Tag Archives: #tradewar

Both Sides Connive

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The trade war continues to drive
Discussion as both sides connive
To show they are right
And it’s their birthright
The other, access to deprive

Once again, discussion about the trade situation seems to be the dominant theme in market activity. Not only did we get comments from Chinese President Xi (“We didn’t initiate this trade war and this isn’t something we want. When necessary, we will fight back, but we have been working actively to try not to have a trade war,”) but we also got a raft of weak PMI data from around the world where, to an analyst, the blame was attributed to… the impact of the trade war.

For instance, Australia started off the data slump with Composite PMI falling to 49.5, below that magic 50.0 boom-bust level and endangering the ‘Lucky Country’s’ 27 year streak of growth with no recession. This outcome increased the talk that the RBA would soon be forced to cut rates again, or perhaps even consider QE, a road down which they have not yet traveled. Aussie, however, is little changed on the day although it has been trending steadily lower for the entire month of November.

Next we saw PMI data from the Eurozone and the UK, all of which was pretty awful. On the EZ side, the interesting thing was that the manufacturing readings were all slightly higher than expected (Germany 43.8, France 51.6, EZ 46.6) but the services data were all much worse driving the composite figures lower (Germany 49.2, France 52.7, and EZ 50.3). The point is that one of the key fears expressed lately has been that the global manufacturing slump would eventually bleed into the rest of the economy. This data is some powerful evidence that is exactly what is occurring. The euro, however, is little changed on the day having rallied on earlier confirmation that Germany did not enter a technical recession, but falling back after the PMI release.

In the UK, however, things were even worse, with all three PMI data points printing much lower than expected and all three with a 48 handle. These are the weakest readings since the immediate aftermath of the Brexit vote in June 2016, and speak to the increased uncertainty that led to the recently called election. In this case, the pound did suffer, falling 0.3% and earning the crown for worst performer of the day. There are just less than three weeks left before the election and thus far, it still appears that Boris is well placed to win. But stranger things have happened with regard to elections lately. Next week we will get to see the Tory manifesto, which you can be sure will be very different than Labour’s version. Once again, I look at that document and wonder why any politician would believe that promising higher taxes, on what appeared to be everyone, is seen as a winning position. I’m confident that Boris will not be proposing a tax program of that nature, although I’m sure there will be plenty of spending promises. However, all of these political machinations are only likely to have modest impacts on the value of the pound at this point. We will need to see the outcome of the election for the next move to be defined. I still believe that a Tory majority in Parliament will see the pound rally a few cents more, but that trading above 1.35 will be very difficult in the near term.

Inflation remains
Elusive in the distance
A crow at midnight

Japan released their latest inflation data overnight and it showed that, despite the 2% rise in the GST, to 10%, the general price level did virtually nothing. The headline number was unchanged at 0.2% while the core number did manage to tick up to…0.7%. Wow. If one were to evaluate the BOJ’s performance on an objective basis, something like how they have done achieving their inflation target, it strikes me that Kuroda-san would be deemed a colossal failure. This is not to imply that the job is easy, but he has been in the chair for more than six years at this point, and despite an extraordinary amount of monetary stimulus (growing the balance sheet from 32.3% of GDP to 104.2% of GDP) core CPI has risen only from -0.7% to +0.7%. Granted, that is not actual deflation, but there is certainly no reason to believe that the 2.0% target is ever going to be attainable. To his credit, I guess, he has been able to drive the yen lower by some 16% since he started (95.00 to 108.50) which has clearly helped Japanese corporate profitability but arguably not much else. I know I’m a bit of a heretic here, but perhaps the Japanese might consider another measure of what they want to achieve. Again I ask; do policy makers around the world really believe that their populations are keen to pay more for anything? I fear that a slavish pursuit of some macroeconomic model’s mooted outcome has resulted in creating more problems than it has fixed. Just sayin’.

A quick peek at the EMG bloc shows that no currency has moved even 0.2% today, which implies that there is nothing, at all, to discuss here. On the data front, yesterday’s Initial Claims data was higher than expected at 227K with a revision higher to the previous week’s print. This is a data point that is going to get increasing scrutiny going forward, because if it starts to trend higher, it could well signal the US economy is starting to suffer more than currently believed (or at least expressed) by the Fed and its members. And that means more rate cuts and the potential for a lower dollar. This morning’s only data point is Michigan Sentiment (exp 95.7) and mercifully we don’t hear from any more Fed speakers.

It is difficult to broadly characterize this morning’s market activity, with the dollar mixed, bond yields slightly lower but equity markets slightly higher. My take is that after a week of modest overall movements, and with the Thanksgiving holiday approaching next week, there is little reason to believe we will see any currency move more than a few ticks in either direction before we head home for the weekend.

Good luck and good weekend
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Too Effing High

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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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Digging In Heels

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In Europe they’re digging in heels
Ignoring all UK appeals.
So, Brexit is looming
With Boris assuming
They’ll blink, ratifying his deal

Brexit and the Trade Wars sounds more like a punk rock band than a description of the key features in today’s markets, but once again, it is those two stories that are driving sentiment.

Regarding the former, the news today is less positive that a deal will be agreed. A wide group of EU leaders have said Boris’s latest offering is unacceptable and that they are not willing to budge off their principles (who knew they had principles?). It appears the biggest sticking point is that the proposal allows Northern Ireland to be the final arbiter of approval over the workings of the deal, voting every four years to determine if they want to remain aligned with the EU’s rules on manufactured goods, livestock and agricultural products. This, of course, would take control of the process out of the EU’s hands, something which they are unwilling to countenance.

French President Emmanuel Macron has indicated that if they cannot agree the framework for a deal by this Friday, October 11, there would be no chance to get a vote on a deal at the EU Summit to be held next week on October 17. It appears, at this point, that the EU is betting the Benn Act, the legislation recently passed requiring the PM to ask for an extension, will be enforced and that the UK will hold a general election later this year in an attempt to establish a majority opinion there. The risk, of course, is that the majority is to complete Brexit regardless and then the EU will find itself in a worse position. All of this presupposes that Boris actually does ask for the extension which would be a remarkable climb-down from his rhetoric since being elected.

Given all the weekend machinations, and the much more negative tone about the outcome, it is remarkable that the pound is little changed on the day. While it did open the London session down about 0.35%, it has since recouped those losses. As always, the pound remains a binary situation, with a hard Brexit likely to result in a sharp decline, something on the order of 10%, while a deal will result in a similar rally. However, in the event there is another extension, I expect the market will read that as a prelude to a deal and the pound should trade higher, just not that much, maybe 2%-3%.

Otherwise, the big story is the trade war and how the Chinese are narrowing the scope of the negotiations when vice-premier Liu He arrives on Thursday. They have made it quite clear that there will be no discussion on Chinese industrial policy or subsidies, key US objectives, and that all the talks will be about Chinese purchases of US agricultural and energy products as well as attempts to remove tariffs. It appears the Chinese believe that the impeachment inquiry that President Trump is facing will force him to back down on his demands. While anything is possible, especially in politics, based on all his actions to date, I don’t think that the President will change his tune on trade because of a domestic political tempest that he is bashing on a regular basis. The market seems to agree with that view as well, at least based on today’s price action which can best be described as modestly risk-off. Treasury and Bund yields are lower, albeit only between 1-2bps, the yen (+0.1%) and Swiss franc (+0.2%) have strengthened alongside the dollar and US equity futures are pointing to a decline of 0.2% to start the session. Ultimately, this story will remain a market driver based on headlines, but it would be surprising if we hear very much before the meetings begin on Thursday.

Looking ahead to the rest of the week, the FOMC Minutes will dominate conversation, but we also see CPI data:

Today Consumer Credit $15.0B
Tuesday NFIB Small Biz Optimism 102.0
  PPI 0.1% (1.8% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
Wednesday JOLTS Job Openings 7.25M
  FOMC Minutes  
Thursday Initial Claims 220K
  CPI 0.1% (1.8% Y/Y)
  -ex food & energy 0.2% (2.4% Y/Y)
Friday Michigan Sentiment 92.0

Source: Bloomberg

Over the weekend we heard from both Esther George and Eric Rosengren, the two FOMC members who dissented against the rate cuts. Both said they see no reason to cut rates again right now, but if the data do deteriorate, they have an open mind about it. Meanwhile, Friday Chairman Powell gave no hints that last week’s much weaker than expected data has changed his views either. This week brings seven more Fed speakers spread over ten different events, including Chairman Powell tomorrow.

At the same time, this morning saw German Factory Orders decline a more than expected 0.6%, which makes the twelfth consecutive Y/Y decline in that series. It is unambiguous that Germany is in a recession and the question is simply how long before the rest of Europe follows, and perhaps more importantly, will any country actually consider fiscal stimulus? As it stands right now, Germany remains steadfast in their belief it is unnecessary. Maybe a hard Brexit will change that tune!

The big picture remains intact, with the dollar being the beneficiary as the currency of the nation whose prospects outshine all others in the short run. As it appears highly unlikely a trade deal will materialize this week, I see no reason for the dollar to turn around. Perhaps the only place that is not true is if there is, in fact, a break though in the UK.

Good luck
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What He’s Wrought

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The High Court within the UK
Explained in a ruling today
That Boris cannot
Complete what he’s wrought
A win for those who want to stay

As I wrote last Tuesday, the Supreme Court ruling in the UK cannot be a surprise to anyone. The issue was that twelve justices who were appointed to their seats from lives of privilege and wealth, and who almost certainly each voted to Remain two years ago, were going to decide whether Boris Johnson, a rebel in every conceivable way, would be allowed to lead the UK out of the EU against their personal views. These are folks who have greatly benefitted from the UK being within the EU, and they were not about to derail that gravy train. Thus, this morning’s ruling should have been the default case in everyone’s mind.

Interestingly, the ruling went far beyond simply the legality of the prorogation, but included a call for Parliament to reconvene immediately. Naturally, John Bercow, the speaker of the House of Commons, and an alleged non-partisan player, called on both sides of the aisle to get back to work post haste. Given that prorogation was nothing new in Parliament, having occurred on a fairly regular basis since 1628 when King Charles I first did so, and since there is no written constitution in the UK by which to compare laws to a basic canon, it will be interesting in the future when another PM seeks prorogation at a time less fraught than the current Brexit induced mania, whether or not they have the ability to do so.

Nonetheless, we can expect Parliament to reconvene shortly and try to do more things to insure that Boris cannot unilaterally ignore the current law requiring the PM to ask for an extension if there is no deal agreed at the deadline. In other words, there is still plenty of action left in this process, with just 37 days left until the current deadline.

And what of Sterling you ask? When the announcement hit the tape at 5:30 this morning, it jumped a quick 0.4% to just below 1.2500. That move had all the hallmarks of short covering by day traders, and we have since removed half of that gain. Interestingly, Boris is currently at the UN session in NY meeting with his EU counterparts and trying to get a deal in place. In the end, I still believe that the EU is ready to relent on some issues to pave the way for a deal of some sort. As European economic data continues to melt down (German IFO Expectations fell to 90.8, well below forecasts and the lowest in more than a decade), there is a growing sense of urgency that the EU leadership cannot afford to allow a hard Brexit. Combining that view with the fact that everybody over there is simply tired of the process and wants it to end means that a deal remains far more likely than not. As such, I remain pretty confident that we will see a deal before the deadline, or at least agreement on the key Irish backstop issue, and that the pound will rebound sharply.

Away from that story, however, things are far less exciting and impactful. On the trade front, news that China has allowed exemptions from soybean tariffs for a number of Chinese importers has been met with jubilation in the farm belt, and has imparted a positive spin to the equity market. Last week’s trepidations over the canceling of the Chinese delegation’s trip to Montana and Nebraska is ancient history. The narrative is back to progress is being made and a deal will happen sooner or later. Equity markets have stabilized over the past two days, although in order to see real gains based on the trade situation we will need to see more definitive progress.

Bond prices continue to focus on the global industrial malaise that is essentially made evident every day by a new data release. Yesterday it was PMI, today IFO and later this week, on Thursday, we will see Eurozone confidence indicators for Industry, Services and Consumers. All three of these have been trending lower since the winter of 2017 and there is no reason to expect that trend to have changed. As such, it is no surprise that we continue to see government bond yields slide with Treasuries down a further 3bps this morning as are JGB’s. Bunds, however, have seen less buying interest and have seen yields fall just 1bp. The story with Bunds is more about the increasing calls for fiscal stimulus in the Eurozone. Signor Draghi has tried his best but the Teutons remain stoic in the face of all his pressure. But Draghi is an economist. Incoming ECB President Christine Lagarde is a politician and may well be the best choice for the role after all. If she has the political nous to change Merkel’s views, that will be enough to open the taps, arguably support growth in the EU and reduce the need for further monetary ease. However, that is a BIG if.

One other story out of China describes comments from PBOC Governor Yi Gang that essentially said there was no reason for them to ease policy aggressively at this time, although they have plenty of tools available if they need to do so in the future. It is clear they are still quite concerned over inflating a housing bubble and will do all they can to prevent any further excess leverage in the real estate sector. It should not be surprising that the renminbi benefitted from these comments as it is 0.25% stronger than yesterday. The combination of a slightly more hawkish PBOC and the positive trade news was all it took.

Turning to this morning’s session, things are pretty quiet at this time. There are only two minor pieces of data, Case Shiller House Prices (exp 2.90%) and Consumer Confidence (133.0). On the speaker front, nobody is scheduled today although yesterday we heard from a number of doves, Bullard, Daly and Williams, all of whom agreed with the recent rate cut. With the day’s big news out of the way, I anticipate a relatively uneventful session. Overall the dollar is slightly softer on the day, and it seems reasonable to believe that trend will stay in place so look for a modest decline as the day progresses.

Good luck
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A Major Broadside

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The question that needs to be asked
Is, have central bank powers passed?
The ECB tried
A major broadside
But markets ignored Draghi’s blast

There has certainly been no shortage of interesting news in the past twenty-four hours, however from a markets perspective, I think the ECB actions, and the market reactions are the most critical to understand. To recap Signor Draghi’s action, the ECB did the following:

1. cut the deposit rate 10bps to -0.50%;
2. restarted QE in the amount of €20Bio per month for as long as necessary;
3. reduced the rate and extended the tenor of TLTRO III loans; and
4. introduced a two-tier system to allow some excess liquidity to be exempt from the -0.50% deposit rate.

Certainly the market was prepared for the rate cut, which had been widely telegraphed, and the talk of tiering excess liquidity had also been making the rounds. Frankly, TLTRO’s had not been a centerpiece of discussion but I think that is because most market participants don’t see them as a major force in the policy debate, which leaves the start of QE2 as the most controversial thing Draghi introduced. Well, maybe that and the fact that forward guidance is now based on achieving a “robust convergence” toward the inflation target rather than a particular timeframe.

Remember, in the past two weeks we had heard from the Three Hawksketeers (Weidmann, Lautenschlager and Knot) each explicitly saying that more QE was not appropriate. We also heard that from the Latvian central banker, Rimsevics, and perhaps most surprisingly of all, from Franҫois Villeroy de Galhau, the French central bank chief. And yet despite clearly stiff opposition, Draghi got the Council to agree. Perhaps, though, he went too far in describing the “consensus as so broad, there was no need to take a vote.” Now, while I have no doubt that no vote was taken, that statement stretches credulity. This was made clear when Robert Holzmann, the new Austrian central bank president and first time member of the ECB, gave an interview yesterday afternoon explicitly saying that the ECB could well have made a mistake by reintroducing QE.

But let’s take a look at what happened after the ECB statement and during the press conference. The initial move was for the euro to decline sharply, trading down 0.65% in the first 10 minutes after the release. When Draghi took to the stage at 8:30 and reiterated the points in the statement, the euro declined a further 30 pips, touching 1.0927, its lowest level since May 2017. But that was all she wrote for the euro’s decline. As Draghi continued to speak and answer questions, traders began to suspect that the cupboard was bare regarding anything else the ECB can do to address further problems in the Eurozone economies. This was made abundantly clear in his pleas for increased fiscal stimulus, which much to his chagrin, does not appear to be forthcoming.

It was at this point that things started to turn with the euro soaring, at one point as much as 1.5% from the lows, and closed 1.3% higher than those levels. And this morning, the rally continues with the euro up to 1.1100 as I type, a solid 0.3% gain. But the big question that now must be asked is; has the market decided the ECB is out of ammunition? After all, given the relative nature of the FX market and the importance of monetary policy on exchange rates, if the market has concluded the ECB CANNOT do anymore that is effective, then by definition, the Fed is going to promulgate easier policies than the ECB with the outcome being a rising euro. So if the Fed follows through next week and cuts 25bps, and especially if it does not close the door on further cuts, we could easily see the euro rally continue. That will not help the ECB in their task to drive inflation higher, and it will set a difficult tone for Madame Lagarde’s tenure as ECB President going forward.

Turning to the Fed, the market is still fully priced for a 25bp cut next week, but thoughts of anything more have receded. However, a December cut is still priced in as well. The problem for the Fed is that the economic data has not been cooperating with the narrative that inflation is dead. For instance, yesterday’s CPI data showed Y/Y core CPI rose 2.4%, the third consecutive outcome higher than expectations and the highest print since September 2008! Once again, I will point to the anecdotal evidence that I, personally, rarely see the price of anything go down, other than the gyrations in gasoline prices. But food, clothing and services prices have been pretty steady in their ascent. Does this mean that the Fed will stay on hold? While I think it would be the right thing to do, I absolutely do not believe it is what will happen. However, it is quite easy to believe that the accompanying statement is more hawkish than currently expected (hoped for?) and that we could see this as the end of that mid-cycle adjustment. My gut is the equity market would not take that news well. And the dollar? Well, that would halt the euro’s rise pretty quickly as well. But that is next week’s story.

As if all that wasn’t enough, we got more news on the trade front, where President Trump has indicated the possibility of an interim trade deal that could halt, and potentially roll back, tariff increases in exchange for more promises on IP protection and agricultural purchases. That was all the equity market needed to hear to rally yet again, and in fairness, if there is a true thawing in that process, it should be positive for risk assets. So, the dollar declined across the board, except against the yen which fell further as risk appetite increased.

Two currencies that have had notable moves are GBP and CNY. The pound seems to be benefitting from the fact that there was a huge short position built over the past two months and the steady stream of anti-Brexit news seems to have put Boris on his back foot. If he cannot get his way, which is increasingly doubtful, then the market will continue to reprice Brexit risk and the pound has further to rally. At the same time, the renminbi’s rally has continued as well. Yesterday, you may recall, I mentioned the technical position, an island reversal, which is often seen as a top or bottom. When combining the technical with the positive trade story and the idea that the Fed has a chance to be seen as the central bank with the most easing ahead of it, there should be no surprise that USDCNY is falling. This morning’s 0.45% decline takes the two-day total to about 1.0%, a big move in the renminbi.

Turning to this morning’s data, Retail Sales are the highlight (exp 0.2%, 0.1% ex autos) and then Michigan Sentiment (90.8) at 10:00. Equity futures are pointing higher and generally there is a very positive attitude as the week comes to an end. At this point, I think these trends continue and the dollar continues to decline into the weekend. Longer term, though, we will need to consider after the FOMC next week.

Good luck and good weekend
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Another False Dawn

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Will Mario cut rates again?
And if so, by twenty or ten
Plus when will he start
To fill up his cart
With more bonds to piss off Wiedmann

Today is all about the ECB which will release its policy statement at 7:45 this morning. Then at 8:30, Signor Draghi will hold his press conference where reporters will attempt to dig deeper. At this stage, markets have priced in a 0.10% cut in the base rate, to -0.50%, with a 32% chance of a 0.20% cut. Just last week markets had priced in a 50% chance of that larger cut, so clearly the commentary from the hawks had an impact. At the same time, 80% of analysts surveyed are expecting a restart to QE with estimates of €30B – €35B per month as the jumping off point. This remains the case despite the vocal opposition by German, Dutch and French central bankers. Clearly, Draghi will have a lot of convincing to do in order to get his way. As I mentioned yesterday, bond prices have retreated driving yields higher which in the case of Bunds and other European paper implies a somewhat lower expectation of more QE.

It is also important to see what type of forward guidance we get as this has become one of the most powerful tools in central bank toolkits. Promises of a continuation in this policy until a specific inflation target is met would be quite powerful. Similarly, any indication that the ECB’s self-imposed limits on QE are under review would also be seen as quite bond bullish with both of these messages sure to undermine the euro. And perhaps that is the interim goal, weakening the euro such that the Eurozone can import a little inflation. Of course with Chinese prices declining and the huge trade uncertainty restricting business investment thus keeping a lid on growth, even a weak euro doesn’t seem that likely to drive inflation higher. At least not the time being. But central bankers remain convinced that they must do something, even if they know it will be ineffective. Finally, you can be sure there will be further pleas for fiscal stimulus to help address the current economic malaise. (Of course, Brussels will still seek to prevent the Italians from adding stimulus, of that you can be sure.)

The US-Chinese rapprochement
Has bolstered the Chinese yuan
Thus equities rose
Although I suppose
This could be another false dawn

It wouldn’t be a complete day without some new trade story and today’s is clearly on the positive side. President Trump delayed the imposition of the additional 5% tariffs on Chinese goods by two weeks, so they will now not go into effect until October 15. This gesture of good will is allegedly to allow the Chinese to celebrate their founding day without new clouds. The Chinese were appreciative and indicated they were now looking at imports of agricultural items, something they have purposely shunned in an attempt to pressure President Trump politically. Of course, given the swine fever that has decimated more than half the Chinese hog population, it seems likely that they are pretty keen to import US pork. At any rate, look for the next round of trade talks to occur during the first half of October while the détente is ongoing. The market response was immediately positive with the Nikkei and Shanghai indices both closing higher by 0.75%, although Eurozone equity markets are little changed, clearly waiting the ECB decision. Perhaps even more impressively, the renminbi has rallied 0.4% to its strongest level since August 23 and closing the gap on the charts that opened up when China last raised tariffs on US goods. At this point, market technicians may get involved as there is an island top in place on the charts. Don’t be surprised if USDCNY falls back to at least 7.00 before this move is over, and perhaps below if the trade situation seems to be easing.

Finally, the last of our big 3 stories, Brexit, has seen more political machinations and an uproar in the UK as the government was forced to release its planning document for a no-deal Brexit. Despite the fact that there were several potential scenarios, all the focus was on the worst-case which described massive potential shortages of food, fuel and medicine along with potential rioting. I have not seen the probability estimates for that scenario, and I’m pretty sure that no news source that favors Remain (all of them?) will publish one. However, despite the uproar in the papers, the pound is unchanged on the day. Remember, parliament is not in session, nor will it be until October 14. It will be fascinating to watch how this plays out. As to the pound, it remains a binary play; hard Brexit leads to 1.10 or below; any deal agreed leads to 1.30-1.35. Place your bets!

This morning we see the most important data of the week, CPI (exp 1.8%, 2.3% ex food & energy) as well as the weekly Initial Claims number (215K). If we see the recent trend continue, where CPI edges higher (was as low as 1.5% in February), that could well give pause to the FOMC. After all, cutting rates when inflation is rising and growth is stable at trend is much tougher to justify. That said, if the FOMC doesn’t cut I would expect a market bloodbath and a cacophony from the White House that would be unbearable, especially if Mario somehow manages to be extremely dovish.

Finally, a short time ago the Central Bank of Turkey cut rates more than expected to 16.5%, with new Central Bank head, Murat Cetinkaya, clearly accepting President Erdogan’s view that high rates cause inflation. At any rate, the lira has been the best performer of the day, rallying 1.1% as I type. Broadly, the dollar is softer ahead of the ECB, but that is simply position squaring before the decision. All the action will come after that.

Good luck
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Up Sh*t’s Creek

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Much time has progressed
Since last I manned a bank desk
But I have returned

Good morning all. Briefly I wanted to let you know that I have begun a new role at Sumitomo Mitsui Banking Corp. (SMBC) as of Monday morning and look forward to rekindling so many wonderful relationships while trying to assist in risk management in an increasingly uncertain world. Don’t hesitate to reach out to chat.

Said Trump well those tariffs can wait
Until it’s a much later date
That opened the door
To buy stocks and more
Now don’t you all feel simply great?

But trade is still problematique
And that’s why the view is so bleak
In Europe they’re shrinking
And China is sinking
It seems the world’s now up sh*t’s creek

Volatility continues to reign in markets as the combination of trade commentary and economic data force constant u-turns by traders and investors. Yesterday afternoon, President Trump decided to delay the imposition of tariffs on the remaining Chinese exports from the mooted September 1st start to a date in mid-December. While that hardly seems enough time to conclude any negotiations, the market reaction was swift and yesterday morning’s risk-off session was completely reversed. Stocks turned around and closed more than 1% higher. Treasuries sold off with yields jumping 5bps in the 10-year and the dollar reversed course with USDJPY rocking 1.5% higher while USDCNY tumbled more than 1%. But that was then…

The world looks less sanguine this morning, however, after data releases last night and this morning showed that the fears over a slowing global economy are well warranted. For instance, Chinese data was uniformly awful with Industrial Production falling to 4.8% growth in July, well below the 6.0% estimate and the slowest growth since they began producing data 17 years ago. Retail Sales were also much weaker than expected, rising 7.6% Y/Y in July vs. expectations of an 8.6% rise. If there were any questions as to whether or not the trade war is impacting China, they were answered emphatically last night…YES.

Then early this morning Germany released its Q2 GDP data at -0.1%, as expected but the second quarter of the past four where the economy has shrunk. Additional Eurozone data showed IP there falling -1.6%, its worst showing since February 2016. Meanwhile, inflation data continues to show a complete lack of price pressure and Eurozone Q2 GDP grew just 0.2%, also as expected but also awful. It should be no surprise that this has led to another reversal in investor psychology as the hopes engendered in the Trump comments yesterday has completely evaporated.

I would be remiss if I didn’t mention that the 2yr-10yr Treasury spread actually inverted this morning for the first time, although it had come close several times during the past months. But not only did the Treasury curve invert there, so did Gilts in the UK and we are seeing the same thing in Japan. At the same time, Bunds have fallen to yet another new low in the 10-year, trading at a yield of -0.645% as I type. The upshot is that combined with the weak economic data, the inverted yield curves have historically implied a recession was on the way. While there are those who are convinced ‘this time is different’ because of how central banks have impacted yield curves with their QE, it is all still pointing down to me.

With all that in mind, let’s take a look at markets this morning. Overnight we have seen a mixed picture in the FX market, with the yen retracing some of yesterday’s weakness, rallying 0.7%, while Aussie and the Skandies have led to the downside with all three falling 0.7% or so. As to the euro and the pound, neither has moved at all overnight. But I think it is instructive to look at the two day move, given the volatility we have seen and over that timeline, the dollar has simply rallied against the entire G10 space. Granted vs. the pound it has been a deminimis 0.1%, but CHF, EUR and CAD are all lower by 0.3% since Monday and the yen is still weaker by 0.6% snice Monday.

In the EMG space, KRW was the big winner overnight, rallying 0.8% after the tariff delay, and we also saw IDR benefit by 0.5%. CNY, meanwhile, was fixed slightly stronger and the offshore currency has held onto that strength, rising 0.35%. On the downside, ZAR is the big loser overnight, falling 1.0% as foreign investors are selling South African bonds ahead of a feared ratings downgrade into junk. We have also seen MXN retrace half of yesterday’s post trade story gain, falling 0.65% at this time.

Looking ahead to this morning’s session, there is little in the way of data that is likely to drive markets so we should continue to see sentiment as the key market mover. Right now, sentiment is not very positive so I expect risk to be jettisoned as can be seen in the equity futures with all down solidly so far. As to the dollar, I like it vs. the EMG bloc, maybe a little less vs. the G10.

Good luck
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Demand, More, to Whet

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In Asia three central banks met
And all three explained that the threat
Of trade tensions rising
Required revising
Their pathway, demand, more, to whet

The RBNZ cut rates 50bps last night, surprising markets and analysts, all of whom were expecting a 25bp rate cut. The rationale was weakening global growth and increased uncertainty over the escalation of the trade fight between the US and China were sufficient cause to attempt to get ahead of the problem. They seem to be following NY Fed President Williams’ dictum that when rates are low, cutting rates aggressively is the best central bank policy. It should be no surprise that the NZD fell sharply on the news, and this morning it is lower by 1.4% and back to levels not seen since the beginning of 2016.

The Bank of Thailand cut rates 25bps last night, surprising markets and analysts, none of whom were expecting any rate cut at all. The rationale was … (see bold type above). The initial FX move was for a 0.9% decline in THB, although it has since recouped two-thirds of those losses and currently sits just 0.3% lower than yesterday’s close. THB has been the best performing currency in Asia this year as the Thai economy has done a remarkable job of skating past many of the trade related problems affecting other nations there. However, the central bank indicated it would respond as necessary going forward, implying more rate cuts could come if deemed appropriate.

The RBI cut rates 35bps last night, surprising markets and analysts, most of whom were expecting a 25bp rate cut. The rationale was… (see bold type above). The accompanying policy statement was clearly dovish and indicted that future rate cuts are on the table if the economic path does not improve. However, this morning INR is actually stronger by 0.3% as there was a whiff of ‘buy the rumor, sell the news’ attached to this move. The rupee had already weakened 3% this week, so clearly market anticipation, if not analysts’ views, was for an even more dovish outcome.

These are not the last interest rate moves we are going to see, and we are going to see them from a widening group of central banks. You can be sure, given last night’s activity, that the Philippine central bank is going to be cutting rates when they meet this evening and now the question is, will they cut only the 25bps analysts are currently expecting, or will they take their cues from last night’s activity and cut 50bps to get ahead of the curve? Last night the peso fell 0.4% and is down 2.5% in the past week. It feels to me like the market is pricing in a bigger cut than 25bps. We shall see.

This central bank activity seems contra to the fact that equity markets are stabilizing quickly from Monday’s sell-off. The idea that because the PBOC didn’t allow another sharp move lower last night in the renminbi is an indication that there is no prospect for further weakness in the currency is ridiculous. (After all, CNY did fall 0.4% overnight). The global rate cutting cycle is starting to pick up steam, and as more central banks respond, it will force the others to do the same. The market has now priced in a 100% probability of a 25bp Fed cut at the September meeting. Comments from Fed members Daly and Bullard were explicit that the increased trade tensions have thrown a spanner into their models and that some preemption may be warranted.

A quick survey of government bond yields shows that Treasuries are down 4bps to 1.66%, new lows for the move; Bunds are down 5.5bps to -0.59% and a new historic low; while JGB’s are down 3bps to -0.21%, below the BOJ’s target of -0.2% / +0.2% for the first time since they instituted their yield curve control process. Bond investors and stock investors seem to have very different views of the world right now, but there are more markets aligning with bonds than stocks.

For instance, gold prices are up another 1% overnight, to $1500/oz, their highest in six years and show no sign of slowing down. Oil prices are down just 0.2% overnight, but more than 8% in the past week, as demand indicators decline more than offsetting production declines.

And of course, economic data continues to demonstrate the ongoing economic malaise globally. Early this morning, June German IP fell 1.5%, much worse than expected and from a downwardly revised May number, indicating even further weakness. It is becoming abundantly clear that the Eurozone is heading into a recession and that the ECB is going to be forced into aggressive action next month. Not only do I expect a 20bp rate cut, down to -0.60%, but I expect that QE is going to be restarted right away and expanded to include a larger portion of corporate bonds. And don’t rule out equities!

So, for now we are seeing simultaneous risk-on (equity rally) and risk-off (bond, gold, yen rallies) on our screens. The equity investor belief in the benefits of lower interest rates is quite strong, although I believe we are reaching a point where lower rates are not the solution to the problem. The problem is economic uncertainty due to changes in international trade relations, it is not a lack of access to capital. But lowering rates is all the central banks can do.

Overall, the dollar is stronger this morning as only a handful of currencies, notably the yen as a haven and INR as described above, have managed to gain ground. I expect that this will continue to be the pattern unless the Fed does something truly surprising like a 50bp cut in September or even more unlikely, a surprise inter-meeting cut. They have done that before, but it doesn’t seem to be in Chairman Powell’s wheelhouse.

The only data today is Consumer Credit this afternoon (exp $16.0B) and we hear from Chicago Fed President Charles Evans, a known dove later today. But equity futures are pointing higher and for now, the idea that Monday’s sharp decline was an opportunity rather than a harbinger of the future remains front and center. However, despite the equity market, I have a feeling the dollar is likely to maintain its overnight gains and perhaps extend them as well.

Good luck
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Open and Shut

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Kashakari, on Friday, explained
For US growth to be sustained
The case for a cut
Was open and shut
Since then, talk of fifty has gained

As the new week begins, last week’s late trends remain in place, i.e. limited equity market movement as uncertainty over the outcome of the Trump-Xi meeting continues, continued demand for yield as investors’ collective belief grows that more monetary ease is on the way around the world, and a softening dollar vs. other currencies and commodities, as the prevailing assumption is that the US has far more room to ease policy than any other central bank. Certainly, the last statement is true as US rates remain the highest in the developed world, so simply cutting them back to the zero bound will add much more than the stray 20bps that the ECB, which is already mired in negative territory, can possibly add.

It is this concept which has adjusted my shorter-term view on the dollar, along with the view of most dollar bulls. However, as I have discussed repeatedly, at some point, the dollar will have adjusted, especially since the rest of the world will need to get increasingly aggressive if the dollar starts to really decline. As RBA Governor Lowe mentioned in a speech, one of the key methods of policy ease transmission by any country is by having the local currency decline relative to its peers, but if everyone is easing simultaneously, then that transmission channel is not likely to be as effective. In other words, this is yet another central bank head calling for fiscal policy stimulus as he admits the limits that exist in monetary policy at this time. Alas, the herd mentality is strong in the central bank community, and so I anticipate that all of them will continue down the same path with a minimal ultimate impact.

What we do know as of last week is there are at least two FOMC members who believe rates should be lower now, Bullard and Kashkari, and I suspect that there are a number more who don’t have to be pushed that hard to go along, notably Chairman Powell himself. Remember, if markets start to decline sharply, he will want to avoid as much of the blame as possible, so if the Fed is cutting rates, he covers himself. And quite frankly, I expect that almost regardless of how the data prints in the near-term, we are going to see policy ease across the board. Every central bank is too committed at this point to stop.

The upshot of all this is that this week is likely to play out almost exactly like Friday. This means a choppy equity market with no trend, a slowly softening dollar and rising bond markets, as all eyes turn toward Osaka, Japan, where the G20 is to meet on Friday and Saturday. Much to their chagrin, it is not the G20 statement of leaders that is of concern, rather it is the outcome of the Trump-Xi meeting that matters. In fact, that is pretty much the only thing that investors are watching this week, especially since the data releases are so uninteresting.

At this point, we can only speculate on how things will play out, but what is interesting is that we have continued to hear a hard line from the Chinese press. Declaring that they will fight “to the end” regarding the trade situation, as well as warning the US on doing anything regarding the ongoing protests in Hong Kong. Look for more bombast before the two leaders meet, but I think the odds favor a more benign resolution, at least at this point.

Turning to the data situation, the only notable data overnight was German Ifo, which fell to 97.4, its lowest level since November 2014, and continuing the ongoing trend of weak Eurozone data. However, the euro continues to rally on the overwhelming belief that the US is set to ease policy further, and this morning is higher by 0.25%, and back to its highest point in 3 months. As to the rest of the week, here’s what to look forward to:

Tuesday Case-Hiller Home Prices 2.6%
  Consumer Confidence 131.2
  New Home Sales 680K
Wednesday Durable Goods -0.1%
  -ex transport 0.1%
Thursday Initial Claims 220K
  Q1GDP 3.2%
Friday Personal Income 0.3%
  Personal Spending 0.4%
  Core PCE 0.2% (1.6% Y/Y)
  Chicago PMI 53.1
  Michigan Sentiment 98.0

Arguably, the most important point is the PCE data on Friday, but of more importance is the fact that we are going to hear from four more Fed speakers early this week, notably Chairman Powell on Tuesday afternoon. And while the Fed sounded dovish last week, with the subsequent news that Kashkari was aggressively so, all eyes will be looking to see if he is persuading others. We will need to see remarkably strong data to change this narrative going forward. And that just seems so unlikely right now.

In the end, as I said at the beginning, this week is likely to shape up like Friday, with limited movement, and anxiety building as we all await the Trump-Xi meeting. And that means the dollar is likely to continue to slide all week.

Good luck
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Oy Vey!

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The jobs report was quite the dud
And traders began smelling blood
If Powell and friends
Would not make amends
Then stocks would be dragged through the mud

Then later, down Mexico’s way
The tariff dispute went away
At least for the moment
Though Trump could still foment
More problems by tweeting, oy vey!

