Overview: Leaving aside the Australian dollar, which is benefiting from the optimism over China's re-opening and a reassessment of the trajectory of monetary policy after a stronger than expected inflation report, the other G10 currencies traded quietly this week and are +/- less than 0.5%. The risk-on honeymoon to start the year remains intact. The MSCI Asia Pacific Index has risen every day this week and index of mainland shares that trade in Hong Kong rose nearly 6.3%. This suggests positive impulses for Chinese stocks when the mainland markets re-open Monday. Europe's Stoxx 600 is up about 0.5% this week. In the US, the S&P 500 closed above the downtrend line from January 2021 and made new highs for the month yesterday. US stock futures are trading with a slightly heavier bias now.
Bond markets are under some
pressure today. Benchmark 10-year yields are 5-10 bp higher in Europe and with
few exceptions are higher on the week. The 10-year US Treasury yield is up
about five basis points near 3.55%, which is slightly below the week's high. Crude
oil is firm with the March WTI contract above $82. This month's high is a
little higher. It settled near $81.65 last week and, barring a setback, it
would be the third consecutive weekly gain and the sixth in the past seven
weeks. Meanwhile, the average price of US retail gasoline continues to drift
higher and around $3.50 is up about 9.5% so far this year. Yesterday's US GDP figures
reduce the chance of surprise from today's personal income and consumption
reports, including the deflators. The University of Michigan reports its final
January confidence and inflation expectation survey results. The focus is on
next week's Fed, ECB, and BOE meetings, and the US jobs report.
Asia Pacific
Although Tokyo's inflation
rose more than higher this month, it may be peaking (4.4% vs. 4.0%). Energy (gas and electricity) subsidies
began this month and can be expected to show up in next month's figures. Also,
the lag time between the yen's appreciation on a trade-weighted basis and the
feed-through to imported prices is hard to predict. However, on a
trade-weighted basis the yen bottomed three months ago. Japan appears to be the
largest buyer of Russia's liquified natural gas and the drop in natgas prices,
leaving aside the exchange rate, should be beneficial to Japan if sustained.
The government moved last year to cap imported wheat prices. Wheat prices
retraced in full last year’s spike sparked by Russia's invasion of Ukraine and
the blocking of grain exports. That said, processed food prices led the rise in
Tokyo CPI, and more increases are expected next month. While the underlying
assumptions about BOJ monetary policy after Governor Kuroda retires in April
are unknown, the median forecast in this month's Bloomberg's survey is for
Japan's CPI to rise 1.9% this year, up from 1.8% in the December survey. Next
year, the CPI is expected to rise 1%.
The Australian dollar rose a
little more than 2% this week to lead the G10 currencies. It was the largest advance in two months
and was driven by the higher inflation figures and developments that keep the
meme about the Chinese recovery intact. Preliminary traffic data and activities
in China during the holiday are constructive and the rally in Chinese shares
that trade in Hong Kong yesterday today may bolster the narrative. The MSCI
Asia Pacific Index rose for the sixth session consecutive session today. Still,
going back to the middle of last October, the Aussie has risen in 12 of the
past 15 weeks. The higher-than-expected Q4 inflation raised the perceived
probability of a quarter-point hike by the central bank next month. This is
partly reflected in the futures market, but also in the 20 bp jump in the
Australian two-year yield to about 3.07%.
The dollar was sold from
around JPY130.20 before Tokyo's CPI to session lows near JPY129.50 in response. It recovered to trade back to session
highs by the end of the Asian session but is consolidating in around a 20-pip
range around JPY130. The greenback settled last week near JPY129.60. The
Australian dollar briefly traded above $0.7140 yesterday and trading sideways
in a slightly more than 15-pip range around the $0.7115 settlement. Of
note, the 50-day moving average is crossing above the 200-day moving average
("Golden Cross"), leaving the Canadian dollar as only G10 currency
that has not done so. While the mainland has been closed this week, the
dollar has fallen from a little above CNH6.78 to a little above CNH6.75 net-net
and has been in a somewhat larger range of above CNH6.72-CNH6.7915. Last
week, before the holiday, the range was roughly CNH6.6975-CNH6.7945.
Europe
Two panels at the World
Trade Organization's dispute settlement body today or in the coming days to
follow up on previous complaints. The first is the legality of trade restrictions imposed on
Lithuanian exports and EU exports with Lithuanian content. China retaliated in
late 2021 after Lithuania allowed a "Taiwanese Representative Office to be
established, which was a clear break from the diplomatic word play and the use
of "Taiwan" proper. Chinese figures reportedly showed an 80% decline
in imports from Lithuania in the first ten months of last year from the year
ago period. The second complaint questions the legality of the Beijing
encroaching upon the high-tech patents of EU companies by preventing them
seeking protection in courts outside of China.
The Bank
of England and the European Central Bank are expected to hike 50 bp next week.
There are two key differences. First, with the move, the Bank of England is
seen as little as a quarter-point from its terminal rate. The ECB is seen
raising rates at least another 75 bp after next week’s move. Second, the market
is favoring a cut by the BOE later this year. The implied yield of the December
Sonia futures contract settled about 30 bp less than the yield of the June
contract yesterday. It has moved above the 25 bp last week and has largely held
above it this week.
The euro
is trading quietly in a narrow range of about a third of a cent below $1.09. Despite the margin new
high being set yesterday near $1.0930, the week has really been one of
relatively quiet sideways movement. Of note, there ae options for a little more
than one billion euros struck at $1.0850 that expire today. The low for the
week was set on Tuesday near $1.0835, and the euro has not been below $1.0850
since then. Sterling has been among the softer of the G10 currencies this
week. The week's high was recorded on Monday, as it edged slightly
closer to $1.2450, without trading above. The low this week was set on Tuesday
near $1.2265. It reached almost $1.2420 in Asia before slipping back to $1.2360.
The intraday momentum indicators look constructive for another try at the highs
in North America. Without a settlement above $1.2400, sterling will snap a four-week
advance.
America
Trade and inventories
continued to confuse the underlying signals from US GDP. They were largely responsible for the
contraction in H1 22 and have been notable boosts in the second half. In Q4,
inventories added 1.5 percentage points to growth and net exports added 0.6
percentage points. Just like the US economy was stronger in H1 22 than the GDP
figures suggested, it was weaker later in the year than the GDP implied. Final
sales to domestic purchasers (GDP minus inventories and trade) rose 0.8% and,
if the government was excluded as well (final sales to private domestic
purchasers), growth practically stagnated (0.2%, annualized) in Q4 22. Consumer
spending slowed to 2.1% from 2.3% in Q3. Spending on services rose 2.6% while
goods purchases snapped a three-quarter decline and rose 1.1%. The GDP price
deflators suggest that December PCE headline deflator that will be released
today likely rose 0.1% with the core rising 0.3%. Of note, if the core deflator
slows to 4.4% as the median expects, then it would be below the upper end of
the current Fed funds target (4.25%-4.50%). December durable goods orders
surged 5.6%, more than twice the median forecast in Bloomberg's survey. It was
flattered by Boeing's orders (250 vs 21 in November and 122 in October). This
was behind the 115.5% surge in non-defense aircraft orders, but defense
aircraft orders jumped 15.2%, while overall defense orders fell 2.8% (after an
8.2% increase in November).
The end of globalization may
be a popular meme, but there is no sign in US trade figure. Looking at US merchandise trade, both
exports ($2.07 trillion) and imports ($3.26 trillion) were at record levels.
The merchandise deficit was also a record ($1.19 trillion). The shortfall in
December was $90.30 bln, which was larger than expected after November's $82.9
bln deficit, which was the smallest since October 2020. Perhaps the biggest
surprise was the decline in weekly jobless claims. They fell to 186k, the
lowest since last April. The four-week moving average is also below 200k
(197.5k) for the first time since May 2022. Some economists may revise higher
their forecast for next week's January nonfarm payroll report. The median
forecast in Bloomberg's survey currently stands at 180k. There is bound to be
talk of a stronger "whisper number".
Mexico reports December
trade figures today, and the median forecast in Bloomberg's survey projects the
first monthly surplus since last March. The December balance often (15 of the past 20 years) improved
November, but there is also something more going on. The three-month shortfall
through November, was the smallest of the year and smaller than the same
year-ago period, even though for the first 11 months of 2022, the deficit was
more than double the Jan-Nov 2021 period. Vehicle exports rose in Q4 and is
probably part of the story. Imports and exports were both up about 8%
year-over-year in November.
The greenback fell to near CAD1.33
yesterday to record a new low since mid-November. It has held below CAD1.3350 and set
new session lows in the European morning slightly below CAD1.3315. The intraday
momentum indicators are over-extended, suggesting CAD1.33 may hold and if there
is penetration, it is unlikely to be sustained. Still, without much fanfare,
barring a sharp reversal back above CAD1.3380, this will be the sixth
consecutive week that the US dollar has moved lower against the Canadian dollar.
The US dollar has drifting lower against the Mexican peso and is traded near
the lows for the week below MXN18.77. That area represented a (61.8%)
retracement of last week's spike to around MXN19.11. The next technical target
is around MXN18.6950. Lastly, as expected Chile left rates steady yesterday,
while Colombia is expected to hike the overnight lending rate by 100 bp to
13.00%. The swaps market sees it as the last hike in the cycle that ban in
October 2021.
Disclaimer
Reviewed by Marc Chandler
on
January 27, 2023
Rating:
