Tag Archives: #ECB

Under Stress

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The week that just passed was a mess
With both bulls and bears under stress
As equities fell
Most bonds performed well
And dollars? A roaring success

Pundits have been searching for adjectives to describe the week that is ending today. Tumultuous strikes me as an accurate reflection, but then stormy, tempestuous and volatile all work as well. In the end though, the broad trends have not changed at all. Equities continue to retreat from their mid-summer highs, bonds continue to rally sharply while yield curves around the world flatten and the dollar continues to march higher.

So what is driving all this volatility? It seems the bulk of the blame is laid at the feet of President Trump as his flipping and flopping on trade policy have left investors and traders completely confused. After all, late last week he declared tariffs would be imposed on the rest of Chinese imports not already subject to them, then after market declines he decided that a portion of those tariffs would be delayed from September until December. But then the Chinese struck back saying they would retaliate and now the President has highlighted he will be speaking directly with President Xi quite soon. On the one hand, it is easy to see given the numerous changes in stance, why markets have been so volatile. However, it beggars belief that a complex negotiation like this could possibly be completed on any short timeline, and almost by definition will take many more months, if not years. There is certainly no indication that either side is ready to capitulate on any of the outstanding issues. So the real question is, why are markets responding to every single tweet or comment? To quote William Shakespeare, “It is a tale told by an idiot, full of sound and fury signifying nothing.” Alas, there is every indication that this investor and trader behavior is going to continue for a while yet.

This morning we are back in happy mode, with the idea that the Presidents, Trump and Xi, are going to speak soon deemed a market positive. Equity markets around the world are higher (DAX +1.0%, CAC +1.0%, Nikkei +0.5%); bond markets have been a bit more mixed with Treasuries (+2bps) and Gilts (+4.5bps) selling off a bit but we continue to see Bunds (-1.5bps) rally. In fact we are at new all-time lows for Bund yields with the 10-year now yielding -0.73%!

As to the dollar, it is still in favor, with only the pound showing any real life in the G10 space, having rallied 0.65% this morning with the market continuing to be impressed with yesterday’s Retail Sales data there. In fact, if we look over the past week, the pound is the only G10 currency to outperform the dollar, having rallied more than 1.0%. On the flip side, the Skandies are this week’s biggest losers with both SEK and NOK down by 1.35% closely followed by the euro’s 1.1% decline, of which 0.3% has happened overnight.

The FX market continues to track the newest thoughts regarding relative central bank policy changes and that is clearly driving the euro. For example, yesterday, St Louis Fed President Bullard, likely the most dovish FOMC member (although Kashkari gives him a run), sounded almost reticent to continue cutting rates, and ruled out the idea that an intermeeting cut was necessary. While he supported the July cut, and will likely vote for September, he again ruled out 50bps and didn’t sound like more made sense. At the same time, Finnish central bank president Ollie Rehn, a key ECB member, explained that come September, the ECB would act very aggressively in order to get the most bang for the buck (euro?). The indication was not only will they cut rates, and possibly more than the 10bps expected, but QE would be restarted and expanded, and he did not rule out movement into other products (equities anyone?) as well. In the end, the market sees that the ECB is going to basically do everything else they can right away as they watch the Eurozone economy sink into recession. Meanwhile, most US data continues to point to a much more robust growth situation.

Let’s look at yesterday’s US data where Retail Sales were very strong (0.7%, 1.0% ex autos) and Productivity, Empire Manufacturing and Philly Fed all beat expectations. Of course, confusingly, IP was a weaker than expected -0.2% and Capacity Utilization fell to 77.5%. Adding to the overall confusion is this morning’s Housing data where Starts fell to 1191K although Permits rose to 1336K. In the end, there is more data that is better than worse which helps explain the 2.1% growth trajectory in the US, which compares quite favorably with the 0.8% GDP trajectory on the continent. As long as this remains the case, look for the dollar to continue to outperform.

Oh and one more thing, given the problems in the Eurozone, do you really believe the EU will sit by and watch the UK exit without changing their tune? Me either!

Next week brings the Fed’s Jackson Hole symposium and key speeches, notably by Chairman Powell. As to today, there is no reason to expect the dollar to do anything but continue its gradual appreciation.

Good luck and good weekend
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Rates Will Be Hewn

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Inflation remains far too low
In Europe, and so Mario
Has promised that soon
Their rates will be hewn
And, too, will their balance sheet grow

The ECB did not act yesterday, leaving all policy unchanged, but Signor Draghi was quite clear that a rate cut, at the very least, would be coming in September. He hinted at a restart of QE, although he indicated that not everyone was on board with that idea. And he pleaded with Eurozone governments to implement more fiscal stimulus.

That plea, however, is a perfect example of why the Eurozone is dysfunctional. While the ECB, one of the key Eurozone institutions, is virtually begging governments to spend more money, another one of those institutions, the European Commission, is prepared to sanction, and even fine, Italy because they want to spend more money! You can’t make this stuff up. As another example, consider that Germany is running a 1.7% fiscal surplus this year, yet claims it cannot afford to increase its defense spending.

It is this type of contradiction that exemplifies the problem with the Eurozone, and more specifically with the euro. Every nation is keen to accept the benefits of being a member, but none want to assume the responsibilities that come along with those benefits. In other words, they all want the free option. The euro is a political construct and always has been. Initially, countries were willing to cede their monetary sovereignty in order to receive the benefits of a more stable currency. But twenty years later, it is becoming clear that the requirements for stability are greater than initially expected. In a way, the ECB’s policy response of even more NIRP and QE, which should further serve to undermine the value of the single currency, is the only possible outcome. If you were looking for a reason to be long term bearish on the euro, this is the most powerful argument.

