The Chaff from the Wheat

As markets await the report
On Payrolls they’re having to sort
The chaff from the wheat
From Threadneedle Street
As Carney, does rate hikes exhort

The gloom that had been permeating the analyst community (although certainly not the equity markets) earlier this year, seems to be lifting slightly. Recent data has shown a stabilization, at the very least, if not the beginnings of outright growth, from key regions around the world. The latest news was this morning’s surprising Eurozone inflation numbers, where CPI rose a more than expected 1.7% in April, while the core rate rose 1.2%, matching the highest level it has seen in the past two years. If this is truly a trend, then perhaps that long delayed normalization of monetary policy in the Eurozone may finally start to occur. Personally, I’m not holding my breath. Interestingly, the FX market has responded by selling the euro with the single currency down 0.2% this morning and 1.0% since Wednesday’s close. I guess that market doesn’t see the case for higher Eurozone rates yet.

In the meantime, the market continues to consider BOE Governor Carney’s comments in the wake of yesterday’s meeting, where he tried to convince one and all that the tendency for UK rates will be higher once Brexit is finalized (and assuming a smooth transition). And perhaps, if there truly is a global recovery trend and policy normalization becomes a reality elsewhere, that will be the case. But here, too, the market does not seem to believe him as evidenced by the pound’s ongoing weakness (-0.3% and back below 1.30) and the fact that interest rate futures continue to price in virtually no chance of rate hikes in the UK before 2021.

While we are discussing the pound, there is one other thing that continues to confuse me, the very fact that it is still trading either side of 1.30. If you believe the narrative, the UK cannot leave the EU without a deal, so there is no chance of a hard Brexit. After all, isn’t that what Parliament voted for? In addition, according to the OECD, the pound at 1.30 is undervalued by 12% or so. Combining these two themes, no chance of a hard Brexit and a massively undervalued pound, with the fact that the Fed has seemingly turned dovish would lead one to believe that the pound should be trading closer to 1.40 than 1.30. And yet, here we are. My take is that the market is not yet convinced that a hard Brexit is off the table or else the pound would be much higher. And frankly, in this case, I agree. It is still not clear to me that a hard Brexit is off the table which means that any true resolution to the situation should result in a sharp rally in the pound.

Pivoting to the rest of the FX market, the dollar is stronger pretty much across the board this morning, and this is after a solid performance yesterday. US data yesterday showed a significant jump in Nonfarm Productivity (+3.6%) along with a decline in Unit Labor Costs (-0.9%), thus implying that corporate activity was quite robust and the growth picture in the US enhanced. We also continue to see US earnings data that is generally beating (quite low) expectations and helping to underpin the equity market’s recent gains. Granted the past two days have seen modest declines, but overall, stocks remain much higher on the year. In the end, it continues to appear that despite all the angst over trade, and current US policies regarding energy, climate and everything else, the US remains a very attractive place to invest and dollars continue to be in demand.

Regarding this morning’s data, not only do we see the payroll report, but also the ISM Non-manufacturing number comes at 10:00.

Nonfarm Payrolls 185K
Private Payrolls 180K
Manufacturing Payrolls 10K
Unemployment Rate 3.8%
Participation Rate 62.9%
Average Hourly Earnings 0.3% (3.3% Y/Y)
Average Weekly Hours 34.5
ISM Non-Manufacturing 57.0

One cannot help but be impressed with the labor market in the US, where for the last 102 months, the average NFP number has been 200K. It certainly doesn’t appear that this trend is going to change today. In fact, after Wednesday’s blowout ADP number, the whisper is for something north of 200K. However, Wednesday’s ISM Manufacturing number was disappointingly weak, so there will be a great deal of scrutiny on today’s non-manufacturing view.

Adding to the mix, starting at 10:15 we will hear from a total of five Fed speakers (Evans, Clarida, Williams, Bowman, Bullard) before we go to bed. While Bullard’s speech is after the markets close, the other four will get to recount their personal views on the economy and future policy path with markets still open. However, given that we just heard from Chairman Powell at his press conference, and that the vote to leave rates was unanimous, it seems unlikely we will learn too much new information from these talks.

