Dollar Firm as Market Sentiment Improves

  • Market sentiment has improved on signs that trade tensions won’t get worse near-term
  • Another revision to US Q2 GDP will be seen today, with growth expected at 2.0% SAAR
  • It looks like the US will try to take advantage of low borrowing rates
  • Germany August unemployment rose 4k; Italy President Mattarella gave Conte a mandate to form a government
  • Legal challenges to UK Prime Minister Johnson’s effort to suspend Parliament have already begun
  • South Africa July PPI rose 4.9% y/y; Argentina is seeking to extend maturities on its debt coming due; Banco de Mexico releases its minutes

The dollar is mostly firmer against the majors as market sentiment improves.  The dollar bloc is outperforming, while Nokkie and yen are underperforming.  EM currencies are mixed.  ZAR and PHP are outperforming, while TRY and KRW are underperforming.  MSCI Asia Pacific was flat, with the Nikkei falling 0.1%.  MSCI EM is up 0.1% so far today, with the Shanghai Composite falling 0.1%.  Euro Stoxx 600 is up 1.1% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 1 bp at 1.49%, while the 3-month to 10-year spread has steepened 2 bp to stand at -49 bp.  Commodity prices are mixed, with Brent oil down 0.2%, copper up 1%, and gold flat.

Market sentiment has improved on signs that trade tensions won’t get worse near-term.  China announced that it won’t immediately retaliate against the latest round of tariff increases by the US.  Officials did not rule out eventual action but for now, it seems cooler heads are prevailing in Beijing.  Furthermore, the PBOC continues to fix the yuan firmer than what market models suggest and that is helping boost sentiment too.

Another revision to US Q2 GDP will be seen today, with growth expected at 2.0% SAAR vs. 2.1% previously.  The Atlanta Fed’s GDPNow model is tracking 2.3% SAAR growth in Q3.  This is above trend (~2%) and little changed from the preliminary 2.1% SAAR in Q2.  Elsewhere, the NY Fed’s Nowcast model is tracking 1.8% SAAR growth in Q3.  July goods trade data and retail/wholesale inventories will also be reported today, as well as weekly jobless claims.

Still, we must acknowledge that as the US-China trade war extends and expands, the risk of recession has risen sharply.  WIRP suggests 100% odds of a rate cut September 18, while the odds of a 50 bp move remain low near 7%.  Elsewhere, the implied yield on the January 2020 Fed Funds futures contract is around 1.54%, which means 50-75 bp of easing before year-end is priced in.  The implied yield on the January 2021 contract has fallen to a cycle low .94%, which means that a third cut is starting to get priced in for 2020.

It looks like the US will try to take advantage of low borrowing rates.  Treasury Secretary Mnuchin said issuance of an ultra-long bond is “under very serious consideration.”  With yields on the 30-year Treasury bond at record lows below 2%, issuing 50- or 100-year debt would allow the US to lock in low borrowing rates.  

Germany August unemployment rose 4k, as expected.  CPI will come out later today and is expected to fall to 1.5% y/y from 1.7% in July.  Some German states have reported their readings already and they point to slight downside risks to the national number.  Eurozone reports August CPI Friday, which is expected to fall a tick to 1.0% y/y.  All signs point to ECB easing September 12.  WIRP suggests 100% odds of a cut, with 27% odds of a 20 bp move.

Italy President Mattarella gave Giuseppe Conte a mandate to form a government.  It appears that Conte will remain Prime Minister, with the Deputy post going to someone from the Democratic Party instead of Five Star leader Di Maio.  The two parties have until next week to formally come together but for now, the worst-case scenario of fresh elections seems to have been avoided.

Legal challenges to UK Prime Minister Johnson’s effort to suspend Parliament have already begun.  Over 70 MPs have sought an urgent court hearing in Edinburgh to determine whether the move is legal.  Another Brexit opponent has filed a separate legal challenge in London, also seeking an urgent review.  Whatever the outcomes may be, the underlying signal to the markets is that Johnson is attempting to remove all obstacles to a potential hard Brexit and that’s very negative for sterling.

South Africa July PPI rose 4.9% y/y vs. 5.3% expected and 5.8% in June.  This suggests further disinflation ahead for consumer prices after July CPI rose 4.0% y/y, lower than expected and matching the cycle lowest from January.  As such, we think the SARB is likely to cut rates again at the next policy meeting September 19.

As a result of recent market pressures, Argentina is seeking to extend maturities on its debt coming due.  The government will reportedly postpone $7 bln of payments on short-term local notes and seek “voluntary reprofiling” of $50 bln of longer-term debt.  New Economy Minister Lacunza said Argentina will also start talks with the IMF regarding repayment of its $44 bln in aid.  These moves may ease default risk near-term, but investors are left wondering what will happen of opposition candidate Fernandez wins in October.

Banco de Mexico releases its minutes.  At that August 15 meeting, the bank surprised markets with a 25 bp cut to 8.0%.  Yesterday, it released its quarterly inflation report and cut its growth forecast for this year to 0.2-0.7% from 0.8-1.8% previously and for next year to 1.5-2.5% from 1.7-2.7% previously.  Next policy meeting is September 26.