Tag Archives: #Powell

Pandemic Support

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Til now the direction’s been clear
As Jay and Mnuchin did fear
If they didn’t spend
The US can’t mend
And things would degrade through next year

But now, unless there’s a breakthrough
It seems Treasury won’t renew
Pandemic support
Which likely will thwart
A rebound til late Twenty-Two

Just when you thought things couldn’t get more surprising, we wind up with a public disagreement between the US Treasury Secretary and the Federal Reserve Chair.  To date, Steve Mnuchin and Jay Powell have seemed to work pretty well together, and at the very least, were both on the same page.  Both recognized that the impact of the pandemic would be dramatic and there was no compunction by either to invent new ways to support both markets and the economy.  As well, both were appointed by the same president, and although their personal styles may be different, both seemed to have a single goal in mind, do whatever is necessary to maintain as much economic activity as possible.

Aah, but 2020 is unlike any year we have ever seen, especially when it comes to policy decisions.  The legalities of the alphabet soup of Fed programs (e.g. PMCCF, SMCCF, MMLF, etc.) require that they expire at the end of the year and must be renewed by the Treasury Department.  And in truth, this is a good policy as expiration dates on spending programs require continued debate as to their efficacy before renewal.  The thing is, given the rapid increase in covid infections and rapid increase in state economic restrictions and shutdowns, pretty much every economist and analyst agrees that all of these programs should continue until such time as the spread of the coronavirus has slowed or herd immunity has been achieved.  Certainly, every FOMC member has been vocal in the need for more fiscal stimulus as they know that their current toolkit is inadequate.  (Just yesterday we heard from both Loretta Mester and Robert Kaplan with exactly that message.)  But to a (wo)man, they have all explained that the Fed will continue to do whatever it can to help, and that means continuing with the current programs.

Into this mix comes the news that Secretary Mnuchin sent a letter to the Fed that they must return the funds made available to backstop some of the Fed’s lending programs, as they were no longer needed.  The Fed immediately responded by saying “the full suite” of programs should be maintained into 2021.

Let’s consider, for a moment, some of the programs and what they were designed to do.  For instance, the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility do seem superfluous at this stage.  After all, more than $1.9 trillion of new corporate debt has been issued so far in 2020 and the Fed has purchased a total of $45.8 billion all year, just 2.4%, mostly through ETF’s.  It seems apparent that companies are not having any difficulty accessing financing, at very low rates, in the markets directly.  In the Municipal space, the Fed has only bought $16.5 billion while more than $250 billion has been successfully issued year to date.  Mnuchin’s point is, return the unused funds and deploy them elsewhere, perhaps as part of the widely demanded fiscal policy support.  The other side of that coin, though, is the idea that the reason the market’s have been able to support all that issuance is because the Fed backstop is in place, and if it is removed, then markets will react negatively.

In fairness, both sides have a point here, and perhaps the most surprising outcome is the public nature of the spat.  Historically, these two agencies work closely together, especially during difficult times.  But as I said before, 2020 is unlike any time we have seen in our lifetimes.  There is one other potential driver of this dissension, and that could be that politically, the Administration is trying to get Congress to act on a new stimulus plan quickly by threatening to remove some of the previous stimulus.  However, whatever the rationale, it clearly has the market on edge, interrupting the good times, although not yet resulting in a significant risk-off outcome.

If this disagreement is not resolved before the next FOMC meeting in three weeks’ time, the market will be looking for the Fed to expand its stimulus measures in some manner, either by increasing QE purchases or by purchasing longer tenor bonds, thus weighing on the back end of the curve as well as the front.  And for our purposes, meaning in the FX context, that would be significant, as either of those actions are likely to see a weaker dollar in response.  Remember, while no other central bank is keen to see the dollar weaken vs. their own currency, as long as CNY continues to outperform all, further dollar weakness vs. the euro, yen, pound, et al, is very much in the cards.

So, with that as our backdrop, markets today don’t really know what to do and are, at this point, mixed to slightly higher.  Asia, overnight, saw further weakness in the Nikkei (-0.4%), but both the Hang Seng and Shanghai exchanges gained a similar amount.  European bourses have slowly edged higher to the point where the CAC, DAX and FTSE 100 are all 0.5% higher on the day, although US futures are either side of unchanged as traders try to figure out the ultimate impact of the spat.  Bonds are mixed with Treasury yields higher by 1 basis point, but European yields generally lower by the same amount this morning.  Of course, a 1 basis point move is hardly indicative of a directional preference.

Both gold and oil are essentially flat on the day, and the dollar can best be described as mixed, although it is starting to soften a bit.  In the G10 space, NZD (+0.45%) leads the way with the rest of the commodity bloc (AUD, NOK, CAD) all higher by smaller amounts.  Meanwhile, the havens are under a bit of pressure, but only a bit, with JPY and CHF both softer by just (-0.1%).  EMG currencies have seen a similar performance as most Asian currencies strengthened overnight, but by small amounts, in the 0.2%-0.3% range.  Meanwhile, the CE4 were following the euro, which had been lower most of the evening but is now back toward flat, as are the CE4.  And LATAM currencies, as they open, are edging slightly higher.  But overall, while there is a softening tone to the dollar, it is modest at best.

On the data front, there is none to be released in the US today, although early this morning we learned that UK Retail Sales were a bit firmer than expected while Italian Industrial activity (Sales and Orders) was much weaker than last month.  On the speaker front, four more Fed speakers are on tap, but they all simply repeat the same mantra, more fiscal spending, although now they will clearly include, don’t end the current programs.

For the day, given it is the Friday leading into Thanksgiving week, I expect modest activity and limited movement.  However, if this spat continues and the Treasury is still planning on ending programs in December, I expect the Fed will step in to do more come December, and that will be a distinct dollar negative.

One last thing, I will be on vacation all of next week, so there will be no poetry until November 30.

Good luck, good weekend, stay safe and have a wonderful holiday
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Each of them Dreads

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The word from three central bank heads
Was something that each of them dreads
Is failing to let
Inflation beset
Their nations, thus tightening spreads

Instead, each one promised that they
Won’t tighten till some future day
When ‘flation is soaring
And folks are imploring
They stop prices running away

As we come to the end of the week, on a Friday the 13th no less, investors continue to be encouraged by the central bank community.  Yesterday, at an ECB sponsored forum, the heads of the three major central banks, Fed Chairman Jerome Powell, ECB President Christine Lagarde and BOE Governor Andrew Bailey, all explained that their greatest fear was that the second wave of Covid would force extended shutdowns across their economies and more permanent scarring as unemployment rose and the skills of those who couldn’t find a job diminished.  The upshot was that all three essentially committed to displaying patience with regard to tightening policy at such time in the future as inflation starts to return.  In other words, measured inflation will need to be really jumping before any of these three, and by extension most other central bankers, will consider a change in the current policy stance.

Forgetting for a moment, the fact that this means support for asset prices will remain a permanent feature, let us consider the pros and cons of this policy stance.  On the one hand, especially given the central banking community’s woeful forecasting record, waiting for confirmation of a condition before responding means they are far less likely to inadvertently stifle a recovery.  On the other hand, this means central banks are promising to become completely reactive, waiting for the whites of inflation’s eyes, as it were, and therefore will be sacrificing their ability to manage expectations.  In essence, it almost seems like they are dismantling one of the major tools in their toolkits, forward guidance.  Or perhaps, they are not dismantling it, but rather they are changing its nature.

Currently, forward guidance consists of their comments/promises of policy maintenance for an uncertain, but extended period of time.  For instance, the Fed’s forecasts indicate interest rates will remain at current levels through 2023.  (Remember Powell’s comment, “we’re not even thinking about thinking about raising rates.”)  But what if inflation were to start to rise significantly before then?  Does the current guidance preclude them from raising rates sooner?  That is unclear, and I would hope not, but broken promises by central banks are also not good policy.  However, if the new forward guidance is metric based, for instance, we won’t adjust policy until inflation is firmly above 2.0% for a period of time, then all they can do is sit back and watch the data, waiting for the economy to reach those milestones, before acting.  The problem for them here is that inflation has a way of getting out of hand and could require quite severe policy medicine to tame it.  Remember what it took for Paul Volcker as Fed Chair back in the early 1980’s.

My observation is that, as with the initiation of forward guidance, this is a policy that is much easier to start than to unwind, and either it will become a permanent feature of monetary policy (a distinct possibility) or the unfortunate soul who is Fed Chair when it needs to be altered will be roasted alive.  In the meantime, what we know is that central banks around the world are extremely unlikely to tighten policy for many years to come.  We have heard that from the BOJ, the RBA, and the RBNZ as well as the big three.  All told, one could make the case that interest rates have found their new, permanent level.

And with that in mind, let us tour market activity this Friday morning.  Equities in Asia followed from Wall Street’s disappointing performance yesterday and all sold off.  The Nikkei (-0.5%) fell for only the second time in the past two weeks.  Meanwhile, after President Trump signed an executive order preventing US investors from supporting companies owned or controlled by the PLA (China’s armed forces), equities in HK (Hang Seng -0.1%) and Shanghai (-0.9%) both fell as well.  The story in Europe is less clear, with some modest strength (DAX +0.2%), CAC (+0.3%) but also some weakness (FTSE -0.5%).  I would blame the latter on further disruption in the UK government (resignation of a high ranking minister, Dominic cummings) and a fading hope on a Brexit deal, but then the pound is higher, so that doesn’t seem right either.

Bond markets, which all rallied sharply yesterday, are continuing that price action, albeit at a more modest pace, with all European markets showing yield declines of between one and two basis points, although Treasuries are essentially unchanged right now.  Of course, Treasuries had the biggest rally yesterday.

Oil is softer (WTI – 1.0%) and gold is a touch firmer (+0.2%) although the latter seems clearly to have found significant support a bit lower than here.  As to the dollar, on the whole it is softer, but not terribly so.  For instance, GBP (+0.3%) is the leading gainer, with AUD (+0.2%) next on the list, but those are hardly impressive moves.  While the bulk of this bloc are firmer, SEK (-0.4%) has fallen on what appears to be a combination of position adjustments and bets on the future direction of the NOKSEK cross.  As to the EMG bloc, there are more gainers than losers, but MXN (+0.3%) is the biggest positive mover, which seems to be a hangover from Banxico’s surprise decision yesterday afternoon, to leave the overnight rate at 4.25% while the market was anticipating a 25-basis point reduction.  On the downside, CLP (-0.95%) is the worst performer, as investors appear concerned that there will be further financial policy adjustments that hinder the long-term opportunity in the country.

On the data front, overnight we saw Eurozone Q3 GDP released at 12.6% Q/Q (-4.4% Y/Y), a tick worse than expectations but it is hard to imply that had an impact of any sort on the markets.  In the US, yesterday saw a modestly better outcome in Initial Claims, and CPI was actually 0.1% softer than expected (helping the bond rally). This morning brings PPI (exp 0.4%, 1.2% Y/Y), about which nobody cares given we have seen CPI already, and then Michigan Sentiment (82.0) at 10:00.  We have two Fed speakers on the docket, Williams early, and then James Bullard.  But given the unanimity of the last vote, and the fact that we just heard from Chairman Powell, it would be a huge surprise to hear something new from either of them.

So, as we head into the weekend, with the dollar having been strong all week, a little further softness would not be a big surprise.  However, there is no reason to believe that there will be a significant move in either direction before we log off for the weekend.

Good luck, good weekend and stay safe
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Electees Are Concerned

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In England and Scotland and Wales
The third quarter saw rising sales
But this quarter will
Repeat the standstill
Of Q2, with different details

In fact, worldwide what we have learned
(And why electees are concerned)
Is policy choices
That help certain voices
By others, are frequently spurned

Markets, writ large, continue to seek the next strong narrative to help generate enthusiasm for the next big move.  But for now, as we are past the ‘Blue wave is good’, and we are past ‘gridlock is good’, and we are past ‘the vaccine is here’, there seems precious little for investors to anticipate.  At least with any specificity.  And that is the key to a compelling narrative, it needs to have a plausible story, a rationale behind that story for the directional movement, but perhaps most importantly, it has to have a target that can be realized.  Whether that target is an announcement, a deadline or long-awaited policy speech, it needs an endgame.  And right now, there is no obvious endgame to drive the narrative.  With that in mind, it should not be very surprising that markets have lost their way.

So, let’s consider what we do know and try to anticipate potential impacts.  The UK Q3 GDP data this morning was of a piece with the US release two weeks ago, as well as what we saw for all the Eurozone nations that have reported, and what we are likely to see from Japan Sunday night; record breaking growth in the quarter, but growth insufficient to make up for the losses in Q2.  Of greater concern for governments everywhere is that Q4 is going to see a dramatic slowing, and in some nations, a return to negative output, due to the resumption of lockdowns throughout Europe as well as in some major US cities.

Economists and analysts seem to have an interesting take on this, essentially explaining that if Q4 turns out worse than previously forecast, it just means that Q1 of next year will be better.  No biggie!  But, of course, that is absurd, especially given the severity of the Covid recession’s impacts already.  After all, the loss of millions of small businesses around the world, and the concurrent loss of employment by those businesses workers is not something that can be quickly reversed.  While in the long term, entrepreneurs will almost certainly restart new businesses, there is a significant time lag between the two events.  And ironically, governments tend to make starting businesses very hard with regulations and licensing fees imposed on the would-be entrepreneur, thus restricting the very economic growth those same governments are desperate to rekindle.

It is this dynamic that has resulted in the need for massive fiscal support by governments worldwide and given the growth of the second wave of the virus, the demand request by central bankers for governments to do even more. The problem inherent in this dynamic is that government largesse is not actually free, despite ZIRP and NIRP.  The cost of further increases in government debt, which is already at record high ratio vs. GDP (>92% globally), is the reduced prospects for future growth.  The requirement to repay debt removes the capital available to invest in productive assets and businesses thus reducing the future pace of growth for everyone.

Up to this point, central banks have been able to absorb the bulk of that new issuance by printing money to do so, but that dynamic is also destined to fail over time.  Especially since it is a global phenomenon.  When only Japan, with debt/GDP >230%, was in this situation, it could rely on growth elsewhere in the world to absorb its exports and help service that debt.  But the global recession we saw in Q2 (>90% of the world was in recession) and are likely to see again in Q4 means that there will not be anybody else around to absorb those exports.  This is why every country is seeking a weaker currency, to help those exports, and remains a key reason that the dollar’s demise remains unlikely in the near future.  (This is also why there are a number of analysts who are anticipating a debt jubilee, where government debt owned by central banks will simply be torn up, leaving the cash in the system, but no bonds to repay.  While debt/GDP ratios will decline sharply, inflation will become the new bugbear.)

Of course, this is all in the future, and a lot to read out of UK GDP data, but this cycle has been pretty clear, and at this stage, even the hope for a vaccine to become widely available early next year is unlikely to change the immediate future.  Which brings us back to square one, a market searching for a narrative.

That lack of direction is clear across markets this morning, with equities mixed in Asia (Nikkei +0.7%, Hang Seng (-0.2%, Shanghai -0.1%), lower in Europe (DAX -0.8%, CAC -0.9%, FTSE -0.35%) and US futures split (DOW -0.4%, SPX -0.1%, NASDAQ +0.5%).  I’m not getting a sense of a strong narrative here at all.

Bond markets, meanwhile, are reversing some of their losses from earlier this week, with Treasuries (-3.3bps), Bunds (-1bp) and Gilts (-2.4bps) all firmer while the rest of Europe is also seeing demand for havens amid the modest equity weakness.  Oil prices are virtually unchanged this morning, holding onto their recent gains, but with no capacity to continue to rally.  Gold, on the other hand, has edged slightly higher, up 0.3%.

Finally, the dollar is truly mixed this morning with half the G10 currencies firmer, led by EUR (+0.25%) and CHF (+0.25%), and half weaker led by the pound’s 0.5% decline and AUD (-0.3%).  We already know why the pound is weak, their GDP data, while very strong on paper, disappointed relative to expectations.  As to the rest of the bloc, the truth is given the euro’s weakness yesterday, a little reversal ought to be no surprise.  EMG currencies show a similar split of half weaker and half stronger this morning. On the plus side, other than TRY (+1.2%) which continues to be roiled by the changes at the central bank, the gains are all modest and heavily focused on the CE4 currencies, which are simply following the euro higher.  On the downside, IDR (-0.6%) and KRW (-0.45%) are the weakest of the lot, with both these currencies seeming to see a bit of profit-taking from recent gains.

On the data front, we do get important numbers this morning, all at 8:30.  Initial Claims (exp 731K), Continuing Claims (6.825M) and CPI (1.3%, 1.7% ex food & energy) are on the docket with the first two still giving us our best real time data on economic activity.  Also, we cannot forget that Chairman Powell, along with Madame Lagarde and BOE Governor Bailey, will be speaking later this morning, at 11:45, at an ECB forum, with the outcome almost certainly to be a plea for fiscal stimulus by governments one and all.

In the end, the lack of a compelling narrative implies to me a lack of direction is in store.  As such, I expect little in the way of a resolution in the near future, and thus choppy dollar price action is the best bet.

Good luck and stay safe
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Haven’t a Doubt

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The Fed, yesterday, made the case
That fiscal support they’d embrace
But even without
They haven’t a doubt
The dollar they still can debase
Their toolbox can help growth keep pace

As of yet, there is no winner declared in the Presidential election, although it seems to be trending toward a Biden victory.  The Senate, as well, remains in doubt, although is still assumed, at least by the market, to be held by the Republicans.  But as we discussed yesterday, the narrative has been able to shift from a blue wave is good for stocks to gridlock is good for stocks.  And essentially, that remains the situation because the Fed continues to support the market.

With this in mind, yesterday’s FOMC meeting was the market focus all afternoon.  However, the reality is we didn’t really learn too much that was new.  While universal expectations were for policy to remain unchanged, and they were, Chairman Powell discussed two things in the press conference; the need for fiscal stimulus from the government as quickly as possible; and the composition of their QE program.  Certainly, given all we have heard from Powell, as well as the other FOMC members over the past months, it is not surprising that he continues to plea for a fiscal response from Congress.  As I have written before, they clearly recognize that their toolkit has basically done all it can for the economy, although it can still support stock and bond markets.

It is a bit more interesting that Powell was as forthright regarding the discussion on the nature of the current asset purchase program, meaning both the size of purchases and the tenor of the bonds they are buying.  Currently, they remain focused on short-term Treasuries rather than buying all along the curve.  Their argument is that their purchases are doing a fine job of maintaining low interest rates throughout the Treasury market.  However, it seems that this question was the big one during the meeting, as clearly there are some advocates for extending the tenor of purchases, which would be akin to yield curve control.  The fact that this has been such an important topic internally, and the fact that the erstwhile monetary hawks are on board, or seem to be, implies that we could see a change to longer term purchases in December, especially if no new fiscal stimulus bill is enacted and the data starts to turn back lower.  This may well be the only way that the Fed can ease policy further, given their (well-founded) reluctance to consider negative interest rates.  If this is the case, it would certainly work against the dollar in the near-term, at least until we heard the responses from the other central banks.

But that was yesterday.  The Friday session started off in Asia with limited movement.  While the Nikkei (+0.9%) managed to continue to rally, both the Hang Seng (+0.1%) and Shanghai (-0.25%) had much less interesting performances.  Europe, on the other hand, started off with a serious bout of profit taking, as early on, both the DAX and CAC had fallen about 1.5%.  But in the past two hours, they have clawed back around half of those losses to where the DAX (-0.9%) and CAC (-0.6%) are lower but still within spitting distance of their recent highs.  US futures have shown similar behavior, having been lower by between 1.5% and 2.0% earlier in the session, and now showing losses of just 0.5% across the board.  One cannot be surprised that there was some profit taking as the gains in markets this week have been extraordinary, with the S&P up more than 8% heading into today, the NASDAQ more than 9% and even the DAX and CAC up by similar amounts.

The Treasury rally, too, has stalled this morning with the 10-year yield one basis point higher, although we are seeing continued buying interest throughout European markets, especially in the PIGS, where ongoing ECB support is the most important.  Helping the bond market cause has been the continued disappointment in European data, where for example, German IP was released at a worse than expected -7.3%Y/Y this morning.  Given the increasingly rapid spread of Covid infections throughout Europe, with more than 300K new infections reported yesterday, and the fact that essentially every nation in the EU is going back on lockdown for the month of November, it can be no surprise that bond yields here are falling.  Prospects for growth and inflation remain bleak and all the ECB can do is buy more bonds.

On the commodity front, oil is slipping again today, down around 3% as the twin concerns of weaker growth and potentially more supply from OPEC+ weigh on the market.  Gold however, had a monster day yesterday, rallying 2.5%, and is continuing this morning, up another 0.3%.  This is one market that I believe has much further to run.

Finally, looking at the dollar, it is definitely under pressure overall, although there are some underperformers as well.  For instance, in the G10, SEK (+0.6%), CHF (+0.5%) and NOK (+0.5%) are all nicely higher with NOK being the biggest surprise given the decline in oil prices.  The euro, too, is performing well, higher by 0.45% as I type.  Arguably, this is a response to the idea that Powell’s discussion of buying longer tenors is a precursor to that activity, thus easier money in the US.  However, the Commonwealth currencies are all a bit softer this morning, led by AUD (-0.15%) which also looks a lot like a profit-taking move, given Aussie’s 4.2% gain so far this week.

In the emerging markets, APAC currencies were all the rage overnight, led by IDR (+1.2%) and THB (+0.95%) with both currencies the beneficiaries of an increase in investment inflows to their respective bond markets.  But we are also seeing the CE4 perform well this morning, which given the euro’s strength, should be no surprise at all.  On the flipside, TRY (-1.2%) continues to be the worst performing currency in the world, as its combination of monetary policy and international gamesmanship is encouraging investors to flee as quickly as possible.  The other losers are RUB (-0.5%) and MXN (-0.3%), both of which are clearly feeling the heat from oil’s decline.

This morning, we get the payroll data, which given everything else that is ongoing, just doesn’t seem as important as usual.  However, here is what the market is looking for:

Nonfarm Payrolls 593K
Private Payrolls 685K
Manufacturing Payrolls 55K
Unemployment Rate 7.6%
Average Hourly Earnings 0.2% (4.5% Y/Y)
Average Weekly Hours 34.7
Participation Rate 61.5%

Source: Bloomberg

You may recall that the ADP number was much weaker than expected, although it was buried under the election news wave.  I fear we are going to see a decline in this data as the Initial Claims data continues its excruciatingly slow decline and we continue to hear about more layoffs.  The question is, will the market care?  And the answer is, I think this is a situation where bad news will be good as it will be assumed the Fed will be that much more aggressive.

As such, it seems like another day with dollar underperformance is in our future.

Good luck, good weekend and stay safe
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Willing to Meet

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The latest from 10 Downing Street
Is Boris is willing to meet
Midway twixt the stance
Of England and France
In order, the talks, to complete

Meanwhile, from the Far East we heard
That growth was strong in, quarter, third
They’re now set to be
The only country
Where year on year growth has occurred

The weekend has brought a few stories of note, all of them with bullish overtones, and so it should be no surprise that the week is starting with a risk-on tone.  The first place to look is in China, which released its Q3 GDP data last night at a slightly worse than expected 4.9% Y/Y.  While the market was looking for 5.5%, given that China is the first nation to achieve positive year over year growth, it was still seen as a market plus.  At least to the broad market. Interestingly, the Shanghai stock market fell 0.7%.  But, between the GDP data, Retail Sales rising 3.3% Y/Y and the Surveyed Jobless Rate falling a bit more than expected to 5.4%, the Chinese are painting a picture of a solid recovery.  And while this is well below the levels seen prior to the pandemic, it is still well ahead of the rest of the world.

Next up is the UK, where optimism has grown that a Brexit deal will, in fact, be reached. Boris, playing to both his constituents and the Europeans, has said that the UK is preparing for a no-deal outcome, but is happy to continue to talk if the Europeans would consider some compromises.  As well, in the House of Lords, word is they are prepared to remove the offending language from the UK government’s proposed Internal Market Bill, the one that caused all the concern since it was published in July.  In this bill, the UK sets out the relationship between the four nations in the UK; England, Scotland, Wales and Northern Ireland.  However, it was written in such a way as to render part of the Withdrawal Agreement moot, essentially overturning international law unilaterally.  Hence the issue.  In fact, the EU has sued the UK in the ICJ to prevent the law from being enacted.  This has been a major sticking point for the EU and has undermined a great deal of trust between the two sides.  Hence, the removal of that language is seen as a clear positive.  Certainly, FX traders saw it that way as the pound has rallied 0.75% since the news first was reported and is now back to 1.30.  While I believe the probability of a deal being completed remains above 50% (neither side wants a no-deal outcome), I also believe that the pound will fall after a deal is reached.  Sell the news remains the most likely situation in my view.

Adding to these two positive stories, the never-ending US stimulus talks continue to garner headlines despite a distinct lack of progress.  Yet, optimism on a stimulus bill seems to be a key driver in US equity markets, and in fact, in global ones as they are all, save Shanghai, propelled higher.  Given the proximity to the election, it seems unlikely that either side will allow the other to have a political victory, and so I remain skeptical a deal will be reached soon.  Of course, that merely means we can have a whole bunch of rallies on optimism that one will be reached!

With all that in mind, let’s take a look at the markets this morning.  Aside from Shanghai’s negative outcome in Asia, we saw strength with the Nikkei (+1.1%) and Hang Seng (+0.65%) both rallying nicely.  Europe as seen modest strength with the CAC (+0.6%) leading the way although the rest of the continent has seen far less love with the DAX (+0.1%), for instance, barely positive.  In fact, as I write, the FTSE 100 is actually slightly lower, down -0.15%.  US futures, though, have taken the stimulus story to heart and are much higher, between 0.8% (DOW) and 1.1% (NASDAQ).

Bond markets are feeling the risk-on mood as well, as they have fallen across the board with yields rising in every developed market.  Treasury yields are higher by 3.2 basis points, while bunds have seen a more modest 1.2 basis point rise.  Interestingly, the PIGS are seeing their bonds tossed overboard with an average rise of 4.5 basis points in their 10-year yields.

Oil prices (WTI -0.35%) are little changed, surprisingly, as one would expect commodities to rally on a positive risk day, while gold (+0.7%) and silver (+2.6%) are both quite strong, again somewhat surprising given higher yields and positive risk.  There are still many market relationships which have broken down compared to long-term trends.

Finally, the dollar is under pressure across the board this morning, with every G10 currency higher led by NOK (+0.95%) despite oil’s decline.  One of the drivers appears to be the unwinding of some large short positions in commodity currencies, a view that had been gaining credence amongst the leveraged community set.  This has helped SEK (+0.6%) and NZD (+0.55%) today as well.  The rest of the bloc, while higher, has been far less interesting.

On the EMG front, ZAR (+0.65%) is the leader with KRW (+0.5%) next in line.  After that, the gains are far less significant.  Korea’s won clearly benefitted from the Chinese GDP news, as China remains South Korea’s largest export destination.  Meanwhile, any gain in gold is likely to help support the rand given the gold mining industry’s importance to the economy there.  And as you consider the fact that the dollar is weak against virtually every currency, it is far more understandable that gold and silver have rallied as well.

On the data front, this week is not terribly interesting with only a handful of releases:

Tuesday Housing Starts 1455K
Building Permits 1506K
Wednesday Fed’s Beige Book
Thursday Initial Claims 865K
Continuing Claims 9.85M
Leading Indicators 0.7%
Existing Home Sales 6.30M
Friday Manufacturing PMI 53.5
Services PMI 54.6

Source: Bloomberg

However, despite a lack of data, there is no lack of Fedspeak this week, with six speeches just today, led by Chairman Powell at 8:00 on an IMF panel.  One of the themes of this week seems to be the discussion of central bank digital currencies, an idea that seems to be gaining traction around the world.  The other central bank tidbit comes from Madame Lagarde, who, not surprisingly, said she thought it made sense the PEPP (Pandemic EMERGENCY Purchase Program) be made a permanent vehicle.  This is perfectly in keeping with central bank actions where policies implemented to address an emergency morph into permanent policy tools as central bank mandates expand.  Once again, I will point out that the idea that other G10 central banks will allow the Fed to expand their balance sheet and undermine the dollar’s value without a response is categorically wrong. Every central bank will respond to additional Fed ease with their own package, thus this argument for a weaker dollar is extremely short-sighted.

But with all that said, there is no reason to believe the positive risk attitude will change today, unless there is a categorical denial by one of the parties discussing the stimulus bill.  As such, look for the dollar to continue to slide on the session.

Good luck and stay safe
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Not So Amused

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While Covid continues to spread
Chair Jay, for more stimulus pled
But President Trump
Said talks hit a bump
And ‘til the election they’re dead

The market was not so amused
With stock prices terribly bruised
So, as of today
Investors must weigh
The odds more Fed help is infused

Although nobody would characterize today as risk-on, the shock the market received yesterday afternoon does not seem to have had much follow through either.  Of course, I’m referring to President Trump’s tweet that all stimulus negotiations are off until after the election.  One need only look at the chart of the Dow Jones to know the exact timing of the comment, 2:48 yesterday afternoon.  The ensuing twenty minutes saw that index fall more than 2%, with similar moves in both the S&P 500 and the NASDAQ.  And this was hot on the heels of Chairman Powell pleading, once again, for more fiscal stimulus to help the economy and predicting dire consequences if none is forthcoming.

At this point, it is impossible to say how this scenario will play out largely because of the political calculations being made by both sides ahead of the presidential election next month.  On the one hand, it seems hard to believe that a sitting politician would refuse the opportunity to spend more money ahead of an election.  On the other hand, the particular politician in question is unlike any other seen in our lifetimes, and clearly walks to the beat of a different drummer.  The one thing I will say is that despite the forecasts of impending doom without further stimulus, the US data continues to show a recovering economy.  For instance, yesterday’s record trade deficit of -$67.2 billion was driven by an increase in imports, not something that typically occurs when the economy is slowing down.  One thing we have learned throughout the Covid crisis is that the econometric models used by virtually every central bank have proven themselves to be out of sync with the real economy.  As such, it is entirely possible that the central bank pleas for more stimulus are based on the idea that monetary policy has done all it can, and central bankers are terrified of being blamed for the economic problems extant.

Speaking of central bank activities and comments, the Old Lady of Threadneedle Street has been getting some press lately as the UK economy continues to deal with not merely Covid-19, but the impending exit from the EU.  Last month, the BOE mentioned they were investigating negative interest rates, but comments since then seem to highlight that there are but two of the nine members of the MPC who believe there is a place for NIRP.  That said, the Gilt market is pricing in negative interest rates from two to five years in maturity, so there is clearly a bigger community of believers.  While UK economic activity has also rebounded from the depths of the Q2 collapse, there is a huge concern that a no-deal Brexit will add another layer of difficulty to the situation there and require significantly more government action.  The BOE will almost certainly increase its QE, with a bump from the current £745 billion up to £1 trillion or more.  But, unlike the US, the UK does not have the advantage of issuing debt in the world’s reserve currency, and at some point, the cost of further fiscal stimulus may prove too steep.  As to the probability of a Brexit deal, it seems that much rides on French President Macron’s willingness to allow the French fishing fleet to sink shrink and allow the UK to manage their own territorial waters.

With this as the backdrop, a look at markets this morning shows a mixed bag on the risk front.  Asian equity markets saw the Nikkei (-0.05%) essentially unchanged although the Hang Seng (+1.1%) got along just fine.  Shanghai remains closed for holidays.  European bourses seem to be taking their cues from the Nikkei, as modest declines are the rule of the day.  The DAX (-0.35%) and the CAC (-0.2%) are both edging lower, and although the FTSE 100 is unchanged, the rest of the continent is following the German lead.  Interestingly, US futures are higher by between 0.3%-0.5%, not necessarily what one would expect.

Bond markets, once again, seem to be trading based on different market cues than either equities or FX, as this morning the 10-year Treasury yield has risen 4 basis points, and is trading back to the recent highs seen Monday.  One would be hard-pressed to characterize today as a risk-on session, where one might typically see investors sell bonds as they rotate into equities, so clearly there is something else afoot.  Yesterday’s 3-year Treasury auction seemed to be pretty well-received, so there is, as yet, no sign of fatigue in buying US debt.  There is much discussion here about the possibility of a contested election, yet I would have thought that is a risk scenario that would drive Treasury buying.  To my inexpert eyes, this appears to be driven by more inflation concerns.  Next week we see CPI again, and based on the recent trend, as well as personal experience, there has been no abatement in price pressures.  And unless the Fed starts buying the long end of the Treasury curve (something Cleveland’s Loretta Mester suggested yesterday), or announces yield curve control, there is ample room for the back end to sell off further with yields moving correspondingly higher, regardless of Fed activity.  And that would bring a whole set of new problems for the US.

Finally, one would have to characterize the dollar as on its back foot this morning.  While not universally lower, there are certainly more gainers than losers vs. the greenback.  In the G10 space, NOK (+0.5%) and SEK (+0.4%) are leading the way, which given oil’s 2.5% decline certainly seems odd for the Nocky.  As for the Stocky, there is no news nor data that would have encouraged buying, and so I attribute the movement to an extension of the currency’s recent modest strength which has seen the krona gain about 2% in the past two weeks.  Meanwhile, JPY (-0.4%) continues to sell off, much to the delight of Kuroda-san and new PM Suga.  Here, too, there is no news or data driving the story, but rather this feels like position adjustments.  It was only a few weeks ago where there was a great deal of excitement about the possibility of the yen breaking out and heading toward par.  That discussion has ended for now.

Emerging markets are generally better this morning as well, led by MXN (+0.85%) which is gaining despite oil’s decline and the landfall of Hurricane Delta, a category 3 storm.  If anything, comments from Banxico’s Governor De Leon, calling for more stimulus and explaining that the recovery will be uneven because of the lack of fiscal action, as well as the IMF castigating AMLO for underspending on stimulus, would have seemed to undermine the currency.  But apparently not.  Elsewhere, the gains are less impressive with HUF (+0.5%) and ZAR (+0.35%) the next best performers with the former getting a little love based on increased expectations for tighter monetary policy before year end, while ZAR continues to benefit, on days when fear is in the background, from its still very high real interest rates.

The only data of note today is the FOMC Minutes this afternoon, but are they really going to tell us more than we have heard recently from virtually the entire FOMC?  I don’t think so.  Instead, today will be a tale of the vagaries of the politics of stimulus as the market will await the next move to see if/when something will be agreed.  Just remember one thing; the Fed has already explained pretty much all the easing it is going to be implementing, but we have more to come from both the ECB and BOE.  That divergence ought to weigh on both the euro and the pound going forward.

Good luck and stay safe
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The New Weasel Word

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The bulk of the FOMC
Explained their preferred policy
More government spending,
Perhaps never ending,
Is what almost all want to see

Meanwhile, ‘cross the pond, what we heard
Is ‘bove 2% is preferred
They’ll soon change their stance
To give growth a chance
Inflation’s the new weasel word

Another day, another central bank explanation that higher inflation is just what the doctor ordered to improve the economy.  This time, Banque de France’s Governor, Francois Villeroy de Galhau, explained that the current formulation used by the ECB, “below, but close to, 2%”, is misunderstood.  Rather than 2% being a ceiling, what they have meant all along is that it is a symmetrical target.  Uh huh!  I’ve been around long enough to remember that back in 1988, when the ECB was first being considered, Germany was adamant that they would not accept a central bank that would allow inflation, and so forced the ECB to look just like the Bundesbank.  That meant closely monitoring price pressures and preventing them from ever getting out of hand.  Hence, the ECB remit, was absolutely designed as a ceiling, with the Germans reluctant to even allow 2% inflation.  Of course, for most of the rest of Europe, inflation was the saving grace for their economies.  Higher inflation begat weaker currencies which allowed France, Italy, Spain, et.al. to continue to compete with a German economy that became ever more efficient.

But twenty-some years into the experiment of the single currency, and despite the fact that the German economy remains the largest and most important in the Eurozone, the inflationistas of Southern Europe are gaining the upper hand.  These comments by Villeroy are just the latest sign that the ECB is going to abandon its price stability rules, although you can be sure that they will never say that.  Of course, the problem the ECB has is similar to that of Japan and the US, goosing measured inflation has been beyond their capabilities for the past decade (more than two decades for the BOJ), so simply changing their target hardly seems like it will be sufficient to do the job.  My fear, and that of all of Germany, is that one day they will be successful in achieving this new goal and will not be able to stop inflation at their preferred level, but instead will see it rise much higher.  But that is not today’s problem.  Just be aware that we are likely to begin hearing many other ECB members start discussing how inflation running hot for a while is a good thing.  Arguably, the only exceptions to this will be the Bundesbank and Dutch central bank.

