Dollar Continues to Power Ahead

  • 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.

AMERICAS

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.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported stronger than expected Q4 GDP.  Last week, Germany, France, and Spain all reported stronger than expected GDP data and so we warned of upside risks to the headline eurozone reading.  GDP contracted   -0.7% q/q vs. -0.9% expected and a revised 12.4% (was 12.5%) in Q3.  If we were to simply annualize this rate, it would be around -3% and nearly seven percentage points lower than the 4% growth posted by the US in Q4.  Of note, the y/y rate came in at -5.1% vs. -5.3% expected and -4.3% in Q3. Looking ahead, the problem is that the entire region may still be in for prolonged virus lockdown cycle, especially with the vaccine rollout issues and so eurozone underperformance is set to continue in Q1 and perhaps Q2.

France reported higher than expected CPI.  Headline inflation was 0.8% y/y (EU Harmonized) vs. 0.5% expected and flat in December. Eurozone January CPI will be reported tomorrow, with headline inflation expected at 0.6% y/y vs. -0.3% in December.  Last week, Germany and Spain also reported higher than expected inflation and so there are upside risks to the headline eurozone reading.  Yet we know from the level of concern about deflationary risks that this move higher is seen as transitory. The same goes for the US and most other major economies, as low base effects from the pandemic will eventually give way to high base effects from the recovery.

Reports suggest UK Chancellor Sunak will not hike taxes in his March budget. Prime Minister Johnson is reportedly keen to keep his election promise not to increase income taxes, national insurance, or the VAT. While we recognized the need for virtually every country to get back on a sustainable fiscal trajectory, now is simply not the time. Any sort of tax hikes would damage a recovery that is anything but strong right now. Instead, we look for Sunak to extend government support programs in the March budget whilst paying lip service to some vague future action to help limit the explosive budget deficits.

ASIA

As reports suggested, Japan Prime Minister Suga extended the state of emergency in ten of the eleven prefectures by a month.  The measures have been in effect since early January and were due to expire February 7. These prefectures together account for around 60% of GDP. Suga said that while infections have come down, the numbers were still concerning.  Residents have been asked to avoid going out after 8 PM, while bars and restaurants have been asked to voluntarily close at that time. The lower house yesterday passed two bills meant to improve enforcement of restrictions, including fines for bars and restaurants that do not close as requested.

Reserve Bank of Australia delivered a dovish hold.  While the cash rates and 3-year yield target were kept at 0.10%, as expected, the RBA extended its asset purchases beyond mid-April with an AUD100 bln increase. Governor Lowe said “The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labor market. The board does not expect these conditions to be met until 2024 at the earliest.” The bank releases its quarterly Statement on Monetary Policy Friday, which will contain updated macro forecasts.  Governor Lowe speaks Wednesday and then testifies to parliament Friday.

AUD is down today as a result of the RBA decision. While we were skeptical, some analysts were looking for some sort of tapering message. Instead, the RBA delivered quite the opposite. We suspect Australian policymakers are watching the apparent slowdown in China’s economy as closely as we are and is taking no chances with any sort of premature withdrawal of accommodation. Iron ore futures have certainly taken note, with prices falling eight of the past eleven days for a cumulative loss of nearly -15%. Of note, AUD has been the worst performer in the majors this past week, down nearly -2% against USD. It is on track to test late December lows near .7555 and then .7515. However, a break below the .76 area would set up a likely test of the December 21 low near .7460.

COMMODITIES AND ALTERNATIVE INVESTMENTS

As we suspected, the supposed attempt by Redditors to engineer a short squeeze in silver is not going as well. For the reasons we discussed yesterday, the market setup and the of silver trading volume is not comparable to that of GameStop. On top of this, the CME increased margin requirements for the metal futures. Silver is down 3.5%, reversing about half of yesterday’s gains. Separately, the retail trading app Robinhood raised another $2.4 bln. This is on top of previous $1 bln raised in the wake of the GameStop event. Of note, shares of that company and other caught in the frenzy are down sharply today in pre-market trading. The US House will hold a hearing on the matter on February 18.

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