Australian dollar dislocates from local economy

See the latest Australian dollar analysis here:

Australian dollar clubbed despite risk rebound

DXY was down overnight:

The Australian dollar eased against DMs:

Did better against EMs:

CFTC positioning is back to its lowest net short since in over a year at -27k contracts:

Gold faded:

Oil held on:

Metals were mixed:

Miners soft:

EM stocks have been partying:

And junk:

But US yields have turned down:

Even as European keep rallying:

Aussie bonds have split the difference:

As stocks enter Nirvana:

Westpac has the wrap:

Event Wrap

The key data release was US Dec. CPI with both headline and core at +2.3%y/y (estimates were +2.4%y/y headline and core +2.3%y/y). Core CPI gained only +0.1%m/m and its annual level to 3-decimals was +2.259% and so highlighted the benign profile.

US NFIB Dec. survey of small business optimism missed at 102.7 (estimated to be effectively unchanged at 104.6), but remained well within its solid range of the past three years. Although greater uncertainty pulled down the headline, both of the key employment and remuneration components lifted and underscore the underlying stability of the sector.

Event Outlook

NZ Dec. Food prices: Westpac expect an unchanged (m/m) level after Nov. -0.7%m/m (annual inflation has picked up).

NZ REINZ Dec house sales may be released (prior -1.9%y/y)

The initial round of European national (final) CPI releases will be dominated by French and Spain (est. 1.4%y/y and +0.8%y/y respectively) and notably UK CPI (est. headline +1.5%y/y, core +1.7%y/y).

Eurozone Nov. industrial production is expected to rebound +0.4%m/m after slipping -0.5%m/m in Oct.

US Dec PPI is estimated to lift to +1.3%y/y (prior +1.1%y/y). In addition NY Fed’s Jan. Empire survey (est. 3.6) and the broader Fed’s Beige Book (expected to continue to point to a moderate expansion) are released.

Bank of England MPC member Saunders (voted for a cut in Dec.) is due to speak.

Fed’s Kaplan and Harker are scheduled to speak as are ECB’s Holzman and Villeroy.

US inflation is tracking softening wages:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in December. The 16% trimmed-mean Consumer Price Index rose 0.1% (1.8% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.2% (2.7% annualized rate) in December. The CPI less food and energy rose 0.1% (1.4% annualized rate) on a seasonally adjusted basis.

But, there are signs of underlying pressures still:

Which will not be helped by this news, via Bloomie:

Existing tariffs on billions of dollars of Chinese goods coming into the U.S. are likely to stay in place until after the American presidential election, and any move to reduce them will hinge on Beijing’s compliance with the terms of a phase-one trade accord, people familiar with the matter said.

The two sides have an understanding that no sooner than 10 months after the signing of the agreement at the White House Wednesday, the U.S. will review progress and potentially trim tariffs now in place on A$521.35 billion of imports from China, the people said, declining to be identified because the matter is private.

Nothing much has changed over the holiday period. The US is still the growth and inflation leader. The global reflation hope embedded in stock markets is still mostly fantasy. Europe is still struggling greatly and China is still slowing.

I still see only a weak global rebound this year as the damage to Chinese globalisation deepens, Europe only crawls out of virtual recession and the US plods on.

There may be slight growth convergence ahead but I can’t see the US dollar falling far enough to support a fulsome reflation in the fundamentals. The Fed isn’t going to cut unless the stocks bear returns while there is more work for the ECB and PBOC ahead.

With the bushfires charring Australia’s already stalled economy, guaranteeing that Australia sits out what good news there is, leaving the RBA little choice but to keep easing, the AUD can’t get far and the odds favour a reversal down in due course.

David Llewellyn-Smith
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  1. In Mohammed El-Erian’s words: “The Fed can’t pull back because it’s worried it will disrupt markets that can be a spillover on the economy. The Fed’s in a lose, lose, lose situation, they can’t stay where they are, they can’t do more, they can’t do less.
    In Andy Xie’s words: “The Fed has gone from the financial bubble’s hostage to its guardian.”
    Is there a way out? No.

  2. It’s pretty clear that everyone has become very complacent

    The bushfires are a precursor to the Australian economy melting down this year

    I just read somewhere all major Aussie banks are forecasting AUD at 72/76 range in 21 and 22 and 67/70 range end of 2020:

    Think we are going to see a 5 handle on AUD this year ASX pounded lower under 6,000 and Aussie house prices have the long overdue correction lower, wouldn’t be surprised if Aussie house prices are 20% lower this time next year

    These bushfires are going to have a much bigger effect than is being discussed = it’s huge news overseas

    I’m really surprised there isn’t one analyst with at least slightly bearish forecast

    It’s going to get much uglier as the year goes on


    • At some point, all the bears, including me, will be right. The issue with anything imminent happening is that the Fed is still pumping additional liquidity into the market and this liquidity is largely going into financial assets. (The BoJ and the ECB are doing the same). From February they are reducing term repos from $35bn to $30bn but this still represents $60bn of new liquidity every single month. And UBS reckons Fed balance sheet expansion (not QE) is going to be a permanent feature – which is not an unreasonable assumption because the US deficit is now so large that there isn’t enough natural demand to fund it so the Fed is now having to fill in the gaps on an ongoing basis. This is actually a huge deal but few people have woken up to the fact, yet.

      In the meanwhile, the various bubbles are going to get ever larger and the larger they get the larger the balance sheet will need to grow to support them all. At some point investors will experience a Damascenian moment and realize that the currency in which their assets (and paper profits) is denominated is worth a lot less than they originally believed.

      In the meanwhile, Strayan assets will be bid (including potentially real estate) as capital flows seamlessly back and forth across borders in search of higher yields.

      • Dom
        I strongly disagree with you with your view
        I haven’t always been a bear, I was the most bullish on the ASX this time last year, I said we would test 7,000
        It’s only the last month or 2 I’ve turned much more bearish
        I don’t believe they can blow this bubble any bigger
        I think it’s ready to burst

        • I was merely pointing to the fact that $100bn of newly created ‘money’ per month can keep a lot of plates spinning

  3. There’s homes to be rebuilt. Surely Sydney and Melbourne construction costs will affect the regional areas too, and may be underinsured.

  4. happy valleyMEMBER

    ” … leaving the RBA little choice but to keep easing …”

    Yep, RBA happy clappy angels of death more than happy to send more fixed interest income retirees and savers over the edge – just doing their financial god’s work, you know.

    • Yep, have you noticed how the economics establishment just ignores the savings side of the ledger when cheerleading lower interest rates? Are they pig ignorant? Serious question.

      All lowering rates does is transfer wealth from Bob the saver to Fred the borrower. 1 for 1. It’s like economists have this blind spot for the obvious. “Never mind all that — it’s what the models say!”

        • Well, it does – it’s just that the people being reamed don’t realise what’s going on. Yet.

          When they eventually wake up to who’s doing the there’ll penalties alright. Probably involving rope and lamp-posts.