NZD higher on spending plans, JPY & CHF off on firmer China PMIs; ISM index, RBA

Rates as of 06:30 GMT

Market Recap

Friday’s market was really quiet. I mean, really, really quiet. One month implied EUR vol reached its lowest level ever at 3.9 vols, vs the previous low of 4.425 hit in June 2014.

NZD was the big mover of the morning after Finance Minister Robertson announced plans to spend more on infrastructure. The size of the package will be announced in a budget policy statement on 11 December. The currency gained as bond yields rose, perhaps in anticipation of greater borrowing needs. The Treasury also said in its November Monthly Economic Indicators Report that economic growth is likely to be below budget forecasts. Most of the move in NZD/USD came this morning, while AUD/NZD had been slipping pretty steadily since Friday morning European time (although it too lurched lower around the time of Robertson’s announcement).

China’s purchasing managers’ indices (PMIs) beat expectations, imparting a “risk on” mood to the markets and leading to a weaker JPY and CHF. Both of the official PMIs, released Saturday were much better than expected. Notably, the manufacturing PMI went back above the 50 “boom or bust” line to 50.2 (it was expected to rise only to 49.5 from 49.3). Non-manufacturing also rose much more than expected (54.4 vs 53.1 expected; 52.8 previous). Monday morning’s Caixin manufacturing PMI also beat expectations, rising to 51.8 from 51.8 (vs fall to 51.5 expected).

In fact, the PMIs for Asia generally signaled that perhaps the worst is over for the global slump. The manufacturing PMIs for South Korea, Japan, Malaysia and Indonesia all moved higher, even though they remained in contraction territory below 50. India’s manufacturing PMI rose to 51.2 from a two-year low of 50.6 a month ago. On the other hand, Taiwan held steady just below the 50 line, while Thailand fell.

A political shake-up in Germany:  Germany’s centre-left Social Democratic Party (SPD) Saturday elected as its leaders two little-known left-wing people who are highly critical of the SPD’s role as coalition partner in Chancellor Merkel’s government. The vote for Saskia Esken/Norbert Walter-Borjans was effectively a vote against the centrist finance minister, Olaf Scholz, and his running mate, who ran on a platform of continuing the coalition with Merkel’s Christian Democratic Union (CDU)/Christian Social Union (CSU). The vote doesn’t necessarily mean the end of the coalition right away, it does seem likely that the SPD will try to renegotiate the coalition agreement. But if no agreement is possible, the SPD could leave the coalition with and thereby bring down the government. If that were to happen, Merkel might stay on for a while at the head of a minority government before holding new elections, possibly in March.

The big question is, would a change in government make it more or less likely that Germany would change its fiscal policy? It’s not clear. In renegotiating the coalition agreement, the SPD could insist on abandoning the ‘black zero’ policy of balanced budgets. Or if the break-up of the coalition allowed the Greens to enter the government, they could push for a more expansionary fiscal policy. That may be why EUR is slightly higher this morning. On the other hand, without Merkel as chancellor, the conservative CDU/CSU could react to the SPD’s tilt to the left by hardening its own position on these issues. Without Merkel, it could be even more difficult than before to find a compromise that both houses of the German parliament could agree on. Personally, I think the increased uncertainty in Germany is EUR negative.

I’m surprised to see GBP so steady this mornig. The polls over the weekend showed a mixed picture. The Conservative lead has been below 10% in five of the last 10 polls, with at least one suggesting that the UK could have a hung parliament (i.e., no party having a majority in parliament). The Conservatives’ popularity is falling in some polls (quite understandable) while Labour’s is generally picking up (quite astonishing, given some of Comrade Corbyn’s idiotic statements plus their rather unbelieveable pledges – but maybe no more unbelievable than the Conservatives’.)

My favorite quote of the weekend: Jo Swinson, leader of the Liberal Democrats, said, “The idea that Brexit is going to be done? We’re like in episode 1 of a 10 season box set, and if you don’t like what you’ve seen up til now, you don’t have to watch the rest.” Unfortunately, I don’t think enough people realize that. If the Conservatives win a majority they will though after Jan. 31st.

