Dollar and Global Equities Higher

Dollar and Global Equities Higher

  • We are seeing an unusual combination of dollar strength and global equity gains today
  • It was an eventful session in Asia, including Japan Post IPO, chatter about the HK-Shanghai link, and plans for a Taiwan-China summit
  • Eurozone service and composite PMIs were close to expectations; UK PMI readings were firmer than expected
  • Fed speech calendar is quite loaded, with Brainard, Harker, Yellen, Dudley, and Fischer all appearing today
  • To put the recent BRL rally into perspective, note that it is just testing the 38% retracement objective from the April-September move near 3.7265
  • Thai and Polish central banks kept rates steady, as expected; Hungary central bank leans more dovish

Price action:  The dollar is mostly stronger against the majors.  The Aussie and the Swiss franc are outperforming, both up 0.1% on the day.  The Kiwi and the euro are underperforming for the second straight day, with the latter trading back near the $1.09 level as the US-Germany 2-year differential continues to move in the dollar’s favor despite firm PMI readings.  Kiwi was hurt by weaker than expected jobs data, and comes on top of a poor dairy auction yesterday.  Sterling is trading near $1.54 after firm UK services PMI, while dollar/yen is trading back above the 200-day MA and near 121.20.  EM currencies are mostly softer.  TWD and MYR are outperforming, with the former helped by news of a Taiwan-China summit.  HUF, ZAR, and TRY are underperforming, with the forint hurt by dovish central bank comments.  MSCI Asia Pacific rose 1.1%, with the Nikkei up 1.3% as Japan markets returned from holiday and the Japan Post IPO well-received.  China markets were higher on chatter about the HK-Shanghai link, with the Shanghai Composite up 4.3% and the Shenzen Composite up 5.1%.  The Dow Jones Euro Stoxx 600 is up 1% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is flat near 2.21%, while European bond markets are mostly firmer.  The 2-year US-German differential is now at 110 bp, the highest since 2006.  Commodity prices are mostly higher, with oil up modestly.

