Continue Restrained

Come autumn and next Halloween
The UK may finally wean
Itself from the bloc
To break the deadlock
But Parliament still must agree(n)

Meanwhile Signor Draghi explained
That growth would continue restrained
And Fed Minutes noted
That everyone voted
For policy to be maintained

There has been fresh news on each of the main market drivers in the past twenty-four hours, and yet, none of it has been sufficient to change the market’s near-term outlook, nor FX prices, by very much.

Leading with Brexit, there was a wholly unsatisfying outcome for everyone, in other words, a true compromise. PM May was seeking a June 30 deadline, while most of the rest of the EU wanted a much longer delay, between nine months and a year. However, French President Emanuel Macron argued vociferously for a short delay, actually agreeing with May, and in the end, Halloween has a new reason to be scary this year. Of course, nothing has really changed yet. May will still try to get her deal approved (ain’t happening); Euroskeptic Tories will still try to oust her (possible, but not soon) and Labour will push for new elections (also possible, but not that likely). The topic of a second referendum will be heard frequently, but as of right now, PM May has been adamant that none will not take place. So, uncertainty will continue to be the main feature of the UK economy. Q1 GDP looks set to be stronger than initially expected, but that is entirely due to stockpiling of inventory by companies trying to prepare for a hard Brexit outcome. At some point, this will reverse with a corresponding negative impact on the data. And the pound? Still between 1.30 and 1.31 and not looking like it is heading anywhere in the near future.

On to the ECB, where policy was left unchanged, as universally expected, and Signor Draghi remarked that risks to the economy continue to be to the downside. Other things we learned were that the TLTRO’s, when they come later this year, are pretty much the last arrow in the policy quiver. Right now, there is no appetite to reduce rates further, and more QE will require the ECB to revise their internal guidelines as to the nature of the program. The issue with the latter is that EU law prevents monetization of government debt, and yet if the ECB starts buying more government bonds, it will certainly appear that is what they are doing. This morning’s inflation data from France and Germany showed that there is still no inflationary impulse in the two largest economies there, and by extension, throughout the Eurozone.

At this point, ECB guidance explains rates will remain on hold through the end of 2019. My view is it will be far longer before rates rise in the Eurozone, until well into the recovery from the next recession. My forecast is negative euro rates until 2024. You read it here first! And the euro? Well, in its own right there is no reason to buy the single currency. As long as the US economic outlook remains better than that of the Eurozone, which is certainly the current case, the idea that the euro will rally in any meaningful way seems misguided. Overnight there has been little movement, and in fact, the euro has been trading between 1.12 and 1.1350 for the past three weeks and is currently right in the middle of that range. Don’t look for a break soon here either.

The FOMC Minutes taught us that the Fed is going to be on hold for quite a while. The unanimous view is that patience remains a virtue when it comes to rate moves. Confusion still exists as to how unemployment can be so low while inflation shows no signs of rising, continuing to call into question their Phillips Curve models. In fact, yesterday morning’s CPI showed that core inflation fell to 2.0% annually, a tick lower than expected and continuing to confound all their views. The point is that if there is no inflationary pressure, there is no reason to raise rates. At the same time, if US economic growth continues to outpace the rest of the world, there is no reason to cut rates. You can see why the market is coming round to the idea that nothing is going to happen on the interest rate front for the rest of 2019. Futures, which had priced in almost 40bps of rate cuts just last month, are now pricing in just 10bps (40% chance of one cut). Despite the ongoing rhetoric from President Trump regarding cutting rates and restarting QE, neither seems remotely likely at this juncture. And don’t expect either of his Fed nominees to be approved.

Finally, Treasury Secretary Mnuchin declared that the US and China have agreed a framework for enforcement of the trade agreement, with both nations to set up an office specifically designed for the purpose and a regular schedule of meetings to remain in touch over any issues that arise. But Robert Lighthizer, the Trade Representative has not commented, nor have the Chinese, so it still seems a bit uncertain. Enforcement is a key issue that has been unsolved until now, although IP protection and state subsidies remain on the table still. Interestingly, equity markets essentially ignored this ‘good’ news, which implies that a completed deal is already priced into the market. In fact, I would be far more concerned over a ‘sell the news’ outcome if/when a trade deal is announced. And of course, if talks break off, you can be certain equity prices will adjust accordingly.

This morning brings Initial Claims (exp 211K) and PPI (1.9%, 2.4% ex food & energy) and speeches from Clarida, Williams, Bullard and Bowman. But what are they going to say that is new? Nothing. Each will reiterate that the economy is doing well, still marginally above trend growth, and that monetary policy is appropriate. In the end, the market continues to wait for the next catalyst. In equities, Q1 earnings are going to start to be released this afternoon and by next week, it will be an onslaught. Arguably, that will drive equities which may yet impact the dollar depending on whether the earnings data alters overall economic views. In the meantime, range trading remains the best bet in FX.

Good luck
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A One-Year Delay

Prime Minister May wanted weeks
The EU, however, now seeks
A one-year delay
Which for PM May
Means Tories will up their critiques

Today brings two important decisions from Europe. First and foremost is the EU Council meeting called to discuss Brexit and determine how long a delay will be granted to the UK to make up their mind. (Hint: it doesn’t seem to matter, there is no clear preference for any decision!) Secondly, the ECB meets a day earlier than usual and will announce its policy decisions (there will be no changes) and at 8:30 Signor Draghi will face the press. The reason they are meeting early is so they can get to Washington for the annual IMF/World Bank meetings.

As to the first, PM May has asked for an extension to June 30, as she continues to try to force her deal down Parliament’s collective throat. However, given how unsuccessful she has been in this process, it seems more likely that the EU is going to force the UK to take a nine-month or one-year extension. In their view, this will allow the political process to play out with either a new referendum or a new election or both, but with some type of mandate finally achieved. Naturally, the hard-core Brexiteers are horrified at this outcome because the thought is that a new vote would result in canceling Brexit. This would not be the first time that a referendum in the EU went badly and was subsequently rerun in order to get the leadership’s desired outcome. Both the French and the Dutch rejected the EU Constitution in 2005 initially, but subsequently reversed the initial vote while the Danes rejected the Maastricht Treaty in 1992 but also voted a second time to approve it. So this would hardly be unprecedented.

The problem for the UK is that the only thing they have agreed on, and just barely, is that they don’t want to leave without a deal. However, if anything, there has been increased rancor amongst the MP’s and there is no clear view on how to proceed. Actually, I guess the other thing Parliament has agreed on is they HATE PM May’s negotiated deal! Meanwhile, UK data this morning was surprisingly robust with IP jumping 0.6% and GDP in February rising at a 2.0% annualized clip, both data points being far better than expected. And the pound has benefitted rising 0.2% this morning, although it still remains mired between 1.30 and 1.31with little prospect of moving until something new happens in the Brexit saga.

On to the ECB, which is still struggling to stimulate the Eurozone economy. In fact, yesterday, the IMF announced reduced forecasts for 2019 GDP growth globally, taking their expected rate down to 3.3% with Europe being one of the key weak spots. The IMF’s 2019 projection is down to 1.3% for the Eurozone, from their previous forecast of 1.5%.

It is this situation that Signor Draghi is trying desperately to address but has so far been largely unsuccessful. It seems clear that the ECB will not countenance a move to further negativity in interest rates, and the TLTRO announcement from last month has faded from view. At this point, the only thing they can do would be reopen QE, but I don’t think that is yet likely. However, do not be surprised if we continue to see the growth trajectory slow in the Eurozone, that the ECB does just that.

