Much Could Be Gained

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

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

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

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

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

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

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

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

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

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

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

Good luck and good weekend
Adf

The Result Europe’s Fearing

The dollar, like art and fine wine
Continues, its peers, to outshine
Like Veblen explained
The more it has gained
The more buyers want to say, “Mine!”

Has the dollar become a Veblen Good? Given its recent performance and the underlying drivers of dollar strength, it certainly seems to behave like one, even if the rationale behind the dollar demand is not quite what Thorstein Veblen imagined in 1899. For those unfamiliar with the term, a Veblen Good is one where demand increases as its price rises, completely opposite to most items. It was defined by Dr Veblen in his 1899 book; The Theory of the Leisure Class, explaining that certain items saw increased demand based on the idea of exclusivity, thus the higher the price the more demand shown.

Now, the dollar is certainly not a rare item given the trillions of them that are currently circulating around the globe. Yet the price of dollars, at least in terms of other currencies, continues to climb despite the numerous studies that demonstrate it is overvalued at current levels. This behavior leads to the question of why, if the dollar is so overvalued, is demand increasing? At this point it seems pretty clear that the rationale is twofold. First is the fact that the financial markets definition of a safe haven begins with US Treasury paper and to buy Treasuries one needs to first buy dollars. So in the current environment, where uncertainty over trade policy, politics and Brexit are constant headlines, havens are in great demand. In fact, the more concern there is, the more demand regardless of the price of the dollar. The second issue is that because the dollar is the funding currency of choice globally, given the deepest and most liquid capital markets exist in the US, there has been a significant amount of issuance by non-US entities, both companies and foreign governments, in USD. As the dollar rises, these borrowers are forced to scramble to obtain as many dollars as they can in order to repay their loans. This simply adds to the demand for dollars, actually increasing that demand the higher the price of the buck. In the end, almost regardless of the relative interest rate structures in different countries, the dollar is destined, for now, to continue rising. Hedgers need to keep that in mind.

In England a showdown is nearing
Which Brexiteers are loudly cheering
By later today
If Boris holds sway
Look for the result Europe’s fearing

In more specific news, the pound has plumbed new depths for the move, trading below 1.20 for the first time since the flash crash in October 2016, as Parliament returns from their summer holiday. Bremainers are trying to pass legislation that takes the Brexit decision out of PM Johnson’s hands and requires a deal to be in place before leaving. Meanwhile, Boris is adamant that he has to have the ability to ‘threaten’ a no-deal in order to win any concessions. In fact, Johnson has said he will call for an election on October 14 if the legislation passes. This would prevent any further parliamentary activity, although negotiations would be ongoing.

Of course, one of the market’s key concerns is an election could wind up with a PM Jeremy Corbyn, the socialist leader of the Labour party , and someone greatly feared by financial markets given his stated desire to nationalize entire swathes of the economy. At this point, there appear to be three possible outcomes; Boris stays in power and despite best efforts oversees a no-deal Brexit; an election where Corbyn becomes the new PM; or the EU caves on the Irish backstop and a deal is verbalized so the hard edges are removed. Arguably in either of the first two situations the pound has further to fall, while clearly the last situation will result in a sharp rebound of the pound, and the euro. My money remains on a deal as the EU cannot look at their economic situation and believe they can withstand the stress of a hard Brexit right now. Consider this, if the EU holds firm and the economy suffers greatly, politicians throughout the EU will find themselves under huge pressure, and likely many will lose their next elections, because of this decision. And that is probably the only thing about which politicians really care.

So with that as a backdrop, what else do we have to look forward to this week? The China trade talks have still not even agreed on a date, so that remains on the back burner for now, although every day without some concrete positive news indicates a longer and longer time before anything positive can happen. Meanwhile, new tariffs were imposed on $115 billion of Chinese imports starting Sunday. Hong Kong is still simmering with the Chinese claiming they can invoke emergency powers (read martial law) if necessary. Argentina is on the cusp, having imposed very strict capital controls last Friday to try to husband whatever hard currency they still have. And sentiment around the world continues to move toward a recessionary outcome.

