Market Recap

Interesting – the New York stock market closed little changed and stock markets are generally higher in Asia today, yet it’s generally a risk-off day, lead as usual by the three commodity currencies. This time CAD was the biggest loser – that’s because the Bank of Canada business outlook index fell to -0.6 from 2.2 (no forecast available). But the “future sales growth” index rose to 6 from -1 and the Senior Loan Officer Survey also improved, so the news wasn’t all bad by any means. The BoC summed up the survey by saying it “point(s) to a moderation from previously high levels of domestic and foreign demand for firms in most regions. Investment and employment intentions remain positive.” BoC Gov. Poloz apparently puts a lot of weight on this survey as supplement to the hard data about the economy.

AUD started falling a few minutes before the minutes of the April 2nd Reserve Bank of Australia (RBA) meeting were released and it kept falling afterwards. The minutes showed that the RBA discussed scenarios in which they might cut interest rates, but concluded that there was “not a strong case” for any change right now. “Nevertheless, a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure,” the minutes said. Meaning, the RBA could justify cutting if it felt the need to. The market sees a 73% chance of a rate cut this year (and no chance at all of a hike, by the way).

Japan’s Economy Minister Motegi held three hours of talks with US Trade Representative Lighthizer. The talks centered on trade in goods. Motegi called the talks “frank and good.” “Frank” talk is a Japanese codeword for “we didn’t agree.” “Good” means in this case “no conclusion yet,” I would guess. The talks continue Tuesday.

One bone of contention is whether the talks should include any mention of currencies, as the trade talks with China do. Motegi stressed that currency rates should be discussed between finance ministers, not as part of trade talks, but US Treasury Secretary Mnuchin said over the weekend that he would like to include a currency provision in any trade agreement to avoid currency manipulation. The fact is though that Japan hasn’t intervened in the FX market since 2011, so currency manipulation isn’t really much of an issue with Japan, unlike the situation with China, which has massively intervened directly in the market in recent years. It’s true that Japan’s quantitative easing probably has spillover effects into the FX market, but the Fed did quantitative easing too, so the US can’t really object to it (although Japan’s QE was on a much larger scale than the Fed’s.)

Pressure on Japan with regards to trade or the yen would be likely to result in a higher yen.


Today’s market

Now that Brexit has been delayed until end-October, will people be looking at the UK economic statistics more closely? I don’t think so, because as long as Brexit is hanging over the economy, the Bank of England is unlikely to change rates. As it stands, the market sees only a 40% chance of a rate hike this year, and only a 15% chance of a hike before October. In other words, nobody sees much chance of a change while Brexit is still pending.

Be that as it may, if you have money at stake you have to be aware of the possibilities. Today we’ve got the UK labor market statistics coming out first thing. The monthly change in employment is expected to be below the previous month’s rate but still well above trend, while the rate of growth in average weekly earnings is forecast to rise somewhat. Overall I’d say the figures were quite positive, given the incredible disruption and chaos that the British economy is facing. Figures like this are likely to be positive for the pound.

Shortly afterwards, the ZEW survey of analysts regarding the German economy comes out. Remember, this is a survey of analysts, not people who really do something, so it’s just their opinion. Usually they think either a) whatever trend we’re in now will continue indefinitely, or b) it’s so good (bad) now that it has to get worse (better) later, i.e. there’s going to be mean reversion. In this case, they see the current situation getting a little worse but at a much slower pace than it was a few months ago, while their expectations keep improving and are now just slightly positive, for some bizarre reason – probably expecting that either activity in China will improve or else that Britain would finally get out of the EU and let everyone go back to working on issues that will help Germany.

In any case, the ZEW survey may be EUR positive today but in fact it’s setting the background for further EUR weakness, as this optimism is likely to be disappointed, in my view. The Citi economic surprise indices show that Eurozone data is still surprising on the downside, even if not as badly as earlier in the year.

US industrial production is forecast to show a modest gain, as predicted by the modest gains in the different regional Fed manufacturing surveys for the month. It’s expected to be more or less in line with the recent trend though so it doesn’t say much about a changing direction in the economy – neither accelerating nor decelerating. Still, not decelerating is better than some other data we’ve seen recently and so it should be positive for the dollar.

The National Association of Home Builders (NAHB) housing market index is expected to rise to 64 after two months at 62. This would confirm that the housing market has bottomed out and is on a gradual uptrend as home buyers respond to lower interest rates. This suggests the housing sector, which has been a drag on the economy recently, may shift to a tailwind that would be positive for the US economy and positive for the dollar.

Overnight, New Zealand announces its consumer price index (CPI). This is a key figure that only comes out once a quarter and so is even more important for New Zealand than for many other countries. It’s expected to show a further slowing in the rate of inflation, albeit still within the Reserve Bank of New Zealand (RBNZ)’s target range. The RBNZ already said at its March meeting that “the more likely direction of our next OCR move is down,” and the market sees a 30% possibility of a rate cut at the next RBNZ meeting (in May) and a 51% probability of a cut by the next meeting in June. A slowdown in inflation would be no surprise, but it could confirm that dovish view and cause NZD to weaken a bit further.

Japan’s trade data comes out today. With the trade talks between Japan and the US just wrapping up, the yen may be more sensitive than usual to news about trade. The NSA figure is forecast to rise slightly, but that means a big fall back into negative territory for the SA figure. That may take some of the pressure off of Japan, although I’m sure the US administration cares more about the US-Japan trade balance than the overall Japan trade balance. JPY negative

Finally, the monthly data dump from China this time includes the key GDP figure. The market is looking for 6.4%, which would be in line with the government’s recent target of “between 6% and 6.5%.” That ought to reassure people that Chinese growth is not collapsing, which might help EM assets in general and the risk-on trade, such as AUD/JPY.

(Although a recent paper by several Chinese academics estimated that GDP growth between 2008-2016 was 1.7 ppt lower than officially estimated, so who really knows what Chinese growth is?) (“A Forensic Examination of China’s National Accounts,” )

There’s no January or February data for retail sales or industrial production, because those two are only announced together in “yoy YTD” form, to take into account the Lunar New Year. But they’re both expected to show a higher level of growth than back in December, as is fixed asset investment (which is always yoy YTD). That should also be reassuring to people that China may have passed the trough and is at least stable if not recovering. The news should be good for risk-on trades.


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Marshall Gittler

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