Dollar Soft Ahead of ECB Decision and FOMC Minutes

  • ECB is widely expected to keep policy unchanged; we cannot imagine anything emerging that is remotely hawkish
  • US reports March CPI and budget data; no Fed speakers but FOMC minutes will do the talking
  • EU holds an emergency summit today ahead of the Brexit deadline Friday
  • UK reported February trade, IP, construction output, and monthly GDP; Japan reported weak orders data
  • IMF cut its global growth forecast for this year to 3.3% from 3.5% seen in January
  • Netanyahu and his Likud party likely won the Israeli elections; Brazil March IPCA inflation is expected at 4.44% y/y

The dollar is mostly weaker against the majors ahead of the ECB decision and FOMC minutes.  Aussie and Nokkie are outperforming, while Swissie and yen are underperforming.  EM currencies are mostly firmer.  ZAR and PHP are outperforming, while MYR and IDR are underperforming.  MSCI Asia Pacific was down 0.2%, with the Nikkei falling 0.5%.  MSCI EM is up 0.2% so far today, with the Shanghai Composite rising 0.1%.  Euro Stoxx 600 is up 0.3% near midday, while US futures are pointing to a higher open.  10-year UST yields are flat at 2.50%, while the 3-month to 10-year spread flattened 1 bp to stand at 9 bp.  Commodity prices are mixed, with Brent oil up 0.7%, copper down 0.1%, and gold flat.

The ECB is widely expected to keep policy unchanged.  We may get some more details about the TLTRO that is planned for September, but not much else of substance is likely.  After all, the ECB already changed its forward guidance at the March meeting.  Since Draghi’s term ends in October, we think it will most likely fall on his successor to provide any further changes in forward guidance.  We would also expect some more discussion of the impact of negative interest rates.

Given the downside risks facing the eurozone, we cannot imagine anything emerging that is remotely hawkish.  Indeed, it’s worth noting that the euro has weakened every ECB meeting day since October 25.  There won’t be any updated staff projections until the next meeting June 6 but recall that reports suggested some ECB officials felt the March forecast revisions were still too optimistic.

During the North American session, the US reports March CPI and budget data.  Headline CPI is seen picking up to 1.8% y/y from 1.5% in February, while core CPI is seen steady at 2.1% y/y.  The budget data will be of interest to the bond market, as the February deficit of -$234 bln was the largest on record, even larger than any seen during the Great Financial Crisis. The 12-month total rose to -$932.3 bln, the largest since February 2013.

There are no Fed speakers today but FOMC minutes will do the talking.  It’s clear that Fed officials are not happy with the market’s interpretation of its dovish pivot that have fed expectations for an easing cycle to start this year.  This would imply recession and that is not something the Fed wants to see.  The minutes will likely underscore the need for “patience” and “flexibility” but they are unlikely to support any notions of rate cuts.

The EU holds an emergency summit today ahead of the Brexit deadline Friday.  May has asked for an extension until June 30.  Reports suggest the EU does not want to give a short extension, since the UK simply risks running out of time again.  Instead, the EU will reportedly grant a longer extension of up to one year with most officials seeing December 2019 or March 2020 as the new deadline.  We think a long delay is the current base case for the market.  May’s talks with Labour have stalled and so she really has run out of options and will likely be forced to take the long delay and then resign as Prime Minister.

The UK reported February trade, IP, construction output, and monthly GDP.  The trade deficit was -GBP4.9 bln vs. -GBP3.8 bln expected, while IP jumped 0.6% m/m vs. 0.1% expected.  Construction output rose 0.4% m/m vs. -0.4% expected, while GDP rose 0.2% m/m vs. flat expected.  Another year of Brexit uncertainty would surely take a greater toll on the UK economy.

Japan reported weak February core machine and March machine tool orders.  Core machine orders contracted -5.5% y/y, while machine tool orders contracted -28.5% y/y.  With broader weakness in the economy being seen, it’s clear that Japan policymaking will err on the dovish side this year.

The IMF cut its global growth forecast for this year to 3.3% from 3.5% seen in January.  This was the weakest since 2009, but the 2020 forecast was kept steady at 3.6%.  The major culprits behind the lowered 2019 forecast were the US (-0.2 percentage points), the eurozone (-0.3 percentage points), and the UK (-0.3 percentage points).  The agency sees global trade volumes rising 3.4% this year from 4% seen in January.  Lastly, it warned that risks remain tilted to the downside.

Norway March headline CPI rose 2.9% y/y vs. 2.8% expected and 3.0% in February.  Underlying inflation ticked up to 2.7% y/y vs. 2.5% expected and 2.6% in February.  Norges Bank has started a modest tightening cycle, and this CPI data shouldn’t impact the pace of rate hikes.  Norges Bank next meets May 9 and is not expected to change policy.  Elsewhere, AUD was boosted by a less dovish than expected stance from RBA Deputy Governor Debelle.

Benjamin Netanyahu and his Likud party likely won the Israeli elections.  While early vote counts suggest the two parties both won 35 seats in the 120-seat Knesset, Likud has the easier path to forming a majority coalition.  Likud and its natural right-wing allies are tipped to win 65 seats total, while the left-wing parties fared poorly.  Horse-trading will now commence but regardless of the election outcome, we believe strong economic fundamentals will allow Israeli assets to outperform this year.  Please see our recent MarketView piece entitled “Israel Assets to Outperform Regardless of Election Outcome.”

Brazil March IPCA inflation is expected at 4.44% y/y vs. 3.89% in February.  If so, this would be the highest rate since October but still within the 2.75-5.75% target range.  Next COPOM meeting is May 8 and no change is expected then.  With the economy remaining very sluggish, the tightening cycle is not expected to start until 2020.