Overview: Talk emerged yesterday that the dramatic losses US equities amid recession fears in light of the rash of tariff announcements and threats would draw the new administration's attention. Commerce Secretary Lutnick suggested yesterday that President Trump may consider a compromise on Mexico and Canadian tariffs announced yesterday. There was no sign of that in the president's address to the joint session of Congress yesterday. US index futures are trading 0.6%-0.8% higher. The other significant development is the opening up of the European purse strings. Germany is considering a 500 bln euro spending program over the next decade and the EU is discussing granting fiscal flexibility that could be worth as much as 650 bln euros over the next four years. That said, joint bonds do not seem as likely a course as it might have appeared a couple of weeks ago. Still, the net impact has been to spur a sharp sell-off in European bonds. Benchmark 10-year yield are up mostly 14-18 bp. today. The euro pushed above $1.07 in the European morning before consolidating. Sterling briefly traded above $1.2850. The US dollar is weaker against all the G10 currencies (the dollar-bloc currencies are laggards) nearly all the emerging market currencies.
Equities have come roaring back. Nearly all the Asia Pacific equities, but Australia and New Zealand rallied, led by Hong Kong's Hang Seng (+2.8%) and the index of mainland shares that trade there (+3.1%). Europe's Stoxx 600, which tumbled 2.1% yesterday is up about 1. 5% and is now higher on the week. US index futures are recovering from the two-day slide. Gold is consolidating in a mostly $2902-$2922 range today. Yesterday's high was near $2928. April WTI recovered yesterday from nearly $66. 75 to $68.50 and settled near the highs. It is better offered today and is near session lows in in late European morning turnover a little above $67.
USD: We had thought it was carving out a bottom, but poor three-day price action has dashed those ideas. US recession fears coupled with the sharp jump in European rates has sent the Dollar Index spiraling lower. It has taken out the (50%) retracement of its October-mid-January rally (~105.15) and through the 200-day moving average (~105.00) for the first time since last November. The next retracement (61.8%) is near 104.00. Still, we think the growth scare is running a little ahead of itself (Atlanta Fed GDP tracker now at -2.8%), as indicated by the rise in auto sales, and above 50 readings on the PMI and ISM manufacturing. The economy does seem to be cooling, but the question is how much. Of today's reports, the ADP private sector jobs estimate, and the ISM services index will receive the bulk of the attention. We would make a case for the Fed's Beige Book, which Fed Chair Powell has cited in the recent cycle. The tariffs and fiscal policy, (government shutdown toward the end next week remains a distinct possibility) are negative shocks. ADP estimated that the private sector added about 144k jobs a month in 2024. The BLS estimate was 129k, which seems to defy memes of politicization or poor data.
EURO: After falling around 9.6% from late last September to the February 2 low euro spent the last few weeks consolidating and correcting higher. The reached $1.0720 today, its best level in nearly four months. It met the (50%) downtrend that began in Q4 24 (~$1.0675) and tested the 200-day moving average. The next retracement (61.8%) is near $1.08. We note that the US-German two-year differential, which often tracks the exchange rate, is at a four-month low near 180 bp. The US 10-year premium peaked in mid-December near 227 bp and traded around 153 bp today, the narrowest since last September. Separately, Switzerland reported that its EU-harmonized measures of CPI on a year-over-year basis since May 2024. It stands at 0.1%. The Swiss deposit rate is at 0.50% and the swaps market expected it to be halved when the SNB meets on March 20. That will leave little room between it and the zero-bound.
CNY: For the past three months, the dollar has traded mostly between CNH7.22 and CNH7.37. Against the onshore yuan the dollar has also moved broadly sideways between CNY7.22 and CNY7.33. As recently as early January, China’s 10-year yield was more than 315 bp below the 10-year US Treasury yield. Now the gap is a little less than 250 bp. An index of mainland shares that trade in Hong Kong are up more than 18% this year, among largest advances in the world. The better financial conditions may encourage officials to provide more stimulus. China Caixin services PMI improved to 51.4 from 51.1. This was blunted by the rise in the manufacturing PMI (reported earlier this week). The composite rose to 51 5 from 51.1. It stood at 52.5 in February 2024. More importantly, investors will be watching for the signals that come from the National People's Congress and Consultative Conference. It has announced a growth target of around 5% and a CPI target of 2%. China’s retaliatory measures against US tariffs appears to be the height of restraint. Similar to steps after last month's 10% tariff increase, were seen as mild and not burning a bridge to a future trade deal. China announced a 15% tariff on some US agriculture goods, for which there are plenty of alternatives, and banned some trade with some defense companies (low hanging fruit). The dollar is consolidating today (~CNH7.2525-CNH7.2770), inside yesterday's range. The PBOC set the dollar's reference rate at CNY7.1714 today, the second consecutive decline.
JPY: We had thought the dollar was carving out a bottoming pattern against the yen, but the greenback stalled in the JPY151.30-50 area and risks posting anther leg down. It fell to almost JPY148 yesterday before recovering to JPY149.50. It is trading in a JPY149.10-JPY150.20 range today. The PMI tends not to elicit much of a market reaction in Tokyo, and today's final services and composite were not exceptions. The services PMI edged up to 53.7 from 53.1 initially and 53.0 in January. It was the fourth consecutive month of improvement. The composite rose to 52.0 from 51.1 initially, and 50.5 in January. One of the reasons the market may not put much stock on the PMI is that the BOJ does not appear give it much emphasis. The swaps market has about a 43% chance that the BOJ hikes in June, but the next hike is not fully discounted until October. The spring wage round, the actual performance of inflation, and the broad moves of the exchange range are likely more important in the BOJ's reaction function than today's PMI.
GBP: Amid the serious crisis in the US-European relations since at least the Suez Crisis (1956), the UK has found it role and voice. Sterling has been rewarded and reached its best level (~$1 2855) since mid-November, when it last settled above its 200-day moving average (~$1. 2785). While there may be some chart resistance as sterling frays the upper Bollinger Band ((~$1.2830), the next retracement (61.8%) is near $1.2925. The manufacturing PMI remains below the 50 boom/bust level, services have not been below 50 since October 2023. It was 51.0 in February up from 50.8 in January. The final composite (output) is at 50.5, unchanged from the preliminary estimate. In February 2024 it was at 53.0.
CAD: The US dollar held above CAD1.4400 and set marginal new session highs near CAD1.4545 area in the North American afternoon before reversing back to CAD1.4370. The US Commerce Secretary suggested a Trump may compromise with the tariffs as soon as today. With yesterday’s recovery, the Canadian dollar is practically flat this year. Even though it is the worst performer among the G10 currencies, given the kind of shock that may headed toward it, the Canadian dollar has been quite resilient. Nearly every tariff that the Trump administration has threatened, but semiconductor chips would appear to apply to Canada. The threat of US tariffs already appears to be having a detrimental effect on the Canadian economy and that warns downside risks with today's services and composite PMI. The economy was already slowing and price pressures easing, which is why the central bank began easing policy in June 2024. It cut its overnight lending target by 175 bp last year, including two half-point cuts in Q4 24. It delivered another quarter-point cut in January. The central bank meets next week, and the market has boosted the likelihood of a rate cut. The swaps market had about a 95% chance of a cut discounted at one juncture yesterday and it has scaled it back to about 65%. It was near 37% chance last Wednesday.
AUD: It took the Australian dollar most of yesterday to do it, but it managed to take out Monday's high (~$0.6255) and rose to almost $0.6255. Follow-through buying lifted to about $0. 6290 today. It had recovered a four-week low near $0.6185 earlier in the yesterday and settled above Monday's high to mark a potentially bullish outside up day. A move above $0.6300-25 lifts the technical tone. The Australia's final service and composite PMI hardly attract attention even in the best of times. The composite PMI was revised lower to 50. 6 from the preliminary reading of 51.2 (51.1 in January), its first decline since last September. And today, the final PMI was overshadowed by the first estimate of Q4 24 GDP. The 0.6% quarterly expansion, in line with expectations, was the fastest last year. It puts the year-over-year pace at about 1.3%. It is expected to grow somewhat faster this year. The RBA see 2.1% growth this year, as does the IMF. The median forecast in Bloomberg's survey is for 1.9%. Separately, the Governor of the Bank of New Zealand Orr resigned (as of the end of the month), but the markets seemed to take it in stride.
MXN: The peso is up about 0.4% today and was up about the same amount yesterday. That puts the peso up about 1.5% on the year. Yet, the Trump administration’s insistence on re-shoring, not near-shoring or friend-shoring, is a direct assault on Mexico's developmental strategy. The dollar rose to almost MXN21 00, yesterday before reversing lower to record new session lows near MXN20.47 in late dealings yesterday following the suggestion by the US Commerce Secretary about a quick compromise. Nearby support is seen around MXN20.45 and then MXN20.36-7. The tariff developments are the most important and Mexico will detail its retaliatory moves on Sunday. On Friday, Mexico reports February CPI. A small rise in the headline year-over-year pace, while the core ticks down slightly is expected. Barring a significant disruption in the capital markets, many expect Banxico to deliver another 50 bp rate cut when it meets again on March 27.
Reviewed by Marc Chandler
on
March 05, 2025
Rating:
