Macro Cheat Sheet - Wednesday, Oct. 24

A high-level distillation of the macro forces impacting various currencies.

US Dollar

Equity market volatility has not reached levels that will spur the Fed’s concern. No one expected a hike at next month’s meeting. The December meeting is too far way for short-term volatility to have any bearing. The volatility in Jan-Feb did not deter the March hike.

The US reports its first estimate of Q3 GDP at the end of the week. Although the economy is understood to have slowed from the heady 4.2% pace in Q2, strong consumption is likely to keep a “3” handle on growth.

The US yield curve (2-10) is a little below 30 bp. It has been range-bound since July between roughly 20 bp and 35 bp.

President Trump has indicated that a proposal for a 10% middle-class income tax will be announced before the November 6 midterm elections and Chair of the House Ways and Means Committee has promised to take it up if the Republicans retain control of both houses of Congress. The estimated cost of a 10% income tax cut on incomes of $40k-$200k could be around $715 bln over the next decade, according to some initial estimates.

Euro

The ECB meets tomorrow. A reaffirmation of its policy to complete its asset purchases by the end of the year and not raise rates until after next summer. Although recent data has been soft, including today’s dismal flash PMI, the ECB President Draghi is unlikely to shift his emphasis away from the strength of the labor market.

Italy has until the middle of November to respond to the EC’s unprecedented request that it alter its budget. The slow-moving confrontation between the EC and Italy will ultimately be resolved by a different EC after next year’s European Parliamentary elections.

The Bundesbank warned that the German economy might have stalled in Q3. This puts downside risk on eurozone Q3 GDP to be released on October 30. Every quarter last year, the eurozone economy expanded by 0.7%. In the first half, growth downshifted to 0.4% in each quarter. Growth may have slowed to 0.2% in Q3, which would be the weakest in four years.

The euro may be carving out a near-term base ahead of $1.1400. The upper end of the near-term range is a little above $1.1625. Meanwhile, three-month implied volatility (~7.4%) is near the 50, 100, and 200-day moving averages (~7.2%-7.4%), while the euro has fallen four cents since the high set at the end of last month as is approaching the August 15 low for the year near $1.13.