Employment Unstressed

The jobs report Friday impressed
With growth in employment unstressed
As well, Friday’s quotes
From Fed speakers’ throats
Explained how their policy’s best

As is evidenced by the fact that the stock market in the US continues to trade to new all-time highs on a daily basis, the Fed is doing an incredible job…just ask them! Friday we learned that both the economy and monetary policy are “in a good place” according to vice-chairman Richard Clarida. Governor Randall Quarles used the same terms as did NY Fed President John Williams, who added, “…the economy is strong,” as well to the mix. At least they are all singing from the same hymnal. So, following a much better than expected payrolls report Friday morning, with the headline number not only beating expectations handily (128K vs. 85K), but the previous two months’ data were revised higher by a further 95K, the Fed is patting themselves on the back.

Adding to the overall joy in markets is the apparent thaw in the US-China trade talks, where it appears that a small, ‘phase one’ deal is pretty much agreed with both sides simply trying to find a place to sign it now that the APEC conference in Chile has been canceled due to local violent protests. And of course, the other big uncertainty, Brexit, has also, apparently, become less risky as the amended deal agreed by Boris and the EU has put to rest many fears of a hard Brexit. While the UK is currently engaged in a general election campaign cum second Brexit referendum, the smart money says that Boris will win the day, Parliament will sign the deal and the next steps toward Brexit will be taken with no mishaps.

Who knows, maybe all of these views are absolutely correct and global growth is set to rebound substantially driving stocks to ever more new highs and allowing central banks around the world to finally unwind some of their ‘emergency’ measures like ZIRP, NIRP and QE. Or…

It is outside the realm of this morning note to opine on many of these outcomes, but history tells us that everything working out smoothly is an unlikely outcome.

Turning to the market this morning shows us a dollar that is marginally firmer despite a pretty broad risk-on feeling. As mentioned above, equity markets are all strong, with Asia closing higher and almost every European market higher by more than 1.0% as I type. US futures are pointing in the same direction following on Friday’s strong performance. Treasury yields are also higher as there is little need for safety when stock prices are flying, and we are seeing gains in oil and industrial metals as well. All of which begs the question why the dollar is firm. But aside from the South African rand, which has jumped 1.5% this morning after Moody’s retained its investment grade rating on country bonds, although it did cut its outlook to negative, there are more currencies lower vs. the dollar than higher.

One possible explanation is the Fed’s claim that they have ended their mid-cycle adjustment and that US rates are destined to remain higher than those elsewhere in the world going forward. It is also possible that continued weak data elsewhere is simply undermining other currencies. For example, Eurozone final PMI’s were released this morning and continue to show just how weak the manufacturing sector in Europe remains. Given the fact that the ECB is basically out of bullets, and the fact that the Germans and Dutch remain intransigent with respect to the idea of fiscal stimulus, a weak currency is the only feature that is likely to help the ECB achieve its inflation target. However, as we have seen over the past many years, the pass-through of a weak currency to higher inflation is not a straightforward process. While I do think the dollar will continue its slow climb higher, I see no reason for the pace of the move to have any substantive impact on Eurozone CPI.

Meanwhile, the G10 currency under the most pressure today is the pound, which has fallen 0.2%, and while still above 1.29, seems to have lost all its momentum higher as the market tries to assess what will happen at the election six weeks hence. While I continue to believe that Boris will win and that the negotiated deal will be implemented, I have actually taken profits on my personal position given the lack of near-term momentum.

Looking ahead to this week, the data picture is far less exciting than last, although we do have the BOE meeting on Thursday to spice things up, as well as a raft of Fed speakers:

Today Durable Goods -1.1%
  -ex transport -0.3%
  Factory Orders -0.4%
Tuesday Trade Balance -$52.5B
  JOLTS Job Openings 7.088M
  ISM Non-Manufacturing 53.4
Wednesday Nonfarm Productivity 0.9%
  Unit Labor Costs 2.2%
Thursday Initial Claims 215K
  Consumer Credit $15.05B
Friday Michigan Sentiment 95.5

Source: Bloomberg

As all of this data is second tier, it is hard to get too excited over any of it, however, if it demonstrates a pattern, either of weakness or strength, by the end of the week we could see some impact. Meanwhile, there are nine Fed speakers slated this week, but given the consistency of message we heard last week, it seems hard to believe that the message will change at all, whether from the hawks or doves. At this point, I think both sides are happy.

Putting it all together, I would argue that the dollar is more likely to suffer slightly this week rather than strengthen as risk appetite gains. But it is hard to get too excited in either direction for now.

Good luck
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Frustrations

The global economy’s state
Continues to see growth abate
As trade between nations
Has met with frustrations
While central banks try to reflate

Markets have been extremely quiet overnight as investors and traders await the release of the US payroll report at 8:30 this morning. Expectations, according to Bloomberg, are as follows:

Nonfarm Payrolls 85K
Private Payrolls 80K
Manufacturing Payrolls -55K
Unemployment Rate 3.6%
Average Hourly Earnings 0.3% (3.0% Y/Y)
Average Weekly Hours 34.4
Participation Rate 63.1%
ISM Manufacturing 48.9
ISM Prices Paid 50.0
Construction Spending 0.2%

While the GM strike has ended, it was in full swing during the survey period and explains the expected significant decline in manufacturing jobs. One other thing having a negative impact is the reduction of census workers. Given these idiosyncratic features, we must look beyond the headline number to ascertain if the employment situation remains robust, or is starting to roll over. Consider that most analysts expect that the GM strike was worth about 50K jobs and the census situation another 20K. If we add those back to the median expectation of 85K, we wind up at essentially the 3-month average of 157K. However, it is important to remember that the 1-year average is higher, 179K, which indicates that there has been an ongoing decline in new hiring for a little while now. Some of this is certainly due to the fact that, as we have heard repeatedly, finding good employees is so difficult, especially in the service industries. But certainly, the trade situation and the fact that the US economy is growing more slowly is weighing on the data as well.

The reason this is important, of course, is that the NFP report is one of the key metrics for the Fed as they try to manage monetary policy in an uncertain world. Unfortunately for them, the Unemployment Rate is backward looking data, a picture of what has been, not what is likely to be. In truth, they should be far more focused on the ISM report at 10:00. At least that has some forecasting ability.

A quick recap of this week’s central bank activity shows us that there were 3 key meetings; the Bank of Canada, who left policy unchanged but turned dovish in their statement; the FOMC, which cut rates and declared they were done cutting rates unless absolutely necessary; and the BOJ, which left policy unchanged but hinted that they, too, could be induced to easing further if things don’t pick up soon. (I can pretty much promise the BOJ that things are not going to pick up soon, certainly not inflation.) Perhaps the most interesting market response to this central bank activity was the quietest bond market rally in history, where 10-year Treasury yields are, this morning, 15bps lower than Monday’s opening. Only Canada’s 10-year outperformed that move with a 20bp decline (bond rally). Given the rate activity, it ought not be surprising that equity markets retain their bid overall. This morning, ahead of the NFP report, US futures are pointing higher and we have seen gains in Europe (FTSE, CAC, and DAX +0.33%) as well as most of Asia (Hang Seng +0.7%, Shanghai +1.0%) although the Nikkei did fall 0.3%.

And what about the dollar? Well, in truth it is doing very little this morning, with most currencies trading within a 0.20% band around yesterday’s closing levels. The one big exception has been the Norwegian krone which has rallied sharply, 0.65%, after a much better than expected Manufacturing PMI release. Interestingly, this movement has dragged the Swedish krona higher despite the fact that Sweden’s PMI disappointed, falling to 46.0. However, beyond that, there is nothing of excitement to discuss.

We hear from five Fed speakers today, starting with Vice-chairman Richard Clarida, who will be interviewed on Bloomberg TV at 9:30 this morning before speaking at 1:00 to the Japan Society. But we also hear from Dallas Fed President Richard Kaplan, Governor Randall Quarles, SF Fed President Mary Daly and NY’s John Williams before the day is out. It seems to me that the market was pretty happy with Chairman Powell’s comments and press conference on Wednesday so I expect we will see a lot of reaffirmation of the Chairman’s thoughts.

So, all in all, it is shaping up to be a pretty dull day…unless Payrolls are a big surprise. I have a funny feeling that we are going to see a much weaker number than expected based on the extremely weak Chicago PMI data and its employment sub index, as well as the fact that the Initial Claims data seems to be edging higher these days. Of course, the equity market will applaud as they will start to price in more rate cuts, but I think the dollar will suffer accordingly.

Good luck and good weekend
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Much Could Be Gained

Today’s jobs report is the theme
About which most traders will scheme
If strong, bulls will buy
Just like last July
If weak, you can bet they’ll all scream

But yesterday there was some news
About a Fed President’s views
Ms. Mester explained
That much could be gained
If price hikes the Fed could perfuse

Yes folks, it’s payrolls day so let’s get that out of the way quickly. Here are the current consensus estimates as per Bloomberg:

Nonfarm Payrolls 145K (whisper 125K)
Private Payrolls 130K
Manufacturing Payrolls 3K
Unemployment Rate 3.7%
Average Hourly Earnings 0.2% (3.2% Y/Y)
Average Weekly Hours 34.4
Participation Rate 63.2%
Trade Balance -$54.5B

Census hiring explains the relatively wide gap between nonfarm and private payrolls, and it is important to understand that these numbers represent a downtick from the trends we have seen during the past several years. But it is also important to remember that a nonfarm number greater than 100K is deemed sufficient to prevent the Unemployment Rate from rising as population growth in the US slows. Given how poor the data has been this week, while official forecasts at most institutions haven’t fallen much, the trading community is definitely looking for a weaker number.

In the event the data is weak, I expect the dollar to decline as the market starts to price in more than a 25bp cut for the end of this month (currently an 85% probability), but I think the initial reaction to equities could be a rally as the reflex of lower rates leading to higher stock prices kicks in. Alas, for stock bulls, I fear the situation is starting to turn to the data is getting weak enough to indicate an imminent recession which will not be good for equity markets. Of course, a strong print should see both the stock market and the dollar rally, while Treasuries sell off. As an aside, 10-year Treasury yields have fallen 37 basis points since September 13! That is a huge move and a very good indicator of just how quickly sentiment has shifted regarding the Fed’s activity later this month.

But there was something else yesterday that I think was not widely noticed, yet I believe is of significant importance. Cleveland Fed President Loretta Mester, one of the two most hawkish members of the FOMC (KC’s Esther George is the other) spoke yesterday and said she thought, “adopting a band for the Fed’s inflation objective makes sense for communications reasons, as it allows some scope to run inflation a bit higher in the band during good times while allowing the target for price gains to be lower during downturns when interest rates are near zero.” This is hugely significant because if a Fed hawk is now comfortable allowing inflation to run above target, something that hawks specifically fight, it means that the FOMC is much more dovish than previously assumed. And that means that we are likely to head toward ZIRP much sooner than many had thought.

This is clearly an impediment to further dollar strength, as one of the pillars of the strong dollar view has been the idea that the FOMC would maintain relatively tighter monetary policy than other central banks. Of course, as we have already seen, other central banks are not sitting around, waiting for Godot, but acting aggressively already. For example, after the RBA cut rates last week, last night the Reserve Bank of India cut rates by 25bps while lowering GDP forecasts. As inflation remains modest in India, you can bet that there will be further cuts to come. The FX impact was on a day when the dollar lost ground against virtually all EMG counterparts, INR actually weakened by 0.15%.

Away from these stories, Brexit is still Brexit with Boris flitting around Europe trying to close the loop. Though not yet able to get a deal agreed in Brussels, he seemingly is having success at home in getting enough of Parliament to back him to get his deal passed. And that is important for the EU, because given the previous failure of Teresa May to get her deal passed, the EU is wary that anything to which they agree will still be voted down. But if Boris can show his deal will get enacted in the UK, it would be a powerful argument for the EU to blink.

And that’s really it folks. The dollar is generally softer this morning against both G10 and EMG currencies with KRW the biggest gainer (+0.8%) on excitement over prospects for the Fed to cut rates which encouraged profit taking after a two-week 2+% decline. But it’s all about payrolls this morning. We do hear from three more Fed speakers today, with Chairman Jay on the hustings in Washington this afternoon. That will give the market plenty of time to have absorbed the data.

For my money, I fear a much worse NFP number, something on the order of 50K. The data has been too weak to expect something much better in my view.

Good luck and good weekend
Adf

The Hard Way

The quarter has come to an end
And Brexit’s now just round the bend
Meanwhile Chairman Jay
Has learned the hard way
Experience is his best friend

It has been more than a week and the market continues to talk about the liquidity crunch that drove repo rates to 10.0% briefly. The Fed did respond, albeit somewhat slowly, and have seemingly been able to get things under control at this point. But in the WSJ this weekend there was a very interesting article asking, how could this have happened? After all, the Fed’s primary responsibility is to ensure that there is sufficient funding in the system. And I think for all market participants, this is a critical question. Since the Fed is essentially the world’s central bank, if they are losing control of the plumbing of the US money markets, what does that say about their ability to implement monetary policy effectively.

The back story revolves around actions that occurred shortly after John Williams was named NY Fed President, despite a complete lack of markets experience (he is a PhD Economist and Fed lifer, never having held a job in the private sector). In one of his first acts, he dismissed two key lieutenants, the head of the Markets Desk and the head of Financial Services, both of whom had been with the Fed for more than twenty years, and both of whom had intimate familiarity with market crises. After all, they were both in their roles during the Financial crisis, when Williams was one of a hundred economists working for the Fed’s Board of Governors. In other words, he has zero real world or market experience, and he fired the two most experienced market hands in his organization. While there has never been an explanation as to why he made that move, it clearly came back to haunt him, and the Fed at large, last week.

The issue for markets is now one of confidence. It doesn’t matter that things seem to be under control at this point, and all the talk of a standing repo facility being implemented to insure there is always sufficient liquidity are addressing the symptoms, not the cause. In addition, there is almost no question that the Fed is going to start rebuilding its balance sheet, as apparently, watching that paint dry was a bit more exciting than anticipated. But in the end, if market participants lose faith that the Fed can effectively manage its processes, then it will significantly change the overall atmosphere in markets. Remember, we have spent the last ten plus years being taught that central banks, and the Fed in particular, have one job, to protect financial markets. Two weeks ago, we realized that the ECB has basically run out of ammunition in its efforts to continue to address Europe’s problems. If the Fed has lost the knowhow regarding what is needed to manage the US financial system, that is a MUCH larger problem. I’m not saying they have, just that the repo market gyrations are an indication that they will have to work very hard to convince markets they are still in charge.

Turning to the market situation overnight, there has been very little of interest overall. In fact, the best way to describe things would be mixed. For example, the dollar is slightly firmer vs. the euro (+0.15%) but slightly weaker vs the pound (-0.15%). And the truth is, as I look across the board, that is a pretty good description of the entire FX market, modest gains and losses without any trend to note. European equity markets are little changed, US futures are the same and Asian markets were mixed (Nikkei -0.5%, Hang Seng +0.5%). Finally, bond markets have shown almost no movement with 10-year yields in the major bonds within 1 basis point of Friday’s levels.

As today is quarter end, it feels like most market participants have already straightened up their positions and are waiting for tomorrow to start anew. Meanwhile, we have seen a bunch of data, with the most noteworthy so far being the very slightly better than expected Chinese PMI data, with Manufacturing PMI printing at 49.8 vs. expectations at 49.6. So, while that is better than a further decline, it still points to contraction and slowing growth in China.

Looking ahead to today’s session and the week upcoming, though, there is a lot of new information on the way, including the payroll report on Friday.

Today Chicago PMI 50.0
Tuesday ISM Manufacturing 51.0
  ISM Prices Paid 50.5
Wednesday ADP Employment 140K
Thursday Initial Claims 215K
  Factory Orders -0.3%
  ISM Non-Manufacturing 55.1
Friday Nonfarm Payrolls 146K
  Private Payrolls 130K
  Manufacturing Payrolls 3K
  Unemployment Rate 3.7%
  Average Hourly Earnings 0.3% (3.2% Y/Y)
  Average Weekly Hours 34.4
  Participation Rate 63.2%
  Trade Balance -$54.5B

In addition to the payroll report, we have fourteen Fed speakers, essentially the entire FOMC, this week. My conclusion from this excessive schedule is that the Fed is very concerned that their message is not getting across effectively and that they feel compelled to clarify and repeat the message. However, given the wide disparity of opinions on the Board, my sense is this onslaught of speeches will simply add to the confusion. Chairman Powell has a tough road ahead to get his views accepted given what seem to be hardening positions on both sides of the argument. In fact, the only way the doves can win out, in my view, is if the economic data here starts to deteriorate significantly, but of course, that is not an outcome they seek either!

As to the dollar, there is nothing that has occurred anywhere to dissuade me from my ongoing bullish view. Until we see some more significant changes in the data, the dollar will remain top dog.

Good luck
Adf

Quite Frankly Floored

Most pundits were, quite frankly, floored
That leaving the ECB Board
Was one of the hawks
Who tired of talks
‘bout QE the Germans abhorred

The dollar is stronger than where I left it Tuesday evening after a rally in yesterday’s NY session. Determining the catalyst for that rally has been difficult given the only economic data of note was New Home Sales (713K), which while quite strong are generally not seen as market moving, and the limited commentary overheard. However, there are three things that conspired, I believe, to drive the dollar higher.

First was the surprise resignation of Sabine Lautenschlaeger from the ECB Executive Board. Ms. Lautenschlaeger was one of the most ardent hawks on the ECB and was quite vocal that there was no need to resume QE at the current time. In fact, she had been proffering that message since the last meeting when Mario first hinted that QE2 was on the table. In the end, though, she was not able to garner enough support to dissuade Signor Draghi from going ahead with it, and it appears she decided that her voice was no longer taken into consideration. Whomever is chosen as her replacement is almost certain to have less hawkish views, and so the market recognized that the tone of the ECB has turned more dovish. A dovish ECB is likely to result in easier policies and correspondingly a weaker euro.

We also heard from Chicago Fed President Charles Evans, a known dove, who indicated that he saw no reason for further rate cuts this year. It appears that he was one of the dots in the middle, comfortable with last week’s cut but calling it quits then. He highlighted that if the economy deteriorated for some reason, he would not be against further cuts, but at the present time, they were not necessary. So, a Fed dove was mildly hawkish, helping cement the idea that the Fed was less likely to cut rates again this year. This can only be seen as dollar bullish.

Finally, we have the calendar as we approach quarter-end and the financing requirements necessary for banks and other financial firms when they report positions. The stricter regulatory environment that has been in place since the financial crisis means that there is an increased demand for dollars on virtually every institution’s balance sheet. That is one reason we have seen issues within the Fed Funds market with all the discussion about the Fed’s repo facility and recent activities. However, there are many institutions that simply buy dollars in order to put their balance sheet in order.

Add them all up, and you have the makings of a dollar rally, which has seen the euro decline 0.85% since yesterday morning, the pound fall 1.2% and the yen fall 0.5%. Granted, the pound has its own issues relating to Boris’s return to Parliament and the inflamed rhetoric on both sides of the aisle there leading to an increase in belief that a hard Brexit is still possible. But the tell that this is simply a dollar rally and not a risk off event is the fact that the yen fell sharply, alongside a rally in equities and decline in the bond market.