Summing up, heading into the payroll report the dollar is firm and shows no signs of retreating. My take is a good number will support the buck, while a weak one will get people thinking about that insurance rate cut again, and likely undermine its recent strength. My money is on a better number today, something like 230K, and a continuation of the last two days of dollar strength.

Good luck and good weekend
Adf

Fleeing the Scene

The latest news from the UK
Is that they have sought a delay
Til midsummer’s eve
When, they now believe,
They’ll duly have something to say

But Europe seems not quite so keen
To grant that stay when they convene
It should be a year
Unless it’s quite clear
The UK is fleeing the scene

Despite the fact it is payroll day here in the US, there are still two stories that continue to garner the bulk of the attention, Brexit and trade with China. In the former, this morning PM May sent a letter to the EU requesting a delay until June 30, which seems to ignore all the points that have been made about a delay up until now. With European elections due May 23, the EU wants the UK out by then, or in for a much longer time, as the idea that the UK will vote in EU elections then leave a month later is anathema. But May seems to believe that now that she is in discussions with opposition leader Jeremy Corbyn, a solution will soon be found and the Parliament will pass her much reviled deal with tweaks to the political codicil about the future. The other idea is a one-year delay that will give the UK time to hold another referendum and get it right this time determine if it is still the people’s will to follow through with Brexit given what is now generally believed about the economic consequences. The PM is due to present a plan of some sort on Wednesday to an emergency meeting of the EU, after which time the EU will vote on whether to grant a delay, and how long it will be. More uncertainty has left markets in the same place they have been for the past several months, stuck between the terror of a hard Brexit and the euphoria of no Brexit. It should be no surprise the pound is little changed today at 1.3065. Until it becomes clear as to the outcome, it is hard to see a reason for the pound to move more than 1% in either direction.

Regarding the trade story, what I read as mixed messages from the White House and Beijing has naturally been construed positively by the market. Both sides claim that progress is being made, but the key sticking points remain IP integrity, timing on the removal of tariffs by the US, and the ability of unilateral retaliation by the US in the event that China doesn’t live up to the terms of the deal. The latest thought is it will take another four to six weeks to come to terms on a deal. We shall see. The one thing we have learned is that the equity markets continue to see this as crucial to future economic growth, and rally on every piece of ‘good’ news. It seems to me that at some point, a successful deal will be fully priced in, which means that we are clearly setting up a ‘buy the rumor, sell the news’ type of dynamic going forward. In other words, look for a positive announcement to result in a short pop higher in equity prices, and then a lot of profit taking and a pretty good decline. The thing is, since we have no real idea on the timing, nor where the market will be when things are announced, it doesn’t help much right now in asset allocation.

As a side note, I did read a commentary that made an interesting point about these negotiations. If you consider communism’s tenets, a key one is that there is no such thing as private property. So, the idea that China will agree to the protection of private property when it contradicts the Chinese fundamental ruling dicta may be a bit of a stretch. Maybe they will, but that could be quite a hurdle to overcome there. Food for thought.

Now, on to payrolls. Here are the latest consensus forecasts:

Nonfarm Payrolls 180K
Private Payrolls 170K
Manufacturing Payrolls 10K
Unemployment Rate 3.8%
Average Hourly Earnings 0.3% (3.4% Y/Y)
Average Weekly Hours 34.5

A little worryingly, the ADP number on Wednesday was weaker than expected, but the month-by-month relationship between the two is not as close as you might think. Based on what we have heard from Fed speakers just yesterday (Harker, Mester and Williams), the FOMC believes that their current stance of waiting and watching continues to be appropriate. They are looking for a data trend that either informs coming weakness or coming strength and will respond accordingly. To a wo(man), however, these three all believe that the economy will have a solid performance this year, with GDP at or slightly above 2.0%, and that it is very premature to consider rate cuts, despite what the market is pricing.

Meanwhile, the data story from elsewhere continues to drift in a negative direction with Industrial Production falling throughout Europe, UK House Prices declining and UK productivity turning negative. In fact, the Italian government is revising its forecast for GDP growth in 2019 to be 0.1% all year and all eyes are on the IMF’s updated projections due next week, which are touted to fall even further.

In the end, the big picture remains largely unchanged. Uncertainty over Brexit and trade continue to weigh on business decisions and growth data continues to suffer. The one truism is that central bankers are watching this and the only difference in views is regarding how quickly they may need to ease policy further, except for the Fed, which remains convinced that the status quo is proper policy. As I continuously point out, this dichotomy remains in the dollar’s favor, and until it changes, my views will remain that the dollar should benefit going forward.

Good luck
Adf

Hitting Home

The current Fed Chairman, Jerome
Initially’d taken the tone
That interest rate hiking
Was to the Fed’s liking
Until hikes began hitting home

Then stock markets round the world crashed
And policymakers’ teeth gnashed
He then changed his mind
And now he’s outlined
His new plan where tightening’s trashed

It’s interesting that despite the fact that the employment report was seen as quite positive, the weekend discussion continued to focus on the Fed’s U-turn last Wednesday. And rightly so. Given how important the Fed has been to every part of the market narrative, equities, bonds and the dollar, if they changed their reaction function, which they clearly have, then it will be the focus of most serious commentary for a while.

But let’s deconstruct that employment report for a moment. While there is no doubt that the NFP number was great (304K, nearly twice expectations, although after a sharply reduced December number), something that has gotten a lot less press is the Unemployment Rate, which rose to 4.0%, still quite low but now 0.3% above the bottom seen most recently in November. The question at hand is, is this a new and concerning trend? If the unemployment rate continues to rise, then the Fed was likely right to stop tightening policy. Yet, most analysts, like politicians, want their cake and the ability to eat it as well. If the Fed has finished tightening because growth is slowing, is that really the outcome desired? It seems to me I would rather have faster growth and tighter policy, a much better mix all around. Now it is too early to say that Unemployment has definitely bottomed, but another month or two of rises will certainly force that to creep into the narrative. And you can bet that will include all the reasons that the Fed better start cutting rates again! Remember, too, if the Fed is turning from tightening to easing, I assure you that the idea the ECB might raise rates is absurd.

Now, with the Fed decision behind us, as well as widely applauded, and the payroll report past, what do we have to look forward to? After all, Brexit is still grinding forward to a denouement in late March, although we will certainly hear of more trials and tribulations before then. I was particularly amused by the idea that the British government has developed plans for the Queen to be evacuated in the event of a hard Brexit. WWII wasn’t enough to evacuate royalty, but Brexit will be? Not unlike Y2K (for those of you who remember that) while a hard Brexit will almost certainly be disruptive in the short run, I am highly confident that the UK will continue to function going forward. The fear-mongering that is ongoing by the British government is actually quite irresponsible.

And of course, there are the US-China trade talks. Except that this week is Chinese New Year and all of China (along with much of Asia) is on holiday. So, there are no current discussions ongoing. But markets have taken heart from the view that President’s Xi and Trump will be meeting in a few weeks, and that they will come to an agreement of some sort. The problem I see is that the big issues are not about restrictions as much as about protection of IP and forced technology transfer. And since the Chinese have consistently denied that both of those things occur, it is not clear to me how they can credibly agree to stop them. The market remains sanguine about the prospects for a trade reconciliation, but I fear the probability of a successful outcome is less than currently priced. While this will not dominate the discussion for another two weeks, be careful when it surfaces again.

Looking ahead to this week, while US data is in short supply, really just trade, we do see more central bank meetings led by the BOE (no change expected), Banxico (no change expected) and Banco do Brazil (no change expected). The biggest risk seems to be in Mexico where some analysts are calling for a 25bp rate cut to 8.00%. We also hear from six Fed speakers, including Chairman Powell again, although at this point, it seems the market has heard all it wants. After all, given Friday’s payroll report, it seems impossible to believe that any Fed member can discuss cutting rates. Not raising them is the best they’ve got for now.

Tuesday ISM Non-Manufacturing 57.1
Wednesday Trade Balance -$54.0B
  Unit Labor Costs 1.7%
  Nonfarm Productivity 1.7%
Thursday Initial Claims 220K
  Consumer Credit $17.0B

So, markets are in a holding pattern while they await the next important catalyst. The stories that have driven things lately, the Fed, Brexit and trade talks are all absent this week. That leads to the idea that the dollar will be impacted by equity and bond markets.

We all know that equity markets had a stellar January and the question is, can that continue? With bond markets also rallying, they seem to be telling us different stories. Equities are looking to continued strength in the economy, while bonds see the opposite. I have to admit, based on the data we continue to see around the world, it appears that the bond market may have it right. As such, despite my concerns over the dollar’s future given the Fed’s pivot, a reversal in equities leading to a risk off scenario would likely underpin the dollar. While it is very modestly higher this morning, it is fair to call it little changed. I think the bias will be for a softer dollar unless things turn ugly. If that does happen, make sure your exposures are hedged as the dollar will benefit.

Good luck
Adf

If Things Go Astray

The jobs report Friday was great
Which served to confuse the debate
Is growth on the rise?
Or will it downsize?
And how will the Fed acclimate?

The first indication from Jay
Is data continues to say
While growth seems robust
We’ll surely adjust
Our actions, if things go astray

In what can only be described as remarkable, despite the strongest jobs report in nearly a year, handily beating the most optimistic expectations for both job growth and wages, Fed Chairman Jay Powell told the market that the Fed could easily slow the pace of policy tightening if needed. While this may seem incongruous based on the data, it was really a response to several weeks of market gyrations that have been explicitly blamed on the Fed’s ongoing policy normalization procedure. A key concern over this sequence of events is that the data of ‘data dependence’ is actually market indices rather than economic ones. For every analyst and economist who had been looking for Powell to break the cycle of kowtowing to the stock market, Friday was a dark day. For the stock market, however, it was anything but, with the S&P 500 rising 3.4% and the NASDAQ an even more impressive 4.25%. The Fed ‘put’ seems alive and well after a three month hiatus.

So what can we expect going forward? The futures market has removed all pricing for the Fed to raise rates further in 2019, and in fact, has priced in a 50% probability of a 25bp rate cut before the year is over! Think about that. Two weeks ago, the market was priced for two 25bp rate hikes! This is a very large, and rapid, change of opinion. The upshot is that the dollar has come under significant pressure as both traders and investors abandon the view of continued cyclical dominance and start to focus on the US’ structural issues (growing twin deficits). In that scenario, the dollar has much further to fall, with a 10% decline this year well within reason. Equity markets around the world, however, have seen a short-term revival as not only did Powell blink, but also the Chinese continue to aggressively add to their monetary policy ease. And one final positive note was heard from the US-China trade talks in Beijing, where Chinese Vice-Premier, Liu He, President Xi’s top economic official, made a surprise visit to the talks. This was seen as a demonstration of just how much the Chinese want to get a deal done, and are likely willing to offer up more concessions than previously expected to do so. The ongoing weak data from China is clearly starting to have a real impact there.

It is situations like this that make forecasting such a fraught exercise. Based on the information we had available on December 31, none of these market movements seemed possible, let alone likely. But that’s the thing about predictions; they are especially hard when they focus on the future.

As to markets today, while Asian equity markets followed Friday’s US price action higher, the same has not been true in Europe, where the Stoxx 600 is lower by 0.4%. Weighing on the activity in Europe has been weaker than expected German Factory Order data (-1.0%) as well as the re-emergence of the gilets jaunes protests in France, where some 50,000 protestors, at least, made their presence felt over the weekend.

Turning to the dollar, it is down broadly, with every G10 currency stronger vs. the greenback and most EMG currencies as well. If the market is correct in its revised expectations regarding the Fed, then the dollar will remain under pressure in the short run. Of course, if the Fed stops tightening policy, and we continue to see Eurozone malaise, you can be certain that the ECB is going to be backing away from any rate rises this year. I have maintained that the ECB would not actually raise interest rates until 2020 at the earliest, and I see no reason to change that view. With oil prices hovering well below year ago levels, headline inflation has no reason to rise. At the same time, despite Signor Draghi’s false hope regarding eventual wage inflation, core CPI in the Eurozone seems pegged at 1.0%. As long as this remains the case, it will be extremely difficult for Draghi, or his successor, to consider raising rates there. As that becomes clearer to the market, the euro will likely begin to suffer. However, until then, I can see the euro grinding back toward 1.18 or so.

One last thing to remember is that despite the Christmas hiatus, the Brexit situation remains front and center in the UK, with Parliament scheduled to vote on the current deal early next week. At this time, there is no indication that PM May is going to find the votes to carry the day, although as the clock ticks down, it is entirely possible that some nays turn into yeas in order to prevent the economic catastrophe that is being predicted by so many. The pound remains beholden to this situation, but I believe the likely outcomes are quite asymmetric with a 2-3% rally all we will see if the deal passes, while an 8% decline is quite viable in the event the UK exits the EU with no deal.

As to data this week, it will not be nearly as exciting as last week, but we see both the FOMC Minutes on Wednesday and CPI on Friday. In addition, we hear from seven Fed speakers across nine speeches, including Chairman Powell again, as well as vice-Chairman Clarida.

Today ISM non-Manufacturing 59.0
Tomorrow NFIB Small Business Optimism 105.0
  JOLT’s Job Openings 7.063M
Wednesday FOMC Minutes  
Thursday Initial Claims 225K
Friday CPI -0.1% (1.9% Y/Y)
  -ex food & energy 0.2% (2.2% Y/Y)

All in all, it seems that the current market narrative is focused solely on the Fed changing its tune while the rest of the central banking community is ignored. As long as this is the case, look for a rebound in equity markets and the dollar to remain under pressure. But you can be certain that if the Fed needs to hold rates going forward because of weakening economic data, the rest of the world will be in even more dire straits, and central banks elsewhere will be back to easing policy as well. In the end, while there may be short-term weakness, I continue to like the dollar’s chances throughout the year as the US continues to lead the global economy.

Good luck
Adf

If Job Numbers Swoon

For Powell, the data he’s viewing
Shows weakness is palpably brewing
Will he change his tune
If job numbers swoon?
If not, it could prove his undoing!

The admonition that markets will remain volatile in 2019 certainly has held true to form thus far. After a significant sell-off in global equity markets yesterday, two pieces of news have now helped a partial rebound. First was the story that vice-ministerial trade talks are now scheduled to be held between the US and China next Monday and Tuesday. The market has taken this as a sign that the trade conflict is abating and that there will be a deal forthcoming shortly. While that would certainly be great news, it seems a bit premature. Nonetheless, it was clearly seen as a market positive overnight.

The second bit of news comes from China, where the PBOC has announced a 1.0% cut in the RRR for all Chinese banks, half to be implemented next week and half two weeks later. As opposed to the very targeted efforts announced earlier in the week, this is a broad-based easing of monetary policy, the first since 2016, and appears to be a direct response to the fact that the Manufacturing PMI data is alluding to contraction in the Chinese economy. As I have written before, China will be forced to continue to ease monetary policy this year due to slowing growth, and it is for that reason that I expect the renminbi to gradually decline all year.

But the bad news is not restricted to China, we have also seen weaker data from both the US and Europe. Yesterday’s ISM Manufacturing data printed at 54.1, significantly lower than expectations and its weakest print November 2016, and while still in expansionary territory is indicative of slowing growth ahead. Meanwhile, inflation data from the Eurozone showed that price pressures continue to recede there on the back of sharply declining oil prices with the area wide CPI rising only 1.6% and the core reading remaining at 1.0%. It appears that the mooted inflation pressures Signor Draghi has been dreaming about remain only in his dreams.

Bond market reaction to this data was very much as would be expected, with 10-year Treasury yields falling to 2.57%, their lowest level since last January, while Bund yields have fallen back to 0.15%, levels not seen since April 2017. In fact, the futures market in the US is now beginning to bet on a rate cut by the Fed before the end of 2019. If you recall, at the December FOMC meeting, the dot plot indicated a median expectation of two more rate hikes this year.

What we can safely say is that there is a great deal of uncertainty in markets right now, and many disparate opinions as to how the economy will perform going forward, and to how the Fed and its central banking brethren will respond. And that uncertainty is not likely to dissipate any time soon. In fact, my fear is that when it does start to fade, it will be because the data is pointing to a much slower growth trajectory, or a recession on a widespread basis. At that point, uncertainty will diminish, but so will asset values!

And how, you may ask, is all this affecting the dollar? Well, yesterday’s price action was of the risk off variety, where the yen was the leader, but the dollar outperformed most emerging market currencies, as well as Aussie and Kiwi, but was slightly softer vs. the rest of its G10 counterparts. This morning, however, on the strength of the trade talk news and policy ease by China, risk is being tentatively embraced and so the yen has fallen a bit, -0.35%, and the dollar has ceded most of its recent gains vs. the EMG space. For example, ZAR (+1.3%), RUB (+1.0%), TRY (+1.1%), and IDR (+1.0%) have all managed to rally sharply alongside a rebound in commodity prices. As well, the market is still enamored of newly installed President Bolsonaro in Brazil with the real higher by a further 0.9% this morning, taking the YTD gain up to 3.0%.

As for the G10, AUD has benefitted from the Chinese news, rising 0.55%, while CAD and NOK are both higher by 0.5% on the back of the rebound in oil prices. This move was a reaction to OPEC output falling sharply. As to the euro, it is higher by just 0.2% although it has recouped about half its losses from Wednesday now. And finally, the pound has bounced as well after its PMI data was actually a positive surprise. That said, it remains within a few percent of its post Brexit vote lows, and until there is a resolution there, will be hard-pressed to gain much ground. Of course, if there is no deal, the pound is likely to move sharply lower. The UK Parliament is due to vote on the current deal next week, although recent news from PM May’s political allies, the Northern Irish DUP, indicates they are unhappy with the deal and cannot support it yet. With less than three months to go before Brexit is upon us, it is increasingly looking like there will be no deal beforehand, and that the pound has further to fall. For hedgers, I cannot exhort you enough to consider increasing your hedges there. I think the risks are highly asymmetric, with a deal resulting in a modest rally of perhaps 2-3%, while a no-deal outcome could easily see an 8% decline.

For today, the NFP report is on tap with expectations as follows:

Nonfarm Payrolls 177K
Private Payrolls 175K
Manufacturing Payrolls 20K
Unemployment Rate 3.7%
Average Hourly Earnings 0.3% (3.0% Y/Y)
Average Weekly Hours 34.5

We also hear from Chairman Powell at 10:15, where the market will be parsing every word to try to get a better understanding of the Fed’s data reaction function, and perhaps to see which data points they deem most important. At this point, strong NFP data ought lead to declining Treasury prices and rising stock prices although I expect the dollar would remain under pressure based on the risk-on feeling. If the data is weak, however, look for stock futures to reverse course (currently they are higher by ~1.0%) and Treasuries to find support. As to the dollar then, broadly stronger, although I expect the yen will be the best performer overall.

Good luck
Adf

Mostly At Peace

Ahead of the payroll release
The market is mostly at peace
But there is no sign
The recent decline
In values is set to decrease

While I apologize for the double negative, this morning’s price action is a story of consolidation of recent losses across emerging market currencies and their respective equity markets. In fact, the biggest gainers in the FX markets today are some of the currencies that have been suffering the most recently. For example, the South African rand is higher by 1.4% on the day, but still down nearly 3.0% this week. Meanwhile in Brazil, in the wake of the assassination attempt on Brazilian presidential candidate Jair Bolsonaro, the real has rebounded 1.75%, essentially recouping the week’s losses, although is still down almost 8.0% this month. The story here is that Bolsonaro, who was leading in the polls and is favored by markets due to his free-market leanings, is expected to receive a sympathy vote along with more press coverage, and has increased his odds of winning the election next month. And of course, everyone’s favorite pair of losers, TRY and ARS, are both firmer this morning as well, by 3.5% and 2.75% respectively, but both remain down substantially in the past month. And there is no sign that policy is going to change sufficiently to have any positive impact in the short term. In other words, while many EMG currencies have performed well overnight, there is little reason to believe that the unfolding crisis in the space has ended.

Turning to the biggest news of the day, the payroll report is due with the following expectations:

Nonfarm Payrolls 191K
Private Payrolls 190K
Manufacturing Payrolls 24K
Unemployment Rate 3.8%
Average Hourly Earnings 0.2% (2.7% Y/Y)
Average Weekly Hours 34.5

If forecasts are on the mark, it will simply represent a continuation of the current US expansion and cement the case for two more rate hikes by the Fed this year. In fact, we would need to see substantially weaker numbers to derail that process on a domestic basis. And given yesterday’s Initial Claims data of 203K, the lowest print since 1969, it seems highly unlikely that this data will be weak.

A second factor reinforcing the view that the Fed will remain on their current rate-raising path was a comment by NY Fed President John Williams. Yesterday, after a speech in Buffalo, he said that he would not be deterred from raising rates simply because it might drive the yield curve into an inversion. This is quite a turn of events for Williams who had historically leaned more dovish when he was at the San Francisco Fed. In addition, it is exactly the opposite from what we have recently heard from two separate Fed presidents, Atlanta’s Bostic and St Louis’ Bullard, both of who were explicit in saying they would not vote for a rate hike if that would cause an inversion. Of course, neither of them is a voter right now while Williams is, so his voice is even more important.

While it is not clear whether Chairman Powell is of a like mind on this subject, there is certainly no evidence that Powell is going to be deterred from his current belief set that further gradual rate hikes are necessary and appropriate. The one thing that is very clear is that the current Fed is focused almost entirely on the US economy, to the exclusion of much of the rest of the world. And this focus reduces the chance that Powell will respond to further emerging market instability unless it reaches a point where the US economy is likely to be impacted. As far as I can tell, the Fed’s focus remains on the impact of the recent increase in fiscal stimulus and how that might impact the inflation situation.

There is one other thing to keep in mind today, and going forward, and that is that yesterday was the last day of comment period on President Trump’s mooted tariff increase on a further $200 Billion of Chinese imports. If he does follow through by implementing these tariffs, look for significant market impact with the dollar resuming its climb and a much bigger negative impact on equity markets as investors try to determine the impact on company results. Also look for commodity prices to decline on the news.

But that is really it for the day. Ahead of the data there is little reason for much of a move. However, even after the data, assuming the forecasts are reasonably accurate, I would expect the dollar’s consolidation to continue. In the end, though, all signs still point to a stronger dollar over time.

Good luck
Adf

Uncomfortably High

Said Carney, exhaling a sigh
The odds are “uncomfortably high”
More pain will we feel
If there is no deal
When England waves Europe bye-bye

Yesterday the BOE, in a unanimous decision, raised its base rate by 25bps. This outcome was widely expected by the markets and resulted in a very short-term boost for the pound. However, after the meeting, Governor Carney described the odds of the UK leaving the EU next March with no transition deal in hand as “uncomfortably high.” That was enough to spook markets and the pound sold off pretty aggressively afterwards, closing the day lower by 0.9%. And this morning, it has continued that trend, falling a further 0.2% and is now trading back below 1.30 again.

