Morning Commentary: Rocky Mountain High

Foreign Exchange - Morning Commentary
Rocky Mountain High
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Later today, Fed Chair Jay Powell is scheduled to speak in Denver in what will be his first substantial comments since last week’s surprisingly weak US economic data.  Markets will clearly be focused on Powell’s interpretation of recent economic trends in the US.  However, on a broader level, central bankers around the world seem to be in agreement around the need for fiscal stimulus.  While there are numerous reasons for fiscal stimulus, here are some of the more persuasive ones.   
  • Low/negative rates late in the business cycle leaves economies vulnerable to shocks.  Monetary policy is usually the “first responder” to economic shocks.  With rates low, there is little monetary ammunition left.  Fiscal stimulus would reduce the burden on monetary policy and allow for higher interest rates. 
  • The lack of fiscal support increases dependence on unconventional policies.  In an ironic twist, the resistance to fiscal stimulus from fiscal conservatives has actually pushed the world further into radical territory as depleted monetary policy pushes further into unchartered territory.
  • Fiscal stimulus is more effective on the margin.  Low/negative interest rates diminishes the marginal benefit of further monetary easing.  Conversely, these same low rates actually makes fiscal stimulus more effective as the risk of crowding out private investment is minimized. 
Curiously, if the case for fiscal stimulus is so strong, then why is it so difficult to achieve?  Politics plays a big role.  In Germany, where there is fiscal space, fiscal conservatism is deeply embedded into the government with three kinds of limits on fiscal policy.  In the US, politics also plays a key role as neither side wants to allow the other side a victory ahead of the 2020 election.  Moreover, the impeachment process makes bipartisan cooperation less likely and raises the prospect of a government shutdown.  Finally, in the UK, the politics of Brexit complicates the government’s ability to deliver fiscal help. 
Ultimately, despite the strong case for fiscal stimulus, the world likely remains overly dependent on monetary policy.  Given the political landscape, significant fiscal stimulus is unlikely absent a recession, and will likely come with longer than normal delays given political constraints. 

  • US announced that it will blacklist 28 Chinese technology companies based off alleged human rights violations against Muslim minorities in Xinjiang.  Officially the US says that these actions are unrelated to trade talks but the optics are bad as the announcement came on the first day of low-level meetings ahead of the principal level talks scheduled for this Thursday and Friday.  Data-wise, Chinese services PMI came in weaker than expected.     
  • US PPI data missed estimates, coming in at -0.3% against estimates for a 0.2% print. 
  • German industrial production data for August came in at 0.3% versus expectations for 0.0% increase.
  • Brexit hopes continue to fade with PM Johnson telling Germany’s Merkel that a Brexit deal is essentially impossible, putting the UK on track for early elections.
  • Japanese investors continue to be strong buyers of US Treasuries, purchasing 1.9 trillion yen worth of USD denominated bonds.  This follows up 2.6 trillion yen worth of purchases in July.  Additionally, the US and Japan formally signed a limited trade deal that opens Japanese markets to US farmers.
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