Up, Up and Away

Said Powell, “We’re in a good place”
On growth, but we don’t like the pace
That prices are rising
And so we’re surmising
More QE’s what needs to take place

Today, then, we’ll hear from Christine
Who is now the ECB queen
This is her first chance
To proffer her stance
On policy and what’s foreseen

And finally, in the UK
The vote’s taking place through the day
If Boris does badly
Bears will sell pounds gladly
If not, it’s up, up and away

There is much to cover this morning, so let’s get right to it.

First the Fed. As universally expected they left rates on hold and expressed confidence that monetary policy was appropriate for the current conditions. They lauded themselves on the reduction in unemployment, but have clearly changed their views on just how low that number can go. Or perhaps, what they are recognizing is that the percentage of the eligible labor force that is actually at work, which forms the denominator in the unemployment rate, is too low, so that there is ample opportunity to encourage many who had left the workforce during the past decade to return thus increasing the amount of employment and likely helping the Unemployment Rate to edge even lower. While their forecasts continue to point to 3.5% as a bottom, private sector economists are now moving their view to the 3.0%-3.2% level as achievable.

On the inflation front, to say that they are unconcerned would greatly understate the case. They have made it abundantly clear that it will require a nearly unprecedented supply shock to have them consider raising rates anytime soon. However, they continue to kvetch about too low inflation and falling inflation expectations. They have moved toward a policy that will allow inflation to run higher than the “symmetric 2% target” for a while to make up for all the time spent below that level. And the implication is that if we see inflation start to trend lower at all, they will be quick to cut rates regardless of the economic growth and employment situation. Naturally, the fact that CPI printed a touch higher than expected (2.1%) was completely lost on them, but then given their ‘real-world blinders’ that is no real surprise. The dot plot indicated that they expect rates to remain on hold at the current level throughout all of 2020, which would be a first during a presidential election year.

And finally, regarding the ongoing concerns over the short term repo market and their current not-QE policy of buying $60 billion per month of Treasury bills, while Powell was unwilling to commit to a final solution, he did indicate that they could amend the policy to include purchases of longer term Treasury securities alongside the introduction of a standing repo facility. In other words, not-QE has the chance to look even more like QE than it currently does, regardless of what the Chairman says. Keep that in mind.

Next, it’s on to the ECB, which is meeting as I type, and will release its statement at 7:45 this morning followed by Madame Lagarde meeting the press at 8:30. It is clear there will be no policy changes, with rates remaining at -0.5% while QE continues at €20 billion per month. Arguably there are two questions to be answered here; what is happening with the sweeping policy review? And how will Madame Lagarde handle the press conference? Given she has exactly zero experience as a central banker, I think it is reasonable to assume that her press conferences will be much more political in nature than those of Signor Draghi and his predecessors. My fear is that she will stray from the topic at hand, monetary policy, and conflate it with her other, nonmonetary goals, which will only add confusion to the situation. That said, this is a learning process and I’m sure she will get ample feedback both internally and externally and eventually gain command of the situation. In the end, though, there is precious little the ECB can do at this point other than beg the Germans to spend some money while trying to fend off the hawks on the committee and maintain policy as it currently stands.

Turning to the UK election, the pound had been performing quite well as the market was clearly of the opinion that the Tories were going to win and that the Brexit uncertainty would finally end next month. However, the latest polls showed the Tory lead shrinking, and given the fragmentation in the electorate and the UK’s first-past-the-post voting process, it is entirely possible that the result is another hung Parliament which would be a disaster for the pound. The polls close at 5:00pm NY time (10:00pm local) and so it will be early evening before we hear the first indications of how things turn out. The upshot is a Tory majority is likely to see a further 1%-1.5% rally in the pound before it runs out of momentum. A hung Parliament could easily see us trade back down to 1.22 or so as all that market uncertainty returns, and a Labour victory would likely see an even larger decline as the combination of Brexit uncertainty and a program of renationalization of private assets would result in capital fleeing the UK ASAP. When we walk in tomorrow, all will be clear!

Clearly, those are the top stories today but there is still life elsewhere in the markets. Ffor example, the Turkish central bank cut rates more than expected, down to 12.0%, but the TRY managed to rally 0.25% after the fact. Things are clearly calming down there. In Asia, Indian inflation printed higher than expected at 5.54%, although IP there fell less than expected (-3.8%) and the currency impact netted to nil. The biggest gainer in the Far East was KRW, rising 0.65% after a strong performance by the KOSPI (+1.5%) and an analyst call for the KOSPI to rise 12% next year. But other than the won, the rest of the space saw much less movement, albeit generally gaining slightly after the Fed’s dovish stance.

In the G10, the pound has actually slipped a bit this morning, -0.2%, but otherwise, movement has been even smaller than that. Yesterday, after the Fed meeting, the dollar fell pretty sharply, upwards of 0.5% and essentially, the market has maintained those dollar losses this morning.

Looking ahead to the data today we see Initial Claims (exp 214K) and PPI (1.3%, 1.7% core). However, neither of those will have much impact. With the Fed meeting behind us, we will start to hear from its members again, but mercifully, not today. So Fed dovishness has been enough to encourage risk takers, and it looks for all the world like a modest risk-on session is what we have in store.

Good luck
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Inflation’s Not Bubbled

Ahead of the Fed’s tête-à-tête
The CPI reading we’ll get
Though Jay remains troubled
Inflation’s not bubbled
The rest of us know that’s bullshet

Yes, it is Fed day with the FOMC set to announce their policy stance at 2:00 this afternoon and Chairman Jay scheduled to meet the press at 2:30. At this point, he and his colleagues have done an excellent job of leading market expectations toward no change, with the futures market pricing in a 0.0% probability of a cut. Interestingly, there is the tiniest (just 5.8%) probability of a rate hike, although that is even less likely in my view. While there will be a great deal of interest in the dot plot, certainly there has not been enough data to change Powell’s oft-stated view that the economy and monetary policy are both in “a good place.”

What should be of greater concern to all of us, as individuals and consumers, is that there has been an increase in discussions about the Fed changing their inflation targeting regime to achieving an average inflation rate of 2.0% over time, meaning that for all the time inflation remains below target (the past 10 years), they will allow it to run above target to offset that outcome. Now, we all know that the Fed’s constant complaints about too-low inflation ring hollow in our ears every time we go to the supermarket, or even the mall (assuming anyone else still goes there) as prices for pretty much everything other than flat screen tv’s has consistently risen for years. But given the way the Fed measures such things; they continue to register concern over the lack of inflation. And remember, too, that the Fed uses PCE, Personal Consumption Expenditures, in their models, which reflects not what we pay, but the rate of change of prices at which merchants sell goods. It is a subtle difference, but the construct of PCE, with a much lower emphasis on housing, and inclusion of the costs that the government pays for things like healthcare (obviously at a lower rate than the rest of us) insures that PCE will always track lower over time. In fact, it is an open question as to whether the Fed can even achieve a higher inflation rate, however it is measured, as long as they maintain their financial repression.

All of that is a prelude to today’s CPI release, where the market is anticipating a reading of 2.0% for the headline and 2.3% for the core. Arguably, this should be an important data point for the folks in the Mariner Eccles building today, but I forecast that they will only see weakness here as noteworthy, arguing for even more stimulus. However, whatever today’s print, it will simply be background noise in the end. It would take some remarkable news to change today’s outlook.

But inflation is important elsewhere in the world as well. For example, this morning Sweden’s CPI rose to 1.8%, a tick higher than expected and basically confirmed to the market that the Riksbank, who seem desperate to exit their negative rate policy, are likely to do so at their February meeting. (Expectations for movement next week remain quite muted.) Nonetheless, the Swedish krona has been a major beneficiary in the market, rallying 0.65% vs. the dollar (0.5% vs. the euro), and is today’s top performer.

Another place we are seeing prices rise more rapidly is in Asia, specifically in both China and India. In the former, CPI rose to 4.5% in November, higher than the expected 4.3% and the highest level since January 2012. This is a reflection of the skyrocketing price of pork there as African swine fever continues to decimate the hog population. (It is this problem that is likely to help lead to a phase one trade deal as President Xi knows he needs to be able to feed his people, and US pork is available and cheap!) In India, the October data jumped to 4.62% (what precision!) and November is forecast to rise to 5.3%. Here, too, food prices are taking a toll on the price index, and we need to be prepared for the November release due tomorrow. When the October print hit the tape, the rupee gapped lower (dollar higher) by nearly 1%, and although it has been slowly clawing back those losses, another surprise on the high side could easily see a repeat.

In contrast to those countries, the Eurozone remains an NPZ (no price zone), a place where price rises simply do not occur. Now, I grant that I have not been there in some time, so cannot determine if the European measurements are reflective of most people’s experience, but certainly on a measured basis, inflation remains extremely low, hovering around 1.0% per annum throughout most of the continent. Remember, tomorrow, Christine Lagarde leads her first ECB meeting and while she has spoken about how fiscal policy needs to pick up the pace and how the ECB needs to be more focused on issues like climate change, we have yet to hear her views on what she actually was hired to do, manage monetary policy. While there is no doubt that she is an exceptional politician, it remains to be seen what kind of central banking chops she possesses. Based solely on her commentary over the years, she appears firmly in the dovish camp, but given Signor Draghi’s parting gift of a rate cut and renewed QE, it seems most likely that she will simply stay the course and exhort governments to spend more money. One thing to keep in mind is that markets have a way of testing new central bank heads early in their terms with some kind of stress. That initial response is everything in determining if said central banker will be seen as strong or weak. We can only hope that Madame Lagarde measures up in that event.

The only other story is the UK election, certainly critical, but given it takes place tomorrow, we will look to discuss outcomes then. One interesting thing was that a Yougov poll released last evening showed PM Boris and the Tories would win 339 seats, still a comfortable majority, but a smaller one than the same poll from two weeks earlier. The pound fell sharply on the news, having traded as high as 1.3215 late yesterday afternoon it was actually just above 1.3100 when I left the office. This morning, it is right in the middle at 1.3150, which is apparently where it was at 5:00 last evening as the stated movement today is virtually nil. Barring a major faux pas by either candidate at this late stage, I think we will see choppiness in the pound until the results are released, early Friday morning. While a vic(Tory) by Boris will likely see a knee-jerk response higher in the pound, I remain of the view that any rally will be modest, perhaps 1%-2% at most, and should be seen as an opportunity to add hedges for receivables hedgers.

And that’s really it for today. I would look for modest movement overall, and don’t anticipate the FOMC meeting to generate much excitement.

Good luck
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Hawks Would Then Shriek

Lagarde and Chair Powell both seek
Consensus, when later this week
Their brethren convene
While doves are still keen
To ease more, though hawks would then shriek

Markets are relatively quiet this morning as investors and traders await three key events as well as some important data. Interestingly, neither the Fed nor ECB meetings this week are likely to produce much in the way of fireworks. Chairman Powell and his minions have done an excellent job convincing market participants that the temporary cyclical adjustment is finished, that rates are appropriate, and that they are watching everything closely and prepared to act if necessary. Certainly Friday’s blowout NFP data did not hurt their case that no further easing is required. By now, I’m sure everyone is aware that we saw the highest headline print since January at 266K, which was supported by upward revisions of 41K to the previous two months’ data. And of course, the Unemployment Rate fell to 3.5%, which is back to a 50-year low. In fact, forecasts are now showing up that are calling for a 3.2% or 3.3% Unemployment Rate next November, which bodes well for the incumbent and would be the lowest Unemployment Rate since 1952!

With that as the economic backdrop in the US, it is hard for the doves on the Fed to make the case that further easing is necessary, but undoubtedly they will try. In the meantime, ECB President Lagarde will preside over her first ECB meeting where there are also no expectations for policy changes. Here, however, the situation is a bit tenser as the dramatic split between the hawks (Germany, the Netherlands and Austria) and the doves (Spain, Portugal and Italy) implies there will be no further action anytime soon. Madame Lagarde has initiated a policy review to try to find a consensus on how they should proceed, although given the very different states of the relevant economies, it is hard to believe they will agree on anything.

Arguably, the major weakness in the entire Eurozone construct is that the lack of an overarching continent-wide fiscal authority means that there is no easy way to transfer funds from those areas with surpluses to those with deficits. In the US, this happens via tax collection and fiscal stimulus agreed through tradeoffs in Congress. But that mechanism doesn’t exist in Europe, so as of now, Germany is simply owed an extraordinary amount of money (~€870 billion) by the rest of Europe, mostly Italy and Spain (€810 billion between them). The thing is, unlike in the US, those funds will need to be repaid at some point, although the prospects of that occurring before the ECB bails everyone out seem remote. Say what you will about the US running an unsustainable current account deficit, at least structurally, the US is not going to split up, whereas in Europe, that is an outcome that cannot be ruled out. In the end, it is structural issues like this that lead to long term bearishness on the single currency.

However, Friday’s euro weakness (it fell 0.45% on the day) was entirely a reaction to the payroll data. This morning’s 0.15% rally is simply a reactionary move as there was no data to help the story. And quite frankly, despite the UK election and pending additional US tariffs on China, this morning is starting as a pretty risk neutral session.

Speaking of the UK, that nation heads to the polls on Thursday, where the Tories continue to poll at a 10 point lead over Labour, and appear set to elect Boris as PM with a working majority in Parliament. If that is the outcome, Brexit on January 31 is a given. As to the pound, it has risen 0.2% this morning, which has essentially regained the ground it lost after the payroll report on Friday. At 1.3165, its highest point since May 2019, the pound feels to me like it has already priced in most of the benefit of ending the Brexit drama. While I don’t doubt there is another penny or two possible, especially if Boris wins a large majority, I maintain the medium term outlook is not nearly as robust. Receivables hedgers should be taking advantage of these levels.

On the downside this morning, Aussie and Kiwi have suffered (each -0.2%) after much weaker than expected Chinese trade data was released over the weekend. Their overall data showed a 1.1% decline in exports, much worse than expected, which was caused by a 23% decline in exports to the US. It is pretty clear that the trade war is having an increasing impact on China, which is clearly why they are willing to overlook the US actions on Hong Kong and the Uighers in order to get the deal done. Not only do they have rampant food inflation caused by the African swine fever epidemic wiping out at least half the Chinese hog herd, but now they are seeing their bread and butter industries suffer as well. The market is growing increasingly confident that a phase one trade deal will be agreed before the onset of more tariffs on Sunday, and I must admit, I agree with that stance.

Not only did Aussie and Kiwi fall, but we also saw weakness in the renminbi (-0.15%), INR (-0.2%) and IDR (-0.2%) as all are feeling the pain from slowing trade growth. On the plus side in the EMG bloc, the Chilean peso continues to stage a rebound from its worst levels, well above 800, seen two weeks ago. This morning it has risen another 0.85%, which takes the gain this month to 4.8%. But other than that story, which is really about ebbing concern after the government responded quickly and positively to the unrest in the country, the rest of the EMG bloc is little changed on the day.

Turning to the data this week, we have the following:

Tuesday NFIB Small Business Optimism 103.0
  Nonfarm Productivity -0.1%
  Unit Labor Costs 3.4%
Wednesday CPI 0.2% (2.0% Y/Y)
  -ex Food & Energy 0.2% (2.3% Y/Y)
  FOMC Rate Decision 1.75%
Thursday ECB Rate Decision -0.5%
  PPI 0.2% (1.2%)
  -ex Food & Energy 0.2% (1.7%)
  Initial Claims 215K
Friday Retail Sales 0.4%
  -ex autos 0.4%

Source: Bloomberg

While there is nothing today, clearly Wednesday and Thursday are going to have opportunities for increased volatility. And the UK election results will start trickling in at the end of the day on Thursday, so if there is an upset brewing, that will be when things are first going to be known.

All this leads me to believe that today is likely to be uneventful as traders prepare for the back half of the week. Remember, liquidity in every market is beginning to suffer simply because we are approaching year-end. This will be more pronounced next week, but will start to take hold now.

Good luck
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Things Are Just Grand

Said Chairman Jerome yesterday
The message I’d like to convey
Is things are just grand
And we’re in command
While keeping recession at bay

As New York walks in this morning, markets look quite similar to where traders left them yesterday. After more record highs in the US equity markets, futures are essentially flat. European equity markets are +/- 0.1% and even Asian markets only moved +/-0.3% overnight. Bond markets are also little changed, with 10-year Treasury yields less than 1bp lower than yesterday’s close, while Germany’s bund is a full 1bp lower. In other words, we’ve seen very little movement there either. Finally, FX markets are entirely within a 0.3% range of yesterday’s closing levels, in both the G10 and EMG blocs, with a pretty even mix of gainers and losers.

The three headlines that have garnered the most commentary are regarding our three favorite topics of late; the Fed, trade and Brexit. In order this is what we learned. Chairman Powell spoke yesterday evening and told us the economy’s glass was not merely half full, but much more than that due to the Fed’s policy decisions. He reiterated that policy rates are appropriate for now and as a group, the FOMC sees no reason to change them unless something untoward appears suddenly on the horizon. And, in fairness, the horizon looks pretty clear. We continue to see mixed, but decent, data overall in the US, which has shown that ongoing weakness in the manufacturing sector has not spilled over into the consumer sector…yet. And perhaps it never will. Without a shock event of some sort (collapse of the trade talks, Chinese intervention in Hong Kong, or something equally serious) it is hard to argue with Jay’s conclusion that US interest rates are on hold for the foreseeable future. With that news, I wouldn’t have changed my position views either.

Moving on to the trade situation, things appear to be moving in the right direction as some comments from the Chinese side pointed to modest further progress on tariffs and what levels are appropriate at this point in time. I find it interesting that the US has been far less forthcoming on the issue of late, which is certainly out of character for the President. While I may be reading too much into this subtle shift in communication strategy, it appears that the Chinese are truly keen to get this deal done which implies that they are feeling a lot of pain. Arguably, the ongoing crisis in Chinese pork production is one area where the US has a significantly stronger hand to play, and one where China is relatively vulnerable. At any rate, despite more positive comments, it has not yet been enough to move markets.

Finally, the only market which has responded to news has been the British pound, which has ‘tumbled’ 0.25% after two polls released in the US showed that the Tory lead over Labour has fallen to 42%-33% from what had appeared to be a double digit lead last week. With both major parties having issued their election manifestos, at this point the outcome seems to be completely reliant on electioneering, something at which Boris seems to have the edge. In the end, I continue to expect that the Tories win a comfortable majority and that Brexit goes ahead on January 31. However, two things to remember are that polls, especially lately, have been notoriously poor predictors of electoral outcomes, and Boris clearly has the capability of saying something incredibly stupid to submarine his chances.

Looking at a range of potential outcomes here, I think the pound benefits most from a strong Tory victory, as it would remove uncertainty. In the event of a hung Parliament, where the Tories maintain the largest contingent but not a majority, that seems like a recipe for a much weaker pound as concerns over a hard Brexit would reignite. Finally, any situation where Jeremy Corbyn is set to lead the UK is likely to see the pound sell off sharply on the back of swiftly exiting capital. Corbyn’s platform of renationalization of private assets will not sit well with investors and the move lower in the pound will be swift and sharp. However, I think this is an extremely low probability event, less than 5% probability, so would not be focusing too much on that outcome.

And that’s really all that has moved markets today and not that much quite frankly. On the data front, we see the Advanced Goods Trade balance (exp -$71.0B), Case Shiller Home Prices (3.25%), New Home Sales (705K) and Consumer Confidence (127.0). Quite frankly, none of these are likely to be market movers.

Today’s story is far more likely to be about liquidity evaporating as the day progresses ahead of Thursday’s Thanksgiving holiday in the US. Trading desks will be at skeleton staff tomorrow and Friday, so given it is effectively month-end today, make sure to take advantage of the liquidity available. The benefit is the quiet market price action should allow excellent execution.

Good luck
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Further Debates

Mnuchin and Powell and Trump
Sat down to discuss how to pump
The ‘conomy higher
To meet Trump’s desire
The Democrats fall with a thump

While Trump later carped about rates
Chair Jay explained recent updates,
To Congress, he made
Cannot be portrayed
As leading to further debates

Arguably the biggest story yesterday was news of a meeting at the White House between President Trump, Treasury Secretary Mnuchin and Fed Chair Powell. While this is hardly unprecedented, given the President’s penchant for complaining about everything Powell has done; notably not cutting interest rates fast enough, when the news was released the conspiracy theorists immediately expected a change of tune from the Fed. But thus far, at least, nothing has changed. The Fed released a statement that explained the Chairman essentially repeated the talking points he made to Congress last week, and that the Fed’s actions are entirely predicated on their economic views and expectations, and not on politics.

The first thing to take away from that Fed statement is; it is a blatant admission that the Fed simply follows the markets/economy rather than leads it. If you listen to Fed speakers or read the Minutes or FOMC statement, they try to imply they are ahead of the curve. They are never ahead of the curve, but instead are always reacting to things that have already occurred. After all, isn’t that what data dependence means? Data isn’t released before it is gathered; it is a backward looking indicator.

The other thing, which is a modest digression, is an important question for those of us who are active in financial markets on a daily basis: Does anybody really think that any of the G10 central banks are actually independent? Consider that in macroeconomic theory, coordinated monetary and fiscal policy is seen as the Holy Grail. And, by definition, if the central bank and administration of a nation are working together, where is the independence? Or why is it considered business as usual when Mario Draghi and Christine Lagarde exhort nations to increase their fiscal spending, when their stated role is monetary policy? My point is central banks long ago lost their independence, if they ever had it at all, and are simply another arm of the government. Their biggest problem is that they are in danger of the illusion that they are independent disintegrating, at which point their powers of verbal suasion may disintegrate as well.

But in the end, despite the wagging of tongues over this meeting, nothing happened and the market returned its focus to…the trade deal. Once again, hopes and fears regarding the elusive phase one deal are driving equity markets, and by extension most others. The latest information I’ve seen is that the Chinese categorically will not sign a deal that leaves tariffs in place, and have even come to believe that the ongoing politics in Washington may leave the President in a weakened state which will allow them to get a better deal. Meanwhile, the President has not agreed to remove tariffs yet, although apparently has considered the idea. Underlying the broad risk-on theme is the idea that both Presidents really need the deal for their own domestic reasons, and so a deal will be agreed. But as yet, nothing is done.

Adding to the trade discussion is the constant commentary by the economic punditry as well as supranational organizations like the IMF who unanimously agree that Trump is a problem settling the US-China trade dispute would immediately lead to faster economic growth everywhere in the world. This morning we heard from new IMF Managing Director, Kristalina Georgieva, who said just that. Remember, the IMF has been reducing its estimates of global growth consistently for the past twelve months, and arguably they are still too high. But the one thing on which we can count is that the President is not going to be swayed by comments from the IMF.

So with that as our backdrop, a quick look at markets shows us that most equity markets continue to move higher (Hang Seng +1.5%, Shanghai +0.85%, DAX +0.95%, FTSE +1.1%) but not all (Nikkei -0.5%). This movement seems predicated on hope that the trade situation will improve, but boy, markets have been rallying on that same story for a few months now, and as yet, there has been no change. In fairness, in the UK, the Tory lead in the polls is growing which has started to filter into an idea that Brexit will happen and then businesses will be able to plan with more certainty going forward.

Interestingly, the bond market does not share the equity market’s collective belief that a trade deal will be done soon. This is evident by the fact that yields have actually been edging down rather than rising as would be expected in a full-scale risk-on environment. Finally, turning to the FX market, in the G10 space today, the biggest move is less than 0.2% with five currencies stronger and five weaker on the day. In other words, there is nothing of note there.

In the EMG space, there are some movers of note with CLP leading the way lower, -0.85%, as ongoing concerns over the fraught political situation make themselves felt in the FX market with investment flows softening. But away from that story, most of the bloc seems to be feeling the effects of the trade tensions, with far more losers, albeit small losers, than winners. On the positive front, ZAR has rallied 0.4% after Eskom, the troubled utility in South Africa, named a new CEO to try to turn things around.

On the data front this morning we see Housing Starts (exp 1320K) and Building Permits (1385K) and NY Fed President Williams speaks at 9:00. As to the data, housing has rarely been a big market driver in FX. And regarding Williams, we already know his views, as well as those of everybody else on the Fed. Nothing is going to change there. With all this in mind, as long as equity markets continue to embrace risk, the dollar (and yen and Swiss franc) are likely to continue to feel modest pressure. But I see no reason for a large move in the near term.

Good luck
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Decidedly Slowed

In China they’ve reached a crossroad
As growth has decidedly slowed
The knock-on effects
Are not too complex
Watch markets, emerging, erode

Once again, the overnight data has disappointed with signs of further slowing in the global economy rampant. The headline was in China, where their big three data points; Fixed Asset Investment (5.2%), Industrial Production (4.7%) and Retail Sales (7.2%) all missed expectations badly. In fact, all of these are at or near historic low levels. But it was not just the Chinese who exposed economic malaise. Japanese GDP printed at just 0.2% in Q3, well below the expected 0.9% outcome. And how about Unemployment in Australia, which ticked higher to 5.3%, adding to concern over the economy Down Under and driving an increase in bets that the RBA will cut rates again next month. In fact, throughout Asia, all the data was worse than expected and that has had a negative impact on equity markets as well as most commodity markets.

Of course, adding to the economic concern are the ongoing protests in Hong Kong, which seemed to take a giant step forward (backward?) with more injuries, more disruption and the resulting closure of schools and work districts. Rumors of a curfew, or even intervention by China’s armed forces are just adding to the worries. It should be no surprise that we have seen a risk off attitude in these markets as equity prices fell (Nikkei -0.75%, Hang Seng -0.95%) while bonds rallied (Treasuries -5bps, JGB’s -3bps, Australian Treasuries -10bps), and currencies performed as expected with AUD -0.75% and JPY +0.3%. Classic risk-off.

Turning to Europe, Germany managed to avoid a technical recession, surprising one and all by releasing Q3 GDP at +0.1% although they did revise Q2 lower to -0.2%. While that is arguably good news, 0.4% annual growth in Germany is not nearly enough to support the Eurozone economy overall. And the bigger concern is that the ongoing manufacturing slump, which shows, at best, slight signs of stabilizing, but no signs of rebounding, will start to ooze into the rest of the data picture, weakening domestic activity throughout Germany and by extension throughout the entire continent.

The UK did nothing to help the situation with Retail Sales falling 0.3%, well below the expected 0.2% rise. It seems that the ongoing Brexit saga and upcoming election continue to weigh on the UK economy at this point. While none of this has helped the pound much, it is lower by 0.1% as I type, it has not had much impact overall. At this point, the election outcome remains the dominant story there. Along those lines, Nigel Farage has disappointed Boris by saying his Brexit party candidates will stand in all constituencies that are currently held by Labour. The problem for Boris is that this could well split the Tory vote and allow Labour to retain those seats even if a majority of voters are looking for Brexit to be completed. We are still four weeks away from the election, and the polls still give Boris a solid lead, 40% to 29% over Labour, but a great deal can happen between now and then. In other words, while I still expect a Tory victory and Parliament to pass the renegotiated Brexit deal, it is not a slam dunk.

Finally, it would not be appropriate to ignore Chairman Powell, who yesterday testified to a joint committee of Congress about the economy and the current Fed stance. It cannot be a surprise that he repeated the recent Fed mantra of; the economy is in a good place, monetary policy is appropriate, and if things change the Fed will do everything in its power to support the ongoing expansion. He paid lip service to the worries over the trade talks and Brexit and global unrest, but basically, he spent a lot of time patting himself on the back. At this point, the market has completely removed any expectations for a rate cut in December, and, in fact, based on the Fed funds futures market, there isn’t even a 50% probability of a cut priced in before next June.

The interesting thing about the fact that the Fed is clearly on hold for the time being is the coincident fact that the equity markets in the US continue to trade at or near record highs. Given the fact that earnings data has been flattish at best, there seems to be a disconnect between pricing in equity markets and in interest rate markets. While I am not forecasting an equity correction imminently, at some point those two markets need to resolve their differences. Beware.

Yesterday’s CPI data was interesting as core was softer than expected at 2.3% on the back of reduced rent rises, while headline responded to higher oil prices last month and was higher than expected at 1.8%. As to this morning, PPI (exp 0.3%, 0.2% core) and Initial Claims (215K) is all we get, neither of which should move the needle. Meanwhile, Chairman Powell testifies to the House Budget Committee and seven more Fed speakers will be at a microphone as well. But given all we have heard, it beggar’s belief any of them will change from the current tune of everything is good and policy is in the right place.

As to the dollar, it is marginally higher overall this morning, and has been trading that way for the past several sessions but shows no signs of breaking out. Instead, I expect that we will continue to push toward the top end of its recent trading range, and stall lacking impetus for the next leg in its movement. For that, we will need either a breakthrough or breakdown in the trade situation, or a sudden change in the data story. As long as things continue to show decent US economic activity, the dollar seems likely to continue its slow grind higher.

Good luck
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Get Out of My Face!

“The economy’s in a good place”
Which means we can slacken the pace
Of future rate cuts
No ifs, ands or buts
So Donald, ‘get out of my face’!

Reading between the lines of yesterday’s FOMC statement and the Powell press conference, it seems abundantly clear that Chairman Powell is feeling pretty good about himself and what the Fed has achieved. He was further bolstered by the data yesterday which showed GDP grew at a 1.9% clip in Q3, far better than the expected 1.6% pace and that inflation, as measured by the GDP deflator, rose 2.2%, also clearly around the levels that the Fed seeks. In other words, although he didn’t actually say, ‘mission accomplished’, it is clearly what he wants everybody to believe. The upshot is that he was able to convince the market that the Fed has no more reason to cut rates anytime soon. But more importantly from a market perspective, he explained at the press conference that the bar was quite high for the Fed to consider raising rates again. And that was all he needed to say for equity markets to launch to yet another new high, and for the dollar, which initially had rallied on the FOMC statement, to turn tail and fall pretty sharply. And the dollar remains under pressure this morning with the euro rising a further 0.15%, the pound a further 0.45% and the yen up 0.5%.

