Dollar Remains Under Pressure as US Rates Fall, Portion of Curve Inverts

  • The dollar remains under pressure as the drop in US rates picks up steam
  • An inverted US yield curve has been the market bogey-man this year
  • This yield compression comes despite surging oil prices and firm US data
  • BOE Governor Carney defended the bank’s Brexit analysis that was released last week
  • Reserve Bank of Australia left rates steady, as expected
  • The EM manufacturing PMIs for November have so far been eye-opening

The dollar is broadly weaker against the majors as US rates continue to fall.  Nokkie and sterling are outperforming, while Loonie and Swissie are underperforming.  EM currencies are mostly firmer.  ZAR and CNY are outperforming, while PHP and TRY are underperforming.  MSCI Asia Pacific was down 0.6%, with the Nikkei falling 2.4%.  MSCI EM is up 0.2% so far today, with the Shanghai Composite rising 0.4%.  Euro Stoxx 600 is down 0.4% near midday, while US futures are pointing to a lower open.  The US 10-year yield is down 2 bp at 2.95%.  Commodity prices are mostly higher, with Brent oil up 2.6%, copper up 0.2%, and gold up 0.7%.

The dollar remains under pressure as the drop in US rates picks up steam.  The 10-year yield broke decisively below 3% yesterday and continues to edge lower today.  At 2.95% currently, it is at the lowest level since September 13 and is well on its way to test the August 22 low near 2.81%.  Odder still, the 2-, 3-, and 5-year portion of the US yield curve has inverted for the first time in over a decade.

An inverted US yield curve has been the market bogey-man this year.  While the 2-10-year spread is the key metric (more on that later today in an expanded MarketView piece), we think that this minor inversion is clearly spooking investors as global equity markets are giving back some of the recent gains today.

This yield compression comes despite surging oil prices and firm US data.  The November ISM manufacturing PMI was reported yesterday.  Headline number came in at 59.3 and was much stronger than the expected 57.5.  New orders rose to 62.1 and employment rose to 58.4, while prices paid fell to 60.7.  Stronger than expected November auto sales (17.4 mln annualized rate) were also reported yesterday.  There is no US data today ahead of ADP jobs report tomorrow.

There is a full slate of Fed speakers this week before the pre-FOMC press embargo goes into effect next week.  Williams speaks today, followed by Powell’s testimony before the Joint Economic Committee Wednesday.  The implied yield on the January 2020 Fed Funds futures contract is currently stuck around 2.71%.  Fed tightening expectations appear to have bottomed, but until markets start pricing in a more hawkish stance, the dollar will have trouble getting much traction.

Firm UK PMIs for November are being reported this week.  Manufacturing was reported Monday at 53.1 vs. 51.7 expected, while construction was reported today at 53.4 vs. 52.5 expected.  Services and composite PMIs will be reported tomorrow.  Consensus is 52.4 and 52.1, respectively.  This could be the calm before the storm for the UK economy, as risks of a no-deal Brexit remain significantly high as Parliament begins debating May’s plan later today.

The debate has been delayed.  The opposition parties were granted an emergency debate first on whether May’s government is in contempt of Parliament for refusing to release legal advice regarding her deal.  Foreign Minister Duncan reportedly filibustered for more than 30 minutes as the government quickly drafted an amendment the contempt motion.  This is an inauspicious start, to state the obvious.

BOE Governor Carney defended the bank’s Brexit analysis that was released last week.  The worst-case scenario of a no-deal Brexit saw the economy possibly contracting 8%, property prices plunging around 33%, and the pound weakening by 25%.  This possible outcome was worse than the government’s own scenario.  Carney said these were not forecasts but simply possible outcomes and noted that it was low-probability.  We are not so confident and warn that it’s basically a coin-flip between deal or no deal Brexit.  This risk should cap sterling gains over the near-term.

Reserve Bank of Australia kept rates steady at 1.5%, as widely expected.  The bank was upbeat about growth and the labor market. However, it noted risks to global growth amidst rising trade tensions.  The RBA also forecast a gradual pickup in domestic inflation.  Australia has a busy data week, with Q3 GDP out Wednesday, followed by October trade and retail sales Thursday.  Bloomberg consensus now sees the first hike in Q1 2020.  The US-China truce is likely to benefit AUD near-term, which is trading at its highest level since August 9 just below .7400.  The 200-day moving average comes in near .7415 and a break above would likely open up a move towards .7500.

The EM manufacturing PMIs for November have so far been eye-opening.  Korea fell to 48.6 from 51.0, Taiwan fell to 48.4 from 48.7, Malaysia fell to 48.2 from 49.2, and Poland fell to 49.5 from 50.4.  Thailand rose from 48.9 to 49.8, Turkey rose from 44.3 to 44.7, and South Africa rose to 49.5 from 42.4 but all remain below the 50 boom/bust level.  China is teetering right at 50 and risks falling below.  All in all, a sobering reading on the state of EM.