Dollar Soft Despite Persistent Risk-off Backdrop

  • The negative virus news stream continues to weigh on market sentiment; yet the dollar safe haven bid is ebbing
  • Any post-election stimulus deal will be very difficult; US data highlight is Chicago PMI; weekly jobless claims data suggest modest improvement continues in the labor market
  • Exxon announced job cuts of 14k globally as low oil prices continue to cut into its margins; Colombia is expected to keep rates steady at 1.75%. 
  • The ECB delivered a dovish hold, as expected; eurozone reported Q3 GDP, preliminary October CPI, and September unemployment
  • Japan reported mixed data; broad brush strokes of the upcoming 5-year plan in China are starting to emerge; Korea reports October trade data Sunday local time

The negative virus news stream continues to weigh on market sentiment. Global infections have topped 45 mln while daily US infections are at record highs and rapidly approaching 100k. Asian and European equity markets are mostly lower, while US equity futures are pointing to a lower open of around -1%. Core bond yields are little changed on the day, continuing the trend seen earlier this week whereby market hedges simply weren’t working as one would expect.

Yet the dollar safe haven bid is ebbing.  The ongoing lack of a large-scale move higher in the dollar in the midst of this week’s risk-off environment is telling.  DXY has moved back into the 93-94 range that held for most of October but is struggling to break above 94.  With DXY likely capped around 94, the euro is likely to see strong near-term support near $1.16 while sterling should hold above $1.29.  USD/JPY remain heavy and is hovering just above the September low near 104.  If dollar weakness picks up again as we expect, a break of 104 is likely and would set up a test of the March low near 101.20.

 

AMERICAS

Frosty relations between Treasury Secretary Mnuchin and House Speaker Pelosi will make any post-election deal very difficult. After months of cordial talks and negotiations, press reports suggest bad feelings have developed after Pelosi apparently sent a list of outstanding issues to Mnuchin and the press simultaneously. Mnuchin responded in kind and now it appears the two are no longer talking. The fact that the two were still negotiating this week is remarkable given clear signals from the Republican Senate that they wouldn’t pass any bill near the $2 trln mark that was being discussed. The two will still have to negotiate during the lame duck session in order to avoid a government shutdown after December 11. Many had hoped a stimulus bill could be attached to this but that now seems highly unlikely. It will most likely be up to the next Congress to pass a stimulus bill and that won’t be until February at the earliest.

The US data highlight is Chicago PMI. It is expected at 58.0 vs. 62.4 in September. Last week, Markit preliminary October PMI readings were reported, with manufacturing at 53.3, services at 56.0, and composite at 55.5. So far, the regional Fed manufacturing surveys have been coming in firm for October. Personal income (0.4% m/m expected) and spending (1.0% m/m expected), core PCE (1.7% y/y expected), and final October University of Michigan consumer sentiment (81.2 expected) will also be reported today. Canada reports August GDP, which is expected to rise 0.9% m/m vs. 3.0% in July.

Weekly jobless claims data suggest modest improvement continues in the labor market. Regular initial claims fell to 751k vs. 770k expected and a revised 791k (was 787k) the previous week. This was the lowest since the week ending March 14, but PUA initial claims rose slightly to 360k and so the two together still total around 1.1 mln, which remains elevated. Regular continuing claims fell to 7.756 mln vs. 7.775 mln expected and a revised 8.465 mln (was vs. 8.373 mln) the previous week. Regular plus PUA continuing claims are around 18.8 mln, the lowest since the week ending April 14 but still elevated. Bottom line, the labor market appears to be improving modestly after a stall in much of Q3. Consensus for the October jobs report out November 6 is currently 610k vs. 661k in September, which would be another sequential drop in this series.

Exxon announced job cuts of 14k globally as low oil prices continue to cut into its margins. This would represent a 15% drop in its global workforce by the end of 2022, with 1900 US jobs to be lost, mostly in Houston. And it’s not just Exxon. BP plans to cut 10k jobs, Royal Dutch Shell 9k, and Chevron 6k. Renewed lockdowns in Europe and rising infections in the US have pushed oil prices lower, with Brent oil leading the move and trading below $40 at the lowest level since May. A break below the $35.61 level would set up a test of the May 13 low near 28.86.

Colombia central bank is expected to keep rates steady at 1.75%.  However, a handful of analysts look for another 25 bp cut to 1.50%.  At its last policy meeting September 25, the bank cut rates 25 bp to 1.75% and said future decisions would be data dependent.  CPI rose 1.97% y/y in September, below the 2-4% target range for the third straight month.  The data continue to come in weak and lower oil prices will add to the headwinds.  As such, we see risks of a dovish surprise today. Of note, S&P affirmed Colombia’s BBB- rating this week but kept the outlook at negative due to persistent weakening of its public finances.

 

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank delivered a dovish hold yesterday, as expected.   While new macro projections won’t come until the December meeting, the ECB and Madame Lagarde warned that the eurozone economy is losing momentum faster than expected and that risks are clearly tilted to the downside. Lagarde said that all bank officials agreed that it was necessary to take action and she added that there is little doubt that the ECB will act in December. In addition, she said that the bank will look at all instruments for the December meeting. Our base case is for a EUR500-750 bln increase in its PEPP along with some possible tweaks to its TLTRO and PELTRO programs. Despite her comments that everything is on the table, we remain confident that the ECB will not go more negative in its policy rates.

Eurozone reported Q3 GDP, preliminary October CPI, and September unemployment. Growth came in at 12.7% q/q vs. 9.6% expected and -11.8% in Q2, with the y/y rate improving to -4.3% vs. -7.0% expected and a revised -14.8% (was -14.7%) in Q2. Of note, France grew 18.2% q/q, Germany grew 8.2% q/q, Italy grew 16.1% q/q, and Spain grew 16.7% q/q, all much stronger than expected. Despite the stellar reading from the US (~7.5% q/q) yesterday, Q3 was one of those rare quarters where the eurozone outperformed the US in terms of growth. Looking ahead, we know that growing lockdowns will be a strong headwind in Q4 and perhaps even Q1. Of note, the US economy has been resilient so far in Q4 but it’s too early now to say that the outperformance shoe is on the other foot. Bloomberg consensus readings for Q4 growth are currently 2.0% q/q for the eurozone and ~1% q/q for the US.

On the inflation front, headline eurozone CPI remained steady at -0.3% y/y and core remained steady at 0.2% y/y, both as expected. Unemployment was 8.3% vs. 8.2% expected and a revised 8.3% (was 8.1%) in August. Lastly, German September retail sales fell -2.2% m/m vs. -0.6% expected. France also reported weak consumer spending, which fell -5.1% m/m vs. -1.4% expected. Eurozone retail sales won’t be reported until November 5 but these readings for its two largest economies suggest downside risks to the -1.5% m/m consensus reading.

 

ASIA

Japan reported October Tokyo CPI, September unemployment, IP, housing starts, and construction orders. Headline CPI came in at -0.3% y/y vs. -0.1% expected and +0.2% in September, while core (ex-fresh food) came in as expected at -0.5% y/y vs. -0.2% in September. Recall that the BOJ’s latest Outlook Report sees core inflation at -0.6% in FY20, +0.4% in FY21, and +0.7% in FY22. On the other hand, IP rose 4.0% m/m vs. 3.0% expected and 1.0% in August, while unemployment remained steady at 3.0% and the job-to-applicant ratio dropped a tick to 1.03. Lastly, housing starts fell -9.9% y/y and construction orders fell -10.6% y/y. The recovery appears to be taking hold but remains uneven, while deflationary pressures will remain a concern going forward.

Broad brush strokes of the upcoming 5-year plan in China are starting to emerge. No numerical growth targets were mentioned, as policymakers appear to be aiming for qualitative goals rather than quantitative. One central plank is the aim for self-reliance in technology, particularly in chip manufacturing. This simply reflects the new normal in terms of China’s trading relationship with the West, as several countries besides the US are limiting the flow of technology to China. The plan also aims to boost domestic consumption whilst relying more on domestic resources, or the so-called “dual circulation” strategy. Details will now be hammered out before parliament approval early next year. China reports official October PMI readings Saturday local time.  Manufacturing PMI is expected to fall a couple of ticks to 51.3 while non-manufacturing is expected to rise a tick to 56.0.

Korea reports October trade data Sunday local time.  Exports are expected to contract -4.9% y/y vs. +7.6% in September, while imports are expected to contract -2.5% y/y vs. +1.6% in September.  However, there are distortions due to fewer working days this year compared to last year and so the trade picture is better than what the headline numbers would suggest. In others sign that China is helping to power a regional rebound, Taiwan GDP grew 3.33% y/y vs. 1.10% expected and -0.58% in Q2 while Hong Kong GDP grew 3.0% q/q vs. 0.7% expected and -0.1% in Q2.