Mr Market Waits for Other Shoe to Drop

Between Syria, trade tensions, and the US special investigator into
Russia’s attempt to influence the US election, market participants are cautious
as they wait for another shoe to drop.
  The US equity market recovery
yesterday has short coattails as markets in Asia and Europe struggle. Bond
yields are mostly softer, and the US 10-year note yield is dipping back below

The US dollar is mixed, with small gains against the dollar bloc and
small losses against the euro, yen, and
  The sense is that whichever
shoes drop; the headline risk is dollar
negative.  The euro closed above CHF1.18 yesterday for the first time
since January 15 and is at its best level since the SNB gave up its
franc-cap.  Elsewhere the Russian ruble continues to fall (~-1.3%), but
the Russian bond yields are little changed.  According to central bank
figures, foreign investors owned a record 34% of Russian bonds.  The
sanctions announced before the weekend spurred the sales of the bonds and

The US reports March CPI, and the
Fed releases its minutes from the March FOMC meeting.
  The risk is on
the upside of the market expectation for a flat CPI, which due to base effects,
would rise by 2.4% from a year ago, up
from 2.2%.  The core rate is expected to have increased by 0.2%, and this
would lift the year-over-year rate above
2.0% for the first time in a year as some factors that the Fed has suggested
were transitory are proving so.  

The FOMC minutes are drawing more attention than usual.  The
March meeting was Powell’s first and a rate hike was delivered.  However, ideas that the minutes will reveal
much insight into what officials were thinking about the rising trade tensions
or the thrust of fiscal policy, which the CBO estimated this week would produce a $1 trillion deficit in 2020,
two years earlier than previously expected, may be disappointed.  

The minutes of central bank meetings should not be confused with an
objective record of the meetings.
   They are purposefully
crafted as part of the official communication to help shape investor
expectations.  This is to say that
they are a policy tool.  Increased protectionism poses a downside risk to the economy.  Not much more can be said
at this juncture.  The same thing is true of the fiscal position. It poses
risks, and it is too early to judge the economic consequences in full, but it
will likely bring the Fed closer to its mandates of full employment and price
stability (at it defines it).    

As the forum continues in China, the new PBOC Governor wasted no time,
following President Xi’s speech yesterday to flesh out more details of the
These include quadrupling the Shanghai-Hong Kong stock connect as
of May 1.  Limits on foreign insurers and ownership of securities firms
will be reduced.  Yi Gang pushed
against “big bang” ideas, noting that it is not China’s way, which is
cautious and gradual. 

 Even if Xi offered old wine in new
skin yesterday, the specifics today reinforce our sense that China is pursuing
a three-prong strategy in dealing with the US trade stance.
First, it flexes some of its considerable economic heft.  Second, it
challenges the unilateral US actions at the WTO, perhaps in concert with
others.  Third, there are several economic
and financial reforms that are
in China’s own immediate interest, and
it will enact these.   

The yuan both on and offshore was
little changed.
  Chinese shares edged higher (0.5%).  The MSCI
Asia Pacific Index was fractionally lower, as is the MSCI Emerging Markets
Index.  China reported softer than expected inflation.  March PPI
rose 3.1% year-over-year, down from 3.7% in February.  Consumer price
inflation slowed to 2.1% from 2.9%.  This
is the fifth month; producer price
inflation has slowed.  The slowing of consumer price inflation seems to be
largely unwinding of the Lunar New Year-related
jump.  The quarterly average has edged higher for the third consecutive
quarter, but the pace in Q1 was exaggerated

There have been a few economic
reports, even if there is little impact in the markets.
reported stronger than expected core machine orders (2.1% vs. expectations
-2.5%) and followed the 8.2% rise in
January.  Officials will find encouragement in the data, which suggest the
underlying economic dynamics are still intact.  The capital spending cycle is supported by exports and the
semiconductor fabrication facilities being build abroad (e.g.,

France’s Industry Sentiment Indicator edged lower, consistent with other
survey data.
  In March it stood at its lowest level since January
2017.  Italy reported a slightly better than expected February retail
sales, which rose 0.4% after a 0.5% decline in January.  

The EU announced that it would add
to its major data reports a new measure that excludes the UK from
This is in
preparation for the UK leaving the EU at
the end of next March.  UK data today mostly disappointed, but the
February trade deficit fell.  The
overall trade balance fell to GBP965 mln.  It has been rarely smaller than
this since 2000, and it is usually a

Like other countries in Europe, the UK’s industrial output figures
disappointed in February.  UK output rose 0.1%.
  The market was
looking for something closer to 0.4%.  It follows a 1.3% rise in January. 
However, this overstates the strength.  Manufacturing output itself fell
0.2% in February following a revised flat report in January (initially
0.1%).  Separately, construction spending fell 1.6% after January’s 3.1%
slide.  Economists had expected an increase. 


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