Good Morning. Kiwi was the story last night as while the RBNZ kept rates unchanged and cut growth forecasts, they seemed to suggest they were done cutting for this year! Kiwi took off against most. But cutting growth forecasts is spreading and the global recovery may yet be put back on hold (see below). Nothing much from Powell apart from acknowledging the concern over the virus but he is in the dark too. But the USD is still bid but that will only remain the case if growth elsewhere remains weak or as long as US data keeps beating. But that JOLTS data yesterday caught my eye (see below) and if not some weird quirk in the data, may suggest the first cracks are being seen in the US unemployment sector. On top of that we still see stress in the repo market in the US. For now I still see the USD higher and the EUR looks very heavy still against most. I am concerned about the UK/EU stance on the talks and how the games of chicken pan out. That uncertainty may keep GBP capped for now. We get more Powell Q&A today but I don’t expect anything different and the data ticket is very light.

Keep the Faith

Data.. All Times GMT

08:30.. Sweden Riksbank Interest Rate Cons: 0.00% Prev: 0.00%

10:00.. Eur Ind Production m/m Cons: -1.6% Prev:0.2%

Eur Ind Production yoy Cons: -2.3% Prev -1.5%

14:00.. US Monthly Budget Statement Cons: $-7.5bn Prev:$-13.3bn

Speakers:..

09:50.. ECB Speaker: Lane (Dove) fireside chat with Mr Lane at the Fifth European Financial Forum

10:00.. Riksbank Press Conference

13:30.. Fed Speaker: Harker (Very Hawkish) on Economic Outlook. Text: yes. Q&A: audience

15:00.. Fed Speaker: Powell (Neutral) Testifies Before Senate Banking Panel

19:10.. RBNZ Governor at Parliament Select Committee on MPS

Details 12/02/20

Nothing from Powell as the repo stress continues: JOLTS data sends a warning: About that reflation idea:

I guess we could not have expected much from Powell as he and the Fed are as much in the dark regarding the virus as the rest of us but he did acknowledge some of its impact. To wit; “we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.” He may well be right for all we know but the market is convinced that the world’s central banks stand ready to do whatever it takes to keep markets and thus, the global economy, driving forwards; stocks hardly budged through the Powell testimony nut the central banks have little ammunition to deal with a prolonged threat. The fact that he had little new to say seems a little strange to me considering we saw more stress in the repo market, as demand for the Fed’s repo was oversubscribed at a rate not seen since the start of the repo crisis. I think most are still unsure what this means but the ongoing substantial over-demand for term repo (which in February was cut by $5BN from $35BN to $30BN) means that the liquidity crisis that continues to percolate just below the surface of the market and which has clogged up the critical plumbing within the US financial system, is getting worse, not better and today’s massive oversubscription indicates that one or more entities continue to face a dire shortage of reserves, i.e., cash (Unless they are fleecing the Fed).

This from Powell yesterday: “As our bill purchases continue to build reserves toward levels that maintain ample conditions, we intend to gradually transition away from the active use of repo operations. Also, as reserves reach durably ample levels, we intend to slow our purchases to a pace that will allow our balance sheet to grow in line with trend demand for our liabilities”. I am not sure that is what equity investors want to hear but it seems they do not believe him! But then he seemed to suggest that bill purchases may extend into Q2! Markets seem to be convinced that even a 5% dip in the S&P will not be tolerated by the Fed but recent data suggests even a 2% fall in US equities could prompt a big unwind in equity longs. According to the clever chaps at Deutsche Bank: Vol control funds are growing more sensitive and now even a 2% drop in the S&P 500 would prompt those funds to unwind $5B they suggest BUT when are we going to see a 2% drop on SPX? That seems like a crash these days.

Lagarde was unclear on where the ECB is going in my view but markets picked on the fact that she seemed to stress that some normalization may happen but to be honest that seems like a distant dream or hope at best when looking at the EU economy now. There has been a lot invested in the EU on the belief that the catch-up or narrowing to the US economy was upon us but the data certainly does not confirm that at all yet and is partly why the EUR is selling off still and will likely fall further.

The disappointment is palpable and I think the market may still be long EURs and a break of 1.0879 (recent lows) may be seen. German politics are now weighing on the zone along with further poor industrial and manufacturing data from Germany through Spain to France. On Monday, Italy followed Germany and France in reporting dreadful industrial production figures for the end of last year. The coronavirus had had no effect at this point; manufacturing was supposedly picking up again and awaiting a boost from renewed Chinese post-trade war demand. We now see that all of the eurozone’s biggest three economies ended the year slowing sharply. The reflation dream is dying and on top of all this, a slowing Chinese economy is bad news for the EU and if you want a haven from China, then, it is certainly not the EUR and it is probably the dollar. I see the USD higher still.

On a trade-weighted basis, the dollar just enjoyed its strongest week in almost a year and to me the waters of the US are far calmer right now and they have a yield. With more of a closed market, the US is better protected from the manufacturing recession we are seeing globally. Tech companies are also miles ahead on the global stage and still attract capital. IF we do see further stress from the virus, the US looks the safest port on the planet. The EU not only has political uncertainty but what is increasingly looking like a rather weak economy still. On top of all that, Trump will buy more votes and probably win the next election; the spending will continue. Having said that, for the USD to stay up, the data needs to keep coming in strong. But as I have said for a while, there are a few cracks.

JOLTS data doesn’t usually grab the attention but I have been waiting for early indicators for a turn on jobs growth. While one wouldn’t know it by looking at the BLS’ jobs report, which in January showed that a whopping 225K jobs were added, the JOLTS (job openings) report issued a vastly different picture, one which if one didn’t know better would suggest that the US labour market hit a brick wall. Why? Because according to JOLTS, traditionally Janet Yellen’s favourite labour market report, job openings in December plunged by a whopping 354K, from a downward revised 6.787MM to 6.423MM, the lowest monthly total since December 2017! Plus the fact that global data has yet to pick up the full impact of the virus.

Why are employers pulling jobs back? Are margins falling and employment costs rising? I think that may well be the case. The issue here is that needless to say, a nearly 1 million drop in job openings in two months is not something one would see if the economy was firing on all cylinders as the stock market represents every single day.

There is some concern that the two-month drop was so bad that a statistical flaw might have skewed the data, such as some seasonal adjustments gone berserk. But as we will see, the not-seasonally adjusted data looks even worse and it’s not just one month. With hindsight we see that the trend started in early 2019 in small uneven drips, and it didn’t really matter until it suddenly did. On a not-seasonally adjusted basis, job openings in December plunged by 14.9% from December 2018, the steepest since the Great Recession. In total, 1.05 million job openings have disappeared over the period. This was the seventh month in a row of year-over-year declines. Something is not right here and I think it is the flaky BLS at it again. They have historically been caught counting job data badly.

The reason why I bring this up is that Job openings are a first indication of cracks in the employment data. This is because other indicators lag job openings, including at the far end, total nonfarm employment and for now, as we have seen just recently, these other indicators have not yet picked up on the plunge in job openings though some have started to wobble.

Some usual suspects have been seeing job losses like bricks-and-mortar retail, manufacturing, transportation, and oil and gas drilling, as one would possibly expect but there is a concern here that this is spilling into services and that could be a game changer. Job openings have dropped on a year-over-year basis in professional and business services, finance & insurance, and health care! That rings alarm bells to me and jobs data is now on watch. What do we take from this; well, the lag between the first significant declines in job openings and an actual decline in employment, seems to be about four to six months. If this data was skewed by a statistical fluke, the drop will self-correct over the next few months. But if what we’re seeing here are the actual trends in job openings, and they don’t bounce back in a serious manner, we can expect to see declining employment a few months from now.

There has been a lot of talk and investment based on the global recovery or reflation story which seems to be struggling to take hold now. Economic forecasts for 2020 suggest another weak year ahead with little to no improvement from that foreseen in the autumn and forecasts from many governments (especially Trump) seem rather overly optimistic now. The RBA is sending messages of hope that the Oz economy can rebound but I am not sure about that with sentiment still reeling after the fires and the virus issue. The global reflation dream is not coming a reality just yet. The World Bank expects, using prevailing exchange rates, global output to rise from a decade low of 2.4 per cent in 2019 to 2.5 per cent in 2020. The hoped for rebound after the US/China trade deal looks unlikely to happen this year.

The biggest problem globally, is that productivity growth is stalling almost everywhere. The recent virus scare is not helping and will hit s/t data soon but what may help is if central banks try and pre-empt the economic impact and either cut or stimulate. If the virus threat ends soon and the easing remains in place, we could see quite a boost later in the year. But right now, estimates for the largest economies like China and India, are being cut, the UK also. GS cut their Chinese GDP growth to 5.2% from 5.8% prior citing a deterioration in Q1 activity.

But with growth forecasts still rather subdued, it does seem like central banks are taking a dim view of further easing. The Riksbank has taken rates back to zero and interestingly, last night, the RBNZ left the OCR unchanged at 1% and cut its Q1 GDP growth forecast to 0.4% from 0.7%. But RBNZ forecasts also show no chance of rate cut in 2020. NZD appreciated against USD and AUD. NZDUSD charged above 0.6420 and stop covering accelerated toward 0.6477. Across the developed world, with interest rates still close to rock bottom more than a decade after the global financial crisis, there is a limit to what conventional and unconventional policy can do. While there is a belief that the central banks will continue easing in any slowdown, that view is being challenged at some small central banks. Talking of small central banks, the SNB is likely getting frustrated with EURCHF levels again as we test 1.0640. This even as global stocks rise and it will be interesting to see if they give up on their recent intervention. Mind you, with their share holdings now they can probably afford to hold it!

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Strategy:

Macro:.

Short AUD @ .6875 at .6917 (average .6896).

Short USDJPY @ 109.95.. stop above 110.35 (s/t position just in case).

Macro Long FTSE250 20,900

Brought to you by Maurice Pomery, Strategic Alpha Limited.

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