Tag Archives: #Japan

Clearly On Hold

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Though policy’s clearly on hold
Most central banks feel they’ve controlled
The story on growth
And yet they’re still loath
To change their inflation threshold

Amidst generally dull market activity (at least in the FX market), traders and investors continue to look for the next key catalysts to drive markets. In US equity markets, we are now entering earnings season which should keep things going for a while. The early releases have shown declining earnings on a sequential basis, but thus far the results have bested estimates so continue to be seen as bullish. (As an aside, could someone please explain to me the bullish case on stocks trading at a 20+ multiple with economic growth in the US at 2% and globally at 3.5% alongside extremely limited policy leeway for further monetary ease? But I digress.) Overnight saw Chinese stocks rock, with Shanghai soaring 2.4% and the Hang Seng 1.1%. European stocks are a bit firmer as well (DAX +0.6%, FTSE +0.4%) and US futures are pointing higher.

Turning to the central banks, we continue to hear the following broad themes: policy is in a good place right now, but the opportunity for further ease exists. Depending on the central bank this is taking different forms. For example, the Minutes of the RBA meeting indicated a growing willingness to cut the base rate further, and market expectations are building for two more cuts this year, down to 1.00%. Meanwhile, the Fed has no ability to cut rates yet (they just stopped raising them in December) but continues to talk about how they achieve their inflation target. Yesterday, Boston Fed president Rosengren posited that a stronger commitment to the symmetry around their 2.0% target could be useful. Personally, I don’t believe that, but I’m just a gadfly, not a PhD economist. At any rate, the idea is that allowing the economy to run hot without tightening is tantamount to easing policy further. In the end, it has become apparent the Fed’s (and every central bank’s) problem is that their economic models no longer are a good representation of the inner workings of the economy. As such, they are essentially flying blind. Previous relationships between growth, inflation and employment have clearly changed. I make no claim that I know what the new relationships are like, just that 10 years of monetary policy experiments with subpar results is enough to demonstrate the central banks are lost.

This is true not just in the US and Europe, but in Japan, where they have been working on QE for nearly thirty years now.

More ETF’s bought
Will be followed by more and
More ETF’s bought

“It’s vital for the Bank of Japan to continue persistently with powerful monetary easing,” Governor Haruhiko Kuroda said. As can be seen from Kuroda-san’s comments last night in the Diet, the BOJ is a one-trick pony. While it is currently illegal for the Fed to purchase equities, that is not the case in Japan, and they have been buying them with gusto. The thing is, the Japanese economy continues to stumble along with minimal growth and near zero inflation. As the sole mandate for the BOJ is to achieve their 2.0% inflation target, it is fair to say that they have been failing for decades. And yet, they too, have not considered a new model.

In the end, it seems the lesson to be learned is that the myth of omnipotence that the central banks would have us all believe is starting to crack. Once upon a time central banks monitored activity in the real economy and tried to adjust policy accordingly. Financial markets followed their lead and responded to those actions. But as the world has become more financially oriented during the past thirty years, it seems we now have the opposite situation. Now, financial markets trade on anticipation of central bank activity, and if central banks start to tighten policy, financial markets tend to throw tantrums. However, there is no tough love at central banks. Rather they are indulgent parents who cave quite quickly to the whims of declining markets. Regardless of their alleged targets for inflation or employment, the only number that really matters is the S&P 500, and that is generally true for every central bank.

Turning to this morning’s data story, the German ZEW survey was released at a better than expected 3.1. In fact, not only was this better than forecast, but it was the first positive reading in more than a year. It seems that the ongoing concerns over German growth may be easing slightly at this point. Certainly, if we see a better outcome in the Manufacturing PMI data at the end of April, you can look for policymakers to signal an all clear on growth, although they seem unlikely to actually tighten policy. Later this morning we see IP (exp 0.2%) and Capacity Utilization (79.1%) and then tonight, arguably more importantly, we see the first look at Chinese Q1 GDP (exp 6.3%).

If you consider the broad narrative, it posits that renewed Chinese monetary stimulus will prevent a significant slowdown there, thus helping economies like Germany to rebound. At the same time, the mooted successful conclusion of the US-China trade talks will lead to progress on US-EU and US-Japanese talks, and then everything will be right with the world as the previous world order is reincarnated. FWIW I am skeptical of this outcome, but clearly equity market bulls are all-in.

In the end, the dollar has been extremely quiet (volatility measures are back to historic lows) and it is hard to get excited about movement in the near-term. Nothing has yet changed my view that the US will ultimately remain the tightest policy around, and thus continue to draw investment and USD strength. But frankly, recent narrow ranges are likely to remain in place for a little while longer yet.

Good luck
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The Market’s Malaise

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Said Trump we might wait sixty days
Before, Chinese tariffs, we raise
Since talks have gone well
There’s no need to sell
Thus ended the market’s malaise

The US-China trade talks continue to dominate the news cycle with the latest news being President Trump’s comments that a sixty-day delay before imposing further tariffs is being considered. While this had been mooted by many analysts, including me, it still was sufficient to help boost the equity market in the US yesterday afternoon. Interestingly, it also seemed to boost the dollar, which rallied throughout yesterday’s session. Clearly, if the Chinese trade situation gets settled, which I continue to believe is quite difficult, it is a net positive for the global economy. But don’t forget that the President is also looking at tariffs on the European auto sector, as well as is maintaining tariffs on imported aluminum and steel, so all is not clear yet. But certainly, the China story has received top billing of late.

The other big story, Brexit, has had less press lately (at least outside the UK) as the ongoing machinations of the British Parliamentary process remain obscure to almost everyone else. The current argument seems to be that a bloc of EU skeptics wants to ensure that the option of a no-deal Brexit remains on the table as a negotiating tactic. You can’t really blame the EU for getting frustrated as the UK has not yet provided a united front as to their demands. But with that said, ultimately it will come down to the Irish backstop and how that can be tweaked to get enough support by the UK. It’s still a game of chicken. Elsewhere in the UK, MPC member Gertjan Vlieghe, one of the more dovish by reputation, commented that a hard Brexit was unlikely to require higher rates as Governor Carney had mentioned previously. That has been my stance all along, and I continue to see the UK leaning toward cutting rates as growth continues to ebb there.

Speaking of ebbing growth, German GDP in Q4 printed at 0.0%, no growth at all. If you recall, Q3 growth there was -0.2%, so they barely avoided a technical recession. While many analysts continue to point to a series of one-off circumstances that drove the poor performance, it remains pretty clear that the underlying growth impulse is under downward pressure. We saw this when the IMF and the European Commission both significantly reduced their forecasts for 2019 GDP growth in Germany, as well as throughout the Eurozone. Today’s data did nothing to change any views on that issue. Regarding the impact on the euro, while it is unchanged today, that is after a 0.5% decline yesterday and a more than 2% decline this month. In the end, the relative situation continues to favor the dollar over the euro in my view.

Japan released GDP data last night as well, with Q4 growth rebounding to a 1.4% annual rate after a sharp decline in Q3. Here, too, Q3 was blamed on idiosyncratic features, but the underlying features of this report show slowing consumption and softening external demand. The yen has been moving in lock-step with the euro, having fallen pretty steadily all month and is down a bit more than 2.0% as well. The difference between the euro and the yen, however is that the yen retains its haven status, and if the deterioration of economic growth continues and we start pushing toward recession, I see the yen outperforming going forward.

Stepping back and looking at the broad picture of the dollar this morning, it is modestly higher, with gains against some EMG currencies (INR, RUB, BRL), but weakness against both Aussie and Kiwi. In the end, the major currencies have done little although it seems the dollar continues to have legs, even in the short term.

On the data front, yesterday’s CPI data came in just a touch firmer than expected, with the core number unchanged at 2.2% rather than the expected 0.1% decline. This morning brings PPI, which nobody is really going to care about given we already got CPI, and Retail Sales, which have been delayed by the shutdown. Expectations there are for a 0.2% rise with a 0.1% rise ex autos. Yesterday we also heard from three Fed speakers, all of whom expressed confidence the economy was solid, and today we hear from one more. As I have recently written, the Fed message has been very consistent lately, growth is solid, inflation pressures remain tame and there is no reason to raise rates further. As long as that remains the case, it will support asset markets, and likely the dollar.

Good luck
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