Dollar Shrugs Off Weak Data Again

  • The dollar has once again shrugged off weak US data
  • EM FX really didn’t take part in yesterday’s post-ISM moves and remains under pressure today
  • ADP reports private employment data for September; despite weakness in manufacturing, the overall US economy remains solid
  • Johnson will reportedly deliver a Brexit ultimatum to the EU today; Germany seems to be moving in the right direction in terms of fiscal stimulus
  • North Korea fired what appears to be a submarine-based ballistic missile; Poland is expected to keep rates steady at 1.5%

The dollar is mostly firmer against the majors as it shrugs off weak data once again.  Yen and euro are outperforming, while Aussie and Swissie are underperforming.  EM currencies are mostly weaker.  ZAR and HUF are outperforming, while KRW and RON are underperforming.  MSCI Asia Pacific was down 0.7% on the day, with the Nikkei falling 0.5%.  MSCI EM is down 0.7% so far today, with China markets closed until October 8 due to the National Day holiday.  Euro Stoxx 600 is down 1.4% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 1 bp at 1.62%, while the 3-month to 10-year spread has inverted 1 bp and stands at -13 bp.  Commodity prices are mixed, with Brent oil flat, copper down 0.2%, and gold up 0.3%.

The dollar has once again shrugged off weak US data.  We saw some knee-jerk selling yesterday that was concentrated in the majors after the weaker than expected ISM PMI report, but the greenback is broadly firmer today as it claws back some of its losses.  The ongoing GM strike is a big reason behind the disappointing September readings and so we think the PMI weakness is exaggerated.  Indeed, September auto sales came in stronger than expected at a 17.19 mln annualized pace.  That’s the strongest pace since June and suggests retail sales remain firm.

EM FX really didn’t take part in yesterday’s post-ISM moves and remains under pressure today.  Most EM currencies ended weaker on the day and that weakness continues today as the dollar stages a comeback against the majors.  MSCI EM FX has retraced nearly two thirds of its September rally, and a break below the 1602 would set up a test of the September 3 low near 1587.  On the equity side, MSCI EM has held up slightly better but it is likely to be dragged lower by MSCI EM FX.

During the North American session, ADP reports private employment data for September.  140k jobs are expected, which is not far from the 147k consensus for non-farm payrolls Friday.  Barkin, Harker, and Williams all speak today.  After the ISM data, WIRP showed a jump in the odds of a cut October 30 to 62% today vs. 40% Monday.  We remain unconvinced of the need for another cut this month, but we should have a clearer picture after Friday’s jobs report and other major US data next week.

Despite weakness in manufacturing, the overall US economy remains solid.  The Atlanta Fed’s GDPNow model is tracking 1.8% SAAR growth in Q3, down from 2.1% previously, which is still near trend (~2%) with little drop-off from 2.0% in Q2.  Elsewhere, the NY Fed’s Nowcast model is tracking 2.1% SAAR growth in Q3, down from 2.2% previously.  Its forecast for Q4 growth is now 1.8% SAAR, down from 2.0% previously, though we expect some downward revisions to both readings this Friday after the weak ISM data.

On the Brexit front, Prime Minister Johnson will reportedly deliver an ultimatum to the EU today.  The proposal scraps the Irish backstop and creates a separate EU customs union for Northern Ireland with a temporary arrangement to enforce regulations at the border, lasting about four years.  This comes after reports yesterday (later denied) that the EU may be willing to put a time limit on the contentious Irish backstop.  Ireland’s Foreign minister has already pushed back against Johnson’s plan, saying it didn’t look like the basis of a deal.

UK October PMI parade continued with construction today at 43.3 vs. 45.0 expected.  If follows manufacturing (48.3 vs. 47.0 expected) yesterday.  Tomorrow, services and composite (50.3 and 50.0 expected, respectively) PMIs will be reported.  Sterling remains heavy, unable to sustain yesterday’s Brexit-related bounce.  The $1.22 area is key, as a break below sets up a test of the September 3 low near $1.1960.

The German government seems to be moving in the right direction in terms of fiscal stimulus.  Reports suggest that more short-term demand-boosting stimulus and medium-term investments measures are being considered, some even being implemented.  Former Finance Minister and Bundestag president Schaeuble has been a centerpiece in this debate, pivoting towards a revision of the country’s long-standing austerity culture.  The ECB also continues to push in the same direction with Draghi calling for fiscal and structural policies in yesterday’s speech, arguing that it could allow the bank to normalize rates soon. Moreover, pressure could intensify when Lagarde takes the helm.  However, the latest dose of monetary easing from the ECB could reduce the sense of urgency in German political circles, where fiscal austerity is still the default position. Meanwhile, the rift in opinions within the ECB was exposed once again by Bundesbank president Weidmann.  He pushed back against Draghi’s attempt to reduce the discord in the institution by calling the discussions about QE “absolutely necessary.”

Tensions in Hong Kong remain high as China entered its 70th anniversary celebration week.  The situation has escalated after a demonstrator was shot by the police yesterday, with protests surging today in response.  Meanwhile, the protests continue to take a toll on the local economy.  Hong Kong August retail sales plunged in August.  Sales fell -25.3% y/y in volume terms and -23.0% y/y in value terms, contracting twice as fast as July.  We see no relief here until the political situation has been addresses, and we are nowhere close yet.

North Korea fired what appears to be a submarine-based ballistic missile, rekindling worries in the region.  The move comes just as the government agreed to restart working-level nuclear talks with the US this Saturday.  South Korea’s Kospi index (-2.0%) and the won (-0.6% vs. USD) were the clear regional underperformers today.  Charts suggest USD/KRW is on track to test the August high near 1223.

National Bank of Poland is expected to keep rates steady at 1.5%.  While the central bank has said that rates could move either way, we think it is too early to think about potential easing.  Earlier this week, Poland September CPI rose 2.6% y/y 2.7% expected and 2.9% in August.  Inflation is nearly at the middle of the 1.5-3.5% target range and so this gives the bank leeway to maintain loose policy for now.