Consolidation Featured

Overview: After dramatic intraday price swings after the US jobs data and service ISM figures before the weekend, the dollar is consolidating today in mostly narrow ranges. The prospect for a March cut by the Federal Reserve finished last Friday virtually unchanged (73% vs 70%) and is about 66% chance today. There was interest in Dallas Fed's Logan's suggestion that the tapering of QT be discussed, though it seems to simply confirm what many has suspected as the use of the reverse repo facility diminishes. We suggested it could wind down by the middle of the year. Also, over the weekend, a tentative deal to re-authorize the federal government spending to avoid a partial government shutdown beginning January 19 was struck but it is not clear that the congressional votes are there.

Meanwhile, the selling pressure on Chinese stocks that trade in Hong Kong or the mainland continues. The CSI 300 was off 1.3% today to bring this year's decline to about 4.25%. The MSCI Asia Pacific Index was off 2% last week and those losses were extended today. Europe's Stoxx 600 is trading about a quarter-of-a-percent lower to start the week. The temporary grounding of Boeing's Max 9 (171 aircraft, mostly in the US) is weighing on the company's shares and a drag on the index futures today, after small gains before the weekend. European 10-year yields are mostly 2-3 bp firmer while the 10-year US Treasury yield has come back a little softer (~4.03%). Gold is trading heavily and is just holding above the pre-weekend low (~$2024.60). February WTI is trading through its pre-weekend low (~$72.20). The low set in the middle of last week was closer to $71. 

Asia Pacific

China is likely to report its December lending figures in the coming days. It appears that bank loans (new yuan loans) increased but this may have been more than offset by a pullback in shadow banking activity. Aggregate financing may have slowed last month. Still, the takeaway is lending has increased in recent months after slowing for a few months around mid-year. The PBOC injected CNY350 (~$50 bln) into the policy banks last month via the Pledged Supplemental Lending facility at 2.4%. That is below the benchmark one-year Medium-Term rate (2.50%), which may be a tell for a 10 bp rate cut on January 15. Separately, China reported that the dollar value of its reserves rose by $66.2 bln. Based on a roughly calculation of changes in exchange rates and bond, we suggested reserves could rise by $50 bln or almost twice the median forecast in Bloomberg's survey for a $26.7 bln increase. For the year as a whole, the value of China's reserves increased by about $110 bln after falling by $123 in the 2022.

Japanese markets were closed today but the first thing tomorrow, Tokyo reports December CPI. Small declines in the headline and core rates are expected. The headline rate may ease from 2.7% to 2.5%. The core rate, which the BOJ targets at 2.0% may draw a little closer after falling to 2.3% last November. However, the measure that excludes fresh food and energy is may be stubborn at 3.6%. The BOJ does not seem to be under much pressure to adjust monetary policy and the recent earthquake reduces the pressure further. November household spending is due as well. It is expected to have fallen by 2.2% year-over-year and that is after a 1.2% decline in the year through November 2022, and a 1.3% decline year through November 2021. Demographics likely played a role, but also so did the decline in real earnings. Average monthly real cash earnings are expected to have fallen by 2.2% in the year through November 2023. They fell by 2.5% in the year ending in November 2022. In fact, on a year-over-year basis they have been falling without fail since April 2022. 

The dollar approached the (50%) retracement of the sell-off from last November's high after the US jobs data on Friday near JPY146.00. This area needs to be overcome to continue to strong upside momentum seem for most of last week, and the next target is the JPY147.50-JPY148 area. The key may be US Treasuries. Ahead of the weekend, the 10-year yield settled above the 200-day moving average, seemingly to confirm the completion of the bottoming pattern. The five-day moving average has crossed below the 20-day moving average in the March 10-year note futures for the first time since early last November. A minimum target may be a yield near 4.20%-4.25%. However, today, the 10-year yield is a little softer and the greenback is consolidating with a JPY144 handle. The Australian dollar plunged to almost $0.6640 on Friday before clawing its way back to settle slightly below $0.6715. We anticipate some near-term consolidation but the downside correction, after rallying around six cents off in the last two months of last year does not appear over. The Aussie approached initial resistance ($0.6645) and peaked in the local session near $0.6735. It tested support near $0.6680 in the European morning. Consolidation may continue, and that applies to the Chinese yuan as well. The dollar is trading within the pre-weekend range with a firmer tone. The range is roughly CNY7.1460-CNY7.1635. The high last week was recorded before the weekend near CNY7.1710, filling an old gap. The PBOC set the dollar's reference rate at CNY7.1006 (CNY7.1029 on Friday). The average projection in Bloomberg's survey was CNY7.1498 (~CNY7.1589 on Friday). 

Europe

News that eurozone retail sales fell by 0.3% in November reinforces ideas that the economy has no traction and likely contracted in Q4 23 (-0.1%) for the second consecutive quarter. Still, October's 0.1% gain was revised to 0.4% and the EC's sentiment surveys ticked up. However, Separately, disappointing German November factory orders kept the pressure on the euro. and trade figures. Factory orders stabilized after falling 3.8% in October, but the 0.3% increase disappointed expectations for a 1.1% gain. Germany's trade figures were better, and exports rose 3.7% in November, well, above forecasts for a 0.5% gain after a revised 0.4% decline in October (initially -0.2%). Imports also rose more than expected (1.9% vs. 0.4%). The trade surplus of 20.4 bln euros was more than expected, and the largest monthly trade surplus since January 2021. However, the takeaway is that that German industry remains weak, hampered in part by high energy costs, and trade disruption. It has already been reported that non-EU exports were off 4.7% year-over-year in November. Exports to the US were off slightly more than 1%, to Switzerland down nearly 7%, and exports to China fell almost 8% year-over-year. Exports to Russia are a third of what they were in November 2021 at 800 mln euros. Still, Germany's trade surplus has nearly returned to pre-Covid levels:  The surplus in the first 11 months of 2023 has been about 187 bln euros and in the same period in 2019, it was about 207 bln euros. The current account surplus was about 7% of GDP in Q4 19 and may have been around 6.5% in Q4 23. 

The odds of an ECB rate hike did not change materially at the end of last week following initial estimate of the region's December CPI (2.9% headline and 3.4% core). It remains around 50%. The euro approached the support we identified near $1.0875 after the US jobs data and recovered dramatically to $1.10 before stalling. While we look for near-term consolidation, the downside correction. It is in a narrow range of about a quarter-of-a-cent above $1.0925 today. It rallied about 6.5-cents in Q4 23, and the risk is that the downside correction is not over. Sterling performed well in the volatile pre-weekend session. It held the lower end of the three-week trading range (~$1.26) rallied to a new high for the week (~$1.2770). There are likely to be option-related interest and stops around $1.28, which sterling has not closed above since the end of last July. It, too, is trading quietly in a little less than a third-of-a-cent range on both sides of $1.2700.

America

If last week was about the US labor market, then this week's focus is on prices. Ahead of the CPI and PPI later this week, today sees the NY Fed's inflation expectation survey. It was at 3.4% in November, down from 3.6% in October and 5% in December 2022. Average retail gasoline prices fell by 4.25% in December and the short-term inflation expectation seems to have become more sensitive. The rolling 24-month correlation of the changes in the Fed's survey results and the average retail price of gasoline ranged roughly +/- 0.25 in the 2018-2020 period, but in the subsequent three years, the correlation has risen to about 0.65% and has been fairly stable there since Q3 22. It is notable that the median expectation for three years was at 3.0% in November, net unchanged from December 2022. It peaked at 4.2% in October 2021, while the one-year expectation peaked eight months later. Surveys are on way to discover expects. The market also has a way. The three-year breakeven is the difference between the yields of the conventional three-year and the inflation protected security. It peaked in late March last year near 4.35% and is now hovering a little above 2.10%.

The US dollar stalled near CAD1.34 after the employment reports, but the risk is that the correction has not be completed. The greenback is fine and recorded the session high so far near $1.3395 in the European morning. A trendline off the mid-November and mid-December highs comes in near CAD1.3410. A convincing break of it could spur a move toward CAD1.3475-80. Despite the volatility in the other currencies and in the capital markets more broadly after the US employment data, the Mexican peso showed surprising strength. The greenback got tagged by about 0.8%, its biggest loss since December 1. It settled slightly below MXN16.88, the lowest close since the end of last August and has slipped to about MXN16.8630 today. We had thought the recent price action was more consistent with a bottoming pattern. The price action needs to be respected, but the momentum indicators have not confirmed it. 

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