Of course, the pound has its own drivers these days as the UK gears up for its election on December 12. According to the most recent polls, the Tories lead the race with 34%, while Labour is at 26%, the Lib-Dems at 19% and the Brexit party at 12%. After that there are smaller parties like the DUP from Northern Ireland and the Scottish National Party. The most interesting news is that the Brexit party is allegedly considering withdrawing from a number of races in order to allow the Tories to win and get Brexit completed. And after all, once Brexit has been executed, there really is no need for the Brexit party, and so its voting bloc will have to find a home elsewhere.

Something that has been quite interesting recently is the change in tone from analysts regarding the pound’s future depending on the election. While on the surface it seems that the odds of a no-deal Brexit have greatly receded, there are a number of analysts who point out that a strong showing by the Brexit party, especially if Boris cannot manage a majority on his own, could lead to a much more difficult transition period and bring that no-deal situation back to life. As well, on the other side of the coin, a strong Lib-Dem showing, who have been entirely anti-Brexit and want it canceled, could result in a much stronger pound, something I have pointed out several times in the past. Ultimately, though, from my seat 3500 miles away from the action, I sense that Boris will complete his takeover of the UK government, complete Brexit and return to domestic issues. And the pound will benefit to the tune of another 2%-3% in that scenario.

The recent trade talks, called ‘phase one’
According to both sides are done
But China’s now said
That looking ahead
A broad deal fails in the long run

A headline early this morning turned the tide on markets, which were getting pretty comfortable with the idea that although the Fed may not be cutting any more, they had completely ruled out raising rates. But the Chinese rained on that parade as numerous sources indicated that they had almost no hope for a broader long-term trade deal with the US as they were not about to change their economic model. Of course, it cannot be a surprise this is the case, given the success they have had in the past twenty years and the fact that they believe they have the ability to withstand the inevitable economic slowdown that will continue absent a new trading arrangement. Last night, the Chinese PMI data released was much worse than expected with Manufacturing falling to 49.3 while Services fell to 52.8, both of which missed market estimates. However, the latest trade news implies that President Xi, while he needs to be able to feed his people, so is willing to import more agricultural products from the US, is also willing to allow the Chinese economy to slow substantially further. Interestingly, the renminbi has been a modest beneficiary of this news rallying 0.15% on shore, which takes its appreciation over the past two months to 2.1%. Eventually, I expect to see the renminbi weaken further, but it appears that for now, until phase one is complete, the PBOC is sticking to its plan to keep the currency stable.

Finally, last night the BOJ left policy unchanged, however, in their policy statement they explicitly mentioned that they may lower rates if the prospect of reaching their 2% inflation goal remained elusive. This is the first time they have talked about lowering rates from their current historically low levels (-0.1%) although the market response has been somewhat surprising. I think it speaks to the belief that the BOJ has run out of room with monetary policy and that the market is pricing in more deflation, hence a stronger currency. Of course, part of this move is related to the dollar’s weakness, but I expect that the yen has further to climb regardless of the dollar’s future direction.

In the EMG bloc there were two moves of note yesterday, both sharp declines. First Chile’s peso fell 1.5% after President Sebastian Pinera canceled the APEC summit that was to be held in mid-November due to the ongoing unrest in the country. Remember, Chile is one of the dozen nations where there are significant demonstrations ongoing. The other big loser was South Africa’s rand, which fell 2.9% yesterday after the government there outlined just how big a problem Eskom, the major utility, is going to be for the nation’s finances (hint: really big!). And that move is not yet finished as earlier this morning the rand had fallen another 1.1%, although it has since recouped a portion of the day’s losses.

On the data front, after yesterday’s solid GDP numbers, this morning we see Personal Income (exp 0.3%); Personal Spending (0.3%); Core PCE (0.1%, 1.7% Y/Y); Initial Claims (215K) and Chicago PMI (48.0). And of course, tomorrow is payroll day with all that brings to the table. For now, the dollar is under pressure and as there are no Fed speakers on the docket, it appears traders are either unwinding old long dollar positions, or getting set for the next wave of weakness. All told, it is hard to make a case for much dollar strength today, although strong data is likely to prevent any further weakness.

Good luck
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