Still Remote

A Eurozone nation of note
Has recently had to demote
Its latest predictions
In most jurisdictions
Since factory growth’s still remote

The FX market has lately taken to focusing on economic data as the big stories we had seen in the past months; Brexit, US-China trade, and central bank activities, have all slipped into the background lately. While they are still critical issues, they just have not garnered the headlines that we got used to in Q1. As such, traders need to look at something and today’s data was German manufacturing PMI, which once again disappointed by printing at just 44.5. While this was indeed higher than last month’s 44.1, it was below the 45.0 expectations and simply reaffirmed the idea that the German economy’s main engine of growth, manufacturing exports, remains under significant pressure. The upshot of this data was a quick decline of 0.35% in the euro which is now back toward the lower end of its 1.1200-1.1350 trading range. So even though Chinese data seems to be a bit better, the impact has yet to be felt in Germany’s export sector.

This follows yesterday’s US Trade data which showed that the deficit fell to -$49.4B, well below the expected -$53.5B. Under the hood this was the result of a larger than expected increase in exports, a sign that the US economy continues to perform well. In fact, Q1 GDP forecasts have been raised slightly, to 2.4%, on the back of the news implying that perhaps things in Q1 were not as bad as many feared.

Following in the data lead we saw UK Retail Sales data this morning and it surprised on the high side, rising 1.1%, well above the expected -0.3% decline. The UK data continues to confound the Chicken Little crowd of economists who expected the UK to sink into the North Sea in the wake of the Brexit vote. And while there remains significant uncertainty as to what will happen there, for now, it seems, the population is simply going about their ordinary business. The benefit of the delay on the Brexit decision is that we don’t have to hear about it every single day, but the detriment remains for UK companies that have been trying to plan for something potentially quite disruptive but with no clarity as to the outcome. Interestingly, the pound slid after the data as well, down 0.25%, but then today’s broader theme is that of a risk-off session.

In fact, looking at the usual risk indicators, we saw weakness in equity markets in Asia (Nikkei -0.85%, Shanghai -0.40%) and early weakness in European markets (FTSE -0.1%) but the German DAX, after an initial decline, has actually rebounded by 0.5%. US futures are pointing lower at this time as well, although the 0.15% decline is hardly indicative of a collapse. At the same time, Treasury yields are slipping with the 10-year down 4bps to 2.56% and both the dollar and the yen are broadly higher. So, risk is definitely on the back foot today. However, taking a step back, the reality is that movement in most markets remains quite subdued.

With that in mind, there is really not much else to discuss. On the data front this morning we see Retail Sales (exp 0.9%, 0.7% -ex autos) and then at 10:00 we get Leading Indicators (0.4%) which will be supported by the ongoing equity market rally. There is one more Fed speaker, Atlanta’s Rafael Bostic, but the message we have heard this week has been consistent; the Fed remains upbeat on the economy, expecting GDP growth on the order of 2.0% as well as limited inflation pressure which leads to the current wait and see stance. There is certainly no indication that this is going to change anytime soon barring some really shocking events.

Elsewhere, the Trump Administration has indicated that the trade deal is getting closer and there is now talk of a signing ceremony sometime in late May, potentially when the President visits Japan to pay his respects to the new emperor there. (Do not forget the idea that the market has fully priced in a successful trade outcome and when it is finally announced, equities will suffer from a ‘sell the news mentality.) With the Easter holidays nearly upon us, trading desks are starting to thin out, however, while liquidity may suffer slightly, the current lack of market catalysts means there is likely little interest in doing much anyway. Overall, today’s dollar strength is likely to have difficulty extending, and if we see equity markets reverse along the lines of the DAX, it would not be surprising to see the dollar give back its early gains. But in the end, another quiet day is looming.

Good luck and good weekend
Adf

Given the Easter holidays and diminished activity, the next poetry will arrive on Tuesday, April 23.

Feeling Distress

The dollar is feeling distress
As Treasury prices compress
The data released
Shows growth has increased
Thus risk is now ‘cool’ to possess

Risk is back in fashion this morning as better than expected Chinese Services PMI data (54.4 vs. exp 52.3) and better than expected German Services PMI data (55.4 vs exp 54.9) have combined with renewed optimism on the US-Chinese trade talks to revive risk taking by investors. If you recall, it was just last month that the PMI data was pointing to a global slowdown, which was one of the keys to market activity. It was part and parcel of the yield curve inversion as well as the dollar’s modest strength as investors fled most other countries for the least bad option, the US markets. But it seems that not only have markets responded positively to the complete u-turn by global central bankers, so have purchasing managers. In the end, everybody loves easy money, and the fact that virtually every nation has reversed early signs of policy tightening has played well on Main Street as well as on Wall Street.

So maybe recession is much further away than had recently been feared. Of course, we continue to see our share of weak data with this week already producing subpar Retail Sales (-0.2%, -0.4% ex autos) and weak Durable Goods Orders (-1.6%, +0.1% ex transport). This makes an interesting contrast to the stronger than expected ISM data (55.3) and Construction Spending (+1.0%). But investors clearly see the glass half-full as equities respond positively, and maybe more impressively, Treasury yields have backed up 14 bps in the past week. This means the yield curve is no longer inverted and we are already hearing a lot of dismissals about how that was an aberration and not a precursor of a recession. You know, ‘This time is different!’

The one thing that remains clear is there is a concerted effort by central bankers everywhere to focus on the good, ignore the bad and try to keep the global economy going. I guess that’s their collective job, so kudos are due as they have recently proven quite nimble in their responses. Of course, the fact that they seem to be inflating new debt bubbles with the potential for very serious consequences when they pop cannot be ignored forever.

Prime Minister May’s at a loss
And so now the aisle she’ll cross
It’s Labour she’ll ask
To help with the task
Of proving her deal’s not just dross

The other market surprise was the news that after a seven-hour cabinet meeting, PM May has given up on the Tories to help her pass the Brexit deal and has now reached out to Labour leader, Jeremy Corbyn, to see if they can come up with something that can garner a majority of votes in Parliament. Yesterday, Parliament tried to come up with their own plan for a second time, and this time handily rejected 11 suggestions. The problem for May is that Labour, itself, is split on what it wants to do, with a large portion looking for another referendum, while it has its own significant portion of Leavers. Quite frankly, the view from 3000 miles away is that this initiative is not going to result in any better solution than the already rejected ones. And while everyone abhors the idea of a hard Brexit, apparently nobody abhors it enough to concede their own viewpoint. However, the market continues to wear its rose-colored glasses and the pound has rebounded 0.5% today and more than 1.1% since yesterday morning. The pound continues to be completely driven by the Brexit saga, as it rallied despite a very poor Services PMI outturn of 48.9.

Away from those stories, market optimism has been fanned by the hints that the US-China trade talks are continuing to make progress. Chinese vide-premier, and lead negotiator, Liu He, is in Washington today and tomorrow to resume the conversation. Meanwhile, central banks continue to back away from any further policy tightening, even in marginal countries where it had been expected. Poland is the latest to sound more dovish than previous comments, and markets are also now pricing in further rate cuts in both India and South Africa. The point is that the market addiction to easy money is growing, and there does not appear to be a single central banker anywhere who can look through the short-term and recognize, and respond to, long term concerns.

But in the meantime, stocks continue to rally. Today, after the Chinese data, we saw the Nikkei jump 1.0%, and Shanghai rally 1.25%. Then after the Eurozone data, the DAX rocketed 1.85% and even the CAC, despite the weak French data, rallied 1.0%. I guess the fact that there are still weak areas in Europe implies that Signor Draghi will never be tempted to raise rates. And not to be outdone, US futures are pointing to a 0.5% rise at the open.

This morning’s data brings ADP Employment (exp 170K) and then ISM Non-Manufacturing (exp 58.0). If things hold true to form, look for a better ISM number, although the ADP will be quite interesting. Remember, last month’s NFP number was shockingly weak so there are still questions about that. Friday, we will learn more, especially with the revisions.

And the dollar? Well, as is often the case on days where risk is accumulated, the dollar is under broad pressure, down 0.3% vs. the euro, NOK and SEK. It is also under pressure vs. EMG currencies with INR (+0.7%) and PHP (+0.6%) leading the way in Asia, while the CE4 are all higher by roughly 0.3%. There is no reason to think this pressure will abate today, unless we see something quite surprising, like the US-China trade talks falling apart. In other words, look for modest further dollar weakness as the session progresses.

