Australian dollar is worrying about the wrong recession

See the latest Australian dollar analysis here:

Macro Morning

DXY was soft last night and looks like it’s in for more for a while. CNY and EUR were firm:

The Australian dollar was firm:

But not so firm as EMs:

Gold is consolidating. There’s a good chance it’s going to push higher short term as DXY weakens:

Oil was firm:

Base metals were mixed:

Big miners strong:

EM stocks are up but hardly partying:

Unlike high yield which is leading the risk rally:

Treasuries were bashed:

And bunds:

As stocks marched higher:

Westpac has the wrap:

Economic Wrap

The US services sector cooled in December, the ISM non-manufacturing index fell a larger than expected 3.1pts to 57.6; a five-month low though still consistent with decent momentum in the services sector. The underlying detail showed more resilience, new orders and new export orders both firmed, while employment eased a touch.

German Nov. factory orders missed expectations and fell -1.0%m/m, -4.3%y/y (est. -0.1%m/m. -2.7%y/y). There was a notably deep slide (-11.6%m/m) in foreign orders within the Eurozone which highlights the downside risks for the region into 2019.

EZ Nov. Retail sales rose a firm +0.6%m/m, +1.1%y/y (est. +0.2%m/m, +0.4%y/y)  lifted by German Nov. retail sales rising +1.4%m/m, +1.4%y/y (est. +0.4%m/m, -0.4%y/y) however the sales data has been volatile of late and may have been distorted by pre-December discounting.

The return of UK Parliament has livened debate around the forthcoming “meaningful vote” that was postponed in early December. Markets anticipate a vote on 15th Jan. but the timing of next week’s vote will be confirmed at a Cabinet meeting on Wednesday, after May attempts to garner some form of support on the Continent and within UK. Risks of another delay remain given the lack of support for May’s current Brexit plan

Event Risk

Australia’s trade balance for Nov is expected to decline slightly from $2.3bn to $2.2bn (Westpac estimate $2.1bn). Lower export prices for energy and lower coal volumes were contributing factors.

US NFIB small business optimism is expected to remain positive on current conditions as well as the outlook. JOLTS job openings data will update the hiring and quit rates, which are watched by the Fed.

So, the usual action if you believe that the Fed is going to ease and EMs stimulate; the US dollar falls, EM assets and commodities lift. FTAlphaville captures the moment:

According to Nikolaos Panigirtzoglou at J.P. Morgan Securities, US equity markets are currently pricing in a 60 per cent chance of a US recession within one year. High-grade credit points to similar odds, as does US Treasuries and base metals. Investors in the one outlier, US high-yield credit, seem more sanguine. The asset class is pricing in a 12 per cent chance:

In order to determine these probabilities, Panigirtzoglou and his team looked at the historical behaviour of different asset classes in the lead-up to US recessions in the past. What they find is that over the past 11 recessions, the S&P 500 declined an average 26 per cent. With the S&P 500 down some 16 per cent since its peak, there’s that approximate 60 per cent chance within the year. (Because 16 is roughly 60 per cent of 26. So of course, this is rather rough measure; indeed not all economic downturns are preceded by stock market sell-offs at all.)

With everybody worried about a US recession the short term shift is out of DXY. The US is clearly going to slow but I’m not worried about recession. I can’t say the same for Europe. Check out the relative position of the composite PMIs between the two:

Sure the US is going to pullback but Europe might just keep falling as its export-led growth tracks a stalling China and EMs (plus is hit by Brexit). China’s most important leading indicator is not at all positive:

Note that in the past two stimulus episodes, Chinese growth did not turn around until credit had been rising for about nine months. It is still falling today.

Rebounding out of the Fed’s communication errors and stuck in Trump derangement syndrome, markets are today repricing for the wrong recession. It’s not coming in the US, unless it is dragged down by Europe and China first.  2019 will be another year of US out-performance amid everybody else doing worse. This has only been re-confirmed by a pausing Fed.

Likewise for today’s rebounding Australian dollar. It’s in a counter-trend rally not a change in direction. That’s the final irony here. It should be pricing the risk of an Australian recession much higher than that of a US one.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. Nothing has changed in the macro. It’s all narrative at present.

    – Fed is still tightening; actively draining global markets of liquidity
    – China is yet to stimulate meaningfully
    – Euro is still grinding to a halt; even with monetary tightening yet to occur

  2. Credit spread widening alert!

    CBA issuing 5 year paper at BBSW+1.13% today. Compare that to the last 5 year issuance of 2018 by ANZ at BBSW+1.03% in December, and 5 year paper from this time last year at BBSW+0.77% — ie banks are paying 0.36% more this year!!!

    LOL for mortgage rates

    • With BBSW at around 2.1%, that takes all in funding to 3.2%, approaching what some people are paying on mortgage rates.
      Attracting deposits would be a cheaper way to fund themselves and less volatile given how low deposit rates currently are.

  3. This sort of thing will concentrate minds wonderfully

    Its all about the oil price……..PPT are busy bidding up the oil futures at the moment before they deal with the rest of it…….letting the dollar go helps

    Sand shipments are way down to the frackers at the moment….will be interesting to see how far they ramp back up.

  4. “Australia’s trade balance for Nov is expected to decline slightly from $2.3bn to $2.2bn (Westpac estimate $2.1bn). ”

    Why do commenters/Economists et al INSIST on only talking about the Trade Balance which is smallishly positive instead of the real measure of our international position, the Current Account, which is chronically and severely negative.

    Why does EVERYONE try to hide the fact of the Current Account Deficit?

    • I don’t think the CAD is a secret or hidden. Perhaps because we always have one it’s less “newsworthy” whereas the trade balance is more volatile and “exciting”.

      But I don’t see a conspiracy here…?

      • The Trade Balance itself is actually a totally irrelevant number. The CAD is a damned exciting number, if anyone talked about it, as it reflects the total shambles our economy has become and our total reliance on foreigners continuing to buy up our as assets.
        If anyone acknowledges the CAD, and its implications, a lot of RBA, Treasury officials, and Professors of Economics would lose all credibility – although they would still hold on to their overpaid jobs.

        No conspiracy? I used to believe that. I thought it was just not possible.

    • The Traveling Wilbur

      Hey Flawse, in all seriousness, when people do stupid stuff you trying to figure out whether it’s motivated by deliberate malicious intent, or, ignorance and stupidity, is a fool’s game. It a) makes little difference at the end of the day b) reconciling which it is on any given occassion will drive you nuts, fruitlessly (self lol) and is best left to others, hopefully those paid to worry about such matters.

      Leaves the little grey cells free to concentrate on higher-order issues. Like where the tea is and how to annualise 18-month periods.

      • Agree TW. It’s impossible to figure. I don’t waste time over it but occasionally the weight of evidence seems to pile up on one side.
        I’m not paranoid. I know the world is out to get me.

    • The CAD is fine – so long as you can afford it – but the longer it goes on the greater the drag on the economy. And things only remain ‘fine’ as long as your foreign friends are willing to continue to lend you the money. When our foreign friends ditch us the RBA will print mountains of money.

      Funny isn’t it, flawse: everything looks and feels fine around you but the reality is it is balanced on a knife-edge. It only requires a wholesale shift in sentiment and the lights go out.

  5. “Sure the US is going to pullback but Europe might just keep falling as its export-led growth tracks a stalling China and EMs”

    The BIG question for us, in the near term, is what will the US Fed and ECB do if their economies run into trouble?????
    My thinking is they are going to print and they are going to print on a scale that, even now, is difficult for us to imagine. Probably they cannot conceive of any other path and, indeed, by this stage there is no other path.

    Last printing binge the EC leaked about 40% of it. I don’t know what the Fed figure is but it would have to be large. That’s a lot of liquidity with Aus being a favoured destination.

    So whither our IR’s and exchange rate? IR’s to the floor, and beyond, and A$ to the moon? Maybe the timing won’t be perfect and we’ll have a period of stress before it all comes loose? (Noting Brenton’s comment above)
    Really really interested in opinions!

    • They’re already at the point of pushing on a string, especially the ECB. I think you’ll see more yellow vest style unrest until populist governments get up. They’ll be the ones to instigate a mixture of money printing and massive fiscal stimulus directed at the real economy; likely the catalyst for inflation finally making a return.

      As you say (correctly), the answers lie back in time.

      • “They’re already at the point of pushing on a string, especially the ECB”
        Will that stop them trying?

      • That’s where the yellow vest thing comes in, as the common man doesn’t give a toss. The mob on the street doesn’t understand any of this, they only see that the rich keep getting richer and the poor keep getting poorer. If the government continues to break their contract to the majority, the majority will tear them limb from limb (perhaps even literally).

      • He says it here:

        We are certain we shall be taken to task by the bloggers and others… Zero Hedge being first and foremost… for changing our view as swiftly and as materially as we have and we are prepared for that. But we were consistent with our bearish view of stocks and our bullish view of the dollar as the Fed ran off its assets taking reserves en masse from the system. If that is going to stop… if that has changed, and we believe that it has… then we’ve no choice but to change with it. And so we shall and so we are. We trust we are clear?

        Basically, he believes that the recent rhetoric from Powell is written in stone. I will say that markets are already pricing this about face by the Fed; it’s why yields have flattened and inverted at some parts of the curve.

        As HnH has said previously, if there is a rally with legs, I’d sell into it.

      • (This is probably better in some other thread)
        As per martin Armstrong
        “The mere fact they are against the refugees renders then far-right. They are a nationalist party – plain and simple, which is rising up throughout Europe at this time.”

        I’m really sick of this “Far Right” BS just because one believes that rule by the globalist extremists is not a good thing.

    • Re: Australia, we’ll go through our own version of the GFC. They’ll drop the IR to zero, start QE and instigate programs similar to those undertaken by the US and EU during the GFC. Our problem is that we are not a reserve currency, and, as you noted above, have been running a longterm CAD (dependent on attracting foreign capital). That makes our currency at risk of greater than healthy falls; aka we could go from having a deflationary recession (depression) to having an inflationary depression (will certainly be a depression in this instance).

    • One more bout of deflation before they let rip. NIRP all round and $10 trillion in QE just in the US. Interest rates can’t go up until the debt write offs start, that will be the time to make the big decisions. Who knows what happens here with the geo-political situation so bad……….we will be on our knees begging for US dollar swaps……..if the Chinese ask for dollar swaps it is all over for them and they know it.

      • Brenton and Nyleta – your opinions valued! Stay Short A$ then? My resident family genius is VERY short A$ and he has been traditionally Long and most often correct (unlike me!).

      • Yep, but continue keeping a finger on the China pulse; aka follow HnH, he is spot on when it comes to China imo. Also, if you haven’t already, diversify the basket of forex you’re holding. A surprise weakening of the USD could wreak havoc on a pure AUD/USD position.

    • Yup. And if you’re an advocate of JM Keynes (which the establishment is) you’ll believe, fundamentally, that savings are evil and a drag on the economy (what is QE if it isn’t a transfer from savers to debtors?). In other words, the economy can be driven by combination of debt and money-printing; an assertion which is incorrect and the process of discovering this will be unimaginably painful for so many.

  6. The PMIs are a waste of time in gauging economic strength or weakness of an economy, however, they do influence speculation in asset classes.
    Only if the fed changes course will the US avoid a recession in the short term.