Tag Archives: #UK

Desperate Straits

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Ahead of today’s CPI
Jobs data from England showed why
Inflation remains
The greatest of pains
That central banks can’t wave good-bye

Despite all their hiking of rates
In seeking to reach their mandates
The job market’s growing 
Which seems to be showing 
Their models are in desperate straits

Today’s key feature is the monthly CPI report from the US where expectations are for a 4.1% headline reading and 5.2% core reading, with both still far higher than the Fed’s 2.0% target.  While the headline number is certainly good news, the Fed’s problem is that the core reading continues to bump along pretty steadily above 5.0% and is not showing any indication of a sharp move lower.  While an exceptionally weak headline reading will almost certainly result in a further rally in risk assets on the premise that the Fed’s pause skip is now baked in, the greater question is how long can the Fed tolerate such a high core CPI reading before resuming their rate hikes?  As we head into the data, the Fed funds futures market is currently pricing just under a 25% chance of a hike tomorrow but nearly an 87% chance of at least one hike by July.  However, that is the peak with a cut then assumed by December.

 

Of course, the thing that is not getting any attention at this point is what happens if the reading is hot?  I have literally not read a single analysis that anticipates a higher outcome showing inflation has become even more intractable than it had seemed for the past several months.  My take is a higher-than-expected reading, especially in the core print, could see the market substantially increase their pricing for a rate hike tomorrow as well as another one or two before the year is over, and that may not be a positive for risk assets.

 

And that’s where the UK’s employment data comes into the discussion, as it is showing the same characteristics as the US employment data, surprising strength.  Briefly, instead of a rising Unemployment Rate, it fell to 3.8% with wages rising by 6.5% Y/Y, well above last month’s and well above forecasts.  There was a reduction in the number of jobless claims and a significant growth in employment of 250K on a quarterly basis, also far above forecasts.  In other words, despite a lot of doom and gloom regarding the UK economy and the irreparable damage that Brexit has done to the nation, it seems that there is continued economic activity at a decent pace and businesses are still hiring and paying up to do so.  I have to say that sounds suspiciously like the commentary regarding the US economy, where despite an ongoing belief that Unemployment is set to rise, each monthly data point has been surprising on the high side, often by a significant amount.  As I have written before, perhaps it is time for the central banking community to review the efficacy of their models as they no longer seem to represent any sense of reality.

 

The other noteworthy news overnight was that the PBOC reduced their 7-day Reverse Repo rate by 10bps to 1.90% in a surprising move.  Tomorrow night the PBOC has their monthly meeting and expectations are for a 10bp reduction in their medium-term lending facilities as the Chinese government struggles with a much slower than expected rebound from their latest Covid reopening.  In fairness, it is not just the Chinese government that is surprised as one of the main themes we have seen for the past several months was the expectation that China’s rebound would result in a significant increase in demand for commodities and that has just not occurred.  However, the fact remains that China is easing policy, both fiscal and monetary, while the G7 remains in a tightening phase.  The natural outcome here is that the renminbi has continued to slide.  While the onshore market closed little changed, with CNY -0.1%, the initial reaction upon the announcement of the rate cut was a little more substantial.  Net, though, the renminbi has been weakening steadily all year long and given recent very low inflation data, it is abundantly clear that the PBOC is not concerned at current levels.  I expect that USDCNY and USDCNH have much further to climb as the summer progresses, especially if CPI continues to run hot here in the US.

 

And those are really the key stories as we await that CPI print shortly.  Asian equity markets followed the US higher last night with the Nikkei continuing its sharp rally, rising 1.8%, and the rest of the markets trailing along behind. Europe, though, is having a less formidable session with minimal movement as the major indices are +/-0.1% from yesterday’s closing levels.  As to US futures, only NASDAQ futures are showing any movement, gaining 0.3% at this hour (7:30).

 

Bond markets are similarly dull, save the Gilt market which has seen 10yr yields rise 5.7bps, as both Treasuries and the rest of the European sovereign market are within 1bp of yesterday’s prices.  The Fed continues to be active in the Treasury market, taking down a significant portion of the issuance yesterday, albeit not directly as they bought off-the-run bonds instead of the issuances.  However, today’s data could easily have a significant impact as traders try to reassess the Fed’s response to a data surprise.

 

Oil prices have stopped falling and have bounce 1.8% from yesterday’s lowest levels of just below $67/bbl, although the trend continues to be lower.  As I have repeatedly written, this is the one market that is all-in on the recession call. Gold (+0.4%) has been pretty uninteresting lately as it stopped falling but has basically flat-lined for the past month just below $2000/oz.  Meanwhile, copper has rallied 2% this morning but is still well below highs seen earlier this year.  However, I think a large part of these movements are the fact that the dollar is generally softer this morning.

 

Versus its G10 counterparts, the dollar is softer across the board with GBP (+0.5%) the leading gainer but decent strength everywhere.  Versus the EMG bloc, there is a bit more variety with KRW (+1.3%) by far the leading gainer on a combination of reported corporate repatriation of overseas cash flows as well as hopes that China’s rate cut will support further growth in Korean exports.  However, after that, the bloc is basically split between gainers and laggards with the biggest moves just 0.3% either way, not enough to get excited about.

 

And that’s really it for today.  It is all about CPI this morning and depending on the data, we have the opportunity to get a better sense of how the Fed might behave tomorrow.

 

Good luck

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Possibly Burst

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It turns out inflation’s not dead

At least in the UK, instead

With prices there surging

The market is purging

All thoughts rate cuts might be ahead

However, elsewhere, there’s concern

That soon there will be a downturn

Thus, stocks have reversed

And possibly burst

The bubble for which most folks yearn

Interestingly, inflation discussions are really beginning to diverge around the world.  What had been a global phenomenon, with prices rising everywhere on the back of pandemic lockdown induced shortages combined with massive fiscal stimulus pumping up demand, is starting to shake out a bit more idiosyncratically.  While in the US we have seen a clear reduction in the trend of prices over the past year, albeit still far above the Fed’s comfort level, elsewhere, this is not necessarily the case.  Today’s example is the UK, where CPI printed at 8.7%, far above the median forecast of 8.2%, although mercifully lower than last month’s 10.1%.  However, core CPI, which excludes energy, food, alcohol and tobacco in the UK, rose to 6.8%, a new high level for this bout of inflation and the highest in the UK since 1992.

One cannot be surprised that the market responded with Gilt yields jumping more than 6bps while the rest of global bond markets have seen yields decline in the face of a broad risk-off sentiment.  More impressively, the OIS market has immediately priced in more than 30bps of additional rate hikes before the end of the year this morning.  While UK stocks are lower, so are equity markets everywhere around the world and perhaps most surprisingly, the pound has only fallen -0.2%.  I suspect that is due to the tension of higher interest rates supporting the currency while worries over the future of policy and the economy are undermining it.  That said, year-to-date, the pound is still the best performing G10 currency vs. the dollar, with gains on the order of 2.5%.  If pressed, I would expect that the pound is likely to range trade going forward as the market continues to reprice Fed expectations higher (removing those forecast rate cuts) while the UK side remains stagnant for now.

Turning our attention to the economy writ large, there is a growing sense that the widely expected recession is coming soon to a screen near you.  Data continues to show weakening trends with, for instance, today’s German IFO Expectations falling to 88.6, far below forecasts, on the back of weakening manufacturing trends in Germany.  As well, yesterday’s US data had its lowlights with the flash manufacturing PMI falling to 48.5, while the Richmond Fed Manufacturing Index fell to -15, both well below expectations.  Layer on the background debt ceiling concerns, where the most recent word is that talks have stalled right now, and there is plenty of reason to turn pessimistic on things.  Arguably, these were keys to yesterday’s equity market declines in the US and we have continued to see red on the screens in every market in Asia and Europe. 

One of the biggest market concerns is China, where talk of slowing growth is continuing as this month’s production and investment data, released last week, was generally softer than expected with property continuing to drag things down, but fixed assets in general softening further.  There continue to be expectations that the PBOC is going to be easing monetary policy further and the renminbi’s recent slide shows no signs of stopping.  This view is also evident in commodity markets, specifically metals markets where copper (-1.5% today, -4.1% in the past week) and aluminum (-0.6%, -3.7%) are under increased pressure as concerns over slowing Chinese growth are impacting demand for these key industrial metals.  

There is, however, one place where this is not so evident, oil prices (+1.5%) as the market continues to respond to prospective production cuts by OPEC+ in the coming months.   The thing about oil is that its demand elasticity is nearly vertical.  Certainly, at the margins there can be more or less demand based on the economic conditions extant, but there is a baseline of demand that is simply not going to disappear.  It is important to remember that despite all the efforts at reduction in the use of fossil fuels, global oil demand hit a record last year.  It is also key to remember that for the past decade, investment in the production of new oil and gas reserves has been severely lacking.  The implication is that while oil prices have fallen well below the highs seen in the immediate wake of the Russian invasion of Ukraine, nothing has changed the long-term supply demand equation which greatly favors demand over supply, i.e. oil prices are likely to rise consistently, if not steadily, over the coming decades.

Summing it all up, today appears to have investors and traders thinking the worst, not the best of things going forward.

A quick look at overnight markets shows that equity market declines have largely been greater than -1.0% with the biggest markets, DAX, CAC, FTSE 100, pushing -2.0%.  There has been no place to hide here, and from a technical perspective, yesterday’s price action looks like an outside bearish reversal, which simply means that the closing level has market technicians selling for right now.  We have seen a significant equity rally in the face of a lot of negative news, so perhaps that run is now over.

Global bond yields are consolidating recent gains, with small declines today not nearly enough to offset what had been 30bp-40bp increases in the past two weeks.  In this market, clearly the debt ceiling talks are the primary story with macroeconomics a distant second for now.  There is just one week before the X-date, at least the latest one, and I suspect that we will hear of an agreement early next week helping to reduce at least some of the pressure on risk attitudes.

Lastly, the dollar is largely stronger this morning with an outlier in NZD (-1.85%) which fell sharply after the RBNZ essentially promised that last night’s 25bp rate hike, to 5.50%, is the last one coming, a big change from market expectations of a 50% probability of a 50bp hike last night.  Essentially, they explained that property market pressures and slowing consumer activity convinced them rates are appropriate to fight inflation.  Kiwi dragged Aussie (-0.5%) lower as well, but the rest of the bloc has seen far less damage with the yen (+0.15%) actually managing a small gain.  But make no mistake, over the past week and month, the dollar has regained its footing, at least against the G10.

In the emerging market bloc, the picture is more mixed with both winners and losers overnight with HUF (+0.8%) the leader, bouncing after the central bank cut its Deposit rate by 1 full percentage point yesterday, as expected and the forint fell sharply.  Meanwhile, MXN (+0.6%) is also showing signs of life after having fallen every day in the past week as the market now assumes Banxico has finished its rate hikes.  On the downside, MYR (-0.45%) and KRW (-0.4%) are both feeling the pressure of the weaker Chinese growth story given its importance to their own economies.

On the data front, the FOMC Minutes are released this afternoon and have a chance to be quite interesting given what appears to be the beginning of a split of opinions regarding the appropriate next steps.  As well, we hear from Governor Waller around lunch time, and ahead of the Minutes.  Waller certainly leans toward the hawkish end of the spectrum, so keep that in mind.

Adding it all up and the combination of declining risk appetite and a growing belief that the Fed is not going to pivot anytime soon implies that the dollar should maintain its footing for now.

Good luck

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Not Quite Right

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The data from China last night
Could, President Xi, give a fright
While IP was fine
Consumption’s decline
Show’s everything there’s not quite right

Now, turning our focus back home
The question that’s facing Jerome
Is should he increase
The speed that they cease
QE?  Or just leave it alone?

Clearly, the big news today is the FOMC meeting with the statement to be released at 2:00 and Chair Powell to face the press 30 minutes later.  As has been discussed ad nauseum since Powell’s Congressional testimony two weeks ago, expectations are for the Fed to reduce QE purchases more quickly than the previously outlined $15 billion/month with many looking for that pace to double.  If that does occur, QE will have concluded by the end of March.  This timing is important because the Fed has consistently maintained that they would not raise the Fed funds rate while QE was ongoing.  Hence, doubling the pace of reduction opens the door for the first interest rate hike as soon as April.

And let’s face it, the Fed has fallen a long way behind the curve with the latest evidence yesterday’s PPI data (9.6%, 7.7% core) printing much higher than expected and at its highest level since the series was renamed the PPI from its previous Wholesale Price Index in 2010.  Prior to that, it was in the 1970’s that last saw prices rising at this rate.  So, ahead of the meeting results, investors are trying to analyze just how quickly US monetary policy will be changing.  Recall, yesterday I made a case for a slower reduction than currently assumed, but as of now, nobody really knows.

What we do know, however, is that the economic situation in China is not playing out in the manner President Xi would like.  Last night China released its monthly growth data which showed Retail Sales (3.9% Y/Y) Fixed Asset Investment (5.2% Y/Y) and Property Investment (6.0% Y/Y) all rising more slowly than forecast and more slowly than last month. Only IP (3.8% Y/Y) managed to grow.  As well, Measured Unemployment rose to 5.0%, higher than expected and clearly not the goal.  For the past several years China has been ostensibly attempting to evolve its economy from the current mercantilist state, where production for export drives growth, to a more domestically focused consumer-led economy like the West.  Alas, they have been unable to make the progress they would have liked and now have to deal with not only Covid, but the ongoing meltdown in the property sector which will only serve to hold the consumer back further.  Interestingly, the PBOC did not adjust the Medium-term Lending Rate as some pundits had expected, keeping it at 2.95%, and so, it should not be that surprising that the renminbi has maintained its strength, although has appeared to stop rising.  A 2.95% coupon in today’s world remains quite attractive, at least for now, and continues to draw international investment.

Aside from these stories, the other headline of note was UK inflation printing at 5.1%, its highest level since 2011 and clearly well above the BOE’s 2.0% target.  Remember, the BOE (and ECB) meet tomorrow and there remains a great deal of uncertainty surrounding their actions given the imminent lockdown in the UK as the omicron variant spreads rapidly.  Can the BOE really tighten into a situation where growth will clearly be impaired?  It is this uncertainty that has pushed the timing of the first interest rate hike by the BOE back to February, at least according to futures markets.  But as you can see, the BOE is in the same position as the Fed, inflation is roaring but there are other concerns that prevent it from acting to stem the problem.  In sum, the betting right now is the Fed doubles the pace of taper and the BOE holds off on raising rates until February, but either, or both, of those remain far less than certain.  Expect some more market volatility across all asset classes today and tomorrow.

With all that in mind, here’s a quick look at markets overnight.  Equities in Asia (Nikkei +0.1%, Hang Seng -0.9%, Shanghai -0.4%) mostly followed the US declines of yesterday, although Japan did manage to eke out a small gain and stop its recent trend lower.  Europe, on the other hand, is having a better go of it with the DAX (+0.3%) and CAC (+0.6%) both performing well as inflation data there was largely in line with expectations, albeit far higher than targets, and there is little concern the ECB is going to do anything tomorrow to rock the boat.  In the UK, however, that higher inflation print is weighing on equities with the FTSE 100 (-0.2%) underperforming the rest of Europe.  Ahead of the open, and the FOMC, US futures are little changed in general, although NASDAQ futures continue to slide, down (-0.25%) as I type.

The rally in European stocks has encouraged a risk-on attitude and so bond markets are selling off a bit with yields edging higher.  Well, edging except in the UK, where Gilts (+3.7bps) are clearly showing their concern over the inflation print.  But in the US (Treasuries +0.3bps), Germany (Bunds +1.2bps) and France (OATs +0.9bps) things are far less dramatic.  Given the imminent rate decisions, I expect that there is a chance for more movement later and most traders are simply biding their time for now.

The commodity picture is a little gloomier this morning with oil (-1.2%) leading the way lower and weakness in metals (Cu -1.5%, Ag -0.5%, Al -1.4%) widespread.  Gold is little changed on the day and only NatGas (+2.1%) is showing any life.  These markets are looking for a sign to help define the next big trend and so are also awaiting the FOMC outcome today.

Finally, the dollar continues to consolidate its recent gains but has been range trading for the past month.  The trend remains higher, but we will need confirmation from the FOMC today to really help it break out I believe.  In the G10, the biggest gainer has been AUD (+0.4%), but that appears to be positional, as Aussie has been sliding for the past week and seems to be taking a breather.  Otherwise, in this bloc there are an equal number of gainers and laggards with none moving more than 0.2%, so essentially trendless.

In the emerging markets, TRY (-2.1%) continues its decline toward oblivion with no end in sight.  Elsewhere, ZAR (-0.6%) has suffered on continue high inflation and the SARB’s unwillingness to fight it more aggressively.  INR (-0.5%) suffered on the back of a record high trade deficit and concerns that if the Fed does tighten, funding their C/A gap will get that much more expensive.  Beyond those, though, there has been far less movement and far less interest overall.

We do have some important data this morning led by Empire Mfg (exp 25.0) and Retail Sales (0.8%, 0.9% ex autos) at 8:30 and then Business Inventories (1.1%) at 10:00 before the FOMC at 2:00.  The inventory data bears watching as an indication of whether companies are beginning to stockpile more and more product given the supply chain issues that remain front and center across most industries.

And that’s really what we have at this point in time.  A truly hawkish Fed should help support the dollar further, while anything else is likely to see the dollar back up as hawkish is the default setting right now.

Good luck and stay safe
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Dissatisfaction

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The Chinese would have us believe
Their growth targets, they will achieve
Alas, recent data
When looked at pro rata
Shows trust in their words is naïve

Meanwhile, in the UK, inflation
Is rising across that great nation
The market’s reaction
Is dissatisfaction
Thus, Gilts have seen depreciation

Just how fast is China’s GDP growing?  That is the question to be answered after last night’s data dump was distinctly worse than expected.  The big outlier was Retail Sales, which grew only 2.5% Y/Y in August, down from 8.5% in July and far below the expected 7.0% forecast.  But it was not just the Chinese consumer who slowed down their activity, IP rose only 5.3% Y/Y, again well below the July print of 6.4% and far below the forecast of 5.8%.  Even property investment was weaker than forecast, rising 10.9%, down from 12.7% in July and below the 11.3% forecast.  So, what gives?

Well, there seem to be several issues ongoing there, some of which may be temporary, like lockdowns due to the spreading delta variant of Covid, while others are likely to be with us for a longer time, notably the fallout from the bankruptcy of China Evergrande on the property market there.  The Chinese government is walking a very fine line of trying to support the economy without overstimulating those areas that tend toward speculation, notably real estate.  This is, however, extraordinarily difficult to achieve, even for a government that controls almost every lever of power domestically.  The problem is that the Chinese economy remains hugely reliant on exports (i.e. growth elsewhere in the world) in order to prosper.  So, as growth globally seems to be abating, the impact on China is profound and very likely will continue to detract from its GDP results.

Adding to the Chinese government’s difficulties is that the largest property company there, Evergrande, is bankrupt and will need to begin liquidating at least a portion of its property portfolio.  Remember, it has more than $300 billion in USD debt and the government has already said that interest and principal payments due next week will not be made.  A key concern is the prospect of contagion for other property companies in China, as well as for dollar bonds issued by other Chinese and non-US entities.  History has shown that contagion from a significant bankruptcy has the ability to spread far and wide, especially given the globalized nature of financial markets.  While we will certainly hear from Chinese officials that everything is under control, recall that the Fed assured us that the subprime crisis was under control, right before they let Lehman Brothers go under and explode the GFC on the world.  The point is, there is a very real risk that investors become wary of certain asset classes and risk overall which could easily lead to a more severe asset price correction.  This is not a prediction, merely an observation of the fact that the probability of something occurring has clearly risen.

Speaking of things rising, the other key story of the morning is inflation in the UK, which printed at 3.2%, its highest level since March 2012, and continues to trend higher.  This cannot be surprising given that inflation is rising rapidly everywhere in the world, but the difference is the BOE may have a greater ability to respond than some of its central bank counterparts, notably the Fed.  For instance, the UK debt/GDP ratio, while having risen recently to 98.8%, remains well below that of the rest of the G7, notably the Fed as the US number has risen to around 130%.  As such, markets have begun to price in actual base rate hikes by the BOE, looking for the base rate to rise to 0.50% (from 0.10% today) by the end of next year with the first hike expected in May.  While that may not seem like much overall (it is not really), it is far more than anticipated here in the US.  And remember, our CPI is running above 5.0% vs. 3.2% in the UK.

The upshot of the key stories overnight is that taking risk is becoming harder to justify for investors all over the world.  While there has certainly not yet been a defining break from the current ‘buy the dip’ mentality, fingers of instability* seem to be developing throughout financial markets globally.  The implication is that the probability of a severe correction seems to be growing, although the timing and catalyst remain completely opaque.

So, how has the most recent news impacted markets?  Based on this morning’s price action, there is clearly at least some concern growing.  For example, equity markets in Asia were all in the red (Nikkei -0.5%, Hang Seng -1.8%, Shanghai -0.2%) as the fallout of slowing Chinese growth and the China Evergrande story continue to weigh on sentiment there.  In Europe, the continent is under some pressure (DAX -0.1%, CAC -0.5%) although the UK (FTSE 100 +0.1%) seems to be shaking off the higher than expected CPI readings.  As to US futures, as I type, they are currently marginally higher, about 0.2% each, but this follows on yesterday’s afternoon sell-off resulting in lower closes.  Nothing about this performance screams risk-on, although it is not entirely bad news.

The bond market seems a bit more cautious as Treasury yields have fallen further and are down 1.3bps this morning after a 4bp decline yesterday.  This is hardly the sign of speculative fever.  In Europe at this hour, yields are essentially unchanged except in Italy, where BTP yields have risen 1.6bps as concerns grow over the amount of leeway the Italian government has to continue supporting its economy.

Commodity markets show oil prices continuing to rise (WTI +1.35%) after inventory numbers continue to show drawdowns and Gulf of Mexico production remains reduced due to the recent hurricane Nicholas.  While gold prices are little changed on the day, both copper (+0.6%) and aluminum (+1.6%) are firmer on supply questions.  Certainly nothing has changed my view that the price of “stuff” is going to continue higher in step with the ongoing central bank additions of liquidity to markets and economies.

Finally, the dollar is under pressure this morning, which given the risk-off sentiment, is a bit unusual.  But against its G10 brethren, the greenback is lower across the board with NOK (+0.85%) the clear leader on the strength of oil’s rally, although we are seeing haven assets CHF (+0.4%) and JPY (+0.4%) as the next best performers.  The rest of the bloc has seen much lesser gains, but dollar weakness is clear.

The same situation obtains in the EMG markets, where the dollar is weaker against all its counterparts, although the mix of gainers is somewhat unusual.  ZAR (+0.5%) is the top performer on the back of strengthening commodity prices and it is no surprise to see RUB (+0.4%) doing well either.  But both HUF (+0.45%) and CZK (+0.4%) are near the top of the list as both have seen higher than forecast inflation readings recently and both central banks are tipped to raise rates in the next two weeks.  As such, traders are trying to get ahead of the curve there.  The rest of the bloc is also firmer, but the movement has been much less pronounced with no particular stories to note.

On the data front this morning, Empire Manufacturing (exp 17.9), IP (0.5%) and Capacity Utilization (76.4%) are on the docket, none of which are likely to change many opinions.  The Fed remains in their quiet period until the FOMC meeting next week, so we will continue to need to take our FX cues from other markets.  Right now, it appears that 10-year yields are leading the way, so if they continue to slide, look for the dollar to follow suit.

Good luck and stay safe
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*see “Ubiquity” by Mark Buchanan, a book I cannot recommend highly enough

Starting to Wane

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The rebound is starting to wane
In England, in France and in Spain
But prices keep rising
With German’s realizing
They’ve not yet transcended their pain

First, some housekeeping, I will be on my mandatory two-week leave starting Monday, so there will be no poetry after today until September 7.

Meanwhile, this morning’s market activity is bereft of interesting goings-on, with very few stories of note as the summer holiday season is clearly in full swing.  Perhaps the three most notable events were UK Retail Sales, German PPI and new Chinese legislation.  Frankly, none of them paint a very positive picture regarding either the economy or markets going forward.

Starting at the top, UK Retail Sales (-2.4% in July) fell short of expectations, with the Y/Y reading back down to +1.8% from a revised +6.8% and the universal description of the situation as the reopening rebound is over.  The spread of the delta variant continues to add pressure as closures are dotted throughout the country, and sentiment seems to be turning lower.  It ought be no surprise that the pound (-0.15%) has fallen further, taking its month-to-date losses to 2.5%.  Too, the FTSE 100 (-0.2%) is under pressure, although it does remain in a broader uptrend, unlike the pound.  However, the first indication here is that risk is being sold off, which seems a pretty good description of the day.

Next, we turn to Germany’s PPI reading (10.4% Y/Y, 1.9% M/M) which is actually the largest annual rise since January 1975, where prices were impacted by the oil crisis!  While we have all been constantly reassured that inflation is a fleeting event and there is absolutely no indication that the ECB will see this number and consider tightening policy in any way, shape or form, I suspect that the good people of Germany may see things a bit differently.  The chatter from Germany is a growing concern over rapidly rising prices with a real chance of political fallout coming.  Remember, Germany goes to the polls next month in an effort to replace Chancellor Merkel, who has been running the country for the past 16 years.  Currently no candidate looks particularly strong, so a weak coalition seems a very possible outcome.  It is not clear that a weakened Germany will be a positive for the euro, which while unchanged on the day has been trending steadily lower for the past two months and yesterday broke below, what I believe is, a key support level at 1.1704.  Look for further declines here.

And finally, the Chinese passed a stricter personal data protection law prohibiting private companies from collecting and keeping data on their customers without explicit permission, a practice that had heretofore been commonplace. This appears to be yet another attack on the tech sector in China as President Xi ensures that the Chinese tech behemoths are disempowered.  After all, similarly to the US, the value of the big platforms comes from these companies’ abilities to compile and monetize the meta-data they collect by using it for targeted advertising.  Of course, the law says nothing about the Chinese government collecting that data and maintaining it, as that is part and parcel of the new normal in China.  One cannot be surprised that Chinese equity markets continue to decline on the back of these ongoing attacks against formerly unsullied companies, with the Hang Seng (-1.85%) now lower by 21% from its peak in February, and showing no signs of stopping as international funds flow out of the country.  Shanghai (-1.1%) also fell sharply, but given this index has more SOE’s and less tech, its decline from its February peak is only 9%.  As to the renminbi, it softened a bit further and is pushing slowly back above 6.50 at this time, its weakest level since April.

Otherwise, nada.  Equity markets are in the red everywhere, with the Nikkei (-1.0%) also slipping and we are seeing losses throughout Europe (DAX -0.4%, CAC -0.3%, FTSE 100 -0.2%) as well.  US futures, too, are pointing lower, with all three indices looking at 0.4% declines.  Of course, yesterday, things looked awful at this hour and both the NASDAQ and S&P 500 managed to close higher on the day, albeit only slightly.

