In the markets, sometimes good news is bad news and bad news is good news, but sometimes good news is good news too. In the coming week we may have a mix of “bad news is good news” together with “good news is good news” that will help to boost risk assets again.
The “bad news is good news” category is headed by China, where the news is starting to be bad indeed. The recent weaker-than-expected Q3 GDP figure has been followed by other bad news. Notably, in the past week not only did the official manufacturing PMI fall more than expected, but among the sub-indices, the “new export orders” plunged.
As you can see, the export order PMI is a fairly good leading indicator of growth in exports. It portends a sharp slowdown in exports over the next three months, as might well be expected given the current trade turbulence. Couple with the sharp decline in the stock market – although it’s up about 5% from the recent lows, it’s still down some 27% from the highs hit back in January – the outlook for a further slowdown in exports and therefore in the real economy is likely to add some urgency to the government’s efforts to come up with measures to support the economy. This should be risk-positive in the long run.
The market thinks that 7.00 is a major resistance line for USD/CNY (green line, inverted). The high back in 2016 was 6.9757. It’s still below that at 6.9370 or so. If it does go through that key point, then we can expect to see further outflows from China, which would be likely to push USD up further.
In the “good news is good news” category, we had some optimistic hints about Brexit on Wednesday, but it looks like those sparks of hope were extinguished on Thursday. There were press reports that the UK and EU had reached a tentative agreement on allowing UK banks to have access to the single market even after Brexit, but EU Chief Negotiator Michel Barnier said those articles were “misleading.” You can see from the graph below how important financial services (the blue bar) are to the overall UK surplus in trade in services. An agreement there would definitely be bullish for GBP and indeed for risk assets around the world, as it would lessen the impact of Brexit on global finance.
This week: US mid-term election RBA, RBNZ, FMOC
The economic calendar is quite light in the upcoming week, as is usual for the second week of the month. Attention will no doubt focus instead on the US mid-term election and the three central bank meetings: the Reserve Bank of Australia (RBA) on Tuesday and the Reserve Bank of New Zealand (RBNZ) and US Fed’s Federal Open Market Committee (FOMC) on Thursday.
The election promises to be riveting. The polls seem quite close in many areas. It looks as if the Democrats will take over the House of Representatives while the Republicans will retain control of the Senate, but then again, the polls also showed Hillary Clinton winning, Brexit being defeated, David Cameron not winning a majority, etc. If the Democrats do win the House, then they are sure to launch investigation after investigation of Trump. They probably will not try to impeach him unless they control the Senate too, but expect a lot of fireworks. Plus more infrastructure spending, since that’s probably the only thing that the Democrats and Trump can agree on (infrastructure does not include building walls on the Mexican border).
The key thing will be how the stock market reacts to the election. Frankly, I think many investors and Wall Street denizens are getting tired of the increasingly hostile atmosphere in Washington and are hoping that the Democrats will get in, at least in the House, and restore some measure of checks and balances to the government, as was originally planned. In any case, not much important legislation has passed so far, and so the prospect of not much getting done in the next two years through the legislature probably won’t spook the markets.
As for the three central bank meetings, no change in rates is expected at any of them, but the market will be looking at them closely to see if they will follow other recent central banks, such as the Bank of Canada and the Bank of England, in taking a slightly more hawkish view.
First the FOMC. Having hiked at their last meeting in September, there’s virtually no chance that they hike again this time. Most of the Committee members we’ve heard from recently have said some variant on their mantra, “some further gradual adjustment in the federal funds rate will be appropriate.” “Gradual” in this case means once a quarter, not every meeting.
The focus then will be on any changes in the statement. I doubt if there will be many changes at all, because the economic situation hasn’t changed that much. There was a slight slowdown in US inflation since the last meeting, but all measures remain at or above the Fed’s 2.0% target, so they won’t have to change the language there. The purchasing managers’ indices fell somewhat but remain in territory that signifies a healthy expansion, while Q3 GDP came in above expectations, so no need to change the phrase that “economic activity has been rising at a strong rate.” With few if any changes likely in the statement and no press conference afterwards, I expect this to be a comparatively uneventful FOMC meeting. If anything, the “steady on the current path” conclusion is likely to bolster the dollar, because there may be some people who think they’ll waver because of the stock market’s fluctuations. What’s the saying? “I pity the fool who thinks that.”
Similarly, neither the RBA nor the RBNZ meetings are expected to result in any move in rates. To be more exact, the market doesn’t think a hike in Australia is likely for another year, while in New Zealand, which doesn’t have contracts going out that far, the market sees zero chance of a rate hike up to next March – and does see a small (9%) possibility of a cut by then.
The inflation trend in the two countries has been different recently – Australian inflation came in slightly weaker than expected and in any case has decelerated, while New Zealand inflation beat estimates and accelerated sharply. But at the end of the day, they’re both at the same rate, 1.9% yoy, which does not necessitate a change in either direction. The RBA targets inflation of 2%-3%, while the RBNZ targets 1%-3%, with a focus on the midpoint of 2%. So for both, they’re still a bit under the minimum that they’d be looking for in order to even thing about tightening. Of course, since it takes some time for monetary policy to work through to an economy (estimates are around three quarters), most central banks like to tighten policy pre-emptively, but after so many years of below-target inflation, I can’t imagine any central banker thinking that way nowadays. At most I would expect some tweaks from their statement but no change in the overall stance, meaning I don’t see that much impact from the meetings.
Aside from that of course we’ll be watching for any new Brexit rumors or leaks. They’re bound to come and they’re bound to be denied.
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