Overview: The dollar's resilience after initially
selling off in response to the as-expected CPI was impressive. A quieter tone
is dominating today and most of the G10 currencies are +/- 0.15%. While the
dollar is consolidating, the underlying tone is still firm. For the week, it
has risen against all the major currencies and the Dollar Index is up nearly
0.6% this week, its fourth consecutive weekly gain. The greenback is rising
today against most of the emerging market currencies as well.
The US quarterly refunding has
been successfully completed and both the US and China's July CPI have been
published. The net result is that the US benchmark 10-year yield is off about
five basis points this week to a little below 4% and the two-year yield is up
less than two basis points. The US Treasury sold more than $500 bln of paper
($103 bln coupons and $410 bln of bills). The chances of a Fed hike next month
were downgraded slightly to 10%. The US 10-year premium over China narrowed a
little but is still over 130 bp. The deflation in China, on the heels of other
disappointing data is encouraging speculation for a rate cut and/or a cut in
reserve requirements. The dollar is holding above CNY7.20. China's CSI 300
plunged by 2.3% today, which led most of the regional markets lower, except
Japan, where the weaker yen helped bolster equities. Europe's Stoxx 600 is
giving back most of yesterday's 0.8% gain, while US index futures are narrowly
mixed. The 10-year JGB yield was steady near 0.58%. European benchmark yields
are mostly 4-5 bp higher, but the stronger than expected UK GDP figures has
sent 10-year Gilt yields 10 bp higher to 4.45%. The US 10-year Treasury yield
is slightly softer near 4.08%. Gold is consolidating its recent losses and
found support near $1910. It is the third weekly loss for the yellow metal.
September WTI posted a possible key downside reversal yesterday after
approaching $85. Follow-through selling today saw it reach $82.25. Its six-week
rally is at risk and must close above $82.82 to extend it.
Asia Pacific
China's lending figures for
July were unexpectedly low. New yuan loans (banks) increased by almost CNY346, which is less
than half of the CNY780 bln projected. Aggregate lending (includes "shadow
banks" non-bank financial institutions) rose by CNY528.2 bln, down from
CNY4.22 trillion in June and well below the CNY1.1 trillion expected. July is
often a weak month, but these figures are exceptionally low. Last July,
aggregate lending stood at CNY778.50 bln, Recently, Chinese officials encourage
regional governments to expedite the borrowing under this year's quotas. The
data can only fuel speculation that officials will provide more financial
support, such a cut in rates and/or a reduction in required reserves.
Japan will report Q2 GDP
first thing Monday morning. It is seen matching Q1 growth of 0.7%, but the quality is
likely poorer. The details are expected to show more inflation (3.8%
year-over-year vs. 2.0% in Q1), less consumption (flat after 0.5%
quarter-over-quarter), less business spending (0.4% vs. 1.4%
quarter-over-quarter). Inventories may have shaved 0.3 percentage points off
GDP (added 0.4 percentage points to Q1 growth). Net exports are seen
contributing 0.9 percentage points, the most since Q3 20, after trimming Q1 GDP
by 0.3 percentage points.
There are three takeaways
from Japan this week and two of them are what did not happen. First, after buying bonds twice last week
at market prices, the BOJ stayed on the sidelines this week. The 10-year
(generic) yielded between 0.57% and 0.64% this week. In the previous week, the
yield reached almost 0.66%. Second, the latest MOF portfolio flow data showed
that despite the increase in domestic rates, Japanese investors continued to
buy foreign bonds and did so at a pace slightly faster than this year's average
in the first week after the Yield Curve Control was adjusted. Third, the dollar
has risen every session this week against the yen. Despite the 1.7% dollar gain
to its best level in a month, implied volatility fell, with the one-month
falling below 9% for the first time since late June.
The jump in US 10-year
yields despite the as expected CPI figures may have helped spur the dollar's
advance to JPY144.80 yesterday. It made a new marginal high today near JPY144.90, holding below
the high for the year, set in late June slightly above JPY145. A little more
than $750 mln in options struck at JPY145 expire today. The next interesting
technical area is around JPY146.00-JPY146.15. Last year's high was set on
October 21 (~JPY152), the same day that the US 10-year yield peaked (~4.33%). Initial
support around JPY144.40. The Australian dollar, which sold off sharply
yesterday from about $0.6615 to $0.6515, made a marginal new low (~$0.6510)
before stabilizing. It is trying to snap a three-day pullback, but looks
set to finish the week lower, to extend the weekly downdraft to its fourth
consecutive week, the longest since February. The low for the week was set on
Tuesday, just below $0.6500. The corrective upticks stalled near $0.6535. Resistance
is seen in the $0.6540-50 area. Meanwhile, the dollar rose to nearly
CNY7.24, its highest level in a month. It is the fifth gain in the past six
sessions. The PBOC set the dollar's reference rate at CNY7.1587. The median
projection in Bloomberg's survey was CNY7.2078.
Europe
UK GDP data were
unexpectedly strong. June
GDP rose by 0.5% after a 0.1% contraction in May. Economists looked for 0.2%
growth. Industrial output surged by 1.8% in June, led by a 2.4% jump in
manufacturing output, well above expectations. Construction output was also
strong, rising 1.6% (after a 0.3% decline). Economists had expected a flat
report. Services output rose by the expected 0.2%, while the trade deficit fell.
The June performance lifted the British economy by 0.2% in Q2. The median
forecast in Bloomberg's survey was for the economy to have stalled after
expanding by 0.1% in Q1. Private consumption rose by 0.7%, the strongest since
Q1 22. Government spending rose 3.1%, more than three-times the projected and
the most since Q2 21. Capital formation was flat, which was better than the
0.7% decline forecast and total business investment rose by 3.4%. The market
had already strongly priced in a hike next month and today's data helps
solidify expectations.
The euro briefly rallied
after the US CPI data to reach $1.1065, a two-week high before reversing low
and dipping below $1.0980 before bottoming. It did manage to hold above Wednesday's low (~$1.0950),
where options for 1.85 bln euros expire today. The euro still appears to be
forging a bottom since pulling back from the year's high in the middle of last
month (~$1.1275). Last week's low was slightly above $1.0910. Still, while
there has not been follow-through euro selling today, the corrective upticks
were uninspiring, stalling in front of $1.1005. Sterling's price action
was ugly; it posted a big outside down day and its settlement below $1.2700 was
the lowest since late June. The speed at which it came off setting a
seven-day high near $1.2820 was stunning. Follow-through selling today was
limited to about $1.2665. The stronger-than-expected GDP figures saw sterling
recover to almost $1.2725 before stalling. Initial support now may be near
$1.2680. A break of $1.2600 would likely trigger stops even though the daily
momentum indicators still to be bottoming.
America
The July US CPI was mostly
as expected. Both
the headline and core rates rose by 0.2%. The significance of the back-to-back
0.2% increase both rates is that one of the leading hawkish Fed governors,
Waller, has said a series of 0.2% increases would be sufficient for him to
consider that inflation is on its way back to target. Still, the year-over-year
headline pace increased for the first time since June 2022 to stand at 3.2%
(3.0% in June). The year-over-year core rate slipped to 4.7% from 4.8%, as
anticipated. Of note, housing, and owners' equivalent rent both increased
sequentially (0.3% from 0.2% and 0.49% from 0.45%, respectively). This helped lift
core services (0.35% vs. 0.25%). Excluding shelter, core services rose by 0.2%.
Fed Cahir Powell has often cited this measure. It has risen by 2.9% at an
annualized pace over the past six months. It fell from 5.3% in January-February
to below 4% in June.
Today, attention turns to
the PPI. Here, too,
a 0.2% increase is expected in the monthly headline and core rates. Note that
the headline year-over-year rate has fallen every month but one (June 2022)
since peaking at 11.7% last March (the same month the Fed began its tightening
cycle). It stood at 0.1% in June, but the base effect warns of a rise today.
Last July, US PPI fell by 0.3%. Barring an outright decline this month, the
year-over-year pace is likely to pick up next month too. There are some components
of the PPI that economists use to help forecast the PCE deflator, which is due
August 31.
The central bank of Mexico
left its policy rate steady at 11.25% and seemed to be in no hurry to cut
rates, even though it shaved its Q3 CPI forecast to 4.7% from 5.0%. Recall that on Wednesday, Mexico reported
that its July inflation fell to 4.79% from 5.06%. Its Q4 23 CPI forecast is
4.6%, which seems conservative. The central bank see inflation 3.1% at the end
of next year. These are changed from a month ago. It called the inflation
outlook "very complex." It sees the balance of risks to inflation
biased to the upside. It sees pressure from energy and agriculture prices the
main sources of upside risk, while recognizing that the greater than expected
appreciation of the peso posed downside risks to inflation.
The US dollar continues to
trade within Tuesday's broad range (~CAD1.3365-CAD1.3500). It fell to a touch below CAD1.3375
yesterday but then snapped back sharply, making new highs late in the session
near CAD1.3445 and extended to CAD1.3455 today. It is straddling the 200-day
moving average found at CAD1.3450. We had suggested that the spike to CAD1.3500
seen Tuesday exhausted the greenback buying. We still suspect it will hold
ahead of the weekend. Turning to the performance against the Mexican peso,
the US dollar traded below MXN17.00 yesterday for the first time in six
sessions. It briefly traded below the 20-day moving average (~MXN16.9185)
but amid its broad recovery, the dollar reached new session highs in to the
close near MXN17.15. The greenback has steadied today and barely traded above
MXN17.1350. The low so far is about MXN17.0530. Mexico reports June industrial
production figures today, but the general risk-appetite and broader dollar
movement may be more important. Separately, Brazil reports IPCA inflation today
and the year-over-year rate may rise for the first time since last June. The
central bank does not meet until September 20 and an uptick is the inflation
reading may not stand in the way of another rate cut (from 13.25%).
Reviewed by Marc Chandler
on
August 11, 2023
Rating:
