The US dollar is sporting a softer profile across the board, though remaining
largely in the ranges seen over the past couple of sessions. At the
same time, the news stream suggests that the global synchronized growth cycle
strengthened late last year and is bound to carry over into the New Year.
The mostly firm manufacturing PMIs are being joined by the service sector
surveys. Moreover, the details are often stronger than the favorable
headline optics. China’s Caixin service PMI rose to 53.9 from 51.9.
The Bloomberg median forecast had expected a small decline. It is the
highest since August 2014. New business was the best since May
2016.
The eurozone followed suit. The service reading ticked up to
56.6 from the flash reading of 56.5 and 56.2 in November. In turn the
composite reading rose to 58.1 from the flash report of 58.0 and November’s
57.5. The strength of the new orders component points to the momentum and
the strength of employment suggest the virtuous cycle remains
intact.
After reporting disappointing manufacturing and construction PMI, the UK
was redeemed with a stronger than expected service PMI today. It rose
to 54.2 from 53.8. The median forecast was for a rise to 54.0. The
composite stands at 54.9, which would have been unchanged, but the November
reading was pared to 54.8. The UK also reported a host of other data and
the take away message is constructive. Nationwide’s home price index rose
more than expected in December, making for a 2.6% year-over-year rise.
Consumer credit rose GBP1.4 bln in line with expectations, though net mortgage lending
and approvals increased more than expected.
Yesterday the US reported stronger than expected construction spending, ISM
manufacturing (with a jump in new orders to its highest level since 2004), and
stronger than expected auto sales. Canada also reported healthy car
sales. Canadian auto sales rose 4.6% in 2017, the eighth annual increase
and the fifth consecutive record high. Last year’s sales topped two
million for the first time.
Today, the US reports ADP jobs estimate (~190k, same as November), weekly
initial jobless claims, and the Markit Services PMI (flash fell to 42.4 from
54.5, and the risk seems to be on the upside.
Many investors, looking for the best way to capitalize on the
synchronized global economic strength see the most attractive opportunities
outside the US. MSCI Asia Pacific Index rose 1.2% to a record
close. In the first three sessions this year it is up 2.5%.
Tokyo returned from the extended holiday and the Topix played catch-up, rising
2.5% to its best level since 1991. The Nikkei added 3.25%. Profit
taking was seen in Korea. MSCI Emerging Markets Index is up about 0.5%
and about 2.8% over the past three sessions. It has only fallen twice
since December 15.
European shares are broadly higher. German, Spanish and Italian
markets are up over 1%, while the Dow Jones Stoxx 600 is about 0.5%
higher. Energy, materials, industrials and financials are leading the
most. Health care, telecom, consumer staples, and real estate are nursing
small losses. Industrial commodities, including oil, continue to trend
higher.
The global expansion is not yet producing strong price pressures.
This was the cloud in the silver lining of the European PMI. Prices eased
for the first time in five months. Longer-term inflation expectations,
judging from the 10-year breakevens are on the rise. The German 10-year
breakeven is near 1.32%, up from 0.95% six months ago and approaching last
year’s high set in February near 1.35%. As we have noted, the US 10-year
breakeven has pushed through the 2% threshold for the first time in nine
months.
Benchmark 10-year bond yields are mostly firmer today. Core
yields are mostly one-two basis points higher in Europe. The 10-year Gilt
yield is up three basis points. Peripheral bond markets are well
bid. Italy’s 10-year yield is off nearly three basis points, while
similar Spanish and Portuguese yields are off closer to five basis
points.
The euro has carved out a shelf above $1.20, and only a convincing break
now will dissuade a push higher. Sterling briefly slipped below its
shelf at $1.35 yesterday but rebounded is now in the middle of the one cent
range than extends to $1.36. Arguably with the rise of US yields in
response to a somewhat more hawkish set of FOMC minutes helped lift the dollar
to almost JPY112.80 as Japan’s markets reopened. The dollar had found
support near JPY112, which corresponds to the 100-day moving average earlier in
the week. There only notable option expiring today is $414 mln struck at
JPY112.45. A move above JPY112.80 is needed to lift the
tone. The Australian dollar is extending its gains.
After validating support near $0.7800, the Aussie is pushing through
$0.7850. Recall that it began last month near $0.7500.
Unless the US dollar can resurface above CAD1.2560, it may have to fall toward
CAD1.2430-CAD1.2450.