Markets Quiet at the Start of an Eventful Week

  • Markets are starting off quietly in an incredibly eventful week
  • The US retail sales data are a game changer; the US yield curve is reflecting lower odds of recession
  • The Tory leadership race continues this week; BOE meets Thursday while UK data is weak
  • Singapore reported weak May trade data; much of South America was in the dark Sunday due to a massive power failure

The dollar is narrowly mixed against the majors as an eventful week begins. Kiwi and euro are outperforming, while Nokkie and yen are underperforming. EM currencies are mostly weaker. TRY and ZAR are outperforming, while THB and MYR are underperforming. MSCI Asia Pacific was down 0.4%, with the Nikkei flat. MSCI EM is down 0.4% so far today, with the Shanghai Composite rising 0.2%. Euro Stoxx 600 is flat near midday, while US futures are pointing to a higher open. 10-year UST yields are up 3 bp at 2.11%, while the 3-month to 10-year spread has steepened 4 bp and stands at -4 bp. Commodity prices are mixed, with Brent oil down 0.5%, copper up 0.1%, and gold down 0.5%.

Markets are starting off quietly in an incredibly eventful week. The Fed, BOE, BOJ, and Norges Bank all meet. The eurozone will report its flash PMIs for June. In EM, the several central banks meet. All hold the potential to move markets, but most occur toward the second half of the week. Until then, it appears that markets are content to tread water. For reasons spelled out below, we remain bullish on the dollar.

Obviously, all eyes are on the FOMC meeting Wednesday. No change in policy is likely, though WIRP shows a 20% chance of a cut. This seems to overstate the case. Markets are looking for a dovish sign from the Fed, but we think there will be disappointment. Why?

Quite simply, the US retail sales data are a game changer. With strong May sales and significant upward revisions to April, Q2 is now looking quite good. Atlanta Fed GDPNow has Q2 growth at 2.1% SAAR, up from 1.4% last week. NY Fed Nowcast has Q2 growth at 1.4% SAAR vs. 1.0% previously. It also raised its Q3 reading to 1.7% SAAR from 1.3% previously. While a slowdown from Q1 (3.1% SAAR) was to be expected, markets have been particularly sensitive for signs of a larger than expected drop-off. So far, we haven’t seen it.

The US yield curve is reflecting lower odds of recession. The 3-month to 10-year curve inversion is only -4 bp today, the least since May 27 and significantly less than the peak -25 bp of June 3. If the US data continue to show further signs of life, we would expect the yield curve to move back into positive territory. Yet we acknowledge that until the various sources of economic uncertainty are cleared up, the slope of the US yield curve could easily bounce back and forth between negative and positive well into H2.

The regional Fed manufacturing surveys for June begin today with the Empire survey. A reading of 11.0 is expected vs. 17.8 in May. Philly Fed is next up on Thursday (10.4 expected vs. 16.6 in May), and together these two will provide the first snapshots of the US economy for this month. April TIC data will also be reported today.

The Tory leadership race continues this week. Boris Johnson dominated the first round vote last week, winning 114 votes from his party vs. 43 for runner-up Jeremy Hunt. Seven candidates go on to the second round, with Gove (37 votes), Raab (27), Javid (23), Hancock (20), and Stewart (19) rounding out the field. The first televised debate was held Sunday, where Johnson was notably absent.

The UK economic data have been coming in weak. For some reason, several BOE officials are still claiming the need for higher rates. Nothing will be done this week nor is anything likely ahead of the October 31 Brexit deadline. Sterling continues to suffer, trading at the lowest level for this month and on track to test the January low near $1.2440. The May 31 low near $1.2560 is within sight.

Singapore reported weak May trade data. NODX contracted -15.9% y/y vs. -16.5% expected and -10% in April. Regional trade continues to be impacted by the US-China trade tensions, which keeps us very bearish on EM. The MAS does not have an explicit inflation target, but low price pressures and the weak economic outlook argues for steady policy at its semiannual meeting in October.

Much of South America was in the dark Sunday due to a massive power failure. Outages were seen in Argentina, Brazil, Chile, Uruguay, and Paraguay. So far, officials have not pinned down the cause but Argentine President Macri said he would not rule out cyberattacks. This comes after press reports of the US stepping up its cyberattacks on Russian power grids. To be continued.