Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Chief Macro Strategist
Summary: USD and JPY strength dominate here as wea await the US jobs report with little anticipation of any negative surprises after the blowout ADP survey earlier this week, though this heavily statistically manipulated survey can spring surprises on occasion. Note that the prepared remarks for the semi-annual testimony from US Fed Chair Powell will be released later today.
Trading interest
News and views
Democratic senators, including Senator Elizabeth Warren, have sent a letter to Fed Chair Powell inquiring into the Fed’s repo operations ahead of Powell’s semi-annual testimony before Congress next Tuesday and Wednesday. It makes plenty of sense for the Democrats to get curiouser and curiouser about this matter as the Fed’s massive balance sheet operations have engineered the stock market surge to all time highs and enabled President Trump’s non-stop victory dance. This could shape up to be one of the more interesting semi-annual testimonies from a Fed chair in a while, though not sure that the Dems have a deep enough understanding to ask the right questions. Note that Powell’s prepared remarks for next week’s testimony will be released later today.
Germany’s industrial production fell to a brutal -6.8% year-on-year pace in December and -3.5% month-on-month. France’s December Industrial Production number was down -3.2% year-on-year. There are no real green shoots in Europe, despite recent attempts to spin some slightly more neutral recent activity surveys as more positive. The long wait for the next policy impulse continues, meanwhile German politics are taking an interesting turn as the state of Thuringia’s traditional mainstream parties deal with whether to keep the populist rightist AfD out in the cold.
The Russian central bank meets today to set the policy rate, with yet another rate reduction expected, which would take the rate to a new cycle low of 6.00%. Given the policy cuts already in the pipeline and the massive meltdown in crude oil prices, the ruble looks relatively stable, but the recent weakening has perhaps been sharp enough to give Governor Nabiullina pause? If not, would expect a more cautious forward guidance – ruble at risk of further downside, and aggravated on downside if we do see a cut. I was surprised to see the Brazilian central bank cutting rates again this week and no surprise to see the real closing at a record low yesterday. Likely plenty more downside to come there.
The Czech central bank yesterday sprang a fast one on the market, hiking rates 25 basis points to 2.25% – against expectations for no move – to defend against a steep rise in the CPI. This is the only CEE central bank noticing the increasingly negative real rates – Poland and Hungary will eventually be forced down the same road with even more negative real rates. Still, doubt whether CZK gets much upside on the move, with the economy’s heavily linkages to German industry/car production, etc.
Market expectations for today’s nonfarm payrolls are running at around +160k. Note that the bureau responsible for gathering the nonfarm payrolls data revised down the numbers for Apr 2018 through March 2019 down by some 500k, a reminder that this data series is an ongoing exercise in statistical manipulation and “birth and death model” assumptions that leave us little clue of the true state of the labour market from month-to-month. To be fair, few other data series are flashing red on the US labour market, including more reliable series like the weekly claims numbers.
Chart: EURUSD
EURUSD has finally blasted below 1.1000 and looks ready to test the sub-1.09 close in the sessions ahead. Traders should be wary of negative attention on the situation from US President Trump at any time, and we have been well trained to believe that any new lows won’t last for long from the last 18 months and more of market action, as each new low has quickly back-filled, but let’s see how this develops as the options market shows record complacency (1-month implied volatility is sub-4.0% even this morning after the break!)
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