EUR/USD rallies to new 2-1/2 year high on both EUR strength and USD weakness
Debt ceiling outlook improves a bit on favorable comments by Meadows
Unemployment claims expected to show small declines
ISM non-manufacturing index expected to remain strong
U.S. factory orders expected to see strength from transportation
EUR/USD rallies to new 2-1/2 year high on both EUR strength and USD weakness — EUR/USD rallied to a new 2-1/2 year high on Wednesday and closed the day up +0.0054 (+0.46%) at $1.1856. Meanwhile, the dollar index fell to a new 1-1/4 year low and closed the day down -0.22%. The euro on Wednesday saw continued strength against a range of currencies due to positive Eurozone economic data and expectations for the ECB at its September or October meeting to announce the tapering of its QE program during 2018. The dollar back in 2014 rallied sharply while the Fed was tapering its QE program and did not wait for the end of QE or the first rate hike. Tuesday’s Eurozone GDP report of +2.1% y/y was the strongest rate in 6-1/4 years and underscored that Eurozone economic growth is now nearly on a par with U.S. economic growth.
Meanwhile, the dollar continued falling on its internal negative factors, which include (1) ideas that the Fed may have to delay its rate-hike regime due to soft U.S. inflation data, and (2) the political uncertainty in Washington. There was also some dovish Fedspeak on Wednesday that hurt the dollar. St. Louis Fed President Bullard said that he doesn’t support a further rate hike and Cleveland Fed President Mester saying that she has lowered her estimate of inflation’s trigger point.
The dollar is suffering as global investors look askance at Washington politics and the fate of the Republican growth agenda. Moreover, global investors may be getting more concerned about the U.S. investment climate with the Trump administration stepping up its trade stance. The Trump administration is reportedly considering new trade pressure on China as a means to get more cooperation on North Korea or at least to carry out its original plan to aggressively challenge China on trade.
Specifically, reports emerged late Tuesday and Wednesday that the Trump administration is planning to begin a new trade investigation against China on intellectual property and forced technology sharing, adding to its ongoing steel and solar trade investigations. If a U.S.-China tit-for-tat on trade begins, it could be a slippery slope towards a broader trade war.
Debt ceiling outlook improves a bit on favorable comments by Meadows — The outlook for a debt ceiling hike before the Treasury hits its X-date in early to mid-October improved on Wednesday after House Freedom Caucus leader Mark Meadows (R-NC) suggested he will support a debt ceiling hike and drop his pre-condition for sharp spending cuts. Mr. Meadows on Wednesday said, “I don’t believe we should play around with the full faith and credit of our country — I’m bullish on getting it done.” He said that bond traders should trust Congress to raise the debt ceiling, saying, “I don’t see us going beyond September, so if they’re trading and factoring that in, I think they’re making assumptions based not on political reality of what’s going to get done.” The debt ceiling will be much easier to push through Congress if it has the support of at least some of the conservative House Freedom Caucus members.
Unemployment claims expected to show small declines — The initial and continuing unemployment claims series both remain near decade-plus lows, indicating a strong labor market where businesses are holding on tightly to their employees. The initial claims series is +17,000 above its 44-year low of 227,000 posted in February and the continuing claims series is +65,000 above the 29-year low of 1.899 million posted in May.
The market consensus is for today’s initial claims report to show a small -2,000 decline to 242,000 following last week’s +10,000 increase to 244,000. The consensus is for today’s continuing claims report to show a -6,000 decline to 1.958 million, adding to last week’s -13,000 decline to 1.964 million.
On the labor front, the market is mainly looking ahead to Friday’s July payroll report, which is expected to show an increase of +180,000. That would be close to the 12-month trend increase of +187,000 but down from June’s +222,000. Friday’s payroll expectations were supported by Wednesday’s ADP report of +178,000, which was mildly below the consensus of +190,000 but close to Friday’s payroll consensus of +180,000. Payroll growth was shaky at +50,000 in March and +152,000 in May, but otherwise payrolls have been strong at more than +200,000 in the other months of this year.
ISM non-manufacturing index expected to remain strong — The market consensus is for today’s July ISM non-manufacturing index to show a -0.5 decline to 56.9, which would reverse June’s +0.5 point increase to 57.4. Even after today’s expected decline, the ISM non-manufacturing index would remain at a relatively high level that illustrates strong business confidence in the non-manufacturing sectors of the U.S. economy. June’s index level of 57.4 was only -0.2 points below the 1-3/4 year high of 57.6 posted in February.
U.S. factory orders expected to see strength from transportation — The market consensus is for today’s June factory orders report to show a strong increase of +3.0%, recovering after May’s weak report of -0.8% and -0.3% ex-transportation. However, most of the factory orders strength is expected to come from transportation, based on the already-reported news that June durable goods orders rose by +6.5% m/m overall but only by +0.2% ex-transportation. On a year-on-year basis, the factory orders series was in good shape in June at +4.2% y/y and +5.5% ex-transportation, illustrating a strong orders pipeline for the U.S. manufacturing sector.