Started by PocketOption, Jun 05, 2023, 09:09 am
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Trueto the historic pattern, the US debt ceiling was used by the party not incontrol of the executive branch to exact spending concessions. Despite theextreme partisanship, the brinkmanship tactics, and fears that this time wouldbe different, there was no default. As Bismarck once quipped, "Laws arelike sausages and it is best not seen them being made." Still, as aconsequence, the rebuilding of the Treasury's account and bill issuance is seentightening financial conditions, while the end of the moratorium on studentloan servicing and spending cuts point to a coming fiscal drag.
TheFederal Reserve's leadership seemed to have been on a purposeful campaign toindicate that it wanted to standpat at the June 13-14 FOMC meeting and themarket accepted the push back. The odds of a hike fell from near 70% to around25% before the May jobs report (and finished the week near 25%). For the 14thconsecutive month, job growth exceeded expectations (median forecast inBloomberg's survey). However, the establishment survey was considerablystronger than the household survey (339k vs. -313k) leading to a sharp rise inthe unemployment rate (3.7% vs. 3.4%). The constructive explanation of the divergence offered by the White House was that it was a definitional issue and if the establishment survey definition held, the household survey would have shown a 394k increase. The more pessimistic explanation was the the establishment survey was flattered by the birth/death rate adjustment (the start and closure of businesses) that added about 230k to the job growth. The Fed has entered the quiet periodahead of the next FOMC meeting so if post-jobs data guidance is to be forthcoming,it may come from their favorite journalists.
Theweek ahead highlights include Australia and Canada central bank meetings. Evenif neither hike rates, the rhetoric may turn more hawkish as officials preparefor a possible hike in Q3. China's trade data is politically sensitive, but alarger trade surplus is likely even though exports had been contracting on ayear-over-year basis from last October through February. After increasing inMarch and April, exports likely fell again in May. Weak price pressures may encouragespeculation of a rate cut or a reduction in reserve requirements later thismonth. Lastly, we note July WTI rallied from $67 on May 31 to nearly $72.20 before the weekend to adjust positions for the possibility that a few OPEC countries voluntary extend their cuts, apparently to make room for the extra production coming from , Iran, and Venezuela.
UnitedStates: The data cycle is in between the employment and inflation. The highlights include ISM services and April consumer credit. Mostof the information from the PMI is found in the flash reading and the finalservices and composite elicit little market reaction typically. The same can besaid for factory orders and the final durable goods estimate. The merchandisetrade balance, reported in late May, anticipate the deterioration of theoverall balance in April. Goods exports softened while imports rose, andalthough this cut net export component to Q2 GDP, the strength of importssuggest robust demand. On the other hand, April consumer credit may haveexpanded near the Q1 average (~$21.6 bln), but it appears to be on a slowingtrend. It rose at an average of $30.4 bln in Q1 2022 and in April last year, itrose by $28.9 bln.
Ourworking hypothesis sketched out in the monthly outlook (here )thatbulk of the interest rate adjustment is behind us. It had been a key driver forthe dollar's recovery since mid-March and by implication, it too is over ornearly so. We did not expect the Fed's Governor Jefferson, nominated to bevice-chair would push against creeping rate hike expectations for June. But hepushed on an open door, as it were, with the US two-year yield off around 20 bpfrom its peak on May 26 before Jefferson spoke. Still, the reaction to the employment report saw the two-year yield snap a three-day slide and jump more than 15 bp to 4.50%. The two-and-a-half month high was set on May 26 near 3.64%. The post-debt ceiling resolution is seen tightening financial conditions as T-bill issuance is boosted starting this coming week. We suspectthat this year's growth is peaking here in Q2, and that the headline CPI may falltoward 3.5% by the end of H1. The base effect will make comparisons inH2 more difficult.
TheDollar Index reached a 104.70, a 12-week high on May 31. It was sold to 103.75before the jobs data. The post-jobs rally stalled near 104.10 A move above 104.20 would help lift the technicaltone. We expect the bounce to be sold especially as the May CPI moves into view(June 13), but a marginal new high (~105.00?) cannot be ruled out.
China: Chinaholds the most currency reserves in the world with a little more than $3.2trillion in April. Most of the recent month-to-month changes reflect valuationadjustments. In May, the decline in the exchange rates of the other reservecurrencies against the dollar and the mixed performance of global bonds seemsbroadly consistent with around a $50 bln decline in the dollar value of China'sreserves in May. The PRC also reports May's trade surplus. In the first fourmonths of this year, China recorded a cumulative trade surplus of slightly morethan $294 bln. The trade surplus in the first four months of 2022 was a littleless than $203 bln. Despite the improvement from a year ago, which wasadversely impacted by Covid lockdowns, exports and imports fell in April(month-over-month, -6.4% and -9.8%, respectively). While the trade balance ispolitically sensitive, disinflation may be more significant for the policyoutlook. China's CPI peaked at 2.8% last September and in April was at atwo-year low of 0.1%. The soft CPI is often attributed to weak demand but thatseems to be an exaggeration given the high weighting of food in the basket. Also,the excess capacity in some industries, like autos, has spurred a bit of aprice war, which also dampens some goods price pressures. The year-over-yearmeasure in producer prices turned negative in Q4 22 and has accelerated to thedownside this year. In April there were off 3.6%, the most since Q1 2016. Weakprices may fan speculation of a cut in rates and/or reserve requirements asearly as this month. Targeted fiscal measures may also be under consideration,according to press reports.
Thedollar's gains after the jobs report suggests the yuan will begin the new weekunder some pressure. The dollar rose to around CNY7.1235 on June 1, a new highfor the year, before falling to CNY7.0560 before the jobs data. It settled the week near CNY7.0880, but the dollar's subsequent price action suggest the yuan will start of the new week on a soft note. One of the bestguides for the dollar's direction against the yuan is its performance againstthe euro and yen.
Japan: Japan'sretail sales appear to be doing fine and have risen for five months in a rowthrough April. On the other hand, real household spending has bene weakerfalling in March (-0.8%) and February (-2.4%). Nominal spending fell too (-0.6%in March and -2.8% in February). Note that real cash earnings (labor) have beenfalling on a year-over-year basis since April 2022, while nominal earnings rosea 1.3% year-over-year in March, after a 2.0% increase year-over-year in March2022. Real consumption rose by 0.6% in Q1, according to the initial GDPestimate (that will be updated on June 8), which was the strongest in threequarters. Stronger-than-expected capex in Q1 warns of the risk that Q1 GDPcould be revised higher. Japan's external account does not draw the sameattention it previously did. Japan enjoys a current account surplus of around2% of GDP but has reported a trade deficit on a balance-of-payments basis sinceAugust 2021 with one exception. Seasonal factors are strong in April and thetrade balance almost always (18 of 20 years) deteriorates in April from March.The deficit stood at JPY454.4 bln in March.
Ifour assessment is valid and the US interest rate adjustment is nearly complete,then the pressure may come off the exchange rate, which has seen the yen fallits lowest level since last November. After falling for 12 of 15 sessionsthrough May 26, Japanese officials stepped on a low rung of the interventionladder, expressing the desire that rates reflect fundamentals (whatever thatreally means) and threatened "appropriate steps if needed." Thetiming of Japanese officials is inspired like when they intervened within daysof the peak in the US 10-year yield late last October. After falling in thefirst four sessions last week, reaching JPY138.45 on June 1, the dollar roseback toward JPY140 after the employment data and rise in US rates. A moveabove the targets a re-test on the JPY140.95 high. The next important chart area is around JPY142.50. In the bigger picture,the dollar still appears to be carving out a top.
Eurozone: Aprilretail sales is the main new news on the economic front in the days ahead. Retailsales look likely to have bounced back after falling 1.2% in March and 0.2% inFebruary. This coupled with another look at Q1 GDP is unlikely to move theproverbial needle ahead of the ECB meeting on June 15. The swaps market ispricing in slightly more than a 90% chance of a quarter point hike at themeeting, which will also see the staff update its forecasts. The market leansstrongly toward another hike in July and it is fully discounted at themid-September meeting. The US two-year premium over German has risen from near112 bp in late April to 170 bp last week and we expect it to stall shortly(~180 bp).
Theeuro rallied from $1.0635 in the middle of last week before rallying to almost$1.0780 ahead of the employment data. The jump in US rates helped cap the euroand send it back a to almost $1.0700. Initial resistance at the start of the new week may be encountered near $1.0730. On the downside, a break of the $1.0690 area would mean more back-and-filling is necessary to forge a solid base, whichthe momentum indicators suggest is forming.
UnitedKingdom: The UK has a light economic calendar in the week aheadoutside of the final service and composite PMI. The May construction PMI offersfresh news. It has been above the 50 boom/bust level since February. It wasstuck at 48.8 last December and this January. Reports suggest the PrimeMinister is considering "voluntary" price controls and is looking atthe French arrangement (announced in March and has been extended from June tocontinue through September). Under the French plan, supermarkets identify items(staples) that will be subject to a price freeze or even cuts. Reports suggestthat often products of the store's own brand are identified.
Sterlingrecovered from about $1.2310 on May 25-26 to reach $1.2545 ahead of the USemployment data. This met the (61.8%) retracement of the decline from theyear's high on May 10 (~$1.2680). The pullback ahead of the weekend snapped afive-day advance, the longest of the year. It tested the $1.2440-50support band. Nearby support is seen around $1.2400. The momentum indicators have turned higher and suggest that buyers may re-emerge on the pullback.
Canada: There are twohighlights in the coming week. First, on June 7, the Bank of Canada meets. Itadopted a "conditional pause" back in January and that is increasinglybeing challenged by stronger than expected data and sticky inflation. Canada's3.1% annualized growth in Q1 was the fastest in the G7. April's 0.7% rise inheadline CPI was well above expectations and brings the annualized rate in thefirst four months of the year to 6.3%. In the last four months of 2022,Canada's CPI rose at an annualized rate of almost 1%. The swaps market showsabout a 30% chance of a hike this week up from less than 10% in early May. Asrecently as May 12, the market was pricing in nearly 50 bp in cuts before theend of the year and now it is nearly fully reflected a 25 bp hike. Second, onJune 9, Canada reports May employment. The Bank of Canada meeting and statementmay make for a minimal market reaction to the jobs data. In the January throughApril period, Canada created almost a quarter of a million jobs, of which 165kwere full-time posts. The unemployment rate has stood at 5.0% since lastDecember. At the end of 2019, it was at 5.6%. The participation rate was at65.6% in March and April. It was at 65.8% in December 2019.
TheUS dollar reversed lower from the mid-week test on CAD1.3650, the upper end ofits two-month trading range. It held CAD1.3400 before the US jobs data andbounced to CAD1.3450. Additional resistance is near CAD1.3465, but theCAD1.3500 area is more important. The daily momentum indicators have turneddown, though CAD1.3400 offers solid support.
Australia: TheReserve Bank of Australia meets on June 6. Inflation and inflation expectationswere stronger than expected and have encouraged investors to look for anotherhike, even if not immediately. Expectations have swung from a small chance of acut to about a 1-in-4 probability of a hike. Moreover, a quarter-point hike isnearly fully discounted for the August 1 RBA meeting. In the past month, theyear-end rate implied by the futures market has risen from about 3.55% to above4.0%. Indeed, it has risen for the past five consecutive weeks. The day afterthe RBA meets, Australia reports Q1 GDP. The median forecast in Bloomberg'ssurvey is for a 0.4 quarterly expansion, lifted by household consumption andnet exports. Australia's trade surplus jumped to A$40.2 bln (~$27 bln) in Q1from A$29.3 bln in Q1 22. The April trade balance will be reported June 8.
TheAustralian dollar set the low for the year at the of May slightly below $0.6460.It staged an impressive two-day rally that lifted it almost two cents. Itstalled after the US jobs report but found new bids in the knee-jerk sell-offthat to back to nearly $0.6600, the bottom of the old two-month trading range.The momentum indicators turned higher, and the technical tone looksconstructive. A move above $0.6640 signals a re-test on the $0.6700, the middleof the previous trading range and 200-day moving average (~$0.6695).
Mexico: Neither May'sCPI nor April's industrial production figures are likely to lead to the centralbank to reconsider the pause announced at the May meeting. Headline CPI (June6) may slip toward 6%, which would be the lowest since September 2021. The corerate may moderate as well. It could slow toward 7.4% from nearly 7.7% in April.It would be the fourth consecutive monthly moderation. Although Mexico'seconomy expanded by 1% quarter-over-quarter in Q1, and auto production wasstrong (+44.5% in Q1 to 346.1k vehicles, the most in a quarter since Q1 19),the monthly industrial output showed a net decline (~-0.4%) in Q1. The nearly0.90% decline in March was the largest since September 2021. A modest recoveryshould not be surprising. Separately, note that on June 4, there is an electionin the most populous state, Mexico State. In addition to its importance in itsown right, it will see a test for of the strength of the ruling Morena Party,which was founded by President AMLO. The incumbent Gomez from the Morena Partyis running well ahead of her rival in polls.
Thedollar fell to a marginal new seven-year low against the Mexican peso after theUS jobs report, edging fractionally closer to MXN17.42. The broader recovery ofthe US dollar and jump in US rates helped it recover against the peso. It settled the band of congestion seen earlier in the pre-weekend session between MXN17.50and MXN17.55. It can rise toward MXN17.65 without improving the technicaloutlook. The momentum indicators are falling since the greenback approachedMXN18.00 on May 23. The lower Bollinger Band is near MXN17.3880. The priceaction suggest that new dollar lows are being greeted with some profit-takingamid what has been a crowded trade. Surveys suggest international fund managersare overweight Mexico, and speculators it the currency futures have the largestnet long peso position in three years. Below the MXN17.40 area, it is difficultto see meaningful chart support until closer to MXN17.00.
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