Tag Archives: #pmmay

A One-Year Delay

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

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

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

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

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

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

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

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

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

Good luck
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Feeling Distress

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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
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So Despised

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Is anyone truly surprised
That Parliament, once authorized
To find a solution
Found no substitution
For May’s deal that they so despised?

One of the more confusing aspects of recent market activity was the rally in the pound when Parliament wrested control of the Brexit process from PM May. The idea that a group of 650 fractious politicians could possibly agree on a single idea, especially one so fraught with risks and complexities, was always absurd. And so, predictably, yesterday Parliament voted on seven different proposals, each designed to be a path forward, and none of them even came close to achieving a majority of votes. This included a vote to prevent a no-deal Brexit. In the meantime, PM May has now indicated she will resign regardless of the outcome, which, arguably, will only lead to more chaos as a leadership fight will now consume the Tories. In the meantime, there is still only one deal on the table, and it doesn’t appear to have the votes to become law. As such, while I understand that the idea of a hard Brexit is anathema to so many, it cannot be dismissed as a potential outcome. It should not be very surprising that the FX market is taking the idea a bit more seriously this morning, although only a bit, as the pound has fallen a further 0.4%, which makes the move a total of 1.0% lower in the past twenty-four hours.

One way to look at the pound’s value is as a probability weighted price of three potential outcomes; no deal, passing May’s deal and a long delay. Based on my views that spot would trade to 1.20, 1.38 or 1.40 depending on those outcomes, and assigning probabilities of 40%, 20% and 40% to those outcomes, spot is actually right where it belongs near 1.3160. But that leaves room for a lot of movement!

Meanwhile, elsewhere in the FX market, volatility is making a comeback. Between Turkey (-5.0%), Brazil (-3.0%) and Argentina (-3.0%), it seems that traders are beginning to awaken from their month’s long hiatus. Apparently, the monetary policy anesthesia that had been administered by central banks globally is wearing off. As it happens, each of these currencies is dealing with local specifics. For instance, upcoming elections in Turkey have President Erdogan on the defensive as his iron grip on power seems to be rusting and he tries to crack down on speculators in the lira. Meanwhile, recently elected Brazilian president Bolsonaro has seen his honeymoon end quite abruptly with his approval ratings collapsing and concerns over his ability to implement key policies seen as desirable by the markets, notably pension reform. Finally, Argentine president Macri remains under pressure as the slowing global growth picture severely restricts local economic activity although inflation continues to run away to unsustainable levels (4% per month!) and the peso, not surprisingly is suffering.

As to the G10, activity there has been less impressive although the dollar’s tone this morning is one of strength, not weakness. In fact, risk continues to be jettisoned by investors as can be seen by the continuing rally in government bonds (Treasury yields falling to 2.35%, Bund yields to -0.07%, JGB’s to -0.09%) while equity markets were weak in Asia and have gained no traction in Europe. Adding to the impression of risk-off has been the yen’s rally (0.2% overnight, 1.0% in the past week), a reliable indicator of market sentiment.

Turning to the data, yesterday saw the Trade Balance shrink dramatically, to -$51.1B, a much lower deficit than expected, and sufficient to positively impact Q1 GDP measurement by a few tenths of a percent. This morning we see the last reading on Q4 GDP (exp 1.8%) as well as Initial Claims (225K). Given the backward-looking nature of Q4 data, it seems unlikely today’s print will impact markets. One exception to this thought would be a much weaker than expected print, which may convince some investors the global slowdown is more advanced than previously thought with equities selling off accordingly. But a better number is likely to be ignored. We also hear from (count ‘em) six more Fed speakers today (Quarles, Clarida, Bowman, Williams, Bostic and Bullard), but given the consistency of recent comments by others it seems doubtful we will learn anything new. To recap, every FOMC member believes that waiting is the right thing to do now and that they should only respond when the data indicates there is a change, either rising inflation or a significant slowing in the economy. Although the market continues to price rate cuts before the end of the year, as yet, there is no indication that Fed members are close to believing that is necessary.

Ultimately, the same key stories are at the fore in markets. Brexit, as discussed above, slowing global growth and the monetary policy actions being taken to ameliorate that, and the US-China trade talks, which are resuming but have made no new progress. One of the remarkable features of markets lately has been the resilience of equity prices despite a constant drumbeat of bad economic news. Investors have truly placed an enormous amount of faith in central banks (specifically the Fed and ECB) to be able to come to the rescue again and again and again. Thus far, that faith has been rewarded, but keep in mind that the toolkit continues to dwindle, so that level of support is likely to diminish. In the end, I continue to see the dollar as a key beneficiary of the current policy mix, as well as the most likely ones for the near future.

Good luck
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Growth Will Soon Sleep

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The place with less people than sheep
Last night said rates might be too steep
A cut now seems fated
Their dollar deflated
As Kiwis fear growth soon will sleep

You can tell it’s a dull day in the FX markets when the most interesting thing that happened was the RBNZ turned dovish in their policy statement, indicating the next interest rate move in New Zealand would be lower. This was a decided change of pace, but also cannot be too great a surprise since their larger neighbor, Australia, pivoted the same way just two weeks ago. The upshot is NZD fell sharply, down 1.4% in the wake of the statement. While I understand that given the diminutive size of the New Zealand economy, any exposures there are likely to be quite small, I think this simply reinforces the story about slowing global growth. In the same vein, we heard a similar story from Bank Negara Malaysia as they lowered their growth and inflation forecasts and hinted that they will cut rates if they see things slowing too rapidly. While the impact on MYR was less impressive, just -0.25%, it is of a piece with the overall global economic situation. That story remains one of slowing growth with central banks hopeful the slowdown is temporary but prepared to react quickly if it appears longer lasting. As I wrote yesterday, it is virtually impossible for the Fed to be responding to slowing growth without every other major central bank (and many minor ones) reacting in the same manner.

Yesterday actually saw the dollar rally during the US session, with the euro falling about 0.4% in NY hours. That helps explain why this morning it is higher by 0.15% on the session, yet lower than when I wrote yesterday. There has been limited new information on the data front (Italian Business Confidence falling more than expected to 100.8), but there has been a widely reported story about Signor Draghi hinting that the ECB is beginning to recognize that five years of negative interest rates might be having some negative impacts on the Eurozone banking sector. It certainly would have been hard to predict that an economic area that heavily relies on bank lending, rather than capital markets, would feel negative impacts from compression of bank lending margins…NOT! But back when NIRP was taking shape, the apocalyptic fears were so great these issues were simply glossed over as meaningless. And now that Eurozone growth has turned lower, the ECB’s plans to normalize rates have fallen by the wayside. It is quite possible that they, too, have painted themselves into an intractable policy corner. It is yet another reason I remain long-term bearish on the euro.

Finally, this morning’s dose of Brexit shows that the hardline euro skeptics may be coming around to PM May’s deal after all. If you recall, this afternoon there will be a series of votes in Parliament as MP’s try to find a solution, mostly to the Irish border question. However, as I have written frequently in the past, this is a truly intractable issue, one where there is no compromise available, but only capitulation on one side or the other. However, there is a growing call for Brexit to be canceled which has the euro skeptics on edge. This line of thought seems to have been PM May’s when she called for a third vote on her plan, and it may well be falling into place. Of course, the caveat for her is that she may be asked required to step down from her role in order to get it over the line. The two alternatives to her plan are now clearly either a lengthy delay, one giving time for a second vote and a reversal of Brexit, or a no-deal outcome on April 12. Since nobody seems to want the latter, and the hard-liners don’t want the former, they may finally get the votes to approve May’s deal. It is the “least worst option” as so delicately put by Jacob Rees-Mogg, one of the leaders of the euro skeptics. Given the toing and froing over the issue, it should be no surprise that the pound is little changed on the day, still hanging around 1.32 as nobody is prepared to take a position on the outcome. If pressed, I would estimate that a vote for the deal will result in the pound rallying toward 1.38 before running into significant selling, while a no-deal outcome probably sees a quick move toward 1.20. And if the result of today’s Parliamentary votes leads toward a long delay, that is likely the pound’s best friend, perhaps driving the beleaguered currency back above 1.40 for a while.

Away from that, the only other noteworthy feature today has been weakness in some oil related currencies with MXN (-1.0%), RUB (-0.75%), NOK (-0.55%) and CAD (-0.25%) all softer. It appears that after a strong run, oil prices are ebbing back somewhat, and these currencies are feeling the brunt today. Quite frankly, the currency movements seem overdone relative to the oil price decline, but it is the only connector I can find across this group.

On the data front, yesterday’s Housing Starts number was quite weak, just 1.162M (exp 1.213M) as was the Consumer Confidence reading at 124.1. We also heard from several other Fed speakers (Kaplan and Daly) both telling us that patience remains a virtue and that while they had modest concern over the yield curve inversion, it wasn’t a game changer for their current policy models. This morning’s only data point is the Trade Balance (exp -$57.0B) and then we hear from KC Fed President Esther George this evening. I am hard pressed to find a change in market sentiment at this point and so hard pressed to change my views. The equity market continues to rally based on more easy money, but monetary policy around the world continues to turn easier and easier, with the Fed still the least tight of them all. In other words, to me, the dollar still has the best position.

Good luck
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Palpably Real

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For Jay and his friends at the Fed
Inflation seems just about dead
So all the debate
‘bout rate hikes can wait
With focus on Brexit instead!

Thus turning to England, we learned
The deal, once again, has been spurned
Now fears of no deal
Are palpably real
Though markets seem quite unconcerned

While the headline news is arguably the second defeat of PM May’s Brexit deal in Parliament, I am going to touch on a different theme to start; namely the Fed.

Yesterday’s CPI data printed on the soft side (Headline 1.5%, Core 2.1%) with both coming in 0.1% below expectations. And while the Fed does not target this reading, it is still an important part of the discussion. That discussion continues to turn toward the idea that the Fed has already overtightened policy and that the next move will be a rate cut. Given the overall slowing in US data and highlighting that the Fed has been completely unable to achieve their inflation target of 2.0%, I expect that the next series of Fed comments, once they are past their meeting next week, will focus on greater efforts to achieve their mandate (the self-imposed 2.0% inflation target) and what needs to be done accordingly. I would look for the end of the balance sheet roll-off quite soon, perhaps in April, but in any case, by June, and I would look for futures markets to start pricing in a full rate cut by the middle of next year. I guess the only question is will the equity market continue to rally despite the weakening underlying fundamentals. Certainly, based on the past ten years of experience, the answer is yes. But can markets defy fundamentals forever? I guess we shall see.

PS. If the Fed is starting to turn more actively dovish, rather than its current passive stance, that will immediately undermine the dollar’s value. While for now I continue to see further upside potential for the buck, that is subject to change if the policies underlying that stance change as well.

Now to Brexit. Poor PM May. She really did work hard to try to find a solution as to how to avoid a hard Brexit, but the EU has literally zero interest in seeing the UK leave their bloc and thrive. If that were the case, the temptation for other unhappy countries (Italy anyone?) to also exit would be too great. As such, it was always in the EU’s long-term interest to play hardball like they did. It can also be no surprise that the widely touted adjustment to the codicil to the agreement was an attempt to bamboozle with flowery words, rather than an effort to put something legally binding in place. As such, once Attorney General Cox declared that the new language was no better than the old, which occurred just as I was getting prepared to publish my note yesterday, it was clear that there was no chance of passage. The fact that the vote lost by a smaller amount, only 149 votes vs. 230 votes the first time, is small consolation.

However, now Parliament has taken over and will have to come up with some plans on their own. It is generally much easier to howl from the peanut gallery than to take responsibility so we shall watch this with great interest. It seems that a majority in Parliament want to vote on a bill that will prevent a no-deal Brexit but given there is only one deal on the table and they handily rejected it, that implies they need a postponement from the EU. It is not enough for the UK to say they want to postpone. In fact, the other 27 members of the EU must all vote unanimously to agree. At this point, there has been no clarity on how long a delay they would like, nor what they plan to do with the time. And the EU has made it clear that those are important aspects of agreeing to a delay. For now, the debate in Parliament rages on, and I assume we will learn their answers in the next day or two, and certainly by the end of the week.

Funnily enough, the FX market has weighed the evidence and decided that there will categorically not be a hard Brexit and the odds of no Brexit are increasing. The pound, after yesterday’s wild ride, is back on an upswing and higher by 0.65% as I type. The one thing of which we can be sure is that the pound will continue to react to headline news until a definitive outcome exists. For my money, it appears as though the market is underpricing the probability of a hard Brexit. While I am pretty sure that nobody really wants one, the fact remains that it continues to be a real possibility even if only by legislative accident. One never knows who is looking at the situation there and sees a chance for personal political gain by allowing a hard Brexit. And in the end, given each MP is a politician first and foremost, that cannot be ignored!

Otherwise, the trade talks are ongoing with a positive spin put forth by the US top negotiator, Robert Lighthizer, although no deal is agreed as yet. Overnight data from Down Under showed weakening Consumer Confidence as the housing market there continues to implode, thus it is no surprise to see AUD having fallen by 0.25% and hugging recent lows. And in truth, little else of note is happening in these markets.

This morning we see Durable Goods (exp -0.5%, +0.1% ex Transport) as well as PPI (1.9%, 2.6% core) although nobody really cares about PPI with CPI just having been released. The Fed is now in their quiet period as they meet next week, so we will not get comments there. This leaves the Brexit debate as the primary focus for the FX market today. Based on all that I have read, I actually expect that the debate there will take more than one day, and that we won’t really get much new information today. Hence, I expect limited market activity for now.

Good luck
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All We’ve Endured

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“Legal changes” have now been “secured”
Which, following all we’ve endured
Encouraged the buying
Of pounds, clarifying
The thought that soft Brexit’s assured

In the ongoing game of chicken, otherwise known as the Brexit negotiations, it seems the EU was the one who flinched. Last night, British PM Theresa May returned from a Strasbourg meeting with European Commission President Jean-Claude Juncker after obtaining potentially substantial modifications to the Irish backstop portion of the negotiated deal. If you recall, this has been the sticking point because the twin objectives of first; preventing a hard border between Ireland and Northern Ireland; and second, insuring that if the UK is outside the EU customs union, appropriate tariffs can be collected, and goods inspected were leading to opposite solutions. The Irish backstop was designed to help alleviate British concerns they would be stuck in the customs union forever. However, as it had previously been written, that did not seem to be the case. Now comes some new language, touted as legally binding, that ostensibly insures that the UK can opt out of the customs union if desired. While I am no lawyer, and thus not qualified to give a legal opinion, my reading of the plain language leaves the impression that nothing much has changed.

This morning, the UK Attorney General, Geoffrey Cox, is going over the package and will be giving his far more qualified opinion to Parliament shortly. (**FLASH – GEOFFREY COX SAYS THE LEGAL RISK OF THE NEW IRISH BACKTOP IS UNCHANGED**) The vote on the deal is still scheduled for 7:00pm this evening (3:00pm EDT) although there are some MP’s who would like a one-day delay in order to be able to read and understand it themselves. In the interim, the market has had quite a wild ride. From yesterday morning, when the pound was trading below 1.30, we have seen a more than 2.0% rally which in the past two hours has completely unwound! Thus, 1.2975 => 1.3250 => 1.3015 has been the movement in the past twenty-four hours. It seems the initial euphoria is being replaced by a more skeptical view that these changes will be enough to turn the Brexit tide in Parliament. At this point, it’s a mug’s game to try to forecast the outcome of this vote. The last I saw was that the deal would lose by 50 votes or so, a much better performance than last time, but still a loss. My gut tells me that a hard Brexit is still a possible outcome, and that there is no certainty whatsoever that Parliament will be able to prevent that.

But away from the pound, the only other currency that has shown any real movement has been the Philippine peso, which has declined a sharp 1.65% overnight. This occurred after the new President of the central bank there explained that the peso had strengthened as much as it could and that given low inflation readings, further rate cuts were on the table. At least this market movement makes sense!

Ongoing stories include the US-China trade talks, where there has been no additional progress, at least none publicized. The Chinese remain concerned that any meeting between the Presidents be just a signing ceremony rather than finalizing negotiations as they are worried that President Trump might reject a deal at the final moments with President Xi thus losing face in the process. I am confident we will hear more on this subject in the next days, and the latest signs point to a positive outcome, but here, too, nothing is certain.

The other ongoing story of note is the rapid change of tack by the world’s central banks. At this point in time, there is only one central bank that is remotely hawkish, the Norgesbank in Norway, where inflation has been running above target, and more importantly, has seen a rising trajectory. However, beyond that, the rest of the world is firmly in the dovish camp. In fact, at this point, the question seems to be just how much more dovish they will become as it grows increasingly clear that global growth is slowing rapidly. While there is the odd positive surprise on the data front, the weight of evidence is pointing to further slowing. The problem the ECB and BOJ have is that they have very little ammunition left to fight slowing growth. While the Fed could certainly cut rates if necessary, that would be quite an abrupt turn of events, given it has been barely three months since they last raised them, and would damage their credibility further. And the PBOC definitely has some room, but they continue to fight their battle against overleverage, and so are stuck between the Scylla of slowing growth and the Charibdis of excess debt. In the end, look for Scylla to win this battle.

Turning to the data story, yesterday’s Retail Sales report printed at +0.2%, after a downward revision of the December print to -1.6%. While there was significant disbelief in the December data point when it was first released, it looks like it was real. The most immediate impact was to the Atlanta Fed’s GDP Now tracker, which fell sharply and is now estimating a 0.5% GDP growth rate for Q1. As to today, CPI is due shortly, with the market expecting 1.6% headline and 2.2% core readings. The Fed remains concerned that they have been unable to generate sufficient inflation. Personally, I think we have too much inflation, but that’s just one man’s opinion.

The upshot of all this is that nothing has changed in the big picture with regard to the dollar. While risk has been embraced in the past two sessions, the dollar story remains one of relative monetary policy stances, and in that camp, the Fed reigns supreme, and by extension, the dollar!

Good luck
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Brexit’s Impact

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From England and Scotland and Wales
The data is telling us tales
That Brexit’s impact
Is set to subtract
From growth and reduce Retail Sales

With less than seven weeks left before the UK is scheduled to leave the EU, the impact of two years of uncertainty is becoming clearer. This morning’s GDP data showed that growth declined -0.4% in December, dragging the Q4 number down to a below expected 0.2% and a full year number of just 1.4%, its weakest since 2009. As is always the case, uncertainty is the bane of economic activity. While the politics of brinksmanship may make sense in the long run, it is difficult to see the near-term benefits. And brinksmanship appears to be PM May’s last hope at putting in place the agreed deal by the UK Parliament. Despite her renewed efforts at getting the EU to offer some adjustments to the negotiated deal, there has been little willingness evident on the EU side to do so. However, the EU mandarins are not so ignorant as to believe that a hard Brexit will have no impact on their own nations’ economies, it is just that they believe that by holding firm the UK will blink first and Parliament will ratify the deal. I think PM May is of the same opinion. And perhaps they are correct, that is exactly what will happen. However, politics is not an exact science, and it appears there is still a very real probability that a hard Brexit is what we will get.

In the meantime, the market took no succor in this morning’s data, with the pound falling a further 0.35% on the day, increasing its month-to-date decline to 1.7% with the trend still firmly lower. While BOE Governor Carney has claimed repeatedly that he may need to raise rates in the event of a hard Brexit due to a price shock, I continue to believe there is virtually no probability that will occur. The initial negative impact on the economy will overwhelm any inflationary impulse, certainly from a political perspective, if not actually from an economic one. Despite the fact that the Fed appears to be on hold at this time, I would still bet on further policy ease rather than tightness from the BOE.

But the pound is not the only currency suffering this morning, in fact every G10 currency is weaker vs. the dollar as it becomes clearer with each passing day that the ability of central banks to remove policy accommodation from a weakening global economy is becoming more and more restricted. A good example is Norway, where growth has held up reasonably well (1.7% in Q4) but inflation has failed to meet expectations. This morning’s CPI data showed the headline rate fall a more than expected 0.4% to 3.1%. While that is clearly above their target, it is a product of the recent rise in oil prices. On a core basis, inflation is quickly falling back to its 2.0% target, and while the market is still pricing a rate hike for March, it is with less conviction. Another weak reading before the next Norgesbank meeting in March is likely to ice that expectation completely. Tightening into an environment of slowing global growth is extremely difficult for any country, let alone a peripheral oil exporter, to accomplish successfully. As it happens, NOK is lower by 0.55% as I type.

But it is not just G10 currencies under pressure this morning, it is the entire complex of dollar counterparts. EMG has seen broad based, albeit not extreme, weakness. The leading decliner is ZAR, with the rand falling 1.1% after the main electric utility, Eskom, disclosed further power cuts leading to concerns over slowdowns in production and mining. The utility is struggling under a massive debt burden and has been on the edge of bankruptcy for some time. But away from that country specific outcome, the dollar’s gains have averaged on the order of 0.2%-0.3% throughout all three EMG blocs.

Looking ahead to data this week we will see January inflation data as well as the delayed Retail Sales numbers amongst a full slate.

Tuesday NFIB Small Business 103.2
  JOLT’s Job Openings 6.9M
Wednesday CPI 0.1% (1.5% Y/Y)
  -ex food & energy 0.2% (2.1% Y/Y)
Thursday Initial Claims 225K
  PPI 0.1% (2.1% Y/Y)
  -ex food & energy 0.2% (2.5% Y/Y)
  Retail Sales 0.2%
  -ex autos 0.1%
Friday Empire Manufacturing 7.0
  IP 0.1%
  Capacity Utilization 78.7%
  Michigan Sentiment 94.5

We also have nine Fed speeches from six different FOMC members including Chairman Powell tomorrow afternoon. However, the Fed has lately been very consistent with the market clearly understanding that they are on hold for the time being. In fact, the market is beginning to price rate cuts into the curve by the end of this year, although the Fed itself has not indicated anything of the sort. One last Fed note; SF Fed President Mary Daly, in an interview on Friday, indicated that the FOMC was actively discussing the merits of using the balance sheet as part of the ‘regular’ toolkit, not simply keeping it for emergencies when interest rates were at the zero bound. That is a bit ironic given that prior to the financial crisis, the balance sheet was the main feature of how the Fed managed interest rates, increasing or reducing reserves in order to guide interest rates to their desired levels. But in this case, it sounds more like the first oblique embrasure of MMT, the idea that debt monetization is not only fine, but that it is immoral not to manage policy in that manner if there are still unemployed people out there. After all, the only risk is inflation, and they have that under control!!!

I am the first to admit that the dollar’s recent strength has surprised me. While I have maintained that it would eventually strengthen, I did not foresee the market embracing the idea that every other central bank would reverse the tightening bias so quickly. But it has. So for now, the US remains the tightest monetary policy out there, and the dollar is likely to continue to benefit accordingly.

Good luck
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Toadies Galore

Posted on by

There once was a time in the past
When jobs like PM were a blast
With toadies galore
And laws you’d ignore
While scheming, all foes, to outlast

But these days when leading a nation
The role has outgrown bloviation
Consider Ms. May
Who just yesterday
Was subject to near ruination

Well, Brexit managed to not be the headline story for the several days between the time the current deal was tentatively agreed with the rest of the EU and the scheduled vote by the House of Commons to approve said deal. During that period, PM May made the rounds to try to sell her deal to the people of the UK. Alas, apparently she’s not a very good saleswoman. Under extreme duress, yesterday she indefinitely delayed the vote that was originally to be held this evening. Amid jeering from the floor of the House of Commons, she tried to make her case, but was singularly unable to do so. As has been the problem all along, the Irish border issue remains intractable with the opposing goals of separating the two nations legally and, more importantly, for customs purposes, while not installing a border between the two. As it currently stands, I will argue there is no compromise solution that is viable. One side is going to have to accept the other side’s demands and frankly, that doesn’t seem very likely. The upshot is that the market has once again begun to assume a no-deal Brexit with all the hyperbolic consequences that entails. And the pound? It was not a happy day if you were long as it fell 2% at its worst point, although only closed down by about 1.5%. This morning, it has regained a further 0.4%, but remains near its weakest levels since April 2017. Unless you believe in miracles (and in fairness there is no better time to do so than this time of year), my strong belief is the UK is going to exit the EU with nothing in place. The pound has further to fall, so hedgers beware.

Let’s pivot to the euro for a moment and discuss all the benefits of the single currency. First, there is the prospect of its third largest trading partner, the UK, leaving the fold and suddenly imposing tariffs on those exports. Next we have France literally on fire, as the gilets jaunes continue to run riot throughout the country while protesting President Macron’s mooted fuel tax increase. In the end, that seems to have been pulled and now he is offering tax cuts! Fiscal probity has been tossed aside in the name of political expediency. Thirdly, we have the ongoing Italian opera over the budget. The antiestablishment coalition government remains adamant that it is going to inject fiscal stimulus to the country, which is slipping into recession as we speak, but the EU powers-that-be are chuffed by the fact that the Italian budget doesn’t meet their criteria. In fact, those same powers continue down the road of seeking to impose fines on Italy for the audacity of trying to manage their own country. (Will someone please explain to me why when the French make outlandish promises that will expand their budget deficit, the EU remains mum, but when the Italians do so, it is an international crisis?)

At the same time as all of this is ongoing, the ECB is bound and determined to end QE this month and keeps talking about starting to normalize interest rates next autumn. Whistling past the graveyard anyone? When three of the four biggest nations in the EU are under significant duress, it seems impossible to consider that owning the euro is the best position. While it is clear that the situation in the US is not nearly as robust as had been believed just a month ago, and the Fed seems to be responding to that by softening their tone; at some point, the ECB is going to recognize that things in the Eurozone are also much worse, and that talk of tightening policy is going to fade from the scene. Rather, the discussion will be how large to make the new TLTRO loan program and what else can the ECB do to help support the economy since cutting rates seems out of the question given the starting point. None of that is priced into the market right now, and so as that unfolds, the euro will fall. However, in today’s session, the euro has recouped about half its losses from yesterday, rebounding by 0.4% after a more than 0.8% decline Monday. As much as there is a building discussion over the impending collapse of the dollar, it continues to seem to me that there are much bigger problems elsewhere in the world, which will help the dollar retain its haven status.

Away from those two stories, I would be remiss if I did not mention that the Reserve Bank of India’s widely respected governor, Urjit Patel, resigned suddenly Monday evening leading to a 1.5% decline in the rupee and a sharp fall in Indian equity markets Tuesday. But then, results from recent local elections seemed to shift toward the ruling BJP, instilling a bit more confidence that PM Modi will be able to be reelected next year. Given the perception of his market/business friendliness, that change precipitated a sharp reversal in markets with the rupee actually rallying 0.9% and Indian equity markets closing higher by 0.6%.

In fact, despite my warnings above, the dollar is under pressure across the board this morning while global equity markets are looking up. It seems there was a call between the US and China restarting the trade negotiation process, which was taken by investors as a sign that all would be well going forward. And while that is certainly encouraging, it seems a leap to believe a solution is at hand. However, there is no question the market is responding to that news as equity markets in Europe are all higher by between 1.0% and 2.0%, US equity futures are pointing to a 1% gain on the open, government bonds are softer across the board and the dollar is down. Even commodities are playing nice today with most rallying between 0.5%-1.0%. So everyone, RISK IS ON!!

Turning to the data story, first let me say that the euro has been helped by a better than expected German ZEW Index (-17.5 vs. exp -25), while the pound has benefitted from a modestly better than expected employment report, with Average earnings rising 3.3% and the Employment Change jumping 79K. At the same time, the NFIB Small Business Optimism Index was just released at a worse than expected 104.8, indicating that the peak may well be behind us in the US economy. At 8:30 we see PPI data (exp 2.5%, 2.6% core) however, that tends not to be a significant market mover. Rather, today is shaping up as a risk-on day and unless there is a change in the tone of the trade talks, there is no reason to believe that will change. Accordingly, for hedgers, take advantage of the pop in currencies as the big picture continues to point toward eventual further dollar strength.

Good luck
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