, risk is under pressure this morning as the litany of potential economic and financial problems continues to grow rather than recede. The latest concerns began last night when China reported slowing Investment (5.6%, below 6.1% expected) and IP (5.0%, weakest since 2002) data (although Retail Sales held up) which led to further concerns over the growth trajectory in the Middle Kingdom. PBOC Governor Yi Gang assures us that China has significant firepower left to address further weakness, but traders are a little less comforted. Adding to concerns are the ongoing protests in Hong Kong over potential new legislation which would allow extradition, to mainland China, of people accused of fomenting trouble in Hong Kong. That is a far cry from the separation that has been key in allowing Hong Kong’s financial markets and economy to flourish despite its close ties to Beijing.

The upshot is that stocks in Hong Kong (-0.65%) and Beijing (-1.0%) fell again, while interest rates in Hong Kong pushed even higher. This has resulted in a liquidity shortage in Hong Kong which is supporting the HKD (+0.2% this week and finally pushing away from the HKMA’s floor). The renminbi, meanwhile, has gone the other way, softening slightly since the protests began. Other signs of pressure were evident by the weakness in AUD and NZD, both of which rely heavily on the Chinese market as their primary export destinations.

Risk is also evident in the energy markets where there has been an escalation in the rhetoric between the US and Iran after the tanker attacks yesterday. This morning the US is claiming it has video proof that Iran was behind the attacks, although it has not been widely accepted as such. Oil prices, which rose sharply yesterday, have maintained those gains, although on the other side of the oil equation is the slowing economy sapping demand. In fact, the IEA is out with a report this morning that next year, production increases in the US, Canada and Brazil will significantly outweigh anemic increases in demand, further pressuring OPEC and likely oil prices overall. However, for the moment, the market concerns are focused on the increased tension in the Gulf with the possibility of a conflict there seeming to rise daily. Remember, risk assets tend to suffer greatly in situations like this.

Aside from the weaker Aussie (-0.25%) and Kiwi (-0.55%), we have also seen strength in the yen (+0.2%), a huge rally in Treasuries (10-year yield down 4.5bps), gold pushing higher (+1% and back to its highest level in three years) and the dollar, overall performing well. The latter is evidenced by the decline in the euro (-0.2%), the pound (-0.3%) and basically the rest of the G10 with similar declines.

This is the market backdrop as we await the last major piece of data before the FOMC meeting next week, this morning’s Retail Sales numbers. Current expectations are for a 0.6% increase, with the ex-autos number printing at 0.3%. But recall, last month economists were forecasting a significant gain and instead the headline number was negative. A similar result this morning would certainly add more pressure on Chairman Powell and friends next week. And that is really the big underlying story across all markets, just how soon are we likely to see the Fed or the ECB or the BOJ turn clearly dovish and ease policy.

It has become abundantly clear that inflation is the only data point that the big central banks are focusing on these days. And given their fixation on achieving a, far too precise, level of 2.0%, they are all failing by their own metrics. Wednesday’s US CPI data was softer than expected leading to reduced expectations for the PCE data coming at the end of the month. In the Eurozone, 5y/5y inflation swaps, one of the ECB’s key metrics for inflation sentiment, has fallen below 1.20% and is now at its lowest level since the contract began in 2003. And in Japan, CPI remains pegged just below 1.0%, nowhere near the target level. It is this set of circumstances, more than any questions on growth or employment, that will continue to drive monetary policy. With this in mind, one can only conclude that money is going to get easier going forward. I still don’t think the Fed moves next week, but I could easily see a 50bp cut in July. Regardless, markets are going to continue to pressure all central banks until policy rates are lowered, mark my words.

Regarding the impact of these actions on the dollar, it becomes a question of timing more than anything else. As I have consistently maintained, if the Fed starts to ease aggressively, you can be sure that the ECB and BOJ, as well as a host of other central banks, will be doing so as well. And in an environment of global weakness, I expect the dollar will remain the favored place to maintain assets.

As for today, a weak Retail Sales print is likely to see an initial sell-off in the dollar but look for it to reverse as traders focus on the impacts likely to be felt elsewhere.