Bonds are definitely in the ascendancy with yields continuing to slide.  Treasury yields are lower by 1.5 bps, Bunds and OATs by 0.5bps and Gilts by 2.0bps.  The question to be asked here, though, is, does this represent confidence that inflation is truly transitory?, or is this a commentary on future economic activity?, or perhaps, is this simply the recognition that central banks have distorted these markets so much they no longer give useful signals?  Whatever the underlying driver, the reality of bonds’ haven appeal remains and given the signals from the equity market, falling bond yields are not a big surprise.

Commodity prices remain under pressure generally, with oil (-0.8%) continuing its recent decline.  After a massive rally from last November through its peak in early July, crude has fallen 17% as of this morning.  In this case, while I understand the story regarding weakening economic growth, it seems to me the long term picture here remains quite positive as the Biden administration’s efforts to end oil production in the US, or at the very least starve it of future growth, means that supply is going to lag demand for years to come.  That implies higher prices are on the way.  As to the rest of the space, gold (+0.25%) continues to trade in its 1775-1805 range since mid-June with the exception of the two-day blip lower that was quickly erased.  Copper’s recent downtrend remains intact although it has bounce 0.3% this morning, and the rest of the industrial metals are either side of unchanged.

The dollar is broadly stronger this morning, with CAD (-0.7%) the weakest of the G10 currencies, clearly suffering from oil’s decline but also, seemingly, from self-inflicted wounds regarding its draconian Covid policies.  The Loonie has now fallen 4.25% this month with half of that coming in just the last two sessions.  But we are seeing continued weakness throughout the commodity bloc here with NOK (-0.45%) and AUD and NZD (both -0.3%) continuing their recent declines.  On the plus side, only CHF (+0.2%) has shown any strength of note.

Emerging market currencies are also under pressure this morning led by ZAR (-0.6%) and MXN (-0.4%) as softer commodity prices weigh heavily here.  We also continue to see weakness in some APAC currencies, with IDR (-0.35%) and KRW (-0.3%) suffering from concerns over the ongoing spread of the delta variant and the corresponding investor funds outflow from those nations.  On the flipside, PHP (+0.35%) was the only gainer of note in the region after the government loosened some Covid restrictions.

There is no economic data today and only one Fed speaker, Dallas Fed President Kaplan.  Of course, Kaplan has been the most vocal calling for tapering, so we already know his view, and after the Minutes from Wednesday, it seems he has persuaded many of his colleagues.  But once again I ask, if the economy is slowing, which I believe to be the case, will the Fed really start to remove accommodation?  I don’t believe that will be the case.  However, for now, the market is likely to bide its time until next week’s Jackson Hole speech by Powell.  Beware summer choppiness due to lack of liquidity and look for the current dollar uptrend to continue while I’m away.

Good luck, good weekend and stay safe
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Feeling Upbeat

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The last central bank set to meet

This month is on Threadneedle Street

No change is expected

Though some have projected

The hawks there are feeling upbeat

Market focus this morning will be on the Bank of England’s policy meeting as it is the last of the major central banks to meet this month.  We have already had a tumultuous time between the ECB’s uber dovishness and the Fed’s seeming turn toward the hawkish side of the spectrum.  Of course, the Fed has largely tried to walk that idea back, but it remains firmly implanted in the market dialog.  As to the UK, growth there, despite more draconian lockdown measures still being imposed in the face of the delta variant of Covid, has been expanding rapidly according to the GDP readings while PMI data points to a continuation of that trend.  Not surprisingly, given the supply side constraints that are evident elsewhere in the world, the UK is also dealing with that issue and so prices have been rising apace.  In fact, the CPI data released last week showed the highest print in more than two years.  Of course, that print was 2.1%, hardly a number to instill fear in anyone’s heart.

And yet, the amount of talk about the need to tighten monetary policy in the UK is remarkable.  At least in the US, we are looking at exceptionally high CPI data, with numbers not seen in decades.  In contrast, CPI in the UK averaged nearly 3.0% for all of 2017, well above the most recent reading.  Not only that, but it was only at the last meeting that the BOE reaffirmed that QE was necessary to support the economy.  The idea that in 6 weeks things have changed that much seems fanciful.  That’s not to say that the committee won’t be discussing potential tightening down the road, especially if recent economic trends continue, but I find it hard to believe that given the ongoing disruptions that are still extant, there can be any serious considerations of change.  As it stands, the market is currently pricing a 15 basis point hike by next June, which would take the base rate back up to 0.25%.  

Arguably, the fact that the market is this focused on what should be a non-event is a good indication of the lack of interesting stories at the moment.  With the ECB and Fed behind us, and with both central banks furiously trying to drive the narrative to their preferred story of transitory inflation and no reason to worry, traders are looking for any opportunity to make a buck.  Some of the previous ideas, whether Bitcoin or meme stocks, have largely lost their luster.  The inflation trade, too, is having a harder time as so many commodity prices have retreated from their early Spring highs.  In this situation, it is not unusual for traders to focus on any potential catalyst far in excess of its importance.  I would contend, that is exactly what we are seeing here and that when the BOE announcement comes, it will have nothing to add to the story.

It can be no surprise, then, that market activity overnight has been extremely quiet overall.  As traders and investors look for the next big thing, volumes tend to decrease, and volatility can abate for a short period of time.  For instance, equity markets in Asia showed almost no pulse with both the Nikkei and Shanghai indices unchanged on the day while the Hang Seng managed to eke out a 0.25% gain.  Europe, on the other hand, is having a go of it, with gains in the DAX (+0.8%) and CAC (+1.0%) after much stronger than forecast confidence data was released.  The FTSE 100 (+0.3% ahead of the BOE) seems to want to join the party but is awaiting the BOE release before really moving.  And, after several desultory sessions with very limited movement in the US, futures this morning are higher by 0.5% across the board.

Bond markets are similarly quiet with modest price declines in Treasuries (+0.8bps), Bunds (+0.9bps) and OATs (+0.9bps) seen at this hour.  Gilts are essentially unchanged, clearly awaiting the BOE meeting before traders are willing to get too involved.

Commodity prices started the session with a mix of gainers and losers, but at this hour, most have turned lower.  Oil (-0.2%) is just backing off slightly but remains in a strong uptrend.  While precious metals (Au +0.2%, Ag +0/6%) stick out for being a bit higher on the day, we are seeing weakness in Copper (-0.2%), Aluminum (-0.4%) and most of the ancillary metals as well as the agricultural space with the three main crops all lower by at least 1.0%.

