Dollar Mixed Ahead of US Jobs Data and Fed Talk

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  • The US dollar is narrowly mixed as the employment data and Fed speeches are awaited 
  • The April employment report is expected to recover from the weather-induced slowdown in March 
  • If one is confident that Macron is the next French President, attention must turn to next month’s parliamentary election 
  • Canada also reports April employment data today 
  • Taiwan and Philippines April CPI came in lower than expected; Colombia reports later  

The dollar is mixed against the majors ahead of the US jobs report. Kiwi and the yen are outperforming, while the euro and Swiss franc are underperforming. EM currencies are mostly softer. ZAR and RUB are outperforming, while SGD and INR are underperforming. MSCI Asia Pacific ex-Japan was down 0.7%, with Japan markets closed for the rest of the week. MSCI EM is down 0.6%, with Chinese markets falling 0.6%. Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a lower open. The 10-year US yield is flat at 2.36%. Commodity prices are mostly higher, with WTI oil down 0.2%, copper up 0.3%, and gold up 0.5%.

The US dollar is narrowly mixed as the employment data and Fed speeches are awaited. Six Fed officials speak today, including Yellen and Fischer. Regional Presidents Williams, Rosengren, Evans, and Bullard also speak. It will be the first flurry of speeches since the FOMC meeting.

The market’s take away from the FOMC statement is that it was little changed. The Fed characterized soft Q1 growth as being driven by transitory factors. The odds of a June rate hike were marked up, even if not to the level of near-certainty that of Bloomberg’s calculation.

The April employment report is expected to recover from the weather-induced slowdown in March. However, the PMI and ISM were not particularly encouraging, though weekly jobless claims are supportive. Of note, Linkedin reported earlier this week that its jobs report showed April was the strongest month for hiring since June 201. However, it noted narrow breadth as three sectors — manufacturing; aerospace, automotive and transport; and software — were responsible while the other 10 industries showed slower job growth. Anything above 187k non-farm payroll growth, which was last year’s average, must be considered reasonably good given the maturing of the expansion.

Earnings growth needs to rise 0.3% to keep the year-over-year rate at 2.7%, which while unimpressive historically, is near the cyclical high. Ideally, the underemployment rate continues its downward course. It fell to 8.9% in March from 9.2% in February. Last April it stood at 9.7%, which bears out the Fed’s point that there was still cyclical slack in the labor market and that it was not all structural.

There are two other impulses today. The first is politics. Early results of the UK local elections indicate, as expected, a strong showing for the Tory Party. They appear to be gaining seats against all the other parties. One early takeaway is that UKIP voters are joining the Tory ranks. That the Tories are doing well is hardly surprising.

This is, after all, why May called for a snap election, circumventing another Cameron-era move (to fix the election schedule). Labour, the main opposition party, has not managed to attract many of the people it claims to be representing. The Tory majority in Westminster is expected to swell after the June 8 election.

If May was not bound by Cameron’s fiscal policy or the fixed election schedule, why was she bound to take the narrow victory of Brexit as a binding commitment as he did? It was offered as a non-binding referendum. It passed by the narrowest margins. And what we have seen in other important referendums, such as in Scotland or the recent PD primary in Italy, the franchise extended to younger cohorts, though not in the UK.

Now quite possibly, May finds she is in over her head. That is what the press reports about Juncker and Merkel’s comments from the recent summit with May indicate. One might take exception as some of the languages, but the common thread was that the UK was not realistic about what was involved and the asymmetry of power once Article 50 was triggered.

The second round of the French presidential election is this weekend, and again results should be known before the open of Asia-Pacific markets on Monday. There is little doubt that Macron will win. However, the microscopic look at Macron’s policy proposals is distracting the focus. The French president is not a figurehead, but its main power lies in foreign policy. Domestically, Macron is a micron. He does not have a party in parliament. He was part of the pro-business wing of the Socialist Party (really social democrat in practice).

If one is confident that Macron is the next French President, attention must turn to next month’s parliamentary election. Yes, Le Pen and the nationalist-populists will be defeated in the fourth consecutive European election (Finland, Austria, the Netherlands), but the course of French policies will be determined by the configuration of parliament.

The second impulse in the market is economic in nature. The highlights include the monetary policy statement from the Reserve Bank of Australia, which was optimistic on growth, and disappointing March industrial output for Spain (-0.4% while median in the Bloomberg survey expected a 0.3% rise. It was the second consecutive decline and the third in four months.

Part of those economic impulses is the weakness in commodities. Iron ore prices dropped almost 5% today in China to bring the weekly loss to 12%. Supply is particularly strong. Oil prices have steadied today after sharp (4.8%) yesterday. The June contract for light sweet crude oil is off 7.4% for the week with today’s small gain taken into account. It is the third consecutive weekly decline. During which time it has fallen by more than 15%. Gold is trying to snap a four-day drop, but it is unlikely to avoid the third consecutive weekly fall. Gold broke an uptrend line going back to the middle of last December. It is found now near $1241.

Canada also reports April employment data today. The Bloomberg median calls for a 10k increase after 19.4k in March. It created 18.4k full-time positions in March and an average of 46.4k over the last three months, but that is skewed by the outsized 105krise in February. Given the respective proportions, this would be as if the US created over a million jobs one month.

Lastly, we note some chunky option expires today. In the euro, which has eased from approaching $1.10, sees 2.5 bln euros struck at $1.10 and another 666 mln struck at $1.0980 rolling off today. Between $1.0950 and $1.0965, another 2.2 bln euros expire. In the yen, the JPY112 strike has $706 maturing, and the JPY1125.50 has $700 mln rolling off. A strike at CAD1.3730 for $330 mln will be cut today.

Taiwan April CPI came in at 0.1% y/y vs. 0.5% expected. The central bank does not have an explicit inflation target. However, low inflation should allow the bank to keep rates steady in 2017. Next quarterly policy meeting is in June, no change in rates is likely then.

Philippines April CPI came in at 3.4% y/y vs. 3.5% expected. This is still in the upper half of the 2-4% target range. While the central bank has signaled the end of the easing cycle, tightening seems unlikely until late 2017 or early 2018. Next policy meeting is May 11, no change seen then.

Colombia April CPI is expected to rise 4.56% y/y vs. 4.69% in March. Note that most in EM have reported lower than expected April CPI, and continued disinflation should allow the central bank to keep cutting rates. Last Friday, the central bank went big with a 50 bp cut to 6.5% when 25 bp was expected. Economic data have been very weak recently, and so like Brazil, Colombia is accelerating and frontloading the rate cuts. Next policy meeting is May 26, we think markets have to look for another 50 bp cut then too.