Started by PocketOption, May 30, 2023, 05:54 pm
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Overview: The debt ceiling drama is not over.The agreement between the negotiating teams of President Biden and HouseSpeaker McCarthy sets the stage for the next act in the drama: each side mustdeliver the votes. A preliminary vote today in the House of Representatives islikely today ahead of floor vote tomorrow. Still, the market is optimistic, andrisk is favored. Asia Pacific bourses were mixed today. We note that the chipsector helped lift South Korea's Kospi up over 1%. Europe's Stoxx 600 isrecouping yesterday's marginal loss, and US equity futures are trading higher.The S&P 500 and NASDAQ are poised to gap higher. Bonds are rallying. Europeanyields are mostly 4-6 bp lower, though Gilts are lagging. The 10-year USTreasury yield is off nearly eight basis points to 3.72%.
The dollar is offered. Amongthe G10 currencies, only the New Zealand dollar and Swedish krona are nursingsmall losses. Sterling is doing best with a nearly 0.5% gain and resurfacingabove previous support near $1.2400. The euro slipped through $1.07 butrebounded in the European morning. Emerging market currencies are mixed. TheTurkish lira has been hammered for around 1.5%. The Hungarian forint andMexican peso lead the advancer. Gold initially fell to two-month lows near$1932 but has rebounded as the dollar and interest rates have come off. It isprobing the $1950 area. July WTI is posting an outside down session. It is offaround 2.1% today to test the $71 area. Last week's low was closer to$70.65.
China reports its May PMItomorrow. Eventhough economists expect Beijing to achieve its growth target this year of 5%,many express disappointment with the pace. They will see the 20.6% decline inthe January-April industrial profits year-over-year as confirmation. Still,given that industrial profits were off 21.4% in Q1, the April data point,released over the weekend, is consistent with a rebound in profits at the startof Q2 (~3.7%). Moreover, the official data suggest that foreign profits areholding up better than China's private sector and state-owned enterprises.
There appears to have been asubtle but potentially important shift in Bank of Japan Governor Ueda'sassessment. At theend of last week, he told the Wall Street Journal that "There appearto be moves leading towards sustainable inflation." Service prices, whichwere still falling a year ago, are now up 1.7% year-over-year. Wage growth,which former BOJ Governor Kuroda emphasized, has been downplayed a bit by Ueda,who argued sustainable inflation is a broad measure, and no single data setcaptures it. The rise in global rates have also helped push up JGB yields. Theyen is approaching the levels that sparked concern among Japanese officialslast year. This is not to suggest that there is a line in the sand or thatstrong foreign buying of Japanese stocks (from insurance companies?) and thelower oil prices do not change the calculus. Separately, Japan reported itsunemployment rate fell back to 2.6% in April from 2.8% in March. Economists inBloomberg's survey expected a 2.7% rate. The job-to-applicant ratio was steadyat 1.32.
The US led the Indo-PacificEconomic Framework of 13 other nations in the region to boost supply chaincooperation. Ostensibly,his s part of the US attempt to fill the vacuum created when it withdrew fromthe Trans-Pacific Partnership negotiations (although Trump did the deed,Clinton and Sanders opposed it in their campaigns). Another prong of the USeconomic effort in the region is the Asia-Pacific Economic Cooperation (APEC),21-coutries and US will host the annual summit in San Francisco in November.
The dollar initially slippedbriefly below JPY140 in early Asian turnover before rallying to a marginal newhigh for the year of almost JPY140.95. It was sold into the European morning, where it found support nearJPY140.00. There are $1.72 bln in options at JPY140 that expire tomorrow. Thenext important chart area on the upside is around JPY142.50. Watch the five-daymoving average (JPY140.20). The dollar has not closed below it since May11. Weakness in Australia's April house permit has helped keep theAustralian dollar pinned in the trough it began forging last week($0.6490-$0.6500). It did make a four-day high in early trading todayreaching almost $0.6560, but the upside momentum was not sustained. There areabout A$510 mln options at $0.6550 that expire today and another A$560 mln thatexpire there tomorrow. The weakness of the yen and euro pointed to continuedweakness in the Chinese yuan, which fell to new six-month lows today. Thegreenback neared CNY7.10. The PBOC is not protesting the dollar's strength inthe setting of the daily reference rate. Today it was set at CNY7.0818 comparedwith the median projection in Bloomberg's survey for CNY7.0811
The fourth meeting of theUS-EU Trade and Technology Council (TTC) will be held today and tomorrow. It is not working toward a free-tradeagreement. Instead, as with the US efforts in the Asia Pacific, it is said torepresent the next generation. It is about standard setting, and other elementsof cooperation, like with supply chain transparency and AI, and on externaltrade issues, like deterring forced labor. The TCC also helps coordinate exportcontrols on and has found opportunities (e.g., Kenya and Jamaica) tosupport infrastructure efforts, which some suggest is a way to counter Chineseinfluence.
It will come as no surprise:Erdogan has been re-elected president of Turkey. The unorthodox policies are widelyunderstood to be unsustainable and borrowing the future. There is somespeculation that he may bring in more market-friendly officials into the newcabinet. But this would not necessarily be positive for the lira. After sellingoff 0.7% yesterday, the lira is off around 1.25% today, the most since lastJuly. Spain held local and regional elections over the weekend. Theyare important in their own right but also as a bit an of a sense of the mood ofthe electorate ahead of the general election. The Socialists suffered a heavy defeat,and to regain the initiative Prime Minister Sanchez called for a snap electionon July 23. A general election was required by early December. The People'sParty, sometimes joined by the anti-immigration, nationalist Vox party, looksto have won 8 of the 12 regions that were contested, including Valencia andMadrid. The PP garnered about 31.5% of the municipal vote nationwide, up from22% in the previous local election in 2019. Vox doubled its vote to 7%. TheSocialists fell to 28%. Unidas Podemos, which is the Socialist coalitionpartner in the national government, also polled poorly. Spanish stocks fell onMonday (~-0.20%), while Spanish bonds rallied. The nearly 10 bp decline in theSpain's 10-year was in line with the declines in Germany, France, and Italy.Today, Spain's 10-year yield is down four basis points, in line with theregional move. Its stock market is up about 0.65% through late morning andoutperforming the Stoxx 600. In Greece, the governing New Democracyfell five seats shy of an outright majority in the 300-seat parliament in theMay 21 elections. Rather than seek a coalition government, Prime MinisterMitsotakis has called for new elections June 25. The other main parties agreed.The vote will take place under somewhat different rules and give a bonus of asmany as 50 seats to the winner. Mitsotakis, who has led a business-friendlyreform agenda, is most likely to be reelected.
The euro is recovering fromthe initial sell-off that brought slightly below $1.0675. It was bought back in the European morningto a little through $1.0730. Some of early selling pressure may have been exacerbated bythe trading around 1.15 bln euros in options at $1.07 that expire today. Thereare options for 2.2 bln euros at $1.0750 that expire tomorrow. We note that theUS 2-year premium over Germany continues to trend higher. It is above 170 bptoday for the first time in a couple of months and has risen for the past sixweeks. The high for the year is a little above 185 bp. Sterling is posting abig outside up day, having first slipped through yesterday's lows (~$1.2335)and then proceeded to rally through yesterday's high (~$1.2370). Itreached a four-day high near $1.2430. The intraday momentum indicators are stretched,suggesting some consolidation is likely in early North America.
The deal worked on the debtceiling and spending still requires a vote in the House of Representatives andthe Senate. Thenegotiators likely anticipate some concessions to individual legislators. Evenif there is more work to be done, and the final shape of the agreement has yetto be determined, the deal is boosts confidence that a default will be avoided.The market can now turn more of its mind share to what happens after the debtceiling is lifted. The initial focus will be on likely boost in T-bill offeringand the replenishing of the Treasury's general account (TGA). The tightening offinancial conditions that this entails is a function of the T-bill demand. Theincrease in T-bill issuance can come from funds that ae currently parked in theFed reverse repo facility. The alternative is that in effect it comes out ofbank reserves. Therein lies the tightening that some estimate can be worth aquarter-point hike.
A deal also removes apotential wild card for the FOMC meeting. The market went into the long US holiday with almosta 58% chance of a hike discounted. Ironically, the odds rose sharply even asthe Atlanta Fed's GDP tracker estimate for growth this quarter was sliced to1.9% from 2.9%. It sees a bigger drag coming from the wider trade deficit,which also reflects stronger domestic demand (imports rose, exports fell)picked up in the personal consumption report. Consumption is off to a goodstart in Q2. Personal spending rose by 0.8% in April. Only one economist inBloomberg's survey of economists forecast more than 0.7%. Fed officials talkabout different measures of inflation, the strength of demand influences theiroutlook. The year-over-year measures are sometimes helpful, but now the baseeffect may exaggerate the improvement. We have preferred to look at theannualized rates. In the first four months of the year, it is running at a 4.2%annualized rate. In the last four months of 2022, the PCE deflator rose at 3.3%annualized rate. The core PCE deflator is running ever so slightly slower (androse nearly 4.1% at an annualized pace in the last four months of 2022. Hence,the conclusion by several Fed officials that there has been not materialimprovement so far this year.
The US reports March houseprice data today, the Conference Board's May survey, and the Dallas Fed'smanufacturing survey. Thesereports do not often more the foreign exchange market. The Fed's Barkin speakstoday ahead of five Fed officials that speak tomorrow, ahead of the Beige Book.A close in the Dollar Index below 104.00 could be a preliminary crack in therally. The US dollar is trading lower against the Canadian dollar for thethird consecutive session. Recall that ahead of the weekend, thegreenback reached CAD1.3655, a new high for the month. It has dribbled lower tonearly CAD1.3565 today. A break, and ideally a close below CAD1.3550 wouldweaken the US dollar's technical tone. Tomorrow Canada report Q1 GDP. Themedian forecast in Bloomberg's survey looks for a 2.5% annualized pace. Theswaps market now looks for a hike by the end of Q3 (to 4.75%). The US dollarwas turned back from MXN18.00 early last week and reached almost MXN17.5350yesterday. It is trading quietly in a narrow range(~MXN17.5540-MXN17.6265). The multi-year low set in the middle of the month wasnear MXN17.42. This can be tested in the coming days.
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