Overview: Russia
is thought to be behind the cyber-attack on Ukraine at the end of last week,
but a military attack over the weekend may be underpinning risk appetites
today. The dollar's pre-weekend gains are being pared slightly. Led
by the Canadian dollar and Norwegian krone, the greenback is lower against most
major currencies, with the yen being the notable exception, which is off about
0.2%. China cut its one-year medium-term lending facility rate by 10 bp
to 2.85%, but the yuan edged higher. North Korea conducted another
missile test, the fourth of the year. Most equity markets but South Korea
and Hong Kong advanced in the region. The South Korean won and the
Russian rouble are leading the losers among emerging market currencies. The
Thai baht and central European currencies are firmer. The JP Morgan
Emerging Market Currency Index has edged lower. It has not risen since
the middle of last week. Europe's Stoxx 600 is up about 0.55% after
sliding 1% before the weekend. It is snapping a three-day drop.
European 10-year benchmark yields are up around 2 bp. The Antipodean
yields played catch-up to the US 10-year yield as it rose eight basis points before
the weekend to around 1.785%. Gold is firm, inside last Friday's
range. March WTI is hovering around $83.30 and is little changed after
advancing 2% before the weekend and 6.2% last week. Natgas in the US has
steadied around $4.30 after falling around 12.3% over the past two
sessions. Europe's benchmark is little changed after easing by less than 0.7% last week. The re-opening of Brazilian mines after the floods may be
weighing on iron ore prices, which are off for a third session. Copper also
begins the new week extending it weakness for a third session as
well.
Asia Pacific
In a mixed performance in
December, the Chinese economy expanded by 1.6% quarter-over-quarter in
Q4. The median
forecast in the Bloomberg survey expected 1.2% growth after practically stagnating
in Q3 (0.2%). Last year, the world's second-largest economy
expanded by 8.1%. The official target was "over 6%." Property
investment was weaker than expected (4.4% year-over-year), while
fixed asset investment slowed a touch less than expected (4.9% from 5.2%).
Industrial production picked up to 4.3% year-over-year from 3.8% in
November. Retail sales disappointed. It rose 1.7% year-over-year in
December, down from 3.9% in November and less than half what economists expected.
The surveyed unemployment rate unexpectedly edged higher to 5.1% from
5.0%.
The PBOC allowed the
one-year medium-term lending facility rate to ease by 10 bp to 2.85%. It is the first reduction since
April 2020. As the Lunar New Year holiday approaches, the PBOC has
become more generous with its liquidity provisions. It lowered the
seven-day reverse repo rate to 2.1% from 2.2%. Chinese shares rose after the
rate cut, which most economists did not give much of a chance for, and the CSI
300 rose by about 0.85% to pre-coup the pre-weekend loss. The PBOC's efforts to put a floor under the economy may not be complete, and many expected
another cut in reserve requirements. Separately, note that the Chinese
demographic picture appeared to deteriorate with 10.62 mln births last year,
down from 12 mln in 2020. However, deaths totaled 10.1 mln, allowing
China to forestall the reduction of its population, which rose by 480k to 1.41
bln.
Japan's core machine orders
jumped 3.4% in November, nearly three times the gain economists (Bloomberg
survey) expected.
They are at their best level in two years. However, the tertiary industry index
rose by 0.4% in November, less than half of what was expected (though the
October series was revised to 1.9% from 1.5%). Still, the combination of
heavy snow in the north and west and a dramatic rise in Covid cases (five-fold
increases in the past week) will weigh on activity. Tokyo is planning on introducing
stricter social measures if hospital occupancy reaches 20%. It was around
19.5% yesterday, according to reports. Tokyo and the surrounding three
prefectures account for around a third of GDP. The BOJ meets
tomorrow. It may lower its growth forecast and lift its inflation
projection.
The dollar recovered from
around JPY113.50 to almost JPY114.30 before the weekend (potential hammer
candlestick) and advanced to JPY114.55 today. This nearly meets the (38.2%) retracement objective
of the greenback's slide since the multi-year high reached on January 4 near
JPY116.35. The next retracement (50%) is slightly above JPY114.90. The Australian dollar fell 1% at the end of last week, its largest
fall in about a month. It slipped briefly below $0.7200 and
made a marginal new low today before bouncing to almost $0.7225. The
first retracement target is near $0.7240. The greenback closed
above CNY6.35 at the end of last week, thought to be the floor of the
desired range by officials. However, despite today's PBOC rate
cut, the greenback remains below there, even if inside the pre-weekend
range. The PBOC set the dollar's reference rate at CNY6.3599. The
market (Bloomberg survey) was for CNY6.3584.
Europe
There is a monetary and
political story to tell of the UK. The implied yield of the March
short-sterling interest rate futures rose 15 bp last week to 70 bp. The swap
market is pricing in a nearly 90% chance of a hike at the February 3
meeting. All told, the market has four rate hikes discounted for this
year. The importance of the Feb hike is that it would lift the base rate to
0.50%, which is the threshold to begin allowing the balance sheet to
shrink,
The political uncertainty is
entirely self-inflicted.
Ironically, it is intensifying even as Omicron cases have been halved and the booster
campaign is fairly successful, and social restrictions will likely be lifted at
the end of the month. The Johnson government has been marred by favoritism,
and what the tabloids call "sleaze", but "partygate" seems
to have been the drop of tea that overflows the cup. Reports suggest that
around three dozen Tory MPs want Johnson to resign, but at least 54 are needed
to trigger a leadership contest. Johnson will likely keep a low profile
in the near-term. An immediate family member reportedly has tested positive
for Covid. Gray is conducting an internal investigation, and some expect
the results later this week. The results could prove to be more embarrassing
than a legal issue. Moreover, the Prime Minister has made his share of
enemies and some (e.g., Cummings) could still supply more fodder. Johnson
has apologized (including to the Queen), but he did not appear contrite and
seemed to be blaming his staff. The Tories are lagging Labour by as much as
10 percentage points according to some polls. Even if Johnson survives the
current controversy, the voters can still punish the Conservatives in the local
elections on May 5.
Reports suggest that the new
German government will implement the planned global minimum 15% corporate tax
for multinationals next year. A law will be drafted ahead of the European Union's
directive. The tax deal was agreed to by 140 countries last year. Although
the OECD and G20 had been debating about such measures for a few years, the
change in the US pushed it over the finish line. However, and few seem to
appreciate it, but our best guess is that the US does not pass the necessary
legislation, which was embedded in the Build Back Better initiative. Moreover,
there seemed to be a push back against it by several in Senators.
By rising above Thursday
highs (marginally) to new highs for the move, and then selling off to close
below its low (~$1.1435), the euro recorded a key reversal ahead of the
weekend. However,
follow-through selling has not really materialized. The $1.1400-level held,
and the euro recovered back to almost $1.1435. A break of the
$1.1385-$1.1400 area is needed to confirm a near-term top is in
place. After snapping a three-day advance before the weekend,
sterling also has not experienced follow-through selling today. It
is trading quietly in less than a third of a cent range below $1.3690.
Initial resistance is seen in the $1.3700-$1.3715 area.
America
US markets are closed for
Martin Luther King's birthday. It gives observers and investors more time to digest the
horrible retail sales report and the unexpected decline in industrial output
last month. Many were quick to dismiss last year's largest monthly decline in
retail sales (-1.9%) to the virus. While there may be something to it,
non-store sales (dominated by Amazon) fell by 8.7%, while department stores saw
a more modest 7% decline. Still, due to other disruptions and delays, the
holiday shopping may have been front-loaded. However, November retail
sales were revised down (0.2% from 0.3%). Moreover, the "control"
component (excluding auto, gasoline, building materials and food service sales)
was revised down in November to -0.5% from -0.1%. Industrial output fell
by 0.1% in December (-0.3% manufacturing). The strong imports and weaker
domestic activity saw business inventories soar 1.3% for the second consecutive
month in October. The rebuilding of inventories is well underway and may
not be a strong tailwind after Q1 22.
Spurred by the Federal Reserve
Waller's comments, more observers are talking about the possibility of a 50 bp
hike in March. We
do not expect a consensus to crystallize around it. Rather than signal
its anti-inflation credentials, it would likely be seen as a worrisome
development. While the Fed may be reluctant to signal a gradual
tightening cycle, it also can play its balance sheet card. In 2018, when
the Fed last began unwinding its balance sheet we played down the tightening
impulse because we emphasized the signaling aspect of QE/QT. However, this
time, purpose of the coming QT (midyear?) is to remove
accommodation.
Canada reports November
securities transactions and manufacturing sales. December existing home sales are
also on tap. The Bank of Canada also releases its quarterly survey ahead
of next week's (January 26 meeting). The swaps market is pricing in a
40-50% chance of a hike. After recovering smartly from CAD1.2455 on
January 13, the greenback reached CAD1.2570 ahead of the weekend. No
follow-through US dollar buying emerged, and it returned to CAD1.2500. We
suspect CAD1.26 will be seen before CAD1.2400. That said, the head and
shoulders pattern we are tracking points to the CAD1.2250 area. The
US dollar continues to grind lower against the Mexican peso. A lower
low has been recorded for the seventh consecutive session today near MXN20.28.
The 200-day moving average is close to MXN20.2785. A convincing
break could target the early November low near MXN20.25 and then the late
October low closer to MXN20.12.
Disclaimer
Reviewed by Marc Chandler
on
January 17, 2022
Rating:
