Rates as of 05:45 GMT

 

Market Recap

Very little movement in currencies over the past 24 hours. Barely worth talking about.

 

One reason for the dull market may have been the lack of any big revelations in the minutes of the recent FOMC meeting. Traders probably held back ahead of the release, but then found little impetus in the minutes to encourage a move in either direction. "Most officials saw rates as well calibrated." “Most” members thought that the Fed’s previous rates cuts were sufficient “to support the outlook of moderate growth, a strong labor market, and inflation near the Committee’s symmetric 2 percent objective.” That just reinforced the view that has emerged since the meeting, that the Fed is in “wait and see” mode while they assess how the rate cuts so far will affect the economy.

 

There were some new points in the discussion about the review of monetary policy strategy. With regards to negative interest rates, which Trump has been calling for, "differences between the U.S. financial system and the financial systems of those jurisdictions suggested that the foreign experience may not provide a useful guide in assessing whether negative rates would be effective in the United States."

 

In fact I’m surprised that there was so little movement in the FX market, given the consistently negative story being told by stocks. US stock markets were down and Asia is down across the region this morning, with every market in the red. The issue is, as usual, US-China trade.

 

First, yesterday’s Wall Street Journal carried a story that said the trade talks “are in danger of hitting an impasse.” “Both sides remain divided over core issues – including Beijing’s demand for removing tariffs and the US’ insistence on China buying farm products – nearly six weeks after an agreement in principle was announced by the White House on Oct. 11th.”

 

Then there’s the “Hong Kong Human Rights and Democracy Act,” the US bill supporting protesters in Hong Kong and warning China against violent suppression of the demonstrations. It passed the Senate unanimously on Tuesday and, unusually, the House passed the Senate bill Wednesday 417-to-1. That eliminates the need to reconcile the two houses’ bills and sends it immediately to Trump’s desk with a veto-proof majority. This bill is kryptonite to China, which is extremely sensitive to any foreign interference in its domestic affairs. China’s Ministry of Foreign Affairs promised “strong countermeasures” if such a bill were enacted.

 

If China refuses to sign an agreement with the US in retaliation for this bill, then Trump will allow the tariffs that are scheduled to go into effect on Dec. 15th to proceed. That means a worsening of the trade war, not an improvement. Stocks lower, AUD/JPY lower. 

 

Nonetheless, China’s Vice Premier Liu, their chief negotiator in the talks, Wednesday said he was “cautiously optimistic” about reaching an initial trade deal (although he said this before the bill passed the House).

 

The question as I see it is whether economics outweighs politics. We shouldn’t underestimate the role that national pride plays as a motivating factor in international relations.

 

The big move yesterday was in oil, which jumped after the US Department of Energy’s weekly oil inventory report showed second consecutive drawdown in inventories at Cushing, Oklahoma, the main storage center in the US. This was despite a increase in national inventories overall.

 

In fact, US oil inventories are nothing to get excited about, in my view. They’re just about average for this time of year. The problem as I see it is the weather. It’s shaping up to be an extraordinarily cold winter in the US, which means “average” inventories might not be enough. I think US oil prices could head substantially higher in the not-so-distant future as the US weather worsens and riots in Iran, Iraq and Lebanon intensify.

 

GBP was higher yesterday, but wait until the appalling Jeremy Corbyn unveils the Labour Party manifesto today. It may be popular with his supporters, but it’s bound to be anathema to the investment community.

 

Today’s market

Yesterday the US House of Representatives passed, on a bipartisan 231 to 192 vote, a continuing resolution to extend the federal government funding through Dec. 20th and keep the government open after the current stopgap funding law expires this week. The legislation goes to the Senate today. If they don’t pass it, then once again the US government will shut down.

 

I put the UK public sector borrowing figures on the schedule today even though they don’t usually affect the FX market significantly. There may be more interest than usual in the figures in the run-up to the UK general election, when both sides seem to be promising pie in the sky and a chicken in every pot (vegetarians may get a tofurkey instead).

 

The ECB meeting minutes don’t usually attract the same amount of interest that the FOMC minutes do, perhaps because the ECB hasn’t taken that many decisions in recent years, or perhaps because the press conference after the meeting is usually so thorough. Recently though it’s been clear that there are deep divisions within the Governing Council about the need for further easing and indeed whether the ECB actually has any leeway to ease policy further. Although they kept policy on hold at this meeting, the minutes may well shed some light on how the arguments between the doves and the hawks are going.

 

For example, ECB Chief Economist Lane recently said that the ECB hasn’t yet reached the limits of its policy and that negative rates are “not particularly a super loose policy.” He also echoed calls by retired ECB Chairman Draghi for fiscal policy to take over some of the burden from monetary policy, saying that “If fiscal policy, structural policies delivered a faster growth rate, then monetary policy challenge would be a lot less.” I wonder if all the other Council members agree with him on these points? We can hope to get some insights into how deep the divisions are and what the prospects for further easing measures, if any, are.

As the graph shows, by late August investors were expecting the ECB to cut rates several more times, but after the September ECB meeting, that speculation died down. Now the betting is that rates will remain on hold for the forseeable future. The market puts only a 35% probability on another rate cut by next September.

 

The minutes may shed some light on various technical issues, such as the composition of asset purchases and any need to adjust the ilmit on how much of each issuer the ECB can buy. But since no decision was announced, it’s likely no decision was taken. 

 

The Philadelphia Fed business outlook survey is expected to improve modestly. This might make up for the disappointing Empire State manufacturing survey, which fell to 2.9 from 4.0 (instead of rising to 6.0 as expected). The Philly Fed index is actually more imporant than Empire State index; it’s the second-best of the five Fed surveys when it comes to forecasting the all-important ISM manufacturing survey, whereas the Empire State survey is down at #4 (the Dallas Fed survey, at #5, shows no statistical relevance). The message from the Philly Fed survey is therefore more important than that from the Empire State survey. USD positive if it does come out higher as expected.

 

I don’t usually write about US initial jobless claims (or any of the weekly data, for that matter). But last week initial claims broke out of their recent range even though the GM strike was settled and there wasn’t any unusually bad weather anywhere. Claims are expected to fall back into the usual range this week, which would probably be neutral for the dollar. If they don’t though – if the consensus forecast is wrong and claims are at or above last week’s level – then it could signal a change in the labor market. That might be negative for the dollar, if it happens.

 

I’ll be watching EU consumer confidence for much the same reason. It fell to the lowest level of the year last month. It’s expected to rebound a bit this month, which would fit in with the prevailing narrative that the worst is over for the EU. That would probably be neutral for EUR. The risk is that if it were to fall below last month’s level to a new low for the year, the market would probably take it badly. 

 

The Japan national consumer price index (CPI) is less important for Japan than for most other countries as it comes out several weeks after the Tokyo CPI, which treads a pretty similar path. This time all the various measures are expected to show slightly faster inflation, in contrast to the Tokyo measure, which continued at the same pace as before. Even so, it’s nothing short of miraculous that they are showing so little change, because the government raised the consumption tax by 2 percentage points during the month. Any acceleration in prices in October has no policy implication. JPY neutral