Overview: Talk from two Fed officials yesterday,
which seemed to validate market expectations eased the upward pressure on the
dollar and helped equities launch a dramatic recovery. The market is pricing in a terminal rate near 5.50%, a little higher than the median dot in December. The S&P 500 posted a
dramatic recover and posted a potential bullish key reversal. Its 0.75% closing
gain was the largest advance in nearly three weeks. A large drop in Tokyo's
February CPI helped take pressure of Japanese government bonds where the
10-year JGB was pushing through its 0.50% cap. Japanese and Indian equities led
the regional equity markets higher. Europe's Stoxx 600 is up 0.7% to bring the
weekly gain to around 1.2%. US equity futures also enjoy a firmer bias. This
week's rise in benchmark 10-year yields is being pare today. European yields
are off 2-6 bp, with the periphery outperforming the core. The 10-year Treasury
yield is off 5 bp to return to 4.0%. Two-year yields are also lower but less
than the 10-year yields with notable exceptions in Italy and Greece.
The US dollar is trading
heavily against the all the G10 currencies. The Swiss franc and sterling are the strongest,
gaining about 0.4%. The greenback is set to record a losing week against the
major currencies, except the Norwegian krone. The Dollar Index is set to snap a
four-week advance. Among emerging market currencies, the South Korean won's
1.1% advance is leading today's move, but the Mexican peso, which set fresh
five-year highs today, is the strongest this week, with a 1.8% advance. The
heavier dollar and softer rates are helping gold recover from the test on $1800
earlier in the week. It is making a new high for the week near $1848 today.
April WTI is consolidating its three-day rally that lifted it to almost $78.60
yesterday, a nearly two-week high.
Asia Pacific
Tokyo's CPI fell to 3.4% in
February from 4.4% in January. Fiscal policy, in the form of subsides for households and
businesses, was an important driver. It bodes well for the national figures on
March 24. Still, somewhat worrisome, or incongruous, is the uptick in the
measure that excludes fresh food and energy. That rose to a new high of 3.2%
from 3.0%. Separately, Japan reported that unemployment in January unexpectedly
slipped to 2.4% from 2.5%, while the job-to-applicant ratio fell to 1.35 from a
revised 1.36 (from 1.35) in December. It was 1.20 in January 2022.
The final service and
composite PMI for Japan and Australia were revised higher in their final
reading. Of note, the
pattern among the high-income countries, the service PMI was above the
manufacturing PMI. The other pattern is that after falling below the 50
boom/bust level, they have regained the key threshold. Japan's service PMI is
at 54.0, better than the 53.6 flash and 52.3 in January. The composite rose to
51.1 from 50.7 preliminary estimate that was unchanged from January. Australia's
services PMI improved from 48.6 in January and 49.2 flash to 50.7 in the final
reading. The same is true of the composite, which rose to 50.6 from a
preliminary estimate of 49.2 and 48.5 in January. It had not been above 50
since last September.
China's Caixin services PMI
rose to 55.0 from 52.9, which is the best since last August. The composite rose for the third
consecutive month. It stands at 54.1 up from 51.1 in January. It was at 50.1
last February. Next week, China report trade and inflation figures. It will
also report reserve figures and given the dollar's recovery last month and the
sell-off in bonds, it would not be surprising to see a drop of $50 bln in the
dollar-value of its reserves (after a $57 bln increase in January to $3.184
trillion). The National People's Congress kicks-off before markets open on
Monday.
The dollar reached a new
high for the year yesterday near JPY137.10, holding below the 200-day moving
average (~JPY137.30) and the high before the BOJ's December surprise
(~JPY137.50). It has
steadied today and is trading within yesterday's range (~JPY136.00 low). Softer
US rates may have helped bring the greenback off its highs. The dollar settled
near JPY136.50 last week, which was the sixth consecutive weekly advance. The
streak could be snapped. The Australian dollar is firmer, but it
remains in the range set on Wednesday (~$0.6695-$0.6785). However, it looks
stretched and may have to retest the $0.6740 area before trying the upside
again. Still, the Aussie finished last week near $0.6725, its fourth
consecutive weekly loss, which end this week. The greenback is also within
Wednesday's range against the Chinese yuan (~CNY6.8625-CNY6.9350). It
is trading quietly near the 200-day moving average (~CNY6.8975). Here, too, the
dollar's five-week rally is ending. The dollar's reference rate was set at
CNY6.9117, tight to expectations oof CNY6.9112 in Bloomberg's survey.
Europe
On the heels of a
stronger-than-expected February CPI (8.5% headline, 5.6% core), the eurozone
reported January producer prices fell a dramatic 2.8% (-0.4% expected in
Bloomberg's survey) to bring the year-over-year rate to 15.0% from 24.5%. Also, the final composite eurozone PMI
confirmed the recovery in the region. The 52.0 reading, a little lower
than the flash estimate (52.3), is the best since last May. The service PMI is
at 52.7 compared with the preliminary reading of 53.0 and 50.8 in January.
Drilling down a bit, we note that Germany's composite was above 50 for the
first time in 10 months (50.7 vs. 51.1 flash estimate). The services PMI was
revised lower from the initial estimate (50.9 vs. 51.3). French service PMI had
not been above 50 since last October and rose to 53.1 from 52.8 initially and
49.4 in January. The composite ticked up to 51.7 from 51.6 of the flash
estimate. Like was seen with the manufacturing PMI, the Spain and Italy did
better than Germany and France. The composite PMI in Italy rose to 52.2 from
51.2 and the Spain's increased to 55.7 from 51.6.
Germany also reported
January trade figures. Exports
rose 2.1% and imports fell by 3.4%. Economists had anticipated an increase in
Germany imports and slower growth in exports. The trade surplus jumped to 16.7 bln euros from 10 bln. The trade surplus averaged 6.3 bln euros a month in
2022, a sharp fall from 14.3 bln euros in 2021 and 18.9 bln euros in 2019.
Germany experienced a terms of trade shock, which is about the relative value
of imports and exports. German exports rose by an average of 0.6% (at current
prices), while imports rose by 0.4% on average a month. As we have argued (see here),
Germany's external position says little about its disparity of power and
wealth. It is a function of numerous forces, including terms of trade and
exchange rates. Preliminary January export figures to non-EU countries found a
large year-over-year increase to the US (20.8%), Turkey (33.3%), Mexico
(34.2%), Australia (28.6%) and India (24.0%). German exports fell to China
(-7.1%) and Russia (-57.5%).
The final UK February PMI
was a little better than the flash reading suggested. The services PMI rose to 53.5 from 53.3
initially and 48.7 in January. The final composite reading edged up to 53.1
from the 53.0 flash estimate and 48.5 previously. It was the highest composite
since last June. Next week, the UK reports January GDP figures and details. The
economy is believed to have grown by 0.1% after a 0.5% contraction in December.
The swaps market is also comfortable with a 25 bp hike at the March 23 BOE
meeting, which would lift the base rate to 4.25%. The peak is seen between
4.50% and 4.75%.
The euro has steadied to
hover around the $1.06 area. It has not risen above $1.0630 today nor spent much time below
$1.0600. It frayed but held below the 20-day moving average this week
(~$1.0665) and has not closed above it in a month. It settled near $1.0550 last
week, losing almost 1.4%. It has recouped a little less than half of those
losses this week. Sterling's low for the week was set on Monday, slightly
below $1.1925. It successfully re-tested it yesterday and has come back
better bid today pushing against the $1.20 level. There are around GBP545 mln
options at $1.20 that expire today and may be slowing sterling's upticks in the
European morning. Sterling will snap a two-week drop with a close above $1.1945
today.
America
US interest rates continued
to rise yesterday and the news of slower than expected productivity and higher
unit labor costs in Q4 22 coupled with the lowest weekly initial jobless claims
in a month. While unit
labor costs rose 3.2% at an annualized rate was stronger than expected, it was
the smallest increase since decline in Q1 21. In fact, if one were to exclude
the quarters in which unit labor costs fell, Q4 232 was the smallest increase
since Q4 2018 and less than half the pace seen in Q2 and Q3 22, and well below
Q1's 8.5% increase. The orthodoxy still has wages at the center of the
inflation discussion. Yet, labor costs are a minor cost of producing most goods.
Consider that the most efficient automakers can manufacture a car in less than
20 hours of direct labor. Assume, generously, that labor costs, benefits, and
legacy costs in the US, are $150 an hour, which is $3000 in an average vehicle
that costs nearly $50k. Consider retail or fast food, part of core non-housing
services. Labor costs appear to be a small part of the overall price. Even in
other services, leases, equipment, insurance, other materials, are important
inputs. If one accepts that labor costs are driving inflation, either directly
or through strong demand, it seems hard to understand the cost-of-living
squeeze or the decline in average hourly earnings since the peak last March at
5.9% (year over-year).
Focus ahead of the weekend
turns to the final services and composite PMI, and more importantly, the ISM
Services Index. It was the
January reading of the ISM Services, which was reported on February 3 shortly
after the monster jobs numbers, which seemed throw the proverbial gas on the
fire and US rates and the dollar have hardly looked back since then. Recall
that ISM services jumped from 49.2 in December to 55.2 in January. This was a
large increase (12.2%), the biggest since June 2020. Yet it did not fully
recover December's sharp fall and remained below the November reading of
55.5. The median forecast in Bloomberg's survey is for a modest decline
last month to 54.5, new orders and business activity may drag the headline
lower. February's flash services PMI rose above 50 for the first time since
last June (to 50.5). The ISM Services Index only dipped below 50 last December.
Meanwhile, estimates for next week's nonfarm payroll has crept up to 215k in
Bloomberg's survey from 200k previously. Still, if true, it would still be the
smallest increase since the end of 2020.
Canada reports January build
permits (expected to post a small gain after falling 7.3% in December). Labor productivity for Q4 is also on tap. The
flat Q4 GDP coupled with the filling of the most full-time positions (~165k)
since Q1 does not bode well for productivity. In the three years pre-Covid,
Canadian productivity rose by an average of about 1% a year. More recently,
Canada's labor productivity fell from Q3 20 through Q1.22 without fail. Next
week is more important for Canada. The Bank of Canada meets March 8. StatsCan
will report the January merchandise trade figures 90 minutes before the central
bank's decision is made and the IVEY PMI, which jumped from 49.3 in December to
60.1 in January. That was the largest advance since January 2021, and the
highest since last May.
The US dollar is near four-day
lows against the Canadian dollar, helped by the recovery in US equities
yesterday and the risk-on mood today. There are options for $405 mln at CAD1.3550 that expire today.
Monday's low was near CAD1.3535, which needs to be taken out to signify anything
of importance. Below there, support is seen near CAD1.3515, and thee 20-day
moving average slightly below CAD1.3490. The dollar is drawing closer to
MXN18.00. It reached a new five-year low today near MXN18.0630. The
greenback is heavier for the fourth session this week and settled around
MXN18.4180 last week. Its nearly 1.8% decline this week is the largest since
mid-January. Coming into today, Mexican stocks and (dollar) bonds have
outperformed their US counterparts. Ahead of today's local session, the peso is
the strongest of the emerging market currencies, though the Chilean peso is a
close second. Year-to-date, they are 1-2 among emerging market currencies (7.7%
and 4.7%).
Disclaimer
Reviewed by Marc Chandler
on
March 03, 2023
Rating:
