Overview: We have put emphasis on today's US retail
sales report. A recovery from the weather-induced weakness in January should
underscore the resilience of US demand after another 200k jobs were created and
personal income jumped 1%. While the dollar has traded firmer in the first half
of this week, given the 25 bp jump in the US two-year yield, its performance is
somewhat disappointing. It is narrowly mixed in the European morning against
the G10 currencies. The dollar bloc, sterling- and the Norwegian krone enjoy a
slightly firmer bias. The euro, yen, and Swiss franc are nursing minor losses. Most
emerging market currencies are softer, but for the second consecutive session,
the Hungarian forint is recovering and leading the advancers.
Equity markets are firm, with
the notable exception of China and Hong Kong. Most of the other large markets
in the Asia Pacific region advanced. Europe's Stoxx 600 is rising for the third
consecutive session and is extending its move into record territory. US index
futures are also trading with an upside bias. A strong reception to the US
Treasury's sale of 30-year bonds yesterday did not prevent the 10-year US yield
from edging higher for the third session in a row yesterday. It is slightly
firmer today testing 4.20%. It settled last week below 4.08%. European
benchmark yields are narrowly mixed today, with the periphery outperforming the
core. Gold is consolidating inside yesterday's range, which was inside
Tuesday's range (~$2150-$2185). It is beginning to look vulnerable to a
downside correction. Oil is extending yesterday's recovery and April WTI is
pushing back above $80 a barrel. The recent highs were around $80.65-85. A
drone strike on a large n refiner yesterday and the first drawdown of US
inventories in seven weeks helped support prices. Today, OPEC+ warned that the
oil markets may face a supply deficit this year.
Asia Pacific
Most of Japan's spring wage
negotiations (shunto) concluded yesterday. Several large companies agreed to the
biggest pay increases in more than 30 years. Observers see an average of more
than 4% pay increase. Last year's average pay increase was slightly less than
3.6% when small companies are included. Note that small and medium-sized
Japanese companies employ around 70% of Japan's workers. Japan's CPI peaked in
January 2023 at 4.3% year-over-year. In January 2024, it stood at 2.2%. Tokyo's
February CPI warns that the national reading could rise back to 2.8%. The BOJ
did not buy equity ETFs earlier this week even though the Topix had tumbled 2%
Monday morning, which seemed to have triggered such operations in the past. The
Topix was near 34-year highs, which may have deterred the BOJ, but others see
it a sign that it is exiting the extraordinary monetary policy. There is some
speculation that the BOJ may abandon its effort to cap the 10-year yield at
1.00%. The 10-year yield set the high for the year on Tuesday slightly shy of
0.80%. It peaked last November around 0.97%.
There are two ways foreign
demand can be met: Exports and direct investment. Exports are the traditional
approach. However, a combination of protectionism and an overvalued dollar
spurred US direct investment strategy--build and sell locally. This was also a
developmental strategy. It was driven by long-term capital flows (buying and
building points of production and distribution) and led to the transfer of
technology and employment. For more 60 years, the local sales by majority-owned
affiliates of US multinational companies outstrips US exports by magnitudes.
Japan's production moved offshore in the 1980s and 1990s were essentially the
same reason, and the local sales of affiliates of Japanese companies outstrips
Japanese exports. Protectionism, and to some extent, rising labor costs in
China are forcing Chinese companies on the same path. The US may balk at direct
investment from Chinese companies, but not so in the Global South. Starting in
late 2022, Chinese exports to other developing countries surpassed shipments to
developed countries and direct investment is also rising.
The dollar spent most of
yesterday in a JPY147.50-JPY148.00 range and it remains in that range today. It pulled back from the session high set
in early Europe on Tuesday and settled little change. A Bloomberg survey out
earlier this week showed a majority expected the BOJ to standpat next week. A
strong US retail sales report, and the higher yields that may result, could
help lift the dollar further against the yen. Above the cap around JPY148.20,
could target the JPY148.70-JPY149.20 area. The Australian dollar held
above Tuesday's low (~$0.6585) but could not muster the strength to push above
Tuesday's high (~$0.6640). Still, the Aussie posted its highest close
(~$0.6625) in two months. It is consolidating inside yesterday's range, which
is also inside Tuesday's range (~$0.6585-$0.6640). The price action looks
constructive and there is little to deter a run at the high set at the end of
last week near $0.6670. The greenback is firm, but little changed
against the Chinese yuan. The PBOC set the dollar's reference rate at
CNY7.0974 (CNY7.0930 yesterday). The average in the Bloomberg survey was
CNY7.1882 (CNY7.1769 yesterday). The dollar has held barely below CNH7.20
against the offshore yuan. It has not closed above it for the past four
sessions.
Europe
The eurozone economy was
flat in Q1 23, expanded by 0.1% in Q2 and contracted by 0.1% in Q3 before
stagnating again in Q4 23. There was some hope of a better 2024, but the dramatic 3.2% plunge
in January industrial production reported yesterday suggests a poor start to
the year. Moreover, despite the meme of German de-industrialization, the slide
in the aggregate industrial output came despite the 1% rise in German output
(0.6% expected). French industrial output had been expected to slip by 0.1% but
instead fell by 1.1%. In December industrial production rose 0.4% not 1.1% as
had initially been reported. Italy has yet to provide its numbers, but Spain's
industrial output rose 0.4%, which was slightly more than expected, while the
December contraction was 0.6%, twice as much as initially reported. The
Netherlands reported its January manufacturing output tumbled 4.7%, giving back
a large chunk of the 6.8% gain in December.
The euro traded firmly
yesterday after $1.09 held on Tuesday. Session highs were reached near $1.0965 in early afternoon
trading in North America. It settled firmly, at its best level in two months.
It has taken a great deal of energy to lift the euro from $1.07 in mid-February
to $1.0980 at the end of last week. Momentum indicators are getting stretched
and the upper Bollinger Band is near $1.0975. It appears many short-term and
momentum traders are long euros, and we suspect there is some pressure to
square up ahead of next week's FOMC meeting, where the risk is asymmetrical. It
is more likely that the Fed signals fewer rather than more rate cuts this year
than three the median thought at the FOMC meeting at the end of last year. We
had been looking for a euro pullback after last week's US employment report and
we are not convinced it is over. Sterling was as quiet as it has been
this year, trading in a third-of-a-cent range above $1.2775. It was in
less than half of the range seen in the last 4-5 sessions. In the three
sessions through Monday, sterling settled above $1.28. While it has remained
within striking distance these past two sessions, it has stalled and settled
below $1.28. It is straddling $1.28 today, straying less than a fifth-of-a-cent
from it. Nearby resistance is seen near Tuesday's high (~$1.2825).
America
The combination of the
February employment report and CPI has seen the market pare back wagers of a
June Fed cut. On the
eve of the jobs report, a June rate cut seemed like a done deal and the Fed
funds futures implied 96% chance. The odds have fallen for the past four
sessions before steadying today, ahead of the US retail sales report. It is
near 75% now. If the Fed does not cut rate in June, the market will likely
downgrade the chances of four cuts this year. Recall that the day before the
jobs report, the Fed funds futures had discounted three rate cuts and about a
62% chance of a fourth cut. The odds of a fourth cut increased after the jobs
data (~80%). Its probability has fallen in the first three sessions of this
week to stand at about 22%.
The risk is that adjustment
may be extended with today's US data. The most important of which is the February retail sales.
February was the third consecutive month of more than a 200k increase in
nonfarm payrolls, and recall personal income surged by 1.0% in January, but
consumption rose by a milder 0.2%, We know that auto sales improved in February
and the average retail price of gasoline rose by 5.75%. A winter storm appears
to have depressed January retail sales. A strong recovery, which speaks to
demand. Separately, but at the same time, February PPI will be released. The
headline rate is expected to accelerate above 1.0% for the first time since
last September. The core rate has been trending low since peaking at 9.7% in
March 2022. There have been two exceptions, July 2023, and January 2024. It is
expected to slip to 1.9% from 2.0% in January. Weekly jobless claims will get
little notice given the retail sales and PPI report. Business inventories are
typically not the kind of data that moves the markets. Recall that businesses
rebuild inventories in Q3, and this added 1.3 percentage points to GDP. In Q4
23, inventories contributed 0.1 percentage points to GDP.
The US dollar probed
three-day lows against the Canadian dollar yesterday (~CAD1.3460). This met the (61.8%) retracement of
the greenback's rally from last Friday's low (~CAD1.3420) to Tuesday's high
(~CAD1.3525). A break of CAD1.3460 would set up a retest on the CAD1.3400-20
support. The Mexican peso's climb has been relentless, it has
risen in 11 of the past 13 sessions. It is the strongest currency in the world
here in Q1 24, with a 1.7% gain against the dollar. The greenback slipped
slightly below MXN16.6600 yesterday as it draws closer to the multiyear low set
last July near MXN16.6265. The dollar's downtrend has accelerated. It has not
closed above the five-day moving average for the past 12 sessions. It is near
MXN16.7520 on a closing basis today.
Overview: We came into this week
expecting the dollar to rise on the back of a recovery in rates. The two-year
note has risen from 4.40% after the jobs report to 4.60%. The dollar's rise has
been less impressive. The Dollar Index had begun with week with a six-day fall
in tow. Today is it is rising for the third session. However, the gains have
been a modest 0.80% off the pre-weekend lows. The dollar broadly is
consolidating in narrow ranges thus far today in quiet turnover. Despite
promising reports on wage negotiations in Japan, the yen is softer for the
second session. A quiet North American session is expected ahead of tomorrow's
retail sales report. The US Treasury sells $22 bln 30-year bonds today. Yesterday's
10-year sale tailed and saw lighter indirect bids.
Asia Pacific equities were mixed today. Japan,
Hong Kong, China, and Indian markets fell, while Taiwan, South Korea, and
Australia advanced. Led by utilities and financials, Europe's Stoxx 600 is
edging higher after rallying 1% yesterday, the most since the end of January.
US index futures are little changed but softer. European 10-year yield are 2-3
basis points lower. The UK 10-year Gilt yield is slightly firmer after the
January GDP rose 0.2%, in line with expectations. The US 10-year yield near
4.16% after slipping below 4.05% after last Friday's employment data. Gold
ended a nine-day advance yesterday with a 1.1% drop. The yellow metal is steady
today near $2158. April WTI is trading firmly but inside yesterday's roughly
$77.35-$78.75 range.
Asia Pacific
Facing intense price pressures from Chinese
brands and shift to EV, reports suggest a couple Japanese producers may reduce
their production capacity in China. Japanese press reports Nissan is
considering a 30% cut and Honda is contemplating a 20% reduction. Nissan has
capacity to produce 1.6 mln vehicles in China and Honda can produce about 1.5
mln vehicles. Although some pundits attribute Chinese competitiveness to
subsidies, part of the problem is that the Japanese producers do not have
electric car offerings. It is not just the vehicle, but reports suggest that
more than 80% of EV battery cells are made in China, with the benefits of
mining and processing of the critical materials (lithium, cobalt, manganese,
and rare earths. According to Bloomberg, on a volume-weighted basis, batteries
cost 11% more in the US and 20% more in Europe. There are three levels of
Chinese subsidies: consumer incentives (now mostly from local governments
rather than a national program, which was discontinued in 2022,), manufacturer
subsidies (typical of China, let many bloom before culling through
consolidation), and infrastructure, including charging stations, standardized
plus, and battery-swapping stations.
Japan's two-year yield has trended higher. Its
eight-week climb has seen the yield nearly double to 0.20% over the run. It is
stalling. Not only is there uncertainty about whether the BOJ moves next week
or waits for next month, but there is also a range of views of what the central
bank may do when it does move. Some look the initial move to bring the
overnight target rate to zero from -0.10%. Others favor a 20 bp move to bring
the target rate to 0.10%. A scenario calls for another move later this year to
brink the target rate to 0.25%. Reports in the local press suggested that the
BOJ could also end its Yield Curve Control, which now caps the 10-year yield at
1.0%. It could revert to announcing a set about of JGBs it would buy. Note that
massive JGB holdings entail large annual expirations. This year's estimate is
about JPY70 trillion (~$470 bln). Preliminary results from Rengo (Japanese
Trade Union Confederation, representing around 7 mln employees) will be known
at the end of the week. Last year an average of 3.8% increase was agreed,
though labor cash earnings were 0.8% higher year-over-year in December. Rengo
is seeking a 5.85% average wage increase. Toyota's union is seeking a bonus
payment of almost eight months of salary. Last month, Honda announced a 5.6%
pay increase, and Mazda agreed to a 6.8% increase. Nissan is giving a 5%
increase.
The dollar's range against the yen yesterday
was set in the first 10 minutes after the US CPI report. It traded between
almost JPY146.60 and slightly above JPY148.10. It was the third consecutive
session that the dollar found support in the JPY146.50-60 area. The bounce saw
the dollar meet the (38.2%) retracement target of the decline from late last
month. For the first time in four sessions, the dollar settled back inside the
Bollinger Band (lower end is now near JPY147.10). The dollar is firm in the
upper end of yesterday's range. The next retracement target (50%) is closer to
JPY148.60. The Australian dollar traded on both sides of Monday's range
in response to the US CPI. After the low was set, the Aussie struggled to
overcome offers near $0.6600. It has not traded above $0.6620 today. While
support may be seen now around $0.6575, we suspect the risk it a bit lower. The
dollar's recovery against the yen yesterday foretold the yuan's weakness today.
The greenback had fallen to its lowest level since the end of January
(~CNY7.1715) yesterday before recovering to slightly above CNY7.18. The
greenback snapped back to CNY7.1950 today. The PBOC set the dollar's reference
rate at CNY7.0930 (vs, CNY7.0963 yesterday). The average in Bloomberg's survey
was CNY7.1769 (CNY7.1855 yesterday). Against the offshore yuan, the dollar has
recovered from yesterday's low near CNH7.1720 to slightly above CNH7.20.
Europe
The UK's January GDP showed the economy
expanded by 0.2% after contracting in two of the three months in Q4 23 for a
0.3% quarter-over-quarter contraction. While the Bank of England officially
accepts that two consecutive contracting quarters denote a recession, a
qualitative judgement suggests it may be fairer to think the UK economy is has
stagnated. Note that the UK population increased by about 0.34% (~230k), while
the economy expanded by about 0.3% year-over-year. Despite the headline, the
details were poor. Industrial output fell by 0.2%, while manufacturing was flat.
Construction output unexpected surged 1.1% (after three months of declines). It
was fueled by public construction. The trade deficit widened. A 0.2% gain in
services was recorded after a 0.1% decline in December.
Hungary, rather than Italy, is in the center
of the maelstrom in Europe, and it is scheduled to assume the rotating EU
presidency in the second half. The immediate issue, which has set the
Hungarian forint to new lows against the euro since last March is about central
bank's independence and its access to EU funding. Prime Minister Orban has
pressed hard for more aggressive monetary easing. He has also sought to broaden
the central bank's supervisory board. Headline CPI has fallen every month since
January 2023 when it peaked at 25.7%. It stood at 3.7% last month. The central
bank targets 3%, +/-1%. Excluding food and energy, core CPI stands at 5.1%. The
central bank began cutting rates last October and delivered four 75 bp cuts in
the base rate to 10% in January. Last month, it delivered a 100 bp cut. The
swaps market is pricing in another 275 bp of cuts in the next six months. An EU
Parliament committee voted on Monday to proceed legal action against the EU for
releasing part of Hungary's suspended funding (~10.2 bln euros of more than 30
bln euros allocated). A formal decision by the EU Parliament is expected before
the end of the week.
The euro recorded a three-day low yesterday,
slightly above $1.09. It met the (50%) retracement of last week's rally (~$1.0910)
and held above the next retracement (61.8%) near $1.0895. The euro is trading
quietly today in a narrow range (~$1.0920-$1.0935). So far this week, it has
traded between roughly $1.09 and $1.0955. It is hovering near the middle of
that range as the North American session is about to begin. The paring of
sterling's recent gains took it to nearly $1.2745 yesterday, meeting the (50%)
retracement of the rally from the March 1 low near $1.2600. The next
retracement (61.8%) is near $1.2710. It recovered to almost $1.28 in the North
American afternoon and has largely been confined to a quarter-cent below $1.28,
so far today. The $1.2820-30 area may cap upticks. The euro helped support near
GBP0.8500 on Monday and recovered to a three-day high yesterday near GBP0.8555.
It has not closed above GBP0.8575 for almost two months. On the downside,
support is seen in the GBP0.8525-30 area.
America
The US February CPI does not change anything. The
first Fed cut was not expected this month or in May. And whatever the Fed
decides in June, it will not be determined by February prices. That said, the
odds of a June cut slipped below 70% from a little above 85% on Monday. After
the jump in the February unemployment rate, reported at the end of last week,
the Fed funds futures priced in about an 80% chance of a fourth cut this year. This seemed
to us to be a bit excessive. After the CPI, the market had downgraded the
chances of a fourth cut to about 37%. Of note, core goods prices rose (0.1%)
for the first time since May 2023. Core services, rose by 0.5%, and roughly the
same excluding rent and owners' equivalent. Looking forward, pending additional
information in the PPI, the CPI suggests the core PCE deflator may be up
0.2%-0.3%, which suggests the year-over-year pace could moderate for the 13th
consecutive month to 2.6%-2.7%. Also, note that the risk is for a higher
headline CPI here in March. Consumer prices rose by 0.1% in March 2023. This
will drop out of the 12-month comparison and will likely be replaced by a
higher number. Still, a key point to us is the bar Fed Chair Powell set at the
January post-FOMC press conference. The inflation data, he said, does not need
to be better, just good.
The Canadian dollar, like the other
dollar-bloc currencies, traded heavier against the US dollar yesterday. Even
the rise in the US S&P 500 failed to lift the Loonie, which fell to
three-day lows. The US dollar reached CAD1.3525, a little shy of the (61.8%)
retracement of last week's slide (~CAD1.3535). Itis consolidating in a narrow
range below CAD1.3500 today. A move above the CAD1.3550 area may signal a
re-test on the CAD1.3600 area that capped the greenback in late February and
early March. The US dollar traded on both sides of Monday's range against
the Mexican peso, but it remains in the range set last Friday
(~MXN16.7640-MXN16.8890). Outside of the reaction to the US CPI, which set
the day's range, trading was mostly uneventful, and the dollar chopped in a
MXN16.80-MXN16.84 range. The greenback is trading mostly below MXN16.80 today.
The multiyear low set last July was near MXN16.6260. Mexico reported a 0.4%
increase in January industrial output. It follows a cumulative decline of
almost 1.75% last November and December. Brazil's February IPCA inflation was
little firmer than expected. The dollar pulled away from BRL5.0 and slipped
below Monday's low to trade below BRL4.96. Brazil's stock market, which was one
of the sources of pressure on the real on Monday, bounced back with a nearly
1.5% gain (it lost about 0.75% on Monday). Petrobras, which had fallen 13% over
the previous two sessions, rose 3.5% yesterday, its biggest gain since late
January.
Overview: The US CPI has become one of the most
important high-frequency economic reports for the capital markets. The dollar
is going into the report narrowly mixed against the G10 currencies. Comments by BOJ Governor Ueda about the weakness in consumption of non-durable
goods was seen by some as reducing the likelihood of a change in policy next
week. The greenback is threatening to snap a five-day drop against the yen. Most
of the G10 currencies are in narrow ranges ahead of the US CPI. Emerging market
currencies are also mixed, , Thailand, and Hungary are the weakest, while
the South African rand, Czech koruna, and the Chinese yuan lead the advancers. The
Chinese yuan on- and offshore traded at their best levels since the end of
January.
Equities are trading higher. Most
of the large markets in the Asia Pacific region rose but Japan, which saw
continued profit-taking. The Hang Seng and mainland shares that trade in Hong
Kong surged by more than 3% led by the tech sector Europe's Stoxx 600 is recouping most of the
yesterday's 0.35% decline, which ended a three-day advance. US index futures
are firmer. European 10-year yields are 1-3 basis points lower, with the
10-year UK Gilt yield off by more than three basis points after a soft
employment report, which saw a larger than expected decline in wage pressure. The
10-year US Treasury yield is off almost one basis point ahead of today's data
and auction. Gold continues to consolidate after reaching almost $2200 at the
end of last week. Initial support is seen near $2170 and then $2150. April WTI
fell to a two-week low yesterday around $76.80 before recovering to settle
slightly below $78. Today, it has reached $78.70.
Asia Pacific
Many observers think that
communist China simply orders its state-owned banks to do it bidding, and
voila, it gets done. It
does well from propaganda purposes, but there seems to be space between them. Beijing
wants the banks to boost their lending to the property developers, but a couple
of the largest are balking. Industrial & Commercial Bank of China and China
Construction Bank have not agreed yet to the syndicated loan for one of the
largest residential property developers. They want more collateral.
The Bank of Japan's target
rate stands at 0.10% but the effective rate is -0.01%. A series of firmer data (CPI, labor
cash earnings, reports of strong wage demands, and an upward revision to Q4 23
GDP) coupled with comments from a couple BOJ officials have fanned speculation
that a rate hike could come as early as next week. A local press report
suggested that the Yield Curve Control could, which caps the 10-year yield at
1.0% could also be jettisoned. The idea is that the BOJ would revert to setting
a fixed amount of JGB buying. There also is much discussion about the
trajectory BOJ policy. The overnight swaps market is pricing an overnight
target rate of around 0.25% by year-end. Before the Diet earlier today, BOJ
Governor Ueda recognized weakness in the consumption of non-durable goods but
saw an overall moderate improvement in consumer sentiment as inflation slowed
and wage increases were expected.
The dollar spent most of the
North American session yesterday hovering around JPY147.00. It barely traded
above last week' settlement (~JPY147.05). US rates traded firmer even after solid demand at the sale
of $56 bln three-year notes. Today, Treasury comes back selling $39 bln of
10-year note. The yield on the three-year note was almost nine basis points
higher than the previous auction but yield on the 10-year note is little
changed. The dollar has edged higher a re-entered the lower Bollinger Band
today (~JPY147.25) and reached JPY147.60. Nearby resistance is seen in the
JPY147.75-JPY148.00. The Australian dollar recorded session lows
yesterday in North America slightly below $0.6600. After the low was
set, the Aussie was unable to rise much above $0.6610. It is in a narrow range
mostly between $0.6610 and $0.6620 today. It probably takes a move above
$0.6640 to lift the tone. Despite the yen's losses, the Chinese yuan
strengthened. The dollar fell to about CNY7.1725, its lowest level since
the end of January. The dollar fell to CNH7.1760 against the offshore yuan,
which is also the lowest since the end of January. The PBOC set the dollar's
reference rate at CNY7.0963 (CNY7.0969 yesterday). The average projection in
the Bloomberg survey was CNY7.1855 (CNY7.1879 yesterday).
Europe
The UK labor market is
gradually slowing gradually. Employment fell in Q3 but rose in Q4 23. It began Q1 24 on a weak
note, falling 21k in the three-months through January compared to the previous
three months. The 3-month unemployment rate bottomed in August 2022 at 3.5%. It
reached 4.3% last July and has since pulled back to 3.8% before rising to 3.9%
in the three-months through January. Average weekly earnings (three-month
year-over-year) remain elevated, but slowly easing, apparently, slow enough to
deter BOE. Average weekly earnings peaked at 8.5% last July and has slowed
every month since to stand at 5.6% (three-month average through December and
January). The swap market increased on the margins the likelihood of a June
rate cut to about 57% chance from about 51% yesterday. This does not sound like
much, but it is the highest probability since in three weeks.
Too much may be being made
of the fact that after contracting in Q3 23 and Q4 23, the British economy may
expand here in Q1 for the first time since Q1 23. The contraction was shallow, and the
recovery is likely to be shallow. The median forecast in Bloomberg's survey is
for 0.1% growth. The January GDP is due tomorrow, and 0.2% growth is expected
after a 0.1% fall in output was reported in December. The industrial sector
looks flat, and construction likely slowed. The trade deficit may have widened.
The service sector may be the only bright spot.
Bank of Italy announced
plans at the end of last week to impose a systemic risk buffer of 1% of
domestic exposure (weighted by counterparty and credit risk) by the end of next
year. Half is due this
year. This is the lower end of the 1%-2% range that had been discussed. The
buffer may be around 7.5 bln euros, which is around half of the excess capital
(above management targets in Q4 23 of the six largest banks. An index of
Italian bank shares fell by about 1% yesterday, though financial services were
down around 3.4% and the market as a whole was off 0.5%-0.6%. European banks in
the Stoxx index (EMU) ended a six-day advance yesterday, with less than a 0.1%
decline. It had fallen in three sessions in the past four weeks.
The euro consolidated at
modestly lower levels yesterday after rallying for the third consecutive week. It reached $1.0980 after the US
employment report and recorded a low yesterday as European activity was winding
down near $1.0915. After the low was made, the euro could hardly rally
15-ticks. Initial support is in the $1.0890-$1.0910 band. It is in an
exceptionally narrow range today between $1.0920 and $1.0940, as the market
awaits the US inflation report. Sterling made a new high for the year
before the slightly shy of $1.29 at the end of last week. It pulled back yesterday
to test the $1.2800 area, the upper end of its previous range and slipped to
almost $1.2775 today. Yesterday's loss ended a six-day advance during which
sterling rose by about 2 3/4 cents. Nearby support is seen near $1.2750
initially.
America
The CPI is arguably the most
important release in the monthly data cycle. The Fed targets the headline PCE deflator but knowing the
CPI (and PPI) allows economists to have a fairly good idea of the PCE deflator.
Headline CPI is expected to have risen by 0.4% last month for a 3.1%
year-over-year rate. It rose by 0.3% in January and the year-over-year rate was
3.1%. However, the risk is that the CPI ticks up this month as the base effect
(0.1% in March 2023) makes for a tough comparison. A 0.4% increase lifts the
three-month annualized rate to 3.6% (Dec-Feb) from 2.8% previously (Sept-Nov). The
six-month annualized pace would be 3.2%. The median forecast in Bloomberg's
survey has the core rate rising 0.3% (0.4% in January), with a favorable base
effect, allowing the year-over-year rate slow to 3.7% from 3.9%. However, the
three-month annualized pace would tick up to 4% from 3.2%. The takeaway is the
CPI data, like the employment report, underscore the lack of urgency from Fed
officials to cut rates.
Mexico reports January
industrial production figures today. While the economy has slowed the 0.7% contraction in December
industrial output overstates the case. A recovery is widely expected despite a
soft manufacturing PMI (50.2 vs. 50.0). The IMEF manufacturing index rose to
51.6 from 50.0. Job creation improved and vehicle production surged by 42%,
recouping most of December's drop. The market appears nearly evenly divided
about the outlook for next week's Banxico meeting, with a small lean toward
standing pat (overnight rate target at 11.25%). Brazil reports the IPCA CPI
today. It is expected to have slowed to around 4.45%. The central bank's
meeting concludes next week a few hours after the FOMC meeting. The swaps
market is pricing a strong likelihood of another 50 bp cut to 10.75%. It would
be the sixth such move in the cycle that began last August.
After the US dollar
recovered before the weekend from CAD1.3420 to almost CAD1.3500, it edged
slightly higher yesterday to around CAD1.3510. It has held below CAD1.3490 so far today
but has yet take out yesterday's low near CAD1.3470. Meanwhile, benchmark
three-month implied volatility fell to a new four-year low yesterday below
4.9%. The greenback trading in a narrow range against the Mexican peso
yesterday after posting its biggest weekly decline so far this year (~-1.20%). The
dollar has not settled above its five-day moving average (~MXN16.8350) for the
past ten consecutive sessions. Yesterday, was the fourth consecutive session
that the US dollar settled below the lower Bollinger Band, which comes in today
near MXN16.7880. The dollar's downside momentum seems to be stalling. It
settled last week near MXN16.8125.
Overview: News that the Japanese economy expanded
rather than contracted in Q4 23 has fanned expectations that rates could be as
early as next week. This is helping keep the yen supported, though it remains in
the pre-weekend range, albeit barely. While the dollar is softer and consolidating against the
euro, Swiss franc, and Canadian dollar, it slightly firmer against the
Antipodeans and Scandis. Sterling is also in a narrow range, but with a softer bias. Most emerging market currencies are firmer, with the Hungarian forint and
Turkish lira the notable exceptions. A quiet North American session looks
likely with a light economic calendar ahead of tomorrow's US CPI.
The yen's recovery and rate
speculation weighed on Japanese stocks. The Nikkei and Topix fell by more than
2%. Itis the biggest decline since last October. Outside of China and Hong
Kong, the other large regional bourses fell. Australia's ASX 200 tumbled by
1.8%, the most in nearly a year. Europe's Stoxx 600 is off by 0.4%, threatening
the three-day advance in the second half of last week. US index futures are
nursing small losses. Japan's 10-year yield rose 2.5 bp, and at 0.75%, is
approaching the year's high. Core European benchmark yields are mostly slightly
softer, while the peripheral yields are a little firmer. UK 10-year Gilt yields
are off a couple of basis points. The 10-year US Treasury yields is little
changed near 4.07%. Gold is consolidating after approaching $2200 before the
weekend. It has held above $2176 today. April WTI fell to a nine-day low near
$77.25 today before recovering. It is near session highs now near $78.30.
Asia Pacific
China reported February CPI
and PPI over the weekend. Deflation in consumer prices ended for the first time since last
August as the CPI rose by 0.7% year-over-year. It was twice the gain economists
expected (0.3% median forecast in Bloomberg's survey). While conventional
wisdom attributes the gain to spending over the Lunar New Year holiday, given
the construction of China's CPI basket, food prices are key. Food prices fell
0.9% year-over-year in February after a 5.9% decline in January. Pork, a staple
in diets, rose by 0.2% in February following a 17.3% drop in January. Excluding
food and energy, China's core CPI stood at 1.2% in February, up from 0.4% in
January. On the other hand, deflation in producer prices deepened to -2.7% from
-2.5% previously. On the month, producer prices fell by 0.2%, matching the
January decline.
The surge in Japanese
capital spending excluding software reported earlier this month prepared the
market for upward revision in Q4 23 GDP. Capital spending jumped 11.7%
year-over-year. The median forecast in Bloomberg's survey was for a 1.5%
increase. In GDP terms, private investment rose 8.4% and that means that rather
than contract by 0.1% as initially estimated, the Japanese economy expanded by
0.1%. Recent BOJ comments, the larger than expected rise in labor earnings and
wage demand have spurred increased speculation that the BOJ could raise rates
at the March 19 meeting. We still lean toward April, the start of the new
fiscal year, the end of energy subsidies for households will lift measured
inflation, the wage round results will have been digested, and the Tankan
survey results will be in hand. Also, note that despite the better Q4 23 GDP,
the economy could be contracting this quarter. Household spending, industrial
production, and housing starts fell sharply in January, partly as a function of
the earthquake on January 1.
After falling for the first
eight weeks of the year, the yen strengthened for the second consecutive week,
and its nearly 2.1% gain was the most since last August. The move was too rapid as the greenback
briefly traded beyond four standard deviations from its 20-day moving average.
It bottomed around JPY146.50 before US rates recovered following the US jobs
data. The dollar held near JPY146.55 in Asia Pacific turnover today, but the
upside has been limited to about JPY147.15. The low from early February was
near JPY145.90 and the 200-day moving average is around JPY146.20. The dollar
is trading slightly inside three standard deviations from its 20-day moving
average (~JPY146.35). The Australian dollar reached almost $0.6670
before the weekend, more than three standard deviations from the 20-day moving
average. It subsequently returned toward session lows (~$0.6615)
before settling near $0.6625. The Aussie met the (50%) retracement objective of
this year's decline (~$0.6655). We look for some back and filling over the next
few sessions and would not rule out a move toward $0.6560-75. It has tested
initial support near $0.6600. The CNY7.20 cap remains in place and the
broad pullback in the US dollar, especially against the yen, in our
understanding, helped drive the dollar to almost CNY7.1815 before the weekend. It
slipped a little further today to about CNY7.1800. That is the lowest level
since February 21. The PBOC set the dollar's reference rate at CNY7.0969
(CNY7.1002 on before the weekend). The average in Bloomberg's survey was
CNY7.1879 (CNY7.1905 previously). Against the offshore yuan, the dollar also
fell to its lowest level since February 21 (~CNH7.1850).
Europe
The economic news stream is
light and political developments are more notable. Many are looking for some insight into the
mood of voters ahead of the June European parliamentary election. In a defeat
for the Irish government, two referendums on changing the language about women
and family in the constitution were defeated. The first referendum sought to
widen the definition of family to include other "durable"
relationships. The second referendum proposed modernizing and making more
inclusive language about care duties in the home. Both referendums were
defeated by more than 2/3. Turnout was almost 45%, almost a 20-percentage point
drop from the 2018 referendum on abortion.
Portugal's Socialist Prime
Minister Costa resigned late last year amid a scandal over lithium and green
hydrogen deals. Costa
led the Socialist government for eight years. There was a national election
yesterday. A center-right coalition led by the PSD (Social Democrats) did best,
but not sufficient to secure a majority. The populist right Chega (Enough) won
around 50 seats, up from a dozen, two years ago. The head of the center-right
coalition, though, has refused to invite Chega into a coalition, meaning a
minority government is the most likely outcome. Minority governments have been
stable in Portugal. Still, there has been little reaction in Portugal's bond or
stock markets.
The euro reached $1.0980
after the US employment data, its best level since January 12. However, the momentum faltered after a
six-day rally, and the euro settled fractionally lower. Still, the weekly gain,
its third consecutive one of 0.95%, was the largest so far this year. It is
trading quietly in about a fifth of a cent range above $1.0935. Initial support
may be in the $1.0890-$1.0900 area. Sterling powered to its best level
to its best level since last July, reaching almost $1.29 before the weekend. It
traded beyond three standard deviations above the 20-day moving average. It is
consolidating in about a third of a cent range today below $1.2865. The upper
Bollinger Band (two standard deviations above the 20-day moving average) is
near $1.2835. Some consolidation seems necessary, and support may be initially
in the $1.2780-$1.2800 area. The euro had fallen to almost GBP0.8500. It has
not closed below there since August 2022. It is trading with a slightly firmer
bias today and reached nearly GBP0.8530.
America
With February employment
data in hand, the attention turns to tomorrow's CPI. The headline is expected to be unchanged
at 3.1%, though the core may tick down to 3.7% from 3.9%. Fed Chair Powell told
Congress last week that the central bank's confidence was "not far"
from allowing it to cut rates. The market understands this to mean a cut in
June rather than March or May. The February jobs data apparently did not change
economic assessments, and odds of a June hike were little changed at about 92%,
down from 96% the previous day and at end of previous week (March 1). Powell
previously explained that while the PCE deflator is the best measure for price
stability, the full employment mandate does not lend itself to a signal number.
Note that when the downward revisions are taken into account, the US created an
average of 265k jobs a month over the past three months, the most since last
June. The private sector has created an average of 205k jobs a month in the
three months through February. That is also the highest for a three-month
period since June 2023. Still, the pop in the unemployment rate to 3.9%, the
highest since January 2022 is a yellow flag, underscoring the gradual slowing
of the labor market. The median Fed forecast in December saw the unemployment
rate rising to 4.1% this year.
For its part, Canada created
twice the number of jobs economists expected (40.7k). That included 70.6k full-time posts, more
than the past five months combined. Still, the unemployment rate crept up to
5.8% (from 5.7%), matching last year's high. Average hourly pay (for permanent
workers) slowed to 4.9% from 5.3%. It is the first back-to-back slowing since
last May-June. Still, the swaps market showed little change in the likelihood
of a June cut (~75%).
The US dollar fell to
CAD1.3420 after the employment data, its lowest level in a month. It recovered to new session highs in the
waning hours of last week's activity, and nearly reached CAD1.3500. There are
options for about $305 mln at CAD1.3550 that expire today. That said, we see
initial resistance in the CAD1.3500-20 area, while the price action reinforces
the importance of support near CAD1.34. Ahead of that, support today may be
seen in the CAD1.3450-60 area. The five-day moving average is slipping below
the 20-day moving average for the first time in over a month. The US
dollar has risen against the Mexican peso in one session in the past two weeks.
It has fallen by about 1.8% over those two weeks. Last week was the
first in eight weeks that the dollar settled below MXN17.00. It set a new low
for the year near MXN16.7640. It is holding above MXN16.78 so far today. Last
year's low was set in July around MXN16.6260. Indeed, that was an eight-year
low. A steep downtrend line has formed since the end of February, and it comes
in today near MXN16.86. Note that every session last week, the dollar settled
below its lower Bollinger Band. The Brazilian real got tagged for about 1% at
the end of last week amid news of a smaller-than-expected dividend from
Petrobras. It was the weakest among the emerging market currencies. Not only
was the dividend smaller than expected, but Petrobras also did not announce an
extraordinary dividend either. The dollar gapped higher and traded above
BRL4.99 briefly. It has not closed above BRL5.00 since the end of last
October.
When everything was said and done last week, the
market did not change its mind. There was still a better than 90% chance that
the Federal Reserve delivers its first rate cut in June. Fed Chair Powell told
Congress that the central bank was not far from the level of confidence needed
to cut rates. The market understands "not far" to mean three months. The US
reported a 275k gain in February's nonfarm payrolls. Taking the past two
month's downward revisions into account, it was the third consecutive month of
more than 225k jobs being created. The 265k average over the past three months
is the highest since last June. The unemployment rate rose to 3.9% from 3.7%.
The Japanese yen appreciated 2% last week amid
speculation that the Bank of Japan could lift rates later this month and the
decline in US rates. Japan is likely to revise away the contraction in Q4 23 on
the back of strong business investment, but the economy is off to a poor start
this year. While US rates fell, European rates fell more. The market also
attributes high probability to an ECB hike in June. Yet, the dollar fell
against all the G10 currencies. The true to form, the Canadian dollar was the
laggard in weak US dollar environment, rising by about 0.55%. This lends
support to our understanding that current phase is for exchange rates to driven
by US rates (and expectations). In the coming days, we expect a firm headline
CPI reading and strong bounce in retail sales helped by autos and gasoline. In
turn, this could put a floor under US rates and lend the greenback support. Technically,
it is stretched, testing Bollinger Band (two-standard deviations for the 20-day
moving average) and beyond. This is to say that we think the most likely
scenario is for dollar-supportive economic news to hit after the dollar's
sell-off seems extreme in a quantitative sense.
United States: The February CPI is the most important data point of the
week. From the central bank's point of view, the labor market remains strong
enough to allow it to focus on its price stability mandate. The year-over-year
headline rate fell to 3% in June 2023 and has not fallen further since then. It
recovered to 3.7% last August and September. It fell to 3.1% in November before
bouncing to 3.4% in December. It returned to 3.1% in January and probably
remained there last month. The median in Bloomberg's survey is for a 0.4%
increase in headline CPI in February. Such an increase would bring the
three-month annualized rate to 3.6% from 2.8% for the previous three months. The
six-month annualized rate, which some Fed officials have cited, would be around
3.2%, down from 3.4% annualized rate in H1 23. The core rate is expected to
rise by 0.3% in February, which would bring the year-over-year rate to 3.7%
from 3.9%. That would be the lowest since May 2021. The three-month annualized
rate would rise to 4% from 3.2% in the previous three months. The six-month
annualized rate would be 3.6% compared with 4.6% in H1 23. The market pays less
attention, of course, to the producer prices due two days later March 14, and
so-called pipeline inflation, looks modest. Economists will use some components
of the report, alongside the CPI to estimate the PCE deflator, which is what
the Fed targets.
At the same time as the PPI, February retail
sales will be reported. While we do think the economy is slowing, the heady
0.8% decline in January retail sales overstates the case. Retail sales likely
increased in February, and we already know that auto sales did (15.81 mln
vehicles, seasonally adjusted annual rate vs. 15.0 mln in January). Retail
sales accounts for around 40% of personal consumption expenditures. Retail
sales were virtually flat in Q4 23, but consumer spending rose by 3%, according
to the latest GDP revision. The 1% jump in January's personal income, well
above expectations, is seen as fuel for more consumption. January industrial
production will be reported at the end of the week. It fell by 0.1% in January
and likely repeated that in February. It was flat in December, so it may be
that the last time US industrial output increased was last November.
Manufacturing output fell by 0.5% in January, offsetting the gains in the
previous two months. A small gain is likely but not to fully offset the January
slump. Lastly, the facility the Federal Reserve offered last year to provide
liquidity to large banks (Bank Term-Funding Program) no longer will be make new
loans as of Monday, March 11.
The Dollar Index peaked in mid-February, the day
after the January CPI, near 105.00. It fell to about 102.35 before the weekend. It
recovered but still settled below the previous day's low (~102.80) and closed below the lower Bollinger Band (~102.90) for the second consecutive session.
Nevertheless, we suspect that this leg down may be over or nearly so. Technically,
many of the currency pairs look stretched. The US 2-year yield bounced off
4.40%, and the Fed funds futures briefly had four cuts full discounted as it
again strayed from the Fed's December dot plot. The upcoming data will support
Fed chief Powell's claim that the central bank's confidence, while rising, is
not quite sufficient to justify the first rate cut.
China: Coming
out of the National People's Congress and the Chinese People's Political and Consultative Conference
and the 5% growth target, many are looking for more concrete supportive
measures. It could include a cut in the one-year Medium-Term Lending Facility
Rate at the end of the week. However, Beijing may be focusing more on
quantities (lending volumes) rather than prices (rates). This could be
expressed in an increase in volume of one-year loans. Separately there appears
to be clear seasonal patterns in Chinese aggregate lending: February slows from
January, but typically recoups in full in March.
China reported consumer prices rose by 0.7% year-over-year in February, apparently helped by spending over the Lunar New Year holiday. It is the first such increase since last August and was well above expectations. Overall, food prices fell by 0.9% in February (-5.9% in January). However, prices of pork and fresh vegetables increased by 0.2% and 2.9% respectively. The price of fruit fell by 4.1%. Although many observers linked the deflationary phase to weak demand, the food prices play an important role and seem more driven supply than demand. Note that food and tobacco account for nearly 30% of China's CPI basket. The core measure, which excludes food and energy rose 1.2% after January's 0.4% increase. It is the highest since February 2022. Deflation in producer prices deepened. Producer prices fell by 0.2% last month and fell 2.7% year-over-year after a 2.5% decline in January. China's producer prices have been falling since October 2022. They had appeared to bottom in the middle of last year at -5.4%.
The dollar's broad losses, and especially the
deeper pullback against the Japanese yen made it easier for Chinese officials
to continue to cap the dollar near CNY7.20. The dollar fell to 2.5-week lows
ahead of the weekend near CNY7.1820. Chart support may be around CNY7.1750. The
dollar fell to CNH7.1850 against the offshore yuan and recovered to make a
marginal new session high (~CNH7.2035) in the North American afternoon before the weekend.
Japan:
The initial estimate of contraction in Q4 23 looks now likely to be revised
away with a jump in capex. Still, the Japanese economy continues to struggle at
the start of the 2024. In late February, we learned that industrial output
collapsed by 7.5% in January, spurred by the earthquake on New Year's Day and
other disruptions in the auto sector. At the end of the week, Japan reports the
January tertiary industry index. A decline would boost the risk that the
world's third-largest economy may be contracting in Q1. Machine tool orders
fell by 14% in January (year-over-year) after a 9.6% decline in December. This
reflects a decline in domestic as well as foreign orders. The February figure
is due on March 11. Comments from a Bank of Japan board member boosted
confidence that officials are preparing to abandon the negative in interest
rate policy. The comments coupled with the stronger wage growth could signal a
hike at the March 19 BOJ meeting, though we are still inclined, even if less
confidently, to an April hike.
The increased confidence that Japan will exit
its negative interest rate policy later this month or next month while at the
same time, US interest rates fell, dragged the greenback to JPY146.50 after the
US employment data. At its lows, the dollar was approaching four standard
deviations below the 20-day moving average (~JPY146.35), twice the Bollinger Band. After the
low was set within 15 minutes of the US jobs data, the dollar recovered but
stalled near JPY147.25, which also the three standard deviation mark. Note that
the five-day moving average fell below the 20-day moving average last week for
the first time since early January, illustrating the turn in the near-term
trend and momentum. The Q4 24 GDP revision may pose headline rise, but the
recovery in US rates could see the dollar trade higher. Initial resistance may
now be around JPY147.50 and then JPY148.00-10.
Eurozone: The only notable high-frequency data point is January's
industrial output. Several countries reported last week: (Germany 0.6%, France
-1.1%, and Spain 0.4%). The Netherland's reported a 1.0% rise in January
manufacturing production. It had jumped 6.8% in December. Ironically, the Dutch
manufacturing PMI stood at 48.9 in January, up from 44.8 in December. It has
not been above 50 since July 2022. Last week's ECB meeting was unsurprising. It
is too early to cut rates but the small downward revisions to this year growth
(0.6% vs. 0.8%) and CPI (2.3% vs. 2.7%) underscore expectations (~90%) of a
rate cut in June, which is about the same as a week ago.
The euro peaked slightly above $1.0980 within
a quarter-of-an-hour of the US jobs data. It briefly overshot the (61.8%)
retracement of the losses ($1.0970). But then the euro drifted about a
half-of-a-cent lower and settled near $1.0940. The loss before the weekend
snapped a five-day rally. The session low around $1.0920 was set a couple
minutes before the jobs report. It settled slightly inside the upper Bollinger Band. Initial support may be found in the $1.0890-$1.0910 area.
United Kingdom: The
UK will provide January/February jobs data. As also seen in the US and
eurozone, the UK's labor market is proving resilient, and this is especially
notable given that the economy declined in H2 23. The key element for the Bank
of England is the weekly earnings. The three-month moving average has fallen
steadily from the 8.5% peak in July 2023 to 5.8% in December. Separately, note
that as the price surge from early 2023 drops out of the 12-month measure, the
year-over-year CPI is likely to fall below 2% in Q2. At the same time, the UK
economy may have stopped contracting but activity does not appear to be
improving. The January monthly GDP and details is due March 13.
Sterling fared better than the euro. It held on to more
of its gains after the US jobs data and extended the advance for the sixth
consecutive session, matching sterling's longest advance since July 2020. It
reached almost $1.29 on the flurry of activity after the US employment report,
which is the highest it has been since last July. It settled (~$1.2860) well
above the upper Bollinger Band (~$1.2805) after trading slightly beyond three
standard deviations from the 20-day moving average (~$1.2870). Last year's high
was around $1.3140. Initial support may be around the old cap of $1.2800 and
then $1.2750.
Canada: After
the Bank of Canada meeting last week, which as widely expected, maintained the
current policy rate and stance (neutral) and the February employment data, the
economic calendar is light in the coming days. The highlight is arguably the
portfolio flow report for January. Recall that 2023, foreign investors bought
almost a net CAD33 bln of Canada's stocks and bonds. That is down from around
CAD138 bln in 2022. In fact, last year was the least since the outright
divestment in 2007. At the end of last year, Canadian's bought a record CAD29.4
bln of foreign financial assets, mostly US equities (CAD23.2 bln). Foreign
investors sold about CAD530 mln of Canadian stocks in December 23 after
liquidating CAD5 bln in November. Foreign investors bought CAD11 bln of debt
instruments, mostly central government bonds and money markets.
Canada created more full-time jobs in February (70.6k)
than it did in the September 2023-January 2024. Nevertheless, with the
unemployment rate ticked up to 5.8% (from 5.7%) and hourly wages moderated
(4.9% year-over-year from 5.3%). The US dollar had fallen to CAD1.3420 after
repeatedly finding offer around CAD1.3600. However, the greenback's broad
recovery and the sell-off in US equities, helped it recover against the
Canadian dollar. It stalled near CAD1.3500. The price action reinforces the
technical significance of the CAD1.3400 area. Initial resistance is likely
around CAD1.3500-35, which houses retracement objective and the five- and
20-day moving averages.
Australia: The
economic diary has no government reports in the days ahead. The Reserve Bank of
Australia meets on March 19, followed by the February employment data on March
21. There is little chance of a cut in the coming months. The futures market
has almost a 70% chance of a cut in June (~75% probability at the end of last
week) and nearly a 90% chance of a cut in August (also was near 75% at the end
of last week). Separately, Australia reported 0.2% growth in Q4 23 last week,
which was in line with expectations. However, for the fourth consecutive
quarter, due to rising population, per capita GDP fell. Note that many
countries in East Asia, including China, Japan, Taiwan, and South Korea have
shrinking populations. Any growth is an increase in per capita GDP.
The Australian dollar had its best week so far this year,
rising almost 1.5% against the US dollar. That lagged the yen and sterling
among the G10 currencies. The Aussie's surge also lifted it beyond three
standard deviations from the 20-day moving average (~$0.6655) in the immediate
reaction to the US jobs data. It reached almost $0.6670, overshooting the
(61.8%) retracement of this year's decline. However, it returned to the session
lows near $0.6615 in the North American afternoon. Still, it was barely within
the previous day's range (the high was $0.6625). The $0.6600 area may offer
initial support but a push back toward $0.6650 seem possible without inflicting
much technical damage.
Mexico: After
falling by 0.7% in December, the second-consecutive monthly decline, Mexico's
industrial production likely bounced back in January, led by a sharp rise in
auto production (~307k vehicles vs 216k in December). The peso is proving more
resilient than expected. It has risen in nine of the last 10 sessions and
begins the new week with a seven-day advance in tow. Its nearly 1% gain this
year has overtaken the Indian rupee (~0.5%) as the strongest emerging market
currency. The dollar recorded a new low for the year ahead of the weekend
around MXN16.7640. The eight-year low set last July was near MXN16.6260. The greenback
approached three standard deviations from the 20-day moving average against the
peso (~MXN16.7570) The downtrend line we have been tracking that has not been
violated on a closing basis begins the new week near MXN17.0150 and finishes
the week around MXN16.97.
(Business trip will interrupt the commentary over the next few days. Check out the March monthly here. Back with the Week Ahead on March 9. May have some comments on X @marcmakingsense.)
Overview: Outside of the Australian and New Zealand
dollars, which are off by 0.20%-0.25%, the other G10 currencies are little
changed and mostly softer in narrow ranges. A firm Tokyo CPI, mostly on base
effects and softer rates helped keep the US dollar below the recent highs
against the Japanese yen. Most emerging market currencies are lower, led by the
Malaysian ringgit. Meanwhile, the Hungarian forint is stabilizing after
extending losses to new record levels against the euro. The new news among US
data today is the ISM services. It is expected to have softened, but
disappointment could weigh on US rates.
The US 10-year yield is off
about 2.5 bp to 4.19%. The 200-day moving average is near 4.17%. It has not
closed below it since the January jobs report on February 2. European benchmark
yields are 2-3 bp lower and the UK Gilt yield is off slightly more than four
basis points ahead of tomorrow's Spring Budget. The US Commerce Department's
decision to require AMD to get license to sell chips tailored for China because
they are still too powerful may have contributed to the 2.6% slide in mainland
shares that trade in Hong Kong, while the CSI 300 itself was up about 0.7%. Tokyo's
equities were mixed, while Taiwan and New Zealand saw small gains, while the
other larger bourses traded off. Europe's Stoxx 600 is down by 0.3% in late
morning dealings. US index futures are also trading with a heavier bias.
Meanwhile, gold's surge has continued. It is closing in on the high set last
December near $2135.40. It is up $100 an ounce since last Monday. April WTI
initially extended yesterday's pullback but found support ahead of $78 and has
recovered back to session highs, just inside yesterday's range, of almost
$78.90.
Asia Pacific
Tokyo's CPI jumped back in
February after both the headline and core slipped below 2% in January to 1.8%
(previously revised from 1.6% initially). The headline rose to 2.6% and the core is
at 2.5%. The increase appears to be mostly the result of base effects and the
subsidies introduced last year for utility prices. This warns of a rise in the
national measure due March 22. The measure that excludes fresh food and energy
did tick down to 3.1% (from 3.3%). Still, the firmer headline and core prints
still point to the BOJ finally exiting the negative interest rate policy
probably next month even though the economy is struggling after contracting in the
second half of 2023. That said, Q4 23 capex was reported early yesterday that
point to an upward revision in Q4 23 GDP. The initial GDP assumed that private
investment contracted by 0.3%. That was the third consecutive quarterly
decline. Japan's Q4 23 GDP will be revised on March 11. The capex figures were
sufficiently strong that the contraction looks likely to be revised away.
In the seemingly
ever-expanding definition of national security, the US Commerce Department
announced last week it will investigate potential data and cybersecurity risks
posted by Chinese EV and internet-connected vehicles. Is it too cynical to suspect the
conclusion is already known? China imposes a 40% tariff on US auto imports (15%
on vehicle imports from other countries). This encourages US producers to build
autos inside China. That is the source of the some 2.1 mln vehicles sold by GM
in China last year (that reflected an 8.7% decline and for the first time in
more than a decade, reports indicate GM sold more cars in the US than China in
2023). The Trump administration boosted the tariff on Chinese auto imports to
27.5% and that has been maintained by the Biden administration. The EU is
moving toward challenging China-made EVs too, but on economic grounds not
national security. The Biden administration recognizes that China is using
unfair trade practices. Isn't that the jurisdiction of the WTO? There is a
sense among many Americans that the WTO has failed. Yet, the facts suggest
something different. The US has challenged China before the WTO 20 times since
2004 and won 17 cases. The other three are still pending before the US
sabotaged the conflict resolution mechanism by blocking the appointment of
appellate judges (Trump and Biden).
The dollar traded firmly
against the yen on Monday, assisted by the firmer US rates. However, the greenback held below
the JPY150.70-JPY150.85 cap seen last week. The firm Tokyo CPI readings saw the
dollar slip to JPY150.35. Nearby support is seen near JPY150.20. The firm Tokyo
CPI reading with implications for the national report due next week and may
reinforce speculation of a rate hike next month. Note that the final Japanese
service and composite PMI were revised a little higher from the preliminary
readings. Since session high was recorded in the Asia Pacific session
yesterday near $0.6535, it trended gently lows and dipped below $0.6510 in
quiet afternoon turnover in North America. Follow-through selling
today pushed it below the shelf forged in the second half of last week in the
$0.6485-90 area. It has found bids slightly below $0.6480. There is little
technically standing in the way of a return to the mid-February lows around
$0.6445. That said, the final service and composite PMI were a little higher
than the flash estimate, confirming the return over the 50 boom/bust level. China's
National People's Congress targeted 5% growth this year, which was largely
expected. Although the general government deficit target is 3%, there will
be CNY1 trillion in special bond issuance by the central government (on top of
the CNY3.9 trillion) in special local government bonds. The PBOC set the
dollar's reference rate at CNY7.1027 (CNY7.1020 yesterday). The average
projection in Bloomberg's survey was CNY7.1985 (CNY7.1890 on Monday). The fix
allows the dollar to trade between about CNY7.9605 and CNY7.244, 8but CNY7.20
has been a formidable cap. It has not been violated in three months.
Europe
There are two highlights
from Europe this week. First, Tomorrow's is the UK Spring budget. Chancellor of the
Exchequer Hunt is widely expected to deliver some tax relief. The scope looks
limited unless there are also some revenue-enhancing measures. The Office for
Budget Responsibility projects that the budget deficit for FY24 will narrow to
3% of GDP form 5.0% in FY23. We anticipate a sharp drop in UK inflation in the
coming months as the surge in early 2023 drops out of the 12-month comparison.
This will likely prove more important from the Bank of England's perspective
that some modest net tax relief. The market has the first cut nearly fully
discounted for August and almost 2 1/2 quarter-points moves this year. Second
is the ECB's meeting Thursday. It is still too early to expect a rate cut. The
swaps market has a cut nearly priced in for June (90%). However, a cut in
growth and inflation forecasts helps set the stage. In December, the ECB's
staff forecast 0.8% growth this year and 2.7% CPI. Growth might be half of that
while inflation could be below 2.5%.
The final February PMIs were
a slightly firmer than the preliminary estimates. There are three takeaways. First, the
eurozone economy appears to be stabilizing but at weak levels. The 49.2
composite reading (unchanged from the flash reading) is the best since last
June, even if still below the 50 boom/bust level. Second, while the
manufacturing sector is still a drag, with the manufacturing PMI at 46.5 (It
has not been above 50 since June 2022), the services PMI is rose above 50
(50.2), for the first time since last July. Third, Italy and Spain are showing
greater strength then Germany and France. The February composite PMI were 51.q
and 53.9, respectively. The conventional narrative is that before monetary
union, the loss of peripheral (and French) competitiveness would be offset by
an occasional devaluation. Under monetary union, the argument goes, real wages
bear the burden of the adjustment. There is some merit to the argument but note
that the competitiveness is also restored by the periphery having lower
inflation than Germany. This was the case last year when Italy's harmonized CPI
rose 0.5% in December year-over-year, while Germany's was 3.8%. Spain's CPI was
3.3% last December and Portugal's was stood at 1.9%.
Separately, while the
British economy contracted in Q3 23 and Q4 23, the composite has been moving
higher. It bottomed
last September at 48.5. It has steadily recovered and moved above 50 last
November and reached 53.0 (rather than 53.3 preliminary estimate) in February,
the best since last May, up from 52.9 in January. In recent comments Bank of
England Governor Bailey recognized the green shoots. The next key data point
from the UK is the employment report on March 12.
Yesterday, the euro barely
traded in the pre-weekend range, and remained firm through the North American
session. According to
Bloomberg's data, the euro traded 1/100 of a cent above last week's high,
slightly north of $1.0865. The euro did not trade below $1.0840 in North
America. The euro bottomed in mid-February slightly below $1.07. It appears to
have taken much energy to lift it this far. It has gone nowhere today and has
been trading inside a $1.0840-$1.0860 range today. The intraday momentum is
getting overbought in the European morning. Ideas that the UK's Spring
Budget will mean a longer delay before the BOE cuts rates appeared to help
sterling yesterday. It briefly rose above $1.27, which it was unable to do
last week. Recall that in the bigger picture, sterling was in a $1.26-$1.28
trade range from mid-December 2023 through early last month. It, too, is in a
narrow range today, roughly $1.2670-$1.2695.
America
The final services and
composite PMI and another look at January durable goods orders (alongside
factory orders) may pose some headline risk but the market may be most
sensitive to the ISM services. Recall that last week, the ISM manufacturing survey was weaker
than expected and softer than the manufacturing PMI. This saw yields fall,
which pulled the greenback lower. Recall that the January services PMI showed a
large jump in prices (64.0 vs. 56.7 in December) and the market will watch this
closely. Still, as the focus shifts to the US labor market the services ISM
employment (January 50.5 and 43.8 in December) will also be a focus.
Around the time Powell
begins to testify tomorrow, the JOLTS report on job openings and the ADP
estimate of private sector employment developments will be published. The JOLTS report seems to have lost much
of its previous market impact and the ADP is not a good guide to forecasting
the government's assessment of the labor market. The BLS estimates the US
created 867k jobs in the three months through January. This seems unreasonably
strong. However, we note that the median forecast in Bloomberg's survey has
edged higher in recent days and now stands at 200k. While it is lower than H2
23 average of 220k a month, it would still be seen as a resilient if not robust
number. Note too that the poor weather that may have been responsible for the
0.2 of an hour decline in the average work week (to 34.1 hours) likely snapped
back and the 0.6% rise in average hourly earnings is not going to be repeated,
allowing the year-over-year rate to return to 4.3%, where it was steadily in Q4
23.
There is practically no
chance of a change in interest rates by the Bank of Canada when it meets on
Wednesday. The
better growth profile (Q3 GDP's contraction was revised to -0.5% from -1.1% and
Q4 growth was 1.0%) takes some pressure off the central bank. Canada's labor
market is not proving as resilient as the US. The unemployment rate is likely
to return to 5.8%, where it was at the end of last year before slipping to 5.7%
in January. It was at 5% as recently as last April. Mexico reports February CPI
tomorrow. The headline and core rates are expected to continue to moderate.
While we favor a cut at the March 21 central bank meeting, our confidence is
not strong. However, the next meeting (May 9) could be too close to the
election to announce a shift in policy by the fiercely independent central bank.
For the fourth consecutive
session, the US dollar is trading inside last Thursday's range
(~CAD1.3525-CAD1.3605) against the Canadian dollar. The consolidative price action still looks
constructive and even the late rally in the S&P 500 yesterday failed to
lend the Canadian dollar much support. The CAD1.3600-25 area offers the nearby
cap, and a break of could signal a move toward CAD1.37. The US dollar fell
by nearly 0.35% against the Mexican peso yesterday, the most in about 2 1/2
weeks. The greenback settled near session lows, around MXN16.9560, its
lowest level since mid-January. It eased to about MXN19.9525 in early Asia
Pacific turnover before recovering to about MXN16.98. The low for the year was
recorded on January 8 near MXN16.7850. In the futures market as of the
reporting week ending February 27, the gross long speculative position slipped
for the second consecutive week, but at 93.8k contracts, it is among the
largest in nearly four years (MXN500k per contract or ~$29.500). The gross
longs at 146k are the most since last March, while the gross shorts are up
about 8k contracts since the end of last year to 52.3k. The downtrend line we
are tracking comes in near MXN17.06 today.
Overview: The dollar is narrowly mixed against the
G10 currencies to begin the week that features a Bank of Canada and ECB
meetings, US jobs data, Federal Reserve Chair Powell's two-day testimony before
Congress, and US President Biden's State of the Union address. Most emerging
market currencies are firmer. The Turkish lira is a notable exception. Higher
than expected took a toll, knocking it down by around 0.5%. On the other hand,
the Malaysian ringgit is up almost as much as the government appears to be
persuading state-owned companies to repatriate foreign earnings.
The Nikkei settled about 40k
for a new record, while the Topix slipped fractionally. Most of the large
bourses in the Asia Pacific region rose by Australia, New Zealand, and the
mainland shares that trade in Hong Kong. Europe's Stoxx is firmer. It has a
five-week rally in tow and has only fallen in two weeks since mid-November 2023.
US index futures are nursing small losses. European benchmark 10-year yields
are mostly 2-3 bp lower. S&P upgraded Portugal's rating to A- from BBB+
before the weekend and maintained a positive outlook. It recognized the
country's improved external financing position. Its 10-year yield is off about
2.5 bp today, the same as Spain. Portugal holds a national election next Sunday.
The 10-year US Treasury yield is near 4.20%. It is up about two basis points
today after falling 11 basis points in last three sessions. Gold is extending
its rally into the fourth session. It is up slightly today after a 1.9% surge
ahead of the weekend. It is trading slightly below the high set late last
December near $2088.50. April WTI traded above $80 a barrel ahead of the
weekend for the first time since early last November. OPEC+ announced it would
extend its output cuts through the middle of the year, though its production
was still more than agreed. April WTI is trading quietly in about a 40-cent
band on both sides of the $80 mark.
Asia Pacific
China's Caixin services and
composite PMI will be reported tomorrow and are expected to tick up. More importantly, the market is
anticipating more stimulative measures by Beijing and will be watching news
from the "two sessions" (National People's Congress and Chinese
People's Political Consultative Conference), which starts tomorrow. Among other
things, a growth and budget deficit target for this year are expected to be
announced. There is likely to be scope for modest fiscal stimulus. Numerous
personnel changes are anticipated. News that Premier Li will not hold the
traditional press briefing after the close of the NPC. As recently as 2018, the
NPC endorsed the press briefing as evidence of China's "openness and
transparency."
Tokyo's February CPI will be
reported the first thing tomorrow. Subsidies introduced in February 2023 dampened the measure a
year ago and the base effect warns of a jump back above 2%. Recall in January,
Tokyo's headline CPI fell to 1.6% before being revised to 1.8%, after finishing
2023 at 2.4%. Similarly, the core rate eased from 2.1% to 1.6% in January and
was revised to 1.8%. Both are expected to have recovered to 2.5%. Still, with a
little bit of luck, the measure that excludes both fresh food and energy may
slip to 3.1% from 3.3% to extend the decline since peaking last July-August at
4.0%. The yen could strengthen on the rise in Tokyo CPI. The Bank of Japan
meets March 19, and the results of the spring wage round will be known a few
days earlier. Still, we think a move in April is more likely. Bloomberg
economists do not see a move until July.
The softer US data extended
the pullback in US yields ahead of the weekend, and this helped reinforce the
recent cap near JPY150.85. The dollar posted its first weekly loss against the yen this year.
Still, it settled above the 20-day moving average (~JPY149.90). As it did last
month, the US jobs data may be the key to US rates and the exchange rate. The
dollar recorded the session low near JPY149.85 near the middle of the Asia
Pacific session before recovering to session highs around JPY150.45 in the European morning. With
firmer US yields and constructive intraday momentum indicators a push to new
highs in North America looks likely today. The Australian dollar carved
out three-day shelf near $0.6490. It is trading in a quiet,
fifth-of-a-cent range above $0.6515 today. A move above the $0.6550-$0.6575
area is needed to signify anything important for a technical perspective. And
even then, the $0.6600-$0.6625 area may also offer resistance. The dollar's
pullback against the yen ahead of the weekend seemed to help Chinese officials
who seem to be resisting pressure for yuan depreciation. It is not trying
to weaken the yuan for competitive purposes but trying to moderate the impact
of the dollar's broad gains. The PBOC set the dollar's reference rate at
CNY7.1020 (last week's fixings were between CNY7.1036 and CNY7.1080). The
average projection in Bloomberg's survey was CNY7.1890 (CNY7.1978 on Friday).
In the spot market, the dollar continues to be capped at CNY7.20. Against the
offshore yuan, the dollar is hovering around CNH7.21.
Europe
There are two key events
this week in Europe: the ECB meeting and the UK's Spring Budget. The ECB may update the progress on its
review of its policy framework. The staff may revise growth and inflation
forecast lower, which provide a backdrop for the rate cut likely in Q2. On the
eve of the last ECB meeting (January 25), the euro settled near $1.0885 and the
20-day moving average was around $1.0940. The euro's highest close in February
was on February 1 near $1.0870 and the 20-day moving average is near $1.0790. Brent
crude oil settled near $80 a barrel on January 24 and the 20-day moving average
was about $78.15. It is now clear to $83 a barrel and the 20-day moving average
is around $82.15. The exchange rate and oil prices feed into the staff's
forecast.
Businesses, households, and
especially voters, have been primed for tax cuts from Chancellor Hunt's spring
budget that will be delivered Wednesday We suspect it
will not change the opinion polls much. Reduced spending to pay for tax cuts may
not be persuasive, especially if personal allowances remain frozen. At the risk
of oversimplifying, the Tories have led the UK government since 2010. The party
is tired as are voters. Labour, meanwhile, appears to have shifted to the right.
There are about 348 Tory MPs and roughly 45 have indicated that they will not
run again in the next election, which is expected later this year. Local
elections will be held in May. The Office for Budget Responsibility sees the
budget deficit falling in FY24 to 3% of GDP from 5% in FY23. Monetary policy is
restrictive. The policy mix contrasts with the US, where the OECD projects a 7%
budget deficit after 6.5% last year and the Fed monetary policy is tight. The
US policy mixed of accommodative fiscal policy and tight monetary policy is
often associated with appreciating exchange rates. A politically sensitive
issue in the Europe, including the UK, and the US is immigration. Many seem
skeptical of the UK government's scheme to send migrants arriving in small
boats to Rwanda. Although the government claims Rwanda is a "safe
country", the Home Office reported last week that 20 Rwandans sought
protection in the UK last year, mostly in Q4 23, and 15 were granted
asylum.
Euro dips below $1.08 were
snapped up in the past three sessions. There are options for about 2.3 bln euros that expire there today
and another set for 1.8 bln euros Wednesday. Last week's high was near $1.0865.
The euro settled higher in back-to-back weeks for the first time this year. Today's
range (~$1.0840-$1.0860) was set in one hour's activity in late Asia Pacific
turnover. The pre-weekend higher was slightly shy of $1.0845. News that
Switzerland's EU harmonized inflation slipped to 1.2% from 1.5% kept the
pressure on the Swiss franc. The euro appears to be trying to solidify a
foothold above the 200-day moving average (~CHF0.9565) for the first time since
last April. Sterling set an eight-day low at $1.26 before the weekend
and bounced smartly on the back of the broader US dollar pullback. It
made new highs for the day in late dealings near $1.2665 (~GBP2.3 bln in
options expire today between $1.2650-$1.2655). It has not been below $1.2650 so
far today and it has tested $1.2680 several times. Last week, it struggled near
$1.27 and has not closed above this, the middle of its old trading range since
February 1, the day before the US job report.
America
The recent price of the
action of the dollar still shows the sensitivity to US rate developments more
than European or Japanese. That
seemed to be clearly the case in Q4 23. Rates and rate expectations fell among
the high-income countries and the dollar fell. The market corrected in January
and February--rates backed up and the dollar rose. The dollar was threatening
to break higher ahead of the weekend when the weaker-than-expected January
construction spending (-0.2% instead of +0.2% as the median forecast in
Bloomberg's survey had it), and especially the weakness in the ISM
manufacturing survey (it remained below 50 at 47.8 vs. 49.1 in January),
including a slump in new orders (49.2 vs. 52.5 in January). The market put more
weight on the ISM than the upward revision in the manufacturing PMI (52.2 from
the preliminary estimate of 51.6 and 50.7 in January). The Atlanta Fed now sees
the economy tracking 2.1% growth in Q1.
After getting past the final
PMI services and composite, the ISM services, and another look at durable goods
orders, the there is one more key event as attention turns to the US labor
market. Namely, Fed
Chair Powell testified before the House Financial Services Committee on
Wednesday and the Senate Banking Committee on Thursday. The prepared remarks
are the same. The questions may differ, but the answers won't. Powell can be
expected not to deviate much from what he said at the press conference
following the last FOMC meeting. The economy and prices are evolving in the
desired direction, and more is needed to boost confidence of meeting the
inflation target. At the same time, he may refer to the Summary of Economic
Projections showing that Fed officials do expect to be able to cut rates later
this year.
The drop in US rates, the
risk-on that saw the S&P 500 reach a new record high, and the broad dollar
pullback ahead of the weekend failed to drive it below the previous day's range
against the Canadian dollar (~CAD1.3540). Still, for the third consecutive session, US dollar
sellers emerged around CAD1.3600. We have been looking for the greenback to
peak in the CAD1.3600-CAD1.3625 area, but so far, the price action has not been
convincing. The US dollar found support today near CAD1.3545. The
Mexican peso, on the other hand, set a new high for the week before the weekend
and has pushed higher today. At the end of last week, it traded for the
first time outside of the range set on February 22 (~MXN17.0120-MXN17.1570).
The downtrend line, we are tracking, comes in today slightly above MXN17.06 and
by the end of the week is below MXN17.02. Today's low near MXN16.9960 is barely
above last month's low set on February near MXN16.9950. The low for the year
was recorded on January 8 around MXN16.7850.
Rarely are officials able
to achieve the proverbial economic soft-landing when higher interest rates help
cool price pressures without triggering a significant rise in unemployment or a
contraction. Yet, without declaring victory, the Federal Reserve's confidence
that this will be achieved has risen. Still, its increased confidence is
unlikely to lead to a rate cut this month.
To appreciate where things
stand begins with recognizing that what has characterized the first two months
of the year is a reaction and correction to what happened in Q4 23.
The decline in interest
rates in the last few months of 2023, in turn, helped lift the stock market. The S&P 500 rallied 11.25% in
Q4 23, it best quarterly performance in three years. Much focus is on the
narrow breadth of the market, as the Magnificent 7 (Apple,
Amazon, Nvidia, Tesla, Microsoft, Meta, and Alphabet) which has replaced the
FANG (Facebook, Amazon, Apple, Netflix, and Google) lead the way.
Yet, the Russell 2000, which is an index of the shares of the 2000 smallest
companies, gained 13.5% in Q4 23.
Falling interest rates
knocked a leg out from the under the dollar. The greenback fell against all the
major currencies in Q4 23. JP Morgan's Emerging Market Currency Index had its
best quarter of the year, rising 2.35% against the dollar in the last three
months of 2023.
As is common in the
capital markets, the pendulum of sentiment swings dramatically. Since the start
of the year, the pendulum has swung back and this is true of Europe, Canada,
and the United States. The market now recognizes the first cut will come later
and the magnitude of rate cuts this year well be less aggressive than thought
likely at the end of last year.
The first Fed rate cut has
been pushed out of March and a rate cut is no longer fully discounted until
July. The market has converged with the median in the Federal Reserve's
December Summary of Economic Projections that anticipated three cuts would be
appropriate this year. As recently as mid-January, the Fed funds futures market
had 6 1/2 cuts discounted. The market has reduced the extent of ECB cuts to
about 95 bp (from 160 bp at the end of January and 190 in late 2023). The Bank
of England is now expected to cut rates twice and possibly three times this
year (65 bp), which is about 105 bp less than was discounted at the end of last
year. The extent of Bank of Canada rate cuts this year has been more than
halved to around 75 bp from 160 bp in late December 2023. We suspect that the
interest rate adjustment is nearly over.
Paradoxically, equities
have continued to rally. The S&P 500 and NASDAQ have set new record highs,
though the Russell 2000 is lagging. Lower interest rate expectations were
previously cited by the bulls, and now the idea that economic activity may be
stronger said to be inflaming the animal spirits. Japan's Nikkei has surpassed
the 1989-1990 highs to reach new records. Europe's Stoxx 600 also set
record-highs last month.
The US Q4 23 GDP grew by
3.2% at an annualized rate. Most economists had expected something closer to
2%. Moreover, the strong pace was achieved with moderating price pressures. The
GDP deflator was halved to 1.6% (from 3.3%). Also, unit labor costs, which are
a key competitive metric, combining labor compensation and productivity, fell
in H2 23. To say the same thing, productivity gains more than offset the
increase in wages/salaries and benefits.
A combination of
stronger than expected US economic data and guidance by Federal Reserve
officials encouraged the market to temper its aggressiveness. The economy
appears a reasonably a strong start to the new year. In early February, the
government reported that the economy grew over 350k jobs in January, which was
nearly twice what economists expected. In the three months through January, US
businesses created almost 750k jobs, the most in a three-month period since
September-November 2022.
Not only were there more
people working, but they were getting paid more. Average hourly earnings rose
by 0.6% in January. That was twice as much as economists expected and the most
in two years. The year-over-year rate stood at 4.5%. It continues to exceed the
Consumer Price Index, which helps underpin demand.
The strength of the
consumer is a key factor that helped avoid a recession that looked likely.
Government deficit spending is arguably another crucial factor. The US budget
deficit was around 6.5% of GDP last year. Some funds, such as within the Chips
Act provisions, are slowly being distributed. More actual spending is in the
pipeline.
The US deficit was twice
the size of the Eurozone's (3.3%), and larger than the UK's (4.5%), Japan's
(5.2%), and Canada's (1.2%) budget shortfalls. Projecting this year's deficit
requires making numerous assumptions, but many economists expect the deficit to
be around 6% of GDP. That may still be twice as high as the Eurozone's and
higher than most others.
The Eurozone and UK are
experiencing economic stagnation, and this looks likely to persist through most
of the year. Inflation in both areas is likely to fall sharply in the coming
months and this will allow the central banks to begin cutting interest rates.
Japanese inflation is also falling, and the core rate slipped looks poised to
below the 2% target. Despite the moderation in prices and an economy that looks
weak at the start of 2024 after contracting in the past two quarters, we expect
the Bank of Japan to raise its overnight interest rate from below zero (-0.10%)
in April, though there is a risk could be at this month's meeting (March 19).
China's economy is
underperforming Beijing's expectations regardless of what the official data may
show. There are promises of more supportive measures. At the same time, what
China does appear to be doing well, like EV and battery production, solar panels,
and processed rare earths, threatens its trading partners. An index of the 300
largest stocks on the Shanghai and Shenzhen exchange fell to five-year lows in
early February before staging an impressive 13%+ rally, encouraged by formal
and informal help from Beijing.
Weak economic impulses
and the elevated geopolitical tensions make for a poor international backdrop. The
risks are set to escalate. US aid to e may be in jeopardy, but Kyiv's F-16,
now with trained pilots, give it the capability to project deep into .
Meanwhile, a secondary consequence of Israel and the Hamas conflict is the loss
of control of the Red Sea. Shipping costs have risen, especially between Europe
and Asia. Oil prices have become more volatile, but net-net have risen by
slightly more than 7% since the end of last year, while gyrating in about a
$10-range below $80 a barrel. The average retail price of gasoline in the US is
nearly 7% higher than at the end of last year, after falling nearly 20% in the
last four months of 2024.
At first, Fed interest
rate cuts may be explained not so much an easing policy as maintaining the same
level of restraint as inflation falls. In effect, without a cut in the nominal
interest rate, the real interest rate, would be too high to navigate a
soft-landing. It is the real rate, economists argue, that is the key signal for
businesses, investors, and policymakers. Later, as growth slips below 2%, the
rate cuts will begin providing more monetary support to the economy. In Europe,
labor markets have remained strong, giving officials more time for price
pressures to moderate. The Swiss National Bank meets on March 21. With core
inflation at 1.2% in January and growth weak, there is a reasonable risk that
the SNB delivers the first rate cut among the high-income countries.
Lastly, we note three
regularities during presidential election years. First, in the past 18
presidential cycles, going back to 1952, the economy has contracted twice (1980
and 2020). Second, the S&P 500 has fallen three times (1960, 2000, and
2008). Third, the Dollar Index (DXY), a basket of leading currencies, has
mostly risen in the dozen presidential election years since the end of Bretton
Woods. The record was perfect from 1976 through 2000. However, in the five
elections since, the Dollar Index has falling in three times (2004, 2012, and
2020).
Most emerging market
currencies fell against the dollar in February. The Mexican peso led with
around a 0.9% gain, closely followed by the Peruvian sol. A few Asian
currencies (Indonesian rupiah, South Korean won, Philippine peso, and Indian
rupee) appreciated by about 0.15% to 0.40%. The Polish zloty was the only
currency from central Europe to have gained (about 0.20%). The JP Morgan
Emerging Market Currency Index fell by about 1.2% to bring the year's loss to
slightly more than 3%. The MSCI Emerging Markets Currency Index rose by 0.20%
after falling nearly 1% in January.
Rising by 4.6%, the MSCI Emerging Markets Index for equities, recouped what was lost in January. It outperformed the
MSCI World Index of developed markets, which rose by about 4.1% in February. The
premium emerging market bonds pay over US Treasuries, measured by the JP Morgan
Emerging Bond Index narrowed slightly below 310 bp in February from 336 bp at
the end of January. It is the tightest spread since May 2021.
Bannockburn's World
Currency Index, a GDP-weighted basket of the currencies of the last dozen
economies fell by about 0.65% in February. This reflected the weakness of all
the foreign currencies but the Mexican peso, South Korean won, and Indian
rupee, which together account for slightly more than 8% of the BWCI. All the
G10 currencies in the index fell, led by the yen's 2% slump.
BWCI fell to a 20-day
low in early Q4 23. It rebounded by about 2.25% in November and December 2023
and reached a four-month high at the end of the year. As the greenback
recovered in January and February, BWCI fell by about 1.75%. It snapped a
six-week slide by rising in the final week of the month. Now that market
expectations have converged with Federal Reserve's projections from the end of
last year, and official comments still seem to endorse those view, we suspect
the key driver in recent weeks has largely run its course. Weak economic data
may reinforce the cap on rates, sap the dollar's strength and allow the BWCI to
recover.
U.S. Dollar: The market, as it did a
few times last year, ran well ahead of the Federal Reserve, only to converge
later. That adjustment now appears over. Official comments do not suggest a meaningful
change in views since the December's Summary of Economic Projections, which
anticipated 75 bp of cuts this year. The Fed's forecast will be updated at the
March 20 meeting. There will also be an update on the unwinding of the balance
sheet. It appears money market funds and others have born most of the
adjustment with bank reserves little changed. Still, some tapering before
stopping seems likely, perhaps beginning in Q2. Meanwhile, even though the
January job growth was nearly twice the forecast, economic activity is slowing, and
this may also help cap yields and the dollar in the weeks ahead. The Fed's facility launched last
year (Bank Term Funding Program) will stop new loans (one-year) on March 11.
The focus has shifted away from the systemically important banks and toward
regional banks, where commercial real estate exposure is significant. The index
of shares of large US banks is essentially is up a little less than 1% while the index of regional
bank shares is off 10% this year. The Dollar Index rose from around 100.60 in
late December to 105.00 in mid-February. The recovery appears over, and in the pullback,
we anticipate in March, the Dollar Index could fall toward 102.00.
Euro: Economic activity in the region
has stagnated since late 2022, and while things do not appear to have gotten
worse, growth impulses seem faint at best. Unemployment, however, remains near
record lows despite the tightening of the monetary policy and the lack of
growth. This seems to embolden the European Central Bank to wait until
inflation falls further toward target before easing monetary policy. And prices
pressures are set to fall sharply in the coming months that will likely lead to a
sub-2% rate in the second quarter. The preliminary February rate stood at 2.6%,
down from 2.8% at the end of last year and 8.5% in February 2023. The ECB will
update its forecasts in March. In December, it had forecast this year's growth
at 0.8% and inflation at 2.7%. Both seem to be vulnerable to downward
revisions. The European Parliament elections in June will increasingly dominate
the officials' bandwidth. Immigration challenges and farm prices have emerged
as key issues. The euro fell from about $1.1140 late last year to around $1.07
in mid-February. A recovery may have begun, perhaps there may be scope toward $1.0950-$1.1000 area, but suspect a new, higher trading range is more likely
than a sustained uptrend.
(As of March 1, indicative closing prices, previous in
parentheses)
Spot: $1.0835 ($1.0855) Median
Bloomberg One-month forecast: $1.0880 ($1.0875) One-month
forward: $1.0865 ($1.0850) One-month implied vol: 5.5% (6.2%)
Japanese Yen: Japan continues to have
a negative policy rate, debt-to-GDP of over 250% and central bank's balance
sheet more than 125% of GDP, an exchange rate that is extremely undervalued and
yet inflation core inflation, has fallen back to 2%. Moreover,
the economy contracted in Q3 23 and Q4 23, and is off to a weak start to 2024,
with a 7.5% decline in January's industrial output. Nevertheless, we still
the Bank of Japan is committed to lifting the target rate from -0.10%, which is
likely in April, after the results of the spring wage round (March 15) and as
the government subsidies for electricity and gas for households end, ahead
of the income tax cut. Bank of Japan Governor Ueda has emphasized the rise of
services prices, but we suspect that the negative rate is seen to hamper
monetary policy. He appears committed to lift rates barring some new shock.
Officials will try to convince businesses and investors that exiting negative
interest rates is not the beginning of tightening sequence. Monetary policy
settings are still very accommodative. The effective overnight rate has been
hovering near -0.05%, or about half as negative as the target. The BOJ owns almost 2/3 of
the equity ETFs, which account for around a quarter its assets. The Nikkei
rallied more than 28% in 2023 and is up about 19.25% here in 2024. Even for
unhedged, dollar-based investors, the return is half again as much as the
S&P has generated in the first two months of the year. The exchange rate
remains sensitive to US interest rates. If US 10-year yields continue to rise,
the JPY152 area, which capped the dollar in the last two years, will be
challenged again. Japanese official verbal intervention has injected a note of
caution into the market. On the one hand, the dollar rose in the first eight weeks of the year before the small (~0.25%) loss in the weekend ending March 1. This speaks to a one-way market. On the other hand, the two-year low in the
benchmark three-month volatility reflects an orderly market.
Spot: JPY150.10 (JPY148.15) Median
Bloomberg One-month forecast: JPY148.45 (JPY145.65) One-month
forward: JPY149.45 (JPY147.45) One-month implied vol: 7.7% (8.2%)
British Pound: The US jobs data and the
CPI pushed sterling out of the $1.26-$1.28 trading range in February. The low
was set after the employment report near $1.2520. However, sterling recovered
and finished the month in the old range. The British economy
contracted for the second consecutive quarter in Q4 24, meeting the Bank of
England's definition of a recession. The market looked past it, and sterling
settled higher on the day of the GDP report (February 15). Chancellor of the
Exchequer Hunt delivers the Spring Budget on March 6. The prime minister and
chancellor have been hinting at tax cuts ahead of what is expected to be an
election later this year. The most impactful cuts would be for the national health
system or income taxes. Depending on the spending cuts that may also be
announced, many look for GBP15-GBP20 bln of tax cuts. The personal allowance
has been frozen since 2021, and un-freezing them may have a greater impact than a small tax cut. Also, there has been some suggestion that the fuel duty
increase scheduled to start later in March could be scrapped, but the Tory's would
receive less recognition for canceling a tax hike than a tax cut. Meanwhile,
inflation is likely to fall sharply in the coming months as the large jump in
February-May 2023 (11.4% an annualized pace) drops out, and even with
conservative assumptions, the year-over-year pace is likely to fall below 2%. This
may encourage the market to bring forward the first rate cut, which the
overnight index swaps do not have fully discounted until August. Sterling,
as we saw in Q4 23, need not be adversely impacted by the shift in
expectations. With the downside break worth less than a cent, sterling could
test the upper end of the old range, seen near $1.28. The high from late last
year was almost $1.2830.
Spot: $1.2655 ($1.2705) Median
Bloomberg One-month forecast: $1.2670 ($1.2655) One-month
forward: $1.2660 ($1.2735) One-month implied vol: 5.8% (6.6%)
Canadian Dollar: Unlike Japan and
the UK, Canada managed to avoid contracting for the second consecutive quarter
in Q4 23. It grew by around 1.1% at an annualized rate, offsetting in full the revised 0.5% contraction (from -1.1% initially) in Q3 23. The economic impulses will likely remain subdued
through mid-year but without the economy contracting, the central bank does not
have much of a sense of urgency to cut rates. Still, like the eurozone and UK,
Canadian inflation rose sharply early last year (6% annualized in the first
five months of 2023), In the five months through January, Canada's CPI actually
declined slightly (not risen slower). Even if that pace is not maintained, and
CPI rises by an average of 0.2% a month from February through May, it may slip
below 2%. The underlying rates softened in January after stagnating in Q4 23.
The swaps market does not have the first cut fully discounted until July and it
has a little more than three cuts fully discounted this year. At the end of
January, the market had the first cut priced in for June and anticipated 100 bp
in cuts in 2024. The Bank of Canada meets on March 6 and there is practically
no chance of a rate cut. The Canadian dollar has fallen every week but one so
far this year and the advancing week was about 0.02%. Two-thirds of this year's
2.1% depreciation of the Canadian dollar took place in January. The US dollar rose to its best level since mid-December in late February, slightly above CAD1.3600. A move above CAD1.3625 signals another leg up, but in lieu of that a consolidative phase is likely that can re-test the CAD1.3450 area seen in late January/early February. Benchmark three-month implied volatility
is near 5%, a four-year low. It was flirting with 4% before the pandemic.
Spot: CAD1.3560 (CAD 1.3455) Median
Bloomberg One-month forecast: CAD1.3515 (CAD1.3475) One-month
forward: CAD1.3555 (CAD1.3445) One-month implied vol: 4.9% (5.0%)
Australian Dollar: The
Australian dollar recorded the low of the year so far with the US January CPI
on February 13 slightly below $0.6450. This seems to have completed the
pullback after the six-cent rally in the last two months of 2023. Provided the $0.6490 area holds, there may be scope back to $0.6600-$0.6625. Since the start of the year,
changes in the exchange rate have been highly correlated with changes in gold
(near 0.80, the upper end of where the correlations over the past five years.
Reserve Bank Governor Bullock did not rule out higher rates, but the derivative's
market clearly expects the next move to be a cut. The market is nearly a 75%
chance of a cut in June, while a quarter-point move is not fully discounted
until September. At the end of January, the market had nearly a 70% chance of a
May cut and a 95% chance of a June cut. Still the slight tick-up in the January
monthly CPI to 3.6% from 3.4%, the two-year low print in December will
reinforce the cautious approach by the RBA when it meets on March 19.
February's employment report is due the next day. Growth will likely remain
subdued in 0.2%-0.3% a quarter here in H1 24.
Spot: $0.6530 ($0.6575) Median Bloomberg
One-month forecast: $0.6575 ($0.6635) One-month forward:
$0.6535 ($0.6585) One-month implied vol: 7.9% (9.0%)
Mexican Peso: The Mexican economy eked out a 0.1%
expansion in Q4 23. Based only a small set of high-frequency data points for
the new year, it looks economic activity has increased a little. Inflation is
continuing to moderate. The central bank appears to have adopted what could be
considered an easing bias. Still, with the market pushing out expectations for
the first Fed cut, Banxico may not sense a great urgency to cut. However, there
is another consideration. If it does not cut on March 21, the next opportunity
would be May 9. The national election is June 2. This may be too close to shift policy for comfort. The short-dated cetes
(T-bills) already seem to be anticipating a cut. The dollar traded between
approximately MXN16.9950 to MXN17.2855. It is the narrowest monthly range in
almost a decade. This is also reflected in the options market, where implied
volatility has fallen to four-year lows, below 9%. The peso was the strongest currency in February, gaining about 0.9% against the US
dollar. In region, the Peruvian sol was second with
about a 0.35% gain and the Brazilian real was virtually flat. Still, we remain
concerned that market positioning leaves it vulnerable to a sell-off ahead of
the election.
Spot: MXN17.02 (MXN17.16) Median
Bloomberg One-Month forecast: MXN17.12 (MXN17.33) One-month
forward: MXN17.11 (MXN17.25) One-month implied vol: 7.4% (10.3%)
Chinese Yuan: Officials succeeded in
maintaining a steady yuan (against the dollar) and stopping the six-month rout
of the CSI 300. Beijing did not push hard to strengthen the currency but did
manage to keep it in a narrow range (approximately CNH7.1765-CNY-7.1995). That
is the narrowest monthly range since July 2015. Although the reference rate
that the People's Bank of China sets daily allows the dollar to trade a little
above CNY7.24, the CNY7.20 has proved a formidable cap. We suspect it is
tactical and not strategic on the part of officials. That means that if the
dollar continues to appreciate against the other major currencies, especially
the Japanese yen, the risk is that the dollar breaks higher against the yuan
too. It is difficult to know the intent of officials, but above CNY7.20 could
signal a return to the previous range (roughly CNY7.25-CNY7.30). Reports that
China's sovereign wealth funds and large asset managers were buying equities
encouraged others to do so as well. The CSI 300 rose 7% in the
holiday-shortened month, the biggest rally since January 2023, and offset the
January decline in full. Starting March 5, two important conferences begin.
They are the country's legislature, a 3000-person strong National People's
Congress and an advisory group, Chinese People's Political and Consultative
Conference. This year's growth target (5%?) is expected to be announced. There
will be personnel changes, and new economic pronouncement. We think more
stimulus and "reforms" will be forthcoming. At the same time,
economic tensions with the US and Europe are high and Chinese forces have continued
to be aggressive toward Taiwan, the Philippines, Japan's the Senkaku
Islands/Diaoyutai Qundao (disputed by both China and Taiwan), as well as Nepal
and Bhutan.
Spot: CNY7.1970 (CNY7.1775) Median
Bloomberg One-month forecast: CNY7.1815 (CNY7.1640) One-month
forward: CNY7.1070 (CNY7.0950) One-month implied vol
4.8% (4.7%)
Overview: The US dollar is mixed today. The
dollar-bloc currencies and the Scandis are enjoying a slightly firmer tone, while the
euro and sterling are edging higher in European turnover. The Swiss franc is softer, and the yen
has given back most of yesterday's gains after BOJ Governor Ueda acknowledged
that central bank seeks further confirmation that sustainable price goal is
within reach. We see it as a further signal of an April move on rates rather
than this month. Emerging market currencies are mostly lower but for a few
Asian currencies. The Dollar index is up about 0.25% this week coming into the
North American session. It fell by around 0.35% last week.
Asia Pacific equities rallied today. South Korea and Taiwan were exceptions. Europe's Stoxx is
up around 0.20% in the European morning. It must rise by another 0.25% or end a
five-week rally. US index futures are trading with a softer bias. The Nasdaq is
up 0.6% this week and the S&P 500 is up 0.15% before today's session. European
10-year bond yields are firmer, especially in the periphery, but the benchmarks
are 1-3 bp lower on the week. The 10-year US Treasury yield is off two basis
point to 4.23%. It finished last week near 4.28%. Gold is firmer as its advance
extends into the third consecutive session. The yellow metal is trading above
$2050. It has not closed above there since February 1, when it reached $2065. April WTI is firm above
$79. The high for the year was set on Wednesday near $79.60. Near $79.20, April
WTI is up 3.5% this week.
Asia Pacific
While some
central banks, like the Federal Reserve, say they are data dependent, the Bank
of Japan seems less so. The core CPI, which the BOJ targets
fell to 2.0% last month and looks poised to fall below it this month. The
economy has contracted for the past two quarters, and there is a real risk it
is continuing to shrink this quarter. Yet, BOJ officials appear determined to
finally exit is negative policy rate. It strikes us that officials view the
negative interest rate policy as having reached a point where the costs
outweigh the benefits. It is more of a technocratic decision than a view of the
economic outlook. Comments by BOJ Governor Ueda at the G20 finance ministers
meeting suggested a move in March, speculation of which helped the yen trade
higher yesterday, was unlikely. The yen returned toward its recent lows after
Ueda's comments were published. We continue to see April as a likely timeframe.
The results of the spring wage round will be known (March 15), and the
government's electricity and gas subsidies are scheduled to end, which will
lift headline inflation.
China's
February PMI were little changed from January. The
manufacturing PMI stands at 49.1, down from 49.2 in January. The low reading
last year was in May at 48.8. The non-manufacturing PMI rose to 51.4 from 50.7.
It is the third month of improvement. It was last above there in September 2023
(51.7). The composite PMI stands was unchanged at 50.9. It was at 56.4 last February.
The Caixin manufacturing PMI has fared better than the "official"
one. It edged up to 50.9 from 50.8. Next week's meeting of the National
People's Congress and the Chinese People's Political and Consultative
Conference are important events. The official growth target (which seems like
an input rather than an output) is expected to be announced (5%?). Personnel
changes are expected and although some platitudes about the private sector may
be announced, the Communist Party continues to broaden its presence and Xi know
no rival.
The yen had
an outsized reaction to the BOJ board members comments about inflation and
expectations reaching a critical point. Ueda's comments unwound most of the
yen's gains, but the swaps market is a different story. Yesterday, the swaps
market showed none of the drama of the spot fx market. The overnight index swap
for the meeting later this month rose by half of a basis point to 2.6 bps. It
rose by another half of a basis point today to 3.1 bp. The peak in January and
February was 35 bp. The OIS for April rose 3/10 of a basis point to 8.4 bp
yesterday, but slipped slightly to 7.8 bp today, where is also settled last
week. Japan's two-year yield is the highest since 2011, but it only rose by
about 8/10 of a basis point to almost 18 bp yesterday and another basis point
today to finish the week at 19 bp. That is a3.5 bp increase on the week. The
dollar found support in the North American morning near JPY149.20, the lowest
since February 12, the day before the US CPI was reported. It recovered to
closed slightly above the 20-day moving average (JPY149.20). The dollar reached
almost JPY150.70 in the European morning. A close below JPY150.50 is needed to
snap the dollar's eight-week advance against the yen. That matches the longest
rally since November-December 2013. With rate expectations converging with the
Fed's Q4 23 views and our expectation of generally softer economic data, the 50
bp rise in the US 10-year yield, which the exchange rate appears to track, may
have run its course. This may reinforce the cap in the JPY151-JPY152
area.
The Australian dollar stabilized yesterday after Wednesday's
drubbing, but it still looks vulnerable. The five- and 20-day moving
averages have turned down and the Aussie failed to close aback above $0.6500,
though it is straddling the area today, having reached almost $0.6515 in late
Asia Pacific turnover. The daily momentum indicators are turning lower. A
three-week rally is ending, and the Aussie has fallen more this week (~0.90%)
than it had risen in the previous three weeks. The Chinese yuan
continues to appear to track the yen. The yen's recovery yesterday saw the
yuan trade at five-day highs, and its reversal today, has seen the greenback
return to the CNY7.20 area that marks the cap. The PBOC set the dollar
reference rate at CNY7.1059 (CNY7.1036 yesterday). The average of Bloomberg's
survey was CNY7.1978 (CNY7.1935). The dollar settled last week near CNY7.1965.
It has risen in all but one week here in 2024.
Europe
The eurozone's
preliminary February CPI estimate stands at 2.6%, down from 2.8% in
January. The core rate is at 3.1%, down from 3.3% in January and is the
lowest in two years. The 0.6% monthly rise in the headline rate brings the
three-month annualized rate to about 1.6% and the six-month annualized rate to
almost 0.5% (no typo). The European Central Bank meets next week. It is still
too early to look for a rate cut, but the economic forecasts will be updated.
This year's CPI forecast of 2.7% seems high as does the growth projection
(0.8%).
The week ahead
continues to see a light calendar of market-moving high frequency British
economic data. The highlight next week is the Spring Budget, which is widely
expected to include some tax cuts as the Tories prepare for an election, seen
later this year. There has been speculation of a cut in the tax for the
National Health Services and a small cut in basic income tax rate. However,
personal allowances have been frozen since 2021, an un-freezing them would have
greater impact than a small tax cut. Some reports suggest the fuel tax duty
that is scheduled to be increased next month could be canceled and paid for by
extending the windfall tax on oil and gas companies (due to expire in March
2028). Separately, the final manufacturing PMI readings for Germany and France
were slightly between the than initial estimates, but at 42.5 and 47.1
respectively, there is little encouraging news here. Spain is more promising
with a 51.5 read, its best since June 2022. Italy's manufacturing PMI stands at
48.7 up from 48.5 in January. Note that the UK's manufacturing PMI final
reading rose to 47.5 (from 47.1 preliminary reading and 47.0 in January).
The euro made
a marginal new six-day low but continues to hold above important technical
support near $1.0790. The market does not appear done trying. The bounce
after the low early in the North American afternoon yesterday stalled near
$1.0810 and today's bounce fizzled slightly above $1.0820. It is difficult to
imagine a euro-bullish message from the ECB next week. Although intermittent
support may be seen around $1.0770, on a breakdown, there is little to stand in
the way of the test on the February low slightly below $1.07. In recent
days, sterling probed the middle of the old trading range near $1.27 but failed
to close above it. Yesterday, it settled on its lows and below the
20-day moving average. It reached about $1.2640 today in late Asia Pacific
turnover before being sold to session lows in early European activity a little
below $1.2620. The trendline connecting the two February lows comes in near
$1.2565 today, slightly below the 200-day moving average (~$1.2575).
America
Economists do
a good job interpolating the PCE deflators after the CPI and PPI are in
hand. And indeed, they matched the median forecast in Bloomberg's
survey. The surprise was the 1% jump in personal income. The median forecast
was for a 0.4% gain and instead it came in at 1.0%. We often think of income
being driven by wages and salaries. In January, dividends seemed to account for
about a third of the increase in income, and the increase in Social Security
payments (cost-of-living adjustment) was worth about 20% of the increase.
There are two
type of US data that will be reported today. The first are
surveys. They include in the final manufacturing PMI, the manufacturing ISM,
the KC Fed's Services Activity, and the final February University of Michigan
consumer survey. Second are the real sector reports. There two: January
construction spending and auto sales. Construction spending rose by an average
of 1.1% in 2023. As part of the general slowing of US growth, construction
spending will also likely moderate. The median forecast in Bloomberg's survey
is for a 0.2% gain after a 2.2% rise in January 2023. If the median forecast is
accurate, it would be the weakest January reading since 2017 (when construction
spending fell by 1.2%). Note that the data is sufficiently important as to
prompt the Atlanta Fed to update its GDP tracker after doing so yesterday (3.0%
vs. 3.2% previously for Q1 24). The Atlanta Fed will update its tracker before
the vehicle sales are known. Vehicle sales fell 5.2% in January to a 15 mln
unit seasonally adjusted annual pace. The median forecast in Bloomberg's survey
calls for about a 2.5% increase to 15.4 mln vehicles. That would mean a 15.2
mln average in the first two months of the year compared with 15.3 mln for the
Jan-Feb 2023 period. Next week, the market's attention turns back to the US
labor market. On top are JOLTS, ADP, and most importantly, the nonfarm payroll
report. The median forecast in Bloomberg's survey is for a 180k increase in
nonfarm payrolls after 353k was estimated in January.
Canada also
reports its February jobs data at the end of next week. But, ahead of
it, on Wednesday, March 6, the Bank of Canada meets. It is too early for the
Bank of Canada to move. The swaps market has about an 80% chance of a cut in
June, virtually unchanged on the week. The market is pricing in three rate cuts
this year and a 40% chance of a fourth cut. A week ago, only three cuts were
discounted. Mexico sees its manufacturing PMI and the IMEF surveys today.
Mexico also reports January worker remittances. There is a strong seasonal
pattern for remittances to decline from December (past 19 consecutive Januarys
without fail). Next week's highlight for Mexico is the February CPI on March 7.
A continued moderation is expected, and this may fan speculation of a rate cut
at the March 21 Banxico meeting. Brazil reports Q4 23 GDP today and February
vehicle sales. The economy eked out a 0.1% gain in Q3 23 and may be fortunate
to repeat that in Q4.
The US dollar
traded inside Wednesday's range yesterday and is inside yesterday's range so
far today. Inside days are often seen as reversals. But it does
not look like the greenback bulls have been satiated. The greenback held the
five-day moving average, slightly below CAD1.3540 and settlement was little
changed near CAD1.3580. The Canadian dollar has fallen every week this year so
far but one (week ending Feb 9 when it rose by 0.02%). It was off 1% in
February and almost 1.5% in January. The immediate cap can be found in the
CAD1.3600-25 area. The Mexican peso was the strongest currency in the
world in February, rising almost 1% against the US dollar. For the
past five sessions, the dollar has traded in the range set on February 22
(~MXN17.0120-MXN17.1570). It may stay in that range today. The downtrend line
we are monitoring comes in near MXN17.08 today and around MXN17.0250 at the end
of next week. The dollar held barely below BRL5.0 yesterday and has not closed
above there since the end of last October. The lower end of the recent range is
BRL4.91-BRL4.92. The real slipped by about 0.35% in February after losing
almost 2% in January.
Overview: The dollar is mixed as the market awaits
the US personal consumption expenditure deflator, which is the measure of
inflation the Fed targets. While there is headline risk, we argue that the
signal has already been generated by the CPI and PPI releases. The yen is the
strongest of the G10 currencies, up nearly 0.5%. The market shrugged off weak
data that spurs speculation of a third quarterly contraction and focused on the
comments from a BOJ board member that were consistent with the exit from
negative interest rates in the coming months. Meanwhile, the Australian and New
Zealand dollars remain fragile after yesterday's drubbing. Most emerging market
currencies are firmer today, led by the Malaysian ringgit, where officials are
threatening to intervene.
Asia Pacific equities were
mixed, including in Japan where the Topix edged higher, but the Nikkei slipped.
Mainland Chinese stocks rose with the CSI 300 up almost 2%. However, Chinese
companies that trade in Hong Kong fell by about 0.2%. South Korea and Taiwan
went in opposite directions as did Australia and New Zealand. Europe's Stoxx
600 is slightly firmer after falling by 0.35% yesterday. US index futures are
trading softer. Bonds are selling off. European benchmark 10-year yields are
4-6 bp higher. The 10-year US Treasury yield is up four basis points to nearly
4.31%. Gold is a little softer but within yesterday's range (~$2024-$2038). April
WTI is flattish near $78.50.
Asia Pacific
Japan's economy continues to
struggle. After
dropping 2.6% in January, the most since the early days of the pandemic,
Japanese retail sales edged up by 0.8% in January. Although economists,
including the IMF continue to bang the drum about weak Chinese consumption,
though it has doubled on a per capita basis over the past decade and is
growing, Japan has been given a free ride. In GDP terms, its consumption has
fallen for three consecutive quarters through Q4 23. It might be stabilizing
this quarter, but next week's labor earnings data will show real wages continue
to lag inflation as has been the case since 2019 on an annual basis.
Separately, Japan reported a dramatic 7.5% plunge in January industrial output.
It grew by a little more than 1.2% all last year. Recall that a 7.5-magnitude
earthquake struck northern Japan on January 1 and disrupted economic activity.
There was also a safety scandal at a subsidiary of Toyota that also caused a
temporary halt of production. A recovery appears underway this month. Factory
output is expected to rise 4.8% this month and 2% in March. Separately, Japan
reported a 7.5% drop in January's annualized housing starts, which last rose in
May 2023.
However, the impact of the
data was overwhelmed by the comments from Takata, from the BOJ board. He said that despite the economic
uncertainties, the "price target is finally coming into sight."
Takata said that the deflationary psychology was pivoting. Japan's 10-year
yield edged up and the yen jumped. Indeed, the dollar was sold below the 20-day
moving average (~JPY149.80) for the first time since the US employment data on
February 2. The poor economic data and the softness of inflation may have seen
some participants waver, but it still seemed to us that an exit from negative
rates in April remained the most likely scenario. And that still is the base
case.
China's PMI will be reported
tomorrow. It will
likely show the manufacturing sector continues to be challenged (below the 50
boom/bust level), as it has last March with one exception (September 2023). The
non-manufacturing, which some suggest is a better reflection of domestic
demand, held above 50 all last year. It finished 2023 at 50.4 and may have
ticked up in February amid anecdotal reports of strong holiday activity. If it
does rise, it would be for the third consecutive month. The composite PMI rose
to a four-month high of 50.9. The Caixin manufacturing PMI will also be
reported. It has fared better than the other one (from China Federation of
Logistics and Purchasing.
The dollar held barely below
the high set earlier this month near JPY150.90 yesterday and the BOJ comments
today saw it fall to almost JPY149.60, the low since the US CPI on February 13.
It recorded range that
day of approximately JPY149.25-JPY150.90 and has been in that range ever since.
The dollar settled last week near JPY150.50. It was the eighth consecutive
weekly gain, and that streak is threatened now. The net speculative
(non-commercial) short yen position in the futures market is the largest since
last November. The Australian dollar stabilized after falling almost 1%
yesterday but could not properly recover. After falling to about
$0.6490, the Aussie could barely trade above $0.6505 in North America. Today,
it rose slightly above $0.6520 in the Asia Pacific session but is slipping back
below $0.6500 in the European morning. The $0.6475 area stands in the way of a
retest on the year's low near $0.6440 when the US CPI was reported on February
13. The recovery of the yen helped Chinese officials defend the CNY7.20
level. The PBOC set the dollar's reference rate at CNY7.1036
(CNY7.1075 yesterday). This allows the dollar to trade in a range of roughly
CNY6.9615 to CNY7.2457. The average projection in Bloomberg's survey was
CNY7.1935 (CNY7.2004 yesterday).
Europe
The preliminary estimate of
the eurozone's February CPI will be reported tomorrow. The median forecast in Bloomberg's survey
is for a 0.6% increase after a 0.4% decline in January. Recall that in February
2023, the CPI rose by 0.8%. That means that the year-over-year rate can slip to
2.5%-2.6% from 2.8% in January. The eurozone's CPI jumped by 0.9% and 0.6% in March
and April 2023, and will be replaced with more moderate numbers this year. This
means that when the ECB meets on April 10, CPI will be close to 2% and poised
to slip below the target. German states reported softer year-over-year CPI
today and the aggregate harmonized measure, due shortly, is expected to fall to
2.7% from 3.1%. France's harmonized measure fell to 3.1% from 3.4%. Spain's
eased to 2.9% from 3.5%. The swaps market has nearly a 90% chance of a rate cut
in June. Three cuts and about 40% chance of a fourth cut are reflected in the
swaps market.
The euro briefly slipped
below $1.08 for the first time in a week yesterday just at start of the
European session. It
recovered back to the session high, slightly below $1.0850 before it
consolidated in dull dealings in the North American afternoon. The bulls may
see a hammer candlestick, and the 20-day moving average held (~$1.0790), which
is also the halfway point of the bounce from the February 14 low slightly below
$1.07. The euro managed to settle above the 200-day moving average (~$1.0830).
It had advanced for eight of the ten sessions through Monday and brings a
two-day decline into today. It has traded with a firmer bias today and edged up
to almost $1.0855. The week's high was set on Tuesday near $1.0865 and
recapturing this would help the technical tone. Sterling's price action
was also not impressive, and it did briefly trade below its 20-day moving
average (~$1.2630). It recovered about half-of-a-cent before sellers
reemerged and knocked it back to $1.2645. Sterling had not fallen since
February 19. It is in less than a quarter-cent range today below $1.2675. With
little market reaction, the UK named the OECD's Chief Economic Economist
Lombardelli to succeed Broadbent as deputy governor of the Bank of England,
whose term ends July 1. Today's byelection in the Rochdale is very
idiosyncratic and will be difficult to generalize. Separately, there are
reports of discussions between the US and the UK about the potential security
risks of holding national elections around the same time.
America
Although US Q4 23 GDP was
revised lower (3.2% vs. 3.3%) consumption was revised higher (3.0% vs. 2.8%). The deflators were also tweaked higher.
However, the January data reported yesterday disappointed. The advanced
merchandise trade deficit widened to a six-month high of $90.2 bln, and retail
inventories rose by 0.5% after a 0.6% increase in December. Wholesale
inventories slipped by 0.1%. This is consistent with the recent pattern whereby
wholesalers are reducing inventory while retails ae see their inventories rise.
Last year, wholesale inventories fell by an average of 0.2% Retail inventories
rose by an average of 0.4% a month last year.
Today's focus is on the
personal income, consumption, and deflators. If US economic activity is going to
moderate, the consumer is key. Personal consumption expenditures rose by an
average of 0.5% a month last year. The weakness in retail sales hinted at a
pullback in the American consumer, who buys more services than goods. The
median forecast in Bloomberg's survey is for a 0.2% increase. Personal income
rose by an average of 0.4% a month in both 2022 and 2023, which is also the
average of the two years before Covid. Many participants are more interested in
the deflator, but with CPI and PPI in hand, economists have a fairly good sense
of the PCE deflators A 0.3% increase in the headline deflator in January
will bring the year-over-year rate to 2.3%-2.4% (from 2.6% in December 2023),
which would be the slowest pace since February 2021. The core deflator is seen
rising by 0.4%, which would allow the year-over-year rate to slip to 2.8% from
2.9%. When the January CPI was reported on February 13, the implied yield of
the December 2024 Fed funds futures contract soared by 23 bp and the Dollar
Index jumped by about 0.75%. Because of the limited new information in deflator
today, the market response should also be constrained.
Canada reports December and
Q4 23 GDP today. Unlike
the UK and Japan, which reported back-to-back quarterly contractions, the
Canadian economy is likely to have returned to growth after a 1.1% annualized
contraction in Q3 23. A 0.8%-0.9% expansion seems likely. The monthly GDP
estimates contracted in June and July and were flat in August through October,
before the economy grew by 0.2% in November. It is expected to have grown by
another 0.2% in December. Ahead of the data, which we think is in line with the
central bank's expectations, the swaps market is pricing in about a 70% chance
of a cut in June. It has three cuts fully discounted this year and almost a 25%
of a fourth cut. At the end of last week, there was around a 76% chance of June
cut and only three quarter-point cuts were envisioned for this year.
The US dollar reached a new
high for the year yesterday, breaching the CAD1.3600 level in early North
American turnover. It
pulled back and found support near CAD1.3560. It finished near CAD1.3575, its
highest settlement since mid-December. We had seen risk extending to
CAD1.3600-CAD1.3625. A move above there could spur another big figure advance
(CAD1.3700-CAD1.3730). A break below CAD1.3525, and ideally, CAD1.3500 would
neutralize yesterday's constructive price action. So far today, the greenback
is quiet but firmly trading between CAD1.3570 and CAD1.3590. The
Mexican peso is the strongest emerging market currency this month, gaining
about 0.85% against the dollar. That puts it in third place for the
year behind the Indian rupee, the only emerging market currency to have edged
higher against the greenback (~0.35%) and Hong Kong dollar (~-0.2%). The peso
has off by about 0.60% this year. Still, the dollar continues to fray the
downtrend line that we have been tracking off the January 23 and February 5 highs
but has not settled above it. We have it coming in near MXN17.09 today.
