Overview: The deluge of Treasury supply is nearly
over for this week. On tap today are 4- and 8-week T-bills and $23 bln 30-year
bonds to finish the quarterly refunding. The sales will come after the July CPI
print that is expected to see the first year-over-year increase since last June.
The market is going into the report with about a 15% chance of a Fed hike next
month discounted. Meanwhile, September crude oil extended its recover from $80
seen on Tuesday to a new 12-month high near $85 before steadying. Amid strike
fears, Europe's natural gas benchmark soared by more than 27% yesterday but is
about 5.3% lower today. For its part, gold has stabilized after falling to
four-week lows yesterday near $1914. It is pushing above $1920 in the European
mornings.
The dollar is broadly softer
against the G10 currencies, but the Japanese yen, which is practically flat. The
Swiss franc and euro are leading the move. However, notable chart levels have
not been taken out and the intraday momentum indicators caution against chasing
the dollar lower in early North American turnover. Most emerging market
currencies are firmer. As widely expected, the Reserve Bank of India left rates
steady, and the central bank of Mexico is expected to do the same later today. Equity
markets are mostly higher. In the Asia Pacific, Taiwan, South Korea, and India
were notable exceptions. Europe's Stoxx 600 is extended yesterday's gains and
is up around 0.4%. US index futures are also trading higher. European benchmark
10-year yields are mostly 1-3 bp higher. Core-peripheral spreads are narrower. The
US 10-year yield is hovering near 4%.
Asia Pacific
In the week after the Bank
of Japan doubled the upper limit on the 10-year JGB, Japanese investors were
net buyers of the most foreign bonds in five weeks, according to Ministry of
Finance data released earlier today. The common narrative was the with higher yields at home, Japanese
investors would repatriate investment, even though they have been buyers of
foreign bonds this year, after last December's surprise adjustment of the Yield
Curve Control. Japanese investors bought JPY438.8 bln (~$3 bln) of foreign
bonds last week. This was slightly more than the average weekly purchase this
year. For their part, foreign investors dumped JPY1.97 trillion of Japanese
bonds, the most in since mid-January.
US President Biden signed an
executive order whose details still have to be worked out that will restrict US
investment in certain sectors via specific vehicles in China. The American press framed the announcement
as some kind of restraint because of the desire to mend the bilateral
relationship. Opposition in Congress wants broader measures that include
biotech and energy. There is a 45-day public comment period, and after two
years of discussions, the order is still very much a work in progress, and from
the outside seems prematurely announced. The "high fence in a small
yard" spin has yet to be proven. China, of course, responded vehemently
that the US broad use of national security weaponizes trade and technology. The
executive order, however, it develops over the next month-and-a-half, will not
be effective until next year and one suspects the US will try to get other
countries to adopt similar measures, whatever the final form. Some form of
Chinese retaliation would also not be surprising.
The dollar settled near
session highs yesterday around JPY143.75. It pushed tentatively above JPY144 for the first time since
July 7, but has not sustained the move, amid the broader US dollar pullback.
Options for about $755 mln struck there expire tomorrow. If the market is
unable extend the upside momentum, a risk of a bout of profit-taking increases.
Key support is at the recent low near JPY141.50, and the 20-day moving average
is slight lower. The Australian dollar seems content to consolidate
between $0.6500 and $0.6600. The oversold momentum indicators appear to be
beginning to bottom but re-establishing foothold above $0.6600 is necessary to
boost the chances that a low is in place. Unless the Aussie can rise above
$0.6570, it will be the fourth session of lower highs. The dollar
remains firm against the Chinese yuan and the wider spread between the onshore
and offshore yuan (CNY and CNH) is consistent with pressure building on the
onshore yuan. The spread between the two was near 0.2 in the last two
sessions was the most since a the end of June. Reports suggest that China
officials have banned the word "deflation" but with negative CPI and
disappointing real sector data (and more likely next week), there are
heightened expectations for cut in rates and/or a reduction in reserve
requirements. The PBOC set the dollar's reference rate at CNY7.1576 today. The
median forecast in Bloomberg's survey was for CNY7.2030.
Europe
There have been two notable
developments in Europe this week. First, amid talk of Germany de-industrializing, TSMC announced
plans to jointly build a new semiconductor fabrication facility in the eastern
part of Germany, joining Intel. Tesla also recently an announced plans to
expand into Germany. Second, Italy is levying a surtax on banks, following the
increase in full year guidance by the two largest banks. There was a dramatic
adverse reaction by bank shares, as one might have expected, which wiped out
$10 bln of market capitalization. The government "clarified" that the
tax would not exceed 0.1% of the banks' assets and indicated that banks which
have already increased deposit rates for savers, the tax "will not have a
significant impact." An index of Italian bank shared plunged 7.8% on
Tuesday and rose by about 3.8% yesterday. Today, the index is a little more
than 1% higher.
Sterling has treaded water
this week, and with one brief exception has traded with a $1.27-handle. Tomorrow's June and Q2 GDP figures and details
may push it out the range. The UK economy contracted by 0.1% in May and is seen
recouping it and a little bit more to rise by 0.2% in June. Industrial output
is seen rebounding after contracting by 0.6% in May, while services are seen
expanding by 0.2% after a flat May. Construction output, which fell by 0.2% in
May is expected to be unchanged in June. The trade deficit is seen narrowing. If
output rises by 0.2% in June, the sum of the monthly figures would suggest
around a 0.3% expansion in Q2. However, this is a not a reliable guide. Consider
that the monthly GDP figures pointed to 0.3% growth in Q1, the quarterly figure
showed only a 0.1% increase. Similarly, the median forecast in Bloomberg's
survey is for a flat quarter. It sees no improvement from Q1's flat consumer
and a 1% increase in government spending to offset the expected weakness in
business spending and investment. Net exports appear little changed from Q1.
While the euro and
sterling's downside momentum has waned, today's gain are still not sufficient. The euro is trading at new highs for the
week, reaching $1.1025 in the European morning. Last Friday's high was slightly
above $1.1040, and resistance is seen around $1.1050 (20-day moving average is
about $1.1060). There are options for almost 1.2 bln euros at $1.10 that expire
today. There are more $1.10 options that expire next week. The euro's daily
momentum indicators are stretched and may be poised to turn higher in the
coming days after falling since mid-July. Meanwhile, sterling has found
strong sellers in front of $1.28 this week. It reached $1.2770 in
early European turnover but appears to be stalling. The $1.2680-$1.2700
has offered support in recent days. Sterling's daily momentum indicators are
also stretched and at least one has turned higher, but the price action is not
convincing. Sterling has spent hardly anytime outside of the range set last
Friday (~$1.2690-$1.2790). Data that could impact BOE expectations are due next
week (employment and wages, CPI, and retail sales).
America
The focus is on today's July
US CPI. Given the base
effect, the 0.2% rise economists are largely looking for will translate into
the first rise in the year-over-year rate since June 2022 when it peaked. The
year-over-year rate is seen rising from 3.0% to 3.3%. Many if not most
observers seem to be thinking this is a one-off fluke, but the risk is that it
is not. In fact, the year-over-year may be rising this month. The
year-over-year may fall against in September and October before rising again in
November and December. Headline CPI rose at an annualized rate 3.6% in Q2 23
after a 4.0% rise in Q1 23. In Q3 22, headline CPI rose at an annualized pace
of 2.4% and 3.2% in Q4 22. Those are the quarterly bogies that need to be beat for
pace of inflation to slow.
Some observers still insist
that China is an important driver of US consumer prices. It has an intuitive appear as some many
American consumer products come from China. However, there are numerous
problems with this conceptualization. First, the US CPI basket is weighted
heavily toward services not goods. And prices of those services, like housing,
medical care, education, and recreation are of a domestic nature. Second,
imagine a consumer good that is imported into the US. By the time the final
end-user buys the item, consider that the costs for storage, transportation,
insurance, and marketing are incurred and each middle step has its own mark-up.
The final cost of the good may double by the time we buy it. Thirdly, the goods
that we do buy seem to be considerably less commodity intensive. The cost of
electronics is hardly a function of their traditional raw materials, for
example. We would argue that the reduced commodity intensity (commodity use for
each unit of GDP) has fallen sharply over the last few decades is a key
development. According to the World Bank since 1990, the US commodity intensity
has fallen from 0.17 to 0.11, meaning it takes 11-cents of commodities to
produce $1 GDP, down by about a third. The comparable eurozone numbers are 0.22
and 0.15. China's commodity-intensity has fallen from 0.3 to 0.2 and Japan's
has eased from 0.18 to 0.13.
The US dollar remains with
Tuesday's broad range against the Canadian dollar (~CAD1.3365-CAD1.3500). It slipped below CAD1.3400 for the first
time since the high was seen and fray the five-day moving average (just below
CAD1.3400), which it has not closed below this month. The daily momentum
indicators are stretched, and like sterling, at least one has turned, while the
price action is not wholly convincing. A close below CAD1.3400 would boost
confidence in our suspicion that the greenback is exhausted after spiking to
CAD1.35 on Tuesday. For its part, the Mexican peso is consolidating the big
moves in both directions seen at the end of last week. The US dollar
continues to hold above MXN17.00. The central bank meets later today. Confirmation
that it intends on keeping the cash target at 11.25% may encourage a push lower.
The dollar's momentum indicators are stretched and at least one has turned down.
Reviewed by Marc Chandler
on
August 10, 2023
Rating:
