Via Marc Chandler at Brown Brothers Harriman:
US Jobs Data – Deja Vu All Over Again?
- Many seem to recognize the risks of long dollar positions today going into the jobs report
- Euro short covering spark came from Draghi, who made it clear that the ECB’s risk assessment was shifting toward a more balanced view
- While we recognize the dollar has scope to weaken a bit more, we suspect it will not be a repeat of last week
- Brazil reports IPCA inflation, which is expected to rise 4.86% y/y vs. 5.35% in January
- Korea’s Constitutional Court upheld parliament’s motion to impeach President Park
The dollar is mostly softer against the majors ahead of the jobs report. The euro and Swedish krona are outperforming, while Nokkie and the yen are underperforming. EM currencies are mostly firmer. TRY and ZAR are outperforming, while THB and TWD are underperforming. MSCI Asia Pacific was up 0.5%, with the Nikkei rising 1.5%. MSCI EM is up 0.2%, with China shares flat. Euro Stoxx 600 is up 0.4% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is flat at 2.60%, the high from last December. Commodity prices are mostly higher, with oil up 0.4%, copper up 0.6%, and gold down 0.4%.
A week ago, after nine Fed officials had spoken, the market widely expected Yellen and Fischer to confirm that the table was set for a rate hike later this month. They did, and the dollar and US interest rates rose. Now, after a strong ADP jobs report (298k), everyone recognizes upside risk to today’s national report, and the dollar has lost its upside momentum against most major currencies except the Japanese yen.
Many seem to recognize the risks of long dollar positions today. There are three sets of possibilities. First, the US jobs report is seen as strong, and the dollar sells off, as last week on “buy the rumor, sell the fact” activity. Second, the jobs report could be strong, and the market sees the pace of Fed tightening accelerating, and the dollar rallies. Third, the jobs report could be disappointing, and the dollar sells off. In two of the three scenarios, the dollar weakens.
On the other hand, what is different now compared with last week is that the dollar is softer before the event. The US dollar’s momentum stalled yesterday, helped by a bout of euro short covering that helped trigger a broader short-covering advance in many of the major currencies. The spark came from the ECB’s Draghi, who made it clear that the central bank’s risk assessment was shifting toward a more balanced view as the downside risks eased. Nevertheless, the fact that the staff’s forecast that inflation next year will be lower than this year warns against over-emphasizing a subtle change in signaling.
Most participants did not expect another rate cut from the ECB. Most did not expect a new long-term loan facility, especially given that the current ones are still open. Although Draghi said that asset purchases could be accelerated if needed, investors recognize that a gradual winding down is more likely than a fresh expansion. With the negative deposit rate of 40 bp, there are some that think that the ECB could reduce the negativity before completely ending is asset purchase program. But this does not appear particularly likely in the next several months, and, moreover, it may look a bit different if inflation peaks, as we expect, in Q2.
While we recognize the dollar has scope to weaken a bit more, we suspect it will not be a repeat of last week. Those that want to pick a near-term dollar top may be reluctant to make much of stand when it may be easier to do so after next week’s FOMC meeting. This view still can see the euro moving toward $1.0640-$1.0680, and sterling testing the $1.22 area. The Australian dollar can push toward $0.7545-$0.7560, while the US dollar can ease back to the CAD1.3430-CAD1.3450 area. Such price action would leave the technical tone intact.
At stake today is also the nine-day drop in US 10-year Treasury prices, which pushed the yield back to 2.62%, the highest since the Fed hiked in mid-December. The nine-day move saw the yield rise by 30 basis points. The yield is slightly lower now. If there were a single factor to explain why the dollar is above JPY115, making a two-month high, we would suggest it is the rise in US yields, which drives the 10-year interest rate differential. The dollar has not closed above JPY115 since January 11.
There are large option expiries today at JPY115 (~$1.3 bln) and JPY116 (~$1.3 bln). We note that the January 19 high was set near JPY115.60 and the 61.8% of the dollar’s decline since the early January high is a touch below JPY116. The dollar’s advance has also lifted it through a trendline drawn from the highs beginning at the JPY115.60 area. That trendline, which some see as the top of a larger wedge, comes in now near JPY114.60. This also corresponds with the 38.2% retracement of the dollar’s leg up since the mid-week low near JPY113.60.
Both the UK and France reported disappointing January manufacturing data. In France, manufacturing output fell 1.0%. The market expected an increase of around 0.5%, while the December series was revised to show a 1.0% decline rather than a 0.8% fall. The broader measure of industrial output fell 0.3% compared with expectations of a 0.5% gain.
In the UK, manufacturing output fell 0.9%, which was a little more than the market expected. A pullback had been expected after the heady rise in December which was revised to 2.2% from 2.1%. Headline industrial output fell 0.4%, a tad less than the market expected. Construction spending also disappointed. It fell 0.4% in January; twice the loss the median forecast anticipated but also follows a strong December gain (1.8%). Lastly, helped by the 1.6% rise in exports and a smaller 0.9% rise in imports, the UK reported a GBP1.966 bln trade deficit. The median expectation in the Bloomberg survey was for a GBP3.1 bln shortfall after GBP2.026 bln deficit in December (which was initially reported as a GBP3.304 bln deficit).
Canada also reports February jobs data. A small decline is expected by the median forecast, as the market looks for some mean reversion after two months of more than 45k job gains. In the past two months, Canada has grown 86k net new full-time jobs. Given that Canada is roughly one-tenth the size of the US, it would be as if the US created 860k new jobs in December-January instead of the 385k it did.
In summary, look for next week’s events (FOMC meeting, Dutch election, and G20 meeting) to limit the dollar’s downside, barring a significant disappointment that makes participants doubt the certainty of a hike next week. Rather than a repeat of last week’s “buy the rumor, sell the fact”, we suspect the opposite will happen, with most of the dollar’s decline already likely seen since yesterday’s ECB meeting. The two weeks of rising US yields (a tenth day of rising 10-year yields would be longest such streak since the mid-1970s) warns of a potential turning point in the market.
Korea’s Constitutional Court upheld Parliament’s motion to impeach President Park. This was our base case and the best possible outcome, since it removes one big source of political uncertainty. A new election will be held within 60 days. The three leading contenders (according to the most recent Gallup poll) to replace Park are Moon Jae-in and Ahn Hee-jung of the largest opposition Democratic Party of Korea, and Ahn Cheol-soo of the smaller opposition People’s Party. Macro policy will remain prudent whoever is elected, but there are likely to be positive micro changes (with regards to how the chaebol operate) in the next administration.
Brazil reports IPCA inflation, which is expected to rise 4.86% y/y vs. 5.35% in January. Disinflation continues, which should allow the easing cycle to continue. In light of the weak economic data, markets appear to be leaning towards a 100 bp cut to 11.25% at the next COPOM meeting April 12. However, we lean toward a 75 bp cut to 11.50%. Much will depend on the external environment then. BRL is finally succumbing to overall EM weakness. Retracement objectives from the December-February drop in USD/BRL come in near 3.2135 (38%), 3.2665 (50%), and 3.3200 (62%). The 200-day MA comes in near 3.2650, so that area will be key.