Waiting to See

At midnight the US imposed
The tariffs that Trump had disclosed
We’re waiting to see
How President Xi
Responds, or if China’s now hosed

It’s all about the tariffs this morning as the US increased the tariff rate on $200 billion of Chinese imports to 25% as of midnight last night. China has promised to retaliate but has not yet announced what they will do. One of the problems they have is they don’t import that much stuff from the US, so they cannot match it exactly. There was an unintentionally humorous article in Bloomberg this morning that tried to outline the ‘powerful’ tools China has to respond; namely selling US Treasuries, allowing the CNY to weaken further, or stop buying US soybeans. The humor stemmed from the fact that they basically destroyed their own arguments on the first two, leaving just the soybean restriction as potentially viable and even that is problematic.

Consider the Treasury sales first. As the Chinese own ~$1.1 trillion, if they sold a significant chunk, they would almost certainly drive US yields higher as Treasury prices fell. But two problems with this are; they would undermine the value of whatever bonds they retained and more problematically, what else would they do with the dollars? After all, the Treasury market is pretty much the only one that is large enough to handle that type of volume on a low risk basis. I guess they could convert the dollars to euros and buy Italian BTP’s (there are a lot of those outstanding) but their risk profile would get significantly worse. And of course, selling all those dollars would certainly weaken the dollar, which would not help the Chinese economy one bit.

On the flip side, allowing the renminbi to weaken sharply presents an entirely different problem, the fact that the Chinese are terrified that they would lose control of the capital flow situation if it weakened too far. Remember in 2015, when the Chinese created a mini-devaluation of just 1.5%, it triggered a massive outflow as USDCNY approached 7.00. The Chinese people have no interest in holding their assets in a sharply depreciating currency, and so were quick to sell as much as they could. The resultant capital flows cost China $1 trillion in FX reserves to prevent further weakness in the currency. Given we are only 2% below that level in the dollar right now, it seems to me the Chinese will either need to accept massive outflows and a destabilizing weakening in the renminbi, or more likely, look for another response.

The final thought was to further restrict soybean imports from the US. While the Chinese can certainly stop that trade instantly, the problems here are twofold. First, they need to find replacement supplies, as they need the soybeans regardless of where they are sourced, and second, given the Swine virus that has decimated the pig herds in China, they need to find more sources of protein for their people, not fewer. So, no pork and less soybeans is not a winning combination for Xi. The point is, while US consumers will likely feel the pressure from increased tariff rates via higher prices, the Chinese don’t have many easy responses.

And let’s talk about US prices for a moment. Shouldn’t the Fed be ecstatic to see something driving prices higher? After all, they have been castigating themselves for ‘too low’ inflation for the past seven years. They should be cheering on the President at this stage! But seriously, yesterday’s PPI data was released softer than expected (2.2%, 2.4% core) and as much as both Fed speakers and analysts try to convince us that recently declining measured inflation is transitory, the market continues to price rate cuts into the futures curve. This morning brings the CPI data (exp 2.1%, 2.1% core) but based on data we have seen consistently from around the world, aside from the oil price rally, there is scant evidence that inflation is rising. The only true exceptions are Norway, where the oil driven economy is benefitting greatly from higher oil prices, and the disasters of Argentina and Turkey, both of which have tipped into classic demand-pull inflation, where too much money is chasing too few goods.

Turning to market performance, last night saw the Shanghai Composite rally 3.1% after the imposition of tariffs, which is an odd response until you understand that the government aggressively bought stocks to prevent a further decline. The rest of Asia was mixed with the Nikkei lower by a bit and the KOSPI higher by a bit. European shares are modestly higher this morning, on average about 0.5%, in what appears to be a ‘bad news is good’ scenario. After all, French IP fell more than expected (-0.9%) and Italian IP fell more than expected (-1.4%). Yes, German Trade data was solid, but there is still scant evidence that the Eurozone is pulling out of its recent malaise so weaker data encourages traders to believe further policy ease is coming.

In the FX market, there has been relatively little movement in any currency. The euro continues to trade either side of 1.12, the pound either side of 1.30 and the yen either side of 110.00. It is very difficult to get excited about the FX market given there is every indication that the big central banks are well ensconced in their current policy mix with no changes on the horizon. That means that both the Fed and the ECB are on hold (although we will be finding out about those TLTRO’s soon) while both the BOJ and PBOC continue to ease policy. In the end, it turns out the increased tariffs were not that much of a shock to the system, although if the US imposes tariffs on the rest of Chinese imports, I expect that would be a different story.

This morning we hear from Brainerd, Bostic and Williams, although at this point, patience in policy remains the story. The inflation data mentioned above is the only data we get (although Canadian employment data is released for those of you with exposures there), and while US equity futures are tilted slightly lower at this time, it feels like the market is going to remain in the doldrums through the weekend. That is, of course, unless there is a shocking outturn from the CPI data. Or a trade deal, but that seems pretty remote right now.

Good luck and good weekend
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Growing Concern

The trade talks have taken a turn
Amidst markets growing concern
The story today
Is China won’t play
By rules which trade partners all yearn

The trade talks narrative is shifting, and markets are not taking kindly to the change. Prior assumptions had been that the talks were progressing well and that this week’s meetings in Washington were going to produce the final agreement. However, this morning the tone has changed dramatically. President Trump tweeted that the Chinese “broke the deal”, implying that items previously agreed by the two sides are no longer acceptable to China. To my reading, the key issue is the Chinese refusal to codify into law the changes being agreed regarding IP and forced technology transfer. It appears that the Chinese believe this too onerous and difficult to accomplish and instead will be giving guidance to local governments. (Perhaps somebody can explain to me how it is too onerous for a dictatorship to change its own laws.) Essentially, they want the US to trust that they will perform as expected. Simultaneously, it appears the Chinese have interpreted President Trump’s hectoring of the Fed to cut rates as an admission that the US economy is not strong, and that Trump needs to cut the deal. This has encouraged the Chinese to play hardball as they believe they have the upper hand now.

The upshot is that the odds of a successful conclusion of the talks have fallen sharply. At this point, my read is they are no more than 50:50, which is far lower than the virtual certainty the market had been pricing as recently as last Friday, and quite frankly far lower than the market is currently pricing. In fact, it is easy to make the case that at least half of the equity rebound since Christmas is due to the growing belief a trade deal would be agreed, so if that is no longer the case, a further repricing (read decline) is in the cards. As such, it should be no surprise that equities in Asia continue to retreat (Nikkei -0.95%, Shanghai -1.5%, Hang Seng 2.4%) and we are seeing weakness throughout Europe as well (DAX -0.9%, CAC -1.3%, FTSE -0.4%) given concerns that a failure in these talks will have a much wider impact spread across the investment community. Not surprisingly, US futures are pointing lower with both Dow and S&P futures -0.75% as I type.

Continuing with the risk-off theme, Treasury yields continue to decline, falling two basis points even after a very weak 10-year auction yesterday, while German bund yields have fallen another bp to -0.06%, their lowest level in two months. The flight to safety is beginning to gain some momentum here.

Finally, looking at the dollar, it should be no surprise it is having another good day. While it is little changed vs. the euro, it continues to trade near the lower end of its recent trading range. However, the pound has fallen a further 0.2% hindered not only by the modest dollar strength but by the realization that there will be no grand deal between the Tories and Labour regarding Brexit. Adding to the risk-off mood is the yen’s further appreciation, another 0.2%, taking it below 110 for the first time in three months.

