Ahead of the Fed, PMI’s
From Europe were quite a surprise
It seems that despite
The lockdowns in sight
The future has much bluer skies
Preliminary PMI data from around the world this morning is the market’s key focus, at least until 2:00 this afternoon when we hear from the Fed. But, in the meantime, the much better than expected readings surprised the market and are driving yet another increase in risk appetite. (One wonders if that appetite will ever be sated!)
Starting in Asia, Australian data was considerably stronger than last month, with the Composite figure printing at 57.0, its second highest print in the (short) history of the series. On the other hand, Japanese data was the sole disappointment, with the Composite slipping 0.1 to 48.0, still pointing to a contracting economy. The European numbers, however, were all much better than expected with Germany printing 2 points higher than expected at 52.5 on the Composite while France (49.6 Composite) actually beat expectations by 6.6 points. As such, the Eurozone Composite PMI printed at 49.8, significantly better than expectations of a 45.7 print. The point here is that while the Eurozone economy is hardly booming (other than German manufacturing), there is a clear sense that the worst may be behind it.
Of course, what makes this so surprising is that the German government has shuttered non-essential businesses until January 10th, with hints that could be extended, after the largest single day fatality count was recorded yesterday. We are also hearing from other European countries, (France and Italy), that further lockdowns and restrictions on gatherings are being considered as the second (third?) wave of Covid-19 sweeps across the continent. Yet, not only markets, but businesses have clearly grabbed hold of the idea that the vaccine is going to lead to a swift end to the government intervention in virtually every economy and allow economic activity to resume as it was before.
The spanner in the works, as it were, is that governments are loathe to cede power and control once it is obtained. If this holds true again, then businesses need to be prepared to have far more rules and restrictions imposed on their operations, something which is typically not associated with an economic boom. However, for now, it appears that the prospect of the tightest restrictions being lifted outweighs the potential longer-term negative impacts of intrusive government. So, as Timbuk 3 explained back in 1986, “The Future’s So Bright (I Gotta Wear Shades).
With that in mind, a quick turn to the FOMC meeting today shows us that the market consensus is for no policy changes in scope or size, but rather, more clarity on what is required for the Fed to consider tighter policy in the future. Expectations continue to center on achieving a specific Unemployment Rate or Inflation Rate or, probably, both in combination. Perhaps Chairman Powell will resurrect the Misery Index (not the current show on TBS, but the original one defined by Ronald Reagan, when he was running for president in 1980, as the sum of inflation and unemployment.) For instance, a target of 3.5% Unemployment and 2.0% Inflation would seem to be right where policymakers would be thrilled. Alas, today we are looking at a reading of 7.9%, with a poor mixture to boot (Unemployment 6.7%, CPI 1.2%). However, as long as Congress fails to pass a new fiscal stimulus bill, do not be too surprised if the Fed does change the program, with my bet being on Operation Twist redux, where they extend the maturities of their current purchases. We will find out at 2.
Turning to the markets, all that hunger for risk has shown up in all markets today, with equities and commodities broadly firmer while bonds and the dollar are broadly weaker. Last night, following the strong equity performance in the US yesterday, we saw less impressive, but still positive price action in Asia with the Nikkei (+0.3%) and Hang Seng (+1.0%) both rallying although Shanghai was flat on the day. Europe, however, has embraced the PMI data, as well as word that a Brexit deal is approaching (told ya so!) and markets there are all much firmer; DAX (+1.6%), CAC (+0.7%), FTSE 100 (+1.0%). Finally, US futures are actually the laggards this morning, with all three in the green but the magnitude of those gains more muted than one might have expected, in the 0.2%-0.3% range.
Bond markets have come under pressure as there is certainly no case to own a low yielding haven asset when one can be gorging on risk, but the price declines are far larger in Europe (Bunds and OATs +3.7bps, Gilts +2.7bps) than in the US (Treasuries +1.0bp). Interestingly, even the PIGS bonds are selling off as it appears Portugal is not quite so interesting a place to hold your cash when the yield there is -0.04% on 10-year paper!
Commodities are firmer, with gold having a second strong performance in a row, up 0.4% this morning, and oil prices are also drifting higher, albeit barely so at this hour. And finally, the dollar is under significant pressure this morning after breaking through several key technical levels, with only CAD (-0.4%) underperforming in the G10. And in truth, I cannot find a good reason for the decline as there don’t appear to be either technical or fundamental reasons evident. On the other side, though, NOK (+0.45%) and GBP (+0.4%) are the leading gainers, although the rest of the space is higher by about 0.3%. Aside from the Brexit hopes, this is all really about the dollar and the ever-growing conviction that it has much further to fall as 2021 approaches and unfolds.
As to the emerging markets, the CE4, taking their cues from the euro, are leading the way with CZK (+0.75%) and PLN (+0.6%) at the head of the pack. Beyond those, the gains are less impressive, on the order of 0.2%-0.3%, with APAC currencies little changed overnight and LATAM currencies opening with less oomph than we are seeing in Europe.
On the data front, ahead of the FOMC this afternoon, we see Retail Sales (exp -0.3%, +0.1% ex autos) and then the preliminary PMI data as well (55.8 Manufacturing, 55.9 Services). My sense is stronger than expected data would have only a limited impact on the dollar, but if the data is weak, another wave lower seems quite possible.
And that is really what we have today. For now, the dollar is under pressure and likely to remain so. At 2:00, there is potential for an additional leg lower, if the Fed opts to increase QE or extend maturities, but I cannot make a case for the dollar to benefit from their announcement. In fact, for now, the only thing that can help the dollar is the fact that it has already moved a long way, and it could be due for a simple trading correction.
Good luck and stay safe