Japanese FX market participants are not treating the yen as the usual safe haven

Outlook:

The US delivers existing home sales and the PMI after a series of PMI's from abroad earlier today. The WSJ forecasts existing home sales to slide back to an annual pace of 5.43 million from 5.54 million the month before, ho hum. The Markit Feb flash manufacturing index is "expected to tick up to 51.5 from 51.9 at the end of January." Aha! We found a typo in the WSJ. Nine to 5 is not up, it's down. Tradingeconomics.com confirms the Jan manufacturing PMI was 51.9 but below 52.4 reported in December.

The eurozone PMI seems okay but look under the hood and it's not. Included in details are that new orders dropped at the slowest in 15 months and that was driven by domestic demand. Export orders fell "sharply and supply delivery times lengthened with delays for inputs the most widespread since December 2018, mostly due to chain issues arising from the coronavirus outbreak," . The euro may have gotten a reprieve on the seemingly good data, but it's too soon to cheer.

The economy and potential stimulus is not front-burner in the eurozone or the UK these days. That space is taken up with the EU budget and with the trade deal between the EU and the UK. We are following these two items only out of the corner of one eye because they seem not to be having any effect on financial markets. We can be fairly sure the players will kick the can down the road on both items until the 11th hour, as usual. Bloomberg reports the Labour party will be voting on replacing Corbyn, which might be fun but won't affect sterling.

No, the only thing that counts right now is the spread or lack of spread of the coronavirus and how it affects economic activity, especially those supply chains but also demand for various goods ranging from copper (to electrify all those empty apartment building in China) to socks, not to mention iPhones.

It's cruel to say so, but Japan is the petri dish for the next stage of talk about the spread. The carriers might be the cruise ship passengers just let off after a controversial, possibly inadequate quarantine.

The first thing the scientists want to know is whether the 621 cases from the Diamond Princess are actually safe. Does the virus spread by direct and liquid contact or from contaminated surfaces, too? The procedure for letting passengers off the ship may not be the best, but Japan could turn out to be the most transparent and reliable source of new information. We have no reason to suppose the Japanese will not release it.

Experts speak highly of Japanese epidemiology and other health sciences. And yet skeptics point to the high proportion of elderly people in Japan, the demographic that has the highest death count, as well as the unhappy observation that this is the country that allowed Fukushima. In the end, it will likely be a mix of public incompetence that you can get anywhere and first-class science. Whatever the mix ends up being, do we get an answer by mid-March or end-March? Nobody knows. What we do know is that Japanese FX market participants are not treating the yen as the usual safe haven. This is not likely an actual capital outflow but rather a pullback from hedging. Whatever it is, it's Big. There is some possibility, not yet on the radar screen, of the dollar/yen returning to 125.76, the recent high from June 2015. That's the worst case scenario (i.e., Japan gets the epidemic).

Separately, Amazon is reaching out to suppliers to ensure it has the goods... the tariffs may have helped as buyers stocked up, but those embracing just-in-time inventory may suffer. "Amazon's algorithms have now asked for six to eight weeks of supply on products made in China instead of just two or three weeks... Amazon has also made larger and more frequent buys, deviating from its regular cadence of automated purchases." The guy who sell cowboy boots and cowboy hats is out of luck. His Chinese supplier is shut down.

Bottom line, it ain't over yet. The US remains the most robust economy, low yields or not, and the dollar remains the safer place.

US Politics: The judge sentenced Roger Stone to 40 months or 3.3 years, about half the minimum in the federal sentencing guidelines, plus a fine of $20,000. The judge also rebuked Trump and the Justice Dept for interfering in the case. "This case also exemplifies why it is that this system, for good reason, demands that the responsibility [for sentencing] falls on someone neutral. Someone whose job may involve issuing opinions in favor of and against the same administration in the same week. Not someone who has a longstanding friendship with the defendant. Not someone whose political career was aided by the defendant. And surely not someone whose personal involvement underlined the case. The court cannot be influenced by those comments. They were entirely inappropriate. But I will not hold them against the defendant, either." Bravo, Amy.

The rest of the judge's statement is full of remarks supporting the rule of law and rejecting political interference. Good thing Trump can't fire federal judges.

He can fire administration executives and did fire the head of the national intelligence, who was at the helm when a report was given to Congress last week declaring that Russia is again interfering in the 2020 election favoring Trump. Shoot the messenger. In his place is a PR guy with zero national intelligence experience, which is okay because when he is only the "acting" head, he doesn't have to have the experience the law requires and doesn't have to be approved in the Senate. Another loophole to be closed. It exists because it never occurred to anyone that a president would put into office someone entirely unqualified.

Over on the Dem side, it looks like Bloomberg maintaining and expanding Giuliani's stop-and-frisk policy is possibly fatal. It was halted by a judge ruling it unconstitutional. This is a big deal and not just an embarrassing mistake. And the party is wondering how it can prevent Bernie from getting the nomination if he goes into the convention with a plurality. Under the new rules, the 500 superdelegates can't vote until the second vote but what if Bernie goes into the first vote with 40% but the superdelegates choose a compromise candidate on the second vote? On the most basic level, this doesn't look very democratic. And yet the party is all too aware that if Bernie is the candidate, it loses the election. Goldman's Blankfein has said that's how he would to vote, as though Trump is less of a threat.

 

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