Poor News There Pushes Dollar Higher Here

It is not the US economic entrails have necessarily made for enjoyable reading of late.  As seems to be often the case, economists revised higher their economic forecasts after being consistently surprised by the actual reports, just in time for the economy lose some momentum.  

This was the case with yesterday's news on house prices and the Chicago PMI.   We have highlighted the risk of disappointment with this US jobs report.  While August non-farm payrolls may be revised higher, as is the general pattern, but September's data may disappoint, with weekly initial jobless claims having bottomed in July. 

Despite all the noise, and he said, she said, there has been not significant change in the expected timing of the first Fed rate hike.  Indeed, the implied yield of the June 2015 Fed funds futures is at the lower end of its five-month trading range.  It currently implies an effective (average) Fed funds rate of 24.5 bp in June 2015.  It was briefly lower than this in mid-August and in late-May.  

Rather, from a fundamental perspective (leaving aside technical factors like momentum and positioning), the main fuel for the dollar's latest gains is the steady drumbeat of poor developments elsewhere.  Yesterday's news that the preliminary core reading of the eurozone's Sept CPI was weaker than expected and drove the euro lower, breaking this year's streak of trading higher on the day regardless of the preliminary report.  

Today Europe's manufacturing PMI disappointed.  It almost feels like we have gone through Alice's Looking Glass again.  Previously countries would try to distinguish themselves from the crisis-striken countries with claims, likely "XXX is not Greece."  Looking at the manufacturing PMI reports, some wag in Spain or Italy, may note that they are not Germany.  Germany's PMI fell to 49.9 from 50.3 in the flash and 51.4 in August.  Shocking.  France,  for its part saw its flash reading unchanged at 48.8.  The two largest eurozone countries are below the 50 boom/bust level though the PMI's signal of industrial output appears to have weakened.  

Italy offered an upside surprise, which is something that has not been said warranted in recent quarters.  Its manufacturing PMI rose to 50.7 compared with expectations for a decline to 49.5 from 49.8 in August.  Spain's PMI of 52.6 was above the consensus expectation of 52.4 but fractionally below 52.8 in August.  

This put the eurozone reading at 50.3.  Down from 50.5 flash reading and the 50.7 in August.  It is notable, however, that the euro was not pushed through yesterday's low.    The bounce has been shallow.  Resistance is seen in the $1.2640 area. 

To be sure it is not just the eurozone that disappoints.  The UK manufacturing PMI fell to a 17-month low in September of 51.6.  The market had expected a small increased from the 52.2 August reading.   Sterling slipped slightly below yesterday's low to recorded a fresh post-referendum low (just above $1.6160).

The dollar briefly traded above the JPY110 level, despite US 10-year Treasury yields slipping back below 2.50% and more cautionary comments from Japanese officials (similar in tone to what was heard last week).  Generally speaking, the Tankan Survey was a bit better than expected.  The two key elements that investors focus were constructive.  Sentiment among larger manufacturers increased to 13 from 12.  Given the weakness of the economy, a small decline was expected.  Capital expenditure plans were revised up to show an increase of 8.6%, up from 7.4% in the previous survey. 

Sentiment among the other industrial groupings, including the large non-manufacturers deteriorated, and the outlooks worsened across the board, including the large manufacturers.    The PMI was unchanged at 51.7. 

China's official manufacturing PMI was unchanged at 51.1.  The Bloomberg consensus was for 51.1.  However, there is still a softish tone as the forward looking new orders slipped to 52.2 from 52.5.  New export orders, incidentally, rose to 50.2 from 50.0.    China's financial challenges are clear (e.g. housing-related, quality of loans, shadow banking, liberalization), but should not be confused with the loss of competitiveness.  Wages and inflation have risen faster than other countries, but it appears that productivity is rising even faster.  This translates into a decline over the last couple of years in unit labor costs.    Note that China’s markets are closed through October 7.  

We look for today’s data to be consistent with our theme that the US economy will moderate after a robust Q2 and Q3.  This means that the risk will be on the downside of consensus estimates.  There are four reports today.  ADP has been doing a fairly good job, until last month of anticipating the national report.  The consensus expects 205k increase.  ISM manufacturing is expected to slip to 58.5 from 59.0.  Construction spending is expected to have risen 0.5% after 1.8% in July.  Auto sales are expected to have cooled from the 17.45 mln unit pace seen in August, though GM, Ford and Chrysler may have picked up market share.