Wednesday, April 5, 2017

Currencies: It's Quiet Out There, Sarge

Too quiet.
The dollar index is up 0.01; the euro is down 0.002; GBP up 0.0027.
Too quiet.

From Marc to Market:

The dollar is practically unchanged against the euro and yen in the first two sessions of the week. The pace can be expected to pick up starting Wednesday.

Japan's service and composite PMI's rose to 52.9 (from 51.3 and 52.2 respectively). It confirms what we (and others) have recognized, namely that Japanese growth strengthened in the first part the year, and begin Q2 on a solid note.

Europe reports service and composite March PMI figures. Recall that the flash estimates were for 56.5 and 56.7 respectively, new records for both. It will put nice finishing touches on the survey data for March. There are two problems. First, the surveys are running well ahead of real sector data. Aggregate growth is not the problem; it is that price pressures, outside of energy and some weather-induced spike in some food prices, are practically non-existent.

The UK may hit a trifecta. The manufacturing and construction PMIs were below expectations. The median forecast in the Bloomberg survey is for a small uptick. The risks are on the downside. The last few months of 2016 were particularly strong. The service PMI averaged 55.3. Even giving the median its due, the average for Q1 would be around 53.7.

Although the US reports both the ISM and Markit PMI for the non-manufacturing sector, the focus will be elsewhere. Specifically, market participants will be more interested in the ADP jobs estimate and the FOMC's minutes later in the day. The first quarter is over. The Fed hiked at the end of the quarter. What is does next will have little to do with economic conditions of the past few months.

The first quarter tends to be a soft one for the US, and Q1 17 does not appear to be an exception, though the NY Fed's GDP tracker says growth reached 2.9% ( as of March 31). The Atlanta Fed's GDPNow suggests 1.2% growth is more likely, which would be in line with the average beginning in 2010. In recent days, we have learned Q4 consumption was particularly robust (3.5% annualized) and that Q1 is considerably softer. The disappointing March auto sales threaten to drag headline retail sales lower. We suspect the poor weather likely exacerbated the pullback, which is consistent with our expectation for a rebound in Q2.

We have suggested that March jobs report may be subject to mean reversion. After two strong reports, the risk is for slower job growth in March. The increase in weekly jobless claims suggests that as well. Weather may also skew the headline, more for the BLS survey than the ADP estimate.

Some economists have noted that the dollar's reaction function often looks like a smile. It rallies as a haven when there is high anxiety, and it rallies in exceptionally good times, but normal times the dollar suffers. Perhaps that is the sort of response we should look for now. A shockingly poor report will likely be quickly written off as distorted, and there is little chance of a May hike discounted. A very strong report may raise the odds of a June hike (BBG 50.1%, CME 59.1%). Under both extreme scenarios, the dollar could rally. On the other hand, a report in line with expectations may deter a dollar rally....