Good luck
Adf

Pure Satisfaction

This weekend the data released
From China showed growth had increased
The market’s reaction
Was pure satisfaction
With short sellers all getting fleeced

Remember all those concerns over slowing growth around the world as manufacturing data kept slipping to recession-like numbers? Just kidding! Everything in the world is just peachy. At least that seems to be the take from equity markets this morning after Chinese PMI data this weekend surprised one and all by showing a significant rebound. The ‘official’ Manufacturing PMI printed at 50.5, up from 49.2 in February and well above the consensus forecast of 49.5. More importantly, it was on the expansion side of the 50.0 boom/bust line. The non-manufacturing number printed at 54.8, also higher than February (54.3) and consensus expectations of 54.1. Then last night, the Caixin data was released and it, too, showed a much better reading at 50.8, up from 49.9 and above consensus expectations of 50.1. And that’s all it took to confirm the bullish case for equity markets with the Nikkei rising 1.4% and Shanghai up 2.6%. In fairness, we also heard soothing words from Chinese Vice-premier Liu He, China’s top trade negotiator, that he was optimistic a deal would soon be reached, perhaps when he is back in Washington later this week.

What makes this so interesting is that European markets are all rallying as well, albeit not quite as robustly (DAX +1.1%, CAC +0.5%) despite weaker than forecast PMI data there. In fact, German Manufacturing PMI fell to 44.1, its lowest level since July 2012 during the European bond crisis, while the French also missed the mark at 49.7. However, it is becoming evident that we are fast approaching the bad news is good phenomenon we had seen several years ago. You may recall that this is the theory that weak economic data is actually good for equity prices because the central banks will ease policy further, thus increasing inequality and making the rich richer helping to support equity market valuations by adding further liquidity to the system.

It cannot be surprising that in this risk-on festival, the dollar has suffered overnight, falling between 0.2% and 0.5% vs. its G10 counterparts and by similar numbers vs. most of the EMG bloc. In fact, the two notable decliners beyond the dollar have been; TRY, currently down 0.6% (although that is well off its worst levels of -2.0%) after local elections over the weekend showed President Erdogan’s support in the major cities in Turkey has fallen substantially; and the yen, which given the risk-on mindset is behaving exactly as expected. In addition, 10-year Treasury yields have backed up to 2.44% and are no longer inverted vs. the 3-month T-bill, after spending all of last week in that situation.

What should we make of this situation? Is everything in the economy turning better and Q4 simply an aberration? Or is this simply the lash hurrah before the coming apocalypse?

On the positive side is the fact that last year’s efforts by central banks around the world to ‘normalize’ monetary policy is clearly over. ZIRP is the new normal, and quite frankly, it looks like the Fed is going to start heading back in that direction soon. Certainly, the market believes so. And as long as free money exists in the current low inflation environment, equity markets are going to be the main beneficiaries.

On the negative side, the number of red flags raised in the economy continues to increase, and it seems hard to believe that economic growth can continue unabated overall. For example, auto manufacturing has been declining rapidly and the housing market continues to slow sharply. These are two of the largest and most important industries in the US economy, and contraction in either will reduce growth. We are looking at contraction in both, despite interest rates still much closer to historic lows than highs. Remember, both these businesses are credit intensive as almost everyone borrows money to buy a car or a house. As an example of the concerns, auto loan delinquencies are at record levels currently with more than 6.5% overdue by more than 90 days.

Obviously, this is a small sample of the economy, albeit an important one with significant knock-on effects, but at the end of the day, investors continue to take the bullish view. Free money trumps all the potential travails of any particular industry.

It’s funny, because this attitude is what has been increasing the hype for the sexiest new economic views of MMT. After all, isn’t this what we have been seeing for the past decade? Fiscal stimulus paid for by central bank monetization of debt with no consequence. At least no consequences yet. Japan is leading the way in this process and despite a debt/GDP ratio of something like 240%, everybody sees the yen as a safe haven with negative 10-year yields. And arguably, last year’s tax and spending bill in the US alongside the end of policy tightening here, and almost certain future easing, is exactly the same story. Ironically, the Eurozone experiment is going to find itself on the wrong side of this process since member countries ceded their seignorage when they accepted the euro for their own currencies. And who knows, maybe MMT is a more correct description of the world and printing money without end has no negative consequences. I remain skeptical that 10 years of experimental monetary policy in the developed world is sufficient to overturn 300 years of economic history, but I am, by nature, a skeptic. At any rate, right now, the market is embracing the idea which means that equity markets ought to continue to gain, and government bond yields are not destined to rise alongside them.

As we start Q2, we are treated to a bunch of data as well as some more Fedspeak:

Today Retail Sales 0.3%
  -ex autos 0.4%
  ISM Manufacturing 54.5
  Business Inventories 0.5%
Tuesday Durable Goods -1.8%
  -ex transport 0.2%
Wednesday ADP Employment 170K
  ISM non-Manufacturing 58.0
Thursday Initial Claims 216K
Friday Nonfarm Payrolls 170K
  Private Payrolls 170K
  Manufacturing Payrolls 10K
  Unemployment Rate 3.8%
  Average Hourly Earnings 0.3% (3.4% Y/Y)
  Average Weekly Hours 34.5

So, on top of Retail Sales and Payroll data, both seen as critical information, we hear from four more Fed speakers during the second half of the week. The thing is, we already know what the Fed’s view is, no rate hikes anytime soon, but it is too soon to consider rate cuts. That is where the data comes in. Any hint of weakness in the data especially Friday’s payroll report, and you can be sure the calls for a rate cut will increase.

Right now, the market feels like the Fed is going to be the initiator of the next set of rate cuts, and so I expect the dollar will be pressured by that view. But remember, if the Fed is cutting, you can be sure every other central bank will be going down that road shortly thereafter.

Good luck
Adf

Rapidly Falling

Magnanimous is the EU
Extending the deadline for two
Weeks so that May
Might still get her way
And England can bid them adieu

But data this morning displayed
That Eurozone growth, as surveyed
Was rapidly falling
While Mario’s stalling
And hopes for a rebound now fade

On a day where it appeared the biggest story would be the short delay granted by the EU for the UK to try to make up their collective mind on Brexit, some data intruded and changed the tone of the market. No one can complain things are dull, that’s for sure!

Eurozone PMI data was released this morning, or actually the Flash version which comes a bit sooner, and the results were, in a word, awful.

German Manufacturing PMI 44.7
German Composite PMI 51.5
French Manufacturing PMI 49.8
French Composite PMI 48.7
Eurozone Manufacturing PMI 47.6
Eurozone Composite PMI 51.3

You may have noticed that manufacturing throughout the Eurozone is below that key 50.0 level signaling contraction. All the data was worse than expected and the German Manufacturing number was the worst since 2012 in the midst of the Eurobond crisis. It can be no surprise that the ECB eased policy last week, and perhaps is only surprising that they didn’t do more. And it can be no surprise that the euro has fallen sharply on the release, down 0.6% today, and it has now erased all of this week’s gains completely. As I constantly remind everyone, FX is a relative game. While the Fed clearly surprised on the dovish side, the reality is that other countries all have significant economic concerns and what we have learned in the past two weeks is that virtually every central bank (Norway excepted) is doubling down on further policy ease. It is for this reason that I disagree with the dollar bears. There is simply no other economy that is performing so well that it will draw significant investment flows, and since the US has about the highest yields in the G10 economies, it is a pretty easy equation for investors.

Now to Brexit, where the EU ‘gifted’ the UK a two-week extension in order to allow PM May to have one more chance to get her widely loathed deal through Parliament. The EU debate was on the amount of time to offer with two weeks seen as a viable start. In any case, they are unwilling to delay beyond May 22 as that is when EU elections begin and if the UK is still in the EU, but doesn’t participate in the elections, then the European Parliament may not be able to be legally constituted. Of course, the other option is for a more extended delay in order to give the UK a chance to run a new referendum, and this time vote the right way to remain.

And finally, there is one last scenario, revoking Article 50 completely. Article 50 is the actual law that started the Brexit countdown two years ago. However, as ruled by the European Court of Justice in December, the UK can unilaterally revoke this and simply remain in the EU. It seems that yesterday, a petition was filed on Parliament’s website asking to do just that. It has over two million signatures as of this morning, and the interest has been so high it has crashed the servers several times. However, PM May is adamant that she will not allow such a course of action and is now bound and determined to see Brexit through. This impact on the pound is pretty much what one might expect, a very choppy market. Yesterday, as it appeared the UK was closer to a no-deal outcome, the pound fell sharply, -1.65%. But this morning, with the two-week delay now in place and more opportunity for a less disruptive outcome, the pound has rebounded slightly, up 0.3% as I type. Until this saga ends, the pound will remain completely dependent on the Brexit story.

Away from those two stories, not much else is happening. The trade talks continue but don’t seem any closer to fruition, with news continuing to leak out that the Chinese are not happy with the situation. Government bond yields around the world are falling with both German and Japanese 10-year yields back in negative territory, Treasuries down to 2.49%, there lowest level since January 2018, and the same situation throughout the G10. Overall, the dollar has been the big winner throughout the past twenty-four hours, rallying during yesterday’s session and continuing this morning. In fact, risk aversion is starting to become evident as equity markets are under pressure this morning along with commodity prices, while the dollar and yen rally along with those government bond prices. The only US data point this morning is Existing Home Sales (exp 5.1M) which has been trending lower steadily for the past 18 months. There is also a bunch of Canadian data (Inflation and Retail Sales) which may well adjust opinions on the BOC’s trajectory. However, it seems pretty clear that the Bank of Canada, like every other G10 central bank, has finished their tightening cycle with the only question being when they actually start to ease.

A week that began with the market absorbing the EU’s efforts at a dovish surprise is ending with clarification that dovishness is the new black. It is always, and everywhere, the chic way to manage your central bank!

Good luck and good weekend
Adf

A Bad Dream

According to pundits’ new theme
December was just a bad dream
Though Europe’s a mess
And China feels stress
The fallout was way too extreme

The thing is, the data of late
Worldwide has not really been great
The only thing growing
Is debt which is sowing
The seeds of a troubled debate

The dollar has been edging higher over the past several sessions which actually seems a bit incongruous based on other market movements. Equity investors continue to see a glass not half full, but overflowing. Bond yields are edging higher in sync with those moves as risk is being acquired ‘before it’s too late’. But the dollar, despite the Fed’s virtual assurance that we have seen the last of the rate hikes, has been climbing against most counterparts for the past two sessions.

Some of this is clearly because we are getting consistently bad economic data from other countries. For example, last night saw Services PMI data from around the world. In France, the index fell to 47.8, its worst showing in five years. German data printed a slightly worse than expected 53.0, while the Eurozone as a whole remained unchanged at 51.2 It should be no surprise that Italy, which is currently in recession, saw its number fall below 50 as well, down to 49.7. Thus, while Brexit swirls on in the background, the Eurozone economy is showing every sign of sliding toward ever slower growth and inflation. As I have been repeating for months, the ECB will not be tightening policy further. And as the Brexit deadline approaches, you can be sure that the EU will begin to make more concessions given the growing domestic pressure that already exists due to the weakening economy. Net, the euro has decline 0.2% this morning, and is ebbing back to the level seen before the Fed capitulated.

Speaking of Brexit, the UK Services PMI data fell to 50.1, its worst showing in two- and one-half years, simply highlighting the issues extant there. PM May’s strategy continues to consist of trying to renegotiate based on Parliament’s direction, but the EU continues to insist it cannot be done. While very few seem to want a hard Brexit, there has been very little accomplished of late that seems likely to prevent it. And the pound? It has fallen a further 0.2% and is trading back just above 1.30, its lowest level in two weeks and indicative of the fact that the certainty about a deal getting done, or at the very least a delay in any decision, is starting to erode.

With the Lunar New Year continuing in Asia, there is no new news on the trade front, just the ongoing impact of the tariffs playing out in earnings releases and economic reports. But this story is likely to be static until the mooted meeting between the two presidents later this month. My observation is that the market has priced in a great deal of certainty that a deal will be agreed and that the tariff regime will end. Quite frankly, that seems very optimistic to me, and I think there is a very real chance that things deteriorate further, despite the incentives on both sides to solve the problem. The issue is that the US’s trade concerns strike at the very heart of the Chinese economic model, and those will not be easily changed.

Elsewhere, the yen has been falling modestly of late, which is not surprising given the recent risk-on sentiment in markets, but the Japanese economy has not shown any signs that the key concern over inflation, or lack thereof, has been addressed. During December’s equity meltdown, the yen rallied ~4.5%. Since then, it has rebound about half way, and in truth, since equity markets stabilized in the middle of January, the yen has been in a tight trading range. At this point, given the complete lack of ability by the BOJ to impact its value based on monetary policy settings, and given the strong belief that it represents a safe haven in times of trouble (which is certainly true for Japanese investors), the yen is completely beholden to the market risk narrative going forward. As long as risk is embraced, the yen is likely to edge lower. But on risk off days, look for it to rebound sharply.

And that’s really all we have for today. This evening’s State of the Union address by President Trump has the potential to move markets given the contentious nature of his current relationship with the House of Representatives. There is growing talk of another Federal government shutdown in two weeks’ time, although as far as the FX market was concerned, I would say the last one had little impact. Arguably, the dollar’s weakness during that period was directly a result of the change in Fed rhetoric, not a temporary interruption of government services.

At 10:00 this morning the ISM Non-Manufacturing data is released (exp 57.2), which while softer than last month remains considerably higher than its European and Chinese counterparts. Overall, as markets continue to reflect an optimistic attitude, I would expect that any further dollar strength is limited, but in the event that fear returns, the dollar should be in great demand. However, that doesn’t seem likely for today.

Good luck
Adf

Growth Had Decreased

While Draghi and his ECB
Evaluate their policy
The data released
Showed growth had decreased
A fact they’re unhappy to see

With limited new information on the two key stories, Brexit and the trade war, the market has turned its attention to this morning’s Flash PMI data for Europe, which it turns out was not very good. French, German and Eurozone numbers (the only ones released) all printed much lower than expected with German Manufacturing dipping to 49.9, a concerning signal about future growth there. The euro responded as would be expected, falling 0.3% and helping to drag down many other currencies vs. the dollar.

This is the backdrop to today’s ECB meeting, further signs of slowing Eurozone growth, which cannot be helping the internal debate about slowly normalizing policy. The policy statement will be released at 7:45 this morning and is expected to show no changes in rates or the balance sheet. Remember, the most recent guidance has been that rates would remain on hold “at least through the end of summer” and that maturing securities would be reinvested. But today’s data has to weigh on that process. As I have argued in the past, there is, I believe, a vanishingly small probability that the ECB raises rates at all. And that is their big problem. If the current slowdown turns into a recession, exactly what else can the ECB do to support the economy there? Nothing! I’m sure they will restart QE, and it is a given that they will roll over the TLTRO’s this year, but will it be enough to change the trajectory? Mario will be pretty happy to turn over the reins to someone else this October as the next ECB President is likely to have a very unhappy time, with lots of problems and lots of blame and not many tools available to address things. This remains the key reason I like the euro to decline as 2019 progresses.

Away from that, though, the Brexit story is waiting for Parliamentary votes next week regarding the elimination of the no-deal choice, which has been seen as a distinct GBP positive. While it is a touch softer this morning, -0.2%, the pound is getting the benefit of every doubt right now. As I wrote yesterday, maintain a fully hedged positions as the risk of a sharp decline has not yet disappeared by any stretch.

There has been no discussion on trade, no US data and no Fed speakers, so traders and investors are running out of cues on which to deal, at least for now. Overall, the dollar is firmer this morning, but that is really just offsetting yesterday’s weakness. In fact, it is very difficult to look at the current situation and anticipate any substantive price action in the near term. While the ECB could surprise by easing policy, that seems highly unlikely for now. However, if we get an even gloomier outlook from Draghi at the 8:30 press conference, I could see the euro declining further. But absent that, it is shaping up to be quite a dull session.

Good luck
Adf