Dollars, Doves And Dictators: Full Week Ahead Preview

While the week ahead doesn’t promise the same level of high drama as last week, there will be no shortage of key data and policy pronouncements for market participants to parse.

Before we get to that, we should probably acknowledge the orange elephant in the room.

The ‘gentleman at the Fed’

On Saturday, during a scorched earth, two-hour address at CPAC, an unhinged, sweating Donald Trump took aim at Jerome Powell again. Here, for anyone fortunate enough to have missed that spectacle, is the clip:

 

Obviously, that is all kinds of inappropriate (and also all kinds of funny, if you can get past the sheer, blatant audacity of the president lambasting the central bank on a Saturday at what amounted to a MAGA rally) and it again opens the door to market participants fretting about Fed independence.

Incidentally, the dollar has fallen for two weeks in a row and in eight of the last eleven weeks.

The CFTC is still trying to catch up from the shutdown, but for whatever it’s worth, in the week through February 19, dollar longs hit a four-week high.

It’s also worth noting – again – that Trump’s (explicit) bragging about the relative strength of the US economy and his (implicit) boasting about how his trade war is undermining economic growth in other countries clearly indicates that he doesn’t fully appreciate the extent to which he is the cause of the dollar’s resilience in the face of the Fed’s dovish pivot.

As for the “gentleman at the Fed”, he’ll have plenty of data to consider in the week ahead. Last week was something of a mixed bag, with stronger-than-expected GDP and decent Conference Board data offset by the worst read on ISM manufacturing since the election. This week features more PMIs, construction spending, new home sales, ADP, the trade balance, factory orders, consumer credit and, of course, February payrolls.

The labor market is riding a record 100-month streak of gains and analysts are looking for “more cowbell” after January’s blockbuster.

(Bloomberg)

“We forecast nonfarm payroll employment growth of 210k in February following an outsized gain of 304k in January”, BofAML writes, in their preview. Barclays is looking for 200k on the headline, near the post-crisis average. If we get another solid report, you can expect Larry Kudlow and Kevin Hassett to be trotted out post haste to bolster the party line.

Hamburger Hill

Sentiment stateside could also be affected by political developments. Michael Cohen’s congressional testimony appears to have made Trump’s legal problems worse and he (Cohen) will be back on Capitol Hill this week for a followup with the House Intelligence Committee.

Meanwhile, House Democrats are preparing to request Trump’s tax returns and the administration is also being scrutinized after it emerged that John Kelly once wrote an internal memo documenting how he was “ordered” to grant Jared Kushner a security clearance over the objections of Don McGahn and the CIA.

The Justice Department is due to receive the Mueller report any day. In his Saturday CPAC speech, Trump called all of this “bullsh*t”, and took personal shots at Adam Schiff, Mueller and Jeff Sessions, whose accent the President mocked in the most condescending fashion imaginable.

“I am an innocent man being persecuted by some very bad people”, Trump said Sunday.

Give me liquidity or give me a recession

Across the pond, everyone will be looking for something definitive from the ECB on a new round of TLTROs.

The European economy looks extremely fragile (that’s actually a generous assessment) and a consensus is forming among market participants that the central bank has missed the window for normalization.

Early last year, when the data started to roll over, the hope was that the malaise would prove fleeting. Mario Draghi added date-dependent forward guidance to the statement (in addition to the traditional state-dependent language) and in December, he tweaked the language around reinvestments in an effort to calm markets. The data, though, generally refused to cooperate. After inflecting a bit throughout 2018, things have decelerated meaningfully, with Italy falling into recession, Germany barely avoiding a similar fate and the ECB itself acknowledging in January that downside risks have proliferated.

Now, the central bank is staring down the prospect of having to launch another round of TLTROs at minimum and it looks increasingly likely that the forward guidance around the rate path will need to be enhanced (it will be stale by summer anyway and if the data doesn’t improve, any changes will almost surely suggest the first hike has been pushed out, in line with analysts and, to a certain extent, markets). Clearly, political risks in Europe around the EU elections only increase the urgency, as does lingering uncertainty around Brexit.

Read more

It’s ‘Eerie’: One Bank Asks Whether Europe Is Now Japan

“While the aggregate level of liquidity in the system is abundant, this aggregate level of liquidity surplus should not be considered a reliable indicator of effective liquidity conditions for the euro system banks in each country, which could be far less accommodative than signaled by the level of the surplus”, Barclays wrote Friday, in their ECB preview, adding that “the cross-border transfer of liquidity within the euro area remains very limited.” Have a look at the following two charts which illustrate that latter point rather poignantly.

(Barclays)

While the ECB acknowledged mounting downside risks in January, and while communications since then have generally been on the dovish side, the bank hasn’t yet had the opportunity to “officially” (if you will) join the global dovish pivot – this week they likely will. Here’s a concise summary from the same Barclays note cited above:

Since the January policy meeting, cyclical data have continued to be weak, core inflation has not delivered positive surprises, and trade-related and political risks persist. Domestic demand remains resilient, in part thanks to more fiscal stimulus in 2019. We expect at next week’s March meeting that the ECB will downgrade its 2019 growth forecast (by -0.25pp) and possibly inflation (by -0.1pp). Against this macro background, we believe that ECB will maintain the current level of monetary policy accommodation. This will require, in our view, delivering another TLTRO to avoid a tightening in bank lending conditions at a time when activity has weakened — we still expect an announcement between March and June — and expect no other policy changes in March.

For their part, Goldman also expects the ECB to announce a new TLTRO next week, “although details could follow later and indicate that it could adjust its guidance if risks to the outlook materialize.”

In their own nuanced discussion, BofAML notes that the whole “there needs to be a monetary policy case” red herring is just that. “To get this out of way right away, we do not think it is very difficult for the ECB to make a ‘monetary policy case’ for a long term liquidity injection”, the bank writes, adding that while it’s obvious a LTRO/TLTRO “would help more in countries where banks are facing funding difficulties, it would not be the first time the ECB decides to deal with ‘fragmentation’ or ‘policy transmission’ issues.”

Up north and down under

We’ll also get the RBA and the BoC this week. These are interesting for reasons that should be obvious to anyone who’s been paying attention.

On the RBA, you’ll recall that Lowe’s shift to a “evenly balanced” on where rates go from here (as communicated during a speech last month) helped cement the global character of the policymaker pivot. There’s data on deck down under as well. “The market is already positioned for dovish guidance, with 22bp of cuts priced over the next year, so the bar to surprise on the dovish side is high”, Barclays says.

As for the BoC, Friday’s Q4 GDP data out of Canada was variously described as a disaster, which raises the stakes for the central bank.

“We expect the policy statement on Wednesday and the Economic Progress Report on Thursday to acknowledge that global and Canadian growth have slowed, and that the capex, consumption and housing data have been softer than expected”, Goldman said Saturday, before noting that “while the statement is likely to preserve the long-run hiking bias, we expect additional emphasis on patience, uncertainty or data-dependence on the path back to neutral.”

(Goldman)

Here’s a bit from BofAML, writing Friday afternoon following the GDP boondoggle:

The economy is growing below potential and there are no pressures on core inflation. With weak global trade, uncertainty over global trade institutions, the US decelerating and the economy still recovering from low oil prices at the end of last year and assimilating higher interest rates, we do not see room for the BoC to tighten policy with respect to [the Fed].

Meanwhile, in China

The US is reportedly on the verge of finishing a 150-page “final” trade agreement to be presented at a prospective meeting between Trump and Xi in Mar-a-Lago, but there are conflicting signals from the administration and the timing is uncertain.

Steve Mnuchin and Kudlow have variously played “good cop” to Bob Lighthizer’s “bad cop” while Trump has played his traditional role as “insane cop”, tossing out unpredictable soundbites at random intervals. On Friday evening, seemingly out of the blue, he declared that he had “asked China to immediately remove all Tariffs on agricultural products (including beef, pork, etc.) based on the fact that we are moving along nicely with Trade discussions.”

The NPC is this week (we’ll get the growth target) and it comes as markets are on tenterhooks about the extent to which Beijing will continue to pull the myriad fiscal and monetary levers at its disposal in the interest of bolstering the economy. China’s credit creation machine kicked into high gear in January and each week seems to bring more stimulus hints.

At the same time, China now boasts the best-performing stock market in the world, a stark contrast to 2018 when the trade war and growth jitters tanked equities in the worst rout since the 2015 crash. MSCI’s decision to move ahead with expanding the weighting of A shares in global indices will trigger more inflows into onshore equities, but due to the sheer scope of the YTD rally, some are cautious.

We’ll also get a raft of key data out of China this week to go along with the headlines from the NPC.

All in all, another busy week as investors ponder the road ahead at a time when nearly every asset has posted solid returns since the Christmas Eve massacre.

(Goldman)

Full calendar via BofAML