Dialing it Up on Hump Day

The dollar is practically unchanged against the euro and yen in
the first two sessions of the week.  
The pace can be expected to pick up starting Wednesday.  

Japan’s service and composite PMI’s rose to 52.9 (from 51.3 and 52.2 respectively). It confirms what we (and others) have recognized, namely that Japanese growth strengthened in the first part the year, and begin Q2 on a solid note.  

Europe reports
service and composite March PMI figures. Recall that the flash estimates were
for 56.5 and 56.7 respectively, new records for both. 
 It will put nice
finishing touches on the survey data for March.  There are two
problems.  First, the surveys are running well ahead of real sector data.
 Aggregate growth is not the problem; it is that price pressures, outside
of energy and some weather-induced spike in some food prices, are practically
The UK may hit
a trifecta.
  The manufacturing and construction PMIs were below
expectations.  The median forecast in the Bloomberg survey is for a small
uptick.  The risks are on the downside.  The last few months of 2016
were particularly strong.  The service PMI averaged 55.3.  Even
giving the median its due, the average for Q1 would be around 53.7.  
Although the US
reports both the ISM and Markit PMI for the non-manufacturing sector, the focus
will be elsewhere.  
market participants will be more interested in the ADP jobs estimate and the
FOMC’s minutes later in the day.    The first quarter is over.
 The Fed hiked at the end of the quarter.  What is does next will
have little to do with economic conditions of the past few months.  
The first
quarter tends to be a soft one for the
US, and Q1 17 does not appear to be an exception, though the NY Fed’s GDP
tracker says growth reached 2.9% ( as of March 31).
  The Atlanta Fed’s GDPNow suggests
1.2% growth is more likely, which would be in line with the average beginning
in 2010.   In recent days, we have learned Q4 consumption was
particularly robust (3.5% annualized) and that Q1 is considerably softer.
 The disappointing March auto sales threaten
to drag headline retail sales lower. We suspect the poor weather likely
exacerbated the pullback, which is consistent with our expectation for a
rebound in Q2.  
We have
suggested that March jobs report may be subject to mean reversion.  
After two strong reports, the risk is for
slower job growth in March.  The increase in weekly jobless claims suggests that as well.  Weather may also
skew the headline, more for the BLS survey than the ADP estimate.   
Some economists
have noted that the dollar’s reaction function often looks like a smile.
  It rallies as a haven when there is
high anxiety, and it rallies in exceptionally good times, but normal times the
dollar suffers.  Perhaps that is the sort of response we should look for now.  A shockingly poor
report will likely be quickly written off as distorted, and there is little
chance of a May hike discounted.  A very strong report may raise the odds
of a June hike (BBG 50.1%, CME 59.1%).  Under both extreme scenarios, the
dollar could rally.  On the other hand, a report
in line with expectations may deter a dollar rally.  

There will be two important aspects of the FOMC minutes that will attract attention.  First the Fed will introduce confidence cones around its forecasts.  This may help investors have a better appreciation for the forecasts, and surely why they are not point specific promises.  Second, the FOMC likely had its first formal discussion of the balance sheet.  The key issue for the market is when and how it will be addressed.  

The modification of the rolling maturing issues into new issues is expected to take place very late this year or early next year.    It is not clear whether the Fed will focus on the MBS or Treasury portfolio or both.  There are a couple of caveats.  These discussions are still early in the process and there will likely be a wide spectrum of views which later will coalesce  around two or three.   Also, it is important to recognize that the Federal Reserve, especially the Board of Governors will look dramatically different by the middle of next year than it does today.  By the end of the month, there will be three vacancies on the seven-person Board.  And next year, both the Yellen and Fischer’s terms as Chair and Vice are up, and neither is likely to remain a Governor.  
The meeting
between the US and Chinese Presidents is at hand. 
 Having seen Chancellor Merkel was treated can only reinforce the cautiousness of President Xi.
 There is much speculation over the range of issues that could be discussed, though President Trump seemed to
play down the trade issue now. The Trump Administration has begun a thorough review of the trade agreements, and it does not seem quite ready to
talk specifics.     
It is not clear
how China sees Trump. 
 He has backed down on two
threats–to cite China as a currency manipulator (on day one) and to abandon
the US recognition of only one China.  China has made two minor concessions.
 It will not import coal from North Korea, who apparently launched some a  projectile on the day before  the meeting between the two presidents.  
Second, China recently granted Trump more than three dozen commercial
It is not
immediately obvious what the US Secretary of State meant when he said that the
period of “strategic patience” with North Korea is over, or what
President Trump had in mind saying that the US did not need China’s help with
North Korea. 
 Separately, but not totally unrelated,
China does not like the missile defense in South Korea.

We expect some
commercial deals to be agreed during Xi’s
would not be surprised if the US and China agreed to trade talks, like the ones
agreed to with Japan.    It is only on this side of  
Alice’s Looking
that the Chinese President may caution the
US President against slipping into
mercantilism and abandoning free trade principles.    

Although the
euro slipped through $1.0650, it was not
sustained, and on Monday and Tuesday, the euro finished near its highs. 
 Barring a surprise,
the euro can firm a cent over the next few sessions. The technicals look
constructive.  The dollar looks better technically against the yen.
 Buying emerges as JPY110 is approached.
 Initial resistance is seen near
JPY111.20.   The $1.2350-$1.2400 may deter a deeper pullback in sterling.   

The dollar-bloc
has been heavy, but it too may have found reasonable technical support.
  The Aussie fell a little through
$0.7550 before catching a bid.  The $0.7600-$0.7620 could now draw prices.
 Most of the Tuesday’s sell-off in the Canadian dollar took place in Asia
and Europe.  In North America, the Canadian dollar recovered.  A move
back to CAD1.33 after turning lower from CAD1.3450 simply return it to where it
was before.  


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