The euro and yen are extending their gains, casting a pall over the US
dollar. The euro is extending its advance into a sixth consecutive
session, which is the longest streak since May. It is approaching last
month's highs in the $1.1860-$1.1880 area. As was the case yesterday, a consolidative tone in Asia was followed by
strong buying in the European morning. There does not appear to be
a fresh fundamental driver.
The dollar has slumped against the yen and is trading at its lowest level
since October 20. It was sold to JPY113.00 in Asia and took another leg down toward JPY112.65 in Europe before
steadying. The further drop in US yields, with the 10-year now off seven
basis points this week, and the continued pullback in equities, are taking a
toll.
The slump in equities accelerated today. The MSCI Asia Pacific
Index fell 0.85%, which is not only the largest decline in this four-day swoon,
but it is the biggest drop in five
months. Japanese markets led the decline with the Nikkei off 1.6% and the
Topix off nearly 2%. One of the few markets that were higher was Korea's KOSDAQ. It rallied 1.5% and is up
6.3% this week. It was the sixth consecutive advance. MSCI Emerging
Markets Index is off for the fifth session, which is its longest swoon in two months.
The retreat in European equities is continuing for the seventh straight session. The
sell-off in commodities is taking a toll on the energy and materials sector,
but information technology and financials are also down more than the market as
a whole. Of note, the DAX gapped lower and is testing the
38.2% retracement objective of the nearly 14% rally since late August (found
near 12892). France's CAC is through a similar retracement level and has
approached the 50% retracement (~5266).
The US S&P 500 has fared considerably better. It did fall
nearly 0.25% yesterday, its third decline in four sessions. However, it
closed near session highs, and once again, despite intraday violation, managed
to close back above its 20-day moving average. It has not closed below
that moving average for 2.5 months. It is found today near
2576.65.
There have been three economic reports to note: Australian wages,
Japanese GDP, and UK employment. Australian wage pressure was more
moderate than expected, rising 0.5% in Q3, the same as in Q2. However,
economists were looking for a larger increase. The Australian dropped
half around half a cent on the disappointment. It was sold through
$0.7600 to trade at four-month lows. The next target is near
$0.7530. Mining, gas, and water employees saw weak wage increases, while
the hospitality, food and public workers saw better wage
growth.
Japan's first estimate of Q3 GDP was slightly slower than expected.
The 0.3% quarter-over-quarter growth was half the pace of Q2. Still, it
is the seventh consecutive quarterly expansion, which Japan's longest growth
streak since 2001. Growth was driven primarily by net exports and capex. Private consumption was a drag,
falling 0.5% after Q2consumption was revised
to 0.7% from 0.8%. Japan's initial estimate for quarterly GDP, like the
US estimate, is often subject to statistically significant revisions. The
first revision is due on December 8.
The UK's employment report showed signs of slowing in the labor
market. The number of people working fell (14k) for the first time in
a year. Those neither working nor looking for work rose by the most in
seven years. The unemployment rate was unchanged at 4.3%. Average
weekly earnings rose 2.2% in the three-month year-over-year period, after the
upward revision to 2.3% in the period ending in August. Excluding bonus
payments, weekly earnings rose at 2.2%, the same as previously. Sterling
initially rallied on the news and reached the session high (~$1.3215) before
sliding back to session lows (a little below $1.3140). It then recovered
to little-changed levels
(~$1.3165).
Oil is still getting the proverbial tar kicked out of it. Brent
is off another 1.25% after dropping 1.5% yesterday. It is the fourth
consecutive decline, and it is off six of the past seven sessions.
WTI is also off a little more than 1% after yesterday nearly 1.9% drop.
Supply concerns appear to be the main culprit again.
The IEA offered an optimistic
assessment of US energy output growth in the coming years. It sees the output more than
demand by 600k barrels a day through Q1 18. At the same time, reports
suggest Russia may be balking at cutting output further or extending the
production restraint. Adding insult to injury, the API estimated that US oil
stocks rose 6.5 mln barrels last week, which if confirmed by the DOE today, it
would be the largest increase since March. Support in the light
sweet contract for December delivery is seen
in the $54.00-$54.60 band.
The US economic calendar features CPI, retail sales, Empire Survey and
business inventories. Lower gasoline prices may weigh on headline CPI.
The core rate is expected to be flat at 1.7% for the sixth month. If
there is a surprise, we suspect that it could be that the core rate ticks
up. It has little implication for policy and the market appear to have fully discounted a hike next
month.
We note that yesterday the December 2018 Fed funds futures contract
slumped to imply an effective Fed funds rate of 1.735%. The current
effective rate is 1.16%. It suggests that the market has come around to
price in a little more than one hikes next year. The market is gradually converging
with the Fed's dot plot, as it has, albeit reluctantly, with this year's signal
that three hikes would be appropriate.
October retail sales will not be able to come close to matching the 1.6%
rise in October, that was flattered by the recovery from the storms.
Still, the GDP components are expected to be firm, rising 0.3% after a 0.4%
rise in September. We are concerned that the recovery may have boosted
these core retail sales as well, warning that there may be scope for
disappointment today. The Fed's Evans and Rosengren speak today, and the DOE
energy report will be closely watched.
Progress on US tax reform continues. The House is still expected to have
a floor vote tomorrow. Late yesterday, the Senate version was changed to
include a repeal of the individual mandate requirement of the Affordable Care
Act, and a sunset provision on tax breaks for the middle class and small
businesses, while keeping permanent the corporate tax cut, which is starts in
2019.
Canada reports existing home sales. They have been up for the
past two months (August and September) after falling for four months. The
Canadian dollar may be vulnerable to a weak report. Note that there is a
$265 mln option struck at CAD1.2730 that expires today.
Disclaimer
Dollar Slides
Reviewed by Marc Chandler
on
November 15, 2017
Rating: