Euro Softens on Political Concerns, Dollar Firm

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  • The euro continues to trade heavily as European political concerns simmer
  • US reports November personal income and spending, core PCE, durable goods orders, and new home sales
  • Canada reports October GDP
  • South Africa reported November budget data

The dollar is mostly firmer against the majors as the holidays approach.  The Loonie and Aussie are outperforming, while Nokkie and euro are underperforming.  EM currencies are mixed.  RUB and KRW are outperforming, while CZK and RON are underperforming.  MSCI Asia Pacific was up 0.6%, with the Nikkei rising 0.2%.  MSCI EM is up 0.6% on the day, with the Shanghai Composite falling 0.1%.  Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a higher open.  The 10-year US yield is flat at 2.48%.  Commodity prices are mixed, with oil down 0.5%, copper up 0.7%, and gold up 0.2%.

The euro continues to trade heavily as European political concerns simmer.  First, Catalan separatists maintained their majority in Spain’s regional parliament.  Second, Germany’s acting Foreign Minister warned of the possibility of a minority government even as coalition talks drag on.  The euro fell as low as 1.1815 before seeing a small bounce, but it remains the worst performing major on the day.

Spanish Prime Minister Rajoy is reportedly meeting with his cabinet today to discuss his next possible moves.  We suspect this drama will play out over an extended period of time, and the uncertainty is likely to weigh on market sentiment.  Add in the drawn-out situation in Germany, which adds a dollop of uncertainty at that end, and one can see why the euro rally may have stalled.

Rise in US yields at the long end yesterday ran out of steam.  The 10-year was unable to breach the 2.50% level, while the 30-year is back below 2.85%.  Yet the 2-year marches higher, reaching another cycle high near 1.88%.  We think price and wage pressures are the missing ingredient for significantly higher rates at the long end.  Perhaps we’ll see some evidence of this today.

During the North American session, the US reports November personal income and spending, core PCE, durable goods orders, and new home sales.  The print that will likely draw the most interest will be core PCE, as markets continue to look for signs of rising wage and price pressures.  Consensus sees a 1.5% y/y rise in core PCE, up from 1.4% but well below the Fed’s preferred 2%.  Yesterday Q3 core PCE was revised down to 1.3% y/y from 1.4% previously.

Canada reports October GDP.  Growth is expected to pick up to 3.5% y/y from 3.3% in September.  Data yesterday was firm.  Headline CPI ran higher than expected at 2.1% y/y while retail sales were up 1.5% m/m vs. 0.5% expected.  A majority of analysts are looking for a 25 bp hike to 1.25% at the next BOC meeting January 17, while BBG’s WIRP page showed the odds rising from 50% to 60% yesterday after the data, only to fall back to around 54% today.

The UK current account gap was larger than expected in Q3.  The deficit of -GBP22. 8 bln compares to the -GBP21.4 bln consensus.  In addition, the Q2 deficit was revised upward to -GBP25.8 bln from -GBP23.2 bln previously.  Sterling has remained remarkably steady in recent days, but remains vulnerable to weak economic data and periodic flare-ups in Brexit concerns.

Sweden retail sales were stronger than expected in November.  Sales rose 0.9% m/m vs. 0.2% expected.  The strong economy, rising inflation, and a weak currency all gave the Riksbank confidence to end its bond purchases next year, though it hedged its bet by continuing to invest proceeds from the existing portfolio.  EUR/SEK has recovered much of the post-Brexit losses but it feels like the 10 area will cap it going forward.

South Africa reported November budget data.  The 12-month deficit narrowed slightly but remains near record highs.  The fiscal outlook remains poor, and we continue to believe that Moody’s will eventually downgrade the nation after the next fiscal year budget is released in February.  For a more in-depth look, please see our recent piece entitled “Markets Sober Up to Post-Election Reality in South Africa.”