Dollar Mixed, Markets Calm Ahead of Jobs Data

  • The highlight today will be the US jobs data; the clues have been mixed
  • US-China trade talks appear to be progressing
  • Prime Minister May has asked the EU for a Brexit delay until June 30
  • Canada also reports March jobs data
  • President Trump will nominate Herman Cain to fill one of the Fed vacancies
  • Norway’s sovereign wealth fund will remove EM from its bond index
  • Philippines reported softer than expected March CPI; Colombia March CPI is expected to rise 3.09% y/y

The dollar is narrowly mixed against the majors ahead of the US jobs data.  Aussie and euro are outperforming, while Kiwi and Swissie are underperforming.  EM currencies are mixed too.  IDR and ZAR are outperforming, while THB and INR are underperforming.  MSCI Asia Pacific was flat, with the Nikkei rising 0.4%.  MSCI EM is up 0.1% so far today, while China markets were closed for holiday.  Euro Stoxx 600 is flat near midday, while US futures are pointing to a higher open.  10-year UST yields are up 1 bp at 2.53%, while the 3-month to 10-year spread steepened 2 bp to stand at 11 bp.  Commodity prices are narrowly mixed, with Brent oil down 0.3%, copper up 0.1%, and gold down 0.2%.

The highlight today will be the US jobs data.  Consensus sees 177k jobs added vs. 20k in February.  Note that as of February, the 3-month average was 186k, the 6-month was 190k, and the 12-month was 209k.  Unemployment is seen steady at 3.8%, while average hourly earnings are seen staying at the cycle high of 3.4% y/y.

Indeed, weekly initial jobless claims fell to 202k for the week ended March 30.  This is a new cycle low and further evidence that the US labor market (and by extension the US economy) remains in good shape.  JOLTS data continue to show a tight labor market.  Can higher wages be far behind?

Getting back to today’s jobs report, the clues have been mixed.  On the positive side, weekly claims were low for the survey week and there was a strong employment component (57.5) in ISM manufacturing PMI.  On the negative side, there was a lower than expected ADP reading of 129k.  It’s often a toss-up but we do think jobs growth moves back toward the 3-month average of 186k.

Will this be enough to get the dollar rally solidly back on track?  Probably not, but a strong number would be good start.  Fed officials have been pushing back forcefully against ideas of a rate cut this year, but the market has not yet come around.   Yes, the yield curve (3-month to 10-year) has turned positive again, but the Fed Funds futures strip still shows that the market is pricing in solid odds of a rate cut in 2019 followed by one in 2020.  Today, only Bostic speaks.

Elsewhere, US-China trade talks appear to be progressing.  President Trump said that a US-China trade deal is not ready yet but added that “we are rounding the turn.”  Claiming that something “very monumental” could come soon, reports suggest Trump is already talking about a summit with Xi.  Top China negotiator Vice Premier Liu said a “new consensus” had emerged, and reports suggest President Xi is keen to ink a deal quickly.

Prime Minister May has asked the EU for a Brexit delay until June 30.  The EU has signaled that it is willing to grant a much longer extension that would avoid a no-deal crash-out and allow the UK enough time to reach a compromise. Unless May can give strong assurances that she and Corbyn have made significant progress in getting a passable deal, it’s going to be hard for the EU to sign off on such a short extension.  May would reportedly prepare the UK for EU elections May 23-26 as talks continue with a plan to cancel the UK participation when (if?) a Brexit deal is reached.

Canada also reports March jobs data today.  Consensus sees a 6k net gain in jobs, which should be payback for the incredibly strong 55.9k gain in February that was driven largely by full-time work (up 67.4k).  Next Bank of Canada meeting is April 24 and it is likely to remain on hold then.

Reports suggest President Trump will nominate Herman Cain to fill one of the vacancies on the Fed’s Board of Governors.  Stephen Moore is meant to fill the other vacancy.  Cain does have experience at the Kansas City Federal Reserve, but his choice is still unorthodox, to say the least.  Cain also comes with some baggage, so it remains to be seen if he can pass Senate confirmation.  Up until Moore and Cain, Trump’s Fed choices (Powell, Clarida, Bowman) were orthodox.

Germany reported firm IP.  It rose 0.7% m/m vs. 0.5% expected, while January was revised up to flat m/m from -0.8% previously.  This is welcome news after extremely weak factory orders data yesterday, which sank -4.2% m/m in February vs. an expected gain of 0.3%.  Still, most indicators warn of further slowing in the German economy and so we view the IP data as an outlier.

Japan reported February household spending and labor cash earnings overnight.  Spending held up well (up 1.7% y/y) despite a massive drop in earnings.  Headline earnings contracted -0.8% y/y vs. an expected 0.9% rise, while real earnings fell an even greater -1.1% y/y vs. an expected 0.8% rise.

Next Bank of Japan meeting is April 25.  It is expected to reaffirm its commitment to maintain loose policy until the 2% inflation target is met (whenever that may be).  Meanwhile, the bank should be happy with recent yen weakness.  USD/JPY is trading at new highs for this move and is on track to test the early March high near 112.15.  After that, charts point to a test of the December 13 high near 113.70.

Norway’s sovereign wealth fund will remove EM from its bond index.  While up to 5% of the fund can still be invested in EM, removal from the benchmark will likely lead to some forced selling of EM bonds.  Of the $1 trln fund, $310 bln is reportedly invested in bonds. The decision was made after the fund got approval to boost its stock portfolio to 70% of the total.  The fund also rejected a plan to cut its corporate bond holdings.

Philippines reported softer than expected March CPI.  Inflation was 3.3% y/y vs. 3.5% expected and 3.8% in February.  This was the lowest reading since December 2017 and moves it further within the 2-4% target range.  Next policy meeting is May 9.  New central bank Governor Diakno is itching to cut rates and just said that the bank will cut when inflation nears the target.  April CPI will come out May 8, and an even lower print would give him the opportunity to cut the next day.

Colombia March CPI is expected to rise 3.09% y/y vs. 3.01% in February.  If so, inflation would remain near the 3% target and well within the 2-4% target range.  We think global uncertainty will keep the central bank sidelined for now.  Next policy meeting is April 26, and no change is expected then.  The peso has been trading sideways for much of this year despite higher oil prices.