Overview: The surge in US yields helped lift the
dollar but did not block the equity rally. The 10-year Treasury yield
surged 12 bp yesterday and the 10-year break-even widened amid ideas that the
Omicron variant will boost price pressures. Japanese and Australian
markets re-opened and led the regional equity advance with nearly 2%
gains. Taiwan and Singapore also posted strong advances. The PBOC
withdrew liquidity from the banking system, and this seemed to weigh on Chinese
and HK activity. The US 10-year yield steadied near 1.63%, while
Australian bonds played catch-up, with yields rising nearly seven basis points
to 1.74%. European bonds yields are mostly little changed to slightly
softer, while UK Gilts, which did not trade yesterday, are up about 8 bp today
to around 1.06%. Europe's Stoxx 600 is trading about 0.8% higher to
extend yesrterday’s gains. US futures indices are a little higher.
The dollar is consolidating yesterday's gains at lower levels against the most of the major
currencies. The yen is the notable exception. We continue to underscore the
sensitivity of the exchange rate with the 10-year Treasury yield. The
greenback approached JPY115.90, its highest level since in five years.
Ahead of what is expected to the 50 bp hike from Poland's central bank, most of the
regional currencies are higher. However, the freely accessible and liquid
emerging market currencies are lower, led by Turkish lira and South African
rand. The JP Morgan Emerging Market Currency Index is off about
0.25%. Iron ore prices are rising for the fourth consecutive session,
while copper is trading a little heavier. February WTI is firm above $76.50 and within the consolidative range. OPEC+ is expected to confirm plans to
boost output by 400k barrels a day next month. Gold has steadied above
$1800 after falling 1.5% yesterday in the face of the surging yields.
Natgas is a little firmer in the US, rising for a third session, while the
European benchmark re-opened and surged nearly 30% to snap the seven-day
drop.
Asia Pacific
The PMI data from China,
Japan, and Australia were better than expected. China's Caixin manufacturing PMI rose to
50.9 after slipping to 49.9 in November. Recall that the
"official" manufacturing PMI was also stronger than expected rising
to 50.3 from 50.1. Japan's final manufacturing PMI rose to 54.3 from 54.2
flash reading. This still leaves it slightly lower than November's
54.5. The Q4 average was about 54 after 52.4 Q3 average. Australia's
story was similar. The manufacturing PMI was revised to 57.7 from 57.4
preliminary estimate after November's 59.2 print, which was the highest since
May. It averaged 58.4 in Q4 and 55.2 in Q3.
Indonesia declared its
intention to limit coal exports to ensure sufficient domestic supplies. Since Beijing cut its coal imports
from Australia in 2020, to protest its foreign policy, China has relied more on
supply from Indonesia. Bloomberg figures suggest it may account for
almost three-quarters of China's thermal coal imports.
Japan's 10-year JGB yield
rose to its highest level since November just below 0.09%. The sharp jump in US yields were
partly responsible. There is also supply looming. Tomorrow, Japan
will sell JPY2.6 trillion 10-year bonds and JPY900 bln 30-year obligations on
Friday.
Tokyo traders returned from
the long holiday weekend and were dollar buyers out of the gate. The greenback has stalled near
JPY115.40 yesterday and Tokyo took it to around JPY115.80. Early European
traders pushed it a little higher. The market seems hesitant given the
proximity of JPY116.00 and limited follow-through selling of Treasuries.
A nearly one-billion-dollar option at JPY115.50 expires today. The
Australian dollar is stabilizing after falling 1% yesterday, the most in a
month. It is finding support by the 20-day moving average
(~$0.7190). Look for resistance in the $0.7220-$0.7230 area. The
broad US dollar gains are helping the PBOC's efforts to cap the yuan.
The dollar rose about 0.25% against the yuan today. The reference rate
was set at CNY6.3794, near market expectations (Bloomberg survey) of
CNY6.3790. The PBOC money market operation resulted in a net drain of
CNY260 bln, the most since October.
Europe
UK markets were closed
yesterday for the long holiday weekend. Gilts have sold off and stocks have
rallied. The economic data were better than expected. The December
manufacturing PMI was revised to 57.9 from the preliminary estimate of 57.6
after November's 58.1. The UK's consumer credit, mortgage lending and
approvals for November also were stronger than projected. The swaps market
has a 25 bp hike at the February 3 BOE meeting nearly fully discounted.
It has almost 100 bp of tightening priced in for this year.
Germany offered pleasant
surprises today. November
retail sales, which were expected to have fallen by 0.3% instead rose by
0.6%. The October series was revised to show a 0.5% gain instead of a
0.3% loss. Also, the unemployment queues fell by 23k in
December. The median forecast (Bloomberg survey) was for a 15k
decline. The unemployment rate unexpectedly slipped to 5.2% from
5.3%. Separately, Spain reported its December unemployment fell by almost
77k, the most since August. Lastly, ahead of the aggregate figure at the
end of the week, French December harmonized CPI was unchanged at 3.4%.
The median forecast (Bloomberg) expected a small increase.
Poland is expected to
deliver the first hike of the New Year. The central bank hiked the reference rate by 50 bp in
December after a 75 bp increase in November and 40 bp in October. The
December CPI is due at the end of the week, and it is expected to rise to 8.2%
from 7.8%. Separately, Hungary's central bank has lifted the ratee
(one-week depo rate) seven times in as many weeks. It sets it on
Thursday. It stands at 4.0% now and was at 1.80% as recently as
mid-November.
The euro has been confined
to about a quarter of a cent range today. It fell by nearly 0.65% yesterday, the most since
December 17 and is straddling the $1.1300 level. Since the middle of
November, it has mainly traded between $1.12 and $1.14. It had approached
the upper end of the range in the last couple of weeks of December.
The US two-year premium over Germany is near 140 bp, the upper end of its
recent range, the highest since March 2020. At the end of 2019, it was
about 80 bp higher. Sterling buckled under the dollar's surge
yesterday, falling to a three-day low near $1.3430. Although still
within yesterday's range, cable has popped back above $1.3500 in the European morning
but is at risk of stalling. Initial support is seen in the
$1.3460-$1.3480 area. Meanwhile, the euro has slumped to about GBP0.8360,
its lowest level since March 2020.
America
The US reports the December
ISM and auto sales and the November JOLTS data. The manufacturing ISM has held up better
than the manufacturing PMI, which eased for five consecutive months through
December. That said, the ISM headline and new orders are expected to have
softened. Prices paid are also expected to have eased. Employment
is expected to be a bright spot. Auto sales are expected to have risen for the
second time in three months and the median forecast (Bloomberg) looks for a
13.1 mln unit annualized pace. If so, it would be the best since
July. Also, on today’s agenda, the Fed's Kashkari, usually a dove,
speaks. A couple of Federal Reserve nominations are expected any day
now. Fed veteran Jefferson and Raskin are expected to be nominated.
A third is expected to be open soon.
Canada reports some November
commodity indices, but the December manufacturing PMI is more important. It has been stuck with 57-hand
since August. November trade figures are due Thursday ahead of the
employment report on Friday. The swaps market has a hike fully discounted
for the March 2 Bank of Canada meeting. Separately, note that Ontario is
reintroducing social restrictions to avoid overwhelming hospitals. Nearly
3/4 of the province's adult ICU beds are occupied.
The Canadian dollar rallied
into the end of 2021.
It gained against the greenback in seven of the last ten sessions.
However, it gave back 0.85% yesterday and is trading quietly today. The US
dollar is hovering around CAD1.2740 near midday in Europe. There is a
$355 mln option at CAD1.2750 that expires today. The Canadian dollar
looks vulnerable to the falling premium Canada offers over the US for two-year borrowings.
The premium today is around 17 bp. It was near 60 bp two months
ago. It is the least since June. A convincing move above CAD1.2750
will target CAD1.2800. Mexico and Brazil have light economic calendars
today. From the late November peak near MXN22.1550, the US
dollar fell around 8.5% to MXN20.3270 at the end of last month. We look
for the greenback to recover. Initial resistance is seen in the
MXN20.65-MXN20.75 band. The US dollar also appears poised to test the
BRL5.70-BRL5.75 area.
Disclaimer
Reviewed by Marc Chandler
on
January 04, 2022
Rating:
