Tag Archives: #dollar

Still Remote

Posted on by

A Eurozone nation of note
Has recently had to demote
Its latest predictions
In most jurisdictions
Since factory growth’s still remote

The FX market has lately taken to focusing on economic data as the big stories we had seen in the past months; Brexit, US-China trade, and central bank activities, have all slipped into the background lately. While they are still critical issues, they just have not garnered the headlines that we got used to in Q1. As such, traders need to look at something and today’s data was German manufacturing PMI, which once again disappointed by printing at just 44.5. While this was indeed higher than last month’s 44.1, it was below the 45.0 expectations and simply reaffirmed the idea that the German economy’s main engine of growth, manufacturing exports, remains under significant pressure. The upshot of this data was a quick decline of 0.35% in the euro which is now back toward the lower end of its 1.1200-1.1350 trading range. So even though Chinese data seems to be a bit better, the impact has yet to be felt in Germany’s export sector.

This follows yesterday’s US Trade data which showed that the deficit fell to -$49.4B, well below the expected -$53.5B. Under the hood this was the result of a larger than expected increase in exports, a sign that the US economy continues to perform well. In fact, Q1 GDP forecasts have been raised slightly, to 2.4%, on the back of the news implying that perhaps things in Q1 were not as bad as many feared.

Following in the data lead we saw UK Retail Sales data this morning and it surprised on the high side, rising 1.1%, well above the expected -0.3% decline. The UK data continues to confound the Chicken Little crowd of economists who expected the UK to sink into the North Sea in the wake of the Brexit vote. And while there remains significant uncertainty as to what will happen there, for now, it seems, the population is simply going about their ordinary business. The benefit of the delay on the Brexit decision is that we don’t have to hear about it every single day, but the detriment remains for UK companies that have been trying to plan for something potentially quite disruptive but with no clarity as to the outcome. Interestingly, the pound slid after the data as well, down 0.25%, but then today’s broader theme is that of a risk-off session.

In fact, looking at the usual risk indicators, we saw weakness in equity markets in Asia (Nikkei -0.85%, Shanghai -0.40%) and early weakness in European markets (FTSE -0.1%) but the German DAX, after an initial decline, has actually rebounded by 0.5%. US futures are pointing lower at this time as well, although the 0.15% decline is hardly indicative of a collapse. At the same time, Treasury yields are slipping with the 10-year down 4bps to 2.56% and both the dollar and the yen are broadly higher. So, risk is definitely on the back foot today. However, taking a step back, the reality is that movement in most markets remains quite subdued.

With that in mind, there is really not much else to discuss. On the data front this morning we see Retail Sales (exp 0.9%, 0.7% -ex autos) and then at 10:00 we get Leading Indicators (0.4%) which will be supported by the ongoing equity market rally. There is one more Fed speaker, Atlanta’s Rafael Bostic, but the message we have heard this week has been consistent; the Fed remains upbeat on the economy, expecting GDP growth on the order of 2.0% as well as limited inflation pressure which leads to the current wait and see stance. There is certainly no indication that this is going to change anytime soon barring some really shocking events.

Elsewhere, the Trump Administration has indicated that the trade deal is getting closer and there is now talk of a signing ceremony sometime in late May, potentially when the President visits Japan to pay his respects to the new emperor there. (Do not forget the idea that the market has fully priced in a successful trade outcome and when it is finally announced, equities will suffer from a ‘sell the news mentality.) With the Easter holidays nearly upon us, trading desks are starting to thin out, however, while liquidity may suffer slightly, the current lack of market catalysts means there is likely little interest in doing much anyway. Overall, today’s dollar strength is likely to have difficulty extending, and if we see equity markets reverse along the lines of the DAX, it would not be surprising to see the dollar give back its early gains. But in the end, another quiet day is looming.

Good luck and good weekend
Adf

Given the Easter holidays and diminished activity, the next poetry will arrive on Tuesday, April 23.

Addiction To Debt

Posted on by

A policy change did beget
In China, addiction to debt
Per last night’s report
Financial support
Continues, the bulls’ views, to whet

The data from China continues to surprise modestly to the upside. Last week, you may recall, the Manufacturing PMI report printed above 50 in a surprising rebound. Last night, Q1 GDP printed at 6.4%, a tick better than expected, and the concurrent data; Fixed Asset Investment (6.3%), IP (8.5%) and Retail Sales (8.7%) all beat expectations as well. In fact, the IP data blew them away as the analyst community was looking for a reading of 5.9%. While there is some possibility that the data is still mildly distorted from the late Lunar New Year holiday, it certainly seems as though the Chinese have managed to prevent any significant further weakness in their economy.

How, you may ask, have they accomplished this feat? Why the way every government does these days. As we also learned last week, debt in China continues to grow rapidly, far more rapidly than the economy, which means that every yuan of debt buys less growth. It should be no surprise that there is diminishing effectiveness in this strategy, but it should also be no surprise that this is likely to be the way forward. In the short run, this process certainly pads the data story, helping to ensure that growth continues. However, there is a clear and measurable negative aspect to this policy.

Exhibit A is real estate. One of the areas seeing the most investment in China continues to be real estate. The problem with expanding real estate debt (it grew 11.6% in Q1 compared to 6.4% growth for GDP) is that real estate investment is not especially productive. For an economy that relies on manufacturing, productivity growth is crucial. The more money invested in real estate, the less available for improved efficiencies in the economy. Longer term this will lead to slower GDP growth in China, just as it has done in all the developed world economies. However, as politics, even in China, is based on the here and now, there is no reason to expect these policies to change. Two years ago, President Xi tried to force a crackdown on excessive debt used to finance the property bubble that had inflated throughout China. However, it is abundantly clear that the priorities have shifted to growth at all costs. At this stage, I expect that we will see consistently better numbers out of China going forward, regardless of any trade resolution. If Xi wants growth, that is what the rest of the world will see, whether it exists or not.

Turning to the FX market, this implies to me that we are about to see CNY start to strengthen further. Last night saw a 0.40% rally taking the dollar down to key support levels between 6.68-6.69. I expect that we are going to see the renminbi start a more protracted move higher and at this point would not be surprised to see the USDCNY end 2019 around 6.30. That is a significant change in my view from earlier this year, but there has also been a significant change in the policy stance in China which cannot be ignored.

Elsewhere, risk overall has been ‘on’ as investors have responded to the better than expected Chinese data, as well as the continued dovishness from the central banking community, and keep buying stocks. If you recall several weeks ago, there was a conundrum as both stocks and bonds were rallying. At the time, the view from most pundits was that the stock market was wrong and that the bond market was presaging a significant slowdown in the economy. In fact, we saw that first yield curve inversion at the time in early March. However, since then, 10-year Treasury yields have backed up by 22bps and now sit above 2.60% for the first time in a month, while stock prices have continued to rally. As such, it appears that the bond market had it wrong, not the stock market. The one caveat is that this stock market rally has been on diminishing volumes which implies that it is not that widely supported. The opposing viewpoints are the bulls believe there is a big catch up rally in the wings as those who have missed out reach peak FOMO, while the bears believe that though the rally has been substantial, it has a very weak underlying basis, and will retreat rapidly.

As to the FX market, yesterday saw dollar strength, which was a bit surprising given the weaker than expected economic data (both IP and Capacity Utilization disappointed) as well as mixed to negative earnings data from the equity market. However, this morning, the dollar has retraced those gains with the pound being the one real outlier, falling slightly amid gains in virtually every other currency, as inflation data from the UK printed softer than expected at 1.9%, thus pushing any concept of tighter policy even further into the future.

On the data front, this morning brings the Trade Balance (exp -$53.3B) and then the Fed’s Beige Book is released this afternoon. We also have two more Fed speakers, Harker and Bullard, but that message remains pretty consistent. No change in policy in the near future and all efforts to determine the best way to push inflation up to the target level. What this means in practice is that there is a vanishingly small probability that US monetary policy will tighten any further in the near future. Of course, neither will policy elsewhere tighten, so I continue to view the dollar’s prospects positively with the clear exception of the CNY as mentioned above.

Good luck
Adf

 

Worries ‘Bout Debt

Posted on by

In DC this weekend they met
The World Bank and IMF set
They bitched about Trump
Explained there’s no slump
But did express worries ‘bout debt

Markets are on the quiet side this morning as they consolidate the gains seen on Friday. Risk continues to be in vogue and so haven currencies; dollars, Swiss francs and Japanese yen, remain under modest pressure. That said, the FX market remains broadly range bound, at least within the G10 space.

The annual World Bank / IMF meetings were held this past weekend in Washington D.C. and all the global economic glitterati were present. Arguably there were three key themes; central bank independence is paramount to successful policy and there is great concern over President Trump’s ongoing, and increasingly strident, complaints about the Fed. Secondly there continues to be broad concern over the slowing growth trajectory that was highlighted by the IMF reducing their global growth forecast yet again last week, this time down to 3.3% in 2019 from their 3.7% estimate last October. Finally, there was evidence that the massive growth in debt around the world is starting to make a few policymakers more nervous.

Of course, the question is will policymakers actually change anything that they do given their concerns? As to the first, the only hope they have is to raise the issue frequently enough so that it gains a broad consensus amongst the non-economic set. Frankly, if you asked the proverbial man on the street who was Fed Chair, or the names of any of the other governors, I would wager less than one in ten people would know any of the answers. At the same time, with the President’s constant haranguing, the Fed remains an excellent scapegoat for any weakness in the US economy going forward. As much as it galls the establishment, there is no reason to believe that this behavior is going to change throughout the rest of the Trump presidency and probably well beyond that.

Regarding the second issue, slowing growth, once again given the current stance of virtually the entire global economic central bank community, it is unclear they have any ability to do anything else. After all, the whole group is already set at ultra-easy money, with limited ability to move any further. But perhaps more importantly, it is questionable whether the central banks are the actual drivers of economic growth, as much as they would like to think they are. Arguably, economic growth comes from a combination of consumer demand and production of those goods and services demanded. The last time I checked, the Fed neither consumed very much nor produced anything (other than hot air and paperwork). All I’m saying is that the ongoing belief that central banks control the economy might be faulty. What they do control is money and financial assets, but as we have seen during the past decade, a strong rally in financial assets does not necessarily translate into strong growth.

Finally, regarding the massive increase in debt that we have seen during the past decade, they are absolutely right to be concerned about this process. As Rogoff and Reinhart explained in their classic book, This Time is Different, excessive debt is the one thing that has consistently been shown to have a negative effect on economic growth. And while the definition of excessive may be uncertain, it is abundantly clear that debt/GDP ratios >100% is excessive.

Add it all up and it seems unlikely that there is going to be a surge in economic growth in the near future, or even the medium term. Thus, when comparing the situations across the globe, the current status is likely to remain the future status.

Turning to the upcoming week, we have a fair amount of data as well as another group of Fed speakers.

Today Empire Manufacturing 6.7
Tuesday IP 0.2%
  Capacity Utilization 79.1%
Wednesday Trade Balance -$53.5B
  Fed Beige Book  
Thursday Initial Claims 205K
  Philly Fed 10.4
  Retail Sales 0.9%
  -ex autos 0.7%
  Business Inventories 0.4%
Friday Housing Starts 1.23M
  Building Permits 1.30M

In addition to this, we hear from five more Fed speakers, although none of them are the big guns like Powell or Williams. And as I have repeatedly described, the Fed story is already well known and unlikely to change unless the data really starts to adjust. Add to this the fact that now Brexit is a back-burner issue and there remains scant information on the US-China trade talks and quite frankly, this week in FX is going to be all about US equity market earnings data. If the data is good and risk is embraced, the dollar will suffer and vice versa.

Good luck
Adf

A Future Upgrade

Posted on by

The data from China conveyed
A story that can be portrayed
As Q1 was weak
But policy tweaks
Imply there’s a future upgrade

In a relatively dull session for news events, Chinese data was the biggest story. The trade surplus there expanded dramatically, rising to $32.6B, much larger than any expectations, as not only did exports grow more robustly (+14.2%) but imports fell sharply (-7.6%). On the surface this suggests that the global situation may have seen its worst days, as demand for Chinese goods was strong, but the domestic economy there continues to be plagued by weakness. However, a few hours later, Chinese money supply and loan data was released with a slightly different message. Here, M2 grew more than expected at an 8.6% rate, while new loans also expanded sharply (+13.7%) implying that the PBOC’s efforts at stimulating the economy are starting to bear fruit. The loan data also implies that growth going forward, in Q2 and beyond, is likely to rebound further. In fact, the only negative piece of news was that auto sales continue to decline in China, falling 5.2% in March, the ninth consecutive year/year decline in the series. The market response to this was muted in the equity space, with Shanghai virtually unchanged, but the renminbi did benefit, rising 0.2% in the wake of the release.

Away from those data points, the news has been sparse. Interestingly, the dollar has been under pressure across the board since yesterday’s close with the euro now higher by 0.6%, both the pound and yen by 0.3% and Aussie leading the way amid firmer commodity prices, by 0.7%. In fact, despite the Shanghai equity performance, today has all the other earmarks of a risk-on session. Equity markets elsewhere in Asia were firm (Nikkei +0.75%, Hang Seng +0.25%), they are higher in Europe (FTSE and CAC +0.4%, DAX +0.6%) and US futures are pointing higher as well (DJIA +0.7%, S&P +0.5%). At the same time government bond yields are rising with 10-year Treasury yields now higher by 5bps. Much of this movement has occurred early this morning after JP Morgan released better than expected results. So, for today, all seems right with the world!

Away from those data releases, there has been far less of interest. Yesterday we heard from NY Fed President Williams who explained that the rate situation was appropriate for now and that there was no reason for the Fed to act in the near future. While growth seems solid, the continuing lack of measured inflation shows no signs of changing and so rates are likely to remain on hold for an extended period. In a related story, a WSJ survey of economists described this morning shows expectations for the next Fed move to have been pushed back to Q4 2020, with a growing likelihood that it will be a rate cut. In other words, expectations are for an extended period of time with no monetary policy changes. If that is the case, then markets will need to find other catalysts to drive prices. Who knows, maybe equity prices will start to reflect company fundamentals again! Just kidding!

Actually, this situation will drive the market to be even more focused on the economic data as essentially every central bank around the world has indicated the current policy pause is designed to observe the data and then respond accordingly. So, if weakness becomes evident in a country or region, look for the relevant central bank(s) to ease policy quickly. At the same time, if inflation does start to pick up someplace, policy tightening will be discussed, if not implemented right away. And markets will respond to these discussions given the lack of other catalysts.

For now however, Goldilocks has been revived. Rates have almost certainly peaked for this cycle, and policy stability may well lead us to yet further new highs in the equity space. Perhaps the central banks have well and truly killed the business cycle and replaced it with a permanent modest growth trajectory. Personally, I don’t believe that is the case, as evidenced by the diminishing impact of each of their policies, but the evidence over the past several years is working in their favor, I have to admit.

This morning’s only data point is Michigan Consumer Sentiment, which is expected to decline slightly from last month’s 98.4 to 98.0 today. We also hear from Chair Powell again, but that story is old news. With risk being acquired, look for the dollar to continue to falter for the rest of the session, albeit probably not by much more. Things haven’t changed that much!

Good luck and good weekend
Adf

 

Rapidly Falling

Posted on by

Magnanimous is the EU
Extending the deadline for two
Weeks so that May
Might still get her way
And England can bid them adieu

But data this morning displayed
That Eurozone growth, as surveyed
Was rapidly falling
While Mario’s stalling
And hopes for a rebound now fade

On a day where it appeared the biggest story would be the short delay granted by the EU for the UK to try to make up their collective mind on Brexit, some data intruded and changed the tone of the market. No one can complain things are dull, that’s for sure!

Eurozone PMI data was released this morning, or actually the Flash version which comes a bit sooner, and the results were, in a word, awful.

German Manufacturing PMI 44.7
German Composite PMI 51.5
French Manufacturing PMI 49.8
French Composite PMI 48.7
Eurozone Manufacturing PMI 47.6
Eurozone Composite PMI 51.3

You may have noticed that manufacturing throughout the Eurozone is below that key 50.0 level signaling contraction. All the data was worse than expected and the German Manufacturing number was the worst since 2012 in the midst of the Eurobond crisis. It can be no surprise that the ECB eased policy last week, and perhaps is only surprising that they didn’t do more. And it can be no surprise that the euro has fallen sharply on the release, down 0.6% today, and it has now erased all of this week’s gains completely. As I constantly remind everyone, FX is a relative game. While the Fed clearly surprised on the dovish side, the reality is that other countries all have significant economic concerns and what we have learned in the past two weeks is that virtually every central bank (Norway excepted) is doubling down on further policy ease. It is for this reason that I disagree with the dollar bears. There is simply no other economy that is performing so well that it will draw significant investment flows, and since the US has about the highest yields in the G10 economies, it is a pretty easy equation for investors.

Now to Brexit, where the EU ‘gifted’ the UK a two-week extension in order to allow PM May to have one more chance to get her widely loathed deal through Parliament. The EU debate was on the amount of time to offer with two weeks seen as a viable start. In any case, they are unwilling to delay beyond May 22 as that is when EU elections begin and if the UK is still in the EU, but doesn’t participate in the elections, then the European Parliament may not be able to be legally constituted. Of course, the other option is for a more extended delay in order to give the UK a chance to run a new referendum, and this time vote the right way to remain.

And finally, there is one last scenario, revoking Article 50 completely. Article 50 is the actual law that started the Brexit countdown two years ago. However, as ruled by the European Court of Justice in December, the UK can unilaterally revoke this and simply remain in the EU. It seems that yesterday, a petition was filed on Parliament’s website asking to do just that. It has over two million signatures as of this morning, and the interest has been so high it has crashed the servers several times. However, PM May is adamant that she will not allow such a course of action and is now bound and determined to see Brexit through. This impact on the pound is pretty much what one might expect, a very choppy market. Yesterday, as it appeared the UK was closer to a no-deal outcome, the pound fell sharply, -1.65%. But this morning, with the two-week delay now in place and more opportunity for a less disruptive outcome, the pound has rebounded slightly, up 0.3% as I type. Until this saga ends, the pound will remain completely dependent on the Brexit story.

Away from those two stories, not much else is happening. The trade talks continue but don’t seem any closer to fruition, with news continuing to leak out that the Chinese are not happy with the situation. Government bond yields around the world are falling with both German and Japanese 10-year yields back in negative territory, Treasuries down to 2.49%, there lowest level since January 2018, and the same situation throughout the G10. Overall, the dollar has been the big winner throughout the past twenty-four hours, rallying during yesterday’s session and continuing this morning. In fact, risk aversion is starting to become evident as equity markets are under pressure this morning along with commodity prices, while the dollar and yen rally along with those government bond prices. The only US data point this morning is Existing Home Sales (exp 5.1M) which has been trending lower steadily for the past 18 months. There is also a bunch of Canadian data (Inflation and Retail Sales) which may well adjust opinions on the BOC’s trajectory. However, it seems pretty clear that the Bank of Canada, like every other G10 central bank, has finished their tightening cycle with the only question being when they actually start to ease.

A week that began with the market absorbing the EU’s efforts at a dovish surprise is ending with clarification that dovishness is the new black. It is always, and everywhere, the chic way to manage your central bank!

Good luck and good weekend
Adf

Heavy-Handed

Posted on by

There once was a large bloc of nations
That gathered to foster relations
On how they should trade
That they might dissuade
A conflict midst trade accusations

But slowly their mission expanded
As rules on more things they demanded
One nation resented
These unprecedented
Requests which they thought heavy-handed

This nation expressed their dissention
By voting to leave that convention
But three years have passed
And no deal’s amassed
Support so they need an extension

I apologize for the length of this morning’s ditty, but sometimes it takes more than one stanza to tell the story.

Brexit is once again the top story today, although the FOMC meeting and US-China trade talks are still in the news. With just nine days left before the UK is due to leave the EU, there is still no agreed upon deal between the two sides of the negotiation. Today, the EU has a council meeting of all its leaders and PM May will be making a speech and asking for an extension. The question has been, how long would she request? At this time, it appears it will be short, just three months, as she is seeking to get the negotiated text voted on in Parliament one more time. However, there has been pushback by several other EU members concerned that three months won’t be enough time to change anything. In fact, some EU members want a much longer delay in order to push for a second Brexit vote; you know, to get the ‘right’ answer this time. At any rate, Brexit continues to be a slow-motion train wreck and all are fascinated to watch, if not to live through its consequences.

As an aside, a conversation I had yesterday with a local who has become more engaged in politics there, indicated that there is an abject fear of leaving without a deal, and that despite the many bad things about PM May’s deal, there will be many MP’s who vote for it rather than allowing a hard Brexit. Certainly that is what May is counting on. We shall see. The FX market continues to react to the ebbs and flows of the conversation and this morning is ebbing. The pound is down 0.3% as it seems some traders are losing confidence in the outcome. As I have repeatedly said, despite the fears of a no-deal outcome, the law remains for the UK to leave next Friday whether there is a deal in place or not, and that is a non-zero probability. If that is the case, the pound will suffer greatly, especially because that is clearly not the current expectation. Hedgers be ready.

On to the FOMC, which will release their policy statement at 2:00 this afternoon, along with their latest economic projections (expected to see GDP growth lowered slightly) and the infamous dot plot. Chairman Powell had made an effort, prior to the quiet period, to minimize the importance of the dots as those projections do not contain error bars showing the level of uncertainty attached to the forecasts. But the market is still talking about them non-stop. I guess six years of harping on the importance of forward guidance, BY THE FED, has trained market participants to pay attention to forward guidance. My money remains on the idea that the median dot will be at no more rate increases this year, and a more pronounced reduction in the long-term neutral rate. However, there are a number of analysts who are warning that the dot plot could look much more hawkish, highlighting another rate hike this year and one more next year. if that is the case, I expect equity markets to suffer, as it is pretty clear the market has priced out any further rate hikes.

In addition, we cannot forget the balance sheet story, where I remain convinced that the balance sheet roll-off will be slated to end by June, and that the composition will be focused on shorter term securities. The idea that shortening the maturity profile now will result in more ammunition for fighting the next economic downturn will prove quite appealing. After all, a big fear of the Fed is the howls of protest from the Austrian school (read Congressional monetary hawks) if they restart QE during the next recession. Shortening the average maturity of holdings now will allow them to maintain the size of the balance sheet while still adding stimulus in the next downturn by extending the maturity then.

And finally, on the trade front, despite a story yesterday indicating the Chinese were backing away from earlier agreements on IP security, the US delegation of Lighthizer and Mnuchin are heading to Beijing this week, with the Chinese delegation expected to come back here the week after in the final push for a deal. Certainly, equity markets have priced in a successful deal here, and probably so has the dollar. Interestingly, Treasury markets continue to look at the world with a very different view of much slower growth now, and in the future. It appears there is a bit more skepticism by bond traders on the successful outcome of a trade deal, than that of equity traders.

Overall, the dollar is marginally firmer this morning, but as we have seen the last several days, individual currency movements have been muted. The Indian rupee continues to perform well as an equity market rally in Mumbai has drawn in foreign investment and the market increasingly prices in a Modi victory in the upcoming election, which is seen as the most economic friendly outcome available. But even there, the rupee has only rallied 0.3% this morning. Throughout the G10, movement continues to be extremely limited, with 0.1% being the extent of today’s activity (the pound excepted).

Ahead of the FOMC meeting, there is no data to be released today, and equity futures are basically flat, pointing to very modest 0.1% declines on the open. Look for very little movement until the FOMC announcement and the following press conference. And then, it will all depend on the outcome.

Good luck
Adf

Maybe Once More

Posted on by

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

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

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

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

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

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

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

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

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

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

Good luck
Adf

 

Quite Sublime

Posted on by

The markets are biding their time
Awaiting a new paradigm
On trade and on growth
While hoping that both
Instill attitudes quite sublime

The dollar has rebounded this morning as most of the news from elsewhere in the world continues to point to worsening economic activity. For example, the German ZEW survey printed at -13.4, which while marginally better than the expected -13.6, remains some 35 points below its long-term average of +22. So, while things could always be worse, there is limited indication that the German economy is rebounding from its stagnation in H2 2018. Meanwhile, Italian Industrial Orders fell to -1.8%, well below the +0.5% expectation, and highlighting the overall slowing tenor of growth in the Eurozone. As I have mentioned over the past several days, we continue to hear a stream of ECB members talking about adding stimulus as they slowly recognize that their previous views of growth had been overestimated. With all this in mind, it should be no surprise the euro is lower by 0.25% this morning, giving back all of yesterday’s gains.

At the same time, Swedish inflation data showed a clear decrease in the headline rate, from 2.2%, down to the Riksbank’s 2.0% target. This is a blow to the Riksbank as they had been laying the groundwork to raise rates later this year in an effort to end ZIRP. Alas, slowing growth and inflation have put paid to that idea for now, and the currency suffered accordingly with the krone falling 1.5% on the release, and remaining there since then. Despite very real intentions by European central bankers to normalize policy, all the indications are that the economy there is not yet ready to cooperate by demonstrating solid growth.

The last data point of note overnight was UK employment, where the Unemployment rate remained at a 40 year low of 4.0% and the number of workers grew by 167K, a better than expected outcome. In addition, average earnings continue to climb at a 3.4% pace, which remains the highest pace since 2008. Absent the Brexit debate, and based on previous comments, it is clear that the BOE would feel the need to raise rates in this situation. But the Brexit debate is ongoing and uncertainty reigns which means there will be no rate hikes anytime soon. The latest news is that Honda is closing a factory in Swindon, although they say the driving impulse is not Brexit per se, but weaker overall demand. Nonetheless, the 4500 jobs lost will be a blow to that city and to the UK overall. Meanwhile, the internal politics remain just as jumbled as ever, and the political infighting on both sides of the aisle there may just result in the hard Brexit that nobody seems to want. Basically, every MP is far more concerned about their own political future than about the good of the nation. And that short-sightedness is exactly how mistakes are made. As it happens, the strong UK data has supported the pound relative to other currencies, although it is unchanged vs. the dollar this morning.

Pivoting to the EMG bloc, the dollar is generally, but not universally higher. Part of that is because much of the dollar’s strength has been in the wake of European data well after Asian markets were closed. And part of that is because today’s stories are not really dollar focused, but rather currency specific. Where the dollar has outperformed, the movement has been modest (INR +0.2%, KRW +0.2%, ZAR +0.4%), but it has fallen against others as well (BRL -0.2%, PHP -0.2%). In the end, there is little of note ongoing here.

Turning to the news cycle, US-China trade talks are resuming in Washington this week, but the unbridled optimism that seemed to surround them last week has dissipated somewhat. This can be seen in equity markets which are flat to lower today, with US futures pointing to a -0.2% decline on the opening while European stocks are weaker by between -0.4% and -0.6% at this point in the morning. On top of that, Treasury yields are creeping down, with the 10-year now at 2.66% and 10-year Bunds at 0.10%, as there is the feeling of a modest risk-off sentiment developing.

At this point, the key market drivers seem to be on hold, and until we receive new information, I expect limited activity. So, tomorrow’s FOMC Minutes and Thursday’s ECB Minutes will both be parsed carefully to try to determine the level of concern regarding growth in the US and Europe. And of course, any news on either trade or Brexit will have an impact, although neither seems very likely today. With all that in mind, today is shaping up to be a dull affair in the FX markets, with limited reason for the dollar to extend its early morning gains, nor to give them back. There is no US data and just one speaker, Cleveland’s Loretta Mester, who while generally hawkish has backed off her aggressive stance from late last year. Given that she speaks at 9:00 this morning, it may be the highlight of the session.