As to the dollar, it is a bit softer this morning with NOK (+0.4%) the leading gainer despite oil’s reversal from early morning gains.  But there is strength in SEK (+0.3%), NZD (+0.25%) and essentially the entire G10 bloc, albeit only modest in size.  It is difficult to point to specific catalysts for this movement, although Sweden’s PPI data did print much higher than forecast leading to some speculation, they too would soon be tightening policy.

***BOE leave policy unchanged, rates on hold***

The first reaction to the BOE news is a modest decline in the pound (-0.2%) although I expect it will remain choppy for now.

Quickly turning to the EMG bloc, the dollar is softer here almost universally with RUB (+0.45%) the leading gainer and PLN (+0.4%) right behind it.  The latter is benefitting from talk that rising inflationary pressures will lead to tighter monetary policy, while the ruble, along with the krone, seems to be maintaining its early gains despite oil’s pullback.  

On the data front, this morning brings the usual weekly Initial Claims (exp 380K) and Continuing Claims (3.46M) as well as Durable Goods (2.8%, 0.7% ex transport).  We also get the final look at Q1 GDP (6.4%) which is forecast to be unchanged from the previous reading.  Tomorrow we will see Core PCE, which is the Fed’s preferred inflation measure, but we can discuss that then.

Overall, it is shaping up to be a dull day.  Further comments from the BOE are highlighting the transitory nature of inflation there, with a statement indicating that while 3.0% inflation will be coming, it will not last very long.  As I continue to type, the pound continues to slide, now down 0.3%, and interest rate markets are adjusting as well, with the rate hike scenario being pushed further into the future.  

The one area where we could get some movement is from the Fed speakers, with six on today’s calendar.  Yesterday, Atlanta Fed president Bostic was the first since the FOMC meeting last week, to reiterate that tapering would be appropriate soon as well as higher rates.  But the preponderance of evidence remains that the Fed is uninterested in doing anything for a long while yet.  I think things will get more interesting for them later in the year if inflation figures continue to run hot, but for now, they remain confident they are in control.

As to the dollar, unless we start hearing a lot more hawkish rhetoric from the Fed speakers, my sense is that it will continue to drift slightly lower in its current trading range.

Good luck and stay safe

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Electees Are Concerned

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck and stay safe
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Macron’s Pet Peeve

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Each day from the UK we learn
The data implies a downturn
Infections keep rising
Yet what’s so surprising
Is Sterling, no trader will spurn

Investors, it seems, all believe
That fishing rights, Macron’s pet peeve
Will soon be agreed
And both sides proceed
Towards Brexit come this New Year’s Eve

Since the last day of September, the pound has been a top performer in the G10 space, rallying 2.0% despite the fact that, literally, every piece of economic data has fallen short of expectations.  Whether it was GDP, PMI, IP or Employment, the entire slate has been disappointing.  At the same time, stories about Brexit negotiations continue to focus on the vast gap between both sides on fishing rights for the French fleet as well as state aid limits for UK companies.  And yet the pound continues to grind higher, trading back to its highest levels in a month.  Granted this morning it has ceded a marginal -0.2%, but that is nothing compared to this steady climb higher.

It seems apparent that traders are not focusing on the macro data right now, but instead are looking toward a successful conclusion of the Brexit negotiations.  Granted, Europe’s history in negotiations is to have both (or all) sides agree at the eleventh hour or later, but agree, nonetheless.  So, perhaps the investor community is correct, there will be no hard Brexit and thus the UK economy will not suffer even more egregiously than it has due to Covid.  But even if a deal is agreed, does it make sense that the pound remains at these levels?

At this stage, the economic prospects for the UK seem pretty awful.  This morning’s employment report showed the 3M/3M Employment change (a key measure in the UK) falling 153K.  While that is not the worst reading ever, which actually came during the financial crisis in June 2009, it is one of the five worst in history and was substantially worse than market expectations.  Of greater concern was that the pace of job cuts rose to the most on record, with 114K redundancies reported in the June-August period.  Adding it all up leaves a pretty poor outlook for the UK economy, especially as further lockdowns are contemplated and enacted to slow the resurgence in Covid infections seen throughout various parts of the country.  And yet the pound continues to perform well.

Perhaps the rally is based on monetary policy expectations.  Alas, the last we heard from the Old Lady was that they were discussing how banks would handle negative interest rates, something which last year Governor Carney explained didn’t make any sense, but now, under new leadership, seems to have gained more adherents.  If history is any guide, the fact that the BOE is talking to banks about NIRP is a VERY strong signal that NIRP is coming to the UK in the next few months.  Again, it strikes me that this is not a positive for the currency.

In sum, all the information I see points to the pound having more downside than upside, and yet upside is what we have seen for the past several weeks.  As a hedger, I would be cautious regarding expectations that the pound has much further to rally.

Turning to the rest of the market, trading has been somewhat mixed, with no clear direction on risk assets seen.  Equity markets in Asia saw gains in the Hang Seng (+2.2%) although the Nikkei (+0.2%) and Shanghai (0.0%) were far less enthusiastic.  Interestingly, the HKMA was forced to intervene in the FX market last night, selling HKD6.27 billion to defend the strong side of the peg.  Clearly, funds are flowing in that direction, arguably directly into the stock market there, which after plummeting 27.5% from January to March on the back of Covid concerns, has only recouped about 42% of those losses, and so potentially offers opportunity.  Perhaps more interestingly, last night China reported some very solid trade data, with imports rising far more than expected (+13.2% Y/Y) and the Trade Balance falling to ‘just’ $37.0B.  Export growth was a bit softer than expected, but it seems clear the Chinese economy is moving forward.

European bourses, however, are all in the red with the DAX (-0.4%) and CAC (-0.3%) representative of the general tone of the market.  Aside from the weak UK employment data, we also saw a much weaker than expected German ZEW reading (56.1 vs. 72.0 expected), indicating that concerns are growing regarding the near-term future of the German economy.

In keeping with the mixed tone to today’s markets, Treasuries have rallied with yields falling 2 basis points after yesterday’s holiday.  Perhaps that is merely catching up to yesterday’s European government bond markets, as this morning, there is no rhyme or reason to movement in this segment.  In fact, the only movement of note here is Greece, which has seen 10-year yields decline by 3bps and which are now sitting almost exactly atop 10-year Treasuries.

As to the dollar, mixed is a good description here as well.  In the G10 space, given the German data, it is no surprise that the euro has edged lower by 0.2% nor that the pound has crept lower as well.  AUD (-0.24%) is actually the worst performer, which looks a response to softness in the commodity space.  SEK (+0.3%) is the best performer after CPI data turned positive across the board, albeit not rising as much as had been forecast.  You may recall the Swedes are the only country that had moved to NIRP and then raised rates back to 0.0%, declaring negative rates to be a bad thing.  The previous few CPI readings, which were negative, had several analysts calling for Swedish rates to head back below zero, but this seems to support the Riksbank’s view that no further rate cuts are needed.

Emerging market currencies are under a bit more pressure, with the CE4 leading the way lower (CZK -0.8%, PLN -0.7%, HUF -0.65%) but the rest of the bloc has seen far less movement, generally +/- 0.2%.  Regarding Eastern Europe, it seems there are growing concerns over a second wave of Covid wreaking further havoc on those nations inspiring more rate cuts by the respective central banks.  Yesterday’s Czech CPI data, showing inflation falling into negative territory was merely a reminder of the potential for lower rates.

Speaking of CPI, that is this morning’s lead data point, with expectations for a 0.2% M/M gain both headline and ex food and energy, which leads to 1.4% headline and 1.7% core on a Y/Y basis.  Remember, these numbers have been running higher than expectations all summer, and while the Fed maintains that inflation is MIA, we all know better.  I see no reason for this streak of higher than expected prints to be broken.  In addition, we hear from two Fed speakers, Barkin and Daly, but we already know what they are likely going to say; we are supporting the economy, but Congress needs to enact a fiscal support package, or the world will end (and it won’t be their fault.)

US equity futures are a perfect metaphor for the day, with DOW futures down 0.4% and NASDAQ futures higher by 0.9%.  In other words, it is a mixed picture with no clear direction.  My fear is the dollar starts to gain more traction, but my sense is that is not in the cards for today.

Good luck and stay safe
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Deep-Sixed

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This morning the UK released
Fresh data that showed growth decreased
By quite an extent
(Some twenty percent)
Last quarter. Boy, Covid’s a beast!

But really the market’s transfixed
By gold, where opinions are mixed
It fell yesterday
An awfully long way
With shorts praying it’s been deep-sixed

Two stories are vying for financial market headline supremacy this morning; the remarkable collapse in gold (and silver) prices, and the remarkable collapse in the UK economy in Q2. And arguably, they are sending out opposite messages.

Starting with the gold price, yesterday saw the yellow metal fall nearly 6%, which translated into $114/oz decline. On a percentage basis, silver actually fell far further, -14.7%, although for now let’s simply focus on gold. The question is, what prompted such a dramatic decline? Arguably, gold’s rally has been based on two key supports, the increasingly larger negative real yield in US interest rate markets and an underlying concern over the impact of massive monetary stimulus by the Fed and other central banks undermining all fiat currencies. These issues drove a speculative frenzy where gold ETF’s were trading above NAV and demand for physical metal was increasing faster than production.

Looking at the real yield story, last Thursday saw the nadir, at least so far, in that metric, with real10-year Treasury yields falling to -1.08%. However, as risk appetite recovered a bit, nominal yields rebounded by 10bps, and real yields did the same, now showing at ‘just’ -0.99%. At this point, it is important to remember that markets move at the margin, so even though real yields remain highly negative, the modest rebound changed the tone of the trade and encouraged a bout of profit-taking in gold. Simultaneously, we saw a much more positive risk environment, especially after Germany’s ZEW survey showed much better than forecast Expectations, pumping up European equity markets and US ones as well. This simply added to the rationale to take profits on what had been a very sharp, short-term increase in the precious metals markets. As these things are wont to do, the selling begat more selling and bingo, a major correction resulted.

Is this the end of the gold story? I sincerely doubt it, as the underlying drivers are likely to continue their original trend. If anything, what we continue to see from central banks around the world is additional stimulus driving ever lower nominal and real yields. We saw this last night in New Zealand, where the RBNZ increased their QE program and openly discussed NIRP, pushing kiwi (-0.5%) lower. But in this context, the important issue is that, yet another G10 central bank is leaning closer to negative nominal yields, which will simply drive real yields even lower. Simultaneously, additional QE is exactly the issue driving concern over the ultimate value of fiat currencies, so both key factors in gold’s rise are clearly still relevant and growing today. Not surprisingly, gold’s price has rebounded about 1.0% this morning, although it did fall an additional 2.5% early in the Asian session.

As to the other story, wow is all you can say. Q2 GDP fell 20.4% in the UK, more than double the US decline and the worst G10 result by far. Social distancing is a particularly damaging policy for the UK economy because of the huge proportion of services activity that relies on personal contact. But the UK government’s relatively slow response to the outbreak clearly did not help the economy there, and the situation on the ground indicates that there are still several pockets of rampant infection. One thing working in the UK’s favor, and thus the pound’s as well, is that despite the depths of the Q2 data, recent activity reports on things like IP and capital formation have actually been better than expected. The point is, this data, while shocking, is old news, as is evidenced by the fact that the pound is unchanged on the day while the FTSE 100 is higher by more than 1% as I type.

So, what are the mixed messages? Well, the collapse in gold prices on the back of rising yields would ordinarily be an indication of a stronger than expected economic result, as increased activity led to more credit demand and higher yields. But the UK GDP result is just the opposite, a dramatic decline that has put even more pressure on both PM Johnson’s government as well as the BOE to increase fiscal and monetary stimulus, thus driving yields lower and debasing the currency even further. So which story will ultimately dominate? That, of course, is the $64 trillion question, but for now, my money is on weaker growth, lower yields and a gold rebound.

Not dissimilar to the mixed messages of those two stories, today’s session has seen a series of mixed outcomes. For instance, equity markets are showing no consistency with both gainers (Nikkei +0.4%, Hang Seng +1.4%) and losers (Shanghai -0.6%) in Asia with similar mixed action in Europe (CAC +0.4%, DAX 0.0%, Stockholm -0.5%). Not to worry, US futures are pointing higher across the board by roughly 0.75%.

Bond markets, however, are pretty consistent, with 10-year yields higher in virtually every market (New Zealand excepted), as Treasuries rise 2.5bps, UK gilts a similar amount and German bunds a bit more than 3bps. In fact, Treasury yields, now at 0.67%, are 17bps higher in the past 6 sessions, the largest move we have seen since May. But again, I see no evidence that the big picture stories have changed nor any reason for US yields, at least in the front end, to rebound any further. One can never get overly excited by a single day’s movement, especially in as volatile an environment as we currently sit.

Finally, the dollar, too, is having a mixed session, with kiwi the leading decliner, but weakness also seen in JPY (-0.45%) and AUD (-0.25%). Meanwhile, the ongoing rally in oil prices continues to support NOK (+0.55%), with SEK (+0.45%) rising on the back of firmer than expected CPI data this morning. (As an aside, the idea that we are in a massively deflationary environment is becoming harder and harder to accept given that virtually every nation’s inflation data has been printing at much higher than expected levels.)

EMG currencies, keeping with the theme of the day, are also mixed, with TRY (-1.3%) the worst in the world as investors and locals continue to flee the currency and the country amid disastrous monetary policy activity. IDR (-0.55%) is offered as Covid cases continue to rise and despite the central bank’s efforts to contain its weakness, and surprisingly, RUB (-0.25%) is softer despite oil’s rally. On the plus side, the gains are quite modest, but CZK (+0.3%) and ZAR (+0.3%) lead the way with the former simply adding to yesterday’s gains while the rand seemed to benefit from a positive economic survey result.

