NZD, AUD up on China hopes, GBP down on PMIs; Ifo indices, Powell talk

Rates as of 06:30 GMT


Market Recap

GBP was the big loser after the new flash UK purchasing managers’ indices (PMIs) showed the UK economy in serious retreat (see below). It’s nice to see the market paying some attention to economics again, even if just for a little bit. GBP is recovering somewhat now as the impact of the disappointing PMIs fade and people focus instead on the polls, which increasingly show the Conservatives getting a majority on their own = Brexit as scheduled on PM Johnson’s terms. Interesting that the market prefers that possibility to another referendum under Labour, which would hold out the possibility of no Brexit at all. I think that just goes to show what the market’s view of Jeremy Corbyn is.

On the other hand, NZD and AUD gained after China said it will raise penalties on violations of intellectual property rights in an attempt to address one of the sticking points in trade talks with the US. Nice of them to say it – frankly, I’ll believe it when I see it. Not necessarily when the penalties are raised, but rather they’re enforced. But maybe even just putting it down on paper will be enough to help nudge the talks along. Trump also said there’s a “very good chance” of reaching a trade pact with China. Of course what he says doesn’t necessarily have any underpinning in reality, but it’s maybe the best we have to go on.

USD also gained on Friday’s better-than-expected PMIs – see below.

Friday’s preliminary PMIs for Europe were ambiguous. The manufacturing PMIs – which are the more cyclical — were higher than expected, which suggests that the business cycle has turned. But the service-sector PMIs – which actually cover more of the economy – were lower, meaning that the composite indices — which supposedly reflect the economy as a whole — were lower than expected. Indeed for the Eurozone as a whole, the composite index at 50.3 is only just above the “boom or bust” line of 50.0, which signifies the difference between an expanding and contracting economy. The Eurozone orders index also fell.

So has the European business cycle turned up, as the manufacturing index is suggesting, or is it about to turn down, as the composite index is indicating? The bond markets voted down, as Eurozone bond yields largely fell (well, excluding Italy). Bund yields were off 4 bps.

There was no such ambiguity in the UK, where the first of what’s to be the regular flash UK PMIs were all below-consensus and showing contraction. No surprise then that gilt yields fell even more than Bunds did.

In the US on the other hand the all PMIs beat expectations, rising more than expected. The manufacturing PMI, which was forecast to tic up just one tick, jumped nearly an entire point (to 52.2 from 51.3).

This is all very interesting I’m sure, but how relevant is it to the FX market? The answer is, somewhat. EUR/USD does to some extent follow the recent direction of the spread between the two manufacturing PMIs. So the US manufacturing PMI gaining on the EU manufacturing PMI is likely to mean a weaker EUR/USD.

The other big thing on Friday was the first major policy speech by ECB President Lagarde. She focused more on fiscal policy than on monetary policy, which was pretty much as expected – she’s more of a politician than an economist, and with the ECB hitting up against the limits of what it can do with policy, it’s probably the right course, too. Monetary policy “cannot and should not be the only game in town,” she said, calling for more “productive expenditure — which, in addition to infrastructure, includes R&D and education.” She also called for greater integration of the Eurozone. As for monetary policy, she promised to “continuously monitor the side-effects of our policies” and said the ECB would soon launch the first strategic review of its policy objectives and tools since 2003, but offered no specifics.

Later in the day, Lagarde’s arch-enemy, Bundesbank President (never ECB Governing Council member) Weidmann set out his line in the sand when he said he would object to changing the ECB’s target to a more of a price target, that is, one that sets out a long-term path for prices and accepts an overshoot of the inflation target at some times to compensate for an earlier undershoot. The US is considering such a “make-up” rule, although no decision has been taken.

Mea culpa: One important point I missed entirely last week: Thousands of workers at Canada’s largest rail company went on strike last week. This means shipments of wheat, crude oil and aluminum are grinding to a halt. Estimates are that the strike could cut GDP growth by as much as ¼ ppt if it lasts through Dec. 5th, when Parliament returns from its break. Parliament has the power to order the strike ended, but the first order of business with the new session will be to elect a House of Commons speaker and hold a throne speech. Then the next several days are usually spent debating a response to the speech, so it remains to be seen how soon back-to-work legislation could be passed. CAD negative


Commitments of Traders report

Big reduction in CAD longs, presumably on the back of Senior Deputy Gov. Wilkin’s speech, which was on Tuesday – the day these data are collected. I’d expect to see some of those longs restored, although the aforementioned rail strike may dampen sentiment towards CAD.

Otherwise, NZD is the only one of the currencies that I follow closely that’s near an extreme in positioning. Speculators closed out some of their NZD shorts; I expect that they have further to go. NZD positive

Gold positioning is near and extreme while silver is still quite modest. However, this “buy silver” signal doesn’t necessarily correspond with other signals. The gold/silver ratio at 83.5 is almost exactly at the time-weighted average of its 2018-2019 range (75.8-93.3), so the price action isn’t at an extreme even if positioning is.

Today’s market

Today’s Ifo indices may go some way to offsetting the negative implications of Friday’s PMIs. The Ifo indices are all expected to rise.

In fact, the rise in Friday’s composite PMI for Germany, although slightly below expectations, was still enough to suggest that we could have an upward surprise on the Ifo indices. That could be positive for EUR.

The Chicago Fed National Activity Index (CFNAI) is due out. The CFNAI is different from the indices that the other regional Fed banks announce, such as the Empire State or the Philly Fed index. Those gauge conditions in that particular Fed district, while the CFNAI gauges overall economic activity and related inflationary pressure on a national basis. A positive number corresponds to growth above trend and a negative number, below trend. Although the components have all been previously announced, the indicator is one of the more closely watched among those issued by the various regional Feds. However it’s difficult to interpret any one number, because the figures are so volatile.

This month’s number is expected to be negative once again, although not as negative as before – more or less in line with the three-month moving average. That suggests to me no change in the underlying situation, which would mean no real impact on USD. \

FYI the Atlanta Fed’s GDPNow forecast for Q4 GDP (qoq SAAR) is 0.4%, the New York Fed’s version is 0.7%, and the St. Louis Fed is 1.6%, compared with Q3 GDP of 1.9%. So a slowdown does indeed seem likely, the only debate is how much of a slowdown.

Overnight, New Zealand announces its retail sales figures (inflation-adjusted). Consensus forecasts are based on a rebound in electronic card transactions, a data series that’s already available. They’re expected to be higher than in Q2 but below the trend, continuing the gradual slowdown in consumption that’s been visible for several years now. At its latest meeting (13 Nov), the Reserve Bank of New Zealand said, “Economic growth continued to slow in mid-2019 reflecting weak business investment and soft household spending. We expect economic growth to remain subdued over the remainder of the calendar year.” In other words, the RBNZ is already discounting a below-trend figure, meaning this shouldn’t have any impact on rate assumptions. NZD neutral

Fed Chair Powell will speak at a local Chamber of Commerce dinner in Rhode Island after spending the day visiting a community development initiative with Boston Fed President Rosengren. The market didn’t really react that much to Powell’s Congressional testimonies last week, so there’s little for him to clarify or explain further what he said. Friday’s PMIs and the U of M consumer sentiment index both rose, indicating that there hasn’t been a “material change” in the economy that would require the Fed to change their tune.


FYI this will be the last week for FOMC members to speak before the December meeting media blackout period begins. Aside from Powell, the only other Fed speakers on the schedule are Gov. Brainard (V) later Tuesday. She’ll be discussing the Fed’s policy framework review, so not necessarily related to any immediate changes in monetary policy.



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