Thoughts on the US Elections and Economic Outlook

The mid-term elections in the US are widely regarded as a referendum on President Trump’s first two years in office. While markets have largely priced in a benign outcome, we outline below the tail risks and what they mean for the US economy and global financial markets.

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Stock Market Gyrations Won’t Impact Fed in December

Markets are left wondering if an equity market correction will stay the Fed’s hand in December. The short answer is no. The long answer is that short of a plunge along the lines of 1987 or 2008, Fed policy should not be impacted. This piece attempts to put some historical context behind our call.

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Uridashi Issuance So Far in 2018

Through mid-October 2018, foreign currency Uridashi issuance totaled $7.6 bln. If this pace is sustained, the full year total of $9.6 bln would represent an increase from $8.4 bln in 2017 but would fall short of the $12 bln issued in 2016.

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Some Thoughts on the Upcoming US Treasury FX Report

The US Treasury will soon release its semiannual report to Congress on “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.” Speculation has grown that China will be named a currency manipulator, which would be the first time any country has been named since 1994. We do not think China will be named, which would be positive for Chinese assets as well as the wider EM.

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Powell and Brainard Suggest Markets Underestimating Fed Hikes

Recent US economic data and Fed comments suggest markets are vastly underestimating the Fed’s capacity to tighten. While much depends on the US economic performance in 2019, we think US rates are likely to rise more than what markets are expecting. This is dollar-positive and EM-negative, to state the obvious.

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Dollar Slips, though Emerging Markets Trade Heavily

The US dollar is seeing its pre-weekend gains pared.  Trade tensions are running high as the US is said to be preparing to levy new tariffs on China as early as today.  Meanwhile, the better tone of Brexit talks lends sterling a hand.  Emerging market strains are re-appearing after a brief hiatus in the second half of last week.  

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Near-Term Dollar Outlook

The US dollar finished last week on a strong note, snapping four-day drop against the euro, sterling, Australian dollar, and Norwegian krona. and rose above JPY112.  The S&P 500 and NASDAQ gapped higher early last week, and entered the gap, without filling it before the weekend and rebounded, suggesting good underlying demand.  US 10-year yield is flirting with the upper end of its range.  Will it break out? 

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Dollar Losses Extended

  • The US dollar remains on the defensive after retreating yesterday
  • A weaker than expected Swedish CPI report is weighing on the krona
  • The Turkish lira rallied in response to yesterday’s surprising 625 bp hike
  • US data highlights include retail sales, IP, and the University of Michigan’s consumer confidence survey
  • Central Bank of Russia is expected to keep rates steady at 7.25% Continue reading “Dollar Losses Extended”

Draghi Sticks to Script

The euro went bid in response to the ECB meeting and Draghi’s seeming optimism.  The staff shaved the GDP forecasts for this year and next while keeping inflation forecasts steady.  Risks were seen as broadly balanced.  

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