By this time, you are all well aware that I believe there will be no deal, and that the market response, as that becomes increasingly clear, will be to drive the pound still lower. In the months after the Brexit vote, January 2017 to be precise, the pound touched a low of 1.1986, but had risen fairly steadily since then until it peaked well above 1.40 in April of this year. However, we have been falling back since that time, as the prospects for a deal seem to have receded. The thing is, there is no evidence that points to any willingness to compromise among the Tory faithful and so it appears increasingly likely that no deal will be agreed by next March. Carney put the odds at 20%, personally I see them as at least 50% and probably higher than that. In the meantime, the combination of ongoing tightening by the Fed and Brexit uncertainty impacting the UK economy points to the pound falling further. Do not be surprised if we test those lows below 1.20 seen eighteen months ago.

This morning also brought news about the continuing slowdown in Eurozone growth as PMI data was released slightly softer than expected. French, German and therefore, not surprisingly, Eurozone Services data was all softer than expected, and in each case has continued the trend in evidence all year long. It is very clear that Eurozone growth peaked in Q4 2017 and despite Signor Draghi’s confidence that steady growth will lead inflation to rise to the ECB target of just below 2.0%, the evidence is pointing in the opposite direction. While the ECB may well stop QE by the end of the year, it appears that there will be no ability to raise rates at all in 2019, and if the current growth trajectory continues, perhaps in 2020 as well. Yesterday saw the euro decline 0.7%, amid a broad-based dollar rally. So far this morning, after an early extension of that move, it has rebounded slightly and now sits +0.1% on the day. But in the end, the euro, too, will remain under pressure from the combination of tighter Fed policy and a decreasing probability of the ECB ever matching that activity. We remain in the 1.1500-1.1800 trading range, which has existed since April, but as we push toward the lower end of that range, be prepared for a breakout.

Finally, the other mover of note overnight was CNY, with the renminbi falling to new lows for the move and testing 6.90. The currency has declined more than 8% since the middle of June as it has become increasingly clear that the PBOC is willing to allow it to adjust along with most other emerging market currencies. While the movement has been steady, it has not been disorderly, and as yet, there is no evidence that capital outflows are ramping up quickly, so it is hard to make the case the PBOC will step in anytime soon. And that is really the key; increases in capital outflows will be the issue that triggers any intervention. But while many pundits point to 7.00 as the level where that is expected to occur, given the still restrictive capital controls that exist there, it may take a much bigger decline to drive the process. With the Chinese economy slowing as well (last night’s Caixin Services PMI fell to 52.8, below expectations and continuing the declining trend this year) a weaker yuan remains one of China’s most important and effective policy tools. There is no reason for this trend to end soon and accordingly, I believe 7.50 is reasonable as a target in the medium term.

Turning to this morning’s payroll report, here are the current expectations:

Nonfarm Payrolls 190K
Private Payrolls 189K
Manufacturing Payrolls 22K
Unemployment Rate 3.9%
Average Hourly Earnings (AHE) 0.3% (2.7% Y/Y)
Average Weekly Hours 34.5
Trade Balance -$46.5B
ISM Non-Manufacturing 58.6

Wednesday’s ADP number was much stronger than expected at 213K, and the whisper number is now 205K for this morning. As long as this data set continues to show a strong labor market, and there is every indication it will do so, the only question regarding the Fed is how quickly they will be raising rates. All of this points to continued dollar strength going forward as the divergence between the US economy and the rest of the world continues. While increasing angst over trade may have a modest impact, we will need to see an actual increase in tariffs, like the mooted 25% on $200 billion in Chinese imports, to really affect the economy and perhaps change the Fed’s thinking. Until then, it is still a green light for dollar buyers.

Good luck and good weekend
Adf