A Too Bitter Pill

Three stories today are of note
First, Italy’s rocking the boat
Next Brexit is still
A too bitter pill
While OPEC, a cut soon may vote

The outcome in all of these cases
Has been that the market embraces
The dollar once more
(It’s starting to soar)
And quite clearly off to the races

On this Veteran’s Day holiday in the US, where bond markets will be closed although equity markets will not, the dollar has shown consistent strength across the board. Interestingly, there have been several noteworthy stories this morning, but each one of them has served to reinforce the idea that the dollar’s oft-forecast demise remains somewhere well into the future.

Starting with Italy, the current government has shown every indication that they are not going to change their budget structure or forecasts despite the EU’s rejection of these assumptions when the budget was first submitted several weeks ago. This sets up the following situation: the EU can hold firm to its fiscal discipline strategy and begin the procedure to sanction Italy and impose a fine for breaking the rules, or the EU can soften its stance and find some compromise that tries to allow both sides to save face, or at least the EU to do so.

The problem with the first strategy is the EU Commission’s fear that it will increase the attraction of antiestablishment parties in the Parliamentary elections due in May. After all, the Italian coalition was elected by blaming all of Italy’s woes on the EU and its policies. The last thing the Commission wants is a more unruly Parliament, especially as the current leadership may find themselves on the sidelines. The problem with the second strategy is that if they don’t uphold their fiscal probity it will be clear, once and for all, that EU fiscal rules are there in name only and have no teeth. This means that going forward, while certain countries will follow them because they think it is proper to do so, many will decide they represent conditions too difficult with which to adhere. Over time, the second option would almost certainly result in the eventual dissolution of the euro, as the problems from having such dramatically different fiscal policies would eventually become too difficult for the ECB to manage.

With this in mind, it is no surprise that the euro is softer again today, down 0.6% and now trading at its lowest level since June 2017. In less than a week it has fallen by more than 2.0% and it looks as though this trend will continue for a while yet. We need to see the Fed soften its stance or something else to change in order to stop this move.

Turning to the UK, the clock to make a deal seems to be ticking ever faster and there is no indication that PM May is going to get one. Over the weekend, there was no progress made regarding the Irish border issue, but we did hear from several important constituents that the PM’s current deal will fail in Parliament. If Labour won’t support it and the DUP won’t support it and the hard-line Brexiteers won’t support it, there is no deal to be had. With this in mind it is no surprise that the pound has suffered greatly this morning, down 1.4% and back well below 1.30. You may recall that around Halloween, the market started to anticipate a Brexit deal and the pound rallied 3.7% in the course of a week. Well, it has since ceded 2.7% of that gain and based on the distinct lack of progress on the talks, it certainly appears that the pound has further to fall. Do not be surprised if the pound trades below its recent lows of 1.2700 and goes on to test the post-Brexit vote lows of 1.1900.

The third story of note is regarding OPEC and oil prices, which have fallen nearly 20% during the past six weeks as US production and inventories continue to climb while the price impact of sanctions on Iran turned out to be much less then expected. This has encouraged speculation that OPEC may cut its production quotas, although the news from various members is mixed. Adding to oil’s woes (and in truth all commodity prices) has been the fact that global growth has been slowing as well, thus reducing underlying demand. In fact, the biggest concern for the market has been the slow down in China, which continues apace and where stories of further policy ease by the PBOC, including interest rate cuts, are starting to be heard. Two things to note are first, the typical inverse correlation between the dollar and commodity prices such that when the dollar rises, commodity prices tend to fall, and second, in line with the dollar’s broad strength, the Chinese yuan has fallen further today, down 0.3%, and pushing back to the levels that inspired calls for a move beyond 7.00 despite concerns over increased capital outflows.

And frankly, those are the stories of note. The dollar is higher vs. pretty much every other currency today, G10 and EMG alike, with no distinction and few other stories that are newsworthy. Looking at the data this week, there are two key releases, CPI and Retail Sales along with a bit of other stuff.

Tuesday NFIB Biz Confidence 108.0
  Monthly Budget -$98.0B
Wednesday CPI 0.3% (2.5% Y/Y)
  -ex food & energy 0.2% (2.2% Y/Y)
Thursday Initial Claims 215K
  Philly Fed 20.2
  Empire State 20.0
  Retail Sales 0.5%
  -ex Autos 0.5%
Friday IP 0.2%
  Capacity Utilization 78.2%

Overall, the data continues to support the Fed’s thesis that tighter monetary policy remains the proper course of action. In addition to the data we will hear from three Fed speakers including Chairman Powell on Wednesday. It seems hard to believe that he will have cause to change his tune, so I expect that as long as the rest of the world exhibits more short-term problems like we are seeing today, the dollar will remain quite strong.

Good luck
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Hardliners Abhorred

According to sources, it seems
That Minister May and her teams
Have neared the accord
Hardliners abhorred
As they’ll need to give up their dreams

While there is much in store for markets this week from the US, between the midterm elections tomorrow and the FOMC meeting on Thursday, today’s biggest headline is really about the UK and Brexit. Allegedly, albeit with no corroboration from either side, the entire UK will remain in the customs union, not just Northern Ireland, in the immediate aftermath of Brexit as the two sides continue to work out the eventual solution. May’s idea is that she will present this to her cabinet with an ultimatum to approve it and send it to Parliament in order to get the process completed before the end of the year. And while the other 27 members of the EU must also ratify the deal, the current belief is that there will be limited problems doing that. However, this all remains speculation at this point, except for the fact that May and her cabinet have a meeting scheduled for tomorrow where more details should become available.

It cannot be surprising that the pound has rallied on the news, jumping 60 pips on the open although since giving back about half that original gain. The broad consensus in the market is that any deal will result in the pound trading sharply higher, although I am skeptical that it can stay much above 1.35 for any meaningful amount of time. Even if the Brexit monkey climbs off the pound’s back, the market will still have to account for the fact that UK growth is slowing more sharply than its peers and that the pressure for the BOE to raise rates will likely ebb accordingly. But for now it remains speculation as to whether a deal is imminent or not. And as long as that uncertainty remains, the pound will be beholden to the latest story or headline on the subject.

Away from the pound though, the dollar is starting to show some life at this stage of the morning. Friday’s employment report, with NFP printing at 250K and AHE at 3.1%, confirmed that growth in the US continues to outperform virtually every other region in the world, and will have done nothing to dissuade the Fed from continuing its rate hiking strategy. While there is no expectation of any activity by the Fed on Thursday, the market probability for a rate hike in December remains above 80%. As long as US data continues to outpace that of the rest of the world, it seems unlikely that the Fed is going to stop.

Regarding the US midterm elections, clearly there is the potential for a market reaction depending on the results and whether the Republican party maintains its hold on the House of Representatives. If not, a split government (it is assumed that they will retain the Senate) will clearly impede the president’s plans for further economic stimulus programs and reintroduce brinksmanship to things like budget discussions. Net, given the current economic situation, I expect that after a kneejerk response, it is unlikely to have a significant impact for a while. However, it does open the possibility of more inflammatory rhetoric, including the threat of impeachment hearings, which may well detract from the dollar’s performance going forward. As we learned following President Trump’s election, markets pay close attention to significant electoral changes. With this in mind, it is important to remember that many pundits have been forecasting the Democrats will retake the House, so if the Republicans hold on, even with a much smaller majority, that may be an outcome not currently priced into the market. My point is that there is still great uncertainty to the outcome, and it is not entirely clear the FX impact that will result.

Away from those stories, the biggest news we saw was the weaker than expected Caixin PMI data from China. The Services print was 50.8 with the Composite number at just 50.5. The latter was at its weakest in more than two years and is an indication that the trade conflict with the US is continuing to take a toll on the Chinese economy. In addition, there were several articles in the press this weekend explaining that despite President Trump’s tweets last week, the meeting between Xi and Trump is really just going to get the trade negotiations restarted. There is no deal imminent. It should be no surprise that the renminbi has weakened during the session, especially after last week’s remarkable rally. So the 0.3% decline this morning needs to be kept in context, and simply represents a move back toward its previous trend.

Broadly speaking, the dollar is performing well against the EMG bloc today with MXN (-0.4%), INR (-0.9%) and KRW (-0.5%) indicative of the type of market activity ongoing.

Looking ahead to the upcoming data, we see that beyond the Fed and election, there is precious little that we will learn.

Today ISM Non-Manufacturing 59.3
Tuesday JOLT’s Jobs Report 7.1M
Thursday Initial Claims 214K
  FOMC Rate Decision 2.25%
Friday PPI 0.3% (2.5% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
  Michigan Sentiment 98.0
  Wholesale Inventories 0.3%

So between the US elections and PM May’s cabinet meeting with its chance to make real Brexit headway, there is much to look for this week. But the data will not be the story. As to today’s session, APAC equity markets have reversed some of last week’s gains after it became clear that trade situation wasn’t going to improve in the very short term. US equity futures are pointing lower, although Europe is modestly higher. It all strikes me as though traders are biding their time awaiting the big news, which makes sense. Look for a dull session today, but with the chance for some fireworks tomorrow, at least in the pound if something happens in the cabinet meeting.

Good luck
Adf

So Ended the Equity Slump

There once was a president, Trump
Who sought a great stock market jump
He reached out to Xi
Who seemed to agree
So ended the equity slump

The story of a single phone call between Presidents Trump and Xi was all it took to change global investor sentiment. Last evening it was reported that Trump and Xi spoke at length over the phone, discussing the trade situation and North Korea. According to the Trump, things went very well, so much so that he requested several cabinet departments to start putting together a draft trade agreement with the idea that something could be signed at the G20 meeting later this month in Buenos Aires. (As an aside, if something is agreed there it will be the first time something useful ever came out of a G20 meeting!) The market response was swift and sure; buy everything. Equity markets exploded in Asia, with Shanghai rallying 2.7% and the Hang Seng up over 4%. In Europe the rally is not quite as robust, but still a bit more than 1% on average across the board, and US futures are pointing higher as well, with both S&P and Dow futures higher by just under 1% as I type.

I guess this answers the question about what was driving the malaise in equity markets seen throughout October. Apparently it was all about trade. And yet, there are still many other things that might be of concern. For example, amid a slowdown in global growth, which has become more evident every day, we continue to see increases in debt outstanding. So more leverage driving less growth is a major long-term concern. In addition, the rise of populist leadership throughout the world is another concern as historically, populists don’t make the best long-term economic decisions, rather they are focused on the here and now. Just take a look at Venezuela if you want to get an idea of what the end game may look like. My point is that while a resolution of the US-China trade dispute would be an unalloyed positive, it is not the only thing that matters when it comes to the global economy and the value of currencies.

Speaking of currencies lets take a look at just how well they have performed vs. the dollar in the past twenty-four hours. Starting with the euro, since the market close on October 31, it has rallied 1.2% despite the fact that the data released in the interim has all been weaker than expected. Today’s Manufacturing PMI data showed that Germany and France both slowed more than expected while Italy actually contracted. And yet the euro is higher by 0.45% this morning. It strikes me that Signor Draghi will have an increasingly difficult time describing the risks to the Eurozone economy as “balanced” if the data continues to print like today’s PMI data. I would argue the risks are clearly to the downside. But none of that was enough to stop the euro bulls.

Meanwhile, the pound has rallied more than 2% over the same timeline, although here the story is quite clear. As hopes for a Brexit deal increase, the pound will continue to outperform its G10 brethren, and there was nothing today to offset those hopes.

Highlighting the breadth of the sentiment change, AUD is higher by more than 2.5% since the close on Halloween as a combination of rebounding base metal prices and the trade story have been more than sufficient to get the bulls running. If the US and China do bury the hatchet on trade, then Australia may well be the country set to benefit most. Reduced trade tensions should help the Chinese economy find its footing again and given Australia’s economy is so dependent on exports to China, it stands to reason that Australia will see a positive response as well.

But the story is far more than a G10 story, EMG currencies have exploded higher as well. CNY, for example is higher by 0.85% this morning and more than 1.6% in the new month. Certainly discussion of breeching 7.00 has been set to the back burner for now, although I continue to believe it will be the eventual outcome. We’ve also seen impressive response in Mexico, where the peso has rallied 1.2% overnight and more than 2% this month. And this is despite AMLO’s decision to cancel the biggest infrastructure project in the country, the new Mexico City airport.

Other big EMG winners overnight include INR (+1.3%), KRW (+1.1%), IDR (+1.1%), TRY (+0.8%) and ZAR (+0.5%). The point is that the dollar is under universal pressure this morning as we await today’s payroll report. Now arguably, this pressure is simply a partial retracement of what has been very steady dollar strength that we’ve seen over the past several months.

Turning to the data, here are current expectations for today:

Nonfarm Payrolls 190K
Private Payrolls 183K
Manufacturing Payrolls 15K
Unemployment Rate 3.7%
Average Hourly Earnings (AHE) 0.2% (3.1% Y/Y)
Average Weekly Hours 34.5
Trade Balance -$53.6B
Factory Orders 0.5%

I continue to expect that the AHE number is the one that will gain the most scrutiny, as it will be seen as the best indicator of the ongoing inflation debate. A strong print there could easily derail the equity rally as traders increase expectations that the Fed will tighten even faster, or at least for a longer time. But absent that type of result, I expect that the market’s euphoria is pretty clear today, so further USD weakness will accompany equity strength and bond market declines.

Good luck and good weekend
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Real Strides

In Twenty-sixteen when we learned
That Britain, the EU, had spurned
The pound took a fall
While casting a pall
On how future growth might be earned

For nearly two years chaos reigned
While Brexiteers strongly maintained
A deal will be made
With no one betrayed
And there is still much to be gained

Well last night it seems that both sides
Have finally made some real strides
It’s no real surprise
To see the pound rise
As delegates closed the divides

The big story this morning is that there seemed to be real movement in the Brexit negotiations with an agreement “95% complete” according to the UK government. The key was an agreement regarding financial services, obviously an enormous issue for the UK, whereby UK financial firms would still be given access to the EU based on the “equivalence” of regulations. While this is not quite as robust as the current situation, being within the bloc, it is seen as sufficient to allow continued cross border access in both directions. Of course, the Irish border situation remains outstanding, but there is talk that progress has been made there and that the benefit of a finance deal will be sufficient to offset hard-line concerns over Ireland.

The market response was immediate with the pound jumping more than 1.0% when the headlines hit. If a Brexit deal is reached, the pound likely has further to rise as there is no question it has suffered based on the increasing likelihood of a no-deal situation. That said, a full-throated rally seems unlikely. There are still many other issues that are going to weigh on the pound, notably the dollar’s underlying strength as well as UK economic malaise. In fact, data early this morning showed that the UK manufacturing PMI fell much more than expected to a reading of just 51.1, its lowest reading since the month after the Brexit vote. Obviously, this data did not include the positive news from today, but it is indicative of how the UK economy continues to slow along with the rest of the world. If a deal is signed, I expect the pound could rally another few percent, but anything more than 1.35 would seem to be a stretch based on the economic fundamentals.

But the Brexit story set the tone for the FX market as the dollar is softer across the board, in many other cases having fallen by more than 1% as well. For example, the euro has rallied by 0.6% amid general enthusiasm generated by yesterday’s global stock rebound. We have also seen both Aussie (+1.1%) and Kiwi (+1.4%) jump sharply, as commodity prices stabilize and risk appetite improves.

This theme was also made evident by movements in government bonds around the world, where, for example, Treasury yields are 10bps higher over the last two sessions. In addition, EMG currencies, which had a terrible month in October, have shown some life this morning. Today we see the Mexican peso has rallied 0.8%, while South Africa’s rand is up 1.5%. Even the Chinese yuan, which has been closely scrutinized due to its approaching the critical 7.00 level, has rallied today by 0.4%, its largest gain in more than three weeks. In fact, most EMG currencies are higher, with many gaining more than 0.5%. In other words, it has been a broad-based USD decline. After a strong multi-week run in the dollar, it can be no surprise that a correction has occurred.

Turning to the data situation, yesterday’s ADP number was quite strong, 227K, and the Employment Cost Index (ECI) showed that wages are rising at a 3.1% clip Y/Y, the fastest in several years. While yesterday’s Chicago PMI disappointed slightly at 58.4, that remains a very firm reading historically. Looking forward to today’s session, we hear from the BOE, where policy is forecast to be unchanged, and we will get updated economic forecasts. If a Brexit deal is signed, look for the UK to raise rates several more times next year as there should be a positive growth impact. Then from the US we see Initial Claims (exp 213K), Nonfarm Productivity (2.2%), Unit Labor Costs (1.0%) and ISM Manufacturing (59.0). While these will be seen as important, tomorrow’s payroll data is still going to be the focus, especially the Average Hourly Earnings (AHE) number. With the ECI pointing higher, if AHE shows the same thing, watch for more talk of the Fed becoming even more aggressive.

Ultimately, the US data picture continues to point to strength in the US economy, especially relative to what we are seeing throughout the rest of the world. The EU is slowing, the UK is slowing, China is slowing and so are most other places. As long as this remains the situation, it is hard to expect the dollar to retreat in any meaningful way. While no market moves in a straight line, the dollar’s trend remains higher.

Good luck
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More Trouble is Brewing

The PMI data last night
From China highlighted their plight
More trouble is brewing
While Xi keeps pursuing
The policies to get things right

Any questions about whether the trade conflict between the US and China was having an impact on the Chinese economy were answered last night when the latest PMI readings were released. The Manufacturing PMI fell to 50.2, it’s lowest level in more than two years and barely above the expansion/contraction level of 50.0. Even more disconcertingly for the Chinese, a number of the sub-indices notably export sales and employment, fell further below that 50.0 level (to 46.9 and 48.1 respectively), pointing to a limited probability of a rebound any time soon. At the same time, the Services PMI was also released lower than expected, falling to 53.9, its lowest level since last summer. Here, too, export orders and employment numbers fell (to 47.8 and 48.9 respectively), indicating that the economic weakness is quite broad based.

Summing up, it seems safe to say that growth in China continues to slow. One question I have is how is it possible that when the Chinese release their GDP estimates, the quarter-to-quarter movement is restricted to 0.1% increments? After all, elsewhere in the world, despite much lower headline numbers (remember China is allegedly growing at 6.5% while Europe is growing at 2.0% and the US at 3.5%), the month-to-month variability is much greater. Simple probability would anticipate that the variance in China’s data would be higher than in the rest of the world. My point is that, as in most things to do with China, we don’t really know what is happening there other than what they tell us and that is like relying on a pharmaceutical salesman to prescribe your medicine. There are several independent attempts ongoing to get a more accurate reading of GDP growth in China, with measures of electricity utilization or copper imports seen as key data that is difficult to manipulate, but they all remain incomplete. And it seems highly unlikely that President Xi, who has been focused on improving the economic lot of his country, will ever admit that the growth figures are being manipulated. But I remain skeptical of pretty much all the data that they provide.

At any rate, the impact on the renminbi continues to be modestly negative, with the dollar touching another new high for the move, just below 6.9800, in the overnight session. This very gradual weakening trend seems to be the PBOC’s plan for now, perhaps in order to make a move through 7.00 appear less frightening if it happens very slowly. I expect that it will continue for the foreseeable future especially as long as the Fed remains on track to tighten policy further while the PBOC searches for more ways to ease policy without actually cutting interest rates. Look for another reserve requirement ratio cut before the end of the year as well as a 7 handle on USDCNY.

Turning to the euro, data this morning showed that Signor Draghi has a bit of a challenge ahead of him. Eurozone inflation rose to 2.2% with the core reading rising to 1.1%, both slightly firmer than expected. The difference continues to be driven by energy prices, but the concern comes from the fact that GDP growth in the Eurozone slowed more than expected last quarter. Facing a situation where growth is slowing and inflation rising is every central banker’s nightmare scenario, as the traditional remedies for each are exactly opposite policies. And while the fluctuations are hardly the stuff of a disaster, the implication is that Europe may be reaching its growth potential at a time when interest rates remain negative and QE is still extant. The risk is that the removal of those policies will drive the Eurozone back into a much slower growth scenario, if not a recession, while inflation continues to creep higher. It is data of this nature, as well as the ongoing political dramas, that inform my views that the ECB will maintain easier policy for far longer than the market currently believes. And this is why I remain bearish on the euro.

Yesterday the pound managed to trade to its lowest level since the post-Brexit vote period, but it has bounced a bit this morning, +0.35%. That said, the trend remains lower for the pound. We are now exactly five months away from Brexit and there is still no resolution for the Irish border issue. Every day that passes increases the risk that there will be no deal, which will certainly have a decidedly negative impact on the UK economy and the pound by extension. Remember, too, that even if the negotiators agree a deal, it still must be ratified by 28 separate parliaments, which will be no easy task in the space of a few months. As long as this is the trajectory, the risk of a sharp decline in the pound remains quite real. Hedgers take note.

Elsewhere, the BOJ met last night and left policy unchanged as they remain no closer to achieving their 2.0% inflation goal today than they were five years ago when they started this process. However, the market has become quite accustomed to the process and as such, the yen is unchanged this morning. At this time, yen movement will be dictated by the interplay between risk scenarios and the Fed’s rate hike trajectory. Yen remains a haven asset, and in periods of extreme market stress is likely to perform well, but at the same time, as the interest rate differential increasingly favors the dollar, yen strength is likely to be moderated. In other words, it is hard to make a case for a large move in either direction in the near term.

Away from those three currencies, the dollar appears generally firmer, but movement has not been large. Turning to the data front, yesterday’s releases showed that home prices continue to ebb slightly in the US while Consumer Confidence remains high. This morning brings the first inklings of the employment situation with the ADP report (exp 189K) and then Chicago PMI (60.0) coming at 9:45. Equity futures are pointing higher as the market looks to build on yesterday’s modest rally. All the talk remains about how October has been the worst month in equity markets all year, but in the broad scheme of things, I would contend that, at least in the US, prices remain elevated compared to traditional valuation benchmarks like P/E ratios. At any rate, it seems unlikely that either of today’s data points will drive much FX activity, meaning that the big trend of a higher dollar is likely to dominate, albeit in a gradual fashion.

Good luck
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New Standard-Bearers

The largest of all Latin nations
This weekend confirmed its frustrations
Electing a man
Whose stated game plan
Is changing the country’s foundations

Meanwhile in a key German state
Frau Merkel and friends felt the weight
Of policy errors
So new standard-bearers
Like AfD now resonate

This weekend brought two key elections internationally, with Brazil voting in Jair Bolsonaro, the right-wing firebrand and nationalist who has promised to clean up the corruption rampant in the country. Not unlike New Jersey and Illinois, Brazil has several former politicians imprisoned for corruption. Bolsonaro represented a change from the status quo of the past fifteen years, and in similar fashion to people throughout the Western world, Brazilians were willing to take a chance to see a change. Markets have been cheering Bolsonaro on, as he has a free-market oriented FinMin in mind, and both Brazilian equities and the real have rallied more than 10% during the past month. The early price action this morning has BRL rising by another 1.65%, continuing its recent rally, and that seems likely to continue until Bolsonaro changes tack to a more populist stance, something I imagine we will see within the first year of his presidency.

Just prior to those results, the German elections in the state of Hesse, one of the wealthiest states in Germany and the home of Frankfurt and the financial industry, showed disdain for the ruling coalition of Chancellor Merkel’s CDU and the Social Democrats, with their combined share of the vote falling to just 39%, from well above 50% at the last election. The big winners were the far left Green Party and the far right AfD, both of whom saw significant gains in the state house there, and both of whom will make it difficult to find a ruling coalition. But more importantly, it is yet another sign that Frau Merkel may be on her last legs. This was confirmed this morning when Merkel announced she was stepping down as leader of her party, the CDU, but claimed she will serve out her term as Chancellor, which runs until 2021.

One other Eurozone story came out Friday afternoon as Standard & Poors released their updated ratings on Italy’s sovereign debt, leaving the rating intact but cutting the outlook to negative. This was slightly better than expected as there were many who worried that S&P would follow Moody’s and cut the rating as well. Italian debt markets rallied on the opening with 10-year yields falling 10bps and the spread with German Bunds narrowing accordingly. So net, there was a euro negative, with Merkel stepping down, and a euro positive, from S&P, and not surprisingly, the euro wound up little changed so far, although that reflects a rebound from the early price action. My concern is that the positive story was really the absence of a more negative story, and one that could well be simply a timing delay, rather than an endorsement of the current situation in Italy. The budget situation remains uncertain there, and if the government chooses to ignore the EU and implement their proposed budget, I expect there will be more pressure on the euro. After all, what good are rules if they are ignored by those required to follow them? None of this bodes well for the euro going forward.

Two other key stories have impacted markets, first from Mexico, the government canceled the construction of a new airport for Mexico City. This was part of the departing administration’s infrastructure program, but, not surprisingly, it has seen its cost explode over time and the incoming president has determined the money is better spent elsewhere. The upshot is that the peso has fallen a bit more than 1% on the news, and I would be wary going forward as we approach AMLO’s inauguration. By cutting the investment spending, not only will the country’s infrastructure remain substandard, but its growth potential will suffer as well. I think this is a very negative sign for the peso.

The other story comes from China, where early Q4 data continues to show the economy slowing further. The government there, ever willing to do anything necessary to achieve their growth target, has proposed a 50% cut in auto sales taxes in order to spur the market. Auto sales are on track for their first annual decline ever this year, as growth slows throughout the country. Interestingly, the market impact was seen by rallies in auto shares throughout Europe and the US, but Chinese equity markets continued to slide, with the Shanghai Index falling another 2.2% overnight. This also has put further pressure on the renminbi with CNY falling another 0.2% early in the session before recently paring some of those losses. USDCNY continues to hover just below 7.00, the level deemed critical by the PBOC as they struggle to prevent an increase in capital outflows. The last time the currency traded at this level, it cost China more than $1 trillion to staunch the outflow, so they are really working to prevent that from happening again.

And those are the big stories from the weekend. Overall, the dollar is actually little changed as you can see that there have been individual issues across specific currencies rather than a broad dollar theme today. Looking ahead to the US session, we get the first of a number of important data points this morning with the full list here:

Today Personal Income 0.4%
  Personal Spending 0.4%
  PCE 0.1% (2.2% Y/Y)
  Core PCE 0.1% (2.0% Y/Y)
Tuesday Case-Shlller Home Prices 5.8%
Wednesday ADP Employment 189K
  Chicago PMI 60.0
Thursday Initial Claims 213K
  Nonfarm Productivity 2.2%
  Unit Labor Costs 1.1%
  ISM Manufacturing 59.0
  ISM Prices Paid 65.0
  Construction Spending 0.1%
Friday Nonfarm Payrolls 190K
  Private Payrolls 184K
  Manufacturing Payrolls 15K
  Unemployment Rate 3.7%
  Average Hourly Earnings 0.2% (3.1% Y/Y)
  Average Weekly Hours 34.5
  Trade Balance -$53.6B
  Factory Orders 0.4%

So there is a ton of data upcoming, with this morning’s PCE and Friday’s Payrolls the key numbers. Last week’s GDP data had a better than expected headline print but the entire weekend press was a discussion as to why the harbingers of weaker future growth were evident. And one other thing we have seen is the equity market dismiss better than expected Q3 earnings data from many companies, selling those stocks after the release, as the benefits from the tax cut at the beginning of the year are starting to get priced out of the future.

The market structure is changing, that much is clear. The combination of central bank actions to reduce accommodation, and an expansion that is exceedingly long in the tooth, as well as increased political uncertainty throughout the world has made investors nervous. It is these investors who will continue to support US Treasuries, the dollar, the yen and perhaps, gold,; the traditional safe havens. At this point, there is nothing evident that will change that theme.

Good luck
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The Doves’ Greatest Friend

Despite signs that growth is now slowing
Said Draghi, he would keep on going
With plans to soon end
The doves’ greatest friend
QE, which has kept Europe growing

While all eyes have been focused on the recent equity market gyrations, which in fairness have been impressive, there are other things ongoing that continue to have medium and long-term ramifications. One of the most important is the ECB and its future path of monetary policy. Yesterday, to no one’s surprise they left policy on hold, but of more interest were the comments Signor Draghi made during his press conference following the meeting. Notably, he continued to characterize the risks to the Eurozone economy as “balanced” despite the fact that virtually every piece of data we have seen in the past two months has indicated growth is slowing there more rapidly than previously anticipated.

If you recall, the declared rationale for the ending of QE was that Eurozone growth had been running above its potential throughout 2017 and it was expected to continue to do so this year. Alas, that no longer seems to be the case. Instead, recent data indicates that the growth impulse there is back at potential, if not slightly below. Recent PMI and IP data have all shown weakness, which when added to the stresses induced by Brexit uncertainty and slowing growth in China make for a substandard future. But not according to Draghi, who indicated that the ECB is going to end QE in December regardless, and that rate hikes are still slated to start next year. Perhaps he is correct and this is simply a temporary rough patch. The problem is the message from recent equity market performance is that there is a growing widespread concern that trouble is brewing everywhere around the world. Of course Draghi’s biggest problem is that if the Eurozone tips into a recession in 2019, they will have a serious problem trying to add monetary stimulus to the economy given the current, still ultra easy, settings. As I have written frequently in the past, this is why I continue to expect the dollar to outperform going forward. Yesterday saw the early morning rally in the euro reverse completely and the single currency closed -0.2%, and this morning it is a further 0.25% lower. The trend is your friend, and this trend is still for a lower euro.

In the meantime, we continue to see Brexit uncertainty plague the pound, which after a 0.5% decline yesterday has continued to fall this morning (-0.2%) as there is no indication that a compromise is in the offing. With the pound back to its lowest levels since late summer, and the trend decidedly lower, it will take a significant breakthrough in the Brexit negotiations to change things. This morning, the NIESR (a well-regarded British economic research institute) published a report that a hard Brexit will result in GDP growth being 1.6% lower than it otherwise would have been in 2019. That’s a pretty big hit, and simply adds to the Brexit concerns going forward. But the clock is still ticking and there is no indication that a solution can be found for the Irish border situation. One side will have to cave, and at this point, my money is on the UK.

As to the rest of the G10 space, the commodity bloc (AUD, CAD and NZD) has had a rough go of it overnight, with all three falling 0.5% or more in the session. It seems that concerns over slowing Chinese and global growth is being recognized as commodity prices continue to slide. With that, these currencies are also taking a beating with Aussie falling back near 0.7000, its lowest level since January 2016. Keep in mind that the more questions that are raised about the global growth trajectory, the more these currencies are likely to suffer.

Turning to our favorite EMG currency, CNY, it traded to a new low for the move overnight, although has since recouped some of those losses. The PBOC fixed the yuan at another new low (6.9510), and that saw both the offshore and onshore markets push the currency down below (dollar above) 6.9700. This is the weakest that the renminbi has been since December 2016 when the PBOC was forced to intervene more aggressively to prevent a rout. Remember they remain extremely concerned that if it trades above 7.00 that will be seen as a trigger for an increase in capital outflows from the country, and lead to a spiraling lower currency and greater domestic issues. Last time the market reached these levels, the PBOC withdrew liquidity from the offshore market, driving interest rates there massively higher, and forcing speculators with short positions to cover. That could well be what we will see next week, but as of now, there has been no activity like that observed. Speculators will only be deterred if the cost of speculation is high, which is not yet the case. Given that, I expect that we will see a run at 7.00 before long, likely next week, unless the PBOC acts. Words will not be sufficient to stop the move.

Away from CNY, other EMG currencies are almost universally weaker with declines ranging between 0.1% and 0.6%. The point is that this is a wide and shallow move, not one driven by specific national idiosyncrasies.

Yesterday’s data showed that defense spending was propping up the US manufacturing sector, with Durable Goods surprising to the high side although the ex-Defense number was soft. This morning, however, brings the most important data of the week, Q3 GDP. The median forecast is for growth of 3.3% and there will be a great deal of scrutiny on any revisions to Q2. A strong number ought to help support the dollar, as it will back up the Fed’s contention that strong growth demands higher interest rates. A soft number, or a big revision lower to Q2, seems likely to have a bigger impact though, as positions are still long dollars, and that would be a chink in its armor. Later this morning we see the Michigan Consumer Sentiment data (exp 99.0) and we also hear from Signor Draghi again, perhaps to try to clarify his message. But as it stands, if data is as expected, the dollar remains the best bet. This is even more likely if we continue to see equity markets decline. Spoiler alert, they have been doing that in Asia and Europe, and US futures are pointing in the same direction!

Good luck and good weekend
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