Cheat Sheet - Monday, Nov. 19 -

Cheat Sheet – Monday, Nov. 19

Nov 19, 2018Jeremy ParkinsonFinance, No picture0

US Dollar

The market always has taken the Fed’s forecast for three rate hikes next year with a large dose of skepticism. The fed funds futures strip implies growing expectations that the Fed pauses after a hike in December and Q1 19.

It is still unclear the direction of fiscal policy next year. It may be difficult for the Democrats to oppose making middle-class tax cuts permanent and an infrastructure initiative cannot be ruled out. Still, the most pressing fiscal issue is the possible partial closure of the government in early December, which the White House is threatening unless its proposed border wall with Mexico gets more funding.

The Atlanta Fed sees Q4 growth tracking 2.8%, while the NY Fed’s model sees it at nearly 2.6%. Although this would represent a slowdown from 3.5% and 4.2% in Q3 and Q2 respectively, it is still above what officials regard as the long-term non-inflationary trend.

From a high level and oversimplifying, but if there is one price to use as an overall metric for the dollar, it may be 96.25 in the Dollar Index, which is where the uptrend connecting the September, October, and November lows can be found at the end of this week.

Euro

Two of the eurozone’s three largest economies (Germany and Italy) unexpectedly contracted in Q3. The flash November PMIs that will be released at the end of the week are expected to confirm the lack of rebound in Q4.

The ECB meets on December 13. It will confirm its intentions to cease net new asset purchases at the end of the year. There is some risk that the incoming data, including the dramatic drop in oil prices, prompt the staff to shave growth and inflation projections for 2019.

The EC has a process in place to address countries that are in violation of its fiscal rules.EC officials will likely seek to minimize the fodder it provides to the populist government. Investors have taken their pound flesh. The 10-year yield is consolidating around 3.50%, and the five-year peak in the premium over Germany was recorded a little more than a month ago (~3.27% vs. 3.10% now).

Except for a few days last week, the euro has been confined to a $1.13-$1.16 trading range since the start of October. The rate differential with the US has stabilized (June 19 Euribor and Eurodollar spread bottomed near 338 bp on November 7 and is now a little more than 320 bp). Three-month implied vol peaked near 8% last week. The lower end of the three-month range is a slightly below 7%.