- Draghi delivered more than we expected at this meeting, markets were clearly disappointed overall
- The US February jobs data could be an important catalyst for an even higher US dollar
- Canada reports February jobs data too; Germany reported weak January factory orders
- China February trade data came in much worse than expected
- The EU reportedly made a new Brexit offer to the UK
- EM FX has sold off sharply after the ECB decision and this trend should continue
- Taiwan February trade data confirmed the mainland reading
The dollar is consolidating against the majors after yesterday’s outsized moves post-ECB. Kiwi and yen are outperforming, while the Scandies and sterling are underperforming. EM currencies are mostly weaker. The CEE currencies are outperforming, while IDR and KRW are underperforming. MSCI Asia Pacific was down 1.5%, with the Nikkei falling 2.0%. MSCI EM is down 1.3% so far today, with the Shanghai Composite falling 4.4%. Euro Stoxx 600 is down 0.8% near midday, while US equity futures are pointing to a lower open. 10-year UST yields are flat at 2.64%. Commodity prices are mostly lower, with Brent oil down 1.7%, copper down 1.1%, and gold up 0.6%.
The market reaction to the ECB decision was nothing short of astounding. As one would expect, the dovish hold by the ECB saw the euro weaken to multi-year lows. However, the outsized impact on global equity and FX markets were quite unexpected. Basically, investors made it clear that global growth concerns totally outweighed the easier liquidity story from the dovish ECB.
While Draghi delivered more than we expected at this meeting, markets were clearly disappointed overall. Another round of TLTROs and pushing out the forward guidance for the first hike into 2020 were no doubt needed. However, this sense of disappointment was fed by reports that some at the ECB felt it was still being too optimistic and that the forecast pick in H2 might not materialize even considering these latest measures.
The euro sank yesterday to multi-year lows but has stabilized today. It tested but did not make a clean break below the $1.1185 area. A break of this last major retracement objective would set up a test of the January 2017 low near $1.0340. Even with the Fed on hold now, the monetary divergence theme remains intact and so we continue to look for further dollar gains.
The US February jobs data could be an important catalyst for an even higher US dollar. Consensus sees +180k non-farm payrolls vs. +304k in January. Average hourly earnings are expected to rise 3.3% y/y vs. 3.2% in January, which would match the cycle high. Unemployment is seen ticking down to 3.9%. Markets will be especially focused on the earnings data. Recent JOLTS data points to increased tightness in the labor market, which suggests growing wage pressures will be seen soon.
We have several pieces of the February jobs puzzle. Weekly initial jobless claims number for the survey week (the one that includes the 12th of the month) fell to 216k (later revised to 217k). This is the lowest reading since the week of January 18 (last month’s survey week) when claims came in at 200k. On the other hand, the jobs component in February ISM fell from 55.5 to 52.3 and in non-manufacturing ISM from 57.8 to 55.2. Lastly, ADP estimated 183k private sector jobs were created last month.
During the North American session, US January housing starts and building permits will also be reported. Fed Chairman Powell is the lone Fed speaker today. After his appearance, the media embargo for the March 20 FOMC kicks in. According to Bloomberg, there are no Fed speakers planned until Evans on March 24.
Canada reports February jobs data too. Jobs are expected to rise 1.2k vs. +66.8k in January. The data have come in weaker than expected of late, leading the BOC to deliver a dovish hold this week. More and more banks are calling for RBA rate cuts this year. If Canadian data continue to disappoint, we will likely see a growing chorus for BOC cuts as well.
Germany reported weak January factory orders. Instead of rising 0.5% m/m, order fell -2.6% m/m. The only silver lining was that December was revised to 0.9% from -1.6% previously. Italy and France reported January IP. Italy’s rose 1.5% m/m vs. 0.2% expected, while France’s rose 1.3% m/m vs. 0.1% expected.
China February trade data came in much worse than expected. Exports contracted -20.7% y/y vs. -5.0% expected while imports contracted -5.2% y/y vs. -0.6% expected. February CPI and PPI will come out Saturday morning local time. CPI is seen rising 1.5% y/y while PPI is seen rising 0.2% y/y. Low price pressures should allow the PBOC to inject more stimulus this year as needed.
The EU reportedly made a new Brexit offer to the UK. While it is meant to break the deadlock, sources say it falls short of what the UK has demanded. The EU proposal reportedly tinkers with a review system that’s already set out, which aims to track progress toward getting rid of the backstop. As of this writing, the UK has not yet responded to the EU offer. However, reports suggest that May will ask for more in a speech today. We do not think the EU will cede any more ground on the backstop.
EM FX has sold off sharply after the ECB decision and this trend should continue. While the more dovish eurozone (and US) interest rate outlooks should have helped risk assets such as EM, any positive impact was swamped by market concerns about the growing downside risks to global activity. Indeed, that has been the major reason why we have been so negative on EM this year and it seems markets are finally coming around to our view.
Taiwan February trade data confirmed the mainland reading. Exports contracted -8.8% y/y vs. -0.7% expected while imports contracted -19.7% y/y vs. +4.8% expected. CPI inflation remained steady at 0.2% y/y vs. 0.3% expected. While the central bank does not have an explicit inflation target, low prices should allow it to keep rates on hold this year. Next policy meeting is March 21, and rates are expected to be kept steady at 1.375%.