E Markets: Muddling

Best to find some mint and a mortar. This is a muddle-through market with little hard news to move it. Headlines are less dramatic like the price action. This time its US Treasury Mnuchin warning China not to devalue its currency, even as the technicals point to a 7.00 break soon. The IMF wants the governments of the world to pay more attention to their state assets as a source for money rather than new debt. Their blog also highlights the risk to EM but their central forecast of a muddle-through. Other than that markets remain hopeful for a Brexit deal, scared about the Italian Budget and EU, worried about US inflation and the FOMC reaction and waiting for more data to confirm any and all of the above. The overnight lack of fear was different though calling it a calm maybe too sanguine. There is still a lot of technical price pain in this market, which seems to enjoy the consolidation, but fears the next smash of the pestle. For tracking risk mood, stick to GBP with its trade and industrial production pointing to a 0.6% q/q growth in 3Q, and with hopes of a deal before the deadline with the EU on trade, the level of GBP becomes a barometer for the bigger global muddled hope trade. 

Question for the Day: Are we back to USD and debt concerns? The relative calm in markets today ahead of CPI tomorrow and after a modest dip in 10-year yields to 3.20% failed yesterday – all this brings back the focus on US debt and the supply that comes today and tomorrow. The US deficits matter and make US rate hikes that much more difficult for the government. The chart from the Peterson Foundation makes it simple to understand why the mid-term elections and the level of spending matters along with why politics have become so divisive. 

There is no muddle through solution for fixing this situation without political consensus. The PAYGO plans worked to force a process to link debts to growth. This has been broken and the genie won’t get back into the bottle.

What Happened?

  • Australia October Westpac Consumer Confidence up 1% to 101.5 from 100.5 – slightly less than 102 expected. This is a modest rebound from the August-September 5.2% drop. Current conditions rose to 103.6 from 102.5 while expectations rose to 100.1 from 99.2. View on economy 1Y was flat and 5Y out dips to 94.9 from 95.2. Sentiment for households with mortgages fell 6.4% in the last 2 months and house price expectations are the lowest since records started May 2009. 


  • Japan August core machinery orders +6.8% m/m after +11% m/m – better than -4% drop expected. The 3M average rose to 2.8% from -0.9% in July. The Cabinet Office upgraded its assessment from the previous month, saying, "Orders shows a sign of picking up." Previously, it said, "The pick-up in machinery orders is stalling." Orders from the manufacturing sector rose 6.6% on month in August, the second straight rise after +11.8% in July, while orders from the non-manufacturing sector excluding those for power generation and ships also rose 6.0% on month, the second straight rise after +10.9% in July.
  • RBA Coombs: Sees signs of economic states convergence. Coombs' speech centred around the improvement in economic conditions in Western Australia, which means there is now less variation in the economic outcomes between different states in Australia. Overall, there was an optimistic tone to the speech with respect to all the three key perspectives she discussed: business investment, labor markets, and housing markets.
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Gary Anderson 4 months ago Contributor's comment

The other Fed people have said neutral is not good enough. Are they aiming for just south of 4 percent?