Good Morning: The Long & the Short of it and The Bigger Picture - 20 February 2019 - ADM ISI
08:26 (45 minutes ago)
- Digesting poor Japan Trade, weak Oz Wages and somewhat hawkish comments
from Fed's Williams; awaiting UK CBI Industrial Trends, FOMC minutes and
Brexit and UK party political developments; Germany 5-yr, US 2-yr FRN
- Japan Trade: export data echo orders and other anecdotal evidence, rise
in exports to USA mainly paced by autos ..... (please don't mention tariffs!)
- FOMC minutes: discussion on balance sheet reduction key, Williams comments
underscore tail risk for disappointment on mooted 'reflation' trade
- UK: CBI manufacturing survey seen weaker, but totally subordinate to
May meeting with Juncker, speculation on Tory breakaway and general
The January FOMC minutes will be the main event of the day. Ahead of that, there are Japan Trade, Australian Wages and South African CPI to digest ahead of the UK CBI Industrial Trends survey, and the central bank speaker list has ECB's Praet, and Fed's Daly and Kaplan, while Germany sells EUR 4.0 Bln of 5-yr and the US re-opens the current 2-yr Treasury FRN. European companies dominate the earnings run, featuring Glencore, Iberdrola and Lloyds, while the US has Agilent and CVS Health. On the political front EU ambassadors discuss the current Brexit status, and there will as ever be a focus on US/China trade negotiations, as well as the de nouveau focus on the risk of US imposing tariffs on autos. In terms of the UK CBI Industrial Trends survey, the expected dip in Orders to -5 from -1 is hardly surprising given the narrative on Brexit and the risks for UK manufacturing, and would in truth hardly signal that the wheels are "falling off", while prices are seen at 16 vs. 18, which is essentially very neutral in terms of the inflation outlook on any historical comparison. But with UK PM May due to meet EU's Juncker today and chatter about some Tory MPs announcing that they are breaking away today (and even some general election speculation), it seems unlikely that the CBI survey will garner much market reaction, as evidenced by the 'apropos almost nothing' short squeeze in GBP FX rates yesterday. Elsewhere, the South African Budget will be closely watched for what 'solutions' it proposes for the more than very beleaguered Eskom and South African Airways, and what is proposed to try and invigorate a very moribund economy, above all given a spectacularly high 27.1% Unemployment Rate. Unsurprisingly the overnight Japan Trade data reinforced the impression that its exports is experiencing some major headwinds to external demand from Asia, above all China, and Europe, and the comfort of the rise in Exports to the US is less encouraging given that the bulk of the rise is accounted for by a rise in Auto Exports. Much also seems to be being made by some commentators and newswires about the reported US demand that any trade agreement with China contains an FX "non-manipulation" clause. Please excuse me, but why on earth would anyone have expected anything different given that it was one of the key changes in the USMCA? Be that as it may, it did prompt a modest spike higher in the CNY.
** U.S.A. - January FOMC Minutes **
- The message of a "patient pause" in terms of assessing the economic outlook, and an appropriate rate trajectory will doubtless be very clear, but it is the discussion on the balance sheet reduction programme which will be the primary point of interest. . As noted on Friday the key signal change over the past week was about the balance sheet reduction (QT) programme with Mester, Kaplan and Brainard offering a variety of views. But assuming the QT programme is going to be wound down, the question then is: what pace of 'taper' might be applied, and when the process will got under way. A consensus on this is still being formed. There should also be some clues offered as to how this might be interfaced with its rate policy, particularly any hints that that rates could still go up (if the economic outlook improves, even if QT is being wound down, which would be less 'dovish'. There is a further issue related to whether it would want to change the composition of its balance sheet, i.e. perhaps using the opportunity to 'unload' the majority of its MBS holdings in favour of a much higher proportion of US Treasuries, which would in turn have significant implications for the pricing of 'spread products'. Yesterday's speeches by Mester and Williams certainly suggest that a) the Fed will make clear that it still sees the next move in rates as up, and b) Williams comments looking for a further reduction in the balance of ca. $600 Bln imply a taper-less end to QT ($50 Bln per month for a further 11 months would total $550 Bln). As such the key tail risk for markets seemingly discounting on a central bank 'reflation' trade and a positive resolution to China/US trade tensions is substantive disappointment. The focus will then turns to the rest of this week's speeches: Friday - Clarida, Williams, NY Fed no. 2 Simon Potter, Quarles, Bullard and Harker all speak at conferences on: a) the Fed's balance sheet and b) quantitative tools for monitoring the economy. Next week, Powell testifies on the economy and monetary policy to House and Senate committees ("Humphrey-Hawkins") on 26 & 27 February. As previously noted, a look at the attached chart of the Fed's balance sheet underlines just how modest in proportionate terms the reduction has been, which continues to beg the question about whether G3 central banks will actually be able to escape the shackles of their post-GFC unconventional monetary policy measures.