Dollar Firm as Risk-off Impulses Continue

  • Equity markets may find out if there is a Powell Put, Part Two
  • Fed officials continue to push back against any notions of easing; Fed Governor Brainard speaks today
  • Norway March manufacturing IP was -0.8% m/m; Norge Bank likely to deliver dovish hold tomorrow
  • RBNZ cut rates 25 bp to 1.5%, as expected; BOT kept rates steady at 1.75%, as expected
  • South Africa elections will be held today; Brazil COPOM is expected to keep rates steady at 6.5%

The dollar is mostly firmer against the majors as risk-off impulses continue. Swissie and yen are outperforming, while Nokkie and sterling are underperforming. EM currencies are mostly weaker. THB and ZAR are outperforming, while TRY and PHP are underperforming. MSCI Asia Pacific was down 1%, with the Nikkei falling 1.5% for the second straight day. MSCI EM is down 0.7% so far today, with the Shanghai Composite falling 1.1%. Euro Stoxx 600 is down 0.4% near midday, while US futures are pointing to a lower open. 10-year UST yields are down 3 bp at 2.43%, while the 3-month to 10-year spread has flattened 2 bp to 2 bp, the flattest since March 28. Commodity prices are mostly lower, with Brent oil down 0.6%, copper down 0.3%, and gold up 0.3%.

Equity markets may find out if there is a Powell Put, Part Two. Short answer is no, though we also downplayed risks of the first Powell Put back in January. Recall that the S&P 500 fell nearly 16% in December, prompting Powell and the Fed to backtrack from its December 19 hike. Given current levels, the S&P would have to fall below the 2500 area to generate a sell-off of similar magnitude to December.

Back then, markets were pricing in significantly higher recession risks. The US economy was in the midst of a soft patch that could have been made worse by the government shutdown. No wonder equity markets were so jittery.   Fast forward to today. We simply don’t think there is any economic justification for the Fed to consider cutting rates right now. The labor market is tight while the economy is humming along.

Falling equity markets this week reflect in part growth concerns stemming from renewed trade tensions. However, it is not up to the Fed to try and offset this potential negative with rate cuts. That is simply beyond the purview of the Fed. The Fed also cannot counter any financial instability that is “man-made.” To address these issues, it is up to the Trump administration to ease off of its reliance on tariffs and tariff threats.

Fed officials continue to push back against any notions of easing. Yesterday, Vice Chair Clarida said that he (like Powell) also views recent disinflation as transitory. Clarida added that “We don’t see a strong case to move rates in either direction.” Likewise, Governor Quarles downplayed the need to worry about inflation running slightly below target, adding that “From my point of view, 1.8 is two” [percent].

Fed Governor Brainard speaks today. Unlike the regional Fed presidents, the Board of Governors tends to move reliably in line with the Chair and Vice Chair. As such, we expect Brainard to toe the same line and stress steady rates for now along with no need to ease now.

Canada reports April housing starts. Yesterday, April Ivey PMI came in at 55.9 vs. 54.3 in March. Next BOC meeting is May 29. After moving to a neutral bias at its April meeting, we see no change this month. USD/CAD has remained largely in the 1.34-1.35 range since April 23. If oil breaks down further, we believe it would push this currency pair up into a higher trading range.

Germany reported firm March IP. It was expected to contract -0.5% m/m but instead rose 0.5%. Yesterday, Germany reported weaker than expected March factory orders (0.6% m/m). The EU just cut its German growth forecast to 0.5% for this year, the most pessimistic of the official organizations. Private sector consensus sees 0.9% growth this year. The EU also warned of ‘pronounced’ eurozone risks.

The euro has remained fairly resilient in recent days. After touching a new low for the year near $1.1110 on April 26, the single currency has bounced. It is having trouble breaking above the $1.12 area as fresh sellers emerge. Given the weak economic outlook, we look for new lows in the coming weeks.

Norway March manufacturing IP came in at -0.8% m/m vs. an expected gain of 0.3%. This dragged the y/y WDA rate down to 1.4% from 3.1% in February. Overall IP fared worse, contracting -6.5% y/y WDA vs. -5.7% in March. EUR/NOK and USD/NOK are moving higher, with the former on track to test the March highs near 9.8805 and the latter near 8.8205.

The soft data come ahead of the Norges Bank meeting tomorrow, where it is expected to keep rates steady at 1.0%. It just hiked rates 25 bp in March and signaled its intent to hike again as soon as June and then again in H2. However, it said rates would likely peak at 1.75%, which implies one more hike in 2020. Two more hikes this year seems aggressive, and we believe the Norges Bank may adjust its expected rate path down at this meeting.

Reserve Bank of New Zealand cut rates 25 bp to 1.5%, as expected. The bank signaled one more cut in 2020, which suggests it is not in any hurry now to cut again. RBNZ also pushed out when inflation will hit the 2% target to Q2 2021 from Q4 2020 previously. NZD traded at a new low for 2019 near .6525 after the decision before recovering. We believe Kiwi remains on track to test the October low near .6425.

Japan reported April services and composite PMI readings. The two came in at 51.8 and 50.8, respectively. March household spending and cash earnings will be reported Friday. Next BOJ meeting is June 20. While we expect the bank to add more stimulus this year, we think it will revolve around the impact of the October consumption tax hike.

Risk-off sentiment has weighed on USD/JPY. The pair is trading just below 110 at the lowest level since March 25. Retracement objectives from this year’s rise come in near 109.50 (38%), 108.65 (50%), and 107.75 (62%).

China reported April trade data. Exports were expected to rise 3.0% y/y but instead contracted -2.7%, while imports were expected to contract -2.1% y/y but instead rose 4.0%. Mainland data were consistent with Taiwan data reported yesterday. China appeared to stabilize in Q2 but it’s clearly a fragile stability even without renewed trade tensions.

Bank of Thailand kept rates steady at 1.75%, as expected. CPI rose 1.2% in April, still near the bottom of the 1-4% target range. It was a dovish hold, as BOT cut its growth forecast for this year by a couple of ticks to 3.8% due largely to weaker exports. Consensus sees the next hike coming in 2020. We concur and see steady rates in 2019.

South Africa elections will be held today. Final results are not expected until Friday and no exit polls will be published. Recent polls suggest the ANC will win somewhere between 51-61% of the vote. We think that the higher the margin of victory, the better it will be for the rand and South African assets. If Ramaphosa receives a strong mandate, it will strengthen his hand within an ANC that remains deeply divided. Please see our recent MarketView piece on South Africa (Next South Africa President Inherits a Poor Outlook for the Economy).

Brazil COPOM is expected to keep rates steady at 6.5%. April IPCA inflation will be reported Friday and is expected to rise 5.0% y/y vs. 4.58% in March. If so, it would be the highest since January 2017 and nearing the top of the 2.75-5.75% target range. Markets do not expect a rate hike until early 2020. If price pressures continue to rise, we look for a hike in H2 2019. Please see our recent MarketView piece on Brazil (Markets Underestimating Brazil COPOM’s Need to Tighten in 2019).