Good luck
Adf

 

A Bad Dream

Posted on by

According to pundits’ new theme
December was just a bad dream
Though Europe’s a mess
And China feels stress
The fallout was way too extreme

The thing is, the data of late
Worldwide has not really been great
The only thing growing
Is debt which is sowing
The seeds of a troubled debate

The dollar has been edging higher over the past several sessions which actually seems a bit incongruous based on other market movements. Equity investors continue to see a glass not half full, but overflowing. Bond yields are edging higher in sync with those moves as risk is being acquired ‘before it’s too late’. But the dollar, despite the Fed’s virtual assurance that we have seen the last of the rate hikes, has been climbing against most counterparts for the past two sessions.

Some of this is clearly because we are getting consistently bad economic data from other countries. For example, last night saw Services PMI data from around the world. In France, the index fell to 47.8, its worst showing in five years. German data printed a slightly worse than expected 53.0, while the Eurozone as a whole remained unchanged at 51.2 It should be no surprise that Italy, which is currently in recession, saw its number fall below 50 as well, down to 49.7. Thus, while Brexit swirls on in the background, the Eurozone economy is showing every sign of sliding toward ever slower growth and inflation. As I have been repeating for months, the ECB will not be tightening policy further. And as the Brexit deadline approaches, you can be sure that the EU will begin to make more concessions given the growing domestic pressure that already exists due to the weakening economy. Net, the euro has decline 0.2% this morning, and is ebbing back to the level seen before the Fed capitulated.

Speaking of Brexit, the UK Services PMI data fell to 50.1, its worst showing in two- and one-half years, simply highlighting the issues extant there. PM May’s strategy continues to consist of trying to renegotiate based on Parliament’s direction, but the EU continues to insist it cannot be done. While very few seem to want a hard Brexit, there has been very little accomplished of late that seems likely to prevent it. And the pound? It has fallen a further 0.2% and is trading back just above 1.30, its lowest level in two weeks and indicative of the fact that the certainty about a deal getting done, or at the very least a delay in any decision, is starting to erode.

With the Lunar New Year continuing in Asia, there is no new news on the trade front, just the ongoing impact of the tariffs playing out in earnings releases and economic reports. But this story is likely to be static until the mooted meeting between the two presidents later this month. My observation is that the market has priced in a great deal of certainty that a deal will be agreed and that the tariff regime will end. Quite frankly, that seems very optimistic to me, and I think there is a very real chance that things deteriorate further, despite the incentives on both sides to solve the problem. The issue is that the US’s trade concerns strike at the very heart of the Chinese economic model, and those will not be easily changed.

Elsewhere, the yen has been falling modestly of late, which is not surprising given the recent risk-on sentiment in markets, but the Japanese economy has not shown any signs that the key concern over inflation, or lack thereof, has been addressed. During December’s equity meltdown, the yen rallied ~4.5%. Since then, it has rebound about half way, and in truth, since equity markets stabilized in the middle of January, the yen has been in a tight trading range. At this point, given the complete lack of ability by the BOJ to impact its value based on monetary policy settings, and given the strong belief that it represents a safe haven in times of trouble (which is certainly true for Japanese investors), the yen is completely beholden to the market risk narrative going forward. As long as risk is embraced, the yen is likely to edge lower. But on risk off days, look for it to rebound sharply.

And that’s really all we have for today. This evening’s State of the Union address by President Trump has the potential to move markets given the contentious nature of his current relationship with the House of Representatives. There is growing talk of another Federal government shutdown in two weeks’ time, although as far as the FX market was concerned, I would say the last one had little impact. Arguably, the dollar’s weakness during that period was directly a result of the change in Fed rhetoric, not a temporary interruption of government services.

At 10:00 this morning the ISM Non-Manufacturing data is released (exp 57.2), which while softer than last month remains considerably higher than its European and Chinese counterparts. Overall, as markets continue to reflect an optimistic attitude, I would expect that any further dollar strength is limited, but in the event that fear returns, the dollar should be in great demand. However, that doesn’t seem likely for today.

Good luck
Adf

If Things Go Astray

Posted on by

The jobs report Friday was great
Which served to confuse the debate
Is growth on the rise?
Or will it downsize?
And how will the Fed acclimate?

