Dollar Remains Firm Ahead of US Jobs Data

  • The debate over the cause of Ukrainian jet crash continues to rage on, but with few consequences for markets; we remain bullish as the dollar continues to edge higher
  • The US December jobs data is the highlight; Canada also reports December jobs data
  • Brazil December IPCA inflation is expected to rise to 4.24% y/y
  • UK Prime Minister Boris Johnson pushed his Withdrawal Agreement bill through the final hurdle in the House of Commons yesterday
  • Japan reported weak November household spending; Australia reported firm November retail sales

The dollar is mostly firmer against the majors ahead of the US jobs data.  The Antipodeans are outperforming, while Swissie and Stockie are underperforming.  EM currencies are mostly weaker.  IDR and INR are outperforming, while the CEE currencies are underperforming again.  MSCI Asia Pacific was up 0.5% on the day, with the Nikkei rising 0.5%.  MSCI EM is up 0.3% so far today, with the Shanghai Composite falling 0.1%.  Euro Stoxx 600 is up 0.1% near midday, while US futures are pointing to a higher open.  10-year UST yields are flat at 1.85%, while the 3-month to 10-year spread is flat at +33 bp.  Commodity prices are mixed, with Brent oil flat, copper up 0.2%, and gold down 0.2%.

The debate over the cause of Ukrainian jet crash continues to rage on, but with few consequences for markets.  It has been fairly quiet trading so far ahead of the US jobs data, with most equity markets edging higher.  Consistent with the better risk appetite, measures of implied volatility are have mostly returned to their pre-Iran levels. The VIX, for example, is back to 12.50, close to the 2019 lows of just below 12. In the FX space, aggregate measures of implied volatility have also declined, but the recovery in EM has lagged behind that of DM.

We remain bullish as the dollar continues to edge higher.  Much will depend on today’s data, but DXY appears to be on track to test the December 23 high near 97.817.  A break above the 97.71 area would set up a test of the November 29 high near 98.544.  The euro is trading at a new low for this move near $1.1085 and a break of the December 20 low near $1.1065 would set up a test of the November 29 low near $1.0980.  Sterling remains heavy but is holding up just above the $1.30 level, while USD/JPY is edging higher to trade just below the December 2 high near 109.75.  After that is the May 21 high near 110.65.

 

AMERICAS

The US December jobs data is the highlight.  Consensus sees 160k jobs added vs. 266k in November, unemployment steady at 3.5%, and average hourly earnings also steady at 3.1% y/y.  ADP came in higher than expected at 202k, but weekly jobless claims for the BLS survey week rose to 235k, the highest for a survey week since December 2017 (244k).  The employment components for ISM manufacturing and non-manufacturing PMI both fell from November, so the clues are mixed.  After last month’s huge 266k jobs gain, we look for a weak number as payback but really, it’s anybody’s guess.  The US also reports November wholesale inventories (0.1% m/m expected) and trade sales (0.2% m/m expected).

Regardless to today’s number, the US economy is still doing better than anticipated in Q4.  The Atlanta Fed’s GDPNow model estimates Q4 GDP growth at 2.3% SAAR, steady from the previous reading.  Elsewhere, the NY Fed’s Nowcast model has Q4 growth at 1.1% SAAR, down from 1.2% previously.  It also cut its estimate for Q1 growth to 1.1% SAAR from 1.5% previously.  Both models will be updated today.  The Atlanta Fed is likely overstating growth a bit and the NY Fed understating it, and we suspect the truth is somewhere in between.  Either way, we are far from recession and the Fed is right to pause for now to assess the landscape.  Because we are upbeat on the US outlook, we do not see further easing in 2020.

We had a bevy of Fed speakers yesterday that took a similarly upbeat view on the US outlook.  Clarida, Williams, Barkin, Evans, and Bullard all saw US growth and labor market remaining strong, whilst leaving the door open to further action if needed.  Kashkari also spoke but did not appear to address the economy or Fed outlook.  No one expects a cut this month, but Fed Funds futures are still pricing in high odds of a cut sometime this year.

Canada also reports December jobs data.  Consensus sees a 25k increase in total employment vs. -71.2k in November, along with unemployment falling a tick to 5.8%.  Overall, recent data have been coming in on the weak side.  Next Bank of Canada meeting is January 22 and rates are expected to remain steady at 1.75%.  However, odds of a cut increase as the year progresses and a 25 bp move is nearly priced in by year-end.  CAD has been hurt by the correction in oil prices and a break above the 1.31 area would set up a test of the December 20 high near 1.3180.

Brazil December IPCA inflation is expected to rise to 4.24% y/y from 3.27% in November.  If so, it would be the highest since May and almost at the 4.25% target but still well within the 2.75-5.75% target range.  Note that the target drops to 4% +/- 1.5 percentage points in 2020.  Next COPOM meeting is February 5 and no change is expected then as we believe rates have bottomed at the current 4.5%.

 

EUROPE/MIDDLE EAST/AFRICA

UK Prime Minister Boris Johnson pushed his Withdrawal Agreement bill through the final hurdle in the House of Commons yesterday, as expected. The House of Lords still needs to vote on it, but this is just a formality. The UK will leave the EU on January 31.  The focus now shifts back to the details and strategy of the trade negotiations. Johnson’s initial position is to seek a Canada-style trade relationship (98% of goods are tariff-free), but the EU says this is impossible to achieve by the year-end transition period deadline. In other words, Johnson is looking for access to the single market while preserving the spirit of Brexit by avoiding “any kind of alignment” with the EU’s rules. But this brings us back to the old EU adage: you can’t have free movement of goods and services without free movement of people and a level playing field. It will be a long year.

 

ASIA

Japan reported weak November household spending.  It contracted -2.0% y/y vs. -1.8% expected, and was the second straight month of contraction.  The overall economy slowed sharply in Q4 due to a combination of the typhoon and consumption tax hike.  The supplementary budget is meant to address this slowdown, and so the Bank of Japan is sidelined for now.  Next policy meeting is January 21 and no change is expected then.

Australia reported firm November retail sales.  Sales rose 0.9% m/m vs. 0.4% expected, while the October reading was revised up a tick to 0.1%.  We cannot get too excited about this, as most expect December and January data to suffer from the impact of the ongoing wildfire crisis.  Please see our recent piece “Some Thoughts (and Prayers) on the Australian Wildfires” for an in-depth look at the situation.  Meanwhile, AUD has stabilized after finding some support this week near .6850.  We think it is still on track to test the December 10 low near .6800, and a break below the .6850 level would set up a test of the November 29 low near .6755.