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Wednesday, March 8, 2017

 The dollar continues to recover from last Friday’s rout, albeit not yet to the high earlier in the week last week. The dollar seems to be led by rising yields, with the 10-year at 2.511% at the close yesterday and 2.541% this morning. Of equal importance is the 2-year at 1.3277%, the highest in over a year. See the chart.

We get the ADP forecast of private sector payrolls today and then the full report on Friday. We don’t much like calendar effects in FX but remember that the dollar often outperforms on the Wednesday ahead of payrolls.

But forming a drag is the latest Atlanta Fed downgrade for Q1 GDP to a lousy 1.3% yesterday, from 1.8% on March 1, led by substandard PCE growth, among other things. We get another update today and it will likely include trade, which subtracted a whopping 1.7% from GDP in Q4.

The trade deficit jumped 9.6% to $48.5 billion, the highest since March 2012, from $44.3 billion in Dec. The WSJ reports that on an inflation-adjusted basis, the deficit is $65.3 billion (from $62 billion in Dec). The WSJ reports “The wider trade gap added to weak data such as housing starts, consumer and construction spending in suggesting the economy struggled to regain momentum early in the first quarter after growth slowed to a 1.9 percent annualized rate in the final three months of 2016.”

 Yesterday oil prices fell back on the API inventory report, a build of 11.6 million barrels vs. expectations of about 1.5 million (1.44-1.66 million). Oilprice.com reports “The build in crude oil inventories was almost 10 times what analysts had predicted and marks yet another new high in U.S. inventories.” Separately, the EIA released the Short-term Energy outlook reporting 2016 saw an average 8.9 million bdp and 2017 will likely see 9.2 million bpd on average. Brent should average $55 this year and $57 in 2018, with WTI about a dollar less. The range, with high confidence, will be $46 to $63 in May this year.

  •  In China, the government reported a rare trade deficit, too, $9.15 billion in Feb, the first since Feb 2014. Exports fell 1.3% y/y (after a rise by 7.9% in Jan) when the forecast was for a rise by 14%. Imports rose by an almost unbelievable 38.1%, although we can note that this is stockpiling of commodities, among other effects, that are not necessarily a negative reading on the economy longer -term. Still, the yuan fell.

  •  In Japan, the government revised Q4 GDP upward to 1.2%, led by capital spending, up 2% q/q, the biggest gain since early 2014. 

  • In the UK, sterling is suffering from several uncertainties. Yesterday the House of Lords voted to rewrite the Brexit bill, meaning it has to go back to the Commons—a defeat as well as a delay. Later today we get the new UK budget from the Chancellor, which will embody the outlook for the economy. Bloomberg reports CoE Hammond is expected to project that the country can weather Brexit and bond issuance next year will be lower. 

The story is coming out at 8 am and so far what we have from Reuters is a higher forecast for 2017— GDP up 2% this year from 1.4% forecast in November—but then falling back in 2018 to 1.6% and 2019, 1.9%. The Office of Budget Responsibility has inflation at 2.4% this year, 2.3% next year and 2% in 2019. “… despite higher-than-target inflation, real wages continue to rise in every year of the forecast." At a guess, economists will scream that devaluation on the scale already seen will not result in such tame inflation and certainly not higher real wages.


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