Both Sides Connive

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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Absent Deceit

Two presidents are set to meet
From nations that fiercely compete
The issue at hand
Is how to expand
The trade twixt them absent deceit

For markets, this issue is key
And so far, today, what we see
Is traders complacent
A deal is now nascent
So buyers have been on a spree

The upcoming meeting between President’s Trump and Xi, due to be held on Saturday, has drawn the most focus amid financial markets in the past twenty-four hours. Yesterday we heard Treasury Secretary Mnuchin express confidence a deal could be completed and that “we were about 90% of the way there…” prior to the abrupt end of discussions last month. If you recall, the US claimed China reneged on their willingness to enshrine the deal details into their canon of law, which the US demanded to insure the deal was followed. However, shortly thereafter, President Trump, in a Fox News interview, talked about raising tariffs if necessary and seemed quite unconcerned over the talks falling apart. In fact, he turned his ire on India and Vietnam for adding to trade troubles. While Asian markets all rallied as the vibes seemed to be improving, a short time ago China announced they would have a set of conditions to present to Mr Trump in order to reach a deal. These include an end to the ban on Huawei products and purchases as well as an immediate end to all tariffs.

Given the importance of reaching a deal for both sides, my take is these comments and terms are simply being used to establish the baseline for the negotiations between the two men, and that some middle ground will be reached. However, markets (wisely I think) took the Chinese demands as a sign that a deal is far less certain than optimists believe, and European equities, as well as US futures, have sold off since their release. I have maintained throughout this process that a deal was always going to be extremely difficult to achieve given the fundamental problem that the Chinese have yet to admit to IP theft or forced technology transfers while the US sees those as critical issues. In addition, the question of enshrinement of terms into local law describes one of the fundamental differences between the two nations. After all, the US is a nation based on its laws, while China is a nation entirely in thrall to one man. Quite frankly, I think the odds of completing a deal are 50:50 at best, and if the luncheon between the two men does not result in the resumption of talks, be prepared for a pretty significant risk-off event.

In the meantime, the global economic picture continues to fade as data releases point to slowing growth everywhere. Yesterday’s Durable Goods numbers were much worse than expected at -1.3%, although that was largely due to the reduction in aircraft orders on the back of the ongoing travails of Boeing’s 737 Max jet. But even absent transport, the 0.3% increase, while better than expected, is hardly the stuff of a strong expansion. In fact, economists have begun adjusting their GDP forecasts lower due to the absence of manufacturing production. Yesterday I highlighted the sharp decline in all of the regional Fed manufacturing surveys, so the Durables data should be no real surprise. But surprise or not, it bodes ill for GDP growth in Q2 and Q3.

Of course, the US is not alone in seeing weaker data. For example, this morning the Eurozone published its monthly Confidence indices with Business Confidence falling to 0.17, the lowest level in five years, while Economic Sentiment fell to 103.3 (different type of scale), its lowest level in three years and continuing the steep trend lower since a recent peak in the autumn of last year. Economists have been watching the ongoing deterioration in Eurozone data and have adjusted their forecasts for the ECB’s future policy initiatives as follows: 10bp rate cut in September and December as well as a 50% probability of restarting QE. The latter is more difficult as that requires the ECB to change their self-imposed rules regarding ownership of government debt and the appearance of the ECB financing Eurozone governments directly. Naturally, it is the Germans who are most concerned over this issue, with lawsuits ongoing over the last series of QE. However, I think its quaint that politicians try to believe that central banks haven’t been directly funding governments for the past ten years!

So, what has all this done for the FX markets? Frankly, not much. The dollar is little changed across the board this morning, with nary a currency having moved even 0.20% in either direction. The issue in FX is that the competing problems (trade, weakening growth, central bank policy adjustments) are pulling traders in different directions with no clarity as to longer term trends. Lately, a common theme emerging has been that the dollar’s bull run is over, with a number of large speculators (read hedge funds) starting to establish short dollar positions against numerous currencies. This is based on the idea that the Fed will be forced to begin easing policy and that they have far more room to do so than any other central bank. As such, the dollar’s interest rate advantage will quickly disappear, and the dollar will fall accordingly. While I agree that will be a short-term impact, I remain unconvinced that the longer-term trend is turning. After all, there is scant evidence that things are getting better elsewhere in the world. Remember, the ongoing twin deficits in the US are hardly unique. Governments continue to spend far more than they receive in tax revenues and that is unlikely to stop anytime soon. Rather, ultimately, we are going to see more and more discussion on MMT, with the idea that printing money is without risk. And in a world of deflating currencies and halting growth, the US will still be the place where capital is best treated, thus drawing investment and dollar demand.

This morning brings some more data as follows: Initial Claims (exp 220K) and the third look at Q1 GDP (3.1%). Later, we also see our 6th regional Fed manufacturing index, this time from KC and while there is no official consensus view, given the trend we have seen, one has to believe it will fall sharply from last month’s reading of 2.0. There are no Fed speakers on the docket, so FX markets ought to take their cues from the equity and bond markets, which as the morning progressed, are starting to point to a bit of risk aversion.

Good luck
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Not So Fast

While everyone thought it was nifty
The Fed was about to cut fifty
Said Jay, not so fast
We’ll not be harassed
A quarter’s enough of a gift-y

Once again, Chairman Powell had a significant impact on the markets when he explained that the Fed is fiercely independent, will not be bullied by the White House, and will only cut rates if they deem it necessary because of slowing growth or, more importantly, financial instability. Specifically, he said the Fed is concerned about and carefully watching for signs of “a loss of confidence or financial market reaction.” In this context, “financial market reaction” is a euphemism for falling stock prices. If ever there was a question about the existence of the Fed put, it was laid to rest yesterday. Cutting to the chase, Powell said that the Fed’s primary concern, at least right now, is the stock market. If it falls too far, too fast, we will cut rates as quickly as we can. Later in his speech, he gave a shout out to the fact that low inflation seems not to be a temporary phenomenon, but that was simply thinly veiled cover for the first part, a financial market reaction.

There are two things to note about these comments. First, the Fed, and really every major central bank, continues to believe they are in complete control of both their respective economies and the financial markets therein. And while it is absolutely true this has been the case since the GFC ended, at least with respect to the financial markets, it is also absolutely true that the law of diminishing returns is at work, meaning it takes much more effort and stimulus to get the same result as achieved ten years ago. At some point, probably in the not too distant future, markets are going to begin to decline and regardless of what those central banks say or do, will not be deterred from actually clearing. It will not be pretty. And second, the ongoing myth of central banks being proactive, rather than reactive, is so ingrained in the central bank zeitgeist that there is no possibility they will recognize the fact that all of their actions are, as the axiom has it, a day late and a dollar short.

But for now, they are still in command. Yesterday’s price action was informed by the fact that despite the weakest Consumer Confidence data in two years and weaker than expected New Home Sales, Powell did not affirm a 50bp cut was on its way in July. Since the market has been counting on that outcome, the result was a mild risk off session. Equity prices suffered in the US and continued to do so around the world last night and Treasuries settled below 2.00%. However, gold prices, which have been rocking lately, gave up early gains when Powell nixed the idea of a 50bp cut. And the dollar? Well, it remains mixed at best. It did rally slightly yesterday but continues to be broadly lower than before the FOMC meeting last week.

We also heard from two other Fed speakers yesterday, Bullard and Barkin, with mixed results. Bullard, the lone dissenter from the meeting made clear that he thought a 25bp reduction was all that was needed, a clear reference to Minneapolis Fed President Kashkari’s essay published on Friday calling for a 50bp cut. However, Thomas Barkin, from the Richmond Fed, sounded far less certain that the time was right for a rate cut. He sounds like he is one of the dots looking for no change this year.

And the thing is, that’s really all the market cares about right now, is what the Fed and its brethren central banks are planning. Data is a sidelight, used to embellish an idea if it suits, and ignored if it doesn’t. The trade story, of course, still matters, and given the increasingly hardened rhetoric from both sides, it appears the market is far less certain of a positive outcome. That portends the opportunity for a significant move on Monday after the Trump-Xi meeting. And based on the way things have played out for the past two years, my money is on a resumption of the dialog and some soothing words, as that will help underpin stocks in both NY and Shanghai, something both leaders clearly want. But until then, I expect a general lack of direction as investors make their bets on the outcome.

One little mentioned thing on the data front is that we have seen every regional Fed manufacturing survey thus far released show significantly more weakness than expected. Philly, Empire State, Chicago, Richmond and Dallas have all fallen sharply. That does not bode well for economic growth in either Q2 or Q3, which, in a twisted way, will play right into the President’s hands as the Fed will be forced to cut rates as a response. Strange times indeed.

This morning, two data points are released; Durable Goods (exp -0.1%, +0.1% ex transports) and the Goods Trade Balance (-$71.8B). Look for weakness in these numbers to help perk of the equity market as anticipation will grow that more rate cutting is in the offing. And look for the dollar to suffer for the same reason.

