Dollar Mixed as Markets Await Fresh Drivers

  • The dollar is mixed as global financial markets await fresh drivers
  • China officials still won’t confirm weekend phone calls restarting trade talks occurred
  • All three measures of the US yield curve have inverted
  • Germany reported final Q2 GDP figures; Italy’s political situation remains fluid
  • Mexico July trade deficit of -$420 mln is expected; Hungary is expected to keep rates steady at 0.90%

The dollar is mixed against the majors as markets await fresh drivers.  Stockie and sterling are outperforming, while Kiwi and Swissie are underperforming.  EM currencies are also mixed.  INR and KRW are outperforming, while RUB and MXN are underperforming.  MSCI Asia Pacific was up 0.5%, with the Nikkei rising 1%.  MSCI EM is up 0.2% so far today, with the Shanghai Composite rising 1.4%.  Euro Stoxx 600 is up 0.2% near midday, while US futures are pointing to a flat open.  10-year UST yields are down 3 bp at 1.51%, while the 3-month to 10-year spread has inverted 2 bp to stand at -46 bp.  Commodity prices are mostly higher, with Brent oil up 1.1%, copper flat, and gold up 0.2%.

The dollar is mixed as global financial markets await fresh drivers.  Asian equity markets benefited overnight from the strong US performance yesterday, but European equity markets are stalling out.  US equity futures are basically flat as further news about the trade war are awaited.  On the other hand, global bond markets are back to signaling trouble ahead, with yields lower across most of the developed world.

China officials still won’t confirm weekend phone calls restarting trade talks occurred.  Global Times wrote that the two countries are keeping in contact at a technical level but said this doesn’t have the significance that Trump claims.  Quite frankly, we are tired of the back and forth but the bottom line stands:  a deal is highly unlikely until 2020.

PBOC set the CNY fix stronger today than what models suggested.  This continues the PBOC’s efforts to lean against the wind.  Without the countercyclical factor, the yuan would be getting fixed much weaker.  That supports our view that China will not weaponize the yuan and will work to keep it from weakening too much.

All three measures of the US yield curve have inverted.  The latest to do so is the 2- to 10-year curve at -2 bp.  The 1- to 10-year curve inverted back in early August and stands at -23 bp currently.  The 3-month to 10-year curve inverted back in May and stands at -46 bp.  All three are the most inverted for this cycle and point to recession ahead.

The big question remains whether the Fed will validate the market fears and cut rates next month.  WIRP suggests 100% odds of a cut, with 11% odds of a 50 bp move.  Yet the situation is complicated by Trump’s continued attacks on Fed Chair Powell.  A cut next month would have bad optics, to put it mildly.  We think it will also depend on how the August data come in.  Stay tuned.

Regional Fed manufacturing surveys for August continue to roll out.  Richmond reports today and is expected at -2 vs. -12 in July.  Yesterday, Dallas came in at +2.7 vs. -4.0 expected and -6.3 in July.  These will lead right into Chicago PMI Friday, which is expected at 47.9 vs. 44.4 in July.  There are no Fed speakers today.

Germany reported final Q2 GDP figures.  While headline growth was steady at -0.1% q/q and % y/y, the breakdown is worth discussing.  Private consumption rose 0.1% q/q, while government spending rose 0.5% q/q.  Capital investment fell -0.1% q/q, but the biggest drag was exports, which contracted -1.3% q/q.  Construction tacked on a -1.0% q/q drop.  With the trade war dragging on, we wouldn’t be surprised to see continued contraction of the economy in Q3.

Italy’s political situation remains fluid.  President Mattarella has given Five Star and the Democratic Party (PD) until tomorrow afternoon local time to form a coalition.  If they fail, then fresh elections would likely be scheduled for November.  The major sticking point is the fate of Prime Minister Conte.  Five Star wants him to remain in his post while PD does not.  Five Star has now threatened to pull out of talks if Conte does not remain as Prime Minister.

Between the weak economic outlook and the Italian drama, the euro remains heavy.  After trading at a high near $1.1165 yesterday, the euro sank like a stone and is currently testing the $1.11 area.  The 10-year spread between Italy and Germany has fallen below 200 bp again on optimism regarding Italian politics.  We suspect this optimism is misguided, and a move back above 200 bp would likely trigger EUR weakness.

Mexico July trade deficit of -$420 mln is expected.  Banco de Mexico releases its quarterly inflation report Wednesday and its minutes Thursday.  Mid-August CPI came in at 3.29% y/y, the lowest since October 2016.  The peso held up well right after the surprise 25 bp cut on August 15.  However, weakness has picked up in recent days and so it’s not entirely clear if the central bank will roll the dice again and cut 25 bp at the September 26 meeting.

National Bank of Hungary is expected to keep rates steady at 0.90%.  CPI rose 3.3% y/y in July, the lowest since February and nearing the center of the 2-4% target range.  The economy is showing signs of slowing and so we expect steady rates for the time being.