Overview: The US dollar, which was sold last week
after the FOMC and soft employment report, remains on the defensive today. The
Antipodean currencies and yen are struggling, but the other G10 currencies are
firm. The dollar is also lower against most emerging market currencies. Still,
given the magnitude of the dollar's pullback, we suspect some consolidation is
likely.
Asia Pacific equities rallied,
helped by the sharp gains in the US before the weekend. Note that South Korea
is banned short sales and the Kospi rallied nearly 5.7% today. The Philippine's
allowed short selling for the first time, and its main index rallied 1.5%.
Europe's Stoxx 600 is treading water after rallying every day last week. US
futures indices are trading with a slightly firmer bias. After falling last
week, European and US 10-year benchmark yields have come back higher today.
European yields are mostly 6-8 bp higher. The US 10-year yield is up a couple
of basis points to about 4.60%. The US quarterly refunding begins tomorrow.
Gold is trading slightly softer and is near the middle of its $11 range late in
the European morning near $1987. December WTI is also consolidating inside the
pre-weekend range but is firmer near $82 a barrel. Saudi Arabia and Russia
indicated they supply curbs will persist through the end of the year.
Asia Pacific
One might be forgiven for thinking that with low nominal and even lower
real rates, a negative overnight policy rate, and a deeply undervalued yen that
the Japanese economy would be doing well, but it ain't. The economy would have contracted in
Q2 if it were not for the strength of tourism, for which the cheap yen probably
played a role. The economy looks to have contracted in Q3. In fact, given the
depreciation of the yen, the Japanese economy may have slipped this year to the
fourth largest behind Germany, which has its own economic challenges. The final
readings showed that despite the better than preliminary estimate (51.6 from
the preliminary 51.1, down from 53.8 in September), the service PMI is still at
the low for the year. The composite PMI stands at 50.5 rather than 49.9 initial
estimate but that is also the low of the year.
Tomorrow,
Japan reports worker earning and household consumption. Real earnings have not risen on a
year-over-year basis since March 2022 and the streak most likely did not end in
September. The decline in household spending may have accelerated to 2.7%
year-over-year from -2.5%. The cabinet approved a new stimulative package last
week for JPY21.8 trillion (~$146 bln) in total fiscal spending. It has high
hopes for the spending: GDP, saying will be boosted by 1.2 percentage points
over the next three years, and inflation will be suppressed by one percentage
point. Estimates suggest that as much as JPY13 trillion in new bond issuance
will be required, as with the other hand, the central bank tries limit the rise
of the 10-year yield. BOJ Governor Ueda seemed to play down the likelihood of
raising the overnight target rate (-0.10%) before the end of the year.
The
Reserve Bank of Australia announces its rate decision the first thing
tomorrow. In
Bloomberg's survey 21 of 24 economists surveyed expect a 25 bp rate hike. The
futures market is less confident. It shows slightly more than a 50% chance and
nearly a 77% chance of a hike before year-end. Recall sentiment swung toward a
rate hike based nearly exclusively on the Q3 CPI report that slowed to 5.4%
from 6.0%, instead of 5.3%, the median response in Bloomberg's survey. The
underling core measures averaged 5.2% down from 5.7% in Q2 but above the 5.0%
median forecast. Other data point to a slowing of the Australian economy,
including a loss of 40k full-time jobs in September, the most since October
2021. The economy grew by 0.4% in the first two quarters this year and is
expected to have slowed to 0.2% in Q3 and Q4.
The
dollar has fallen against the yen for the past three sessions, which is
the longest pullback in three months. The streak is being challenged today as
the greenback stabilizes. It held above the low set on October 31
(~JPY149.00). The dollar has traded up to JPY149.75, with the help of firmer US
rates. The JPY150.00 offers nearby resistance, and then JPY150.35. The
Australian dollar has advanced eight of the past ten sessions coming into
today. The nearly 1.25% rally ahead of the weekend was the largest in
nearly four months. It extended the gains marginally to almost $0.6525 before
stalling. It remains in a narrow range and has held above $0.6500. Given the
dramatic advance that lifted the Aussie to its best level since mid-August and
the arguably closeness of tomorrow's RBA call, consolidation is not surprising.
Support is likely in the $0.6460-80 area. The dollar fell by nearly
0.55% against the Chinese yuan ahead of the weekend and has edged a little
lower today, falling to about CNY7.2650. It is the fourth consecutive
session that the greenback has moved lower against the yuan. Despite the yuan's
recovery, the PBOC kept the dollar's reference rate nearly steady at CNY7.1780
(CNY7.1796 on Friday), while the average projection in the Bloomberg survey
fell to CNY7.2860 (CNY7.3134 Friday).
Europe
The final October EMU PMI does not change the general
picture. After
contracting by 0.1% in Q3, the regional economy appears not to have hit bottom.
The median forecast in Bloomberg's monthly survey sees stagnation this quarter
but that may be optimistic. There are no growth impulses. The final services
PMI was unchanged from the flash reading at 47.8 (48.7 in September). The
composite is at 46.5 was also unchanged from the initial reading. (47.2 in
September). It has not been above 50 since May. The German composite fell to
45.9 (45.8 flash) from 46.4, while the French composite was revised to 44.6
(from 45.3 preliminary estimate) and from 44.1 in September. Italy's composite
fell to 47.0 from 49.2, and Spain's outperformance remains evident (50.0 vs.
50.1 in September). On the other hand, Germany's September factory orders rose
by 0.2% and the median forecast in Bloomberg's survey anticipated a 1.5%
decline. Still, the August series was revised to show a 1.9% gain rather than
3.9%. Note that the swaps market has about an 80% of a quarter point ECB cut in
April 2024 and 34 bp of cuts by the end of H1. Two weeks ago (October 23), it
was at 40% and 20 bp, respectively.
Tomorrow's King's Speech in the UK to open the new session of parliament will outline the government's legislative session that will most likely lead to an election late next year. Today, the market showed little reaction to the construction PMI
(45.6 vs. 45.0). At the end of the week, economists (median in Bloomberg's
survey) expect the UK to report GDP contracted by 0.1% in Q3. The BOE's
downbeat forecasts last week saw the market bring forward rate cuts. The market
has discounted about an 80% chance quarter-point cut by August 2024. As
recently as October 18, the swaps market was pricing in about a 30% chance of
another hike.
The
euro surged by nearly 1.6% last week, the most since it peaked in mid-July. When the euro turns, the move can be
unimaginably sharp. Recall that last year, on September 28, the euro recorded a
multiyear low near $0.9535 and four sessions later it was near $1.00. It peaked
slightly above $1.0745 ahead of the weekend and reached $1.0755 today. Still,
given the extent of the move since the FOMC meeting, it looks stretched, which
may caution against chasing it. It remains above its upper Bollinger Band (~$1.0715)
and has not traded below $1.0720 today. The $1.0765 area is the (38.2%)
retracement of the losses from the July high (~$1.1275). Above there, the
$1.0800-10 area is the next important chart area. Sterling jumped by a
little more than 2% last week, its largest weekly advance of the year. The
gains have been extended today to nearly $1.2425. It is approaching the
200-day moving average (~$1.2435), which it has not traded above since
mid-September. Sterling is also approaching the (38.2%) retracement of its
losses from the year's high set near $1.3140 in mid-July found near $1.2460. It
has not traded below $1.2365 today. Sterling is recovering against the euro
after trending lower since late August. The euro has fallen through the uptrend
ling connecting the August, September, and October lows (found by GBP0.8670
before the weekend)
America
When the 33k strikers are added back into US nonfarm
payrolls, October's job growth was in line with expectations. The point is that nearly every other
component was disappointing. The job growth of the previous two months was
revised lower by 101k. The household survey reported a loss of 348k jobs, and
the unemployment rate rose 0.1% to 3.9%. After revisions, the average earnings
slowed to 4.1% from 4.3%, year-over-year, and the average work week fell back
to its cyclical low of almost 34.2 hours. Aggregate hours fell by 0.26%, the
most in two years. The measure of under-employment rose by 0.2% to 7.2%, the
highest since early last year. The report is consistent with the slowdown that
is widely expected after the heady 4.9% annualized pace in Q3. The early
estimates for Q4 GDP appear to be coming in between around 1.0% and 1.5%. This
is a light week for important US economic data, but next week will likely see a
decline in headline inflation and retail sales.
At
recent post-FOMC press conferences, word or phrase seemed to capture the
markets' imagination, like "patience" or "caution." Perhaps, this time, the most
important word was "persistence" in reference to the threshold of the
change in rates impacting the monetary policy. The issue was about whether the
increase in market rates was doing of some of the Fed's tightening for it. The
Fed Chair recognized that short-term movements are noisy and that what mattered
for policy makers were persistent moves. About a month after the FOMC's
September FOMC meeting, the 10-year had risen by about 70 bp to 5.0%.
Separately, note that today's quarterly Senior Loan Officer Opinion Survey is
likely to point to further tightening of financial and credit conditions, which
the FOMC statement seemed to recognize. After the employment report, ahead of
the weekend, and this week's quarterly refunding, the yield briefly traded at
4.50%. In the past two-and-a-half weeks, the US two-year has fallen from about
5.20% to 4.80%. The implied yield of the December 2024 Fed funds futures
settled last week at 4.42%, the least in two months. It was near 4.90% on
October 18. Before the weekend, the market was pricing in about 90 bp of cuts
by the end next year. It is now pricing in about 85 bp of cuts.
A
disappointing Canadian employment report did not stand in the way of the
continued recovery of the Canadian dollar. The greenback rose to a new high for the
year in the middle of last week a hair's breadth below CAD1.39 and finished the
week near CAD1.3660. The US dollar has extended its decline to about CAD1.3630
today. There is a band of support in the CAD1.3570-CAD1.3600 area. On the
upside, the greenback has not traded above CAD1.3670 today. The US
dollar tumbled to about MXN17.2835 ahead of the weekend, before finding a
strong bid that lifted it back to MXN17.48. Still, the peso rose 3.35%
last week, bettered only by the Chilean peso (~+3.65%). The dollar's drop met
the (61.8%) retracement of its gains off the multiyear low set in July
(~MXN16.6260). The dollar is little changed now. Nearby resistance may be seen
in the MXN17.50-60 area.
Reviewed by Marc Chandler
on
November 06, 2023
Rating:
