Tempting the Fates

Around the world most central banks
Have, monthly, been forced to give thanks
That tempting the fates
With negative rates
Has not destroyed euros or francs

And later today we will hear
From Draghi, the man who made clear
“Whatever it takes”
Would fix the mistakes
Investors had grown, most, to fear

With Brexit on the back burner for the day, as the UK awaits the EU’s decision on how long of a delay to grant, the market has turned its attention to the world’s central banks. Generally speaking, monetary ease remains the primary focus, although there are a few banks that are bucking the trend.

Starting with the largest for today, and world’s second most important central bank, the ECB meets today in what is Mario Draghi’s final policy meeting at the helm. Given their actions last month, where they cut the deposit rate a further 10bps to -0.50% and restarted QE to the tune of €20 billion per month, there is no expectation for any change at all. In fact, the only thing to expect is more exhortations from Draghi for increasing fiscal policy stimulus by Germany and other Northern European nations that are not overly indebted. But it will not change anything at this stage, and he has already tied Madame Lagarde’s hands going forward with their most recent guidance, so this will be the farewell tour as everybody regales him for saving the euro back in 2012.

But there have been a number of other moves, the most notable being the Swedish Riksbank, which left rates unchanged, but basically promised to raise them by 25bps in December to return them to 0.00%. Apparently they are tired of negative rates and don’t want them to become habit forming. While I admire that concept, the problem they have is growth there is slowing and inflation is falling well below their target of 2.0%. The most recent reading was 1.5%, but the average going back post the financial crisis is just 1.1%. SEK gained slightly after their comments, rallying 0.15% this morning, but the trend in the krone remains lower and I think they will need to raise a lot more than 25bps to change that.

Meanwhile, other central bank activity saw Norway leave rates unchanged at 1.50% as core inflation there remains above their 2.0% target. NOK’s response was essentially nil. Indonesia cut rates by 25bps, as widely expected, its fourth consecutive rate cut, and although the rupiah is ever so slightly softer this morning, -0.2%, its performance this year has been pretty solid, having gained 2.3% YTD. Finally, the Turkish central bank cut rates by a surprising 250bps this morning, much more than the 100bps expected. If you recall, President Erdogan has been adamant that higher interest rates beget higher inflation, and even fired the previous central bank head to replace him with someone more malleable. Interestingly, a look at Turkish inflation shows that it has been falling despite (because of?) recent rate cuts. And today, despite that huge cut, the initial currency impact was pretty modest, with the lira falling 0.5% immediately, but already recouping some of those losses. And in the broader picture, the lira’s recent trend has clearly been higher and remains so after the cut.

On the data front we saw PMI data from the Eurozone and it simply reinforced the idea that the Eurozone is heading into a recession. Germany’s numbers were worse than expected (Manufacturing 41.9, Composite 48.6) which was enough to drag the Eurozone data down as well (Manufacturing 45.7, Composite 50.2). It seems clear that when Germany reports their Q3 GDP next month it will be negative and Germany will ‘officially’ be in a recession. It is data of this nature that makes it so hard to turn bullish on the single currency. Given their economic travails, the Teutonic austerity mindset, which was enshrined in law, and the fact that the ECB is essentially out of bullets, it is very difficult to have a positive view of the euro in the medium term. This morning, ahead of the ECB policy statement, the euro is little changed, and I see no reason for it to move afterwards either.

So, there was lots of central bank activity, but not so much FX movement in response. My sense is that FX traders are now going to fully turn their attention to the FOMC meeting next week, as even though a rate cut seems assured, the real question is will the Fed call a halt to the mid-cycle adjustment, or will they leave the door open to further rate cuts. The risk with the former is that the equity market sells off sharply, thus tightening financial conditions, sowing fear in Washington and forcing a reversal. However, the risk with the latter is that the Fed loses further credibility, something they have already squandered, by being proven reactive to the markets, and less concerned with the economy writ large.

For today’s session, we have the only real data of the week, Durable Goods (exp -0.7%, -0.2% ex Transport), and Initial Claims (215K) at 8:30, then New Home Sales (702K) at 10:00. We also see the US PMI data (Manufacturing 50.9, Services 51.0) although the market generally doesn’t pay much attention to this. Instead it focuses on the ISM data which won’t be released until next week.

Without any Fed speakers on the docket, once again the FX market is likely to take its cues from equities, which are broadly higher this morning after a number of better than expected earnings announcements. In this risk-on environment, I think the dollar has room to edge lower, but unless we start to see the US data really deteriorate, I have a feeling the Fed is going to try to end the rate cuts and the dollar will benefit going forward. Just not today.

Good luck
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A Major Broadside

The question that needs to be asked
Is, have central bank powers passed?
The ECB tried
A major broadside
But markets ignored Draghi’s blast

There has certainly been no shortage of interesting news in the past twenty-four hours, however from a markets perspective, I think the ECB actions, and the market reactions are the most critical to understand. To recap Signor Draghi’s action, the ECB did the following:

1. cut the deposit rate 10bps to -0.50%;
2. restarted QE in the amount of €20Bio per month for as long as necessary;
3. reduced the rate and extended the tenor of TLTRO III loans; and
4. introduced a two-tier system to allow some excess liquidity to be exempt from the -0.50% deposit rate.

Certainly the market was prepared for the rate cut, which had been widely telegraphed, and the talk of tiering excess liquidity had also been making the rounds. Frankly, TLTRO’s had not been a centerpiece of discussion but I think that is because most market participants don’t see them as a major force in the policy debate, which leaves the start of QE2 as the most controversial thing Draghi introduced. Well, maybe that and the fact that forward guidance is now based on achieving a “robust convergence” toward the inflation target rather than a particular timeframe.

Remember, in the past two weeks we had heard from the Three Hawksketeers (Weidmann, Lautenschlager and Knot) each explicitly saying that more QE was not appropriate. We also heard that from the Latvian central banker, Rimsevics, and perhaps most surprisingly of all, from Franҫois Villeroy de Galhau, the French central bank chief. And yet despite clearly stiff opposition, Draghi got the Council to agree. Perhaps, though, he went too far in describing the “consensus as so broad, there was no need to take a vote.” Now, while I have no doubt that no vote was taken, that statement stretches credulity. This was made clear when Robert Holzmann, the new Austrian central bank president and first time member of the ECB, gave an interview yesterday afternoon explicitly saying that the ECB could well have made a mistake by reintroducing QE.

But let’s take a look at what happened after the ECB statement and during the press conference. The initial move was for the euro to decline sharply, trading down 0.65% in the first 10 minutes after the release. When Draghi took to the stage at 8:30 and reiterated the points in the statement, the euro declined a further 30 pips, touching 1.0927, its lowest level since May 2017. But that was all she wrote for the euro’s decline. As Draghi continued to speak and answer questions, traders began to suspect that the cupboard was bare regarding anything else the ECB can do to address further problems in the Eurozone economies. This was made abundantly clear in his pleas for increased fiscal stimulus, which much to his chagrin, does not appear to be forthcoming.

It was at this point that things started to turn with the euro soaring, at one point as much as 1.5% from the lows, and closed 1.3% higher than those levels. And this morning, the rally continues with the euro up to 1.1100 as I type, a solid 0.3% gain. But the big question that now must be asked is; has the market decided the ECB is out of ammunition? After all, given the relative nature of the FX market and the importance of monetary policy on exchange rates, if the market has concluded the ECB CANNOT do anymore that is effective, then by definition, the Fed is going to promulgate easier policies than the ECB with the outcome being a rising euro. So if the Fed follows through next week and cuts 25bps, and especially if it does not close the door on further cuts, we could easily see the euro rally continue. That will not help the ECB in their task to drive inflation higher, and it will set a difficult tone for Madame Lagarde’s tenure as ECB President going forward.

Turning to the Fed, the market is still fully priced for a 25bp cut next week, but thoughts of anything more have receded. However, a December cut is still priced in as well. The problem for the Fed is that the economic data has not been cooperating with the narrative that inflation is dead. For instance, yesterday’s CPI data showed Y/Y core CPI rose 2.4%, the third consecutive outcome higher than expectations and the highest print since September 2008! Once again, I will point to the anecdotal evidence that I, personally, rarely see the price of anything go down, other than the gyrations in gasoline prices. But food, clothing and services prices have been pretty steady in their ascent. Does this mean that the Fed will stay on hold? While I think it would be the right thing to do, I absolutely do not believe it is what will happen. However, it is quite easy to believe that the accompanying statement is more hawkish than currently expected (hoped for?) and that we could see this as the end of that mid-cycle adjustment. My gut is the equity market would not take that news well. And the dollar? Well, that would halt the euro’s rise pretty quickly as well. But that is next week’s story.

As if all that wasn’t enough, we got more news on the trade front, where President Trump has indicated the possibility of an interim trade deal that could halt, and potentially roll back, tariff increases in exchange for more promises on IP protection and agricultural purchases. That was all the equity market needed to hear to rally yet again, and in fairness, if there is a true thawing in that process, it should be positive for risk assets. So, the dollar declined across the board, except against the yen which fell further as risk appetite increased.

Two currencies that have had notable moves are GBP and CNY. The pound seems to be benefitting from the fact that there was a huge short position built over the past two months and the steady stream of anti-Brexit news seems to have put Boris on his back foot. If he cannot get his way, which is increasingly doubtful, then the market will continue to reprice Brexit risk and the pound has further to rally. At the same time, the renminbi’s rally has continued as well. Yesterday, you may recall, I mentioned the technical position, an island reversal, which is often seen as a top or bottom. When combining the technical with the positive trade story and the idea that the Fed has a chance to be seen as the central bank with the most easing ahead of it, there should be no surprise that USDCNY is falling. This morning’s 0.45% decline takes the two-day total to about 1.0%, a big move in the renminbi.

Turning to this morning’s data, Retail Sales are the highlight (exp 0.2%, 0.1% ex autos) and then Michigan Sentiment (90.8) at 10:00. Equity futures are pointing higher and generally there is a very positive attitude as the week comes to an end. At this point, I think these trends continue and the dollar continues to decline into the weekend. Longer term, though, we will need to consider after the FOMC next week.

Good luck and good weekend
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Rates Will Be Hewn

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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Lingering Issues

Some pundits now have the impression
That we will soon be in recession
The data of late
Has spurred the debate
And could remove Powell’s discretion

Meanwhile, we just heard from Herr Draghi
That “lingering” issues made foggy
The future of growth
So he and Jay both
Will soon ease ere things turn too quaggy

Some days, there is far more to discuss than others, and today is one of those days. Markets are trying to digest all of the following information: weaker US data, weaker Eurozone data, dovish comments from Signor Draghi, confirmation the RBA is likely to cut rates again, increased likelihood that Boris Johnson will be the next PM in the UK, and increased tensions in the Middle East.

Starting at the top, yesterday’s Empire State Manufacturing survey printed at a much worse than expected -8.6, which represented a 26.4-point decline from May’s survey and the largest fall on record. It was a uniformly awful report, with every sub-index weak. While by itself, this report is generally second tier data, it is adding to the case that the US economy is slowing more rapidly than had previously been expected and is increasing market expectations that the Fed will act sooner rather than later. We will see how that turns out tomorrow.

Then this morning, the German ZEW Survey was released at -21.1, a 19-point decline and significantly worse than expected. This is seen as a potential harbinger of further weakness in the German economy adding to what has been a run of quite weak manufacturing data. Although auto registrations in the Eurozone ticked ever so slightly higher in May (by 0.04%), the trend there also remains sharply downward. All in all, there has been very little encouraging of late from the Continent.

Then Signor Draghi got is turn at the mike in Sintra, Portugal, where the ECB is holding its annual summer festivities, and as usual, he did not disappoint. He explained the ECB has plenty of tools left to address “lingering” risks in the economy and hinted that action may be coming soon. He expressly described the ability for the ECB to cut rates further as well as commit to keep rates lower for even longer. And he indicated that QE is still available as the only rules that could restrict it are self-imposed, and easily changed. Arguably, this had the biggest impact of the morning as Eurozone equities rocketed on the prospect of lower rates, bouncing back from early losses and now higher by more than 1.0% on the day across the board. German bunds have plumbed new yield depths, touching -0.30% while the euro, to nobody’s surprise, has weakened further, ceding modest early gains to now sit lower by -0.3%. This is proof positive of my contention that the Fed will not be easing policy in isolation, and that if they start easing, you can be sure that the rest of the world will be close behind. Or perhaps even ahead!

Adding to the news cycle were the RBA minutes, which essentially confirmed that the next move there will be lower, and that two more rate cuts this year are well within reason as Governor Lowe tries to drive unemployment Down Under to just 4.5% from its current 5.2% level. Aussie has continued its underperformance on the news, falling a further 0.1% this morning and is now back to lows last touched in January 2016. And it has further to fall, mark my words.

Then there is the poor old pound, which has been falling sharply for the past week (-1.75%) as the market begins to price in an increased chance of a no-deal Brexit. This is due to the fact that Boris Johnson is consolidating his lead in the race to be the next PM and he has explicitly said that come October 31, the UK will be exiting the EU, deal or no deal. Given the EU’s position that the deal on the table is not open for renegotiation, that implies trouble ahead. One thing to watch here is the performance of Rory Stewart, a dark horse candidate who is gaining support as a compromise vs. Johnson’s more hardline stance. The point is that any indication that Johnson may not win is likely to see the pound quickly reverse its recent losses.

And finally, the Middle East continues to see increased tensions as Iran announced they were about to breach the limits on uranium production imposed by the ill-fated six-nation accord while the US committed to increase troop deployment to the area by 1000 in the wake of last week’s tanker attacks. Interestingly, oil is having difficulty gaining any traction which is indicative of just how much market participants are anticipating a global economic slowdown. OPEC, too, has come out talking about production cuts and oil still cannot rally.

To recap, bond, currency and commodity markets are all forecasting a significant slowdown in economic activity, but remarkably, global stock markets are still optimistic. At this point, I think the stock jockeys are on the wrong side of the trade.

As to today, we are set to see Housing Starts (exp 1.239M) and Building Permits (1.296M) at 8:30. Strong data is likely to have little impact on anybody’s thinking right now, but weakness will start to drive home the idea that the Fed could act tomorrow. Overall, the doves are in the ascendancy worldwide, and rightly so given the slowing global growth trajectory. Look for more cooing tomorrow and then on Thursday when both the BOJ and BOE meet.

Good luck
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Doves There Held Sway

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

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

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

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

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

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

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

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

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

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

Good luck
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Support They Withdrew

Elections across the EU
Showed people there no longer view
The powers that be
As able to see
Their woes, so support they withdrew

The weekend saw the conclusion of the EU elections which resulted in a significant change in the political landscape there. No longer do the two centrist parties represent a majority but rather, huge gains were made by more extreme nationalist parties in almost every country. For example, in the UK, the Brexit party dominated, winning >30% of the vote, with both Tories and Labour losing significant share. In Germany, Chancellor Merkel’s Christian Democrats saw their vote share decline dramatically, well below 30%, and in France, President Macron’s party lost out to the National Front’s Marine Le Pen. It appears that there is a great deal of anxiety afoot in the EU, which of course is only enflamed by the imminent (?) exit of the UK.

But getting trounced in EU elections is not nearly enough to stop those currently holding power in individual country governments from changing their ways, this much is clear. As evidence I point to the process for selecting the new leadership of the ECB, the European Commission and the European Council, which will continue to be managed according to the old rules of country size combined with the recentness of those nations holding one of the seats. The point is that while thus far there has been some lip service paid to the changes afoot, the entrenched political class are not about to give up their positions without a fight.

It is with this in mind that I continuously view the euro with such skepticism. Not only are individual countries riven, but the broad leadership seems unwilling to accept that the world is different than when the EU was formed. For now, markets continue to view the situation as tenable but weakening. And given the lack of fiscal policy initiatives across the bloc, (except for Italy which is on the road to getting penalized for them), currency values remain beholden to monetary policy efforts. With that in mind, all eyes will be on the ECB meeting next week when the latest economic forecasts are presented. Recent data has shown that surveys point to further weakness, but domestic consumption has held up well across most of the nations using the euro. However, given the clear slowdown being seen in both the US and China, it is difficult to believe that the ECB will sound remotely hawkish. I expect that the new TLTRO’s will have very favorable terms as Signor Draghi will do everything he can to goose the economy before he leaves in October. And despite the growing call for looser policy in the US, I expect the dollar to maintain its current strength.

In China a small bank went bust
And traders are losing their trust
The PBOC
Can preempt the spree
Of weakness that pundits discussed

The other interesting news over the weekend was that the PBOC assumed control of Baoshang Bank, a small lender that turned out to be highly overextended with off balance sheet transactions. This is the first time in more than 20 years this has been necessary, and the market impacts were mostly as one would expect. Shares in other small banks suffered, the PBOC injected ~$20 billion into the system to help offset some of the pressure and the yuan fell a further 0.25%. The one mild surprise was that the Shanghai Composite actually closed higher on the day, but that was in response to the new PBOC liquidity. Chinese data remains suspect and there is no evidence that anything regarding the US-China trade situation has improved since last week’s split. While the Chinese continue to claim they will maintain a stable currency, the pressure continues to build for the yuan to weaken further.

Away from those two stories, the wires have been relatively quiet. The dollar is firmer across the board this morning, rising about 0.2% uniformly, as risk continues to be reduced by investors around the world. Treasury yields have fallen back below 2.30% in the 10-year, while similar duration Bunds traded as low as -0.16% before edging back to their current -0.14% level. European equity markets are soft, albeit not collapsing, and US equity futures are pointing to a lower opening. The data to be released this week is relatively limited which means that markets are going to be looking for subtler clues from the central banking community for the next directional trends.

Today Case-Shiller Home Prices 2.6%
  Consumer Confidence 130.0
Thursday Initial Claims 215K
  Q2 GDP (2nd look) 3.1%
  Goods Trade Balance -$72.0B
Friday Personal Income 0.3%
  Personal Spending 0.2%
  Core PCE 0.2% (1.6% Y/Y)
  Chicago PMI 53.7
  Michigan Sentiment 101.5

We have a much less active Fed speaker calendar with just two, Clarida and Williams, but given the overall consistency of what we have heard lately, i.e. patience is the proper policy but the possibility of easing has not been ruled out, unless one of these two sounds highly dovish, I don’t expect much response. The week is setting up to focus on Thursday and Friday’s data, as well as waiting to hear about the next steps on Brexit or European leadership. It seems for now that the trade story has moved to the back burner. Given all this, it is hard to get excited about pending movement in the dollar, and I imagine that barring a self-induced market sell-off, there will be little of note ongoing this week with the dollar remaining in a fairly tight range.

Good luck
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Rapidly Falling

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

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

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

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

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

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

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

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

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

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

Good luck and good weekend
Adf