Daily Agenda: All Roads Lead to U.S. Dollar

Weak inflation data out of France; Federal Reserve releases Beige Book; U.S. financial firms post quarterly earnings.


The World Bank’s semiannual Global Economic Prospects report, released yesterday, presented a bleak message, with 2015 estimates for global gross domestic product cut to 3 percent versus a prior forecast of 3.4 percent. By the bank’s reckoning the slump in Europe, slowing demand from a maturing Chinese economy and depressed oil prices will leave the U.S. alone as a major economy with good prospects. With prospects of deflation and stagnation haunting global investors, a key question is how secure are the traditional safe havens. Sovereign bonds across most geographies appear richly priced by any fundamental metric, as anticipated central bank intervention weighs on yields artificially. Meanwhile, a modest rally in gold still leaves it well below its three-month high. The answer appears to be that investors seeking higher ground are continuing to be drawn to the U.S. dollar. A report issued yesterday from Track Research showed that the share of total currency trading volume represented by U.S. dollar pairs rose from 87 percent in April 2014 to more than 90 percent last month, marking a tidal shift in foreign exchange, and that the euro had lost ground in currency reserves in nearly all central banks. With the euro making a historic move this morning to fall below its initial value of $1.1743 when first introduced in 1999, for many investors, the dollar appears to remain the sole life raft.

U.S. banks report fourth-quarter 2014 earnings. JPMorgan Chase, the largest global private-sector bank by assets, announced today a decline in profits for the fourth quarter of 2014, driven heavily by legal expenses in excess of $1.1 billion as the hangover from the 2008–’09 financial crisis continues to weigh on the financial sector. With earnings of $1.19 per share, the bank’s profits were down 6.6 percent versus the same period in 2013. Separately, Wells Fargo announced fourth-quarter earnings of $1.02 per share, in line with consensus analyst estimates.

Factory activity in Europe as forecast. Euro zone industrial production for November registered in line with consensus forecasts at an expansion of 0.2 percent versus October. The figures represent a contraction 0.3 percent from the same month in 2013, with output levels that are down by a double-digit factor on a year-over-year basis from post-recovery highs.

France posts soft inflation data. Consumer inflation in France for December was marginally stronger than forecast at 0.1 percent month-over-month, but still represented a five-year low for the nation as activity measures continue to stall. Today’s release by the INSEE national statistics office indicated that soft commodities prices were the primary driver in the deceleration of price increases. In light of the prospects for the disclosure of a market purchase facility at the European Central Bank’s upcoming monthly announcement, this data provides additional support for European sovereign bond market bulls.

U.S. data on deck. December retail sales data will be the big economic story of the day in the U.S. for domestic markets as the consumer discretionary sector continues to be a major driver of sentiment. In a report issued this morning, Société Générale economist Michala Marcussen commented that a dip in headline sales driven by cheap gasoline might mask strength in core purchases, suggesting a sharp pick-up in fourth-quarter spending. Also scheduled for release today are the weekly Energy Information Administration crude oil inventory report and Federal Reserve Beige Book.

Portfolio Perspective: Beige Book PreviewDouglas Porter, BMO Capital Markets


The Fed’s Beige Book is out for release at 2 pm and will provide a look at economic conditions across the country. As Sal Guatieri, my colleague at BMO Capital Markets, notes, this edition could shed light on two developments that have contributed to a recent slowing in business cap expenditures. The first is the slowdown at West Coast ports, with Institute for Supply Management surveys reporting that delays in imported materials and supplies are impeding sales and production. The second — and more worrisome — development is plunging oil prices. The previous report found that while drilling and exploration remained at high levels, some firms were reevaluating their plans, notably in the Dallas area. Oil prices have slid a further $27 per barrel since the report was tallied, compelling more firms to slash exploration budgets. Even so, most business contacts were upbeat about the outlook for spending and the economy.

Douglas Porter is chief economist for BMO Capital Markets in Toronto.