Looking ahead to this week, there is much Fedspeak and some quite important data, culminating in the payroll report on Friday.

Today ISM Manufacturing 51.3
  ISM Prices Paid 46.8
  Construction Spending 0.3%
Wednesday Trade Balance -$53.4B
  Fed’s Beige Book  
Thursday ADP Employment 149K
  Initial Claims 215K
  Nonfarm Productivity 2.2%
  Unit Labor Costs 2.4%
  Factory Orders 1.0%
  Durable Goods 2.1%
  -ex Transport -0.4%
  Ism Non-Manufacturing 54.0
Friday Nonfarm Payrolls 160K
  Private Payrolls 150K
  Manufacturing Payrolls 5K
  Unemployment Rate 3.7%
  Average Hourly Earnings 0.3% (3.0% Y/Y)
  Average Weekly Hours 34.4

So obviously, everyone will be waiting for Friday’s payroll report, but before then we hear from five speakers and Chairman Powell speaks Friday at 12:30pm.

The RBA left rates on hold last night, as expected but further cuts are coming, especially as China’s economy slows further. That said, AUD is the top G10 performer overnight. Meanwhile, the other piece of positive news we saw was South African GDP rising at 3.1% in Q2, much better than expected and enough to help the rand rally 0.7%. Other than those two pieces of news though, it has really been all about Brexit and the pound. For now, that makes sense as the market awaits the outcome of this afternoon’s parliamentary vote. Until then, risk is under pressure and havens will likely perform well.

Good luck
Adf

Cow’ring In Fear

Tis coming increasingly clear
That growth is at ebb tide this year
The PMI data
When looked at, pro rata
Shows industry cow’ring in fear

Meanwhile in Osaka, the meet
Twixt Trump and Xi lowered the heat
On tariffs and trade
Which most have portrayed
As bullish, though some are downbeat

With all the buildup about the meeting between President’s Trump and Xi, one might have thought that a cure for cancer was to be revealed. In the end, the outcome was what was widely hoped for, and largely expected, that the trade talks would resume between the two nations. Two addenda were part of the discussion, with Huawei no longer being shut out of US technology and the Chinese promising to buy significantly more US agricultural products. Perhaps it was the two addenda that have gotten the market so excited, but despite the results being largely in line with expectations, equity markets around the world have all exploded higher, with both Shanghai and Tokyo rallying more than 2.2%, Europe seeing strong gains, (DAX +1.35%, FTSE + 1.15%) and US futures pointing sharply higher (DJIA +1.1%, NASDAQ +1.75%). In other words, everybody’s happy! Oil prices spiked higher as well, with WTI back over $60 due to a combination of an extension of the OPEC+ production cuts and the boost from anticipated economic growth after the trade truce. Gold, on the other hand, is lower by 1.4% as haven assets have suffered. After all, if the apocalypse has been delayed, there is no need to seek shelter.

But a funny thing happened on the way to market salvation, Manufacturing PMI data was released, and not only was it worse than expected pretty much everywhere around the world, it was also below the 50 level pretty much everywhere around the world. Here are the data for the world’s major nations; China 49.4, Japan 49.3, Korea 47.5, Germany 45.0, and the UK 48.0. We are awaiting this morning’s US ISM report (exp 51.0), but remember, that Friday’s Chicago PMI, often seen as a harbinger of the national scene, printed at a disastrous 49.7, more than 3 points below expectations and down 4.5 points from last month.

Taking all this into account, the most important question becomes, what do you do if you are the Fed? After all, the Fed remains the single most important actor in financial markets, if not in the global economy. Markets are still pricing in a 25bp rate cut at the end of this month, and about 100bps of cuts by the end of the year. In the meantime, the most recent comments from Fed speakers indicate that they may not be that anxious to cut rates so soon. (see Richmond Fed President Thomas Barkin’s Friday WSJ interview.) If you recall, part of the July rate cut story was the collapse of the trade talks and the negative impact that would result accordingly. But they didn’t collapse. Now granted, the PMI data is pointing to widespread economic weakness, which may be enough to convince the Fed to cut rates anyway. But was some of that weakness attributable to the uncertainty over the trade situation? After all, if global trade is shrinking, and it is, then manufacturing plans are probably suffering as well, even without the threat of tariffs. All I’m saying is that now that there is a trade truce, will that be sufficient for the Fed to remain on hold?

