Summary of Our Macro Views

Summary of Our Macro Views

Given what we see as an increased noise to signal ratio in global financial markets recently, it may be particularly helpful to summarize our views.

1.  We remain dollar bulls on a medium- and longer-term basis, but recognize that stale longs are bailing, and new momentum shorts are being established.  

2.  Since the disappointing US September jobs report, the news stream chopped the greenback’s underlying support.  The pendulum of market sentiment has swung hard against a rate hike not only this year, but pushing it into Q2 16.  The downshift in job creation has been echoed with the disappointing retail sales data.  The Beige Book also picked up some deterioration.  Nine of twelve districts reported modest or moderate growth, down from eleven previously, and the language seemed less optimistic.  Two Federal Reserve Governors, Brainard and Tarullo, have come out strongly opposed to a hike this year.  These are more important dissents than regional presidents, all of whom do not vote.  Going forward, the views of the Fed’s leadership will be particularly important.  Dudley speaks today.  He had tipped investors off early that a September rate hike had become “less compelling”.

3.  The central dollar bullish narrative was predicated on divergence.  The divergence has two phases.  The first phase is developments abroad.  Many major central banks are still easing policy, most notably the Bank of Japan and the European Central Bank.  There is scope for additional easing in China.  Australia, New Zealand, Sweden and Norway may not have finished their easing cycles either.  The second phase is the Fed raising rates.

4.  The first phase is lasting longer than we had thought, but it is continuing.  The ECB has already signaled that its asset purchase program is flexible.  It could be extended, expanded, and/or its composition changed.  It is already experimenting with changing its operations (moving toward reverse auctions rather than bidding in the market).  The ECB downgraded its growth and inflation forecasts, and earlier today ECB’s Nowotny noted that even core inflation is below target.  He suggested that more tools may be needed.  The ECB meets on October 22.  We suspect that a consensus is still being forged, and while Draghi may sound dovish, the ECB may not take fresh action.  If it does move, it may simply extend the current program, which had a soft end date September 2016.

5.  The appreciation of the euro is not particularly helpful for the ECB.  On a trade-weighted basis, it is at the upper end of where has traded since the second half of January.  It is up 5.5% off its March lows.  Beyond $1.15, the market is looking at the August 24 spike to almost $1.1715.  The $1.1810 area corresponds to a 38.2% retracement of the euro’s decline that began in earnest in spring 2014.  There is also talk of interest in the $1.20 strikes on a two month view.  On the downside, the loss of $1.1350 would be the first sign that the euro move is tiring, but it may take a break of the $1.1250 area undermine the technical tone.

6. The Japanese economic data has disappointed, and many anticipate that the world’s third largest economy contracted in Q3.  Data will not be released until the middle of November.   Many anticipate the BOJ will increase its monetary support at its policy meeting at the end of the month, which is also when it raised its target to JPY80 trln from JPY60 trln last year.  However, the BOJ’s Kuroda, and the recent BOJ minutes gave no hint that policymakers were close to such a decision.

7.  The dollar has been confined to a fairly narrow trading range against the yen since late-August.  The symmetrical triangle pattern that had appeared to be carved out moved to close to the apex to be valid, but the spring continued to coil.  The Bollinger Band had narrowed to levels seen only a few times in the past, suggesting a big move was in the offing.  Today the dollar approached JPY118, its lowest level since August 24, when it spiked to almost JPY116.  Technically, a break now of JPY118 could spur a move to a marginal new low (~JPY115.50), and possibly JPY113.00.

8.  The key level to watch in the 10-year US Treasury is 1.90%. This was the low yield in August and again earlier this month.  In the S&P 500, the 2020 level is important.  It has been flirted with on an intraday basis, but a close above it is needed to lift the tone.

9.  Pushing out the expected Fed lift-off eases a weight on emerging markets.  The gains in the CRB Index are also broadly constructive.  On the other hand, the weaker US and Chinese growth profiles do not bode well.  In addition, and in contrast to the CRB Index, the Journal of Commerce/ECRI Industrial Price Index is sitting it its trough with a six-year low recorded last week.

10.  China has succeeded in stabilizing its equity market and spurring a bond market rally.  Nearly every week, officials are announcing new initiatives to make the yuan more accessible.  This week it has announced plans to extend the hours of currency trading in Shanghai to cover the European session and the North American morning.  It has closed the gap between spot and the central reference rate and between the onshore and offshore yuan.  The odds appear to be shifting in favor of the inclusion of the yuan in the IMF’s SDR basket, which is expected to be decided next month (though implementation has been delayed until September 2016).