The dollar took a tumble because yields took a tumble. China and payrolls contribute, the key driver of the dollar dip was a response to a surprise rally in the bond market that took the 10-year yield to 2.370%, the lowest since Dec 7, from 2.452% the day before or over 8 points. The yield was as low as 2.352% around noon. The WSJ ascribes the move as investors “becoming less confident in their belief that economic growth and inflation are poised to increase due to more expansive fiscal policies under a Donald Trump administration.”
Why would they think that out of the blue? The Fed minutes, which the WSJ sees as focusing more on the negative aspects of the Trump effect, including concern about fiscal stimulus and especially concern that a stronger dollar will impede the path to the Fed’s inflation target at 2%.
The bond gang is also nervous about whatever China is up to, driving a short squeeze that took the yuan to the highest since Nov, plus today’s payrolls perhaps disappointing after ADP came out with a lousy 153,000 for the private sector vs. other forecasts of the overall rate much higher at 178,000-183,000. We say you can always find a reason once a correction from oversold gets started. The bond yield move was overdone. The 10-year yield was 1.867% on election day and closed December at 1.620%. The WSJ (wisely) note the Fed may say three hikes this year but the market still doesn’t believe it— Fed funds futures show the probability of three hikes at 33% yesterday, down from 40% the day before. It’s still bucking for June for the first one, with a 64% probability.
As for payrolls this morning, the forecast range seems to be about 175,000 to 183,000, after 180,000 in Nov, although ADP has a disappointing private sector forecast of 153,000. The year 2016 will contain the lowest total since 2012, ending the new-record highs in 2014 and 2015, which had the fastest rates of job creation since 1999. Unemployment is expected to tick up from 4.6% to 4.7%.
Well, golly, of course with unemployment under 5%, the pace was going to slow down at some point. To position the year 2016 as “the worst since 2012” is to reveal a negative bias. Instead of pointing out that little tidbit, the press (WSJ) could have emphasized total jobs created since the crisis, which is a stunning 8 million-plus.
From such a triviality--reporters aiming for clever phrasing—is new sentiment born. The only thing that can override this new negativity is a giant rise in average hourly earnings, but the number has to exceed expectations, now standing at 0.3% (after a drop of 0.1% in Nov). In other words, it not only has to be good, it has to be better than the forecast. This is not likely, so a renewed dollar dip is a real possibility.
Meanwhile, we also get the Nov trade deficit, probably a tiny improvement to $42.5 billion from $42.6 billion. Trade has been relegated to the back of the bus for two decades as a top currency factor in favor of sexier stuff like PMI and payrolls. But all those hours learning terms of trade and the other arcane stuff of trade economics might be useful again now that Trump is putting trade at the top of the list. Also, the CAD may get a comeuppance on trade and jobs data today, too. The trade deficit is likely bigger at C$1.6 billion from C$1.13 in Oct, while not adding new jobs of any size so that the unemployment rate rises to 6.9% from 6.8%.
We imagine the retreat from the Trump reflation trade will be short-lived. Optimism and hope, even if unfounded on anything real, will resume driving animal spirits. The dollar will recover. But the charts are the charts and we could easily get more reversals later today or early next week. We don’t believe the new yen signal for a minute, for example, not if yields are the true main factor. As usual on payrolls day, it’s the right time to clean your desk and stay away from trading.
Trump Trade War: Before even taking office, Trump has bullied Carrier, GM and Ford. Now Trump attacked Toyota for planning a new plant in Mexico that would export to the US. CEO Carlos Ghosn, who is a real CEO and not a loudmouth showman, responded in the FT by asking for clear and consistent rules. “We need laws, regulations, expectations, policies to be announced and we follow it. Because this has got to apply to everybody, we’re all in the same boat.” The stock fell.
The FT also tells us the basis of tariff threats—and they are authentic, based on something never repealed called “Section 338 of the Trade Act of 1930, which allows presidents to impose tariffs of up to 50 per cent on imports from countries found to ‘discriminate’ against the US.” China is the most obvious target.
Not unrelated is a plan by British PM May to be the first visitor to Trumpland after the inauguration, seeking the trade deal that Obama had said would go to the back of the line. She has Brexit on her side but Trump advisor Farage potentially a snake in the closet.
Tidbit: The CME came up with a monthly FX contract to supplement the usual quarterlies. But as we found out when we worked with the CME over a decade ago, they still have their heads in the wrong place. Retail traders are choosing spot overwhelmingly over futures not because of the periodicity of the contracts, but rather because of the size. You can open a retail spot trading account for a few hundred dollars and if you are overseas, leverage can be 200x.
The margin requirements in futures is thousands, not hundreds. The contracts are for standard amounts like €125,000 and CAD/AUD 100,000. Hardly any small retail traders can or will pony up thousands to trade futures, despite the many superior aspects of futures (everyone gets the same price! Trades are guaranteed by the exchange!), when the alternative is smaller and more suitable contract sizes and in fact, infinitely variable sizes. We “experts” have been telling the CME this for years. They don’t listen.
By Barbara Rockefeller
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