The first indication from Jay
Is data continues to say
While growth seems robust
We’ll surely adjust
Our actions, if things go astray

In what can only be described as remarkable, despite the strongest jobs report in nearly a year, handily beating the most optimistic expectations for both job growth and wages, Fed Chairman Jay Powell told the market that the Fed could easily slow the pace of policy tightening if needed. While this may seem incongruous based on the data, it was really a response to several weeks of market gyrations that have been explicitly blamed on the Fed’s ongoing policy normalization procedure. A key concern over this sequence of events is that the data of ‘data dependence’ is actually market indices rather than economic ones. For every analyst and economist who had been looking for Powell to break the cycle of kowtowing to the stock market, Friday was a dark day. For the stock market, however, it was anything but, with the S&P 500 rising 3.4% and the NASDAQ an even more impressive 4.25%. The Fed ‘put’ seems alive and well after a three month hiatus.

So what can we expect going forward? The futures market has removed all pricing for the Fed to raise rates further in 2019, and in fact, has priced in a 50% probability of a 25bp rate cut before the year is over! Think about that. Two weeks ago, the market was priced for two 25bp rate hikes! This is a very large, and rapid, change of opinion. The upshot is that the dollar has come under significant pressure as both traders and investors abandon the view of continued cyclical dominance and start to focus on the US’ structural issues (growing twin deficits). In that scenario, the dollar has much further to fall, with a 10% decline this year well within reason. Equity markets around the world, however, have seen a short-term revival as not only did Powell blink, but also the Chinese continue to aggressively add to their monetary policy ease. And one final positive note was heard from the US-China trade talks in Beijing, where Chinese Vice-Premier, Liu He, President Xi’s top economic official, made a surprise visit to the talks. This was seen as a demonstration of just how much the Chinese want to get a deal done, and are likely willing to offer up more concessions than previously expected to do so. The ongoing weak data from China is clearly starting to have a real impact there.

It is situations like this that make forecasting such a fraught exercise. Based on the information we had available on December 31, none of these market movements seemed possible, let alone likely. But that’s the thing about predictions; they are especially hard when they focus on the future.

As to markets today, while Asian equity markets followed Friday’s US price action higher, the same has not been true in Europe, where the Stoxx 600 is lower by 0.4%. Weighing on the activity in Europe has been weaker than expected German Factory Order data (-1.0%) as well as the re-emergence of the gilets jaunes protests in France, where some 50,000 protestors, at least, made their presence felt over the weekend.

Turning to the dollar, it is down broadly, with every G10 currency stronger vs. the greenback and most EMG currencies as well. If the market is correct in its revised expectations regarding the Fed, then the dollar will remain under pressure in the short run. Of course, if the Fed stops tightening policy, and we continue to see Eurozone malaise, you can be certain that the ECB is going to be backing away from any rate rises this year. I have maintained that the ECB would not actually raise interest rates until 2020 at the earliest, and I see no reason to change that view. With oil prices hovering well below year ago levels, headline inflation has no reason to rise. At the same time, despite Signor Draghi’s false hope regarding eventual wage inflation, core CPI in the Eurozone seems pegged at 1.0%. As long as this remains the case, it will be extremely difficult for Draghi, or his successor, to consider raising rates there. As that becomes clearer to the market, the euro will likely begin to suffer. However, until then, I can see the euro grinding back toward 1.18 or so.

One last thing to remember is that despite the Christmas hiatus, the Brexit situation remains front and center in the UK, with Parliament scheduled to vote on the current deal early next week. At this time, there is no indication that PM May is going to find the votes to carry the day, although as the clock ticks down, it is entirely possible that some nays turn into yeas in order to prevent the economic catastrophe that is being predicted by so many. The pound remains beholden to this situation, but I believe the likely outcomes are quite asymmetric with a 2-3% rally all we will see if the deal passes, while an 8% decline is quite viable in the event the UK exits the EU with no deal.

As to data this week, it will not be nearly as exciting as last week, but we see both the FOMC Minutes on Wednesday and CPI on Friday. In addition, we hear from seven Fed speakers across nine speeches, including Chairman Powell again, as well as vice-Chairman Clarida.

Today ISM non-Manufacturing 59.0
Tomorrow NFIB Small Business Optimism 105.0
  JOLT’s Job Openings 7.063M
Wednesday FOMC Minutes  
Thursday Initial Claims 225K
Friday CPI -0.1% (1.9% Y/Y)
  -ex food & energy 0.2% (2.2% Y/Y)

All in all, it seems that the current market narrative is focused solely on the Fed changing its tune while the rest of the central banking community is ignored. As long as this is the case, look for a rebound in equity markets and the dollar to remain under pressure. But you can be certain that if the Fed needs to hold rates going forward because of weakening economic data, the rest of the world will be in even more dire straits, and central banks elsewhere will be back to easing policy as well. In the end, while there may be short-term weakness, I continue to like the dollar’s chances throughout the year as the US continues to lead the global economy.

Good luck
Adf