Weekly Outlook WC 17/04/2023
Are we seeing a move towards a two-polar global economy? Is the time where the US dominates and leads the global economy coming to an end? Maybe . . . but maybe not. There are certainly indications, but is this due to temporary dollar weakness; a strengthining of China and it’s collaboration with other non-US markets or just the de-dollarisation story being re-hashed?
Last week saw big data releases which may signal the start of a new phase, but overall, it really is a make or break point for the US.
Globally, there is potential that it could be the start of a multi-polar split which is not something that has been seen before. A bit of super high level background, traditionally the global economy has been more or less in sync with the US; as the health of the US market rises and falls, so does the global economy.
However, we could potentially be seeing the start of a split. With the outlook for the US looking shaky and deteriorating but other markets having an improving outlook.
The groups can be crudely organised into
Western + Developed economies
Eastern + Emerging economies
There will be some crossover but broadly speaking the Eastern markets are being driven by China and the Western markets largely driven by the US.
Looking at the recent US data releases:
- JOLTS missed expectation
- NFP wasn’t as bullish as previous releases
- US CPI missed expectation (YoY still well over Fed target)
- US Initial jobless claims came in slightly higher (but not a major miss)
- Potentially tighter credit conditions restricting lending
- Retail sales missed expectation
Whereas China was a different picture:
- PMI services grew
- CPI missed but YoY still well below target
- New loans significantly increased and beat expectation
- Exports significantly beat expectations coming in at +14.8% vs -7% expected.
The interesting thing about the exports is where the growth came from. ASEAN (Association of Southeast Asian Nations) exports showed huge growth while at the same time exports to the US fell by -7.68%.
The growth in China is also powering emerging markets such as Brazil which was achieved a trade surplus with China (https://www.statista.com/chart/29718/brazil-china-bilateral-trade/) potentially signalling a shift within south america, which is extremely rich in resources and raw materials – something which could spell trouble for Australia if resources are beginning to be more heavily sourced elsewhere. Are there long term opportunities in resource rich emerging markets like Brail, Chile and Peru?
Although the ‘de-dollarisation’ story has been about for a long time, it may be that it is beginning to gain some traction nad evidence to support it. If the dollar is weak and weakening and countries are beginning to do global trade in a range of currencies, this will remove a lot of the buying/demand for the dollar which could cause a much bigger drop than previously seen during the weaker dollar cycles.
I don’t think that not using the dollar for global trade automatically removes the dollar from being the global reserve currency, there are a lot of factors required for a currency to be a global reserve currency and I cannot see how the Yuan (if this is the suggestion) satisfies the requirements – especially considering the political structure and the lack of fully developed financial marked with global reach – but this is far from my expertise area.
Also, does a weaker dollar mean that emerging markets could better service any dollar denominated debt potentially giving an incentive to move away from adding demand for dollars for non-us trade? That is pure speculation and thinking out loud.
Another couple of interesting releases last week were linked to the GBP. Growth missed expectations which isn’t too surprising considering the high inflation, but something which wasn’t widely reported was the rise in loan defaults in the UK. This has several implications but the main two are:
- Banks will begin to tighten lending standards, making it harder to get a loan for both commercial and personal – this will further suppress growth
- It is clear that households are really now at the point of collapse: which will add a lot of political pressure on the government and the BoE (even though they are supposed to be independent).
This makes the potential for further hikes less likely, but with inflation still running high in the UK, one more hike may be favoured – however the time lag of interest rates may have ran out and we are beginning to see the impacts of all of the rate hikes, more hikes may really over do it and plunge the UK into a deeper than expected recession.
There was also what seemed to be a bird of prey show in Europe with Hawkish comments everywhere – suggesting that up to 50bps wouldn’t really be a surprise.
We are coming into earnings season for equities, this could have a big impact on markets and the dollar.
China: Foreign Direct Investment in China (due on Monday) might be an interesting one to watch – followed by Chinese GDP on Tuesday. Could the China reopening story begin to play out?
UK Unemployment – if this misses, it could further add pressure to leave rates unchanged in May. This is followed by UK CPI – This is a key measure, but with news announcements in the UK about Supermarkets dropping prices, it may not be timely enough to represent what is going on at ground level. A high print may not really translate into more hikes if the other data releases are weak.
Empire Manufacturing Survey is out – looking at the trend and previous releases, it’s printing at lows comparable to 2008 and 2016. Although the backdrop is different (potentially opposite) to 2016 (https://www.nytimes.com/2018/09/29/upshot/mini-recession-2016-little-known-big-impact.html) it’s still interesting that it’s down at recessionary levels. Also the weekly unemployment numbers from the US may confirm the cooling of the jobs numbers.
AUD RBA’s monetary policy meeting minutes – will this hint that a hot labour market is a concern and could trigger hikes to restart? – especially if the China reopening story is starting.
Tuesday sees CAD CPI released – Recent comments from the BoC have suggested that the chance of a soft landing has increased from Canada. Inflation reads are relatively low and trending downwards compared to its peers, but the markers for economic strength are coming in strong (GDP, Employment) – this will be further buoyed by OPEC’s recent announcement.
Friday has a host of PMIs – Breaking these PMI’s down will be important – so EUR will be focused on the prices to give a reflection on inflation, whereas the US may be focused on things like forward orders or employment.
DXY – The DXY may be finding some support around the 101 – the below chart shows the DXY with the key horizontals. I have also overlaid the VIX. You can see the very close correlation. Whereas the DXY found support – the VIX broke down to new lows.
However, coming into earnings season, the VIX may rise if there are some poor earnings released.
Marc highlighted that there is a lot of divergence in the US pairs, which could potentially signal a dollar reversal – something else which isn’t something to fully rely on, but could be used for a dollar strengthening argument is the seasonality. The beginning of May signals a bullish run for the DXY, plus I have increasingly heard “Sell in May and go away” from a lot of sources. If the US equities are sold off, then this could see that money flow into the dollar – at least initially as that’s where it has to go as when a US equity is sold it ‘buys’ back US dollars.
Seasonality Chart Source (https://www.seasonalcharts.com/classic_usdindex.html)
The S&P is coming towards a resistance level – there are a lot of factors to consider and arguements for it breaking through, but an equal number (if not slightly more) for it dropping.
EXY has a little bit more headroom before it hits the resistance level between 111.50 – 112.00
The gap created on the back of the OPEC announcment has held and also broke the descending trendline, if conditions for oil remain bullish – it could move up over $90
Chile Copper Exports
Although the price of copper is stuck in the $3.80 – $4.20 range, the amount of copper coming into the market has increased again. The Chile copper exports number increased. (Chart: Investing.com)
It’s a very mixed picture – but overall I am more bullish the EUR, but can certainly see factors which could give the USD strength so it really is a mixed picture. The CAD has a bit of a tailwind too. There are issues beginning to surface in the UK so I’m tentative on any GBP strength. The crosses may be the safest place to play in the short term.