Dollar Mixed on Hump Day

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  • The US reports weekly mortgage applications, ADP employment, Markit services and composite PMI readings, and the ISM non-manufacturing PMI
  • FOMC minutes will be released
  • Eurozone and UK services and composite PMIs were reported
  • Polls suggest that Le Pen fared poorly in last night’s French debate
  • ZAR is weaker on reports that Zuma will cling to power; Colombia reports March CPI 

The dollar is mixed against the majors in choppy trading. Stockie and sterling are outperforming, while the yen and Kiwi are underperforming. EM currencies are mostly weaker. INR and MXN are outperforming, while ZAR and TRY are underperforming. MSCI Asia Pacific was up 0.2%, with the Nikkei rising 0.3%. MSCI EM is up 0.4%, with China markets rising 1.4% after returning from a two-day holiday. Euro Stoxx 600 is up 0.2% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 2.36%. Commodity prices are mixed, with oil up 1.1%, copper up 1.3%, and gold down 0.3%.

The dollar is mixed as markets remain choppy and uninspired. US yields remains soft, with the 2-year yield at 1.26% and the 10-year at 2.36%. The 2-year US-German differential stands at 203 bp, down a tick from yesterday and still well below the 223 bp peak in early March.

Yesterday, markets got a surprise with Richmond Fed President Lacker’s immediate resignation over leaking of confidential information. Back in January, Lacker had said he would resign in October. Now, the resignation is effective immediately. Lacker was one of the most hawkish at the Fed. While the Richmond Fed was not a voting member of the FOMC in 2017, it will be in 2018.

It’s worth noting that the regional Fed presidents are picked by the board of directors of each regional Fed. On the other hand, Fed Governors are picked by the President of the US. Two governorships remain vacant, while Tarullo’s resignation takes effect today. Next year, both Yellen’s and Fischer’s terms as Chair and Vice Chair are up, and neither is likely to be reappointed. Filling these posts will allow President Trump to significantly shape US monetary policy in the coming years.

During the North American session, the US reports weekly mortgage applications, ADP employment, Markit services and composite PMI readings, and the ISM non-manufacturing PMI. The main focus data-wise will be ADP, with Bloomberg consensus at 185k currently. More important may be the FOMC minutes that will be released in the afternoon.

There will be two important aspects of the FOMC minutes that will attract attention. First, the Fed will introduce confidence cones around its forecasts. This may help investors have a better appreciation for the forecasts, and surely why they are not point-specific promises. Second, the FOMC likely had its first formal discussion of the balance sheet. The key issue for the market is when and how it will be addressed.

The modification of the rolling maturing issues into new issues is expected to take place very late this year or early next year. It is not clear whether the Fed will focus on the MBS or Treasury portfolio or both. There are a couple of caveats. These discussions are still early in the process and there will likely be a wide spectrum of views which later will coalesce around two or three.

Final March services and composite PMI readings for the Eurozone were reported. The services PMI came in at 56.0 vs. 56.5 expected, while the composite came in at 56.4 vs. 56.7 expected. Looking at the country breakdown, German services and composite came in close to expectations at 55.6 and 57.1, respectively, while French services and composite were softer than expected and came in at 57.5 and 56.8, respectively. Spain was close to expectations, while Italy was weaker than expected at 52.9 and 54.2, respectively.

Polls suggest that Le Pen fared poorly in last night’s French debate. An Elabe poll showed that 25% viewed Melenchon as the most convincing, followed by Macron with 21% and Fillon with 15%. Le Pen registered 11%. In a separate poll, Melenchon, Fillon and Macron were all tied for most convincing at 18%, followed by Le Pen again with 11%. With the unexpected surge of Melenchon, these numbers call into question whether Le Pen will even make it into the second round of voting.

Although the euro slipped through $1.0650, it was not sustained, and on Monday and Tuesday, the euro finished near its highs. Barring a surprise, the euro can firm a cent over the next few sessions. The technicals look constructive. The dollar looks better technically against the yen. Buying emerges as JPY110 is approached. Initial resistance is seen near JPY111.20. Elsewhere, the $1.2350-$1.2400 may deter a deeper pullback in sterling.

UK reported March services and composite PMIs too. After weaker than expected manufacturing and construction PMI readings, services bucked that trend and came in at 55.0 vs. 53.4 expected. UK composite PMI came in at 54.9 vs. 53.8 expected.

Japan’s service and composite PMI’s rose to 52.9 (from 51.3 and 52.2 respectively). Data confirms what we (and others) have recognized, namely that Japanese growth strengthened in the first part the year, and begin Q2 on a solid note.

Sweden reported February industrial production and orders. Instead of the expected 0.1% m/m gain, IP rose 0.2%% while orders jumped 7.9% m/m%. The Riksbank meets April 27, but no change in policy is expected then. Indeed, despite headline CPI inflation at 1.8% y/y (underlying at 2.0% y/y) and the economy humming along, most expect the first hike from the Riksbank in 2018.

The rand is on its back foot again on reports that Zuma will likely hang on to power. That has been and will remain our base case, as he has survived numerous attempts during his two terms. Reports suggest Zuma has retained the support of key ANC officials, despite the chorus of public calls for his resignation. USD/ZAR is back above the key 13.75 area, which sets up a test of the November high near 14.65.

Colombia reports March CPI, which is expected to rise 4.74% y/y vs. 5.18% in February. If so, this would move inflation closer to the 2-4% target range. The central bank has cut rates several times already, and appears likely to cut 25 bp again to 6.75% at the next policy meeting April 28.