Started by PocketOption, Sep 25, 2023, 08:07 am
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Themost important outcome of the last week's flurry of central bank meetings wasthe median forecast of Fed officials for 50 bp less in cuts next year than ithad anticipated in June as it revised up its growth forecasts for this year andnext. The prospect for higher rates for pushed equities lower. Sterlingand the Swiss franc were the weakest currencies in the G10 last week, fallingby a little more than 1.1%. Both central banks did not hike rates to the surprise of many. Norwaymore than Sweden held out the possibility of another hike in Q4, while theRiksbank's decision hedge a quarter of its reserves, which seems likeintervention, failed to give krona much of a boost, rising about 0.25% againstthe euro. The Bank of Canada stood pat earlier this month, but strongereconomic data saw a nearly doubling to the perceived odds of a Bank of Canadarate hike next month to a little less than 50%.
Japanese officials arethreatening intervention but the "higher for longer" signal by theFederal Reserve and the rise in US 10-year yields suggests the yen's weaknessis fundamentally driven. Federal Reserve Chair Powell said at least ahalf-of-a-dozen times the press conference "proceed carefully" butthis applies to Japan, as well. If intervention requires the sales ofTreasuries (last September and October, Japan's holdings of Treasuries fell byabout $130 bln) that could push up US interest rates, which could encourageothers to buy dollars. One takeaway from last year's experience is to intervenewhen one believes US rates are near a high. Higher US rates make some carrytrades more attractive, and this adds the weight on the Chinese yuan. Theimpact of the numerous measures that have been announced are likely to beginpercolating and the September PMI may reflect it. The base effect warns of asharp drop in the eurozone's September CPI due on September 29. Tokyo'sSeptember headline and core CPI measures are expected to continue to soften. Inthe US, the CPI has already delivered the inflation signal, the headline tickedup, but the core likely softened.
United States: We are in between the FOMC meeting and thenext employment report. The deceleration of the labor market is expected becontinuing and the early estimates are coming in around 150k (vs. 187k inAugust). If true, it would the second-lowest nonfarm payroll growth since the startof 2021 but could be consistent with a tick lower in the unemployment rate. Themarket will look past the distortions caused by the labor strikes. In the weekahead, house prices, new home sales (both are expected to have softened) anddurable goods orders (second consecutive decline is expected) will be reported.Without the decline in transportation orders (see Boeing), a small increase ispossible, may draw some attention. But the main interest will be on thepersonal income and consumption data. The rise in personal income may havedoubled from the 0.2% increase in July. The 0.4% gain would match this year'saverage through July, the same as the first seven months of 2022. Consumptionis likely to have downshifted. After increasing by 0.8% in July, the most sinceJanuary, the median forecast is for a 0.5% increase, which is still strong.This year's monthly average through July is 0.6%, slightly off last year'space. Consumption expenditures have been outstripping income, which is translatedinto lower savings but that may have changed a little in August.
Although theFed targets the headline PCE deflator, the CPI is stealing most of its thunder.The headline deflator is seen rising by 0.4% for a 3.4% year-over-year increase(from 3.3%). The core deflator is projected to have increased by 0.2%. Thatwould allow the year-over-year rate to ease to 3.8%-3.9%, which would be thelowest since Q3 21. The way that officials could signal a desire to look pastthe impact of higher energy prices, which acts as a tax consumption, would beto focus even more on the core rate. Meanwhile, time is running out for the USCongress to pass the appropriations bills or there will be a partial governmentshutdown. This coupled with the (broadening) UAW strike, the resumption ofstudent debt servicing, the higher energy prices, and the tightening of lendingconditions set the stage for a significant economic slowdown in Q4.
The Dollar Index is near theyear's high set in March near 105.90. It looks poised to take it out, whichwould target the 107.20 area, the (50%) retracement of the decline since lastSeptember's multiyear high around 114.75. The momentum indicators arestretched, which is hardly surprising given that the Dollar Index has risen for10 consecutive weeks. Still, the five- and 20-day moving average are stillmoving higher. Last week's low, set prior to the FOMC decision was almost104.65. It may take a close below there to signal an end of this run-up.Initial support may be seen in the 105.20-30 area.
China: In an unusual calendar twist,China's Caixin PMI will be released before the official one(September 29 vs. September 30). Still, the sequence is not so important andthe composites (51.7 vs. 51.3 for the Caixin and official measures,respectively, in July). It seems quite fashionable in the Anglo-American pressto frame China's economic challenges in structural terms. And indeed, theredoes seem to be some structural elements. However, market participants seem tooften emphasize structural drivers and under-estimate cyclical forces. Beijingmay not be addressing its structural challenges (at the risk ofoversimplifying, over-reliance on debt-fueled infrastructure investment andreal estate), but it seeking to boost cyclical growth through various channels.These include lower rates, credit easing, encouraging more spending by localgovernments, allowing re-negotiations of existing mortgages, and lower downpayment requirements.
Chinese officials have beenable to moderate the yuan's decline. Here in Q3, it is off by about 0.6%, whichis less than all the G10 currencies but the Norwegian krone, and all but ahandful of emerging market currencies. Still, while the policy divergenceis large and the dollar is remains broadly stronger, Beijing faces an uphillbattle. The dollar settled on weekly basis this year only once CNY7.30, and it was narrowly averted last week (CNY7.2990). The JP Morgan Emerging Market Currency Index is off nearly 3.5%this quarter. Note that Chinese markets are closed for national holidays forthe first week in October.
Eurozone: Some hawks at the European Central Bankwant the markets to still believe that the tightening cycle is not over but themarket is having little to do with it. The swaps market has a little more thana 20% chance of a hike discounted in Q4 and begins showing a bias toward a cutin Q2 24. It is fully discounted in early Q3 24. The most important data pointbefore the end of the month is the preliminary September CPI. It and Octoberreport will likely make the case by the hawk even less tenable. In September2022, the eurozone's CPI rose by 1.2% (and 1.5% October). These drop out of the12-month comparisons, and this is going to produce a sharp deceleration in theyear-over-year rate. August's 5.3% pace could fall below 4%, and possibly alittle above 3.5% before firming in November and December.
The euro has found a (temporary?) foothold above $1.0610, which corresponds to the (38.2%) retracement of therally from the September 2022 low near $0.9535. A break could spur a return theMarch low around $1.0500 and the year's low set in January, a little lower(~$1.0485). The euro has fallen for 10 consecutive weeks since the mid-Julypeak of about $1.1275. The single currency has not traded above the 20-daymoving average this month. It is found now slightly below $1.0740.
Japan: Even though Japan reports on the labormarket, retail sales, and industrial output, it may be difficult to convincethe market that the world's third-largest economy is not contracting in Q3.Japan's retail sales are not a good gauge of consumption. Consider that in Julyhousehold spending fell 5.0% year-over-year (-4.2% in June), while retail salesrose 6.8% (5.6% in June). Retail sales are reported in nominal terms (value notvolume) and focus on retail goods. The broader measure of household spendingincludes services and is in real terms (adjusted for inflation). The Bank ofJapan left policy on hold last week and Governor Ueda seemed to dampen hopethat he had inspired about an exit from negative interest rates before the endof the year.
The key data point next week is Tokyo's September CPI. Like theCPI gives valuable insight into the US PCE deflator, Tokyo's CPI is a goodgauge of the national measure that is reported a few weeks later. While the headlineand core rates have peaked, the risk is still on the upside with the measurethat exclude fresh food and energy. In the three months through August, theheadline rate has risen at 2.4% annualized rate and the core by 2.8%. However,excluding fresh food and energy rose at 4% annualized pace. In August, Tokyoreported that fresh food prices had risen by 4% year-over-year and food pricesin general were up 8.2%. Next week, Prime Minister Kishida is expected to beginproviding details of the priorities of the supplemental budget that will likelybe formally announced next week. Lastly, early on October 1, the Q3 TankanSurvey will be released. A small improvement in sentiment among the largecompanies is expected while response from small businesses is likely to remainpoor (in slightly negative territory).
Japanese officials have beenthreating intervention for several weeks in the face of the 1) the broad dollarrally and 2) rising US interest rates. The falling yen is not assupportive for Japanese equities, and in the week ending September 15, foreigninvestors sold the most Japanese shares in four years. The rolling 30-daycorrelation has turned negative, which, while not precedented, of course, isnot the usual relationship. The market is cautious, but it is pushingahead. The weekly close above JPY148 was the highest since last October. Thegreenback has risen for three consecutive weeks against the yen and seven ofthe past eight weeks. It closed firmly near JPY148.40. The secondary high after last year's peak was nearJPY148.85, and after that, there is little in front of the psychologicallyimportant JPY150.
UK: It is a relatively light week forhigh-frequency market moving data from the UK. Nationwide's house price indexand lending (and mortgage figures), money supply, and consumer credit typicallyhave negligible impact. Revisions to Q2 GDP (0.2% quarter-over-quarter) havebeen superseded by the recent news that the economy contracted by 0.5% in July.It is, though, the one-year anniversary of the crisis that led to the end of Truss'sshort tenure as prime minister and sterling's record-low (~$1.0350, September26). Since then, sterling is the strongest of the G10 currencies, net-netappreciating almost 16% (the euro is in second with about an 11.3% gain).Recall Truss was pushing for tax cuts and increased defense spending that wouldhave left a GBP60 bln deficit by the middle of the decade, according to theFinancial Times estimates. Interest rates surged on the prospect the largeunfunded deficits. Capital went on strike. Truss was toppled by her own partyand fiscal orthodoxy was supposed to return. Yet, the budget deficit for thefiscal year that ended in March was about GBP120.7 bln, up from GBP112.1 bln inthe previous fiscal year. The deficit in first four months of the currentfiscal year is around GBP53.3 bln compared with almost GBP39.7 bln in theApril-July period last year.
Sterling held below the 200-daymoving average ($1.2435) last Monday and Tuesday, before the week's big events.It was offered after the FOMC meeting and fell to almost $1.2430. It was taggedfor the better part of a cent on the BOE's decision to hold rates and saw a low$1.2240. It made a marginal new low, slightly above $1.2230 ahead of theweekend and sterling closed near its lows. While there may be support around $1.2200, the larger head and shoulders pattern, which we have been tracking, has an objective near $1.20, and the (38.2%)retracement is around $1.2075.
Canada: The market extended the Canadian dollar'sdecline after it was unannounced that unexpectedly Canada's GDP contracted inQ2 (-0.2%) on September 1. However, the data since then suggests it was a bitof a fluke that overstated the weakness of the Canadian economy. The Augustemployment report was stronger than expected and aggregate hours workedincreased. The IVEY PMI snapped a four-month decline in August to match itsbest level since April (53.5). The July trade deficit was smaller than expected(CAD990 mln). July retail sales rose by 0.3% after a rising by 0.1% in both Mayand June. Excluding autos, retail sales rose 1.0%, twice the median forecast inBloomberg' survey. August CPI surprised on the upside, rising by 0.4% on themonth (also, twice the median forecast in Bloomberg's survey) and theyear-over-year rate rose to 4.0% from 3.3% in July. The underlying coremeasures and their three-month moving average, which Bank of Canada GovernorMacklem referenced, rose as well. The highlight in the coming week is the Julymonthly GDP. After contracting by 0.2% in June, the Canadian economy likelygrew again in July. The takeaway is that swaps market has moved to discount alittle more than an 70% chance of a hike in Q4, with a little less than a 50%chance it is delivered next month.
This adjustment in rateexpectations dovetails with the recent recovery in the Canadian dollar. TheCanadian dollar rose for the third week in the past four, following a six-weekslump. So far, this month, the Canadian dollar's nearly 0.20% gain leads theG10 currencies. After peaking near CAD1.3700 on September 7, the US dollarwas sold to almost CAD1.3380 the day before the FOMC meeting concluded. Itsubsequently bounced to CAD1.3525, a little shy of the (50%) retracement of theleg down, before returning to CAD1.3425 after Canada's retail sales reportahead of the weekend. Still, the greenback recovered to make new session highs near CAD1.3500. The close, though was little changed near CAD1.3480. There appears to be scope into the CAD1.3550-75 area.
Australia: Australia reports the August monthly CPIand retail sales ahead of the central bank meeting on October 3. It will be thefirst policy meeting under the new Governor Michele Bullock. The monthly CPIpeaked at the end of last year at 8.4% and it stood at 4.9% in July. Thedowntrend is expected to have continued in August. July retail sales wereboosted by the FIFA Women's World Cup and likely fell in August. Elsewhere, wenote that the labor dispute at Chevron's liquified natural gas plants has beenresolved. Rising mortgage rates are being felt as three-year fixed rates arebeginning to float with a large switch seen this month. The market seespractically no chance of a hike at Bullock's first meeting but is not convincedthat the RBA is finished and sees a window of opportunity for the last hike inthe cycle to be delivered in Q1 24. The Australian dollar has forged arange between around $0.6360 and $0.6525. The range was nearly covered Wednesday-Thursdaylast week (~$0.6385-$0.6510). Expect the range to hold, until it doesn't. Unlikein the euro and sterling, the next speculative position in the futures market,is net short the Aussie., which changes the potential dynamics.
Mexico: Mexico reports the August trade andemployment figures next week ahead of the central bank meeting on September 28.Many argue that the peso's rally to its best levels since 2015 is producing anovervalued currency. Yet, the richness of the peso is not fueling a deteriorationof the external balance. Through July, Mexico has reported a trade deficit of$7.22 bln. In the first seven months of 2022, the trade deficit was slightlymore than $19 bln. Moreover, leaving aside portfolio and direct investmentinflows, worker remittances alone are sufficient to cover the trade deficit. Inthe January through July period, worker remittances into Mexico are nearly $36bln, almost a 10% increase from the same period a year ago. Mexico'sunemployment rate appears to have put in a cyclical low near 2.4% in March. InJuly it was slightly above 3.1%. Last year, it averaged almost 3.3%. Banxicohas indicated it is on hold for a protracted period. Brazil and Chile have cutrates twice as they begin their easing cycle. The first cut by Banxico has beenpushed from Q4 23 to Q1 24, according to the swaps market.
The US dollar traded brieflybelow MXN17.0 before the FOMC meeting concluded and rallied to MXN17.25 thefollowing day. Sellers pounced on the greenback sending it back to MXN17.10. However, the risk-off mood that prevailed before the weekend helped lift the dollar, which settled near MXN17.2200. Early last week the five-day moving average crossed backbelow the 20-day moving average. The macro forces that have driven the peso almost 14% higher thisyear against the dollar appear to remain intact. Also, as Brazil, Chile, andother countries in the region cut interest rates, Mexico's yields becomerelatively more attractive. Consider, for example, at the start of the year,Chile's overnight rate was 75 bp more than Mexico and now it is 175 bp below. Still, a move above MXN17.27 could see MXN17.35-45.
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