Fragile Stability Today after Yesterday's Growth Scare Saw US Rates, Equities, and the Dollar Tumble

(Business travel disrupts the commentary for the next two days.  New monthly drops March 1.)  

Overview: A growth scare, perhaps spurred by the Philadelphia Fed's non-manufacturing activity survey and the sharp drop in Conference Board's consumer confidence measure, sparked a sharp drop in US yields, a sell-off in US equities and a weaker US dollar. There is a fragile stability today. The greenback is firmer but mostly within yesterday's ranges against the G10 currencies and is narrowly mixed against emerging market currencies. President Trump added copper to the list of industries/commodities that could be subject to a tariff. May copper rallied almost 5.2% from yesterday's lows but is now trading back near yesterday's highs. 

The US 10-year yield fell for the fifth consecutive session yesterday settled below 4.30% for the first time this year. It is flat near 4.30% now. European benchmark 10-year yields are 2-4 bp lower. China announced its intention to recapitalize several large banks helped lift Chinese stocks onshore and in Hong Kong. The HK index of mainland shares is up 20.6% this year. Outside of Japan and Australia, most of the large bourses in the region advanced. Europe's Stoxx 600 is up about 0.80%, which if sustained, would be the largest gain in nearly two weeks. US index futures are firm after yesterday's sell-off. Gold dropped 1.25% yesterday and is little changed today, but holding above $2900. The yellow metal held the 20-day moving average yesterday (~$2889 today). It has not traded below it since January 7. April WTI posted a bearish outside day yesterday, dropping 2.5%, and closed at its lowest level of this year (slightly below $69). It is straddling the $69-level today. 

USD: Falling US rates more than offset the US tariff threat and kept the dollar on the defensive. yesterday and it is consolidating today. The US two-year yield reached 4.07%, the lowest since November 1. Recall that the higher-than-expected January CPI was reported on February 12, the day the two-year yield set the high for the month February around 4.38%. The 10-year yield settled below 4.30%, the lowest since December 12. It recorded the month's high on February 12, near 4.66%. The Dollar Index frayed resistance early yesterday near 106.75 as Trump renewed his tariff threat on Canada and Mexico for next week. It fell slightly through 106.20 yesterday but held Monday's low near 106.10. It is stuck in the trough today and must rise above yesterday's high to be anything notable. January new home sales and building starts and permits are on tap today. Rising mortgage rates in January may have seen new home sales slow after rising by 3.6% in December. Meanwhile, housing starts surged by 16.1% in December, the largest increase since March 2021, and appear to have slowed by nearly 10% in January.

EURO: The euro has traded in a $1.04 to about $1.0530 range over the last five sessions and remains in that range now. The US two-year premium over Germany peaked this month near 225 bp on February 10 and approached 200 bp yesterday. The low since early last November was seen in late January near 193 bp. The euro's January high was slightly shy of $1.0535. Germany's CDU/CSU is looking to strike a deal with the SPD for the existing Bundestag to pass a 200 bln euro defense budget that could be blocked by the new Bundestag, which does sit until March 24. It is a parliamentary maneuver that was previously used in 1998 at the start of the Kosovo War. With the ECB set to ease policy again next week, and at least two more cuts are discounted after that, the short end of the yield curve is soft. Anticipated supply has been a weight on the long-term yield. The German 10-year yield is up about 8 bp this year. In contrast, the French 10-year yield is off three basis points and Italy's up three basis points.

CNY: The US dollar reached a three-day high slightly above CNH7.2700 yesterday to test a two-week down trendline. It pulled back to about CNH7.2475 near the end of the European session. The greenback bottomed on Monday near CNH7.2260, its lowest level since November 19. It is trading inside yesterday's range today. Through yesterday, the offshore yuan has appreciated by about 1.1% against the US dollar this year, while the onshore yuan is up about 0.6%. The PBOC set the dollar's reference rate at CNY7.1732 after CNY7.1726 yesterday, the highest fix since Trump's second inauguration on January 20. Beijing announced intentions to recapitalize three of its largest banks in the coming months with at least CNY400 bln. Chinese banks shares rallied on the news. 

JPY: The decline in the US 10-year yield weighed on greenback against the yen. The US 10-year premium over Japan fell to around 290 bp yesterday, the smallest since last October. It had bottomed last September near 275 bp. Last month's peak (~358 bp) was the most since May 2024. The US dollar reached JPY150.30 yesterday before falling to around JPY148.55 in North America yesterday to take out the December 2024 low. It traded on both sides of Monday's range but settled within it. It is consolidating within yesterday's range. Still, the downside risk may extend to around JPY147, which corresponds to the (61.8%) retracement of the mid-September 2024-January 10, 2025, dollar rally (~JPY139.60 to JPY158.85). The economic calendar is relatively quiet until Friday's reports that include Tokyo's February CPI (likely to have moderated after January's rise), a soft January industrial output and a recover in January retail sales after a 0.8% decline in December.

GBP: Sterling held above $1.2600 yesterday but continued to meet opposition in the $1.2680 area. It is holding in a little less than a half-cent range below there today. Last week's low was near $1.2565, and this must be taken out to confirm a near-term high is in place. After falling nearly 10% from late last September through mid-January, it has risen by about 4.9%. The (50%) retracement of its downtrend comes in near $1.2765, and the 200-day moving average closer to $1.2785. The light economic calendar continues. Nationwide reports its house price index tomorrow on Friday and the year-over-year pace is expected to moderate from 4.1% in January. Prime Minister Starmer calls on US President Trump tomorrow. It seems unlikely that Starmer can change Trump's mind on Ukraine or his assessment that US allies are more of a threat than Russia or China.

CAD: The US dollar reached a nine-day high near CAD1.4320 yesterday and has reached CAD14340 in European turnover today. Trump's claim that tariffs threatened on Canada and Mexico are still on track may have spooked the market. Many market participants regard it as a negotiating tactic rather than a strike against free trade per se. Yet, the US dollar is rising for the fourth consecutive session and the seventh session in the past eight. The greenback settled above the 20-day moving average (~CAD1.4295) for the first time since February 3. The US dollar recorded a two-month low on February 14 near CAD1.4150. The (38.2%) retracement of the loss from the spike on February 3 (~CAD1.48) is near CAD1.44. Meanwhile, the odds of a rate cut next month have crept higher from about 1-in-4 chance a week ago to almost 50% now. The timing of the US tariffs may have more impact than the data.

AUD:  The Australian dollar stalled in front of the (38.2%) retracement of its swoon from $0.6940 on September 30 to the early February low a little below $0.6090. That retracement is near $0.6415, and the Aussie peaked around $0.6410. It is lower for the fourth consecutive session and six of the past seven sessions. A convincing break of $0.6320, which is fraying in European turnover today, signals a test on $0.6285, and possibly $0.6250. Australia reported January CPI was unchanged at 2.5% in December. The market has anticipated a small rise, and the trimmed mean did rise. The monthly CPI bottomed last September-October at 2.1%. In January 2024, it stood at 3.4%. January's private sector credit is due ahead of the weekend. It rose by 0.6% in December, a smidgeon above last year's average monthly pace. The impact on the timing of the RBA next rate cut is minimal. The futures market has about a 77% chance of a May cut. The next cut is fully discount in July, with another cut discounted by year-end. 

MXN: The US dollar made a marginal new eight-day high yesterday near MXN20.5460 ostensibly on some follow-through buying after US President Trump renewed his threat of Canadian and Mexican tariffs next week. The dollar is consolidating within yesterday's range in quiet turnover so far today. Still, with Mexico reportedly under pressure to levy 25% tariffs on Chinese imports, it supports the widely held view that the tariff threats are about negotiating leverage. Mexico's imports from China have practically doubled in in the past five years. Some of the imports, like Chinese EV do not have similarly priced North American alternative. The threat of US tariffs on Mexico discourage new direct investment inflows until the situation is clarified. Mexico's central bank has halved this year's growth forecast to 0.6%, and after a 50 bp rate cut earlier this month, the market favors another one of similar size when it meets again on March 27.  

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