By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Broad-based USD softness was the big theme of the day yesterday, despite a solid ISM services print, as markets elsewhere traded in choppy fashion. Today, a light docket awaits.
WHERE WE STAND – It proved to be a day of broad-based, and substantial, USD weakness on Wednesday, with the buck getting beaten up across the board.
Quite why the buck was so soft is, to be honest, a bit of a headscratcher, with there not being an especially obvious catalyst for the move. Certainly, yesterday’s data can’t be blamed, not only as the move got going long before it was released, but also considering that the ISM services survey rose to a 9-month high in November, and that last month’s ADP employment stats simply confirmed the ‘no hire, no fire’ nature of the labour market with which we are now familiar.
There seemed to be a bit of a prevailing narrative doing the rounds that it was the now near-certain nomination of Kevin Hassett to serve as the next Fed Chair which was acting as a trigger for the weakness, though that felt like a classic example of folk just pinning any narrative onto the price action, as opposed to an actual catalyst. In any case, as I noted yesterday, Hassett will likely have the same issue as Gov. Miran presently does if he were to advocate for any uber-dovish jumbo rate reductions. Namely, that unless there is a coherent economic argument for such policy action, he simply won’t be able to garner the votes from enough FOMC members in support of such a move. Selling the buck, or putting on Treasury steepeners, solely on the back of this story, feels rather wide of the mark to me.
In any case, whatever the prevailing narrative, that dollar downside did see us take out some pretty key levels across the board. The DXY, for instance, closed back under its 50-day moving average for the first time since early-Oct; the GBP enjoyed its best day since May, and closed above the 200-day MA for the first time in a month; the EUR printed 6-week highs, above its 100-day MA; while USDJPY closed at its lowest in a fortnight.
All this does make me rather nervous, at least in the short-term, about my bullish USD view. While I maintain that the US is still the ‘cleanest dirty shirt’ among DM economies, and that a return to the idea of ‘US exceptionalism’ is likely into next year, I’m equally not especially inclined to sit in an underwater position with two and a half weeks to go until Christmas. In keeping with the mantra that a lot of participants seem to be adopting right now, this is one I’ll come back to in January.
Outside of the FX space, it was ultimately a choppy day for markets across the board, with no particularly clear theme or tone in evidence. Treasuries gained some ground on the aforementioned ADP report, which pointed to the loss of 32k private sector jobs last month, though these gains pared relatively rapidly, especially at the front-end, likely on a realisation that the data really doesn’t change much for the FOMC, with a 25bp cut next week still essentially a done deal.
Stocks, meanwhile, were pretty choppy across the board, though did pare a rather notable wobble around the cash open, on (later denied) reporting that Microsoft had been lower its AI-related staff sales targets. While the impact of this was short-lived, it does nonetheless serve as a useful reminder of the vulnerability that some of these AI-related names continue to display, and which becomes increasingly prevalent in a market that’s ‘priced to perfection’.
In any case, my view remains that the path of least resistance for stocks continues to lead higher into year-end, with spoos printing 7,000 before 2025 is done still not out of the question.
LOOK AHEAD – A fairly light docket lies ahead today, lacking top-tier data releases, as attention really now starts to shift towards next Wednesday’s FOMC decision.
As for the ‘here and now’, though, we will be getting the weekly US jobless claims figures this afternoon, though neither the initial nor continuing prints coincide with the survey week for the November jobs report, which will be released on 16th December. The data is also unlikely to move the needle much for the FOMC, with a 25bp cut next week nailed-on at this stage.
Elsewhere, this morning brings our latest read on eurozone retail sales, which should’ve stagnated in October, though the data itself is hardly likely to be a market-mover. We also have a smattering of ECB and BoE speakers through the day, though once again any fresh comments on the policy outlook seem unlikely.