- The Italian drama continues
- Eurozone reported weaker than expected flash PMI readings for September
- Reports suggest China will enact broad tariff cuts
- Japan reported August nationwide CPI
- Brazil mid-September IPCA inflation is expected to rise 4.36% y/y
The dollar is mostly firmer against the majors as the week draws to a close. Kiwi and Swissie are outperforming, while the yen and sterling are underperforming. EM currencies are mixed. KRW and TWD are outperforming, while TRY and MXN are underperforming. MSCI Asia Pacific was up 1%, with the Nikkei rising 0.8%. MSCI EM is up 1.2% so far today, with the Shanghai Composite rising 2.5%. Euro Stoxx 600 is up 0.4% near midday, while S&P futures are pointing to a higher open. The 10-year US yield is up 2 bp at 3.08%. Commodity prices are mostly higher, with Brent oil up 0.9%, copper up 2.3%, and gold down 0.1%.
The dollar is getting some modest traction as the week draws to a close. Perhaps higher US rates are finally having an effect. Perhaps markets are finally acknowledging the ongoing risks related to Italy as well as Brexit. Either way, the dollar has seen some technical damage this week that will take some days to repair. DXY is trying to stabilize as it trades at its lowest level since July 9. Break below that low near 93.713 would set up a test of the June low near 93.193.
The Italian drama continues. The leader of Five Star has threatened to leave the governing coalition if it can’t find the funds to keep their campaign promises to spend more. Finance Minister Tria is trying to keep the budget deficit at -1.6% of GDP, while both Five Star leader Di Maio and League leader Salvini want to boost spending that would widen the deficit beyond -2% of GDP.
The timing of Italy’s data revisions couldn’t be worse. It just revised up its 2017 deficit figure to -2.4% of GDP from -2.3% previously. This will complicate Tria’s efforts as he tries to set new growth and budget targets by September 27. A draft budget must be presented to the EU by mid-October.
Eurozone reported weaker than expected flash PMI readings for September. The aggregate composite reading fell to 54.2 from 54.5 in August, the lowest since May. Manufacturing PMI fell to 53.3 from 54.6 and services rose slightly to 54.7 from 54.4. France saw a sharp fall in both components, dragging its composite PMI down to 53.6 from 54.9 in August. Germany mirrored the aggregate reading, with manufacturing PMI falling to 53.7 and services rising to 56.5. This led to its composite PMI falling to 55.3 from 55.6 in August.
Still, the euro continues to rally, trading above $1.18 for the first time since June 14 before falling back. That day in June was marked by a dovish ECB meeting. The ECB just met last week and won’t meet again until October 25. We suspect ECB officials are not very happy with the recent euro weakness and may push back verbally ahead of that next meeting.
Sterling has been unable to build on yesterday gains. Sterling traded at its highest level since July 10 near $1.33 but has since fallen back to trade below$1.32. Pessimism regarding a Brexit deal after the Salzburg summit is finally weighing on sterling, which had powered ahead this week on strong economic data. Prime Minister May promised to make a fresh Brexit offer even as the EU said more progress must be seen to go ahead with a special Brexit summit in November.
Time is running out. Not just for the Brexit deal, but perhaps for May herself. In less than two weeks, she will face a growing mutiny in her party at the Tory’s annual conference in Birmingham. Therein lies the rub. May must try to placate both the EU and her own party in a Brexit deal but risks alienating both with a compromise.
Reports suggest China will enact broad tariff cuts. What does this mean? It suggests that China is buckling in for a protracted period of trade tensions with the US. By cutting tariffs on imports with its other major trading partners, China is making adjustments to offset the impact of its tariffs on US goods. Neither side is blinking.
Japan reported August nationwide CPI. Headline rose 1.3% y/y vs. 1.1% expected, while ex-fresh food rose 0.9% y/y, as expected. The headline reading is the highest since February, while ex-fresh food is the highest since March. The acceleration will be welcomed by policymakers. However, given that the BOJ just met and kept policy steady, the data are unlikely to have any near-term policy implications.
The yen is the only major that’s doing worse than the dollar this week. USD/JPY made a new high for this move today and is on track to test the July high near 113.15. EUR/JPY has broken higher and is likely to test the April high near 113.50, while GBP/JPY is likely to test the May high near 150 and then perhaps the April high near 153.85.
During the North American session, Markit reports flash US PMI readings for September. Elsewhere, Canada reports August CPI and July retail sales. Headline inflation of 2.8% y/y is expected, with core seen rising 1.9% y/y. Sales are expected to rise 0.3% m/m.
Despite the lack of any NAFTA deal yet, CAD has been benefiting from the generally soft USD tone. Yesterday, CAD tested the late August low near 1.2890 but so far has been unable to break that area. Below that lies the 200-day moving average near 1.2865. Break below that area would set up a test of the April low near 1.2530, with an intermediate target seen at the mid-May low near 1.2730.
Brazil mid-September IPCA inflation is expected to rise 4.36% y/y vs. 4.30% in mid-August. COPOM left rates steady but it was a hawkish hold. COPOM acknowledged inflation risks have risen, and that tightening would begin if risks worsen. The language supports our view that it will hike 50 bp to 7.0% at the next meeting October 31. BRL is taking part in the broad EM rally, with USD/BRL trading at its lowest level since September 10.