Tag Archives: #minutes

Some Other Soul

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It seems like Prime Minister May
Is quickly approaching the day
When some other soul
Will try to control
The mess Brexit’s caused the UK

Once again, the pound is the lead story as the slow motion train wreck, also known as the Brexit process, continues to unfold. Yesterday, you may recall, PM May was promising to present her much reviled Brexit deal to Parliament for a fourth time, with new promises that if it was passed, the UK would hold a second referendum on the subject. However, not only did the opposition Labour party trash the idea, so did most of her own Conservative party, as well as the Democratic Unionist Party from Northern Ireland, which is the group that has helped her maintain control for the past two years. At this point, her previous idea of having one more vote the first week of June and then stepping down seems to be dead. The latest news is the pressure from her own cabinet is mounting quickly enough to force her to step down as soon as this week. Meanwhile, Boris Johnson, who was a key cheerleader for Brexit in the run-up to the initial vote and spent time as Foreign Minister in PM May’s government, is the favorite to move into Number 10 Downing Street. He has made it clear that he is quite willing to simply walk away from the EU with no deal.

With that as the political backdrop, it should be no surprise that the pound continues to suffer. This morning it is lower by 0.3% and is now trading less than a penny from its 2019 lows, which were established back on January 2nd. It is very difficult to create a scenario where the pound rebounds in the short term. Unless there is a massive shift in thinking in Parliament, or the EU decides that they will concede to UK demands regarding the Irish backstop (remember that?), the market is going to continue to price in the probability of a hard Brexit ever so slowly. The post-Brexit vote low of 1.1906, back in October 2016 is on the radar in my view. That said, it will take a while to reach it unless Boris becomes PM and summarily exits the EU. At that point, the pound will fall much faster.

Ironically, the economic data from the UK continues to show an economy that, while having some difficulty, is outperforming many other areas. This morning’s CPI data showed inflation at 2.1%, a tick below expectations and essentially right at the BOE’s target. I am constantly amused by Governor Carney’s comments that he will need to raise rates due to a potential inflation shock. At this point, that seems like an extremely low risk. Granted, given the openness of the UK economy, if the pound were to collapse in the wake of a hard Brexit, inflation would almost certainly rise initially. The question, I think, is whether that would be seen as a temporary shock, or the beginning of a trend. Arguably, the former would be more likely.

Away from the UK, the FX market has been reevaluating its views on EMG currencies and thus far, the verdict is…they suck! While I have highlighted the weakness seen in the Chinese yuan while the trade war brews, I have been less focused on other currencies which have been collateral damage to that war. But there has been significant damage in all three EMG areas. For example, even excluding the Argentine peso, which has all kind of domestic issues unrelated to trade and has fallen nearly 6% this month and more than 26% this year, LATAM currencies have suffered significantly this month. For example, USDBRL is trading back above 4.00 for the first time since last October and is down by 3.0% in May. We have seen similar weakness in both the Colombian and Chilean pesos, down 5% and 4% respectively. In fact, the Mexican peso is the region’s top performer, down just 0.5% this month although it had been weaker earlier in May. It seems that the trade war is acting as a benefit on the assumption that supply chains are going to find their way from China to Mexico in order to supply the US.

It ought not be surprising that many APAC currencies have also performed quite poorly this month led by KRW’s 4% decline and IDR’s 3.2% fall. Even the Taiwan dollar, historically one of the least volatile currencies is feeling the pressure, especially since the Huawei sanctions, and has fallen more than 1.2% in the past week, and for the month overall. Granted, these moves may not seem as large as the LATAM currencies, but historically, APAC currencies are more tightly controlled and thus less volatile. And there is one exception to this, the Indian rupee, which is basically unchanged on the month. This relative strength has a twofold explanation; first India is poised to benefit as a supplier to the US in the wake of the trade war, and second, the surprisingly strong showing of PM Narendra Modi in the recent election was taken as a positive given his pro-business platform.

Finally, a look at EEMEA shows weakness across the board here as well, albeit not quite as drastically. For example, TRY has fallen 4.5% this month, although the cause seems self-inflicted rather than from outside events. The ongoing political turmoil and inability of the central bank to tighten policy given President Erdogan’s clear opposition to that has encouraged foreign investors to flee. But we have also seen HUF fall 2.5%, and weakness in the Scandies with both NOK and SEK down more than 2.0% this month.

All in all, you can see that the dollar has been ascendant this month as a combination of slowing global growth, trade concerns and the relative outperformance of the US economy continues to draw inflows.

Looking at the data picture, the only US release is the FOMC Minutes at 2:00 this afternoon. Analysts are going to be parsing the comments to see if they can determine if there is building sentiment regarding an ‘insurance’ rate cut. Certainly, some members are willing to go down that road as we heard from St Louis Fed President Bullard yesterday saying just that. There are a number of other speakers today, and in truth, it does seem as though there is an evolution in the FOMC’s thinking. Remember, the market is pricing a cut before the end of the year, and if we continue to see mixed economic data and inflation’s dip proves more than ‘transitory’, I think we will see a consensus build in that direction. While in the very short run, a decision like that could be a dollar negative, my sense is that if the Fed starts to cut, we will see the rest of the world’s central banks ease further thus offsetting the negative impact.

Good luck
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Continue Restrained

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Come autumn and next Halloween
The UK may finally wean
Itself from the bloc
To break the deadlock
But Parliament still must agree(n)

Meanwhile Signor Draghi explained
That growth would continue restrained
And Fed Minutes noted
That everyone voted
For policy to be maintained

There has been fresh news on each of the main market drivers in the past twenty-four hours, and yet, none of it has been sufficient to change the market’s near-term outlook, nor FX prices, by very much.

Leading with Brexit, there was a wholly unsatisfying outcome for everyone, in other words, a true compromise. PM May was seeking a June 30 deadline, while most of the rest of the EU wanted a much longer delay, between nine months and a year. However, French President Emanuel Macron argued vociferously for a short delay, actually agreeing with May, and in the end, Halloween has a new reason to be scary this year. Of course, nothing has really changed yet. May will still try to get her deal approved (ain’t happening); Euroskeptic Tories will still try to oust her (possible, but not soon) and Labour will push for new elections (also possible, but not that likely). The topic of a second referendum will be heard frequently, but as of right now, PM May has been adamant that none will not take place. So, uncertainty will continue to be the main feature of the UK economy. Q1 GDP looks set to be stronger than initially expected, but that is entirely due to stockpiling of inventory by companies trying to prepare for a hard Brexit outcome. At some point, this will reverse with a corresponding negative impact on the data. And the pound? Still between 1.30 and 1.31 and not looking like it is heading anywhere in the near future.

On to the ECB, where policy was left unchanged, as universally expected, and Signor Draghi remarked that risks to the economy continue to be to the downside. Other things we learned were that the TLTRO’s, when they come later this year, are pretty much the last arrow in the policy quiver. Right now, there is no appetite to reduce rates further, and more QE will require the ECB to revise their internal guidelines as to the nature of the program. The issue with the latter is that EU law prevents monetization of government debt, and yet if the ECB starts buying more government bonds, it will certainly appear that is what they are doing. This morning’s inflation data from France and Germany showed that there is still no inflationary impulse in the two largest economies there, and by extension, throughout the Eurozone.

At this point, ECB guidance explains rates will remain on hold through the end of 2019. My view is it will be far longer before rates rise in the Eurozone, until well into the recovery from the next recession. My forecast is negative euro rates until 2024. You read it here first! And the euro? Well, in its own right there is no reason to buy the single currency. As long as the US economic outlook remains better than that of the Eurozone, which is certainly the current case, the idea that the euro will rally in any meaningful way seems misguided. Overnight there has been little movement, and in fact, the euro has been trading between 1.12 and 1.1350 for the past three weeks and is currently right in the middle of that range. Don’t look for a break soon here either.

The FOMC Minutes taught us that the Fed is going to be on hold for quite a while. The unanimous view is that patience remains a virtue when it comes to rate moves. Confusion still exists as to how unemployment can be so low while inflation shows no signs of rising, continuing to call into question their Phillips Curve models. In fact, yesterday morning’s CPI showed that core inflation fell to 2.0% annually, a tick lower than expected and continuing to confound all their views. The point is that if there is no inflationary pressure, there is no reason to raise rates. At the same time, if US economic growth continues to outpace the rest of the world, there is no reason to cut rates. You can see why the market is coming round to the idea that nothing is going to happen on the interest rate front for the rest of 2019. Futures, which had priced in almost 40bps of rate cuts just last month, are now pricing in just 10bps (40% chance of one cut). Despite the ongoing rhetoric from President Trump regarding cutting rates and restarting QE, neither seems remotely likely at this juncture. And don’t expect either of his Fed nominees to be approved.

Finally, Treasury Secretary Mnuchin declared that the US and China have agreed a framework for enforcement of the trade agreement, with both nations to set up an office specifically designed for the purpose and a regular schedule of meetings to remain in touch over any issues that arise. But Robert Lighthizer, the Trade Representative has not commented, nor have the Chinese, so it still seems a bit uncertain. Enforcement is a key issue that has been unsolved until now, although IP protection and state subsidies remain on the table still. Interestingly, equity markets essentially ignored this ‘good’ news, which implies that a completed deal is already priced into the market. In fact, I would be far more concerned over a ‘sell the news’ outcome if/when a trade deal is announced. And of course, if talks break off, you can be certain equity prices will adjust accordingly.

This morning brings Initial Claims (exp 211K) and PPI (1.9%, 2.4% ex food & energy) and speeches from Clarida, Williams, Bullard and Bowman. But what are they going to say that is new? Nothing. Each will reiterate that the economy is doing well, still marginally above trend growth, and that monetary policy is appropriate. In the end, the market continues to wait for the next catalyst. In equities, Q1 earnings are going to start to be released this afternoon and by next week, it will be an onslaught. Arguably, that will drive equities which may yet impact the dollar depending on whether the earnings data alters overall economic views. In the meantime, range trading remains the best bet in FX.

Good luck
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A One-Year Delay

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Prime Minister May wanted weeks
The EU, however, now seeks
A one-year delay
Which for PM May
Means Tories will up their critiques

Today brings two important decisions from Europe. First and foremost is the EU Council meeting called to discuss Brexit and determine how long a delay will be granted to the UK to make up their mind. (Hint: it doesn’t seem to matter, there is no clear preference for any decision!) Secondly, the ECB meets a day earlier than usual and will announce its policy decisions (there will be no changes) and at 8:30 Signor Draghi will face the press. The reason they are meeting early is so they can get to Washington for the annual IMF/World Bank meetings.

As to the first, PM May has asked for an extension to June 30, as she continues to try to force her deal down Parliament’s collective throat. However, given how unsuccessful she has been in this process, it seems more likely that the EU is going to force the UK to take a nine-month or one-year extension. In their view, this will allow the political process to play out with either a new referendum or a new election or both, but with some type of mandate finally achieved. Naturally, the hard-core Brexiteers are horrified at this outcome because the thought is that a new vote would result in canceling Brexit. This would not be the first time that a referendum in the EU went badly and was subsequently rerun in order to get the leadership’s desired outcome. Both the French and the Dutch rejected the EU Constitution in 2005 initially, but subsequently reversed the initial vote while the Danes rejected the Maastricht Treaty in 1992 but also voted a second time to approve it. So this would hardly be unprecedented.

The problem for the UK is that the only thing they have agreed on, and just barely, is that they don’t want to leave without a deal. However, if anything, there has been increased rancor amongst the MP’s and there is no clear view on how to proceed. Actually, I guess the other thing Parliament has agreed on is they HATE PM May’s negotiated deal! Meanwhile, UK data this morning was surprisingly robust with IP jumping 0.6% and GDP in February rising at a 2.0% annualized clip, both data points being far better than expected. And the pound has benefitted rising 0.2% this morning, although it still remains mired between 1.30 and 1.31with little prospect of moving until something new happens in the Brexit saga.

On to the ECB, which is still struggling to stimulate the Eurozone economy. In fact, yesterday, the IMF announced reduced forecasts for 2019 GDP growth globally, taking their expected rate down to 3.3% with Europe being one of the key weak spots. The IMF’s 2019 projection is down to 1.3% for the Eurozone, from their previous forecast of 1.5%.

It is this situation that Signor Draghi is trying desperately to address but has so far been largely unsuccessful. It seems clear that the ECB will not countenance a move to further negativity in interest rates, and the TLTRO announcement from last month has faded from view. At this point, the only thing they can do would be reopen QE, but I don’t think that is yet likely. However, do not be surprised if we continue to see the growth trajectory slow in the Eurozone, that the ECB does just that.

On that subject, it may be time to question just how much worse things are going to get in the global economy. After all, one of the key issues has been Brexit, which at this point looks like it will be delayed for a long time at the very least. As well, we continue to hear that the trade talks between the US and China are making progress, so if there is a successful conclusion there, that would be another positive for global growth. With the IMF (a frequent negative indicator) sounding increasing warnings, and some stirrings of better data (not only the UK, but Italian IP surprised on the high side today rising 0.8% in February, compared to expectations of a -0.8% outcome), and last week’s slightly better than expected Chinese PMI data, perhaps the worst is behind us. Of course, counter to that view is the global bond market which continues to price in further economic weakness based on the increased number of bonds with negative yields as well as the ongoing lethargy in US rates. It is easy to become extremely pessimistic as global policymakers have not shown great command, but this view cannot be ignored.

Overall, the dollar is slightly softer this morning, down 0.15% vs. the euro and 0.35% vs. AUD (RBA Governor DeBelle sounded slightly less dovish in a speech last night) as well as lesser amounts vs. other currencies. We are seeing similar magnitude gains in many EMG currencies, but overall, the pattern seems to be that the dollar softens overnight and regains its footing in the US session.

This morning brings CPI data (exp 1.8% and 2.1% ex food & energy) and then the FOMC Minutes from March are released at 2:00. We also hear from Randall Quarles, although, as I continue to say, at this point, there seems little likelihood of a change in view by any of the FOMC’s members. I see no reason for the recent pattern to change, so expect that the dollar will stabilize, and likely rebound slightly as the day progresses. But despite the EU meeting and the ECB meeting, it seems unlikely there will be much new information to change anybody’s view when the bell rings this afternoon.

Good luck
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Carefully Looking Ahead

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The Minutes explained that the Fed
Was carefully looking ahead
But so far it seems
The hawks’ fondest dreams
Of hiking again might be dead

As well, when it comes to the size
Of the Fed’s balance sheet, in their eyes
It’s likely to stay
Quite large like today
Not shrink while they, debt, monetize

Markets are little changed this morning after a lackluster session yesterday when the Fed released their Minutes from the January meeting. Overall, the tone of the Minutes seemed to be slightly less dovish than the tone of the Powell press conference that followed the meeting, as well as much of the commentary we have heard since then. Apparently, Cleveland’s Loretta Mester is not the only one who believes rates will need to be raised further this year, as the Minutes spoke of “several’ members with the same opinion. Of course, that was offset by “several” members who had the opposite view and felt that there was no urgency at all to consider raising rates further this year. Patience continues to be the watchword at the Mariner Eccles building, and I expect that as long as the economic data does not differ dramatically from forecasts, the Fed will be quite happy to leave rates on hold. They specifically mentioned the potential problems that could derail things like slowing global growth, a poor outcome in the US-China trade talks or a disruptive Brexit. But for now, it appears they are comfortable with the rate setting.

The balance sheet story was of even more interest to many market participants as the gradual running off of maturing securities has seemingly started to take a bite out of available liquidity in markets. And in fact, this seems to be where the Fed minutes indicated a more dovish stance in my eyes. While there is still a thought that rates might be raised later this year, it was virtually unanimous that shrinking the balance sheet will end this year, leaving the Fed with a much larger balance sheet (~$3.5-$4.0 trillion) than many had expected. Recall, prior to the financial crisis the Fed’s balance sheet was roughly $900 billion in size. To many, this is effectively a permanent injection of money into the economy and so should support both growth and inflation going forward. However, the risk is that when the next downturn arrives (and make no mistake, it Will arrive), the Fed will have less room to act to support the economy at that time. This is especially true since even with another one or two rate hikes, Fed Funds will have topped out at a much lower level than it has historically, and therefore there will be less rate cutting available as a policy tool.

Adding it up, it seems rate guidance was mildly hawkish and balance sheet guidance was mildly dovish thus leaving things largely as expected. It is no surprise market activity was muted.

This morning, as the market awaits the ECB Minutes, we see the dollar little changed overall, although there have been some individual currency movements. For example, AUD has fallen 0.7% (and dragged NZD down -0.5%) after a well-respected local economist changed his rate view to two RBA rate cuts later this year due to the rapidly weakening housing market. Prior to this, the market had anticipated no rate movement for at least another 18 months, so this served as quite a change. And all this came despite strong Australian employment data with the Unemployment rate remaining at 5.0% and job growth jumping by 39K.

Meanwhile, mixed data from Europe has leaned slightly bullish as surprisingly strong French Composite PMI data (49.9 vs 49.0 expected) offset surprisingly weak German Manufacturing PMI data (47.6 vs 49.7 expected). I guess the market already knows that Germany is slowing more rapidly than other nations in the Eurozone (except for Italy) due to the ongoing trade friction between the US and China. But despite the ongoing Gilets Jaune protests, the French economy managed to find some strength. At any rate, the euro has edged higher by 0.15% after the reports. At the same time, the pound has also rallied 0.15% after releasing the largest budget surplus on record (since 1993), and perhaps more importantly, on some apparent movement by the EU on Brexit. PM May is hinting that she may be able to get a legally binding way to end the backstop in a codicil to the Brexit negotiations, which if she can, may allow cover for the more euro skeptical members of her party to support the deal. There is no question the pound remains completely beholden to the Brexit story and will continue to do so for at least another month.

Pivoting to the trade talks, there are several stories this morning about how negotiators are preparing a number of memos on separate issues with the idea they will be brought together at the Trump-Xi meeting to be held in the next several weeks. There is no question that the market continues to view the probability of a deal as to be quite high, but I keep looking at the key issues at stake, specifically with regards to IP and the coercion alleged by US companies, and I remain skeptical that China will back away from that tactic. The Chinese do not view the world through the same eyes as the US, or the Western World at large. As per an article in the WSJ this morning, “We must never follow the Western path of constitutionalism, separation of powers and judicial independence,” Mr. Xi said in an August speech. That comment does not strike me as a basis for compromise nor enforcement of any deal that relies on those issues. But for now, the market continues to believe.

And that’s pretty much the stuff that matters today. We do get most of our data for the week this morning with Initial Claims (exp 229K), Durable Goods (1.5%, 0.3% ex transport), Philly Fed (14.0) and Existing Home Sales (5.00M). While individually, none of them have a huge impact, the suite of information if consistently strong or weak, could well lead to some movement given the broad sweep of the economy covered. There are no Fed speakers on the docket today, and so it doesn’t appear that there is much reason to expect real movement today. Equity markets around the world have seen limited movement and US futures are flat to slightly lower. Treasury yields are slightly firmer but remain at the bottom end of their recent trading range. Overall, it seems like a dull day ahead.

Good luck
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No Magical Date

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March 1st is no magical date
Said Trump, while investors fixate
On whether a deal
On trade will be sealed
By then, or if tariffs can wait

After a day where there was mercifully little discussion of the ongoing trade negotiations, they have come back to the fore. Yesterday, President Trump indicated that the March 1st deadline for a deal was now far more flexible than had previously been indicated. Based on the reports that there has been substantial progress made so far, it seems a foregone conclusion that tariffs will not be rising on March 2nd. However, key issues remain open, notably the question of forced technology transfer and IP theft. Of course, as the Chinese maintain that neither one of those things currently occur, it is difficult for them to accept a resolution and change their methods. On the flip side, both Trump and Xi really need a deal to remove a major economic concern as well as to demonstrate their ability to help their respective nations.

One of the things that appears to be on the agenda is a Chinese pledge to maintain a stable yuan going forward, rather than allowing the market to determine its value. Looking back, it is ironic that the IMF allowed the yuan to join the SDR in 2016 to begin with, given that it continues to lack a key characteristic for inclusion in the basket; the ability to be “freely usable” to make payments for international transactions. And while the PBOC had been alleging that they were slowly allowing more market influence on the currency in their efforts to internationalize it, the results of the trade talks seem certain to halt whatever progress has been made and likely reverse some portion of it. It should be no surprise that the yuan strengthened on the back of these reports with the currency rallying 0.8% since yesterday morning. If currency control is part of the deal, then my previous views that the renminbi will weaken this year need to be changed. Given the continued presence of financial controls in China, if they choose to maintain a strong CNY, they will be able to do so, regardless of what happens in the rest of the world.

Meanwhile, away from the trade saga, the ongoing central bank activities remain the top story for markets. This has been made clear by comments from several central bankers in the past 24 hours. First, we heard from Cleveland Fed President Mester who, unlike the rest of the speakers lately, indicated that she expects rates to be higher by the end of the year. her view is that 3.00% is the neutral rate and that while waiting right now makes sense, the growth trajectory she expects will require still higher rates. However, while the FX market paid her some attention, it is not clear that the equity market did. Two things to note are that she is likely the most hawkish member of the Fed to begin with, and she is not a voting member this year, so will not be able to express her views directly.

Remember, too, that at 2:00 this afternoon, the FOMC Minutes of the January meeting will be released. Market participants and analysts are all very interested to see the nature of the conversation that led to the remarkable reversal from ‘further rate hikes are likely, to ‘patience is appropriate for now’ all while economic data remained largely unchanged. Until that release, most traders will be reluctant to add to any positions and movement is likely to be muted.

Across the pond, ECB Member Peter Praet continues to discuss the prospect of rolling over TLTRO’s which begin coming due in June of next year. Remember, one of the key issues for the Eurozone banks who availed themselves of this funding is that once the maturities fall below one year, it ceases to be considered long term funding and impacts bank capital ratios. Banks will then either have to call in loans that were made on the basis of this funding, or raise loan interest rates, or see their profits reduced as they pay more for their capital. None of these situations will help Eurozone growth. So, despite claims that banks must stand on their own, and TLTRO’s will only be rolled over if there is a monetary policy case to be made, the reality is that it is quite clear the ECB will roll these loans over. If they don’t, it will require the restarting of asset purchases or some other easing measure.

Once again, I will highlight that given the current growth and inflation trajectories in the Eurozone, there is a vanishingly small probability that the ECB will allow policy to get tighter than its current settings, and a pretty large probability that they will ease further. This will not help the euro regardless of the Fed’s actions. Yesterday saw the euro rally on the back of the updated trade story, but that has been stopped short as the market begins to accept the idea that the ECB is not going to tighten policy at all. Thus, this morning, the euro is unchanged.

The final story of note is, of course, Brexit, where the most recent word is that PM May is seeking to get a subtle change in the EU stance on the backstop plan thus allowing a new vote, this time with a chance of passing. The pro-Brexit concern is that the current form of the backstop will force the UK to be permanently attached to the EU’s trade regime with no say in the matter, exactly the opposite of what they voted for. May is meeting with EU President Juncker today, and it is quite possible that the EU is starting to feel the pressure of the ramifications of a no-deal Brexit and getting concerned. The Brexit outcome remains highly uncertain, but the FX implications remain the same; a Brexit deal will help the pound rally initially, while a no-deal Brexit will see a sharp decline in Sterling. Yesterday there was hope for the deal and the pound rallied. This morning, not so much as the pound has given back half the gain and is down 0.2% on the day.

Elsewhere, the dollar has been mixed with gainers and losers in both the G10 and the EMG blocs as everybody awaits the Minutes, which is the only data for the day. It is hard to believe there will be much movement ahead of them, and afterwards, it will depend on what they say.

Good luck
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Greater Clarity

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Last year rate hikes had regularity
But now the Fed seeks greater clarity
‘Bout whether our nation
Is feeling inflation
Or some other source of disparity

Investors exhaled a great sigh
And quickly realized they must buy
Those assets with risk
To burnish their fisc
Else soon prices would be too high

The December FOMC Minutes were received quite positively by markets yesterday as it appears despite raising rates for the fourth time in 2018, it was becoming clearer to all involved that there was no hurry to continue at the same pace going forward. The lack of measured inflation and the financial market ructions were two key features that gave pause to the FOMC. While the statement in December didn’t seem to reflect that discussion, we have certainly heard that tune consistently since then. Just yesterday, two more Fed regional presidents described the need for greater clarity on the economic situation before seeing the necessity to raise rates again. And after all, given the Fed has raised rates 225bps since they began in December 2015, it is not unreasonable to pause and see the total impact.

However, regarding the continued shrinking of the balance sheet, the Fed showed no concern at this point that it was having any detrimental effect on either the economy or markets. Personally I think they are mistaken in this view when I look at the significant rise in LIBOR beyond the Fed funds rate over the past year, where Fed Funds has risen 125 bps while LIBOR is up 187bps. But the market, especially the equity market, remains focused on the Fed funds path, not on the balance sheet, and so breathed a collective sigh of relief yesterday.

Given this turn of events, it should also not be surprising that the dollar suffered pretty significantly in the wake of the Minutes’ release. In the moments following the release, the euro jumped 0.7% and continued subsequently to close the day nearly 1% stronger. One of the underpinnings of dollar strength has been the idea that the Fed was going to continue to tighten policy in 2019, but the combination of a continuous stream of comments from Fed speakers and recognition that even back in December the Fed was discussing a pause in rate hikes has served to alter that mindset. Now, not only is the market no longer pricing in rate hikes this year, but also analysts are backing away from calling for further rate hikes. In other words, the mood regarding the Fed has turned quite dovish, and the dollar is likely to remain under pressure as long as this is the case.

Of course, the other story of note has been the trade talks between the US and China which ended yesterday. During the talks, market participants had a generally upbeat view of the potential to reach a deal, however, this morning that optimism seems to be fading slightly. Equity markets around the world have given back some of their recent gains and US futures are also pointing lower. As I mentioned yesterday, while it is certainly good news that the talks seemed to address some key issues, there is still no clarity on whether a more far-reaching agreement can be finalized in any near term timeline. And while there has been no mention of tariffs by the President lately, a single random Tweet on the subject is likely enough to undo much of the positive sentiment recently built.

The overnight data, however, seems to tell a different story. It started off when Chinese inflation data surprised on the low side, rising just 1.9% in December, much lower than expected and another red flag regarding Chinese economic growth. It seems abundantly clear that growth there is slowing with the only real question just how much. Forecasts for 2019 GDP growth have fallen to 6.2%, but I wouldn’t be surprised to see them lowered going forward. On the other hand, the yuan has actually rallied sharply overnight, up 0.5%, despite the prospects for further monetary ease from Beijing. It seems that there is a significant inflow into Chinese bond markets from offshore which has been driving the currency higher despite (because of?) those economic prospects. In fact, the yuan is at its strongest level since last August and seemingly trending higher. However, I continue to see this as a short-term move, with the larger macroeconomic trends destined to weaken the currency over time.

As to the G10 currencies, they have stabilized after yesterday’s rally with the euro virtually unchanged and the pound ceding 0.25%. Two data points from the Eurozone were mixed, with French IP slipping to a worse than expected -1.3% while Italian Retail Sales surprised higher at +0.7% back in November. While there was no UK data, the Brexit story continues to be the key driver as PM May lost yet another Parliamentary procedural vote this morning and seems to be losing complete control of the process. The thing I don’t understand about Brexit is if Parliament votes against the current deal next week, which seems highly likely at this stage, what can they do to prevent a no-deal Brexit. Certainly the Europeans have not been willing to concede anything else, and with just 79 days left before the deadline, there is no time to renegotiate a new deal, so it seems a fait accompli that the UK will leave with nothing. I would welcome an explanation as to why that will not be the case.

Turning to this morning’s activity, the only data point is Initial Claims (exp 225K), but that is hardly a market moving number. However, we hear from three regional Fed presidents and at 12:45 Chairman Powell speaks again, so all eyes will be focused on any further nuance he may bring to the discussion. At this point, it seems hard to believe that there will be any change in the message, which if I had to summarize would be, ‘no rate changes until we see a strong reason to do so, either because inflation jumps sharply or other data is so compelling that it forces us to reconsider our current policy of wait and see.’ One thing to keep in mind, though, about the FX markets is that it requires two sets of policies to give a complete picture, and while right now all eyes are on the Fed, as ECB, BOJ, BOE and other central bank policies evolve, those will have an impact as well. If global growth is truly slowing, and the current evidence points in that direction, then those banks will start to sound more dovish and their currencies will likely see plenty of selling pressure accordingly. But probably not today.

Good luck
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Little Trust

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Investors and traders believe
The trade talks will shortly achieve
Solutions robust
Despite little trust
Since both sides are known to deceive

Risk is definitely back on this morning as equity markets around the world continue their recent rebound, Treasury and bund prices slide, and commodities climb higher. As to the dollar, it is modestly softer, except against the yen, which is the worst performer in the G10 today.

The primary driver of these moves remains the US-China trade talks, which seem to be going pretty well. If you recall, Monday, Chinese Vice-Premier Liu He made an appearance to demonstrate the importance of the talks to both sides’ negotiators, and the fact that they were extended an extra day, only ending today in Beijing, implies that positive momentum was building and neither side wanted to give that up. While the first reports are that there are still some areas of wide disagreement, there seems to be no doubt that progress has been made.

In addition to the trade story, the market continues to hear soothing words from various Fed speakers regarding the pace of further potential rate hikes. Yesterday, St. Louis Fed President Bullard was quite clear that he thought there was no reason to raise rates further at this time given the lack of measured inflation, although he remains comfortable with the continuing unwinding of the balance sheet. And Bullard is a voter this year, so market participants tend to give voters just a little more credence in their comments. Later this afternoon the Fed will release the Minutes of their December meeting, although I don’t expect them to be that useful. You may recall that it was that meeting’s statement and the ensuing press conference that kicked off the last leg of the equity market rout. Investors kept seeing signs of slowing growth while the Fed seemed oblivious, especially to activity elsewhere in the world. In fact, it was that meeting that convinced many (myself included) that the Fed was no longer in the put writing business.

How wrong we all were on that score. We have heard from a half dozen Fed speakers in the past two weeks, including some of the most hawkish (Mester), and to a (wo)man they all indicated that there was no urgency to raise rates, with some, like Bullard, questioning if there was even a need to do so at all. Clearly, the market has become far more comfortable that the Fed is not out to destroy the equity market, and recent price action is the result of that change of view. Given the change of tone since the meeting, it seems unlikely to me that the Minutes will teach us very much about the current state of Fed thinking. Instead, we still have another eight Fed speeches (including another Powell speech) between today and Friday, which will give us all much better information than three-week old data.

Other news of note includes the announcement overnight by the PBOC that they would be instituting a new bank lending program, the Medium Term Lending Facility (MTLF) which is designed to offer cheap bank funding for loans to SME’s without overly expanding the liquidity in the market. Remember, the Chinese are still trying to wring excess leverage out of some sectors of the economy, but are also feeling the effects of overall slowing economic growth so feel the need to address that. These loans appear quite similar to the ECB’s TLTRO’s, which were deemed a big success when they were being issued. Of course, the key concern there is now that those loans are coming up to maturity, banks need to replace that funding and that is not so easy in a market where global liquidity is drying up. Will the same thing happen in China? Quite possibly. My observation on extraordinary monetary policy is that it has proven much harder to remove than to implement.

At any rate, the market was cheered by that news, as well as the trade talks, and the renminbi continues to behave quite well, actually rallying a further 0.2% this morning. I still foresee a weaker currency over time, but thus far, the PBOC has prevented any substantive movement.

Brexit continues to fester in the background with PM May losing another vote in Parliament. This new bill now prevents Her Majesty’s Treasury from adjusting tax rates in the event of a no-deal Brexit. And yet, there is no indication that the deal on the table is going to pass, so it remains unclear just how that will work. Given the magnitude of the issue, waiting to the 11th hour to achieve agreement may be the only way to get it done. And so, I continue to expect a very late acceptance of the deal, although it is by no means clear that will be the case. One other noteworthy Brexit item is the potential impact it will have on Japanese companies, who have used the UK as their beachhead into the EU. PM Abe will be visiting PM May tomorrow to make sure she understands how important a trade deal is to those Japanese firms, and how important those Japanese firms are to the UK economy.

And otherwise, the currency market remains fairly dull for right now. Even EMG currencies are only showing modest movement overall, albeit generally stronger today. The thing is, market participants are so focused on the major issues, and by extension the major currencies, that there has been reduced activity elsewhere. As long as risk appetite remains robust, the dollar should remain under pressure along with the yen. And for today, that seems like the best bet.

Good luck
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Problem’s Aplenty

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Two stories have traders’ attention
The first showed the Fed’s apprehension
That their preferred path
Was earning the wrath
Of markets, thus causing dissention

The other is that the G20
(According to the cognoscenti)
May let Xi explain
A trade war’s insane
Since both men have problems aplenty

Once again the market has narrowed its focus on two things only, in this case the Minutes from the November FOMC meeting and the upcoming dinner between Presidents Trump and Xi at the G20 meeting in Buenos Aires. It seems that traders in virtually every market are taking their cues from these stories.

Starting with the Minutes, it is clear that the Fed finds itself at an inflection point in their policymaking with the easy part now behind them. Up until September, it was evident that policy was extremely accommodative, and the Fed’s goal of gradually reducing that accommodation was easy to achieve, hence the steady pace of a 25bp rate hike every other meeting. However, despite the fact that nobody actually knows where the neutral rate of interest (also known as r*) is, it is apparent that the current Fed funds rate is much closer to that mythical rate than it used to be. Hence the dilemma. How much further should the Fed raise rates, and at what pace? The last thing they want is to raise rates sufficiently to slow the economy into a recession. But they also remain quite wary of policy settings that are too easy, since that could lead to financial instability (read bubbles) and higher inflation. This is why they get paid the big bucks!

Signals from the US economy lately have been mixed, with the housing market slowing along with auto sales, but general consumer confidence and spending remaining at very high levels. Underpinning the latter is the ongoing strength in the labor market, where the Unemployment rate remains near 50 year lows of 3.7%. There is a caveat with the labor market though, and that is the Initial Claims data, which had been trending lower consistently for the past nine years, but has suddenly started to tick higher over the past month. While this could simply be a temporary fluctuation based on changes in seasonal adjustments, it could also be the proverbial canary in the coalmine. We will have a better sense next Friday, when the November NFP report is released, but based on the recent Initial Claims data, a soft employment report is entirely within reason.

The upshot is that the Fed is no longer certain of its near term rate path which means that many of the investing memes of the past ten years, notably buy-the-dip, may no longer make sense. Instead, the volatility that we have seen lately across all markets is likely to be with us going forward. But remember, too, that volatility is a market’s natural habitat. It has been the extreme monetary policies of central banks that have moderated those natural movements. And as central banks back away from excessive monetary ease, we should all expect increased volatility.

The second story is the upcoming meeting between Presidents Trump and Xi tomorrow night. Signals from Trump going into the meeting have been mixed (aren’t all his signals mixed?) but my take is that sentiment is leaning toward at least a pause in any escalation of the trade war, with the true optimists expecting that concrete progress will be made toward ending the tariffs completely. Color me skeptical on the last part, but I wouldn’t be surprised if a temporary truce is called and negotiations restarted as both men are under increasing domestic pressure (China’s PMI just fell to 50.0 last night indicating the economy there is slowing even more rapidly than before) and so a deal here would play well both on a political level, as well as to markets in each country. And when the needs of both parties are aligned, that is when deals are made. I don’t think this will end the tension, but a reduction in the inflammatory rhetoric would be a welcome result in itself.

Recapping the impact of the two stories, the fact that the Fed is no longer inexorably marching interest rates higher has been seen as quite the positive for equities, and not surprisingly a modest negative for the dollar. Meanwhile, optimism that something positive will come from the Trump-Xi dinner tomorrow has equity bulls licking their collective chops to jump back into the market, while FX traders see that as a dollar negative. In other words, both of the key stories are pointing in the same direction. That implies that prices already reflect those views, and that any disappointment will have a more significant impact than confirmation of beliefs.

As it happens, the dollar is actually a bit firmer this morning, rallying vs. most of its G10 counterparts, but only on the order of 0.2%. The pound remains under pressure as traders continue to try to handicap the outcome of the Parliamentary vote on Brexit on December 11, and the signs don’t look great. Meanwhile, the euro has softened after weaker than expected CPI data (headline 2.0%, core 1.0%) and continued weak growth data are making Signor Draghi’s plans to end QE next month seem that much more out of touch.

This morning brings a single data point, Chicago PMI (exp 58.0) as well as a speech from NY Fed President John Williams. However, at this point, given we have heard from both the Chairman and vice-Chairman already this week, it seems unlikely that Williams will surprise us with any new views. Remember, too, that Powell testifies to Congress next week, so we will get to hear an even more detailed discussion on his thinking on Tuesday. Until then, it seems that the dollar will continue its recent range trading. The one caveat is if there truly is a breakthrough tomorrow night in Buenos Aires, we can expect the dollar to respond at the opening in Asia Sunday night. But for today, it doesn’t feel like much is on the cards.

Good luck and good weekend
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There Is No Plan B

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Said Europe, “there is no Plan B”
This deal is the best that you’ll see
Opponents keep saying
The deal is dismaying
Because it cedes full sovereignty

It turns out last week was quite a difficult one in markets, with equity prices around the world under significant pressure as concerns continue to grow regarding growth prospects everywhere. In fact, for the first time we heard Fed Chair Jay Powell moderate his description of the US economy’s growth trajectory. It seems that the clear slowing in the housing sector combined with less positive IP and Durable Goods data has been enough to alert the Fed to the possibility that all may not be right with the world. While there is no indication that the Fed will delay its December rate hike, questions about 2019’s rate path have certainly been debated more aggressively with the consensus now believing that we can see a pause before just two more rate hikes next year. With the Powell Fed indicating that they are truly data dependent (as opposed to the Yellen Fed which liked the term, but not the reality), if we continue to see slowing US growth, then it is quite reasonable to expect a shallower trajectory of rate hikes in the US.

But that was last week’s news and as the new week begins, the biggest story is that the EU has agreed the terms of the Brexit negotiations that were just completed two weeks ago. The entire process now moves on to the next stage, where all 28 parliaments need to approve the deal. Given the terms of the deal, which has the opportunity to lock the UK into the EU’s customs union with no say in its evolution, it would be surprising if any of the other 27 members reject the deal. However, it remains unclear that the deal will be accepted by the UK parliament, where PM May does not hold a majority and rules because of a deal with the Northern Irish DUP. Of course the irony here is that Northern Ireland is the area of greatest contention in the deal, given the competing desires of, on the one hand, no hard border between Ireland and Northern Ireland, and on the other hand, the desire to be able to separate the two entities for tariff and immigration purposes.

At this stage, it seems there is at best a fifty-fifty chance that the deal makes it through the UK parliament, as the opposition Labour Party has lambasted the deal (albeit for different reasons) in the same manner as the hard-line Brexiteers. But political outcomes rarely follow sound logic, and so at this point, all we can do is wait until the vote, which is expected to be on December 12. What we do know is that the FX market is not sold on the deal’s prospects as despite the announcement by the EU, the pound has managed to rally just 0.25% today and remains, at 1.2850, much closer to the bottom of its recent trading range than the top. I continue to believe that a no vote will be tantamount to a hard Brexit and that the pound will suffer further from here in that event. However, if parliament accepts the deal, I would expect the pound to rally to around1.35 initially, although its future beyond that move is likely to be lower anyway.

Last week’s risk-off behavior led to broad-based dollar strength, with the greenback rallying on the order of 1.0% against both its G10 and major EMG counterparts. While that movement pales in comparison to the rout in equity markets seen last week, it was a consistent one nonetheless. This morning, though, the dollar is under a modicum of pressure as the fear evident last week has abated.

For example, despite softer than expected German IFO data (102.0 vs. exp 102.3), the euro has rallied 0.25% alongside the pound. A big part of this story seems to be that the Italians have made several comments about a willingness to work with a slightly smaller budget deficit in 2019 than the 2.4% first estimated. While the euro has clearly benefitted from this sentiment, the real winner has been Italian debt (where 10-year BTP’s are 17bps lower) and Italian stocks, where the MIB is higher by 2.7%. In fact, that equity sentiment has spread throughout the continent as virtually every European market is higher by 1% or more. We also saw strength in APAC equity markets (Nikkei +0.75%, Hang Seng +1.75%) although Shanghai didn’t join in the fun, slipping a modest 0.15%. The point is that market sentiment this morning is clearly far better than what was seen last week.

Looking ahead to the data this week, the latest PCE data is due as well as the FOMC Minutes, and we have a number of Fed speakers, including Chairman Powell on Wednesday.

Tuesday Case-Shiller Home Prices 5.3%
  Consumer Confidence 135.5
Wednesday Q3 GDP 3.5%
  New Home Sales 578K
Thursday Initial Claims 219K
  Personal Income 0.4%
  Personal Spending 0.4%
  PCE 0.2% (2.1% Y/Y)
  Core PCE 0.2% (1.9% Y/Y)
Friday Chicago PMI 58.3

In addition to Powell, we hear from NY Fed President Williams as well as Vice-Chairman Richard Clarida, both of whom will be closely watched. Given the recent change in tone to both the US data (slightly softer) and the comments from Fed speakers (slightly less hawkish), I think the key this week will be the Minutes and the speeches. Investors will be extremely focused on how the evolution in the Fed’s thinking is progressing. But it is not just the Fed. Remember, the ECB has promised to end QE come December despite the fact that recent data has shown slowing growth in the Eurozone.

The greatest fear central bankers currently have is that their economy rolls into a recession while interest rates are already at “emergency” levels and monetary policy remains extremely loose. After all, if rates are negative, what can they do to stimulate growth? This has been one of the forces driving central bankers to hew to a more hawkish line lately as they are all keen to get ahead of the curve. The problem they face collectively is that the data is already beginning to show the first indications of slowing down more broadly despite the continuation of ultra easy monetary policy. In the event that the global economy slows more rapidly than currently forecast, there is likely to be a significant increase in market volatility across equities, bonds and currencies. In this case, I am not using the term volatility as a euphemism for declines, rather I mean look for much more intraday movement and much more uncertainty in expectations. It is this scenario that fosters the need for hedgers to maintain their hedge programs at all times. Having been in the markets for quite a long time, I assure you things can get much worse before they get better.

But for today, there is no reason to believe that will be the case, rather the dollar seems likely to drift slightly lower as traders position for the important stuff later this week.

Good luck
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Propense to Inveigh

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The Minutes released yesterday
Had not very much new to say
Rates will keep on rising
And assets downsizing
Despite Trump’s propense to inveigh

The market reaction was swift
With 10-years receiving short shrift
The stock market fell
(Was this its death knell?)
While dollars received quite a lift!

And here I thought the FOMC Minutes would be dull and boring with limited market impact. I couldn’t have been more wrong. While the text itself was as dry as usual, it seems the market read between the lines and gleaned the following: interest rates are going to go higher for a while yet, a longer time than previously considered.

Arguably the biggest change in the September FOMC statement was the removal of the sentence regarding policy being accommodative. Chairman Powell focused on this at the ensuing press conference, and has commented on it since then as well. The gist of his message has been that since the dividing line between accommodative and not accommodative is so uncertain (r* is immeasurable) and that it is not likely to be stationary either, there is no way the Fed can be certain they have reached that target. Given that premise, describing their policy as accommodative seemed to express too much precision in something that is extremely uncertain.

However, the compilation of views from the Minutes seemingly showed a larger group of members sounding hawkish. In the end, the market read this to mean that the Fed was going to be raising rates at least another 100bps before they stop. Consider that if they act every quarter through the end of 2019, raising rates 25bps each time, Fed Funds is going to be in a range of 3.25%-3.50% at the end of next year. And while that is still low on a historic basis, it is much higher than markets have seen in more than a decade. Based on what we have heard from the ECB and BOJ, it is also much higher than their cash rates are going to be at that time. In fact, it is quite possible that in both those cases, cash rates will still be 0.00% or negative at the end of next year.

If you play out that scenario, it cannot be very surprising that the dollar was a beneficiary of the release of the Minutes. So yesterday’s 0.6% decline in the euro makes a great deal of sense. In fact, the dollar index performed in exactly the same manner, rising 0.6% on the day. And one thing to keep in mind is that Fed funds futures markets are still pricing in only a 25% probability that rates will be that high at the end of next year. If the Fed stays the course, and there is no reason yet to believe they won’t, that market will need to adjust, and other markets will adjust accordingly.

So a quick recap of the G10 currencies showed that the dollar performed will against all of them yesterday, but has since ceded some of that ground in what appears to be a short-term trading effect. So this morning’s 0.15% rise in the euro, or 0.1% rise in the pound hardly seems compelling.

But there was another story of note yesterday as well, the US Treasury issued its semiannual report on currencies and, once again, did not find China a currency manipulator by its legal definition. This cannot be a real surprise because despite the President’s constant complaints, according to the law, a country can only be designated a manipulator if three conditions are met; consistent currency intervention, running a large trade surplus with the US and running a large current account surplus overall. In fact, China has not been actively intervening on a net basis in the FX markets, and its overall current account surplus has actually fallen to near flat, although obviously it continues to run a large surplus with the US.

Recent price action in USDCNY had been extremely stable, with the PBOC seeking to maintain very modest volatility and expressly saying that they would not be using the exchange rate as a ‘weapon’ in trade. But interestingly, last night, after the release of the Treasury report, the PBOC fixed CNY at its weakest level in nearly two years and the renminbi fell 0.25%. As well, Chinese stock markets continued their recent declines, with Shanghai falling another 2.9% and now trading at its lowest point since December 2014. Concerns are growing that the Chinese economy may be slowing faster than anticipated and this is also being reflected in commodity prices, where base metals have been falling along with oil. (Oil also suffered because of the ongoing inventory build in the US, which when combined with fears over slowing global growth have been sufficient to add a little caution to all those claims that $100 oil was returning soon.)

And those were the big stories yesterday. The US data was surprisingly weak, with both Housing Starts and Building Permits falling and coming in well short of expectations. But this market is far more focused on the Fed and its perceived intentions than on a piece of data. That tells me that this morning’s Initial Claims (exp 212K) and Philly Fed (20.0) are unlikely to move markets. Of more interest may be speeches by two Fed speakers, Bullard and Quarles, especially if they delve into more detail of their policy expectations.

Equity futures are pointing lower, and Treasury yields have maintained yesterday’s gains and are back at 3.20%. My sense is that risk is being reduced across the board here, thus driving both stocks and bonds lower at the same time. If that is true, then look for further commodity price weakness and the dollar to retain its recent gains.

Good luck
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