Dollar Firm, Markets Calm Ahead of US Midterm Elections

  • Markets await the results of today’s US midterm elections
  • US rates are struggling to maintain upward momentum
  • Italian Finance Minister Tria refuted press reports that he was going to present a revised draft budget to the EU
  • Eurozone reported final services and composite PMI readings for October
  • RBA left policy unchanged last night, as expected
  • Philippines October CPI remained steady at 6.7%y/y; Brazil COPOM released its minutes

The dollar is mostly firmer against the majors in narrow ranges ahead of the US midterm election results tonight.  The Antipodeans are outperforming, while Stockie and Loonie are underperforming.  EM currencies are mostly weaker.  PHP and IDR are outperforming, while TRY and ZAR are underperforming.  MSCI Asia Pacific was up 0.8%, with the Nikkei rising 1.1%.  MSCI EM is down 0.1% so far today, with the Shanghai Composite falling 0.2%.  Euro Stoxx 600 is down 0.2% near midday, while US futures are pointing to a lower open.  The US 10-year yield is down 1 bp at 3.19%.  Commodity prices are mostly lower, with Brent oil down 0.4%, copper down 0.2%, and gold up 0.3%.

Markets remain calm as they await the results of today’s US midterm elections.  Projected results will start coming out during the early Asian session.  As we wrote yesterday (“Thoughts on the US Elections and Economic Outlook”), the market has priced in a Democratic victory in the House and a Senate victory in the Senate.

US rates are struggling to maintain upward momentum.  The 10-year yield has so far proven unable to sustain a move above 3.20%.  This is a bit disappointing given the firm US data seen so far for October.  Yesterday, ISM non-manufacturing PMI came in at 60.3 vs. 59.0 expected.

During the North American session, the US reports September JOLTS job openings.  The labor market remains strong and should be reflected in another good JOLTS reading.  Because of the press embargo ahead of the FOMC meeting Thursday, there are no Fed speakers until the day after.

Italian Finance Minister Tria refuted press reports that he was going to present a revised draft budget to the EU.  Rather, he said the government is currently not changing the budget.  Italy was asked to deliver a revised budget to the EU by next Tuesday, November 13.  Nervousness ahead of that date is likely to contain euro rallies.  Indeed, it remains heavy but a break below the $1.1360 area is needed to set up a test of the October low near $1.13.

Eurozone reported final services and composite PMI readings for October.  The headline readings improved to 53.7 and 53.1, respectively.  Looking at the country breakdown, Spain and Germany improved while Italy and France worsened.  Of note, Italy’s readings fell sharply to 49.2 and 49.3 respectively.  This couldn’t have come at a worse time for Tria, who is already saddled with unreasonably optimistic growth forecasts in the draft budget.

Germany reported stronger than expected factory orders.  Orders rose 0.3% m/m rather than the expected -0.5% contraction.  However, orders still contracted -2.2% y/y and was the steepest drop with four straight months in negative territory.

RBA left policy unchanged last night, as expected.  However, it delivered a hawkish hold by marking up its growth forecasts to 3.5% for 2018 and 2019.  The RBA expressed concern about global trade tensions and the domestic housing market.  AUD has been struggling to build on its recent gains and remains stuck just above .7200.  A move back below the .7140 area is needed to signal a deeper correction towards the October low near .7020.

Philippines October CPI remained steady at 6.7%y/y vs. 6.6% expected.  Inflation remains well above the 3-5% target range.  Next central bank meeting is November 15 and it will be a close call.  Another 25 bp hike is justified, but the firming peso could allow it to stand pat.  The Philippines reports Q3 GDP Thursday, which is expected to grow 6.3% y/y vs. 6.0% in Q2.  With growth remaining robust, the central bank should be able to continue its tightening cycle into 2019.

Brazil COPOM released its minutes.  At that meeting, COPOM left rates steady at 6.5%.  The minutes cited reduced domestic uncertainties and lowered risk premia as the main reasons for the decision.  Next COPOM meeting is December 12.  A lot can happen between now and then, but steady rates now seem likely until early 2019.  October IPCA consumer inflation will be reported Wednesday, which is expected to rise 4.66% y/y vs. 4.53% in September.  If so, it would remain near the 4.5% target and well within the 3-6% target range.