QE We’ll Bestow

The data continue to show
That growth is unhealthily slow
The pressure’s on Jay
To cut rates and say
No sweat, more QE we’ll bestow

The market narrative right now is about slowing growth everywhere around the world. Tuesday’s ISM data really spooked equity markets and then that was followed with yesterday’s weaker than expected ADP employment data (135K + a revision of -38K to last month) and pretty awful auto sales in the US which added to the equity gloom. This morning, Eurozone PMI data was putrid, with Germany’s Services and Composite data (51.4 and 48.5 respectively) both missing forecasts by a point, while French data was almost as bad and the Eurozone Composite reading falling to stagnation at 50.1. In other words, the data continues to point to a European recession on the immediate horizon.

The interesting thing about this is that the euro is holding up remarkably well. For example, yesterday in the NY session it actually rallied 0.45% as the market began to evaluate the situation and price in more FOMC rate cutting. Certainly it was not a response to positive news! And this morning, despite gloomy data as well as negative comments from ECB Vice-President Luis de Guindos (“level of economic activity in the euro area remains disappointingly low”), the euro has maintained yesterday’s gains and is unchanged on the session. At this point, the only thing supporting the euro is the threat (hope?) that the Fed will cut rates more aggressively going forward than had recently been priced into the market. Speaking of those probabilities, this morning there is a 75% probability of a Fed cut at the end of this month. That is up from 60% on Tuesday and just 40% on Monday, hence the euro’s modest strength.

Looking elsewhere, the pound has also been holding its own after yesterday’s 0.5% rally in the NY session. While I think the bulk of this movement must be attributed to the rate story, the ongoing Brexit situation seems to be coming to a head. In fact, I am surprised the pound is not higher this morning given the EU’s reasonably positive response to Boris’s proposal. Not only did the EU not dismiss the proposal out of hand, but they see it as a viable starting point for further negotiations. One need only look at the EU growth story to recognize that a hard Brexit will cause a significant downward shock to the EU economy and realize that Michel Barnier and Jean-Claude Juncker have painted themselves into a corner. Nothing has changed my view that the EU will blink, that a fudged deal will be announced and that the pound will rebound sharply, up towards 1.35.

Beyond those stories, the penumbra of economic gloom has cast its shadow on everything else as well. Government bond yields continue to decline with Treasury, Bund and JGB yields all having fallen 3bps overnight. In the equity markets, the Nikkei followed the US lead last night and closed lower by 2.0%. But in Europe, after two weak sessions, markets have taken a breather and are actually higher at the margin. It seems that this is a trade story as follows: the WTO ruled in the US favor regarding a long-standing suit that the EU gave $7.5 billion in illegal subsidies to Airbus and that the US could impose that amount of tariffs on EU goods. But the White House, quite surprisingly, opted to impose less than that so a number of European companies that were expected to be hit (luxury goods and spirits exporters) find themselves in a slightly better position this morning. However, with the ISM Non-Manufacturing data on tap this morning, there has to be concern that the overall global growth story could be even weaker than currently expected.

A quick survey of the rest of the FX market shows the only outlier movement coming from the South African rand, which is higher this morning by 0.9%. The story seems to be that after three consecutive weeks of declines, with the rand falling more than 6% in that run, there is a seed of hope that the government may actually implement some positive economic policies to help shore up growth in the economy. That was all that was needed to get short positions to cover, and here we are. But away from that story, nothing else moved more than 0.3%. One thing that has been consistent lately has been weakness in the Swiss franc as the market continues to price in yet more policy ease after their inflation data was so dismal. I think this story may have further legs and it would not surprise me to see the franc continue to decline vs. both the dollar and the euro for a while yet.

On the data front, this morning we see Initial Claims (exp 215K) and then the ISM Non-Manufacturing data (55.0) followed by Factory Orders (-0.2%) at 10:00. The ISM data will get all the press, and rightly so. Given how weak the European and UK data was, all eyes will be straining to see if the US continues to hold up, or if it, too, is starting to roll over.

From the Fed we hear from five more FOMC members (Evans, Quarles, Mester, Kaplan and Clarida), adding to the cacophony from earlier this week. We already know Mester is a hawk, so if she starts to hedge her hawkishness, look for bonds to rally further and the dollar to suffer. As to the rest of the crew, Evans spoke earlier this week and explained he had an open mind regarding whether or not another rate cut made sense. He also said that he saw the US avoiding a recession. And ultimately, that’s the big issue. If the US looks like a recession is imminent, you can be sure the Fed will become much more aggressive, but until then, I imagine few FOMC members will want to tip their hand. (Bullard and Kashkari already have.)

Until the data prints, I expect limited activity, but once it is released, look for a normal reaction, strong data = strong dollar and vice versa.

Good luck
Adf

A Lack of Well-Being

Down Under the RBA eased
And Aussie bulls have gotten squeezed
In Europe they’re seeing
A lack of well-being
Which has politicians displeased

The RBA cut rates by 25bps last night, as fully expected by the interest rate markets, and they indicated that despite the fact that their base rate was now at a record low of 0.75%, they were considering further easing in the future. The Aussie dollar suffered on the news and is the worst performer in the G10 today, down 0.80%. In fact, Aussie is now at its lowest level since the financial crisis and, in truth, the trend certainly looks like it has further to fall. Australia continues to suffer from the combination of China’s slowing growth as well as the fall-out from the US-China trade war. Alas for the Australians, there is precious little they can do to insulate themselves from those things given they have literally built their economy over the past twenty-five years on the back of Chinese growth. Given the US dollar’s overall trend higher, I see nothing that would change this in the near term. Receivables hedgers beware.

Adding to the global gloom was the release of the Eurozone Manufacturing PMI data which continues to point to a manufacturing recession there. Germany’s was actually slightly better than forecast, but at 41.7 remains far and away the worst of the bunch. The overall Eurozone reading was at 45.7, essentially unchanged from last month and showing no signs of improvement whatsoever. In fact, the sub-indices showed that both new orders and prices paid are falling even faster. Given this news it can be no surprise that Eurozone CPI was released at a weaker than forecast 0.9% this morning as well. It is easy to see why Signor Draghi has been keen to add stimulus to the Eurozone economy, but it will take some time for the most recent activities to work their way into the data, which implies that things are going to get worse before they get better. Interestingly, after an early dip on the data, the euro has clawed back those losses and is now essentially unchanged on the day. Of course, the euro remains in a very clear downtrend and is lower by 1.9% since the ECB’s last policy meeting where they cut rates and restarted QE. Looking back a bit further into the summer, since last June, the single currency has fallen more than 4.6%. This trend, too, has legs.

As a harbinger of the narrative, the WTO released updated forecasts for growth in global trade this morning and the reading was not pretty. The new forecast is for global trade to grow just 1.2% in 2019 and 2.7% in 2020. This compares to growth of 3.0% in 2018, and its last forecasts of 2.6% and 3.0% for this year and next. At this point, the market is sharpening its focus on the upcoming trade negotiations due to begin in Washington on October 10th. Everybody is hoping for a positive outcome, but from everything that has been reported so far, it appears the two sides remain far apart on a number of issues, and though a deal will be beneficial for both, it remains a distant prospect I fear.

Turning our attention to Japan, last night the government auctioned a new tranche of 10-year JGB’s with pretty disastrous results. A day after explaining they will be reducing the amount of purchases in the back end in order to steepen the yield curve, they were true to their word. Yields there climbed 5bps with the bid-to-cover ratio a very weak 3.42, the lowest since 2016. This price action had a knock-on effect everywhere in the world as Treasury prices fell (yields +6bps) with a similar story in Germany (+4.5bps) and the UK (+7bps). For our purposes, the impact was in USDJPY, which is higher by 0.25% this morning, extending its bounce of the last month. Once again, the current market does not appear to be risk sensitive per se, this is simply dollar outperformance.

A quick look at the rest of the FX world shows SEK a key underperformer this morning, falling 0.55% as the market continues to focus on the change in tone from the Riksbank. They had been working hard to ‘normalize’ interest rates over the past year, but the data there continues to undermine their case with this morning’s PMI release of 46.3 dramatically lower than forecasts and the weakest reading since 2012. Instead, they are far more likely going to need to cut rates again, hence the krone’s weakness.

In the EMG sphere, ZAR is the biggest loser today, falling 1.0% on the back of two related stories; first Fitch cut the credit rating of Eskom, the troubled government-owned utility, to CCC-, essentially dead. This situation has been weighing on economic growth there for quite a while, and the bigger concern is that it forces a countrywide credit downgrade. South Africa is currently under review by Moody’s, and another cut would put them in junk territory forcing a significant amount of ZAR bond sales by international investors (with some estimates as high as $15 billion worth), and correspondingly, driving the rand even lower. But if you look across the board, while ZAR is the worst performer, the dollar is higher against virtually the entire space.

Turning to the upcoming session, we are looking forward to ISM Manufacturing data (exp 50.0) after a very weak Chicago PMI number yesterday (47.1). We also get to hear from three Fed speakers, Evans, Clarida and Bowman, although the last of these, Governor Bowman, rarely speaks of monetary policy with her focus on community banking. Beyond this, the bigger trend remains a higher dollar and there is nothing to indicate that trend is changing.

Good luck
Adf

 

Not a Chance

From Germany and, too, from France
We saw the economy’s stance
Their prospects are dire
And though they aspire
To growth, it seems they’ve not a chance

Surveying the markets this morning, the theme seems to be that the growth scare continues to be real. PMI data from Europe was MUCH worse than expected across the board, with Services suffering as well as the manufacturing data which has been weak for quite a while already. This is how things stacked up:

Event Expectations Release
German Manufacturing PMI 44.0 41.4
Services PMI 54.3 52.5
Composite PMI 51.5 49.1
French Manufacturing PMI 51.2 50.3
Services PMI 53.2 51.6
Composite PMI 52.6 51.3

Source: Bloomberg

Anybody that claims Germany is not in recession is just not paying attention. Friday evening, the Bundestag agreed to a new €54 billion bill to address climate change, which some are looking at as an economic stimulus as well. However, a stimulus bill would need to create short term government spending, and the nature of this bill is decidedly longer term in nature. And a bigger problem is the German unwillingness to run a budget deficit means that if they put this in place, it will restrict their ability to add any stimulus on a more timely basis. It also appears that the ECB and IMF will continue to call them out for their austere views, but thus far, the German people are completely backing the government on this issue. Perhaps when the recession is in fuller flower, der mann on der strasse will be more willing for the government to borrow money to spend.

It ought not be that surprising that European equity markets suffered after the release with the DAX down a solid 1.2% and CAC -1.0% with the bulk of the move coming in the wake of the releases. This paring of risk also resulted in a rally in Bunds (-6bps), OATS (-3bps) and Treasuries (-3bps) while the dollar rallied (EUR -0.4%, GBP -0.3%).

But I think this begs the question of whether or not a recession is going to be solely a European phenomenon or if the US is going to crash that party. What we have learned in the past two weeks is that the ECB is basically spent, and that the market’s review of their newest policy mix was two thumbs down. Ironically, Draghi’s clear attempts to weaken the euro are now being helped by the significantly weaker than expected Eurozone data that he’s trying to fix. Apparently, you can’t have it both ways. Much to his chagrin, however, I believe that there is plenty more downside for the euro as the Eurozone economy continues its slow descent into stagnation. When Madame Lagarde takes over on November 1st, she will have an empty cupboard of tools to address the economy and will be forced to rely on verbal suasion. I expect that we will hear from the Mandame quite frequently as she tries to change the narrative. I also expect that her efforts will do very little, especially if China continues to falter.

