Dollar Mixed as Markets Buffeted by Headline Risk

  • The US-China situation remains fluid
  • US reports August JOLTS jobs openings and August wholesale trade sales; FOMC minutes will be released
  • Mexico September CPI is expected to rise 3.00% y/y; Brazil September IPCA inflation is expected to rise 2.98% y/y
  • Sterling jumped on press reports of a “major” concession by the EU to get a Brexit deal
  • Turkish troops have begun crossing into Northern Syria; BOT minutes show growing concern about the strong baht

The dollar is narrowly mixed against the majors as market digest fast-moving developments in Brexit and trade war.  The Antipodeans are outperforming, while yen and Swissie are underperforming.  EM currencies are also mixed.  ZAR and RUB are outperforming, while TRY and MYR are underperforming.  MSCI Asia Pacific was down 0.5% on the day, with the Nikkei falling 0.6%.  MSCI EM is down 0.2%, with the Shanghai Composite rising 0.4%.  Euro Stoxx 600 is up 0.3% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 2 bp at 1.55%, while the 3-month to 10-year spread has steepened 3 bp and stands at -11 bp.  Commodity prices are mostly higher, with Brent oil up 1.1%, copper up 0.2%, and gold down 0.2%.

Markets have stabilized after yesterday’s sharp price action.  Currencies are little changed, sovereign debt yields are flat, while European equity indices and US futures are modestly higher.  We suspect many market participants are sidelined for now as sentiment continues to get whip-sawed by headlines on Brexit and the trade war.  We encourage investors to look through all the noise and to focus on the true signal.  To us, that signal remains no deal in either case.

The US-China situation remains fluid.  Yesterday, the US announced visa bans on any China officials linked to human rights abuses of Muslims in Xinjiang province.  There were also reports that the US is following up on efforts to limit China’s weighting in major indexes as well as restricting US pension fund flows to China.  This comes after another round of US blacklists for eight more Chinese tech companies.  In terms of retaliation, China had a simple message: “Stay tuned.”

Yet today, we have gotten positive signals from China.  First, officials said China was still open to a partial deal as long as no more tariffs are imposed.  There are two planned rounds that would have to be called off, one in mid-October and another in mid-December.  In return, China would some concessions such as increased purchases of US farm goods.  Because this would leave out the major structural issues (IP, unfair subsidies) that the US is focusing on, this offer is likely a non-starter.  Markets are reacting positively to the improved tone, however.  Stay tuned, indeed.

We already like new IMF Managing Director Georgieva.  In her first public comments, she warned of a synchronized global slowdown due to the ongoing trade wars.  She sees “serious risk” that global weakness will spread and underscored that the IMF will cut its global growth forecasts for 2019 and 2020.  This view is spot on but her warnings are unlikely to change policy.



US reports August JOLTS jobs openings (7250 expected) along with August wholesale trade sales.  The Atlanta Fed will update its GDPNow model after the wholesale trade data.  Its estimate for Q3 GDP growth stands at 1.8% SAAR.  The NY Fed’s Nowcast model currently shows a drop-off in Q4 growth to 1.3% SAAR from its Q3 estimate of 2.0%.

FOMC minutes will be released.  Fed officials continue to stress that the US economy is in “a good place” whilst also noting downside risks.  Clearly, the Fed is waiting for more information to base its next policy decision on.  While a cut this month is becoming more likely, it is by no means a done deal.  WIRP has odds at nearly 81%, while we’d put it a little lower at around 65%.

Powell takes part in a “Fed Listens” event.  Yesterday, Fed Chair Powell gave a possible preview of this month’s FOMC meeting.  Powell said the Fed will soon announce steps to add reserves to the system.  He added that the Fed is contemplating purchases of T-bills to do so but stressed this is not QE.  Powell noted that many indicators show a strong labor market with rising wages but acknowledged that global developments post risks to an otherwise favorable US outlook.  Lastly, Powell said unconventional tools would be used again if needed, but that negative rates were unlikely.

Chicago Fed President Evans said he “wouldn’t mind another cut” as it would help boost inflation.  He added that there “could well be reasons” for another 25 bp cut.  He is a voter this year.  After yesterday’s PPI miss, we acknowledge rising risks of a cut this month.  Yet markets remain overly aggressive in pricing in multiple cuts.  Two are expected this year and another two next year.  We believe that such a rate path is inherently pricing in a US recession, which is not our base case yet.

Mexico September CPI is expected to rise 3.00% y/y vs. 3.16% in August.  If so, inflation would be right at the center of the 2.4% target range.  For now, the central bank is likely to continue easing.  Central bank minutes will be released Thursday.  Next policy meeting is November 14 and another 25 bp cut is expected then.

Brazil September IPCA inflation is expected to rise 2.98% y/y vs. 3.43% in August.  If so, inflation would move further towards the bottom of the 2.75-5.75% target range.  For now, the central bank is likely to continue easing.  Next COPOM meeting is October 30 and another 50 bp cut to 5.0% is expected then.



Sterling jumped on press reports of a “major” concession by the EU to get a Brexit deal.  The EU would reportedly allow the Northern Ireland assembly (Stormont) to revoke any Brexit deal after a period of time, mostly likely 2025.  The vote would have to be passed by a so-called double majority, which in this case means a majority by both the Nationalist and Unionist camps.  The EU would also require a customs border in the Irish Sea.  Sterling gains have since faded as the UK is seen as unwilling to have Northern Ireland stay in the EU customs union.  With GBP support still holding for now at $1.22 the EUR/GBP cross been unable to crack the .9000 area.  We like sterling lower across the board.  If $1.22 eventually goes as we expect, then EUR/GBP should easily move past .9000.

Press reports confirm that Turkish troops have begun crossing into Northern Syria.  This shouldn’t come as a surprise.  While it’s unlikely to be a major market-moving event in the near-term, it’s still a negative development.  A direct military operation in Syria and the likely clashes with Kurdish forces will add another layer of uncertainty to the already challenging outlook for Turkey.  The overall reaction in local assets was mild, which is probably in part due to light positioning.  Note that despite the aggressive rate cuts by the central bank, the lira is still a very expensive currency to short with 3-month implied yields around 14%.  Measures of implied volatility and risk reversals have increased over the last few sessions but remain below the levels seen through most of August.  Somewhat under the radar, the Turkish government signed an agreement with Russia to enable financial-sector firms to use a Russian payments system alternative to SWIFT. The agreement will allow the two sides to use local currency in mutual settlement.

Norway reported August GDP.  Headline fell -0.6% m/m, while mainland (ex-oil) fell -0.2% vs. -0.3% m/m expected.  Tomorrow, Norway reports September CPI and headline inflation is expected to drop a tick to 1.5% y/y.  If so, this would be the lowest since November 2017 and well below the 2% target.  We believe Norges Bank will find it increasingly difficult to justify another rate hike in this current environment.



Japan reported September machine tool orders.  Orders contracted -35.5% y/y vs. -37.0% in August.  Markets are getting increasingly confident of BOJ easing.  WIRP suggests 100% odds of a cut October 30, with 8% odds of a 20 bp move.  Yet USD/JPY has remained rangebound.

Bank of Thailand minutes show growing concern about the strong baht.  The bank noted that the economy may be more sensitive to currency appreciation as risks of a growth slowdown rise.  It warned that this would put “additional pressure” on already softening domestic demand and pledged to “closely monitor developments of exchange rates, capital flows, and impacts on the economy through various channels, as well as consider implementing additional measures at an appropriate timing if necessary.”  BOT last cut in August and we think it will continue to cut in the months ahead.  One more 25 bp cut to 1.25% is priced in but we see risks of more than one.