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Dollar’s weakness worsens due to trade tensions and Mnuchin jawboning
U.S. new home sales expected to fall back from a 10-3/4 year high
Unemployment claims remain very favorable
Leading indicators expected to show a strong increase of +0.5%
Treasury auctions 7-year T-notes with the yield near Monday’s 5-3/4 year high

Dollar’s weakness worsens due to trade tensions and Mnuchin jawboning — The dollar index on Wednesday fell to another new 3-year low and closed the day sharply lower by -1.02%. The dollar index since President Trump’s election victory in Nov 2016 has now fallen by a net -8.4% despite (1) the strong U.S. economy, (2) four post-election interest rate hikes by the Fed totaling +100 bp, and (3) the start of the Fed’s balance sheet reduction program in Oct 2017.

The weakness in the dollar is partially due to strength in other currencies such as the euro and the yen where economic growth has been surprisingly strong and where the markets are looking ahead to an eventual normalization of monetary policy. The ECB is expected to end its QE program by the end of this year and start raising interest rates by mid-2019. The BOJ may start taking baby steps towards curbing its QE program by later this year.

However, the dollar also has internal weakness based on U.S.-driven trade tensions and concern that the Trump administration actively favors a weaker dollar. The dollar on Wednesday fell after Treasury Secretary Mnuchin said that “a weaker dollar is good” for U.S. trade and that the dollar’s short-term value is “not a concern of ours at all.” The White House later tried to walk that back by claiming that the dollar is “very stable.” However, the markets are already aware that President Trump wants a lower U.S. trade deficit and that a weak dollar would further that overarching goal.

Adding to the bearish tone, global investors are growing increasingly concerned about the Trump administration’s move towards protectionism, which is likely to bring tit-for-tat retaliation from China and other countries. The Trump administration on Monday slapped tariffs on solar cells-panels and washing machines. More alarming, President Trump seems to be tilting towards announcing a U.S. pull-out of NAFTA as a means to spark concessions by Mexico and Canada during the 6-month exit period, or perhaps to simply torpedo the agreement once and for all.

U.S. new home sales expected to fall back from a 10-3/4 year high — The market consensus that today’s Dec new home sales report will fall by -7.9% to 675,000 units, giving back part of November’s +17.5% surge to a 10-1/2 year high of 733,000. New home sales in November saw a boost from the Aug/Sep hurricanes, but demand was also strong in general.

New home sales should remain generally strong in 2018 due to solid consumer confidence and extra pocket-cash from the tax cuts. However, there will also be some headwinds for home sales in 2018 from high home prices and rising mortgage rates.

Unemployment claims remain very favorable — The initial unemployment claims series in last week’s report (for the week ended Jan 12) fell sharply by -41,000 to a new 45-year low of 220,000. That illustrated that layoffs are at their lowest level in more than four decades, attesting to the strength of the U.S. labor market. The continuing claims series last week rose by +85,000 to 1.952 million from the previous week’s 44-year low of 1.867 million, but that report was for the week ended Jan 5 when there were still holiday distortions. The market consensus is for today’s initial unemployment claims report to show a +15,000 increase to 235,000, reversing part of last week’s -41,000 decline to 220,000. The consensus is for today’s continuing claims report to show a -27,000 decline to 1.925 million, reversing part of last week’s +76,000 increase to 1.952 million.

Leading indicators expected to show a strong increase of +0.5% — The market consensus is for today’s Dec leading indicators report to show a +0.5% m/m increase, adding to Nov’s increase of +0.4%. The LEI is currently in very strong shape with the LEI in Nov at a 2-3/4 year high of +5.5% on a year-on-year basis.

The U.S. economy has been strong in the past three quarters with GDP growth of +3.1% in Q2-2017 and +3.2% in Q3. The consensus is that Friday’s Q4 GDP report will show another solid increase of +3.0%. The recent +3.0% GDP growth rate is substantially better than (1) the tepid +2.2% average growth rate seen since the Great Recession, and (2) the Fed’s view of a longer-run U.S. growth potential of only +1.8%. On a calendar year basis, the consensus is that U.S. GDP growth in 2018 will pick up to +2.6% from +2.3% in 2017 due to the tax cuts and support from strong global growth. However, the consensus is also that GDP growth will then fall back to +2.2% in 2019 after the tax cuts start to wear off.

Treasury auctions 7-year T-notes with the yield near Monday’s 5-3/4 year high — The Treasury today will sell $28 billion of 7-year T-notes, concluding this week’s $103 billion T-note auction package. Today’s 7-year T-note issue was trading at 2.58% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of 0.51% against the current 7-year breakeven inflation expectations rate of 2.07%. The 7-year T-note yield has risen sharply by about +75 bp in the past four months and posted a new 6-3/4 year high on Monday of 2.59%, the highest level since mid-2011.

The 12-auction averages for the 7-year are as follows: 2.50 bid cover ratio, $11 million in non-competitive bids to mostly retail investors, 4.6 bp tail to the median yield, 20.7 bp tail to the low yield, and 67% taken at the high yield. The 7-year is moderately popular among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 67.1% of the last twelve 7-year T-note auctions, moderately above the average of 63.3% for all recent Treasury coupon auctions.

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