Overview: From the pre-weekend low to yesterday's
high, the NASDAQ rallied around 7.5% and is trading a little firmer ahead of
the US open. Bottom-pickers emerged after the tech-heavy benchmark slid
about 20% from its record high late last year. At the same time, a chorus
of Fed officials have underscored Chair Powell's message that while a March
rate hike is in the cards, there is no forward guidance. All options are
open but there is no desire to surprise the market (see BOE last
November). Many Asian centers remain on holiday, but Japan, Australia,
New Zealand, and India all advanced. Europe's Stoxx 600, with a four-week
loss in tow, is up about 1% near midday in Europe, led by industrials and information
technology. Benchmark 10-year yields are around 1-2 bp softer in Europe and
the US. It puts the 10-year Treasury yield around 1.76%. The dollar
is trading off, extending yesterday's move. The major foreign currencies
are up 0.25%-0.50%, led by the Scandis and Swiss franc with the euro as a laggard.
Emerging markets are led by the freely accessible currencies like the
South African rand, Russian rouble, and Mexican peso. The JP Morgan
Emerging Market Currency Index is pushing higher after rising over 1%
yesterday, the most since before Xmas. Gold is testing the 200-day moving
average near $1806. It's low from the end of last week was around
$1780. The next technical target is in the $1817-$1825 area. March
WTI is stalling ahead of last week's high (~$88.75). A break of $85 could
signal a correction instead of consolidation. US natural gas is paring
yesterday's 5% gain, while Europe's benchmark is falling another 8% after a
slide of similar magnitude yesterday. Copper is trading with a
firmer bias. The CRB Index has advanced for the past six consecutive
weeks for a nearly 12.5% gain. It rose nearly 1% yesterday.
Asia Pacific
The Reserve Bank of
Australia will end its A$4 bln a week bond purchases, but Governor Lowe did not
moderate his rhetoric as expected to allow for a sooner rate
increase. This
sparked a brief wobble in the currency and rates, but market expectations did
not change much. The swaps market is pricing in about 110 bp of rate
increase over the next year and 25 bp is fully discounted by early H2.
Other data today were weaker than expected. The flash January
manufacturing PMI was shaved to 55.1 from 55.3 and 57.7 in December.
December retail sales slumped 4.4% rather than the 2% expected after surging
7.3% in November.
After a series of disappointing reports at the end of last week, including December industrial production and
retail sales, Japan's data surprised on the upside today. The January manufacturing PMI stands
at 55.4 not the flash reading's 54.6 (54.3 in December). Unemployment
unexpectedly slipped lower in December to 2.7% from 2.8%, while the
job-to-applicant ratio ticked up to 1.16 from 1.15. Lastly, we note that that the
lower house of the Diet passed a resolution today on the eve of the Beijing
Olympics, critical of China's human rights and especially its treatment of
Uyghurs.
South Korea's January trade
deficit was more than twice as large as expected at $4.9 bln, a new
record. Last January, it reported a $3.6 bln surplus. Exports were weaker than expected
rising 15.2% year-over-year, down from 18.3% in December. Imports were
also stronger than expected. They were 35.5% higher than a year
ago. Economists had projected them slowing below 30%.
The dollar is at a three-day
low against the Japanese yen near JPY114.70. It has nearly retraced half of last week's recovery
that lifted it from around JPY113.50 to JPY115.70. The next (61.8%)
retracement is near JPY114.30. We suspect the dollar can stabilize and
recover a bit in the North American session. The Australian
dollar initially fell to about $0.7035 on the RBA's stance, but quickly
regained its composure and made new session highs around $0.7090 in late Asian
dealings. It is approaching resistance in the $0.7100-$0.7120
area. The US dollar is consolidating within yesterday's range
against the offshore yuan. It is little changed around CNH6.37.
Europe
There is a significant
adjustment taking place that appears to be supporting the euro. The US 2-year premium over Germany is
narrowing for the third consecutive session. It reached 181 bp last week and is
now near 167 bp. It is the largest decline in two months. It is
largely the function of the backing up of German rates. The German 2-year
yield is rising for its sixth consecutive session. During this run, the
yield has fallen by about 16 bp to minus 0.46%. It is
the highest yield in almost six years. The market is pricing in about a
30 bp hike from the ECB over the next 12-months. It looks like the first move
is expected later this year. The ECB meets on Thursday.
The eurozone flash
manufacturing PMI of 59.0 was trimmed to 58.7 after 58.0 in December. A downward revision to Germany's
reading (59.8 vs. 60.5) and a disappointing Italian report (58.3 vs. 62.0) were
responsible. France's stood at 55.5 unchanged from the flash report (55.6
in December). Spain's defied expectations of a pullback and was steady at
56.2.
Other data were mixed. France, like Germany yesterday,
reported firmer than expected January CPI. It rose by a minor 0.1%, but
the market had expected a 0.2% decline. The year-over-year rate edged up
to 3.3% from 2.9%. German retail sales collapsed in December, falling
5.5% on the month. It was about four-times larger than expected. On
the other hand, the unemployment queues fell by 48k in January, the largest
decline since last August. The unemployment rate unexpectedly eased to
5.1% from 5.2%. Italy's December unemployment rate fell to 9.0% from a
revised 9.1% in November. Recall that it was at 9.9% at the end of
2019. For the eurozone as a whole, the unemployment rate in December
stood at 7.0%, the eighth consecutive decline. It was at 7.5% before the
pandemic.
The UK reported stronger
January house prices (Nationwide), and more mortgage approvals and stronger
consumer credit growth in December. The manufacturing PMI was revised to 57.3
from 56.9, but it still fell for the second month (57.9 in December). It
is the lowest since last February. The UK government is taking several
new initiatives to show that it is not paralyzed by Gray's report or the
pending police investigation. It has begun a two-week consultation period
to scrap mandatory vaccines for frontline NHS workers. We note that
Finland is also lowering its assessment of the Covid threat, including
eliminating the virus pass and social restrictions. The Johnson
government is also considering committing more soldiers and equipment to
NATO.
The euro is firm near
$1.1265. It has met
the (38.2%) retracement of the leg down from the peak on January 14 just shy of
$1.1485. The next retracement (50%) is around $1.1300, where a 1.55 bln
euro option expires today. Support now is seen in the $1.1220-$1.1240
area. Sterling is pushing above $1.35 and is approaching its
(38.2%) retracement objective slightly above $1.3505. The next (50%)
retracement is near $1.3555, around the 20-day moving average. Sterling
bottomed last week by $1.3560. The gains in the European morning have
stretched the intraday momentum indicator, suggesting North American dealers
may have a difficult time extending the upticks much.
America
It is almost as if the Fed
orchestrated an effort to calm the rate hike expectations. Recall many have revised higher, some to
seven, hikes this year. The flattening of the yield curve may have also
gotten some official attention. Bostic, Barkin, and Daly all seemed to be
reading from the same general script. The White House may have also
gotten into the act with a press briefing yesterday that noted that in the week
of the jobs survey, nine million workers had called in sick or taking care of a
sick family member. That said, we note that the implied yield of the
December Fed funds futures contract has risen for the last five sessions and is
trading a little firmer now.
Outside of the JOLT report
on job openings and December construction spending, today's US data is
primarily from the private sector. Markit's final manufacturing PMI is expected to be little
changed from the 55.0 flash reading, which was the lowest since before the 2020
election. The ISM manufacturing reading is expected to fall to around
57.5. It would also be the lowest since November 2020 and would be the third
consecutive decline. Prices paid are expected to have fallen for the
third consecutive month. The median forecast in the Bloomberg survey
looks for 67.0 after peaking last June at 92.1. Finally, are the US auto
sales figures. A modest gain to almost 13 mln (seasonally adjusted annual
rate) is expected. In January 2021, the pace was 16.6 mln.
Canada reports November GDP
(Bloomberg median 0.4% for 3.6% year-over-year pace) and the Markit manufacturing
PMI. The employment
data at the end of the week is more important for the markets, but a Bank of Canada
rate hike next month is baked in the cake. Mexico reported its economy
contracted in Q4 (by 0.1%) but it was the second consecutive quarterly decline
in output. The swaps market still has 100 bp of tightening priced in over
the next three months. Today, Mexico reports worker remittances (strong)
and Markit's manufacturing PMI and IMEF activity indices. Brazil sees the
Markit PMI and January trade figures (a small deficit is expected). The
central bank meets tomorrow and has pre-committed to a 150 bp hike. It
was the most aggressive last year and is perceived to be near a peak, which
appears have encouraged foreign flows into the bond and stock markets.
The US dollar is correcting
lower against the Canadian dollar rallying 1.5% last week. It met the (38.2%) retracement
objective near CAD1.2665 today and the next (50%) is near CAD1.2625.
There is an option for about $570 mln at CAD1.2705 that will be cut today.
A move above CAD1.2720 could suggest the correction is over. The
greenback's pullback against the Mexican peso has been deeper. It
is approaching the (61.8%) retracement objective near MXN20.52. The
20-day moving average is a little lower (~MXN20.5080). Resistance now is
pegged around MN20.65.
Disclaimer
Reviewed by Marc Chandler
on
February 01, 2022
Rating:
