- Today has the making of the sixth consecutive Friday that the dollar gains against the euro and yen
- The North American session features four Fed speakers, all regional presidents
- Markit’s preliminary assessment of the US manufacturing PMI will be reported, but in terms of economic data, the focus will be on Canada
- Much focus is on next week’s OPEC meeting in Algiers
The dollar is mostly firmer against the majors in narrow ranges. The Scandies are outperforming while sterling and Kiwi are underperforming. EM currencies are mixed. ZAR and TWD are outperforming while PHP and MXN are underperforming. MSCI Asia Pacific was down 0.2%, as Japan markets fell 0.3% after returning from holiday. MSCI EM is down 0.2%, as Chinese markets fell 0.5%. Euro Stoxx 600 is down 0.5% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 1.61%. Commodity prices are mixed, with oil flat, copper up 0.1%, and gold flat.
As Nassim Taleb instructed, we should not be fooled by randomness. If you see six red results in a row at a roulette table, do not conclude the game is rigged. If you flip a coin, and it is tails six consecutive times, the contest is not necessarily rigged.
Today has the making of the sixth consecutive Friday that the dollar gains against the euro and yen. The Australian dollar has fallen six of the past seven Friday’s and is down today. We note that this pattern has held in weeks that the dollar rose and in weeks, like this one, that the dollar has fallen. If there is a narrative that makes sense of this pattern, it may simply be an effort to reduce short dollar positions ahead of weekends.
Today’s firmer dollar was partly signaled by the loss of its downside momentum with 12 hours or so of the FOMC decision, which was hardly surprising, even if disappointing. The Fed has painted itself into a corner. Although Yellen conditioned a hike on continued improvement in the labor market and no new global risks, the market remains unconvinced. The chances that the Fed funds target is 50-75 bp at the end of the year are less than 50%.
Japan’s Finance Minister was quoted saying that deflation is the biggest problem for the Japanese economy. This seems to wrong diagnosis of the problem. The problem is growth potential. The BOJ estimates that potential growth is only 0.2%. The challenge is not that Japan is expanding below its potential, but that its potential is too low. Today’s data confirms the economy is expanding. The preliminary manufacturing PMI rose to 50.3. It is back in expansion mode (above 50) for the first time since February. The All-Industries Activity Index, a proxy for GDP rose 0.3%, a little more than expected.
After bouncing off JPY100 yesterday, the dollar reached almost JPY101.25 in Asia but met sellers that have pushed it back to JPY100.80. Additional intraday support is seen near JPY100.50. Japanese markets were closed yesterday, but it appears that institutions were eager to lock in the dramatic backing up of long-term yields that were triggered by BOJ action.
The main news from Europe is the flash PMI. Manufacturing rose on the aggregate level to 52.6 from 51.7. This was marred by the decline in services, seemingly emanating from Germany. The aggregate service reading fell to 52.1 from 52.8. The composite fell to a 20-month low of 52.6. The year’s average until now was 53.1.
The German service sector was at 54.4 as recently as July. It fell in August and fell further in September. It stands at 50.6. Manufacturing edged higher to 54.3 from 53.6. The composite eased to 52.7 from 53.6. It is the lowest since May. If there is a silver lining in the disappointing German data, it is economic weakness may, over time, prompt more stimulus policies.
France showed improvement in manufacturing, services and its composite. Although comparisons between countries are difficult with this time series, it is interesting to note that the French composite of 53.3 (from 51.9) is above the German composite (52.7). It is the best composite reading in France since last October. However, the manufacturing PMI remained below 50 (49.5) where it has been since February. The services reading rose to 54.1 from 52.3.
The euro has been confined to less than a 25 tick range around yesterday’s North American close. Intraday technicals warn of scope for a mild push higher into the $1.1225 area, before coming back off into the weekend.
Sterling and the New Zealand dollar are competing for the weakest of the majors today. Kiwi has dropped 1.25 cents since the RBNZ indicated it continued to anticipate further monetary easing. The loss does little more unwind the previous three days of gains. Yesterday was the first day in five that sterling did not trade below $1.30. It dipped back below there today.
The North American session features four Fed speakers, all regional presidents: Harker, Mester, Kaplan, and Lockhart. Insight after the controversial FOMC meeting (three dissents and three seemingly opposed to a rate hike this year via the dot plots) will be helpful, but it may not come today. Next week, 12 of the 17 Fed officials will speak, including Yellen and Fischer. Also speaking will be Governor Tarullo and Chicago President Evans, who were likely among the officials who do not think a hike this year is warranted.
Markit’s preliminary assessment of the US manufacturing PMI will be reported, but in terms of economic data, the focus will be on Canada. Canada releases its July retail sales and August CPI. The median forecast is for a 0.1% increase in headline retail sales and a 0.5% increase excluding autos. Headline CPI may tick up to 1.4% from 1.3%, while the core rate may slip to 2.0% from 2.1%.
The Canadian dollar is little changed ahead of the start of the North American session. It is holding on to its 1.3% gain this week on the back of a weaker US dollar and higher oil prices. The US dollar bounced off of CAD1.30 yesterday and neared CAD1.3100 in Europe, but is coming off again, and looks poised to retest yesterday’s lows. Oil is pulling back after firming to two-week highs yesterday.
Much focus is on next week’s OPEC meeting in Algiers. Meetings between Saudi and Iranian officials spurred speculation of an agreement, but reports suggest a deal remains elusive. Given the high level of output, and the coming online of the Kazakhstan field, a freeze in production may not be sufficient to sustain the recovery in oil prices.
Singapore August CPI came in at -0.3% y/y vs. -0.4% expected. This is the lowest rate of deflation since June 2015, and could move into positive territory by year-end. Trade and retail sales data came in stronger than expected last week. Coming after the strong China data for August, it seems that the EM Asia outlook is stabilizing, if not improving. It’s a tough call for the MAS meeting next month. No move is likely then in light of improved data, but we see a very small chance of a dovish surprise.