Tag Archives: #FOMC

Calm’s Been Restored

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Remarkably, though oil soared
Responding to Yemen, who roared
Most markets of note
Have taken a vote
And seen to it calm’s been restored

Of course the big news over the weekend was the attack on Saudi oil production by a number of unmanned drones on Saturday. It was quite successful, at least in terms of the attackers (Yemen’s Houthi rebels claimed responsibility) seeming goals, as it shut down half of Saudi production for an unspecified period. That means that 5% of the world’s oil production is off-line, although between reserves stored around the globe and the ability of US producers to ramp up production, the impact seems to be less substantial on world markets. Naturally oil prices are higher, with WTI currently +8.25%, although that is well off the initial highs which showed a 15% jump. And Treasury prices are higher as well, with the 10-year higher by half a point and yields falling 6.5bps. Gold is up 1.0%, and equity markets are softer, but not that much with only Italy’s market down even 1.0% and the rest of Europe lower by somewhere on the order of 0.6%. APAC stocks were also modestly softer, and US futures are pointing to a softer opening, but none of this speaks to any panic.

Finally, the dollar can only be described as mixed, at least at this point in the session. Granted, APAC currencies were mostly softer, led by INR’s 0.85% decline, which is directly attributed to the jump in oil prices (India imports virtually all their oil.) But that is actually the largest move on the day. Remember, in the wake of the ECB meeting last week, the euro rallied more than 1.0%! The point is, the FX market is not hugely concerned about this situation and seems unlikely to become so unless there are more attacks and the supply situation changes far more dramatically and permanently.

The only conclusion I can draw from this price action is that the market is still entirely focused on central bank activity with this week the culmination of a series of meetings. By Thursday, we will have heard from the Fed, the BOJ, the BOE, Bank Indonesia and the Norgesbank regarding any new policy actions. Expectations are as follows:

Wednesday FOMC Cut 0.25%
Thursday BOJ No rate change
  Bank Indonesia Cut 0.25%
  Norgesbank No rate change
  BOE No rate change

But in reality, the only one that matters is the Fed, which is driving the entire global conversation. If you recall, it was only a few weeks ago when expectations were rampant that they would cut 50bps. Treasury yields had fallen to 1.45% and there was a growing belief that recession was on its way. But then the US employment data was decent, Retail Sales were strong and CPI came in higher than expected for the third consecutive month. It became much harder with that economic backdrop for the doves to be squawking about adding stimulus aggressively. And remember, in July, there were already two dissensions, so the concept of unanimity has long been missing. At this point, the question is more about Chairman Powell’s press conference and whether or not he puts forth a dovish message. (Arguably, anything that is not outright dovish will be seen as hawkish by the market.)

While the Fed and ECB are clearly in different places, it is also important to remember that as much as the market is focused on the Fed, the same was true of the ECB right up until last week, when it became clear the ECB had run out of ammunition. It is every central banker’s greatest fear to find themselves with no ability to impact the market and push it in the direction they choose. My sense is that day is coming soon for many major central banks. Other than the ECB, it has not yet arrived, but trust me; it is coming sooner than you might think.

With all that in mind, the narrative has quickly moved beyond oil and is now back to discussing the FOMC meeting. Other than that, we have a bit of data, and after the meeting a number of Fed speakers.

Today Empire Manufacturing 4.0
Tuesday IP 0.2%
  Capacity Utilization 77.6%
Wednesday Housing Starts 1250K
  Building Permits 1300K
  FOMC Rate Decision 2.00% (-0.25%)
Thursday Initial Claims 213K
  Philly Fed 10.0
  Leading Indicators 0.1%
  Existing Home Sales 5.37M

So all in all, not too exciting. I would be remiss if I didn’t highlight that Chinese data overnight was uniformly awful, with the big three indicators; Retail Sales (7.5%), IP (4.4%), and Fixed Asset Investment (5.5%) all falling short of estimates and all reaching levels not seen since records began to be kept. And this was data from August, before the latest round of tariffs kicked in. Growth in China is slowing rapidly and the PBOC has not been able to adjust policy sufficiently to offset it. The renminbi weakened a bit, but in line with today’s general lack of movement, the 0.25% decline is hardly significant.

And that’s really all there is. The modest risk-off scenario seems likely to remain in place, but it is hard to see a significant extension of the overnight moves absent another catalyst. And right now, there is none on the horizon. Look for a dull day, with limited movement from the opening levels.

Good luck
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Run Off The Rails

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In England and Scotland and Wales
The saga has run off the rails
So Boris is gambling
A vote will keep scrambling
Dissent and extend his coattails

Meanwhile market focus has turned
To data, where much will be learned
When payrolls are shown
And if they have grown
Watch stocks rise as havens are spurned

The Brexit story remains front page news as the latest twists and turns create further uncertainty over the outcome. Boris is pushing for an election to be held on October 15 so that he can demonstrate he has a sufficient majority to exit with no deal when the EU next meets on October 17-18, thus forcing the EU’s hand. However, parliament continues to do what they can to prevent a no-deal Brexit and have passed a bill directing the PM to seek an extension if there is no deal agreed by the current Halloween deadline. With that in hand, they will agree to a vote on October 29, thus not allowing sufficient time for a new government to do anything ahead of the deadline.

But Boris, being Boris, has intimated that despite the extension bill, he may opt not to seek that extension and simply let the UK leave. That would really sow chaos in the UK as it would call into question many constitutional issues; but based on the current agreement with the EU, that action may not be able to be changed. After all, even if the EU offers the extension, the UK must accept it, which seemingly Boris has indicated he won’t. Needless to say, there is no clarity whatsoever on how things will play out at this time, so market participants remain timid. The recent news has encouraged the view that there will be no hard Brexit and has helped the pound recoup 2.0% this week. However, this morning it is slipping back a bit, -0.3%, as traders and investors are just not sure what to believe anymore. Nothing has changed my view that the EU will seek a deal and cave-in on the Irish backstop issue, especially given the continuous stream of terrible European data.

To that point, German IP was released at a much worse than expected -0.6% this morning, with the Y/Y outcome a -4.2% decline. I know that Weidmann and Lautenschlager are ECB hawks, but it is starting to feel like they are willing to sacrifice their own nation’s health on the altar of economic fundamentalism. The ECB meeting next Thursday will be keenly watched and everything Signor Draghi says at the press conference that follows will be parsed. But we have a couple of things coming before that meeting which will divert attention. And that doesn’t even count this morning’s surprise announcement by the PBOC that they were cutting the RRR by 0.5% starting September 16 in an effort to ease policy further without stoking the real estate bubble there.

So let’s look at today’s festivities, where the US payroll report is released at 8:30 and then Chairman Powell will be our last Fed speaker ahead of the quiet period and September 18 FOMC meeting. Here are the current expectations:

Nonfarm Payrolls 160K
Private Payrolls 150K
Manufacturing Payrolls 5K
Unemployment Rate 3.7%
Average Hourly Earnings 0.3% (3.0% Y/Y)
Average Weekly Hours 34.4

Yesterday’s ADP number was much stronger than expected at 195K, but the employment data from the ISM surveys has been much weaker so there is a wide range of estimates this month. In addition, the government has been hiring census workers, and it is not clear how that will impact the headline numbers and the overall data. I think the market might be a little schizophrenic on this number as a good number could serve to reinforce that the economy is performing well enough and so drive earning expectations, and stocks with them, higher. But a good number could detract from the ongoing Fed ease story which, on the surface, would likely be a stock market negative. In a funny way, I think Powell’s 12:30 comments may be more important as market participants will take it as the clear direction the Fed is leaning. Remember, futures are pricing in certainty that the Fed cuts 25bps at the meeting, with an 11% probability they cut 50bps! And the comments we have heard from recent Fed speakers have shown a gamut of viewpoints exist on the FOMC. Interesting times indeed! At this point, I don’t think the Fed has the gumption to stand up to the market and remain on hold, so 25bps remains the most likely outcome.

As to the rest of the world, next week’s ECB meeting will also be highly scrutinized, but lately there has been substantial pushback on market and analyst expectations of a big easing package. Futures are currently pricing in a 10bp cut with a 46% chance of a 20bp cut. Despite comments from a number of hawks regarding the lack of appetite for more QE, the majority of analysts are calling for a reinstitution of the asset purchase program as soon as October. As to the euro, while it has edged higher this week, just 0.35%, it remains in a long-term downtrend and has fallen 1.6% this month. The ECB will need to be quite surprisingly hawkish to do anything to change the trend, and I just don’t see that happening. Signor Draghi is an avowed dove, as is Madame Lagarde who takes over on November 1. Look for the rate cuts and the start of QE, and look for the euro to continue its decline.

Overall, though, today has seen a mixed picture in the FX market with both gainers and losers in G10 and EMG currencies. Some of those movements have been significant, with ZAR, for example, rallying 0.75% as investment continues to flow into the country, while CHF has fallen 0.6% as haven assets are shed in the current environment. Speaking of shedding havens, how about the 10-year Treasury, which has seen yields rebound 15bps in two days, a truly impressive squeeze on overdone buyers. But for now, things remain generally quiet ahead of the data.

Given it is Friday, and traders will want to be lightening up any positions outstanding, I expect that this week’s dollar weakness may well see a modest reversal before we go home. Of course, a surprise in the data means all bets are off. And if Powell sounds remotely hawkish? Well then watch out for a much sharper dollar rally.

Good luck
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Lest Bubbles They Stoke

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There is a fine fellow named Jay
Who not too much later today
Will take to the stage
And help us to gauge
How quickly Fed funds will decay

This week several Fed members spoke
And all of them sought to invoke
That growth is still fine
Thus they’ve drawn the line
On more cuts, lest bubbles they stoke

It is quite remarkable that despite ongoing unrest in Hong Kong, with the temperature there rising each week, as well as the countdown to Brexit getting shorter and shorter, the only thing that matters right now is Jay Powell’s speech this morning from Jackson Hole. It is the defining theme of today’s market activity.

Let me set the stage to begin: interest rate markets are pricing in a rate cut in September, another in October and then a chance of one in December with “certainty” of that third cut by March 2020. Given that GDP growth in the US is running at 2.1% annually, Retail Sales have consistently beaten expectations and are up more than 4% in the past year and the Unemployment Rate, at 3.7%, is a tick away from its post-WWII lows, three cuts seem like a lot of monetary stimulus. After all, despite the fact that the Fed watches the PCE Deflator as their inflation gauge of choice, we all know that inflation is running higher than its current reading of 1.4%. The government’s own evidence is from CPI readings which most recently showed prices rising at a 1.8% level, with the core reading there at 2.1%. And ask yourself if even that conveys the feel of inflation. My guess is: Not. Even. Close.

At any rate, that’s what the market is pricing. As NY walks in this morning, equity markets around the world have shown modest gains (US futures included), bonds are falling with 10-year Treasury yields back up to 1.64% and the dollar is stronger almost across the board. Arguably, expectations are for Powell to confirm that July was not a ‘one and done’ rate cut but rather the beginning of several insurance cuts. The fly in that ointment comes from the comments we heard yesterday from a series of regional Fed Presidents, all of whom said that they saw little reason to cut rates further at this time. Effectively their argument was that growth is solid, unemployment low and inflation pretty close to target. While all paid heed to the fact that the Fed funds rate was above the 10-year yield, they were unwilling to buy into the idea that the curve inversion was presaging a recession at this time. There is just not enough evidence to them.

With the Fed’s hawks in full flight, it will certainly be tricky for Powell to describe anything about the FOMC as coordinated. Remember, the Minutes showed us members who didn’t want to cut at all as well as members wanting to cut by 50bps. That’s a pretty wide dispersion of thought. All told, he has a pretty tough job today if he doesn’t want to spook the markets.

As I have no idea what he will say, let’s game out two different views; first he manages to surprise dovishly and second, more likely in my opinion, he disappoints and sounds more hawkish than the market (and President) wants.

Dovish Surprise – If he confirms the markets current pricing and, for example, doubles down saying QE is an effective tool and they will use it again, look for a sharp equity rally to begin with, as well as a bond rally and dollar weakness. Certainly that would be the initial price action. However, it is not clear how long that would last. After all, if the current claim is growth is solid, what is the reason for all the ‘insurance’? At some point, market participants will ask that very question, as well as, what does the Fed know that we don’t? The result would be a reversal of equity gains, although bonds would likely still rally. And the dollar? I think a rebound would be in order as well as strength in the yen and Swiss franc. However, even if he does manage to sound dovish, I don’t see the dollar falling more than 2%-3% before finding a floor. At this point, I cannot paint a scenario where the dollar enters a longer term downtrend. Overall, my unscientific odds on this outcome are less than 25%.

Hawkish Disappointment – This seems far more likely to be the outcome, if only because to my eyes, the market has really gotten ahead of itself with regard to rate cuts. Essentially, if Powell doesn’t confirm that July’s cut was the beginning of a new rate-cutting cycle, the market is going to be disappointed. If he pushes back at all, sounding more like Esther George or Eric Rosengren, the two dissenters, than James Bullard or Neel Kashkari, the 50bp advocates, the market will be REALLY disappointed.

In the first case, I expect we will see equity markets fall a percent or a bit more today, with Europe giving up its early gains and the US quite weak. Bonds are a tougher call here, although I expect that the initial price action would be for further weakness. Remember, despite the fact that yields are 15bps from the low point seen two weeks ago, they are still down 37bps this month. There is plenty of room to fall. As to the dollar, that will rally further against everything, the yen included. I would expect the euro to finally test, and break, 1.10, and we could easily see 1% weakness and more throughout the emerging markets.

If he pushes back, well today may be remembered in market history as PB (Powell’s black) Friday. Equity markets would see significant losses as all the bets on further easy policy would be shed immediately. Bonds, too, would fall sharply as the idea that the Fed would no longer need to cut rates would change the entire sentiment there. And finally, the dollar would explode higher. Any ideas that the Fed has further room to cut rates than virtually all its counterparties, a key dollar bearish thesis, would be swept away and the dollar would really appreciate sharply. Think about EUR at 1.08; GBP at 1.20 (and that’s without the Brexit story); and the yen back to 108.00. However, given the risk of this type of market disruption, I do not believe this is at all likely either. In the end, a mild disappointment seems the most likely outcome, so look for stocks to close the week on a low note and the dollar on a high note.

Before he speaks at 10:00 this morning, we do see New Home Sales (exp 647K), but quite frankly, nobody cares about that today. It is all Powell, all the time.

Good luck and good weekend
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Not a Clue

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The thing that we learned from the Fed
Was they’ve not a clue what’s ahead
A few wanted fifty
But others more thrifty
Suggested a quarter instead

The thing that has Powell perplexed
Is what to do when they meet next
That’s why when he speaks
Near Jackson Hole’s peaks
Investors all fear some subtext

Once again the market has wandered aimlessly ahead of tomorrow’s Jackson Hole speech by Chairman Powell. Equity markets have generally edged lower (Hang Seng -0.85%, DAX -0.1%, FTSE -0.6%) although a few managed to scrape out a gain (Nikkei +0.05%, Shanghai +0.1%). Bond markets have also been mixed with most Asian markets rallying while Europe has seen small losses. I guess it’s only fitting that 10-year Treasuries are essentially unchanged on the day. Meanwhile, the dollar continues its broad winning ways with mostly modest gains against both G10 and EMG currencies.

At this point, all eyes are on tomorrow’s Powell speech to discern the Fed’s next move. Yesterday afternoon’s FOMC Minutes painted a picture of a group with significant differences in views. We know of the two dissenters, who didn’t want to cut rates at all, and it turns out that a “couple of participants” were looking for a fifty basis point cut. In the end, it is no surprise that twenty-five was the result, although the rationale, given their stated views that downside risks to the economy had diminished, seem shaky. The market response to the Minutes was, therefore, largely nonexistent, with almost no movement subsequent to their release in any market, which, given the proximity of the new information coming from Powell ought not be that surprising. In fact, it seems unlikely that today will bring too much activity either given that the important data has already been released (European PMI’s) and Initial Claims (exp 216K) and Leading Indicators (0.3%) are unlikely to change any opinions.

A quick look at those Eurozone PMI’s shows that they were marginally better than expected although continue to paint a picture of a weakening economy with no inflationary impulse. The biggest concern was that the new orders survey in Germany fell even further, a sign that there is no recovery in sight. At their release, the euro managed to rally about 0.35%, however it has given all of those gains back in the past four hours and seems more likely to wander aimlessly than take on a direction. The release of the ECB’s Minutes did nothing to change any views, merely confirming that they are preparing further easing for next month, with a growing chance of both an interest rate cut and the restarting of Large Scale Asset Purchases, better known as QE.

Other news of note comes from Djakarta, where Bank Indonesia (BI) surprised one and all and cut 25bps last night. However, the rupiah managed to eke out a small gain on the session as investors and traders seem more focused on the positive growth story, a true rarity these days, than on the interest rate situation. Most analysts are convinced that BI is done cutting unless the global economy really tanks, rather than merely continues its recent slowdown. In China we saw the renminbi soften some 0.3% and fall to levels not seen since 2008 in the onshore market. However, there has been no obvious further deterioration of the trade situation so I don’t anticipate a significant extension unless the PBOC acts more aggressively to ease policy. And arguing in favor of less movement is the fact that the 70th anniversary of the founding of the People’s Republic is coming up on October 1st. Historically, the PBOC will go out of their way to insure financial markets are stable during that celebration and frequently they start the process several months beforehand.

Brexit is the final story that seems to be having an impact as PM Johnson is visiting Paris today after meetings in Berlin yesterday. At this point the EU continues to talk tough, but nothing has changed regarding the desperate need for the EU to prevent a shock to a weakening economy. In fact, the pound is bucking today’s dollar trend, currently trading higher by 0.15%, as traders are beginning to read between the lines and realize that a deal is more likely than currently priced. I maintain that we will see something in October that will avoid a no-deal outcome and the pound will rally sharply as that becomes a reality.

And that’s really all for today. Bloomberg will be interviewing several FOMC members in Jackson Hole, so that should offer some background color, but at this point, it is all about Chairman Powell tomorrow. Until then, tight ranges are the most likely outcome.

Good luck
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Weakness Worldwide

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The Fed followed through on their pledge
To cut rates, as they try to hedge
‘Gainst weakness worldwide
But Jay clarified
It’s not a trend as some allege

The market response was quite swift
With equities given short shrift
Commodities fell
While bonds did excel
In FX, the buck got a lift

Something has really begun to bother me lately, and that is the remarkable inconsistency over the benefits/detriments of a currency’s value. For example, the dollar has been relatively strong lately, and as you are all aware, I believe will continue on that path overall. The key rationales for the dollar’s strength lie in two factors; first, despite yesterday’s cut, US interest rates remain much higher than every other G10 country, in most cases by more than 100bps, and so the relative benefit of holding dollars vs. other currencies continues. The second reason is that the US economy is the strongest, by far, of the G10, as recent GDP data demonstrated, and while there are certain sectors of weakness, notably housing and autos, things look reasonably good. This compares quite favorably to Europe, Japan and Oceania, where growth is slowing to the point that recession is a likely outcome. The thing is, article after article by varying analysts points to the dollar’s strength as a major problem. While President Trump rightly points out that a strong dollar can hinder US exports, and as a secondary effect corporate earnings, remember that trade represents a small portion of the US economy, just 12% as of the latest data.

Contrast this widespread and significant concern over a strong currency with the angst over the British pound’s recent performance as it continues to decline. Sterling is falling not only because the dollar is strong, but also because the market is repricing its estimates of the likelihood of a no-deal Brexit. Ever since the Brexit vote the pound has been under pressure. Remember that the evening of the vote, when the first returns pointed to a Remain win, the pound touched 1.50. However, once the final results were in, the pound sold off sharply, losing as much as 20% of its value within four months of the vote. However, since then, during the negotiation phase, the pound actually rallied back as high as 1.4340 when it looked like a deal would get done and agreed. Alas, that never occurred and now that no-deal is not only back on the table, but growing as a probability, the pound is back near its lows. And this is decried as a terrible outcome! So, can someone please explain why a strong currency is bad but a weak currency is also bad? You can’t have it both ways. Arguably, every complaint over the pound’s weakness is a political statement clothed in an economic argument. And the same is true as to the dollar’s strength, with the difference there being that the President makes no bones about the politics.

In the end, the beauty of a floating currency regime is that the market adjusts based on actual and expected flows, not on political whims. If there is concern over a currency’s value, that implies that broader policy adjustments need to be considered. In fact, one of the most frightening things we have heard of late is the idea that the US may intervene directly to weaken the dollar. Intervention has a long and troubled history of failure, especially when undertaken solo rather than as part of a globally integrated plan a la the Plaza Accord in the 1980’s. An unsolicited piece of advice to the President would be as follows: if you want the strongest economy in the world, be prepared for a strong currency to accompany that situation. It is only natural.

