Dollar Decoupling Continues

  • President Trump finally conceded the election, hopefully closing a turbulent chapter of the country’s history; markets are already looking ahead to the Biden administration
  • The highlight today is US December jobs data; weekly jobless claims suggest a slightly improving labor market as 2021 begins; the US curve continues to steepen; so far, Fed officials do not seem concerned with this steepening; Canada also reports December jobs data
  • Germany reported firm November IP, trade, and current account data; share prices of China’s three major telecoms companies plunged after MSCI stated that it will remove them from its indexes; Taiwan reported December trade data

The Blue Wave trades remain in play but the dollar is still not partaking.  Equity markets are higher and UST prices are lower.  Yet DXY is up for the third straight day and traded above 90 for the first time since December 29.  We view this bounce as temporary and continue to target the February 2018 low near 88.25.  The euro tested the $1.22 area today but has since recovered nearly half a cent, while sterling is trying to climb back above $1.36. USD/JPY traded above 104 today for the first time since December 15 but could not sustain the move and now feels heavy at around 103.85.

 

AMERICAS

President Trump finally conceded the election, hopefully closing a turbulent chapter of the country’s history. In a recorded statement, Trump said he is now purely focused on the transition to the Biden administration and added that he was “outraged by the violence, lawlessness, and mayhem.” More top White House staff officials have resigned, including Education Secretary DeVos and Transportation Secretary Chao (married to Mitch McConnell). Acting head of the Council of Economic Advisers Goodspeed also resigned, while reports suggest Treasury Secretary Mnuchin wants to stay on to ensure that the transition to Janet Yellen goes smoothly.

Despite easing tensions, top Democratic leaders are calling for Trump to be removed from office for inciting the events in Washington. Schumer and Pelosi are threatening impeachment if Vice President Pence and the cabinet do not invoke the 25th Amendment. With less than two weeks to go before Trump’s term ends, there simply may not be enough time for either process to play out. That said, the fact that Trump released the recorded statement suggests he realizes how damaging the entire episode has been to his political standing, especially within his own party. As such, we do not expect any resumption of tensions or large-scale protests ahead of January 20.

Markets are already looking ahead to the Biden administration. US equity markets are trading at record highs on stimulus hopes. Even NASDAQ has joined the party despite fears of greater regulatory scrutiny on tech companies under the Blue Wave. Conversely, longer-dated US Treasury yields have risen (see below). As noted yesterday, the dollar is the missing piece right now. We continue to believe that the Blue Wave favors a weaker dollar and view recent gains as corrective in nature. Weakness should resume in the coming days.

The highlight today is US December jobs data. Consensus sees +50k vs. +245k in November, with unemployment seen rising a tick to 6.8%. If so, this would be the first rise in the rate since April. Of note, the estimates range from -400k to +250k. The -123k reading for private sector jobs from ADP has lowered expectations a bit. We got the final clue yesterday with the December ISM services PMI report. While the headline reading came in higher than expected at 57.2 vs. 55.9 in November, the details were not so good. The employment component dropped below 50 to 48.2, the lowest reading since August. November wholesale trade sales and inventories and consumer credit will also be reported.

Weekly jobless claims suggest a slightly improving labor market. Data yesterday showed regular initial claims steady at 787k for the week ending January 2, meaning the previous week’s improvement was sustained. PUA initial claims fell to 161k and to the two programs together totaled 948k, the lowest since , both the lowest since mid-March. Meanwhile, regular continuing claims fell to 5.07 mln for the week ending December 26, the lowest since mid-March.  Both PUA and PEUC continuing claims fell to a total of 12.9 mln for the week ending December 19, the lowest since mid-September. Overall, the signs point to a modestly improving labor market after weakening earlier in the month. As such, perhaps job growth will pick up in January.

The US curve continues to steepen. At 100 bp, the 3-month to 10-year curve is the steepest since March and the year’s high comes in near 120 bp on March 18. The 10-year yield of 1.08% is also the highest since March 18, while 10-year TIPS inflation breakeven inflation rate of 2.10% is the highest since October 2018. Clearly, the rise in the long end is driven in part by rising inflation expectations. However, we also believe that supply concerns are playing a part since the next round of stimulus will have to be funded by increased debt issuance.

So far, Fed officials do not seem concerned with this steepening. Kaplan said he expects yields to rise due to an improved economic outlook, adding that the Fed should not intervene to prevent this from happening. Bullard expects longer-term rates to rise as the economy recovers, adding that rising bond yields also reflect hopes for an end to the pandemic. Bullard added that the ingredients for higher inflation are in place and that negative rates are not a good option for the US. These two are both non-voters in 2021. We know from the December FOMC minutes that “a couple” of Fed officials were concerned about rising long rates.

Canada also reports December jobs data. Consensus sees -37.5k vs. +62.1k in November. If so, this would be the first monthly job loss since April, when the pandemic first hit. With virus numbers rising across the country, the economy will slow as lockdowns continue. That said, the Bank of Canada is on hold for now as fiscal policy will be the main channel for stimulus in 2021. Next policy meeting is January 20 and no change then is expected.

 

EUROPE/MIDDLE EAST/AFRICA

Germany reported firm November IP, trade, and current account data. Following yesterday’s better-than-expected factory orders data, IP rose 0.9% m/m and October was revised up to 3.4% from 3.2% previously. Exports rose 2.2% m/m vs. 1.0% expected while imports jumped 4.7% m/m vs. 0.4% expected. This means that Q4 GDP might end up better than first thought. Germany remains the engine of eurozone growth, but other countries are starting to look better ahead of these most recent virus restrictions. Separately, the eurozone unemployment rate for November fell a tick to 8.3%, better than the 8.5% expected.

 

ASIA

The share prices of China’s three major telecoms companies plunged after MSCI stated that it will remove them from its indexes after they were delisted in New York. The move, which now seems final, comes after a series of flipflops on the issue. Other indices will follow (S&P, Dow Jones, FTSE Russell, etc). This now means a huge outflow from passive investment and funds benchmarked to these indices. MSCI noted that the decision applies to shares that trade in Hong Kong, which are traded far more actively than those in New York. As such, there is likely to be some selling pressure on the HKD as funds rebalance their holdings in the coming days. According to Bloomberg, trading volumes in China Mobile shares reached $5.7 bln, the second highest on record, given it had a weighting of 1.1% in the MSCI China Index.

Taiwan reported December trade data. Exports rose 12.0% y/y vs. 10% expected and 12.0% in November, while imports are rose 0.9% y/y vs. 4.3% expected and 10.0% in November. Firm exports reflect the improved regional outlook and activity, but soft import suggest domestic demand is lagging. Export gains were broad based, with China (17.1% y/y), Germany (10.6% y/y), the US (7.5%), and Japan (3.3%) the major drivers. The gains are particularly noteworthy in light of ongoing TWD strength, with USD/TWD trading below 28 this week for the first time since July 1997. Despite being put on the currency manipulation Monitoring List, the central bank is likely to continue intervening to lean against the wind.