Awaiting Fresh Cues, the Greenback Consolidates Gains

The US dollar’s recent gains have pared slightly amid light news

Comments from the BOE’s Broadbent sounded more hawkish than his somewhat dovish reputation

Three of the four Fed officials that speak today are known quantities

The FOMC minutes are somewhat dated, but may still offer insight into how the Fed is thinking about the pace of tightening

Price action: The dollar is mostly softer against the majors, but still trading in very narrow ranges. The Scandies are outperforming, while the Aussie and the Swiss franc are underperforming. The euro is trading higher near $1.0665 after testing but not breaking below yesterday’s low for this move near $1.0630. Sterling is trading around $1.5220, while dollar/yen is edging lower to trade around 123.40. EM currencies are mixed. RUB and ZAR are outperforming, while INR and IDR are underperforming. MSCI Asia Pacific fell 0.1%, with the Nikkei up 0.1%. China markets were lower, with the Shanghai Composite down 1.0% and the Shenzen Composite down 1.9%. The Dow Jones Euro Stoxx 600 is down 0.6% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 2.26%, while European bond markets are mostly firmer. Commodity prices are mixed, with oil up around 2% but copper down slightly.

The US dollar’s recent gains have pared slightly amid light news.  Attention turns to the US, were several Fed officials speak, October housing starts/permits will be released, and then later in the session, traders will peruse the minutes from last month’s FOMC meeting.

The euro held Tuesday’s low near $1.0630, and short-covering lifted the single currency to almost $1.07 before the bears showed their hand.  Similarly, after the JPY123.50 level was tested, the dollar pushed back, but the quarter yen range is among the narrowest session ranges.

Comments from the BOE’s Broadbent sounded more hawkish than his somewhat dovish reputation. He discussed the need to look past near-term cost shocks.  Sterling did not keep pace with the euro, but it did briefly trade above yesterday’s high to reach almost $1.5250.

Although the Nikkei posted a small gain, most stock markets are lower today after the S&P 500 failed to sustain its gains yesterday.  The S&P 500 reversed after hitting the 50% retracement objective of the slide since the November 4 high near 2114.60.  While it successfully closed the gap created by last Friday’s lower opening, last Thursday’s gap remains unfilled.  That gap is found between 2044.64 and 2045.66.

Three of the four Fed officials that speak today are known quantities.  Barring a significant surprise, Dudley, Lockhart (voting members), and Mester (non-voter) are inclined to support a hike next month.  The three are on a panel discussing the payments system, and may not address the state of the economy or monetary policy.  The new Dallas Fed President is less familiar to the markets, and he speaks at midday.

The FOMC minutes are somewhat dated, but may still offer insight into how the Fed is thinking about the pace of tightening.  Recall that the September dot-plots suggested that the majority see four rates hikes next year.  The market is less sanguine.  We note that the December 2016 Fed funds futures contract implies a yield of 89 bp.

Three reports since the FOMC met have likely provided officials with the “more data” showing the resilience of the US economy to a number of headwinds.  The US employment report (for October) was one of the strongest of the year.  September consumer credit rose by a record.  Although the headline pace of yesterday’s CPI report was in line with expectations, the details likely bolstered confidence that price pressures will increase.  The three-month annualized pace of core PCE is 2% compared with 1.7% previously.

The two sectors that will likely see core measures of inflation rise are healthcare, which accounts for 25% of the core PCE basket.  Premiums are expected to rise next year.  Medical costs are rising at near a 3% year-over-year pace.  Housing costs are also rising, with rents rising at more than a 3% year-over-year pace.  Goods prices are still soft.  They slipped 0.1% in October, but core services rose 0.3%.  Moreover, the willingness of airlines to pass the energy saving to consumers may have peaked.  Airfare rose 1.5%, snapping a three-month declining streak.  The 10-year breakeven is about 10 bp higher at 1.56% from when the Fed meet in late-October and nearly 20 bp higher than was prevailing at the September FOMC meeting.

The latest DOE energy information is also awaited.  Yesterday’s API estimate showed a small decline in oil inventories.  However, the consensus expects a 2.2 mln barrel build from the official report. Output rose 25k barrels to 9.19 mln in last week’s report, even while the rig count has slipped to new five year lows. The January light sweet futures contract is trading comfortably within Monday’s range ($41.21-$43.24)

South Africa’s October CPI came in as expected, rising 4.7% y/y vs. 4.6% in September. Core inflation eased slightly to 5.2% y/y from 5.3% in September. September retail sales, however, surprise on the downside with a sharp 1.9% m/m decline, compared with expectations for a rise of 0.5%. The South African Reserve Bank meets Thursday and is expected to keep rates steady at 6.0%. The market is almost evenly split, however. Of the 26 analysts polled by Bloomberg, 16 see no hike and 10 see a 25 bp hike to 6.25%. Analysts are also looking for a tightening cycle roughly at a pace of 25 bp per quarter. This strikes us as too aggressive, and we see a much more cautious approach and no move tomorrow.

Brazil September monthly GDP proxy came in weaker than expected at -6.2% y/y vs. a revised -4.6% (was -4.5%) in August. This is the deepest contraction for this cycle, and implies that Q3 GDP contracted -5.1% y/y vs. -2.6% in Q2. No wonder the fiscal numbers remain bad. On Tuesday, Brazil reported October tax revenues that were disappointing at -2.5% y/y vs. +5.0% y/y in September. This was the weakest showing since November 2014, and does not bode well for October fiscal data due out November 30.

Chile reports Q3 GDP, and is expected to grow 2.1% y/y vs. 1.9% in Q2. Copper remains a key driver for Chile, and the news here is not good. Copper is making new cycle lows, and is on track to test the 2008 low near 125. With global demand for industrial commodities likely to remain soft due to sluggish global growth, that 125 low could be breached on the way to the November 2001 low near 60. The central bank last week left rates steady at 3.25%, as expected. The latest central bank survey shows market expectations for 50 bp of tightening by end-2016, followed by one more 25 bp hike to take rates to a likely plateau of 4.0% for the next 23 months.