With that out of the way, there is no real point in rehashing the FOMC yesterday as there are myriad stories already available. In brief, they cut 25bps, but explained it as an insurance cut because of global uncertainties. Weak sauce if you ask me. The telling thing is that during the press conference, when Powell explained that this was not the beginning of a new cycle and the stock market sold off sharply, he quickly backtracked and said more cuts could come as soon as he heard about the selloff. It gets harder and harder to believe that the Fed sees their mandate as anything other than boosting the stock market.

This morning brings the final central bank meeting of the week with the BOE on the docket at 7:00am. At this point, with rates still near historic lows and Brexit on the horizon, the BOE is firmly in the wait and see camp. Concerns have to be building as more economic indicators point to a slump, with today’s PMI data (48.0) posting its third consecutive month below the 50.0 level. I think it is clear that a hard Brexit will have a short-term negative impact on the UK economy, likely making things worse before they get better, but I also believe that the market has already priced in a great deal of that weakness. And in the end, I continue to believe that the EU will blink as they cannot afford to drive Europe into a recession just to spite the UK. So there will be no policy change here.

One interesting outcome since the Fed action yesterday was how many other central banks quickly cut interest rates as well. Brazil cut the Selic rate by 50bps, to a record low 6.00% as they had room from the Fed move and then highlighted the fact that a key pension reform bill seemed to have overwhelming support and was due to become law. This would greatly alleviate government spending pressures and allow for even more policy ease. As well, the Middle East saw rate cuts by Saudi Arabia, the UAE, Qatar and Bahrain all cut rates by 25bps as well. In fact, the only bank that does not seem likely to respond is the PBOC, where they have been trying to use other tools, rather than interest rate policy, to help bolster the economy there.

This morning sees the dollar broadly higher with both the euro and pound down by ~0.40%, and similar weakness in a number of EMG currencies like MXN and INR. Even the yen has weakened this morning by 0.2%, implying this is not so much a risk-off event as a dollar strength event. Data today brings Initial Claims (exp 212K) and ISM Manufacturing (52.0). Regarding the ISM data, yesterday saw an extremely weak Chicago PMI print of just 44.4, its lowest since December 2015. Given how poor the European and Chinese PMI data were overnight and this morning, I wouldn’t be surprised to see a weak outcome there. However, I don’t think that will be enough to weaken the dollar much as the Fed just gave the market its marching orders. We will need to see a very weak payroll report tomorrow to change any opinions, but for today, the dollar remains in the ascendancy.

Good luck
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A Rate Cut’s Assumed

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In Washington DC today
We’ll get to hear from Chairman Jay
A rate cut’s assumed
So, equities boomed
While dollar strength seems here to stay

Markets are on tenterhooks as the release of the FOMC statement approaches. That actually may be overstating the case. The market is highly confident that the Fed is going to cut the funds rate by 25 bps this afternoon as there has not been nearly enough change in the trajectory of the economic data over the past ten days to change any views. During this ‘quiet period’ we have seen solid, if unspectacular economic indicators. Certainly nothing indicating a severe slowdown, but also nothing indicating that the economy is overheating. As well, we have heard from several other central banks, notably the ECB and BOJ, that further policy ease is on the way and they are ready to move imminently. Finally, the whipped cream on this particular decision was released yesterday morning when core PCE data printed at 1.6%, a lower than expected outcome, and sufficient proof that inflation remains too quiescent for the Fed’s liking. At this point, it all seems anticlimactic.

Perhaps of more interest will be the press conference to be held at 2:30, when Chairman Powell will be able to explain more fully the rationale behind cutting rates with an economy running at potential, historically low unemployment and the easiest financial conditions seen in a decade. But hey, inflation is a few ticks low, so that is clearly justification. (As an aside, I find it remarkable that any central bank is so wedded, with precision, to a specific target inflation rate, and that not achieving that target is grounds for policy change. Let’s face it, monetary policy tools are blunt instruments and work with a significant lag. In fact, when a target is achieved, that seems to be more luck than skill. There are a number of central banks that aim for inflation to be within a range, and that seems to make far more sense than setting a 2.0% target and complaining when the rate is at 1.6%.)

In the meantime, there are still a few other things that are impacting markets today, notably the US-China trade talks and the ongoing Brexit story. Regarding the trade talks, the delegations met for two days in Shanghai and made approximately zero headway. The word is they are further apart now than when talks broke down three months ago. Suddenly it is dawning on a lot of people that these trade talks may not be concluded on a politically convenient schedule (meaning in time for the US election). The market impact was a decline in Asian equity indices with the Nikkei falling 0.9%, both Shanghai and Korea falling 0.7%, and the Hang Seng in Hong Kong down 1.3%. However, European indices have barely moved on the day and US futures are pointing higher after Apple beat earnings estimates following the close yesterday. The implication here is that US markets have moved on from the trade story while Asian ones are still beholden to every word. Quite frankly, that seems to be a realistic outcome given the fact that trade represents such a small part of the US economy as opposed to every Asian nation, where it is a major driver of economic activity.

Turning to the Brexit story, the pound plumbed new depths yesterday, trading close to 1.21 before a modest bounce this morning (+0.15%) as Boris continues to hold a hard line on talks. He is pushing very hard for the EU to reopen the existing, unratified deal and will not meet face-to-face with any EU counterparts until they do so. Thus far, the EU has been adamant that the deal is done, and they refuse to change it.

But here’s the first clue that things are going to change; the Bank of Ireland said that a hard Brexit will reduce GDP growth in 2020 to 0.7% from the currently expected 4.1% growth. As I mentioned before, Ireland is on the front lines and will feel the brunt of the early impacts. At some point, probably pretty soon, Taoiseach Leo Varadkar is going to prevail on the rest of the EU to reopen talks before Ireland is crushed. And remember, too, that a no-deal Brexit leaves the EU with a £39 billion hole in their budget as that was to be the UK’s parting alimony payment.

While the EU tries to convince one and all that they hold the upper hand, it is not clear to me that is the case. Working in Boris’s favor was today’s Q2 GDP data from the Eurozone showing growth falling to 0.2% in the quarter with Italy at 0.0%, Spain dipping to 0.5% and France having reported 0.2% yesterday. Germany doesn’t actually report until next month, but indications are 0.0% is the best they can expect. The euro remains under pressure, trading at the bottom of its recent 1.11-1.14 trading range and shows no signs of rebounding. And of course, the fact that the ECB is getting set to ease policy further is not helping the single currency at all. I maintain that despite the Fed’s actions today, unless Powell promises three more cuts soon, the dollar will remain bid.

And those are really today’s stories. Overall, the FX market is pretty benign today, with the largest mover being TRY, which rallied 0.45% as optimism is growing that the economy is stabilizing which means that the current high rates are quite attractive to investors. But away from that, movement has been on the order of 0.10%-0.20% in either direction. In other words, nothing is happening.

On the data front, remember this is payroll week as well, and today we see ADP Employment (exp 150K) and then Chicago PMI (50.6) before the FOMC this afternoon. As earnings season is still underway, I expect equities to respond to that data, but the dollar will likely bide its time until the Fed. After that, nothing has changed my broadly bullish view, although an uber-dovish Powell could clearly do so.

Good luck
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The Doldrums

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

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

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

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

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

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

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

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

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

Good luck
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Soon On the Way

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck and good weekend
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Some Real Fed Appeasing

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

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

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

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

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

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

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

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

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

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

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

Good luck
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Constant Hyperbole

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On Wednesday the FOMC
Will offer their latest decree
Will Fed funds be pared?
Or will Jay be scared
By Trump’s constant hyperbole?

The one thing that’s patently clear
Is rates will go lower this year
And lately some clues
Show Powell’s new views
Imply NIRP he’ll soon engineer

Once again, market movement overnight has been muted as traders and investors look ahead to Wednesday’s FOMC meeting and Chairman Powell’s press conference afterwards. Current expectations are for the removal of the word ‘patient’ from the statement and some verbiage that implies rates will be adjusted as necessary to maintain the US growth trajectory. Futures markets are pricing just a 25% probability of a rate cut on Wednesday, but a virtual certainty of one at the July meeting in six weeks’ time. With that said, there are several bank analysts calling for a cut today, or a 50bp cut in July. The one thing that seems abundantly clear is that interest rates in the US have reached their short-term peak, with the next move lower.

