Asia Pacific
Japan's flash PMI disappointed, but the new
quasi-emergency measures in the face of a surge in the virus is the main
culprit. The manufacturing PMI remained firm, rising to 54.6
from 54.3, but the services collapsed to 46.6 from 52.1. This dragged the
composite back below the 50 boom/bust level to 48.8 from 52.5. Separately,
at least five prefectures felt the impact of the 6.6 earthquake in the southern
islands. Lastly, after a 90-minute call before the weekend, US/Japanese
officials seek a "quick resolution" to the steel and aluminum tariffs
imposed on national security grounds by the US in 2018.
Australia's preliminary PMI also disappointed.
The manufacturing PMI eased to 55.3 from 57.7, but here too the virus sapped
the service sector. Its PMI slumped to 45.0 from 55.1. The
composite is at 45.3, down from 54.9. Australia reports Q4 CPI
tomorrow. The year-over-year pace is expected to tick up to 3.2% from
3.0%, while the trimmed and weighted mean prices are forecast (Bloomberg
survey) to 2.3% from 2.1%.
The US dollar is testing this month's low
against the Japanese yen near JPY113.50. A break would initially
target the JPY113.00 area, but the risk may extend to JPY112.50. On the
upside, the greenback meets resistance ahead of JPY114.00, where, just below a
$460 mln option expires today. The Australian dollar is extending
its losses today. It peaked last Thursday near $0.7275 and is pushing
at $0.7150 in the European morning, which is around the halfway mark of the
rally from the December 3 low a little below $0.7000. The $0.7115 area
corresponds to the next retracement objective (61.8%). Note that a A$410
mln option expires tomorrow at $0.7100. The dollar gapped lower
against the Chinese yuan and proceeded to drop to almost CNY6.3240, its weakest
level since April 2018. The greenback has fallen in 10 of
the past 12 sessions. The yuan is also higher against its trade-weighted basket
(CFETS) and appears to be at its highest level since August 2015. The
record trade surplus and portfolio capital inflows are offsetting the policy
divergence. The PBOC set the dollar's reference rate at CNY6.3411,
slightly stronger than the market (Bloomberg survey) for CNY6.3407.
Europe
Germany's preliminary PMI surprised to the
upside. The manufacturing PMI rose to 60.5 from 57.4, well above
expectations, which had anticipated a decline. The service sector
rebounded to 52.2 from 48.7. The composite moved back above the 50
boom/bust level for the first time in three months (54.3). France, on the
other hand, disappointed. The manufacturing PMI did not decline as much
as expected (now 55.5 from 55.6), but the service PMI fell more (53.1 from
57.0). This dragged the composite to 52.7 from 55.8 (Bloomberg median
forecast was 54.7). The aggregate readings were mixed. The manufacturing
PMI rose to 59.0 from 58.0, better than expected. The services PMI fell
to 51.2 from 53.1 (expected 52.0) and the composite fell to 52.4 from
53.3. This is the fifth decline in the aggregate composite in the past
six months. It peaked last July at 60.2. The virus seems to be the
key and appears to be disrupting Q1 economic activity. Geopolitics, European
politics, and elevated energy prices are doing no favors.
The UK flash PMI disappointed as well.
The manufacturing PMI eased to 56.9 from 57.9 and mixed the median forecast
(Bloomberg survey) of 57.6. The services PMI slipped to 53.3 from 53.6.
Optimistic economists had forecast a small rise. The composite ticked to
53.4 from 53.6, defying expectations for a small gain. It is third
consecutive decline in the composite PMI and the sixth in the past eight
months, since peaking last May at 62.2. Meanwhile, the market is swirling
with talk about other miscues by the Johnson government as Gray's report of
her internal investigation is awaited.
Italy begins choosing a new president
today. There is one ballot a day to be cast by 630 members of
parliament, 321 senators, and 58 regional representatives. In the first
three rounds a 2/3 majority is needed for victory. Starting with the
fourth round, only a simple majority is needed. Berlusconi pulled out
over the weekend. The risk is that if Draghi becomes the next president,
efforts to name a new prime minister could falter, and thereby force snap
elections. Traditionally, Italy is viewed as a weak presidential model, but
the president does have authority to name a prime minister (which is how Draghi
got the job), force parliament to reconsider legislation and can name 1/3 of
the Constitutional Court. European politics is a key focus in the first
part of this year. We have talked about UK and Italian
developments. Portugal goes to the polls in a few days, and the French
presidential election in April is already moving on the radar screens as the
latest polls show Macron's support is fading, falling to 37% (from 41%) in
December, and a 60% disapproval rating.
The euro is going no place quickly. For
the fourth consecutive session it is being blocked by offers in the $1.1360-$1.1370
area. It found bids near $1.1300 in the second half of last week.
An option for almost 1.1 bln euros at $1.13 expires tomorrow. We see the
technical factors favoring a downside break and see initial potential toward
$1.1255. Technically, sterling looked particularly vulnerable at
the end of last week and follow-through selling today has seen it approach
$1.35. It peaked on January 13 near $1.3750. The
$1.3460 area is the next target. It is the (50%) retracement objective of
the rally that began on December 20 from about $1.3175. Also, note that
the five-day moving average is poised to cross below the 20-day average for the
first time in a little over a month.
America
With sharp losses in the stock market, talk
about the "Fed's put" has been rekindled. Indeed, the
Fed funds futures had last week begun pricing in risk of a fifth hike this
year, and about a 1-in-3 chance of a 50 bp move in March. The drop in
equities has stalled the market's aggressiveness. But also note what is a
self-correcting mechanism too. A sharp decline in equities has seen
private sector demand for US notes and bonds, and spurs talk of business
downturn. We have argued that between the anticipated rate hikes, balance
sheet reductions, fiscal tightening, and the more than doubling of the price of
oil are powerful headwinds on the economy, the cumulative effect of which may
not be fully appreciated. Note that a third of the S&P 500 by market
cap report earning this week.
Moreover, the tightening is taking place as
the US economy loses forward momentum. The US sees the flash PMI
today. It is expected to have softened. The composite PMI has
fallen in six of the past seven months since peaking last May at 68.7.
The median forecast in Bloomberg's survey looks for it to fall below
57.0. The FOMC meeting at mid-week is the highlight, but the first look
at Q4 GDP is the following day. Estimates have been shaved and the risk seems
to be on the downside of the median forecast (Bloomberg survey) of 5.3%.
The Bank of Canada also meets Wednesday.
Economists in Bloomberg's survey sees a standpat policy. The swaps market has
almost a 73% chance of a hike discounted. Participants should be braced for
increased volatility. We side with the market and are inclined to see a
hike. They are not the only ones in the Americas that will likely hike
this week. Chile is expected to hike 125 bp to bring the policy rate
to 5.25%. It would be the first back-to-back hike since July-August, and
would be the third move of 125 bp. Colombia is expected to raise its repo
rate to 3.75% from 3.0%. It also hiked rates 50 bp in December after the first
move in the cycle in October for 75 bp.
The US dollar bottomed last week near
CAD1.2450 and bounced to almost CAD1.26 before the weekend. This
is the previous neckline of a head and shoulders topping pattern we have
monitored. We have been looking for a countertrend bounce and in Europe,
it is testing CAD1.2615. Initial resistance is around CAD1.2630, a
near-term retracement objective and the 20-day moving average. Above
there, potential is to CAD1.2650-CAD1.2675. The greenback carved
a low near the Mexican peso's 200-day moving average last week (~MXN20.28) and traded
up to MXN20.5665. It is knocking on this area now. A move above
here could spur initial gains toward MXN20.65. The momentum indicators
favor the US dollar.
Disclaimer
Reviewed by Marc Chandler
on
January 24, 2022
Rating:
