Overview: Seven of the G10 central banks pumped the brakes between last week and this week as they purposely seek to push demand back into line with supply. And there are more signs that they are succeeding in weakening growth impulses. The dramatic surge in European bond yields continues today with 10-year rates mostly rising another 13-15 bp. Italian and Greek benchmark yields are up 22-24 bp. The US 10-year Treasury yield is up nearly five basis points to 3.50%. Equities are slumping, though Hong Kong and the mainland’s CSI 300 rose, ostensibly helped by more measures for the China’s property sector. Still, the MSCI Asia Pacific Index snapping a six-week advance with a loss of a little more than 1% this week. Europe’s Stoxx 600 is off 1% today to bring this week’s drop to more than 3%, the most in three months. US futures are off more than 1% after yesterday’s sharp losses. In a relatively calm foreign exchange market, the dollar is mostly higher. The yen is bucking the move and recovering about 0.4% after yesterday’s nearly 1.7% fall. Most emerging market currencies are lower, led by the South African rand (-1.1%) and the Mexican peso (-0.55%). After plunging $30.5 yesterday, gold has stabilized ahead of the 20-day moving average near $1773. Demand concerns are weighing on oil prices, and January WTI is off 2.6% after falling 1.1%yestrday. Still, near $74 a barrel is up 4.5% this week. US natgas is around 6% lower after rallying 8.4% yesterday and is holding on to a nearly 5% gain on the week. Europe’s natgas benchmark is off 9% to brink this week’s loss to more than 11%. Iron ore trimmed yesterday’s 2.6% gain, falling marginally today. March copper is about 0.6% lower to new two-week lows. March wheat is virtually unchanged after rising 1% yesterday.
Asia Pacific
Japan's flash December PMI
composite survey ticked up to 50.0 after dipping to 48.9 in November, which was
its lowest since February. It finished last year at 52.5. The increase was due to services,
where the PMI rose to 51.7 from 50.3. It last was below 50 in August. It is the
manufacturing sector that is still challenged. It slowed to 48.8 from 49.0 and is
the weakest since October 2020. The BOJ meets next week. There is little chance
policy will shift. While the BOJ's virtual ownership of the all of the 10-year
bond ensures that it remains below the 0.25% yield-curve control cap, the rise
in global yields has seen the 20-year yield jump from Tuesday's December low of
about 1.06% to a high around.15%. The 30-year yield was at two-month low on
Tuesday near 1.38% to a high today about 1.49%.
Australia' flash December
composite PMI slumped to 47.3 from 48.0. It is the third month below the 50 boom/bust level and the
lowest since the start of the year. It was at 54.9 a year ago. Unlike, Japan,
Australia's manufacturing sector activity is growing, albeit slowly. The
manufacturing PMI stands at 50.4, down from 51.3. It was the service sector
that was the drag. It slumped to 46.9 from 47.6. With a couple of exceptions,
it has been declining since peaking in February at 47.4.
The surge in European rates
seemed to weigh on the yen yesterday, and amid the broader dollar recovery
after the ECB meeting, the greenback rose to a marginal new high for the month,
slightly above JPY138.15. It
flirted with the 20-day moving average, (now near JPY137.65), which it has not
closed above since November 3. After yesterday's fireworks, the dollar is
consolidating in a one-yen range above JPY136.85. The greenback settled near
JPY136.55 last week. The daily momentum indicators are trending higher. The
Australian dollar broke down yesterday, after stalling in front of its 200-day
moving average (~$0.6900) earlier in the week. Yesterday's drop took it to
a six-day low slightly above $0.6675. It rose to about $0.6735 today before new
sellers emerged and is back near yesterday's lows in the European morning. We
look continued losses to continue, and our next target is the $0.6600-20 area,
and possibly, $0.6530-50. The dollar edged up against the Chinese yuan today
but remained below the week's high set Tuesday near CNY6.9890. The relative
stability of the yuan contrasts with the chaos in China amid surging Covid. Since
gapping lower on December 5, the greenback has traded between roughly CNY6.9370
and CNY7.0. The PBOC set the dollar's reference rate at CNY6.9791, while the
median in Bloomberg's survey projected CNY6.9803. The dollar rose against most
of G10 currencies this week and snapped what appears to be a record two-week
fall against yuan. It gained about 0.25% against the yuan this week.
Europe
The ECB delivered a 50 bp
hawkish hike and signaled another 50 bp hike at the next meeting in early
February. ECB President
Lagarde reiterated the statement's pledge of "significant and steady"
moves going forward and declared that the smaller hike was no pivot. The market
took it at face value and lifted the anticipated rate for June 2023 by 27 bp to
about 3.06%. If it feels vaguely familiar, it is because that is where the
market was a week before the October 27 ECB meeting. Still, the hawkishness of
the message was underscored by the upward revisions to the staff’s inflation
forecast, which see the average pace 2025 of both the headline and core rates
above the 2% target. The ECB provided more details on QT than expected,
indicating that it would begin in March and average 15 bln a month through Q2
23 when it be reassessed. Decisions on the "greening" of its
corporate bond portfolio will also be announced in February. The ECB
acknowledged that the eurozone economy may contract this quarter and next, but
the staff forecasts the downturn will likely be short and shallow. Benchmark
10-year bond yields spiked higher, and the peripheral spreads widened against
the core. Two-year yields jumped 15-30 bp. At both ends of the curve, Italian
bonds were hit the hardest. The US two-year premium over German sank to almost
180 bp, the least in 10 months before returning to a little below 190 bp. Today
it fell to around 176 bp. The premium stood at 220 bp at the end of last week.
The eurozone preliminary PMI
remained in contraction territory, but not as deep as in November. The
manufacturing PMI rose to 47.8 from 47.1. The services PMI 49.1 from 48.5. The composite stands at
48.8, up from 47.8. It has been below 50 since breaking it in July. German
figures were better than the French. The German composite stands at 48.9 from
46.3 in November and 45.1 in October. The French composite fell to 48.9 from
48.7 and 50.2 in October. It seems a stretch to say that the data supports the
ECB's hope that the downturn will be brief and not deep. It may turn out that
way, but it does not appear to have been determined by the results of the
preliminary December PMI. The fear of energy shortages has diminished, and
supply chains disruptions have appeared to ease, but the headwinds remain
strong.
The BOE's 50 hike was a
contested decision. The
six-person majority carried the day with the half-point hike. Mann dissented in
favor of a 75 bp move, and Dhingra and Tenreyro wanted to stand-pat. The
fraying of votes may and the BOE's toned down statement that suggested a
further increase "may" be required would seem to raise the prospect
of a different outcome at the next meeting on February 2. The BOE also dropped
last month's warning that the path of interest rates implied by the market was
too aggressive. Yet, the swaps market made only a modest adjustment, reducing
the chance of a 50 bp hike to around 74% from a little above 90% discounted at
the close on Wednesday. It is a slightly lower than 85% in the European morning
today.
UK retail sales fell by 0.4%
in November. The median
forecast in Bloomberg's survey was for a 0.3% gain. Small comfort comes from
the upward revision to the October series to show a 0.9% gain rather than the
0.6% increase initially reported. The preliminary December manufacturing PMI
fell to 44.7 from 46.5. It is the lowest since May 2020. The flash services PMI
rose for the first time since June to stand at 50.0 from 48.8. The composite
rose to 49.0 from 48.2. It is the fifth month below 50. It finished last year
at 53.6.
In yesterday's volatile
session, the euro reached $1.0735, a new six-month high, and nearly met the
(61.8%) retracement of this year's decline (~$1.0745). It fell below Wednesday's low (~$1.0620)
but closed above it. Early gains today were stalled in front of $1.0665 but
buying was seen in the European morning near $1.0610. The daily momentum
indicators are still overextended and have not decisively turned lower. We
suspect a break of the $1.0550-60 area is needed to signal a proper correction.
Sterling traded below its 20-day moving average (~$1.2145) today for the first
time since November 10 and nearly met the (61.8%) retracement of this month's
gains (~$1.2110). The 200-day moving average is closer to $1.2100. The
daily momentum indicators appear to be turning down. Here, we suspect a break
of $1.20 is needs to signal that a correction has begun.
America
The US reported a dismal
combination of data yesterday, pointing to a serious loss of economic momentum.
Retail sales in November
tumbled by 0.6%, three-times more than the median forecast in Bloomberg survey
and the biggest loss decline of the year. The core measure, which excludes
autos, gasoline, food services, and building materials, which feeds into GDP
models fell by 0.2% (instead of increasing by 0.1% as the median forecast). And,
adding insult to injury, the October gain of 0.5% was revised to 0.5% from 0.7%.
Industrial production fell for the second consecutive month. The 0.2% decline
(median forecast was for a flat report) was led by a 0.6% drop in manufacturing
output. It was the first decline since June and only marginally dented by the
upward revision in October to show a 0.3% gain instead of 0.1% increase. Business
inventories rose by 0.3% in October, slightly slower than expected. The Empire
State Manufacturing survey reversed from a 4.5 reading in November to -11.2 in
December, a four-month low. The Philadelphia Fed business outlook was not as
bleak as it had been (-13.8 vs. -19.4) but the details remain poor with new
orders, shipments, and employment falling. A bright spot was the unexpected
fall in weekly initial jobless claims, which fell by 20k to 211k, the lowest in
two months. This series can be volatile, and the four-week moving average
remains with the 227k-230k range that has prevailed for the past month. The
Atlanta Fed's GDP model shaved its estimate for Q4 GDP to 2.8% from 3.2%. The
preliminary estimate of December's composite PMI is expected to be below 50 for
the sixth consecutive month.
Mexico's central bank's 50
bp hike was no surprise, and the peso, which had been paring its initial loss
in the fact of the greenback's surge following the ECB meeting, softened a bit.
Just as the market
currently favors a 25 bp hike by the Fed at its next meeting (February 1), many
expected Banxico to also slow its pace when it meets next on February 9. The
overnight target rate stands at 10.50% and the swaps market is pricing a peak
around 10.75%, though Bloomberg's survey of economist sees the terminal rate at
11.0%. Deputy Governor Esquivel's term at this year, and so far, these is no
indication about his reappointment or replacement. That said, many observers
were concerned that AMLO's appointments would be dovish, and yet it has been
anything but. With yesterday's move, it has lifted the overnight rate by 650 bp,
and began nine months before the Federal Reserve. The overnight target is well
above headline inflation (7.80%) and core (8.51%).
The greenback is edging
above yesterday's high against the Canadian dollar and traded around CAD1.3680
in the European morning. The
recent highs stalled near CAD1.3700, and a break of it today could spur a move
toward CAD1.3800. The upper Bollinger Band is found near CAD1.3750 today. There
are options for almost $610 mln at CAD1.3775 that expire Monday. Weaker
equities and oil are doing the Loonie no favors. That said, the intraday
momentum indicators are stretched. The US dollar found support against the
Mexican peso on Tuesday and Wednesday near MXN19.50. Yesterday's high was
near MXN19.8575 and today it has traded to almost MXN19.8840. The risk-off mood
warns of upside risk in North America today. The week's high was slightly above
MXN19.91, and the (61.8%) retracement of the leg low from the late September
spike to MXN20.58 comes in near MXN19.99. The 200-day moving average is a
little higher, closer to MXN20.02. The US dollar has also been trending higher
against the Brazilian real. It rose by about 0.5% yesterday, its fifth gain in
six sessions. The greenback settled around BRL5.3140 yesterday, its highest close
this month. The next area of resistance is seen by BRL5.40. Lastly, Colombia's
central bank is expected to hike the overnight lending rate by 100 bp to 12.0%.
It was at 3.0% last December. Headline inflation was a little above 12.5% last
month, and the core rate was slightly below 9.50%.
Disclaimer
Reviewed by Marc Chandler
on
December 16, 2022
Rating:
