Lingering Issues

Some pundits now have the impression
That we will soon be in recession
The data of late
Has spurred the debate
And could remove Powell’s discretion

Meanwhile, we just heard from Herr Draghi
That “lingering” issues made foggy
The future of growth
So he and Jay both
Will soon ease ere things turn too quaggy

Some days, there is far more to discuss than others, and today is one of those days. Markets are trying to digest all of the following information: weaker US data, weaker Eurozone data, dovish comments from Signor Draghi, confirmation the RBA is likely to cut rates again, increased likelihood that Boris Johnson will be the next PM in the UK, and increased tensions in the Middle East.

Starting at the top, yesterday’s Empire State Manufacturing survey printed at a much worse than expected -8.6, which represented a 26.4-point decline from May’s survey and the largest fall on record. It was a uniformly awful report, with every sub-index weak. While by itself, this report is generally second tier data, it is adding to the case that the US economy is slowing more rapidly than had previously been expected and is increasing market expectations that the Fed will act sooner rather than later. We will see how that turns out tomorrow.

Then this morning, the German ZEW Survey was released at -21.1, a 19-point decline and significantly worse than expected. This is seen as a potential harbinger of further weakness in the German economy adding to what has been a run of quite weak manufacturing data. Although auto registrations in the Eurozone ticked ever so slightly higher in May (by 0.04%), the trend there also remains sharply downward. All in all, there has been very little encouraging of late from the Continent.

Then Signor Draghi got is turn at the mike in Sintra, Portugal, where the ECB is holding its annual summer festivities, and as usual, he did not disappoint. He explained the ECB has plenty of tools left to address “lingering” risks in the economy and hinted that action may be coming soon. He expressly described the ability for the ECB to cut rates further as well as commit to keep rates lower for even longer. And he indicated that QE is still available as the only rules that could restrict it are self-imposed, and easily changed. Arguably, this had the biggest impact of the morning as Eurozone equities rocketed on the prospect of lower rates, bouncing back from early losses and now higher by more than 1.0% on the day across the board. German bunds have plumbed new yield depths, touching -0.30% while the euro, to nobody’s surprise, has weakened further, ceding modest early gains to now sit lower by -0.3%. This is proof positive of my contention that the Fed will not be easing policy in isolation, and that if they start easing, you can be sure that the rest of the world will be close behind. Or perhaps even ahead!

Adding to the news cycle were the RBA minutes, which essentially confirmed that the next move there will be lower, and that two more rate cuts this year are well within reason as Governor Lowe tries to drive unemployment Down Under to just 4.5% from its current 5.2% level. Aussie has continued its underperformance on the news, falling a further 0.1% this morning and is now back to lows last touched in January 2016. And it has further to fall, mark my words.

Then there is the poor old pound, which has been falling sharply for the past week (-1.75%) as the market begins to price in an increased chance of a no-deal Brexit. This is due to the fact that Boris Johnson is consolidating his lead in the race to be the next PM and he has explicitly said that come October 31, the UK will be exiting the EU, deal or no deal. Given the EU’s position that the deal on the table is not open for renegotiation, that implies trouble ahead. One thing to watch here is the performance of Rory Stewart, a dark horse candidate who is gaining support as a compromise vs. Johnson’s more hardline stance. The point is that any indication that Johnson may not win is likely to see the pound quickly reverse its recent losses.

And finally, the Middle East continues to see increased tensions as Iran announced they were about to breach the limits on uranium production imposed by the ill-fated six-nation accord while the US committed to increase troop deployment to the area by 1000 in the wake of last week’s tanker attacks. Interestingly, oil is having difficulty gaining any traction which is indicative of just how much market participants are anticipating a global economic slowdown. OPEC, too, has come out talking about production cuts and oil still cannot rally.

To recap, bond, currency and commodity markets are all forecasting a significant slowdown in economic activity, but remarkably, global stock markets are still optimistic. At this point, I think the stock jockeys are on the wrong side of the trade.

As to today, we are set to see Housing Starts (exp 1.239M) and Building Permits (1.296M) at 8:30. Strong data is likely to have little impact on anybody’s thinking right now, but weakness will start to drive home the idea that the Fed could act tomorrow. Overall, the doves are in the ascendancy worldwide, and rightly so given the slowing global growth trajectory. Look for more cooing tomorrow and then on Thursday when both the BOJ and BOE meet.

Good luck
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Doves There Held Sway

It seems that a day cannot pass
When one country ‘steps on the gas’
Twas China today
Where doves there held sway
With funding for projects en masse

If I didn’t know better, I would suspect the world’s central banks of a secret accord, where each week one of them is designated as the ‘dove du jour’ and makes some statement or announcement that will serve to goose stock prices higher. Whether it is Fed speakers turning from patience to insurance, the ECB promising more of ‘whatever it takes’ or actual rate cuts a la the RBA, the central banks have apparently realized that the only place they continue to hold sway is in global stock markets. And so, they are going to keep on pushing them for as long as they can.

This week’s champion is the PBOC, which last night eased restrictions further on infrastructure investment by local governments, allowing more issuance of ‘special bonds’ and encouraging banks to lend more for these projects. At the same time, the CNY fix was its strongest in a month, back below the 6.90 level, as the PBOC makes clear that for the time being, it is not going to allow the yuan to display any unruly behavior. True to form, Chinese equity markets roared higher led by construction and cement companies, and once again we see global equity markets in the green.

While in the short run, investors remain happy, the problem is that in the medium and longer term, it is unclear that the central banking community has sufficient ammunition left to really help economic activity. After all, how much lower is the ECB going to cut rates from their current -0.4% level? And will that really help the economy? How many more JGB’s can the BOJ buy given they already own about 50% of the market? In truth, the Fed and the PBOC are the only two banks with any real leeway to ease policy enough to have a real economic impact, rather than just a financial markets impact. And for a world that has grown completely reliant on central bank activity to maintain economic growth, that is a real problem.

Adding to these woes is the ongoing trade war situation which seems to change daily. The latest news on this front is that if President Xi won’t sit down with President Trump at the G20 meeting in Japan later this month, then the US will impose tariffs on all Chinese imports. However, it seems the market is becoming inured to statements like these as there has been precious little discussion on the subject, and the PBOC’s actions were clearly far more impactful.

The question is, how long can markets continue to ignore what is a clearly deteriorating global economic picture before responding? And the answer is, apparently, quite a long time. Or perhaps that question is aimed only at equity markets because bond markets clearly see a less rosy future. At some point, we are going to see a central bank announcement result in no positive impact, or perhaps even a negative one, and when that occurs, be prepared for a rockier ride.

Turning to the FX markets this morning, the dollar has had a mixed session, although is arguably a touch softer overall. So far this month, the euro, which is basically unchanged this morning, has rallied 1.4%, while the pound, which is a modest 0.15% higher this morning after better than expected wage data, is higher by just 0.5%. My point is that despite some recent angst in the analyst community that the dollar was due to come under significant pressure, the overall movements have been quite small.

In the EMG bloc, there has also been relatively little movement this month (and this morning) as epitomized by the Mexican peso, which fell nearly 3% last week after the threat of tariffs being imposed unless immigration changes were made by Mexico, and which has recouped essentially all of those losses now that the tariffs have been averted. China is another example of a bit of angst but no substantial movement. This morning, after the PBOC drove the dollar fix lower, the renminbi is within pips of where it began the month. Again, FX markets continue to fluctuate in relatively narrow ranges as other markets have seen far more activity.

Repeating what I have highlighted many times, FX is a relative market, and the value of one currency is always in comparison to another. So, if monetary policies are changing in the same direction around the world, then the relative impact on any currency is likely to be muted. It is why, despite the fact that the US has more room to ease policy than most other nations, I expect the dollar to quickly find its footing in the event the Fed gets more aggressive. Because we know that if the Fed is getting aggressive, so will every other central bank.

Data this morning has seen the NFIB Small Business Optimism Index rise to 105.0, indicating that things in the US are, perhaps, not yet so dire. This is certainly not the feeling one gets from the analyst community or the bond market, but it is important to note. We do see PPI as well this morning (exp 2.0%, 2.3% core) but this is always secondary to tomorrow’s CPI report. The Fed remains in its quiet period so there will be no speakers, and the stock market is already mildly euphoric over the perceived policy ease from China last night. Quite frankly, it is hard to get excited about much movement at all in the dollar today, barring any new commentary from the White House.

Good luck
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A New Race Begins

The die has now finally been cast
Prime Minister May’s time has past
A new race begins
With fears that who wins
Will push for a hard Brexit fast

June 7, 2019 is the day on which Theresa May will step down from her role as leader of the Conservative Party in the UK, and consequently Prime Minister. While she will remain in the chair as caretaker, she will no longer drive policy. Instead, we will get to hear about the ensuing political machinations of each of the MP’s who want to replace her. At this time, the leading candidate is Boris Johnson, who was Foreign Minister until he resigned about a year ago under protest of how May was conducting the Brexit negotiations. He is seen as quite committed to having the UK exit and is not afraid of a no-deal outcome. Also in the running is ex-Brexit Minister, Dominic Raab, who while clearly pushing for finality is not seen quite as hardline as Johnson.

The mechanics of the process are a bit arcane, especially for Americans unfamiliar with the Parliamentary process. Briefly, the PM is the leader of the party that wins the most seats in Parliament. The Conservative Party, while without a current majority, leads the government through a coalition with the Democratic Unionist Party of Northern Ireland. There are 120,000 members of the Conservative Party (active party members) who will vote to determine the new leader of the party. The current MP’s will have a series of polls to whittle potential successors down to just two candidates for that vote. The key to remember is that these 120K are the activist wing and are substantially more pro-Brexit than the party at large. As such, it is quite possible, if not likely, that the next PM makes an exit, deal or not, a requirement by the new deadline of October 31.

But politics is a funny thing, and as we have all learned over the past few years, what polls say and how people vote are not necessarily the same thing. At this time, the market has clearly been pricing in an increasing probability of a hard Brexit, although it is by no means fully priced. Last week I proffered a table showing my estimates of probabilities for each of three scenarios and will update it here:

  May 16, 2019 May 17, 2019 May 24, 2019
Soft Brexit 50% 20% 5%
Vote to Remain 30% 35% 40%
Hard Brexit 20% 45% 55%

It strikes me that the idea of a deal is going away. Given the EU’s position that they will not renegotiate, the choices have come down to stay or leave with no deal. Simply based on the fact that the pound has been falling for the past three weeks, my assumption is that preparations for a hard Brexit are moving apace. As it happens, this morning the pound has rallied slightly, +0.25%, but the trend remains quite clear and this was likely short-term profit taking into the long holiday weekend. The path of least resistance for the pound remains lower.

And actually, short-term profit taking seems to be the story of the day in the FX markets. The dollar is very modestly softer across the board after a week of steady strength. For instance, the euro, after a 0.4% jump on the back of weaker than expected New Home Sales yesterday morning has maintained that gain but been unable to rally further. We see AUD and NZD both having bounced (0.1% and 0.35% respectively) and CAD is firmer by 0.2%. Meanwhile, the yen, which has rallied 1% on its haven status during the past week, has edged down 0.1%.

Speaking of havens, after a pretty awful week in the equity markets, this morning Europe is bouncing, and US futures are pointing higher. At the same time, Treasury yields, which traded as low as 2.29% yesterday (their lowest since October 2017) have rebounded slightly to 2.32%. Bunds also dipped to their lowest level (-0.117%) since October 2016 yesterday. In other words, risk appetite has clearly been under pressure lately.

However, this morning, there is a little relief, at least on the trading front, and that can be seen in the EMG bloc as well. The CE4, most of APAC and LATAM’s opening are all showing very modest strength. The only currency moving more aggressively has been INR, where PM Modi’s surprisingly strong showing in the election, where he clearly won a strong mandate to continue his policies, has been seen as a huge boon for the Indian economy and helped the rupee gain 1.4% this week.

Turning to the data today, we get Durable Goods (exp -2.0%, +0.2% ex-Transport) as the final piece of the puzzle before the holiday weekend. After a spate of Fed speakers, there is nothing scheduled on that front either. On this subject, Dallas Fed President Kaplan yesterday reiterated the party line of patience, explaining that there was no compelling evidence right now to drive his decision on the next policy move. There are currently 15 members of the FOMC (two governor roles remain empty), and my tally is there are 3-4 who would be quick to cut rates with the remaining group firmly in the do-nothing camp. If upcoming data next week starts to point to a weakening trend, I would expect to see that ratio swing more dovish, but for now, there is no reason to believe that anything here is going to change. In other words, there are still more reasons for the dollar to rally than fall.

Good luck and have a great holiday weekend
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Some Other Soul

It seems like Prime Minister May
Is quickly approaching the day
When some other soul
Will try to control
The mess Brexit’s caused the UK

Once again, the pound is the lead story as the slow motion train wreck, also known as the Brexit process, continues to unfold. Yesterday, you may recall, PM May was promising to present her much reviled Brexit deal to Parliament for a fourth time, with new promises that if it was passed, the UK would hold a second referendum on the subject. However, not only did the opposition Labour party trash the idea, so did most of her own Conservative party, as well as the Democratic Unionist Party from Northern Ireland, which is the group that has helped her maintain control for the past two years. At this point, her previous idea of having one more vote the first week of June and then stepping down seems to be dead. The latest news is the pressure from her own cabinet is mounting quickly enough to force her to step down as soon as this week. Meanwhile, Boris Johnson, who was a key cheerleader for Brexit in the run-up to the initial vote and spent time as Foreign Minister in PM May’s government, is the favorite to move into Number 10 Downing Street. He has made it clear that he is quite willing to simply walk away from the EU with no deal.

With that as the political backdrop, it should be no surprise that the pound continues to suffer. This morning it is lower by 0.3% and is now trading less than a penny from its 2019 lows, which were established back on January 2nd. It is very difficult to create a scenario where the pound rebounds in the short term. Unless there is a massive shift in thinking in Parliament, or the EU decides that they will concede to UK demands regarding the Irish backstop (remember that?), the market is going to continue to price in the probability of a hard Brexit ever so slowly. The post-Brexit vote low of 1.1906, back in October 2016 is on the radar in my view. That said, it will take a while to reach it unless Boris becomes PM and summarily exits the EU. At that point, the pound will fall much faster.

Ironically, the economic data from the UK continues to show an economy that, while having some difficulty, is outperforming many other areas. This morning’s CPI data showed inflation at 2.1%, a tick below expectations and essentially right at the BOE’s target. I am constantly amused by Governor Carney’s comments that he will need to raise rates due to a potential inflation shock. At this point, that seems like an extremely low risk. Granted, given the openness of the UK economy, if the pound were to collapse in the wake of a hard Brexit, inflation would almost certainly rise initially. The question, I think, is whether that would be seen as a temporary shock, or the beginning of a trend. Arguably, the former would be more likely.

Away from the UK, the FX market has been reevaluating its views on EMG currencies and thus far, the verdict is…they suck! While I have highlighted the weakness seen in the Chinese yuan while the trade war brews, I have been less focused on other currencies which have been collateral damage to that war. But there has been significant damage in all three EMG areas. For example, even excluding the Argentine peso, which has all kind of domestic issues unrelated to trade and has fallen nearly 6% this month and more than 26% this year, LATAM currencies have suffered significantly this month. For example, USDBRL is trading back above 4.00 for the first time since last October and is down by 3.0% in May. We have seen similar weakness in both the Colombian and Chilean pesos, down 5% and 4% respectively. In fact, the Mexican peso is the region’s top performer, down just 0.5% this month although it had been weaker earlier in May. It seems that the trade war is acting as a benefit on the assumption that supply chains are going to find their way from China to Mexico in order to supply the US.

It ought not be surprising that many APAC currencies have also performed quite poorly this month led by KRW’s 4% decline and IDR’s 3.2% fall. Even the Taiwan dollar, historically one of the least volatile currencies is feeling the pressure, especially since the Huawei sanctions, and has fallen more than 1.2% in the past week, and for the month overall. Granted, these moves may not seem as large as the LATAM currencies, but historically, APAC currencies are more tightly controlled and thus less volatile. And there is one exception to this, the Indian rupee, which is basically unchanged on the month. This relative strength has a twofold explanation; first India is poised to benefit as a supplier to the US in the wake of the trade war, and second, the surprisingly strong showing of PM Narendra Modi in the recent election was taken as a positive given his pro-business platform.

Finally, a look at EEMEA shows weakness across the board here as well, albeit not quite as drastically. For example, TRY has fallen 4.5% this month, although the cause seems self-inflicted rather than from outside events. The ongoing political turmoil and inability of the central bank to tighten policy given President Erdogan’s clear opposition to that has encouraged foreign investors to flee. But we have also seen HUF fall 2.5%, and weakness in the Scandies with both NOK and SEK down more than 2.0% this month.

All in all, you can see that the dollar has been ascendant this month as a combination of slowing global growth, trade concerns and the relative outperformance of the US economy continues to draw inflows.

Looking at the data picture, the only US release is the FOMC Minutes at 2:00 this afternoon. Analysts are going to be parsing the comments to see if they can determine if there is building sentiment regarding an ‘insurance’ rate cut. Certainly, some members are willing to go down that road as we heard from St Louis Fed President Bullard yesterday saying just that. There are a number of other speakers today, and in truth, it does seem as though there is an evolution in the FOMC’s thinking. Remember, the market is pricing a cut before the end of the year, and if we continue to see mixed economic data and inflation’s dip proves more than ‘transitory’, I think we will see a consensus build in that direction. While in the very short run, a decision like that could be a dollar negative, my sense is that if the Fed starts to cut, we will see the rest of the world’s central banks ease further thus offsetting the negative impact.

Good luck
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Truly Displeasing

Down Under the story’s that rates
May soon fall, which just demonstrates
That growth there is easing
Thus truly displeasing
The central bank head and his mates

The RBA Minutes were released last evening and the central bank in the lucky country is not feeling very good. Governor Lowe and his team painted two, arguably similar, scenarios under which the RBA would need to cut rates; a worsening of the employment situation or a continued lack of inflation (driven by a worsening of the employment situation). We have been hearing this tune from Lowe for the past several months and the market is already pricing in more than one full 25bp cut before the end of 2019. However, as is often the case, when these theories are confirmed the market adjusts further. And so, it should be no surprise that AUD is lower again this morning, falling 0.35% and now trading back to the lows last seen in January 2016. For a bit more perspective, the last time Aussie was trading below these levels was during the financial crisis in Q1 2009 amidst a full-on risk blowout. But the combination of slowing Chinese growth, and generic dollar strength is taking a toll on the Aussie dollar. The trend here is lower and appears to have further room to run. Hedgers take note!

In England, meanwhile, it appears
The outcome that everyone fears
A no-deal decision
Might soon be the vision
And Sterling might weaken for years

Turning to the UK, the odds of a hard Brexit seem to be increasing by the day. As the EU elections, scheduled for later this week, approach, the hardline Tories are in the ascendancy. Nigel Farage, one of the most vocal anti-EU voices, is leading his new Brexit party into the elections and they are set to do quite well. At the same time, Boris Johnson, the former Foreign Minister in PM May’s government, as well as former Mayor of London, and also a strong anti-EU voice, is now the leading candidate to replace May in the ongoing leadership struggle. The PM is still trying to push water uphill find support for her thrice defeated bill, but it should be no surprise that, so far, that support has yet to materialize. After all, it was hated three times already and not a single word in the bill has changed. At this point, her only hope is that the increasingly real threat of a PM Johnson, who has stated he will simply exit the EU quickly, may be enough to get those wavering to come to her side. Based on the FX market price action over the past three weeks, however, it is becoming clearer that her bill is going to fail yet again.

Since the beginning of the month, the pound has fallen 3.6% (-0.25% today) and is trading at levels last seen in early January. As this trend progresses, it looks increasingly likely that the market will test the post-Brexit lows of 1.1906. And, of course, if Johnson is the next PM and he does pull out of the EU without a deal, an initial move to 1.10 seems quite viable. Once again, hedgers beware. As an aside, do not think for a moment that the euro will go unscathed in a hard Brexit. It would be quite easy to see a 2%-3% decline immediately, although I suspect that would moderate far more quickly than the damage to the pound.

Turning our eyes eastward, we see that the ongoing trade war (it has clearly escalated past a spat) between the US and China continues to have ramifications in the FX markets. Not only is the yuan continuing to weaken (-0.2% today) but other currencies are starting to feel the brunt. The most obvious loser has been the Korean won (-0.15% overnight) which has fallen 5.4% in the past month. While the central bank there is clearly concerned, given the cause of the movement and the strong trend, there is very little they can do to halt the slide other than raising interest rates aggressively. However, that would be devastating for the South Korean economy, so it appears that there is further room for this to decline as well. All eyes are on the 1200 level, which last traded in the major dollar rally in the beginning of 2017.

Do you see the trend yet? The dollar is continuing its strengthening tendencies across the board this morning. Other news adding fuel to the fire was the latest revision of OECD growth forecasts, where the US data was upgraded to 2.6% for 2019 while virtually every other area (UK, China, Eurozone, Japan, etc.) was downgraded by 0.1%-0.2%. It should be no surprise that the dollar remains well-bid in this environment.

Turning to the data this week, it is quite sparse as follows:

Today Existing Home Sales 5.35M
Wednesday FOMC Minutes  
Thursday Initial Claims 215K
  New Home Sales 675K
Friday Durable Goods -2.0%
  -ex transport 0.2%

Obviously, all eyes will be on the Minutes tomorrow, but the data set is not very enticing. That said, we do hear from eight more Fed speakers across a total of ten speeches (Atlanta’s Rafael Bostic is up three times this week). Yesterday, Chairman Powell explained that while corporate debt levels are high, this is no repeat of the mortgage crisis from 2008. Of course, Chairman Bernanke was quite clear, at the time, that the mortgage situation was “contained” just before the bottom fell out. I’m not implying the end is nigh, simply that the track record of Fed Chairs regarding forecasting market and economic dislocations is pretty dismal. At this time, there is no evidence that the Fed is going to do anything on the interest rate front although the futures market continues to price for nearly 50bps of rate cuts this year. And when it comes to forecasting, the futures market has a much better track record. Just sayin’.

All told, at this point there is no reason to think the dollar is going to reverse any of its recent strength, and in fact, seems likely to add to it going forward.

Good luck
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The Chaff from the Wheat

As markets await the report
On Payrolls they’re having to sort
The chaff from the wheat
From Threadneedle Street
As Carney, does rate hikes exhort

The gloom that had been permeating the analyst community (although certainly not the equity markets) earlier this year, seems to be lifting slightly. Recent data has shown a stabilization, at the very least, if not the beginnings of outright growth, from key regions around the world. The latest news was this morning’s surprising Eurozone inflation numbers, where CPI rose a more than expected 1.7% in April, while the core rate rose 1.2%, matching the highest level it has seen in the past two years. If this is truly a trend, then perhaps that long delayed normalization of monetary policy in the Eurozone may finally start to occur. Personally, I’m not holding my breath. Interestingly, the FX market has responded by selling the euro with the single currency down 0.2% this morning and 1.0% since Wednesday’s close. I guess that market doesn’t see the case for higher Eurozone rates yet.

In the meantime, the market continues to consider BOE Governor Carney’s comments in the wake of yesterday’s meeting, where he tried to convince one and all that the tendency for UK rates will be higher once Brexit is finalized (and assuming a smooth transition). And perhaps, if there truly is a global recovery trend and policy normalization becomes a reality elsewhere, that will be the case. But here, too, the market does not seem to believe him as evidenced by the pound’s ongoing weakness (-0.3% and back below 1.30) and the fact that interest rate futures continue to price in virtually no chance of rate hikes in the UK before 2021.

While we are discussing the pound, there is one other thing that continues to confuse me, the very fact that it is still trading either side of 1.30. If you believe the narrative, the UK cannot leave the EU without a deal, so there is no chance of a hard Brexit. After all, isn’t that what Parliament voted for? In addition, according to the OECD, the pound at 1.30 is undervalued by 12% or so. Combining these two themes, no chance of a hard Brexit and a massively undervalued pound, with the fact that the Fed has seemingly turned dovish would lead one to believe that the pound should be trading closer to 1.40 than 1.30. And yet, here we are. My take is that the market is not yet convinced that a hard Brexit is off the table or else the pound would be much higher. And frankly, in this case, I agree. It is still not clear to me that a hard Brexit is off the table which means that any true resolution to the situation should result in a sharp rally in the pound.

Pivoting to the rest of the FX market, the dollar is stronger pretty much across the board this morning, and this is after a solid performance yesterday. US data yesterday showed a significant jump in Nonfarm Productivity (+3.6%) along with a decline in Unit Labor Costs (-0.9%), thus implying that corporate activity was quite robust and the growth picture in the US enhanced. We also continue to see US earnings data that is generally beating (quite low) expectations and helping to underpin the equity market’s recent gains. Granted the past two days have seen modest declines, but overall, stocks remain much higher on the year. In the end, it continues to appear that despite all the angst over trade, and current US policies regarding energy, climate and everything else, the US remains a very attractive place to invest and dollars continue to be in demand.

Regarding this morning’s data, not only do we see the payroll report, but also the ISM Non-manufacturing number comes at 10:00.

Nonfarm Payrolls 185K
Private Payrolls 180K
Manufacturing Payrolls 10K
Unemployment Rate 3.8%
Participation Rate 62.9%
Average Hourly Earnings 0.3% (3.3% Y/Y)
Average Weekly Hours 34.5
ISM Non-Manufacturing 57.0

One cannot help but be impressed with the labor market in the US, where for the last 102 months, the average NFP number has been 200K. It certainly doesn’t appear that this trend is going to change today. In fact, after Wednesday’s blowout ADP number, the whisper is for something north of 200K. However, Wednesday’s ISM Manufacturing number was disappointingly weak, so there will be a great deal of scrutiny on today’s non-manufacturing view.

Adding to the mix, starting at 10:15 we will hear from a total of five Fed speakers (Evans, Clarida, Williams, Bowman, Bullard) before we go to bed. While Bullard’s speech is after the markets close, the other four will get to recount their personal views on the economy and future policy path with markets still open. However, given that we just heard from Chairman Powell at his press conference, and that the vote to leave rates was unanimous, it seems unlikely we will learn too much new information from these talks.

Summing up, heading into the payroll report the dollar is firm and shows no signs of retreating. My take is a good number will support the buck, while a weak one will get people thinking about that insurance rate cut again, and likely undermine its recent strength. My money is on a better number today, something like 230K, and a continuation of the last two days of dollar strength.

Good luck and good weekend
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So Despised

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
Adf