Macro: Sandcastle economics
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Upside US earnings surprise boost USD
John J. Hardy
Chief Macro Strategist
After more than a year of the official US Average Hourly Earnings series failing to achieve any form of liftoff, we saw a sudden surge in August – assuming revisions don’t push the reading back lower – to a strong +0.4% month-on-month and cycle high +2.9% year-on-year. This surprise was sufficiently large to jolt the US rate outlook late Friday and sets up considerably more anticipation for coming releases like this Thursday’s US August CPI release, as the market is dragged back into pricing in higher odds of a second rate hike before 2019 rolls around. The US dollar was bid on the back of the earnings data, though the JPY managed to keep pace with the new USD surge as Japan released a much stronger than expected GDP data point and perhaps due to weak risk appetite.
In Asia over the weekend, China posted its largest ever trade surplus to the US even as China’s overall trade balance came in a bit lower than expected on far stronger import growth. There were no notable new trade war headlines over the weekend even after Trump on Friday boasted of possible intent to impose tariffs on a further $267 billion in Chinese imports. Markets will remain vulnerable to the next headline or tweet linked to the ongoing trade row.
In Sweden, the Sweden Democrats saw a large boost in their support in the national election, but the percentage of votes, at 17.9%, was toward the lower end of the range of polls. Despite the total refusal by either of the left- or right- coalitions to form a government with the SD, a minority government can be formed as long as SD don’t vote against it (should this mean a more likely centre-right coalition? – either way the two potential coalitions are of equal strength and SD is “the decider” here).
I was not aware of the actual voting process in Sweden until this morning. Apparently, when voters go to polling places, they actually physically pick up ballots for the party they intend to vote for in full public view before going into the booth, meaning that it isn’t a fully secret ballot (supposedly, a voter could pick up the ballots for two or more parties, but it seems obvious that, given the controversial nature of the SD, the turnout might have been rather different if the process were totally secret).
Chart: EURUSD
The US dollar was bid on the surge in US yields on the back of the upside wage inflation surprise on Friday, and the euro has underperformed, falling not only against the surging greenback, but also versus the buoyant yen and Swiss franc. With the local lows and 21-day SMA falling here, the next levels lower are the key, round 1.1500 level, the 61.8% Fibonacci retracement down at 1.1466 and then the final range low towards 1.1300. For bulls, the implications of the recent large scale rejection of the move below 1.1500 is running out of steam and the pair needs to see a fresh surge back to 1.1700+ for a sense that the bulls have a case for the big 1.1750-1.1800 pivot zone.
In Asia over the weekend, China posted its largest ever trade surplus to the US even as China’s overall trade balance came in a bit lower than expected on far stronger import growth. There were no notable new trade war headlines over the weekend even after Trump on Friday boasted of possible intent to impose tariffs on a further $267 billion in Chinese imports. Markets will remain vulnerable to the next headline or tweet linked to the ongoing trade row.
In Sweden, the Sweden Democrats saw a large boost in their support in the national election, but the percentage of votes, at 17.9%, was toward the lower end of the range of polls. Despite the total refusal by either of the left- or right- coalitions to form a government with the SD, a minority government can be formed as long as SD don’t vote against it (should this mean a more likely centre-right coalition? – either way the two potential coalitions are of equal strength and SD is “the decider” here).
I was not aware of the actual voting process in Sweden until this morning. Apparently, when voters go to polling places, they actually physically pick up ballots for the party they intend to vote for in full public view before going into the booth, meaning that it isn’t a fully secret ballot (supposedly, a voter could pick up the ballots for two or more parties, but it seems obvious that, given the controversial nature of the SD, the turnout might have been rather different if the process were totally secret).
Chart: EURUSD
The US dollar was bid on the surge in US yields on the back of the upside wage inflation surprise on Friday, and the euro has underperformed, falling not only against the surging greenback, but also versus the buoyant yen and Swiss franc. With the local lows and 21-day SMA falling here, the next levels lower are the key, round 1.1500 level, the 61.8% Fibonacci retracement down at 1.1466 and then the final range low towards 1.1300. For bulls, the implications of the recent large scale rejection of the move below 1.1500 is running out of steam and the pair needs to see a fresh surge back to 1.1700+ for a sense that the bulls have a case for the big 1.1750-1.1800 pivot zone.
The G-10 rundown
USD – solid support for the greenback from the earnings data, but it is all about follow-through from here and the US CPI data Thursday look like the key, non-Trump tweet event risk of the week.
EUR – the euro looking heavy in broad terms – watching the 1.1500-1.1450 area in EURUSD for whether more profound weakness develops. Doesn’t feel like ECB has much to add at its meeting this week, given that forward guidance stretches so far out into 2019.
JPY – the yen more or less matching the US dollar’s strength since Friday despite the surge in US yields, as weak risk appetite and a strong GDP revision, as well perhaps as the sense that Japan’s large current account surplus with the US will garner further negative attention after recent Trump comments.
GBP – another promising-sounding round of comments from the EU’s Barnier as he claimed to find much to like in May’s recent Brexit paper. We’ll see – time is running out, but for now sterling looks firm versus the euro and would look even more so if EURGBP could work below 0.8900. Not expecting any drama from the BoE this week.
CHF – interesting strength here despite lack of new highs in the BTP (Italy) yield spreads to the core bond yields. 1.1200 area is very important in EURCHF as a major inflection point on the way up to 1.2000 after the SNB’s abandoning of the franc ceiling in January 2015. Next level looks like 1.1000.
AUD – the hapless Aussie looking very weak indeed and new local highs USDCNY don’t help, nor do concerns on the Australian housing market or the big mining companies’ equity prices under pressure. The latest Australian jobs data up on Thursday.
CAD – USDCAD relatively bid after Canada’s jobs report failed to impress, with earnings rises dipping sharply in August versus the prior print. The 1.3225 area is the last resistance ahead of the 1.3386 top from the early summer.
NZD – AUDNZD heavy in the key 1.0850-00 pivot area, but not expecting runaway downside even if this falls as rate spreads don’t match the price action.
SEK – the Swedish krona got most of its bid ahead of the fact. We don’t see the election result materially altering fiscal policy any time soon, but meanwhile, the Riksbank committing to a rate hike could boost the SEK and take EURSEK back toward 10.20-25 as Swedish short rates are pushing to new three-year highs.
NOK – Norway’s inflation print this morning seeing support for NOK as the underlying CPI comes in hotter than expected at 1.9% vs. 1.7% expected and 1.4% in July. Barring a mishap in energy markets or an ugly risk-negative deleveraging event, seems the old range back toward 9.40-50 is the side of least resistance.
USD – solid support for the greenback from the earnings data, but it is all about follow-through from here and the US CPI data Thursday look like the key, non-Trump tweet event risk of the week.
EUR – the euro looking heavy in broad terms – watching the 1.1500-1.1450 area in EURUSD for whether more profound weakness develops. Doesn’t feel like ECB has much to add at its meeting this week, given that forward guidance stretches so far out into 2019.
JPY – the yen more or less matching the US dollar’s strength since Friday despite the surge in US yields, as weak risk appetite and a strong GDP revision, as well perhaps as the sense that Japan’s large current account surplus with the US will garner further negative attention after recent Trump comments.
GBP – another promising-sounding round of comments from the EU’s Barnier as he claimed to find much to like in May’s recent Brexit paper. We’ll see – time is running out, but for now sterling looks firm versus the euro and would look even more so if EURGBP could work below 0.8900. Not expecting any drama from the BoE this week.
CHF – interesting strength here despite lack of new highs in the BTP (Italy) yield spreads to the core bond yields. 1.1200 area is very important in EURCHF as a major inflection point on the way up to 1.2000 after the SNB’s abandoning of the franc ceiling in January 2015. Next level looks like 1.1000.
AUD – the hapless Aussie looking very weak indeed and new local highs USDCNY don’t help, nor do concerns on the Australian housing market or the big mining companies’ equity prices under pressure. The latest Australian jobs data up on Thursday.
CAD – USDCAD relatively bid after Canada’s jobs report failed to impress, with earnings rises dipping sharply in August versus the prior print. The 1.3225 area is the last resistance ahead of the 1.3386 top from the early summer.
NZD – AUDNZD heavy in the key 1.0850-00 pivot area, but not expecting runaway downside even if this falls as rate spreads don’t match the price action.
SEK – the Swedish krona got most of its bid ahead of the fact. We don’t see the election result materially altering fiscal policy any time soon, but meanwhile, the Riksbank committing to a rate hike could boost the SEK and take EURSEK back toward 10.20-25 as Swedish short rates are pushing to new three-year highs.
NOK – Norway’s inflation print this morning seeing support for NOK as the underlying CPI comes in hotter than expected at 1.9% vs. 1.7% expected and 1.4% in July. Barring a mishap in energy markets or an ugly risk-negative deleveraging event, seems the old range back toward 9.40-50 is the side of least resistance.
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