Markets Calmer, Dollar Firmer Ahead of Jobs Data

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  • For the first time this week, the PBOC set higher central reference rate for the yuan
  • Chinese shares rallied, with the apparent assistance of officials, after the circuit breakers were abandoned
  • The calmer conditions and rise in US yields are helping the US dollar recoup some losses against the yen
  • Usually, the US jobs reports is the most important driver; today’s report may be different

Price action: The dollar is mostly firmer against the majors ahead of US jobs data. The dollar bloc and sterling are outperforming, while the Swiss franc and Swedish krona are underperforming. The euro is trading back below $1.09 to near $1.0870, while sterling is trading right around $1.46. Dollar/yen has moved back above 118. EM currencies are mixed. INR, ZAR, and TRY are outperforming while the CEE currencies are underperforming. The PBOC fixed USD/CNY slightly lower, for the first time after eight straight up days. MSCI Asia Pacific was down 0.2% on the day, with the Nikkei down 0.4%. MSCI EM is up 0.4%, with the Shanghai Composite up 2% and the Shenzen Composite up 1.1% after the new circuit breakers were suspended. Euro Stoxx 600 is up 0.2% near midday, while US futures are pointing to a higher open. The 10-year UST yield is up 2 bp at 2.17%, while European bond markets are mostly firmer. Commodity prices are mixed, with oil and copper up slightly, gold and iron ore down 1%.

For the first time this week, the PBOC set higher central reference rate for the yuan and Chinese shares rallied, with the apparent assistance of officials, after the circuit breakers were abandoned. This, coupled with somewhat firmer oil prices, is helping to facilitate some semblance of stability in the global capital markets.

Global equities are retracing part of yesterday’s losses. In the Asia-Pacific region, Japan and Australia were exceptions. The Nikkei slipped 0.4%, bringing this week’s loss to 7%.   The Australian market lost as much on the day and is off 5.75% on the week.

Australia reported a 0.4% increase in November retail sales, with the October series revised to 0.6% from 0.5%. Despite the stabilization of Chinese impulses, and the constructive retail sales report, the Australian dollar is trading only slightly firmer, within yesterday’s ranges. It had briefly pushed through the $0.7000 yesterday, but has help above there today. The high, just below $0.7080 was recorded in Asia and Europe took it lower. However, intra-day technical indicators suggest upside potential in North America today.

The euro was squeezed to almost $1.0950 yesterday in North America. Asia sold into those euro gains. Disappointing German and French industrial production figures gave Europe little reason to reestablish the euro’s upside momentum and it has languished near $1.0850. This corresponds to a 38.2% retracement of this week’s advance. Additional retracement objectives are found near $1.0825 and $1.0800.

Yesterday, Germany reported considerably stronger than expected November factory orders (1.5% vs. consensus 0.1%). This encouraged hopes for a strong industrial output figure today. Alas, instead of rising 0.5% as the consensus thought, it fell 0.3%. The sting may have been lessened by the upward revision to the October series (from 0.2% to 0.5%). French industrial output fell 0.9% in November, three times more than the consensus expected and the October series was revised to 0.7% from 0.5%. Manufacturing itself rose 0.4%, recouping in full the October decline.

The diverging competitiveness between Germany and France is best illustrated by their trade performances. Germany reported a 20.6 bln euro trade surplus in November. Exports rose 0.4% and imports rose 1.6%. France reported a 4.6 bln euro trade deficit. It also reported increased exports and imports.

The UK November trade deficit narrowed, though exports fell. The overall deficit was GBP3.17 bln, though more than the market expected (GBP2.7 bln), it was smaller than the downwardly revised October shortfall of GBP3.5 bln. The deficit has averaged GBP2.8 bln in the first eleven months of 2015. The average monthly deficit in Q3 was GBP2.9 bln. Barring a significant improvement in December, which seems unlikely, net exports will be a drag on Q4 GDP. Separately, we note that the UK’s trade deficit with the EU reached a record of GBP8.2 bln, spurred by auto imports.

Sterling’s gains in the North American afternoon yesterday were marginally extended in Asia, but sellers still appear in control. A move back toward yesterday’s lows would not be surprising given the softness of the intra-day technical indicators.

The calmer conditions and rise in US yields are helping the US dollar recoup some losses against the yen. It is, however, still within yesterday’s ranges. Yesterday’s high was recorded near JPY118.75. A move above there could spur a move toward JPY119.20.

Usually, the US jobs reports is the most important driver. Today’s report may be different. First, the ADP estimate seemed to remove or at least reduce the risk of a significant downside surprise. Second, many observers see the market turmoil as potentially offsetting improvement in the labor market in guiding the Federal Reserve. Part of the reason the Fed did not hike in September was due to the volatility in the global capital markets.

The FOMC minutes seemed to underscore the desire for actual price pressures to emerge and not just anticipated. Average hourly earnings should jump to 2.7%-2.8%, partly a function of the base effect. This would be the largest increase in many years. It would lend credence to ideas that the tighter labor market will boost wages, and therefore inflation over time.

Such a report will likely snap the six-day rally in the US two-year note, the longest rally in more than a year. As we noted yesterday, the euro-sensitive two-year spread slipped earlier in the week, but is has begun more in the US direction again. The US premium over the UK is at new cyclical highs today. Admittedly, the correlation is not perfect, but as long as the divergent trend is in place, it is difficult to turn too positive on the euro and sterling.

The same general point holds for Canada as well. The currency-sensitive two-year spread is moving back in the US direction. At 57 bp, it is two basis points from it cyclical high recorded at the end of last year. Canada also reports employment figures today. After losing nearly 36k jobs in November, it is expected to have grown 8k in December. However, the internals may not be as constructive. In November, Canada added 36.6k full-time jobs. This is unreasonably strong. The six and 12 month averages are 14k and 16k respectively. Oil prices are flat, which might not be sufficient to override the potentially diverging energy reports.

Taiwan December trade data was weaker than expected. This suggests mainland China trade will also come in on the weak side when reported next week. Exports came in at -14% y/y vs. -13% expected, while imports came in at -16% y/y vs. -13% expected. Weak export orders suggest little recovery in exports in H1 2016. We expect further gains in USD/TWD, as well as further easing from the central bank.

Turkey reported weaker than expected November IP, 3.5% y/y vs. 4.3% consensus. Earlier this week, CPI came in at 8.81% y/y, and is the highest since November 2014. The central bank delivered a dovish surprise last month when it remained on hold, but rising inflation should push it into hiking rates at its next meeting on January 19. Of course, the soft data recently will likely keep pressure on the bank not to hike. This tug of war will continue to play out this year, and likely keeping the lira on its back foot.

Brazil reported lower than expected December IPCA inflation, rising 10.67% y/y vs. 10.79% consensus. This is still a new cycle high and the highest since November 2003. COPOM next meets January 20, and we think the tightening cycle will restart then with a 50 bp hike to 14.75%. Whatever the bank, more BRL weakness is likely, but no rate hike would likely accelerate its losses.

China reports December CPI and PPI tonight after US markets close. The former is expected to rise 1.6% y/y while the latter is expected to fall -5.8% y/y.