Dollar Firm as New Month Begins

  • The dollar had a stellar November after a shaky October, and gains should continue in December
  • A Phase One trade deal remains elusive; November ISM manufacturing PMI will be reported
  • With ten days to go, the Conservative Party lead in the polls has narrowed; eurozone and UK reported final manufacturing PMIs
  • Turkey’s Q3 GDP rose 0.9% y/y, slightly below expectations; oil prices remain volatile ahead of the OPEC+ meeting in Vienna Thursday
  • China reported November PMIs and brought a welcome dose of optimism to the region

The dollar is mixed against the majors as liquidity returns after the US holiday and a new month begins.  The Antipodeans are outperforming, while sterling and yen are underperforming.  EM currencies are mostly weaker.  PLN and HUF are outperforming, while MXN and PHP are underperforming.  MSCI Asia Pacific was up 0.5% on the day, with the Nikkei rising 1.0%.  MSCI EM is up 0.1% so far today, with the Shanghai Composite rising 0.1%.  Euro Stoxx 600 is up 0.4% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 6 bp 1.84%, while the 3-month to 10-year spread has risen 6 bp to +27 bp.  Commodity prices are mostly higher, with Brent oil up 2.2%, copper up 0.4%, and gold down 0.4%.

The dollar had a stellar November after a shaky October, and gains should continue in December.  On Friday, DXY traded at its highest level since October 15 near 98.544 before falling back.  The dollar’s performance is all the more remarkable given the slowdown in the US economy in Q4.  That narrative is shifting, however, as the US economy is doing better than expected (see below).  We believe this makes further dollar gains more likely as 2019 winds down and we move into 2020.

Local press reports the Chinese government will insist on getting a rollback of tariffs as part of a Phase One deal. The US seems prepared to remove the tariffs due in December, but not (yet) a full roll back on existing tariffs.  This has always been one of main points of contention in this round of the negotiations, so it shouldn’t come as a surprise that both sides are digging in. We would expect more negative headlines as negotiators follow the usual script of brinkmanship. The same goes to the discussions surrounding human rights and Hong Kong.

Indeed, press reports suggest the Phase One trade deal has stalled due to Hong Kong legislation passed by the US Congress.  However, it’s positive that China’s retaliation so far has left out trade.  Instead, China sanctioned some human rights groups and suspended further Hong Kong port visits by US Navy ships.  These measures are largely symbolic but until a trade deal is wrapped up, we remain cautious on EM.  Note Hong Kong October retail sales contracted -26.2% y/y in volume terms, worse than expected and compares to -20.3% in September.



The US economy has not slowed as sharply as anticipated in Q4.  The Atlanta Fed’s GDPNow model currently estimates Q4 GDP growth at 1.7% SAAR, up from 0.4% previously.  Elsewhere, the NY Fed’s Nowcast model now has Q4 growth at 0.77% SAAR, up from 0.71% previously.  The Atlanta Fed may be overstating growth a bit and the NY Fed understating it, but we suspect the truth is somewhere in between.  Either way, we are far from recession and the Fed is right to pause this month to assess the landscape.

Indeed, the Fed’s Beige Book report released last Wednesday for the upcoming December 11 FOMC meeting was fairly upbeat.  It noted that the economy expanded “modestly” through mid-November, highlighting steady consumer spending and some signs of improvement in manufacturing.  Employment continue to rise slightly, while wage pressures intensified in low-skill jobs.  Lastly, it noted that “firms generally expected higher prices going forward.”

During the North American session, November ISM manufacturing PMI will be reported.  It is expected at 49.2 vs. 48.3 in October.  This will be the first snapshot for November and will likely set the tone for a data-heavy week that culminates with the jobs reports Friday.  There are no Fed speakers today.



Eurozone final November manufacturing PMI rose to 46.9 from a preliminary 46.6.  Germany improved to 44.1 from 43.8 preliminary and France improved to 51.7 from 51.6 preliminary, while Spain came in at 47.5 and Italy at 47.6, both better than expected.  Final services and composite PMI readings will then be reported Wednesday.  The euro traded Friday at its lowest level since October 10 near $1.0980 but then recovered to end the week back above $1.10.  It remains heavy and we look for further losses ahead with a near-term target of the October 1 low near $1.0880.

With ten days to go, the Conservative Party lead in the polls has narrowed. Labour’s standing has improved in four of the five latest polls, and the difference between the two parties has fallen to an average of around 10 percentage points.  There is, however, a new variable to consider: the impact of the deadly attacks at London Bridge last Friday. It’s unclear which party will be best able to capitalize on the renewed focus on national security. And if this isn’t enough uncertainty, Trump is flying in to London today for a two-day NATO summit.  Note final manufacturing PMI came in at 48.9 vs. 48.3 preliminary.  Final readings for services and composite PMI will be reported Wednesday.  Sterling has been remarkably stable, still trapped in the middle of a broad range of $1.28-1.30 since mid-October.

Turkey’s Q3 GDP rose 0.9% y/y, slightly below expectations but a big bounce from last quarter’s negative print. The improvement came on the back higher domestic consumption and exports. The government is penciling in 5% growth for next year, which seems very unlikely even with expected stimulus. Both the IMF and markets are expecting growth to be close to zero for 2019 and rising to between 2.3-3.0% next year. The lira is unchanged on the day and the local equity index is up 0.8%, but in line with regional trend.

Oil prices remain volatile ahead of the OPEC+ meeting in Vienna Thursday.  Last week, oil plunged after OPEC+ forecast a global oil surplus in 2020 but signaled that it doesn’t plan deeper output cuts.  Iraq ten surprised markets over the weekend by saying that additional cuts of around 400,000 bbl/day was possible.  Note that the current cuts are scheduled to end in March and so an extension will also have to be announced.



Japan final manufacturing PMI came in at 48.9 vs. 48.6 preliminary.  Better yet, press reports suggest the government is planning on a supplemental budget worth at least JPY12 trln ($110 bln).  Discussions will be held early this week before a final decision is made.  So far, the October data have been terrible and so the calls for fiscal stimulus have grown louder.  USD/JPY continues to edge higher and is trading at the highest level since May 30 near 109.75.  The pair should soon break above 110 to test the late May highs near 110.65.

Korea November CPI came in at 0.2% y/y vs. 0.7% expected and flat in October.  Inflation remains well below the 2% target.  Bank of Korea just left rates steady and cut its growth forecasts, but Governor Lee believes the economy is bottoming.  That remains to be seen and we would not rule out further easing in 2020.  Indeed, Korea reported weaker than expected November trade data over the weekend.  Exports contracted -14.3% y/y and imports by -13.0% y/y, both readings near the worst of the cycle.  Exports have contracted twelve straight months and show little sign of turning around yet.  This is a bad sign for the entire region, as Korea serves as a reliable bellwether.

China reported November PMIs and brought a welcome dose of optimism to the region. The official manufacturing PMI surprised on the upside at 50.2, the fist print in expansion territory since April. The Caixin manufacturing print came in at 51.8, slightly higher than the previous month’s reading. Lastly, the non-manufacturing component came in at 54.4, well above expectations and the October print. The numbers reflect some positive impact from the government’s stimulus measures, but also improved sentiment on the trade front.  Indeed, export orders rose to the highest in seven months but remain in contraction territory.