China will no longer be labeled a currency manipulator; the dollar continues to gain traction
This week sees a 1-2-3-4 punch of major December US data starting with CPI today
Markets are starting to get a taste of just how difficult it will be for the UK and EU to strike a trade deal by year-end; French pension reform appears to be creeping forward
Japan reported November current account data; China exports jumped 7.6% y/y in December, much higher than expected but due largely to base effects
The dollar is mostly firmer against the majors ahead of key US data. Swissie and Stockie are outperforming, while the dollar bloc is underperforming. EM currencies are mostly weaker. PHP and PLN are outperforming, while TRY and MYR are underperforming. MSCI Asia Pacific was up 0.3% on the day, with the Nikkei rising 0.7% after Japan returned from holiday. MSCI EM is flat so far today, with the Shanghai Composite falling 0.3%. Euro Stoxx 600 is flat near midday, while US futures are pointing to a lower open. 10-year UST yields are down 1 bp at 1.83%, while the 3-month to 10-year spread is down 2 bp at +29 bp. Commodity prices are mixed, with Brent oil up 0.7%, copper down 0.3%, and gold down 0.2%.
China will no longer be labeled a currency manipulator. Recall that China was designated a manipulator in a baldly political move back in August, even though it only met one of the three criteria needed to be labeled as such. The news is not a huge surprise, though some reports suggest this was a pre-condition to the planned signing of the Phase One deal Wednesday. Still, the symbolic gesture is just more confirmation that both sides are on their way towards improved trade relations and this should continue to boost risk assets. Treasury Secretary Steven Mnuchin said that “China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability.” The yuan continues on its steady appreciating trend, now over 4% stronger against the dollar since September.
There are some other points of note in the so-called “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.” These include 1) the return of Switzerland to the monitoring list for having “increased markedly” its FX purchases, 2) Thailand and Taiwan are close to breaching the thresholds to being listed, and 3) Vietnam got a pass again as it “credibly conveyed” that it’s FX purchases are required for re-building reserves. We will be writing a longer piece on this latest Treasury report today.
The dollar continues to gain traction. We remain bullish on the dollar and DXY appears on track to test the December 23 peak near 97.817. Break above the 97.71 area would set up a test of the November 29 high near 98.544. The euro’s bounce has run out of steam near the $1.1150 area, while sterling has been unable to recover back above the $1.30 area. Meanwhile, USD/JPY traded today at new highs for the cycle above the 110 area, and the pair is on track to test the May 21 high near 110.65.
This week sees a 1-2-3-4 punch of major December US data starting with CPI today. This will be followed quickly by PPI Wednesday, retail sales Thursday, and IP Friday. The jobs data last week were disappointing but do not change our relatively upbeat view of the US economy. Headline CPI is seen rising 2.4% y/y, which would be the highest since October 2018. While this is largely energy-driven, note that core CPI is seen rising 2.3% y/y and is just below the 2.4% cycle high. A similar dynamic is seen for PPI, with both headline and core expected to rise 1.3% y/y.
During the North American session, there are some other events to note besides the CPI report. US December real average earnings will be reported. In terms of the Fed, Williams and George speak today. Yesterday, Bostic toed the party line and gave an upbeat outlook for the US economy. That said, he reiterated that there is “a pretty high bar” for the Fed to contemplate a rate hike. Bostic is not a voter this year but we believe his view is pretty much the consensus on the FOMC currently.
Markets are starting to get a taste of just how difficult it will be for the UK and EU to strike a trade deal by year-end. The European Commission just issued its demand that existing reciprocal access to fishing waters be maintained. One EU official said this is the first time that a fishing accord has been a pre-condition for a trade deal, and totally goes against Johnson’s stance that the UK will reassert control over its fishing waters. Elsewhere, global investment banks are lobbying to maintain their easy access to the EU market, asserting that EU rules could damage business and threaten financial stability. These two issues are just the tip of the iceberg and so our base case remains an extension for Brexit beyond December 1.
French pension reform appears to be creeping forward. After weeks of strikes that crippled public transportation, President Macron is trying to find a compromise solution. By dropping his proposal to raise the so-called pivot age allowing full retirement benefits from 62 to 64 years, Macron has been able to get the major unions back to the negotiating table. Yet Prime Minister Philippe warned that if a deal is not struck within three months, the government will issue new rules by decree to bring the pension fund into balance by 2027. Stay tuned.
Japan reported November current account data. The adjusted balance was JPY1.79 trln vs. JPY1.78 trln expected. Of note, the trade balance was in slight deficit but was more than offset by the typically large income surplus from overseas investment. USD/JPY continues to edge higher, trading above the 110 level for the first time since May 23. The move has been gradual and attributed to the usual factors, including a decline in demand for safe-haven assets, the revival in interest for carry trades, but also to broadly stronger dollar since the start of the year. The May 21 high near 110.65 is the next target, followed by the April 24 high near 112.40. Of note, USD/JPY risk reversals are gradually but consistently pricing out demand for downside protection in the options markets.
China exports jumped 7.6% y/y in December, much higher than expected but due largely to base effects. Imports also soared, up 16.3% y/y, leading to a widening of the trade surplus from $38.7 to $46.8 bn. Trade with the US continued to decline, with the surplus falling to $23 bln, compared to a high of $42 bln in the end of 2018. It’s too early to gauge the impact of improving trade tensions, but the first positive ripples are starting to be seen in the data.