Archives of “September 2019” month

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Forces of Movement at the Start of Q4 19

  
  Analysis
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The world’s largest economy appears to have grown by about 2% in Q3 at an annualized pace, the same as in Q2, and in line with what many Fed officials understand to be trend growth.  The strength of the US labor market underpins consumption, the powerful engine of the US economy.  The latest readings of both the labor market and consumption will highlight the economic data in the week ahead.
The strength of the recent housing data (starts and sales) suggest that the decline in interest rates is beginning to have some traction in the particularly sensitive sectors of the economy.  It seems that the economic conditions that foster residential investment also favor auto sales.   US light vehicle sales have averaged 16.93 mln a month a seasonally-adjusted annual basis.  In both 2017 and 2018 average sales averaged about 17.15 mln.  Lower interest rates and greater average incentive (industry estimates average in September of $4.2k compared with $4.0k in September 2018) would favor a gain on the 16.97 mln pace seen in August.  However, there is a quirk in the calendar that warns the report may disappoint. The weekend before Labor Day (September 2) was captured in August’s report.
Auto sales and jobs growth are cyclical.  The 12-month moving average of US vehicle sales peaked in February 2016 at 17.57 mln.  With all the revisions, it may be hard to keep track of it, but the 12-month average of non-farm payroll growth peaked in February 2015 at 260k.  In a revealing but straightforward way, it illustrates where the US economy is in the business cycle.  US job growth is slowing.  The average monthly job growth this year has been 158k.  In the first eight months of 2018, an average of 234k jobs were created.  The quarterly average has steadily fallen this year, and it will again if the jobs growth reported on October 4 is less than 178k.  The median forecast in the Bloomberg survey calls for 140k after August’s 130k.  Weekly jobless claims were flat between the survey periods.  Some survey data has warned of weakness.  The GM strike and government census hiring could impact the September jobs report in opposite directions.
The takeaway message is lower interest rates (10-year yield is about 30 bp lower year-over-year) and lower oil prices (~15% year-over-year) maybe helping the US economy extend its recovery in the face of the end of the fiscal stimulus, tax hikes (on imports), and trade certainties and uncertainties.  The economy may show sufficient rigor and price pressures sufficient firmness that a consensus toward a standing pat after two cuts may gain currency.  At the same time, the Fed will likely provide some details of its assessment of the banking system’s reserve demand at the October meeting.  Given the extent of the confusion among investors, it would be instructive for the Fed to separate its operational issues, the plumbing, if you will, from the conduct of monetary policy proper.  Arguably a way to do that is not to announce a change in both simultaneously, i.e., at the October meeting.
When the US money market calm returns as we expect, then let’s assume for the sake of the exercise that the fed funds effective rate averages 1.85%.  A 25 bp rate cut would bring it to 1.60%. The implied yield of the January 2020 futures settled last week at 1.5750%.   At this juncture, the market appears to accept the Fed’s framing of the issue as a midcourse correction that will extend the record-long recovery.
II
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Big Tech wins US talent war as Trump visa policy hurts Indian IT

  
  Analysis
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While the immigration policies of U.S. President Donald Trump give the impression of slamming the door on foreign talent, a closer look at visa data shows that the big four American tech companies are accelerating their drive to attract and retain highly skilled professionals.In contrast, the biggest losers are Indian information technology companies, such as Cognizant Technology Solutions, Infosys and Tata Consultancy Services, who had long been the biggest employers of foreign IT talent in the U.S.At issue is the H-1B visa, the permit that allows foreign talent with specialized skills to reside and work in the U.S. for up to six years. People from India, especially with computer skills, account for the biggest percentage — 74% — of H-1B visa applicants, followed by those from China at 11%.
Workers who enter the U.S. under the H-1B have the opportunity to apply for permanent residency and start their own business. The prospect of the American dream has enabled the U.S. to attract some of the best minds in the world and has been the engine of innovation in the country.
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CFTC Commitments of Traders: Canadian dollar buyers bail

  
Analysis, Forex
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Forex futures positioning data for the week ending September 24, 2019 from the CFTC:

Forex futures positioning data for the week ending September 24, 2019 from the CFTC:
  • EUR short 61K vs 69K short last week. Shorts trimmed by 8K
  • GBP short 81K vs 86K short last week. Shorts trimmed by 5K
  • JPY long 13K vs 24K long last week. Longs trimmed by 11K
  • CHF short 11k vs 5k short last week. Shorts increased by 6K
  • AUD short 47k vs 54k short last week. Shorts trimmed by 7K
  • NZD short 36K vs 30K short last week. Shorts increased by 6K
  • CAD long 5K vs 20K long last week.  Longs trimmed by 15K
There were some substantial moves across the board in this week’s data. There was no overarching theme in the US dollar. The loonie has stubbornly held onto longs but I suspect the jump in oil prices and lack of a corresponding climb in the loonie may have sent some specs to the sidelines — that data certainty hasn’t eroded.

Reminder: A week-long Chinese holiday starts on Tuesday

  
  Analysis

That could make for a quiet week next week

The US leak about Chinese investment limits is a bit of a dirty trick because of the timing of trading next week.
Chinese markets are open Monday then close until the following week. That will leave traders in a jam and surely scare away some of those on the long side.
The Shanghai Composite made some headway after the drop in early August but last week it formed a double top and it was already headed lower before the latest headlines.
That could make for a quiet week next week

US considering limits on US portfolio flows into China

  
  Analysis
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That would be big

Trump and Xi
That’s not a good sign for trade talks.
Bloomberg reports that the White House is discussing ways to limit US investors portfolio flows into China in a move that would be akin to capital restrictions.
It would be a major escalation in the trade war.
They’re also considering de-listing Chiense companies from US exchanges, examining limits on the Chinese companies included in stock indexes managed by US firms.
The report says Trump has given a greenlight to the discussions but that any plan would be subject to his approval.
This sounds a bit like a leak to put pressure on China but the trade is to de-risk and ask questions later. Chinese stocks are getting hit particularly hard.
I find it hard to believe that we’re headed towards a true, lasting trade deal when this kind of thing is on the table.
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