Dollar Firm Ahead of US Jobs Report

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Win Thin
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• The number of confirmed coronavirus cases and deaths continue to rise; the dollar continues to climb
• The January jobs data is the highlight for the week; Canada also reports jobs data
• The Fed submits its semiannual Monetary Policy Report to Congress today; Mexico and Brazil report January inflation data
• The downdraft in eurozone industrial data continues; Russia cut rates 25 bp to 6.0% and signaled more easing ahead
• RBA upbeat but Governor Lowe warns of “significant areas of uncertainty”
• Japan reported weak December cash earnings and household spending; emerging Asia focuses on stimulus

The dollar is broadly firmer against the majors ahead of the US jobs data.  Yen and sterling are outperforming, while the Antipodeans are underperforming.  EM currencies are broadly weaker. PHP and HKD are outperforming, while THB and KRW are underperforming.  MSCI Asia Pacific was down 0.6% on the day, with the Nikkei falling 0.2%.  MSCI EM is down 0.8% so far today, with the Shanghai Composite rising 0.3%.  Euro Stoxx 600 is down 0.4% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 4 bp at 1.60%, while the 3-month to 10-year spread is down 3 bp to stand at +5 bp.  Commodity prices are mostly lower, with Brent oil down 0.3%, copper down 1.1%, and gold up 0.1%.

The number of confirmed coronavirus cases continues to rise, now at over 31K worldwide while deaths are approaching 650.  Much of the news flow has been focus on the possible vaccine, but the trial process means it’s unlikely to be available in the near-term. The economic impact continues, however, with still-heavy disruptions in travel and businesses being seen in China (and beyond). For example, China’s refineries have reportedly cut fuel production by 15%, paring back demand by some 2 mln barrels a day.

The dollar continues to climb.  DXY has broken above the November 29 high near 98.544.  More importantly, it has broken above the 62% retracement objective of the October-December drop near 98.402.  This sets up a test of the October 1 cycle high near 99.667. the euro is trading at a new low for this move near $1.0950 and the next target is the October 1 low near $1.0880.  USD/JPY is lagging, however, as the pair was turned back from the 110 area by these latest risk-off impulses.

AMERICAS

The January jobs data is the highlight for the week.  Consensus sees 165k vs. 145k in December, with unemployment seen steady at 3.5% and hourly average earnings seen picking up a tick to 3.0% y/y.  Note also that BLS will release its final benchmark revision for 2019.  The preliminary 2019 revision of 501k reported back in August is about twice the average of those seen in the previous ten years.  The final benchmark estimate has typically been close to the preliminary reading. If so, there will likely be significant downward revisions, but these would not derail what we see as ongoing strength in the US labor market.

What do the clues suggest?  ADP reported a 291k gain in private sector jobs yesterday, nearly twice what was expected.  Weekly claims for the BLS survey week were the lowest since October, while the employment component for ISM manufacturing also suggest a strong NFP.  Note that the employment component for ISM non-manufacturing fell to 53.1 from 54.8, which still signals expansion albeit at a slower pace.  For the US economy, it’s full speed ahead.

The US economy remains strong.  Advance Q4 GDP came in at 2.1% SAAR and that strength appears to be carrying over into 2020.  The Atlanta Fed’s GDPNow model estimates Q1 GDP growth at 2.9% SAAR, while the NY Fed’s Nowcast model estimates Q1 GDP growth at 1.6% SAAR.  Both models will be update today.  While these early reads are subject to significant revisions, we are clearly far from recession and the Fed is right to maintain steady rates and to assess how the outlook unfolds in 2020.

The Fed submits its semiannual Monetary Policy Report to Congress today.  From the Fed’s website: The Federal Reserve Act requires the Federal Reserve Board to submit written reports to Congress containing discussions of “the conduct of monetary policy and economic developments and prospects for the future.”  Chair Powell will testify before the House Tuesday and the Senate Wednesday.

Canada also reports January jobs data.  Total jobs are expected to rise 17.5k vs. a revised 27.3k (was 35.2k) in December.  January Ivey PMI will also be reported.  Lower oil prices have really taken a toll on the Loonie, with USD/CAD trading yesterday at the highest since December 3.  That day’s high near 1.3320 will likely be tested soon and a break above sets up 1.3385 as the next near-term target.

Mexico January CPI is expected to rise 3.28% y/y vs. 2.83% in December.  If so, inflation would be the highest since July 2016 and back in the top half of the 2-4% target range.  Next policy meeting is February 13 and a 25 bp cut to 7.0% is expected as policymakers continue their efforts to boost growth.

Brazil January IPCA inflation is expected at 4.34% y/y vs. 4.31% in December.  If so, inflation would be the highest since May 2019 and in the top half of the 2.5-5.5% target range for 2020.  Yet COPOM just cut rates 25 bp to 4.25% yesterday.  BRL continues to suffer, and the outside up day recorded yesterday for USD/BRL suggests further gains ahead for the greenback.

EUROPE/MIDDLE EAST/AFRICA

The downdraft in eurozone industrial data continues. German December IP came in at -6.8% y/y, well below the -3.7% expected.  Its manufacturing PMI continues to recover, but the survey data is being offset by weak hard data from the factories. German trade data showed exports rising 0.1% m/m and imports falling -0.7% m/m.  French IP numbers also disappointed at -3.0% y/y against expectations for +1.0%, and its manufacturing production at -3.2% y/y was far lower than the +1.2% expected.

Russia central bank cut rates 25 bp to 6.0%, as expected.  The bank added that further easing is possible at one of the next meetings.  Yesterday, January CPI came in at 2.4% y/y vs. 2.5% expected and 3.0% in December.  Inflation is the lowest since July 2018 and further below the 4% target. As such, we think several more cuts are possible this year.

ASIA

Reserve Bank of Australia issued its Statement on Monetary Policy.  Its updated quarterly forecasts suggest an improving labor market and lower unemployment next year, with growth seen accelerating after a near-term hit from the wildfires.  Governor Lowe also gave his semi-annual testimony to Parliament overnight.  He noted that the risks from further rate cuts “slightly” outweigh the benefits, adding that this could turn, “particularly if the unemployment rate deteriorates.”  Lowe also warned of “significant areas of uncertainty.”  AUD is testing the October 2 low near .6670.  If that breaks as we expect, there really aren’t too many major chart points until the February 2009 low near .6250 and then the October 2008 low near .6000.

Japan reported December cash earnings and household spending overnight.  Real earnings declined -0.9% y/y, as expected.  However, household spending plunged -4.8% y/y vs. -1.7% expected, as the lack of earnings growth took a toll on consumption.  This means that the economy was already weakening before the coronavirus hit, which has led some analysts to raise their estimates for recession risk in 2020 despite the fiscal stimulus that’s in the pipeline.

In emerging Asia, it’s all about stimulus right now as the region grapples with the impact of the coronavirus.  Earlier this week, Thailand and the Philippines cut rates whilst India injected long-term liquidity.  Today, the Thai Constitutional Court ordered parliament to vote on the stalled budget bill, calling it an urgent matter.  Also, Philippine central bank Governor Diokno signaled another cut by mid-year.