Market Recap

Good news all around in the US! It seems that US congressional negotiators have agreed on the spending bills necessary to keep the government open past Friday’s deadline. The agreement includes some money for fencing on the border with Mexico, but much less than Trump wants and nothing that could be called a “wall.” It’s not certain that Trump will go along with the deal, but markets seem to think it’s likely that he will.
Secondly, a White House official said Trump “wants to meet with President Xi very soon,” giving the markets some reason to be optimistic on the China trade front too.

The possibility that these two major problems plaguing the US might be solved boosted USD and gave rise to a “risk on” mood, which boosted AUD and depressed JPY and CHF. USD has now opened higher eight consecutive mornings.

NZD however was an outlier among the commodity currencies ahead of tonight’s Reserve Bank of New Zealand meeting (see below for in-depth analysis). Dovish expectations for that meeting (which I share) have been depressing NZD bond yields, further widening the gap between UST and NZD bonds.

Today is the 20th anniversary of the Bank of Japan’s zero interest rate policy, aka ZIRP. At the Monetary Policy Meeting of 12 Feb 1999, the BoJ said it “will provide more ample funds and encourage the uncollateralized overnight call rate to move as low as possible.” It said it would “initially aim to guide the above call rate to move around 0.15%, and subsequently induce further decline in view of the market developments.”

It’s remarkable not only how long this “extraordinary” policy has continued but also how widespread it’s become as several other central banks around the world now have negative interest rates as well (eg the ECB). The BoJ celebrated the occasion by cutting its purchases of 10yr-25yr bonds by ¥20bn to ¥180bn, the first reduction in purchases in that maturity zone since July. The yen briefly strengthened on the news, but the risk-on mood prevailed and the currency resumed weakening. Nonetheless, the BoJ’s move is a warning that perhaps it’s running out of assets to purchase. That could prove problematic for the authorities as inflation continues to run well below target.

GBP fell after the preliminary UK Q4 GDP came in weaker than expected at +0.2% qoq (+0.3% expected). Even more worrisome, the mom change came in at -0.4% mom vs unchanged expected. The big problem seems to be business investment, which fell every quarter last year. That’s a measure of how Brexit is affecting the UK economy by eroding confidence among companies.

Although Britain isn’t doing badly compared to other countries, its prospects aren’t that great, either.

UK PM May will update Parliament today on any recent progress in seeking changes to the agreement with the EU. (This speech was originally planned for tomorrow.) Since there hasn’t been any progress, that should be short speech. She will then put forward a neutral motion and MPs will add amendments to it, which they will then debate on Thursday. That may help us to get a sense if there’s any possible agreement that could command a majority. As usual, this is a very complicated process so please read your local press on it. My only comment would be that any hints of a willingness to delay Brexit would be likely to boost the pound, while on the other hand, indications that she really is willing to go ahead with a “no deal” Brexit would cause it to crash further.

Today’s market

The main event of the day will take place overnight when the Reserve Bank of New Zealand (RBNZ) meets to determine its Official Cash Rate (OCR). The OCR has been on hold at 1.75% since Nov. 2016.

Market views on the RBNZ have fluctuated wildly in recent months. At the end of last October, there was an 85% chance that rates would be unchanged by the end of this year, but two weeks later, it was 95% certain that rates would be higher. Five weeks later, it was 90% sure that they would be unchanged. Now, following Wednesday’s disappointing Q4 employment data, it’s seen as a toss-up between unchanged and lower; there’s about zero chance that they’ll be higher.

Given the disappointing employment data and the dovish turn that other central banks have taken, particularly in neighboring Australia (which is New Zealand’s second-largest trading partner after China), I would expect further signs of caution from the RBNZ as well, leading to a weaker NZD next week.

In any case, I’d say the outlook for NZD is pretty grim, from both a macroeconomic point of view…

…and just looking at commodity prices…

Given what’s happening in China, I don’t think the outlook for commodity prices is that great, at least not for the next couple of months. So I’d tend to be bearish NZD as well as AUD.

As for today’s indicators, the National Federation of Independent Businesses (NFIB) small business optimism survey is expected to decline. This indicator tends to move along with the consumer confidence indices, which come out earlier, so a decline should be no surprise. Nonetheless, it may be negative for USD. (The purple line shows the average of the U of M and Conference Board consumer confidence indices.)

The Job Offers and Labor Turnover Survey (JOLTS) report is forecast to show about the same number of job openings as in the previous month. This would be the fourth below-peak month for openings, which would tend to confirm the downtrend. However, openings are still expected to be well above the number of unemployed persons (6.54mn), meaning that there’s a shortage of workers, not jobs. That should keep wages rising and the possibility of Fed hikes alive. USD positive

Japan’s producer price index (PPI) is expected to show the third consecutive mom decline, with the yoy rate also dropping. This is only natural as commodity prices, particularly energy, fall. Lower upstream price pressures imply lower downstream price pressures, too. Inflation is simply never going to come to this country. JPY negative

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Marshall Gittler

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