Market Recap

Odd movement in the markets today – it looks like a typical “risk on” day with the commodity currencies all rallying and JPY falling. But if that’s the case, why is CHF up there on the plus side, too? It strengthened significantly on Friday after the US market began trading. This morning there was an odd “flash crash” In the currency caused by trading in thin liquidity with the Tokyo market out for a holiday. CHF plunged briefly, but has since recovered all the losses – it was just a temporary move for less than half an hour. The more interesting question for me is Friday’s move lower in USD/CHF. My guess is that it was spurred by news that the Swiss Foreign Minister was in Washington and talking with senior US officials about a free trade agreement with the US. That could boost Switzerland’s already enormous current account surplus, estimated for this year at 9.8% of GDP – the largest of any industrial country. (Germany is 7.1% and China, for all its trade surplus, is a mere 0.1% of GDP). Switzerland also will sign a post-Brexit trade agreement with the UK, one of the few countries to work out such an agreement. The US is already Switzerland’s second-largest export market, after next-door neighbor Germany, taking 11.7% of the country’s exports. The UK is down pretty far with only 4.3% of Switzerland’s exports.

In any case, why is there a risk-on sentiment in the markets anyway? Stocks closed generally lower on Friday (certainly lower across the board in Europe) and this morning stocks are mixed in Asia. And the news out of the US isn’t good: talks on averting another government shutdown have stalled and participants see only a “50-50 chance” of an agreement by the deadline Friday. However, we have to wonder whether the shutdown really matters for the markets. The S&P 500 rose +10.3% over the course of last month’s 35-day shutdown, so clearly investors don’t think it’s that big an deal for the economy.

Probably, today’s action all comes back to China and trade. China said Vice Premier Liu will join US Trade Representative Lighthizer and Treasury Secretary Mnuchin in trade talks in Beijing Thursday and Friday. With such senior people meeting, there’s hopes for some agreement. And Trump’s advisers have reportedly discussed holding a summit with China President Xi next month, although that would probably be after the 1 March deadline for deciding whether to increase tariffs. The talks in Beijing later this week will be a crucial point for the markets.

Today’s market

It’s UK short-term indicator day today! The usual three indicators – monthly GDP, trade, and industrial/manufacturing production, plus we get the first estimate of UK quarterly GDP. I suspect that the quarterly GDP will be the most important. It’s expected to show a slowdown in growth, with growth for the entire year falling to around 1.4%, the lowest in a decade. While that’s nothing new, just confirming what most people expect anyway from the collapsing PMIs, I still expect it to be GBP negative. Especially, I would focus on the month-on-month figure, which is forecast to show no growth in December. That suggests future growth is likely to be even more sluggish.

The UK trade data aren’t likely to be any more encouraging, either. They’re forecast to show a widening trade gap at both the visible and overall level. GBP negative, too.

Industrial production is at least expected to show a small (+0.1%) rise mom, but after three consecutive months of decline, that’s kind of pathetic. It was positive on a mom basis only five months last year. Such sluggish growth in output is also GBP negative.

After that, not much. Fed Governor Michelle “Miki” Bowman will be making her first speech since joining the FOMC. She’s the first person to fill the Fed Board’s community bank seat, which was created under a 2015 law. Appropriately enough, she will be speaking about community banking at a community banking convention, so her focus won’t be on policy, but there will be a Q&A session in which someone is bound to ask her views on policy. Everyone will be listening closely to see what way she leans. I doubt if she’s going to be one of the policy heavyweights during the FOMC’s monthly debate, but as a Fed Governor she has a vote, and her vote is just as good as anyone else’s, so it’s important to know her views. I suspect that a community banker is likely to be more concerned about growth than inflation and so she’s likely to come off dovish, which would be negative for the dollar, but I’m just guessing here as no one really knows yet.

Overnight, Australian home loans are forecast to continue their decline. This would make 9 mom declines during 2018, confirming the Reserve Bank of Australia’s recent comment that “the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed.” Since the RBA identified “the effect of falling housing prices in some cities” as one of the two main domestic uncertainties (the other being “the outlook for household spending”), a further confirmation of this fact is likely to be negative for AUD.

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Marshall Gittler

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