After two days of major drops in the US stock markets, analysts are revising their positions on where interest rates, and therefore currencies, are headed.
Up until the weekend, the consensus was that there wouldn’t be any rate cuts by the Fed until at least April.
But, unless we have some major good news this week to calm the markets, the next rate cut could be sooner than expected. And the dollar could be weaker in the near term!
What’s Going On?
There have been two (rather simple) theories put forward to explain the sudden drop in stocks at the open on Monday, followed by further downside.
The first was a clear-cut win for self-described democratic socialist candidate Bernie Sanders in the Nevada primary. Then we got a torrent of disconcerting news about new cases of COVID-19 around the world. The US’ CDC publicly announced preparation for measures to deal with the spread of the virus.
Both of these theories ignore an issue that manifested late on Friday which showed a sudden drop in liquidity for corporate debt.
In fact, as the week progressed, four major corporations in the US withdrew potential bond offerings over concerns of lack of interest from buyers. Treasury yields plummeted to record lows, which would otherwise encourage issuance.
Concerns of low liquidity in the markets might be a better explanation for why major stock investors are moving out of equities for the moment.
What About the Data?
We have a host of data coming out before the US open and during trading hours. This includes final Q4 GDP, durable goods orders, initial jobless claims and pending home sales.
All of this is likely to keep investors on their toes. Even if markets move higher today, it will still be an open question whether that’s a sign of normalization or whether it’s just a rebound before further losses. Let’s focus on durable goods orders.
Generally, core durable goods orders primarily impact the stock market. They indirectly affect currencies through their potential impact on Fed policy and risk appetite.
Core means excluding transportation and defense. These typically take a breather at the start of the year.
What We Are Looking For
Expectations are for durable goods to have dropped 1.5% in Jan compared to +2.4% in the prior month.
This is largely attributed to scheduled less defense spending and Boeing’s lack of sales during the month.
Expectations are for core durable goods, on the other hand, to increase by 0.2%. This is in comparison to a decline of 0.1% in the prior month.
January saw the beginning of the COVID-19 outbreak. Therefore, it likely didn’t weigh as much on the metric yet. This was also right after the signing of the US-China trade deal, which could support the figure.
On the other hand, orders were likely lighter from China due to the scheduled Lunar New Year holidays. This means that buyers likely front-loaded acquisitions in December (partly explaining why the prior month was significantly higher).