Overview: The US dollar is narrowly mixed against
the G10 currencies. Stronger than expected Australian retail sales helped
steady the currency after the soft inflation data took it down. Sterling has
also steadied after it suffered its largest loss yesterday (~0.9%) in over a
month. Sweden's 25 bp rate hike has not given the krona much of a lift. Central
European currencies lead the emerging market currencies higher, while the PBOC
set the dollar's reference rate lower than expected. Still the yuan is
softer.
Equities in Asia were mixed,
but the Europe's Stoxx 600 is posting gains for the third consecutive session. US
large banks passed the Fed's stress test, and some good earnings news is
helping US index futures post modest gains. Benchmark 10-year bonds yields are
mostly 4-6 bp higher in Europe and the US 10-year Treasury yield is about five
basis points higher near 3.76%. Gold remains softer and testing the $1900 area,
which it has not traded below since mid-March. August WTI recovered from almost
$67 yesterday to test $70 today where is has stalled.
Asia Pacific
Japan reported a stronger
than expected recovery of retail sales in May. Instead of rising 0.8% as the median
in Japanese retail sales rose 1.3% after a 1.1% decline in April. Japan's
retail sales have risen by an average of almost twice last year's pace and have
been bolstered by higher prices. Still, Japanese consumption rose 2.1% in Q1
(real, annualized). It is moderating here in Q2 and is consistent with Q2 GDP
slowing from 2.7% (annualized in Q1) to around 1.0%. Tomorrow, Japan reports
May industrial output (median forecast in Bloomberg's survey is for a 1.0%
decline, the first since January) and labor market (steady) and the fourth
consecutive year-over-year decline in housing starts. But the most important
data point is Tokyo's June CPI. The risk is that the headline and core measures
tick up, but that the measure that excludes fresh food and energy rises to a
new cyclical high. Separately, Australia's retail sales rose 0.7% in May,
well above expectations (0.1%) and the strongest in four months. The report
helped offset yesterday's softer inflation reading. The futures market is
pricing almost a 29% chance of a hike next week, up from less than 20% at
yesterday's close.
China reports its PMI the
first thing tomorrow. The
manufacturing PMI likely remained below the 50 boom/bust level after holding
above it in Q1. The non-manufacturing PMI likely slowed for the third
consecutive month but remained above 50. That same is probably true for the
composite. Meanwhile, the investors and businesses are eager to get more
government stimulus and the focus has shifted to the Politburo meeting at the
end of July.
The dollar edged to marginal
new seven-month high against the yen near JPY144.70. The greenback is climbing the five-day
moving average and has not closed below it since June 9. It is slightly above
JPY144.00 now. New session highs seem likely in the North American session, but
the market may be hesitant about broaching JPY145 without fresh fundamental
cover that could come from tomorrow's US PCE deflator, but then the month-end
and what for many in the US will be a four-day weekend. The Australian
dollar found support slightly below $0.6600 but stalled near $0.6630. A
move above there could see a return to $0.6660-80. However, the technical tone
remains fragile, though its 0.20% gain today puts its atop the G10
currencies. A close below $0.6600 could spur another cent loss in the
coming days. After seemingly pulling back yesterday, the PBOC again sent a
signal via the dollar fix today that is trying to stabilize the yuan. The
dollar's reference rate was set at CNY7.2208, well below the median projection
of CNY7.2519. Given that the dollar can move in a 2% band around the fix, the
lower setting limits its upside. Nevertheless, the dollar is firm against the
yuan, above CNY7.24, though it held below yesterday's high (almost CNY7.2550).
Europe
There is much interest in
tomorrow's initial estimate of the eurozone's June CPI. Ahead of it, Germany and Spain reported
their figures. Spain's harmonized measure rose by 0.6% in June after falling
0.1% in May. Due the fact that last June's 1.9% jump drops out of the 12-month
comparison means translates into a sharp drop in the year-over-year rate to
1.6% from 2.9%. This probably overstates the improvement. In the H1 23, Spain's
harmonized CPI rose at an annualized rate of 5.2%. The core rate eased to 5.9%
from 6.1%. Recall that Italy reported yesterday, and at an annualized rate, its
harmonized CPI rose 1.2%. German states have reported (0.2%-0.3%
month-over-month), and the national figure is due shortly. Price pressures are
more resilient in Germany and price pressures rose this month. A 0.4%
month-over-month increase in the harmonized measure would bring the H1 23
annualized pace to around 6.8%.
Sweden's Riksbank hiked the
repo rate 25 bp to 3.75%, after two consecutive 50 bp earlier this year. The swaps market favored a quarter-point
move but had about a 30% chance of a larger increase discounted. Riksbank
officials recognize sensitivity of inflation to the exchange rate. Over the
past 12-months, the krona has fallen by around 9.5% against the euro and
sterling. It has fallen to a record low against the euro this month and to
nearly 16-year lows against sterling. Indeed, on the rate hike itself the krona
slipped to a marginal new record low against the euro. The Riksbank is seen in
a cruel dilemma. It wants to combat inflation (9.7% year-over-year headline and
8.2% underlying excluding energy), but the is aware of the stress in the
housing and commercial real estate sector will likely be exacerbated. The
central bank announced it was boosting its bond sales from currently selling
SEK3.5 bln (conventional bonds and inflation-protected securities) to SEK5 bln
a month. Officials signaled at least one more hike this year.
The euro was sold to nearly
$1.0880, a new low for the week, but above last week's low near $1.0845 seen on
the back of the disappointing PMI. The euro recovered but stalled near $1.0920 in the European
morning. Nearby resistance is seen around $1.0940. Sterling fell from
around $1.2750 yesterday to almost $1.2600. Today, it is pinned near
yesterday's lows and has not been above $1.2655. Unless sterling recovers soon,
the five-day moving average cross below the 20-day moving average next week for
the first time since June 5. While the ECB and Fed look set to hike rates next
month, the Bank of England does not meet until August and the market is already
pricing in around an 80% chance of another 50 bp hike, suggesting most of the
supportive news is already discounted.
America
Today's US data pales in
comparison to tomorrow's. Today features another revision to Q1 GDP. The market is more
interested in Q2 GDP and the Atlanta Fed's tracker eased to 1.8%, which is
slightly faster than Q1. Weekly jobless claims have risen lately, but the labor
market focus is on next week's nonfarm payroll estimate. The private sector is
seen growing around 200k jobs this month, which is below this year's average
through May of 248k. Job growth is slowing but is still sufficiently strong as
not to stand in the way of a Fed hike next month. Tomorrow, the US reports
personal income and spending (the latter looks to have slowed to 0.2% after
surging by 0.8% in April), but more importantly, the deflators. The headline is
expected to slow to be 4% for the first time since April 2021, while the core
measure is forecast to be steady at 4.7%.
It has taken the market
about two weeks since the FOMC signaled two more hikes were likely this year to
meet the Fed halfway. That
is to say that the Fed funds futures has now fully pricing in one more hike. The
January Fed funds futures contract implies a year-end effective rate of 5.33%. This
is about 25 bp more than the current effective average. What will it take to
get the market to price in the other half the Fed has indicated? First, we
suspect it is a question of time in the sense that there is plenty of data
between next month's meeting and the next one (Sept 19-20). Second, there is
also scope for additional shocks. US large banks passed the Fed's stress tests,
but new capital requirements and changes to supervision are still expected. Fed
Chair Powell said yesterday that bank stress, and the appreciation that credit
availability works with a lag, informed his decision to hold rates steady. Third,
pressures from the commercial real estate market are widely seen as a risk,
especially for many regional banks.
The US dollar posted a key
reversal against the Canadian dollar on Tuesday after setting a new nine-month
low (~CAD1.3115). Follow-through
buying lifted the greenback to slightly above CAD1.3275 yesterday. It drew
closer to CAD1.3280 today, to approach the 20-day moving average for the first
time since June 1. The next upside corrective target is in the CAD1.3300-20
area. Support is seen near CAD1.3240. Meanwhile, the greenback is going
nowhere quickly against the Mexican peso. It is moving sideways in its
trough. This week's range has been roughly MXN17.0460 to MXN17.18. Given the
carry, sideways movement is sufficient to keep the peso bulls engaged.
Reviewed by Marc Chandler
on
June 29, 2023
Rating:
