E Markets: Exhaust

The exhaustion of the week should not be ignored. Sure we get the jobs report, and its as usual all-important to understanding the risk/rewards of the weekend and week ahead. Either there is wage inflation in the US or there isn’t. Higher real growth with a stronger consumer balance sheet may make the flurry of worry about the FOMC reaction to stocks reverse. The noise of weather in the report is always a concern and one snowflake doesn’t make a blizzard. The ADP miss yesterday puts the whispers closer to 185,000 NFP rather than 200,000. There are overnight, plenty of stories that make for a smog filled day even before the US labor report. First is that China and the US are still talking and that the US trade deficit yesterday made clear that tariffs haven’t really changed things yet. 

Second is that US energy independence makes the OPEC issues even more difficult. The US is now net exporting oil and refined fuelThird is that the US rate curve inversion is less scary– as more analysts argue its about 3M-10Y not 2Y to 5Y that matters. Finally, we also got a host of little data stories that were mixed showing weaker Japan household spending and weaker German industrial production –all of which makes the higher global growth story into 2019 look harder to believe unless you see China and the US jumpstart things. The most interesting moves in markets – and there weren’t many overnight – come from the UK as Brexit politics and odds get reflected in Gilts and the GBP. All of which puts the risk barometer of GBP/JPY as my favorite to watch into the weekend as it captures oil, trade and politics all in one. This is still a bear market for risk but we should all learn to enjoy the bounces and not to breathe the exhaust. 

Question for the Day: Is the unwind of the FOMC hikes justified? The short answer is yes – but it’s not stock markets. There are two drivers for the market unwinding Fed hike fears – oil and financial conditions. Moving from normalization to neutral means the FOMC is in data reaction mode and it will wait and see if they think the kink in the 2-5Y rate curve and the noise of the financial conditions suggest we are closer to neutral at 2% than 3%. The shifting bets on the FOMC hit the USD and helped the equity market yesterday. The bounce back in equities has put in a double bottom formation for risk. The FOMC reaction function isn’t just about inflation from wages, it’s also about oil. The lower prices at the pump will help 1Q growth and its going to matter to the outlook for pass-through. Perhaps we all are getting the Powell S&P500 put wrong and its really a WTI put that he has with crude at $50 being the neutral rate. 

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