Dollar Firm as Global Financial Markets Calm

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Win Thin
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• Global financial markets are finally seeing a measure of calm return; local Chinese media is sounding more confident that the situation is now under control
• The White House will announce fiscal measures today; five states hold primaries and one holds a caucus with 352 total pledged delegates up for grabs
• Italy announced that it is extending travel curbs beyond just the north to the entire nation; further fiscal measures there will be seen
• Japan reported February machine tool orders; China reported CPI and PPI

The dollar is mostly firmer against the majors as a measure of calm returns to global financial markets.  Nokkie and Loonie are outperforming, while yen and Swissie are underperforming.  EM currencies are mixed.  MXN and ZAR are outperforming, while the CEE currencies are underperforming.  MSCI Asia Pacific was up 0.4% on the day, with the Nikkei rising 0.9%.  MSCI EM is up 1.2% so far today, with the Shanghai Composite rising 1.8%.  Euro Stoxx 600 is up 3.7% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 18 bp at 0.72%, while the 3-month to 10-year spread is up 17 bp to stand +37 bp.  Commodity prices are mostly higher, with Brent oil up 7.4%, copper up 1.2%, and gold down 1.4%.

Global financial markets are finally seeing a measure of calm return.  Oil and equity markets are higher, while gold and core bond prices are lower.  The dollar is finally finding a bid and DXY has just today retraced about a quarter of its drop from the late February peak.  Yet it’s way too early to sound the all clear, as the virus continues to spread.  Indeed, we suspect the next leg down will be seen when policymakers worldwide have introduced large-scale stimulus measures and the economic data still weaken.

Local Chinese media is sounding more confident that the situation is now under control. Indeed, President Xi Jinping visited Wuhan today in an important symbolic gesture. Both new cases and deaths have declined sharply from the mind-February levels. There have “only” been about 1,500 new cases and 260 deaths this month in China. Italy, on the other hand, has implemented a country-wide shut down; people can only leave their house for grocery shopping, doctor visits and care for elderly or sick relatives. Italy is now the country with the highest number of infected (9,172) and deaths (463).

AMERICAS

Reports suggest the White House will seek a payroll tax cut and “very substantial relief” for industries hurt by the coronavirus.  President Trump said that he will announce “very dramatic” actions to support the economy at a planned press conference today at .  It’s not clear if House Democrats will agree to a payroll tax cut, but may compromise in order expand paid sick leave for workers and other help for hourly wage earners. Treasury Secretary Mnuchin said they are ready to use “all economic tools” and that he is in close consultation with Fed Chair Powell about the situation.

Five states hold primaries and one holds a caucus with 352 total pledged delegates up for grabs: Idaho (20 delegates), Michigan (125), Mississippi (36), Missouri (68), and Washington (89) hold primaries, while the North Dakota caucus adds another 14 pledged delegates.  Of these, Michigan is key for Sanders.  After pulling a huge upset win during the 2016 primaries, Sanders hopes to pull a repeat.  However, two new polls show him trailing Biden by double digits in Michigan.  If Biden can continue to post large wins in the big states, his delegate lead will quickly become insurmountable.  According to betting markets, the race to become the Democratic nominee has continued to shift dramatically in Biden’s favor.

Fed easing expectations remain elevated.  Next FOMC meeting is March 18 and WIRP suggests a 75 bp cut is fully priced in.  After that, one last 25 bp cut is nearly priced in by mid-year that would take the Fed funds target range down to the crisis-era low of 0.0-0.25%.  Before the cut, markets were pricing in 75-100 bp of total easing vs. 150 bp that’s now expected.  With the media embargo now in place, there are no Fed speakers until Powell’s post-decision press conference.

Meanwhile, the Fed boosted its repo operations Monday to ensure that funding markets remains normal.  The New York Fed said that the move was to “ensure reserves remain ample and to mitigate the risk of money market pressures that could adversely affect policy implementation.”  Despite some stresses seen across many credit markets, we do not feel that a dollar funding problem is looming.  That said, if such a problem develops, the Fed is likely to dust off some of its crisis-era tools again, such as dollar swap lines for foreign banks.

EUROPE/MIDDLE EAST/AFRICA

The ECB should be relieved that the euro is softening ahead of its decision Thursday.  After trading yesterday at its highest level since January 2019 near $1.1495, the euro has given back about a quarter of its gains from the February 20 low.  Yet the euro remains elevated.  Draghi often pushed back at euro strength during his tenure, let’s see how Lagarde approaches it.  We believe she will try and prevent further gains when the ECB meets Thursday.  We will put out an ECB preview later today.

France and Italy both reported January IP earlier.  They rose 1.2% m/m and 3.7% m/m vs. expectations of 1.8% and 1.6%, respectively.  Eurozone IP will be reported Thursday and it is expected to rise 1.4% m/m.  Yet this is all old news.  With the industrial north of Italy shutting down, there are clear downside risks building across much of the eurozone.

Italy announced that it is extending travel curbs beyond just the north to the entire nation.  Ski resorts across the nation are shuttering early.  With the economic toll rising, Italian policymakers are reportedly looking to boost its fiscal package to around EUR10 bln from EUR7.5 bln initially.  Furthermore, the government will suspend mortgage payments across the country. The measure will apply to individuals and households. Banks will also offer debt moratoriums to small firms and households impacted by the crisis. It’s worth noting that Italy’s banking sector has not done any worse than banks across the region, both down some 30% this year. Italy’s spreads to German bonds widened a lot over the last few weeks, but it has already started to ease.

There has been no progress in talks between the EU and Turkey over the refugee situation at the Greek border. The EU wants Turkey to continue harboring refugees, along the lines of the 2016 deal. Erdogan sees the opportunity to extract further concessions and leverage his position given the uncertainty in Syria. We can sympathize with Erdogan’s position to some extent; the EU has been very slow in disbursing the funds and Turkey has shouldered a huge share of the burden. A lot of this will depend on the peace deal reached between Erdogan and Putin on Idlib. The lira has stabilized somewhat, but we think it’s just a matter of time until it resumes its depreciation trend. CDS prices have increased over the last few weeks, but much of this has been part of a broader risk-off trend.

Norway reported February CPI.  Headline inflation halved to 0.9% y/y from 1.8% in January, while underlying inflation dropped sharply to 2.1% y/y from 2.9% in January.  Norges Bank meets March 19 and easing expectations are picking up as oil plunges and inflation drops sharply.  Bloomberg consensus sees a 25 bp cut to 1.25%, and one analyst sees a 50 bp cut to 1.0%.  Rates have been kept steady since the last 25 bp hike to 1.5% back in September.

ASIA

Japan reported February machine tool orders.  Orders contracted -30.1% y/y vs. -35.6% in January.  Data support our view that the economic outlook remains weak and that further stimulus is warranted.  The yen has weakened as market sentiment stabilizes.  After trading yesterday at the lowest level since November 2016 near 101.20, USD/JPY today has retraced more than a third of the drop from the February peak.

China reported February CPI and PPI data.  The former rose 5.2% y/y as expected, while the latter fell -0.4% y/y and was a tick more than expected.  Inflation is simply not a concern for policymakers.  Rather, we look for more stimulus measures in the coming weeks to help the economy recover from the virus.  China reports February money and loan data this week, but no date has been set.