Dollar Mixed As Fed Lift-off Doubts Build

 Dollar Mixed As Fed Lift-off Doubts Build

  • The overwhelming theme of no imminent Fed lift-off continues to dominate the trading environment
  • Yet on the other side of the coin, ECB’s Nowotny noted that the bank is “clearly missing” its inflation target
  • We still see no reason to expect a reversal of the medium-term bear trend in EM
  • Australia jobs data for September were weaker than expected
  • China’s lending numbers came in on the strong side
  • BOK and BI left rates steady, as expected; Peru and Chile central banks meet, with the latter expected to deliver a 25 bp hike

Price action:  The dollar is mixed against the majors.  The dollar bloc and the yen are outperforming, while the euro is underperforming.  The euro made another marginal new high for this cycle just below $1.15, the highest since August 26, but has since fallen back to trade near $1.1430.  Sterling has now recouped all of its recent losses and is testing the $1.55 level, the highest since September 22.  Dollar/yen tested the 118 level, the lowest since August 24.  EM currencies are mostly firmer.  MYR, KRW, and IDR are outperforming, while the CEE currencies are underperforming.  MSCI Asia Pacific rose 2.1%, with the Nikkei up 1.2%.  China markets rose, with the Shanghai Composite up 2.3% and the Shenzen Composite up 3%.  The Dow Jones Euro Stoxx 600 is up 1.1% near midday, while S&P futures are pointing to a higher open.  The 10-year UST yield is up 3 bp to 2.0%, while European bond markets are mostly softer.  Commodity prices are mostly higher, though oil is down around 1% on the day. 

  • The overwhelming theme of no imminent Fed lift-off continues to dominate the trading environment.  Dollar softness from weak US retail sales yesterday has carried over today.  After two Fed Governors made dovish comments recently, the WSJ piece by Hilsenrath may have added fuel to the fire.  The cacophony of Fed comments can sometimes seem overwhelming, but we put the most weight on the trio of Yellen, Fischer, and Dudley.  We continue to believe that the December meeting remains live, with two jobs reports yet to be seen beforehand.  Recent US data have not been helpful, and so this dollar correction may have some legs still.
  • Yet on the other side of the coin, ECB’s Nowotny noted that the bank is “clearly missing” its inflation target.  Final Eurozone CPI for September will be reported Friday, confirming the -0.1% y/y preliminary reading.  Markets should expect more jawboning as the euro pushes above the $1.15 area.  With recent signs of the German economy softening, the stronger euro will not be welcomed by European policymakers.  The ECB meets next week, and Draghi could make even stronger signals.
  • Emerging markets continue to rebound and, in some cases, are leading the rally.  In the equity space, the Shanghai Composite is up about 6.5% since it reopened after the holiday, rising 2.3% today.  Indices in Korea, Russia, Turkey, and the Philippines are all up over 1%.  It’s hard to make a truly bullish case for EM equities when slow US growth is major factor behind pushing back Fed lift-off.  In the FX space, MYR is up nearly 2% and KRW and IDR up 1.5%, and follows BRL’s 2.2% stronger close yesterday.
  • We still see no reason to expect a reversal of the medium-term bear trend in EM.  Rather, this bounce seems to stem mostly from short-covering and possibly the recent stability/increase in commodity prices.  Still, anecdotal reports suggest that some flows are coming back into EM assets as valuations have vastly improved, especially in the case of local assets after the huge depreciation of EM currencies.  Investors should use this current bounce to rebalance their portfolios and to adjust their hedges, but see little reason to be more bullish on EM from a medium-term perspective.
  • During the North American session, the US reports weekly jobless claims, October Empire manufacturing index, September CPI and real average weekly earnings, and October Philly Fed survey.  There are several Fed speakers today, with Bullard, Dudley, and Mester all making appearances.  Canada reports September existing home sales.
  • Australia jobs data for September were weaker than expected.  Employment fell by -5.1K, compared with an expected increase of 9.6k and a 17.4k rise in August.  The unemployment rate was unchanged at 6.2%, as expected.  The weakness in the data was driven by a 13.9K decline in fully time employment, which more than offset the increase in part time employment.  The numbers will feed expectations for another cut by the RBA, but it’s far from a sure thing.
  • China’s lending numbers came in on the strong side.  New loans for September came in at RMB1.05 trln and aggregate financing at RMB 1.3 trln, both above expectations.  The numbers are roughly in line with the average over the last several months.  Still, it suggests that the government’s efforts to spur lending (including a series of rate cuts) are having some positive effects.
  • Bank of Korea met and kept rates steady at 1.5%, as expected.  A small handful was looking for a 25 bp cut to 1.25%.  CPI rose 0.6% y/y in September, way below the 2.5-3.5% target range, and yet the BOK has been on hold since the last 25 bp cut back in September.  For now, it appears that the BOK will let fiscal stimulus and the weak won boost the economy, but we think further monetary easing will be seen ahead.
  • Bank Indonesia met and kept rates steady at 7.5%, as expected.  Inflation eased to 6.8% y/y in September, but is running above the 3-5% target range.  Indonesia reported September trade, which came in on the weak side. Exports fell -18% y/y vs. -15% expected while imports came in at -26% y/y vs. -20% expected.  As a result, the trade balance surprised on the upside at just over $1 bln.  The economy remains sluggish, but high inflation and the weak rupiah has kept BI on hold.  If inflation continues to fall and the rupiah remains firm, BI may try to sneak in a rate cut before year-end.
  • Israel reports September CPI, and is expected at -0.5% y/y vs. -0.4% in August.  With inflation so far below the 1-3% target range, the central bank has been getting more concerned about deflation risks.  Next policy meeting is October 26, and is expected to keep rates steady at 0.1%.  However, like last month, one analyst looks for a 10 bp cut to 0.0%.  Recent ILS gains may push policymakers into taking unconventional measures ahead.
  • Central bank of Chile meets and is expected to hike rates 25 bp to 3.25%.  However, the market is split.  Of the 27 analysts polled by Bloomberg, 19 see a 25 bp hike and 8 see no move.  CPI rose a lower than expected 4.6% y/y in September, down from 5% in August but still above the 2-4% target range.  Taken in conjunction with the firmer peso, we think there is a very small chance of a dovish surprise.  The bank has leaned more hawkish in recent months but whatever the timing of the first hike, we think the tightening cycle will not be aggressive.
  • Central bank of Peru meets and is expected to keep rates steady at 3.5%.  It just hiked at its September meeting, and officials have said that the next hike was probably not needed for a couple of months.  Another hike may be seen this year, but recent softness in the economy warrants caution.  CPI rose 3.9% y/y in September, and is moving back towards the 1-3% target range.