Dollar Firm, Markets Calm Ahead of Brexit Vote

  • UK Parliament is scheduled to hold its Brexit vote today
  • Market moves during the initial post-vote period will be most difficult to gauge
  • US reports December PPI
  • Germany posted growth of 1.5% in 2018, the weakest in five years
  • Japan reported weak December machine tool orders
  • China reported December money and loan data; Israel reports December CPI

The dollar is mostly firmer against the majors ahead of the Brexit vote in UK parliament.  Loonie and Nokkie are outperforming, while the euro and Swissie are underperforming.  EM currencies are mostly weaker.  PHP and IDR are outperforming, while the CEE currencies are underperforming.  MSCI Asia Pacific was up 1.1%, with the Nikkei rising 1% after reopening from holiday.  MSCI EM is up 1.1% so far today, with the Shanghai Composite rising 1.4%.  Euro Stoxx 600 is up 0.2% near midday, while US equity futures are pointing to a higher open.  The US 10-year yield is down 1 bp at 2.69%.  Commodity prices are mostly higher, with Brent oil up 1.3%, copper up 0.3%, and gold down 0.1%.

UK Parliament is scheduled to hold its Brexit vote today.  The outcome is expected sometime between 8-9 PM London time, and is widely expected to result in a rejection of May’s plan.  What’s unclear is what happens next.  Please see our recent piece entitled “Possible Brexit Scenarios.”  Sterling has been unable to hang on to its recent gains ahead of the vote.  For the most part, after an initial sell-off, the scenarios would seem to favor UK assets for anything other than a no-deal Brexit.

Yet it is the initial post-vote period that will be most difficult to gauge.  Some are looking at the margin of defeat as a useful predictor of what comes next.  For instance, a narrow defeat would seem to favor either a second referendum or an extension of the Article 50 deadline.  The situation remains very fluid and so the only call that we can make with any degree of confidence is that volatility is likely remain elevated.

US reports December PPI.  Headline is expected to remain steady at 2.5% y/y, while core is seen accelerating to 3.0% y/y from 2.7% in November.  A lot of US data have been delayed by the partial government shutdown, including trade, inventories, new home sales, construction spending, factory and durable goods orders, and the monthly budget statement.

This is another day with a heavy speaking schedule for Fed officials.  Kashkari, George, and Kaplan speak today.  All are expected to continue stressing “caution” and “flexibility.”  The Fed’s Beige Book will be released as scheduled tomorrow.  This comes ahead of the January 30 FOMC meeting, where markets are putting a zero chance on a hike then.

Germany posted growth of 1.5% in 2018.  This was the weakest reading in five years and underscores the slowdown gripping the eurozone currently.  Q4 data was not broken out yet, but the nation’s Federal Statistics Office said there was a “slight” increase in GDP last quarter.  The office added that this estimate is preliminary and based on only about half the information for last quarter.

Between the soft data and Brexit risks, the euro remains heavy.  After testing the $1.15 area again earlier today, it is trading at the day’s low.  A close below yesterday’s low near $1.1440 would give us an outside down day that signals further losses ahead.

Japan reported weak December machine tool orders.  Orders contracted -18.3% y/y vs. -17% in November and was the weakest reading since July 2016.  The BOJ is likely frustrated by the firm yen, which tends to hurt export competitiveness and dampen inflation.  Given recent economic trends in Japan, we see no end to BOJ stimulus until well into 2021.

China reported December money and loan data.  Closely watched new loans rose CNY1.08 trln vs. CNY825 bln expected, while aggregate financing rose CNY1.6 trln vs. CNY1.3 trln expected.  The uptick was to be expected after several rounds of monetary easing last year, and this is likely to continue in Q1 after the recent cut in reserve requirements.   Yet the real sector data remain weak.  Yesterday, officials said taxes will be cut “on a larger scale” to support the economy.

Israel reports December CPI, which is expected to rise 1.0% y/y vs. 1.2% in November.  If so, inflation would be back below the 1-3% target range.  For now, the central bank is likely to maintain a cautious tightening stance after starting the cycle back in November with a 15 bp hike to 0.25%.  Next policy meeting is February 25, no change is expected then.