Perhaps the most important lesson to learn as a child is how to lose. Failure and the teachable moments from it are essential to progress. Winning similarly requires grace and some sense of duty back to the game and its players. Have markets and politicians learned these lessons? The weekend left many wondering if the inverted yield curve as a predictor of trouble was overstated. The big worries about US/China trade talks grind on but the issue over the US political intrigue of the Mueller investigation into Russian meddling into the election came and went with no particular findings against President Trump. Of course, the Russian planes carrying troops to Venezuela maybe a different story and complication to watch. The UK Brexit plans remain in play with Prime Minister May vowing to quit if she wins parliamentary approval for her plan. Winning by losing is in vogue, like owning an equity put, you have to be quick to capture the moment, as was the case in Europe today. The German IFO today made clear that the PMI flash was not the same as the overall mood for recovery in Europe and so the fears of a much weaker 2Q growth ebb. The first gain in 6-months was due to services not manufacturing. So maybe we have the makings of another recovery out of the ashes of fear that started in December but most of this is about external demand hits and for that, we go back to China. Governor of the People’s Bank of China Yi Gang said at the China Development Forum in Beijing on Sunday that the central bank "has already withdrawn from day-to-day interventions and now more and more market participants are getting used to a flexible exchange rate." The PBOC also drained liquidity overnight. This seems to be counter to the US wishes for a stable rate with more trade talks set later this week with a focus on e-commerce issues. The CNY/USD relationship remains central to understanding the risk mood bounce in Europe. How China stimulus and growth plays out in 2Q will be the key for EUR and USD. Watching 6.60 against 6.75. 

Question for the Day: Do yield curve inversions matter? The signal of the yield curve globally rests on its force in changing policy views of politicians and central bankers. The inverted yield curve in the US remains in play today and it’s going to be the fodder for much of the analyst gloom about 2019. Much of the pressure on global rates is from QE and ZIRP policy outside of the US and so the term-risk premium noise involved in capital flows makes this a less obvious domestic story. There are some other notable points to make about this 2019 inversion as they are not always the predictor of a recession –credit to Charlie Bilello:  

First, the Fed Funds rate is lower than any other such inversion with the average over the last 50 years being 6.2% rather than the present 2.4%. 

Second the chance for a false signal remains. The last such example was 1965-1967 when the US also had a notable deficit issue due to the Vietnam War. Also notable is the length of time between inversion and the actual recession – usually 14 months – making the rest of 2019 more difficult to trade.

Third, the FOMC seems more intent on not starting a slowdown without inflation or any credit bubble, they can ease just as quickly now, as they have learned from previous examples. The Fed doesn’t want to be blamed for killing the economy given the present politics. The problem is that the FOMC still prices in 1 hike for 2020 while the markets prices in 2 cuts for 2020.  This is where the pain trade lives.   

What Happened?

• Thailand election surprise raises questions of voting irregularities. With all but 6% of votes counted, the election commission reported that the pro-junta Palang Pracharat was leading with 7.69 million votes. Pheu Thai trailed with 7.23 million votes. However, based on a Reuters tally of partial results of the 350 constituency seats contested on Sunday, Pheu Thai was on track to win at least 129 and Palang Pracharat at least 102. Another 150 “party list” seats in the lower house will be allocated under a complex proportional representation formula.
• BOJ Harada: QQE improves productivity. “The biggest contribution QQE has made to Japan’s economy was to boost its productivity,” Harada said in a speech at a seminar. “Without QQE, Japan’s jobless rate would not have fallen below 2.5 percent,” said Harada, known as a vocal advocate of aggressive monetary easing on the nine-member BOJ board.
• Spain February PPI up 0.1% m/m, 1.9% y/y after 0.3% m/m, 1.8% y/y – as expected. The ex-energy PPI rose 0.2% m/m, 1.9% y/y after 1.7% y/y. 

• German March IFO jumps to 99.6 from 98.7 – better than 98.5 expected – first gain in 6-months. The current conditions rise to 103.8 from 103.6 – also better than 102.9 expected – while the future expectations rose to 95.6 from 94 – better than 94 expected. In manufacturing, the business climate weakened once again. The manufacturers assessed their current business somewhat less positively. The outlook also worsened. The expectations component fell to its lowest value since November 2012. With declining demand, businesses hardly expect any more increases in production. In the services, the index rose noticeably, mainly as a result of clearly more optimistic expectations. The service providers gave more positive assessments to their already favorable business situation. In trade, the business climate improved. Appraisals of the current situation rose to their highest level since May 2018. Also, the business expectations brightened. Especially the retailers reported a very good current situation.

Market Recap:

Equities: The US S&P500 futures are off 0.1% after losing 1.9% Friday (the worse 1-day fall since Jan 3). The Stoxx Europe 600 is off 0.15% gaining ground after German IFO.  The MSCI Asia Pacific fell over 2% with the ex-Japan off 1.9%. 

