Marshall Gittler's Market Review

The Asian news overnight wasn’t particularly edifying. Japanese labor costs fell instead of rising as expected, adding to the deflationary outlook for Japan. USD/JPY was slightly higher.

Australian retail sales unexpectedly fell instead of rising slightly, which sent AUD sharply lower. The currency is already under pressure from falling iron ore prices. With wage growth stagnant and consumers under pressure from high debt levels, Australia is searching for new sources of growth but is unlikely to find one soon in my view. That suggests AUD may remain weak for some time.

Also in Asia, voting is still taking place for South Korea’s new president. Former opposition leader Moon Jae-in is widely expected to defeat software tycoon Ahn Cheol-soo. Moon has called for a moderate approach towards North Korea, which involves a two-track policy of engaging in dialogue while keeping pressure on through sanctions. Ahn on the other hand was backing a more confrontational approach. Moon’s victory could prove modestly positive for JPY if the market is paying attention to such matters.

The European day starts off with several indicators out of Germany. Industrial production is expected to fall on a month-on-month basis, but yesterday’s better-than-expected factory orders suggests the pipeline is still healthy. The country’s trade surplus, meanwhile, is expected to rise, which may add to the political friction between the US and Germany.

Later in the day, the US National Federation of Independent Businesses (NFIB) small business optimism survey is expected to continue its decline from the euphoric levels that it hit in the wake of Trump’s victory. Businessmen are gradually realizing that even with full control of the US Congress and White House, Republicans can’t just wave a magic wand and rectify all the country’s problems. Nonetheless, small business optimism remains at an elevated level, which may keep the dollar underpinned somewhat.

Canadian building permits for March are expected to rise at an above-trend level. This would corroborate the message from yesterday’s housing starts from April, which is that the housing market in Canada remains resilient even as mortgage rates rise and wages stagnate. A strong housing market in theory should be positive for CAD, but I expect that like yesterday, oil will be the main factor moving USD/CAD, not Canadian economic fundamentals.

The US Job Opening and Labor Turnover Survey (JOLTS) is expected to show job openings remaining around last month’s unusually high level. That’s a good sign for future payroll figures and would add to the recent positive news about the job market, such as last Friday’s jump in nonfarm payrolls and further fall in the unemployment rate. It should therefore be positive for the dollar.

FYI, Fed Chair Janet Yellen is also known to pay attention to the “quit rate,” which is another number released with the JOLTS report. That’s the percentage of individuals who leave their jobs willingly. The idea is that people don’t leave their jobs willingly unless they’re confident of getting another one quickly. Hence the Fed views this number as an indicator of confidence in the job market.

As for today’s speakers, Boston Fed President Eric Rosengren is likely to repeat the kind of hawkish comments he made last week, when he said that the current low level of unemployment adds to his concern that the Fed needs to remove accommodation – i.e., to hike rates. Similar comments in this vein therefore shouldn’t move the market that much unless he expresses some urgency about the matter, as last week he said he wanted to tighten only gradually. Dallas Fed President Robert Kaplan, a voting member of the FOMC, said a few weeks ago that three rate hikes this year “is still a good baseline.” The Fed has already done one and the market attributes a 100% probability to another one in June, leaving only one for the second half of the year. Only if he says something to imply that he might change his view would the dollar be affected. 

 

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