Overview: The US dollar is trading lower against most
currencies, but the intraday momentum indicators are stretched, suggesting the
selling pressure may not be sustained through in North America today. December
US personal income and consumption data was contained in yesterday's Q4 23 GDP
data, but the market want to see the monthly print, which is expected to see
the core measure ease with the headline rate flat. Tokyo's January CPI was much
softer than expected, falling to 1.6% at the headline and core rates. Still,
the market loos for the BOJ to exit its negative interest rate policy in April.
Chinese stocks, which rallied almost 4% in the past three sessions, helped by formal and informal official action, eased today with the CSI 300 slipping around 0.3%. Disappointing Intel earnings yesterday may have contributed to the retreat in Asia Pacific indices today (India and Australia markets were closed. The MSCI regional index fell for the first time in seven sessions. Europe's Stoxx 600, less tech-sensitive, is up for the third consecutive session. Its weekly gain (~2.9%), if sustained would be the largest since early November. Meanwhile, the US S&P and NASDAQ are poised to snap six-day advances today unless a strong recovery is seen. The weaker-than-expected Tokyo CPI saw the yield on the 10-year JGB pull back a few basis points to 0.70%. European benchmark 10-year yields are mostly 2-4 bp lower, while the 10-year Treasury yield is little chanced near 4.11%. Gold is in a narrow range between around $2018 and $2024. It is marginally lower on the week. With China warning against striking its ships in the Red Sea, crude oil is a little heavier after the March WTI contract reached $77.50 yesterday. Still, near $76.60, March WTI is up about 4.6% this week, the largest surge since last October.
Asia Pacific
The BOJ meeting earlier this week boosted confidence
that an exit from the negative interest rate policy is likely in April. Yet, at the same time, it seems that the BOJ's
assessment of the trajectory of inflation is proving correct. Today's January
Tokyo CPI, with runs about 0.2 percentage points above the national figures,
fell by more than expected. Specifically, the headline rate dropped to 1.6%
from 2.4%. It is the lowest since March 2022. The core rate, which excludes
fresh food, is at 1.6%, the first sub-2% reading since May 2022. The
measure that excludes fresh food and energy, has proven considerably stickier,
thanks in part to processed food prices. Still, the decline reported today
(3.1% vs. 3.5%) is the fifth consecutive monthly decline. Comments by BOJ
Governor Ueda earlier this week, put an emphasis on services prices. They
slowed to 1.7% from 2.2%. It is the national core rate that the BOJ targets.
Today's report suggests that before the BOJ lifts its -0.10% target rate, the
national core rate may be below the 2% target.
Next week's regional highlights include China's
January PMI. It may be too early
to see the impact of the stepped-up measures to support the economy. Japan
reports December retail sales, industrial production, and employment.
Industrial output is expected to jump back (~2.5% after a 0.9% decline in
November) and retail sales are expected to rise by about 0.6% after a 1.1% gain
in November. It would take the two months to recoup October's 1.7% decline.
These data points will help economists fine-tune Q4 23 GDP forecasts.
Currently, the median in Bloomberg's survey sees a 1.1% annualized expansion
after a 2.9% contraction in Q3. Business investment and consumption are
expected to have risen for the first time in three quarters. Australia's
December retail sales are expected to have fallen by around 1.5% after rising 2.0%
in November. Consumer price inflation is expected to have slowed to around 4.3%
in Q4 23 from 5.4% in Q3.
The dollar was confined yesterday to about half of a
yen on either side of Wednesday's settlement near JPY147.50. It is trading quietly today in about half of a
yen range below JPY148.10. In fact, if the dollar cannot close above the
current session high, it will post its first weekly loss of the year against
the yen. While it continues to consolidate today, we expect next week's FOMC
meeting and US employment data to inject more volatility in the exchange rate. Our
bias is to view the consolidation as a continuation pattern, and for a stronger
dollar that could complete the upside correction seen since the start of the
month. The Australian dollar continues to trade poorly. In the past four
sessions, the Australian dollar has an unsustainable rally and settles near its
lows. The market looks as if it is rebuffing attempts to establish a foothold
above $0.6600. If it is unable to close above there today, it would mark the
fourth consecutive weekly loss for the Aussie, its longest losing streak since
last August. So far this week, though, the bears cannot drive it through
$0.6550, and last week's low was near $0.6525. The Chinese yuan snapped
a four-day advance yesterday but is slightly firmer today. The PBOC set the
dollar's reference rate at CNY7.1074 (CNY7.1044 yesterday), while the average
in Bloomberg's survey was CNY7.1702 (CNY7.1649 yesterday). The dollar rose to a
three-day high near CNY7.1822 before coming back off. The greenback is poised
to record its first losing week of the year against the offshore yuan.
Europe
There were no surprises from the ECB yesterday. Policy was left on hold, but ECB President Lagarde
failed to convince the market that it was too early to discuss rate cuts. In
fact, the odds of an April move increased to around 80% from about 65%. It now
is closer to 90%. The extent of this year's cuts is seen around 145 bp (vs. 132
bp a week ago). Lagarde warned that growth risks were still tilted lower, while
geopolitical developments pose an upside risk for inflation. She also noted
that wage pressures were beginning to ease. Separately, today the ECB published
December M3 money supply, and it rose on a year-over-year basis for the first
time since June, extending its recovery for the fourth consecutive month. Gradually,
it appears that the credit conditions in the eurozone are bottoming out.
Next week's highlights include the eurozone's Q4 GDP. Lagarde warned of stagnation. The median forecast in
Bloomberg's survey is for a 0.1% contraction, which would match Q3's
performance. The eurozone sees the initial estimate of January's CPI. The
median projection in Bloomberg's survey sees a 0.3% month-over-month decline,
which would allow the year-over-year rate to slip to 2.8% from 2.9%. The core
rate is expected to be unchanged at 3.4%. In the February-May period, the base
effect suggests the eurozone CPI could fall below 2%. Of note, the Germany's EU
harmonized measure is seen falling to 3.0% from 3.8%, while France's CPI may
ease to 3.7% from 4.1%.
The Bank of England meets on February 1. There is practically no chance of a change in policy.
The swaps market has a little better than a 50% chance of a cut in May, and it
is fully priced in for June. At the end of last year, the swaps market was
discounting almost 58 bp of cuts by mid-2024. In late December 2023, the market
had priced in about 172 bp in cuts this year, and it scaled it back to slightly
more than 100 bp, from nearly seven quarter-point cuts to four.
The drop in eurozone rates and the stronger than
expected US Q3 GDP weighed on the euro. The
single currency continued to be sold on intraday moves above $1.09. In fact, it
has not closed above $1.09 since January 15. It held the week's low, slightly
above $1.0820, yesterday, but was pushed to a marginal new low today a little
below $1.0815. There are options for 910 mln euros at $1.08 that expire today. The
euro recovered to almost $1.0870 in the European morning, which is stretching
the intraday momentum indicators and may give early North American operators a
new selling opportunity. Our reading of the charts suggest potential toward
$1.0765, and possibly $1.0725. The head and shoulders pattern that might have
been forged projects toward $1.06, which given the state of the momentum
indicators, seems a bit much. Sterling remains in a $1.26-$1.28 range. It
made a marginal near three-day low today near $1.2675 before recovering
back a little above $1.2740. Yesterday's high slightly below $1.2745. Here, too, the
momentum indicators are stretched, warning of the adverse risk-reward
considerations in the two-cent range.
America
The world's largest economy expanded by 3.3% at an
annualized rate in Q4 23, better than nearly everyone expected. Consumption slowed less than expected (2.8% vs. 3.1%),
and business investment, government, inventories, and net exports all
contributed to the expansion. Moreover, the strong growth took place with less
inflation. The GDP deflator was more than halved to 1.5% from 3.3%. It is the
slowest since the deflation in Q2 20. The core deflator was steady at 2.0%. The
GDP reported embedded today's personal income and consumption data. The
consumption component suggests an upside risk to the 0.5% gain expected in December,
while income expected to have risen by 0.3% (after 0.4% in November). The
headline PCE deflator is seen steady at 2.6%, while the core rate may have
ticked down to 3.0% from 3.2%. With little meaningful January data, except for
some surveys and weekly jobless claims, economists are pessimistic about the
outlook for the first quarter. Bloomberg's monthly survey found a median
forecast of 0.6%. This seems exceptionally dour. The Atlanta Fed GDP tracker
will offer its first estimate for Q1 24 GDP later today. It tends not to be
particularly accurate at this stage of the data cycle. Consider it a
preliminary place holder.
Next week's US highlights include the FOMC meeting and
the January employment report. The
Federal Reserve will stand pat. A combination of Fed-speak and economic data
have succeeded in prompting the market to push back first cut. At the end of
last year, the Fed funds futures had a March cut fully discounted. Now it is
seen as a 50/50 proposition. The market has also taken back one quarter point
cut in expected this year, so it now has 137 bp of cuts discounted down from
168 bp in mid-January (five quarter-point cuts and ~50% chance of a sixth).
There are several employment reports next week,
include JOLTS, ADP, the Employment Cost Index, weekly jobless claims, and the
monthly nonfarm payroll report. It
is widely recognized that jobs growth is slowing, and that government and
health care employment growth has helped carry the labor market. The median
forecast in Bloomberg's survey is that the US economy added about 168k people
to payrolls. If accurate, that would match the average job growth in Q4 23. On
average, and taking the downward revisions into account, the US created about
225k jobs a month in 2023, down from almost 400k a month in 2022. In Q4 23, the
private sector grew about 115k jobs a month. The 2023 average was almost 170k
after 377k average in 2022. Still, the unemployment rate may tick up to 3.8%
from 3.7%. A 0.2% increase in average hourly earnings will keep the
year-over-year pace at 4.1%.
The US dollar peaked yesterday in Asia, setting a new
high for the week near CAD1.3535, a smidgeon below the month's high set last
week slightly above CAD1.3540. The
failed attempt to make a new high spurred some position adjustment and fell
slightly below CAD1.3470, which is also where the 200-day moving average is
found. Follow-through action today has pushed the greenback to CAD1.3445.
The intraday momentum indicators are stretched, and the US dollar may stall
ahead of the next support area CAD1.3400-15 area, which is more important from
the technical perspective. Mexico reports its December trade figures today
ahead of next week's Q4 GDP. There is a strong seasonal tendency for
Mexico's trade balance to improve in December. The median forecast in
Bloomberg's survey is a for a $1.84 bln surplus, almost three-times larger than
November. It would be the largest monthly surplus in three years. More
important for the peso will be the broader dollar movement. This week's dollar
high was within a few pips of previous week's high (~MXN17.3860). In between,
the dollar had fallen to about MXN17.0565. Since the second high was recorded,
the dollar set a low near MXN17.14. It consolidated yesterday in the narrowest
range of the week, roughly a five-centavos range on both sides of MXN17.22. It
has slipped to MXN17.1575 in European turnover, but looks poised to recover in
North America today.
Reviewed by Marc Chandler
on
January 26, 2024
Rating:
