Two Countries that Fought

There once were two countries that fought
‘bout trade as each one of them thought
The other was cheating
Preventing competing
By champions both of them sought

They sat down to seek a solution
So both could avoid retribution
But talks have been tough
And not yet enough
To get a deal for execution

The US-China trade talks continued overnight, and though progress in some areas has been made, clearly it has not yet been enough to bring in the leadership. The good news is that the talks are set to continue next week back in Washington. The bad news is that the information coming out shows that two of the key issues President Trump has highlighted, forced technology transfer and subsidies for SOE’s, are nowhere near agreement. The problem continues to be that those are pillars of the Chinese economic model, and they are going to be loath to cede them. As of this morning, increased tariffs are still on the docket for midnight, March 2, but perhaps next week enough progress will be made to support a delay.

Equity markets around the world seemed to notice that a deal wasn’t a slam dunk, and have sold off, starting with a dull session in the US yesterday, followed by weakness throughout Asia (Nikkei -1.1%, Shanghai -1.4%). Interestingly, the European markets have taken a different view of things this morning, apparently attaching their hopes to the fact that talks will continue next week, and equity markets there are quite strong (DAX +1/0%, FTSE +0.4%). And the dollar? Modestly higher at this time, but overall movement has been muted.

Asian markets also felt the impact of Chinese inflation data showing CPI fell to 1.7% last month, below expectations and another indication that growth is slowing there. However, the loan data from China showed that the PBOC is certainly making every effort to add liquidity to the economy, although it has not yet had the desired impact. As to the renminbi, it really hasn’t done anything for the past month, and it appears that traders are biding their time as they wait for some resolution on the trade situation. One would expect that a trade deal could lead to modest CNY strength, but if the talks fall apart, and tariffs are raised further, look for CNY to fall pretty aggressively.

As to Europe, the biggest news from the continent was political, not economic, as Spain’s PM was forced to call a snap election after he lost support of the Catalan separatists. This will be the nation’s third vote in the past four years, and there is no obvious coalition, based on the current polls, that would be able to form. In other words, Spain, which has been one of the brighter lights in the Eurozone economically, may see some political, and by extension, economic ructions coming up.

Something else to consider on this issue is how it will impact the Brexit negotiations, which have made no headway at all. PM May lost yet another Parliamentary vote to get the right to go back and try to renegotiate terms, so is weakened further. The EU does not want a hard Brexit but feels they cannot even respond to the UK as the UK has not put forth any new ideas. At this point, I would argue the market is expecting a delay in the process and an eventual deal of some sort. But a delay requires the assent of all 27 members that are remaining in the bloc. With Spain now in political flux, and the subject of the future of Gibraltar a political opportunity for domestic politics, perhaps a delay will not be so easy to obtain. All I know is that I continue to see a non-zero probability for a policy blunder on one or both sides, and a hard Brexit.

A quick look at the currency markets here shows the euro slipping 0.2% while the pound has edged higher by 0.1% this morning. Arguably, despite the Brexit mess, the pound has been the beneficiary of much stronger than expected Retail Sales data (+1.0% vs. exp +0.2%), but in the end, the pound is still all about Brexit. The sum total of the new economic information received in the past 24 hours reaffirms that global growth is slowing. Not only are inflation pressures easing in China, but US Retail Sales data was shockingly awful, with December numbers falling -1.2%. This is certainly at odds with the tune most retail companies have been singing in their earnings reports, and given the data was delayed by the shutdown, many are wondering if the data is mistaken. But for the doves on the Fed, it is simply another point in their favor to maintain the status quo.

Recapping, we see trade talks dragging on with marginal progress, political pressure growing in Spain, mixed economic data, but more bad news than good news, and most importantly, a slow shift in the narrative to a story of slowing growth will beget the end of monetary tightening and could well presage monetary ease in the not too distant future. After all, markets are pricing in rate cuts by the Fed this year and no rate movement in the ECB (as opposed to Draghi’s mooted rate hikes later this year) until at least 2020. The obvious response to this is…add risk!

A quick look at today’s data shows Empire State Manufacturing (exp 7.0), IP (0.1%), Capacity Utilization (78.7%) and Michigan Sentiment (94.5). We also have one last Fed speaker, Raphael Bostic from Atlanta. Virtually all the recent Fed talk has been about when to stop the balance sheet runoff, with Brainerd and Mester the latest to discuss the idea that it should stop soon. And my guess is it will do just that. I would be surprised if they continue running down the balance sheet come summer. The changes going forward will be to the composition, less mortgages and more Treasuries, but not the size. And while some might suggest that will remove a dollar support, I assure you, if the Fed has stopped tightening, no other nation is going to continue. Ironically, this is not going to be a dollar negative, either today or going forward.

Good luck and good weekend
Adf

 

Really Quite Splendid

For traders, the month that just ended
Turned out to be really quite splendid
The stock market soared
As risks were ignored
Just like Chairman Powell intended

The problem is data last night
Showed growth’s in a terrible plight
Both Europe and China
Can lead to angina
If policymakers sit tight

Now that all is right with the world regarding the Fed, which has clearly capitulated in its efforts to normalize policy, the question is what will be the driving forces going forward. Will economic data matter again? Possibly, assuming it weakens further, as that could quickly prompt actual policy ease rather than simply remaining on hold. But reading between the lines of Powell’s comments, it appears that stronger than expected data will result in virtually zero impetus to consider reinstating policy tightening. We have seen the top in Fed funds for many years to come. Remember, you read it here first. So, we are now faced with an asymmetric reaction function: strong data = do nothing; weak data = ease.

Let’s, then, recap the most recent data. Last night the Caixin Manufacturing PMI data from China was released at a lower than expected 48.3, its lowest point in three years. That is simply further evidence that the Chinese economy remains under significant pressure and that President Xi is incented to agree to a trade deal with the US. Interestingly, the Chinee yuan fell 0.6% on the news, perhaps the first time in months that the currency responded in what would be considered an appropriate manner to the data. That said, the yuan remains nearly 2% stronger than it began the year. We also saw PMI data from Europe with Germany (49.7) and Italy (47.8) both underperforming expectations, as well as the 50.0 level deemed so crucial, while France (51.2) rebounded and Spain (52.4) continued to perform well. Overall, the Eurozone data slid to 50.5, down a full point and drifting dangerously close to contraction. And yet, Signor Draghi contends that this is all just temporary. He will soon be forced to change his tune, count on it. The euro, however, has held its own despite the data, edging higher by 0.2% so far this morning. Remember, though, with the Fed having changed its tune, for now, I expect the default movement in the dollar to be weakness.

In the UK, the PMI data fell to 52.8, well below expectations, as concerns over the Brexit situation continue to weigh on the economy there. The pound has fallen on the back of the news, down 0.3%, but remains within its recent trading range as there is far more attention being paid to each item of the Brexit saga than on the monthly data. Speaking of which, the latest story is that PM May is courting a number of Labour MP’s to see if they will break from the party direction and support the deal as written. It is quite clear that we have two more months of this process and stories, although I would estimate that the broad expectation is of a short delay in the process beyond March and then an acceptance of the deal. I think the Europeans are starting to realize that despite all their tough talk, they really don’t want a hard Brexit either, so look for some movement on the nature of the backstop before this is all done.

Finally, the trade talks wrapped up in Washington yesterday amid positive signs that progress was made, although no deal is imminent. Apparently, President’s Trump and Xi will be meeting sometime later this month to see if they can get to finality. However, it still seems the most likely outcome is a delay to raising tariffs as both sides continue the talks. The key issues of IP theft, forced technology transfer and ongoing state subsidies have been important pillars of Chinese growth over the past two decades and will not be easily changed. However, as long as there appears to be goodwill on both sides, then there are likely to be few negative market impacts.

Turning to this morning’s data, it is payroll day with the following expectations:

Nonfarm Payrolls 165K
Private Payrolls 170K
Manufacturing Payrolls 17K
Unemployment Rate 3.9%
Average Hourly Earnings 0.3% (3.2% Y/Y)
Average Weekly Hours 34.5
ISM Manufacturing 54.2
Michigan Sentiment 90.8

Clearly, the payroll data will dominate, especially after last month’s huge upside surprise (312K). Many analysts are looking for a reversion to the mean with much lower calls around 100K. Also, yesterday’s Initial Claims data was a surprisingly high 253K, well above expectations, although given seasonalities and the potential impacts from the Federal government shutdown, it is hard to make too big a deal over it. But as I highlighted in the beginning, the new bias is for easier monetary policy regardless of the data, so strong data will simply underpin a stock market rally, while weak data will underpin a stock market rally on the basis of easier money coming back. In either case, the dollar will remain under pressure.

Good luck and good weekend
Adf

Animal Spirits Were Stirred

All week from the Fed we have heard
That patience is their new watchword
The market’s reaction
Implied satisfaction
And animal spirits were stirred!

While it may be a new day, nothing has really changed. Yesterday we heard from both Chairman Powell and vice-Chairman Clarida and both said essentially the same thing: the Fed is watching both the economy and markets closely, and given where policy rates currently stand, they can afford to be patient before acting next. On the subject of the Fed’s balance sheet, neither indicated there was cause for a policy change, but Powell, when asked, remarked that if they thought the shrinking balance sheet was becoming a problem, they would not hesitate to adjust policy. The market interpretation was: the Fed is not going to raise rates anytime soon so we better buy stocks as quickly as we can. The result was yet another rally in equities with all three US market indices rising about 0.5% on the day. At this point, even the Fed must recognize that they have gotten their message across.

The next key story that remains ongoing is the trade situation between the US and China. There was no specific news on the subject and no comments from either side. The market view is that there was clearly some progress made during the initial discussions earlier this week and many people are optimistic that the next round of talks, which will include more senior representatives from both sides, can lead to a permanent resolution. As long as that remains the collective mindset, it is one less pressure point for global equity markets. However, it must be remembered that the US is seeking significant changes in the structure of the Chinese economy, and so a complete resolution will not be easy to achieve, especially in the accelerated timeline currently extant. I expect an extension of the timeline as the first concrete result.

The third key story has been Brexit, which continues to be a complete mess. Next week’s Parliamentary vote looks destined to fail, and now there is a growing movement for the deadline to be extended three months to the end of June. While that requires a unanimous vote to do so, comments from European members seem to be heading in that direction. The pound has benefitted from the discussion, as traders believe that the extra three months will help alleviate the risk of a no-deal Brexit and the forecast consequences on both the economy and the currency in that event. However, the Irish border remains unchanged and there has been no indication that the UK will accept an effective walling off of Northern Ireland for the sake of the deal. We shall see.

Two other stories are also gaining in their importance, the rebound in oil prices and further weakness in the Eurozone economy. As to the first, the OPEC agreement to cut production by 1.2 million barrels/day has served to remove fears of an oil glut and recent inventory figures have backed that up. As well, while WTI has traded back above $50/bbl, there is a growing belief that the US fracking community is not going to be able to produce as much oil as previously thought, especially if prices slip back below that $50 level. Oil prices have rallied for nine consecutive days but remain far below levels seen just last October. Historically, rising commodity prices have gone hand in hand with a declining dollar, and for right now, that correlation has been holding.

Finally, we continue to see weak economic data from the Eurozone, with this morning’s Italian IP data (-1.6% in Nov) the latest in a string that has shown Europe’s manufacturing sector is under increasing pressure. This story is the one that has received shortest shrift from the market overall. In fact, I would argue it has been completely ignored, certainly by FX traders. While everyone focuses intently on the Fed and the recent change of heart regarding future rate hikes, there has been almost no discussion with regard to the ECB and how, as economic growth continues to slow in the Eurozone, the idea that they will be tightening policy further come September is laughable. At some point, the market will realize that the Eurozone is in no position to normalize policy further, and that instead, the question will arise as to when they will seek to add more stimulus. My gut tells me that a change in forward guidance will be the first step as they extend the concept of rate hikes from; “not until the end of summer” to something along the lines of “when we deem appropriate based on the economic data”. In other words, the current negative rate regime will be indefinite, and if (when) the next recession arrives, look for a reintroduction of QE there. My point is that the euro has no business rallying in any substantive way.

With all of this as background, a quick tour of markets shows that while the dollar actually performed fairly well during the US session yesterday, it is giving back some of those gains this morning. For example, the euro, despite weak data, is higher by 0.3%. The pound, on the back of the renewed Brexit deal hope is higher by 0.5%. Firmer commodity prices have helped AUD (+0.6%), NZD (+0.9%) and CAD (+0.3%). But the biggest consistent winner of late has been CNY, which has rallied a further 0.65% overnight and is now up 1.6% this week. This is a far cry from the situation just a few weeks ago, when there were concerns the yuan might break through the 7.00 level. Two things come to mind here as to the cause. The first possibility is that there has been an increase in investment flows into the Chinese bond market, where yields remain higher than in much of the developed world, and the Chinese bond market is slowly being added to global bond indices requiring fund managers to add positions there. The second, slightly more conspiratorial idea is that the Chinese government is pushing the yuan higher during the trade negotiations with the US to insure that its value is not seen as an impediment to reaching any deal. Whatever you think of President Trump’s tactics, there is no question that the Chinese economy has come under increased pressure since the imposition of US tariffs on their exports. It is not hard to believe that the stronger yuan is a direct response to help reach an agreement as quickly as possible.

And that’s pretty much everything to watch today. This morning we get CPI data with expectations for headline to print at -0.1% (1.9% Y/Y) and ex food & energy to print at +0.2% (2.2% Y/Y). Thankfully there are no more Fed speakers, but I would say given the near unanimity of the message from the nine speakers this week, we have a pretty good idea of what they are thinking. Equity futures are pointing slightly lower following European markets, which are softer today. However, given that equity markets around the world have rallied steadily all week, it can be no real surprise that a little profit taking is happening on a Friday. As to the dollar, in the short term I think it remains under pressure, but over time, I continue to see more reasons to own it than to short it.

Good luck and good weekend
Adf

 

Greater Clarity

Last year rate hikes had regularity
But now the Fed seeks greater clarity
‘Bout whether our nation
Is feeling inflation
Or some other source of disparity

Investors exhaled a great sigh
And quickly realized they must buy
Those assets with risk
To burnish their fisc
Else soon prices would be too high

The December FOMC Minutes were received quite positively by markets yesterday as it appears despite raising rates for the fourth time in 2018, it was becoming clearer to all involved that there was no hurry to continue at the same pace going forward. The lack of measured inflation and the financial market ructions were two key features that gave pause to the FOMC. While the statement in December didn’t seem to reflect that discussion, we have certainly heard that tune consistently since then. Just yesterday, two more Fed regional presidents described the need for greater clarity on the economic situation before seeing the necessity to raise rates again. And after all, given the Fed has raised rates 225bps since they began in December 2015, it is not unreasonable to pause and see the total impact.

However, regarding the continued shrinking of the balance sheet, the Fed showed no concern at this point that it was having any detrimental effect on either the economy or markets. Personally I think they are mistaken in this view when I look at the significant rise in LIBOR beyond the Fed funds rate over the past year, where Fed Funds has risen 125 bps while LIBOR is up 187bps. But the market, especially the equity market, remains focused on the Fed funds path, not on the balance sheet, and so breathed a collective sigh of relief yesterday.

Given this turn of events, it should also not be surprising that the dollar suffered pretty significantly in the wake of the Minutes’ release. In the moments following the release, the euro jumped 0.7% and continued subsequently to close the day nearly 1% stronger. One of the underpinnings of dollar strength has been the idea that the Fed was going to continue to tighten policy in 2019, but the combination of a continuous stream of comments from Fed speakers and recognition that even back in December the Fed was discussing a pause in rate hikes has served to alter that mindset. Now, not only is the market no longer pricing in rate hikes this year, but also analysts are backing away from calling for further rate hikes. In other words, the mood regarding the Fed has turned quite dovish, and the dollar is likely to remain under pressure as long as this is the case.

Of course, the other story of note has been the trade talks between the US and China which ended yesterday. During the talks, market participants had a generally upbeat view of the potential to reach a deal, however, this morning that optimism seems to be fading slightly. Equity markets around the world have given back some of their recent gains and US futures are also pointing lower. As I mentioned yesterday, while it is certainly good news that the talks seemed to address some key issues, there is still no clarity on whether a more far-reaching agreement can be finalized in any near term timeline. And while there has been no mention of tariffs by the President lately, a single random Tweet on the subject is likely enough to undo much of the positive sentiment recently built.

The overnight data, however, seems to tell a different story. It started off when Chinese inflation data surprised on the low side, rising just 1.9% in December, much lower than expected and another red flag regarding Chinese economic growth. It seems abundantly clear that growth there is slowing with the only real question just how much. Forecasts for 2019 GDP growth have fallen to 6.2%, but I wouldn’t be surprised to see them lowered going forward. On the other hand, the yuan has actually rallied sharply overnight, up 0.5%, despite the prospects for further monetary ease from Beijing. It seems that there is a significant inflow into Chinese bond markets from offshore which has been driving the currency higher despite (because of?) those economic prospects. In fact, the yuan is at its strongest level since last August and seemingly trending higher. However, I continue to see this as a short-term move, with the larger macroeconomic trends destined to weaken the currency over time.

As to the G10 currencies, they have stabilized after yesterday’s rally with the euro virtually unchanged and the pound ceding 0.25%. Two data points from the Eurozone were mixed, with French IP slipping to a worse than expected -1.3% while Italian Retail Sales surprised higher at +0.7% back in November. While there was no UK data, the Brexit story continues to be the key driver as PM May lost yet another Parliamentary procedural vote this morning and seems to be losing complete control of the process. The thing I don’t understand about Brexit is if Parliament votes against the current deal next week, which seems highly likely at this stage, what can they do to prevent a no-deal Brexit. Certainly the Europeans have not been willing to concede anything else, and with just 79 days left before the deadline, there is no time to renegotiate a new deal, so it seems a fait accompli that the UK will leave with nothing. I would welcome an explanation as to why that will not be the case.

Turning to this morning’s activity, the only data point is Initial Claims (exp 225K), but that is hardly a market moving number. However, we hear from three regional Fed presidents and at 12:45 Chairman Powell speaks again, so all eyes will be focused on any further nuance he may bring to the discussion. At this point, it seems hard to believe that there will be any change in the message, which if I had to summarize would be, ‘no rate changes until we see a strong reason to do so, either because inflation jumps sharply or other data is so compelling that it forces us to reconsider our current policy of wait and see.’ One thing to keep in mind, though, about the FX markets is that it requires two sets of policies to give a complete picture, and while right now all eyes are on the Fed, as ECB, BOJ, BOE and other central bank policies evolve, those will have an impact as well. If global growth is truly slowing, and the current evidence points in that direction, then those banks will start to sound more dovish and their currencies will likely see plenty of selling pressure accordingly. But probably not today.

Good luck
Adf

Little Trust

Investors and traders believe
The trade talks will shortly achieve
Solutions robust
Despite little trust
Since both sides are known to deceive

Risk is definitely back on this morning as equity markets around the world continue their recent rebound, Treasury and bund prices slide, and commodities climb higher. As to the dollar, it is modestly softer, except against the yen, which is the worst performer in the G10 today.

The primary driver of these moves remains the US-China trade talks, which seem to be going pretty well. If you recall, Monday, Chinese Vice-Premier Liu He made an appearance to demonstrate the importance of the talks to both sides’ negotiators, and the fact that they were extended an extra day, only ending today in Beijing, implies that positive momentum was building and neither side wanted to give that up. While the first reports are that there are still some areas of wide disagreement, there seems to be no doubt that progress has been made.

In addition to the trade story, the market continues to hear soothing words from various Fed speakers regarding the pace of further potential rate hikes. Yesterday, St. Louis Fed President Bullard was quite clear that he thought there was no reason to raise rates further at this time given the lack of measured inflation, although he remains comfortable with the continuing unwinding of the balance sheet. And Bullard is a voter this year, so market participants tend to give voters just a little more credence in their comments. Later this afternoon the Fed will release the Minutes of their December meeting, although I don’t expect them to be that useful. You may recall that it was that meeting’s statement and the ensuing press conference that kicked off the last leg of the equity market rout. Investors kept seeing signs of slowing growth while the Fed seemed oblivious, especially to activity elsewhere in the world. In fact, it was that meeting that convinced many (myself included) that the Fed was no longer in the put writing business.

How wrong we all were on that score. We have heard from a half dozen Fed speakers in the past two weeks, including some of the most hawkish (Mester), and to a (wo)man they all indicated that there was no urgency to raise rates, with some, like Bullard, questioning if there was even a need to do so at all. Clearly, the market has become far more comfortable that the Fed is not out to destroy the equity market, and recent price action is the result of that change of view. Given the change of tone since the meeting, it seems unlikely to me that the Minutes will teach us very much about the current state of Fed thinking. Instead, we still have another eight Fed speeches (including another Powell speech) between today and Friday, which will give us all much better information than three-week old data.

Other news of note includes the announcement overnight by the PBOC that they would be instituting a new bank lending program, the Medium Term Lending Facility (MTLF) which is designed to offer cheap bank funding for loans to SME’s without overly expanding the liquidity in the market. Remember, the Chinese are still trying to wring excess leverage out of some sectors of the economy, but are also feeling the effects of overall slowing economic growth so feel the need to address that. These loans appear quite similar to the ECB’s TLTRO’s, which were deemed a big success when they were being issued. Of course, the key concern there is now that those loans are coming up to maturity, banks need to replace that funding and that is not so easy in a market where global liquidity is drying up. Will the same thing happen in China? Quite possibly. My observation on extraordinary monetary policy is that it has proven much harder to remove than to implement.

At any rate, the market was cheered by that news, as well as the trade talks, and the renminbi continues to behave quite well, actually rallying a further 0.2% this morning. I still foresee a weaker currency over time, but thus far, the PBOC has prevented any substantive movement.

Brexit continues to fester in the background with PM May losing another vote in Parliament. This new bill now prevents Her Majesty’s Treasury from adjusting tax rates in the event of a no-deal Brexit. And yet, there is no indication that the deal on the table is going to pass, so it remains unclear just how that will work. Given the magnitude of the issue, waiting to the 11th hour to achieve agreement may be the only way to get it done. And so, I continue to expect a very late acceptance of the deal, although it is by no means clear that will be the case. One other noteworthy Brexit item is the potential impact it will have on Japanese companies, who have used the UK as their beachhead into the EU. PM Abe will be visiting PM May tomorrow to make sure she understands how important a trade deal is to those Japanese firms, and how important those Japanese firms are to the UK economy.

And otherwise, the currency market remains fairly dull for right now. Even EMG currencies are only showing modest movement overall, albeit generally stronger today. The thing is, market participants are so focused on the major issues, and by extension the major currencies, that there has been reduced activity elsewhere. As long as risk appetite remains robust, the dollar should remain under pressure along with the yen. And for today, that seems like the best bet.

Good luck
Adf

A Year So Dreary

(With apologies to Edgar Allen Poe)

‘Eighteen was a year so dreary, traders studied hara-kiri
As they pondered every theory, algorithm and z-score.
Interest rates were slowly rising, growth no longer synchronizing,
Brexit’s failures mesmerizing, plus we got a real trade war
Italy, meanwhile explained that budget limits were a bore
Europe looked aghast and swore.

Thus instead of markets booming, (which most pundits were assuming)
What we got was all consuming angst too great to just ignore
Equities reduced to rubble, high-yield bonds saw their spreads double
As the Fed inspired bubble sprung a leak through the back door
Balance sheet adjustment proved to be more harsh than heretofore
Stock investors cussed and swore.

But the New Year’s now commencing, with the markets’, trouble, sensing
Thus predictions I’m dispensing might not be what you wished for
Life’s not likely to get better, ‘specially for the leveraged debtor
Who ought write an open letter to Chair Powell and implore
Him to stop his raising rates so assets grow just like before
Would that he would raise no more.

Pundits far and wide all wonder if Chair Powell’s made a blunder
Or if he will knuckle under to entreaties from offshore
Sadly for mainstream investors, lest our growth decays and festers
Powell will ignore protestors though they’ll raise a great uproar
Thus far he has made it clear that neutral’s what he’s shooting for
Jay, I fear, sees two hikes more.

At the same time Signor Draghi, who’s EU is weak and groggy
Using words in no way foggy, told us QE’s dead, he swore!
Plus he strongly recommended that when summer, this year, ended
Raising rates would be just splendid for those nations at the core
Even though the PIGS keep struggling, this he’s willing to ignore
Higher rates might be in store.

Lately, though, are growing rumors, that six billion world consumers
Are no longer in good humors, thus are buying less, not more
This result should be concerning for those bankers who are yearning
Rates to tighten, overturning years when rates were on the floor
Could it be what we will see is QE4 as an encore?
Maybe low rates are called for.

What about the budget shortfall, in the States that’s sure to snowball
If our growth rate has a pratfall like it’s done ten times before?
While this would be problematic, growth elsewhere would crash to static
Thus it would be quite pragmatic to assume the buck will soar
Don’t believe those euro bulls that think rate hikes there are in store
Christmas next we’re One-Oh-Four.

Now to Britain where the story of its Brexit’s been so gory
Leaving Labour and the Tories in an all out civic war
Though the deal that’s on the table, has its flaws, it would help cable
But when PM May’s unable to find votes here’s what’s in store
Look for cable to go tumbling well below its lows of yore
Next December, One-One-Four.