Good luck
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Open and Shut

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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Markets Are Waiting

For right now most markets are waiting
To see if key risks are abating
Next week it’s the Fed
Then looking ahead
The G20 is captivating

The question is what we will learn
When Powell and friends next adjourn
The bond market’s sure
A cut has allure
To help them avoid a downturn

Markets this morning are pretty uninteresting as trader and investor focus turns to the two key upcoming events, next week’s FOMC meeting and the G20 meeting at the end of the month. At this point, it is fair to say that the market is pricing in renewed monetary ease throughout most of the world. While the Fed is in their quiet period, the last comments we heard were that they would act appropriately in the event economic growth weakened. Futures markets are pricing in a 50% chance of a cut next week, and a virtually 100% chance of a cut in July, with two more after that before the end of the year. While that seems aggressive to many economists, who don’t believe that the US economy is in danger of slowing too rapidly, the futures market’s track record is pretty good, and thus cannot be ignored.

But it’s not just the US where markets are pushing toward further rate cuts, we are seeing the same elsewhere. For example, last week Signor Draghi indicated that the ECB is ready to act if necessary, and if you recall, extended their rate guidance further into the future, assuring no rate changes until the middle of next year. Eurozone futures markets are pricing in a 10bp rate cut, to -0.50%, for next June. This morning we also heard from Banque de France President, and ECB Council member, Francois Villeroy that they have plenty of tools available to address slowing growth if necessary. A key pressure point in Europe is the 5year/5year inflation contract which is now pricing inflation at 1.18%, a record low, and far below the target of, “close to, but below, 2.0%”. In other words, inflation expectations seem to be declining in the Eurozone, something which has the ECB quite nervous.

Of course, adding to the picture was the news Monday night that the PBOC is loosening credit conditions further, targeting infrastructure spending. We also heard last week from PBOC Governor Yi Gang that the PBOC has plenty of tools available to fight slowing economic output. In fact, traveling around the world, it is easy to highlight dovishness at many central banks; Australia, Canada, Chile, India, Indonesia, New Zealand and Switzerland quickly come to mind as countries that have recently cut rates or discussed the possibility of doing so.

Once again, this plays to my constant discussion of the relative nature of the FX market. If every country is dovish, it becomes harder to discern which is the most hawkish dove. In the end, it generally winds up being a case of which nation has the highest interest rates, even if they are falling. As of now, the US continues to hold that position, and thus the dollar is likely to continue to be supported.

While the Fed meeting is obvious as to its importance, the G20 has now become the focal point of the ongoing trade situation with optimists looking for a meeting between Presidents Trump and Xi to help cool off the recent inflammation, but thus far, no word that Xi is ready to meet. There are many domestic political calculations that are part of this process and I have read arguments as to why Xi either will or won’t meet. Quite frankly, it is outside the scope of this note to make that call. However, what I can highlight is that news that a meeting is scheduled will be seen as a significant positive step by markets with an ensuing risk-on reaction, meaning stronger equities and a sell-off in the bond market, the dollar and the yen. Equally, any indication that no meeting will take place is likely to see a strong risk-off reaction with the opposite impacts.

Looking at the overnight data, there have been few releases with the most notable, arguably, Chinese in nature. Vehicle Sales in China fell 16.4%, their 11th consecutive monthly decline, which when combined with slowing monthly loan growth paints a picture of an economy that is clearly feeling some pain. The only other data point was Spanish Inflation, which printed at 0.8%, clearly demonstrating the lack of inflationary impulse in the Eurozone, even in one of the economies that is growing fastest. Neither of these data points indicates a change in the easing bias of central banks.

In the US this morning we see CPI data which is expected to print at 1.9% with the ex food& energy print at 2.1%. Yesterday’s PPI data was on the soft side, so there is some concern that we might see a lower print, especially given how rapidly oil prices have fallen of late. In the end, it is shaping up as another quiet day. Equity markets around the world have been slightly softer, but that is following a weeklong run of gains, and US futures are pointing to 0.3% declines at this point. Treasury yields are off their lowest point but still just 2.12% and well below overnight rates. And the dollar is modestly higher this morning, although I don’t see a currency that has moved more than 0.2%, indicating just how quiet things have been. Look for more of the same until at least next Wednesday’s FOMC announcement.

Good luck
Adf

Soon On the Way

While Powell did not actually say
That rate cuts were soon on the way
He hinted as much
So traders did clutch
The idea and quickly made hay

If there was ever any doubt as to what is driving the equity markets, it was put to rest yesterday morning. Chairman Powell, during his discussion of the economy and any potential challenges said the following, “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion.” Nowhere in that comment does he actually talk about cutting rates, but the market belief is that ‘appropriate action’ is just that. The result was a powerful equity market rally (DJIA and S&P +2.1%, NASDAQ +2.6%), a modest Treasury sell-off and further weakness in the dollar. At this point, Wall Street analysts are competing to define the terms of the Fed’s next easing cycle with most now looking for at least two rate cuts this year, but nobody expecting a move later this month. And don’t forget the futures market, where traders are pricing in 60bps of rate cuts before the end of the year, so two cuts and a 40% probability of a third.

All of this is ongoing in the face of continuing bombastic trade rhetoric by both the US and China, and with President Trump seemingly quite comfortable with the current situation. While it appears that he views these as negotiating tactics, it seems clear that the strategy is risky and could potentially spiral into a much more deeply entrenched trade war. However, with that in mind, the one thing we all should have learned in the past two plus years is that forecasting the actions of this President is a mug’s game.

Instead, let’s try to consider potential outcomes for various actions that might be taken.

Scenario 1: status quo, meaning tariffs remain in place but don’t grow on either side and trade talks don’t restart. If the current frosty relationship continues, then markets will become that much more reliant on Fed largesse in order to maintain YTD gains, let alone rally. Global growth is slowing, as is growth in trade (the IMF just reduced forecasts for 2019 again!), and earnings data is going to suffer. In this case, the market will be pining for ‘appropriate action’ and counting on the Fed to cut rates to support the economy. While rate cuts will initially support equities, there will need to be more concrete fiscal action to extend any gains. Treasuries are likely to continue to see yields grind lower with 2.00% for the 10-year quite viable, and the dollar is likely to continue to suffer in this context as expectations for US rate cuts will move ahead of those for the rest of the world. Certainly, a 2% decline in the dollar is viable to begin with. However, remember that if the economic situation in the US requires monetary ease, you can be sure that the same will be true elsewhere in the world, and when that starts to become the base case, the dollar should bottom.

Scenario 2: happy days, meaning both President’s Xi and Trump meet at the G20, agree that any deal is better than no deal and instruct their respective teams to get back to it. There will be fudging on both sides so neither loses face domestically, but the threat of an all-out trade war dissipates quickly. Markets respond enthusiastically as earnings estimates get raised, and while things won’t revert to the 2016 trade situation, tariffs will be removed, and optimism returns. In this case, without any ‘need’ for Fed rate cuts, the dollar will likely soar, as once again, the US economic situation will be seen as the most robust in the world, and any latent Fed dovishness is likely to be removed. Treasury prices are sure to fall as risk as quickly embraced and 2.50%-2.75% 10-year Treasuries seems reasonable. After all, the 10-year was at 2.50% just one month ago.

Scenario 3: apocalypse, the trade war escalates as both Presidents decide the domestic political benefits outweigh the potential economic costs and everything traded between the two nations is subject to significant tariffs. Earnings estimates throughout the world tumble, confidence ebbs quickly and equity markets globally suffer. While this will trigger another bout of central bank easing globally, the impact on equity markets will be delayed with fear running rampant and risk rejected. Treasury yields will fall sharply; 1.50% anyone? The dollar, however, will outperform along with the yen, as haven currencies will be aggressively sought.

Obviously, there are many subtle gradations of what can occur, but I feel like these three descriptions offer a good baseline from which to work. For now, the status quo is our best bet, with the chance of happy days coming soon pretty low, although apocalypse is even more remote. Just don’t rule it out.

As to the markets, the dollar has largely stabilized this morning after falling about 1% earlier in the week. Eurozone Services PMI data printed ever so slightly higher than expected but is still pointing to sluggish growth. The ECB is anticipated to announce the terms of the newest round of TLTRO’s tomorrow, with consensus moving toward low rates (-0.4% for banks to borrow) but terms of just two years rather than the previous package’s terms of four years. Given the complete lack of inflationary pulse in the Eurozone and the ongoing manufacturing malaise, it is still very hard for me to get excited about the euro rallying on its own.

This morning brings ADP Employment data (exp 185K) as well as ISM Non-Manufacturing (55.5) and then the Fed’s Beige Book is released at 2:00. We hear from three more Fed speakers, Clarida, Bostic and Bowman, so it will be interesting to see if there is more emphasis on the willingness to respond to weak markets activity. One thing to note, the word patience has not been uttered by a single Fed member in a number of days. Perhaps that is the telling signal that a rate cut is coming sooner than they previously thought.

Good luck
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A Victimless Crime

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

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

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

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

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

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

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

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

Good luck and good weekend
Adf