Started by PocketOption, Jun 05, 2023, 09:09 am
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Overview: Another bizarre US debt-ceiling episode is over. PresidentBiden will sign the bill that was approved by the Senate late yesterday. It isa bit anticlimactic for the market, for which the US jobs data is the key focusnow. Outside of the fiscal drama, the Federal Reserve leadership haseffectively push against market expectations for a hike later this month. Theodds were around 70% earlier this week, and ahead of the jobs report, is near30%. The dollar's three-week rally has been snapped. It is sporting a softerprofile ahead of the data and is lower against all the G10 currencies. It isalso weaker against nearly all the emerging market currencies today, with thenotable exception of the Turkish lira and Hungarian forint. The Chinese yuan isposting its first back-to-back gain in a month and its 0.55% gain, ifsustained, would be the largest in more than two months.
Asia Pacific equities rallied, led by adramatic 4% gain in HK and mainland shares that trade there. All the largebourses were higher. Europe's Stoxx 600 is up 1% and US futures have a firmerbias. European benchmark yields are mostly 2-3 bp higher today, but Italianbond yield is flat. The 10-year US Treasury yield is almost two basis pointshigher at 3.61%. The weaker dollar is helping gold extend its recovery fromaround $1932 on Tuesday to $1983.50 today. It is poised to snap a three-weekdecline. Ahead of the weekend OPEC meeting, the July WTI is pushing higher.It reached a three-day high near $71.55 before steadying. The week's low wasset Wednesday near $67.
China's Caixin services and composite PMIwill be reported early Monday in Beijing. Yesterday, Caixin's manufacturing PMI unexpectedlyticked up. Might the service PMI surprise too? The median forecast inBloomberg's survey is for a decline to 55.2 to 56.4. It was at 57.8 in March,the highest since November 2020. China may also report May reserve figures.Based on valuation shifts, a decline of around $50 bln seems reasonable.
Early Monday, Japan and Australia's finalservices and composite PMI will be reported. Japan's service PMI has risen for six consecutive months throughthe preliminary May reading of 56.3, a record high. The re-opening of Japanpost-Covid and the return of tourism has given the economy an added boost. A weakyen and a restoration of flights in East Asia are helping, as well. The flashestimate put the composite at 54.9 (from 52.9 in April). Given the smalldecline in the final manufacturing PMI (from the flash estimate), if theservices PMI is not revised higher, the composite will slip. Unlike in Japan,Australia's manufacturing PMI was revised higher (to 48.4 from 48.0 preliminaryestimate). The initial estimate of the services PMI was that it unwound a chunkof April's surge (from 48.6 to 53.7, the largest rise in a little more than ayear). The initial estimate showed the composite tracking the service reading,falling to 51.2 from 53.0, which was a jump from March's 48.5. The central bankmeeting is next week's highlight for Australia. The firmer inflation hasboosted ideas that the RBA, which paused, is not done raising rates. Thefutures market prices in about a 33% chance of a quarter-point hike next week.A week ago, it was perceived to be practically no chance of a hike.
The dollar's four-day decline against theyen is at risk today. The dollarsettled at the end of last week near JPY140.60 and recorded a low yesterdaynear JPY138.45 before closing at JPY138.80. It is in a JPY138.60-JPY139.10range today. The key driver is the US 10-year yield and its reaction to the USjobs data. There are options for $640 mln at JPY138.25. The dollar's rally thatcarried it from dip below JPY130 (March 24) to almost JPY140.95 earlier thisweek looks over and we expect a bounce in the dollar (that could extend to~JPY139.50) will be sold. After falling to a new low for the yearearlier this week (~$0.6460), the Australian dollar has rebounded smartly andis setting a new 8-day high in the European morning near $0.6635 and piercingthe 20-day moving average. It has nearly retracement half of the declinesince the May 10 peak near $0.6820. A move above $0.6640 targets the$0.6680-$0.6700. The generally softer US dollar spilled over to activityagainst the Chinese yuan. The greenback snapped a three-day rise yesterdaywith a minor 0.15% decline. The move gained steam today and the dollar is offabout 0.55% and is below CNY7.06. The dollar's pullback today is the most sincelate March. For the third consecutive session, the PBOC set the dollar'sreference rate below expectations (CNY7.0939 vs. CNY7.0948, the medianprojection in Bloomberg' survey.
Europe's final May PMI will be reportedearly Monday. Similar to China,but for different reasons, after a strong start to the year, the eurozoneeconomy appears to have stalled. The manufacturing PMI rose inNovember-January, but has fallen since, and has not been able to grow (above50) since last June. The services PMI improved from December through Aprilbefore slipping in May (preliminary 55.9 vs. 56.2). The composite spent H2 22below 50 and reached 54.1 in April, before slipping in May. The preliminaryreading of 53.3 was a three-month low. The UK's manufacturing PMI fell for thethree months through May. It has not been above 50 since last June. The servicePMI has been climbing higher in a sawtooth pattern, alternating between gainsand losses. It rose to 55.9 (from 52.9) in April and the preliminary readingfor May slipped to 55.1. Reflecting the weakness in manufacturing, thecomposite PMI pulled back more than services in May (53.9 vs. 54.9).
There is a risk that later today, S&Pcould cut its rating for French credit from AA, given its negative outlook andFitch's downgrade to AA- in April. Fitchcited the high government debt and the dim prospects for future reforms afterthe strong (and violent) public push back against the recent pension reforms.The question is not if S&P should downgrade France, clearly the fiscalhealth has deteriorated, but whether it matters. Operationally, for the ECB,the highest rating is what counts and DBRS and Moody's have maintained theirrating of AA. Also, the French premium over Germany on 10-year yields isunchanged around 55 bp since Fitch's announcement. The two-year differential isalso virtually unchanged a little below 20 bp. Separately, Fitch isreviewing UK AA- credit rating today. It has a negative outlook. S&Phas the UK as an AA credit with a negative outlook. Moody's sees it as an AA- creditand also has a negative outlook.
The euro bottomed Wednesday near $1.0635,and it reached almost $1.0780 today. Itis in a narrow range of about a fifth of a cent, mostly above yesterday's close(~$1.0760). Nearby resistance is seen in the $1.0800-30 area. The dailymomentum indicators have turned higher and month-long slide (from nearly $1.11on April 26) appears complete. A break of $1.0725 now would be disappointing. Sterlingis rising for the sixth consecutive session today to reached $1.2545. Ithas retraced (61.8%) of its losses from the May 10 high (~$1.2680) to lastweek's low (~$1.2310) near $1.2540 today. The five-day moving average looks setto cross back above the 20-day moving average early next week. It is holding ina quarter-cent range (~$1.2520-$1.2545) ahead of the US jobs report. A break of$1.2450 would be disappointing.
Most of the recent string of reports,albeit different covering different elements and time periods, were strongerthan expected, speaking to the ongoing resilience of the US labor market. Still, at the same time, below the surface, it doesappear the tightness of the labor market is easing. Job growth is slowing on atrend basis. Year-to-date, nonfarm payrolls has risen by 1.14 mln. In the firstfour months last year, the US created almost 1.94 mln jobs. Or consider thatthe three-month moving average fell to 222k in April, the lowest since January2021. If the median in Bloomberg's survey is accurate (195k), the three-monthmoving average is likely to have fallen toward 200k in May. The unemploymentrate has stopped falling and has bouncing between 3.4% and 3.6% for six months.Average hourly earnings rose by 0.5% in April. This seems a bit of a fluke andwas the highest since last July. A reversion back to the recent average of 0.3%could see the year-over-year rate ease back to 4.3% where it was in March from4.4% in April. The average year-over-year pace this year has been 4.5% comparedwith 5.7% in the Jan-Apr 2022 period.
Amid talk of foreign central bank demandfor Treasuries drying up, we looked at the Fed's custody account for foreigncentral banks. During the lastnine weeks through May 31, foreign central banks have bought US Treasuriesevery week without fail. During this buying spree, the longest since April-June2020, they have bought more than $110 bln. At $2.986 bln, the holdings are thelargest since last September. The Federal Reserve also offers custody servicefor the Agency securities as well. Over the past two months, they have risenslightly (~$2.3 bln).
The Canadian dollar is extending its gainstoday. The US dollar peaked inthe middle of the week near CAD1.3650, just shy of last week's high hasapproached CAD1.3405 today. Coming into today, the greenback has fallen in fourof the past five sessions. A break of CAD1.3400 could signal a test to the lowof end of this year's range (CAD1.3260-CAD1.3300). The intraday momentumindicators suggest a bounce is likely in early North American activity andinitial resistance is in the CAD1.3450 area. Note that in a soft US dollarenvironment, the Canadian dollar often lags on the crosses. Meanwhile,the greenback made a new two-and-a-half week low near MXN17.5150. Recallthat the multi-year low was set in mid-May near MXN17.42. Mexico State, themore populous state holds elections on Sunday. It is likely to confirm thatAMLO's Morena Party is the force to be reckoned with in next year's generalelection. Mexico touches on several key investment themes, including highinterest rates and near-shoring/friend-shoring. The peso is the strongestcurrency in the world so far this year, appreciating about 11.3%.
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