Market Recap

I don’t have any rates tables today because I was out of the market yesterday, but sterling seems to be the focus of attention. It plunged on Tuesday after UK PM Boorish Johnson talked with German Chancellor Merkel by phone. Afterwards, Downing Street apparently told reporters that taks were “close to breaking down.” The curious thing was that they focused on Merkel’s comments, which is unusual; normally the side briefing mostly tells what their side said, and leaves it up to the other side to characterize the talks from their point of view, but a spokesman for Chancellor Merkel didn’t comment on the call. It looks like Boorish just wants someone to blame when the whole thing collapses.

GBP popped higher yesterday on reports that the EU is ready to allow the Northern Irish assembly to vote to leave a new Irish backstop after some unspecified number of years. However, sterling quickly lost the gains as investors thought that even if this is a compromise on the part of the EU, it might be too late – more likely, it’s just an effort by the EU to look like it’s willing to compromise so that it can avoid being blamed for the inevitable disaster. The BBC’s Europe editor yesterday tweeted that there was speculation in the EU that Boorish might not even attend next week’s EU Council summit if there wasn’t the prospect of a deal.

Towards the end of the European day, it was reported that Johnson and Irish PM Varadkar hope to meet later this week after a “constructive” call. GBP could recover somewhat today on hopes for that meeting. However, I wouldn’t get my hopes up too high. In an interview with broadcaster RTE, Varadkar there are “big gaps” between the two sides and it will be “very difficult” to reach an agreement before the Oct. 31st deadline.

Next week we have the EU Council Summit Oct. 17th-18th and then the Oct. 19th Benn Act deadline – if Parliament doesn’t agree to either a withdrawal agreement or leaving the EU without a deal by Oct. 19th, then the Act proposes a new withdrawal date of Jan. 31, 2020, which the PM is required to accept if the European Council accepts it. After that, there would probably be a general election, where voters get a choice between crashing out with no agreement or having Jeremy Corbyn as PM – kind of like the game we used to play as kids, which would you rather do: sit on a hot stove or drink a pail of boiling water? Eat ants or caterpillars? Etc. I expect sterling will remain in focus as we get down to the wire.

There’s been amazingly little change in the risk reversals over the last month. I can only guess that the market has been assuming for some time that the Oct. 31st deadline is going to be rescheduled.


Today’s market

Speaking of GBP, today is short-term indicator day for the UK. Normally this would be a big day for data-watchers, but probably politics trumps everything in Britain now. It would have to be some amazing economic news to get much of a bounce out of sterling at this point.

And frankly, the market isn’t looking for anything particularly amazing. Overall output is forecast to be unchanged in August. That’s not great at all, in fact it’s GBP negative.

The trade deficit is also expected to widen out again after a few unusually narrow months. That may also be GBP negative

You can see though that nothing special is happening with exports. Although they have improved a bit recently, the big movement is in imports. Earlier this year imports soared as companies stockpiled ahead of what everyone thought was going to be the Brexit deadline. Ever since the deadline was delayed, they’ve just been running down their inventories. So the relatively narrow deficit doesn’t reflect any great surge in exports, which have been rising at a fairly stable pace over the last year or so.

After that comes what’s probably the biggest indicator of the week: the US consumer price index (CPI). The CPI isn’t the inflation gauge that the Fed targets –that’s the personal consumption expenditure (PCE) deflator, or more accurately, the core PCE deflator – but the market pays attention to it almost as if it were. Surprisingly, the market pays more attention to the headline CPI figure than to the core figure, whereas with the PCE deflator the attention is definitely on the core figure. In this case, the headline figure is expected to show no change in the pace of inflation at the monthly level, although the yoy rate of change is forecast to accelerate one tic. The yoy rate of core inflation is forecast to remain the same. That means no change in the inflation picture, which probably means no change in the Fed’s view and therefore no change in the dollar. Fed Chair Powell Wednesday said that the US economy was “in a good place,” although he repeated his warning that low inflation, low growth and low interest rates continue to pose a threat to the economic outlook – when have you ever known a central banker to say that everything was great?

From my point of view, inflation at almost exactly the Fed’s 2% target level and unemployment at a 50-year low gives no reason at all for the Fed to cut rates according to its “dual mandate,” but what do I know? If I were that smart, I’d be on the FOMC myself. The market expects one more cut this year and two next, and in recent years the market has forecast the Fed’s moves better than the Fed itself has.


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Marshall Gittler

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