The trade wars are escalating and other countries are responding that they may impose retaliatory taxes on US goods. The immediate reaction was for a weaker dollar, but all other things equal, an import tax should reduce demand for imports and thus for foreign currencies, causing the dollar to rise. Lower imports in the US leads to a smaller US trade deficit, which means lower trade balances outside of the US.
Trying to gauge what happens with currencies necessitates not thinking in terms of single causes. The dollar is just one side of a currency pair, so we must also consider what happens in the rest of the world if global trade falls. I would expect any slowdown in global growth to disproportionately affect the rest of the world, leading to weaker foreign currencies, ie a stronger USD.
Peter Brandt’s tweet came across my desk earlier this week and on further investigation makes for a compelling pairs trade.
In addition to the largest speculative short positioning in silver’s history, the gold silver spread is at multi year highs and currently sits at 82 which means the price of gold is 82 times that of silver. About 30% more than the 10 year average. Buying silver whilst simultaneously selling gold is the trade of the month.
Previous week: 19 March 2018 – 23 March 2018
RBA monetary meeting minutes—Tuesday 20 March 2018
Weak wage growth, weak inflation.
Key sentences from the minutes:
- Wages growth had remained low. The wage price index had increased by 0.6 per cent in the December quarter and growth over the year had increased slightly to 2.1 per cent.
- Financial market pricing continued to imply that the cash rate was expected to remain unchanged during 2018, with a 25 basis point increase expected in the first half of 2019.
- In considering the stance of monetary policy, members noted that overall conditions in the global economy had continued to improve. The upswing had been broadly based and global spare capacity had continued to fall. Many advanced economies had been growing at above-trend rates and unemployment rates were below estimates consistent with full employment. The pick-up in the global economy had contributed to a rise in oil and other commodity prices over the preceding year. Nonetheless, Australia’s terms of trade were expected to decline over the following few years but remain at a relatively high level.
- Globally, inflation remained low, but there had been some signs of inflationary pressures building. Further inflationary pressures were in prospect in the United States, where fiscal policy was expected to be more expansionary in the context of limited spare capacity. This had led to some adjustments to financial market pricing, most notably an increase in longer-term bond yields in the advanced economies.
- Employment had grown strongly and the unemployment rate had fallen over the preceding year. However, the improvement in overall conditions had not yet translated into a definitive pick-up in wages growth, which remained low. Forward-looking indicators suggested that spare capacity in the labour market would continue to decline gradually over 2018 and, as a consequence, wages growth was expected to rise gradually.
- Over 2018, GDP growth was expected to exceed potential growth and CPI inflation was expected to increase gradually to be a little above 2 per cent.
- Members observed that, on a trade-weighted basis, the Australian dollar remained within its range of the preceding two years but that an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than forecast.
- The Board decided to leave the cash rate unchanged at 1.5 per cent.
UK CPI—5.30pm 20 March 2018 Tuesday
As suspected previously, 3% is truly a ceiling. UK inflation rose +2.7% in February vs a year earlier which was lower than +2.8% expected. January’s inflation was +3%. There is now much less urgency / need by the 9 member BOE to raise interest rates. Brexit will continue to be the committee’s narrative for keeping the bank rate at +0.50% now that runaway inflation woes is now all but disappeared.
US Crude oil inventories—10.30 am 21 March 2018 Wednesday
US crude inventories DECREASED by -2.62 million barrels on the expectation of +3.25 million increase. Baker Hughes US oil rig count increased by 4 from 800 to 804. Oil production was 10,407k barrels per day for week ending 16/03/2018, an increase from 10,381k barrels per day in the previous week. US oil production having overtaken Saudi Arabia continues to push for new highs. The rise in rig count is attributed to the strong correlation to the price of oil. The head on battle between US and OPEC continues. Frackers are churning out their rigs while OPEC is keeping a lid on production.
Image taken from Zerohedge:
FOMC economic projections, statement, Federal funds rate, press conference—22 March 2018 2am Thursday
The FOMC raised the Federal Funds rate by 0.25% from 1.25% – 1.50% to 1.50% – 1.75% as expected. Economic projections were made more bullish which sort of contradicts the changes made in the FOMC statement. Dot plots too were made more bullish.
FOMC Statement from 21 March 2018:
Changes made 31 January 2018 to 21 March 2018: Solid à Moderate / Moderated
- January: “the labor market has continued to strengthen and that economic activity has been rising at a solid rate.” March: “the labor market has continued to strengthen and that economic activity has been rising at a moderate rate.”
- January: “Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low.” March: “Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.”
- January: “Janet L. Yellen, Chair” March: “Jerome H. Powell, Chairman”. Ouch. Janet got replaced.
FOMC Economic Projections of March 2018:
GDP growth, core PCE, and the Federal Funds rate were all revised upwards while unemployment rate was revised downwards. Their revisions all reflect the committee’s increased bullishness on the US economy.
3 hikes (total including today) for 2018. Median: 2.125% (range 1.625% to 2.625%); prior 2.125%
3 hikes for 2019 (up from 2) – 2019 2.875% (range 1.625% to 3.875%); prior 2.688%
2 hikes for 2020 (up from 1) – 2020 3.375% (range 1.625% to 4.875%); prior 3.063%
RBNZ monetary policy summary, official cash rate—22 March 2018 4 am Thursday
Official cash rate was left unchanged at 1.75%.
Monetary policy statement of 22 March 2018: Key sentences with changes made
- March: “The outlook for global growth continues to gradually improve.”
- February: “While global inflation remains subdued, there are some signs of emerging pressures. Commodity prices have increased, although agricultural prices are relatively soft.” March: “While global inflation remains subdued, there are some signs of emerging pressures. Commodity prices have continued to increase and agricultural prices are picking up.”
- March: “Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth. Labour market conditions are projected to tighten further.”
- March: “CPI inflation is expected to weaken further in the near term due to softness in food and energy prices and adjustments to government charges. Tradables inflation is projected to remain subdued through the forecast period.”
- March: “Non-tradable inflation is moderate but expected to increase in line with increasing capacity pressures.”
- March: “Over the medium term, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2 percent.”
- March: “Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”
Bank of England official bank rate, monetary policy summary—8pm 22 March 2018 Thursday
Although the bank rate was left unchanged, the vote count raised an eyebrow. Just one eyebrow though. 2 hawks, Ian McCafferty and Michael Saunders decided to vote to raise the bank rate by 25 basis points. The monetary policy committee is made up 7 doves and 2 hawks. Raising of the bank rate will take 3 more doves to cross over to vote for the increase. A rate hike in May (next meeting) has already been fully priced in.
Taken from Zerohedge and RanSquawk:
Brexit: Maintains view on Brexit that was stated in the February release by stating ‘Developments regarding the UK’s withdrawal from the EU – and in particular the reaction of households, businesses and asset prices to them – remain the most significant influence on, and source of uncertainty about, the economic outlook’. Although did acknowledge that since the previous meeting, a draft withdrawal agreement between the UK and EU had been agreed ahead of the EU council meeting on March 23rd.
Data: Overall has been broadly consistent with the MPC’s view set out in the QIR
Inflation: Inflation is expected to ease further in the short term but remain above the 2% target.
“As in February, the best collective judgement of the MPC remained that, given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon. All members agreed that any future increases in Bank Rate were likely to be at a gradual pace and to a limited extent.”
Growth: Prospects for global growth remain strong. Q4 GDP was revised lower to 0.4% with components suggesting less rotation towards net trade and business investment than anticipated in February, albeit could be subject to revision. Activity indicators suggest underlying Q1 2018 growth is similar to that of Q4 2017.
Wages: Pay growth continued to pick up. The firming of short-term measures of wage growth in recent quarters and a range of survey indicators suggests pay growth will rise further in response to the tightening labour market; providing increasing confidence that growth will pick-up at target consistent rates.
Slack: Maintains view on slack that was stated in the February release by stating that the steady absorption of slack has reduced the degree which it is appropriate for the MPC to accommodate an extended period of inflation above the target.
|Name||Voting Record||Dove / Hawk|
|Mark Carney||1 to increase, 49 to maintain, 1 to reduce||Dove|
|Ben Broadbent||1 to increase, 74 to maintain, 1 to reduce||Dove|
|Sir Jon Cunliffe||0 to increase, 46 to maintain, 1 to reduce||Dove|
|Sir David Ramsden*||0 to increase, 5 to maintain, 0 to reduce||Dove*|
|Andrew Haldane||1 to increase, 38 to maintain, 1 to reduce||Dove|
|Ian McCafferty||16 to increase, 44 to maintain, 1 to reduce||Hawk|
|Michael Saunders||5 to increase, 8 to maintain, 0 to reduce||Hawk|
|Silvana Tenreyro||BOE: 1 to increase, 5 to maintain, 0 to reduce
Bank of Mauritius: 0 to increase, 8 to maintain, 3 to reduce
|Dr Gertjan Vlieghe||1 to increase, 22 to maintain, 2 to reduce||Dove|
|Dove – Hawk Count||7 Doves 2 Hawks|
Sir David Ramsden on 25th February 2018 said that “relative to where I was, I see the case for rates rising somewhat sooner rather than somewhat later.” His words seem to imply that he is now striking a hawkish stance. However, I do not believe his hawkishness. In the meeting in November 2017, he was part of the minority that voted not to raise the bank rate, not to lift the foot off the accelerator when inflation was at 3%. Even though his public statement he made last month was hawkish, it did not deter him from voting with the majority to maintain the bank rate. He could have followed through with his words and voted with the two real hawks on the committee to raise the bank rate but he chose not to. Similar to Andrew Haldane, Sir Dave Ramsden is a dove in hawk clothing.
Omnibus spending bill (USA)
“The centerpiece was a big increase in US defense spending to US$700 billion, up US$61 billion, and a 10 per cent hike in domestic spending, which would rise to US$591 billion.”
Such a steep price tag for “American Leadership”
Given that President Trump earned an economics degree from the Wharton School of the University of Pennsylvania, he definitely knows that there are no winners in a trade war. Unfortunately, he doesn’t care. His trade war with the rest of the world, if dragged on for months and years will without a doubt stall the US economy.
Japan core inflation hits 1%!!
After lowering the bank rate to -0.1%, having a 0% target in 10 year Japanese Government Bond by buying paper in the boat load, and buying all those ETFs, the Bank of Japan has just reached a milestone! Core inflation hits 1%!! 1% more to go till it hits their mandated target of 2%! Way to go Kuroda!
Coming week: 26 March 2018 – 30 March 2018
US Crude oil inventories—10:30 am 28 March 2018 Wednesday
Inventories will continue to build up, oil production to rise, and crude prices will consequently fall.
Trade Ideas (+ watch list)
Nasdaq-100 is at the trend line
USD/JPY continues to sell off towards 101 support
USD/CAD long at support of 1.2900