- UK data were disappointing
- The Aussie moved higher on the data, and remained firm after the RBA meeting
- The Senate’s tax bill surprisingly retained the Alternative Minimum Tax for corporations
- National Bank of Poland is expected to keep rates steady at 1.5%; Colombia November CPI is expected to remain steady at 4.1% y/y
The dollar is mixed against the majors. Aussie and Nokkie are outperforming, while sterling and yen are underperforming. EM currencies are mostly firmer. ZAR and RUB are outperforming, while MYR and INR are underperforming. MSCI Asia Pacific was flat, with the Nikkei falling 0.4%. MSCI EM is down 0.4%, with the Shanghai Composite falling 0.2%. Euro Stoxx 600 is down 0.5% near midday, while S&P futures are pointing to a lower open. The 10-year US yield is flat at 2.38%. Commodity prices are mostly lower, with WTI oil down 0.5%, copper down 2.2%, and gold flat.
The US dollar is confined to narrow ranges against the euro and yen, straddling unchanged levels in the Asian session and the European morning. The action in elsewhere. The British pound is the weakest of the majors, paring 0.4% against the greenback, though around $1.3425, it can hardly be considered weak. A month ago, sterling was a few cents lower. Still, its gains reflected two things: broader dollar weakness and optimism on Brexit talks.
The British government was in denial. Perhaps because of this, many investors do not recognize the conflicting and mutually exclusive demands that have been unleashed by opening the proverbial Pandora’s Box. Specifically, there are three issues the UK needs to address. the role of the European Court of Justice (ECJ) to protect EU citizens in the UK after Brexit, the Irish border, and making good on its financial commitments.
Since the end of March when the UK triggered Article 50, there has only been apparent movement on the funds and it was belated at that. The ECJ represents encroachment upon sovereignty that antagonizes many who advocate the UK leaving the EU. The EU, of course, sees it quite differently. We have highlighted the mutually exclusive demand over the Irish border. The EU and Ireland refuse to accept a hard border between Northern Ireland and the Republic of Ireland. The DUP, which the Tory government’s survival rests, refuses to countenance a hard border between Northern Ireland and the UK.
Moreover, upon hints that May was going to accept the EU and Ireland position, the DUP expressed its disapproval. This was done via phone call in the middle of May’s lunch with Juncker, which she had to take as the future of her government was likely threatened. Some officials in Scotland and London wanted the same privilege of being allowed to remain in the single market. It is indeed a sticky wicket.
UK data were disappointing. The BRC like-for-like retail sales for November showed consumers still reluctant to buy non-essentials. Food sales were up and that helped blunt the impact of the decline in non-food sales. Auto registrations (proxy for sales) remain depressed. The -11.2% year-over-year in November compares with a gain of nearly 3% last November. The service PMI fell to 53.8 from 55.6. It offset the better manufacturing survey and the composite fell to 54.9 from 55.8.
On the other hand, the Australian dollar is the strongest of the major currencies. Its 0.6% gain is seeing it probe three-week highs near $0.7650. The market put more weight on the firm PMI (composite rose to 54.3 from 53.1) and better retail sales (0.5% vs. 0.3% expected and a revised 0.1% gain in September, which had initially been reported as flat) than on the slightly wider Q3 current account deficit and the failure of net exports to add to Q3 GDP (flat compared with expectations for 0.25% after 0.30% in Q2). The first look at Q3 GDP will be released in Australia on Wednesday. A 0.7% on a quarter-over-quarter basis is expected, about on par with Q2.
The Aussie moved higher on the data, but remained firm after the central bank meeting. The RBA, as widely expected, left the cash rate at 1.5%. However, the comments seem more optimistic on wage growth, and in any event, the central bank did not seem to be on the verge of easing policy. Some observers have been playing up that scenario, especially in light of the weakening of house prices. Australia’s two-year yield had dipped below the US 2-year yield last week, but today’s nearly 6 bp increase by Australia puts the rate back on top, and may be lending the Aussie some support. A convincing move above $0.7650 could see $0.7700-$0.7730.
The final eurozone service and composite PMIs were spot on the flash readings. However, the data had some new news. German service PMI was revised to 54.3 from 54.9. It was 54.7 in October, but surprisingly it is now lower than it was last November (when it was at 55.1). Owing to the strength of manufacturing, the composite PMI is at a lofty 57.3 (57.6 flash and 56.6 in October). French service and composite readings were revised slightly higher from the flash readings.
Italy also report strong data, while Spain was more mixed, but the composite ticked up. The disappointment of the day though comes from the eurozone October retail sales. It fell 1.1% on the month. Economists were looking for a 0.7% decline. The data means that European retail sales grew only 0.4% over the past year, despite falling unemployment and among the strongest growth seen in over a decade.
For the better part of two weeks now, the euro has been consolidating its recovery in the first several weeks of November. It has found support near $1.1800 and has struggled to finish the North American sessions above $1.19. The near-term price action may be guided by the uptrend line drawn off the November 7 low, and several lows since then, and comes in near $1.1840 today. It was tested and held in early Europe today.
While the US sees the October trade balance (likely wider deficit despite the amazing energy story) and service PMI and ISM, the real focus is elsewhere for investors. The tax reform that the Senate passed early this past Saturday retained the Alternative Minimum Tax for corporations (and some individuals). This came as a surprise to many as earlier drafts had not included it. If kept in the final version, it would offset other tax cuts. It is seen hurting technology companies and insurers the most, according to some reports. There has been some suggestion that its inclusion may have been an oversight as the bill was rushed.
The poor showing of the US tech sector weighed on Asian equities today. The net loss of the MSCI Asia Pacific index was negligible, but it was the seventh consecutive loss. For the record, it is up about 25.7% year-to-date. European bourses are lower as well. The Dow Jones Stoxx 600 is off nearly 0.5%, led by health care and information technology. It is giving back around half of yesterday’s gains. It is up about 6.7% year-to-date. The MSCI Emerging Markets Index is off 0.4% today. Yesterday’s 0.55% gains broke a three-day slide. It is up 29.6% year-to-date.
The S&P 500 gapped higher, rallied a bit more to new record highs and the proceeded to retreat all session to close on its lows. It is largely flat now. It closed near 2639. A break of 2628 warns of the risk of a retest on 2600 is a retracement objective and where the 20-day moving average is found. Since late August, the S&P 500 has closed only once (November 15) below this average.
National Bank of Poland is expected to keep rates steady at 1.5%. CPI came in high at 2.5% y/y in November vs. 2.3% expected. This is the highest since November 2012 and is right at the target. Wage pressures are building as the labor market tightens, and so we believe that the NBP will be forced to hike in H1 2018.
Colombia November CPI is expected to remain steady at 4.1% y/y. If so, it would still be above the 3% target and above the 2-4% target range. Central bank minutes will be released Thursday. At the November meeting, the bank delivered the second dovish surprise in a row and cut rates 25 bp to 4.75%. Next meeting is December 14 and another 25 bp cut to 4.5% is likely.