Speaking of the euro’s value, in the wake of the ECB statement yesterday morning, it fell 0.3% to 1.1100, its lowest level since mid-May 2017, however, Draghi’s unwillingness to commit to even more QE at the press conference disappointed traders and the euro recouped those early losses. This morning, it is basically right at the same level as before the statement, with traders now turning their focus to Wednesday’s FOMC meeting.

So, let’s consider that story. At this point it seems pretty clear that the Fed is going to cut rates by 25bps. Talk of 50bps has faded as the last several data points have proven much stronger than expected. Yesterday saw a blowout Durable Goods number (+2.0%, +1.2% ex transport) with both being well above expectations. This follows stronger than expected Retail Sales, CPI and payroll data this month, and even a rebound in some of the manufacturing surveys like Philly and Empire State. While the Housing Market remains on its heels, that doesn’t appear to be enough to entice a 50 bp move. In addition, we get our first look at Q2 GDP this morning (exp 1.8%) and the Fed’s favorite inflation data of PCE next week before the FOMC meeting concludes. Strength in any of this will simply cement that any cut will be limited to 25bps. Of course, there are several voting members, George and Rosengren top the list, who may well dissent on cutting rates, at least based on their last comments before the quiet period. Regardless, it seems a tall order for Chairman Powell to come across as excessively dovish given the data, and I would contend that the euro has further to fall as a result. In fact, I expect the dollar has further to climb across the board.

The other big story, of course, is the leadership change in the UK, where PM Boris had his first discussion with EU leaders regarding Brexit. Ostensibly, Boris demanded to discard the Irish backstop and the EU said absolutely not. At this point the EU is counting on a sufficient majority in the UK Parliament to prevent a no-deal Brexit, but there are still three months to go. This game is going to continue for a while yet, but at some point, it is going to be a question of whether Ireland blinks as they have the most to lose. Their economy is the most closely tied to the UK, and given they are small in their own right, don’t have any real power outside the EU. My money is on the EU changing their stance come autumn. In the meantime, the pound is going to remain under pressure as the odds of a no-deal Brexit remain high. This morning it is lower by a further 0.2%, and I see no reason for this trend to end anytime soon.

In other news, Turkey slashed rates 425bps yesterday as the new central bank head, Murat Uysal, wasted no time in the chair responding to President Erdogan’s calls for lower rates. The market’s initial response was a 1.5% decline in the lira, but it was extremely short-lived. In fact, as I type, TRY is firmer by nearly 1.0% from its levels prior to the announcement. Despite the cut, interest rates there remain excessively high, and in a world desperately seeking yield, TRY assets are near the top of the list on both a nominal and real basis.

Beyond that, it is hard to get excited about too much heading into the weekend. While equity markets suffered yesterday after some weak earnings data, futures are pointing to a better opening this morning. Treasuries are virtually unchanged as are gold and oil. So all eyes will be on the GDP data, where strength should reflect in a stronger dollar, but probably weaker equities, as the chance for more than a 25bp cut dissipates.

Good luck
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Thus Far They’ve Failed

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The ECB meeting today
Is forcing its members to weigh
The costs if they wait
To cut the base rate
Vs. benefits if they delay

Their problem is as things now stand
Recovery should be at hand
But thus far they’ve failed
As growth’s been curtailed
From Sicily to the Rhineland

Today brings the first of three major central bank meetings in the next six days as the ECB is currently meeting and the market awaits the outcome. Next week we will hear from both the BOJ and then the Fed, but for now all eyes are turned toward Frankfurt.

Expectations, as measured by the futures market, have moved to a 48% probability of a 10bp rate cut by the ECB this morning, although most of the punditry believe that Signor Draghi will simply lay the groundwork for a cut in September at the next meeting. The arguments for waiting are as follows: given the expectations of a Fed rate cut, with some still holding out hope for 50bps, the market benefits of cutting today would be quickly offset, and one of the few arrows the ECB still has left in its quiver would be wasted. The key benefit they are seeking is a weaker euro, and the concern is that any weakness will be short-lived, especially in the event of a 50bp cut by Powell. Of course, one need only look at the chart to see that the euro has been trending steadily lower for the past year, falling nearly 5% since last July, although as we await the meeting outcome it remains unchanged on the day. It’s not clear to me why else they would wait. After all, the data continues to point to ongoing Eurozone weakness every day. This morning’s example was the German Ifo Business Climate Index, which fell to 95.7, its lowest point since April 2013. It is becoming abundantly clear that Germany is heading into a recession and given Germany’s status as the largest economy in the Eurozone, representing nearly one-third of the total, that bodes ill for the entire bloc.

I maintain that it makes no sense to wait if they know that they will cut next month. They are far better off cutting now, maybe even by 20bps, and using September to restart QE, which is also a foregone conclusion. The funny thing about appointing Madame Lagarde, the uber dove, as the next ECB president, is that she won’t have anything to do once she sits down given the fact that all the easing tools will have been used already. Well, perhaps that is not strictly correct. Lagarde will be able to expand QE to cover, first, bank bonds and then, eventually equities.

(As an aside, for all you capitalists out there, the practice of central banks buying equities should cause great discomfort. After all, they can print as much money as they need to effectively buy ownership in all the public companies in an economy. And isn’t the definition of Socialism merely when the government owns the means of production? It seems to me that central bank equity purchases are a great leap down that slippery slope!)

At any rate, FX markets have largely been holding their breath awaiting the ECB outcome this morning. The same cannot be said of equity markets, where we continue to see records in the US, and markets in both Asia and Europe continue to rally on the idea that lower rates will continue to support stocks. At the same time, bond markets are also still on the march, with Bunds trading to yet another new low, touching -0.46% yesterday, and currently at -0.41%. Treasuries, too, remain bid, with the 10-year yield ticking slightly lower to 2.03%. And in the commodity space, oil prices are firmer after both a surprisingly large inventory draw and the ongoing issues in the Persian Gulf as the UK and Iran duke it out over captured tankers.

With the Brexit story now waiting for its next headlines, which will likely take at least a few days to arrive, and the US-China trade story awaiting next week’s meetings in Beijing, it is central banks all the way as the key market drivers for now. This morning’s Initial Claims (exp 219K) and Durable Goods (0.7%, 0.2% -ex transport) seem unlikely to be key movers.

So Mario, it’s all up to you today. How dovish Draghi sounds will be the key event for today, and likely the impetus behind movement until next Wednesday when Chairman Powell takes the spotlight. Personally, I think he will be far more dovish than the market is currently pricing and we will see the dollar rally further.

Good luck
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The Die Has Been Cast

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So now that the die has been cast
And Boris is PM at last
The window is closing
To set forth composing
A Brexit deal that can be passed

Meanwhile throughout Europe the tale
Shows Draghi is likely to fail
In rekindling growth
While he and Jay both
Find prices their great big White Whale

By the end of the day, Queen Elizabeth II will install Alexander Boris de Pfeffel Johnson as Prime Minister of the United Kingdom. After naming a new cabinet, he will make his first speech and will certainly reiterate that, regardless of the status of negotiations with the EU, the UK will be leaving on October 31. While all of these things had been widely anticipated, their reality sets in motion a potentially turbulent three months. Given the overall weakening growth impulse in the UK economy and the ongoing political intrigue, there is not much to recommend owning the pound right now. Interestingly, however, it is firmer by 0.3% this morning on a combination of a slight uptick in Mortgage Approvals, demonstrating that perhaps the UK housing market is not completely dead, as well as some ‘buy the news’ activity after a prolonged decline in the currency.

Looking ahead, it appears that the only thing that will help rally the pound in any significant manner would be a clear change of heart by the EU regarding reopening negotiations on Brexit. And while, to date, the EU has been adamant that will not occur, one need only look at the continuing slide in the Eurozone economy to recognize that the EU cannot afford a major shock, like a no-deal Brexit, to occur without falling into a continent wide recession.

Which leads to the other key story of the day, the absolutely abysmal Eurozone PMI data that was released earlier this morning. While these are all flash numbers, they paint a very dark picture. For example, German manufacturing PMI fell to 43.1, well below last month’s 45.0 as well as consensus expectations of 45.1. In fact, this was the lowest point since seven years ago during the Eurozone crisis just before Signor Draghi’s famous “whatever it takes” comments. And while the Services number fell only slightly, to 55.4, the Composite result was much worse than expected at 51.4 and pointing toward a real possibility of a technical recession in Germany. French data was similarly downbeat, with Manufacturing falling to 50.0 and the composite weak, with the same being true for the Eurozone data overall.

Given the data, it is no surprise that the euro has edged even lower, down a further 0.1% this morning after a 0.5% decline in yesterday’s session. Interestingly, there are still a large number of pundits who believe that the ECB will stay on the sidelines tomorrow at their meeting, merely laying the groundwork for action in September. However, that continues to be a baffling stance to me, especially when considering that Mario Draghi is still in charge. This is a man who has proven willing, time and again (see: whatever it takes”), to respond quickly to perceived threats to economic stability in the Eurozone. There is no good reason for the ECB to wait in my view. Whether or not the Fed cuts 50 next week (they won’t) is hardly a reason to fiddle while Europe burns. Look for a 10bp cut tomorrow, and perhaps another 10 bps in September along with the announcement for more QE. And don’t be surprised if QE evolves into bank bonds or even equities. Frankly, I think they would be better off writing everyone in the Eurozone a check for €3000 and print €1 trillion that way. At least it would boost consumption to some extent! However, central bankers continue to work with their blinders on and can only see one way to do things, despite the fact that method has proven wholly insufficient.

As to the rest of the market, Aussie PMI data continued to decline, dragging the Aussie dollar down with it. This morning, AUD is lower by 0.35% and back below 0.70 again. With more rate cuts in the offing, I expect it will remain under pressure. Japan, on the other hand saw PMI data stabilize and actually tick higher on the Services front. This is quite a surprise given the ongoing trade ructions between the US and China, themselves and the US and themselves and South Korea. But despite all that, the data proved resilient and, not surprisingly, so did the yen, rallying 0.15% overnight. The thing about the yen is that since the beginning of June it has merely chopped back and forth between 107 and 109. The BOJ’s big concern is that given the relative lack of policy leeway they have as compared to the Fed, that the yen might restart a significant rally, further impairing the BOJ’s efforts at driving inflation in Japan higher. One other thing to remember is that despite the ongoing equity market rally, we have also seen a consistent bid in haven assets. While this dichotomy is highly unusual, it nonetheless implies that there is further room for the yen to appreciate. A move to 105 in the near-term is not out of the question.

But in truth, today’s general theme is lack of movement. The pound is by far the biggest mover, with most other currencies continuing to chop back and forth within 0.1% of yesterday’s closes. It appears that FX traders are awaiting the news from the ECB, the BOJ and the Fed in the next week before deciding what to do. The same is not as true in other markets, where equity bulls continue to rule the roost (corral?) as despite ongoing tepid earnings data, stocks remain bid overall. Bonds, too, are still in demand with Treasury yields hovering just above 2.0%, but more interestingly, Eurozone bonds really rallying. Bunds have fallen to -0.38%, which has helped drag France to -0.11%, but more amazingly, Italy to 1.53% and Greece to 1.97%! That’s right, Greek 10-year yields are lower than US 10-year yields, go figure.

