Quite a lot of people seem to be hanging their hats on Wednesday’s Fed statement when it comes to finding a reason to stay long the dollar.
Comments out Tuesday from Trump and his economic spirit animal Peter Navarro sent the broad dollar lower and USDJPY went with it as the market tried to come to terms with an administration in which multiple actors seem prepared to verbally intervene in FX markets.
While traders took Navarro’s absurd attack on Germany in stride, if we’ve learned anything over the past week it’s that we shouldn’t underestimate Trump and his merry band of halfwits when it comes to showing off their uncanny propensity to do and say dumb sh*t that moves markets.
When it comes to the Fed, conditions appear to be right for a hawkish lean in the statement – this week’s equity woes notwithstanding. After 2015’s December hike the dollar firmed and stocks plunged, tightening financial conditions and effectively short-circuiting liftoff. This time around it’s been largely the opposite dynamic. Between higher stocks, a weaker dollar, and decent incoming data, this would seem as good a time as any to hint that March is in play.
We’ve seen a lot of talk about substituting a bit of SOMA rolloff for one of 2017’s three “planned” rate hikes. The idea is that shrinking the balance sheet will be more dollar neutral than outright FF hikes. That serves two purposes, i) it pacifies the White House, where Trump is hell-bent on a weaker dollar, and ii) it at least shows the committee is making some effort to keep a lid on policy-induced dollar strength at a time when an excessively strong greenback could trigger a crisis in EMs that have borrowed heavily in dollars. Here’s Bloomberg’s Richard Breslow on the Fed meeting:
I can just imagine the conversation taking place in the Board Room of the Eccles Building. We’d like to be bold. We’d like to take more credit for the improvement in the domestic and global economies. It’s felt so good to talk boldly. But what if we’re wrong? With all this craziness going on, we have a patriotic duty to wait for more clarity. He’s never going to follow through with the things he said to get elected. Will he? Besides, we don’t want to take away the Chair’s maneuverability when she testifies on the 15th.
Overnight the dollar traded like it was waiting on something and as noted above, it is. “Dollar bulls are still not capitulating despite it being on target for a sixth consecutive week of losses,” one trader wrote this morning, adding that “while some doubts are finally starting to creep in, the majority of analyst notes this week suggest the FOMC can put the dollar uptrend back on track.”
That’s we are on that.
Turning to some key data, we got PMIs out of Europe and, perhaps more notably, China overnight. For most average investors, PMI stands for “pretty much inane,” but Wednesday’s numbers are worth noting.
China January Manufacturing PMI printed at 51.3 versus estimates of 51.2. Here’s Barclays take:
China’s January NBS manufacturing PMI edged lower to 51.3 from 51.4, but remained in expansionary territory for a sixth consecutive month. (Figure 1). The moderation was led by a softening in the production index to 53.1 from 53.3 in December, and the new orders index to 52.8 from 53.2 (Figure 2). Trade-related indices improved slightly, with export orders and import indices edging up to 50.3 from 50.1, and 50.7 from 50.3, respectively (Figure 3). Input prices moderated to 64.5 (previous: 69.6), but was still the third highest in the past 69 months, indicating that PPI inflation could register at c.5.5% in January by our estimates (Figure 4). By firm size, the PMI for large enterprises edged down to 52.7 (previous: 53.2), and activity in small enterprises remained sluggish, with PMI falling to 46.4 (Figure 5).
So that’s decent news – I guess.
In Europe, stocks were buoyed by a 55.2 PMI print for the bloc. That was a blip above the flash number. As Bloomberg notes, “the report follows data on Tuesday showing euro-area inflation accelerated to 1.8 percent last month, effectively reaching a level the European Central Bank defines as price stability.”
Here’s a rundown of Asian and European markets:
- MSCI Asia Pacific up 0.1% to 142
- Nikkei 225 up 0.6% to 19148
- Hang Seng down 0.2% to 23318
- S&P/ASX 200 up 0.6% to 5653
- Stoxx 600 up 1% to 364
- FTSE 100 up 0.9% to 7166
- DAX up 1% to 11648
- German 10Yr yield up 3bps to 0.46%
- Italian 10Yr yield up 3bps to 2.29%
- Spanish 10Yr yield up 4bps to 1.64%
- S&P GSCI Index up 0.1% to 396.4
As noted, the US is in wait and see mode with the Fed on deck. But we did learn on Tuesday evening that the iPhone market will apparently not be saturated until everyone on the f*cking planet has Steve Jobs in their pocket, so that’s singlehandedly helping futs.
- S&P 500 futures up 0.2% to 2,279.75
- Brent Futures up 0.3% to $55.73/bbl
- Gold spot down 0.01% to $1,210.63
- U.S. Dollar Index up 0.2% to 99.70