Tag Archives: #Xi

Becoming a Bane

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Twixt Europe and Russia, Ukraine
Is feeling incredible strain
As diplomats leave
The markets perceive
That risk is becoming a bane

The fear is that war is in view
At which time the best thing to do
Is buy francs and yen
And Treasuries, then
Be ready for stocks to eschew

While it is true that the Fed meeting on Wednesday is of significant importance to market participants, there is another, much greater concern that has risen to the top of the list today, the growing sound of war drums in the Ukraine.  Both sides seem to be increasing both their activities and their rhetoric, and financial markets are really starting to take notice.  The immediate losers have been on the Russian side as the MOEX (Russian stock market index) is down 6.1% so far this morning and 15% YTD.  In addition, RUB (-1.5%) is the worst performing EMG currency today and this year, having fallen -5.0% so far.  The implication is that international investors are fleeing given the threats of retaliation by the EU and NATO in the event Russia actually does invade.

The latest headline from the EU is, FURTHER MILITARY AGGRESSION TO COME AT SEVERE COST.  You can see why owning Russian assets seems quite risky here as on a military basis, there is probably very little the EU or NATO can do in response to an invasion.  But they can certainly impose much more severe economic sanctions and even boot Russia from the SWIFT system, removing the nation’s access to dollars for any transactions.  Of course, given the fact that Germany is so reliant on Russia for its natural gas supply, which by the way has seen prices explode higher this morning in Europe by 12.3%, it does seem unlikely that the most severe sanctions will be imposed.

Will this devolve into war?  There is no way to know at this time.  My take is neither side wants a hot war as those are extremely expensive and difficult to prosecute, but President Putin has an agenda with respect to the West’s attitude toward the Ukraine and what constitutes the Russian sphere of influence.  Arguably, one of the big concerns is that leadership in the West lacks both real world experience and any mandate to “protect” the Ukraine.  However, they also don’t want to look either foolish or weak to their own constituents.  I fear that pride and hubris on both sides could result in a much worse outcome than needs to occur.  For a long time, I read the Ukraine tensions as a negotiating tactic by Putin to achieve a greater buffer zone around Russia.  Alas, the situation seems to have deteriorated pretty severely and pretty quickly.  At this time, one must be prepared for a more dramatic and negative outcome, one which is likely to see traditional havens like yen, Swiss francs, the dollar, and Treasuries rise dramatically.

Apparently, President Xi
Does not like the FOMC
As Jay keeps implying
That rates will be flying
And Xi can’t force growth by decree

While Covid has been an extraordinary burden on the world in so many different ways, as with all things, there has been a modicum of good as a result as well.  For instance, the WEF has been downgraded to a bunch of Zoom calls with no elite hobnobbing and very little press overall.  However, that elite cadre persist in their efforts to rule the world by decree and I thought it worth highlighting something that didn’t get much press last week when it occurred but offers an indication of China’s current economic thinking.  President Xi’s speech included the following, (emphasis added) “Second, we need to resolve various risks and promote steady recovery of the world economy. The world economy is emerging from the depths, yet it still faces many constraints. The global industrial and supply chains have been disrupted. Commodity prices continue to rise. Energy supply remains tight. These risks compound one another and heighten the uncertainty about economic recovery. The global low inflation environment has notably changed, and the risks of inflation driven by multiple factors are surfacing. If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers. They would present challenges to global economic and financial stability and developing countries would bear the brunt of it.”

Boiled down, this comes to Xi Jinping basically asking (telling?) Jay Powell to avoid raising rates as that would be a problem for China, as well as other EMG economies.  Now, I don’t believe that Chairman Powell is overly concerned about China, but I do believe that while the tightening of policy is very likely to start, it will be short-lived as the economic situation proves to be less robust than currently thought.  However, I thought it instructive as backdrop for recent actions by the PBOC and as a harbinger of the future, where interest rates there are likely to continue declining.  However, nothing has changed my view that the renminbi (+0.2%) is going to continue to strengthen this year.

Ok, so a tour of markets makes for some pretty sad reading this morning.  While the Nikkei (+0.25%) managed to eke out a gain, the Hang Seng (-1.25%) could not despite ostensible positive news regarding Chinese property developers being able to sell some properties.  Europe, though, is bleeding badly on the Russia/Ukraine story (DAX -1.8%, CAC -1.7%, FTSE 100 -1.2%) with the UK clearly the least impacted for now.  Meanwhile, US futures, which had spent the bulk of the evening in the green, are now lower by -0.25% across the board.

Treasuries are playing their haven role like Olivier, rallying further with yields declining another 2.5bps, taking them 15bps from recent highs.  Bunds (-2.4bps), OATs (-1.9bps) and Gilts (-3.3bps) are all seeing strong demand as well as investors flee to the relative safety of fixed income.

Turning to commodities, oil (-0.2%) is in consolidation mode, although the uptrend remains strong.  NatGas in the US (-1.0%) is clearly dislocated from that in Europe but feels very much like it is developing a base around $4/mmBTU.  Gold (+0.4%) is proving more of a haven these days despite the dollar’s strength, although industrial metals (Cu -1.8%, Al -0.85%) are under pressure today.

And finally, the dollar is showing its traditional haven characteristics as well, rallying against all its G10 counterparts and most EMG currencies.  SEK (-0.8%) and NOK (-0.75%) are leading the way lower, arguably because of the proximity of those nations to the Ukraine and the escalation of military and naval activity in the Baltic and North Seas with both Russian and NATO ships and submarines seen.  AUD (-0.7%) is obviously feeling the impact of weakening commodity prices as well as the general dollar strength.  The rest of the bloc is all weaker, just not quite to this extent.

Aside from the RUB (now -2.0%), PLN (-0.9%), ZAR (-0.9%) and CZK (-0.85%) are the worst performers this morning in the EMG bloc.  The zloty story is interesting given central bank comments that “Polish rates should rise more than the market expects”, which would ordinarily be seen as currency bullish, however, given Poland’s proximity to the Ukraine, one cannot be surprised to see investors selling the currency.  The same is true of CZK, although frankly, other than a pure risk-off play, I can see no news from South Africa.

This is a big data week with far more than the Fed on tap.

Today PMI Manufacturing 56.7
PMI Services 54.8
Tuesday Case Shiller Home Prices 18.2%
Consumer Confidence 111.8
Wednesday New Home Sales 765K
FOMC Decision 0.00% – 0.25%
Thursday Initial Claims 260K
Continuing Claims 1650K
Durable Goods -0.5%
-ex Transport 0.3%
Q4 GDP 5.3%
Q4 Personal Consumption 2.9%
Friday Employment Cost Index 1.2%
Personal Income 0.5%
Personal Spending -0.6%
PCE Deflator 0.4% (5.8% Y/Y)
Core PCE Deflator 0.5% (4.8% Y/Y)
Michigan Sentiment 68.8

Source: Bloomberg

So, while of course the FOMC meeting is the primary piece of data, both the Claims and PCE data is going to be carefully scrutinized as well for indicators of the current economic situation and the Fed’s likely reaction function.  As of now, no Fed speakers are scheduled after the meeting for the rest of the week, although I imagine we will hear from several by the end of the week.

As to the dollar, right now, its haven status is all that matters.   Look for it to continue to perform will unless there is a real de-escalation of the Ukraine situation.

Good luck and stay safe
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Lest Things Implode

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The central banks all through the West
Are trying to figure how best
To, policy, tighten
But not scare or frighten
Investors and so they are stressed

Meanwhile from Beijing data showed
That Chinese growth actually slowed
With prospects now dimmed
The central bank trimmed
Two interest rates, lest things implode

There is a new contest amongst the punditry to see who can call for the most shocking rate policy by the Fed this year.  With the FOMC in their quiet period, they cannot respond to comments by the likes of JPM Chair Jamie Dimon (the Fed could raise rates 7 times this year!) or hedge fund manager and noted short seller Bill Ackman (the Fed should raise rates by 50 basis points in March to shock the market), and so those comments get to filter through the market discussion and creep into the narrative.  A quick look at Fed funds futures shows that the market is now pricing in not only a 25bp rate hike, but a probability of slightly more at the March meeting.

Now, don’t get me wrong, I think the Fed is hugely behind the curve, as evidenced by the fact they are still purchasing assets despite raging inflation, and think an immediate end to asset purchases would be appropriate policy, as well as raising rates in 0.5% increments or more until they start to make a dent in the depth of negative real yields, but I also know that is not going to happen.  Time and again they have effectively explained to us all that while inflation is certainly not a good thing, the worst possible outcome would be a decline in the stock market.  Their deference to investors rather than to Main Street has become a glaring issue, and one that does not reflect well on their reputation.  And yet, Chairman Powell has never given us a reason to believe that he will simply focus on inflation, which is currently by far the biggest problem in the economy.

However, with the market having already priced in a 0.25% rate hike for March, it is entirely realistic they will raise rates at that meeting.  The key question, though, is will they be able to continue to tighten policy when equity markets start to respond more negatively?  For the past 35 years (since Black Monday in 1987) the answer has been a resounding NO.  Why does anybody think this time is different?

Interestingly, at the same time virtually every Western central bank is trying to figure out the best way to fight the rapidly rising inflation seen throughout the world, the Middle Kingdom has their own, unique, issues, namely disappointing economic growth and expanding omicron growth leading up to the Winter Olympics.  Of course, the last thing that President Xi can allow is any inkling that things in China are not running smoothly, and so after the release of weaker than expected IP, Fixed Asset, Retail Sales and GDP data for Q4, the PBOC cut both its Medium-Term Lending and 7-day Reverse Repo rates by 0.10% last night.  In addition to the weaker data came the news that yet another property developer, Logan Group, may have made guarantees that do not appear on their balance sheet to the tune of $812 million.  I have lost count of the number of property developers in China that are now under growing pressure ever since the initial stories about China Evergrande.  But that is the point, the entire property sector is under huge pressure of imploding and property development has been somewhere between 25%-30% of the Chinese GDP growth.  This does not bode well for Chinese GDP growth going forward, which does not bode well for global growth.  PS, one last thing to mention here is the Chinese birth rate fell to its lowest level since 1950!  Only 10.62 million babies were born in 2021, despite significant efforts by the government to encourage family growth.  As demographics is destiny, unless the Chinese change their immigration policies, the nation is going to find itself in some very difficult straits as the population there ages rapidly and the working population shrinks.  Just sayin’.

Ok, with that out of the way, a look around today’s holiday markets shows that risk is on!  Aside from the Hang Seng (-0.7%) overnight, which is where so many property firms are listed, every other major market is in the green.  The Nikkei (+0.75%) and Shanghai (+0.6%) were both solid performers as that PBOC rate cut was seen as encouraging.  In Europe, the DAX (+0.4%), CAC (+0.6%) and FTSE 100 (+0.6%) are all firmer as are the peripheral markets.  Even US futures (+0.1% across the board) are firmer although there is no trading here today due to the MLK holiday.

Bond markets, on the other hand, are under pressure everywhere as Treasury futures are down 13 ticks or about 3 basis points higher, while European sovereigns (Bunds +1.7bps, OATs +2.0bps, Gilts +2.8bps) are all seeing higher yields as well.  In fact, 10-year Bunds are approaching 0.0% for the first time since May 2019.  Asia was no different with only China (-0.8bps) seeing a yield decline and sharp rises in Australia (+6.7bps) and South Korea (+9.7bps).

In the commodity markets, WTI (0.0%) is flat although Brent (-0.3%) is edging down from its multi-year highs.  NatGas (-0.6%) is also edging lower and European gas prices are falling even more significantly as a combination of LNG cargoes and warmer weather eases some pressure on that market.  Gold (+0.2%) is firmer, despite what appears to be a risk-on day, although copper (-0.7%) is under a bit of pressure.  In other words, the noise is overwhelming the signal here.

As to the dollar this morning, mixed is the best description as there are gainers and losers in both G10 and EMG blocs.  Interestingly, despite oil’s lackluster trading, both NOK (+0.3%) and CAD (+0.2%) are the leading gainers in the G10 while JPY (-0.25%) is following its risk history, selling off as equities gain.  In the emerging markets, RUB (-0.55%) is the worst performer as there seems to be growing concern over the imposition of tighter sanctions in the event Russia does invade the Ukraine.  KRW (-0.45%) is next in line after North Korea launched yet two more ballistic missiles, raising tension on the peninsula.  On the plus side, THB (+0.4%) has been continuing its recent gains as the nation opens up more completely from Covid lockdowns.

It is a relatively light data week with Housing the main focus, and with the Fed in their quiet period, we won’t be getting help there either.

Tuesday Empire Manufacturing 25.0
Wednesday Housing Starts 1650K
Building Permits 1700K
Thursday Initial Claims 220K
Continuing Claims 1521K
Philly Fed 19.8
Existing Home Sales 6.41M
Friday Leading Indicators 0.8%

Source: Bloomberg

In truth, it is shaping up to be a quiet week.  Next week brings the central bank onslaught with the Fed, BOJ and BOC, but until then, we will need to take our cues from equities and geopolitical tensions to see if anything occurs that may inspire the jettisoning of risk assets in a hurry.  My gut tells me we will not be seeing anything of that nature, and so a range bound week for the dollar seems in store.

Good luck and stay safe
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Somewhat Weak

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In China, the PBOC
Whose policy, previously
Consisted of planks
Instructing the banks
To buy more and more renminbi

Has seemingly now changed its mind
With prop trading now much maligned
Instead, what they seek
Is yuan, somewhat weak
And banks that object will be fined

Let’s face it, constantly harping on inflation is getting tiresome.  While it remains the biggest topic in the market, we have discussed it extensively, and in fact, until there is some clarity as to the next Fed chair, it is very difficult to even try to determine how the Fed will respond going forward.  The word is that President Biden will be revealing his nomination tomorrow at which point we can game out potential future scenarios.

In the meantime, we have seen large movements in some emerging market currencies, and we have heard about some potential changes in policies underlying one of the less volatile ones, the Chinese renminbi.  One of the more surprising features of the dollar’s rally since summertime has been the fact that the renminbi has actually strengthened about 0.6% while the euro has declined nearly 8%.  In fairness, the euro has many self-inflicted problems that have been underlying its recent weakness, but the dollar, as measured by the Bloomberg dollar index, has risen by nearly 6%, implying there has been a lot of broad-based dollar strength.  This begs the question, why hasn’t the renminbi followed suit?

There are several potential answers to this question with the likelihood that each has been a part of the process.  Remember, for a mercantilist economy like China’s, a weaker currency tends to be the goal in an effort to improve the competitiveness of its exporters.  So, acceptance of a stronger currency demonstrates other priorities.

If nothing else, China plays the long game, historically willing to sacrifice short-term economic performance for the sake of a longer-term goal, often a political one.  And one of the things China is very keen to achieve is de-dollarization of its economy.  Given the growing antagonism between the US and China, President Xi has determined his nation is better served by an alternative to the US dollar in as many areas as possible.  One of those areas is in trade with other developing nations.  To the extent that the Chinese can convince other Asian, Middle Eastern or African nations to accept renminbi in exchange for their products, rather than dollars, it both strengthens Xi’s grip on those nations’ economies as well as reduces his reliance on the US led SWIFT system thus preventing any interference by the US.  As such, it is incumbent upon Xi to insure that CNY is a strong and stable currency, the exact words the PBOC uses to describe the renminbi in almost every press release.

Now, while this may have been at odds with short-term potential benefits, Xi understood the long-term benefits of removing as much of the Chinese economy from the dollar’s global sphere of influence as possible.  And it seems, that a major tool used to help maintain the renminbi’s strength has been the encouragement of local Chinese banks prop trading desks to continue to buy the currency.  There have long been stories of the PBOC whispering in the ear of Chinese banks to do just that, with the implication that the PBOC would prevent any significant weakness.

But that was then.  It seems now that the ongoing malaise in the Chinese economy, where growth forecasts continue to slide and expectations for another 50 basis point RRR cut are growing, has the PBOC apparently cracking down on prop desks buying too much CNY.  They have been instructed to monitor client activity and keep it at more ‘normal’ levels.  Some see that as a tacit admission that the previous policy, which was never explicit, was in fact a reality.  In addition, much will be made of the fixing, which last night was printed 0.2% weaker than expected.  Now, while 0.2% may not seem like much, in a currency with historical volatility around 3%, it is a signal.  In addition, the PBOC indicated that it would be ready to allow a “more flexible currency”, their code for weakness.  This is not to say the CNY is going to collapse, just that the unusual strength we have seen over the past six plus months is likely coming to an end.  Be warned.

Turning to the rest of the market this morning, the situation is somewhat mixed, with equity markets showing both gains and losses, although bond markets are under universal pressure.  Starting with equities, Asia gave no directional cues with the Nikkei (+0.1%) little changed while the Hang Seng (-0.4%) and Shanghai (+0.6%) gave confusing signals.  It seems that there is a very large sell order making the rounds in Evergrande stock, which is weighing on HK, while Shanghai responded to the first hints of easing by the PBOC.  Europe, which was modestly higher earlier in the session, has drifted to a mixed performance as well with the DAX (-0.1%) and CAC (-0.2%) both a touch softer although the FTSE 100 (+0.1%) has eked out a gain.  In the absence of any data releases, it seems that traders are biding their time for the next big thing.  US futures, on the other hand, are all firmer by about 0.35%, despite talk of a faster taper by more Fed speakers late last week.

Bond markets, though, are having a rougher time of things with Treasuries (+3.3bps) leading the way, but Bunds (+1.3bps) and Gilts (+2.5bps) both following along.  OATs are unchanged on the day, although have spent the bulk of the session with modestly higher yields.  The thing about yields, though, is that they remain range-bound and have shown little impetus to trend in either direction.  This is a market waiting for the next central bank discussion.

In the commodity space, oil continues under pressure as the thought of SPR releases in a coordinated manner from a number of nations continues to dog the price.  NatGas (-5.4%), interestingly, has tumbled after a larger than expected build in inventories, something US homeowners will welcome.  In the metals space, gold (-0.2%) is slightly softer and copper (-0.6%) is feeling a bit more strain.  However, aluminum (+0.6%) and nickel (+2.1%) show that this is not a universal issue.

As to the dollar, in the G10 the story is mixed with AUD (+0.3%) the best performer while SEK (-0.4%) is the worst.  However, these appear to be flow related movements as there has been no data or commentary from either nation.  The rest of the bloc has barely moved, +/- 0.1% for most of them, as traders await the next big idea.  In the emerging markets, CLP (+3.0%) is the big gainer as yesterday’s presidential election resulted in the conservative candidate performing far better than expected and investors now hoping that the country will maintain its investment friendly policies.  On the downside, RUB (-1.3%) and HUF (-0.6%) are in the worst shape with the former feeling pain based on concerns recent troop movements near the Ukraine border will result in an invasion and potential further sanctions, while the forint is suffering despite a more aggressive central bank as inflation there continues to ramp higher.  Expectations are growing for yet another rate hike as the fear is they are falling further behind the curve.

With the holiday before us, data is all crammed into the first three days this week, and most of it is on Wednesday:

Today Existing Home Sales 6.18M
Tuesday Manufacturing PMI 59.1
Services PMI 59.0
Wednesday Initial Claims 261K
Continuing Claims 2052K
GDP 2.2%
Durable Goods 0.2%
-ex Transport 0.5%
Personal Income 0.2%
Personal Spending 1.0%
Core PCE 0.4% (4.1% Y/Y)
New Home Sales 800K
Michigan Sentiment 66.9
FOMC Minutes

Source: Bloomberg

Consider that on the day before Thanksgiving, we are going to see some of the most important data of the month, and there will be relatively few people around.  If there is any surprise, we could see significant volatility.  In fact, for the week as a whole, the lack of liquidity is likely to result in a choppier market.  Keep that in mind if you need to execute anything of substance, but overall, the dollar’s recent rally seems likely to continue.

Good luck and stay safe
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Far From Benign

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There once was a market decline
That seemed, at the time, to consign
Investors with shares
To turn into bears
An outcome quite far from benign

But that was a long time ago
As by afternoon all the flow
Was buying the dip
Thus, proving this blip
Was not a bull market deathblow

I wonder if stock prices declining for 18 hours now counts as a correction.  What had appeared to be the beginnings of a more protracted fall in stocks turned into nothing more than a modest blip in the ongoing bull market.  Some teeth were gnashed, and some positions lightened, but by 3:15pm, it was all over with a 1.3% rebound from that time to the close.  Granted, the S&P 500 did decline 1.7% on the day, but given the substantial buying impulse seen at the end of the day, as well as the change in tone of the market narrative, it certainly feels this morning like the worst is behind us.  While China Evergrande continues to be bankrupt, the new story is that despite its large size, it is not large enough to be a real catalyst for market destruction and, anyway, the PBOC would never let things get to a point where its bankruptcy would lead to contagion elsewhere in the Chinese markets/economy.

As to the last point, be careful with your assumptions.  While this is not meant to be a prediction, consider that President Xi Jinping has spent the last year cracking down on successful firms in China as they have amassed both wealth and power, something that an autocrat of Xi’s nature cannot abide.  So, a fair question to ask is, would Xi let the Chinese economy crash in order to consolidate his power even further?  While I don’t believe he would purposely do that, I would not rule out him allowing things to unfold in a manner he sees as beneficial to his ultimate plans, thus financial distress in China could well be in our future.  And if you are Xi Jinping, the idea that Western markets would react badly to an Evergrande collapse would only be a positive.  My point is, I don’t think you can rule out other motives in this situation.

At any rate, this literally seems like ancient history at this time, with markets all in the green and the market narrative of ‘buy the dip’ proving itself once again to be the proper course of action.  Pavlov himself could not have conditioned retail investors any better than the Fed and other central banks have done over the past decade.

So, with Evergrande in the rearview mirror, the market gets to (re)turn its focus to the FOMC meeting, which begins this morning and whose outcome will be announced at 2pm tomorrow.  That means we are back to talking about tapering.  Will they, or won’t they?  And if they do, when will they start?

The market consensus is clearly that tapering is coming with about two-thirds of market economists forecasting the first reduction in asset purchases will occur in November.  While there are some differing views on how they will taper, the consensus appears to be a reduction of $10 billion of Treasuries and $5 billion of mortgage-backed securities each month until they are done.  So, eight months of reductions takes us to next June if we start in November.  Of course, this assumes that there are no interruptions, and that the Fed leadership remains intact.

First, remember, Chairman Powell’s term is up in February, and while he remains the favorite to be reappointed, it seems the most progressive wing of the Democratic party wants to see someone else, with Lael Brainerd, a current Fed governor and past Treasury Undersecretary, seen as the leading alternative.  Ms Brainerd has consistently been even more dovish than Powell, and if she were to be confirmed for the Chair, it would be easy to believe she halted any tapering at that point.  After all, if one believes in MMT, (which by all accounts Ms Brainerd embraces), why would the Fed ever stop buying Treasuries?  Again, this is not predictive, just something to keep in mind.

Second, the tapering narrative is based on the idea that economic growth coming out of the Covid recession is self-sustaining and no longer needs central bank support.  But what if the recovery is more anemic than currently forecast.  The one consistency we have seen over the course of the past months is that forecasts for economic growth in Q3 and Q4 have declined dramatically.  For instance, the Atlanta Fed’s GDPNow forecast model is pointing to 3.65% currently, down from 5.3% at the beginning of the month and 7.6% just two months ago.  Shortages of certain things still abound and prices on staples like beef, pork, and poultry, continue to rise rapidly.  In short, the situation in the economy is anything but clear.

In this case, the question really becomes, will the Fed turn its attention to inflation, or will it remain focused only on unemployment?  If the inflation heat reaches too high a temperature, then it would be easy to believe tapering will occur far more rapidly.  However, if growth remains the focus, then any reason to delay tapering will be sought.  I remain in the camp that while they may initiate tapering, the Fed will be buying bonds long after June 2022.  We shall see.

A quick turn to markets shows that all is right with the world!  Stocks are almost universally higher as Asia (Hang Seng +0.5%, Shanghai +0.2%) led the beginning of the rebound although Japan (Nikkei -2.1%) was still coming to grips with yesterday’s narrative coming out of their holiday.  Europe is strongly higher this morning (DAX +1.45%, CAC +1.4%, FTSE 100 +1.15%) as fear has rapidly dissipated.  And after the worst US equity session in months, futures this morning are higher by about 0.8% across the board.

It should be no surprise that bonds are for sale this morning with yields mostly higher.   Treasury yields, which fell 6bps yesterday, have bounced slightly, up 1.7bps this morning.  European sovereigns, which saw a lesser rally yesterday have barely sold off with nothing rebounding even a full basis point.  One noteworthy outlier is Greece, whose bonds are sharply higher with 10-year yields declining 4.6bps, after Greek central bank comments that the ECB would never stop buying Greek paper.

Commodity prices are generally firmer with oil (WTI +1.2%) leading although gold (+0.2%), copper (+0.95%) and aluminum (+1.0%) are all embracing the risk rebound.

And finally, the dollar, which had rallied so sharply yesterday morning, has given back all of those gains.  NOK (+0.8%) leads the G10 charge higher with CAD (+0.5%) next in line as oil’s rebound supports both currencies.  The rest of the bloc has seen less exuberance, generally between 0.1% and 0.25%, although JPY (-0.1%) has slipped as its haven status is no longer a benefit.

EMG currencies have seen a little less dramatic movement with the leading gainer CZK (+0.3%) followed by RUB (+0.25%) with the latter benefitting from oil while the former continues to find support based on views its central bank remains hawkish enough to raise rates.  Otherwise, the gainers have been quite modest, 0.2% or less with two currencies falling on the day, ZAR (-0.2%) and PLN (-0.25%).  In both cases, it appears the concerns lie with central bank policy prospects.  However, given the modest size of the decline, it is hardly a key issue.

On the data front, this morning brings Housing Starts (exp 1550K) and Building Permits (1600K), although with the FOMC meeting in the background, neither is likely to move the needle.  And that’s really it for the day as there are no speakers.  As long as we don’t see a bombshell from Evergrande, which seems unlikely in our time zone, today feels like a quiet session with potential modest further dollar weakness.  All eyes will continue to be on tomorrow’s FOMC announcement, and, more importantly, Chairman Powell’s comments at the press conference.  Until then, slow going is likely.

Good luck and stay safe
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Havoc Our Way

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It’s been fifty years to the day
Since Nixon brought havoc our way
He slammed down the sash
Where gold swapped for cash
That’s led to today’s disarray

Given the importance of this event, although it is often overlooked, I felt I had to mention the anniversary.  In truth, it was yesterday, August 15, 1971, when President Nixon closed the gold window, ending the Bretton Woods agreement that insured (allowed?) every nation to convert their dollars to gold and ushered in the current framework of fiat currencies.  Prior to his action, the global monetary system was based on the value of gold, which was exchangeable into US dollars (or perhaps the other way around) at $35.00/oz.  Each nation’s gold sat in cages in the vault at the Federal Reserve Bank of NY and would literally be physically moved from cage to cage in order to satisfy national debts amongst the countries. The problem for the US was that most of the movement was out of the US cage into other countries’, which represented the massive trade and current account deficits the US was running.  So, Nixon essentially told the world, holding dollars was the only choice.