Away from the weak European data, there was not that much else of interest. Friday, if you recall, the US equity markets suffered after the low-level Chinese trade delegation canceled a trip to Montana and Nebraska as the perception was the talks broke down. It turns out, however, that the request came from the US for other reasons, and that the talks, by all accounts, went quite well. At this point, the market is now looking forward to Chinese Vice-Premier, Liu He, coming to Washington on October 10, so barring any further tweets on the subject that topic may well slip to the back burner.

Brexit was also in the news as Boris makes his way to NY for the UN session this week He has scheduled meetings with all the key players from Europe including Chancellor Merkel, President Macron and Taoiseach Varadkar. At the same time, the Labour party’s conference is in disarray as leader Jeremy Corbyn wants to campaign on a second referendum but will not definitively back Remain. In other words, it’s not just the Tories who are split over Brexit, it is both parties. And don’t forget, we are awaiting the UK Supreme Court’s decision on the legality of Boris’ move to prorogue parliament for five weeks, which could come any day this week. In the end, the pound is still completely beholden to Brexit, so look for a Supreme Court ruling against the government to result in a rally in the pound as it will be perceived as lowering the probability of a no-deal Brexit. Again, my view remains that at the EU summit in the middle of next month, there will be an announcement of a breakthrough of some sort to fudge the Irish backstop and that the pound will rally sharply on the news.

Looking ahead to this week, we have a fair amount of new information as well as a host of Fed speakers:

Tuesday Case-Shiller House Prices 2.90%
  Consumer Confidence 133.3
Wednesday New Home Sales 656K
Thursday Q2 GDP (2ndrevision) 2.0%
  Initial Claims 211K
Friday Personal Income 0.4%
  Personal Spending 0.3%
  Durable Goods -1.1%
  -ex transportation 0.2%
  Core PCE Deflator 0.2% (1.8% Y/Y)
  Michigan Sentiment 92.0

Source: Bloomberg

We also hear from 11 different Fed speakers this week, two of them twice! At this point I expect they will be working hard to get their individual viewpoints across which should actually help us better understand the mix of views on the board. So far we have a pretty good understanding of where Bullard, George and Rosengren stand, but none of them are speaking this week. This means we will get eleven entirely new viewpoints. And my take is that the general viewpoint is going to be unless the data really turns lower; there is no more cause to ease at this point. I don’t think the equity market will like that, nor the bond market, but the dollar is going to be a big beneficiary. The euro is back below 1.10 this morning. Look for it to continue lower as the week progresses.

Good luck
Adf

The Die Has Been Cast

So now that the die has been cast
And Boris is PM at last
The window is closing
To set forth composing
A Brexit deal that can be passed

Meanwhile throughout Europe the tale
Shows Draghi is likely to fail
In rekindling growth
While he and Jay both
Find prices their great big White Whale

By the end of the day, Queen Elizabeth II will install Alexander Boris de Pfeffel Johnson as Prime Minister of the United Kingdom. After naming a new cabinet, he will make his first speech and will certainly reiterate that, regardless of the status of negotiations with the EU, the UK will be leaving on October 31. While all of these things had been widely anticipated, their reality sets in motion a potentially turbulent three months. Given the overall weakening growth impulse in the UK economy and the ongoing political intrigue, there is not much to recommend owning the pound right now. Interestingly, however, it is firmer by 0.3% this morning on a combination of a slight uptick in Mortgage Approvals, demonstrating that perhaps the UK housing market is not completely dead, as well as some ‘buy the news’ activity after a prolonged decline in the currency.

Looking ahead, it appears that the only thing that will help rally the pound in any significant manner would be a clear change of heart by the EU regarding reopening negotiations on Brexit. And while, to date, the EU has been adamant that will not occur, one need only look at the continuing slide in the Eurozone economy to recognize that the EU cannot afford a major shock, like a no-deal Brexit, to occur without falling into a continent wide recession.

Which leads to the other key story of the day, the absolutely abysmal Eurozone PMI data that was released earlier this morning. While these are all flash numbers, they paint a very dark picture. For example, German manufacturing PMI fell to 43.1, well below last month’s 45.0 as well as consensus expectations of 45.1. In fact, this was the lowest point since seven years ago during the Eurozone crisis just before Signor Draghi’s famous “whatever it takes” comments. And while the Services number fell only slightly, to 55.4, the Composite result was much worse than expected at 51.4 and pointing toward a real possibility of a technical recession in Germany. French data was similarly downbeat, with Manufacturing falling to 50.0 and the composite weak, with the same being true for the Eurozone data overall.

Given the data, it is no surprise that the euro has edged even lower, down a further 0.1% this morning after a 0.5% decline in yesterday’s session. Interestingly, there are still a large number of pundits who believe that the ECB will stay on the sidelines tomorrow at their meeting, merely laying the groundwork for action in September. However, that continues to be a baffling stance to me, especially when considering that Mario Draghi is still in charge. This is a man who has proven willing, time and again (see: whatever it takes”), to respond quickly to perceived threats to economic stability in the Eurozone. There is no good reason for the ECB to wait in my view. Whether or not the Fed cuts 50 next week (they won’t) is hardly a reason to fiddle while Europe burns. Look for a 10bp cut tomorrow, and perhaps another 10 bps in September along with the announcement for more QE. And don’t be surprised if QE evolves into bank bonds or even equities. Frankly, I think they would be better off writing everyone in the Eurozone a check for €3000 and print €1 trillion that way. At least it would boost consumption to some extent! However, central bankers continue to work with their blinders on and can only see one way to do things, despite the fact that method has proven wholly insufficient.

As to the rest of the market, Aussie PMI data continued to decline, dragging the Aussie dollar down with it. This morning, AUD is lower by 0.35% and back below 0.70 again. With more rate cuts in the offing, I expect it will remain under pressure. Japan, on the other hand saw PMI data stabilize and actually tick higher on the Services front. This is quite a surprise given the ongoing trade ructions between the US and China, themselves and the US and themselves and South Korea. But despite all that, the data proved resilient and, not surprisingly, so did the yen, rallying 0.15% overnight. The thing about the yen is that since the beginning of June it has merely chopped back and forth between 107 and 109. The BOJ’s big concern is that given the relative lack of policy leeway they have as compared to the Fed, that the yen might restart a significant rally, further impairing the BOJ’s efforts at driving inflation in Japan higher. One other thing to remember is that despite the ongoing equity market rally, we have also seen a consistent bid in haven assets. While this dichotomy is highly unusual, it nonetheless implies that there is further room for the yen to appreciate. A move to 105 in the near-term is not out of the question.

But in truth, today’s general theme is lack of movement. The pound is by far the biggest mover, with most other currencies continuing to chop back and forth within 0.1% of yesterday’s closes. It appears that FX traders are awaiting the news from the ECB, the BOJ and the Fed in the next week before deciding what to do. The same is not as true in other markets, where equity bulls continue to rule the roost (corral?) as despite ongoing tepid earnings data, stocks remain bid overall. Bonds, too, are still in demand with Treasury yields hovering just above 2.0%, but more interestingly, Eurozone bonds really rallying. Bunds have fallen to -0.38%, which has helped drag France to -0.11%, but more amazingly, Italy to 1.53% and Greece to 1.97%! That’s right, Greek 10-year yields are lower than US 10-year yields, go figure.

Turning to the data story, yesterday saw the 16th consecutive decline in Existing Home Sales, another -1.7% with New Home Sales (exp 660K) the only data point on today’s docket. The Fed remains in quiet mode which means markets will be all about earnings again today. Some of the bellwether names due to report are AT&T, Boeing and Bank of America. But in the end, FX remains all about monetary policy, and so tomorrow is likely to be far more interesting than the rest of today.

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

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