Dollar Soft on Weak Data and the Return of Tariff Man

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Win Thin
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• The dollar has taken a hit from the weaker than expected data Monday
• Tariff man is back
• The US economy remains solid in Q4 but there are some worrying signs for the November jobs data Friday
• The political pressure on Turkey from the US could increase soon; South Africa’s Q3 GDP came in well below expectations at -0.6% q/q and 0.1% y/y
• Japan JGB auction went poorly on supply concerns ahead of planned fiscal stimulus; RBA kept rates steady at 0.75% but the outlook was upbeat

The dollar is mostly weaker against the majors in the wake of weak US data yesterday.  Aussie and sterling are outperforming, while euro and Nokkie are underperforming.  EM currencies are mostly weaker as trade 7tensions rise.  PHP and MXN are outperforming, while ZAR and KRW are underperforming.  MSCI Asia Pacific was down 0.4% on the day, with the Nikkei falling 0.6%.  MSCI EM is down 0.2% so far today, with the Shanghai Composite rising 0.3%.  Euro Stoxx 600 is down 0.1% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 2 bp 1.80%, while the 3-month to 10-year spread has fallen 4 bp to +23 bp.  Commodity prices are mostly higher, with Brent oil up 0.1%, copper down 0.7%, and gold up 0.4%.

The dollar has taken a hit from the weaker than expected data Monday.  DXY is trading at its lowest level since November 21 and is coming up on the 200-day moving average near 97.648.  The euro is testing the $1.11 area, while USD/JPY is testing its 200-day moving average near 108.90.  Sterling is trading at its highest level since October 22 and is testing the top of its well-worn $1.28-1.30 range.  There is still a lot of major US data to come this week and so markets may be wary of selling the greenback too aggressively ahead of Friday jobs data.

Tariff man is back. After proposing tariffs on Brazilian and Argentine steel, Trump has now turned to France, targeting $2.4 bln of products.  The first two were attributed to “massive devaluations” of their currencies, while the measure against France relates to a tax on digital revenues that affects tech firms such as Apple and Google, which supposedly “discriminates against US companies.” France said the EU is ready to retaliate.  The two nations agreed in August to work on a compromise but the 90-day deadline expired last week with no deal.  USTR Lighthizer added that the US is looking into opening investigations into similar digital taxes levied by Austria, Italy, and Turkey.  These events are in line with our view that the Trump administration will widen the scope of the Trade War into the election period.

Separately, uncertainty surrounding the US-China trade deal is also rising. The latest reports discuss retaliation by China against the Congressional measures in support of Hong Kong in the form of a list of “unreliable entities” which could lead to sanctions on US companies. We still think that the risk of human rights issues contaminating the trade talks is small, but it remains a possibility.  Adding to these concerns, Trump said today that he had no deadline to complete the trade deal with China, further denting the mood.  Yesterday, US Commerce Secretary Ross warned that President Trump will raise tariffs on China if a trade deal isn’t reached.

AMERICAS

The US economy remains solid in Q4.  After the weak Monday data, the Atlanta Fed’s GDPNow model estimates Q4 GDP growth at 1.3% SAAR, down from 1.7% previously.  Elsewhere, the NY Fed’s Nowcast model now has Q4 growth at 0.77% SAAR, up from 0.71% previously and will be updated Friday.  The Atlanta Fed may be overstating growth a bit and the NY Fed understating it, but we suspect the truth is somewhere in between.  Either way, we are far from recession and the Fed is right to pause this month to assess the landscape.

There are some worrying signs for the November jobs data Friday.  The employment component for ISM manufacturing yesterday fell to 46.6 from 47.7 in October.  Furthermore, initial jobless claims for the survey week containing the 12th of the month rose to 228k, the highest reading since mid-June.  As such, there may be some downside risks to the jobs reading.  ADP data tomorrow will be another piece of the puzzle but further muddying the waters is the return of GM autoworkers, which is expected to add nearly 50k to the number.  Consensus sees 190k jobs added vs. 128k in October, with the unemployment rate seen steady at 3.6% and average hourly earnings steady at 3.0% y/y.

We believe the labor market remains in solid shape overall and this should continue to support consumption.  November auto sales will be reported today and are expected to come in at an annualized 16.90 mln pace vs 16.55 mln in October.  There are no Fed speakers today.

EUROPE/MIDDLE EAST/AFRICA

The political pressure on Turkey from the US could increase soon.  The Senate Foreign Relations Committee could start discussing measures against Turkey’s actions in Syria and the purchase of the S-400 missile system next week. In the meantime, senators continue to pressure Trump to impose the mandated sanctions in accordance with the CAATSA legislation regarding the S-400 issue. It requires that the administration selects at least five out of 12 sanctions under CAATSA.

On the data front, November CPI came in at 10.6%, slightly below expectations. This is a pickup compared to the previous month’s reading of 8.6% but was largely due to base effects. The central bank should continue easing in the next meetings, but the pace of cuts should start to decelerate. Local assets have had a good run recently with the currency stable for months and equities posting solid gains, while yields and implied volatility have been trending lower.

South Africa’s Q3 GDP came in well below expectations at -0.6% q/q and 0.1% y/y, hitting the rand. Headwinds from the mining and manufacturing sectors weighed on growth. The figures just about confirm that 2019’s GDP will come in very soft, likely below 1.0%. As we noted last month, the SARB missed a golden opportunity to cut rates to boost the economy.  With sentiment souring, it will be much tougher to pull off.  The rand depreciated nearly 1%, by far the underperformer on the day, while local stocks are down 0.3%.

ASIA

Japan JGB auction went poorly on supply concerns ahead of planned fiscal stimulus.  Initial press reports put the size of a supplemental budget at least JPY12 trln ($110 bln).  Subsequent reports put the number as high as JPY25 trln ($230 bln).  Discussions will be held early this week before a final decision is made.     Either way, that’s a lot of supply ahead and so the bid-cover ratio to today’s 10-year auction fell to 3.28 from 3.62 in November and was the lowest since August 2016.  Yields rose to -0.022% today, the highest since April 17.

Reserve Bank of Australia kept rates steady at 0.75%, as expected.  The outlook was surprisingly upbeat as it noted that risks to the global economy have lessened recently.  The RBA added that while past easing is having an impact, it decided to hold rates now given long lags in monetary policy.  Still, the bank warned of weak household income growth weighing on consumer spending and maintained its view that it’s reasonable to expect an extended period of low rates and that it is prepared to ease further if needed.  Note WIRP suggests 55% odds of a cut at the next meeting February 4.  AUD is trading at the highest level since November 11 and is testing a key retracement objective near .6865.  Break above that would set up a test of the October 31 high near .6930.