Dollar gets more traction before ADP
ADP’s private sector employment data will be the highlight; higher US rates help the dollar; reports suggest Democrats are moving closer to a deal on fiscal stimulus; Colombia’s CPI in September is slightly above expectations at 4.51% y / y
Eurozone data came in very weak; reports suggest Prime Minister Johnson will agree to a minimum wage hike; Poland should keep its rates stable at 0.10%; The SARB is experiencing a gradual hawkish turn
- RBNZ entered the tightening cycle up 25bp to 0.5%, as expected; Australia tightens mortgage lending standards; Korea September CPI came in slightly above expectations at 2.5% y / y; the situation on the energy markets remains tense, particularly in Europe
The dollar is finally getting some traction. The DXY is up for the second day in a row after three straight days of decline and is trading just below last week’s high near 94.50. A break above that sets up a test of the September 2020 high near 94.742. The euro remains heavy and is trading at its lowest since July 2020, near $ 1.1530, and is on track to test the June and July 2020 lows just below $ 1.12. The pound is holding up better but is trading below $ 1.36. We expect a test of last week’s low near $ 1.3410 soon as negatives continue to mount. Finally, USD / JPY traded near 111.80 and is on course to test last week’s high near 112.10. After that there is the February 2020 high near 112.25 and then the April 2019 high near 112.40. We believe that the drivers that favored the dollar in Q3 will remain in play for Q4.
ADP’s private sector employment data will be the highlight. The consensus forecasts 430,000 against 374,000 in August. Yesterday, the ISM services PMI stood at 61.9 versus 59.9 expected and 61.7 in August. More importantly, the employment component stood at 53.0 from 53.7 in August and was the 7th consecutive month above 60, which is really unheard of in normal times. Last week, the employment component of the manufacturing PMI rose to 50.2 from 49.0 in August. Clearly, all eyes are on the September employment data on Friday. Consensus sees the NFP up 488,000 from 235,000 in August, with the unemployment rate expected to drop to 5.1%.
Higher US rates help the dollar. The 2-year yield was trading above 0.29% today and is approaching last week’s high at nearly 0.32%, while the 10-year yield was trading near 1.57% which was last week’s high. Note, average hourly earnings are expected to increase 4.6% year-on-year from 4.3% in August. Wage pressures have intensified, increasing the risk that the current surge in inflation will be more than transient. We continue to believe that the tapering bar is low enough and that an NFP number at or above the August 235k will be enough for the Fed to pull the trigger at the November 2-3 FOMC meeting.
Reports suggest Democrats are moving closer to a deal on fiscal stimulus. With themselves. Progressive Wing leaders suggest a price for the “human infrastructure” bill between $ 2.5 billion and $ 2.8 billion, while President Biden has proposed something between $ 1.9 billion and $ 2.2 billion . While this exceeds the $ 1.5 billion proposed by Senator Manchin, we doubt the White House would have made a bigger offer without some assurances from Manchin and the other moderates. The two sides are therefore not very far apart, it seems, and some accounting gimmicks may soon come to an agreement.
Our basic scenario has always been that of compromise. Our best guess remains that Democrats agree on a figure around $ 2.5 billion and wrap it up with a debt ceiling increase that can be passed without any Republican support via budget reconciliation before the deadline. October 18. Once passed, the infrastructure bill will be passed with bipartisan support before the end of the month.
Colombia September The CPI came a little above expectations at 4.51% y / y, increasing the risk of more expressive rate hikes in future meetings. The acceleration of price pressure was mainly due to major elements – food and energy – pushing the CPI well above the upper end of the target range of 2-4% of the price. bank, although core inflation eased slightly to 3.03% yoy from 3.11% in August. Still, the hawks showed up at the last meeting, with three of the seven MPC members voting for a 50bp hike above the 25bp delivered. Their case has just gotten stronger and we see a good chance that they will win the day at the next meeting on October 29th.
EUROPE / MIDDLE EAST / AFRICA
Eurozone data came in very weak. August retail sales were expected to increase 0.8% m / m but only rose 0.3%. In addition, July has been revised down to -2.6% from -2.3% previously. Elsewhere, Germany reported very weak factory orders in August. Orders were expected to fall by -2.2% m / m but instead plunged -7.7%. However, July was revised to 4.9% m / m from 3.4% previously. ECB policymakers should be aware that rising inflation comes at a time when the real sector is weakening. While the hawks are making a lot of noise, we believe caution will prevail and the ECB will maintain its accommodative stance at least until next year. Centeno from the ECB speaks today.
Reports suggest Prime Minister Johnson will agree to a minimum wage hike as part of his vision to remake the UK economy. This is a continuation of recent Conservative efforts to co-opt some key elements of the Labor platform. Johnson has hinted that an increase in wages for the lowest wages could possibly be seen. A government commission is said to be supposed to recommend a 5.7% increase in the minimum wage and Johnson has said he will accept whatever is recommended. An increase in wages for the lowest wages usually gives the best value for money, as their marginal propensity to consume is much higher than for the highest wages. With the BOE hinting strongly that it will start removing the punch bowl soon, we suspect the government is looking for ways to keep the party going. Stay tuned.
The National Bank of Poland is expected to keep rates at 0.10%. As the market is positioned for another accommodative hold today, we warn of a hawkish tilt as risks mount. Last week, headline inflation for September stood at 5.8% yoy versus 5.5% expected and real in August. This was the highest since June 2001 and well above the target range of 1.5 to 3.5%. The September 8 meeting minutes will be released on Friday and should be very accommodating. Some bank officials called the November meeting key to policy, as new macroeconomic forecasts will be released at that time. Maybe it’s up to them to start moving away from his ultra-dovish stance today.
The Reserve Bank of South Africa is experiencing a gradual hawkish turn, despite chronic economic weaknesses. The Biannual Bank Policy Review released yesterday confirmed the renewed focus on inflation, which was coming almost entirely from the energy and commodities side. However, officials also spoke about closing the output gap and the need to avoid having to “catch up with inflation”. This suggests a higher probability of a hike at the November 18 meeting. The SARB model reported a rise in the fourth quarter, but few believed it. So far, that is. Indeed, breakeven points have risen sharply, implying an increased risk of inflation de-anchoring.
The Reserve Bank of New Zealand entered the tightening cycle with a 25bp increase to 0.5%, as expected. He said that “the current restrictions on Covid-19 have not significantly changed the medium-term outlook for inflation and employment.” Looking ahead, “The committee noted that further removal of stimulus from monetary policy is expected over time.” The WIRP suggests that the subsequent 25bp hikes are taken into account almost entirely for the November 24 and February 23 meetings. It should be noted that the bank’s expected rate path has just been updated at the last meeting on August 18 to show the average OCR increasing to 0.6% by the end of 2021, 1.6% by the end of 2022, 2.0% by the end of 2023 and 2.1% by the third quarter. 2024, the end of the forecast period. The path will be updated again at the November 24 meeting and should give markets a better idea of how the tightening cycle is likely to play out.
Australia is tightening mortgage lending standards. After the RBA granted another dovish stand this week, the Australian Prudential Regulation Authority tightened lending standards for mortgages. The banking regulator cited the growing risks to the financial stability of a booming housing market, as it asked lenders to assess the ability of any new borrower to repay their loan at a higher interest rate of at least 3 percentage points to the rate of the loan product, compared to 2.5% points used now by banks. The RBA has long insisted it would rely on macro-prudential measures to cool the housing market rather than the rather brutal tool of rate hikes. At this week’s meeting, the RBA affirmed its commitment to keeping rates stable until at least 2024 and we believe today’s regulatory decision aims to underscore that.
Korea’s September CPI is slightly above expectations at 2.5% yoy, reinforcing the view that the bank will remain on a tightening path. The inflation target is 2.0% and the core is 1.9%. The increase in turnover is largely due to transport costs and certain household goods, and to a lesser extent to services. This means the BOK will continue to outperform most Asian central banks with another hike at its November meeting, even though rates will remain well below those of most other central banks in emerging Asia.
The situation on the energy markets remains tense, especially in Europe. The Dutch first month futures contract is trading at a record high of € 130 per megawatt / hour. The pilots are well known and there does not appear to be any new incremental news. The tightening of supply appears to be the main driver here, perhaps compounded by Russia’s geopolitical flexion to put pressure on the Nordstream process. On the demand side, the recovery continues, and much will depend on the cold winter in Europe.