- The foreign currencies were broadly firmer last week and that trend continues this week
- Despite the holiday, the US has a fairly heavy data week that contains the first major snapshots of December
Brazil reports November consolidated budget data
- EU Trade Commissioner Hogan predicted that the UK is likely to abandon its opposition to a Brexit transition extension
- Korea November IP contracted -0.3% y/y vs. -0.4% expected; Hong Kong reported better than expected November trade data
The dollar is mostly weaker against the majors as another holiday-shortened week gets under way. Kiwi and Swissie are outperforming, while Stockie and Loonie are underperforming. EM currencies are mostly firmer. THB and MYR are outperforming, while ZAR and HUF are underperforming. MSCI Asia Pacific was flat on the day, with the Nikkei falling 0.8%. MSCI EM is up 0.1% so far today, with the Shanghai Composite rising 1.2%. Euro Stoxx 600 is down 0.5% near midday, while US futures are pointing to a lower open. 10-year UST yields are up 4 bp at 1.92%, while the 3-month to 10-year spread is up 5 bp at +38 bp. Commodity prices are mixed, with Brent oil up 0.7%, copper down 0.1%, and gold flat.
The foreign currencies were broadly firmer last week and that trend continues this week. Markets are taking advantage of the bearish turn in dollar sentiment as well as another wave of risk-on behavior. Bullishness on the global economy is quite strong, but we are perhaps a bit more skeptical given ongoing weakness in the UK, Japan, and the eurozone. Dollar bearishness may also be overdone given our more constructive outlook on the US economy, but technical damage has been done that must now be repaired. US rates are up today, which are helping the dollar to get some traction after earlier selling.
DXY traded today at its lowest level since December 13 before recovering a bit on higher US yields. It is on track to test the December 12 low near 96.588. After that is the June 25 low near 95.843. The euro broke above the December 13 high near $1.12 but there was no follow-through. A clean break above $1.1210 is needed to set up a test of the June 25 high near $1.1410. Sterling has recouped nearly a third of its post-election sell-off. Major retracement objectives from that drop come in near $1.3140, $1.3210, and $1.3280. USD/JPY had been stuck near the 109.50 area but finally succumbed and fell to 109.05, the lowest since December 13.
Despite the holiday, the US has a fairly heavy data week that contains the first major snapshots of December. December Chicago PMI kicks things off today and is expected to rise to 48.0 from 46.3 in November. Dallas Fed manufacturing index will also be reported today and is expected to rise to 0.0 from -1.3 in November. These come ahead of the key December ISM manufacturing Friday, which is expected to rise to 49.0 from 48.1 in November.
There will be a lot of other US data today. November advance goods trade balance (-$68.8 bln), retail (0.1% m/m expected) and wholesale (0.2% m/m expected) inventories, and pending home sales (1.3% m/m expected) will all come out today. All are important inputs to Q4 GDP and so expect some further tweaking of the forecasts. There are no Fed speakers until after the New Year’s holiday Wednesday.
The US economy is still doing better than anticipated in Q4. The Atlanta Fed’s GDPNow model now estimates Q4 GDP growth at 2.3% SAAR, up from 2.1% previously. Elsewhere, the NY Fed’s Nowcast model now has Q4 growth at 1.19% SAAR, down from 1.32% previously. It also raised its estimate for Q1 growth to 1.51% SAAR from 1.64% previously. The Atlanta Fed is likely overstating growth a bit and the NY Fed understating it, and we suspect the truth is somewhere in between. Either way, we are far from recession and the Fed is right to pause for now to assess the landscape. Because we are upbeat on the US outlook, we do not see further easing in 2020.
Brazil reports November consolidated budget data. Revenue collection has slowed in recent months, even as interest costs have risen. This led to the larger than expected central government primary deficit of -BRL16.5 bln reported Friday which warns of similar risks to the consensus -BRL16.4 bln seen in the consolidated data today. Next COPOM meeting is February 5. If inflation continues to creep higher, then the easing cycle has likely ended with rates at the current 4.5%.
EU Trade Commissioner Hogan predicted that the UK is likely to abandon its opposition to a Brexit transition extension. He called Johnson’s decision “very odd” and suggested it was a political stunt. We believe markets are also pricing in some sort of extension beyond next December 31. Why else would sterling have recovered from the post-election sell-off that took sterling as low as $1.29 last week? It will be impossible for the UK and the EU to negotiate a new trade deal by end-2020 and so an extension seems to be the most likely scenario.
Korea November IP contracted -0.3% y/y vs. -0.4% expected. December trade will be reported Wednesday, with exports expected to contract -8.6% y/y and imports by -6.9% y/y. In between, Korea reports December CPI Tuesday, which is expected to rise 0.6% y/y vs. 0.2% in November. Next central bank meeting is January 17. If low inflation and weak economy continue, then another 25 bp cut to 1.0% is possible then.
Hong Kong reported better than expected November trade data. Exports contracted -1.4% y/y vs. -6.2% expected while imports contracted -5.8% y/y vs. -8.4% expected. It’s too early to get excited about the economy, which continues to suffer from the local protests. The external headwinds should ease a bit in the coming months as the US-China trade war softens, but the protests look set to continue well into the new year.