On that subject, it may be time to question just how much worse things are going to get in the global economy. After all, one of the key issues has been Brexit, which at this point looks like it will be delayed for a long time at the very least. As well, we continue to hear that the trade talks between the US and China are making progress, so if there is a successful conclusion there, that would be another positive for global growth. With the IMF (a frequent negative indicator) sounding increasing warnings, and some stirrings of better data (not only the UK, but Italian IP surprised on the high side today rising 0.8% in February, compared to expectations of a -0.8% outcome), and last week’s slightly better than expected Chinese PMI data, perhaps the worst is behind us. Of course, counter to that view is the global bond market which continues to price in further economic weakness based on the increased number of bonds with negative yields as well as the ongoing lethargy in US rates. It is easy to become extremely pessimistic as global policymakers have not shown great command, but this view cannot be ignored.

Overall, the dollar is slightly softer this morning, down 0.15% vs. the euro and 0.35% vs. AUD (RBA Governor DeBelle sounded slightly less dovish in a speech last night) as well as lesser amounts vs. other currencies. We are seeing similar magnitude gains in many EMG currencies, but overall, the pattern seems to be that the dollar softens overnight and regains its footing in the US session.

This morning brings CPI data (exp 1.8% and 2.1% ex food & energy) and then the FOMC Minutes from March are released at 2:00. We also hear from Randall Quarles, although, as I continue to say, at this point, there seems little likelihood of a change in view by any of the FOMC’s members. I see no reason for the recent pattern to change, so expect that the dollar will stabilize, and likely rebound slightly as the day progresses. But despite the EU meeting and the ECB meeting, it seems unlikely there will be much new information to change anybody’s view when the bell rings this afternoon.

Good luck
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So Despised

Is anyone truly surprised
That Parliament, once authorized
To find a solution
Found no substitution
For May’s deal that they so despised?

One of the more confusing aspects of recent market activity was the rally in the pound when Parliament wrested control of the Brexit process from PM May. The idea that a group of 650 fractious politicians could possibly agree on a single idea, especially one so fraught with risks and complexities, was always absurd. And so, predictably, yesterday Parliament voted on seven different proposals, each designed to be a path forward, and none of them even came close to achieving a majority of votes. This included a vote to prevent a no-deal Brexit. In the meantime, PM May has now indicated she will resign regardless of the outcome, which, arguably, will only lead to more chaos as a leadership fight will now consume the Tories. In the meantime, there is still only one deal on the table, and it doesn’t appear to have the votes to become law. As such, while I understand that the idea of a hard Brexit is anathema to so many, it cannot be dismissed as a potential outcome. It should not be very surprising that the FX market is taking the idea a bit more seriously this morning, although only a bit, as the pound has fallen a further 0.4%, which makes the move a total of 1.0% lower in the past twenty-four hours.

One way to look at the pound’s value is as a probability weighted price of three potential outcomes; no deal, passing May’s deal and a long delay. Based on my views that spot would trade to 1.20, 1.38 or 1.40 depending on those outcomes, and assigning probabilities of 40%, 20% and 40% to those outcomes, spot is actually right where it belongs near 1.3160. But that leaves room for a lot of movement!

Meanwhile, elsewhere in the FX market, volatility is making a comeback. Between Turkey (-5.0%), Brazil (-3.0%) and Argentina (-3.0%), it seems that traders are beginning to awaken from their month’s long hiatus. Apparently, the monetary policy anesthesia that had been administered by central banks globally is wearing off. As it happens, each of these currencies is dealing with local specifics. For instance, upcoming elections in Turkey have President Erdogan on the defensive as his iron grip on power seems to be rusting and he tries to crack down on speculators in the lira. Meanwhile, recently elected Brazilian president Bolsonaro has seen his honeymoon end quite abruptly with his approval ratings collapsing and concerns over his ability to implement key policies seen as desirable by the markets, notably pension reform. Finally, Argentine president Macri remains under pressure as the slowing global growth picture severely restricts local economic activity although inflation continues to run away to unsustainable levels (4% per month!) and the peso, not surprisingly is suffering.

As to the G10, activity there has been less impressive although the dollar’s tone this morning is one of strength, not weakness. In fact, risk continues to be jettisoned by investors as can be seen by the continuing rally in government bonds (Treasury yields falling to 2.35%, Bund yields to -0.07%, JGB’s to -0.09%) while equity markets were weak in Asia and have gained no traction in Europe. Adding to the impression of risk-off has been the yen’s rally (0.2% overnight, 1.0% in the past week), a reliable indicator of market sentiment.

Turning to the data, yesterday saw the Trade Balance shrink dramatically, to -$51.1B, a much lower deficit than expected, and sufficient to positively impact Q1 GDP measurement by a few tenths of a percent. This morning we see the last reading on Q4 GDP (exp 1.8%) as well as Initial Claims (225K). Given the backward-looking nature of Q4 data, it seems unlikely today’s print will impact markets. One exception to this thought would be a much weaker than expected print, which may convince some investors the global slowdown is more advanced than previously thought with equities selling off accordingly. But a better number is likely to be ignored. We also hear from (count ‘em) six more Fed speakers today (Quarles, Clarida, Bowman, Williams, Bostic and Bullard), but given the consistency of recent comments by others it seems doubtful we will learn anything new. To recap, every FOMC member believes that waiting is the right thing to do now and that they should only respond when the data indicates there is a change, either rising inflation or a significant slowing in the economy. Although the market continues to price rate cuts before the end of the year, as yet, there is no indication that Fed members are close to believing that is necessary.

Ultimately, the same key stories are at the fore in markets. Brexit, as discussed above, slowing global growth and the monetary policy actions being taken to ameliorate that, and the US-China trade talks, which are resuming but have made no new progress. One of the remarkable features of markets lately has been the resilience of equity prices despite a constant drumbeat of bad economic news. Investors have truly placed an enormous amount of faith in central banks (specifically the Fed and ECB) to be able to come to the rescue again and again and again. Thus far, that faith has been rewarded, but keep in mind that the toolkit continues to dwindle, so that level of support is likely to diminish. In the end, I continue to see the dollar as a key beneficiary of the current policy mix, as well as the most likely ones for the near future.

Good luck
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Growth Will Soon Sleep

The place with less people than sheep
Last night said rates might be too steep
A cut now seems fated
Their dollar deflated
As Kiwis fear growth soon will sleep

You can tell it’s a dull day in the FX markets when the most interesting thing that happened was the RBNZ turned dovish in their policy statement, indicating the next interest rate move in New Zealand would be lower. This was a decided change of pace, but also cannot be too great a surprise since their larger neighbor, Australia, pivoted the same way just two weeks ago. The upshot is NZD fell sharply, down 1.4% in the wake of the statement. While I understand that given the diminutive size of the New Zealand economy, any exposures there are likely to be quite small, I think this simply reinforces the story about slowing global growth. In the same vein, we heard a similar story from Bank Negara Malaysia as they lowered their growth and inflation forecasts and hinted that they will cut rates if they see things slowing too rapidly. While the impact on MYR was less impressive, just -0.25%, it is of a piece with the overall global economic situation. That story remains one of slowing growth with central banks hopeful the slowdown is temporary but prepared to react quickly if it appears longer lasting. As I wrote yesterday, it is virtually impossible for the Fed to be responding to slowing growth without every other major central bank (and many minor ones) reacting in the same manner.

Yesterday actually saw the dollar rally during the US session, with the euro falling about 0.4% in NY hours. That helps explain why this morning it is higher by 0.15% on the session, yet lower than when I wrote yesterday. There has been limited new information on the data front (Italian Business Confidence falling more than expected to 100.8), but there has been a widely reported story about Signor Draghi hinting that the ECB is beginning to recognize that five years of negative interest rates might be having some negative impacts on the Eurozone banking sector. It certainly would have been hard to predict that an economic area that heavily relies on bank lending, rather than capital markets, would feel negative impacts from compression of bank lending margins…NOT! But back when NIRP was taking shape, the apocalyptic fears were so great these issues were simply glossed over as meaningless. And now that Eurozone growth has turned lower, the ECB’s plans to normalize rates have fallen by the wayside. It is quite possible that they, too, have painted themselves into an intractable policy corner. It is yet another reason I remain long-term bearish on the euro.