This morning brings US CPI (exp 0.7%, 1.1% ex food & energy) on an annual basis, but as Chairman Powell and his minions have made clear, inflation is not even a top ten concern these days. However, if we see a higher than expected print, it is entirely realistic to see Treasury yields back up further.

Overall, the dollar remains under modest pressure, but one has to wonder if yesterday’s gold price action is a precursor to a correction here as well. Remember, positioning is extremely short the dollar, so any indication that the Fed will be forced to address inflation could well be a signal for position reductions, and hence a dollar rebound.

Good luck and stay safe
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Prepare For Impact

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The second wave nears
A swell? Or a tsunami?
Prepare for impact

The cacophony of concern is rising as the infection count appears to be growing almost everywhere in the world lately. Certainly, here in the US, the breathless headlines about increased cases in Texas, Florida and Arizona have dominated the news cycle, although it turns out some other states are having issues as well. For instance:

In Cali the growth of new cases
Has forced them to rethink the basis
Of easing restrictions
Across jurisdictions
So now they have shut down more places

In fact, it appears that this was the story yesterday afternoon that turned markets around from yet another day of record gains, into losses in the S&P and a very sharp decline in the NASDAQ. And it was this price action that sailed across the Pacific last night as APAC markets all suffered losses of approximately 1.0%. These losses resulted even though Chinese trade data was better than expected for both imports (+2.7% Y/Y) and exports (+0.5% Y/Y) seemingly indicating that the recovery was growing apace there. And, given the euphoria we have seen in Chinese stock markets specifically, it was an even more surprising outcome. Perhaps it is a result of the increased tensions between the US and China across several fronts (Chinese territorial claims, defense sales to Taiwan, sanctions by each country on individuals in the other), but recent history has shown that investors are unconcerned with such things. A more likely explanation is that given the sharp gains that have been seen throughout equity markets in the region lately, a correction was due, and any of these issues could have been a viable catalyst to get it started. After all, a 1% decline is hardly fear inducing.

The problem is not just in the US, though, as we are seeing all of Europe extend border closures for another two weeks. The issue here is that even though infections seem to be trending lower across the Continent, the fact that they will not allow tourists from elsewhere to come continues to devastate those economies which can least afford the situation like Italy, Spain and Greece. The result is that we are likely to continue to see a lagging growth response and continued, and perhaps increased, ECB largesse. Remember all the hoopla regarding the announcement that the EU was going to borrow huge sums of money and issue grants to those countries most in need? Well, at this point, that still seems more aspirational than realistic and the idea that there would be mutualized debt issuance remains just that, an idea, rather than a reality. While the situation in the US remains dire, it is hard to point to Europe and describe the situation as fantastic. One of the biggest speculative positions around these days, aside from owning US tech stocks, is being short the dollar, with futures in both EUR and DXY approaching record levels. While the dollar has clearly underperformed for the past several weeks, it has shown no indication of a collapse, and quite frankly, a short squeeze feels like it is just one catalyst away. Be careful.

Meanwhile, ‘cross the pond, the UK
Saw GDP that did display
A slower rebound
And thus, they have found
Most people won’t come out and play

As we approach the final Brexit outcome at the end of this year, investors are beginning to truly separate the UK from the EU in terms of economic performance.  Alas, for the pound, the latest data from the UK was uninspiring, to say the least.  Monthly GDP in May, the anticipated beginning of the recovery, rose only 1.8%, with the 3M/3M result showing a -19.1% outcome.  IP, Construction and Services all registered worse than expected results, although the trade data showed a surplus as imports collapsed.  The UK is continuing to try to reopen most of the economy, but as we have seen elsewhere throughout the world, there are localized areas where the infection rate is climbing again, and a second lockdown has been put in place.  The market impact here has been exactly what one would have expected with the FTSE 100 (-0.4%) and the pound (-0.3%) both lagging.

To sum things up, the global economy appears to be reopening in fits and starts, and it appears that we are going to continue to see a mixed data picture until Covid-19 has very clearly retreated around the world.

A quick look at markets shows that the Asian equity flu has been passed to Europe with all the indices there lower, most by well over 1.0%, although US futures are currently pointing higher as investors optimistically await Q2 earnings data from the major US banks starting today.  I’m not sure what they are optimistic about, as loan impairments are substantial, but then, I don’t understand the idea that stocks can never go down either.

The dollar, overall, is mixed today, with almost an equal number of gainers and losers in both the G10 and EMG blocs.  The biggest winner in the G10 is SEK (+0.6%), where the krona has outperformed after CPI data showed a higher than expected rate of 0.7% Y/Y.  While this remains far below the Riksbank’s 2.0% target, it certainly alleviates some of the (misguided) fears about a deflationary outcome.  But aside from that, most of the block is +/- 0.2% or less with no real stories to discuss.

On the EMG side, we see a similar distribution of outcomes, although the gains and losses are a bit larger.  MXN (+0.65%) is the leader today, as it seems to be taking its cues from the positive Chinese data with traders looking for a more positive outcome there.  Truthfully, a quick look at the peso shows that it seems to have found a temporary home either side of 22.50, obviously much weaker than its pre-Covid levels, but no longer falling on a daily basis.  Rather, the technical situation implies that by the end of the month we should see a signal as to whether this has merely been a pause ahead of much further weakness, or if the worst is behind us, and a slow grind back to 20.00 or below is on the cards.

Elsewhere in the space we see the CE4 all performing well, as they follow the euro’s modest gains higher this morning, but most Asian currencies felt the sting of the risk-off sentiment overnight to show modest declines.

On the data front, this week brings the following information:

Today CPI 0.5% (0.6% Y/Y)
  -ex food & energy 0.1% (1.1% Y/Y)
Wednesday Empire Manufacturing 10.0
  IP 4.4%
  Capacity Utilization 67.8%
  Fed’s Beige Book  
Thursday Initial Claims 1.25M
  Continuing Claims 17.5M
  Retail Sales 5.0%
  -ex auto 5.0%
  Philly Fed 20.0
  Business Inventories -2.3%
Friday Housing Starts 1180K
  Building Permits 1290K
  Michigan Sentiment 79.0

Source: Bloomberg

So, plenty of data for the week, and arguably a real chance to see how the recovery started off.  It is still concerning that the Claims data is so high, as that implies jobs are not coming back nearly as quickly as a V-shaped recovery would imply.  Also, remember that at the end of the month, the $600/week of additional unemployment benefits is going to disappear, unless Congress acts.  Funnily enough, that could be the catalyst to get the employment data to start to improve significantly, if they let those benefits lapse.  But that is a question far above my pay grade.

The dollar feels stretched to the downside here, and any sense of an equity market correction could easily result in a rush to havens, including the greenback.

Good luck and stay safe

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