A further slowing in growth
US payrolls data is out this evening (Australia time) and, unless something else is brewing, markets tend to tread water in anticipation.
It’s hard to beat the system when we’re standing at a distance, so we keep waiting (waiting) waiting on the world to change – John Mayer
Getting out of a bed at ungodly hours of the morning has been less of a problem for me and I hope my fellow scribes this week, as deciding what to say or write once we get to the office.
The discussion around the FX desk in Sydney yesterday was about the ongoing grind lower in currency volatility (e.g. in G10 FX, consistency below 7% since late February, and evidenced by some excruciatingly narrow daily ranges in the likes of the AUD/USD in the last 48 hours). While this means buying protection against adverse currency moves is cheap and getting cheaper (or so our options desk tells me!) it also means that ‘carry’ is making something of a comeback and which geos a fair way towards explaining the resilience/strength of the US dollar.
In truth playing for carry in G10 currencies is akin to picking up pennies in front of a steamroller, but it nevertheless costs money to be short dollars against G10 currencies, all of which have lower yields. Against this and as we’ve been writing in our FX Strategy notes, real US interest rates differentials between the US and other major currencies have been falling since the Fed’s pivot in December, which is a significant fundamental downforce on the US dollar but which may only come to bear as and when volatility picks up and/or more tangible evidence of stronger growth outside the US is to hand. Here, yesterday’s plunge in German factory orders (now -8.4% yr/y) was exactly the opposite, though in truth these figures, for February, reflect what we should have already gleaned from the more up-to-date March PMI data earlier in the week.
As for today’s song title, we might be getting closer to change on two of the big ‘known unknowns’, namely Sino-US trade and Brexit. All the smoke signals from ‘source’ stories this week are that significant progress in being made in trade talks. China’s Vice Premier Liu He is about to meet with President Trump and where we can expect a good deal of bonhomie to be evident. But a few thorny issue evidently stand between now and a deal, notably whether or not the US will agree to immediately wind back existing tariffs on Chinese imports (the US’s evident intend was/is to keep them in place as a stick to ensure compliance with any deal) and the enforcement mechanisms themselves that need to be constructed and implemented in such a way that the US is not seen to be impinging on Chinese sovereignty (i.e. allows China’s to save face).
As for Brexit, Sterling has been the weakest currency overnight, giving back the gains we saw this time yesterday on news that the House of Commons had voted by 312 to 311 to block a no-deal Brexit (this now needs ascent from the House of Lords to become law). Even here though, it is not in the gift of the UK government but rather the EU to ensure a no-deal doesn’t happen. Reports are that both the UK and EU are thinking in terms of a nine-month extension to Article 50, to be agreed at next Wednesday’s EU Summit, from the EU’s side on the condition of course that the UK commits to holding EU elections at the end of the month.
In the meantime, talks between senior Labour and Conservative party officials are continuing, and while described as comprehensive and constructive, there is no indication they are going to yield fruit in front of next week’s Summit. Our read is that Labour is likely to insist both on a commitment to keep the UK inside a Customs Union post Brexit and quite possibly that any such deal should be put to second referendum (or ‘confirmatory vote’ as it is being dubbed). This may both be bridges too far for the government to accept, lest it risks blowing the Tory party completely apart.
GE: Factory orders (m/m%), Feb: -4.2%m/m vs. 0.3 exp.
US: Jobless claims (k), week to 30 Mar: 202 vs. 215 exp.
CA: Ivey PMI 54.3 from 50.6
Nothing much to see in the APAC time one Friday, save for Japan February wages data, likely to confirm still sluggish wages earnings growth in both cash and real terms (in fact both seen dropping back below 1%y/y from just above 1% in January).
Germany has industrial production for February, which after yesterday’s weak factory orders data are not going to print anywhere close to the +0.5% consensus, recorded prior to the orders numbers.
US payrolls is the main draw tonight where employment growth is seen rebounding after the weak (25k) February print. Consensus is 178k. the unemployment rate is seen steady at 3.8% and average hourly growth unchanged in yr/yr terms at 3.4% assuming a 0.3% monthly rise (vs. +0.4% in February). Our US data whisperer, Tapas Strickland, points out that some models suggest a strong bounce-back in payrolls, but these should be discounted given some signs of weakness in small business hiring and the impact of severe weather. So NAB’s call is a slightly below consensus +165k, while wages (+0.3%) and unemployment (3.8%) are at consensus.
Canadian payrolls are due some payback after two very strong months (+55.9k and 66.8k) with a monthly riser in 10k. The unemployment rate is expected to be steady at 5.8% and wages growth also steady at 2.2%.
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