Of course, the fiat currency regime has evolved into the current situation where the ability to print money is endless, and every government is happy for it to never end.  The strictures of a gold-backed currency are far too confining for the social programs deemed essential by virtually every government in the world today, which is why we will never go back.  The real question is, what lies ahead?

The ructions in China persist
As data last night, forecasts, missed
And President Xi
Continues to see
More targets that he can blacklist

As to the markets today, the single biggest story has been the release of Chinese data at significantly worse than expected levels.  The key figures showed Retail Sales (8.5%, exp 10.9%), IP (6.4%, exp 7.9%) and Fixed Asset Investment (10.3%, exp 11.3%).  The disappointing outcome has been attributed to the spread of the delta variant of Covid which has not only resulted in the closure of some key infrastructure points, notably two busy ports, but also weighed on many peoples’ willingness to travel during the typically busy summer vacation season.  Given the Chinese propensity for draconian measures in their effort to stop the spread of the virus, people are concerned they will get stuck some place with no ability to return home if there is a sudden lockdown.

The Wall Street response was immediate, with a number of economic forecasts for China taken lower by between 0.5%-0.7% for 2021 as a whole.  In addition, greater attention has been paid to the Chinese credit impulse (the amount of credit that is flowing into the economy from the banking system) which has been slowing rapidly since a peak in October.  This statistic tends to lead the Chinese economy’s performance by between 6 and 12 months, so it should be no surprise we are starting to see reduced output there.

Interestingly, despite the slowing growth story, the Xi government continues to attack its bellwether tech firms, the ones that have been growing the fastest.  It is becoming increasingly evident that President Xi is perfectly willing to sacrifice economic growth in an effort to consolidate his power even further.  Last night we again saw key government editorials about the evils of online gaming and how it should be curtailed even further.  Alibaba, one of the largest and most successful Chinese internet companies, remains squarely in Xi’s sights as he brings every potential threat to heel.  In the end, this is unlikely to help the Chinese economy writ large which from this poet’s perspective means we are likely to see a very gradual depreciation in the yuan as the currency market becomes a relief valve for domestic economic pressures.

The only other headline news has been the fall of Kabul to the Taliban in a remarkably swift 72 hours, with numerous stories about the evacuation as well as the political failures that led to this outcome.  Perhaps this is the impetus for today’s risk reduction, or perhaps it is the China story, or simply the ongoing spread of the delta variant; but whatever the reason, we are definitely seeing a bit of risk-off attitude across markets.

For instance, equity screens are all red with Asia ((Nikkei -1.6%, Hang Seng -0.8%, Shanghai 0.0%) and Europe (DAX -0.6%, CAC -1.0%, FTSE 100 -1.1%) clearly under pressure.  I’m sure Friday’s very weak Michigan Sentiment number (70.2, weakest since 2011) did not help anyone’s mood, and despite the fact that all three major US indices crept higher on the day Friday, by 0.1% or less, to new record highs, this morning all three are pointing lower by about -0.3%.

Bonds though are a bit more circumspect here, as while Treasury yields have edged lower by 0.3bps, all of Europe’s sovereign markets are selling off with yields rising.  Perhaps, investors have decided that the situation is so dire they don’t want any European paper at all!  So, bunds (+1.0bps), OATs (+1.4bps) and Gilts (+1.2bps) are all lower along side their respective equity markets.

Commodities, too, are softer this morning led by oil (-1.35%) and gold (-0.2%) with base metals (Cu -1.6%, Al -0.2%, Sn -0.3%) falling as well.  In fact, the only part of this bloc holding up is foodstuff, where the big three, corn, wheat and soybeans are all firmer.

Where, you may ask, is everybody putting their money if they are selling both stocks and bonds?  It seems the dollar is finding support against most currencies, except for the havens of JPY (+0.25%) and CHF (+0.2%).  Otherwise, the rest of the G10 is softer vs. the dollar, notably the commodity bloc where AUD (-0.5%), NOK (-0.45%) and CAD (-0.3%) are the laggards.  Similarly, in the EMG bloc, it is the commodity currencies that are under the most pressure with RUB (-0.3%), ZAR (-0.2%) and PHP (-0.35%).  In fact, the only currency with gains is TRY (+0.6%) which continues to benefit from the highest real yields on the planet.

The data story this week brings Retail Sales and Housing data as well as the FOMC Minutes on Wednesday.

Today Empire Manufacturing 28.5
Tuesday Retail Sales -0.2%
-ex autos 0.2%
IP 0.5%
Capacity Utilization 75.7%
Wednesday Housing Starts 1600K
Building Permits 1610K
FOMC Minutes
Thursday Initial Claims 365K
Continuing Claims 2800K
Philly Fed 24.0
Leading Indicators 0.7%

Source: Bloomberg

Retail Sales and the FOMC Minutes are likely to get the most attention, although any really big miss, like Friday’s Michigan data, could lead to further movements, so beware.  As well we hear from a few Fed speakers, with Chairman Powell talking tomorrow, but the subject does not appear to be the economy, then uber-dove Kashkari and his counterpart, the hawkish Kaplan later in the week.

At this point, risk remains under pressure and I sense that it has some room to run lower.  It has been more than 9 months since there has been a 5% drawdown in the equity market, an inordinately long period of time for pressures to build up.  This is not to say that a drawdown is coming, just that there is real instability underlying the market, so one is very possible.  And I sense that this risk-off event would be classic with the dollar gaining real ground against virtually everything.

