Dollar Mixed, Equities Higher on Trade Optimism

  • Risk on sentiment has returned due to press reports that suggest that the US may lift its tariffs on China
  • During the North American session, the US reports December IP and Canada reports December CPI
  • There has been no new Brexit news to speak of, and yet sterling is powering to two-month highs; UK reported weak December retail sales
  • Japan reported December national CPI
  • Colombia reports November retail sales and IP

The dollar is narrowly mixed against the majors as the week winds down.  The Scandies are outperforming, while sterling and yen are underperforming.  EM currencies are mostly weaker.  IDR and HUF are outperforming, while ZAR and MXN are underperforming.  MSCI Asia Pacific was up 0.7%, with the Nikkei rising 1.3%.  MSCI EM is up 0.5% so far today, with the Shanghai Composite rising 1.4%.  Euro Stoxx 600 is up 1.1% near midday, while US equity futures are pointing to a higher open.  The US 10-year yield is up 2 bp at 2.77%.  Commodity prices are mostly higher, with Brent oil up 1.2%, copper up 1.4%, and gold down 0.5%.

Risk on sentiment has returned due to press reports that suggest that the US may lift its tariffs on China.  According to the report, such a move would be meant to calm markets and give China an incentive to make deeper concessions. The report was quickly denied by all parties and so we suggest taking this with a huge grain of salt, at least for now.

Reports suggest the compromise was proposed by Treasury Secretary Mnuchin.  However, we all know that trade policy is really being run by Lighthizer (USTR) and Navarro (White House Trade Council).  These two are much more hardline and so unlikely to go along with any lifting of tariffs.  Still, it seems that many investors feel that where there’s smoke, there’s fire.  Global equity markets are closing the week on an up note.

The White House continued its efforts to minimize the impact of the shutdown.  Yesterday, the State Department called its employees back to work with pay.  For most of these workers, that means back to work in January 22.  However, State would not say where it is getting the money to pay its workers.

During the North American session, the US reports December IP (0.2% m/m expected).  The Federal Reserve reports this data and so it is unaffected by the shutdown.  The Fed’s Williams (voter) and Harker (alternate, non-voter) speak today.  Yesterday, Evans (voter) echoed recent Fed statements about caution, patience, and pausing.

Elsewhere, Canada reports December CPI (1.7% y/y headline and 1.9% y/y core common expected).  Bank of Canada just left rates steady, as soft data warranted a further pause.  Next policy meeting is March 6.  A lot can happen between now and then, but early readings suggest a 25 bp hike to 2.0% is expected then.

In case anyone is wondering about the US jobs report, this is from the Department of Labor’s website:  The Department of Labor, including the Bureau of Labor Statistics, is funded through September 30, 2019.  BLS is operating as usual and expects to follow its announced release schedule.  The January 2019 Employment Situation will be published as scheduled on February 1, 2019 at 8:30 a.m.

It’s worth noting that yesterday’s weekly jobless claims number was for the survey week (the one that includes the 12th of the month).  Initial claims fell to 213k and suggests a solid number for January.  According to guidance from the BLS, federal employees who are furloughed will be counted as employed.  Furthermore, those who are working but not receiving pay will also be counted as employed.  Bottom line:  the shutdown’s impact on the jobs data should be limited.

On the other hand, the Commerce Department is closed due to the shutdown so data there have been postponed.  These include (but are not limited to) trade, inventories, retail sales, personal income and spending, and GDP.

There has been no new Brexit news to speak of since the no confidence vote, and yet sterling has powered to two-month highs.  Sterling has not been able to break above $1.30 yet.  The November 7 high near $1.3175 is within sight, though the 200-day moving average near $1.31 should provide some resistance if $1.30 were to go.

UK December retail sales contracted.  Headline fell -0.9% mm vs. -0.8% m/m expected, while ex-auto fuel fell -1.3% m/m vs. -0.8% expected.  Data have been soft as of late in the runup to Brexit.  Because of the heightened uncertainty across many areas, the Bank of England can do nothing except wait and see for now.  Next policy meeting is February 7, and no change is expected then.

Japan reported December national CPI.  Headline inflation fell to 0.3% y/y from 0.8% in November, as expected.  Ex-fresh food fell to 0.7% y/y vs. 0.8% expected and 0.9% in November.  Tokyo CPI readings for January are due out next week, with headline expected to ease to 0.2% y/y.  This underscores how far the BOJ is from meeting its 2% inflation target.  Next policy meeting is January 23, no change is expected then.

USD/JPY continues to edge higher, trading at levels not seen since January 2.  Charts point to a test of the December 26 high near 111.40, though 110 should provide some resistance.

Colombia reports November retail sales and IP.  The former is expected to rise 7.1% y/y while the latter is expected to rise 4.3% y/y.  Higher oil prices, if sustained, would go a long way in supporting the economy this year.  Next central bank meeting is January 31, no change is expected then.  Markets expect the first rate hike in Q2, and we concur.