EMU Q4 23 GDP Stagnates, Underscoring Divergence with the US

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EMU Q4 23 GDP Stagnates, Underscoring Divergence with the US

Overview: The US dollar is mixed ahead of the start
of the FOMC meeting and is mostly in its recent ranges. The euro, which was
sold below $1.08 yesterday for the first time since mid-December is holding
above it today. The less-than-expected projection of US Treasury borrowing
requirements for Q1 and Q2 weighed on US rates, which, in turn, dragged the
greenback lower against the yen. It is trading near a four-day low, a
little above JPY147.00. The rally in US equities threatened to push the dollar
below CAD1.34, a two-week low. The dollar trading with a softer bias against
most emerging market currencies today, including the Hungarian forint, where
the central bank is expected to cut the base rate by 75-100 bp today (fourth
cut in the cycle).

A new security law in Hong Kong
helped trigger a 2.3% slide in the Hang Seng. China's CSI 300 is off 1.8%. Japan's
market was narrowly mixed, and outside of Australia, most of the other large
markets fell. Europe's Stoxx 600 is rising for the fifth consecutive session,
matching its longest advancing streak since last July. US index futures are
slightly softer. European benchmark 10-year yields are mostly 1-2 bp higher,
though UK Gilt yield is a little lower. The 10-year US Treasury yield is
slightly lower near 4.06%. Gold is trading with a firmer bias, and traded to
$2040 today, its best level since January 16. After yesterday's stunning
reversal from nearly $79.30 to about $76.40, March WTI is trading quietly
straddling $77 a barrel.

Asia Pacific

Japan's labor market ended
2023 little changed with an unemployment rate of 2.4% and a job-to-applicant
ratio of 1.27. The
unemployment rate at the end of 2022 was also 2.5%. The job-to-applicant ratio
slipped to 1.28 in November, matching the low since June 2022 before slipping
further in December. Japan reports December retail sales and industrial
production tomorrow. Retail sales are expected to slow after the heady 1.1%
surge in November. Industrial production is expected to have recovered
strongly, rising by as much as 2.5%, helped by rising exports, after a 0.9%
decline in November. Q4 GDP is due in mid-February. A recovery in consumption
and private investment after two consecutive quarterly contractions is expected
to have boosted GDP by 1.1% (annualized rate). 

Australia reported a sharp
2.7% drop in retail sales last month, and the 2.0% gain in November was revised
to 1.6%. The median
forecast in Bloomberg's survey anticipated a 1.7% decline in December retail
sales. Australia reports Q4 CPI. It is expected to have moderation to a 4.3%
year-over-year rate from 5.4% in Q3. The underlying measures are also expected
to moderate, even if not by as much. The monthly calculation is seen falling to
3.7% from 4.3%, which would be the lowest since the end of 2021. It peaked in
December 2022 at 8.4%. The Reserve Bank of Australia meets next week, and the
market nearly has the first cut priced in at the August meeting and has nearly
two cuts discounted for this year. As the Australian dollar rallied in Q4 23,
its two-year interest rate discount to the US narrowed from around 100 bp to
about 60 bp. It moved briefly below 40 bp in the middle of the month and is now
near 46 bp.

US Treasury yields remained
soft yesterday and this seem to help keep the yen bid. The three-day high set in local hours on
Monday (~JPY148.35) was sold into in Europe and North America and the session
low was recorded in late North American dealings slightly below JPY147.60. The
pre-weekend low was about JPY147.45 and it was taken out today, with a low near
JPY147.15. However, the session low does not seem in place. The next target is
last week's low was closer to JPY146.65. We suspect the market will be
reluctant to sell the greenback to aggressively ahead of the interest rate
sensitive events in the coming days, starting with the quarterly refunding
announcement and the FOMC meeting tomorrow. The employment data at the end of
the week often injects volatility. The Australian dollar continues to
straddle the $0.6600 area. The Aussie posted a close above there to post
its highest close in two weeks and reached $0.6625 today. We are cautious about
this being the breakout. That said, it may hard to resist, if it were to move
above the $0.6630-50 area. Initial support is seen in the $0.6580-90 area. The
dollar has traded in narrow range between about CNY7.1750 and CNY7.1800. The
Chinese 10-year benchmark yield fell below 2.45%, a two-decade low amid
expectations for a rate cut after the Chinese Lunar New Year holiday. The PBOC
set the dollar's reference rate at CNY7.1055 (CNY7.1097 yesterday). The average
forecast in Bloomberg's survey was CNY7.1739 (CNY7.1802 yesterday). 

Europe

The chief economic news
today from the eurozone is the first estimate of Q4 23 GDP. It was flat amid expectations of a 0.1%
contraction. Details are not included in the initial report. However, the
largest four economies have reported their figures. The Bundesbank warned of
downside risks to German growth and these materialized. Europe's largest
economy contracted by 0.3%, but the 0.1% contraction in Q3 was revised to flat.
The French economy stagnated in Q4 23, and its 0.1% in Q3 was also revised to
flat. In contrast, Italy expanded by 0.2% (0.1% in Q3 23) and Spain grew by
0.6% while Q3 was revised to 0.4% from 0.3%. 

The euro was pressed below
$1.08 in the North American morning yesterday for the first time since December
13. There apparently were
not many stops below it as the euro held above $1.0795 and finished back within
the pre-weekend range. The euro has held above $1.0810 today but has been
unable to sustain gains through $1.0840. Although the momentum indicators are
stretched from roughly 2.5-cent loss this month, and the speculators in the
futures have cut their net long position (from 152k contracts in December to
almost 88k contracts as January 23), we are not convinced a durable low is in
place yet. We have suggested a target around $1.0765, and possibly
$1.0725. Sterling set a four-day low yesterday near $1.2660 but
recovered back to the middle of the $1.26-$1.28 trading range. It reached
$1.2720 in early Asia Pacific activity before retreating to nearly $1.2670.
Buying interest in the European morning helped keep yesterday's low intact.
Speculators in futures market have larger net long sterling position as of last
Tuesday that is the largest since last September (~31.5k contracts). In
aggregate, it appears they are playing for an upside break.

America

House price data from
November and the Conference Board's measure of consumer confidence are second
fiddle today to the JOLTS report on job openings. The number of jobs opening trended lower
last year, increasing only in two months (through November (April and August).
At 8.79 mln in November, they were down about 18% year-over-year. In November
2019, they stood at 6.92 mln. The median forecast in Bloomberg's survey is for
a decline to 8.72 mln, which would be the least since March 2021. Meanwhile,
the estimate for Friday's nonfarm payrolls has crept up to 180k, according to
the median in Bloomberg's survey. The average in Q4 23 was 165k, the lowest
three-month average since January 2021. Note too, the busy day in a busy week
of corporate earnings, including Alphabet (Google), Microsoft, Advanced Micro
Devices, General Motors, Starbucks, and Pfizer. 

Mexico reports Q4 23 GDP
today. Slowing
growth and falling inflation is seen allowing the central bank to cut interest
rates more likely in March than next week. Tomorrow, several Latam countries,
are expected to continue the easing cycle that began last year. Mexico's
economy expanded by 1% (quarter-over-quarter) in Q3 23 and is expected to have
slowed to about 0.4% in Q4. Canada reports November GDP tomorrow. It may have
eked out a 0.1% gain after stagnating in October. The economy contracted by
1.1% (annualized rate) in Q3 23 and forecasts of a 0.4% expansion in Q4 23
(median in Bloomberg's monthly survey) seems a bit high. It will be
reported until the end of February. 

The US dollar closed at a
two-week low against the Canadian dollar a little above CAD1.3400 and a
marginal new low was recorded today, ever so slightly below CAD1.34. The strong recovery in US equities
(risk-on) sent the greenback to new session lows in last dealings. It settled
below the 20-day moving average for the first time since January 4. A possible
double top is in place (~CAD1.3540) with a neckline at CAD1.3415. The measuring
objective would be around CAD1.33, which would correspond roughly to the
(61.8%) retracement for the US dollar rally from the end of December to
mid-January. Still, the intraday momentum indicators are stretched, suggest
that there may not be the convincing break today. A move above CAD1.3420-30
would stabilize the greenback's tone. Neither lower rates nor strong US
equity market gains managed lend the Mexican peso much support. The price
action lends credence to our suspicions that the strength of the peso's draw
has weakened. In the futures market, the gross speculative longs have been
trimmed for the past two weeks (~16k contracts) after building for the previous
11 weeks. The gross speculative shorts have risen in six of the past seven
weeks and near 52.5k contracts, it is the largest since last June. Yesterday,
the dollar recouped a little more than what it lost before the weekend to
settle above MXN17.20. It is in a narrow range so far today: 
~MXN17.1900-MXN17.2330. Although the dollar is near its lows in Europe, we
expected the greenback to recover in North America dealing today. 

  

Disclaimer

Source: EMU Q4 23 GDP Stagnates, Underscoring Divergence with the US