Animal Spirits Return And The Euro Probes Two-Month Lows

The euro has broken down. It has been pushed below the $1.2055 shelf that had been created. The next immediate target is the $1.20 psychological level and the $1.1975 area, which is the 50% retracement of the rally since the election. If sustained (which means that the $1.2055 area now acts as resistance), today's break may suggest a larger topping pattern for the euro that projects toward $1.1750. Sterling continues to be more resilient than the euro, and many are linking it to the success in rolling out the vaccine. After testing the couple year high set at the end of January, sterling sold off yesterday and settled North America on its lows (~$1.3655), but there has been no follow-through selling today. It is consolidating mostly below $1.3700. The euro is being pushed below GBP0.8800 for the first time since last May. There is little chart support ahead of the GBP0.8700 area.  

America

The nonpartisan Congressional Budget Office forecast the US economy to grow at an annual rate of 4.6% this year based on policies as of January 12. That means that the $900 bln stimulus approved at the end of last year is included, but none of the new stimulus being debated or the economic impact of any of President Biden's executive orders. Counter-intuitively, the CBO estimates that the four quarters' growth would be closer to 3.7% due to the gains that occurred in Q3 20. Recall that last week, the IMF revised its forecast this year's US GDP to 5.1% from 3.1%. This is still about the recovery from the economic shock induced by the pandemic. 

Before the public health crisis, there was a concern that the US, alongside most high-income countries were facing weaker labor force growth, fewer new household formations, and weaker productivity growth. While the CBO may have turned more optimistic in the near-term, it became more pessimistic about the longer-term growth prospects. It warns that average growth this decade may only be about 1.7%. That means that it will take longer to absorb the slack in the labor market. It now sees the unemployment rate reaching 5.0% next year and on average remaining above 4% from 2026 to 2031. It averaged 3.7% in 2019. Many investors are worried about inflation, and last March and April's decline will drop out, making for a dramatic rise ahead simply due to the base effect. The CBO is less sanguine. It does not anticipate a sustained increase of the headline PCE deflator above the Fed's 2% (on average) target until Q2 24. The CBO also expects the 10-year yield to remain subdued, rising from around 1.1% in the middle of 2021 to 1.20% at the end of the year.  

The US and Canada have light economic diaries today. US January auto sales will trickle across the screens for much of the day. The Bloomberg survey's median forecast anticipated sales at a 16.15 mln unit annual pace (seasonally-adjusted). Sales in January 2020 were at a 16.6 mln pace. Fed speakers include Kaplan, who spoke yesterday, and Mester, who speaks tomorrow. Mexico reports December worker remittances, which have been strong. On average, they have been running about 10% higher than a year ago. In December 2019, workers abroad sent $3.12 bln back to Mexico. In December 2020, it is expected to have been closer to $3.6 bln. By way of comparison, note that Mexico's trade surplus averaged almost $2.9 bln a month last year.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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