However, in the Mariner Eccles building, they have another dilemma, the fact that Fed funds are just 2.50%, the lowest cyclical peak in history. It has been widely recounted that the average amount of rate cutting by the Fed when fighting a recession has been a bit more than 500bps, which given the current rate, results in two possibilities: either they will have to quickly move to use other policy tools, like QE; or interest rates in the US are going to go negative before long! And quite frankly, I expect that it will be a combination of both.

Consider, while the Fed did purchase some $3.5 trillion of assets starting with QE1 in 2009, the Fed balance sheet still represents just 19% of US GDP. This compares quite favorably with the ECB (45%) and the BOJ (103%), but still represents a huge increase from its level prior to the financial crisis. Funnily enough, while there was a great deal of carping in Congress about QE by the (dwindling) hard-money set of Republicans, if the choice comes down to NIRP (Negative Interest Rate Policy) or a larger balance sheet, I assure you the politicians will opt for a larger balance sheet. The thing is, if the economy truly begins to slow, it won’t be a choice, it will be a combination of both, NIRP and QE, as the Fed pulls out all the stops in an effort to prevent a downturn.

And NIRP, in the US, will require an entirely new communications effort because, as in Europe and Japan, investors will find themselves on the wrong side of the curve when looking for short term investments. Money market funds are going to get crushed, and corporate treasuries are going to have to find new places to invest. It will truly change the landscape, and it is not clear it will do so in a net positive way. But regardless, NIRP is coming to a screen near you once the Fed starts cutting, although we are still a number of months away from that.

With that in mind, the obvious next question is how it will impact other markets. I expect that the initial reaction will be for a sharp equity rally, as that is still the default response to rate cuts. However, if the Fed is looking ahead and sees trouble on the horizon, that cannot be a long-term positive for equities. It implies that earnings numbers are going to decline, and no matter how ‘bullish’ interest rate cuts may seem, declining earnings are hard to overcome.

Bonds, on the other hand, are easy to forecast, with a massive rally in Treasuries, a lagging rally in corporates, as spreads widen into a weakening economy, but for high-yield bonds, I would expect significant underperformance. Remember, during the financial crisis, junk bond yield spreads rose to 20.0% over Treasuries. In another economic slowdown, I would look for at least the same, which compares to the current level of about 5.50%.

Finally, the dollar becomes a difficult question. Given the Fed has far more room to ease policy than does the ECB, the BOJ, the BOE or the BOC, it certainly seems as though the first move would be lower in the buck. However, if the Fed is easing policy that aggressively, you can be sure that every other central bank is going to quickly follow. Net I expect that we could see a pretty sharp initial decline, maybe 5%-7%, but that once the rest of the world gets into gear, the dollar will find plenty of support.

A quick look at markets overnight shows that the dollar is little changed overall, with some currencies slightly firmer and others slightly softer. However, there is no trend today, nor likely until we hear from the Fed on Wednesday.

Looking at data this week, it is much less interesting than last week’s and unlikely to sway views.

Today Empire Manufacturing 10.0
Tuesday Housing Starts 1.239M
  Building Permits 1.296M
Wednesday FOMC Rates 2.50% (unchanged)
Thursday BOJ Rates -0.10% (unchanged)
  Initial Claims 220K
  Philly Fed 11.0
  Leading Indicators 0.1%
Friday Existing Home Sales 5.25M

As I said, not too interesting. And of course, once the Fed meeting is done, we will get to hear more from the various Fed members, with two speakers on Friday afternoon (Brainard and Mester) likely to be the beginning of a new onslaught.

Yes, the trade situation still matters, but there is little chance of any change there until the G20 meeting next week, and that assumes President’s Trump and Xi agree to meet. So, for now, it is all about the Fed. One last thing, the ECB has their Sintra meeting (their answer to Jackson Hole) this week, and it is likely that we will hear more about their thinking when it comes to easing policy further given their current policy settings include NIRP and a much larger balance sheet already. Any hint that new policies are coming soon will certainly undermine the single currency. Look for that beginning on Wednesday as well.

Good luck
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