Time to focus on the East, where China’s growth just might have ceased
Or slowed quite sharply at the least, from damage due to Trump’s trade war
Xi, however’s not fainthearted, and more ease he has imparted
Trying to get growth restarted, which is really quite a chore
But with leverage so extended, how much more can they pay for?
Not as much as days of yore.

With growth there now clearly slowing, public cash is freely flowing,
Banks are told, be easygoing, toward the Chinese firms onshore
But the outcome’s not conclusive, and the only thing conducive
To success for Xi is use of weakness in the yuan offshore
I expect a steady drift much lower to Seven point Four
Only this and nothing more.

Now it’s time for analyzing, ten-year yields, so tantalizing
With inflation hawks advising that those yields will jump once more
But inflation doves are banking that commodities keep tanking
Helping bonds and Bunds when ranking outcomes, if you’re keeping score
Here the doves have better guidance and the price of bonds will soar
At what yields will they sell for?

Slowing growth and growing fear will help them both throughout the year
And so it’s not too cavalier to look for lower yields in store
Treasuries will keep on rising, and for now what I’m surmising
Is a yield of Two point Five is likely come Aught Twenty’s door
Bunds will see their yields retreat to Zero, that’s right, to the floor
Lower ten-year yields, look for.

In a world where growth is slowing, earnings data won’t be glowing
Red ink will, for sure, be flowing which investors can’t ignore
P/E ratios will suffer, and most firms will lack a buffer
Which means things will just get tougher for investors than before
What of central banks? Won’t they be able, prices, to restore?
Not this time, not like before.

In the States what I foresee is that the large cap S&P
Can fall to Seventeen Fifty by year end next, if not before
Europe’s like to see the same, the Stoxx 600 getting maimed
Two Fifty is where I proclaim that index will next year explore
Large percentage falls in both are what investors all abhor
But its what I see in store.

Oil’s price of late’s been tumbling, which for drillers has been humbling
OPEC meanwhile keeps on fumbling, each chance to, its strength, restore
But with global growth now slowing, storage tanks are overflowing
Meanwhile tankers, oceangoing, keep on pumping ship to shore
And more drilling in the States means lower prices are in store
Forty bucks I now call for.

One more thing I ought consider, Bitcoin, which had folks on Twitter
Posting many Tweets quite bitter as it tumbled ever more
Does this coin have true potential? Will it become influential?
In debates quite consequential ‘bout where assets you may store?
While the blockchain is important, Hodlers better learn the score
Bitcoin… folks won’t pay much for

So instead come winter next, Bitcoin Hodlers will be vexed
As it suffers from effects of slowing growth they can’t ignore
While it might be worth Two Grand, the end result is that demand
For Bitcoin will not soon expand, instead its like to shrink some more
Don’t be fooled in thinking you’ll soon use it at the grocery store
Bitcoin… folks won’t pay much for

Fin’lly here’s an admonition, if these views do reach fruition
Every single politician will blame someone else for sure
I’m not hoping for this outcome, I just fear the depths we might plumb
Will result in falling income and recession we’ll explore
So if risk you’re managing, more hedging now is what’s called for
Fear and risk are what will soar!

For you folks who’ve reached the end, please know I seek not to offend
But rather try to comprehend the state of markets and some more
If you read my thoughts last year, I tried to make it very clear
That economic trouble’s near, and so that caution is called for
Mostly though I hope the time invested has not made you sore
For you, my readers, I adore!

Have a very happy, healthy and prosperous New Year
Adf

 

Naught But Fool’s Gold

There once was a story, oft told
That growth round the world would be bold
But data of late
Has shown that the fate
Of that tale was naught but fool’s gold

Instead round the world what we see
Are signs that the future will be
Somewhat less robust
Than had been discussed
Since money is no longer free!

The dollar is strong this morning, rising vs. essentially every other currency after a series of weak data points from China and the EU reinforced the idea that global growth is slowing. As I type my last note of the year, the euro is lower by 0.65%, the pound -0.7% and Aussie has fallen -0.9%. In the emerging market space, the damage is generally less severe, with both CNY and BRL falling -0.4% while MXN and INR have both slipped -0.3%. There are two notable exceptions to this, however, as ZAAR has tumbled 1.5% and KRW fallen -0.8%. In other words, the dollar is in the ascendant today.

What, you may ask, is driving this movement? It started early last evening when China released some closely watched economic indicators, all of which disappointed and indicated further slowing of the economy there. Fixed Asset Investment rose just 5.9%, IP rose just 5.4% and Retail Sales rose just 8.1%. As Chinese data continue to fall below estimates, it increases the odds that the PBOC will ease monetary policy further, thus undermining the renminbi somewhat. But the knock on effect of weakening Chinese growth is that the rest of Asia, which relies on China as a key market for their exports, will also suffer. Hence the sharp decline in AUD and NZD (-1.0%), along with KRW and the rest of the APAC currencies. It certainly appears as though the trade tensions with the US are having a deleterious effect on the Chinese economy, and that may well be the reason that we have heard of more concessions on their part in the discussions. Today’s story is that corn purchases will be restarting in January, yet another rollback of Chinese trade barriers.

But it was not just China that undermined the global growth story; Eurozone data was equally dismal in the form of PMI releases. In this case, Germany’s Manufacturing PMI printed at 51.5, France at 49.7 and the Eurozone as a whole at 51.4. Each of these was substantially below expectations and point to Q4 growth in the Eurozone slowing further. While the French story is directly related to the ongoing gilets jaune protests, Germany is a bigger issue. If you recall, Q3 growth there was negative (-0.2%) but was explained away as a one-off problem related to retooling auto plants for emissions changes in regulations. However, the data thus far in Q4 have not shown any substantive improvement and now call into question the idea that a Q4 rebound will even occur, let alone offset the weak Q3 data.

Adding to the Eurozone questions is the fact that the ECB yesterday confirmed it was ending QE this month, although it has explained that it will be maintaining the size of the balance sheet for “an extended period of time” after its first interest rate rise. Currently, the market is pricing in an ECB rate hike for September 2019, but I am very skeptical. The fact that Signor Draghi characterized economic risks as to the downside rather than balanced should come as no surprise (they are) but calls into question why they ended QE. Adding to the confusion is the fact that the ECB reduced its forecasts for both growth and inflation for 2018 and 2019, hardly the backdrop to be tightening policy. In the end, much of this was expected, although Draghi’s tone at the press conference was clearly more dovish than had been anticipated, and the euro fell all day yesterday and has continued on this morning in the wake of the weak data. And this doesn’t even include the Italian budget mess where Italy’s latest figures show a smaller deficit despite no adjustments in either spending or taxes. Magical thinking for sure!

Meanwhile, the UK continues to hurtle toward a hard Brexit as PM May was rebuffed by the EU in her attempts to gain some conciliatory language to bring back to her Parliament. While I don’t believe in the apocalyptic projections being made about the UK economy come April 1st next year, I do believe that the market will severely punish the pound when it becomes clear there will be no deal, which is likely to be some time in January.

As to the US-China trade situation, this morning there is more fear of tariffs by the US, but the negotiation is ongoing. Funnily enough, my reading of the signs is that China is, in fact, blinking here and beginning to make some concessions. The last thing President Xi can afford is for the Chinese economy to slow sharply and put millions of young men out of work. Historically, excessive unemployed youth can lead to revolution, a situation he will seek to avoid at all costs. If it means he must spin some concessions to the US into a story of strengthening the Chinese economy, that is what he will do. It would certainly be ironic if President Trump’s hardball negotiating tactics turned out to be successful in opening up the Chinese economy and broadly pushing forward a more internationalist agenda, but arguably, it cannot be ruled out. Consider the ramifications on the political debate in the US if that were to be the case!! As to the market implications, I would expect that risk would be quickly embraced, equity markets would rally sharply as would the dollar, while expectations for the Fed would revert to tighter policy in 2019 and beyond. Treasuries, on the other hand, would fall sharply and yields on the 10-year would likely test their highs from early November. We shall see.

This morning brings Retail Sales (exp 0.2%, ex autos 0.2%), IP (0.3%) and Capacity Utilization (78.6%). Data that continues to show the US growing, especially in the wake of the weakness seen elsewhere in the world, should continue to underpin the dollar going forward. While I understand the structural issues like the massive budget and current account deficits should lead to dollar weakness, we are still in a cyclical phase of the market, and the US remains the best place to be for investment, so it remains premature to write off further dollar strength.

Good luck, good weekend and happy holidays to you all.

FX Poetry will return on January 2nd with forecasts for next year, and in regular format starting January 3rd.

Adf