The question at this time is whether the rally continues, or if it was merely a one-day event. At this point, the evidence seems to indicate that a slow continuation of the dollar rally is the most likely outcome. Certainly, there will be nothing hawkish coming from ECB policymakers as the hawks seem more willing to quit than continue to lose their battle. Eurozone data continues to implode and another key German institute, the DIW Institute, announced its expectation that when German GDP for Q3 is released on November 14, it will show growth at -0.2%, the second consecutive decline and put Germany in a technical recession. As an aside, it is interesting to see just how crucial the idea of monetary discipline is to Germans, in general, and German bankers in particular. Despite the fact that Germany probably has the weakest growth in the Eurozone, its ECB members are amongst the most hawkish. If that ever changes, you can be sure the euro will fall far more rapidly!

As to the Fed, it seems to me that there is a clear level of comfort developing on the FOMC that two cuts were sufficient in the current circumstances to stanch any bleeding in the economy, and barring an escalation in the trade war, they seem ready to stand pat. If that is the case, then dollars will retain their relative attractiveness. And of course, the calendar is beyond all our reach, but we will need to see if Friday, when the spot value date turns to October 1, whether or not there is reduced demand for the greenback. My sense is that pressure will dissipate quickly, and possibly reverse as those dollars are seen as short-term needs. But for the rest of the day, I think the dollar has room to run a little further.

Turning to today’s session, we do get the final reading of Q2 GDP (exp 2.0%) as well as the ancillary data that comes with that report. I always look at the Personal Consumption component (4.7%) as the best measure of demand, so keep an eye there. And of course, we get Initial Claims (212K), but that series’ stability has been extraordinary and largely taken it out of the conversation. If we do start to see that rise, however, beware of weakening nonfarm numbers and a lot more dovish rhetoric from the Fed.

As to the Fed, we have six, count ‘em, speakers today with nary a hawk in sight. As such, amongst Kaplan, Bullard, Clarida, Daly, Kashkari and Barkin, I expect rationales as to why another rate cut or two makes sense, or at the very least highlights of weakening global growth and impending problems like Brexit which require easier Fed policy as a response. However, given they are all known on the dovish side, I don’t think it matters that much. For now, I don’t see anything derailing the dollar and look for a modest further increase throughout the session.

Good luck
Adf

 

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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The Fun’s Just Begun

In Hong Kong, the protestors won
In England, the fun’s just begun
But as of today
Bremain’s holding sway
And risk has begun a new run

As New York walks in this morning, there have been significant changes in several of the stories driving recent price action with the upshot being that risk is clearly in favor today. Things started in Hong Kong, where Carrie Lam, the territory’s Chief Executive, formally withdrew the extradition bill that had prompted three months of increasingly violent protests there. The quick back story is that this bill was presented in June as a response to a situation where a man accused of murder in Taiwan could not be returned there for trial due to the lack of formal extradition mechanisms in the existing legal framework. However, the bill they crafted was quite open-ended and would have allowed for extradition to the mainland for minor infractions, a situation seen as fraught with danger for Hong Kong’s shrinking independence. That is what begat the protests, and although they have grown in scope as well as size, it is seen as a significant first step to restoring order. It is hard to believe that Beijing is happy with this outcome as they were strong supporters of the bill, but thus far, they have made no comment.

As it happens, financial markets saw this as a significant change in the tone for the future and there was a massive equity rally in HK, while risk assets generally performed well at the expense of haven assets. So the Hang Seng rose nearly 4.0% with other APAC stock markets also gaining, albeit not to the same extent. European markets are also on the move this morning, with gains ranging from the FTSE 100’s +0.4% to the FTSE MIB (Italy) up 1.65%. And don’t worry, US equity futures are all pointing higher as well, on the order of 0.75%. Meanwhile, Treasuries have sold off modestly, with the 10-year yield higher by 3bps, Bunds have fallen further, with yields there up by 6bps, and the yen has bucked the trend in currencies, falling 0.25% amid a broad dollar decline. Finally, gold is lower by 0.65%, although remains near the top of its recent trading activity.

The other story that has seen significant changes comes from London, where PM Boris Johnson has not only lost a vote regarding his ability to deliver Brexit, but also has lost his slim majority in parliament after a single member defected to the LibDems. Subsequent to that, there was a vote on a bill brought to the floor to prevent the PM from forcing a no-deal Brexit, one which Boris opposed but passed 328-301 with 21 Tories voting against the PM. Johnson summarily fired those rebels from the party and now leads a minority government. His current tactic is to push for a snap election on October 14 or 15 so that a new government will be available to speak to the EU at a formal meeting on October 18. However, he needs two-thirds of all members of parliament to vote for that, meaning he needs the Labour party to agree. If you are confused by this back and forth, don’t feel too badly, I think pretty much everyone is, and there is certainly no clarity as to what will come next.

With that convoluted process in mind, from a markets perspective the result is clear, the probability of a no-deal Brexit has receded for the moment and the pound has been the biggest beneficiary, rallying 0.9% this morning and is now more than two cents above yesterday’s depths. While this move certainly makes sense given the current understanding of the situation, it is by no means the end of the story. If anything, it is the end of chapter one. Later today we should know if there is going to be another election and then it will take a little time before the market understands the odds of those outcomes. Remember, if there is an election and Jeremy Corbyn is seen with a chance to win, it will not be a positive for the pound or the UK economy either. For now, the market is focused on a somewhat lower probability of a hard Brexit and the pound is benefitting accordingly. However, I don’t think the binary nature of the problem has disappeared, simply been masked temporarily. For hedgers, implied volatility has fallen sharply on the back of this news and the ensuing move, but I would argue uncertainty remains quite high. Options still make a lot of sense here.

Past those two stories, there is no further news on the trade front, although that will certainly become the topic du jour again soon. In the meantime, recent data has continued to paint a mixed picture at best for the G10 economies. For example, yesterday’s ISM data printed at 49.1, well below expectations and the worst print since January 2016. While one print below 50.0 does not indicate a recession is upon us, it is certainly a harbinger of slower growth in the future. Then this morning we saw Service PMI’s from Europe with Italy’s much weaker than expected while France, Germany and the Eurozone as a whole printed at expectations. However, expectations still point to slowing growth, especially in combination with the manufacturing surveys which are mostly sub 50.0. In the UK, the PMI was also weak, 50.6, and there is talk that Q3 is going to result in modest negative GDP performance causing a technical recession in the UK joining Germany and Italy in that regard. In the end, while the trade war may be negatively impacting both the US and China, it is also clearly having a big impact throughout Europe and the rest of the world.

As to the rest of the FX market, the risk on behavior has led to broad based dollar weakness, with the euro rebounding 0.35%, Aussie and Kiwi up similar amounts and the Skandies rallying even further, +0.7%. Canada is a bit of an outlier here as oil prices have been under pressure lately, although have bounced 1.0% this morning, but more importantly, the BOC meets with great uncertainty as to whether they will cut rates or not. Markets are pricing in a 92% chance they will do so, but the analyst community is split about 50/50 on the prospects for a cut today. That said, those same analysts are looking for cuts later this year, so this seems more about timing than the ultimate result.

In the EMG bloc ZAR has had another winning day, rising 1.4% as international bond buyers continue to aggressively buy South African paper after the country averted a recession. But broadly, the dollar is lower against virtually all EMG currencies due to risk-on sentiment.

On the data front, this morning brings the Trade Balance (exp -$53.4B) a modest decline from last month’s outcome, and then the Beige Book comes at 2:00 but that’s all. We will hear from a plethora of Fed speakers today, five in all, ranging from uber doves Kashkari and Bullard to moderate Robert Kaplan from Dallas. Yesterday, Bullard in another speech said the Fed should cut 50bps at the upcoming meeting while Boston’s Rosengren said there didn’t seem to be the need to do anything right now. A full cut plus some is still priced in at this point.

In the end, broad risk sentiment is today’s driver. As long as that remains positive, look for the dollar to remain under pressure.

Good luck
Adf