Overview: A surprise cut in China's seven-day repo
and a stronger than expected UK employment report are session's highlights
ahead of the US CPI. The base effect alone suggests a sharp fall in the
year-over-year rate, while the median forecast in Bloomberg's survey has been
shaved to a 0.1% month-over-month gain. The dollar is under pressure and is
weaker against nearly all the G10 currencies. It is mixed against the emerging
market currencies. The dollar gapped higher against the Chinese yuan for the
second consecutive session and is higher against the South African rand,
Mexican peso, and Turkish lira, among a few others.
It is a risk-on day, with
equities advancing. Tokyo and Taiwan gained by more than 1%, while
nearly all the large bourses in the Asia Pacific region advanced. Europe's
Stoxx 600 is edging higher for the second consecutive session and US equity
futures are firm. Benchmark 10-year bond yields are mostly a little lower,
except for UK Gilts, where the strong employment and wage growth are lifting
the 10-year yield by a handful of basis points to nearly 4.40%. Gold is
consolidating in a narrow range around $1960. After falling 4.3% yesterday,
following a 3.2% drop in the last two session of last week, July WTI is
stabilizing today (~$67.15-$68.15).
Asia Pacific
The PBOC unexpectedly cut
the seven-day repo rate by10 bp to 1.90%. It is the first such cut since last August and elevated
speculation of a cut in the one-year medium-term lending facility later this
week and a reduction in the loan prime rates next week. There is also scope for
a cut in reserve requirements though the reduction in interest rates may push
it into Q3. Reports suggest officials are considering a broader package of
stimulative measures, including more support for the property market. Separately,
but perhaps not unrelated, China reported a smaller than expected rise in new
bank loans (CNY1.36 trillion, while nearly double the April lending, below the
CNY1.55 trillion expected). The lending figures also indicate that shadow bank
lending slowed to about CNY200 bln from about CNY500 bln in April.
US exemptions on South
Korean and Taiwanese existing semiconductor fabrication in China is set to
expire at the end of Q3, but the US has signaled an extension. It is not clear the length of the extension,
but reports suggest that Estevez, the US Undersecretary of Commerce for
industry and security, indicated last week the extension would be for the
foreseeable future. The US leverage over South Korean and Taiwanese
chipmakers (as well as Japanese and Dutch chip companies) does not derive from
the role of US Treasuries, the dollar, or the US military might. Rather it
arises out of the fact that their technology and equipment was developed or
manufactured by the US. Reports note that Samsung has indicated that it
has reduced some of its operations in China, and in any event, was not
producing its most advanced chips there. Just like the US modified its
rhetoric from de-coupling to de-risking to help ensure that a Europe and its
other allies would stay the course, the extension of the exemptions may help
ensure cooperation from South Korea.
Reports indicate that
Pakistan made its first government-to-government payment for Russia crude oil
in Chinese yuan. It
does not appear to have been acknowledged yet, but we suspect Pakistan tapped
its swap line with the PBOC. According to Chinese data released yesterday, the
outstanding fx swaps totaled CNY109 bln (~$15.6 bln) at the end of Q1 23, a
record. Even though China has negotiated a few dozen swaps lines, the use
has been extremely limited. Argentina alone may account for 2/3 of the swap
usage. Pakistan, like Argentina, are not turning the yuan to protest the
hegemonic role of the dollar or US deficit, but out of sheet necessity given
their dire financial straits. Some have suggested that these swap lines are the
way the yuan will be internationalized, but the scale is not there. Most
countries do not have a natural yuan revenue stream and those that have used
the swaps lines are pose credit risk. This is a far cry from invoicing in yuan
or the use of the yuan as a reserve currency.
The dollar is consolidating
against the yen within yesterday's narrow range (~JPY139.05-JPY139.75). This pennant or triangle formation tends
to be seen as a continuation pattern. The downtrend off the highs comes in near
JPY140 and the uptrend off the lows is found near JPY138.75. That said, the
five-day moving average (~JPY139.50) looks poised to cross below the 20-day
moving average (~JPY139.35) in the next day or two for the first time in two
months. The Australian dollar's advance is stretching into the fourth
consecutive session. It is the ninth session of the month, and the Aussie
has only fallen once (June 7). It is nearly $0.6800 the upper end of the
trading range that goes back to late February. It has traded above the $0.6800
cap three times here in Q2 but has not closed above it once. A convincing move
above it would suggest potential toward $0.6900. For the second consecutive
session, the dollar gapped higher against the Chinese yuan. It reached
CNY7.1670 before steadying. Still, it remains above yesterday's high
(~CNY7.1480). The PBOC is not expressing concern about the yuan's weakness
through the setting of the dollar's reference rate. It was set at CNY7.1498, a
bit above median in Bloomberg's survey for CNY7.1469.
Europe
There is practically no
doubt in the market's mind that the ECB will hike rates 25 bp on Thursday. Moreover, the swaps market is pricing in
about a 70% chance of another move at the next meeting in July (27th). The
meeting is the week's highlight. Today's ZEW survey was mixed. The assessment
of the current situation weakened to -56.5 from -34.8. It was weaker than
expected and has not been positive since November 2021. On the other hand, the
expectations component improved to -8.5 from -10.7. It is the first improvement
in four months. Recall that the German economy contracted in Q4 22 and Q1 23
(0.5% and 0.3%, respectively). The median forecast in Bloomberg's survey
projects a 0.1% expansion in Q3 and 0. 2% in Q4.
The UK reported April/May
jobs report. Wage
growth accelerated and the unemployment rare unexpectedly fell. The
takeaway is that the risks of a 50 bp move at next week's Bank of England
meeting has increased. The unemployment rate fell to 3.8% in the three months
through April. The market had expected a rise to 4.0% from 3.9%. It was 3.7% in
the last three months of 2022. Recall that the UK unemployment rate was 3.8% in
the last few months of 2019. Wage growth accelerated in April, following the
9.7% increase in the national living wage. Average weekly earnings, excluding
bonuses accelerated to 7.2% from 6.8%. The Financial Times reported last week
that according to the Indeed, job search website, that the median wage in the
UK jobs postings was 7.2% higher in May from a year ago. The number of
employees on payrolls rose by 23k in May, and April's loss of 136k jobs was
revised to a gain of 7k. Vacancies are falling. Tomorrow, the UK reports April
GDP figures, and details. In March, the UK economy unexpectedly contracted
by 0.3%. It is seen recovering and growing 0.2% in April. The swaps market
is pricing about a 25% chance of a 50 bp hike next week. A month ago, a
quarter-point hike was not fully discounted. The year-end rate is seen near
5.65%, up almost 15 bp today and 30 bp this month.
The euro has been bid
through $1.08 for the first time since May 23 and the five-day moving average
is crossing above the 20-day moving average for the first time since May 14. Some buying may be related to the nearly
815 bln euros in options at $1.0790 that expire today. A move above $1.0810
targets the $1.0860 area. Still, the intrasession momentum indicators are
stretched, which leaves the single currency vulnerable to a firm US CPI report.
Initial support is seen near $1.0780. Sterling has not experienced
follow-through selling after yesterday's outside down day. It has come back
bid, rising to almost $1.2580. Yesterday's high was nearly $1.2600. Here, too,
the intraday momentum indicators are stretched. A setback in North American may
find initial support near $1.2540.
America
The US reports May CPI
figures today. The
median forecast in Bloomberg's survey calls for a 0.2% increase on the month.
That would bring the year-to-date pace, at an annualized rate of a little more
than 3.8%. Due to the 0.9% increase in May 2022 dropping out of the 12-month
comparison, the year-over-year rate could fall to 4.1%-4.2%, which would the
slowest pace in two years. The core rate is proving to be more resilient. It is
expected to rise by 0. 4%, which is the average monthly increase for the past
six month. That will translate into slightly more than a 5% annual rate through
May. In the first five months of 2022, the annualized pace of core CPI was
closer to 5.8%. Last May, core CPI rose by 0.6%, as this drops out of the
12-month comparison, the year-over-year rate may ease to 5.2%-5.3%. That would
be the lowest since late 2021. Moreover, as we have noted (here),
another significant decline in headline CPI should be expected when the June
CPI is reported on July 12. In June 2022, US headline CPI jumped by 1.2%. This
will drop out. A conservative projection suggests it will be replaced by a 0.3%
increase. That would bring the year-over-year rate 3.2%-3.3%. The core rate may
ease to 5%.
For the fourth consecutive
session, the greenback is consolidating between CAD1.33 and CAD1.34. There are nearly $700 mln of options at
CAD1.3330 that expire today but were likely neutralized in recent sessions. The
US dollar found support in early European turnover near CAD1.3340. We suspect
it can retest yesterday's high around CAD1.3385. The mayor of Mexico City
and the foreign minister announced their resignations yesterday to prepare
presidential contest within the Morena Party. Two other officials (a
senator and another cabinet minister) are expected to resign shortly. Friday is
the deadline to declare candidacy and officials cannot hold a public office
during the campaign. A series of polls, in which non-party members can
participate will be held in late summer and a candidate selected in late
August/early September. This did not stop the peso from grinding to a new
multi-year high yesterday. The dollar reached MXN17.2415. It is consolidating
in quiet turnover now. A move above MXN17.32 could see MXN17.40, but from a
larger perspective, we see little to prevent a move toward MXN17.00.
Reviewed by Marc Chandler
on
June 13, 2023
Rating:
