Intraday Market Thoughts

GBP Breaks out, USD Hurt

by Adam Button
Dec 4, 2019 14:38

Broadening USD selloff after the US ADP survey on pvt sector payrolls posted its 2nd biggest decline in 3 years, falling to 67K from 121K vs an expected 135K. Broad GBP strength exploited USD selling to hit the 1.31 for the 1st time in 7 months. The latest swings in economic data highlight the opacity in the global economy in the second half of 2019. As USDX breaks below its 100 DMA, Aussie slides after GDP. The BOC decision and ISM non-manufacturing are due up next (see more below.)  The English Premium video is posted below, recoding during the release of the ADP, focusing on the  latest FX and index trades.

A clear narrative has developed in markets: Global economies were slipping in Q2 but the Fed and other central banks halted the decline with rate cuts. In addition, hopes for a US-China trade truce have set the stage for a pickup in global growth in early 2020.

What undermines the narrative is how spotty the data is on all of it. It's clear there was a slowdown that accelerated in Q2 but it's overwhelmingly a manufacturing slump in the global context. It makes sense that it's tied to the trade war but China has also kept policy relatively tight over the past two years and made efforts to curb excess capacity.

In China and the US household spending and other parts of the economy have held up. On Wednesday, China's November Caixin services PMI rose to 53.5 from 51.1. Unlike manufacturing, it never fell below 50.

At about the same time, Australia reported that Q3 GDP was up 0.4% q/q. That was softer than +0.5% expected but Q2 was revised a tick higher so it essentially netted out. Within the data trade was robust and added 0.2 pp which is not what you would expect in a global industrial slowdown. At the same time, household spending slowed and that was a probably related to the murky housing picture.

Ultimately, we're stuck with the incomplete picture and trying to sort out what's sentiment-driven and what's real. It's natural for businesses to pullback with all the trade war headlines but ultimately if growth and demand holds up, they will put money to work. Markets are also still struggling to adapt to a world where bonds yield nothing – a factor that skews every signal.

In the short-term we will continue to focus on incoming economic data along with trade headlines but stepping back and taking a broad survey is a reminder of how much of the current market narrative is built on flimsy data.

Up next is the Bank of Canada decision and ISM non-manufacturing reports. USD bulls need services ISM to come in within expecations of 54-54.7 after today's poor ADP print and Monday's release of manuf ISM showing a deepening contraction in that sector. Look for the BOC to take a page out of the RBA's book by retaining a dovish bias while promising nothing.

Act Exp Prev GMT
ADP Employment Change
67K 137K 121K Dec 04 13:15
GDP (q/q)
0.4% 0.5% 0.6% Dec 04 0:30
Final Services PMI [F]
51.6 51.6 Dec 04 14:45
53.5 51.2 51.1 Dec 04 1:45

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