This past week saw monetary policy decisions from two of the world's most important central banks: the Bank of England (BoE) and the Federal Reserve (Fed). While both central banks held rates steady as expected, the ramifications of the decisions are much further reaching.
In the US, the Fed doubled down on its dovishness by removing all projected hikes in 2019 and signaling it would end its balance sheet normalization program this September as it acknowledged economic headwinds and uncertainties. Interestingly, the Fed left its inflation projections the same which, in our opinion, signals that the Fed could be prepared to intentionally overshoot its 2% inflation target. This implies that the Fed could be on the cusp of changing the way in which it looks inflation.
In our view, the timing of this dovish pivot coming right before the Fed's conference in June is likely more than just a coincidence. Only time will tell whether or not the Fed changes its inflation reaction function. But for now, U.S. rates have dropped across the board with the 3 month/10 year yield curve inverting for the first time since before the Great Recession, further fueling global growth concerns.
Over in the U.K., the BoE also left rates unchanged but mainly for idiosyncratic reasons. While recent economic data has been positive, it's really all about Brexit and the uncertainties stemming from extreme divergence in the implication of the outcomes. As it stands, the EU has given the U.K. an unconditional extension to April 12, the day the U.K. must decide whether or not to take part in the EU elections. If the U.K. refuses to take part in the EU elections, the EU has indicated that a further extension is impossible. In the case where PM May's WA passes, the U.K. will have until May 22 to exit the EU.
Clearly a lot depends on the outcome of a third meaningful vote and while the fear of a no-deal exit could sway some votes, the numbers still remain stacked against the PM. Beyond the main vote, if held, also keep an eye on amendments from anti-no deal MPs. Parliament has pulled some control from the PM and could move to take even more.
We have maintained in past commentaries that the path to an ultimate soft Brexit would be noisy and see nothing that has changed our view.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 0.90%
Expectations for rates to remain unchanged at 1.75%
Expectations for rates to remain unchanged at 1.75%
Expectations for rates to remain unchanged at 8.25%
Expectations for rates to remain unchanged at 6.75%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
Expectations for a slight decline from 1230k to 1225k
Expectations for a slightly smaller trade deficit
Expectations for gains for both of 0.3%
New Home Sales
Expectations for a gain to 620k from 607k
Canada Trade Data
Expectations for another large trade deficit
Expectations for a gain of 0.1% following -0.1%
Expectations for an unchanged report at 98.5
Expectations for a sharp increase to 0.6%; YoY 1.5%
German Jobs Report
Expectations for the UR to fall from 5.0% to 4.9%
Asia/Japan, and New Zealand
Japan Jobs Report
Expectations for the UR to remain at 2.5%
Japan Ind. Product.
Expectations for CPI to decline from 0.3% to 0.2%
New Zealand Trade
Expectations for a smaller trade deficit
The EUR has continued to consolidate largely between $1.1300 and $1.1500 since the middle of November. Short term trends continue to alternate between a bullish and bearish bias lasting a few days to a week or so; most recently, the euro has been weakening on the back of very weak PMI and manufacturing data. Continue to expect more range bound markets with a slight bias toward euro weakness; much of the euros movements will still depend on how the GBP will react to the ongoing Brexit, U.K. Parliament, and EU negotiations.
It is hard to put into words the complexity and nuances of the Brexit negotiations and the impact on the GBP as the official March 29 deadline approaches. The ebbs and flows of the parliamentary maneuvers and votes are taking their toll on the psyche of the market. Markets continue to remain modestly constructive and optimistic for a deal as the deadline or a short term extension seems to be in the offing. The GBP will continue to reflect the continued optimism/pessimism of the most recent headline.
While the correlation with the JPY and “risk-on” or “risk-off” strategies is not as strong as in 2018, the correlation remains workable and bears monitoring. The JPY rose sharply during December as equities and interest rates cratered; as stocks have rebounded along with interest rates in the New Year, the JPY has weakened. This past week, U.S. interest rates collapsed and the JPY has appreciated again. Continue to expect more of the same bipolar responses.
RBC, our mothership, had forecast a range for the CAD for Q1 of 1.3600/$ to 1.3100$; at the time they made that forecast in December, the CAD was very weak and had been on a sharp downtrend. Since the beginning of the New Year, the CAD has rebounded but settled into a tighter range of 1.3450 – 1.3250/$ over the past three months reflective of the directional changes in equities and commodity prices. Continue to expect more consolidative and range bound markets this week.
The CNY has been benefiting from a number of fronts since the beginning of the year. The Chinese government and central bank have been using all monetary and fiscal means possible to keep the economy liquid and afloat. Continued positive expectations surrounding a successful conclusion to the U.S. – China trade deal also spurred demand for CNY. Over the past weeks, the CNY has consolidated its gains as the trade negotiations drag on; expect more sideways trading until more news is known about the trade negotiations.
The AUD reflects the recent bipolar nature of global equities, interest rates, and commodities prices and trends. December was a "risk-off" month and the Aussie weakened sharply reflecting all that pessimism. January and February saw global equities rebound and the Aussie has followed suit; over the past month, equities have been consolidating and so has the AUD. Expect more sideways trading this week.
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