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Monday, April 3, 2017


 The Wall Street Journal last week featured a story on “soft” data (consumer sentiment) vs. “hard” data (PMI) and asserts it’s the NY Fed’s weighting of soft data that gets it to 3% in Q1 GDP, while the Atlanta Fed likes the hard stuff and gets only 0.9%, A recent WSJ survey gets 1.9% with a high end of 3.6%. “If the soft data is overstating the actual picture in the economy, there will be plenty of disappointment to go around.” The hard vs. soft narrative seems to come from Morgan Stanley this time, but has been reinvented many times before.

The lesson for us this week is that we get hard data today—Markit final manufacturing PMI (53.4 in the flash). We also get the ISM manufacturing PMI, expected down at 57.0 from 57.7. Construction spending is hard (expected up 1% after -1%). Are vehicle sales hard? Probably. Expectations are for 17.3 million from 17.58 million last time. And keep in mind that earnings season will begin in about ten days. Earnings tend to be ignored by the bond and FX gangs, but an unhappy surprise can always get noticed. At a guess, pessimism from the Atlanta Fed will get a lot of attention this week.

Even the Congressional Budget Office is depressed by the US economic outlook:

One bit of hard data is the Commitment of Traders report in futures showing speculators cut the net dollar longs in the latest week. Euro net shorts are the lowest since May 2014 at a mere 7900 contracts, while GBP and JPY shorts were cut, too. This bodes ill for a true dollar recovery but also reveals a lack of consensus of the next direction. Q2 could be a real mess. SocGen’s Juckes said of the sterling position: "The short is finally shrinking, but is still huge. That probably leaves us in no man's land for a while longer but we still like euro/sterling longs for the long run, pairing two 'cheap' currencies and buying the one that isn't sticking pins into a wax image of its economy."

OK!, but that neglects the upcoming French elections in April. Let’s assume LePen gets beaten back, as seems likely. The euro can rally quite a lot on removal of this obstacle. After all, the eurozone is getting higher growth and perhaps higher inflation than the US, although last week’s eurozone inflation data was disappointing.

Besides, the outlook for the US has been enveloped in a cloud of Trumpian smoke. There may be no fire at all in the White House. Saxo Bank thinks almost everything in the US is overpriced--government sector, inflation, recession risk and the reflation/Trump trade. Chief economist Jakobsen told Bloomberg “Unless there is a huge increase in immigrants coming to Europe, the European elections are a non -event. Right now the cheapest and most mispriced assets in the world are European assets, European currency, French equities. If it weren’t for the French and German election discount, the euro would have been trading at $1.12-$1.13 already.”

In a nutshell, the market is overestimating political risk in Europe and underestimating the chances of a US recession.

We don’t see a US recession, although it can be argued the bond gang continues to worry about it and this coming Friday’s payrolls, expected to show a drop in March on bad weather after a balmy Feb, might look like confirmation. But that part about overestimating political risk is probably true. It’s never a good idea to extrapolate from a sample of one, but the Dutch election told the tale—unbridled xenophobic populism is making itself unpopular. And the ECB is down but not out:

Meanwhile, we have a resurrected worry to occupy us this week—the meeting on Thursday or Friday (accounts differ) between Trump and Pres Xi. Trump says he has “great respect” for Xi and “great respect for China.” “I would not be at all surprised if we did something that would be very dramatic and good for both countries and I hope so…. China has great influence over North Korea. And China will either decide to help us with North Korea, or they won’t. And if they do that will be very good for China, and if they don’t it won’t be good for anyone.”

Trump is hoping for a new trade deal with China that will induce China to take control of N. Korea in some way. And he is threatening a US war on N. Korea if China declines. This should be a Holy Cow! Moment but it’s failing to strike fear into anyone’s heart, presumably because Trump has lost the power to impress with exaggerated statements. Imagine if someone like Nixon had said such a thing! Or any other president in recent or distant times. Threatening war is a big deal. The markets don’t believe him. Trump has lost credibility by crying wolf too often and too loudly. But watch out. Trump likes to keep his promises, even if he later lies about what he promised. In this instance, he is not saying he will invite NATO or anyone else to tackle N. Korea—only China, and if not China, the US will act unilaterally.

 What does this mean for the dollar? We saw the dollar gain on the first and second Iraq wars. It’s not clear it will benefit this time. Underneath all this is a Trump administration wish for a weaker dollar, which it thinks will promote exports. If we get war-mongering plus fresh comments about a too-strong dollar, watch out.


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