This is a busy week for data, but we will all be distracted by political risk. We get Eurostat wage growth today but backward-looking to Q4. Tomorrow it's UK inflation (following 1.8% in Jan) with expectations rising that a hike must be out there somewhere. Wednesday it's Japanese trade and US existing home sales. Thursday brings new home sales and Friday, the Markit eurozone PMI. Bloomberg reports the composite PMI will likely dip to 55.8 from 56.0 in Feb but that is still a respectable number. And all week we have a slew of Feds talking about the economy, including dove Kashkari. So far he has not succeeded in getting the market on his side.
On the political front, Bloomberg headlines that Merkel seeks anti-Trump allies, referring to her solidarity statement with Japanese PM Abe. As the US president loses credibility, a vacuum opens up to be filled by somebody else. Is it Merkel? Is it China? Australia is toying with the idea of a new trans- Pacific trade deal that does include China, unlike the US version, now dead as a dodo. After Trump hung up on the PM, we should not be surprised.
Americans should have an abiding fondness for Australia, which fought hard and well alongside US forces in WWII in Asia (Uncle Dick), in Korea (brother Robert) and Viet Nam (brother Gary). We are among the US families that celebrate Anzac Day (April 25).
High on the political list is tonight's televised debate among the five French candidates, with Macron and LePen leading the pack. Tomorrow's news stories will contain polls.
Then there's the 60th anniversary of the Treaty of Rome on March 25 celebrating the founding of the European Economic Community. UK PM May will wait until this is over before announcing Article 50 on March 29, at which point we get a flood of sarcasm and scary forecasts. The most recent Ipsos Mori survey shows only 4 of 10 Britons have confidence the Brexit deal will be good for the US. This feels about right.
In the US, FBI director Comey testifies today about Russia hacking the election and equally important, whether Trump has any shred of evidence that former Pres Obama hacked Trump Tower. So far every other security department has denied it, including the British, who are really quite annoyed by the accusation. Trump's credibility is already in the basement before the first 100 days are up. And he keeps digging.
It's hard to divvy up the political effects from the economic ones. For example, on Friday the University of Michigan consumer confidence index was quite good, but the dollar fell anyway. The index points upward, 97.6 from 91.0 a year ago, or up 7.3%. "Economic conditions" are 114.5, down from Feb but up 8.4% y/y. And "expectations" are higher at 86.7 from 86.5 in the month before and up 6.4% y/y. Everybody and his brother knows consumer sentiment should drive spending and consumer spending drives the US economy, so why did the dollar fall after the release? We can blame yields, which are down and likely to remain range-bound until we see progress on things like the budget and health-care bill, much less the tax cuts, deregulation and infrastructure spending that underlie the Trump reflation trade.
Nobody really wants to discuss the nuts and bolts of US policy-making, but the nuts and bolts are forced upon us if we want to project financial markets. So far, the Trump administration is botching things badly and that bodes ill for the later projects, which now look postponed to later in the year. And if the government is stumbling and yields are stumbling, the dollar is stumbling, too. That's just the domestic side. It's a whole lot worse on the foreign side. Developments over the weekend were damaging to the US' reputation and credibility.
The top headline in the FT on Sunday is "G20 drops vow to resist all forms of protectionism. Watereddown commitment to free trade reflects Trump's America First agenda." At G20 in Baden-Baden, TreasSec Mnuchin would not agree that the final communique contain the July statement that G20 would "resist all forms of protectionism." The communique does contain the usual stuff about boosting growth and avoiding currency manipulation to gain trade advantage. Talks were non-confrontational but Mnuchin says the protectionism language "was not necessarily relevant from my standpoint." Nobody has any idea what that means. Participants left confused. German FinMin Schaeuble said Mnuchin seems not to have the power to determine much of anything.
Asked who should be listened to, Mnuchin said the president comes first. This is the guy who says two different things before breakfast and lies through his teeth, so nobody is reassured. Trump has said the dollar is too strong—or other currencies are too weak—a form of jawboning that violates the G20 currency manipulation promise right off the bat. Declining to promise to eschew protectionism is actually secondary. Bottom line, our worst fears about a trade and currency war are not allayed. The German Economy Minister said on the sidelines, according to the FT, that if the US imposes a border tax, Germany could start a case at the WTO.
It's not hard to imagine Trump taking the US out of G20 and the WTO. Granted, these are not the most impressive institutions man has ever devised, but they have served to contain naked selfaggrandizement.
Separately, Trump insulted Merkel, including refusing her invitation to do the usual handshake for the cameras and saying Germany owes NATO and the US a vast sum of money for the "expensive defense it provides to Germany." NATO, yes, but money owed to the US? A former NATO official said Trump doesn't understand how NATO works. No money is owed to the US.
The Guardian reports Ivo Daalder, who was US permanent representative to Nato from 2009 to 2013, wrote "The US decides for itself how much it contributes to defending Nato. This is not a financial transaction, where Nato countries pay the US to defend them. It is part of our treaty commitment. All Nato countries, including Germany, have committed to spend 2% of GDP on defense by 2024. So far five of 28 Nato countries do. Those who currently don't spend 2% of their GDP on defense are now increasing their defense budgets. That's a good thing. But no funds will be paid to the US." FYI, Daalder is a US citizen born in the Netherlands who attended MIT and Oxford. In other words, an immigrant.
Merkel also had to explain to Trump that the European Union is a trade union, meaning there is no longer any such things as bilateral trade agreements. Earlier she had explained Article 5 of the Geneva Convention to him. On trade, Trump said Friday "The negotiators for Germany have done a far better job than the negotiators for the United States. But hopefully we can even it out." Merkel responded that there are no German negotiators. Trade negotiations are under the authority of the EU. "We've transferred competencies over to the European Union," Merkel said. "That means the European Commission negotiates these free trade agreements."
Trump is an ill-informed boor who says he had a "great" meeting with Merkel when all other observers say it was "awkward" and "tense," so not self-aware, either.
Wait, it's going to get worse. Nobody expects Trump to apologize to Obama and to the world for lying about Obama tapping his phones, but this time anti-Trump forces are not going to let it go, as they did the false birther accusation. Then there is the much vaunted US system of checks and balances. It hasn't been put to the test in quite such a dramatic way since Roosevelt tried to pack the Supreme Court. Now we have the New York State Attorney General preparing to develop a case against Trump for breaking the emoluments clause (self-enrichment). AG Schneiderman has hired a specialist in public corruption, Mr. Master (what a name), whose title will be "senior enforcement counsel." Schneiderman is the guy who brought the case against the fraudulent Trump University. Now to see if the state AG has legal "standing" to go after a sitting president.
Schneiderman is going to get a lot of free help. Separately, the WSJ reports "In January, a government watchdog group represented by a team of constitutional scholars and ethics experts filed a suit alleging Mr. Trump is violating the Constitution by maintaining ownership of businesses that accept payments from foreign governments. Mr. Trump called the suit ‘totally without merit,' and his lawyers have said they don't believe that accepting payments from foreign government officials violates the Constitution."
Nobody can estimate how much the embarrassing Trump performance is weighing on the dollar. We know it's a weight. Meanwhile, the Dutch election removed some weight from the euro but the French debate tonight may add some back on, depending on how the politicians perform and what the polls say tomorrow. We have yet to see any commentary indicating LePen could win the whole shooting match—she is expected to get defeated in the second round. The fate of the euro/dollar depends on it, as least near-term. Even if LePen wins, Frexit remains a distant possibility. It will be more smoke than fire. Still, it can damage the euro and provide a counterweight to the damage Trump is doing.
The euro is not the only currency, of course. A currency that "should" be weak is the yen. The BoJ has softened QE a tiny amount but not enough to justify yen appreciation. Sterling "should" fall on the economic horror-show about to commence in the UK, but dragging it out has the effect of diminishing the impact. We all know, or think we know, that the consequences are going to be bad. One commentator said on weekend TV that Brexit proves the point that actual democracy is a bad idea, which is why we have a republic in the US—the pitchfork mobs are dumb and the elites really do have superior knowledge and competence. Quick, think of what country has the longest history of pitchfork mobs? We'd say France.
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This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.