Overview: The sentiment that fueled
the recovery in US equities before the weekend carried over into today.
Several Asia Pacific centers, including China, Taiwan, and South Korea were
closed today, but Japan, Hong Kong, and India rose by more than 1%. Europe's
Stoxx 600 had a four-week drop in tow, is up around 0.6%, led by information
technology and industrials. The S&P and Dow futures are lower but the NASDAQ is up around 0.4%. The US 10-year yield is around
1.79%, while European yields are mostly 2-4 bp higher except in Italy, where the
presidential contest resulted in the status quo. Italy's 10-year yield is slightly lower and its premium over Germany is around 127 bp, the
least since November. The dollar has come back softer. The
Antipodeans and Sweden lead the charge today, while the yen and Swiss franc are
softer. Emerging market currencies, are led by the freely accessible Turkish
lira and South African rand. The JP
Morgan Emerging Market Currency Index snapped a three-week advance last week
and lost almost 1%. It is about 0.2% higher around midday in Europe. Gold lost about 3% in the last three sessions and is trading quietly
today within the pre-weekend range. March WTI is firm in the $87-$88
area. US natgas prices have jumped 6%, while Europe's benchmark is off
around 6%. Copper is about 0.8% higher after falling more than 4.5%
over the past two sessions. Note that lumber prices fell by 23% in the
seven days through last Thursday and rallied 3% ahead of the weekend to snap a losing streak.
Asia Pacific
The Chinese economy grew more than expected in
Q4. The 1.6% quarterly pace compares with a 1.2% median forecast in the Bloomberg survey and 0.2% in Q3. Still, leaving aside the accuracy of its
estimate provided two weeks after the end of the quarter, the quality of the
growth is suspect. The doubts were borne out by the January PMI figures
released over the weekend. The manufacturing PMI slipped to 50.1 from
50.3. The new order component fell to 49.3 from 49.7 and has been below
the 50 boom/bust level since last August. Export orders are also
contracting. The Caixin manufacturing PMI fell to 49.1 (from 50.9), its lowest
level since February 2020. Non-manufacturing help is a little better at
51.1 (from 52.7) but the services themselves fell to a five-month low.
Transportation and hospitality sectors were hit hard, suggesting the impact of
the virus. The composite fell to 51.0 from 52.2. The other parts of
the Caixin PMI survey will be released on February 6. Covid and seasonal
factors may have contributed to the weakness, but the takeaway underscores that
Chinese officials have shifted from de-leveraging to supporting growth.
Fiscal and monetary policy levers are being pushed. Soft power levers are also
coming into play.
Support for Japan's new government waned in
the most recent Nikkei survey to 59% from 65%. There is a
lingering concern that Japan is going to experience another phase of relatively
short-term governments. The first electoral test is a few months
away. In July, about half of the upper house of the Diet will be elected
(124 or 245 seats). Meanwhile, Japan's 10-year yield edged up to 0.185%,
its highest level since January 2016. International pressure seems to be the
major driver here and the BOJ yield-curve-control limits it to around 25
bp. The IMF has recommended that Japan target a short-term rate
instead of the 10-year to be more effective.
The dollar is consolidating in a narrow range
against the Japanese yen inside last Friday's range
(~JPY115.10-JPY115.70). Today is the first session in five that
the dollar has not (yet) risen above the previous session's high. A move
above JPY115.70 would signal a test on JPY116.00 and the multi-year high set on
January 4 near JPY116.35. The Australian dollar settled poorly
last week. All told it fell by 2.75% last week, its largest weekly
decline in five months. Technically, it was oversold, and
speculators in the futures market had a near-record net short position.
These seemed vulnerable to a less dovish central bank (meeting first thing tomorrow in
Sydney) and a better appetite for risk more generally. Near-term
potential may extend into the $0.7100 -$0.7120 area. With the
mainland markets closed, the offshore yuan continued the downside correction
that began last week. The US dollar rose to CNH6.3865, its highest-level
since January 10. It had re-entered the CNH6.35-CNH6.40 area that has
mostly marked the range since the middle of last October.
Europe
The UN Security Council will discuss Ukraine,
but given the unanimity that is required, no action will be
forthcoming. The Security Council has a presidency that rotates
on a monthly basis. Russia will hold the presidency as of February
1. Reports suggest the UK is considering doubling the number of troops it
offers to NATO. This sounds big and bold, but estimates suggest that this
translates to less than 1000 troops. Last week, the US said that 8500
troops were on heightened alert for possible deployment to assist NATO.
Meanwhile, the Pentagon reports Russia is still boosting its troop
mobilization. Separately, and noteworthy, the President of Ukraine, no
Russian-sympathizer, cautioned that the US was spurring panic that was not
helpful. On another front, Russia acquiesced to Ireland's formal request
and shifted its military exercises (February 3-February 8) away from Ireland's
exclusive economic zone. It may have planned its exercises there with the
intent of relenting when asked to stir further divisions.
After several rounds without a winner, a
compromise was struck in Italy. The current president,
Matterella will serve another term. All the parties but the Brothers of
Italy endorsed this outcome. Although the term is for seven years, don't
expect Matterella to complete his term. The most likely scenario is that
he serves until next year's parliamentary election. Draghi's role as
caretaker Prime Minister will have come to a natural end and Matterella can
resign. Draghi would once again be the favored candidate to succeed him.
Mattarella’s predecessor, Napolitano, served about 20 months of his second
term. Napolitano accepted an unprecedent second term to also help the
country through a fragmented parliament. Some observers are
claiming that Draghi has been weakened by losing his presidential bid. We
are less convinced but recognize that the agenda in Italy will not shift toward
the enacting the reforms needed to secure the EU funding and implementation of
the new electoral law that will govern next year's election.
Spain and German states reported January CPI
figures. Spain's harmonized measure fell 0.9%, which was less than
expected. The year-over-year rate eased to 6.1% from 6.6%. The
median forecast (Bloomberg survey) was for 5.5%. Most German states
reported softer year-over-year pressures, but aggregate harmonized measure may
come in a little above the unchanged reading expected. The eurozone
figure is due out on Wednesday and the latest (Bloomberg) survey results put it
at 4.4% down from 5.0%. Separately, the eurozone Q4 GDP grew by 0.3%
quarter-over-quarter, to lift the year-over-year rate to 4.6%, in line with
expectations.
The euro snapped a four-day drop ahead of the
weekend, but only after falling to new lows since June 2020 (~$1.1120). It
extended the recovery to about $1.1180. A move above the $1.1200 area
would boost ideas that the breakout was fake as was the upside break around the
middle of the month. There are two chunk options that expire tomorrow
that are worth noting. There is one for nearly 2 bln euro at $1.1225 and
the other is for 1.3 bln year at $1.1150. Sterling's pullback
from $1.3750 seen near mid-month stalled at the end of last week near
$1.3360. It has recovered to almost $1.3450 today. A move
above $1.3460 could see $1.3500-$1.3550 ahead of what is expected to be a
hawkish central bank message on Thursday.
America
Comments by Atlanta Fed's Bostic that the Fed
could raise rates by 50 bp in March seemed to reinforce the hawkish tilt by the
market. Recall that several banks revised their Fed call last
week. Many economists are looking for more than four hikes this
year. The range appears to be 3-7 and 2-4 next year. We do not read into Bostic's comments to contain new information. He essentially repeated
Chair Powell's effort to secure the maximum of flexibility in these uncertain
times. Moreover, while Powell said at his press conference that if he
could re-do his December dot he would recognize higher inflation, Bostic said
he continues see three rate hikes as appropriate this year.
Powell noted that Q1 growth is going to be
weak. He was referring to the virus interruption. However,
qualitatively Q4 GDP left something to be desired. Inventory accumulation
accounted for nearly five percentage points of the 6.9% expansion. Note
that the final sales to domestic purchasers (excludes trade and inventories), a
measure of the underlying strength of the domestic economy, rose by 1.9% after
1.3% growth in Q3. Before the weekend, the Atlanta Fed GDPNow first
estimate for Q1 22 stood at 0.1%. It is the beginning of the quarter, and
of course, it is subject to significant adjustments. Still, expectations
for the January jobs data at the end of the week have been scaled back.
The median in the Bloomberg survey is now at 150k, and at least a couple of
banks, including some with very aggressive Fed forecast, have warned of the
risk of an outright loss of jobs.
The busy week begins quietly with the Chicago
PMI and the Dallas manufacturing Index. Neither are typically
market-movers. The Fed's Daly speaks today and on Thursday, the
new Fed nominees with have their confirmation hearings. Canada's
employment data on Friday is the highlight, but tomorrow Canada reports
November GDP (expected to rise by 0.3% after expanding by 0.8% in October).
Mexico provides its preliminary Q4 GDP figures today. It may have
contracted for the second consecutive quarter. Brazil's trade and
industrial production will be reported ahead of the central bank meeting on
Wednesday. It has pre-committed to a 150 bp hike that would lift the
Selic rate to 10.75%.
The US dollar rose 1.5% against the Canadian
dollar last week, the most since August. We see the Bank
of Canada to be as hawkish as the Federal Reserve, but the falling two-year
premium Canada offers and the risk-off mood took its toll. The
greenback's bounce stalled near CAD1.2800. Initial support is seen now
around CAD1.2680-CAD1.2700. Look for CAD1.2750-CAD1.2770 to cap it in
North America today. The greenback rose every day last week against the
Mexican peso. It peaked around MXN20.9140 before the weekend, its highest
level this month. During the dollar's decline since the middle of the
month, the five-day moving average has offered support, especially on a closing
basis. The five-day average is now near MXN20.74. A close below it
may suggest a near-term dollar top may be in place.
Disclaimer
Reviewed by Marc Chandler
on
January 31, 2022
Rating:
