Overview: The new week does not mean new
forces. The dollar is recouping some of what it lost ahead of the weekend
after the disappointing US jobs growth, but yields continue to rise and many
risk assets, equities and crypto continue to struggle. Asia Pacific
equities were mixed. With Tokyo closed, Hong Kong, China, Taiwan, and
India advanced. Last week the MSCI regional benchmark fell almost
0.5%. Europe's Stoxx 600 is off for a third session. Only energy
and financials are advancing. US futures are slipping lower.
Meanwhile, the US 10-year yield is firmer near 1.78%. European yields are easing after starting higher. Australian and New Zealand bonds played catch-up and
rose six basis points. The US dollar is mixed but mostly firmer.
The euro and Swedish krona are the heaviest as the pre-weekend gains are
pared. The Australian and Canadian dollars and Norwegian krone are the most resilient.
Russia and Turkey lead some emerging market currencies higher, while the euro
seems to be a drag on central European currencies. Still, the JP Morgan
Emerging Market Currency Index, which rose by 0.2% last week is slightly firmer
today. Gold is knocking on resistance near $1800. Oil is little changed with
the February WTI around $79. Iron ore fell 1.6% to pare last
week's 5.4% advance. Copper is higher for the second session. It
snapped a four-week advance last week, falling 1.2%. US natural gas
gapped higher after jumping more than 2% before the weekend as a cold wave hit the
northern part of the country and parts of Canada. Europe's natural gas
prices jumped 28% last week and are tacking on another 5% today.
Asia Pacific
Japanese markets were closed
for Coming-of-Age Day. There are two highlights this week. In terms of data, the
November current account stands out. The November balance has
deteriorated compared with October for the past 14 years. With the
current account comes the monthly portfolio flows. We already know from
the weekly MOF data that Japanese investors were small buyers of foreign bonds
and larger sellers of foreign equities. For their part, foreigners bought
Japanese bonds for the first time in three months. On the other hand,
they were small sellers of Japanese stocks after having stepped up their
purchases in October. The monthly data, unlike the weekly data, provides a
country breakdown. The second highlight of the week is the Economic Watchers
survey (December) ahead of next week's BOJ meeting. The BOJ may downgrade
its growth assessment while tweaking higher its inflation outlook.
China may report its lending
figures and trade figures, but the highlight will be December CPI and PPI first
thing Wednesday morning in Beijing. The CPI is expected to soften slightly, as may PPI.
If true, it may boost ideas that the PBOC will ease policy before the end of
the month and the start of the week-long Lunar New Year celebration beginning
January 31. Chinese aggregate financing slowed in 2021 from a monthly
average of a little more than CNY3 trillion in the first 11 months of 2020 to
about CNY2.64 trillion last year. Chinese officials have urged the
state-owned banks to continue to lend to the distressed property market.
Also, local governments reportedly began tapping this year's borrowing quotas
at the end of last year. Recall too that on December 15, the PBOC cut the
reserve requirements, ostensibly freeing up CNY1.2 trillion into the banking
system. Did it lead to new lending? The PBOC could cut
reserve requirements again and/or it may cut the one-year medium-term lending
facility from the 2.95% since April 2020. China's trade surplus is expected
to have grown in dollar terms, after falling in November ($74.5 bln vs. $71.7
bln). However, in yuan terms, it may have eased for the second
consecutive month.
The dollar is confined to
about a 30-pip range above JPY115.55. It continues to hold above the breakout from early last
week above last year's highs. There is an option for about $600 mln at
JPY116 that rolls off today. The price action over the last few days
could be a bullish flag or pennant formation. A move above previous day's
high may be the signal that the pattern is complete. The pre-weekend high
was about JPY116.05. The Australian dollar recovered smartly
before the weekend, rising from around $0.7130 to almost $0.7190. It
is flirting with $0.7200. Resistance is seen near $0.7220. The
greenback firmed against the Chinese yuan last Thursday. It gave a little back
before the weekend and is giving back a little more today. It is holding
above last week's low (~CNY6.3640). The PBOC set the dollar's reference rate
at CNY6.3653, while the market (Bloomberg survey median) was for about
CNY6.3635.
Europe
A SkyNews/YouGov poll is
problematic for UK Prime Minister Johnson. It showed that nearly half of Tory members
think that Chancellor Sunak would be a better leader and could lead the party
better than Johnson in the next election. Nearly a third think he should
resign. This is not a coup de grace, but it would seem to hasten the
likelihood that Johnson reshuffles his cabinet to see if a somewhat fresh slate
can be had. Meanwhile, the UK's Brexit negotiator resigned last month,
and Foreign Secretary Truss takes over. Talks on the Northern Ireland
Protocol resume this week. The government's position does not appear to
have changed, and Truss reiterated that Article 16 will be invoked if the EU
does not compromise further.
Germany will be the first G7
country to provide an estimate of Q4 GDP. At the end of the week, it will announce
the full year's growth, where the Q4 pace will be extrapolated. Recall
that in Q1 21, Europe's biggest economy contracted by 1.9% (quarter-over-quarter)
and recouped in Q2. In Q3, it recorded 1.7% growth. The economy may
have expanded by around 0.5%, but the risk is on the downside, especially after
last week's report of much weaker than expected November industrial production
(-0.2% rather than the 1.0% forecasts, and the October gain was shaved to 2.4% from
2.8%). The November trade surplus was also a bit smaller than
expected.
As a potential weight on the
euro, which is trading at the upper part of the $1.12-$1.14 trading range, the likelihood of Russia's grab for more of Ukraine seems under
appreciated. There
are three different sets of security talks with Russia this week. It begins
with today’s bilateral meeting with the US, followed by NATO and then the
Organization for Security and Cooperation in Europe. It is telling that
there has yet to be a seat at the negotiations for the European Commission, which
seems to highlight the split in Europe between economics and security. Most
observers agree that the US and NATO cannot accede to Putin's key demands,
which are tantamount to conceding a sphere of influence (and arguably more)
that the Soviet Union had in many key respects. Without assurances, for
example, that Ukraine and Georgia will never be allowed to join NATO, Putin,
previously of the KGB, cannot feel Russia is secure. The talk of room to
compromise on how troops are deployed, or a new intermediate missile agreement
are nice but do not appear to be the crux of the matter.
The euro appears
vulnerable. It
is at the upper end of the $1.12-$1.14 trading range. The threat of
Russian action is not imminent but close. The US 2-year premium over
Germany has continued to edge higher. The market is pricing in an even
more aggressive Fed. Support has been forged in the $1.1275 area, where
options for nearly 930 mln euros expire today. The next area of support
is about half of a cent lower, and we imagine it will be tested by the middle
of the week when the US reports what is expected to be another tick up in CPI,
which may prompt more participants to expect four rather than three hikes this
year. The high today has been about $1.1360 and there is another set of
options at $1.1350 for 550 mln euros that also expire today. Sterling
continues to hover near two-month highs around $1.3600. The data
highlight of the week, November monthly GDP and the details, may be too dated,
given the disruption caused by Omicron, to drive sterling, perhaps leaving it at
the mercy of broader dollar developments. There is an option that
expires today at $1.3610 for about GBP305 mln. Meanwhile, sterling is
trading at its best level against the euro since February 2020. The euro
is around GBP0.8535. Recall when the pandemic first hit, the euro
recorded a low near GBP0.8280. The divergence of monetary policy suggests
this will likely be taken out.
America
The market looked past the
disappointing jobs growth from the last month's establishment
survey. It was
skewed by the seasonal adjustment. The household survey held up
considerably better and this saw the unemployment rate slip to 3.9% from
4.0%. While it is below the Fed's long-run neutral rate, the weak
participation rate would seem to exaggerate how low it is, and underscores why
Fed Chair Powell has emphasized several times why there is no single indicator
for the labor market as there is for inflation. Moreover, of the Fed's
two mandates, it is mostly concerned with price stability at this
juncture. Indeed, the market is pricing in a greater chance of a March
hike and a fourth hike this year than before the report.
Harder to quantify than the
expectations for the Fed funds rate, the unwinding of the central bank's
balance sheet is also becoming more salient. It is there that the markets may
focus in the upcoming days. Powell's confirmation hearings in the Senate
will be held tomorrow and Brainard on Thursday. Several Fed presidents
speak this week, including three hawks who vote this year (Mester, George, and
Bullard). Chicago's Evans also speaks, and like Kashkari from Minnesota,
are on the dovish side, which in the current context, may mean two hikes this
year. Although many high-profile economists, including Summers and
Dudley argue that the Fed is behind the inflation curve, we suspect that as the
Fed "catches up" the next meme could be choking off growth.
Fiscal policy will be less supportive. The "excess savings" are
being absorbed as pent-up consumption runs its course. Financial
conditions are already tightening. This could be the second half
story.
Canada has a light economic
calendar this week, but last Friday's employment report sets the stage.
Canada grew 122k full-time positions. Around half of them may have been accounted for by a
shift from part-time to full-time. The data was sufficient enough to persuade
the market that the Bank of Canada will hike rates at both its March and April
meetings. The swaps market has 137 bp of tightening discounted over the
next 12 months.
Mexico also has a sparse economic calendar this week. The main feature is November industrial output
tomorrow. A small rise is expected. Despite concerns over
AMLO's energy sector reforms in a nationalistic direction, and the cutting of
oil exports, the peso is one of the markets' favorites in the past couple of
months. The swaps markets have 230 bp of tightening priced in over the
next year, of which 75 bp is expected here in Q1. The first meeting is
February 10. The highlight of the week for Brazil is tomorrow's
IPCA inflation. The year-over-year pace is expected to ease for the first
time since May 2020. It would support ideas that the peak of price pressures
may be at hand. Ostensibly this would impact the outlook for the rate
trajectory and may make the 300 bp of tightening in the swaps market look a bit exaggerated.
The US dollar approached
CAD1.26. It has not
traded below there since mid-November. That area may also be the neckline of a
head and shoulders pattern, which if valid, may project toward CAD1.2250.
To put that potential objective in context, consider that last
October/November, the greenback briefly traded below CAD1.2300, while last
year's low was set in May/June near CAD1.20. The US dollar is
also trading heavily against the Mexican peso. It is near
two-month lows and is a little above the low set on New Year's Eve, which was
around MXN20.3270. Below there is the 200-day moving average
(~MXN20.27). Note that speculators in the futures market have nearly
their smallest net short peso position since the middle of last
year.
Disclaimer
Reviewed by Marc Chandler
on
January 10, 2022
Rating:
