A New Paradigm

As mid-year approaches, it’s time
To ponder the central bank clime
Will negative rates
Appear in the States
And welcome a new paradigm?

With the end of the first half of 2020 approaching, perhaps it’s time to recap what an extraordinary six months it has been as well as consider what the immediate future may hold.

If you can recall what January was like, the big story was the Phase One trade deal, which was announced as almost completed at least half a dozen times, essentially every time the stock market started to decline, before it was finally signed. In hindsight, the fact that it was signed right at the beginning of the Lunar New Year celebrations in China, which coincided with the recognition that the novel coronavirus was actually becoming a problem, is somewhat ironic. After all, it was deemed THE most important thing in January and by mid-February nobody even cared about it anymore. Of course, by that time, Covid-19 had been named and was officially declared a pandemic.

As Covid spread around the world, the monetary responses were impressive for both their speed of implementation and their size. The Fed was the unquestioned leader, cutting rates 150bps in two emergency meetings during the first half of March while prepping the market for QE4. They then delivered in spades, hoovering up Treasuries, mortgage-backed bonds, investment grade corporate bonds and junk bonds (via ETF’s) and then more investment grade bonds, this time purchasing actual securities, not ETF’s. Their balance sheet has grown more than $3 trillion (from $4.1 trillion to $7.1 trillion) in just four months and they have promised to maintain policy at least this easy until the economy can sustainably get back to their inflation and employment goals.

On the fiscal front, government response was quite a bit slower, and aside from the US CARES act, signed into law in late March, most other nations have been less able to conjure up enough spending to make much of a difference. There was important news from the EU, where they announced, but have not yet enacted, a policy that was akin to mutualization of debt across the entire bloc. If they can come to agreement on this, and there are four nations who remain adamantly opposed (Sweden, Austria, Denmark and the Netherlands), this would truly change the nature of the EU and by extension the Eurozone. Allowing transfers from the richer northern states to the struggling Mediterranean countries would result in a boon for the PIGS as they could finally break the doom-loop of their own nation’s banks owning the bulk of their own sovereign debt. But despite the support of both France and Germany, this is not a done deal. Now, history shows that Europe will finally get something along these lines enacted, but it is likely to be a significantly watered-down version and likely to take long enough that it will not be impactful in the current circumstance.

Of course, the ECB, after a few early stumbles, has embraced the idea of spending money from nothing and is in the process of implementing a €1.35 trillion QE program called PEPP in addition to their ongoing QE program.

Elsewhere around the world we have seen a second implementation of yield curve control (YCC), this time by Australia which is managing its 3-year yields to 0.25%, the same level as its overnight money. There is much talk that the Fed is considering YCC as well, although they will only admit to having had a discussion on the topic. Of course, a quick look at the US yield curve shows that they have already essentially done so, at least up to the 10-year maturity, as the volatility of yields has plummeted. For example, since May 1, the range of 3-year yields has been just 10bps (0.18%-0.28%) while aside from a one-week spike in early June, 10-year yields have had an 11bp range. The point is, it doesn’t seem that hard to make the case the Fed is already implementing YCC.

Which then begs the question, what would they do next? Negative rates have been strongly opposed by Chairman Powell so far, but remember, President Trump is a big fan. And we cannot forget that over the course of the past two years, it was the President’s view on rates that prevailed. At this time, there is no reason to believe that negative rates are in the offing, but in the event that the initial rebound in economic data starts to stumble as infection counts rise, this cannot be ruled out. This is especially so if we see the equity market turn back lower, something which the Fed seemingly cannot countenance. Needless to say, we have not finished this story by a long shot, and I would contend there is a very good chance we see additional Fed programs, including purchasing equity ETF’s.

Of course, the reason I focused on a retrospective is because market activity today has been extremely dull. Friday’s equity rout in the US saw follow through in Asia (Nikkei -2.3%, Hang Seng -1.0%) although Europe has moved from flat to slightly higher (DAX +0.5%, CAC +0.25%, FTSE 100 +0.5%). US futures are mixed, with the surprising outcome of Dow and S&P futures higher by a few tenths of a percent while NASDAQ futures are lower by 0.3%. The bond market story is that of watching paint dry, a favorite Fed metaphor, with modest support for bonds, but yields in all the haven bonds within 1bp of Friday’s levels.

And finally, the dollar is arguably a bit softer this morning, with the euro the leading gainer in the G10, +0.5%, and only the pound (-0.2%) falling on the day. It seems that there are a number of algorithmic models out selling dollars broadly today, and the euro is the big winner. In the EMG bloc, the pattern is the same, with most currencies gaining led by PLN(+0.65%) after the weekend elections promised continuity in the government there, and ZAR (+0.55%) which is simply benefitting from broad dollar weakness. The exception to the rule is RUB, which has fallen 0.25% on the back of weakening oil prices.

On the data front, despite nothing of note today, we have a full calendar, especially on Thursday with the early release of payroll data given Friday’s quasi holiday

Tuesday Case Shiller Home Prices 3.70%
  Chicago PMI 44.0
  Consumer Confidence 90.5
Wednesday ADP Employment 2.95M
  ISM Manufacturing 49.5
  ISM Prices Paid 45.0
  FOMC Minutes  
Thursday Initial Claims 1.336M
  Continuing Claims 18.904M
  Nonfarm Payrolls 3.0M
  Private Payrolls 2.519M
  Manufacturing Payrolls 425K
  Unemployment Rate 12.4%
  Average Hourly Earnings -0.8% (5.3% Y/Y)
  Average Weekly Hours 34.5
  Participation Rate 61.2%
  Trade Balance -$53.0B
  Factory Orders 7.9%
  Durable Goods 15.8%
  -ex transport 4.0%

Source: Bloomberg

So, as you can see, a full slate for the week. Obviously, all eyes will be on the employment data on Wednesday and Thursday. At this point, it seems we are going to continue to see data pointing to a sharp recovery, the so-called V, but the question remains, how much longer this can go on. However, this is clearly today’s underlying meme, and the ensuing risk appetite is likely to continue to undermine the dollar, at least for the day. We will have to see how the data this week stacks up against the ongoing growth in Covid infections and the re-shutting down of portions of the US economy. The latter was the equity market’s nemesis last week. Will this week be any different?

Good luck and stay safe

Time of Distress

If banks in this time of distress
Are fine, at least in the US
Then why would the Fed
Stop dividends dead
While buy backs, forever suppress?

In a market that is showing little in the way of price volatility today, arguably the most interesting story is the results of the Fed’s bank stress tests that were released yesterday. There seemed to be a few inconsistencies between the actions and the words, although I guess we should expect that as standard operating procedure these days.

The punchline is the Fed halted share repurchases by banks while capping dividend payouts to no more than their average earnings for the past four quarters. In their tests they explained that, depending on the trajectory of the recovery, banks could lose between $560 billion (V-shaped) and $700 billion (U-shaped) in the coming year from loan losses. It ought not be that surprising that they would want to force banks to preserve capital in this situation, especially as the current Covid economy is far worse than any of their previous stress test parameters. And yet, the Fed explained that the banks were strongly capitalized, nonetheless. It strikes me that if they were so well capitalized, there would be no concerns over rewarding shareholders, but then again, I am just an FX guy.

But let’s take a look at the bigger picture. While the Fed has been doing everything in their power to prevent the equity market from declining, and so far have been doing a pretty good job in that regard, they have just laid out two of what I believe will be three regulations that are in our future. As populism rises worldwide and the 1% remain on the defensive, I expect that we are going to see widespread changes in the way capital markets work. Consider the following:

• Share repurchases are going to be a thing of the past. Now that the Fed has shown the way, I expect that regardless of who is in the White House after the election, one of the key lessons that will have been learned is that companies need to keep bigger rainy day funds, as well as invest more in their own businesses. At least that will be the spin when share repurchases are made illegal.
• Dividend caps are going to be the future as well. Here, too, with a nod toward reducing overall leverage and maintaining greater cash balances, dividends are going to be capped at some percentage of net income, probably averaged over several quarters so a single event will not necessarily disrupt that process, but dividend yields are going to decline as well. Of course, any yield will be better than the ongoing returns from ZIRP!
• Management salary caps. Finally, I think we will be able to look forward (?) to a time when senior management will have their salaries and bonuses capped at a multiple, and not a very large one, of the average employee’s salary.

The real question is, will these regulations apply only to publicly listed companies, or will there be an effort to change the way all businesses are managed in the US? But mark my words, this is the future, at least for a while.

If I am correct, and I truly hope I am not, then I think several other things will play out. First, these regulations will quickly be enacted in most nations. After all, if the US, the largest economy with the most sophisticated capital markets, can change the rules, so can everybody else. Second, this is going to play havoc with the Fed’s ongoing attempts to support equity prices. After all, restricting the ability of investors to earn a return is going to have a severe negative impact on valuations. However, the Fed will find themselves hard-pressed to argue against widespread adoption of these policies as they initiated them with the banks. Needless to say, risk assets are likely to find much reduced demand if there is less prospect of return.

To sum it up, there seems to be a real risk that we are going to see structural changes in capital markets that will result in permanently lower valuations, and the potential for a significant repricing of risk assets. This is not an imminent threat, but especially if there is a change in the White House and the Senate, this will quickly move up the agenda. Risk assets are likely to become far riskier, at least at current valuations.

But enough about my clouded crystal ball. Rather, a quick look at today’s session shows that yesterday afternoon’s US equity rally continued into Asia (Nikkei +1.1%, Sydney +1.5%) and Europe (DAX +1.1%, CAC +1.6%, FTSE 100 +1.55%) although US futures are actually little changed at this hour. Bond markets are edging higher, with yields declining on the order of 1bp-2bps across the haven markets, while oil is continuing to rebound from its sharp fall earlier this week.

FX markets are mixed in direction and have seen limited movement overall. In fact, the leading gainer this morning is the yen, up 0.3%, although despite some commentary that this is a haven asset move, that really doesn’t jive with what we are seeing in the equity space. Perhaps a better explanation is that CPI readings last night from Tokyo continue to show deflationary forces are rampant and, as we have seen for the past twenty years, that is a currency support. Kiwi is up a similar amount, but here, too, there is no news on which to hang our hat. On the flip side, we have seen tiny declines in SEK and GBP, and in truth, beyond yen and kiwi, no currency has moved more than 0.1%.

In the emerging markets, the picture is also mixed, with a similar number of gainers and losers, although magnitudes here are also relatively small. On the downside, RUB and ZAR have both fallen 0.4% while last night KRW managed a 0.35% gain. Both Russia and South Africa reported a jump in new Covid cases which seems to be overshadowing hopes of reopening the economy. As to the won, it was a beneficiary of both the equity risk rally as well as an apparent easing of tensions with North Korea.

On the data front, yesterday’s Initial Claims data was a bit concerning as though the number fell, it fell far less than expected. There are growing concerns that a second wave of layoffs is coming, although we continue to see companies reopening as well. I still believe this is the most relevant number going right now. This morning we get Personal Income (exp -6.0%), Personal Spending (9.2%), Core PCE (0.9% Y/Y) and Michigan Sentiment (79.2). While there will almost certainly be political hay made about the Income and Spending numbers, my sense is none of them will have much market impact. Rather, today is shaping up as a very quiet Friday as traders and investors look forward to a summer weekend.

Good luck, good weekend and stay safe


Sand on the Beach

The central bank known as the Fed
Injected more funds, it is said
Than sand on the beach
While they did beseech
The banks, all that money to spread

But lately the numbers have shown
Liquidity, less, they condone
Thus traders have bid
For dollars, not quid
Nor euros in every time zone

A funny thing seems to be happening in markets lately, which first became evident when the dollar decoupled from equity markets a few days ago. It seemed odd that the dollar managed to rally despite continued strength in equity markets as the traditional risk-on stance was buy stocks, sell bonds, dollars and the yen. But lately, we are seeing stock prices continue higher, albeit with a bit tougher sledding, while the dollar has seemingly forged a bottom, at least on the charts.

The first lesson from this is that markets are remarkably capable at sussing out changes in underlying fundamentals, certainly far more capable than individuals. But of far more importance, at least with respect to understanding what is happening in the FX market, is that dollar liquidity, something the Fed has been proffering by the trillion over the past three months, is starting to, ever so slightly, tighten. This is evident in the fact that the Fed’s balance sheet actually shrunk this week, to “only” $7.14 trillion from last week’s $7.22 trillion. While this represents just a 1% shrinkage, and seemingly wouldn’t have that big an impact, it is actually quite a major change in the market.

Think back to the period in March when the worst seemed upon us, equity markets were bottoming, and central banks were panicking. The dollar was exploding higher at that time as both companies and countries around the world suddenly found their revenue streams drying up and their ability to service and repay their trillions of dollars of outstanding debt severely impaired. That was the genesis of the Fed’s dollar swap lines to other central banks, as Chairman Jay wanted to insure that other countries would have temporary access to those needed dollars. At that time, we also saw the basis swap bottom out, as borrowing dollars became prohibitively expensive, and in the end, many institutions decided to simply buy dollars on the foreign exchange markets as a means of securing their payments.

However, once those swap lines were in place, and the Fed announced all their programs and started growing the balance sheet by $75 billion/day, those apocalyptic fears ebbed, investors decided the end was not nigh and took those funds and bought stocks. This explains the massive rebound in the equity markets, as well as the dollar’s weakness that has been evident since late March. In fact, the dollar peaked and the stock market bottomed on the same day!

But as the recovery starts to gather some steam, with recent data showing that while things are still awful, they are not as bad as they were in April or early May, the Fed is reducing the frequency of their dollar swap operations to three times per week, rather than daily. They have reduced their QE purchases to less than $4 billion/day, and essentially, they are mopping up some of that excess liquidity. FX markets have figured this out, which is why the dollar has been pretty steadily strengthening for the past seven sessions. As long as the Fed continues down this path, I think we can expect the dollar to continue to perform.

And this is true regardless of what other central banks or nations do. For example, yesterday’s BOE action, increasing QE by £100 billion, was widely expected, but interestingly, is likely to be the last of their moves. First, it was not a unanimous vote as Chief Economist, Andy Haldane, voted for no change. The other thing is that expectations for future government Gilt issuance hover in the £70 billion range, which means that the BOE will have successfully monetized the entire amount of government issuance necessary to address the Covid crash. But regardless of whether this appears GBP bullish, it is dwarfed by the Fed activities. Positive Brexit news could not support the pound, and now it is starting to pick up steam to the downside. As I type, it is lower by 0.3% on the day which follows yesterday’s greater than 1% decline and takes the move since its recent peak to more than 3.4%.

What about the euro, you may ask? Well, it too has been suffering as not only is the Fed beginning to withdraw some USD liquidity, but the ECB, via yesterday’s TLTRO loans has injected yet another €1.3 trillion into the market. While the single currency is essentially unchanged today, it is down 2.0% from its peak on the 10th of June. And this pattern has repeated itself across all currencies, both G10 and EMG. Except, of course, for the yen, which has rallied a bit more than 1% since that same day.

Of course, in the emerging markets, the movement has been a bit more exciting as MXN has fallen more than 5.25% since that day and BRL nearly 10%. But the point is, this pattern is unlikely to stop until the Fed stops withdrawing liquidity from the markets. Since they clearly take their cues from the equity markets, as long as stocks continue to rally, so will the dollar right now. Of course, if stocks turn tail, the dollar is likely to rally even harder right up until the Fed blinks and starts to turn on the taps again. But for now, this is a dollar story, and one where central bank activity is the primary driver.

I apologize for the rather long-winded start but given the lack of interesting idiosyncratic stories in the market today, I thought it was a good time for the analysis. Turning to today’s session, FX market movement has been generally quite muted with, if anything, a bias for modest dollar strength. In fact, across both blocs, no currency has moved more than 0.5%, a clear indication of a lack of new drivers. The liquidity story is a background feature, not headline news…at least not yet.

Other markets, too, have been quiet, with equity markets around the world very slightly firmer, bond markets very modestly softer (higher yields) and commodity markets generally in decent shape. On the data front, the only noteworthy release was UK Retail Sales, which rebounded 10.2% in May but were still lower by 9.8% Y/Y. This is the exact pattern we have seen in virtually every data point this month. As it happens, there are no US data points today, but we do hear from four Fed speakers, Rosengren, Quarles, Mester and the Chairman. However, they have not changed their tune since the meeting last week, and certainly there has been no data or other news which would have given them an impetus to do so.

The final interesting story is that China has apparently recommitted to honoring the phase one trade deal which means they will be buying a lot of soybeans pretty soon. The thing is, I doubt it is because of the trade deal as much as it is a comment on their harvest and the fact they need them. But the markets have largely ignored the story. In the end, at this point, all things continue to lead to a stronger dollar, so hedgers, take note.

Good luck, good weekend and stay safe

Making More Hay

The Chairman explained yesterday
That more help would be on the way
If things turned out worse
Thus he’s not averse
To Congress soon making more hay

Chairman Powell testified before the Senate Banking Committee yesterday and continued to proffer the message that while the worst may be behind us, there is still a long way to go before the recovery is complete. He continued to highlight the job losses, especially in minority communities, and how the Fed will not rest until they have been able to foster sufficient economic growth to enable unemployment to fall back to where it was prior to the onset of the Covid crisis. He maintains, as does the entire FOMC, that there are still plenty of additional things the Fed can do to support the economy, if necessary, but that he hopes they don’t have to take further measures. He also agreed that further fiscal stimulus might still be appropriate, although he wouldn’t actually use those words in his effort to maintain the fiction that the Fed is independent of the rest of the government. (They’re not in case you were wondering.) In other words, same old, same old.

The market’s response to the Chairman’s testimony was actually somewhat mixed. Equity prices continue to overperform, although they did retreat from their intraday highs by the close, but the dollar, despite what was clearly an increasing risk appetite, reversed early weakness and strengthened further. Initially, that dollar strength was attributed to a blow-out Retail Sales number, +17.7%, but that piece of the rally faded in minutes. However, as the day progressed, dollar buyers were in evidence as the greenback ignored traditional sell signals and continued to forge a bottom.

Recently, there seems to have been an increase in discussion about the dollar’s imminent decline and the end of its days as the global reserve currency. Economists point to the massive current account deficit, the debasement by the Fed as it monetizes debt and the concern that the current administration will not embrace previous global norms. My rebuttal of this is simple: what would replace the dollar as the global monetary asset that would be universally accepted and trusted to maintain some semblance of its value? The answer is, there is nothing at this time, that could possible do the job. The euro? Hah! Not only is it still dealing with existential issues, but the fact that there is no European fiscal policy will necessarily result in missing support when needed. The renminbi? Hah! The idea that the free world would rely on a currency controlled by the largest communist regime is laughable. The Swiss franc? Too small. Bitcoin? Hahahahah! ‘Nuff said. Gold? Those who are calling the end of the dollar’s importance in the world are not the same people calling for a return to the gold standard. In fact, the views of those two groups are diametrically opposed. For now, the dollar remains the only viable candidate for the role, and that is likely to remain the case for a very long time. As such, while it will definitely rise and fall over short- and medium-term windows, do not believe the idea of a coming dollar collapse.

Meanwhile, ‘cross the pond in the land
Where Boris is still in command
Inflation is sinking
While Bailey is thinking
He ought, the B/S, to expand

Turning to more immediate market concerns, UK data this morning showed CPI falling to 0.5% Y/Y, well below the BOE’s target of 2.0%. With the BOE on tap for tomorrow, the market feels quite confident that Governor Bailey will be increasing QE purchases by £100 billion, taking the total to £745 billion, or slightly more than one-third of the UK economy. The thing is, it is not clear that QE lifts prices of anything other than stocks. I understand that central banks are limited by monetary tools, but if we have learned anything since the GFC in 2008-09, it is that monetary tools are not very effective when addressing the real economy. There is no evidence that this time will be different in the UK than it has been everywhere else in the world forever. The pound, however, has suffered in the wake of the current UK combination of events. So rapidly declining inflation along with expectations of further monetary policy ease have been more than enough to offset yesterday’s positive Brexit comments explaining that both sides believe a deal is possible. Perhaps the question we ought to be asking is, even if hard Brexit is avoided, should the pound really rally that much? My view remains that while a hard Brexit would definitely be a huge negative, the pound has enough troubles on its own to avoid rising significantly from current levels. I still cannot make a case for 1.30, not in the current situation.

As to the rest of the FX market, it is having a mixed session today, with both gainers and losers, although no very large movers in either direction. For instance, the best G10 performer today is NOK, which has rallied just 0.3% despite oil’s lackluster performance today. Meanwhile, the worst performer is the euro, which has fallen 0.2%. The point is, movement like this does not need a specific explanation, and is simply a product of position adjustments over time.

Emerging market currency activity has been no different, really, with MXN the best performer (you don’t hear that much) but having rallied just 0.35%. the most positive story I’ve seen was that the Mexican president, AMLO, has promised to try to work more closely with the business community there to help address the still raging virus outbreak. On the downside, KRW, yesterday’s best performer, is today’s worst, falling 0.55%. This seems to be a response to the increasingly aggressive rhetoric from the North, who is now set to deploy troops to the border, scrapping previous pledges to maintain a demilitarized zone between the nations. However, it would be wrong not to mention yesterday’s BRL price action, where the real fell 1.7%, taking its decline over the past week to more than 5.1%. The situation on the ground there seems to be deteriorating rapidly as the coronavirus is spreading rapidly, more than 37K new cases were reported yesterday, and investors are taking note.

On the data front this morning, we see Housing Starts (exp 1100K) and Building Permits (1245K), neither of which seems likely to be a market mover. The Chairman testifies before the House today, but it is only the Q&A that will be different, as his speech is canned. We also hear from the Uber-hawk, Loretta Mester, but these days, even she is on board for all the easing that is ongoing, so don’t look for anything new there.

Ultimately, I continue to look at the price action and feel the dollar is finding its footing, regardless of the risk attitude. Don’t be too greedy if you are a receivables hedger, there is every chance for the dollar to strengthen further from here.

Good luck and stay safe


Jay Was Thinking

If anyone thought Jay was thinking
‘Bout raising rates while growth was sinking
The chairman was clear
That long past next year
Their balance sheet will not be shrinking

The money quote: “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates,” said Mr. Powell.  And this pretty much sums up the Fed stance for the time being.  While there are those who are disappointed that the Fed did not add to any programs or announce something like YCC or, perhaps, more targeted forward guidance, arguably the above quote is even more powerful than one of those choices.  Frequently it is the uncertainty over a policy’s duration that is useful, not the policy itself.  Uncertainty prevents investors from anticipating a change and moving markets contrary to policymakers’ goals.  So, for now, there is no realistic way to anticipate the timing of the next rate hike.  Perhaps the proper question is as follows: is timing the next hike impossible because of the lack of clear targets?  Or is it impossible because there will never be another rate hike?

What the Fed did tell us (via the dot plot) is that only two of the seventeen FOMC members believe interest rates will be above 0.0% in 2022 (my money is on Esther and Mester, the two most hawkish members), but mercifully, not a single dot in the dot plot was in negative territory.  They also expressed a pretty dour view of the economy as follows:


  2020 2021 2022
Real GDP -6.5% 5.0% 3.5%
Core PCE 1.0% 1.5% 1.7%
Unemployment 9.3% 6.5% 5.5%

Source: Bloomberg

It is, of course, the 11.5% gain from 2020 to 2021 that encourages the concept of the V-shaped recovery as evidenced by simply plotting the numbers (including 2019’s 2.3% to start).

Screen Shot 2020-06-11 at 9.30.05 AM

So, perhaps the bulls are correct, perhaps the stock market is a screaming buy as growth will soon return and interest rates will remain zero for as far as the eye can see.  There is, however, a caveat to this view, the fact that the Fed is notoriously bad at forecasting GDP growth over time.  In fact, they are amongst the worst when compared with Wall Street in general.  But hey, at least we understand the thesis.

Another interesting outcome of the meeting was the tone of the press conference, where Chairman Jay sounded anything but ebullient over the current economic situation, especially the employment situation.  And it is this takeaway that had the biggest market impact.  After the press conference, equity markets in the US sold off from earlier highs (the NASDAQ set another all-time high intraday) and Treasuries rallied with yields falling again.  In other words, despite the prospect of Forever ZIRP (FZ), equity investors seemed to lose a bit of their bullishness.  This price action has been in place ever since with Asian equity markets all falling (Nikkei -2.8%, Hang Seng -2.3%, Shanghai – 0.8%) and Europe definitely under pressure (DAX -2.1%, CAC -2.2%, FTSE 100 -2.0%).  US futures are also lower with the Dow (-1.9%) currently the laggard, but even NASDAQ futures are lower by 1.1% at this hour.

It should be no surprise that bond markets around the world are rallying in sync with these equity declines as the combination of risk-off and the prospect for FZ lead to the inevitable conclusion that lower long term rates are in our future.  This also highlights the fact that the Fed’s concern over the second part of its mandate, stable prices, has essentially been set aside for another era.  The belief that inflation will remain extremely low forever is clearly a part of the current mindset.  Yesterday’s CPI (0.1%, 1.2% core) was simply further evidence that the Fed will ignore prices going forward.  So, 10-year Treasury yields are back to 0.7% this morning, 20 basis points below last Friday’s closing levels.  In other words, the impact of last Friday’s NFP number has been erased in four sessions.  But we are seeing investors rotate from stocks to bonds around the world, perhaps getting a bit nervous about the frothiness of the recent rallies.  (Even Hertz, the darling of the Robinhooders, is looking like Icarus.)

With risk clearly being jettisoned around the world, it should be no surprise that the dollar has stopped falling, and in fact is beginning to rally against almost all its counterparts.  While haven assets like CHF (+0.2%) and JPY (+0.1%) are modestly higher, NOK (-0.9%) and AUD (-0.85%) are leading the bulk of the G10 lower.  Norway is suffering on, not only broad dollar strength, but oil’s weakness this morning, with WTI -3.1% on the session.  As to Aussie, the combination of weaker commodity prices, the strong dollar, and market technicals as it once again failed to hold the 0.70 level, have led to today’s decline.

Emerging market activity is also what you would expect in a risk-off session, with MXN (-1.6%), ZAR (-1.1%) and RUB (-0.7%) leading the way lower.  Obviously, oil is driving both MXN and RUB, while ZAR is suffering from the weakness in the rest of the commodity complex.  I think the reason that the peso has fallen so much further than the ruble is that MXN has seen remarkable gains over the past month, more than 13% at its peak, and so seems overdue for a correction.  One notable exception to this price action today is THB, which is higher by 0.65% on a combination of reports of a fourth stimulus package and a breach of the 200-day moving average which got technicians excited.

This morning’s data brings the latest Initial Claims data (exp 1.55M), as well as Continuing Claims (20.0M) and PPI (-1.2%, 0.4% core).  While nobody will care about the latter, there will be ongoing intense scrutiny on the former as Chairman Jay made it abundantly clear that employment is the only thing the Fed is focused on for now.  With the FOMC meeting behind us, we can expect to start to hear from its members again, but on the schedule, nothing happens until next week.

It is not hard to make the case that both the euro and pound have been a bit toppish at recent levels, and with risk decidedly off today, further declines there seem quite viable.


Good luck and stay safe


Unless Lowered Instead

All eyes have now turned to the Fed
As pundits expect Jay will spread
The message that rates,
Until future dates,
Are fixed, unless lowered instead

Most market activity is muted this morning as traders and investors await the latest words of wisdom from Chairman Jay and his compadres. The key questions in the air are:

1. What will the Fed’s new forecasts describe?
2. What will the dot plot (remember that?) look like?
3. Will there be any change in current forward guidance?
4. Will there be any mention of yield curve control (YCC)?

Let’s quickly try to unpack these and see what they mean.

1. The Fed ordinarily updates its economic forecasts quarterly, but wisely, in my view, skipped March’s update given the incredible uncertainty that existed due to the beginnings of the Covid-19 impact. Three months later, the breadth of economic destruction has become clearer, but it will be interesting to learn their current views on the topic. For comparison, last week the ECB forecast a central scenario of Eurozone GDP as follows: 2020 -8.7%, 2021 +5.2%, 2022 +3.3%. The OECD forecast global GDP at -6.0% this year and US GDP at -7.3% this year assuming no second wave of infections. Those numbers fall to -7.6% and -8.5% respectively if there is a second wave of Covid infections. No matter how you slice it, 2020 is set to report negative GDP growth, but the question is, will the Fed demonstrate relative optimism or not?

2. The dot plot, as you may recall, was the biggest issue for a long time, as it was the Fed’s non-verbal way of offering forward guidance. The idea was that each FOMC member would offer his/her own views of the future level of rates and the median forecast was seen as a proxy of the Fed’s views. While it is abundantly clear that the view for 2020 will remain 0.00%, the real question is what the timeline anticipated by the FOMC will be as to when rates can start to rise again. It strikes me that while there will be some divergence, as always, we are likely to see only very gradual increases expressed, with a real possibility that 2021’s median will also be 0.00% and rates only beginning to rise in 2022. This begs the question…

3. How will they proffer their forward guidance? Current language is as follows: “The Committee expects to maintain this target (0.00%-0.25%) until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Current thoughts are they could become more specific with respect to the timeline, (e.g. saying rates would remain at current levels until the end of 2022) or with respect to data (e.g. until Unemployment is at 5.0% and Inflation is back to 2.0%). Of course, the lesson from Chairman Bernanke is that if they go the latter route, they can easily change the level as they see fit. But for now, the longer the timeline, the more confidence that would seem to be imparted. At least, that’s the theory.

4. Finally, there has been a great deal of discussion regarding YCC and whether the Fed will announce a program akin to the BOJ (10-year) or RBA (3-year) where they target a rate on a specific maturity of the Treasury curve. Most analysts, as well as Cleveland Fed President Mester, believe it is too early to make a pronouncement on this subject, but there are those who believe that despite the equity market’s recent frothiness, they may want to step harder on the gas pedal to make sure they keep up what little momentum seems to have started. To me, this is the biggest story of the afternoon, and the one with the opportunity for the most market impact. It is not fully priced in, by any means, and so would likely see a huge rally in both bonds and stocks as the dollar fell sharply if they were to announce a program like this. I like gold on this move as well.

So, plenty to look forward to this afternoon, which explains why market activity has been so limited overall so far today. Equity markets in Asia were barely changed, although in the past few hours we have seen European bourses start to decline from early modest gains. At this point the DAX (-0.8% and CAC (-0.6%) are fully representative of the entire Eurozone space. At the same time, US futures have turned mixed from earlier modest gains with Dow e-minis down 0.3% although NASAAQ futures are actually higher by a similar amount.

Bond markets are generally anticipating something from the Fed as the 10-year has rallied and yields declined a further 3bps which now takes the decline since Friday’s close to 10bps. Bunds and Gilts are both firmer as well, with modestly lower yields while the PIGS are mixed as Greek yields have tumbled 9bps while Spain (+3bps) and Portugal (+4.5bps) see rising yields instead.

And finally, the dollar is definitely on its back foot this morning. In fact, it is lower vs. the entire G10 bloc with Aussie and Kiwi leading the way with 0.5% gains. Right now, the Aussie story looks more technical than fundamental, as it approaches, but cannot really hold 0.70, its highest point in almost a year. But overall, what is interesting about this movement is that despite yesterday’s desultory equity performance and this morning’s modest one as well, the dollar is behaving in a risk-on manner. Something else is afoot, but I have not yet been able to suss it out. I will though!

In the EMG space, the dollar is lower against virtually all its counterparts with IDR as the major exception. The rupiah fell 0.65% last night, actually recouping larger earlier losses at the end of the session, after the central bank explained they would be capping any strength in an effort to help Indonesian exporters. On the plus side is a range of currencies from all three blocs, which is evidence of pure dollar weakness rather than specific positive currency stories.

On the data front, overnight we learned that Chinese PPI was weaker than expected, reflecting weakness in its export markets and not boding well for that elusive V-shaped recovery. We also saw horrific April French IP data (-34.2% Y/Y), but that was pretty much as expected. This morning we get the latest CPI data from the US (exp 0.3%, 1.3% ex food & energy), but inflation remains a secondary concern to the Fed for now. Rather, there is far more focus on the employment data at the Mariner Eccles Building, so really, for now it is all about waiting for the Fed. If pressed, I think they will be more likely to offer some new, more dovish, guidance as it appears they will not want to lose any positive momentum. That means the dollar should remain under pressure for a little while longer.

Good luck and stay safe

Enough Wherewithal

The Chairman explained to us all
The Fed has enough wherewithal
To counter the outbreak
But, too, Congress must take
More actions to halt the shortfall

The US equity markets led global stocks lower after selling off in the wake of comments from Chairman Powell yesterday morning. In what was a surprisingly realistic, and therefore, downbeat assessment, he explained that while the Fed still had plenty of monetary ammunition, further fiscal spending was necessary to prevent an even worse economic and humanitarian crisis. He also explained that any recovery would take time, and that the greatest risk was the erosion of skills that would occur as a huge swathe of the population is out of work. It cannot be a surprise that the equity markets sold off in the wake of those comments, with a weak session ending on its lows. It is also not surprising that Asian markets overnight followed US indices lower (Nikkei -1.75%, Hang Seng -1.45%, Shanghai -1.0%), nor that European markets are all in the red this morning (DAX -1.6%, CAC -1.7%, FTSE 100 -2.2%). What is a bit surprising is that US futures, at least as I type, are mixed, with the NASDAQ actually a touch higher, while both the Dow and S&P 500 see losses of just 0.2%. However, overall, risk is definitely on its back foot this morning.

But the Chairman raised excellent points regarding the timeline for any recovery and the potential negative impacts on economic activity going forward. The inherent conflict between the strategy of social distance and shelter in place vs. the required social interactions of so much economic activity is not a problem easily solved. At what point do government rules preventing businesses from operating have a greater negative impact than the marginal next case of Covid-19? What we have learned since January, when this all began in Wuhan, China, is that the greater the ability of a government to control the movement of its population, the more success that government has had preventing the spread of the disease. Alas, from that perspective, the inherent freedoms built into the US, and much of the Western World, are at extreme odds with those government controls/demands. As I have mentioned in the past, I do not envy policymakers their current role, as no matter the decision, it will be called into question by a large segment of the population.

What, though, are we now to discern about the future? Despite significant fiscal stimulus already enacted by many nations around the world, it is clearly insufficient to replace the breadth of lost activity. Central banks remain the most efficient way to add stimulus, alas they have demonstrated a great deal of difficulty applying it to those most in need. And so, despite marginally positive news regarding the slowing growth rate of infections, the global economy is not merely distraught, but seems unlikely to rebound in a sharp fashion in the near future. Q2 has already been written off by analysts, and markets, but the question that seems to be open is what will happen in Q3 and beyond. While we have seen equity weakness over the past two sessions, broadly speaking equity markets are telling us that things are going to be improving greatly while bond markets continue to point to a virtual lack of growth. Reading between the lines of the Chairman’s comments, he seems to be siding with the bond market for now.

Into this mix, we must now look at the dollar, and its behavior of late. This morning had seen modest movement until about 6:30, when the dollar started to rally vs. most of its G10 counterparts. As I type, NOK, SEK and AUD are all lower by 0.5% or so. The Aussie story is quite straightforward as the employment report saw the loss of nearly 600K jobs, a larger number than expected, with the consequences for the economy seen as potentially dire. While restrictions are beginning to be eased there, the situation remains one of a largely closed economy relying on central bank and government largesse for any semblance of economic activity. As to the Nordic currencies, SEK fell after a weaker than expected CPI report encouraged investors to believe that the Riksbank, which had fought so hard to get their financing rate back to 0.00% from several years in negative territory, may be forced back below zero. NOK, however, is a bit more confusing as there was no data to see, no comments of note, and the other big key, oil, is actually higher this morning by more than 4%. Sometimes, however, FX movement is not easily explained on the surface. It is entirely possible that we are seeing a large order go through the market. Remember, too, that while the krone is the worst performing G10 currency thus far in 2020, it has managed to rally more than 7% since late April, and so we are more likely seeing some ordinary back and forth in the markets.

One other comment of note in the G10 space was from BOE Governor Andrew Bailey, who reiterated that negative interest rates currently have no place in the BOE toolkit and are not necessary. While the comments didn’t impact the pound, which is lower by 0.25% as I type, it continues to be an important distinction as along with Chairman Powell, the US and the UK are the only two G10 nations that refuse to countenance the idea of NIRP, at least so far.

In the emerging markets, what had been a mixed and quiet session earlier has turned into a pretty strong USD performance overall. The worst performer is ZAR, currently down 0.9% the South African yield curve bear-steepens amid continued unloading of 10-year bonds by investors. But it is not just the rand falling this morning, we are seeing weakness in the CE4 (CZK -0.7%, HUF -0.5%, PLN -0.4%) and once again the Mexican peso is finding itself under strain. While the CE4 appear to simply be following the lead of the euro (-0.35%), perhaps with a bit more exuberance, I think the peso continues to be one of the more interesting stories out there.

Both MXN and BRL have been dire performers all year, with the two currencies being the worst two performers in the past three months and having fallen more than 20% each. Both currencies continue to be extremely volatile, with daily ranges averaging in excess of 2% for the past two months. The biggest difference is that BRL has seen a significant amount of direct intervention by the BCB to prevent further weakness, while MXN continues to be a 100% free float. The other thing to recall is that MXN is frequently seen as a proxy for all LATAM because of its relatively better liquidity and availability. The point is, further problems in Brazil (and they are legion as President Bolsonaro struggles to rule amid political fractures and Covid-19) may well result in a much weaker Mexican peso. This is so even if oil prices rebound substantially.

Turning to data, we see the weekly Initial Claims number (exp 2.5M) and Continuing Claims (25.12M), but otherwise that’s really it. While we have three more Fed speakers, Kashkari, Bostic and Kaplan, on the calendar, I think after yesterday’s Powell comments, the market may be happier not to hear their views. All the evidence points to an overbought risk atmosphere that needs to correct at some point. As that occurs, the dollar should retain its bid overall.

Good luck and stay safe

Make Hay

The Fed, today’s, finally set
To start to buy corporate debt
Meanwhile the UK
Did start to make hay
With its largest Gilt issue yet

While markets are fairly docile this morning, there are four interesting stories to note, all of which are likely to have bigger impacts down the road.

The first of these emanates from the Mariner Eccles Building in Washington, where the FOMC will begin to implement its Secondary Market Corporate Credit Facility (SMCCF), purchasing its first investment grade bond ETF’s. Ironically, in their effort to stabilize corporate credit markets that are suffering a hangover of excess issuance prior to the Covid-19 crisis, the Fed is going to ramp up margin debt for the purchases. A little ‘hair of the dog’ it seems is the best idea they have. Consider, the process of these purchases is that the Treasury has deposited $37.5 billion into an SPV account which will serve as collateral for that SPV to purchase up to 10x that amount in securities. Talk about speculative! If the SPV purchases its full allotment, then the Fed will effectively be increasing the total amount of margin debt outstanding by nearly 80%. Granted, there is no concern about the Fed being able to pay for these securities in actuality, it’s just the legal questions that may arise if they fall in price by more than 10% and the Fed has actual losses on its balance sheet. Naturally, the idea is that with the Fed buying, there is almost no possibility that prices could fall. However, do not believe that for a moment, just as we have seen in the Treasury market, despite the Fed buying $ trillions worth, bond prices still decline all the time. And don’t forget what we saw in March, when yields rocketed higher for a period of time. Perhaps the most surprising aspect is that US equity futures have been trading either side of flat despite this new money entering the market.

The second interesting story comes from across the pond, where the UK issued gilts via a syndicate for the first time, offering a new 10-year bond and garnering £65 billion pounds of demand, a record amount of attraction. It seems that one of the things that got buyers excited was a comment by BOE Deputy Governor Broadbent hinting that negative rates are not out of the question as the Old Lady seeks to insure sufficient policy support for the economy.

While on the subject of negative rates, it is worth noting that two Fed regional presidents, Bostic and Evans, were both circumspect as to the need for the Fed to ever go down that road. That is certainly good news, but one cannot forget the language change made in September of last year when the Fed stopped referring to the “zero lower bound” and began calling it the “effective lower bound”. Observers far more prescient than this one have noted that the change clearly opens the door for negative rates in the future. There is certainly no indication that is on the cards right now, but it is not an impossibility. Keep that in mind.

From Austria, Herr PM Kurz
Admitted that fiscal transfers
Are what are required
Lest Rome is inspired
To exit, which no one prefers

Another interesting headline this morning comes from Vienna, where Austrian PM Sebastian Kurz explained that the only way Italy can survive is via debt mutualization by the EU, as there is no way they will ever be able to repay their debt. While it is refreshing to hear some truth, it is also disconcerting that in the very next comment, PM Kurz explained there was no way that Austria was comfortable with that course of action. While Austria stood ready to support Italy, they would not take on their obligations. Of course, this is the fatal flaw in the EU, the fact that the Teutonic trio of Germany, Austria and the Netherlands are the only nations that can truly help fund the crisis but are completely unwilling to do so. I once again point to the German Constitutional Court ruling last week as a sign that the euro is likely to remain under pressure for a time to come. While this morning it is now higher by 0.2%, it remains near the bottom of its recent range with ample opportunity to decline further. Beware the ides of August, by which time the ECB will have responded to the court.

And finally, it must be noted that it is raining in Norway. By this I mean that the Government Pension Fund of Norway, the world’s largest wealth fund, is going to be selling as much as $41 billion in assets in order to fund the Norwegian government and its response to the crisis. This is exactly what a rainy-day fund is meant for, so no qualms there. But it does mean that we are going to see some real selling pressure on financial assets as they liquidate that amount of holdings, many of which are in US stocks. NOK, however, has been the beneficiary, rallying 0.8% this morning on the news. Given the krone has been the worst performing G10 currency this year, it has plenty of room to rally further without having any negative economic impacts.

Those are the most interesting headlines of the day, and the ones most likely to have a market impact. However, today, for the first time in a while, there is not much market impact in any markets. Equity prices in Asia were modestly softer, while those in Europe are mixed but edging higher. Bond prices are within a tick or two of yesterday’s closing levels, and the dollar is having a mixed session, although I would estimate that on net it is slightly weaker.

On the data front, it has been extremely quiet overnight with a few Sentiment indicators in France and Japan, as well as the NFIB here in the US, all printing terrible numbers, but none quite as terrible as the median forecasts. My observation is that analysts are now expanding their view of just how bad things are and beginning to overstate the case. As for this morning, we have CPI on the docket, with expectations of a 0.4% headline print and 1.7% core print. While inflation may well be in our future given the combination of monetary and fiscal policy response, it is not in the near future.

Barring some other news story, markets seem pretty happy to consolidate for a change, and I expect that is what we will see today. However, nothing has changed my view that a substantial repricing of risk is still in our future, and with it, a stronger dollar. While we don’t know what the catalyst will be, I have my eye on the ECB response to the German Constitutional Court ruling.

Good luck and stay safe

The Real Threat

Around the world, government’s fret
Is it safe to reopen yet?
As growth worldwide slows
Each government knows
Elections are now the real threat

The common theme in markets today, the one that is driving asset prices higher, is that we are beginning to see a number of countries, and in the US, states, schedule the easing of restrictions on activity. Notably, in Italy, the European epicenter of the virus, PM Conte is trying to reschedule the return to some sense of normality with the first relief to occur one week from today in the manufacturing and construction industries, followed by retailers two weeks later. Personal services and restaurants, alas, must wait until June 1 at the earliest. While that hardly seems like an aggressive schedule, the forces arrayed on both sides of the argument grow louder with each passing day, neither of which has been able to convince the other side. (This sounds like the Democrats and Republicans in Congress.) But the reality is, there is no true playbook as to the “right” way to do this as we still know remarkably little about the disease, and its true infectiousness. Of course, collapsing the global economy in fear is likely to result in just as many, if not more, victims.

But it’s not just Italy that is starting. In the US, Georgia is under close scrutiny as it begins easing restrictions as of today. New York’s Governor Cuomo is now talking about a phased in reopening of certain areas, mostly upstate NY, beginning on May 15. And the truth is that many states in the US are preparing to reopen sections of their respective economies. The same is true throughout Europe and Asia, as the rolling lockdowns globally have essentially inflicted as much pain as governments can tolerate.

Of course, the real question is, what exactly does it mean to reopen the economy? I think it is fair to say that the immediate future will not at all resemble the pre-virus situation. Even assuming that most personal financial situations were not completely disrupted (and they truly were), how many people are going to rush out to sit in a movie theater with 200 strangers? How many people are going to jump on an enclosed metal tube with recirculated air for a quick weekend getaway? In fact, how many are going to be willing to go out to their favorite restaurant, assuming it reopens? After all, you cannot eat dinner while wearing an N95 mask!

My point is, the upcoming recovery of this extraordinary economic disruption is likely to be very slow. In fact, history has shown that traumatic events of this nature (think the Depression in the 1930’s) result in significant behavioral changes, especially regarding personal financial habits. The virus has highlighted the fragility of many job situations. It has exposed just how many people worldwide live close to the edge with almost no ability to handle a situation that interrupts their employment cashflow. And these lessons are the type that stick. They will almost certainly result in reduced consumption and increased personal savings. And that is almost the exact opposite of what built the global economy since the end of WWII.

With this in mind, it strikes me that the dichotomy we continue to see in markets, where equity investors are remarkably bullish, while bond and commodity investors seem to be planning for a very long period of slow/negative growth, is going to ultimately be resolved in favor of the bond market. No matter how I consider the next several months, no scenario results in that fabled V-shaped recovery.

But perhaps I am just a doom monger who only sees the negatives. After all, a quick look at markets today shows that the bulls are ascendant. Equity markets around the world are firmer this morning as the combination of prospective reopening of economies and additional central bank stimulus have convinced investors that the worst is behind us. Last night, the BOJ, as widely expected, promised unlimited JGB buying going forward. In addition, they increased their corporate bond buying to ¥20 trillion, essentially following in the Fed’s footsteps from two weeks ago. If their goal was to prop up the stock market, then it worked as the Nikkei closed higher by 2.7% helping the rest of Asia (Hang Seng +1.9%, Australia +1.5%) as well. Europe took the baton, and with more policy ease expected from the ECB on Thursday, has seen markets rise between 1.4% (FTSE 100) and 2.4% (DAX). Meanwhile, the euphoria continues to seep westward as US futures are all higher by roughly 1% this morning.

Bond markets, too, are feeling a bit better with Treasuries and bunds both seeing yields edge higher, 2bp and 1bp respectively, while the risky bonds from the PIGS, all see yields fall sharply. Interestingly, commodity markets don’t seem to get the joke, as oil (-15.8%) is under significant pressure. Finally, the dollar is under pressure across the board, falling against all its G10 counterparts with AUD (+1.4%) leading the way on a combination of today’s positivity and some short-term positive technicals. Even NOK (+0.75%) is firmer today despite oil’s sharp decline, showing just how much the big picture is overwhelming market idiosyncrasies.

In EMG space, pretty much the entire bloc is firmer vs. the dollar with ZAR (+1.15%) and HUF (+0.85%) on top of the list. The rand seems to be the beneficiary of the idea that South Africa is set to receive $5 billion from the IMF and World Bank to help them cope with Covid-19 related disruptions. Meanwhile, the forint is seeing demand driven by expectations of the country easing its lockdown restrictions this week. One quick word about BRL, which has not opened as yet. Last week saw some spectacular movement with the real having fallen nearly 10% at its worst point early Friday afternoon as President Bolsonaro’s most important ally, Justice Minister Moro, resigned amid allegations that Bolsonaro was interfering with a corruption investigation into his own son. The central bank stepped in to stem the tide, and successfully pushed the real higher by nearly 3%, but the situation remains tenuous and as Bolsonaro’s popularity wanes, it seems like there is a lot of room for further declines.

On the data front this week, the first look at Q1 GDP will be closely scrutinized, as well as the FOMC meeting on Wednesday and Thursday’s Claims data.

Tuesday Case Shiller Home Prices 3.13%
  Consumer Confidence 87.9
Wednesday Q1 GDP -3.9%
  FOMC Rate Decision 0.00% – 0.25%
Thursday Initial Claims 3.5M
  Continuing Claims 19.0M
  Personal Income -1.6%
  Personal Spending -5.0%
  Core PCE -0.1% (1.6% Y/Y)
  Chicago PMI 38.2
Friday ISM Manufacturing 36.7
  ISM Prices Paid 28.9

Source: Bloomberg

Obviously, the data will be nothing like any of us have ever seen before, but the real question is just how much negativity is priced into the market. In addition, while the Fed is not expected to change any more policies, you cannot rule out something new to goose things further.

In the end, there is no economic evidence yet that the situation is improving anywhere in the world. And while measured cases of Covid-19 infections may be dropping in places, human behaviors are likely permanently altered. This crisis is not close to over, regardless of what the stock markets are trying to indicate. My money is on the bond market view that things are going to be very slow for a long time to come. And that implies the dollar is going to retain its bid as well.

Good luck and stay safe

Infinite Buying

Is infinite buying
Kuroda-san’s new mantra
If so, will it help?

An interesting lesson was learned, for those paying attention, yesterday after a headline hit the tape about the BOJ. The headline, BOJ Considering Unlimited JGB Purchases, had an immediate impact on the yen’s value, driving it lower by 0.7% in minutes. After all, logic dictates that a central bank that will buy all the government debt available will drive rates, no matter where they are, even lower, and that the currency would suffer on the back of the news. But, as is often the case, upon further reflection, the market realized that there was much less here than met the eye, and the yen recouped all those losses by early afternoon. In fact, over the past two sessions, the yen is essentially unchanged overall.

But why, you may ask, would that headline have been misleading. The key is to recognize that the BOJ’s current policy describes their QQE (Qualitative and Quantitative Easing) as targeting ¥80 trillion per year, equivalent in today’s market to approximately $740 billion. But they haven’t come close to achieving that target since 2017, actually only purchasing about ¥15 trillion last year. That’s a pretty big miss, but a year after they created that target, they began Yield-Curve Control (YCC), which states that 10-year JGB’s will be kept at around a 0.0% yield, +/-0.2%. Now, given that the BOJ already owns nearly 50% of all JGB’s outstanding, there is very little actual trading ongoing in the JGB market, so it doesn’t really move very much. The point is, the BOJ doesn’t need to buy many JGB’s to keep yields around 0.0%. However, they have been concerned over the optics of reducing that ¥80 trillion target, as reducing it might seem a signal that the BOJ was tightening policy. But now, in the wake of the Fed’s announcement that they will be executing unlimited QE, the BOJ has the perfect answer. They can get rid of a target that no longer means anything, while seeming to expand their program. At the same time, when pressed, they will point to their successful YCC and claim they are purchasing everything necessary to keep rates low. And in fairness, they will be right.

Next week it’s the central bank three
Who meet and they’ll try to agree
On proper next steps
(Increasing the PEPP?)
And printing cash like it was free

This was merely a prelude to what the next several days are going to hold, anticipation of the next central bank actions as the three major central banks, BOJ, Fed and ECB, all meet next week. At this point, we have already seen all the excitement regarding the BOJ, and as to the Fed, while they may well announce more details on their efforts to get funds flowing to SME’s, they are already at unlimited QE (and they are active, buying $75 billion/day) and so it seems unlikely that there will be anything else new to be learned.

The ECB, however, is the place where all the action is going to be. Remember, Madame Lagarde was a little slow off the mark, when back in March she stated that the ECB’s job was not to worry about spreads in the government bond market. Granted, within two weeks, after the market crushed Italian BTP’s and called into question Italy’s ability to fund its Covid-19 response, she realized that was, in fact, her only role. And so subsequently we got a €750 billion PEPP program that included Greek debt for the first time. But clearly, based on the recent PMI data, as well as things like this morning’s Ifo Expectations Survey (69.4 vs. exp 75.0), more is needed. So, speculation is now rampant that PEPP will be increased by €250 billion, and that the Capital Key will be explicitly scrapped. The latter is important because that is the driver of which nation’s debt they purchase and is based on the relative size of each economy. But the main problem is Italy, and so you can be sure that the ECB is going to wind up with a lot more Italian debt than would be allowed under the old rules.

Turning back to this week, though, we still have a whole day to traverse before the weekend arrives. Overall, markets are beginning to quiet down, with actual volatility a bit softer than we had seen recently. For example, though equity markets in Europe are lower, the declines are between 0.7% (FTSE 100) and 1.1% (Spain’s IBEX), with the CAC and DAX in between. If you recall, we were seeing daily movement on the order of 2%-5% not that long ago. The same was true overnight, with the Nikkei (-0.9%), Hang Seng (-0.6%) and Shanghai (-1.1%) all softer but by less dramatic amounts. As to US futures, while they were negative earlier, they are actually currently higher by about 0.5%, although we have a long way to go before the opening.

Bond markets are uninspiring, with Treasuries basically unchanged. European markets are a bit firmer (yields lower) across the board as investors try to anticipate the mooted increase in PEPP. And JGB’s are yielding -0.026%, right where the BOJ wants them.

The dollar this morning is now ever so slightly softer, with CAD actually the leading gainer up 0.2%, while the rest of the G10 is +/-0.1%. The Ifo data was the only release of note, although we have seen oil prices rebound slightly, currently higher by about 1.0% helping both CAD and NOK. In the EMG bloc, the story is a bit more mixed, although gainers have had a better day than losers. By that I mean, CZK (+1.35%), HUF (+1.1%) and RUB (+1.0%) have seen stronger gains than the worst performers (INR and KRW both -0.5%). As always, there are idiosyncratic drivers, with CZK seeming to benefit from word that lockdowns are about to ease, while HUF is gaining on the imminent beginning of QE purchases by the central bank. As to RUB, the combination of oil’s continuing rally off its worst levels earlier this week, and the Bank of Russia’s 50bp rate cut, to 5.50%, has investors looking for better times ahead. Ironically, that stronger oil seems to be weighing on the rupee, while the won fell as foreign equity selling dominated the market narrative.

Yesterday’s Claims data was pretty much as expected, granted that was 4.4M, still horrific, but the market absorbed the news easily. This morning brings Durable Goods (exp -12.0%, -6.5% ex transport) and then at 10:00 Michigan Sentiment (68.0). Not surprisingly, expectations are for some of the worst readings in history, but the way the market has been behaving, I think the risk is actually for a less negative data print and a sharp risk rally. Eventually, unless there really is a V-shaped recovery, I do see risk being shed, but it doesn’t seem like today is the day to get started.

Good luck, good weekend and stay safe