- The dollar is finally getting some traction today ahead of the jobs report
- There are no real alternatives to the dollar
- The main event today will be the US jobs report; Canada also reports May jobs data
- PBOC Governor Yi Gang hinted that the 7 level for the yuan is by no means sacrosanct
- The euro has given back half of its post-ECB gains; Germany reported weak April data
- Mexico tariff situation remains as clear as mud; Chile is expected to keep rates steady at 3.0%
The dollar is mostly firmer against the majors ahead of the US jobs data. Sterling and Loonie are outperforming, while Swissie and Stockie are underperforming. EM currencies are mostly softer. RUB and MYR are outperforming, while ZAR and TRY are underperforming. MSCI Asia Pacific was up 0.1%, with the Nikkei rising 0.5%. MSCI EM is down 0.1% so far today, with Chinese markets closed for holiday. Euro Stoxx 600 is up 0.8% near midday, while US futures are pointing to a higher open. 10-year UST yields are up 1 bp at 2.12%, while the 3-month to 10-year spread rose 2 bp and stands at -17 bp. Commodity prices are mixed, with Brent oil up 1%, copper down 0.4%, and gold down 0.2%.
The dollar is finally getting some traction today ahead of the jobs report. Yet it is down against every major currency this week except for the yen. The greenback has fared better against EM FX this week. Our conviction will continue to be tested from time to time, but we remain dollar bulls. We remain constructive on the US economic outlook whilst acknowledging the risks coming from trade tensions. We also do not share the market view that the Fed will cut several times this year.
There are no real alternatives to the dollar. Despite Draghi’s unexpectedly upbeat tone yesterday, the eurozone economy is struggling. So is the UK due to Brexit uncertainty and Japan too ahead of the October consumption tax hike. The Antipodeans are cutting rates already, with BOC possibly joining them. Only the Scandies are hiking, and they have been adjusting their expected rate paths lower due to growing downside risks.
The main event today will be the US jobs report. Consensus sees 175k jobs added vs. 263k in April. Unemployment is expected to remain steady at 3.6%, as are hourly average earnings growth at 3.2% y/y. While we expect continued firmness in the labor market, it is a lagging economic indicator and thus has little near-term impact on Fed policy. However, the readings could have a big impact on market psychology, which remains relentlessly negative.
That said, Fed officials are clearly feeling the heat to cut. Yesterday, NY Fed’s Williams said the US outlook remains solid. He admitted that as risks are mounting, the Fed is prepared to adjust its views. Interestingly, Williams said he’s not sure the inverted yield curve signal is as strong as it was a year ago and that it doesn’t require a Fed rate cut. It’s clear that the Fed is concerned by what the bond market is signaling but doesn’t quite believe it yet.
Canada also reports May jobs data. Consensus sees 5k jobs added vs. 106.5k in April, which was clearly an outlier. The Bank of Canada just kept rates steady and delivered a less dovish than expected message by saying that the slowdown is seen as temporary. Markets think otherwise, with WIRP showing rising odds of a rate cut in the autumn. Next policy meeting is July 10, no change is expected then.
PBOC Governor Yi Gang hinted that the 7 level for the yuan is by no means sacrosanct. More specifically he said that no number is important than another with regards to the exchange rate, supporting our view He added that China has “tremendous” room to adjust both fiscal and monetary policies if trade tensions worsen. This suggests China is buckling in for the long haul. The yuan has stabilized recently, but we think that has more to do with wider EM FX getting traction than anything else. USDCNY was but USD/CNH made a new high for this cycle today above 6.95.
The euro has given back half of its post-ECB gains. While the bank delivered on nearly every front, markets were disappointed that Draghi was not more dovish. Indeed, his comments suggested little urgency while the terms of the TLTRO were not quite as generous as hoped. Reports later suggested this was a compromise solution, the middle ground between several options. Rather than being bold, the ECB went with a safe compromise. That is one big reason why we remain bearish on the euro.
Germany reported weak April IP, trade, and current account data. IP fell -1.9% m/m vs. -0.5% expected, while exports contracted -3.7% m/m vs. -0.9% expected and imports contracted -1.3% m/m vs. -0.2% expected. With the eurozone’s largest economy struggling, it makes Draghi’s upbeat tone yesterday even more puzzling.
Japan reported April labor cash earnings and household spending. Headline earnings fell -0.1% y/y vs. -0.7% expected, while real earnings fell -1.1% y/y vs. -1.5% expected. While not as bad as feared, the fall in earnings nevertheless weighed on household spending, which rose only 1.3% y/y vs. 2.6% expected. This becomes more important as the October consumption tax hike gets closer.
Mexico tariff situation remains as clear as mud. On the Mexican side, officials remain relentlessly optimistic. On the US side, we are being treated to an ongoing “good cop/bad cop” situation. Some reports suggest a delay is being considered, others report that the tariffs will still go into effect Monday. Talks are set to continue today but we suspect talks may have to continue over the weekend. Elsewhere, Fitch cut Pemex to sub-investment grade BB+ with negative outlook following its cut yesterday to the sovereign.
Meanwhile, Mexico May CPI is expected to rise 4.35% y/y vs. 4.41% in April. With the peso coming under greater pressure and tariffs potentially pushing local prices up, any notions of easing have been put to bed. As if there weren’t enough things to worry, Banxico now must grapple with the possible stagflation risks from the US tariffs. Next policy meeting is June 27, no change is expected then.
Chile central bank is expected to keep rates steady at 3.0%. Ahead of the decision, May CPI and trade will be reported, with inflation expected to rise to 2.2% y/y from 2.0% in April. If so, it would be the highest since December but still near the bottom of the 2-4% target range. The bank is in no hurry to hike again, especially with copper prices making new lows for this move.