US stocks come into the new week riding their longest streak of daily declines this year, with the S&P having fallen for five consecutive sessions.
Following a rousing start to 2019, markets have paused to ponder slowing global growth, the prospect that a trade agreement between the Trump administration and China is not in fact a done deal and generalized questions about whether the YTD rally in risk assets has run too far, too fast.
The ECB’s dovish pivot seems to have been counterproductive to the extent it “confirmed” growth worries and lackluster Chinese trade data for February followed by an expected hangover from January’s surge in credit creation don’t do anything to allay fears – neither does Friday’s disappointing jobs number in the US.
Full docket stateside
We’ll get Trump’s budget this week which sets up another fight with lawmakers over wall money. The White House is looking for $8.6 billion in border barrier funding, despite having lost this battle less than a month ago.
On the data front, they’ll be plenty for market participants (and Fed officials) to digest, with CPI, PPI, retail sales, business inventories, durable goods, construction spending, new home sales, Empire manufacturing, industrial production, and U. of Michigan sentiment all on deck stateside.
The retail sales print will be watched especially closely following the “anomalous” 1.2% drop in December, the worst read since 2009.
“We forecast a 0.1% m/m rebound in January retail sales, driven by the core component (0.6% m/m) [and] this should alleviate concerns about consumer spending following the unexpected decline in December”, Barclays wrote over the weekend.
CPI should be interesting as well, given the Fed’s penchant for leaning on subdued inflation when it comes to justifying a prolonged (read: indefinite) “pause” and also considering wage inflation came in hot on Friday.
The dollar has confounded bears of late. Apparently, it didn’t occur to a lot of folks that were the Fed to lean decisively dovish, other central banks would too, negating any greenback weakness that would have “naturally” accompanied a less aggressive FOMC – especially in an environment where the US economy still looks good, relatively speaking anyway.
Goldman, for instance, was just stopped out of their short dollar call. Here’s the bank’s FX team to explain (via a note dated Friday evening):
In the aftermath of this week’s ECB meeting we were stopped out of our short DXY recommendation at 97.50, for a potential loss of 1.4%. We opened the trade on January 4 following Fed Chair Powell’s remarks to the American Economic Association, which appeared to indicate a shift in policy trajectory for the FOMC. Although this aspect of the view has played out largely as we expected, growth in other G10 economies has surprised to the downside since the start of the year, and other central banks have also moved in a dovish direction. In hindsight, the Fed view was better expressed in rates than FX. We continue to expect Dollar weakness, but even if incoming data cooperate this may take time to materialize on DXY (with its high EUR weight) due to market pessimism about global growth. Instead, the main beneficiary of the current data backdrop seems likely to be the Yen, and we therefore open a tactical short recommendation in USD/JPY, with a target of 108 and stop of 112.5.
One potential problem with that call is that the BoJ has variously suggested Japan is not in fact out of options when it comes to easing and indeed, Kuroda last month explicitly said he’d consider four additional easing measures should the inflation target drift even further out of reach.
Concerns about angering Trump notwithstanding, Japanese officials will be loath to tolerate too much yen strength. As we’ve said on any number of occasions, even the slightest hint that the BoJ is looking to normalize policy against a backdrop of proliferating risks is a recipe for the yen to appreciate, something that is wholly unpalatable considering how far from target inflation is in Japan.
Pan and the Lost Boys
Speaking of the BoJ, they’re on deck this week and one would certainly expect a dovish lean in light of recent events. Of course a dovish lean doesn’t mean actual changes to policy – they may well keep whatever powder they have left dry for now, or at least until the yen looks like it really wants to run.
“Fragile global growth, dovish shifts by major central banks, most recently by the ECB, and recent remarks from senior BoJ officials led markets to focus on the prospect for a dovish shift by this Friday’s BoJ as well”, Barclays wrote Sunday, adding that “while recent disappointment in economic data (eg, IP, trade) suggests a risk of downgrade in the BoJ’s economic assessment, we do not expect any policy reaction at this point.” They go on to say that if USDJPY were to move convincingly below 110, the market may begin to expect something definitive from Kuroda, but for Barclays, the BoJ “is likely to keep its powder dry until the JPY appreciates further, refraining from further easing at this stage.”
You’ll recall from the flash crash/smash that unfolded earlier this year that fundamental factors aren’t the only thing that can catalyze sharp yen appreciation. Worryingly, when you get flash moves in a safe haven, it’s often difficult to sort things out after the fact in terms of figuring out what part of the move was “fundamental” and what was merely a liquidity vacuum or a fat finger or a stop run.
Relive the January JPY flash event
“If there are further declines in activity data from February and Japan’s economy really has entered a recession, the BOJ, as a policymaker, will likely need to seek some kind of additional easing measures”, Goldman wrote last week, before noting that while they “do not expect specific measures to be seriously discussed at the March MPM, the BOJ, while keeping an eye on this risk scenario, will likely engage in serious discussion of economic trends.”
Obviously, the BoJ is concerned about the side effects of its extraordinary policies and that discussion will inform any decision about further stimulus.
Eastbound And Downing
Brexit takes center stage this week and just to underscore how urgent this situation is becoming, the Financial Times reported on Sunday evening that the BoE is now instructing some banks to get ready for the storm.
“The Bank of England has told some UK lenders to triple their holdings of easy-to-sell assets in the run-up to Brexit to cope with the market meltdown forecast if the UK crashes out of the EU without a deal later this month”, FT says, adding that “some lenders must now hold enough liquid assets to withstand a severe stress of 100 days rather than the normal 30, under rules brought in late last year by the BoE’s Prudential Regulation Authority.”
The UK will leap out of the EU plane with no parachute if Theresa May and MPs can’t get this sorted out within the next 19 days and this week is pivotal in that regard. (Very) long story (very) short, nobody knows what’s going to happen or really, what’s even going on right now. “The UK’s labyrinthine crisis over EU membership is approaching its finale with an extraordinary array of options including a delay, a last-minute deal, no-deal Brexit, a snap election or even another referendum”, Reuters wrote Sunday.
Basically, lawmakers will vote three times this week – or at least that’s what it looks like right now. Here’s the ridiculous decision tree from the BBC:
And here’s Barclays with some color and a table that attempts to game out what might befall sterling under various outcomes:
PM May is expected to hold another ‘meaningful vote’ by Tuesday, followed by two more votes, one on ‘no deal’ and another on A50 extension, if her Brexit deal fails to pass. If WA does not pass, House of Commons will vote ‘no-deal Brexit’ on Wednesday. A ‘No-deal’ will likely to be blocked by MPs, leading to a vote on and extension of A50 (‘Brextension’) on Thursday. This appears the most likely outcome priced in by markets and in our opinion.
According to the Sunday Times, May could end up losing on Tuesday by an even more embarrassing tally than she did before.
The bottom line: We’re in for another week of Brexit headline hockey, a fate worse than death, to be sure.
Meanwhile, nobody is quite sure where things stand on US-China trade talks. This time last week, everyone seemed convinced that the deal was all but done. Fast forward seven days and folks aren’t so sure.
Over the weekend, China’s credit growth data for February came in well below estimates, which threw a bit of cold water on the blockbuster January figures. For their part, Goldman thinks that was at least somewhat deliberate. “We see the slowdown in credit growth as a result of a less supportive policy stance [and] while there are technical reasons such as the timing of the Chinese New Year, if the government wanted they could have kept liquidity supply loose despite if the economy and markets were very weak and trade talks weren’t progressing well”, the bank says. In other words, Beijing may well have been trying to cool things down following criticism of the January credit bonanza and signs that the A-share rally was starting to get out of control.
The notion that authorities may have sought to rein things in is underscored by the controlled demolition of Mainland equities on Friday courtesy of a state-sanctioned sell rating on one of the market’s high-fliers. Throw in the crash in February exports and lingering signs of PPI deflation and you’re left with more questions than answers following the NPC. There’s more data on deck this week in China, as FAI, IP and retail sales loom.