Shake it like a Polaroid Picture. That is the advice for today as markets wait for political clarity on Brexit, more on US/China trade talks and China stimulus plans, more on how emerging markets are going to stop the rising USD trade despite the sharp drop in global rates. The picture on global growth is mixing badly with the policy uncertainties. Back to the headlines for a quick refresher on why yesterday’s risk appetite developed into indigestion – China industrial profits fall to May 2009 lows, RBNZ flips to easing bias, Thai election results delayed until May 9 due to irregularities, Japan Nikkei poll shows 25% of business leaders see global economy worse in 6-months, Italy business, and consumer confidence drop – as there is no end to the recession there and the government plans more spending– while Sweden’s NIER sees the economy cooling down. ECB Draghi puts the best spin he can on it all with vows to reach the 2% target, even as he will exit without ever raising rates. The pain trade in shorting TRY continues with the overnight rate over 600%. The LATAM sogginess in EM FX shown by ARS closing 1.5% weaker at 42.7 continued with ZAR breaking key levels, MXN over 19.20 and elections for India and Indonesia remain in focus. The pain trade in EM isn’t unique, as the move up in the USD against NZD stands out overnight.  Rates matter everywhere and the pushing forward of rate cut expectations there from June 2020 to November 2019 make the NZD carry trade wobble particularly against the USD. This is worth watching in the context of China and Asia growth rebound hopes. The 200-day at .6929 and 55-day moving average at .6824 look important for measuring any such mood shifts, but .70 and .6450 are the big picture levels to watch. 

Question for the Day: Is Europe the weak spot for global growth? The news from overnight would suggest that China rather than Europe is the bigger risk as industrial profits plummet there while French consumer confidence rises a smidge even as manufacturing confidence falls. The charts on China for March will be watched closely and the NBS PMI will be the first showing of what maybe the start of more global growth fears or hope. The China 1Q Beige Book said recovery is unmistakable with investment and hiring both improved. However, Trade is the focus for growth still– particularly as it reflects back to Europe and US. 

The economic focus this week in Europe, beyond the Brexit dramas, and the Italy/French deals with China, is on the ECB Watchers 20thanniversary conference and policy response functions at the FOMC and ECB. ECB Draghi’s speech today is notable and worth highlighting as it further expands on the central banks forecast logic and policy responses. The compare and contrast against the Chinese plans for rebalancing seems important. Here are my take-aways: 

1)  Soft patch still. Draghi argues this is an extended soft-patch, not a recession: “So we are now seeing a more persistent deterioration of external demand. But a “soft patch" does not necessarily foreshadow a serious slump. During the four euro area business cycle expansions since 1970, there have been 50 soft patches– defined as a two-quarter growth slowdown – and only 4 recessions.”

2)  Investment plans are key. “But for now expectations for investment remain relatively robust. Though professional forecasters have slightly downgraded their projections for investment growth this year – from around 3% to around 2.5% – the fundamentals are in place for investment to rebound, if global growth stabilizes.”

3)  Employment-consumption relationship holds. “The resilience of the employment-consumption relationship helps explain why, even as the manufacturing outlook has worsened, services have remained relatively robust. Services is the most labor-intensive sector and is associated closely with consumers’ expenditure.”

4)  ECB will continue to act if needed to reach 2% HICP target. “Our current reaction function is well designed to respond to further delays in inflation convergence. In such a situation, just as we did at our March meeting, we would ensure that monetary policy continues to accompany the economy by adjusting our rate forward guidance to reflect the new inflation outlook…. the ECB will adopt all the monetary policy actions that are necessary and proportionate to achieve its objective. We are not short of instruments to deliver on our mandate.”

The key point for today is that there is more doubt about the ECB policy action TLTRO-III being sufficient than the PBOC/Xi actions to restart the China economy. Whether this proves true over the next quarter will matter significantly to all markets. 

What Happened?

• RBNZ leaves rates unchanged at 1.75%- as expected – but shifts to easing bias. The statement made clear the outlook shift: “Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down. Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy. The global economic outlook has continued to weaken, in particular amongst some of our key trading partners including Australia, Europe, and China. This weaker outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.”

• Korea March consumer confidence rises to 99.8 from 99.5 – better than 99 expected – 4thmonth of gains. The CSI for future rose 2 to 94 but current conditions fell 2 to 91. Income outlook was flat at 98 and future spending plans rose 1 to 110.
• China Jan-February industrial profits -14% y/y to CNY708.1bn after -1.9% y/y - largest drop since May 2009.  For all of 2018 industrial profits were +10.3% y/y. Profits in the auto industry fell 42% y/y Jan-Feb followed by profits in iron producers -34.5% and chemicals fell 27.2% y/y. The broad manufacturing sector saw profits drop 15.7% y/y.    NBS spokesman Zhu Hong attributed the profit decline partly to price drops in the autos, oil refining, steel and chemicals industries, which in turn had an impact on profits. The profit decline was also partly a result of slowing industrial output and sales, Zhu added.

• France March consumer confidence up to 96 from 95 – as expected. The current financial situation was unchanged at -26 while future view improved to -11 from -13. Unemployment outlook rose to 22 from 12 and future standard of living dipped to -30 from -29.  Savings plans fell to 0 from 1 while purchase plans rose to -19 from -21. 
• Italy March consumer confidence drops to 111.2 from 112.4 – weaker than 112.0 expected – with all components lower.  The current conditions fell to 107.8 from 109.4, future outlook 115.9 from 116.9. The personal economic view drops to 106.8 from 108.2 while overall economy view fell to 123.9 from 126.4. 
• Italy March manufacturing confidence drops to 100.8 from 101.6 (revised from 101.7) – weaker than 101.3 expected. Order books fell to -11 from -10.5, production outlook drops to 3.5 from 5.6. Construction sector rose to 140.3 from 135.5 with orders up to -20.2 from -21.3 and employment 5.6 from 0.3. Services rose to 100.1 from 98.3 with orders 0.7 from -3.5 and outlook 9.7 from 5.3. Retail held flat at 105.5 with sales dropping to 10.4 from 13.3 and future expectations higher at 23.7 from 20.7.  
• Sweden March KI business confidence drops to 101.7 from 101.9 – with services balancing against manufacturing downturn. Manufacturing fell 5.5, construction rose 1.1, services rose 5.1. 

Market Recap:

Equities: The US S&P 500 futures are off 0.15% after a 0.72% gain yesterday. The Stoxx Europe 600 is off 0.35% to 375.90 after opening bid while the MSCI Asia Pacific was off 0.1% despite China bouncing. 

• Japan Nikkei off 0.23% to 21,378.73
• Korea Kospi off 0.15% to 2,145.62
• Hong Kong Hang Seng up 0.56% to 28,728.25
• China Shanghai Composite up 0.85% to 3,022.72
• Australia ASX up 0.07% to 6,217.60
• India NSE50 off 0.33% to 11,445.05
• UK FTSE so far off 0.3% to 7,173
• German DAX so far off 0.2% to 11,390
• French CAC40 so far off 0.4% to 5,285
• Italian FTSE so far off 0.1% to 21,109

Fixed Income: SF Fed Daly talked about inflation asymmetry risks and her dovish tilt helped rally overnight. Risk off mood growing in equities added to EU open with a good German auction helping extend rally along with month-end buying – German 10Y Bund yields off 3bps to -0.04%, France off 2bps to 0.33%, UK Gilts off 2bps to 0.99% while Periphery mixed – Italy up 7bps to 2.54%, Spain off 2bps to 1.08%, Portugal off 3bps to 1.27% and Greece up 1bps to 3.79%. 

• Germany sold E3bn of 10Y 0.25% Feb 2029 Bunds at -0.05%with 2.1 cover and 1bps tail – previously 2.01 cover and 0.3tail. 
• US Bonds are bid in bull curve steepening with focus on risk mood, 5Y sale, Fed speakers – 2Y off 7bps to 2.19%, 5Y off 5bps to 2.14%, 10Y off 4bps to 2.37%, 30Y off 2bps to 2.85%
• Japan JGBs bid with focus on US/China– 2Y off 1bps to -0.17%, 5Y flat at -0.18%, 10Y off 1bps to 0.07% and 30Y flat at 0.54%. 
• Australian bonds are bid with RBNZ driver. RBNZ rate cut market expectations moves to Nov 2019 from June 2020.  10Y NZ rates fell 12bps to 1.78% while 3Y AUD off 6bps to 1.38% and 10Y off 6bps to 1.75%. Australia sold A$900mn of 10Y 2.75% Nov 2029 bonds at 1.8158% with 2.81 cover – previously 2.156% with 3 cover. 
• China PBOC skips open market operations for 6th day– liquidity neutral. China bonds mixed – 2Y flat at 2.64%, 5Y off 1bps to 2.97% and 10Y up 1bps to 3.10%. 

Foreign Exchange: The US dollar index fell 0.15% to 96.75 on the day. In emerging markets, USD is bid – Asia: KRW off 0.25% to 1137.65, INR up 0.15% to 68.865; EMEA: RUB off 0.7% to 64.875, ZAR off 1.4% to 14.601, TRY off 1.9% to 5.429

• EUR: 1.1275 up 0.05%.Range 1.1247-1.1286 with 1.1250 still important but 1.1185 risk back in play with US data/rates key. 
• JPY: 110.30 off 0.25%. Range 110.24-110.71with EUR/JPY 124.40 off 0.1%. Tempered by equities with 109.80-110.80 keys. 
• GBP: 1.3205 flat. Range 1.3166-1.3215 with EUR/GBP .8535 up 0.1%. Basically untradeable with Brexit and politics fluid 1.30-1.3350 keys.
• AUD: .7100 off 0.5%.Range .7092-.7142 with NZD off 1.35% to .6810. All about RBNZ and dovish tilt with .6880 pivot opening .6750 next.  
• CAD: 1.3410 up 0.2%.Range 1.3377-1.3413 with focus on oil, NAFTA, politics and 1.3380 base for 1.3450 breakout. 
• CHF: .9930 off 0.1%.Range .9905-.9966 with EUR/CHF 1.1200 off 0.1%. Whiff of fear driving with 1.1180 key on cross .9880 key for $. 
• CNY: 6.7230 up 0.15%.Range 6.7100-6.7240 with PBOC fix 6.7141 from 6.7042 – with focus on talks/stimulus plans vs. EUR and US rates. 

Commodities: Oil lower, Gold higher, Copper off 0.4% to $2.8810. 

• Oil: $59.48 off 0.75%.Range $59.42-$60.07. API reported a 1.93mb build in crude adding to downside pressures when a 0.5mb rise was expected. The $60 cap broke but remains important for WTI. Brent $67.82 off 0.2% with eyes on equities/OPEC April meeting cancelation. 
• Gold: $1318.00 up 0.25%.Range $1312.20-$1318.80 with USD and rates driving with $1325 key for $1340 next. Silver up 0.1% to $15.44, Platinum up 0.3% to $862.40 while Palladium off 1.9% to $1486.80 with bubble talk and focus from auto execs. 

Conclusions: Is the fear of a recession in the US at a peak? The market expectations for a FOMC rate cut in 2020 contrast sharply with the Fed dot plots. The clash of data dependent policy against 10-years of forward guidance as a tool seem to be in play as Fed policy is now more uncertain than it was during the QE years. The path to normal has been a clear-cut one as well and the last 3 months prove that the end of this is difficult. The present FOMC neutral views are tempered by the uncertainty of economic forecasts everywhere. What seems more obvious is that markets have shifted away from fears about inflation to fears about growth and that confidence shift hasn’t yet been reflected in FOMC thinking. Listen closely to Fed speakers for any such shift as that is where policy and markets collide. 

Economic Calendar:

• 0700 am Kansas City George speech
• 0830 am Canada Jan trade deficit C$4.59bn p C$3.85bn e
• 0830 am US Jan trade deficit $59.8bn p $57.5bn e
• 0930 am ECB Mersch speech
• 1000 am Mexico Feb unemployment 3.6p 3.5%e
• 1000 am US 4Q current account deficit $124.8bn p $129.5bn e
• 1030 am US weekly EIA crude inventory -9.589mb p +0.5mb e
• 0100 pm US 5Y note sale