Good luck and good weekend
Adf

 

Doves There Held Sway

Posted on by

It seems that a day cannot pass
When one country ‘steps on the gas’
Twas China today
Where doves there held sway
With funding for projects en masse

If I didn’t know better, I would suspect the world’s central banks of a secret accord, where each week one of them is designated as the ‘dove du jour’ and makes some statement or announcement that will serve to goose stock prices higher. Whether it is Fed speakers turning from patience to insurance, the ECB promising more of ‘whatever it takes’ or actual rate cuts a la the RBA, the central banks have apparently realized that the only place they continue to hold sway is in global stock markets. And so, they are going to keep on pushing them for as long as they can.

This week’s champion is the PBOC, which last night eased restrictions further on infrastructure investment by local governments, allowing more issuance of ‘special bonds’ and encouraging banks to lend more for these projects. At the same time, the CNY fix was its strongest in a month, back below the 6.90 level, as the PBOC makes clear that for the time being, it is not going to allow the yuan to display any unruly behavior. True to form, Chinese equity markets roared higher led by construction and cement companies, and once again we see global equity markets in the green.

While in the short run, investors remain happy, the problem is that in the medium and longer term, it is unclear that the central banking community has sufficient ammunition left to really help economic activity. After all, how much lower is the ECB going to cut rates from their current -0.4% level? And will that really help the economy? How many more JGB’s can the BOJ buy given they already own about 50% of the market? In truth, the Fed and the PBOC are the only two banks with any real leeway to ease policy enough to have a real economic impact, rather than just a financial markets impact. And for a world that has grown completely reliant on central bank activity to maintain economic growth, that is a real problem.

Adding to these woes is the ongoing trade war situation which seems to change daily. The latest news on this front is that if President Xi won’t sit down with President Trump at the G20 meeting in Japan later this month, then the US will impose tariffs on all Chinese imports. However, it seems the market is becoming inured to statements like these as there has been precious little discussion on the subject, and the PBOC’s actions were clearly far more impactful.

The question is, how long can markets continue to ignore what is a clearly deteriorating global economic picture before responding? And the answer is, apparently, quite a long time. Or perhaps that question is aimed only at equity markets because bond markets clearly see a less rosy future. At some point, we are going to see a central bank announcement result in no positive impact, or perhaps even a negative one, and when that occurs, be prepared for a rockier ride.

Turning to the FX markets this morning, the dollar has had a mixed session, although is arguably a touch softer overall. So far this month, the euro, which is basically unchanged this morning, has rallied 1.4%, while the pound, which is a modest 0.15% higher this morning after better than expected wage data, is higher by just 0.5%. My point is that despite some recent angst in the analyst community that the dollar was due to come under significant pressure, the overall movements have been quite small.

In the EMG bloc, there has also been relatively little movement this month (and this morning) as epitomized by the Mexican peso, which fell nearly 3% last week after the threat of tariffs being imposed unless immigration changes were made by Mexico, and which has recouped essentially all of those losses now that the tariffs have been averted. China is another example of a bit of angst but no substantial movement. This morning, after the PBOC drove the dollar fix lower, the renminbi is within pips of where it began the month. Again, FX markets continue to fluctuate in relatively narrow ranges as other markets have seen far more activity.

Repeating what I have highlighted many times, FX is a relative market, and the value of one currency is always in comparison to another. So, if monetary policies are changing in the same direction around the world, then the relative impact on any currency is likely to be muted. It is why, despite the fact that the US has more room to ease policy than most other nations, I expect the dollar to quickly find its footing in the event the Fed gets more aggressive. Because we know that if the Fed is getting aggressive, so will every other central bank.

Data this morning has seen the NFIB Small Business Optimism Index rise to 105.0, indicating that things in the US are, perhaps, not yet so dire. This is certainly not the feeling one gets from the analyst community or the bond market, but it is important to note. We do see PPI as well this morning (exp 2.0%, 2.3% core) but this is always secondary to tomorrow’s CPI report. The Fed remains in its quiet period so there will be no speakers, and the stock market is already mildly euphoric over the perceived policy ease from China last night. Quite frankly, it is hard to get excited about much movement at all in the dollar today, barring any new commentary from the White House.

Good luck
Adf