The Story of Boris

Today it’s the story of Boris
A man who commands a thesaurus
When speaking of foes
To prove that he knows
More things than the Press’s Greek chorus

Tell me if you’ve heard this one before…a politician makes a bold promise to achieve something by a specific date.  As the date approaches, and it is clear that promise will not be fulfilled, he changes his tune blaming others for the problems.

I’m certain you recognize this situation, and of course, today it is the story of Boris.  Back on September 7, Johnson was adamant that if a deal was not completed by October 15, the day an EU summit was scheduled to begin, that there would be no deal at all.  It appears that he believed he had the upper hand in the negotiations and wanted to get things done.  As well, the EU had indicated that if a deal was not agreed by the middle of October, it would be nearly impossible for all of the 27 member nations to approve the deal in their respective parliaments.

Alas for Boris, things have not worked out as well as he might have hoped.  Instead, two major issues remain; EU access to fishing in UK waters and the limits on UK state aid for companies, and neither one seems on the verge of a breakthrough.  Yet the calendar pages keep turning and here we are, one day before the ‘deadline’ and nothing has been agreed.  In fact, as the EU prepares for its summit starting tomorrow, this is the statement that has been released, “progress on the key issues of interest to the union is still not sufficient for an agreement to be reached.”

Though Boris’s deadline grows near
It seems that he might not adhere
As now the UK
Will not walk away
From Brexit discussions this year

With this as a backdrop, one would not be surprised to see the pound start to lose some of its recent luster.  Clearly, that was a major part of yesterday’s price action, where the pound declined 1.0% and the rest of the G10 saw an average decline of only 0.4%.  In other words, while the dollar was strong against virtually all comers yesterday, the pound was at the bottom of the barrel.  Apparently, some investors are beginning to get cold feet with respect to their view that despite all the bluster, a Brexit deal will be reached.  It is also not surprising that comments from Number 10 Downing Street this morning indicate the UK will not walk away from Brexit talks immediately.  So, the EU effectively called Johnson’s bluff, and Boris backed down.  It is also important to note that while the EU would like to get a deal agreed as soon as possible, they see no hard deadline with respect to when things need to be completed before the end of the year.

The overnight session saw a follow on from yesterday, with the pound falling another 0.55% before the comments about continuing the discussions hit the tape.  The ensuing rebound now has the pound higher by 0.25% on the session, and actually the best performer in the G10 today.  The bigger point is that the Brexit saga is not nearly done, and there is still plenty of opportunity for more volatility in the pound.  I read one bank claimed the probability of a no-deal Brexit has fallen to 20%.  Whether that is accurate or not, a no-deal Brexit is likely to see the pound fall sharply, with a move to 1.20 entirely realistic.  Hedgers take note.

As to the rest of the market/world, yesterday’s risk reducing session seems to have ended, although risk is not being readily embraced either.  Overnight saw equity markets either little changed (Nikkei and Hang Seng +0.1%) or lower (Shanghai -0.55%).  Chinese Money Supply and lending data showed that the PBOC continues to push funds into the economy to support things, and the renminbi’s price action shows that there continue to be inflows to the country.  CNY (+0.2%) has consistently been a strong performer, even after the PBOC relaxed short selling restrictions at the beginning of the week.

European markets have also proven to be mixed, with the CAC, DAX and FTSE 100 all lower by -0.2%, but Spain and Italy both higher by 0.3%.  Earlier in the session, all markets were higher, so perhaps some concerns are growing, although there have been no comments on the tape of note.  US futures have also given up earlier gains and currently sit essentially unchanged.

Bond markets had a strong performance yesterday, with 10-year Treasury yields declining 5 basis points and a further 1.5 basis points this morning.  We have seen the same type of price action across European government bond markets, with virtually all of them rallying and yields declining by 2-3 bps.

Finally, as we turn to the dollar, yesterday’s broad strength is largely continuing in the EMG bloc, save CNY’s performance, but against its G10 counterparts, it is, arguably, consolidating.  Aside from the pound, the rest of the G10 is +/- 0.15%, with only slightly weaker than expected Eurozone IP data as a guide.  As to the EMG bloc, there is weakness in RUB (-0.6%), HUF (-0.5%) as well as the two highest beta currencies, MXN and SAR (-0.3%).  Russia has the dubious distinction of the highest number of new cases of Covid today, more than 14K, (wait a minute, don’t they have a vaccine?) and Hungary, with nearly 1000 is also feeling the crunch based on population size.  It appears that investors are concerned over economic prospects as both nations see the impending second wave and are considering lockdowns to help stem the outbreak.  As to MXN and SAR, they are simply the most popular vehicles for investors to play emerging markets generally, and as risk seems to be falling out of favor, their decline is no surprise.

On the data front, PPI (exp 0.2%, core 0.2%) is today’s event, but given yesterday’s CPI release was spot on, this will largely be ignored.  The inflation/deflation discussion continues but will need to wait another month for the next installment as yesterday taught us little.

One of the positives of the virtual society is that things like the World Bank / IMF meetings, which had been such big to-dos in Washington in past years, are now held virtually.  As such, they don’t generate nearly the buzz as in the past.  However, it should be no surprise that there is a single thesis that is making the rounds in this virtual event; governments need to spend more money on fiscal stimulus and not worry about increased debt.  Now, while this has been the central bank mantra for the past six months, ever since central banks realized they had run out of ammunition, it is still remarkable coming from two organizations that had made their names hectoring countries about having too much debt.  Yet that is THE approved message of the day, governments should borrow more ‘free’ money and spend it.  And it should be no surprise that is the message from the chorus of Fed speakers as well.  Alas, in the US, at least, the politics of the situation is far more important to the players than the potential benefits of passing a bill.  Don’t look for anything until after the election in my view.

As to the session, I see no reason for the dollar to do much at all.  The dollar bears have been chastened and lightened their positions, while the dollar bulls no longer like the entry point.  It feels like a choppy day with no direction is on the cards.

Good luck and stay safe
Adf

Macron’s Pet Peeve

Each day from the UK we learn
The data implies a downturn
Infections keep rising
Yet what’s so surprising
Is Sterling, no trader will spurn

Investors, it seems, all believe
That fishing rights, Macron’s pet peeve
Will soon be agreed
And both sides proceed
Towards Brexit come this New Year’s Eve

Since the last day of September, the pound has been a top performer in the G10 space, rallying 2.0% despite the fact that, literally, every piece of economic data has fallen short of expectations.  Whether it was GDP, PMI, IP or Employment, the entire slate has been disappointing.  At the same time, stories about Brexit negotiations continue to focus on the vast gap between both sides on fishing rights for the French fleet as well as state aid limits for UK companies.  And yet the pound continues to grind higher, trading back to its highest levels in a month.  Granted this morning it has ceded a marginal -0.2%, but that is nothing compared to this steady climb higher.

It seems apparent that traders are not focusing on the macro data right now, but instead are looking toward a successful conclusion of the Brexit negotiations.  Granted, Europe’s history in negotiations is to have both (or all) sides agree at the eleventh hour or later, but agree, nonetheless.  So, perhaps the investor community is correct, there will be no hard Brexit and thus the UK economy will not suffer even more egregiously than it has due to Covid.  But even if a deal is agreed, does it make sense that the pound remains at these levels?

At this stage, the economic prospects for the UK seem pretty awful.  This morning’s employment report showed the 3M/3M Employment change (a key measure in the UK) falling 153K.  While that is not the worst reading ever, which actually came during the financial crisis in June 2009, it is one of the five worst in history and was substantially worse than market expectations.  Of greater concern was that the pace of job cuts rose to the most on record, with 114K redundancies reported in the June-August period.  Adding it all up leaves a pretty poor outlook for the UK economy, especially as further lockdowns are contemplated and enacted to slow the resurgence in Covid infections seen throughout various parts of the country.  And yet the pound continues to perform well.

Perhaps the rally is based on monetary policy expectations.  Alas, the last we heard from the Old Lady was that they were discussing how banks would handle negative interest rates, something which last year Governor Carney explained didn’t make any sense, but now, under new leadership, seems to have gained more adherents.  If history is any guide, the fact that the BOE is talking to banks about NIRP is a VERY strong signal that NIRP is coming to the UK in the next few months.  Again, it strikes me that this is not a positive for the currency.

In sum, all the information I see points to the pound having more downside than upside, and yet upside is what we have seen for the past several weeks.  As a hedger, I would be cautious regarding expectations that the pound has much further to rally.

Turning to the rest of the market, trading has been somewhat mixed, with no clear direction on risk assets seen.  Equity markets in Asia saw gains in the Hang Seng (+2.2%) although the Nikkei (+0.2%) and Shanghai (0.0%) were far less enthusiastic.  Interestingly, the HKMA was forced to intervene in the FX market last night, selling HKD6.27 billion to defend the strong side of the peg.  Clearly, funds are flowing in that direction, arguably directly into the stock market there, which after plummeting 27.5% from January to March on the back of Covid concerns, has only recouped about 42% of those losses, and so potentially offers opportunity.  Perhaps more interestingly, last night China reported some very solid trade data, with imports rising far more than expected (+13.2% Y/Y) and the Trade Balance falling to ‘just’ $37.0B.  Export growth was a bit softer than expected, but it seems clear the Chinese economy is moving forward.

European bourses, however, are all in the red with the DAX (-0.4%) and CAC (-0.3%) representative of the general tone of the market.  Aside from the weak UK employment data, we also saw a much weaker than expected German ZEW reading (56.1 vs. 72.0 expected), indicating that concerns are growing regarding the near-term future of the German economy.

In keeping with the mixed tone to today’s markets, Treasuries have rallied with yields falling 2 basis points after yesterday’s holiday.  Perhaps that is merely catching up to yesterday’s European government bond markets, as this morning, there is no rhyme or reason to movement in this segment.  In fact, the only movement of note here is Greece, which has seen 10-year yields decline by 3bps and which are now sitting almost exactly atop 10-year Treasuries.

As to the dollar, mixed is a good description here as well.  In the G10 space, given the German data, it is no surprise that the euro has edged lower by 0.2% nor that the pound has crept lower as well.  AUD (-0.24%) is actually the worst performer, which looks a response to softness in the commodity space.  SEK (+0.3%) is the best performer after CPI data turned positive across the board, albeit not rising as much as had been forecast.  You may recall the Swedes are the only country that had moved to NIRP and then raised rates back to 0.0%, declaring negative rates to be a bad thing.  The previous few CPI readings, which were negative, had several analysts calling for Swedish rates to head back below zero, but this seems to support the Riksbank’s view that no further rate cuts are needed.

Emerging market currencies are under a bit more pressure, with the CE4 leading the way lower (CZK -0.8%, PLN -0.7%, HUF -0.65%) but the rest of the bloc has seen far less movement, generally +/- 0.2%.  Regarding Eastern Europe, it seems there are growing concerns over a second wave of Covid wreaking further havoc on those nations inspiring more rate cuts by the respective central banks.  Yesterday’s Czech CPI data, showing inflation falling into negative territory was merely a reminder of the potential for lower rates.

Speaking of CPI, that is this morning’s lead data point, with expectations for a 0.2% M/M gain both headline and ex food and energy, which leads to 1.4% headline and 1.7% core on a Y/Y basis.  Remember, these numbers have been running higher than expectations all summer, and while the Fed maintains that inflation is MIA, we all know better.  I see no reason for this streak of higher than expected prints to be broken.  In addition, we hear from two Fed speakers, Barkin and Daly, but we already know what they are likely going to say; we are supporting the economy, but Congress needs to enact a fiscal support package, or the world will end (and it won’t be their fault.)

US equity futures are a perfect metaphor for the day, with DOW futures down 0.4% and NASDAQ futures higher by 0.9%.  In other words, it is a mixed picture with no clear direction.  My fear is the dollar starts to gain more traction, but my sense is that is not in the cards for today.

Good luck and stay safe
Adf

Nary a Tear

The Ides of October are near
The date by which Boris was clear
If no deal’s agreed
Then he will proceed
To (Br)exit with nary a tear

We are but one week away from the date widely touted by UK PM Johnson as the deadline to reach a deal with the EU on the terms of the post-Brexit relationship between the two.  It seems the date was set with several issues in mind.  First, there is an EU summit to be held that day and the next, and the idea was that any agreed upon deal could be reviewed at the summit and then there would be sufficient time for each of the remaining 27 EU members to enact legislation that would enshrine the deal in their own canon of laws.

On the other hand, if no deal is reached by then, the Johnson government would have the ensuing two- and one-half months to finalize their Brexit plans including such things as tariff schedules and customs procedures.  At the same time, while Boris has been adamant that October 15 is the deadline, the EU has been clear that they see no such artificial deadline and are perfectly willing to continue the negotiations right up until December 31.  The idea here is that if an agreement comes that late, a temporary measure can be put in place while each member enacts the appropriate legislation.

Back on September 29, in All Doom and Gloom, I posited that the market was pricing in a two-thirds probability of a hard Brexit.  The analysis was based on the level of the pound relative to its longer-term valuations and historical price action.  But clearly there is far more to the discussion in these uncertain times than simply historical price action.  And in the ensuing days I have reconsidered my views of both the probability of a hard Brexit and my estimation of the market’s anticipation.

For what it’s worth, I have come to the belief that a hard Brexit remains an unlikely event, less than a 20% probability.  Intransigence in international negotiations is the norm, not an exception, so all of Boris’s huffing and puffing is likely just that, hot air.  And in the end, it is not in either side’s interest to have the UK leave with no deal in place.  Too, the ongoing pandemic has distracted most people from the potential impacts of a hard Brexit, and my understanding is that the subject is hardly even newsworthy on the Continent.  The point is, on the EU side, other than the French fishermen, Brexit is not something of concern to the population.  After all, they are far more concerned with whether or not they will remain employed, be able to feed their families and pay rent, and who will win the UEFA Cup.  For most of Europe, the UK is an abstract thought, although not for all of it.  (An interesting statistic is that German exports to the UK have already fallen 40% since immediately after the Brexit vote four years ago.)  As such, if the EU were to soften their stance on some of the last issues, virtually nobody would notice, certainly not their constituents so, there is likely little price for EU politicians to pay electorally, with that outcome.

The UK, on the other hand, remains highly focused on Brexit, and Boris would certainly suffer in the event that any eventual deal is not widely perceived as beneficial to the UK.  The UK, of course has other problems, notably that the virus is spreading more widely again, and the government response has been to reimpose restrictions and lockdowns in the hardest hit areas.  Of course, this is exactly the thing to halt a recovery in its tracks, which if added to the potential harm from a no-deal Brexit, may be too much for Boris to withstand.  But it is the other problems which are a key driver of the pound’s exchange rate, and the main reason I don’t expect any significant rally from current levels.  Instead, I believe the odds are for a retreat to the 1.20-1.25 level, regardless of the Brexit outcome.  A signed deal would merely delay the achievement of that target for a few months, at best.  The combination of growing fiscal deficits, additional BOE policy ease and a sluggish economic recovery all point to the pound weakening over time.  While a hard Brexit will accelerate that outcome, even a deal will not prevent it from occurring.  Hedgers beware.

On to markets.  Yesterday’s US equity rally begat the same in Asia (Nikkei +1.0%, Australia +1.1%) and Europe, after a slow start, has turned higher as well (DAX +0.7%, CAC +0.55%).  China’s weeklong holiday is ending today, and their markets will reopen tonight.  US futures are also pointing higher, roughly 0.5% across the board.  It seems that the market remains entirely beholden to the US stimulus talks, and yesterday, after the President said negotiations would cease until after the election, that tune changed as there was talk of stand-alone bills on airline support or a second round of $1200 checks for previous recipients.  I have to admit that the market response to the stimulus talks reminds me of the response to the trade talks with China at the beginning of last year, with each positive headline worth another 0.5% in gains despite no net movement.

Bond markets are in vogue this morning as yields are lower in Treasuries and throughout Europe.  Of course, 10-year Treasury yields have been trending higher for the past week and a half and are now more than 25 basis points higher than their nadir seen on August 4th.  Yesterday’s 10-year auction went off without a hitch, with the yield right on expectations and solid investor demand.  Meanwhile, yesterday’s FOMC Minutes explained that several members would consider even more bond buying going forward, which cannot be a surprise given what we have heard from the most dovish members since then.  Just this week, Minneapolis Fed President Kashkari
said just that.  But with that in mind, remember that despite the prospect of more bond buying, Treasury yields are at the high end of their recent range and look like they have further to climb.  Again, this appears to be a market commentary on inflation expectations, and one that I presume the Fed is encouraging!

As to the dollar, it is very slightly softer at this point of the session, although not universally so.  Looking at the G10 space, the biggest mover is AUD, with a gain of just 0.25%.  Meanwhile, both EUR and CHF have edged lower by 0.1%.  The point is there is very little activity or movement as there have been few stories or data of note overnight. EMG currencies have shown a bit more strength led by RUB (+0.7%) and MXN (+0.6%), both benefitting from oil’s modest gains this morning. The rest of the bloc has seen much less positivity, with only KRW (+0.4%) on the back of a widening trade surplus and HUF (+0.3%) after CPI data today showed a modest decline, thus allowing the central bank to maintain its current policy settings.

On the US calendar we get Initial Claims (exp 820K) and Continuing Claims (11.4M), still the timeliest economic information we receive.  The issue here is that after the initial post-Covid spike, the decline in these numbers has really slowed down.  In other words, there are still many layoffs happening, hardly the sign of a robust economy.  In addition, we hear from three more Fed speakers, but their message is already clear.  ZIRP for years to come, and they will buy bonds the whole time.

Investors remain comfortable adding risk these days, as the central banking community worldwide continues to be seen as willing to provide virtually unlimited support.  If risk continues to be “on”, I see little reason for the dollar to rally in the short term.  But neither do I see much reason for it to decline at this stage.

Good luck and stay safe
Adf

Spring Remains Distant

From Brussels, a letter was sent
To London, with which the intent
Was telling the British
The EU’s not skittish
So, don’t try, rules, to circumvent

The pound is under pressure this morning, -0.6%, after it was revealed that the EU is inaugurating legal proceedings against the UK for beaching international law.  The details revolve around how the draft Internal Market Bill, that has recently passed through the House of Commons, is inconsistent with the Brexit agreement signed last year.  The specific issue has to do with the status of Northern Ireland and whether it will be beholden to EU law or UK law, the latter requiring a border be erected between Ireland, still an EU member, and its only land neighbor, Northern Ireland, part of the UK.  Apparently, despite the breathless headlines, the EU sends these letters to member countries on a regular basis when they believe an EU law has been breached.  As well, it apparently takes a very long time before anything comes of these letters, and so the UK seems relatively nonplussed over the issue.  In fact, given that the House of Lords, which is not in Tory control, is expected to savage the bill, it remains quite unclear as to whether or not this will be anything more than a blip on the Brexit trajectory.

However, what it did highlight was that market participants have grown increasingly certain that an agreement will be reached, hence the pound’s recent solid performance, and that this new wrinkle was enough for weak hands to be scared from their positions.  At this point, almost everything that both sides are doing publicly is simply intended to achieve negotiating leverage as time runs out on reaching a deal.  Alas for Boris, I feel that his biggest enemy is Covid, not Brussels, as the EU is far more concerned over the pandemic impact and how to respond there.  At the margin, while a hard Brexit is not preferred, the fear of the fallout in Brussels has clearly diminished, and so the opportunity for a hard Brexit to be realized has risen commensurately.  And the pound will fall further if that is the outcome.  The current thinking is there are two weeks left for a deal to be reached so expect more headlines in the interim.

The Tankan painted
A picture in black and white
Spring remains distant

Meanwhile, it is still quite cloudy in the land of the rising sun, at least as described by the Tankan surveys.  While every measure of the surveys, both small and large manufacturing and non-manufacturing indices, improved from last quarter by a bit, every one of them fell short of expectations.  The implication is that PM Suga has his work cut out for him in his efforts to get economic activity back up and running.  You may recall that CPI data on Monday showed deflation remains the norm, and weak sentiment is not going to help the situation there.  At the same time, capital flows continue to show significant foreign outflows in both stock and bond markets there.  It was only two weeks ago that the JPY (-0.1% today) appeared set to break through the 104 level with the dollar set to test longer term low levels.  Of course, at that time, the market narrative was all about the dollar falling sharply.  Well, both of those narratives have evolved, and if capital continues to flow out of Japan, it is hard to make the case for yen strength.  Remember, the BOJ is never going to be seen as relatively tighter in its policy stance, so a firmer yen would require other drivers.  Right now, they are not in evidence.

And frankly, those are the two most interesting stories in the market today.  Arguably, the one other theme that has gained traction is the rise in layoffs by large corporations in the US.  Yesterday nearly 40,000 were announced, which is at odds with the idea that the economy here is going to rebound sharply.  On an individual basis, it is easy to understand why any given company is reducing its workforce in the current economic situation.  Unfortunately, the picture it paints for the immediate future of the economy writ large is one of significant short-term pain.  Given this situation, it is also easy to understand why so many are desperate for Congress to agree a new stimulus bill in order to support the economy.  And it’s not just elected officials who are desperate, it is also the entire bullish equity thesis.  Because, if the economy turns sharply lower, at some point, regardless of Fed actions, equity markets will reprice lower as well.

But that is not happening today.  As a matter of fact, equities are looking pretty decent, yet again.  China is closed for a series of holidays, but the overnight session saw strength in Australia (+1.0%) although the Nikkei (0.0%) couldn’t shake off the Tankan blues.  Europe, however, is all green led by the FTSE 100 (+0.9% despite that letter) with the CAC (+0.65%) and DAX (+0.1%) also positive.  US futures are all pointing higher with gains ranging from 0.8%-1.25%.

Bond markets actually moved yesterday, at least a little bit, with 10-year Treasury yields now at 0.70%.  Yesterday saw a 3.5 basis point move with the balance occurring overnight.  Given yesterday’s equity rally, this should not be that surprising, but given the recent remarkable lack of movement in the bond market, it still seems a bit odd.  European bond markets are behaving in a full risk on manner as well, with havens like Bunds, OATS and Gilts all seeing yields edge higher by about 1bp, while Italy and Greece are seeing increased demand with modestly lower yields.

As to the dollar overall, despite the pound’s (and yen’s) weakness, it is the dollar that is under pressure today against both G10 and EMG currencies.  Today’s leader in the G10 clubhouse is NOK (+0.55%) which is a bit odd given oil’s 1.0% decline during the session.  But after that, the movement has been far less enthusiastic, between 0.1% and 0.3%, which feels more like dollar softness than currency strength.

EMG currencies, however, are showing some real oomph this morning with the CE4 well represented (HUF +1.15%, PLN +0.85%) as well as MXN (+1.05%) and INR (+0.85%).  The HUF story revolves around the central bank leaving its policy rate on hold after a surprise 0.15% rise last week.  This was taken as a bullish sign by investors as the central bank continues to focus on above-target inflation there.  Meanwhile, inflation in Poland rose 3.2% in a surprise, above their target and has encouraged views that the central bank may need to tighten policy further, hence the zloty’s strength today.  The India story revolves around the government not increasing their borrowing needs, despite their response to Covid, which helped drive government bond investor inflows and rupee strength.  Finally, the peso seems the beneficiary of the overall risk-on attitude as well as expectations for an uptick in foreign remittances, which by definition are peso positive.

On the data front, yesterday saw ADP surprise higher by 100K, at 749K.  As well, Chicago PMI, at 62.4, was MUCH stronger than expected.  This morning brings Initial Claims (exp 850K), Continuing Claims (12.2M), Personal Income (-2.5%), Personal Spending (0.8%), Core PCE (1.4%) and ISM Manufacturing (56.4).  US data, despite the layoff story, has clearly been better than expected lately, and this can be seen in the increasingly positive expectations for much of the data.  While European PMI data this morning was right on the button, the numbers remain lower than those seen in the US.  In addition, the second wave is clearly hitting Europe at this time, with Covid cases growing more rapidly there than back in March and April when it first hit.  As much as many people want to hate the dollar and decry its debasement (an argument I understand) it is hard to make the case that currently, the euro is a better place to be.  While the dollar is soft today, I believe we are much closer to the medium-term bottom which means hedgers should be considering how to take advantage of this move.

Good luck and stay safe
Adf

Yesterday’s News

The first bit of data we’ve seen
Has shown what economists mean
When most business stops
And GDP drops
Reacting to Covid – 19

This data describes people’s fear
Another wave just might appear
But right now those views
Are yesterday’s news
And ‘buy the dip’ traders are here

The UK is an interesting study regarding GDP growth because they actually publish monthly numbers, rather than only quarterly data like the rest of the developed world. So, this morning, the UK reported that GDP activity in April declined 20.4% from March, which had declined 5.8% from February when the first impact of Covid-19 was felt. This has resulted in the UK economy shrinking back to levels last seen in 2002. Eighteen years of growth removed in two months! Of course, when things recover, and they will recover as the lockdowns are eased around the world, we will also get to see the fastest growth numbers in history. However, we must remember that a 20% decline will require a 25% rebound to get back to where we started. Keep that in mind when we start to see large positive numbers in the summer (hopefully) or the autumn if people decide that the risks of Covid outweigh the benefits of returning to previous activities.

Needless to say, this has been an unprecedented decline, on a monthly basis, in the economy for both its depth and speed. But the more remarkable thing, is that despite this extraordinary economic disruption, a look at financial markets shows a somewhat different story. For example, on February 28, the FTSE 100 closed at 6580.61 and the pound finished the session at 1.2823. On April 30, after the worst two-month economic decline in the UK’s history, its main stock market had declined 10.3% while the pound had fallen just 1.8%. Granted, both did trade at substantially lower levels in the interim, bottoming in the third week of March before rebounding. But it seems to me that those are pretty good performances given the size of the economic dislocation. And since then, both the FTSE 100 and the pound have rallied a bit further.

The question is, how can this have occurred? Part of the answer is the fact that on a contemporaneous basis, investors could not imagine the depths of the economic decline that was taking place. While there were daily stories of lockdowns and death counts, it is still hard for anyone to have truly understood the unprecedented magnitude of what occurred. And, of course, part of the answer was this did not happen in a vacuum as policymakers responded admirably quickly with the BOE cutting rates by a total of 0.65% in the period while expanding their balance sheet by £150 billion (and still growing). And the UK government quickly put together stimulus packages worth 5% of then measured GDP. Obviously, those measures were crucial in preventing a complete financial market collapse.

Another thing to remember is that the FTSE 100 was trading at a P/E ratio of approximately 15 ahead of the crisis, which in the long-term scheme of things was actually below its average. So, stock prices in the UK were nowhere near as frothy as in the US and arguably had less reason to fall.

As to the pound, well, currencies are a relative game, and the same things that were happening in the UK were happening elsewhere as well to various degrees. March saw the dollar’s haven status at its peak, at which point the pound traded below 1.15. But as policymakers worldwide responded quite quickly, and almost in unison, the worst fears passed and the ‘need’ to own dollars ebbed. Hence, we have seen a strong rebound since, and in truth a very modest net decline.

The questions going forward will be all about how the recovery actually unfolds, both in timing and magnitude. The one thing that seems clear is that the uniformity of decline and policy response that we saw will not be repeated on the rebound. Different countries will reduce safety measures at different paces, and populations will respond differently to those measures. In other words, as confusing as data may have been before Covid, it will be more so going forward.

Now, quickly, to markets. Yesterday’s equity market price action in the US was certainly dramatic, with the Dow falling nearly 7% and even the NASDAQ falling 5.25%. The best explanation I can offer is that reflection on Chairman Powell’s press conference by investors left them feeling less confident than before. As I wrote in the wake of the ECB meeting last week, the only way for a central banker to do their job (in the market’s eyes) these days is to exceed expectations. While analysts did not expect any policy changes, there was a great deal of talk on trading desks floors chatrooms about the next step widely seen as YCC. The fact that Jay did not deliver was seen as quite disappointing. In fact, it would not be surprising to me that if stock markets continued to decline sharply, the Fed would respond.

But that is not happening as buying the dip is back in fashion with European markets higher by roughly 1.5% and US futures also pointing higher. Meanwhile, with risk back in favor, Treasury yields have backed up 3bps and the dollar is under pressure.

On the FX front, the G10 is a classic depiction of risk-on with the yen (-0.5%) and Swiss franc (-0.3%) both declining while the rest of the bloc is higher led by CAD and AUD, both up 0.5%. In truth, this has the feeling of a bounce from yesterday’s dollar strength, rather than the beginning of a new trend, but that will depend on the broader risk sentiment. If equity market ebullience this morning fades as the session progresses, look for the dollar to take back its overnight losses.

Meanwhile, EMG markets are having a more mixed session with APAC currencies all having fallen last night in the wake of the US equity rout. APAC equities were modestly lower to unchanged but had started the session under far more pressure. At the same time, the CE4, with the benefit of the European equity rebound and higher US futures are mostly firmer led by PLN (+0.6%). But the biggest winner today in this space is MXN, which has rebounded 0.7% from yesterday’s levels, although that represented a nearly 4% decline! In other words, the defining characteristic of the peso these days is not its rate but its volatility. For example, 10-day historic volatility in the peso is currently 28.37%, up from 13.4% last Friday and 21.96% in the middle of May when we were looking at daily 3% moves. Do not be surprised if we see another bout of significant peso volatility, especially given the ongoing concerns over AMLO’s handling of Covid.

On the data front, only Michigan Sentiment (exp 75.0) is on the docket today, which may have an impact if it is surprisingly better than expected, but I don’t anticipate much movement. Rather, FX remains beholden to the overall risk sentiment as determined by the US equity markets. If the rebound continues, the dollar will remain under pressure. If the rebound fails, look for the dollar to resume yesterday’s trend.

Good luck, good weekend and stay safe
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Don’t Be Fooled

Said Christine Lagarde, don’t be fooled
That we’re on hold can be overruled
If data gets worse
Or else the reverse
Then our policies can be retooled

Madame Lagarde was in fine fettle yesterday between her press conference in Frankfurt following the ECB’s universally expected decision to leave policy unchanged, and her appearance on a panel at the WEF in Davos. The essence of her message is that the ECB’s policy review is critical to help lead the bank forward for the next decades, but that there is no goal in sight as they start the review, other than to try to determine how best to fulfill their mandate. She was quite clear, as well, that the market should not get complacent regarding policy activity this year. Currently, the market is pricing for no policy movement in 2020. However, Lagarde emphasized that at each meeting the committee would evaluate the current situation, based on the most recent data, and respond accordingly.

With that as a backdrop, it is interesting to look at this morning’s flash PMI data, which showed that while manufacturing across the Eurozone may be starting to improve slightly, overall growth remains desultory at best. Interestingly it was France that was the bigger laggard this month, with its Services and Composite data both falling well below expectations, and printing well below December’s numbers. Germany was more in line with expectations, but the situation overall is not one of unadulterated economic health. The euro, not surprisingly has suffered further after the weak data, falling another 0.2% this morning which takes the year-to-date performance to a 1.6% decline. While that is certainly not the worst performer in the G10 (Australia holds the lead for now) it is indicative that despite everything happening in the US politically, the economy continues to lead the G10 pack.

Perhaps a bit more surprising this morning is the British pound’s weakness. It has fallen 0.3% despite clearly more robust PMI data than had been expected. Manufacturing PMI rose to 49.8, well above expectations and the highest level since last April. Meanwhile, the Composite PMI jumped to 52.4, its highest point since September 2018, and indicative of a pretty substantial post-election rebound in the economy. Even better was that some of the sub-indices pointed to even faster growth ahead, and the econometricians have declared that this points to UK GDP growth of 0.2% in Q1, again, better than previously expected. Remember, the BOE meets next Thursday, and a week ago, the market had been pricing in a 70% probability of a 25bp rate cut. This morning that probability is down to 47% and the debate amongst analysts has warmed up on both sides. My view is the recent data removes the urgency on the BOE’s part, and given how little ammunition they have left, with the base rate sitting at 0.75%, they will refrain from moving. That means there is room for the pound to recoup some of its recent losses, perhaps trading back toward the 1.3250 level where we started the year.

Away from those stories, the coronavirus remains a major story with the Chinese government now restricting travel in cities with a total population of more than 40 million. While the WHO has not seen fit to declare a global health emergency, the latest count shows more than 800 cases reported with 27 deaths. The other noteworthy thing is the growing level of anger being displayed on social media in China, with the government getting blamed for everything that is happening. (I guess this is the downside of taking credit for everything good that happens). At any rate, if the spread is contained at its current levels, it is unlikely to have a major impact on the Chinese economy overall. However, if the virus spreads more aggressively, and there are more shutdowns of cities and travel restrictions, it is very likely to start impacting the data. With Chinese markets closed until next Friday, our only indicator in real-time will be CNH, which this morning is unchanged. Watch it closely as weakness there next week could well be an indicator that the situation on the ground in China is getting worse.

But overall, today’s market activity is focused on adding risk. Japanese equities, the only ones open in Asia overnight, stabilized after yesterday’s sharp declines. And European equities are roaring this morning, with pretty much every market on the Continent higher by more than 1.0%. US futures are pointing higher as well, albeit just 0.25%. In the bond market, Treasuries and bunds are essentially unchanged, although perhaps leaning ever so slightly toward higher rates. And gold is under pressure today, along with both the yen and Swiss franc. As I said, risk is back in favor.

There is neither data nor Fedspeak today, so the FX market will need to take its cues from other sources. If equities continue to rally, look for increased risk appetite leading to higher EMG currencies and arguably a generally softer dollar. What about the impeachment? Well, to date it has had exactly no impact on markets and I see no reason for that to change.

Good luck and good weekend
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Turning the Screws

There once was a great city state
That introduced rules and debate
However its heirs
Lead muddled affairs
Thus Roman woes proliferate

Meanwhile from the UK, the news
Gave Johnson’s opponents the blues
Improvements reported
In confidence thwarted
The Sterling bears, turning the screws

Italian politics has once again risen to the top of the list of concerns in the Eurozone. This morning, 5-Star leader, Luigi Di Maio, is on the cusp of resigning from the government, thus forcing yet another election later this year. The overriding concern from the rest of Europe is that the man leading the polls, Silvio Matteo, is a right-wing populist and will be quick to clash with the rest of the EU on issues ranging from fiscal spending to immigration policy. In other words, he will not be welcome by the current leading lights as his views, and by extension the views of the millions who vote for him, do not align with the rest of the EU leadership. Of course, there has been steady dissent from that leadership for many months, albeit barely reported on this side of the Atlantic. For example, the gilets jaunes continue to protest every week around the country, as they voice their disagreement with French President Macron’s attempts to change the rules on issues ranging from pensions to taxes to labor regulations. And they have been protesting for more than a year now, although the destructive impact has been greatly reduced from the early days. As well, there are ongoing protests in the Catalonia region of Spain with separatists continuing to try to make their case. The point is that things in Europe are not quite as hunky-dory as the leadership would have you believe.

However, for today, it is Italy and the potential for more dissent regarding how Europe should be managed going forward. The result has been the euro reversing its early 0.25% gains completely, actually trading slightly lower on the day right now. While there is no doubt the recent Eurozone data has been better than expected, it remains pretty awful on an absolute basis. But markets respond to movements at the margin, so absent non-market events, like Italian political ructions, it is fair to expect the euro to benefit on this data. In fact, there is an ongoing evolution in the analyst community as a number of them have begun to change their ECB views, with several implying that the ECB’s next move will be policy tightening, and some major Investment Banks now forecasting 10-year German bunds to trade back up to 0.0% or even higher by the end of the year. We shall see. Certainly, if Madame Lagarde hints at tighter policy tomorrow, the euro will benefit. But remember, the ECB is still all-in on QE, purchasing €20 billion per month, so trying to combine the need to continue QE alongside a discussion of tighter policy seems a pretty big ask. At this point, the euro remains under a great deal of pressure overall, but I do expect this pressure to ebb as the year progresses and see the dollar decline eventually.

As to the UK, the hits there just keep on coming. This morning, the Confederation of British Industry (CBI), which is essentially the British Chamber of Commerce, reported that both orders and price data improved modestly more than expected, but more importantly their Optimism Index jumped to +23 from last month’s -44, which is actually its highest level since April 2014, well before Brexit was even a gleam in then-PM David Cameron’s eye. Not surprisingly, the pound has rallied further on this positive jolt, jumping 0.5% this morning and is the leading performer against the dollar overall today. It should also be no surprise that the futures market has reduced its pricing for a BOE rate cut next week to a 47% probability, down from 62% yesterday and 70% on Friday. Ultimately, I think that Carney and company would rather not cut if at all possible, given how little room they have with the base rate at 0.75% currently. If we see solid PMI flash data on Friday, I would virtually rule out any chance for a cut next week, and expect to see the pound rally accordingly.

Away from those two stories though, market activity has been far less interesting. The rest of the G10, beyond the pound, is generally within 10bps of yesterday’s closing levels. As to the Emerging markets, the big winner has been ZAR, which has rallied 0.65% after CPI rose to 4.0%, although that remains well below the midpoint of the SARB’s target range of 3.0% – 6.0%. Expectations are for continued policy ease and continue investment inflows to help support the currency. But other than the rand, it has been far less interesting in the FX market.

The ongoing fears over the spread of the coronavirus seem to be abating as China has been aggressively working to arrest the situation, canceling flights out of Wuhan and being remarkably transparent with respect to every new case reported. In fact, equity markets around the world have collectively decided that this issue was a false alarm and we have seen stocks rally pretty much everywhere (Italy excepted) with US futures pointing higher as well.

And that really sums up the day. The ongoing impeachment remains outside of the framework of the market as nobody believes that President Trump will be removed from office. The WEF participants continue to demonstrate their collective ability to pontificate about everything, but do nothing. And so, we need to look ahead to today’s data, and probably more importantly to equity market performance for potential catalysts for movement. Alas, the only US data of note is Existing Home Sales (exp 5.43M), something that rarely moves markets. This leaves us reliant on equity market sentiment to drive the FX market, and with risk definitively on this morning, I expect to see EMG currencies benefit while the dollar suffers mildly.

Good luck
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Growth Can Be Spurred

In England this morning we heard
From Vlieghe, the BOE’s third
Incumbent to say
That given his way
He’d cut rates so growth can be spurred

The pound is under pressure this morning after Gertjan Vlieghe became the third MPC member in the past week, after Carney and Tenreyo, to explain that a rate cut may be just the ticket at this point in time. Adding these three to the two members who had previously voted to cut rates, Haskel and Saunders, brings the number of doves to five, a majority on the committee. It can be no surprise that the pound has suffered, nor that interest rate markets have increased the probability of a 25bp rate cut at the January 30 meeting from below 25% last week to 50% now. Adding to the story was the release of worse than expected November IP (-1.2%) and GDP (-0.3%) data, essentially emphasizing the concerns that the UK economy has a long way to go to recover from the Brexit uncertainty.

However, before you turn too negative on the UK economy, remember that this is backward-looking data, as November was more than 6 weeks ago, and in the interim we have had the benefit of the resounding electoral victory by Boris Johnson. This is not to say that the UK economy cannot deteriorate further, just that there has been a palpable change in the tone of commentary in the UK as Brexit uncertainty has receded. Granted, the question of the trade deal with the EU, which is allegedly supposed to be signed by the end of 2020, remains open. But it is very difficult for market participants to look that far ahead and try to anticipate the outcome. And if anything, Boris has the fact that he was able to renegotiate the original Brexit deal in just six weeks’ time working in his favor. While previous assumptions had been that trade deals take years and years to negotiate, it is clear that Boris doesn’t subscribe to that theory. Personally, I wouldn’t bet against him getting it done.

But for now, the pound is the worst performer of the session, and given today’s news, that should be no surprise. However, I maintain my view that current levels represent an excellent opportunity for payables hedgers to add to hedges.

The other mover of note in the G10 space is the yen, which has fallen 0.4% after traders were able to take advantage of a Japanese holiday last night (Coming-of-age Day) and the associated reduced liquidity to push the dollar above a key technical resistance point at 109.72. Stop-loss orders at that level led to a quick jump at 4:00 this morning, and given the broad risk-on attitude in markets (equity markets worldwide continue to rebound from concerns over further Middle East flare ups), it certainly feels like traders are going to push the dollar up to 110, a level not seen since May. However, the other eight currencies in the G10 have been unable to generate any excitement whatsoever and are very close to unchanged this morning.

In the EMG space, Indonesia’s rupiah is once again the leader in the clubhouse, rising a further 0.7% after the central bank reiterated it would allow the currency to appreciate and following an announcement by the UAE that it would make a large investment in the nation’s (Indonesia’s) sovereign wealth fund. The resultant rally, to the rupiah’s strongest level in almost a year, has been impressive, but there is no reason to believe that it cannot continue for another 5% before finding a new home. This is especially true if we continue to hear good things regarding the US-China trade situation. Trade has also underpinned the second-best performer of the day in this space, KRW, which has rallied 0.5%, on the trade story.

While those are the key stories thus far this session, we do have a full week’s worth of data to anticipate, led by CPI, Retail Sales and Housing data.

Tuesday NFIB Small Biz Optimism 104.9
  CPI 0.3% (2.4% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
Wednesday PPI 0.2% (1.3% Y/Y)
  -ex food & energy 0.2% (1.3% Y/Y)
  Empire Manufacturing 3.5
  Fed’s Beige Book  
Thursday Initial Claims 218K
  Philly Fed 3.0
  Retail Sales 0.3%
  -ex autos 0.5%
  Business Inventories -0.1%
Friday Housing Starts 1380K
  Building Permits 1460K
  IP -0.1%
  Capacity Utilization 77.0%
  Michigan Sentiment 99.3
  JOLTS Job Openings 7.264M

Source: Bloomberg

So clearly there is plenty on the docket with an opportunity to move markets, and we also hear from another six Fed speakers. While you and I may be concerned about rising prices, it has become abundantly clear that the Fed is desperate to see them rise further, so the only possible reaction to a CPI miss would be on the weak side, which would likely see an equity rally on the assumption that even more stimulus is coming. Otherwise, I think Retail Sales will be the data point of choice for the market, with weakness here also leading to further equity strength on the assumption that the Fed will add to their current policy.

And it is hard to come up with a good reason for any Fed speaker to waver from the current mantra of no rate cuts, but ongoing support for the repo market and a growing balance sheet. And of course, that underlies my thesis that the dollar will eventually fall. Just not today it seems!

Good luck
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A True Blue Pangloss

Right now there’s a group of old men
(Though Europe has proffered a hen)
Who feel it’s their right
To hog the limelight
When talking pounds, dollars or yen

Here’s a thought for the conspiracy theorists amongst you. Do you think that the cabal of central bankers get annoyed when something other than their actions and words are responsible for moving markets? And so yesterday they determined it was Carney’s turn to make comments that would dominate the financial wires. I mean, war in the Middle East is completely out of the central bankers’ control, which means they have to be reactive in the event that market moves start to become uncomfortable (i.e. stock prices fall). When you are the leader of a G10 central bank, a key part of your role is to make sure that traders and investors jump at your every word (or so it seems) so if the investment community is worrying about something like war, the central bankers are just not very relevant. And they HATE that! While, of course, this is somewhat tongue in cheek, it is remarkable how quickly we hear from a major central banker after market activity that has been focused on non-monetary issues.

Mark Carney, the Old Lady’s boss
Explained, like a true blue Pangloss
That under the rules
They’d plenty of tools
To ease two percent at a toss

At any rate, arguably, as the relief rally continues, the biggest news overnight was a speech by BOE Governor Carney indicating that despite the fact that the base rate is currently set at 0.75%, the BOE has the capability, if necessary, to ease policy by an effective 250bps through rate cuts, more QE and forward guidance. Interestingly, if you read the speech, he doesn’t say that is what they are going to do, although two MPC members have voted for a rate cut already, he is merely responding to the critics who claim the central banks have no ammunition left to fight an eventual downturn in economic activity. Cable traders, however, must have heard the following: we are going to ease policy immediately, at least based on the fact that the pound is today’s worst performing currency, having fallen 0.65% as I type, and taking its decline thus far in 2020 to nearly 2.0%.

At the same time, the central bank cabal should be pleased because equity markets around the world are rallying aggressively, mostly on the idea that a war between the US and Iran is not imminent, and tangentially on the idea that the central banks remain adamant that they have plenty of ammunition left to keep easing monetary policy ad infinitum.

And that’s really the story, isn’t it? Markets remain almost completely beholden to central bank activity and central bank comments. As long as the prevailing view is that any decline in equity markets is an aberration and will be addressed immediately, we are going to see global equity markets rise. You cannot really fight that story. However, when it comes to the FX markets, there is slightly more opportunity for diversion amongst countries as each nation is likely to add differing amounts of stimulus, thus the relative value of one currency vs. another can react to those differences.

After all, looking at the UK, for example, the combination of the imminent Brexit deal and reduction in policy uncertainty as well as Carney’s comments that the BOE has plenty of room to ease has been more than sufficient to support the FTSE 100, which is higher by 0.6% this morning. And of course, part and parcel of that movement is the pound’s weakness. In fact, I believe this year is going to be all about relative policy ease, at least in the G10 space, with the Fed on track to ease more than any other nation via their not QE and repo programs. And that is why, as the year progresses, I continue to expect the dollar to decline. But so far this year, that has not been the narrative.

With this in mind, a look at the overnight price action shows that equity markets around the world have looked great (Nikkei +2.3%, Shanghai +0.9%, DAX +1.3%, CAC +0.45%) and haven assets have suffered (JPY -0.3%, -0.9% since Tuesday; gold -0.6%; and Treasuries +5bps since yesterday morning). A diminished chance of war and talk of easier policy have worked wonders for risk appetites. Can all this continue? As long as central banks keep playing the same tune they have for the past decade, there doesn’t seem to be any reason for it to stop.

Meanwhile, the dollar has generally been going gangbusters this year, up against all its G10 counterparts, although having a more mixed performance in the EMG space. In truth, US data so far has generally been beating expectations with yesterday’s ADP print of 202K (with a big revision higher for the previous month) the latest proof of that theory. Obviously, Friday’s payroll report will be carefully watched to see if job growth remains abundant, and perhaps more importantly, to see if wages continue to rise. So for the time being, it seems that the FX market is focused on the economic data, and the US data has generally been the best of the bunch, hence the dollar’s strength.

This morning, the only piece of data is Initial Claims (exp 220K) which during payroll week is generally ignored. This means that the dollar’s ongoing short term strength is likely to continue to manifest itself until we get a bad number, or we hear, more clearly, that the Fed is going to ease. I continue to believe that payables hedgers should be taking advantage of what, I believe, will be short term dollar strength. But there is a long way to go this year.

Good luck
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New Brexit Day

In Britain and in the EU
They finally made a breakthrough
Three months from Thursday
Is New Brexit Day
Will England, at last, bid adieu?

So French President Macron finally agreed what we all knew he would agree, that the UK will get another three-month Brexit extension. The question now is whether or not the UK will be able to figure out how to end this saga. It is abundantly clear that Labour leader, Jeremy Corbyn, is terrified of a general election because he knows he and his party will be decimated, and he is likely to lose his role. However, it is also abundantly clear that Parliament, as currently constructed, is completely unable to finalize this process. Later today we will know if Boris will be able to convince two-thirds of the current Parliament to vote with him and prepare the ground for an election. Already, the Scottish National Party and Lib-Dems are on board, but that will not get the job done, Labour has to agree.

Throughout all these machinations, FX traders find themselves constantly searching for a clue as to the outcome but the big picture remains the same. A hard Brexit is still seen as resulting in a very sharp decline in the pound. Meanwhile, a smooth Brexit transition, where the negotiated deal is put in place, is likely to add a few cents more to the pound’s current value, at least in the short run. Finally, in the event that an election led to a Parliament that not only voted against the deal, but decided to withdraw Article 50, something not getting very much attention at all, then the pound would very likely head back north of 1.40. Of the three, my money is still on a negotiated withdrawal, but stranger things have happened. At any rate, we ought to no more before the end of the day when Parliament will have ostensibly voted on whether or not to hold the new election.

Moving on to the other stories in the market, there really aren’t very many at all! In fact, markets around the world seem to be biding their time for the next big catalyst. If pressed, I would point to Wednesday’s FOMC meeting as the next big thing.

On Wednesday the FOMC
Will issue their latest decree
While Fed Funds will fall
They don’t seem in thrall
To more cuts, lest growth soon falls free

As of this writing, the probability of the Fed cutting rates 25bps on Wednesday, at least according to futures market pricing, is 91%. This is a pretty good indication that the Fed is going to cut for a third time in a row, despite the fact that they keep exclaiming what a “good place” the economy is in. One of the interesting things about this is that both the Brexit situation and the trade situation seem to have improved substantially since the September meeting, which seemingly would have reduced the need for added stimulus. However, since the stock market continues to rely on the idea of ongoing stimulus for its performance, and since the performance of the stock market continues to be the real driver of Fed policy, I see no reason for them to hold back. However, inquiring minds want to know if Wednesday’s cut will be the last, or if they will continue down this slippery slope.

According to Fed funds Futures markets, expectations for another cut beyond this one have diminished significantly, such that there is only a 50% probability of the next cut coming by March 2020. And, after all, given the reduction in global tensions and uncertainty, as well as the recent hints from CPI that inflation may finally be starting to pick up, it seems that none of their conditions for cutting rates would be met. However, if Chairman Jay sounds hawkish in his press conference, and the result is that equity markets retreat, do not be surprised if those probabilities change in favor of another cut in December. So, we have much to look forward to this Wednesday.

Ahead of that, and after the UK parliament vote later today, though, I think we will rely on Wednesday morning’s data for the next opportunity for excitement. Here’s the full slate:

Tuesday Case Shiller Home Prices 2.10%
  Consumer Confidence 128.0
Wednesday ADP Employment 110K
  GDP 3Q 1.6%
  FOMC Decision 1.75% (-0.25%)
Thursday Initial Claims 215K
  Personal Income 0.3%
  Personal Spending 0.3%
  Core PCE 0.1% (1.7% Y/Y)
  Chicago PMI 48.0
Friday Nonfarm Payrolls 85K
  Private Payrolls 80K
  Manufacturing Payrolls -55K (GM Strike)
  Unemployment Rate 3.6%
  Average Hourly Earnings 0.3% (3.0% Y/Y)
  Average Weekly Hours 34.4
  Participation Rate 63.1%
  ISM Manufacturing 49.0
  ISM Prices paid 50.0

Source: Bloomberg

So, the back half of the week can certainly produce some excitement. Remember, the employment data will have been significantly impacted by the General Motors strike, which has since been settled. Expect to see a lot of analysis as to what the numbers would have been like absent the strike. But still, the Fed remains the dominant theme of the week. And then, since the press conference never seems to be enough, we will hear from four Fed speakers on Friday to try to explain what they really meant.

For now, though, quiet is the most likely outcome. Investors are not likely to get aggressive ahead of the Fed, and though short positions remain elevated in both euros and pounds, they have not been increasing of late. Overall, the dollar is little changed on the day, and I see little reason for it to move in either direction. Quiet markets are beneficial for hedgers, so don’t be afraid to take advantage.

Good luck
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