Dollar Gains Traction Ahead of Holiday Weekend

February 12, 2021

Weekly jobless claims data are worth discussing as they suggest labor market stress is ongoing; Treasury completed its sale of $126 bln in total coupon debt this week; the CBO forecasts a wider budget deficit for 2021
BOE Chief Economist Haldane came out with some upbeat comments about the UK recovery; UK Q4 GDP data surprised on the upside but still paints a grim picture; UK monthly data was decidedly mixed; Draghi is getting cross-party support for his candidacy; Russia kept rates steady at 4.25%, as expected
Australia announced a snap 5-day lockdown for the state of Victoria; India reports January CPI and December IP

The dollar is getting some limited traction ahead of the holiday weekend. DXY is up modestly for the second straight day after being down four straight days. Global equities are mostly lower, as are core bond yields. The euro is holding above $1.21, while sterling’s relentless rally has stalled out and is trading back below $1.38. USD/JPY has recovered to trade above 105 again. While we are increasingly confident that the dollar can carve out a bottom in Q1, this week’s volatile price action suggests its recovery won’t be a straight line.

AMERICAS

Weekly jobless claims data are worth discussing. Regular initial claims fell to 793k (adjusted) from a revised vs. 812k (was 779k) last week, while regular continuing claims fell to 4.545 mln from a revised 4.69 mln (was 4.59 mln) the previous week. Together with PUA initial claims, the total fell to 1.1 mln (unadjusted) and is the lowest since early January. So far, so good. However, PUA and PEUC continuing claims jumped by 2.6 mln. Combined with regular continuing claims, the total of 18.7 mln (unadjusted) is the highest since early December.

These divergent trends suggest labor market stress is ongoing. Basically, while fewer people are getting laid off and going on unemployment, those that are unemployed are not going back to work fast enough to prevent the jump in continuing claims. We think this just reflects the ongoing impact of the virus and lockdowns. We all know that the road to recovery would be long and winding but we’re hoping things get better as the vaccine rollout continues. If this continues, then we have to be ready for another soft jobs number for this month. Stay tuned.

The US Treasury completed its sale of $126 bln in total coupon debt this week. Yesterday was the final leg and $27 bln of 30-year bonds were sold with weak metrics. The bid to cover ratio was 2.18 vs. 2.47 in January, 60.5% went to indirect bidders (representing foreign demand) vs. 68.6% in January, and the yield was 1.933% vs. 1.825% in January. Ending this week’s sales on a soft note was the exact opposite of what we saw last month, when a heavy week of bond sales ended with a strong 30-year auction. That said, the 30-year yield is lower now at 1.94% than where it ended last week (1.97%). The same goes for the 10-year yield.

In related news, the Congressional Budget Office forecasts a wider budget deficit for 2021. It now sees a deficit of $2.26 trln in the fiscal year ending September 2021 vs. $1.81 trln forecast back in September. However, the medium term outlook improved. The CBO now sees the cumulative deficit over the next ten years that is $345 bln lower than what it projected back in September. Of note, these projections include the $900 bln stimulus package from December but do not include the package currently being formulated. Lastly, the CBO stressed that this outlook “is not intended to provide a forecast of future budgetary outcomes; rather, it provides a benchmark that policy makers can use to assess the potential effects of future policy decisions.”

It’s a quiet day in North America ahead of a 3-day holiday weekend for both the US and Canada. Preliminary February University of Michigan consumer sentiment is the only US data to be reported and it is expected at 80.9 vs. 79.0 in January. There are no Fed speakers scheduled. Canada reports December wholesale trade sales, which are expected to fall -1.7% m/m vs. a 0.7% gain in November.

EUROPE/MIDDLE EAST/AFRICA

Bank of England Chief Economist Haldane came out with some upbeat comments about the UK recovery. Haldane said the economy will bounce back “like a coiled spring” as lives starts coming back to normal and people spend their recent savings. This mirrors the upbeat outlook that the bank presented at its most recent meeting this month. Implied inflation expectations seem to reflect this view, though this is probably also incorporating some of the Brexit supply shocks. The 5-year Gilt breakeven inflation rates are around 3% and compares to 2.1% in the US and just 1.26% in Germany.

UK Q4 GDP data surprised on the upside but still paints a grim picture. GDP expanded by 1.0% q/q in Q4, which was double the expected 0.5%. This translated into a -7.8% y/y print, which was better than the -8.1% expected and an improvement from the -8.6% seen in Q3. However, it was pretty much driven by government spending (6.4% q/q), which helped offset weakness in private consumption (-0.2% q/q) and exports (0.1% q/q). GFCF also helped, rising 2.1% q/q but this is unlikely to carry over into Q4. The numbers were supported by the softer mobility restrictions in December, though the country has paid the price in higher infection rates and will now have to face the headwinds from the latest lockdowns. The good news is that the vaccine rollout continues to surprise providing a light in the end of the pandemic tunnel..

The UK monthly data was decidedly mixed. December IP rose 0.2% m/m vs. 0.5% expected and a revised 0.3% (was -0.1%) in November, construction fell -2.9% m/m vs. 0.5% expected and a revised 1.7% (was 1.9%) in November, services rose 1.7% m/m vs. 1.0% expected and a revised -3.1% (was -3.4%) in November, and the trade deficit was -GBP6.2 bln vs. -GBP5.75 bln expected and a revised -GBP6.6 bln (was -GBP5 bln) in November. Markets expect weakness to intensify in Q1.

As expected, Draghi is getting cross-party support for his candidacy. The anti-establishment 5-Star Movement endorsed him in yesterday’s vote, meaning that we should see the government in place soon. Italian bonds have been rallying since the news broke with the 10-year spread to German bunds now comfortably below the 100 bp level and at multi-year lows near 90 bp. This compares to spreads in the mid-50s for Spain and Portugal.

Russia central bank kept rates steady at 4.25%, as expected. CPI rose 5.2% y/y in January, the highest since April 2019 and further above the 4% target. With inflation accelerating, the easing cycle likely ended with the last 25 bp cut back in July. Indeed, the forward guidance is no longer signaling possible easing as the bank said it will “determine the timeline and pace of a return to neutral monetary policy.” It noted “Disinflationary risks no longer prevail over a one-year horizon.”

ASIA

Australia announced a snap 5-day lockdown for the state of Victoria. The state’s 6.5 mln residents must stay home except for essential shopping, care, exercise. and work. Authorities are taking quick action to contain a COVID outbreak that had led cases in the state to grow to 19. While the number seems low, the lockdown is testament to the fact that Australian policymakers have acted quickly and decisively to contain any outbreaks. If the lockdown ends as planned, there will be little impact on the economy. AUD is lower today as USD stages a bit of a comeback. The .78 area is proving tough to breach but the January high near .7820 should eventually break. If so, the January 2018 high near .8135 is the next target.

India reports January CPI and December IP. Inflation is expected to fall to 4.40% y/y from 4.59% in December, while IP is expected to fall -0.1% y/y vs. -1.9% in November. If so, inflation would be the lowest since September 2019 and further within the 2-6% target range. As such, we see ongoing risks of a rate cut later this year. The RBI left rates steady at 4.0% last week, which made sense after the upside budget surprise. While it also started to take back the pandemic-related 100 bp cut in the reserve with a 50 bp hike last week, Governor Das said the bank was moving to more targeted cash injections. We do not think normalizing policy means the easing cycle has ended just yet.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2021. All rights reserved.