Finally, this morning’s dose of Brexit shows that the hardline euro skeptics may be coming around to PM May’s deal after all. If you recall, this afternoon there will be a series of votes in Parliament as MP’s try to find a solution, mostly to the Irish border question. However, as I have written frequently in the past, this is a truly intractable issue, one where there is no compromise available, but only capitulation on one side or the other. However, there is a growing call for Brexit to be canceled which has the euro skeptics on edge. This line of thought seems to have been PM May’s when she called for a third vote on her plan, and it may well be falling into place. Of course, the caveat for her is that she may be asked required to step down from her role in order to get it over the line. The two alternatives to her plan are now clearly either a lengthy delay, one giving time for a second vote and a reversal of Brexit, or a no-deal outcome on April 12. Since nobody seems to want the latter, and the hard-liners don’t want the former, they may finally get the votes to approve May’s deal. It is the “least worst option” as so delicately put by Jacob Rees-Mogg, one of the leaders of the euro skeptics. Given the toing and froing over the issue, it should be no surprise that the pound is little changed on the day, still hanging around 1.32 as nobody is prepared to take a position on the outcome. If pressed, I would estimate that a vote for the deal will result in the pound rallying toward 1.38 before running into significant selling, while a no-deal outcome probably sees a quick move toward 1.20. And if the result of today’s Parliamentary votes leads toward a long delay, that is likely the pound’s best friend, perhaps driving the beleaguered currency back above 1.40 for a while.

Away from that, the only other noteworthy feature today has been weakness in some oil related currencies with MXN (-1.0%), RUB (-0.75%), NOK (-0.55%) and CAD (-0.25%) all softer. It appears that after a strong run, oil prices are ebbing back somewhat, and these currencies are feeling the brunt today. Quite frankly, the currency movements seem overdone relative to the oil price decline, but it is the only connector I can find across this group.

On the data front, yesterday’s Housing Starts number was quite weak, just 1.162M (exp 1.213M) as was the Consumer Confidence reading at 124.1. We also heard from several other Fed speakers (Kaplan and Daly) both telling us that patience remains a virtue and that while they had modest concern over the yield curve inversion, it wasn’t a game changer for their current policy models. This morning’s only data point is the Trade Balance (exp -$57.0B) and then we hear from KC Fed President Esther George this evening. I am hard pressed to find a change in market sentiment at this point and so hard pressed to change my views. The equity market continues to rally based on more easy money, but monetary policy around the world continues to turn easier and easier, with the Fed still the least tight of them all. In other words, to me, the dollar still has the best position.

Good luck
Adf

Doublespeak

The sitting Prime Minister, May
Heard terrible news yesterday
Her plan to promote
A Brexit deal vote
Was halted much to her dismay

This forces her, later this week
A longer extension to seek
But still the EU
Seems unlikely to
Do more than add new doublespeak

In yet another twist to the Brexit saga, the Speaker of the House of Commons, John Bercow, refused to allow another vote on PM May’s deal this week. He explained that Parliamentary rules since 1604 have existed to prevent a second vote on a bill that has already been rejected unless there have been substantial changes to the bill. In this case there were no changes and PM May was simply trying to force approval based on the idea that the clock was running out of time. The pound reacted to the news yesterday by quickly dropping 0.5%, although it has since recouped 0.2% this morning.

This has put the PM in a difficult spot as she prepares to travel to the EU council meeting in Brussels later this week. Given that there is still no clarity on how the UK wants to handle things, or at least how Parliament wants to handle things, she will need to seek an extension in order to avoid a no-deal Brexit. However, the comments from several EU members, notably Germany and France, have indicated they need some sense of direction as to what the UK wants before they will agree to that extension. Remember, too, it requires a unanimous vote by the other 27 members of the EU to grant any extension. At this stage, the market is virtually certain an extension will be granted, at least based on the fact that the pound remains little changed on the day and has been able to maintain its modest gains this year. And it is probably a fair bet that an extension will be granted. But the real question is what the UK will do with the time. As of now, there is no clarity on that at all. Unless the EU is willing to change the deal, which seems unlikely, then we are probably heading for either a new general election or a new Brexit referendum, or both. Neither of these will add certainty, although the predominant view is that a new referendum will result in a decision to stay. Do not, however, ignore the risk that through Parliamentary incompetence, next week the UK exits without a deal. That risk remains very real.

One side note on the UK is that employment data released this morning continues to beat all estimates. Wages continue to rise (+3.4%) and the Unemployment Rate fell further to 3.9%. Despite a slowing economy overall, that has been one consistent positive. It has been data like this that has helped the pound maintain those gains this year.

Elsewhere the global growth story continues to suffer overall, as both China and the Eurozone continue to lag. While there was no new data from China, we did see the German ZEW survey (-3.6 up from -13.4) and the Eurozone version as well (-2.5 up from -16.6). However, at the same time, the Bundesbank just reduced their forecast for German GDP in 2019 to 0.6%, although they see a rebound to 1.7% in 2020. My point is that though things may have stopped deteriorating rapidly, they have not yet started to show a significant rebound. And it is this dearth of economic strength that will continue to prevent the ECB from tightening policy at all for quite a while to come.

A quick glance Down Under shows that optimism in the lucky country is starting to wane. Three-year Australian government bonds have seen their yield fall to 1.495%, just below the overnight rate and inverting the front of the curve there. This calls into question the RBA’s insistence that the next move will be an eventual rate hike. Rather, the market is now pricing in almost two full rate cuts this year as Australia continues to suffer from the slowing growth in China, and the world overall. While the FX impact today has been muted, just a -0.1% decline, Aussie continues to lag vs. other currencies against a dollar that has been on its back foot lately.

Speaking of the dollar, tomorrow, of course, we hear from the Fed, with a new set of economic projections and a new Dot Plot. Since there is no chance they move rates, I continue to expect the market to be focused on the balance sheet discussion. This discussion is not merely about the size of the balance sheet, and when they stop shrinking it, but also the composition and general tenor of the assets they hold. Remember, prior to the financial crisis and the utilization of QE, the Fed generally owned just short-term T-bills and maybe T-notes out to three years. But as part of their monetary policy experiment, they extended the maturities of their holdings with the average maturity now nine years. This compares to the six-year average maturity of the entire government bond issuance. The longer this average tenor, the more monetary ease they are providing to the market, so the question they need to answer is do they want to maintain that ease now or try to shorten the current maturity, so they have the opportunity to use that policy in a time of greater need. While this remains up in the air right now, whatever decision is made it will give a strong clue into the Fed’s view of the current situation and just how strongly the economy is actually performing.

This morning’s Factory Orders data (exp 0.3%) is unlikely to have a market impact of any sort. Equity markets have been muted with US futures pointing to essentially an unchanged opening. Yesterday saw limited price action, with both the dollar and equities barely changed. My sense is today will shape up the same way. Tomorrow, however, will be a different story, of that you can be sure.

Good luck
Adf

It All Went to Hell

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

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

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

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

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

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

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

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

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

Good luck and good weekend
Adf

Mario’s Turn

It’s Mario’s turn to explain
Why rates should start rising again
His problem, of course
Is he can’t endorse
A rise if it leads to more pain

Markets have been quiet overnight as traders and investors await the ECB’s policy statement, and then perhaps more importantly, Signor Draghi’s press conference to be held at 8:30 this morning. The word filtering out from the ECB is that the TLTRO discussion has moved beyond the stage of IF they need to be rolled over to the stage of HOW exactly they should construct the process. Yesterday’s OECD downgrade of Eurozone growth is likely the last straw for the more hawkish ECB members, notably Germany, Austria and the Netherlands. This is especially so given the OECD slashed their forecasts for German growth by 0.8%! As it happens, Eurozone GDP data was released this morning, and it did nothing to help the monetary hawks’ cause with Q4’s estimate revised lower to 1.1% Y/Y. While the FX market has shown little overall movement ahead of the ECB meeting, European government bonds have been rallying with Italy, the country likely to take up the largest share of the new TLTRO’s, seeing the biggest gains (yield declines) of all.

Once again, the juxtaposition of the strength of the US economy and the ongoing weakness in the Eurozone continues to argue for further gradual strength in the dollar. That US strength was reaffirmed yesterday by the much higher than expected trade deficit (lots more imports due to strong demand) as well as the ADP Employment report, which not only saw its monthly number meet expectations, but showed a massive revision to the previous month, up to 300K from the initial 213K reported. So, for all the dollar bears out there, please explain the drivers for a weaker dollar. While the Fed has definitely turned far less hawkish, so has every other central bank. FX continues to be a two-sided game with relative changes the key drivers. A more dovish ECB, and that is almost certainly what we are going to see this morning, is more than sufficient to undermine any long-term strength in the euro.

Beyond the ECB meeting, however, the storylines remain largely the same, and there has been little movement in any of the major ones. For example, the Brexit deadline is drawing ever closer without any indication that a solution is at hand. Word from the EU is that they are reluctant to compromise because they don’t believe it will be sufficient to get a deal over the line. As to PM May, she is becoming more explicit with her internal threats that if the euroskeptics don’t support her deal, they will be much less pleased with the ultimate outcome as she presupposes another referendum that will vote to Remain. The pound continues to struggle in the wake of this uncertainty, falling another 0.25% overnight which simply indicates that despite all the talk of the horror of a no-deal Brexit, there is a growing probability it may just turn out that way.

Looking at the US-China trade talks, there has been no word since Sunday night’s WSJ story that said the two sides were moving closer to a deal. The trade data released yesterday morning was certainly significant but is really a reflection of the current global macroeconomic situation, namely that the US economy continues to be the strongest in the world and continues to absorb a significant amount of imports. At the same time, weakness elsewhere has manifested itself in reduced demand for US exports. In addition, there was probably some impact from US importers stuffing the channel ahead of worries over increased tariffs. With that concern now dismissed after the US officially stated there would be no further tariff increases for now, channel stuffing is likely to end, or at least slow significantly. Given the lack of information regarding the status of the trade talks, there is no way to evaluate their progress. The political imperatives on both sides remain strong, but there are some very difficult issues that have yet to be addressed adequately. In the meantime, the reniminbi has been biding its time having stabilized over the past two weeks after a 3.0% rally during the previous three months. That stability was evident overnight as it is essentially unchanged on the day.

Beyond those stories there is precious little to discuss today. There is a bit of US data with Initial Claims (exp 225K) along with Nonfarm Productivity (+1.6%) and Unit Labor Costs (+1.6%) all released this morning. In addition, we hear from Fed governor Brainerd (a known dove) early this afternoon. But those things don’t seem likely to be FX drivers today. Rather, it is all about Signor Draghi and his comments. The one other thing to note is that risk appetite in markets, in general, has been ebbing of late. US Equities have fallen in six of the past eight sessions and futures are pointing lower again. The same has largely been true throughout Europe, where markets are lower this morning by roughly 0.4%. fear is a growing factor in markets overall, and as we all know by now, both the dollar and the yen are the main FX beneficiaries in that scenario. It feels like the dollar has room to edge higher today, unless Draghi is quite hawkish. And that is a low probability outcome!

Good luck
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