Dollar Soft as Markets End the Week on a Positive Note

  • Global financial markets are closing out the week on a positive note
  • US Senate voted on two bills yesterday that were meant to reopen the government
  • ECB left rates steady, as expected; German government cut its 2019 growth forecast to 1.0%
  • The US outlook remains solid as shown by data yesterday; Kudlow looks for “significant” job gains in January
  • Japan reported January Tokyo CPI overnight
  • The situation in Venezuela remains fluid

The dollar is mostly softer against the majors as the week winds down.  Nokkie and euro are outperforming, while Swissie and yen are underperforming.  EM currencies are mostly firmer.  KRW and PHP are outperforming, while TRY and RUB are underperforming.  MSCI Asia Pacific was up 1%, with the Nikkei rising 1%.  MSCI EM is up 1% so far today, with the Shanghai Composite rising 0.4%.  Euro Stoxx 600 is up 0.8% near midday, while US equity futures are pointing to a higher open.  10-year UST yields are up 1 bp at 2.72%.  Commodity prices are mostly higher, with Brent oil up 0.1%, copper up 0.2%, and gold up 0.3%.

In the absence of any fresh drivers, global financial markets are closing out the week on a positive note.  Yet risks remain in place and may reassert themselves next week as the Fed meets, the US shutdown continues, UK Parliament votes the next Brexit steps, and US-China trade talks start up again.  All of these provide some event risk and potential for negative headlines.  But for now, markets are happy to enjoy some peace and quiet.

The US Senate voted on two bills yesterday that were meant to reopen the government.  Both failed to get the necessary 60 votes to pass.  It’s worth noting that six Republicans crossed over and voted for the Democrat’s bill, giving it more support than the Republican bill.  Reports also suggest that House Democrats are preparing to offer a proposal to boost border security spending by close to the $5.7 bln wanted for the wall.

Can the two parties put aside the hard feelings and come up with a compromise?  Today is Day 35 and federal workers will miss their second paycheck.  Polls show a large majority of Americans blame Trump and the Republicans for the shutdown. This is one of the reasons why six Republicans supported the Democrat’s bill.  The economic and political costs are mounting but have not yet reached a tipping point to get a deal done.

The ECB left rates steady, as expected.  Draghi said that risks had moved to the downside, but otherwise stuck to the same script as December.  He added that a new TLTRO had been discussed but needed further study.  The ECB put off any policy changes until the March meeting, when new staff forecasts would give the ECB cover to do so.  Market is becoming increasingly skeptical of the ECB’s ability to lift rates this year.

After the ECB decision, the German government cut its 2019 growth forecast to 1.0%.  This is even more pessimistic than the recent IMF revision for Germany, which cut its 2019 growth forecast to 1.3% from 1.9% previously.  After the sub-50 German manufacturing PMI reported earlier today, think there are downside risks to all the forecasts.  IFO reported January German business confidence today at 99.1 vs. 100.7 expected and was the lowest in almost three years.   A larger than expected drop in the expectations component to 94.2 was the culprit.

The euro spiked higher initially on disappointment that the ECB wasn’t more dovish.  However, it came off sharply on the German headlines just as Europe closed but has recovered back above $1.13.  The November low near $1.1215 is the next big target.

On the other side of the coin, the US outlook remains solid as shown by data yesterday.  Markit US composite PMI rose to 54.5, as both manufacturing and services PMIOs came in better than expected.  Also, weekly claims fell to 199k for the week ended January 19, the lowest since November 1969.  Claims for the previous week ending January 12 (the BLS survey week) were revised down to 212k.  Claims data shows the labor market remains strong, with a solid number likely for January NFP that will be reported next Friday on schedule.

The shutdown’s impact on the jobs data should be limited.  According to guidance from the BLS, federal employees who are furloughed will be counted as employed.  Furthermore, those who are working but not receiving pay will also be counted as employed.  NEC head Kudlow teased the number yesterday, saying January jobs may be up “a significant amount.”  Current consensus is +165k vs. 312k in December.

Kudlow also touched on the Fed vacancies.  He said that the White House hasn’t renominated Marvin Goodfriend and so there are still two vacant seats on the Board of Governors.  Kudlow added that Trump wants any new Fed nominees to think like him.  So far, Trump’s Fed picks have been orthodox and well-respected.  We do not think Trump would stray from this, though he would clearly prefer a dovish pick over a hawkish one.

Japan reported January Tokyo CPI overnight.  Headline inflation rose 0.4% y/y vs. 0.2% expected, while ex-fresh food rose 1.1% y/y vs. 0.9% expected.  The BOJ just downgraded its inflation forecasts, supporting the notion that it won’t begin to remove stimulus until FY2021, if not later.  Policymakers should be happy with recent yen weakness, although USD/JPY has still been unable to break above 110.

The situation in Venezuela remains fluid.  After opposition leader Juan Guaido claimed to be the legitimate leader of the nation, the armed forces came out in support of embattle President Nicolas Maduro.  Russia warned the US not to meddle in Venezuelan affairs, but US Secretary of State Pompeo nevertheless urged the Organization of American States to reject Maduro.  The US also offered $20 mln in emergency aid to Guaido and his supporters and requested a meeting of the UN Security Council on Saturday.  We do not think that developments Venezuela will have much impact on the EM asset class.