Wednesday, September 16, 2020

Capital Markets: "Dollar Eases Ahead of the FOMC"

From Marc to Market:
Overview: The dollar has been sold against nearly all the world's currencies ahead of what is expected to be a dovish Federal Reserve, even if no fresh action is taken. The Scandis and Antipodean currencies are leading the majors. The South African rand and Mexican peso are leading the emerging markets currencies higher, and the JP Morgan Emerging Market Currency Index is stronger for the fourth consecutive session. Equity markets are mostly higher, though, in Asia, China, Hong Kong, and South Korean markets saw profit-taking. Australia, Taiwan, and Australia rallied more than 1%. Europe's Dow Jones Stoxx 600 has advanced consistently since last Thursday's ECB meeting. US stocks are trading higher, and that would put the S&P 500 near yesterday's highs. Debt markets quiet, and benchmark 10-year yields are a little softer. The US 10-year yield is near 66 bp. Gold is higher, but below yesterday's high (~$1972). Oil is extending its rebound that began yesterday. Rather than increase, US oil inventory was drawn down, according to API, by 9.5 mln barrels. The official EIA estimate is released later today.

Asia Pacific
China challenged the US's 2018 $360 bln tariffs at the WTO and won the ruling by a three-person panel. The judges found that the US tariffs to be excessive and discriminatory and concluded Washington did not make its case for an exemption from the rules. Nor did it accept the US argument for negotiations outside the WTO. Still, for China, it is a pyrrhic victory because blocking the appointment of new appellate judges, the US has paralyzed the conflict resolution process. By appealing, and it can within the next 60 days, the US would render the decision moot.

Still, on the one hand, China scores propaganda points to the US as violating international trade rules. It is the US that is cast as a revisionist. On the other hand, the far-reach of the American president is demonstrated. If Biden wins, Trump is thought to deliver a fait accompli. To show the US is a good citizen in global institutions, which the Trump Administration has eschewed, Biden would have to retract the levies and thereby making a concession to China. Yet, the dilemma does not seem unmanageable, and Beijing might want to be inclined to make some concessions and give Biden a chance to reset the relationship....
The Federal Reserve meets amid expectations that its concerns about the downside risks to the economy will give its economic assessment and forward guidance its specific gravity. After achieving maximum flexibility by eschewing the point inflation target to an average rate, and purposefully not specifying the period that the average covers, Powell is not about to allow the media to encroach upon it during the press conference. As the chart below, created by my colleague Dimitrios Skambas, shows many of the Fed's facilities launched during the crisis are hardly being used. The Fed's balance sheet has fallen in two of the past three weeks, and in any event, it is about $155 bln small than it was at its peak three months ago, and that is with it buying about $20 bln of Treasuries a week.
While the quarter began off with a bang, the recovery appears to have slowed, and that is the takeaway from the disappointing industrial production report yesterday. It showed only a 0.4% increase in output on the month, less than half of what economists forecast. The upward revision to July's gain from 3.0% to 3.5% compounds that loss of momentum rather than making up for the miss. Manufacturing output missed expectations too. The 1.0% would under normal circumstances be outstanding, but now fit into the flagging momentum meme. Originally reported at 3.4% in July, manufacturing was revised up to 3.9%.

Although the Atlanta and St. Louis GDP trackers ae higher than the NY Fed model (30.8% and 20.21% respectively), the NY Fed model captures the sense, many people have that the economic momentum is fading. It sees the US economy tracking 15.6% annualized growth in Q3 and then slowing to 7.3% in Q4. The median forecast in the Bloomberg survey has change at a nearly 25% annualized pace in Q3 and 5% in Q4. Expectations of the first hike, according to the CNBC survey, were pushed back to February 2023, six-month deference from the July survey. According to that CNBC survey, 48% expect inflation to be over 2% for six months before the Fed hikes, and nearly as many (41%) think it has to be above there for a year....