Dollar Firms, Strong Jobs Lift Aussie, Awaiting Fed-Speak

Dollar Firms, Strong Jobs Lift Aussie, Awaiting Fed-Speak

  • Draghi’s comments to the European Parliament are similarly dovish in tone to the October post-ECB press conference
  • Japanese machinery orders rose 7.5% in September, more than twice the Bloomberg consensus estimate
  • The Australian dollar is easily the best performing major currency following a strong employment report
  • Politics in the Iberian Peninsula continue to attract market attention this week
  • The central banks of Korea and the Philippines kept rates on hold, as expected, Chile and Peru are up next

Price action: The dollar is mostly firmer against the majors. The Aussie and the Swedish krona are the exception, up on the day and outperforming. The Aussie benefited from a strong Australian jobs report. The Norwegian krone and the euro are underperforming. The euro is trading near $1.0720 after earlier dipping below $1.07, while sterling is trading around $1.5190, unable to sustain its move above $1.52. Dollar/yen is trading flat near 123. EM currencies are mostly weaker too. TWD and SGD are outperforming, while RUB and ZAR are underperforming. MSCI Asia Pacific rose 0.4%, with the Nikkei flat. China markets were mixed, with the Shanghai Composite down 0.5% and the Shenzen Composite up 0.3%. The Dow Jones Euro Stoxx 600 is down 0.5% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is down 1 bp at 2.32%, while European bond markets are mostly firmer. Commodity prices are mixed, with oil down modestly on the day and copper making new cycle lows.

  • Draghi’s comments to the European Parliament are similarly dovish in tone to the October post-ECB press conference.  Sterling posted outsized gains yesterday, pushing above $1.5200, and those gains were extended to almost $1.5250 today before sterling was sold back to $1.5175, leaving it almost flat against the euro.
  • Japanese machinery orders rose 7.5% in September, more than twice the Bloomberg consensus estimate, and fully recouping the 5.7% decline in August. The Nikkei was up fractionally, led by utilities and tech while the decline in oil prices weigh on the energy sector.  The dollar has been confined to about a third of a yen range.  Thus far it has the makings of the third consecutive lower higher, and the greenback did make new lows for the week near JPY122.75.  With sizable options struck at JPY123 expiring today through Monday, this area will be pivotal
  • The Australian dollar is easily the best performing major currency, gaining about 1% against the US dollar today.  The Aussie was lifted to almost $0.7155, highs for the week and the 20-day moving average by a stellar jobs report.  It is true that Australia’s employment report tends to be volatile, and today’s report may overstate the case, but the underlying movement is in the right direction.  The RBA recently recognized improved economic prospects, and specifically cited the labor market.
  • Australia grew 58.6k jobs in October, nearly four times more than expected, and of these 40k were full-time positions.  On top of that, the September series was revised to show less weakness.  The unemployment rate fell back to 5.9% from 6.2%, totally unexpectedly, and this is despite the rise in the participation rate to 65.0% from 64.9%.
  • Politics in the Iberian Peninsula continue to attract market attention this week.  After the collapse of the minority center-right government in Portugal, a new government is still awaited.  DBRS is the only ECB-recognized rating agency that gives Portugal an investment grade rating.  It is set to review it tomorrow and at a minimum a cut in the outlook is anticipated.  A loss of its investment grade status, however, could make Portuguese bonds unacceptable for QE participation and cheap lending by the ECB.  Portugal’s 10-year yield is off 5 bp today leaving it up about 7 bp over the past week.
  • In Spain, the confrontation between independent-bent Catalonia and Madrid sharpened.  Meanwhile, the latest polls ahead of next month’s election shows Podemos support slipping toward 10%, but the new centrist Ciuadanos at 21%, which is roughly half of what the PP drew, and leaves the ruling party with 26.5% support.  The Socialists are close with 24%.
  • The North American focus will be on the Federal Reserve.  Over the course of the day, no fewer than six Fed officials will speak.  Yellen starts the day around the time the equity market opens, and Fischer finishes the day a little before the Tokyo open on Friday.  NY Fed President Dudley in speaking shortly after midday.  While other Fed officials offer insight, we continue to place emphasis on the signals from the Fed’s leadership.  Yet besides them, Lacker (a voting hawk) and Bullard (a non-voting hawk) speak.  Among these five officials, we expect a reiteration of the FOMC statement and the prospect for a move next month.  Chicago Fed’s Evans has been among the doves, but he appears to have softened his position recently.
  • Separately, the US releases the weekly initial jobless claims and JOLTS, but after last week’s stellar jobs report, today’s data may not do much for investors.  Tomorrow’s retail sale report will be more important.  The GDP component was soft in August and actually declined in September, and should bounce back in October.  The weaker than expected import prices may point to downside risks on tomorrow’s PPI data.
  • Bank of Korea kept rates steady at 1.5%.  Although core CPI remains elevated at 2.1% y/y, headline is running at a relatively benign 0.9% y/y in October, and is below the 2.5-3.5% target range.  The effects of fiscal stimulus will likely be gauged by the BOK before it acts again, while Finance Minister Choi is sounding more upbeat on the economy.  The last move was a 25 bp cut to 1.5% in June, but we think the bank will cut rates further in 2016 if the data remain soft.  Bloomberg consensus sees only 25 bp of easing through 2016.
  • The Philippine central bank kept rates steady at 4%, as expected.  Data has come in on the firm side recently, despite the external headwinds.  Inflation remains very subdued at 0.4% y/y in October, well below the 2-4% target range.  However, upside risks are present due to the El Nino effect and its pass-through.  Monetary policy seems to be roughly in balance at the moment.  The last move was a 25 bp hike in its policy rates in September 2014, but we think the bank will lean more dovish in 2016 if the data turn soft.  Bloomberg consensus sees a modest 50 bp or so of tightening in 2016, but we are not so convinced.
  • Brazil reports September retail sales, and are expected at -7.2% y/y vs. -6.9% in August.  The economy remains too weak to hike rates any further, though it remains to be seen how markets will react to steadily climbing inflation.  Elsewhere, rumors of Meirelles replacing Levy are still one of the main drivers for local assets. We will address this more in depth in an upcoming report.
  • India reports September IP and October CPI.  The former is expected to rise 4.9% y/y, while the latter is expected to rise 4.85% y/y.  The next policy meeting for India is on December 1.  Price pressures appear to be picking up, with CPI inflation moving toward the top of the 2-6% target range.  WPI contracted -4.5% y/y, however, pointing to no pipeline pressures.  The last move was a 50 bp cut in its policy rates in September.
  • Banco de Mexico releases its minutes.  The tone of the statement was very dovish, and so we would expect the minutes to show a similar tone as well.
  • Chile’s central bank meets and is expected to keep rates steady at 3.25%.  The market is mixed, however.  Of the 28 analysts polled by Bloomberg, 8 see a 25 bp hike to 3.5% while 20 see no change.  CPI rose 4.0% y/y in October, down from 4.6% in September and right at the top of the 2-4% target range.  The last move by the central bank was a 25 bp hike to 3.25% in October that started the tightening cycle, but we know that no hike was also discussed.  With the economy sluggish and inflation falling, the tightening cycle is not expected to be an aggressive one.  Bloomberg consensus sees roughly 25 bp per quarter of tightening through 2016, which seems too hawkish to us.
  • Peru’s central bank meets and is expected to keep rates steady at 3.5%.  The last move was a 25 bp hike to 3.5% in September that started the tightening cycle.  Inflation was 3.66% y/y in October vs. 3.90% in September, but remains above the 1-3% target range.  However, it has fallen from the 4% y/y peak in August and we think disinflation should continue.  The economy remains sluggish and so an aggressive tightening cycle seems unlikely.  Bloomberg consensus sees roughly 25 bp every other quarter of tightening through 2016, which sounds right to us.  Copper is making new cycle lows, which should weigh on growth in both Peru and Chile.