Markets Mark Time Ahead of Brexit Summit

  • US rates remain in limbo even as equities rally
  • UK reported softer than expected September CPI data
  • The EU summit in Brussels will take place today
  • South Africa August retail sales are expected at -0.1% y/; Argentina September CPI is expected to rise 40.1% y/y

The dollar is mixed against the majors as markets mark time ahead of the Brexit summit in Brussels.  Stockie and Kiwi are outperforming, while sterling and Loonie are underperforming.  EM currencies are mixed too.  THB and IDR are outperforming, while ZAR and MXN are underperforming.  MSCI Asia Pacific was up 0.8%, with the Nikkei rising 1.3%.  MSCI EM is flat so far today, with the Shanghai Composite rising 0.6%.  Euro Stoxx 600 is down 0.2% near midday, while US futures are pointing to a lower open.  The US 10-year yield is flat at 3.17%.  Commodity prices are mostly higher, with Brent oil down 0.2%, copper up 0.7%, and gold up 0.2%.

US rates remain in limbo even as equities rally.  After soft US data earlier in the week, we finally got a strong JOLTS reading that suggests the labor market remains tight.  US equity markets rallied but the rates markets hardly reacted.  We continue to believe that US rates and the US rates outlook will resume their climb, but this consolidative period is going on a bit longer than we’d like.

The euro continues to trade heavily after yesterday’s failure to extend gains above the $1.16 area.  We need to see a break below $1.15 to signal an end to this current bounce.  Elsewhere, sterling also feels heavy and is probing the downside as Brexit uncertainty continues. Here, a break below $1.3050 would signal a deeper move lower.  Lastly, USD/JPY is struggling to extend its bounce off the 111.65 low on Monday.  We need to see a break of the 113 area to suggest that this bounce is sustainable.

During the North American session, the US reports September housing starts and building permits.  Starts are expected to fall -0.5% m/m, while permits are expected to rise 2.0% m/m.  FOMC minutes will also be released, while Brainard is the only Fed speaker today.  Note that Bloomberg’s WIRP shows market odds of a December hike are still quite high at 76%.

Eurozone reported final September CPI.  Headline was revised up a tick to 2.1% y/y, while core was steady at 0.9% y/y, both as expected.  Next ECB meeting is October 25.  No change is expected then.  Indeed, the ECB is expected to affirm its forward guidance, with QE to end this year and rate hikes to comments sometime after next summer.

The UK reported soft September CPI data today ahead of retail sales data Thursday.  The readings were softer than expected, with headline rising 2.4% y/y and CPIH rising 2.4% y/y.  Both decelerated from August and comes after labor market data yesterday that showed job losses for the first time since October 2017.

Short sterling futures implied yields have backed off modestly in recent days and today’s data added to the trend.  They now show the market is fully pricing in the next 25 bp hike by June and the one after by March 2020.  We think this trajectory assume some sort of Brexit compromise is reached.  To us, a no deal hard Brexit poses downside risks to the economy.  Next BOE meeting is November 1, no change is expected then.

The EU summit in Brussels will take place today.  Despite some reports that it would be canceled, both sides are forging ahead.  Guests will start to arrive at 6 PM local time (noon ET), with Prime Minister May scheduled to speak at 7 PM (1 PM ET).  Markets will likely be very nervous as her dinner speech at the Salzburg summit was widely panned.  Apparently, she gets no dinner and leaves while the EU leaders then take part in a working dinner.

A variety of outcomes are possible.  In the simplest terms, the EU could cancel the emergency Brexit summit planned for November or they could decide to go ahead with it.   Given either of those outcomes, then May’s cabinet allies could decide to support her or to pull their support.  Game theory suggests a negotiated solution leads to the best outcome for both, but the Prisoner’s Dilemma warns that it is easy to get the non-negotiated solution that is worse for both.  To be continued.

South Africa August retail sales are expected at -0.1% y/y vs. +1.3% in July.  Instead of monetary policy, all eyes are now on fiscal policy under new Finance Minister Mboweni.  He will present his mid-term budget statement on October 24.  While he will be hamstrung by the weak economy, Mboweni needs to make a strong statement to maintain market credibility.

Argentina September CPI is expected to rise 40.1% y/y vs. 34.2% in August.  Under the new monetary policy framework, the central bank now targets monetary aggregates rather than inflation.  Yields on LELIQ 7-day notes climbed this month but have stabilized around 72%.  Some semblance of stability is forming in Argentina, so recent measures are finally paying off.