And once again, I will remind you all that there is literally no chance that the ECB will sit back and watch, rather than act, if the Fed actually succeeds in raising inflation and weakening the dollar.

Speaking of the Fed, this week has seen a significant amount of Fedspeak already, with Chairman Powell on the stand in Congress for the past three days.  What he, and virtually every other Fed speaker explained, was that more fiscal stimulus was required if the government wanted to help boost growth.  The Fed has done all they can, and to listen to Powell, they have been extremely effective, but the next step was Congress’s to take.  The exception to this thought process came from St Louis Fed President Bullard, who explained that based on his forecasts, the worst is behind us and no further fiscal stimulus is needed.  What makes this so surprising is that he has been one of the most dovish of all Fed members, while this is a distinctly hawkish sentiment.  But he is the outlier and will not affect the ultimate outcome at this stage.

Powell was on the stand next to Treasury Secretary Mnuchin, who made the comment with the biggest impact on markets.  He mentioned that he and House Speaker Pelosi were back to negotiating on a new stimulus package, which the equity market took as a sign a deal would be reached quickly.  We shall see.  Clearly, there is a great deal of angst in Congress right now, so the ability to agree on anything across the aisle is highly questionable.

With that in mind, a look at markets shows what had been a mixed opening is turning into a more negative session.  Overnight saw Asian equity markets with minimal gains and losses (Nikkei +0.5%, Hang Seng -0.3%, Shanghai -0.2%), but Europe, which had been behaving in a similar manner early in the session has turned sharply lower.  At this time, the DAX (-1.95%) and CAC (-2.0%) are leading the way lower, with the FTSE 100 (-0.8%) having a relatively better day.  At the same time, US futures turned from flat to lower, with all three indices now pointing to -0.6% losses at the open.

It is difficult to point to a specific comment or piece of news driving this new sentiment, but it appears that the bond market is in the same camp as stocks.  Treasury yields, while they remain in a narrow range, have slipped 1bp, to 0.65%, and we are seeing Bunds (-2bps) and Gilts (-3bps) also garner demand as havens are in play.  Apparently, central bank desire for inflation is not seen as a serious situation quite yet.

Commodity prices have turned around as well, with oil falling 2% from morning highs, and gold dropping 1%.  In other words, this is a uniform risk reduction, although I would suspect that gold prices should lag the decline elsewhere.

As to the dollar, it is starting to pick up a more substantial bid with EUR (-0.3%) and GBP (-0.35%) sliding from earlier levels.  NOK (-1.15%) remains the worst performer in the G10, which given the decline in oil prices and evolving risk sentiment should be no surprise.  But at this point in the day, the entire bloc is weaker vs. the buck.  EMG currencies, too, have completely reversed some modest early morning strength, and, once again, ZAR (-1.2%) and MXN (-1.0%) lead the way lower.  One must be impressed with the increased volatility in those currencies, as they start to approach levels seen in the initial stages of the Covid crisis.  For anyone who thought that the dollar had lost its haven status, recent price action should put paid to that notion.

On the data front, today brings Durable Goods (exp 1.4%, 1.0% ex Transport) and we hear from two more Fed speakers, Williams and Esther George.  While Williams is almost certain to repeat Powell’s current mantra of more fiscal support, Ms George is one of the more hawkish Fed members and could well sound more like James Bullard than Jay Powell.  We shall see.

This has been a risk-off week, with equity markets down across the board and the dollar higher vs. every major currency in the world.  It seems highly unlikely that the Durable Goods number will change that broader sentiment, and so the ongoing equity market correction, as well as USD rebound seems likely to continue into the weekend.  Remember, short USD positions are still the rule, so there is plenty of ammunition for a further short covering.

Good luck, good weekend and stay safe
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Further To Go

Posted on by

The contrast could not be more clear
Twixt Powell and Christine this year
The Fed jumped in first
But now they’ve disbursed
As much aid as like to appear

Meanwhile Ms Lagarde in Berlin
Was clearly quite slow to begin
But Europe depends
On banks to extend
Its aid, so can still underpin

More growth by increasing the flow
Of cash, through TLTRO
Thus, traders now see
The buck vis-à-vis
The euro, has further to go

It was less than two months ago when the most prominent theme in the market was the imminent demise of the dollar, not merely in the short-term, but in the long run.  The idea that was being circulated was that because of the US’s excessive and growing twin deficits (Budget and Current Account), investors would soon decide that holding dollar’s would be too risky and thus demand a different unit of account and store of value.  During this period, we did see the dollar sell off, with the greenback falling nearly 6.5% vs. the euro during the month of July.  But that was basically that.  It was a great story, and probably a good trade for some early movers, but explaining short term market volatility by referring to ultra-long-term financial theory was always destined to fail.  And fail it has.  After all, since then, the dollar has actually appreciated (+2.2% vs. the euro) and yet, if anything, the US has seen its budget and current account deficits widen further.

Rather, short-term dollar movement tends to be driven by things like relative monetary policy and relative macroeconomic performance.  Looking back at that time, the prevailing sentiment was that the Fed, despite having already implemented an unfathomable amount of monetary ease already, was preparing to do even more.  Recall, leading up to, and through, the Jackson Hole symposium, market participants were sure that the Fed was going to not merely allow inflation to run hot, but help it do so.  Meanwhile, the ECB, in its typical plodding manner, was very quiet and the punditry saw little in the way of additional ease on the horizon.  In fact, there were complaints that the ECB was not doing nearly enough.

However, as seems to happen quite frequently, the punditry turns out to have gotten things backwards.  Last week, the Fed announced their new policy goals, counting on average inflation targeting to help them achieve significantly lower unemployment, although they still couldn’t didn’t explain how they were going to achieve said higher inflation.  And then earlier this week, Chairman Powell, in as much, admitted that the Fed has done all they can and that it was up to Congress to expand fiscal stimulus in order to give the economy the support it needed to cope with the Covid inspired recession.  In other words, the Fed is out of bullets.

One of the problems the Fed has is that transmission of monetary policy is effected by banks, that is the way the system is designed.  But the bulk of the Fed programs have only supported markets, by them buying Treasuries, Mortgage-backed securities, Corporates (IG and Junk) and Munis.  But for small companies who don’t access the capital markets directly, virtually none of the Fed’s activities have had an impact as the bank’s are reluctant to lend in this environment of economic uncertainty.  Europe, on the other hand, relies on banks for the majority of capital flow to its economy, as European corporate debt markets remain much smaller and more fragmented across countries.  So, when the ECB created the TLTRO, targeted lending facility, where they PAY banks 1.00% to lend money to companies, who also pay the banks interest, it turns out to be a more efficient way to prosecute monetary policy ease.  And this morning, the latest tranche of this program saw an additional €174.5 billion taken up.  This is on top of the €1.3 trillion that was taken up last time there was a tender, three months ago.

The point is, suddenly investors and traders are figuring out that the ECB has the ability to promulgate policy ease more effectively than the Fed, and just as importantly, are doing so.  Add it all up and you have ECB policy looking easier than Fed policy at the margin, a clear recipe for the euro’s decline.  This move in the euro is just beginning, and it would not be surprising to see the single currency head back toward 1.12 before the end of the year.  As I have written in the past, there was no way the ECB would sit back and allow the dollar to fall unhindered.  They simply cannot afford that outcome to occur.

Which brings us to today’s session, where risk is being jettisoned across equity markets globally, although several European markets are starting to turn things around.  Overnight, following a very weak US session, Asia was red across the board led by the Hang Seng (-1.8%), but with weakness in Shanghai (-1.7%) and the Nikkei (-1.1%). Europe, however, while starting lower in every market has now seen a little positivity as the DAX (+0.15%) and Italy’s FTSE MIB (+0.7%) are offsetting increasingly modest weakness in the CAC (-0.1%) and FTSE 100 (-0.4%).  Finally, US futures, which had also been lower by more than 0.5% earlier in the session, have rebounded to flat.

The bond market, however, remains enigmatic lately, with yields continuing to trade in extremely tight ranges regardless of the movement in risk assets.  At this time, Treasury yields are unchanged, after remaining essentially unchanged during yesterday’s US equity sell-off.  Bunds have seen yields edge lower by 1.5 basis points, while Gilt yields have edged higher by less than a basis point.  It seems that the bond markets, globally, are unwilling to follow every twist and turn of the recent stock market manias.

As to the dollar, it is firmer vs. most of its counterparts, but just like we are seeing in European equities, we are beginning to see a bit of a rebound in some currencies as well.  In the G10, the biggest story is NOK (-0.65%) where the Norgesbank disappointed one and all by seeming to be more dovish than anticipated.  Many had come to believe they would be putting a timeline on raising interest rates, but they did no such thing, thus the krone has continued its recent poor performance (-5.8% vs. the dollar in the past month).  But we are seeing weakness elsewhere with SEK (-0.8%) actually the worst performer, albeit absent any specific news, and both NZD (-0.5%) and AUD (-0.3%) suffering at this point.

In the EMG bloc, overnight saw weakness across the Asian currencies led by KRW (-0.7%) and THB, IDR and TWD (all -0.5%) as risk was shed across the board.  But with the recent turn in events, early losses by ZAR (+0.7%) and MXN (+0.3%) have turned to gains.  It is those two currencies, however, which remain the most volatile around, so be careful if hedging there.

On the data front, yesterday’s US PMI data was right on expectations and showed continued progress in the economy, a sharp contrast to the European situation.  This morning saw modestly weaker than expected German IFO data (Expectations 97.7), which is not helping the euro.  Later today we see Initial Claims (exp 840K), Continuing Claims (12.275M) and finally New Home Sales (890K) at 10:00.  Once again, the tapes will be painted with Fedspeak, led by Powell at 10:00 in front of the Senate Banking Committee, but also hearing from six more FOMC members. While I would not be surprised if Powell tried to walk back his comments about the Fed being done, it’s not clear he will be able to do so.

For now, the dollar’s trend remains pretty solid, and I expect that it will continue to grind higher until we get a substantive change in policies.

Good luck and stay safe
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Congressional Sloth

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The Chairman is set to appear
Near Mnuchin, and both will make clear
Congressional sloth
Is killing off growth
Thus, action’s required this year

The subtext, though, is that the Chair
Has realized his cupboard is bare
No ammo remains
To prop up the gains
That stocks have made ‘midst much fanfare

Yesterday’s risk-off session may well have set the tone for the week, as there has been precious little rebound yet seen.  In addition to the virus story, and the news of large bank misdeeds, the US election story remains a critical factor, although at this point, any impact remains difficult to discern.  The one thing that is quite clear is that there is a very stark choice between candidates.  Given the prevailing meme that it is going to be a very close election, and the outcome could be in doubt for weeks following November 3rd, and assuming that the market response will be quite different depending on who eventually wins, one cannot blame traders and investors for omitting the issue from their current calculations.  While eventually, there is likely to be a significant market response, at this point, it seems there is little to be gained by positioning early.

In the meantime, however, the current administration continues to seek to do what it thinks best for the economy, and today we will get to hear from Chairman Powell, as well as Treasury Secretary Mnuchin, in Congressional testimony.  As is always the case in these situations, the text of Powell’s speech has been pre-released and it continues to focus on the one (apparently only) thing that is out of his control, more fiscal stimulus.  In his opening remarks he will describe the economy as improving but with still many problems ongoing.  He will also explain that monetary stimulus needs the help of fiscal stimulus to be truly effective.  In other words, he will explain that the Fed is now ‘pushing on a string’ and if Congress doesn’t enact new stimulus measures, there is little the Fed will be able to do to achieve their statutory goals.  Of course, he won’t actually use those words, but that will be the meaning.  It is abundantly clear that the Fed’s ability to support the real economy, as opposed to financial markets, has reached its end.

However, it is not just the Fed that has reached its limit, essentially every G10 central bank has reached the limit of effective central banking.  It has been argued, and I agree with the sentiment, that the difference between ‘normal’ positive interest rates and the zero and negative rates we currently see around the world is similar to the difference between Newtonian and Quantum mechanics in Physics.  In the positive rate environment, things are exactly as they seem.  Investment decisions are based on estimated returns, and risk of repayment is factored into the rate charged. There is a concept called the time value of money, where one dollar today is worth more than that same dollar in the future.  It is the basis on which Economics, the subject, was formulated.  This is akin to Newton’s well-known laws like; Every action has an equal and opposite reaction, or a body in motion will stay in motion unless acted on by another force.  They are even, dare I say, intuitive.

But in the zero (or negative) interest rate world, investment decisions are completely different.  First, the time value of money doesn’t make sense as it becomes, a dollar today is worth less than a dollar in the future.  As well, the addition of forward guidance is self-defeating.  After all, if they know that interest rates are going to remain zero for the next three years, what is the hurry for a company to borrow money now? Especially given the extreme lack of demand for so many products.  Instead, managements have realized that there is no need to worry about increasing production, they will always be able to do that when demand increases.  Rather, their time can be better spent reconfiguring their capital structure to reduce equity (lever up) and show ever increasing EPS growth without risking a poor investment decision.  This is akin to the difficulty in understanding the quantum realm, where uncertainty reigns (thank you Heisenberg) and the accuracy of measuring the position (EPS) and momentum (growth) of a particle are inversely related.

The problem is that central bankers are all Newtonians (or Keynesians), and so simply plug zero and negative numbers into their models and expect the same reactions as when they plug in positive numbers. And the output is garbage, which is a key reason they have been unable to stimulate economic activity effectively.  Alas, as long as problems persist, central bankers will feel compelled to “do something” when doing nothing may be the best course of action.  In the end, look for more monetary stimulus as it is the only tool they have.  Unfortunately, its effectiveness has been diminished to near zero, like their interest rates.

In the meantime, a look around markets shows that risk is neither off nor on this morning, but mostly confused.  Asian equity markets followed yesterday’s US losses, with declines of around 1% in those markets open.  (The Nikkei remained closed).  But European bourses have turned modestly higher on the day as the results of some regional elections in Italy have been taken quite positively.  There, the League’s Matteo Salvini lost seats to the current government, thus reducing the probability of a toppling government and easing pressure on Italian assets.  In fact, the FTSE MIB is the leading gainer today, higher by 1.2%, but we also see the DAX (+1.0%) and CAC (+0.5%) shaking off early losses to turn up.  US futures are mixed at this time, although well off the lows seen during the Asia session.

In the bond market, yesterday saw Treasury yields decline about 3 basis points amidst the ongoing risk reduction, but this morning, prices are edging lower and the yield has backed up just about 1bp.  In Europe, things have been much more interesting as Italian BTP’s have rallied sharply during the day, with yields now down 3.5 basis points, after opening with a similar sized rise in yields.  Bunds, meanwhile, are selling off a bit, as fears of an eruption of Italian trouble recede.

And finally, the dollar, which had been firmer much of the evening, is now ceding much of those gains, and at this hour I would have to describe as mixed.  In the G10, NOK (-0.5%) remains under the most pressure as oil prices continue to soften and there is now a controversy brewing with respect to the investment strategy of the Norwegian oil fund.  But away from NOK, the G10 is +/- 0.15%, which means it is hard to describe the situation as significant.

In the emerging markets, ZAR (+1.1%) continues to be the most volatile currency around, with daily movements in excess of 1%.  It has become, perhaps, the best sentiment gauge out there.  When investors are feeling good, ZAR is in demand, and it is quick to be sold in the event that risk is under pressure.  CNY (+0.45%) is the next best performer.  This is at odds with what appears to be the PBOC’s intentions as they set the fix at a much weaker than expected 6.7872, or 0.4% weaker than yesterday.  It seems the PBOC may be getting concerned over the speed with which the renminbi has been rising, as in the end, they cannot afford for the currency to appreciate too far.  On the red side of the ledger, KRW and IDR both fell 0.6% last night as risk mitigation was the story at the time.

Aside from Chairman Powell speaking today, we also see Existing Home Sales (exp 6.0M), which if it reaches expectations would be the highest print since 2007.  If risk is back in vogue, then I would look for the dollar to continue to edge lower.  And you can be sure that Chairman Powell will not do anything to upset that apple cart.

Good luck and stay safe
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Absent Demand

Posted on by

With Autumn’s arrival at hand
The virus has taken a stand
It won’t be defeated
Nor barely depleted
Thus, markets are absent demand

Risk is definitely on the back foot this morning as concerns grow over the increase in Covid-19 cases around the world.  Adding to the downward pressure on risk assets is the news that a number of major global banks are under increased scrutiny for their inability (unwillingness?) to stop aiding and abetting money laundering.  And, of course, in the background is the growing sense that monetary authorities around the world, notably the Fed, have run out of ammunition in their ongoing efforts to support economic growth in the wake of the government imposed shutdowns.  All in all, things look pretty dire this morning.

Starting with the virus, you may recall that one of the fears voiced early on was that, like the flu, it would fade somewhat in the summer and then reassert itself as the weather cooled.  Well, it appears that was a pretty accurate analysis as we have definitely seen the number of new cases rising in numerous countries around the world.  Europe finds itself in particularly difficult straits as the early self-congratulatory talk about how well they handled things vis-à-vis the US seems to be coming undone.  India has taken the lead with respect to the growth in cases, with more than 130,000 reported in the past two days.  The big concern is that government’s around the world are going to reimpose new lockdowns to try to stifle growth in the number of cases, but we all know how severely that can impact the economy.  So, the question with which the markets are grappling is, will the potential long-term benefit of a lockdown, which may reduce the overall caseload outweigh the short-term distress to the economy, profits and solvency?

At least for today, investors and traders are coming down on the side that the lockdowns are more destructive than the disease and so we have seen equity markets around the world come under pressure, with Europe really feeling the pain.  Last night saw the Hang Seng (-2.1%) and Shanghai (-0.6%) sell off pretty steadily.  (The Nikkei was closed for Autumnal Equinox Day.)  But the situation in Europe has been far more severe with the DAX (-3.2%), CAC (-3.1%) and FTSE 100 (-3.5%) all under severe pressure.  All three of those nations are stressing from an increase in Covid cases, but this is where we are seeing a second catalyst, the story about major banks and their money laundering habits.  A new report has been released that describes movement of more than $2 trillion in illicit funds by major (many European) banks, even after sanctions and fines have been imposed.  It can be no surprise that bank stocks throughout Europe are lower, nor that pre-market activity in the US is pointing in the same direction.  As such, US future markets showing declines of 1.5%-2.0% are right in line with reasonable expectations.

And finally, we cannot ignore Chairman Powell and the Fed.  The Chairman will be speaking before Congress three times this week, on both the need for more fiscal stimulus as well as the impact of Covid on the economy.  Now we already know that the Fed has implemented “powerful” new tools to help support the US, after all, Powell told us that about ten times last week in his press conference.  Unfortunately, the market is a bit less confident in the power of those tools.  At the same time, it seems the ECB has launched a review of its PEPP program, to try to determine if it has been effective and how much longer it should continue.  One other question they will address is whether the original QE program, APP, should be modified to be more like PEPP.  It is not hard to guess what the answers will be; PEPP has been a huge success, it should be expanded and extended because of its success, and more consideration will be given to changing APP to be like PEPP (no capital key).  After all, the ECB cannot sit by idly and watch the Fed ease policy more aggressively and allow the euro to appreciate in value, that would be truly catastrophic to their stated goal of raising the cost of living inflation on the Continent.

With all that in mind, a look at FX markets highlights that the traditional risk-off movement is the order of the day.  In other words, the dollar is broadly stronger vs. just about everything except the yen.  For instance, in the G10 space, NOK (-1.45%) is falling sharply as the combination of risk aversion and a sharply lower oil price (WTI -2.5%) has taken the wind out of the krone’s sails.  But the weakness here is across the board as SEK (-0.8%) and the big two, GBP (-0.5%) and EUR (-0.45%) are all under pressure.  It’s funny, it wasn’t that long ago when the entire world was convinced that the dollar was about to collapse.  Perhaps that attitude was a bit premature.  In fact, the euro bulls need to hope that 1.1765 (50-day moving average) holds because if the technicians jump in, we could see the single currency fall a lot more.

As to the emerging markets, the story is the same, the dollar is broadly higher with recent large gainers; ZAR (-2.0%) and MXN (-1.4%), leading the way lower.  But the weakness is broad-based as the CE4 are all under pressure (CZK -1.3%, HUF -1.1%, PLN -0.95%) and even CNY (-0.2%) which has been rallying steadily since its nadir at the end of May, has suffered.  In fact, the only positive was KRW (+0.2%) which benefitted from data showing that exports finally grew, rising above 0.0% for the first time since before Covid.

As to the data this week, it is quite light with just the following to watch:

Tuesday Existing Home Sales 6.01M
Wednesday PMI Manufacturing (Prelim) 53.3
Thursday Initial Claims 840K
Continuing Claims 12.45M
New Home Sales 890K
Friday Durable Goods 1.1%
-ex Transport 1.0%

Source: Bloomberg

The market will be far more interested in Powell’s statements, as well as his answers in the Q&A from both the House and Senate.  The thing is, we already know what he is going to say.  The Fed has plenty of ammunition, but with interest rates already at zero, monetary policy needs help from fiscal policy.  In addition to Powell, nine other Fed members speak a total of twelve times this week.  But with Powell as the headliner, it is unlikely they will have an impact.

The risk meme is today’s story.  If US equity markets play out as the futures indicate, and follow Europe lower, there is no reason to expect the dollar to do anything but continue to rally.  After all, while short dollar positions are not at record highs, they are within spitting distance of being so, which means there is plenty of ammunition for a dollar rally as shorts get covered.

Good luck and stay safe
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