- Efforts to pass the next relief bill continue; we got another clue for Friday jobs data yesterday; Minneapolis Fed President Kashkari was quite upfront about his thoughts on recent equity market volatility; Brazil’s lower house speaker elections delivered a much-needed victory for the government
- Eurozone reported stronger than expected Q4 GDP; France reported higher than expected CPI; reports suggest UK Chancellor Sunak will not hike taxes in his March budget
- As reports suggested, Japan Prime Minister Suga extended the state of emergency in ten of the eleven prefectures by a month; RBA delivered a dovish hold; AUD is down today as a result of the RBA decision
The dollar continues to move higher. What started off as a risk-off bounce last week appears to have morphed into something bigger, with the dollar is up yesterday and today even as global equity markets are starting the week off higher. DXY is trading at the highest level since December 9 near 91.20 and a break of the 91.428 area would set up a test of the November 23 higher near 92.80. Likewise, the euro is trading at the lowest level since December 1 near $1.2030 and break below the $1.2010 area would set up a test of the November 23 low near $1.18. Sterling is outperforming and still trading near $1.37, which has pushed the EUR/GBP cross down to new lows just below .88 and could test last April’s low near .8671. USD/JPY is trading at the highest level since November 16 near 105.05. With Friday’s clean break above 104.50, the pair is on track to test that month’s high near 105.70.
Efforts to pass the next relief bill continue. President Biden met yesterday with the group of ten Republican Senators that drew up a $618 bln alternative to his $1.9 trln proposal. Both sides said the meeting went well but nothing substantive has emerged yet. We still view this as a trial marker from the Republicans and if horse-trading gets both sides to split the difference, we are left with a potential package of around $1.25 bln. This is close to what we thought was a reasonable compromise that would be just north of $1 trln. Still, other reports suggest that Democratic lawmakers are still forging ahead with the possibility of passing much of Biden’s proposal via the budget reconciliation process that requires only simple majority passage in both houses.
The Congressional Budget Office released a study showing the US economy will return to pre-pandemic levels even without another shot of stimulus. Of course, this will strengthen the Republican argument that there is no need to go big on the next package. On the other hand, the CBO projects the unemployment rate falling to 5.3% by year-end. While down from the 8.4% forecast by the CBO back in July, Democrats will focus on the millions still out of work and needing assistance.
We got another clue for Friday jobs data yesterday. While headline ISM manufacturing PMI eased to 58.7 from a revised 60.5 (was 60.7 in December), the employment component rose to 52.6 from a revised 51.7 (was 51.5) in December. This is the highest reading since June 2019. Of course, services PMI Wednesday is much more important for the US but for now, the economy is starting the year off on pretty firm footing. Auto sales are expected today at an annual 16.15 mln rate vs. 16.27 mln in December.
Minneapolis Fed President Kashkari was quite upfront about his thoughts on recent equity market volatility. Kashkari noted “GameStop has gotten a lot of attention. If one group of speculators wants to have a battle of wills with another group of speculators over an individual stock, God bless them. That’s for them to do, and if they make money, fine. And if they lose money, that’s on them. I’m not at all thinking about modifying my views on monetary policy because of speculators in these individual stocks.” Well said, though we think the Fed should always be on the lookout for signs of stress in the financial markets. Recall that Chair Powell would not comment on the situation at his post-decision press conference last week. Kaplan and Mester speak today.
Brazil’s lower house speaker elections delivered a much-needed victory for the government. Artur Lira was mostly expected to win, but it’s still a positive development that removes a risk event holding back local assets from catching up with other EMs. We hope the negative political noise will start to fade, though it never really goes way. The government will now be able to push ahead a reform agenda, even if limited, probably focusing on items such as tax reform, while at least trying to establish minimal fiscal discipline. We remain tactically bullish on Brazilian assets.