A night of contradictory headlines – markets go along for the ride

A night of contradictory headlines – markets go along for the ride     

• USD: US phase 4 fiscal stimulus still in limbo - Speculation about US fiscal stimulus remains just that with House Speaker Pelosi sounding skeptical, saying that while she has had constructive talks with Treasury Secretary Mnuchin, the two sides are "way off" on state and local funding and child tax credit. As a result, House Democrats (in what is a symbolic gesture) have voted and passed their own USSD2.2trn bill this morning (SG time), not waiting on Senate Republicans to negotiate. Bottom Line - closer the US gets to election day, the less the chances of a compromise deal and events overnight are clearly a step back from earlier this week and represent a negative for USD on the margin.              

• GBP: Turbulence on Brexit headlines - fisheries, state aid and dispute mechanism remain contentious - Cable oscillates between a 1.2820 low and 1.2978 high overnight on Brexit headlines. An initial sharp dip comes on the back of a Reuters report suggesting little progress in EU – UK talks with EU officials stating “there is no sign of a landing zone on fisheries, level playing field in trade talks with the UK”. Sentiment is further undermined by the EU announcing commencement of legal action against UK on the latter’s Internal Market Bill that undermines the Withdrawal Agreement. The decision to pursue legal action is not a surprise and is unlikely to derail talks but comes at a time when FX markets are highly sensitive to Brexit headlines. Cable then spikes as a FT report describes the mood in Whitehall as “cautiously optimistic” with talks set to “go to the brink”. Talks will continue today ahead of a meeting between chief negotiators Barnier and Frost while EC President Michel will brief EU leaders on the state of play ahead of the main Brexit summit on October 15.    

• GBP: Bottom Line - The overnight developments may require some tempering of Brexit optimism but Citi analysts still see a rudimentary deal in coming weeks. There are 5 key reasons as to why PM Johnson would want a deal, albeit a rudimentary one – (1) Legacy risks – A No Deal is likely to introduce longer term risks to Johnson’s legacy as PM, and chances of re-election in 2024; (2) Blue Wall - Most of PM Johnson’s 2020 election gains came from seats in the midlands and Northern England that would be hit hardest on No Deal; (3) No US FTA – US House Speaker Pelosi, Richard Neal, chair of the House Ways and Means Committee, and Joe Biden have all warned of no US-UK FTA in the event of No Deal; (4) Risks to the Union - opinion polls show a majority of Scottish citizens would vote for independence, worth watching ahead of the May Scottish Parliament elections and a No Deal may also eventually lead to calls for Irish reunification via a re-run of the 1973 Northern Ireland border poll; (5) Social unrest – No Deal raises the risk of social unrest on the island of Ireland.        

Data releases overnight

• JPY: BoJ Tankan: USDJPY break evens suggest Japanese exporter hedging likely to pickup - The results of the September BoJ Tankan survey suggest a mild recovery from the prior survey in June, though slightly weaker than expected. This implies the Japanese economy has bottomed from the coronavirus slump but is still struggling. DI of large manufacturing enterprises modestly picks up to -27 in Q3 from -34 in Q2 2020 (consensus was for a recovery to -24) while large non-manufacturing enterprises DI also edges up to -12 from -17 (though lower than consensus for a pickup to -9). Importantly, the budget rate for USDJPY is mostly flat from the last survey at 107.34 for FY2020. While exports (especially auto exports) have dropped severely in the first half of this year, Japanese exporters have engaged in modest hedging activities, which has been a background for steadier USDJPY price action over the last few months. Given the solid recovery in US retail sales (particularly durable goods including autos), Japan’s exports and their necessity for USD sale hedges are expected to recover. With hedging costs only adding some 15-25bp (forward discount) over the next 3 to 6 months, their demand to sell USDJPY could potentially be strong at around 107-108.

• USD: Still-strong ISM manufacturing, with employment rising - US ISM manufacturing moderates slightly in September, declining to 55.4 from 56.0 in August with the new orders subcomponent falling to a still-elevated 60.2 from 67.6, production pulling back to 61.0 from 63.3 but the employment subcomponent rising to 49.6 from 46.4. The bounce-back in ISM manufacturing appears to have stabilized around elevated mid-50s-levels, well into expansionary territory, indicating continued growth from low levels and Citi analysts signal that another rise in the ISM employment subcomponent should again indicate positive hiring (Citi expects 60k manufacturing jobs will likely be added in the September employment report to be released tonight).    

• USD: Seasonally adjusted strong core PCE points to a likely overshoot > 2.0% in early 2021 - US personal spending continues to recover in August, up 1.0%MoM and down just 1.9%YoY while personal income falls 2.7%MoM due to reduced government transfers, but remains up 4.7%YoY. Data on spending, incomes and prices present a combined picture of an economy rapidly normalizing from deeply-depressed levels. The unexpectedly-strong core PCE inflation at 1.6%YoY though will likely provoke little attention from Fed officials but means core PCE inflation is on track to overshoot 2.0% in early-2021.   

Key data releases tonight   

• USD: Nonfarm Payrolls – Citi: 1200k, median: 900k, prior: 1371k; Private Payrolls – Citi: 1300k, median: 875k, prior: 1027k; Manufacturing Payrolls – Citi: 60k, median: 40k, prior: 29k; Average Hourly Earnings YoY – Citi: 4.2%, median: 4.8%, prior: 4.7%; Unemployment Rate – Citi: 8.2%, median: 8.2%, prior: 8.4% - Citi analysts expect another month of solid +1 million job gains in September though with notable two-sided risks around this forecast. Average hourly earnings should resume a gradual decline in September after a few months of modest increases while the unemployment rate should fall further with continued hiring in September.      

This is is an extract from the Daily Currency Update, dated October 2, 2020. Please approach a Citigold Relationship Manager if you would like more information.