While central banks worldwide compete
To broaden their own balance sheet
They also complain
They can’t stop the pain
Lest more money reaches Main Street

Fiscal policy is the topic du jour as not only are there numerous stories about the ongoing theatrics in Washington, but we continue to hear virtually every member of the Fed calling for more fiscal stimulus.  Starting from the top, where in a speech on Tuesday, Chairman Powell excoriated Congress for not acting more quickly, and on through a dozen more speeches this week, there is one universal view; the Fed has done everything in its power to support the economy but it is up to the government to add more money to the mix to make up for the impact of the government shutting down businesses.  And while this is not just a US phenomenon, we hear the same thing from the ECB, BOE, BOC and BOJ, it appears that the market is coming to believe that the US is going to be the nation that acts most aggressively on this front going forward.

There is a conundrum here, though, as this view is seen as justification for a weaker dollar.  And frankly, I am confused as to the logic behind that view.  It appears there is a growing belief, based on polling data, that President Trump will lose the election, and that there will be a Democratic sweep taking back the Senate.  With that outcome in mind, investors expect a huge fiscal stimulus will quickly be enacted, perhaps as much as $4 trillion right away.  Now, if this is indeed the case, and if fiscal stimulus is what is required to get the economy growing again, and if the US is going to be the country taking the biggest steps in that direction, wouldn’t it make sense that the dollar would be in demand?  After all, if US data improves relative to that in Europe or elsewhere, doesn’t it stand to reason that the dollar will benefit?

Adding to this conundrum is the fact that we are hearing particularly dovish signals from other central banks (in addition to their calls for more fiscal stimulus) with the Bank of Canada the latest to explain that negative interest rates could well be appropriate policy if the government doesn’t spend more money.  So now, NIRP has the potential to become policy in virtually every G10 nation except the US, where the Fed has been consistent and explicit in saying it is not appropriate.  So, I ask, if US rates remain positive across the curve, while other nations all turn negative, is that really a dollar bearish signal?  It doesn’t seem so to me, but then I’m just a salesman working from home.

And yet, dollar weakness is certainly today’s theme, with the greenback lower vs. every one of its major counterparts today.  For example, the euro is higher by 0.4% this morning despite the fact that production data from the three largest economies point to a renewed slowdown in activity.  French IP has fallen -6.2% since August of last year, rising a less than forecast 1.3% on a M/M basis.  Monday, we saw German IP data fall -0.2% in August, taking its Y/Y results to -9.6%.  hardly the stuff of bullishness.  And while it is true that Italy’s data was better than expected (+7.7% in August, though still -0.3% Y/Y), looking at that suite of outcomes does not inspire confidence in the Eurozone economy.  And recall, too, that the ECB Minutes released Wednesday were clear in their concern over a rising euro, implying they would not allow that to come to pass.  But here we are, with the euro back at 1.1800 this morning.  Go figure.

The pound, too, seems to be defying gravity as despite much worse than forecast monthly GDP data (2.1% vs. 4.6% expected) and IP data (0.3% M/M, -6.4% Y/Y), the pound, which has been a strong performer lately, is slightly higher this morning, up 0.1%.  Again, this data hardly inspires confidence in the future economic situation in the UK.

But as they say, you can’t fight city hall.  So, for whatever reason, the current narrative is that the dollar is due to fall further because the US is going to enact more stimulus.  There is, however, one market which seems to understand the ramifications of additional stimulus, the Treasury market.  10-year Treasury yields, which had found a home near 0.65% for a long time, look very much like they are heading higher.  While this morning, bonds have rallied slightly with the yield declining 1.5 bps, we are still at 0.77%, and it seems only a matter of time before we are trading through this level and beyond.  Because, remember, if the narrative is correct and there is a huge stimulus coming, that’s $4 trillion in new paper to be issued.  That cannot be a positive for bond prices.

The European government bond market is also having a good day, with yields declining between 2 and 3 basis points everywhere.  At least here, if the ECB is to be believed, the idea of additional QE driving bond yields lower makes sense, especially since we are not looking at the prospect of multiple trillions of euros of additional issuance.

Looking at those two markets, it is hard to come up with a risk framework for today, and the equity markets are not helping.  Asian markets overnight were generally slightly softer (Nikkei -0.1%, Hang Seng -0.3%) but we did see Shanghai rally nicely, +1.6%, after having been closed all week long.  That seems like it was catching up to the week’s price action.  Europe, on the other hand is mixed, with strength in some markets (CAC +0.35%, FTSE 100 +0.45%) and weakness in others (DAX 0.0%, Spain -0.6%, Italy -0.3%).  I find it interesting that the UK and France, the nations that released the weakest IP data are the best performers.  Strange things indeed.  US futures, though, are pointing higher, somewhere on the order of 0.4%-0.5%.

And as I mentioned, the dollar is weaker across the board.  The best performers in the G10 are NZD (+0.6%) and NOK (+0.5%), with the former looking more like a technical rebound after some weakness earlier this week, while the krone has benefitted from its CPI data.  Earlier this year, as NOK weakened, Norwegian CPI rose sharply, to well over 3.0%, but it appears that the krone’s recent strength (it has rallied back to levels seen before the pandemic related market fluctuations) is starting to have a positive impact on inflation.

EMG currencies are also entirely in the green this morning with CNY (+1.35%) the biggest gainer.  In fairness, this appears to be a catch-up move given China had been closed since last Thursday.  But even CNH, which traded throughout, has rallied 0.7% this morning, so clearly there is a lot of positivity regarding the renminbi.  This also seems to be politically driven, as the assumption is a President Biden, if he wins, will be far less antagonistic to China, thus reducing sanctions and tariffs and allowing the country to resume its previous activities. But the whole bloc is higher with the CE4 showing strength on the order of 0.5%-0.7% and MXN, another politically driven story, rising 0.5%.  The peso is also assumed to be a big beneficiary of an impending Biden victory as immigration restrictions are expected to be relaxed, thus helping the Mexican economy.

And that’s really it for the day.  There is no data to be released and only one Fed Speaker, Richmond’s Barkin, but based on what we have heard this week, we already know he is going to call for more fiscal stimulus and not much else.  Also, as Monday is the Columbus Day holiday, look for things to slow down right around lunch, so if you have things to get done, get them done early.

Good luck, good weekend and stay safe
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