Dollar Firm After FOMC Minutes but Aussie Takes the Spotlight

  • The FOMC minutes can be best described as less dovish than anticipated
  • The next piece of the US labor market puzzle comes out today
  • Eurozone flash PMI readings for February were reported; ECB will release the record of its January 24 meeting
  • Reports suggest the Chinese port of Dalian has banned coal imports from Australia; Australia reported January jobs data
  • Korea reported weak trade data for the first 20 days of February
  • Bank Indonesia kept rates steady at 6.0%, as expected; Banco de Mexico releases minutes

The dollar is mostly firmer against the majors in the wake of the FOMC minutes. Sterling and yen are outperforming, while the Antipodeans are underperforming. EM currencies are mixed. ZAR and TRY are outperforming, while THB and MYR are underperforming. MSCI Asia Pacific was up 0.2%, with the Nikkei rising 0.2%. MSCI EM is up 0.3% so far today, with the Shanghai Composite falling 0.3%. Euro Stoxx 600 is down 0.1% near midday, while US equity futures are pointing to a higher open. 10-year UST yields are up 2 bp at 2.66%. Commodity prices are mixed, with Brent oil up 0.2%, copper down 0.7%, and gold down 0.2%.

The FOMC minutes can be best described as less dovish than anticipated. The Fed saw continued sustained expansion, a strong labor market, and inflation near target. While it saw recent household data as strong, the FOMC saw risks from slowing global growth, China trade tensions, and the partial shutdown. Yet “several” saw a 2019 rate hike if the economy stays on track. Lastly, almost the entire FOMC wanted to announce an end to the balance sheet runoff before too long.

All of these talking points really aren’t that surprising considering the Fed’s dovish shift last month. However, the dollar caught a bid because the market was looking for something much more dovish and didn’t quite get it. Still, Fed tightening expectations for 2019 remain extremely low, almost non-existent.

The next piece of the US labor market puzzle comes out today. The weekly initial jobless claims (228k expected) are for the BLS survey week (the week that contains the 12th of the month). Also today, the US reports December durable goods orders (1.7% m/m expected), February Philly Fed survey (14.0 expected) and Market PMIs (54.8 manufacturing expected), and January leading index (0.1% m/m expected) and existing home sales (0.2% m/m expected).

Eurozone flash PMI readings for February were reported. Headline manufacturing PMI fell below 50 to 49.2 vs. 50.3 expected and 50.5 in January, but a rise in the services PMI to 52.3 (51.3 expected) boosted the composite PMI to 51.4 vs. 51.1 expected and 51.0 in January. The sub-50 manufacturing reading was the first for this cycle and bears watching.

The country breakdown was worrisome. Germany manufacturing PMI dropped sharply to 47.6 vs. 49.8 expected and 49.7 in January, but a much firmer services PMI of 55.1 (52.9 expected) boosted the composite reading to 52.7 vs. 52.0 expected. France saw higher readings for both manufacturing (51.4) and services (49.8), pushing its composite higher to 49.9 vs. 48.9 expected and 48.2 in January. Germany’s role as the engine of eurozone growth is clearly ebbing.

The ECB will release the record of its January 24 meeting. Then, Draghi acknowledged that risks had shifted to the downside yet still maintained the forward guidance for a rate hike after this summer. Next policy meeting is March 7 and updated staff forecasts will be released. Things have gotten worse since the last update in December. Will the ECB acknowledge this?

Reports suggest the Chinese port of Dalian has banned coal imports from Australia. The Foreign Ministry would not confirm it was specifically targeting Australia, adding that authorities regularly inspect coal imports for environmental reasons. At face value, the move seems to be retaliation for Australia following the US lead in banning Huawei from its 5G network for security reasons.

Australia reported strong January jobs data. A total of 39.1k jobs were added vs. 15k expected. 65.4k full-time jobs were added but this was offset by -26.3k part-time jobs. Note that this was the opposite of last month, when a revised 16.9k gain (was 21.6k) was heavily weighted towards part-time work (26.4k) that offset a -9.5k drop in full-time work. The unemployment rate was steady at 5.0%.

AUD had a see-saw day because of the conflicting drivers. After making a new high for this move near .7205, it reversed lower. A close below yesterday’s low near .7140 would give us an outside down day that points to further Aussie losses ahead. Near-term target is the February 12 low near .7055.

Korea reported weak trade data for the first 20 days of February. Exports contracted -11.7% y/y and imports by -17.3% y/y. Korea offers the earliest and arguably cleanest reads for regional trade and so this report will be closely watched. Headwinds to the economy are building and so we see very little in the way of tightening this year after the Bank of Korea first hiked in November. Next policy meeting is February 28, no change is expected then.

Bank Indonesia kept rates steady at 6.0%, as expected. It was a dovish hold, as it dropped previously language regarding a “hawkish” stance “pre-emptive” policy in favor of maintaining “external stability.” CPI rose 2.8% y/y, the lowest since August 2016 and below the 3.5% target. If the rupiah remains relatively firm, we think Bank Indonesia may contemplate a rate cut later this year. We know the government has made attempts to reflate the economy ahead of April elections.

Banco de Mexico releases minutes. The bank delivered a dovish hold this month, suggesting the tightening cycle is over. Mexico reports mid-February CPI Friday, which is expected to rise 4.05% y/y vs. 4.52% in mid-January. If so, this would be the lowest since December 2016 and nearing the top of the 2-4% target range. Yet as long as the peso remains vulnerable, the notion of rate cuts is off the table. Next policy meeting is March 28, no change is expected then.