• Japan Nikkei off 3.01% to 20,977.11
• Korea Kospi off 1.92% to 2,144.86
• Hong Kong Hang Seng off 2.03% to 28,523.35
• China Shanghai Composite off 1.97% to 3,043.03
• Australia ASX off 1.15% to 6,208.70
• India NSE50 off 0.90% to 11,354.25
• UK FTSE so far flat at 7,206
• German DAX so far up 0.15% to 11,381
• French CAC40 so far off 0.1% to 5,275
• Italian FTSE so far up 0.65% to 21,215

Fixed Income: Bonds are mixed with focus on curves and ECB/FOMC speeches more than German IFO. German Bunds are off 2bsp to -0.03%, French OATs are up 3bps to 0.37%, UK Gilts are up 3bps to 1.04% while periphery is mixed with Italy flat at 2.46%, Spain up 2bps to 1.09%, Portugal up 2bps to 1.28% and Greece off 2bps to 3.76%. 

• US Bonds lower with curve slightly steeper with focus on supply, Fed speakers – 2Y up 1bps to 2.34%, 5Y up 1bps to 2.27%, 10Y up 1bps to 2.47%, 30Y up 2bps to 2.91%. 
• Japan JGBs rally in catch up to US and equity pain– 2Y off 1bps to -0.18%, 5Y off 1bps to -0.19%, 10Y off 2bps to -0.08%, 30Y off 2bps to 0.51%. 
• Australian bonds see profit taking play with focus on equities/commodities– 3Y up 5bps to 1.43%, 10Y up 5bps to 1.81%. 
• China PBOC skips open market operations for 4thday– net drains CNY60bn on the day. Bonds rally sharply in catch up trade – 2Y off 11bps to 2.66%, 5Y off 1bps to 3.01%, 10Y off 2bps to 3.11%. 

Foreign Exchange: The US dollar index is off 0.1% to 96.58. The emerging markets are USD offered– ASIA: KRW up 0.2% to 1132.95, INR up 0.45% to 68.85; EMEA: ZAR up 0.4% to 14.422, RUB up 0.5% to 64.287, TRY up 1.9% to 5.653 – with Erdogan warnings. 

• EUR: 1.1315 up 0.15%.Range 1.1289-1.1325 with 1.1250-1.1420 holding. 
• JPY: 110.20 up 0.25%.Range 109.71-110.24 with EUR/JPY 124.65 up 0.35%. The 110 break didn’t have follow through but opens 108 risks on equity turn about. 
• GBP: 1.3175 off 0.3%.Range 1.3160-1.3220 with EUR/GBP .8590 up 0.45% - May and Brexit still driving with 1.30-1.33 keys. 
• AUD: .7090 up 0.1%.Range .7065-.7097 with NZD flat at .6875 focus is on commodities, China and equities with .7050 pivot still 
• CAD: 1.3420 flat.Range 1.3403-1.3440 with focus on 1.3380 and oil – US rates driving. 
• CHF: .9940 up 0.1%.Range .9932-.9949 with EUR/CHF 1.1240 up 0.15%. Safe-haven demand driving with .9880-1.00 keys. 
• CNY: 6.7120 off 0.1%.Range 6.7040-6.7200. PBOC fix 6.7098 from 6.6944. CNY trading on EUR more than stocks or talk hopes. 

Commodities: Oil lower, Gold higher, Copper up 0.2% to $2.8935. 

• Oil: $59.00 off 0.1%.Range $58.33-$59.17 watching equities with German IFO key, Venezuela story developing - $58-$60 WTI still key – with Brent $66.95 off 0.15% with focus on $66-$68 again. 
• Gold: $1316.90 up 0.35%.Range $1310.60-$1318.90 with $1305 base for $1325 and $1340 again depending on USD and rates. Silver up 0.6% to $15.50 at pivot for $15.80 next. Platinum $851.60 up 0.4% while Palladium off 0.6% to $1506.90. 

Conclusions: Watchful? The Asian selling of risk was notable last night and the conclusions from the weekend and early headlines today is about stability rather than a sharp bounce back in confidence.  Markets like the Fed are data dependent. This is how Chicago Fed President Evans put it. “We have to take into account that there’s been a secular decline in long-term interest rates,” Evans said in comments at the Credit Suisse Asian Investment Conference in Hong Kong, days after the Fed signaled an end to its tightening and abandoned plans for further rate hikes in 2019. “Some of this is structural, having to do with lower trend growth, lower real interest rates,” he said. “I think, in that environment, it’s probably more natural that yield curves are somewhat flatter than they have been historically.” On the sidelines of the conference, Evans told CNBC in an interview that he could understand why investors were more “watchful, waiting and looking,” adding the Fed was doing the same.

Economic Calendar:

• 0630 am Phil Fed Harker speech
• 1030 am US Mar Dallas Fed manufacturing 13.1p 7.0e