Turning to the data story, yesterday saw the 16th consecutive decline in Existing Home Sales, another -1.7% with New Home Sales (exp 660K) the only data point on today’s docket. The Fed remains in quiet mode which means markets will be all about earnings again today. Some of the bellwether names due to report are AT&T, Boeing and Bank of America. But in the end, FX remains all about monetary policy, and so tomorrow is likely to be far more interesting than the rest of today.

Good luck
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Sans Details

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In England and Scotland and Wales
A new PM finally hails
With Boris the man
We know the game plan
Is Brexit, as yet sans details

As of 7:05 this morning, it was finally official that Boris Johnson was elected as the new leader of the UK’s Conservative and Unionist Party (aka the Tories) by a substantial margin. By all rights, as of tomorrow, he will be the new Prime Minister of the UK. Congratulations Boris!

And so, the Brexit story now takes a new turn as Boris was instrumental in campaigning for the vote three years ago, and has been a vocal supporter ever since, unlike his predecessor, Theresa May. He has been abundantly clear that if the EU does not reopen the negotiations, he will take the UK out of the EU without a deal. Yet to date, the EU has been adamant that the only deal available is the one they have already tabled. Since the beginning, I have maintained that while the UK will certainly be negatively impacted by a no-deal Brexit, the EU will also feel significant pain. This is especially true in northern Europe, with Germany, France and the Netherlands amongst the biggest exporters to the UK. Thus, we are now involved in the biggest game of chicken seen in the global economy in a very long time. (While the politicians describe this as brinksmanship, I think chicken is a better label.) At this point, it is anybody’s guess how things will turn out, but what we do know is that if there really is a no-deal Brexit, the pound will fall much further, the euro will decline, and global growth will slow further.

As it happens, we are already seeing the UK economy slip, with the latest evidence being this morning’s CBI report which printed at a much worse than expected -34, its lowest since the immediate wake of the Brexit vote in 2016. And not surprisingly, the pound remains under pressure, down 0.1% as I type, which makes 2.1% during the past month. In addition, we heard from BOE member Saunders, who confirmed that the BOE default assumption of a smooth Brexit may not be the outcome, and that monetary policy will need to adjust to the new realities in that case. While he continues to fear a stagflationary outcome, there remains little case for the BOE to raise rates anytime soon. The evidence is abundantly clear that in a global rates environment that is declining, there is virtually no chance the UK would tighten policy in any way. Despite the fact that the US has far more room to cut rates than the UK, the problems attendant to Brexit, at least initially, are going to continue to weigh on the pound going forward.

Away from the Brexit story, all eyes are turning toward the ECB meeting to be held in two days’ time in Frankfurt. While most analysts around the world are convinced that Signor Draghi is going to use this meeting to set the table for more action in September, the market is moving toward my view that a rate cut is coming Thursday. OIS markets are pricing in a 40% probability of a 10bp cut, and there are a few outlier analysts who are even calling for 20 bps right away. After all, if you consider what NY Fed president Williams said last week about how, when rates are low, acting aggressively right away is a better strategy than a slow decline in rates, that would argue for 20 bps on Thursday. The other question is whether they will introduce some sort of tiering into the program to allow the European banks, which have been getting killed by the negative rate charges, to exempt some portion of their excess reserves from the penalty rates. That is actually a huge deal, and one where there is very little clarity. In the meantime, despite the fact that the market is certain the Fed is going to cut rates by 25 bps next week, I think the euro has room to fall further in the interim. It is lower by 0.25% this morning, and I expect a move toward 1.10, especially as I believe they will cut Thursday.

As to the rest of the G10, the dollar is broadly stronger, but the magnitude of change remains very modest, on the order of 0.10%-0.20%. In the EMG space, the dollar has also seen broad strength, although here, too, the size of the movement remains muted, with the biggest losers falling just 0.3% (PLN, HUF, IDR). It should be no surprise that markets continue to bide their time as we await the official news from the ECB as well as Friday’s US GDP data, which will clearly play into the FOMC decision next week.

And that’s pretty much today’s story. Equity earnings continue to be released, and it seems that most are beating the lowered expectations that are out there. This has been enough to prevent further equity market damage but has not led to significant gains. On the rate front, Treasuries have been stagnant for the past few sessions with 10-year yields standing at 2.03%, well off the highs seen two weeks ago in a technical sell-off, but certainly with plenty of room to decline from here, especially in the event the Fed does cut 50. We get one piece of data, Existing Home Sales (exp 5.33M), but that seems unlikely to change many views regardless of the outcome. So, my view remains that the dollar’s slow drift higher is still the most likely outcome for now.

Good luck
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The Doldrums

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In summer, the doldrums at sea
Describe lack of activity
The same can be said
As markets stop dead
Awaiting some new policy

Markets remain generally dull this morning as despite what appear to be a number of catalysts to drive things, (tension in the Persian Gulf, increased tension in HK, debt ceiling concerns in the US, etc.) all eyes remain focused on the FOMC meeting next week, and to a somewhat lesser extent, the ECB meeting this Thursday. The Fed is now in their quiet period, meaning we won’t hear anything from any FOMC members until they release the statement on July 31. And remember, the last thing we heard was NY Fed President John Williams explaining that when rates are already low (like they are now) that history shows it is better if a central bank acts preemptively and aggressively when cutting rates. Yes, it’s true that the NY Fed issued a statement afterward explaining that was an academic speech and had nothing to do with current monetary policy discussion, but that doesn’t really matter. The market reaction last week was to ramp up expectations for a 50bp cut next week, and the disclaimer only had a marginal impact.

Meanwhile, virtually every analyst believes that the ECB is merely going to set the table for cutting rates in September, with a number looking for confirmation that they are going to restart QE next January. It seems to me that if they already know they are going to cut rates in September, and they know that the incoming ECB president, Madame Lagarde, is going to be in favor of the move, that there is a pretty good chance they cut rates this week. Markets are not priced for that outcome which means that it would likely have a pretty significant impact on the euro, pushing it lower right away. And consider the situation if the Fed only cuts 25bps, which I continue to believe is the most likely outcome, whereby you would have a more dovish than expected ECB and more hawkish than expected Fed. That will not help the euro, trust me. In addition, on Wednesday, we will see the Flash PMI data from Europe and Thursday, just before the ECB meeting ends, German Ifo data as well. Weakness there could easily be used as a justification for an earlier rate cut. All I’m saying is that the idea that the Fed is starting out on an easing path does not necessarily imply the dollar is going to tumble, despite the President’s wishes.

However, ahead of those meetings, traders are reluctant to maintain large positions, and we have seen trading activity ebb. At least in the FX markets. Looking at current levels, the euro, which is down a marginal 0.10% this morning, is back within pips of the lows seen just before Chairman Powell, in June, explained that the Fed would be cutting rates again soon. So, if the ECB does cut, that could easily help take the euro down to levels last seen in mid 2017. Meanwhile, the pound is today’s worst performing G10 currency, falling a further 1/3 of 1% as the market awaits tomorrow’s announcement as to the results of the Tory leadership contest, the winner of which will become the next UK PM. All signs still point to Boris Johnson, and the market interpretation of that is a greater likelihood of a hard Brexit. Remember, too, that despite all the machinations in Parliament there, Brexit remains the law of the land in the UK, so the efforts to prevent or mollify it actually have an uphill battle.

Away from those two currencies, the dollar is marginally stronger, but the performance is somewhat mixed. For instance, the yen is weaker by 0.2%, but Aussie is stronger by 0.1%, and perhaps that is the message. While there is no broad theme, movement has been limited overall. The same situation exists within the EMG bloc, where there are both gainers and decliners, but none of them have moved very far, certainly not enough to describe a trend.

Looking ahead to the data this week, we see the following:

Tuesday Existing Home Sales 5.33M
Wednesday New Home Sales 660K
Thursday ECB Meeting -0.40%
  Initial Claims 219K
  Durable Goods 0.7%
  -ex transport 0.2%
Friday Q2 GDP 1.8%

Arguably, after the ECB meeting, where a surprise cannot be ruled out, Friday’s first look at Q2 GDP is going to be the most interesting thing we see. There is a pretty wide range of expectations for this number, as there are more and more analysts falling into one of two camps, either recession is coming, or everything is full steam ahead. But more importantly, if the GDP data is weak, look for expectations of a 50bp rate cut next week to be cemented in, while a strong print is likely to see just the opposite; stocks decline, the dollar rise and expectations of a 25bp rate cut only. But until then, the housing data is likely not that interesting, after all that has been a consistently weak sector of the economy, and Durable Goods will be superseded by GDP. So with no speakers on the docket, it should be a pretty dull week until we get to Thursday.

One caveat is that if Jeremy Hunt surprises and wins the Tory contest in the UK, look for the pound to rally a few cents initially. However, there is still little to recommend a sharp rally unless Brexit is canceled, and he has promised to leave as well.

Good luck
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Could Not Be Severer

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For two years the EU played rough
On Brexit and called every bluff
They forced the UK
To see it their way
And every pushback they’d rebuff

But now that the date’s drawing nearer
And Johnson can’t be any clearer
He’ll walk with no deal
It’s now become real
That Brexit could not be severer

So Barnier finally blinked
Agreeing the Irish were linked
And in a surprise
He talked compromise
Though as yet, no new deal’s been inked

The pound is higher this morning as news that the EU is willing to discuss a compromise for the Irish border has clearly changed the discussion. If you recall, the EU has been adamant that the only deal available is the one that erstwhile PM May negotiated, which includes a section on the Irish border that could easily keep the UK beholden to the EU in perpetuity. Naturally, the Brexiteers were not happy with that outcome and it eventually led to May’s resignation.

The problem for the EU is that Boris Johnson, who is the most likely candidate to become the new PM when results are announced next week, has been abundantly clear that if the EU doesn’t fix the parts of the deal that are controversial, he will take the UK out on October 31 without a deal. And there is no indication he is bluffing. So suddenly the EU has figured out that a no-deal Brexit is a real possibility and that they may no longer have the upper hand. Consider that the UK has already suffered economically during the run-up to the actual exit, while the EU’s suffering has been self-inflicted and not related to Brexit at all. Given the EU’s economy is broadly slowing already, the last thing they need is something like Brexit, which would likely tip the EU into recession if there is no deal. And voila, the EU has finally figured out that they have much to lose in this negotiation.

It should be no surprise that the pound has rallied on the news, although the 0.5% rally is not that impressive. But it’s a start, and if the two sides can come to an agreement on the Irish situation, then there is a real opportunity for the pound to rebound sharply. After all, a smooth Brexit has always been likely to drive the pound back toward 1.40. While it is still way too early to assume that outcome, at least it is back on the table.

The other theme of the overnight session has been central bank rate cuts, with South Korea surprising analysts with a 25bp cut to 1.50% while they lowered forecasts for both growth and inflation for 2019 and 2020. The ongoing trade situation between the US and China is a major headache for the Koreans, and don’t forget they have their own direct trade issue with Japan regarding the Japanese export of key materials for Korean manufacturing. We also saw Indonesia cut rates 25bps, beginning the reversal of the 175bps of rate hikes they implemented in 2018. While growth there remains solid, with inflation falling and forecasts for slowing growth in its key export markets, this was not a great surprise. Analysts are looking for two more cuts this year as well. Interestingly, neither the won nor rupiah weakened on the news, with both currencies firmer by 0.15% when the market closed in Asia time.

And perhaps that is the theme for today, mild dollar weakness despite other nation’s activities. But the operative word is mild. In fact, the pound’s rally, which was also helped by surprisingly robust Retail Sales data, is by far the largest move of the session. Otherwise, in both G10 and EMG spaces, we are seeing some back and forth on the order of 0.10%-0.20%, hardly enough to get excited about.

Clearly, there is much more market discussion on the earnings season as it unfolds in the US. Yesterday’s big news was Netflix, which missed estimates on subscriber growth in Q2 and has seen its stock fall sharply in the aftermarket. But Eurozone equities are under pressure as well after weak results from SAP and Nordea Bank presage further struggles on the continent.

Now here’s something to consider. Right now, the market is fully priced for a Fed cut at the end of the month, and there is a strong expectation that the ECB meeting next week is going to outline its future policy ease. Those have been key drivers in the broad equity market rally we have seen since June, and if either Powell or Draghi disappoints, equity markets are certainly going to suffer. But what if earnings data comes in broadly worse than expected, a la Netflix last night, and equity prices fall regardless of the rate story. After all, by almost every measure, valuations in the US equity space are quite high so a decline may well be due on its own, rate cuts or not. The question is how those same central banks will respond. Will they ease more aggressively to prevent a further decline, or will they ignore the outcome? In the past, this wasn’t really a consideration as central banks were focused only on inflation and employment or growth. But these days I’m not so sure that is the case. Just beware if earnings data start to stumble.

Turning to this morning’s session, there are only two US data points, Initial Claims (exp 216K) and Leading Indicators (0.1%). We also hear from two Fed speakers, Bostic and Williams, although both have already explained their views earlier this week. On that subject, we heard from FOMC voter Esther George yesterday and she has been the first Fed speaker to be clear that there is no reason for a rate cut anytime soon. Now she has always been one of the more hawkish Fed members and it would not shock me if she dissented at the next vote assuming a rate cut is the outcome. Wouldn’t it be interesting if the first dissent under Powell’s tenure was looking for a cut and the second, in the following meeting, was looking to stay on hold? It certainly indicates there is a diversity of opinion at the Fed, at least with regard to the proper policy implementation if not with regard to Keynesianism.

And that’s all there is for today. Earnings data are likely to be the main drivers as neither data point is seen as a market mover. With the dollar on its back foot this morning, I see no reason for it to turn around at this time. Look for a further slow decline.

Good luck
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Be Prepare for Mayhem

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Next week when the former PM
Steps down be prepared for mayhem
Both Johnson and Hunt
Are willing to punt
May’s deal, which they’re quick to condemn

Remember, back in the day, when I suggested that the probability of a hard Brexit was much higher than the market was assuming? In fact, I have been highlighting this fact pretty consistently since, at least, January heading up to the original deadline. Well, now, it appears that the market is figuring out that the probability of a hard Brexit is higher than they previously assumed. Last night, in a debate between the two candidates for PM, front-runner Boris Johnson and Jeremy Hunt, both were clear that the Irish backstop was dead in the water, and both were clear that they would be willing to walk away with no deal. Ongoing negotiations have become more difficult as the UK is making more demands and the EU is now complaining that the UK is trying to “bully” them! This is the funniest statement that I have ever seen. For two years, the EU essentially bullied PM May into agreeing to things that were unpalatable, including the Irish backstop. Now all of a sudden, the EU’s tender feelings have been hurt by the UK pushing back!

Since the original vote, pundits around the world have assumed that the UK would bear the brunt of the fallout from Brexit. After all, the rest of the EU is the UK’s largest trading partner, and the UK only represents something like 10% of EU exports. But as the EU dips back into recession with monetary policy already stretched, it is becoming clearer that the EU will suffer greatly in a no-deal Brexit. Just ask Germany how its auto manufacturers will be impacted when suddenly there are tariffs on BMW’s in the UK. The point is that both sides are likely to feel pain, although it seems the UK has already absorbed part of it, while the rest of the EU has been laboring under the assumption that the UK would cave in eventually. My view is there is no chance of a deal at this point and there are only two possible outcomes; no-deal Brexit or no Brexit. However, there seems to be limited willingness to hold a second referendum to try to overturn the first one, with major splits within both main parties there. And that leads to a no-deal Brexit. Be prepared.

It should be no surprise that this has had a pretty big impact on the pound this morning, which has fallen by 0.75% to its lowest level since January 2017. And this is despite better than expected employment data where wages grew a stronger than expected 3.6% in May, while the Unemployment rate remained at 45-year lows of 3.8%. While the UK economy seems to be holding up reasonably well, I continue to look for the BOE to cut rates in November after the hard Brexit occurs, if only as a precaution for a quick slowdown. Meanwhile, the pound is likely to continue to decline between now and then, testing 1.20 before long. However, vs. the euro, where the pound has also been sliding, I expect that trend to stabilize and even reverse. This is due to the fact that the Eurozone is going to suffer far more than currently anticipated from a hard Brexit. Right now, the cross is trading at 0.9030. I would look for a move in the euro to 1.05-1.06 and the cross to head down to 0.88.

Away from the Brexit story, things are a bit less exciting on the currency front. Broadly the dollar is strong today, as weaker Eurozone data (German ZEW Sentiment fell more than expected to -24.5) has pundits discussing a recession in Germany and confirming a more aggressive policy ease from the ECB. As such, the euro is lower by 0.3% this morning, as all the dovishness from the Fed is being offset by all the dovishness from ECB members.

Down Under, the RBA Minutes continue to highlight the need to keep policy accommodative as they, too, recognize that their old models need tweaking and that lower rates will not lead directly to further inflation. Aussie, which has actually performed pretty well overall since Powell’s first testimony last week, is lower by 0.2%. While the RBA is likely to remain on hold for now, look for more cuts as soon as the Fed starts to cut.

And those have really been the key drivers in the market today. Looking at the CE4, all of them have fallen roughly the same 0.3% as the euro meaning there is no new information to be gleaned. LATAM currencies are barely budged and APAC has also seen very limited movement overnight. The same can be said of global equity markets, which have seen very limited movement, on the order of 0.2% as investors await the next big story. Arguably, that story will start to be told next week by the ECB, with the punchline added by the FOMC at the end of the month. In the meantime, earnings season is beginning, so individual equity prices are likely to see movement, but it is hard to get excited about a macro move in the near term. And bonds? Well, they have stopped falling as the overly aggressive long positions seem to have been unwound. I expect they will start to rally again, albeit at a slower pace than we saw at the beginning of the month.

This morning brings the most interesting data of the week, Retail Sales (exp 0.1%, 0.1% ex autos), as well as a spate of Fed speakers including Chairman Powell at 1:00 this afternoon. If Retail Sales disappoint already low expectations, look for bonds to rally along with stocks as the dollar falls. If they are quite strong, I think the market is far less prone to react as the July rate cut is still a done deal. It just will have a much smaller probability of being a 50bp cut.

Good luck
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Soon On the Way

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Said Brainerd and Williams and Jay
A rate cut is soon on the way
Inflation’s quiescent
And growth’s convalescent
So easing will help save the day

We have learned a great deal this week about central bank sentiment from the Fed, the ECB, the BOE, Sweden’s Riksbank as well as several emerging market central banks like Mexico and Serbia. And the tone of all the commentary is one way; easier policy is coming soon to a central bank near you.

Let’s take a look at the Fed scorecard to start. Here is a list of the FOMC membership, voting members first:

Chairman Jerome Powell                – cut
Vice-Chair Richard Clarida             – cut
Lael Brainerd                                    – cut
Randal Quarles                                 – cut
Michelle Bowman                            – ?
NY – John Williams                           -cut
St Louis James Bullard                    – cut
Chicago – Charles Evans                  – cut
KC – Esther George                           – stay
Boston – Eric Rosengren                 – cut

Non-voting members
Philadelphia – Patrick Harker       – cut
Dallas – Robert Kaplan                    – ?
Minneapolis – Neel Kashkari         – cut 50!
Cleveland – Loretta Mester            – stay
Atlanta – Rafael Bostic                    – stay
Richmond – Thomas Barkin          – stay

While we have not yet heard from the newest Governor, Michelle Bowman, it would be unprecedented for a new governor to dissent so early in their tenure. In the end, based on what we have heard publicly from voting members, only Esther George might dissent to call for rates to remain on hold, but it is clear that at least a 25bp cut is coming at the end of the month. The futures market has priced it in fully, and now the question is will they cut 50. At this point, it doesn’t seem that likely to me, but there are still two weeks before the meeting, so plenty can happen in the interim.

But it’s not just the Fed. The ECB Minutes were released yesterday, and the telling line was there was “broad agreement” that the ECB should “be ready and prepared to ease the monetary policy stance further by adjusting all of its instruments.” It seems pretty clear to me (and arguably the entire market) that they are about to ease policy. There are many analysts who believe the ECB will wait until their September meeting, when they produce new growth and inflation forecasts, but a growing number of analysts who believe that they will cut later this month. After all, if the Fed is about to cut based on weakening global growth, why would the ECB wait?

And there were the Minutes from Sweden’s Riksbank, which were released this morning and showed that their plans for raising rates as early as September have now been called into question by a number of the members, as slowing global growth and ongoing trade uncertainties weigh on sentiment. While Sweden’s economy has performed better than the Eurozone at large, it will be extremely difficult for the Riksbank to tighten policy while the ECB is easing without a significant adjustment to the krona. And given Sweden’s status as an open economy with significant trade flows, they cannot afford for the krona to strengthen too much.

Meanwhile, Banco de Mexico Minutes showed a split in the vote to maintain rates on hold at 8.25% last month, with two voters now looking for a cut. While inflation remains higher than target, again, the issue is how long can they maintain current policy rates in the face of cuts by the Fed. Look for rate cuts there by autumn. And finally, little Serbia didn’t wait, cutting 25bp this morning as growth there is beginning to slow, and recognizing that imminent action by the ECB would need to be addressed anyway.

In fairness, the macroeconomic backdrop for all this activity is not all that marvelous. For example, just like South Korea reported last week, Singapore reported Q2 GDP growth as negative, -3.4% annualized, a much worse than expected outcome and a potential harbinger of the future for larger economies. Singapore’s economy is hugely dependent on trade flows, so given the ongoing US-China trade issues, this ought not be a surprise, but the magnitude of the decline was significant. Speaking of China, their trade data, released last night, showed slowing exports (-1.3%) and imports (-7.3%), with the result a much larger than expected trade surplus of $51B. Additionally, we saw weaker than expected Loan growth and slowing M2 Money Supply growth, both of which point to slower economic activity going forward. Yesterday’s other important economic data point was US CPI, where core surprised at 2.1%, a tick higher than expected. However, the overwhelming evidence that the Fed is going to cut rates has rendered that point moot for now. We will need to see that number move much higher, and much faster, to change any opinions there.

The market impact of all this has generally been as expected. Equity prices, at least in the US, continue to climb as investors cling tightly to the idea that lower interest rates equal higher stock prices. All three indices closed at new records and futures are pointing higher across the board. The dollar, too, has been under pressure, as would be expected given the view that the Fed is going to enter an easing cycle. Of course, while the recent trend for the dollar has been down, the slope of the line is not very steep. Consider that the euro is only about 1% above its recent cyclical lows from late April, and still well below the levels seen at the end of June. So while the dollar has weakened a bit, it is quite easy to make the case it remains within a trading range. In fact, as I mentioned yesterday, if all central banks are cutting rates simultaneously, the impact on the currency market should be quite limited, as the relative rate stance won’t change.

Finally, a quick word about Treasury bonds as well as German bunds. Both of these markets were hugely overbought by the end of last week, as investors and speculators jumped on the idea of lower rates coming soon. And so, it should be no surprise that both of these markets have seen yields back up a decent amount as those trades are unwound. This morning we see 10-year yields at 2.13% in the US and -0.21% in Germany, well off the lows of last week. However, this trade is entirely technical and at some point, when these positions are gone, look for yields on both securities to head lower again.

This morning brings just PPI (exp 1.6%, 2.2% core) which is unlikely to have much impact on anything. With no more Fed speakers to add to the mix, I expect that we will continue to see equities rally, and that the dollar, while it may remain soft, is unlikely to move too far in any direction.

Good luck and good weekend
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Some Real Fed Appeasing

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The jobs report Friday suggested
That everyone who has requested
Employment has found
That jobs still abound
And companies are still invested

The market response was less pleasing
At least for the bulls who seek easing
With equities falling
And yields, higher, crawling
Look, now, for some real Fed appeasing

We are clearly amidst a period of ‘good news is bad’ and ‘bad news is good’ within the market context these days. Friday was the latest evidence of this fact as the much better than expected Nonfarm Payroll report (224K vs. 160K expected) resulted in an immediate sell-off in equity and bond markets, with the dollar rallying sharply. The underlying thesis remains that weakness in the US (and global) economy will be sufficient to ensure easier monetary policy, but that the problems will not get so bad as to cause a recession. That’s a pretty fine line to toe for the central banks, and one where history shows they have a lousy record.

However, whether it is good or bad is irrelevant. What is abundantly clear is that this is the current situation. So, Friday saw all three major US indices fall from record highs; it saw 2-year Treasury yields back up 11bps and 10-year yields back up 8pbs; and it saw the dollar rally roughly 0.75%.

The question is, why were markets in those positions to begin with? On the equity side of the ledger, prices have been exclusively driven by expectations of Fed policy. Until the NFP report, not only was a 25bp rate cut priced into Fed funds for the FOMC meeting at the end of the month, but there was a growing probability of a 50bp rate cut. This situation is fraught with danger for equity investors although to date, the bulls have been rewarded. At least the bond story made more sense from a macroeconomic perspective, as broadly weaker economic data (Friday’s numbers excepted) had indicated that both the US and global economies were slowing with the obvious prescription being easier monetary policy. This had resulted in German bunds inverting relative to the -0.40% deposit rate at the ECB as well as US 10-year yields falling below 2.00% for the first time in several years. Therefore, stronger data would be expected to call that thesis into question, and a sell-off in bonds made sense.

And finally, for the dollar, the rally was also in sync with fundamentals as higher US yields, and more importantly, the prospect of less policy ease in the future, forced the dollar bears to re-evaluate their positions and unwind at least some portion. As I have been writing, under the assumption that the Fed does indeed ease policy, it makes sense that the dollar should decline somewhat. However, it is also very clear that the Fed will not be easing policy in a vacuum, but rather be leading a renewed bout of policy ease worldwide. And as the relative interest rate structure equalizes after all the central banks have finished their easing, the US will still likely be the most attractive investment destination, supporting the dollar, but also, dollar funding will still need to be found by non-US businesses and countries, adding to demand for the buck.

With this as a backdrop, the week ahead does not bring much in the way of data, really just CPI on Thursday, but it does bring us a great deal of Fed speak, including a Powell speech tomorrow and then his House and Senate testimony on Wednesday and Thursday. And don’t forget the ECB meeting on Thursday!

Today Consumer Credit $17.0B
Tuesday NFIB Small Biz 105
  JOLT’s Jobs Report 7.47M
Wednesday FOMC Minutes  
Thursday ECB Meeting -0.4%
  Initial Claims 222K
  CPI 0.0% (1.6% Y/Y)
  -ex food & energy 0.2% (2.0% Y/Y)
Friday PPI 0.1% (1.6% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)

Remember, that on top of the FOMC Minutes to be released Wednesday afternoon, we will hear from seven different Fed speakers a total of thirteen times this week, including Powell’s testimony on Capitol Hill. Amongst this crowd will be the two most dovish members of the FOMC, Bullard and Kashkari, as well as key members Williams and Quarles. It will be extremely interesting to see how these speakers spin the jobs data relative to their seemingly growing bias toward easing. Much has been made of the idea of an ‘insurance’ rate cut, in order to prevent anything from getting out of hand. But Powell will also need to deal with the allegations that he is capitulating to President Trump’s constant demands for lower interest rates and more QE if he comes across as dovish. I don’t envy him the task.

Regarding the ECB meeting, despite continuing weakness in most of the Eurozone data, it feels like it is a bit too soon for them to ease policy quite yet. First off, they have the issue of what type of impact pushing rates even further negative will have on the banking system there. With the weekend news about Deutsche bank retrenching across numerous products, with no end of red ink in sight, the last thing Signor Draghi wants is to have to address a failing major bank. But it is also becoming clearer, based on comments from other ECB members (Coeure and Villeroy being the latest) that a cut is coming soon. And don’t rule out further QE. The ECB is fast becoming desperate, with no good options in sight. Ultimately, this also plays into my belief that despite strong rationales for the dollar to decline, it is the euro that will suffer most.

However, the fun doesn’t really start until tomorrow, when Chairman Powell speaks at 8:45am. So for today, it appears that markets will consolidate Friday’s moves with limited volatility, but depending on just how dovish Powell sounds, we are in for a more active week overall.

Good luck
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