Risk Off’s Set To Soar

Though April saw rallies galore
In equities, bonds and much more
The first days of May
Seem set to convey
A tale that risk-off’s set to soar

Last week finished on a down note for risk appetite, as we saw equities decline sharply on Friday, at least in those markets that were open, as well as the first cracks in the rebound in currencies vs. the dollar. This morning, those trends are starting to reassert themselves and we look to be heading toward a full-blown risk-off session.

A quick recap reminds us that Thursday, which was month end, saw a modest decline in equities which was easily attributed to portfolio rebalancing. After all, the April rally was impressive in any context, let alone the current situation where huge swathes of the global economy have been shuttered for more than a month. Friday, while a holiday in many markets around the world, saw far more significant equity market declines in countries that were open, with US markets falling between 2.5% and 3.2%. The weekend saw loads of stories highlighting the adage, ‘Sell in May and go away’, as an appropriate strategy this year. This was compounded by the far more bearish take by Warren Buffett regarding the US economy, where he explained that Berkshire Hathaway had exited its positions in airline stocks and instead had grown its cash pile to $138 billion. These are not the signs of confidence that investors crave, and so this morning, European equity markets are all much lower, led by the CAC (-4.0%) and DAX (-3.5%). While both China and Japan were closed for holidays, the Hang Seng had a terrible performance, falling 4.2%, and we saw sharp declines throughout the rest of Emerging Asia. Meanwhile, US futures markets are all lower by about 1% as I type.

I guess the question at hand remains the sustainability of last month’s price action. Right now, there are two key subjects where the underlying narrative is up for grabs; risk appetite and inflation. For the former, there is a large contingent who believe that the worst is over with respect to Covid-19, and its spread is abating. This means that over the course of the next few weeks and months, economies are going to reopen and that the situation will return to normal. There is much talk of a V-shaped recovery on the strength of the extraordinary efforts of central banks and governments around the world. The flip side of this argument is that despite the tentative steps toward reopening economies worldwide, the pace of recovery will be significantly slower than the pace of the decline. Concerns about how much of the economy has been irrevocably destroyed, with small businesses worldwide closing, and unemployment everywhere rising sharply, are rife. While we are still in the first half of Q1 earnings season, the data to date have not been pretty, and remember, the virus only became a significant issue in March, generally. This implies that the bearish view may have more legs, and it is the side I believe fits the fact pattern more accurately.

The inflation narrative is just as fierce, with the hard money advocates all decrying the central bank activity as opening the door to currency collapses and hyperinflation right around the corner. Meanwhile, the other side of the argument looks to the history of the past twenty years, where Japan has been printing yen and effectively monetizing its debt, while still unable to achieve any sort of inflation at all. In this case, I think the deflationistas make the best case for the near term, as the combination of unprecedented demand destruction as well as extraordinary growth in debt both point to slower growth and price declines in the short and medium term. However, that is not to ignore the fact that central banks have gone far outside the boundaries of what had traditionally been viewed as their bailiwick, and especially if we do see a debt jubilee of some type, where government debt owned by a nation’s own central bank is forgiven, then the opportunity for a significant inflationary outcome remains on the table. Just not right away.

Adding it up for today points to a reduced risk appetite as evidenced by those equity markets that are open. Bond markets have not played along as one might have expected, with Treasury yields lower by only 1bp, and Bund yields, along with the rest of Europe’s, actually higher this morning. That price action seems to be a response to concerns over the outcome of the German Constitutional Court’s ruling due tomorrow, regarding the legality of QE, the PEPP and, perhaps more critically, the necessity of the ECB to follow the Capital Key when purchasing bonds.

In the FX markets, the dollar has resumed its role as king of the world, rallying against every currency except the yen, which has essentially stayed flat. In the G10 space, NOK is the leading decliner, down 1.2% as oil prices are back on the schneid with WTI down 6.3% this morning. But we are seeing the pound (-0.8%) and Swedish krone (-0.7%) under significant pressure as well. GBP traders are looking ahead to Thursday’s BOE meeting where expectations are rising for another bout of policy ease, which fits in with the broad risk-off framework. The krone, meanwhile, is suffering as the Riksbank finds itself in a difficult spot regarding its QE program. It seems that despite its claims that it would be purchasing not only government bonds, but corporates as well, that is illegal based on the bank’s guiding legislation, and so there is some monetary policy confusion now undermining the currency.

In the EMG space, IDR (-1.45%) and RUB (-1.3%) have been the weakest performers, with the ruble suffering from both weaker oil prices as well as the recent increase in the pace of infections in Russia. While things there are already under pressure, they could well get worse before they get better. Meanwhile, Indonesia saw a reversal of half of last week’s currency gains as PMI data (27.5) highlighted just how weak the near-term looks for the island nation. While the bulk of the rest of the space has suffered on the back of the overall risk-off sentiment, there has been a later reversal in ZAR, where the rand is now higher by 0.75% after its PMI data surprised one and all by printing at 46.1, well above expectations and a very modest decline compared to March, albeit still in contractionary territory.

On the docket this week, we see a great deal of information culminating in the payroll report on Friday, and that is certain to be frightful.

Today Factory Orders -9.4%
Tuesday Trade Balance -$44.2B
  ISM Non-Manufacturing 37.8
Wednesday ADP Employment -20.5M
Thursday Initial Claims -3.0M
  Continuing Claims -19.6M
  Nonfarm Productivity -5.5%
  Unit Labor Costs 3.8%
  Consumer Credit $15.0B
Friday Nonfarm Payrolls -21.3M
  Private Payrolls -21.7M
  Manufacturing Payrolls -2.25M
  Unemployment Rate 16.0%
  Average Hourly Earnings 0.3% (3.3% Y/Y)
  Average Weekly Hours 33.5
  Participation Rate 61.6%

Source: Bloomberg

The range of expectations for the payroll number highlight the ongoing confusion, with estimates between -840K and -30.0M. Regardless, the number will be a record, of that there is no doubt.

In addition to all this data, we hear from the RBA and the BOE on Thursday, with further ease on the cards, and we get to hear from five different Fed speakers. In these unprecedented times, as policymakers struggle to keep up with the economic destruction, we will soon become inured to shocking data. But that will not make it any better, and I fear that shock or not, risk appetites will continue to diminish as the month, and year, progresses. This means that the dollar is likely to retain its bid for a while yet.

Good luck and stay safe
Adf

Infinite Buying

Is infinite buying
Kuroda-san’s new mantra
If so, will it help?

An interesting lesson was learned, for those paying attention, yesterday after a headline hit the tape about the BOJ. The headline, BOJ Considering Unlimited JGB Purchases, had an immediate impact on the yen’s value, driving it lower by 0.7% in minutes. After all, logic dictates that a central bank that will buy all the government debt available will drive rates, no matter where they are, even lower, and that the currency would suffer on the back of the news. But, as is often the case, upon further reflection, the market realized that there was much less here than met the eye, and the yen recouped all those losses by early afternoon. In fact, over the past two sessions, the yen is essentially unchanged overall.

But why, you may ask, would that headline have been misleading. The key is to recognize that the BOJ’s current policy describes their QQE (Qualitative and Quantitative Easing) as targeting ¥80 trillion per year, equivalent in today’s market to approximately $740 billion. But they haven’t come close to achieving that target since 2017, actually only purchasing about ¥15 trillion last year. That’s a pretty big miss, but a year after they created that target, they began Yield-Curve Control (YCC), which states that 10-year JGB’s will be kept at around a 0.0% yield, +/-0.2%. Now, given that the BOJ already owns nearly 50% of all JGB’s outstanding, there is very little actual trading ongoing in the JGB market, so it doesn’t really move very much. The point is, the BOJ doesn’t need to buy many JGB’s to keep yields around 0.0%. However, they have been concerned over the optics of reducing that ¥80 trillion target, as reducing it might seem a signal that the BOJ was tightening policy. But now, in the wake of the Fed’s announcement that they will be executing unlimited QE, the BOJ has the perfect answer. They can get rid of a target that no longer means anything, while seeming to expand their program. At the same time, when pressed, they will point to their successful YCC and claim they are purchasing everything necessary to keep rates low. And in fairness, they will be right.

Next week it’s the central bank three
Who meet and they’ll try to agree
On proper next steps
(Increasing the PEPP?)
And printing cash like it was free

This was merely a prelude to what the next several days are going to hold, anticipation of the next central bank actions as the three major central banks, BOJ, Fed and ECB, all meet next week. At this point, we have already seen all the excitement regarding the BOJ, and as to the Fed, while they may well announce more details on their efforts to get funds flowing to SME’s, they are already at unlimited QE (and they are active, buying $75 billion/day) and so it seems unlikely that there will be anything else new to be learned.

The ECB, however, is the place where all the action is going to be. Remember, Madame Lagarde was a little slow off the mark, when back in March she stated that the ECB’s job was not to worry about spreads in the government bond market. Granted, within two weeks, after the market crushed Italian BTP’s and called into question Italy’s ability to fund its Covid-19 response, she realized that was, in fact, her only role. And so subsequently we got a €750 billion PEPP program that included Greek debt for the first time. But clearly, based on the recent PMI data, as well as things like this morning’s Ifo Expectations Survey (69.4 vs. exp 75.0), more is needed. So, speculation is now rampant that PEPP will be increased by €250 billion, and that the Capital Key will be explicitly scrapped. The latter is important because that is the driver of which nation’s debt they purchase and is based on the relative size of each economy. But the main problem is Italy, and so you can be sure that the ECB is going to wind up with a lot more Italian debt than would be allowed under the old rules.

Turning back to this week, though, we still have a whole day to traverse before the weekend arrives. Overall, markets are beginning to quiet down, with actual volatility a bit softer than we had seen recently. For example, though equity markets in Europe are lower, the declines are between 0.7% (FTSE 100) and 1.1% (Spain’s IBEX), with the CAC and DAX in between. If you recall, we were seeing daily movement on the order of 2%-5% not that long ago. The same was true overnight, with the Nikkei (-0.9%), Hang Seng (-0.6%) and Shanghai (-1.1%) all softer but by less dramatic amounts. As to US futures, while they were negative earlier, they are actually currently higher by about 0.5%, although we have a long way to go before the opening.

Bond markets are uninspiring, with Treasuries basically unchanged. European markets are a bit firmer (yields lower) across the board as investors try to anticipate the mooted increase in PEPP. And JGB’s are yielding -0.026%, right where the BOJ wants them.

The dollar this morning is now ever so slightly softer, with CAD actually the leading gainer up 0.2%, while the rest of the G10 is +/-0.1%. The Ifo data was the only release of note, although we have seen oil prices rebound slightly, currently higher by about 1.0% helping both CAD and NOK. In the EMG bloc, the story is a bit more mixed, although gainers have had a better day than losers. By that I mean, CZK (+1.35%), HUF (+1.1%) and RUB (+1.0%) have seen stronger gains than the worst performers (INR and KRW both -0.5%). As always, there are idiosyncratic drivers, with CZK seeming to benefit from word that lockdowns are about to ease, while HUF is gaining on the imminent beginning of QE purchases by the central bank. As to RUB, the combination of oil’s continuing rally off its worst levels earlier this week, and the Bank of Russia’s 50bp rate cut, to 5.50%, has investors looking for better times ahead. Ironically, that stronger oil seems to be weighing on the rupee, while the won fell as foreign equity selling dominated the market narrative.

Yesterday’s Claims data was pretty much as expected, granted that was 4.4M, still horrific, but the market absorbed the news easily. This morning brings Durable Goods (exp -12.0%, -6.5% ex transport) and then at 10:00 Michigan Sentiment (68.0). Not surprisingly, expectations are for some of the worst readings in history, but the way the market has been behaving, I think the risk is actually for a less negative data print and a sharp risk rally. Eventually, unless there really is a V-shaped recovery, I do see risk being shed, but it doesn’t seem like today is the day to get started.

Good luck, good weekend and stay safe
Adf

 

Rule By Decree

The virus continues to be
Our number one priority
The global response
Has been to ensconce
The idea of rule by decree

Thus governments, both left and right
Expand as they all try to fight
Their total demise
And what that implies
‘Bout politics as a birthright

Covid-19 has created a new lens through which we view everything these days, from financial market activity to whether or not to answer the doorbell. And in every task, we have become more circumspect as to the potential effects of our choices. As Dorothy said, “I don’t think we’re in Kansas anymore.” But despite the major upheavals we have seen, we must still seek the best possible outcomes at our appointed tasks, be they as important caring for our loved ones, or as mundane as hedging FX risk. Of course, this note talks about the latter not the former, so while I truly wish you all to stay healthy and safe, that will not be the topic du jour.

Instead, I thought it might be worthwhile to discuss just how much firepower central banks and governments have thrown at Covid-19, or more accurately at the disruptions the spread of the virus has wrought. I have gathered from central bank websites the remarkable amount of actions that they have taken so far in just March of this year. This is not meant to be exhaustive but merely illustrative of the breadth of activity we have seen:

Central Bank Rate cuts Current rate QE  Bio USD equivalent
Fed -1.50% 0.25% 5000
BOC -1.50% 0.25% 90
Norgesbank -1.25% 0.25%
RBNZ -0.75% 0.25%
Chile -0.75% 1.00%
RBI -0.75% 4.40% 12
Bank of England -0.65% 0.10% 240
RBA -0.50% 0.25% 80
BOKorea -0.50% 0.75%
Philippines -0.50% 3.75%
BCBrazil -0.50% 3.75%
Colombia -0.50% 3.75%
Banxico -0.50% 6.50%
Thailand -0.25% 0.75%
Indonesia -0.25% 4.50%
PBOC -0.20% 2.20%
SNB 0.00% -0.75%
ECB 0.00% -0.50% 1100
BOJ 0.00% -0.10% 205
Riksbank 0.00% 0.00% 30
MASingapore 0.00% 1.26%
Russia 0.00% 6.00%
Danmark Nationalbank 0.15% -0.60%

The collective amount of rate cutting has been 10.70%! And QE that was easily confirmed now totals more than $6.75 trillion equivalent. Central banks are pulling out all the stops. Meanwhile, governments, to the extent they are separate than central banks, have been adding fiscal stimulus by the truckload as they create inventive new ways to support both businesses and individuals in this most remarkable of situations. Will it be enough to stem the tide? Only time will tell, but nobody can accuse these officials of not trying, that’s for sure.

Of course, as I have discussed previously, the biggest concern ought to be just how much of the economy is controlled by governments, especially in ostensibly free market nations, when all this finally passes. And even more importantly, how quickly they reduce that control. Alas, if history is any guide, it will require a revolution for governments to cede their grip on the economy, and by extension the power it brings. There is a book, “The Fourth Turning” by Neil Howe, which discusses the cycles of history. It is a fascinating read, and one which seems quite prescient as to the current global political situation. I highly recommend taking a look.

In the end, what seems quite certain is that what we assumed was normal just two months ago may never return. This is true of businesses as well as market behaviors. Safe havens have lost much of their luster as investors find themselves in a very difficult situation. How can getting paid just 0.6% nominally for 10 years (current 10-year treasury yield) be considered a safe place to hold your funds with inflation running at 2.3%, and after a likely short-term deflationary bout due to demand destruction, set to move to heights not seen since prior to the GFC? Of course, the answer is, it can’t. But then Treasuries have a higher return than Gilts, Bunds or JGB’s, the other nations to which one would naturally gravitate for a safe haven. Equities certainly don’t create warm and fuzzy feelings given the extraordinary situation with businesses shutting down everywhere and revenues and earnings collapsing. Commodities? Even gold has had a tough time, although it is marginally higher since all this really got going in earnest, but as a safe haven? Cryptocurrencies? (LOL). In fact, despite the ongoing depreciation of the dollar through creeping inflation, Benjamins are clearly the one thing that remain accepted as a place to maintain value. They are fungible and recognized worldwide as a store of value and medium of exchange. It is with this in mind that we should recognize the near-term outlook for the dollar should remain positive.

So what has happened overnight? The dollar is king once again, rising against all its G10 counterparts with CAD the laggard, -1.1%, after oil prices once again sold off sharply (WTI briefly traded below $20/bbl and isdown about 5.2%) this morning. But the weakness is widespread with SEK -1.0% and EUR -0.8% following closely behind the Loonie. European data released this morning showed, not surprisingly, that Economic Confidence (94.5 from 103.5) had fallen at its fastest pace ever, although it has not yet plumbed the depths of the Eurozone crisis in 2012. Give it time!

Emerging markets are also under significant pressure, with MXN today’s biggest loser, down 1.8%, as the combination of tumbling oil prices, the rapid decline of US demand and AMLO’s remarkably insouciant response to Covid-19 has investors fleeing despite the highest yields available in LATAM. But RUB (-1.3%) on the back of declining oil prices and ZAR (-1.1%) on the back of declining commodity prices as well as internal credit problems, are also suffering. In fact, just two currencies, MYR and PHP were able to rally today, each by about 0.2% as each nation announced additional fiscal and monetary support.

Looking ahead this week, aside from the ongoing virus news, we do get more data as follows:

Tuesday Case Shiller Home Prices 3.29%
  Chicago PMI 40.0
  Consumer Confidence 110.0
Wednesday ADP Employment -150K
  Construction Spending 0.5%
  ISM Manufacturing 45.0
  ISM Prices Paid 41.8
Thursday Trade Balance -$40.0B
  Initial Claims 3150K
  Factory Orders 0.2%
Friday Nonfarm Payrolls -100K
  Private Payrolls -110K
  Manufacturing Payrolls -10K
  Unemployment Rate 3.8%
  Average Hourly Earnings 0.2% (3.0% Y/Y)
  Average Weekly Hours 34.2
  Participation Rate 63.3%
  ISM Non-Manufacturing 44.0

Source: Bloomberg

Obviously, much of this is still backward looking and the real question on the NFP report is just how much of the disruption took place during the survey week, which was 3 weeks ago. I think the Initial Claims number will have more power this month, as well as the ISM data. But boy, next month’s NFP report is going to be UGLY!

At any rate, there is not going to be anything positive from the economic data set this week, or probably throughout April. Rather the next piece of positive news we will hear is when the infection curve has started to flatten and there is an end to this disruption in sight. As of now, one man’s view is we will be like this for another month at least. I sincerely hope for everyone, that it is shorter than that.

Good luck and stay safe
Adf

Wind At His Sails

In England and Scotland and Wales
Young Boris has wind at his sails
A thumping great win
To Labour’s chagrin
Has put Brexit back on the rails

As well, from the US, the news
Is bears need start singing the blues
The trade deal is done
At least for phase one
Thus more risk, investors did choose

An historic victory for PM Boris Johnson yesterday has heralded a new beginning for the UK. Historic in the sense that it is the largest majority in Parliament for either party since Margret Thatcher’s second term, and historic in the sense that the Labour party won the fewest seats since 1935. One can only conclude that Jeremy Corbyn’s vision of renationalization of industry and high taxes was not the direction in which the UK wants to head. Perhaps the only concern is the Scottish National Party winning 49 of the 58 seats available and will now be itching to rerun the Scottish independence referendum. But that is an issue for another day, and today is all about a huge relief rally in equities as the threat of a hard Brexit essentially disappears, while the pound has also benefitted tremendously, rising 1.7% from yesterday’s closing level and having traded almost a full percent higher than that in the early aftermath of the results. So here we are this morning at 1.3390, right at my forecast for the initial move in the event of a Johnson victory. The question of course, is where do we go from here?

Before I answer, I must also mention the other risk positive story, about which I’m sure you are already aware, the news that President Trump has signed off on terms of a phase one trade deal with China. The details thus far released indicate China has promised to buy $50 billion of agricultural products from the US, and will be more vigilant in protection of IP rights, while the US is set to reduce the tariff rates already imposed and delay, indefinitely, the tariffs that were due to come into effect this Sunday. Not surprisingly, equity markets around the world rallied sharply on this news as well while haven investments like Treasuries, Bunds and the yen (and the dollar) have all fallen.

So everyone is feeling good this morning and with good reason, as two of the major political uncertainties that have been hanging over the market have been resolved. With this in mind, we can now try to answer the question of what’s next in the FX markets.

History has shown that while macroeconomic factors have some impact on the relative value of currencies, that impact is driven by the corresponding interest rates in each nation. So a nation that has strong economic growth and relatively tighter monetary policy is likely to see a strong currency while the opposite is also true. Now this correlation is hardly perfect, and financial theory cannot be completely ignored regarding a country’s fiscal balances (current account, trade and budget), where deficits tend to lead to a weaker currency, at least in theory, and surpluses the opposite. Obviously, one need only look at the dollar these days to recognize that despite the US’s significant negative fiscal position, the dollar remains relatively quite strong.

But ever since the financial crisis, there has been another part of monetary policy that has had a significant impact on the FX market, namely QE. As I’ve written before, when the US was implementing QE’s 1, 2 and 3, the dollar fell markedly each time, by 22%, 25% and 17% over a period of 9 months, 11 months and 22 months respectively. Clearly that pattern demonstrates the law of diminishing returns, where a particular action has a weaker and weaker effect the more frequently it is used. Of course, in each of these cases, the Fed funds rate was at 0.00%, so QE was the only tool in the toolbox. This brings us to the current situation; positive interest rates but the beginning of QE4. I know that none of us think 1.5% is a robust return on our savings, but remember, US interest rates are the highest in the G10, by a lot. In addition, the economy seems to be doing pretty well with GDP ticking over above 2.0%, Unemployment at 50 year lows and wage gains solidly at 3.0% or higher. Equity markets in the US make new highs on a regular basis and measured inflation is running right around 2.0%. And yet…the Fed is clearly looking at QE despite all their protestations. Buying $60 billion per month of T-bills with the newly stated option of extending those purchases to coupons is clearly expanding the balance sheet and driving risk accumulation further. And that is QE!

So with the knowledge that the Fed is engaged in QE4, and the history that shows the dollar has fallen pretty significantly during each previous QE policy, my view is that we are about to embark on a reasonable weakening of the US dollar for the next year or so. Now, clearly the initial conditions this time are different, with positive growth and interest rates, but while that will likely limit the dollar’s decline to some extent, it won’t prevent it. If pressed, I would say that we are likely to see the dollar fall by 10% or so over the next 12-18 months. And that is regardless of the outcome of the US elections next year. In the event that we were to see a President Warren or President Sanders, I think the dollar would suffer far more aggressively, but right now, removing the effect of the election still points to a slow decline in the buck. So for receivables hedgers, it is likely to be a situation where patience is a virtue.

Turning to the data story, last night we saw the Japanese Tankan report fall to 0, below expectations of 3 and down from its previous reading of 5. But the yen’s 0.35% decline overnight has more to do with risk appetite than that particular number. However, I’m sure PM Abe and BOJ Governor Kuroda are not thrilled with the implications for the economy. Otherwise, there has been precious little else of note released leaving us to ponder this morning’s Retail Sales data (exp 0.5%, 0.4% ex Autos) and wait to hear pearls of wisdom from NY Fed President Williams at 11:00. Of course, given the fact the Fed just finished meeting and there appears very little uncertainty over their immediate future course, my guess is the only thing he can try to defend is ‘not QE’ and how they are on top of the repo situation. But today is a risk on day, so while we may not extend these movements much further, I feel we are likely to maintain the gains vs. the dollar across the board.

In a final note, this will be the last poetry until January as I will be on vacation and then will return with my prognostications for 2020 to start things off.

Good luck, good weekend and happy holidays to all
Adf

 

A Paean to John Maynard Keynes

The positive vibe still remains
Encouraging stock market gains
Likewise bonds are sold
With dollars and gold
In paeans to John Maynard Keynes

As the market walks in ahead of today’s jobs report, once again poor data has been set aside and the equity bulls are leading the parade to acquire more risk assets. Stock markets are rallying, bond markets selling off and there is pressure on gold and the dollar. Granted, the moves have not been too large, but the reality is that the default market activity is to buy stocks regardless of valuation.

Let’s start with a quick look at current data expectations:

Nonfarm Payrolls 183K
Private Payrolls 179K
Manufacturing Payrolls 40K
Unemployment Rate 3.6%
Average Hourly Earnings 0.3% (3.0% Y/Y)
Average Weekly Hours 34.4
Michigan Sentiment 97.0

Source: Bloomberg

These are all pretty good numbers, and if the forecasts are right, it would certainly reinforce the idea that the US economy is ticking over nicely. Of course, the problem is that we have seen some pretty bad data in the past week which may call this evaluation into question. Recall Monday’s terrible ISM Manufacturing data, as well as Wednesday’s double whammy of ISM Non-Manufacturing and ADP Employment, both of which sharply disappointed. While yesterday’s Durable Goods was right on the mark, I would argue that based on the data seen this week, the US economy is clearly slowing down into the fourth quarter.

Adding to the general gloom is the data we have seen from elsewhere, notably Europe, where this morning’s German IP report (-1.7%) was the worst monthly print since April and took the year on year decline to -5.3%, the slowest pace since the financial crisis in 2009! Remember, Factory orders in Germany were awful yesterday, and the PMI data, while not as bad as expected regarding manufacturing, was much worse than expected in the service sector. The point is Europe is clearly not going to be driving the global economy higher anytime soon.

And of course, the other main engine of growth, China, has continued to present a picture of an economy in slow decline with excess leverage and financial bubbles still abundant, and with a central bank that is having trouble deciding which problem to address, excess leverage or slowing growth.

With this as a starting point, it is easy to see why there are so many bears in the market. But there is an antidote to this unrequited bearishness…the Fed! While Chairman Powell has repeatedly explained that the FOMC’s current practice of purchasing $60 billion per month of Treasury bills is NOT QE, it is certainly QE. And remember, the Fed is not just purchasing T-bills, they are also adding liquidity through overnight, weekly and monthly repo operations on a regular basis. In fact, they are taking all the collateral offered and lending money against it, not even targeting an amount they want to add. It certainly appears that they are simply adding as much liquidity to the markets as possible to prevent any of those bears from gaining traction. So in reality, it is no real surprise that risk assets remain in demand.

In fact, the Fed’s ongoing active stance in the money markets has me reconsidering my long-held views on the dollar’s future. The macroeconomic story remains, in my estimation, a USD positive, but one need only look at the dollar’s performance during QE1, QE2 and QE3 where we saw dollar declines of 22%, 25% and 16% respectively to force one to reconsider those views. ‘Not QE’ could easily undermine the dollar’s strength and perhaps, despite the ECB’s ongoing efforts, drive the dollar much lower. In conversations with many clients, I have been hard pressed to come up with a scenario where the dollar falls sharply, short of another shocking US electoral outcome where, as a nation we vote for left wing populism, à la Senator Warren or Senator Sanders, rather than our current stance of right wing populism. However, if the Fed maintains its current stance, expanding the balance sheet and adding liquidity with abandon to the money markets, there is every reason to believe that the dollar will suffer. After all, we continue to run a massive current account deficit, alongside our trade and budget deficits, and we are flooding the markets with newly issued Treasury debt. At some point, and perhaps in the not too distant future, the market may well decide the US dollar is no longer the haven asset that it has been in the past. In any case, while I consider the issues, it would be sensible, in my estimation, for hedgers to consider them as well.

And with that cheery thought, let us look forward to this morning’s market activity. My sense is that the combination of modestly higher than expected Initial Claims data during the survey week, as well as weak ISM employment sub-indices, and of course, the weak ADP number, will result in a disappointing outcome today. I fear that we could see something as low as 100K, which could see a knee-jerk reaction lower in the dollar as expectations ratchet up for more Fed monetary ease.

One other thing to keep in mind is that as we approach year-end, market liquidity starts to dry up. There should be no problems today, nor next week, I expect, but after that, trading desks see staffing thin out for vacations and risk appetite for the banks shrinks significantly. Nobody wants to risk a good year, and nobody will overcome a bad one in the last week of the year. So to the extent possible, I strongly recommend taking care of year end activity by the end of next week for the best results.

Good luck and good weekend
Adf

Too Effing High

Said Powell, we’re going to buy
More assets in order to try
To make sure that rates
Stay where the Fed states
And stop trading too effing high

“This is not QE; in no sense is this QE!” So said Fed Chairman, Jerome Powell, yesterday at a conference in Denver when describing the fact that the Fed would soon resume purchasing assets. You may recall right around the time of the last FOMC meeting, there was sudden turmoil in the Fed Funds and other short-term funding markets as reserves became scarce and interest rates rose above the Fed’s target. That resulted in the Fed executing a series of short-term reverse repos in order to make more reserves available to the banking community at large. Of course, the concern was how the Fed let itself into this situation. It seems that the reduction of the Fed balance sheet as part of the normalization process might have gone a little too far. Yesterday, Powell confirmed that the Fed was going to start buying 3-month Treasury bills to expand the size of the balance sheet and help stabilize money markets. However, he insisted that given the short-term nature of the assets they are purchasing, this should not be construed as a resumption of QE, where the Fed bought maturities from 2-years to 30-years. QE was designed to lower longer term financing rates and boost investment and correspondingly economic growth. This action is meant to increase the availability of bank reserves in the system so that no shortages appear and money markets remain stable and functioning.

As far as it goes, that makes sense given commercial banks’ regulatory needs for a certain amount of available reserves. But Powell also spoke about interest rates more generally and hinted that a rate cut was a very real possibility, although in no way certain. Of course, the market is pricing in an 80% probability of a cut this month and a 50% probability of another one in December. Certainly Powell didn’t dispute those ideas. And yet a funny thing happened in the markets yesterday despite the Fed Chairman discussing further policy ease; risk was reduced. Equity markets suffered in Europe and the US, with all major indices lower by more than 1.0% (S&P -1.5%). Treasury yields fell 3bps and the dollar rallied steadily all day along with the yen, the Swiss franc and gold.

It is the rare day when the Fed Chair talks about easing and stock prices fall. It appears that the market was more concerned with the escalation in trade war rhetoric and the apparent death of any chance for a Brexit deal, both of which have been described as key reasons for business and investor uncertainty which has led to slowing growth, than with Fed policy. And for central banks, that is a bigger problem. What if markets no longer take their cues from the central bankers and instead trade based on macroeconomic events? What will the central banks do then?

On the China front, yesterday’s White House actions to blacklist eight Chinese tech firms over their involvement in Xinjiang and the Uigher repression was a new and surprising blow to US-China relations. In addition, the US imposed visa restrictions on a number of individuals involved in that issue and has generally turned up the temperature just ahead of the next round of trade talks which are due to begin tomorrow in Washington. It has become abundantly clear that the ongoing trade war is beginning to have quite a negative impact on the US economy as well as that of the rest of the world. President Trump continues to believe that the US has the advantage and is pressing it as much as he can. Of course, Chinese President Xi also believes that he holds the best cards and so is unwilling to cave in on key issues. However, this morning there was a report that China would be quite willing to sign a more limited deal where they purchase a significantly greater amount of agricultural products, up to $30 billion worth, as well as remove non-tariff barriers against US pork and beef in exchange for the US promising not to implement the tariffs that are set to go into effect next Tuesday and again on December 15. In addition, the PBOC fixed the renminbi last night at a lower than expected 7.0728, indicating that they want to be very clear that a depreciation in their currency is not on the cards. It is not hard to view these actions and conclude that China is starting to bend a little, especially with the Hong Kong situation continuing to escalate.

It also seems pretty clear that the talks this week have a low ceiling for any developments, but my sense is some minor deal will be agreed. However, the big issues like state subsidies and IP theft are unlikely to ever be resolved as they are fundamental to China’s economic model and there are no signs they are going to change. In the end, if we do get some de-escalation of rhetoric this week, I expect risk assets to respond quite favorably, at least for a little while.

Turning to Brexit, all we have heard since yesterday’s phone call between Boris and Angela is recriminations as to who is causing the talks to fall apart. Blame is not going to get this done, and at this point, the question is, will the UK actually ask for an extension. Ostensibly, Boris is due to speak to Irish PM Varadkar today, but both sides seem pretty dug in right now. The EU demand that Northern Ireland remain in the EU customs union in perpetuity appears to be a deal breaker, and who can blame them. After all, the purpose of Brexit was to get out of that customs union and be free to negotiate terms as they saw fit with other nations. However, as European economic data continues to deteriorate, the pressure on the EU to find a deal will continue to increase. While you cannot rule out a hard Brexit, I continue to believe that some type of fudge will be agreed before this is over. Yesterday the pound suffered greatly, falling below 1.22 for a bit before closing lower by 0.6%. This morning, amid a broadly weaker dollar environment, the pound is a laggard, but still marginally higher vs. the dollar, up 0.1% as I type.

The rest of the FX market was singularly unimpressive overnight, with no currency moving even 0.5% as traders everywhere await the release of the FOMC Minutes this afternoon. Ahead of the Minutes, we only see the JOLTS jobs report (exp 7.25M) which rarely matters to markets. Yesterday’s PPI data was surprisingly soft, falling -0.3% and now has some analysts reconsidering their inflation forecasts for tomorrow. Of course, quiescent inflation plays into the hands of those FOMC members who want to cut rates further. At this point, the softer dollar seems to be more of a reaction to yesterday’s strength than anything else. I expect limited movement ahead of the Minutes, and quite frankly, limited afterwards as well. Tomorrow’s CPI feels like the next big catalyst we will see.

Good luck
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QT Anyone? (or The Three Hawksketeers)

As summer recedes
JGB rates have collapsed
QT anyone?

As we approach the unofficial end of summer with the Labor Day holiday weekend, it seems the BOJ is finally responding to the fact that their yield curve control policy has been dismissed by the market for basically all of August. A brief history shows that ordinary QE had lost its ability to impact the Japanese economy by September 2016, by which time the BOJ owned about 40% of JGB’s outstanding and thus destroyed any sense of it being a true market. At that point, they introduced yield curve control in an attempt to insure that 10-year yields didn’t rise prematurely. Initially they set a range of +/-0.10% around zero, where if the 10-year traded outside the range they would step in and push it back. Last year they widened that range to +/-0.20%, and up until the beginning of this month, things were working smoothly.

Then the global bond rally gathered steam and JGB’s were not exempt with 10-year yields falling to -0.30% at one point earlier this week, well below the lower bound. Remarkably, the BOJ did nothing, calling into question their commitment to yield curve control. As it turns out, last night they finally acted, reducing the quantity of bonds to be purchased monthly going forward by a significant ¥50 trillion. JGB yields did rally 3bps initially, but closed the session only 1bp higher and still well below the lower bound. As I have been writing, this is simply further proof that the central banks have run out of effective monetary policy tools. As to the impact on the yen, overnight has seen a very modest strengthening of just 0.15%. For the month, however, the increase in risk aversion has seen the yen outperform every other currency in the world, rallying 2.1% against the dollar, and more against most others. While I continue to view the dollar in a positive light going forward, I also continue to see further gains for the yen against all comers.

The hawks at the ECB fear
That not only rate cuts are near
So this week they’ve shrieked
Though rates might be tweaked
That QE has no place this year

Meanwhile, from Europe we had the third of the Three Hawksketeers in the ECB on the tape overnight, Klaas Knot the President of the Dutch central bank. In line with his German colleagues Sabine Lautenschlager and Jens Weidmann, he said that while a cut in interest rates could make sense here, there is absolutely no cause for the reinitiation of QE at this time. That is to be used in dire emergencies (perhaps like a hard Brexit?). This sets up quite a battle for Signor Draghi at his penultimate meeting next month, where other ECB members, Finland’s Ollie Rehn notably, have already called for ‘impactful’ actions implying he wants to over deliver on market expectations.

The market response to the Knot comments was muted at best with Bunds and Dutch bonds seeing yields actually fall 0.5bps in today’s trade. However, that could also be a response to this morning’s Eurozone CPI data where the headline printed at 1.0%, as expected but still miles from their target of “just below 2.0%”. Of more concern though was the core number which surprisingly fell to 0.9%, adding to the case for further stimulus, at least in the ECB’s collective modeling minds. And the euro? Well it has continued its slow and steady decline this month, falling another 0.2% and now trading at its lowest level since May 2017. It continues to be very difficult to make a case for the euro to rebound significantly anytime soon. And despite the Three Hawksketeers, I am more and more convinced that QE starts up again next month. Look for further declines in the single currency.

On the trade front, everybody seems willing to take the over on a positive outcome which has supported stocks nicely. On Brexit, there have been three lawsuits filed against PM Johnson’s move to prorogue Parliament for five weeks, but the first ruling that came down this morning went in Boris’s favor. The pound is little changed on the day, even after marginally weaker than expected house price data, but for the month it is actually a touch higher, 0.2%, which just shows that the market really was focused on a hard Brexit last month. There have been several EU officials stating that prorogation should have no impact on negotiations, and some even see it my way as a strong lever to get a deal.

For all you hedgers, consider this: a 1-year ATMF option costs a bit more than 5 cents. While that is certainly higher than it was before Brexit occurred, I would contend that October will be a binary event, with a no-deal outcome driving a quite severe decline, likely to at least 1.10, while a deal should take us back to 1.30-1.35 quickly. In either case, 5 cents seems like a reasonable price to pay. And obviously, shorter term options will cost less with the same movement available.

And that’s really it for today. The dollar continues to largely grind higher vs. its EMG counterparts, and, quite frankly, its G10 counterparts as well. Equity markets remain in their trade euphoria clouds, and bond markets seem a bit more cautious. Yesterday saw US Q2 GDP revised down to 2.0%, as expected, but the consumer spending measurement was an even stronger than expected 4.7%. This morning the BEA releases Personal Income (exp 0.3%), Personal Spending (0.5%) and PCE (1.4%, 1.6% core) all at 8:30. We also see Chicago PMI (47.5) at 9:45 and Michigan Sentiment (92.3) at 10:00. The Fed is mercifully quiet going into the weekend so barring a shocking outcome in PCE or a White House tweet, the best bet is a continued slow grind higher in the dollar.

Good luck and good weekend
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Loosen the Screws

Said President Trump, come next week
That he and Xi are set to speak
Meanwhile he complains
The euro remains
Too weak, and a boost there he’ll seek

But that was all yesterday’s news
Today Jay will offer his views
On whether the Fed
Is ready to shred
Its old plans and loosen the screws

ECB President Draghi once again proved his mettle yesterday by managing to surprise the market with an even more dovish set of comments when he spoke at the ECB gathering in Sintra, Portugal. Essentially, the market now believes he promised to cut interest rates further and restart QE soon, despite the fact that rates in the Eurozone remain negative and that the ECB has run up against their self-imposed limits regarding percentage of ownership of Eurozone government bonds. In other words, once again, Draghi will change the rules to allow him to go deeper down the rabbit hole otherwise, these days, known as monetary policy.

Markets were Europhoric, on the news, with equities on the Continent all rising 1.5% or so, while government bond yields fell to new lows. German Bund yields touched a new, all-time, low at -0.326%, but we also saw French OAT yields fall to a record low of 0.00% in the 10-year space. In fact, all Eurozone government bonds saw sharp declines in yields. For Draghi, I’m sure the most gratifying result was that the 5 year/5 year inflation swap contract rebounded from 1.18%, up to 1.23%, still massively below the target of “close to, but below, 2.0%”, but at least it stopped falling. In addition, the euro fell, closing the day lower by 0.2% and back below the 1.12 level, and we also saw gold add to its recent gains, as lower interest rates traditionally support precious metals prices.

US markets also had a big day yesterday with both equity and bond markets continuing the recent rally. Clearly, the idea that the ECB was ready to add further stimulus was a key driver of the move, but that news also whetted appetites for today’s FOMC meeting and what they will do and say. Adding fuel to the equity fire was President Trump’s announcement that he would be meeting with Chinese President Xi at the G20 next week, with plans for an “extended meeting” there. This has created the following idea for traders and investors; global monetary policy is set to get much easier while the trade war is soon coming to an end. The combination will remove both of the current drags on global economic growth, so buy risky assets. Of course, the flaw in this theory is that if Trump and Xi come to terms, then the trade war, which has universally been blamed for the world’s economic troubles, will no longer be weakening the economy and so easier monetary policy won’t be necessary. But those are just details relative to the main narrative. And the narrative is now, easy money is coming to a central bank near you, and that means stocks will rally!

Let’s analyze that narrative for a moment. There is a growing suspicion that this is a coordinated attempt by central bankers to rebuild confidence by all of them easing policy at the same time, thus allowing a broad-based economic benefit without specific currency impacts. After all, if the ECB eases, and so does the Fed, and the BOJ tonight, and even the BOE tomorrow, the relative benefits (read declines) to any major currency will be limited. The problem I have with the theory is that coordination is extremely difficult to achieve out in the open, let alone as a series of back room deals. However, it does seem pretty clear that the data set of late is looking much less robust than had been the case earlier this year, so central bank responses are not surprising.

And remember, too, that BOE Governor Carney keeps trying to insist that UK rates could rise in the event of a smooth Brexit, although this morning’s CPI data printed right on their target of 2.0%, with pipeline pressures looking quite subdued. This has resulted in futures markets pricing in rate cuts despite Carney’s threats. This has also helped undermine the pound’s performance, which continues to be a laggard, even with yesterday’s euro declines. The fact that markets are ignoring Carney sets a dangerous precedent for the central banking community as well, because if markets begin to ignore their words, they may soon find all their decisions marginalized.

So, all in all, the market is ready for a Fed easing party, although this morning’s price action has been very quiet ahead of the actual news at 2:00 this afternoon. Futures markets are currently pricing a 23% chance of a rate cut today and an 85% chance of one in July. One thing I don’t understand is why nobody is talking about ending QT this month, rather than waiting until September. After all, the balance sheet run-off has been blamed for undermining the economy just as much as the interest rate increases. An early stop there would be seen as quite dovish without needing to promise to change rates. Just a thought.

And really, these are the stories that matter today. If possible, this Fed meeting is even more important than usual, which means that the likelihood of large movement before the 2:00pm announcement is extremely small. There is no other data today, and overall, the dollar is ever so slightly softer going into the announcement. This is a reflection of the anticipated easing bias, but obviously, it all depends on what the Chairman says to anticipate the next move.

Good luck
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Constant Hyperbole

On Wednesday the FOMC
Will offer their latest decree
Will Fed funds be pared?
Or will Jay be scared
By Trump’s constant hyperbole?

The one thing that’s patently clear
Is rates will go lower this year
And lately some clues
Show Powell’s new views
Imply NIRP he’ll soon engineer

Once again, market movement overnight has been muted as traders and investors look ahead to Wednesday’s FOMC meeting and Chairman Powell’s press conference afterwards. Current expectations are for the removal of the word ‘patient’ from the statement and some verbiage that implies rates will be adjusted as necessary to maintain the US growth trajectory. Futures markets are pricing just a 25% probability of a rate cut on Wednesday, but a virtual certainty of one at the July meeting in six weeks’ time. With that said, there are several bank analysts calling for a cut today, or a 50bp cut in July. The one thing that seems abundantly clear is that interest rates in the US have reached their short-term peak, with the next move lower.

However, in the Mariner Eccles building, they have another dilemma, the fact that Fed funds are just 2.50%, the lowest cyclical peak in history. It has been widely recounted that the average amount of rate cutting by the Fed when fighting a recession has been a bit more than 500bps, which given the current rate, results in two possibilities: either they will have to quickly move to use other policy tools, like QE; or interest rates in the US are going to go negative before long! And quite frankly, I expect that it will be a combination of both.

Consider, while the Fed did purchase some $3.5 trillion of assets starting with QE1 in 2009, the Fed balance sheet still represents just 19% of US GDP. This compares quite favorably with the ECB (45%) and the BOJ (103%), but still represents a huge increase from its level prior to the financial crisis. Funnily enough, while there was a great deal of carping in Congress about QE by the (dwindling) hard-money set of Republicans, if the choice comes down to NIRP (Negative Interest Rate Policy) or a larger balance sheet, I assure you the politicians will opt for a larger balance sheet. The thing is, if the economy truly begins to slow, it won’t be a choice, it will be a combination of both, NIRP and QE, as the Fed pulls out all the stops in an effort to prevent a downturn.

And NIRP, in the US, will require an entirely new communications effort because, as in Europe and Japan, investors will find themselves on the wrong side of the curve when looking for short term investments. Money market funds are going to get crushed, and corporate treasuries are going to have to find new places to invest. It will truly change the landscape, and it is not clear it will do so in a net positive way. But regardless, NIRP is coming to a screen near you once the Fed starts cutting, although we are still a number of months away from that.

With that in mind, the obvious next question is how it will impact other markets. I expect that the initial reaction will be for a sharp equity rally, as that is still the default response to rate cuts. However, if the Fed is looking ahead and sees trouble on the horizon, that cannot be a long-term positive for equities. It implies that earnings numbers are going to decline, and no matter how ‘bullish’ interest rate cuts may seem, declining earnings are hard to overcome.

Bonds, on the other hand, are easy to forecast, with a massive rally in Treasuries, a lagging rally in corporates, as spreads widen into a weakening economy, but for high-yield bonds, I would expect significant underperformance. Remember, during the financial crisis, junk bond yield spreads rose to 20.0% over Treasuries. In another economic slowdown, I would look for at least the same, which compares to the current level of about 5.50%.

Finally, the dollar becomes a difficult question. Given the Fed has far more room to ease policy than does the ECB, the BOJ, the BOE or the BOC, it certainly seems as though the first move would be lower in the buck. However, if the Fed is easing policy that aggressively, you can be sure that every other central bank is going to quickly follow. Net I expect that we could see a pretty sharp initial decline, maybe 5%-7%, but that once the rest of the world gets into gear, the dollar will find plenty of support.

A quick look at markets overnight shows that the dollar is little changed overall, with some currencies slightly firmer and others slightly softer. However, there is no trend today, nor likely until we hear from the Fed on Wednesday.

Looking at data this week, it is much less interesting than last week’s and unlikely to sway views.

Today Empire Manufacturing 10.0
Tuesday Housing Starts 1.239M
  Building Permits 1.296M
Wednesday FOMC Rates 2.50% (unchanged)
Thursday BOJ Rates -0.10% (unchanged)
  Initial Claims 220K
  Philly Fed 11.0
  Leading Indicators 0.1%
Friday Existing Home Sales 5.25M

As I said, not too interesting. And of course, once the Fed meeting is done, we will get to hear more from the various Fed members, with two speakers on Friday afternoon (Brainard and Mester) likely to be the beginning of a new onslaught.

Yes, the trade situation still matters, but there is little chance of any change there until the G20 meeting next week, and that assumes President’s Trump and Xi agree to meet. So, for now, it is all about the Fed. One last thing, the ECB has their Sintra meeting (their answer to Jackson Hole) this week, and it is likely that we will hear more about their thinking when it comes to easing policy further given their current policy settings include NIRP and a much larger balance sheet already. Any hint that new policies are coming soon will certainly undermine the single currency. Look for that beginning on Wednesday as well.

Good luck
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Contrite

More stock market records were smashed
And bulls remain quite unabashed
The future is bright
With Powell contrite
As prior rate hikes are now trashed

The world is a fabulous place this morning, or at least the US is, if we are judging by the financial markets. Both the S&P 500 and NASDAQ indices made new all-time highs yesterday, with the Dow Jones scant points away from its own new record. The dollar is back to its highest point since mid-December and looks poised to rally toward levels not seen since mid 2017. Meanwhile, Treasuries remain in demand, despite all this risk appetite, as yields actually dipped yesterday and continue to hover around 2.50%. And the remarkable thing is the fact that there is no reason to believe these trends will end in the near future. After all, as we move into the heart of earnings season, the data shows that 80% of the 105 companies that have so far reported have beaten their (much reduced) estimates. Even though actual earnings growth is sparse, the fact that expectations have been reduced sufficiently to allow a no-growth result to seem bullish is the fuel for market bulls.

Beyond the earnings story, we have had a bit more positive US data, with New Home Sales rising 4.5%, instead of the expected decline. Last week we also saw strong Retail Sales data, and even though broadly speaking, the housing market seems a bit shaky, (Housing Starts and Existing Home Sales were both soft), there has been enough positive news overall to keep up momentum. And when compared to the Eurozone, where Germany’s Ifo fell to 99.2, below expectations and French Business Confidence fell to 101, its lowest point in three years, it is even clearer why the US is in favor.

Of course, there is one other reason that the US is a favored investment spot right now, the Fed. Over the course of the first four months of 2019, we have seen the Fed turn from a clear hawkish view to uber-doves. At this point, if there are two FOMC members who think a rate hike is in the cards for the rest of the year, it would be a lot. The market is still pricing in a chance of a rate cut, despite the ongoing data releases indicating things are pretty good in the US, and of course, President Trump and his staff have been consistent in their view that rates should be lower, and QE restarted. Funnily enough, given the global central bank desire to pump up inflation, and their total inability to do so for the past decade, do not be surprised to see further policy ease from the US this year. In fact, despite all the angst over Modern Monetary Theory (MMT) I would wager that before long, some mainstream economists are going to be touting the idea as reasonable and that it is going to make its way into policy circles soon thereafter.

In fact, one of the things I have discussed in the past, a debt jubilee, where debt is completely written off, seems almost inevitable. Consider how much government debt is owned by various nations’ central banks. The Fed owns $2.2 trillion, the BOJ owns ¥465 trillion (roughly $4.5 trillion) while the ECB owns €2.55 trillion (roughly $2.85 trillion). Arguably, each could make a book entry and simply destroy the outstanding debt, or some portion of it, without changing anything about the economy directly. While in the past that would have been anathema to economists, these days, I’m not so sure. And if it was done in a coordinated fashion, odds are the market response would be pretty benign. In fact, you could make the case that it would be hyper bullish, as the reduction in debt/GDP ratios would allow for significant additional policy stimulus as well as increased demand for the remaining securities outstanding. We continue to get warnings from official quarters (yesterday the IMF’s new chief economist was the latest to explain there is no free lunch) but politicians will continue to hear the siren song of MMT and will almost certainly be unable to resist the temptation.

Anyway, turning back to the FX market, the dollar has proven to be quite resilient over the past several sessions. This morning, after a rally yesterday, it is higher by another 0.2% vs. the euro. As to the pound, it has fallen steadily during the past week, a bit more than 1.2%, and though unchanged this morning, is now trading well below 1.30. Aussie fell sharply last night after inflation data disappointed on the low side and calls for rate cuts were reaffirmed. This morning, it is down 0.95% and pushing back to 0.7000, which has been a long-term support line. However, if rate cuts are coming, and China remains in the doldrums, it is hard to see that support continuing to hold.

This is not just a G10 phenomenon though, with EMG currencies also on the back foot. For instance, KRW fell 0.75% overnight and broke through key support with the dollar trading back to its highest level since mid-2017. RUB, ZAR and TRY are all lower by ~0.7% and LATAM currencies are under pressure as well.

The point is that as I have been explaining for the past months, whatever issues might exist within the US, they pale in comparison to the issues elsewhere. And looking at the economic growth momentum around the world, the US continues to lead the pack. We will get another reading on that come Friday, but until then, the data is sparse, with nothing at all released today.

I see no reason for current market trends to falter, so expect equities to rally with the dollar alongside them as international investors buy dollars in order to buy stocks. We will need something remarkably different to change this narrative, and it just doesn’t seem like there is anything on the horizon to make that happen.

Good luck
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