Dollar continues to gain against the offshore Yuan – Latest data is discouraging

Outlook

As we wrote Friday, the markets believe the Fed has decided on the Nov rate cut, even if December is still up in the air and may depend on fresh inflation and labor market data. Meanwhile, it’s nearly a dead cert the ECB will cut on Thursday even if it whines about inflation and growth worries.  It’s not a one-for-one move in the currency but unless it’s fully priced in, the euro should sag at least a little.

Tidbit: Bloomberg highlights that the mood has shifted in China from gloom to hope—the CSI 300 gained 1.9% after last week’s stumble. Over the weekend, FinMin Lan failed to deliver any specific stimulus amounts but “vowed new steps to support the property sector and hinted at greater government borrowing.” Goldman Sachs chose to believe it and upgraded its forecasts for China’s recovery.

It’s interesting that “A Shanghai Stock Exchange gauge of property stocks surged 4.7%.” One specific: local governments will be allowed to use special bonds to buy unsold homes, and the central government will take steps “to relieve the debt burden of local governments, signaling a possible rare revision to the budget that could come in the next few weeks.” If the property market is the key cause of malaise, this is indeed a start.

But the dollar continues to gain against the offshore yuan and the latest data is discouraging. We will have to wait for stimulus to kick in with no one knowing what lag. The headline CPI fell to 0.4% and factory gate price inflation is down 2.8%. In trade, exports rose at the slowest pace in 5 months and here’s the killer—imports rose a lousy 0.3%, suggesting domestic demand is ultra-weak.

Tidbit: The Nobel prize for economics went to three US economists, one from the University of Chicago and two from MIT, whose focus is the institutionalization of income inequality. This follows two other Nobels for the same subject. To be fair, non-winner Piketty ignited interest in the topic with a best-seller nearly ten years ago but his book was long on pinko ideas and lacked data, aka evidence, and thus a degree of consistency.

Forecast

Geopolitical conditions are worsening. China is playing games with Taiwan. We still await the full Israeli response on two fronts. Trump has gained some favor, at least in the polls. Nobody can explain why anyone would want this guy again.

While risk appetite is gung-ho in equities, risk aversion is on the rise in currencies. This should favor the dollar for at least a few days. But beware the usual push-back after the ECB meets.

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