This morning, despite the confusion
The outcome’s a foregone conclusion
Stock markets will rise
While bonds scrutinize
The data, and fight the illusion

I’m not even sure where to start this morning. Friday’s market activity was largely as I had forecast given the weak payrolls report, just a 75K rise in NFP along with weaker earnings numbers, leading to a massive increase in speculation that the Fed is going to cut, and cut soon. In fact, the probability for a June cut of 25bps is now about 50/50, with a full cut priced in for the July meeting and a total of 70bps of cuts priced in for the rest of 2019. Equity markets worldwide have rallied on the weak data as a new narrative has developed as follows: weaker US growth will force the Fed to ease policy sooner than previously forecast and every other central bank will be forced to follow suit and ease policy as well. And since the reaction function for equity markets has nothing to do with economic activity, being entirely dependent on central bank largesse, it should be no surprise that stock markets are higher everywhere. Adding to the euphoria was the announcement by the Trump administration that those potential Mexican tariffs have been suspended indefinitely after progress was made with respect to the ongoing immigration issues at the US southern border.

This combination of news and data was all that was needed to reverse the Treasury market rally from earlier in the week, with 10-year yields higher by 5bps this morning, and the dollar, which had fallen broadly on Friday, down about 0.6% across the board after the payroll report, has rebounded against most of its counterpart currencies. The one outlier here is the Mexican peso, which after the tariff threat had fallen by nearly 3%, has rebounded and is 2.0% higher vs. the dollar this morning.

To say that we live in a looking glass world where up is down and down is up may not quite capture the extent of the overall market confusion. One thing is certain though, and that is we are likely to continue to see market volatility increase going forward.

Let’s unpack the Fed portion of the story, as I believe it will be most helpful in trying to anticipate how things will play out going forward. President Trump’s threats against Mexico really shook up the market but had an even bigger impact on the Fed. Consider, we have not heard the word ‘patient’ from a Fed speaker since Cleveland Fed President Loretta Mester used the word on May 3rd. When the FOMC minutes were released on May 22, the term was rampant, but the world had changed by then. In the interim, we had seen the US-China trade talks fall apart and an increase in tariffs by both sides, as well as threats of additional actions, notably the banning of Huawei products in the US and the restriction of rare earth metals sales by China. At this point, the trade situation is referred to as a war by both sides and most pundits. We have also seen weaker US economic activity, with Retail Sales and Housing data suffering, along with manufacturing and production. While no one is claiming we are in recession yet, the probabilities of one arriving are seen as much higher.

The result of all this weak data and trade angst was a pretty sharp sell-off in the equity markets, which as we all know, seems to be the only thing that causes the Fed to react. And it did so again, with the Fed speakers over the past two weeks highlighting the weakening data and lack of inflation and some even acknowledging that a rate cut would be appropriate (Bullard and Evans.) This drove full on speculation that the Fed was about to ease policy and futures markets have now gone all-in on the idea. It would actually be disconcerting if the Fed acted after a single poor data point, so June still seems only a remote possibility, but when they meet next week, look for a much more dovish statement and for Chairman Powell to be equally dovish in the press conference afterward.

And remember, if the Fed is turning the page on ‘normalization’ there is essentially no chance that any other major central bank will be able to normalize policy either. In fact, what we have heard from both the ECB’s Draghi and BOJ’s Kuroda-san lately are defenses of the many tools they still have left to utilize in their efforts to raise inflation and inflationary expectations. But really, all they have are the same tools they’ve used already. So, look for interest rates to fall further, even where they are already negative, as well as more targeted loans and more QE. And the new versions of QE will include purchases that go far beyond government bonds. We will see much more central bank buying of equities and corporate bonds, and probably mortgages and municipals before it is all over.

Ultimately, the world has become addicted to central bank policy largesse, and I fear the only way this cycle will be broken is by a crisis, where really big changes are made (think debt jubilee), as more of the same is not going to get the job done. And that will be an environment where havens will remain in demand, so dollars, yen, Treasuries and Bunds, and probably gold will all do quite well. Maybe not immediately, but that is where we are headed.

Enough doom and gloom. Let’s pivot to the data story this week, which is actually pretty important:

Today JOLTs Jobs Report 7.479M
Tuesday NFIB Small Biz 102.3
  PPI 0.1% (2.0% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
Wednesday CPI 0.1% (1.9% Y/Y)
  -ex food & energy 0.2% (2.1% Y/Y)
Thursday Initial Claims 216K
Friday Retail Sales 0.7%
  -ex autos 0.3%
  IP 0.1%
  Capacity Utilization 78.7%
  Michigan Sentiment 98.1

Clearly CPI will be closely watched, with any weakness just fanning the flames for rate cuts sooner. Also, after the weak NFP report Friday, I expect closer scrutiny for the Initial Claims data. This has been quite steady at low levels for some time, but many pundits will be watching for an uptick here as confirmation that the jobs market is starting to soften. Finally, Retail Sales will also be seen as important, especially given the poor outcome last month, which surprised one and all.

Mercifully, the Fed is in its quiet period ahead of their meeting next week, so we won’t be hearing from them. Right now, however, the momentum for a rate cut continues to build and stories in the media are more about potential weakness in the economy than in the strength that we had seen several months ago. If the focus remains on US economic activity softening, the dollar should come under pressure, but once we see that spread to other areas, notably the UK and Europe, where they had soft data this morning, I expect those pressures to equalize. For today, though, I feel like the dollar is still vulnerable.

Good luck
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