Of course, there is plenty of other data for the Fed to study before their next meeting, perhaps most notably this Friday’s payroll report. And there is the fact that with the market still fully priced for a rate cut, it will be extremely difficult for the Fed to stand on the side as the equity market reaction would likely be quite negative. I have a feeling that the markets are going to drive the Fed’s activities, and quite frankly, that is not an enviable position. But we have a long time between now and the next meeting, and so much can, and likely will, change in the interim.

As to the FX market, the dollar has been a huge beneficiary of the trade truce, rallying nicely against most currencies, although the Chinese yuan has also performed well. As an example, we see the euro lower by 0.3%, the pound by 0.45% and the yen by 0.35%. In fact, all G10 currencies are weaker this morning, with the true outliers those most likely to benefit from lessening trade tensions, namely CNY and MXN, both of which have rallied by 0.35% vs. the dollar.

Turning to the data this week, there is plenty, culminating in Friday’s payrolls:

Today ISM Manufacturing 51.0
  ISM Prices Paid 53.0
Wednesday ADP Employment 140K
  Trade Balance -$54.0B
  Initial Claims 223K
  ISM Non-Manufacturing 55.9
  Factory Orders -0.5%
Friday Nonfarm Payrolls 160K
  Private Payrolls 153K
  Manufacturing Payrolls 0K
  Unemployment Rate 3.6%
  Average Hourly Earnings 0.3% (3.2% Y/Y)
  Average Weekly Hours 34.4

So, there will be lots to learn about the state of the economy, as well as the latest pearls of wisdom from Fed members Clarida, Williams and Mester in the first part of the week. And remember, with Thursday’s July 4th holiday, trading desks in every product are likely to be thinly staffed, especially Friday when payrolls hit. Also remember, last month’s payroll data was a massive disappointment, coming in at just 75K, well below expectations of 200K. This was one of the key themes underpinning the idea that the Fed was going to cut in July. Under the bad news is good framework, another weak data point will virtually guaranty that the Fed cuts rates, so look for an equity market rally in that event.

In the meantime, though, the evolving sentiment in the FX market is that the Fed is going to cut more aggressively than everywhere else, and that the dollar will suffer accordingly. I have been clear in my view that any dollar weakness will be limited as the rest of the world follows the Fed down the rate cutting path. Back in the beginning of the year, I was a non-consensus view of lower interest rates for 2019, calling for Treasuries at 2.40% and Bunds at 0.0% by December. And while we could still wind up there, certainly the consensus view is for much lower rates as we go forward. Things really have changed dramatically in the past six months. Don’t assume anything for the next six!

Good luck
Adf

So Distorted

Said Draghi, if things get much worse
Then more money, I will disburse
And negative rates
Which everyone hates
Will never go into reverse!

This morning, the Germans reported
That IP there’s lately been thwarted
Now markets are waiting
For payrolls, debating
Why everything seems so distorted

India. Malaysia. New Zealand. Philippines. Australia. India (again). Federal Reserve (?). ECB (?).

These are the major nations that have cut policy rates in the past two months, as well as, of course, the current forecasts for the two biggest central banks. Tuesday and Wednesday we heard from a number of Fed speakers, notably Chairman Powell, that if the economy starts to weaken, a rate cut is available and the Fed won’t hesitate to act. At this point, the futures market has a 25% probability priced in for them to cut rates in two weeks’ time, with virtual certainty they will cut by the late July meeting.

Then yesterday, Signor Draghi guided us further out the calendar indicating that interest rates in the ECB will not change until at least the middle of 2020. Remember, when this forward guidance started it talked about “through the summer” of 2019, then was extended to the end of 2019, and now it has been pushed a further six months forward. But of even more interest to the markets was that at his press conference, he mentioned how further rate cuts were discussed at the meeting as well as restarting QE. Meanwhile, the newest batch of TLTRO’s will be available at rates from -0.3% to 0.10%, slightly lower than had previously been expected, but certainly within the range anticipated. And yet, despite this seeming dovishness, the market had been looking for even more. In the end, the euro rallied yesterday, and has essentially maintained its recent gains despite Draghi’s best efforts. After all, when comparing the policy room available to the Fed and the ECB, the Fed has the ability to be far more accommodative in the near term, and markets seem to be responding to that. In the wake of the ECB meeting, the euro rallied a solid 0.5%, and has only ceded 0.1% of that since. But despite all the angst, the euro has not even gained 1.0% this week, although with the payroll report due shortly, that is certainly subject to change.

Which takes us to the payroll report. Wednesday’s ADP data was terrible, just 27K although the median forecast was for 180K, which has a number of analysts quite nervous.

Nonfarm Payrolls 185K
Private Payrolls 175K
Manufacturing Payrolls 5K
Unemployment Rate 3.6%
Participation Rate 62.9%
Average Hourly Earnings 0.3% (3.2% Y/Y)
Average Weekly Hours 34.5

Given the way this market is behaving, if NFP follows ADP, look for the dollar to fall sharply along with a big bond market rally, and arguably a stock market rally as well. This will all be based on the idea that the Fed will be forced to cut rates at the June meeting, something which they are unwilling to admit at this point. Interestingly, a strong print could well see stocks fall on the idea that the Fed will not cut rates further, at least in the near future, but it should help the dollar nicely.

Before I leave for the weekend, there are two other notable moves in the FX markets, CNY and ZAR. In China, an interview with PBoC Governor Yi Gang indicated that they have significant room to ease policy further if necessary, and that there is no red line when it comes to USDCNY trading through 7.00. Those comments were enough to weaken the renminbi by 0.3%, above 6.95, and back to its weakest level since November. Confirmation that 7.00 is not seen as a crucial level implies that we are going to see a weaker CNY going forward.

As to ZAR, it has fallen through 15.00 to the dollar, down 0.5% on the day and 3.4% on the week, as concerns grow over South Africa’s ability to manage their way through the current economic slump. Two key national companies, Eskom, the electric utility, and South African Airways are both struggling to stay afloat, with Eskom so large, the government probably can’t rescue them even if they want to. Slowing global growth is just adding fuel to the fire, and it appears there is further room for the rand to decline.

In sum, the global economic outlook continues to weaken (as evidenced by today’s German IP print at -1.9% and the Bundesbank’s reduction in GDP forecast for 2019 to just 0.6%) and so easier monetary policy appears the default projection. For now, that translates into a weaker dollar (more room to move than other countries) and stronger stocks (because, well lower rates are always good, regardless of the reason), while Treasuries and Bunds should continue to see significant inflows driving yields there lower.

Good luck and good weekend
Adf

Lost Traction

The tea leaves that everyone’s reading
‘bout trade talks claim risk is receding
Since Donald and Xi
Are desperate anxious to see
A deal that shows both sides succeeding

The equity market reaction
Has been one of great satisfaction
But bonds and the buck
Have had much less luck
As growth on both sides has lost traction

This morning is all about trade. Headlines blaring everywhere indicate that the US and China are close to ironing out their differences and that Chinese President Xi, after a trip through parts of Europe later this month, will visit the US at the end of March to sign a deal. It should be no surprise that global equity markets have jumped on the news. The Nikkei rose 1.0%, Shanghai was up 1.1% while the Hang Seng in Hong Kong rallied 0.5%. We have seen strength in Europe as well, (FTSE +0.5%, CAC +0.5%) although the German DAX is little changed on the day. And finally, US futures are pointing to a continuation of the rally here with both S&P and Dow futures currently trading higher by 0.25%.

However, beyond the equity markets, there has been much less movement in prices. Treasuries have barely edged higher and the dollar, overall, is little changed. It is pretty common for equity market reactions to be outsized compared to other markets, and this appears to be one of those cases. In fact, I would caution everyone about one of the oldest trading aphorisms there is, “buy the rumor, sell the news.” A dispassionate analysis of the trade situation, one which has evolved over the course of two decades, would indicate that a few months hardly seems enough time to solve some extremely difficult issues. The issue of IP (whether stolen or forced to be shared in order to do business) and state subsidies for state-owned firms remains up in the air and given that both these issues are intrinsic to the Chinese economic model, will be extremely difficult to alter. It is much easier for China to say they will purchase more stuff (the latest offer being $23 billion of LNG) or that they will prevent the currency from weakening, than for them to change the fundamentals of their business model. While positive trade sentiment has clearly been today’s driver, I would recommend caution over the long-term impacts of any deal. Remember, the political imperatives on both sides remain quite clear and strong, with both Presidents needing a deal to quiet criticism. But political expediency has rarely, if ever, been a harbinger of good policy, especially when it comes to economics.

Of course, one of the reasons that a deal is so important to both sides is the slowing economic picture around the world and the belief that a trade deal can reverse that process. Certainly, Friday’s US data was unimpressive with Personal Spending falling -0.5% in December (corroborating the weak Retail Sales data), while after a series of one-off events in December pumped up the Personal Income data, that too declined in January by -0.1%. The ISM numbers were softer than expected (54.2 vs. the 55.5 expected) and Consumer Confidence slumped (Michigan Sentiment falling to 93.7). All in all, not a stellar set of data.

This has set up a week where we hear from three key central banks (RBA tonight, Bank of Canada on Wednesday and ECB on Thursday) with previous thoughts of policy normalization continuing to slip away. Economic data in all three economic spheres has been retreating for the past several months, to the point where it is difficult to blame it all on the US-China trade situation. While there is no doubt that has had a global impact (look at Germany’s poor performance of late), it seems abundantly clear that there are problems beyond that.

History shows that most things have cyclical tendencies. This is especially true of economics, where the boom-bust cycle has been a fact of life since civilization began. However, these days, cycles are no longer politically convenient for those in power, as they tend to lose their jobs (as opposed to their heads a few hundred years ago) when things turn down. This explains the extraordinary effort that even dictators like President Xi put into making sure the economy never has a soft patch. Alas, the ongoing efforts to mitigate that cycle are likely to have much greater negative consequences over time. The law of diminishing returns virtually insures that every extra dollar or euro or yuan spent today to prevent a downturn will have a smaller and smaller impact until at some point, it will have none at all. It is this process which drives my concern that the next recession will be significantly more painful than the last.

So, while a trade deal with China would be a great outcome, especially if it was robust and enforceable, US trade with China is not the only global concern. Remember that as the trade saga plays out.

Aside from the three central bank meetings, we also get a bunch of important data this week, culminating in Friday’s payroll report:

Today Construction Spending 0.1%
Tuesday New Home Sales 590K
  ISM Non-Manufacturing 57.2
Wednesday Trade Balance -$49.3B
  ADP Employment 190K
  Fed’s Beige Book  
Thursday Initial Claims 225K
  Nonfarm Productivity 1.7%
  Unit Labor Costs 1.6%
Friday Nonfarm Payrolls 180K
  Private Payrolls 170K
  Manufacturing Payrolls 10K
  Unemployment Rate 3.9%
  Average Hourly Earnings 0.3% (3.3% Y/Y)

In addition to all this, we hear from four more Fed speakers, including Chairman Powell on Friday. It seems increasingly clear that Q1 growth has ebbed worldwide compared to the end of last year, and at this point, questions are being raised as to how the rest of the year will play out. Reading those tea leaves is always difficult, but equity markets would have you believe, based on their recent performance, that this is a temporary slowdown. So too, would every central banker in the world. While that would be a wonderful outcome, I am not so sanguine. In the end, slowing global growth, which I continue to anticipate, will result in all those central bankers following the Fed’s lead and changing their tune from policy normalization to continued monetary support. And that will continue to leave the dollar, despite President Trump’s latest concerns over its strength, the best place to be.

Good luck
Adf

Really Quite Splendid

For traders, the month that just ended
Turned out to be really quite splendid
The stock market soared
As risks were ignored
Just like Chairman Powell intended

The problem is data last night
Showed growth’s in a terrible plight
Both Europe and China
Can lead to angina
If policymakers sit tight

Now that all is right with the world regarding the Fed, which has clearly capitulated in its efforts to normalize policy, the question is what will be the driving forces going forward. Will economic data matter again? Possibly, assuming it weakens further, as that could quickly prompt actual policy ease rather than simply remaining on hold. But reading between the lines of Powell’s comments, it appears that stronger than expected data will result in virtually zero impetus to consider reinstating policy tightening. We have seen the top in Fed funds for many years to come. Remember, you read it here first. So, we are now faced with an asymmetric reaction function: strong data = do nothing; weak data = ease.

Let’s, then, recap the most recent data. Last night the Caixin Manufacturing PMI data from China was released at a lower than expected 48.3, its lowest point in three years. That is simply further evidence that the Chinese economy remains under significant pressure and that President Xi is incented to agree to a trade deal with the US. Interestingly, the Chinee yuan fell 0.6% on the news, perhaps the first time in months that the currency responded in what would be considered an appropriate manner to the data. That said, the yuan remains nearly 2% stronger than it began the year. We also saw PMI data from Europe with Germany (49.7) and Italy (47.8) both underperforming expectations, as well as the 50.0 level deemed so crucial, while France (51.2) rebounded and Spain (52.4) continued to perform well. Overall, the Eurozone data slid to 50.5, down a full point and drifting dangerously close to contraction. And yet, Signor Draghi contends that this is all just temporary. He will soon be forced to change his tune, count on it. The euro, however, has held its own despite the data, edging higher by 0.2% so far this morning. Remember, though, with the Fed having changed its tune, for now, I expect the default movement in the dollar to be weakness.

In the UK, the PMI data fell to 52.8, well below expectations, as concerns over the Brexit situation continue to weigh on the economy there. The pound has fallen on the back of the news, down 0.3%, but remains within its recent trading range as there is far more attention being paid to each item of the Brexit saga than on the monthly data. Speaking of which, the latest story is that PM May is courting a number of Labour MP’s to see if they will break from the party direction and support the deal as written. It is quite clear that we have two more months of this process and stories, although I would estimate that the broad expectation is of a short delay in the process beyond March and then an acceptance of the deal. I think the Europeans are starting to realize that despite all their tough talk, they really don’t want a hard Brexit either, so look for some movement on the nature of the backstop before this is all done.

Finally, the trade talks wrapped up in Washington yesterday amid positive signs that progress was made, although no deal is imminent. Apparently, President’s Trump and Xi will be meeting sometime later this month to see if they can get to finality. However, it still seems the most likely outcome is a delay to raising tariffs as both sides continue the talks. The key issues of IP theft, forced technology transfer and ongoing state subsidies have been important pillars of Chinese growth over the past two decades and will not be easily changed. However, as long as there appears to be goodwill on both sides, then there are likely to be few negative market impacts.

Turning to this morning’s data, it is payroll day with the following expectations:

Nonfarm Payrolls 165K
Private Payrolls 170K
Manufacturing Payrolls 17K
Unemployment Rate 3.9%
Average Hourly Earnings 0.3% (3.2% Y/Y)
Average Weekly Hours 34.5
ISM Manufacturing 54.2
Michigan Sentiment 90.8

Clearly, the payroll data will dominate, especially after last month’s huge upside surprise (312K). Many analysts are looking for a reversion to the mean with much lower calls around 100K. Also, yesterday’s Initial Claims data was a surprisingly high 253K, well above expectations, although given seasonalities and the potential impacts from the Federal government shutdown, it is hard to make too big a deal over it. But as I highlighted in the beginning, the new bias is for easier monetary policy regardless of the data, so strong data will simply underpin a stock market rally, while weak data will underpin a stock market rally on the basis of easier money coming back. In either case, the dollar will remain under pressure.

Good luck and good weekend
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