Good luck and stay safe
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Playing Hardball

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Last night China shocked one and all
With two policy shifts not too small
They’ve now become loath
To target their growth
And in Hong Kong they’re playing hardball

It seems President Xi Jinping was pining for the spotlight, at least based on last night’s news from the Middle Kingdom. On the economic front, China abandoned their GDP target for 2020, the first time this has been the case since they began targeting growth in 1994. It ought not be that surprising since trying to accurately assess the country’s growth prospects during the Covid-19 crisis is nigh on impossible. Uncertainty over the damage already done, as well as the future infection situation (remember, they have seen a renewed rise in cases lately) has rendered economists completely unable to model the situation. And recall, the Chinese track record has been remarkable when it comes to hitting their forecast, at least the published numbers have a nearly perfect record of meeting or beating their targets. The reality on the ground has been called into question many times in the past on this particular subject.

The global economic community, of course, will continue to forecast Chinese GDP and current estimates for 2020 GDP growth now hover in the 2.0% range, a far cry from the 6.1% last year and the more than 10% figures seen early in the century. Instead, the Chinese government has turned its focus to unemployment with the latest estimates showing more than 130 million people out of a job. In their own inimitable way, they manage not to count the rural unemployed, meaning the official count is just 26.1M, but that doesn’t mean those folks have jobs. At this time, President Xi is finding himself under much greater pressure than he imagined. 130 million unemployed is exactly the type of thing that leads to revolutions and Xi is well aware of the risks.

In fact, it is this issue that arguably led to the other piece of news from China last night, the newly mooted mainland legislation that will require Hong Kong to enact laws curbing acts of treason, secession, sedition and subversion. In other words, a new law that will bring Hong Kong under more direct sway from Beijing and remove many of the freedoms that have set the island territory apart from the rest of the country. While Covid-19 has prevented the mass protests seen last year from continuing in Hong Kong, the sentiments behind those protests did not disappear. But Xi needs to distract his population from the onslaught of bad news regarding both the virus and the economy, and nothing succeeds in doing that better than igniting a nationalistic view on some subject.

While in the short term, this may work well for President Xi, if he destroys Hong Kong’s raison d’etre as a financial hub, the downside is likely to be much greater over time. Hong Kong remains the financial gateway to China’s economy largely because the legal system their remains far more British than Chinese. It is not clear how much investment will be looking for a home in a Hong Kong that no longer protects private property and can seize both people and assets on a whim.

It should be no surprise that financial markets in Asia, particularly in Hong Kong, suffered last night upon learning of China’s new direction. The Hang Seng fell 5.6%, its largest decline since July 2015. Even Shanghai fell, down 1.9%, which given China’s announcement of further stimulus measures despite the lack of a GDP target, were seen as positive. Meanwhile, in Tokyo, the Nikkei slipped a more modest 0.9% despite pledges by Kuroda-san that the BOJ would implement even more easing measures, this time taking a page from the Fed’s book and supporting small businesses by guaranteeing bank loans made in a new ¥75 trillion (~$700 billion) program. It is possible that markets are slowly becoming inured to even further policy stimulus measures, something that would be extremely difficult for the central banking community to handle going forward.

The story in Europe is a little less dire, although most equity markets there are lower (DAX -0.4%, CAC -0.2%, FTSE 100 -1.0%). Overall, risk is clearly not in favor in most places around the world today which brings us to the FX markets and the dollar. Here, things are behaving exactly as one would expect when investors are fleeing from risky assets. The dollar is stronger vs. every currency except one, the yen.

Looking at the G10 bloc, NOK is the leading decliner, falling 1.1% as the price of oil has reversed some of its recent gains and is down 6% this morning. But other than the yen’s 0.1% gain, the rest of the bloc is feeling it as well, with the pound and euro both lower by 0.4% while the commodity focused currencies, CAD and AUD, are softer by 0.5%. The data releases overnight spotlight the UK, where Retail Sales declined a remarkable 18.1% in April. While this was a bit worse than expectations, I would attribute the pound’s weakness more to the general story than this particular data point.

In the EMG bloc, every market that was open saw their currency decline and there should be no surprise that the leading decliner was RUB, down 1.1% on the oil story. But we have also seen weakness across the board with the CE4 under pressure (CZK -1.0%, HUF -0.75%, PLN -0.5%, RON -0.5%) as well as weakness in ZAR (-0.7%) and MXN (-0.6%). All of these currencies had been performing reasonably well over the past several sessions when the news was more benign, but it should be no surprise that they are lower today. Perhaps the biggest surprise was that HKD was lower by just basis points, despite the fact that it has significant space to decline, even within its tight trading band.

As we head into the holiday weekend here in the US, there is no data scheduled to be released this morning. Yesterday saw Initial Claims decline to 2.44M, which takes the total since late March to over 38 million! Surveys show that 80% of those currently unemployed expect it to be temporary, but that still leaves more than 7.7M permanent job losses. Historically, it takes several years’ worth of economic growth to create that many jobs, so the blow to the economy is likely to be quite long-lasting. We also saw Existing Home Sales plummet to 4.33M from March’s 5.27M, another historic decline taking us back to levels last seen in 2012 and the recovery from the GFC.

Yesterday we also heard from Fed speakers Clarida and Williams, with both saying that things are clearly awful now, but that the Fed stood ready to do whatever is necessary to support the economy. This has been the consistent message and there is no reason to expect it to change anytime soon.

Adding it all up shows that investors seem to be looking at the holiday weekend as an excuse to reduce risk and try to reevaluate the situation as the unofficial beginning to summer approaches. Trading activity is likely to slow down around lunch time so if you need to do something, early in the morning is where you will find the most liquidity.

Good luck, have a good holiday weekend and stay safe
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Burdened With Shame

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There once was a president, Xi
Who ruled with a fist of F E
But there’s now a nit
That cares not a whit
‘Bout politics while running free

So mandarins now take the blame
For playing along with Xi’s game
Their jobs they have lost
And soon they’ll be tossed
In jail, as they’re burdened with shame

Apparently, at least some of the rumors of undercounting coronavirus infections seem to have been true as last night the latest data showed an extraordinary jump in total cases to nearly 60,000 with a regrettable mortality rate of 2.3%, meaning more than 1350 people have passed away from its effects. Last week, much was made about how this was not very different than the simple flu, but that is just not the case. The mortality rate of the flu is 0.1%, an order of magnitude lower. At any rate, officials in Hubei Province revised the way they were calculating cases (i.e. they started admitting to higher numbers) and suddenly there were nearly 15,000 more cases just like that. In typical dictatorial fashion, the previous Hubei leadership, whose job was to prevent the truth from escaping, has been summarily sacked, and President Xi has a new man on the job, with a clean(er) slate. Talk about a thankless job!

At this point, what has become clear is that the dynamics of the spread of the virus remain uncertain and despite significant efforts by the Chinese, it appears premature to declare the situation under control. Recent market activity, where risk assets were aggressively acquired leading to record high stock prices, may now need to be rethought. Consider that the narrative that had been developing, especially after it appeared the growth of the virus was slowing, was that any impact would be temporary and confined to Q1. If that were the case, then it certainly was reasonable to think that ongoing central bank largesse would continue to push risk assets ever higher. But today it seems as though the definition of temporary may need to be adjusted somewhat, and investors are treading more cautiously. This is a terrible human tragedy and the most concerning aspect is that due to the politics in China, efforts to address it using the broadest array of expertise from the WHO and CDC is not being utilized. The likely outcome of these decisions is that many more will die from the coronavirus’s effects, and economic growth worldwide will be pretty significantly impacted.

And that is the background for this morning’s market across all assets. Risk is very definitely off today as can be seen in equity markets in Europe (DAX -1.1%, CAC -1.2%, FTSE100 -1.6%) and US equity futures, all of which are down between 0.7% and 0.9%. Treasury bonds have been in demand, rising half a point with yields falling 4bps to 1.59% while gold is higher by 0.5%. In the FX markets, the yen is today’s top performer, rallying 0.35% while the dollar outperforms virtually every other currency. And finally, oil prices have been slumping again as the IEA has just issued a report estimating that oil demand would actually shrink in 2020, the first time that has happened since the financial crisis and global recession of 2008-09. The latter certainly makes sense given that China has been the largest user of petroleum and its products. Consider that not only has travel to and from China fallen dramatically, over 100 million people are on lockdown in the country, and industrial output has slowed dramatically given there are no factory workers available to get to the factories.

The initial estimates of Chinese Q1 GDP were reduced to 4.5%-5.0%, but lately I have seen estimates falling to 0.0% for Q1 which would have a pretty severe impact on the global economy. And one of the problems is that data from China doesn’t come out quite as regularly as it does here in the US or in Europe, so there are long periods with no new information. Consider also that the Chinese simply didn’t release the January trade figures (they must be AWFUL) and it would not be surprising if they delay the release of much important data going forward. My point here is that we will have an increasingly difficult time understanding the actual situation on the ground in China, although it will become more apparent as those companies and countries that do the most business there report their data. The greater the deterioration of that data, the greater the problem on the mainland.

Turning to individual currency movers this morning, RUB and NOK, the two currencies most closely linked to the price of oil, are the biggest laggards in the EMG and G10 spaces respectively. Aside from the yen’s gains, the pound just jumped 0.3% after reports that Chancellor of the Exchequer, Sajid Javid, has resigned. Apparently the market was unimpressed with his performance. Boris is actively reshuffling his cabinet today, so there are other moves as well, but this was the only one that moved the market. But elsewhere in the G10, the dollar reigns supreme.

In the EMG space, HUF is today’s biggest winner, rising 0.45% after January’s CPI data jumped to 4.7% annually, well above their 3.0% target, and the central bank said they are ready to use all tools to rein it in. Clearly that implies rate hikes are coming to Hungary. (As an aside, I wonder if Powell, Lagarde or Kuroda are going to be ringing up the central bank there asking how they were able to create inflation.) But away from HUF, any gainers have moved so little as to be effectively unchanged, while the rest of the space, notably LATAM, is under pressure on the back of the weaker China story.

Data this morning brings Initial Claims (exp 210K) and CPI (2.4%, 2.2% ex food & energy), with the latter likely to be closely watched. Weakness in this print will only increase the odds of a rate cut here in the US, likely driving the market to price one in by July (currently a 72% probability). Chairman Powell didn’t teach us anything new yesterday, simply rehashing Tuesday’s testimony and no Senators raised anything noteworthy. Today we get two more Fed speakers, Kaplan and Williams, with Kaplan needing to be closely watched. After all, he is the only FOMC member who has admitted that the growth of the Fed’s balance sheet is having an impact on markets, and could prove to be problematic over time.

But it is a risk off day, which means that further yen strength is likely, and the dollar should continue to perform well overall.

Good luck
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Both Sides Connive

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

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

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

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

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

Inflation remains
Elusive in the distance
A crow at midnight

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

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

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

Good luck and good weekend
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Absent Deceit

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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

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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
Adf