In the EMG bloc, one cannot be surprised that CNY is weaker, pushing back toward 6.85 and touching its weakest level since January. On top of that, the offshore CNH is even weaker as speculation grows that a collapse in the trade talks will result in the Chinese allowing the renminbi to fall much more sharply. But it’s not just China under pressure here; we are seeing weakness in every area. For example, the Mexican peso has fallen 0.5%, Indian Rupee 0.3% and Korean won 0.85%. In other words, the carry trade is under pressure as the first investors search for a safe place to hide. Unless the talks get back on track, I expect that we will see further weakness in the EMG bloc especially.

On the data front, overnight we saw Chinese financing data which demonstrated that despite the PBOC’s efforts to add liquidity to the market, financing is not growing as rapidly as they would like. For example, New Yuan Loans increased a much less than expected CNY 1trillion (exp CNY 1.2 trillion), while Outstanding Loan Growth ebbed as well. The point is that like every other central bank, the PBOC is finding that their ability to control the economy is slipping.

This morning brings Initial Claims (exp 220K) along with the Trade Balance (-$50.2B) and PPI (2.3%, core 2.5%) all at 8:30. Also at that time, we hear from Chairman Powell, followed by speeches from Atlanta’s Rafael Bostic and Chicago’s Charles Evans later in the day. The thing is, it beggars belief that any of them are going to change their tune regarding the Fed’s patience as they watch the economy develop. At this point, the key question is, if the trade talks completely fall apart and new tariffs are imposed by both sides leading to a severe decline in the equity market, will the Fed start to contemplate cutting rates? At this point I am sure they would vehemently deny that is their thought process. But if recent history is any guide, the financialization of the US economy has forced the Fed to respond to any significant movement in the S&P. So I would answer, yes they will! But that is a story for another day. Unless there is positive news from the trade front today, look for the overnight trends to continue; weaker equities, stronger Treasuries and a stronger dollar.

Good luck
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Uncertainty Reigns

Concerns over trade still remain,
For bullish investors, a bane
They want to believe
That Trump will achieve
His goals, so investments can gain

But right now uncertainty reigns
Resulting in stock market pains
When risk is reduced
Then bonds get a boost
While euros and pounds feel the strains

The one thing we know for sure is that the trade situation continues to be a major topic on investor minds, whether those investors are of the equity or fixed income persuasion. Despite the ostensible good news that Chinese vice-premier Liu He would still be coming to Washington later this week to continue the trade talks with Mnuchin and Lighthizer, it seems the market has become a bit less convinced that a deal is coming soon. As I have written several times over the past few weeks, it seems clear the market had fully priced in a successful completion of the trade talks and an (eventual) end to tariffs. But the President’s tweets on Sunday has caused a serious reconsideration of that pricing. Arguably, the 2% decline we have seen in US equity indices over the past two sessions is not nearly enough to offset the full risk, but it is a start. Ironically, I think the constant reiteration by financial heavyweights like Christine Lagarde and Mario Draghi, of how important it is to avoid a trade war, has set up a situation where in the event no deal is reached, the market reaction will be worse than if they had never piped up in the first place.

At any rate, the increased tensions have certainly reduced risk appetites across the board. Not only have equity markets suffered (Nikkei -1.5%, Shanghai -1.1% after yesterday’s US declines) but Treasury yields continue to fall. This morning 10-year Treasury yields have fallen to 2.43%, their lowest since late March and essentially flat to the 3-month T-Bill. Expect to hear more discussion about an inverted yield curve and the omens of a recession in the near future.

Away from the trade situation, it seems most other market stories are treading water. For example, the Brexit situation has been back page news for the past two weeks. PM May continues to negotiate with opposition leader Jeremy Corbyn, but there is no consistency to the reports of progress. Labour wants to join the customs union which is something the pro-Brexiteers are fiercely against. Depending on the source of the article you read, a deal is either imminent or increasingly unlikely, which tells me that nobody really knows anything. The pound, which had seen some strength last week, especially on Friday when rumors of a deal were rife, has fallen a further 0.45% this morning and is back near the 1.30 level. It seems increasingly likely to me there will be no solution before the EU elections, and that there will be no solution before the October 31 deadline. Parliament remains riven and leadership there has been completely absent. I expect this to be exhibit A in the long tradition of muddling through by European nations.

Elsewhere in the FX markets, the RBNZ did cut rates last night by 25bps, unlike their Australian brethren who stayed on hold. Kiwi is softer by 0.25% this morning on the back of the news and has helped drag the Aussie with it. Of course, part of the malaise in these currencies is the ongoing uncertainty over the trade talks, as well as the suspect Chinese data.

Speaking of that data, last night China released much worse than expected trade results with exports falling 2.7% and imports rising just 4.0% resulting in a trade surplus of ‘just’ $13.8B, well below expectations. It seems that the tariffs are starting to have a real impact now that inventories need to be replenished. Aside from the impact on the Shanghai exchange noted above, the renminbi also drifted modestly lower, -0.1%, and continues to push toward levels last seen in January. One thing of which I am confident is that if the trade talks fall apart completely, CNY will weaken sharply and test the 7.00 level in short order. Part of the recent stability in the currency has been due to a general malaise in the FX market as evidenced by the extremely low volatility across the board. But part of it, no doubt, is the result of the PBOC managing the currency and absorbing any significant selling in order to demonstrate they are not manipulating the currency lower to enhance their trade. But that will surely end if the talks end unsuccessfully.

Away from those stories it is much more about a modest risk-off scenario today with both JPY and CHF stronger by 0.2%, while EMG currencies are suffering (MXN -0.4%, TRY -0.5%). However, the overall market tone is, not unlike the Fed, one of patience for the next catalyst to arrive. Given the dearth of important data until Friday’s CPI, that should be no real surprise.

In fact, this morning there are no data releases in the US although we do hear from Fed Governor Lael Brainerd at 8:30. Yesterday’s comments from Governor Clarida were generally unenlightening, toeing the line that waiting was the best idea for now and that there were no preconceived notions as to the next rate move. As such, I expect Brainerd to be on the same page, and the FX market to continue to tread water at least until Friday’s CPI.

Good luck
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Cold Sweats

The President’s tactic of threats
On trade talks gave some the cold sweats
So equities fell
But then by the bell
Those sellers had many regrets

Stock prices rebounded with verve
But bonds, if you look at the curve
Continue to price
A fools’ paradise
And cuts by the Federal Reserve

One of the most interesting dichotomies that we see these days is the completely different views of the global economy by stock markets and bond markets. Stock prices continue to see every glass as at least three-quarters full, willing to look past any potential bad news and rally. Yesterday saw a rout in the Far East after the President’s tweets regarding the raising of tariff rates by the end of this week. Europe continued the trend, closing down sharply as concerns grew that a change in tactics by the US could result in a renewed focus on the European auto sector and, not surprisingly, US equity markets opened sharply lower. But within a few hours, buyers emerged as the story morphed from ‘the US-China trade talks were about to collapse’ to ‘this is just a negotiating tactic by President Trump and everything is still on track for a successful (and fully priced) completion of these negotiations.’ And overnight, equity markets in Asia steadied with generally modest gains, although not nearly enough to offset Monday’s price action. Overall, equity markets remain quite optimistic.

At the same time, Treasury yields have fallen further and are back below 2.50% in the 10-year for the first time in a month. The implication is that bond investors and traders are now far less sanguine over the outcome of these talks. Certainly, if the trade talks do collapse, markets would be severely impacted with equity prices likely to see sharp declines and risk assets, in general under pressure. Treasuries (and Bunds) however, would very likely see a significant uptick in demand and it would not be hard to envision another period of a yield curve inversion. My point is it almost appears as if equity investors and bond investors are reading different stories about current events. I guess the reality is that bond investors are inherently more risk averse, so any hint of trouble forces a response. And of course, equity investors are the ones who continue to highly value ‘zombie’ companies, those firms whose profits cannot cover interest payments and who stay in business by the grace of Federal Reserve largesse.

The upshot is that risk seeking behavior remains the dominant theme in markets. As long as central banks continue to add liquidity to the mix (which despite the Fed having stopped, the BOJ and ECB continue to add as does the PBOC), that money needs to find a home somewhere. And stock markets have been the primary destination for the past ten years.

The interesting thing about the willingness to seek risk is that the dollar continues to outperform most other currencies. For the longest time, during periods of strong global growth, the dollar would soften as investment flowed to other nations and drove economic activity. However, the current situation shows a willingness to take risk and yet a simultaneous desire to hold dollars. For instance, a look at the Dollar Index (DXY) which is a broad measure against a number of currencies, shows that the dollar remains near its highest level in two years and the trend remains higher. All I’m saying is that there seems to be a disconnect between the three key global markets with both FX and bonds seeing a much darker future than equity markets.

Looking at the overnight activity, the RBA left rates on hold, which was mildly surprising as at least half the analyst community was looking for a rate cut. In the end, AUD rallied 0.4% and is, by far, the best performer of the day. As it happens, the RBNZ meets tonight and is widely expected to cut rates by 25bps thus the kiwi is lower by 0.25%. The euro and pound are essentially unchanged as there has been precious little in the way of new information either data wise or regarding the ongoing Brexit fiasco. And the rest of the G10 seems to be under very modest pressure with CAD and CHF both softer by about 0.15%.

In the emerging market space, CNY continues to fall, down a further 0.15% this morning and we continue to see pressure on LATAM currencies (MXN -0.2%). TRY is also under pressure (-1.0%) as the investors exit both stock and bond markets there in the wake of the decision to rerun the Istanbul mayoral election and the further erosion of democracy in Turkey. In APAC, MYR is little changed in the wake of the widely anticipated 25bp rate cut by the central bank there, although it has been falling steadily for the past two weeks in anticipation. But otherwise, in truth, it has been quiet.

Data today brings just the JOLTs Jobs Report (exp 7.24M) and we hear from Randal Quarles, the Fed governor overseeing regulations. Yesterday’s Fed talk was largely in line with the view that the recent dip in inflation is ‘transitory’ and that they continue to watch the data for information to help them make their next move. Overall, it is shaping up as a pretty dull session, and unless we hear something else on the trade front, I expect limited movement in most markets.

Good luck
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Still Feeling Stressed

The overnight data expressed
That China is still feeling stressed
But Europe’s reports
Showed growth of some sorts
Might finally be manifest

The dollar is on its heels this morning after data from Europe showed surprising strength almost across the board. Arguably the most important data point was Eurozone GDP printing at 0.4% in Q1, a tick higher than expected and significantly higher than Q4’s 0.2%. The drivers of this data were Italy, where Q1 GDP rose 0.2%, taking the nation out of recession and beating expectations. At the same time Spain grew at 0.7%, also better than expectations while France maintained its recent pace with a 0.3% print. Interestingly, Germany doesn’t report this data until the middle of May. However, we did see German GfK Consumer Confidence print at 10.4, remaining unchanged on the month rather than falling as expected. Adding to the growth scenario were inflation readings that were generally a tick firmer than expected in Italy, Spain and France. While these numbers remain well below the ECB target of “close to but just below” 2.0%, it has served to ease some concerns about Europe’s future. In the end, the euro has rallied 0.25% while European government bond yields are all higher by 2-5bps. However, European equity markets did not get the memo and remain little changed on the day.

Prior to these releases we learned that China’s PMI data was softer than expected, with the National number printing lower at 50.1, while the Caixin number printed at 50.2. Even though both remain above the 50.0 level indicating future growth, there is an increasing concern that China’s Q1 GDP data was more the result of a distorted comparison to last year’s data due to changed timing of the Lunar New Year. Remember, that holiday has a large impact on the Chinese economy with manufacturing shutdowns amid widescale holiday making, and so the timing of those events each year are not easily stabilized with seasonal adjustments to the data. As such, it is starting to look like Q1’s 6.4% GDP growth may have been somewhat overstated. Of course, China remains opaque in many ways, so we may need to wait until next month’s PMI data to get a better handle on things. One other clue, though, has been the ongoing decline in the price of copper, a key industrial metal and one which China represents approximately 50% of global demand. Arguably, a falling copper price implies less demand from China, which implies slowing growth there. Ultimately, while it is no surprise that the renminbi is little changed on the day, Chinese equities edged higher on the theory that the PBOC is more likely to add stimulus if the economic slowdown persists.

Of course, the other China story is that the trade talks are resuming in Beijing today and market participants will be watching closely for word that things are continuing to move in the right direction. You may recall the President Xi Jinping gave a speech last week where he highlighted the changes he anticipated in Chinese policy, all of which included accession to US demands in the trade talks. At this point, it seems the negotiators need to “simply” hash out the details, which of course is not simple at all. But if the direction from the top is broadly set, a deal seems quite likely. However, as I have pointed out in the past, the market appears to have already priced in the successful conclusion of a deal, and so when (if) one is announced, I would expect equity markets to fall on a ‘sell the news’ response.

Turning to the US, yesterday’s data showed that PCE inflation (1.5%, core 1.6%) continues to lag expectations as well as remain below the Fed’s 2.0% target. With the FOMC meeting starting this morning, although we won’t hear the outcome until tomorrow afternoon, the punditry is trying to determine what they will say. The universal expectation is for no policy changes to be enacted, and little change in the policy statement. However, to me, there has been a further shift in the tone of the most recent Fed speakers. While I believe that Loretta Mester and Esther George remain monetary hawks, I think the rest of the board has morphed into a more dovish contingent, one that will respond quite quickly to falling inflation numbers. With that in mind, yesterday’s readings have to be concerning, and if we see another set of soft inflation data next month, it is entirely possible that the doves carry the day at the June meeting and force an end to the balance sheet roll-off immediately as a signal that they will not let inflation fall further. I think the mistake we are all making is that we keep looking for policy normalization. The new normal is low rates and growing balance sheets and we are already there.

As Powell and friends get together
The question is when, it’s not whether
More policy easing
Will seem less displeasing
So prices can rise like a feather

Looking at this morning’s releases, the Employment Cost Index (exp 0.7%) starts us off with Case-Shiller home prices (3.2%) and then Chicago PMI (59.0) following later in the morning. However, with the Fed meeting ongoing, it seems unlikely that any of these numbers will move the needle. In fact, tomorrow’s ADP number would need to be extraordinary (either high or low) to move things ahead of the FOMC announcement. All this points to continued low volatility in markets as players of all stripes try to figure out what the next big thing will be. My sense is we are going to see central banks continue to lean toward easier policy, as the global focus on inflation, or the lack thereof, will continue to drive policy, as well as asset bubbles.

Good luck
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A Victimless Crime

Investors are biding their time
Til GDP data sublime
But what if it’s weak?
Will havoc it wreak?
Or is that a victimless crime?

In general, nothing has really happened in markets overnight. Perhaps the only exception is the continued weakness in the Shanghai Composite, which fell another 1.2%, taking the week’s decline beyond 5%. But otherwise, most equity markets are little changed, currencies have done little, and bond yields are within 1 bp of yesterday’s closes as well. The blame for this inactivity is being laid at the feet of this morning’s US GDP data, where we get our first look at Q1. What is truly interesting about this morning’s number is the remarkably wide range of expectations according to economist surveys. They range from 1.0% to 3.2% and depending on your source, I have seen median expectations of 2.0% (Tradingeconomics.com), 2.2% (Bloomberg) and 2.5% (WSJ). The problem with such a wide range is it will be increasingly difficult to determine what is perceived as strong or weak when it prints. However, my view is that we are in the middle of a market narrative which dictates that a strong print (>2.5%) will see equity and dollar strength on the back of confidence in the US economy continuing its world leading growth, while a weak number (<2.0%) will lead to equity strength but dollar weakness as traders will assume that given the Fed’s recent dovish turn, expectations for rate cuts will grow and stocks will benefit accordingly while the dollar suffers. We’ll know more pretty soon.

