Overview: The 7% December CPI print did not prevent
the dollar from weakening broadly. The Dollar Index fell by 0.65%, the
largest decline since late November. The 10-year yield rose by less than a basis
point to poke above 1.74%. The S&P 500 spent most of the session
chopping in a 15-point range. The greenback is still offered broadly,
with the dollar-bloc and sterling leading. Emerging market currencies are narrowly
mixed, with the Turkish lira's 2%+ slide being the chief outlier. The JP
Morgan Emerging Market Currency Index is heavier after rising around 1.2% in
the past two sessions. Equities are faltering. Japan, China, and
South Korea were a drag on the MSCI Asia Pacific Index, while the Stoxx 600 has turned higher after a softer opening, after rising by about 0.65% yesterday. US futures are trading with a slightly firmer bias. Benchmark 10-year European yields are narrowly mixed, while the US yield is near 1.75%. Gold is snapping a four-day
advance after approaching $1830. Oil prices are also paring yesterday's gains,
which had lifted the February WTI contract above $83. It is consolidating
in a narrow range. Nickel reached a 10-year high yesterday as Indonesia
said it could introduce an export tax but is softer today. Other industrial
metals that we track are softer too. Iron ore is off a little more than 3%
after rallying more than 5% over the past couple of sessions. Copper is
pulling back around 1% after a similar two-day advance. US natural gas
prices are down a little more than 2% today after a four-day ~25% rally. Europe's natgas benchmark is off for a third session and is off about 12.4%
this week.
Asia Pacific
Tokyo raised its Covid alert
amid the surging pandemic. It now stands at the second highest of four levels. Cases in
the capital are the highest in four months. Japan had seemed more
resilient in the face of the Omicron variant, but it now looks like the
contagion was simply delayed. Three of Japan's worst areas are now
in a quasi-emergency posture, allowing local authorities to impose restrictions
on bars and restaurants. Tokyo will also re-impose restrictions if the
hospital bed utilization reaches 20%. It was near 14% yesterday.
Japan no longer will require
medical workers who have had close contact with Omicron cases to quarantine
due to stress on the health care system. Australia has made similar allowance
for transport and freight workers in a bid to address the supermarket
shortages. Prime Minister Morrison said that 10% of the workforce was on
leave at any time due to the virus, while some media outlets reported that absenteeism is near 50% in the transport sector. Australia was in a
zero-Covid policy, but as of Wednesday, it reported more than a million
cases. The general election is likely in Q2, and the government's
handling of the virus will be a key issue.
The dollar was sold a little
through JPY114.40 yesterday, nearly two yen off its multi-year high set on
January 4. There
has been no follow-through selling to speak of, but it has made little headway
above yesterday's JPY114.65 settlement. Last month's uptrend line comes
in today around JPY114.30, and technically, a break of it could see a push
toward JPY113.50. The Australian dollar rose above last month's
highs yesterday (~$0.7280) and is pushing above $0.7300 today. It
is trading near the upper Bollinger Band (~$0.7315). The $0.7345 area is the
(61.8%) retracement objective of the fall from the late October high
(~$0.7555). After gapping lower against the Chinese yuan
yesterday, the greenback stabilized today. It has edged back
above CNY6.36. The PBOC stepped up its protest of the yuan's strength by
setting the dollar's reference rate about 60 pips weaker than expected
(Bloomberg survey) at CNY6.3542. The median bank projection was
CNY6.3482.
Europe
The UK has two sets of
negotiations today. First, Foreign Secretary Truss meets with the EU's Sefcovic to
discuss the Northern Ireland protocol. Truss is seen as a possible
successor to the beleaguered Prime Minister Johnson. Brexit has derailed
the previous two UK Prime Ministers, Cameron (referendum) and May (Brexit
proper). Although polls show most voters are not pleased with how Brexit
has been implemented, Johnson's main problems stem from a petty corruption scandal
and the handling of Covid (not by example). Second, the UK and India launch
free-trade negotiations today. This is the start of what will be protracted talks.
On one hand, the UK has been trying to secure free-trade agreements now that it
is outside of the EU and the old Commonwealth is fertile ground. On the
other hand, the Indian economy is one moving up the ranking table and is not as
integrated into global trade and finance as much as the other economies its
size.
Italy's presidential
selection process begins in earnest on January 24. While Draghi has indicated interest in the
post, he seems to think he can pick a caretaker replacement that can lead the
country into next year's election. However, Berlusconi is threatening to
force an election if Draghi is chosen over him for president. Meanwhile,
Draghi is maneuvering to block proposals from the center-right for a large
spending package to help households and businesses impacted by the surge in Covid. They seek a package of around 20 bln euro, which would require a
change in the budget that was just passed a couple of weeks ago. Instead,
Draghi seeks a 2 bln euro package that helps the tourism industry and helps
fund the furlough program for employees. His plan seems to repurpose some
existing funds and would not require changes to the budget.
Hungary's central bank left
the one-week deposit rate at 4.00% for the third consecutive week. It had ratcheted its rate up from 1.8%
in mid-November to 4.0% at the end of last year. December CPI is due out
tomorrow and is expected to have eased to 7.2% from 7.4%. Note that in an
attempt to ease price pressures on households, the government has capped fuel
prices and fixed mortgage rates. Starting next month, the prices for six
commodities (sugar, flour, sunflower oil, chicken breast, pork leg, and most
milk) are cut back to mid-October prices.
The euro was in a
$1.12-$1.14 trading range since around the middle of November. It broke out to the top side
yesterday and reached almost $1.1480 today. It closed above a downtrend
line going back to last April/May. It was near $1.1435 yesterday and a
little lower today. The last leg lower began in late October near
$1.1690. The $1.1440 area corresponded with the (50%) retracement
objective and the next one (61.8%) is near $1.1500. The euro closed above
its upper Bollinger Band yesterday (~$1.1405) and is still above it (~$1.1430)
today. Sterling is pushing above its 200-day moving average
(~$1.3735) for the first time since last September. Yesterday,
it met the (50%) retracement objective of the slide since last year's high on
June 1 (~$1.4250) that was found a little above $1.37. The next retracement
(61.8%) is closer to $1.3835. It is holding a little below its upper
Bollinger Band (~$1.3760).
America
Many outspoken critics of
the Fed argue that the central bank has not given up on the idea that inflation
will fall on its own accord. Their rationale is that when the supply chain disruptions are
resolved and base effects are unwound, and the fiscally induced consumer
spending eases, inflation will fall. The critics argue that unemployment
is below the natural rate and that this will contribute to the persistence of
inflation. Without drawing attention to it, or resolving some of the
critical problems, the critics are ultimately angry that the Fed has eschewed the
Phillips Curve, which posits a stable inverse relationship between unemployment
and inflation.
Used vehicle prices rose
3.5% in December, for a 37.3% year-over-year gain. Only some parts of the energy complex,
like gasoline prices (almost 50% year-over-year increase) rose by more.
Monetary policy is not suited to address the issues that are lifting used car
and truck prices and energy. In effect, then the critics say, that to
cope with those drivers, the Fed must squeeze those other parts of the economy
that they can. Chair Powell and noted hawk, St. Louis Fed Bullard both
expressed the desire "to bring inflation under control in a way that does
not disrupt the real economy." Who doesn't want that?
They know the tools they
have and insist on defining the problem in a way that lets them use it. Maslow's observation about if all
one has is hammer, the problems will look like nails. Their tools here compress
demand until it falls back to the supply curve. As an aside, in an
interview with the Dow Jones, Bullard said he now thinks four rate hikes may be
appropriate this year. Many market participants have come around to
this view, and the Fed funds futures are pricing in around a 60% chance of four
hikes instead of three. Yet, last month's Summary of Economic Projections
(dot plot) showed two Fed officials who thought four hikes would be appropriate
this year. If one of those dots were not Bullard, who
many regard as the most hawkish member (and voting this year), it suggests another
dimension of the hawkish turn of the Fed.
The US PPI and weekly
jobless claims are unlikely to drive the dollar, which appears to be caught in
a powerful position adjustment. Many observers recognize that the greenback often has
weakened after the start of the monetary tightening cycle. However, that
still seems to be a couple months away (a consensus among Fed officials of a
March move seems to be solidifying). While we had expected the twin
deficit issue to reemerge as a key driver, we did not expect it to begin with
Russian troops poised to invade Ukraine while Italian politics threaten to
inject a new element of instability.
The head and shoulder US
dollar top we identified against the Canadian dollar is unfolding. The neckline at CAD1.26 was taken
out on Tuesday and yesterday's push saw the greenback test the 200-day moving
average near CAD1.25. Today it has been sold to almost CAD1.2465. It
closed below its lower Bollinger Band yesterday (~CAD1.2540) and remains below
it (~CAD1.2495) today. Nearby support is seen near CAD1.2450. The
greenback is pinned near its recent trough against the Mexican peso, though it
made a marginal new low a little below MXN20.32 yesterday. It has not
closed above MXN20.40 so far this week, and has not been above there today, so
far. The week's high was set near MXN20.5230 and there is an option for
$600 mln at MXN20.50 that expires today.
Disclaimer
Reviewed by Marc Chandler
on
January 13, 2022
Rating:
