Overview: The dollar is bid. Only the Japanese yen
is holding its own against the greenback but only after it fell to new lows for
the year. The Scandis and Antipodeans are the heaviest among the G10
currencies, while sterling has fallen to a new low for the month. The prospect
of a rate hike tomorrow has not protected the New Zealand dollar much and it is
off nearly 0.5%. Emerging market currencies are more mixed. Outside of the
Russian rouble, the South Korean won, Philippine peso, and Mexican peso lead
the advancers. The Hungarian forint, the strongest currency this year is off 1%
amid expectations that the central bank will cut its overnight rate by as much
as 100 bp to 17% (base rate is at 13%).
Most of the large Asia Pacific
equity markets fell. Taiwan, South Korea, and India were exceptions. Europe's
Stoxx 600 is snapping a three-day advance and is off about 0.3% in late morning
turnover. US equity futures are a little softer. European 10-year yields are
mostly 2-3 bp higher, but the sell-off in Gilts is stronger and the 10-year
yield is up seven basis points to 4.13%, a new three-month high. The 10-year
Treasury yield is up a little more than a basis point to 3.73%. Gold is on the
defensive and is retesting last week's lows near $1950. July WTI is trading
quietly around $72.
Asia Pacific
Japan's preliminary May PMI
was stronger than expected. The manufacturing PMI edged higher to 50.8 from 49.5, helped by
stronger new orders and output. It is the first time above 50 since last
October. The service PMI rose to a new record high of 56.3 (from 55.4). The
composite improved to 54.9 from 52.9, its best level since October 2013. The
markets do not typically react much to the PMI, instead, the highlight of the
week is Tokyo's May CPI. While the headline and core are expected to ease
slightly from the 3.5% year-over-year pace in April, the underlying measure,
which excludes fresh food and energy, is seen rising to a new cyclical high of
3.9% (from 3.8%).
Australia's flash PMI
softened from the final April reading. The manufacturing PMI was unchanged at 48.0. It is the third
month below 50. The service PMI slowed to 51.8 from 53.7 in April. The
composite PMI eased to 51.2 from 53.0 last month, which was the highest since
last April. The data highlight of the week may be the April retail sales
report. Australia's retail sales crashed by 3.9% last December and has been
recovering this year (1.9% in Jan, 0.2% in Feb, and 0.4% in March). Another
small gain is expected. The central bank meets on June 6 and is expected to
hold its cash target steady at 3.85%.
The dollar closed the North
American session firmly near JPY138.60 and edged higher early in the Asia
Pacific turnover to reach a new high for the year a little shy of JPY138.90. It retreated to the five-day moving
average near JPY138.25. While a break of JPY138 would signal a loss of
momentum, a shelf has been forged in the JPY137.25-50 area and the 200-day
moving average is a little lower, closer to JPTY137.15. The Australian
dollar remains pinned in the lower end of the two-and-a-half month trading
range ($0.6600-$0.6700). The range has fray on an intraday basis but
not on closing basis for two months. At the end of April, it spiked to about
$0.6575 before recovering and rose to $0.6820 within a fortnight. Despite
warnings from the PBOC at the end of last week, the dollar gapped higher
against the yuan and approached last week's high for the year. It reached
CNY7.0550 today. Last week's high was slightly above CNY7.06. The gap is found
between yesterday's high (~CNY7.0370) and today's low (~CNY7.0395). The dollar
has been climbing the five-day moving average, found now around CNY7.0260. The
PBOC's dollar fix at CNY7.0326 was a little above expectation (CNY7.0322, the
median in Bloomberg's survey), seemingly showing little official concern.
Europe
The eurozone economy
appeared to come to a screeching halt in March. Retail sales fell by 1.2%, industrial
output cratered by 4.5%, and we learned yesterday that construction output
slumped 2.4% (and the February series was revised to 1.7% from 2.3%). The PMI
survey gave little hint of this weakness. In fact, in April, the composite was
the highest since April 2022. The manufacturing PMI has been below the 50
boom/bust level since last July, and in April was at its lowest level since
June 2020. The manufacturing PMI weakened further in May, falling to 44.6 from
45.8. The service PMI snapped a six-month advance that took it to 56.2 in
April, the highest since April 2022. It slipped to 55.9. German manufacturing
PMI fell to 42.9 from 44.5 but the services PMI improved to 57.8 from 56.0. The
composite edged up to 54.3 from 54.2. France's manufacturing weakness moderated
(46.1 vs. 45.6) but service activity slowed (52.8 v. 54.6). The composite eased
to 51.4 from 52.4.
The UK's flash PMI showed a
stabilization of the manufacturing sector and slower growth in services. The composite PMI reached 54.9 in April,
which is also the best level since April 2022, and eased slightly to 53.9 this
month. The manufacturing PMI slowed further to 46.9 from 47.8. It was 45.3 at
the end of last year and 54.6 last May. The services PMI slipped to 55.1 from
55.9, a 13-month high. It was slightly below 50 at the end of last year and
53.4 last May. The composite is at 53.9 from 54.9. Tomorrow, the UK reports
April CPI, which due to the base effect, should see the year-over-year rate
fall sharply. The median forecast in Bloomberg's survey sees the year-over-year
rate falling to 8.2% from 10.1%. The core rate is expected to be steady at
8.2%. April retail sales are due at the end of the week and a small gain is
expected after a 0.9% decline in March.
The euro is softer within its
recent range. It had
fallen to $1.0760 before the weekend and reached nearly $1.0780 today. The
$1.0735 area is the (61.8%) retracement of the rally since the March 15 low
near $1.0515. The intrasession momentum indicators are stretched and support
near last week's lows may hold today. Sterling has been sold to almost $1.2380, a
new low for the month. It is recording a lower high for the fifth
consecutive session. The intraday momentum indicators are stretched here too,
but we note that the (38.2%) retracement of its rally from the March 8 low near
$1.18 is found closer to $1.2345.
America
The Fed says it is data
dependent but what data? Today's Philadelphia Fed's non-manufacturing activity survey is
probably not what it means. That said, the Philadelphia's Fed's manufacturing
survey was much stronger than the depressing Empire State survey. The Empire
State manufacturing survey slumped to -31.8 from 10.8. Economists in
Bloomberg's survey projected a -3.2 reading. In contrast, the Philly Fed
improved to -10.4 from -31.3. Bloomberg's survey found a median of -20. We
suspect there is scope for the non-manufacturing survey to better April's -22.8
reading, which was the worst since December 2020. Nor will the May PMI move the
Fed's needle. It is expected to point to a small slowing in activity, but the
recent string of US date has been mostly above expectations and there are some
(see Atlanta Fed GDPNow) that see evidence that the economy re-accelerated
after slowing a 1.1% at annualized pace in Q1. Economists in Bloomberg's
monthly survey saw the median forecast for Q2 rise to a still lowly 0.5% from
0.2%. Today, the US also reports new home sales. They rose by an average of
3.3% a month in Q1 and 4.3% in Q4 22, after three quarter of declines. After a
9.6% rise in March, a pullback is expected (~2.5%). It is too unlikely to
change the minds of Fed officials.
Comments by two Fed
officials seemed to take some of the sting away from Chair Powell's weekend
comments. St. Louis
Fed's Bullard does not vote this year, but he remains among the leading hawkish
voices. Still, his call for two more hikes seemed, well, even hawkish for him.
Minneapolis Fed President Kashkari is more activist than hawk. He was a leading
dove and now a leading hawk. He said that even if the Fed pauses, it should
clearly signal that the tightening cycle is not over. That increasingly seem like
a fallback option for hawks. Agree to pause in June but get a commitment of a
low bar for hike at the next meeting (July 26). The odds in the Fed funds
futures market are of quarter-point hike in June edged up to around 25%
yesterday. The implied yield of the January 2024 Fed funds futures contract is
about 4.70%. The yield was near 4% on May 4. The high yield point before Powell
was 4.73%.
Canada has a quiet economic
diary this week. Today's
industrial product price index and the raw materials price index barely get
noticed by market participants. The greenback is probing resistance at the
upper end of its five-day range near CAD1.3545. The down sloping top is formed
by the trendline off the two March highs and the April high, which comes in
today around CAD1.3575. Last week's high was almost CAD1.3570. The
Mexican peso has fallen for five consecutive sessions coming into today, which
is the longest losing streak since January 2022. It is threatening to snap
that streak today. The US dollar is trading with a softer bias around MXN17.87
in the European morning. It is consolidating in a narrow range today. The
recent weakness seems like a little bit of a shake out of some of the
late, and therefore weak long pesos. The fundamental drivers of the peso were
never the investment climate under AMLO, but the high interest rates, low vol
currency, near-shoring/friend-shoring meme, helped by strong worker
remittances, and a strongly independent central bank and Supreme Court. These
drivers are still intact, and the technical correction will likely be seen as a
new buying opportunity.
Reviewed by Marc Chandler
on
May 23, 2023
Rating:
