Dollar Hangs on to Gains as Markets Stabilize

  • Markets are stabilizing as China attempted some damage control overnight
  • The 10-year yield broke decisively below 3% Monday and continued to move lower yesterday
  • Eurozone reported final services and composite PMIs for November
  • UK Prime Minister May lost three key votes in Parliament; the last UK PMI prints for the week were weak
  • Australian GDP data came in much weaker than expected; Philippines November CPI rose 6.0% y/y
  • Reserve Bank of India kept rates steady, as expected; National Bank of Poland is expected to keep rates steady at 1.5%

The dollar is mixed against the majors as markets try to stabilize after yesterday’s big moves.  Stockie and sterling are outperforming, while the yen and Aussie are underperforming.  EM currencies are mixed too.  ZAR and MXN are outperforming, while IDR and KRW are underperforming.  MSCI Asia Pacific was down 1%, with the Nikkei falling 0.5%.  MSCI EM is down 1.2% so far today, with the Shanghai Composite falling 0.6%.  Euro Stoxx 600 is down 0.7% near midday, while US equity and bond markets are closed in honor of former President George H. W. Bush.  Commodity prices are narrowly mixed, with Brent oil down 0.1%, copper up 0.1%, and gold down 0.1%.

Markets are stabilizing as China attempted some damage control overnight.  After President Trump’s threats yesterday to slap further tariffs on Chinese imports, the Ministry of Commerce calling the recent meeting “very successful.”  The Ministry promised to quickly implement items of agreement with the US and to push forward on trade talks within the 90-day timetable.  Still, details of the so-called truce are still lacking, with both sides unable or unwilling to divulge any so far.

The 10-year yield broke decisively below 3% Monday and continued to move lower yesterday.  At 2.91%, it is the lowest since September 7 and is on its way to test the August 22 low near 2.81%.  There are rising concerns of an inverted yield curve in the US, though we downplay these risks (see our recent piece entitled “Some Thoughts on US Yield Curve Inversion”).  Note that the US bond and equity markets are closed today to honor former President George H. W. Bush.

Market expectations for the December 19 FOMC meeting have been largely unaffected, with WIRP showing nearly 75% odds of a hike then.  The adjustment has been seen further out as the implied yield on the January 2020 Fed Funds futures contract has been hovering around 2.70% since last week, the lowest since early September and down from a peak near 2.95% on November 8.  This current implied yield suggests only one hike in 2019 after the widely expected hike this month.

Eurozone reported final services and composite PMIs for November at 53.4 and 52.7, respectively.  Both are above the flash readings, driven largely by improvements in Italy and France.  Yet the continuing slowdown is undeniable.  Next week’s ECB meeting will be very important, as new staff forecasts will be released.  The euro remains heavy and is likely to break below support near $1.13 to eventually test the November low near $1.1215.

UK Prime Minister May lost three key votes in Parliament as the Brexit debate begins.  This is not good, to state the obvious.  Two votes force May to publish secret government legal documents, while the third gave Parliament the power to amend the final Brexit deal.   Sterling reacted accordingly, trading at its lowest level since June 2017 near $1.2660 yesterday.  While sterling is seeing a small bounce today, the June 2017 low near $1.2590 is likely to be tested.

The last UK PMI prints for the week were weak.  Services PMI was 50.4 vs. 52.5 expected, while the composite PMI was 50.7 vs. 52.1 expected.  The readings are moving perilously close to the 50 boom/bust level.  If we get a hard Brexit, they will undoubtedly sink quickly below 50.  While the BOE’s no-deal scenario may sound too apocalyptic to some, we have little doubt that the economy will suffer greatly.   Indeed, it already has from the extended uncertainty.    

Australian GDP data came in much weaker than expected.  Growth slowed to 2.8% y/y from a revised 3.1% (was 3.4%) in Q2.  Consensus saw 3.3%.  We thought the RBA signaled it was in no hurry to hike rates and this data support that view.  Reports that the US-China trade truce is on thin ice hasn’t helped AUD either, as the recent rally ran out of steam near .7400.   The next target on the downside is seen at last week’s low near .7200.

Philippines November CPI rose 6.0% y/y vs. 6.3% expected and vs. 6.7% in October.  This is the lowest since July and the first month of deceleration since December 2017.  Inflation is still well above the 2-4% target range.  Next policy meeting is December 13, and the lower inflation reading as well as the relatively firm peso should give it leeway to keep rates steady at 4.75%.

Reserve Bank of India kept rates steady, as expected.  A small handful of analysts were looking for a 25 bp hike.  However, price pressures have started to ease, and CPI rose only 3.3% y/y in October, below the 4% target and in the bottom half of the 2-6% target range.  The bank cut its inflation forecast for the second half of the current fiscal year ending March 2019 to 2.7-3.2% from 3.9-4.5% previously.  The firmer rupee was also a factor supporting steady rates.

National Bank of Poland is expected to keep rates steady at 1.5%.  November CPI inflation was reported at 1.2% y/y, the lowest since and well below the 1.5-3.5% target range.  We see risks that the central bank extends its official forward guidance of steady rates into 2020 after this inflation print.