Note that Friday’s Commitments of Traders report didn’t come out on Friday because of the Thanksgiving holiday. It will be out tonight.

Today’s market

We get the final manufacturing PMIs for the major economies today, plus the manufacturing PMIs for many of the other countries that haven’t yet announced (at least, for those that are compiled by Markit. Ones that are compiled by other organizations may have different release dates.) The key point here is going to be the Institute of Supply Management (ISM) in the US. That’s got a longer history than the Markit PMI and is more closely watched, I’d say. The ISM manufacturing index is forecast to bounce back up, as did the Markit version of that index, but the ISM is expected to remain below 50. The question is whether the market focuses on the direction (USD-positive) or the number itself (USD-negative). Given the mixed picture here, I suspect it will depend more on how big a surprise this indicator has.

FYI when I wrote my weekly outlook on Thursday, the market consensus for this indicator was 49.6. Now it’s 49.2. The Bloomberg “whisper,” compiled simply by Bloomberg subscribers who care to submit a guess, is an even lower 48.7 (previous was 48.3). In short, expectations have come down a lot. That increases the possibility of a positive surprise.

Overnight, we get the Reserve Bank of Australia (RBA) rate decision. The RBA meets 11 times a year (only skips a meeting in January) so there usually isn’t that much change in the Australian economic situation between meetings, although the fact that much of their important data only comes out quarterly does give some meetings more importance than others. What we did have of interest this time was RBA Gov. Lowe’s recent speech on “Unconventional Monetary Policy: Some Lessons From Overseas.” The lessons we learned from that are:

  1. 1.Australia has not yet reached the “threshold for undertaking QE,” or quantitative easing.
  2. 2.The RBA’s “current thinking is that QE becomes an option to be considered at a cash rate of 0.25 per cent.” (It’s currently 0.75%)
  3. 3.If they decide to do QE, it will be by buying government bonds. “We have no appetite to undertake outright purchases of private sector assets as part of a QE program.”
  4. 4.Negative interest rates are “extraordinarily unlikely.”

    As you can see, after his speech the odds of rates staying unchanged until next June plunged while the odds of two or more cuts jumped, mostly because the odds of three rate cuts rose to 11% from 4%. Still, no scenario has even a 50% probability – the market is undecided.

    The odds of a rate cut at the current meeting are considered low (only 10%), but that jumps to 62% by the time the next meeting rolls around in February, and it’s 73% by April.

    Until then, we have to monitor growth, employment and inflation in Australia and see how they’re going. With the unemployment rate moving up

    and inflation well below the RBA’s target band

    another rate cut seems an eventuality. But not today. AUD neutral

DISCLAIMER

.

The information and opinions in this report were prepared by Marshall Gittler. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, the author makes no representation as to its accuracy or completeness. This report is provided for informational purposes only and does not take into account the particular investment objectives, financial situations, or needs of individual traders. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy.

.

The author is not acting as a financial adviser, consultant or fiduciary to you or any of your agents (collectively, “You” or “Your”) with respect to any information provided in this report. Information contained herein is being provided solely on the basis that the recipient will make an independent assessment of the merits of any investment decision, and it does not constitute a recommendation of, or express an opinion on, any product or service or any trading strategy. The information presented is general in nature and is not directed to retirement accounts or any specific person or account type, and is therefore provided to You on the express basis that it is not advice, and You may not rely upon it in making Your decision.

.

The author may hold positions in any of the currencies that he is writing about. He may also be holding debt or equity securities in any of the markets or issuers he writes on.

.

Hyperlinks to third-party websites in this report are provided for reader convenience only. The author neither endorses the content nor is responsible for the accuracy or security controls of those websites.

.

‘The key is not to predict the future, but to prepare for it.’ Pericles, 500 BCE

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.