Dollar Mixed as Markets Await Fresh Drivers

  • The Trump administration is fighting a trade war on many fronts
  • Recent developments suggest that China has become the sole focus for the trade hawks
  • We see no letup in the hardline stance being taken against all US trading partners
  • The Atlanta Fed’s GDPNow model is now tracking 1.1% SAAR for Q2, down from 1.6% previously
  • Australia reported April labor market data
  • Bank Indonesia kept rates steady at 6.0%, as expected; Banco de Mexico is expected to keep rates steady at 8.25%

The dollar is narrowly mixed against the majors as markets await fresh drivers. Nokkie and Loonie are outperforming, while sterling and Swissie are underperforming. EM currencies are also mixed. INR and ZAR are outperforming, while PHP and KRW are underperforming. MSCI Asia Pacific was down 0.3%, with the Nikkei falling 0.6%. MSCI EM is down 0.2% so far today, with the Shanghai Composite rising 0.6%. Euro Stoxx 600 is up 0.2% near midday, while US futures are pointing to a higher open. 10-year UST yields are flat at 2.38%, while the 3-month to 10-year spread has risen 1 bp and to stand at -1 bp. Commodity prices are mixed, with Brent oil up 0.3%, copper up 0.6%, and gold down 0.1%.

Market sentiment bounced yesterday after the US said it will delay plans to impose tariffs on imported autos. The 25% tariff based on national security grounds would have fallen hardest on imports from Europe, Japan, Mexico, and Canada. This was not about China. For now, the decision has been punted for 60 days even as US officials said that negotiations will continue.

The Trump administration is fighting a trade war on many fronts. China has been getting all the headlines, but the US was also gearing up for battle with Europe and Japan. For now, it seems more prudent for the US to narrow its focus. Note that there have also been press reports that the US is moving closer to striking a deal with Mexico and Canada to remove tariffs on their steel and aluminum exports to the US as part of an effort to get Congressional approval for the stalled USMCA.

Recent developments suggest that China has become the sole focus for the trade hawks. President Trump signed an executive order yesterday that gives the government broad powers to bar US companies from doing business with foreign telecom suppliers. The move clearly targets a certain Chinese telecom giant, as the Commerce Department quickly moved to place it on the so-called “entity list.” This is a very serious move and supports our belief that both sides are digging. We do not see any deal coming soon.

As long as Lighthizer and Navarro are driving US trade policy, we see no letup in the hardline stance being taken against all US trading partners. There may be some shifts in tactics, but the overall strategy remains constant and confrontational. This latest flurry of changes in trade policy signal greater confrontation ahead, not less. If and when China is settled, the US will simply move on to its next trade skirmish. Within this larger context, it’s hard to be bullish on EM on any level.

The US reports April housing starts and building permits and weekly jobless claims today. The regional Fed manufacturing surveys for May kicked yesterday with a firm Empire manufacturing reading (17.8 vs. 8.0 expected). This will be followed by the Philly Fed survey today (9.0 expected).

The Atlanta Fed’s GDPNow model is now tracking 1.1% SAAR for Q2, down from 1.6% previously. Elsewhere, the New York Fed’s Nowcast model is tracking 2.2% SAAR for Q2 vs. 2.1% the previous week. This model is updated every Friday and should see a significant downward revision too after the weak retail sales and IP data reported yesterday.

The Fed’s Kashkari and Brainard speak today. Fed officials have been downplaying the impact of the tariffs on the US economy, saying it’s too early to gauge. Yet they must acknowledge that downside risks are building. The Fed Funds futures market continues to price in chances of a second rate cut this year to go with the one already priced in for this year and the one for next year, while the US yield curve has inverted again. To ignore what markets are telling them would be foolhardy, as the Fed discovered in December.

Japan reported soft April machine tool orders and PPI data. Orders contracted -33.4% y/y vs. -28.5% in March, while PPI slowed to 1.2% y/y from 1.3% in March. Next Monday sees Q1 GDP, which is expected to contract -0.2% SAAR. Early Q2 data so far do not suggest much of a rebound and so the BOJ will likely be inclined to add more stimulus later this year. Next policy meeting is June 20, no change is expected then.

Australia reported April labor market data. Consensus saw 15k jobs added but instead we saw 28.4k. However, the mix was not good as it was driven by a 34.7k gain in part-time jobs. Indeed, the unemployment rate unexpectedly rose to 5.2%. RBA has made it clear that it views the strong labor market as the engine that keeps the economy going. As such, the data takes on added significance in the coming months as the bank contemplates an easing cycle.

Next RBA meeting is June 4, and WIRP now shows 54% odds of a cut vs. 35% at the start of the week. AUD continues to make new lows for this move. While it has seen a bit of a post-data bounce, the recent break of .6955 sets up a test of the January low near .6740.

Bank Indonesia kept rates steady at 6.0%, as expected. The bank signaled that it remains cautious due to growing external risks, stressing the desire to maintain stability. We read this to mean that it is concerned that the rupiah would come under more pressure if it cut rates too soon. CPI rose 2.8% y/y in April, in the bottom half of the 2.5-4.5% target range. Next policy meetings are June 20 and July 18, and the decision will depend largely on external conditions.

Banco de Mexico is expected to keep rates steady at 8.25%. April CPI rose 4.41% y/y, the highest since and further above the 2-4% target range. While some held out hope for an easing cycle to start this year, rising inflation is likely to push this into 2020 at the earliest.