Returning to the China story, there are actually two separate threads of discussion regarding the Chinese markets and economy. The first, which has been undermining equities there this week, is that the PBOC is backing off on its recent easing trajectory, slowing the injection of short-term funds into the market. The massive equity market rally that we have seen there so far this year has been fueled by significant margin buying, however, if easy money is ending then so will the rally. While I am certain the PBOC will do all it can to prevent a major correction in stock prices, the tone of discussion there is that the PBOC is no longer supporting a further rise.

The second part of the story was a speech last night by President Xi regarding the Belt and Road Initiative. In it, he basically acceded to the US demands for honoring IP, ending forced technology transfer and maintaining a stable currency. Adding to that was the PBOC’s fix at a stronger than expected rate of 6.7307, reinforcing the idea that they would not seek advantage by weakening their currency. Given that the renminbi has been weakening steadily for the past seven sessions and reached its weakest point in more than two months, the PBOC’s actions have served to reinforce their desire to maintain control of the currency.

But arguably, the more important part of the speech was that it cleared the way, at the highest levels, for the Chinese to agree to numerous US demands on trade, and thus successfully conclude the trade talks. Those talks get going again next week when Mnuchin and Lighthizer travel back to Beijing. Look for very positive vibes when they meet the press.

Given that one of the key constraints in the global economy lately has been trade concerns, led by the US-China spat, a resolution will be seen as a harbinger to deals elsewhere and the removal of at least one black cloud. Will central banks then return to their tightening efforts? I sincerely doubt that we will see anything of the sort in the near term. At this point, I expect the reaction function for the central banking community is something along the lines of, ‘we will raise rates after we see inflation print at high levels for several consecutive months, not in anticipation that higher inflation is coming because of growth in another variable.’

So despite my earlier concerns that the market had already priced in a successful conclusion of the trade deal, and that when it was signed, equity markets would retreat, it now seems more likely that we have further to run on the upside. Central banks are nowhere near done blowing all their bubbles.

And those are the big stories for the day. As well as the GDP data at 8:30 we get Michigan Sentiment at 10:00 (exp 97.0), although that seems unlikely to have any impact after GDP. The dollar has had a hell of a week, rallying steadily as we continue to see weak data elsewhere (Japanese IP -4.6% last night!), and some emerging markets, notably ARS and TRY have come under significant new pressure. It wouldn’t surprise if there was some profit taking after the data, whether strong or weak, so I kind of expect the dollar to fade a little as we head into the weekend.

Good luck and good weekend
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Continue Restrained

Come autumn and next Halloween
The UK may finally wean
Itself from the bloc
To break the deadlock
But Parliament still must agree(n)

Meanwhile Signor Draghi explained
That growth would continue restrained
And Fed Minutes noted
That everyone voted
For policy to be maintained

There has been fresh news on each of the main market drivers in the past twenty-four hours, and yet, none of it has been sufficient to change the market’s near-term outlook, nor FX prices, by very much.

Leading with Brexit, there was a wholly unsatisfying outcome for everyone, in other words, a true compromise. PM May was seeking a June 30 deadline, while most of the rest of the EU wanted a much longer delay, between nine months and a year. However, French President Emanuel Macron argued vociferously for a short delay, actually agreeing with May, and in the end, Halloween has a new reason to be scary this year. Of course, nothing has really changed yet. May will still try to get her deal approved (ain’t happening); Euroskeptic Tories will still try to oust her (possible, but not soon) and Labour will push for new elections (also possible, but not that likely). The topic of a second referendum will be heard frequently, but as of right now, PM May has been adamant that none will not take place. So, uncertainty will continue to be the main feature of the UK economy. Q1 GDP looks set to be stronger than initially expected, but that is entirely due to stockpiling of inventory by companies trying to prepare for a hard Brexit outcome. At some point, this will reverse with a corresponding negative impact on the data. And the pound? Still between 1.30 and 1.31 and not looking like it is heading anywhere in the near future.

On to the ECB, where policy was left unchanged, as universally expected, and Signor Draghi remarked that risks to the economy continue to be to the downside. Other things we learned were that the TLTRO’s, when they come later this year, are pretty much the last arrow in the policy quiver. Right now, there is no appetite to reduce rates further, and more QE will require the ECB to revise their internal guidelines as to the nature of the program. The issue with the latter is that EU law prevents monetization of government debt, and yet if the ECB starts buying more government bonds, it will certainly appear that is what they are doing. This morning’s inflation data from France and Germany showed that there is still no inflationary impulse in the two largest economies there, and by extension, throughout the Eurozone.

At this point, ECB guidance explains rates will remain on hold through the end of 2019. My view is it will be far longer before rates rise in the Eurozone, until well into the recovery from the next recession. My forecast is negative euro rates until 2024. You read it here first! And the euro? Well, in its own right there is no reason to buy the single currency. As long as the US economic outlook remains better than that of the Eurozone, which is certainly the current case, the idea that the euro will rally in any meaningful way seems misguided. Overnight there has been little movement, and in fact, the euro has been trading between 1.12 and 1.1350 for the past three weeks and is currently right in the middle of that range. Don’t look for a break soon here either.

The FOMC Minutes taught us that the Fed is going to be on hold for quite a while. The unanimous view is that patience remains a virtue when it comes to rate moves. Confusion still exists as to how unemployment can be so low while inflation shows no signs of rising, continuing to call into question their Phillips Curve models. In fact, yesterday morning’s CPI showed that core inflation fell to 2.0% annually, a tick lower than expected and continuing to confound all their views. The point is that if there is no inflationary pressure, there is no reason to raise rates. At the same time, if US economic growth continues to outpace the rest of the world, there is no reason to cut rates. You can see why the market is coming round to the idea that nothing is going to happen on the interest rate front for the rest of 2019. Futures, which had priced in almost 40bps of rate cuts just last month, are now pricing in just 10bps (40% chance of one cut). Despite the ongoing rhetoric from President Trump regarding cutting rates and restarting QE, neither seems remotely likely at this juncture. And don’t expect either of his Fed nominees to be approved.

Finally, Treasury Secretary Mnuchin declared that the US and China have agreed a framework for enforcement of the trade agreement, with both nations to set up an office specifically designed for the purpose and a regular schedule of meetings to remain in touch over any issues that arise. But Robert Lighthizer, the Trade Representative has not commented, nor have the Chinese, so it still seems a bit uncertain. Enforcement is a key issue that has been unsolved until now, although IP protection and state subsidies remain on the table still. Interestingly, equity markets essentially ignored this ‘good’ news, which implies that a completed deal is already priced into the market. In fact, I would be far more concerned over a ‘sell the news’ outcome if/when a trade deal is announced. And of course, if talks break off, you can be certain equity prices will adjust accordingly.

This morning brings Initial Claims (exp 211K) and PPI (1.9%, 2.4% ex food & energy) and speeches from Clarida, Williams, Bullard and Bowman. But what are they going to say that is new? Nothing. Each will reiterate that the economy is doing well, still marginally above trend growth, and that monetary policy is appropriate. In the end, the market continues to wait for the next catalyst. In equities, Q1 earnings are going to start to be released this afternoon and by next week, it will be an onslaught. Arguably, that will drive equities which may yet impact the dollar depending on whether the earnings data alters overall economic views. In the meantime, range trading remains the best bet in FX.

Good luck
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