  • We are seeing an unusual combination of dollar strength and global equity gains today.  Over the past several months, the two have not moved together due to the different implications of Fed lift-off/no Fed lift-off.  We continue to focus on the monetary policy divergence theme, which favors the dollar.
  • It was an eventful session in Asia.  Japan Post marked the biggest IPO of the year and Japan’s biggest IPO since 1998, and it went very well.  The stock price rose 26% from its IPO price, its insurance unit soared 56% and the banking unit was up 15%.  The Japanese government privatized around 11% of each company, raising JY1.4 trln ($12 bln).  The Nikkei ended the day up 1.3%.
  • There was also plenty of news out of China.  First, Caixin PMIs for October came in on the strong side, with the composite rising to 49.9 from 48.0 and the services component at 52.0 from 50.5.  Second, the PBOC posted a comment on its website about the Shenzhen-Hong Kong link.  Even though the PBOC later said the comments were dated and the posting was a mistake, the positive sentiment boost seems to have lingered.  Third, markets interpreted as positive the scheduling of the first talk between the presidents of China and Taiwan since the 1949 civil war.
  • We note, however, that this is not a clear cut story.  Elections in Taiwan will be held in January, and President Ma’s Koumintang party is widely expected to be replaced by the opposition Democratic Progressive party, which has a more pro-independence stance.  Still, the Taiwanese TAIEX index outperformed regional indices and rose 1.6%, while the Shanghai Composite was up 4.3%, rising back to levels not seen since August.
  • Eurozone service and composite PMIs were reported earlier.  The Eurozone composite reading came in at 53.9 vs. 54.0 consensus.  Looking at the country breakdown, the French composite reading came in at 52.6 vs. 52.3 consensus, while the German composite reading came in at 54.2 vs. 54.5 consensus.  The service component for the Eurozone came in at 54.1 vs. expectations for 54.2.  As we noted recently, the PMI readings do not seem to support any sense of urgency for further ECB stimulus.
  • Elsewhere, the UK reported services and composite PMIs.  The services reading came in at 54.9 vs. 54.5 consensus, and follows strong manufacturing and soft construction PMI readings.  Overall, the composite UK reading came in at 55.4 vs. 53.6 consensus. This has helped sterling hold up relatively well today, though markets are still unclear as to the likely timing of BOE lift-off.
  • New Zealand Q3 employment data came out overnight on the weak side.  Employment change came in at 1.5% y/y, compared with expectations of an increase of 2.5%.  After the terrible milk auction yesterday, the Kiwi has been on the ropes and markets are looking for further RBNZ easing.  Elsewhere, Australia reported September trade and retail sales overnight.  The trade deficit was smaller than expected at –AUD2.3 bln, while retail sales rose the expected 0.4% m/m.  The next RBA meeting is December 1.  While we think more easing is likely in 2016, some will look for a December move if upcoming data come in soft.
  • During the North American session, the US reports weekly mortgage applications, October ADP jobs, September trade, and October ISM non-manufacturing PMI.  Consensus calls for 180k increase in the ADP estimate, slowing from 200k in September.  Although the ADP frequently undershot the BLS estimate this year, in August and September it overshot the government’s figures.  The average ADP this year is 195k.  Several Fed officials, including Dudley, have suggested that job growth of something less than 200k a month will still be sufficient to absorb slack in the labor market.  This means that slower jobs growth does not preclude a Fed hike.
  • Fed speech calendar is quite loaded, with Brainard, Harker, Yellen, Dudley, and Fischer all appearing today. To the extent that the Fed’s leadership addresses the outlook for monetary policy, they will most likely reiterate the FOMC statement.  There was a subtle shift in the burden of proof.  Rather than the economy having to do something unless there is disappointment, the Fed is prepared to hike rates at the next meeting.   Governor Brainard speaks in Frankfurt.  She and Tarullo, who speaks tomorrow, have distanced themselves from the Fed’s leadership by suggesting that rates should not be hiked this year.  Nevertheless, we suspect that many understand that the policy signal comes from the Fed’s leadership of Yellen, Fischer, and Dudley.
  • Canada reports September trade today, with consensus at -CAD1.75 bln.  October Ivey PMI will be reported tomorrow, and October jobs data will be reported Friday.  We cannot rule out further BOC easing if the data continue to come in soft.
  • Given the performance of the two-year US note, and the possibility that Fed funds average something less than the midpoint of the next target range, it appears that markets are pricing in something more than the 50% chance of a December lift-off that is being cited.  Indeed, the two-year note yield has continued to rise even as the December Fed funds futures contract has settled at 19.5 bp for the fifth consecutive session.
  • It’s worth noting that at 0.77%, the US 2-year yield is the highest since mid-September, right before the FOMC meeting on September 17 when many expected lift-off.  The 2-year US-German spread continues to move higher.  At 110 bp, it’s the highest since late 2006.  This has given the dollar some traction against the euro and the majors, but not so much against EM.  We don’t think this divergence in the dollar’s performance between majors and EM can be sustained.  Something has to give, and we think the EM rally is the weak link in the chain.  TRY poste-election bounce ran out of steam.  Are the BRL and COP rallies for real?  We don’t think so, not with the Brazilian economy still in freefall.
  • To put the recent BRL rally into perspective, note that it is just testing the 38% retracement objective from the April-September move near 3.7265.  That’s also the low for USD/BRL from October 9.  The 50% objective comes in near 3.5655 and the 62% near 3.4040.  COP is doing a bit better than BRL.  The peso is testing the 50% retracement objective from the May-August move near 2809.  The 62% objective comes in near 2701, and also represents the 200-day MA.  A break below that would set up a test of the May low for USD/COP near 2352.
  • Bank of Thailand met and kept rates steady at 1.5%, as expected.  October CPI was just reported at -0.77% y/y, still well below the 2.5-3.5% target range.  And yet the BOT has kept rates steady since its last 25 bp cut in April.  For now, the bank seems to be putting the onus of providing stimulus on fiscal policy.
  • Hungary central bank minutes will be released.  Last week, central bank Vice President Nagy said it could hold rates steady into 2019.  This went beyond the formal forecast horizon of steady rates until 2017.  Deflation risks persist, but it’s hard to see how anyone can try to predict monetary policy four years out.  Furthermore, Nagy added today that the bank will ease further with “non-conventional” tools rather than policy rate cuts.  The forint is the worst performer in EM today.
  • Polish central bank kept rates steady at 1.5%, as expected.  Earlier this week, Poland reported October CPI steady at -0.8% y/y, well below the 1.5-3.5% target.  We think the NBP will likely restart the easing cycle, but probably not until early 2016, when the incoming Law and Justice can stack the MPC with doves as the existing terms end.