Overview: The month-end and slew of data is making for a
volatile foreign exchange session, while the rash of earnings has generally
been seen as favorable though weakness was seen among the semiconductor chip
fabricators. China, Hong Kong, and Japanese equities fell but the other large
markets in the region rose. Europe’s Stoxx 600 is up around 0.8%. It is the eighth
advance in the past 10 sessions. US futures are higher and the S&P 500’s
advance of nearly 7.6% coming into today, if sustained, would be the largest
monthly advance since November 2020. Asia Pacific bonds played catch-up after the
big Treasury rally yesterday, but European and American yields and benchmark 10-year
yields are higher. The US 10-year is near 2.72%, up four basis points. European
yields are mostly 5-8 bp higher. The yen and Swiss franc lead the advancing major
currencies today, but sterling, the Canadian and Australian dollars, and the
euro have given up their early gains. Most emerging market currencies are gaining
on the greenback. Gold reached almost $1768 today, a $40 advance from the end of
last week, but its gains have been pared and it is trading near $1757 ahead of
the US open. September WTI has alternated between gains and losses this week. It
fell about 0.85% yesterday and is up 2.25% today to around $98.60. On advancing
sessions this week, September WTI has gained more than 2%. US natgas has steadied
after falling almost 10% in the past two sessions. It may be the first decline
in four weeks. Europe’s natgas benchmark is about 2.6% lower after falling
nearly 2.9% yesterday. Still, it is up more than 21% this week. Iron ore snapped
a five-day advance and fell nearly 3.3% today, ostensibly on disappointment that
China does not appear poised to provide broad economic support. September
copper, on the other hand, is extending its rally into the sixth consecutive session.
It is up almost 5% this week after a 3.6% advance last week. Despite signs of a
bumper North American crop, the September wheat prices have firmed, and are at their
best level in three weeks.
The dollar fell by slightly more than 1.6%
against the yen yesterday, the most since last November. It is off another 1% today what appears to be a major
reassessment. The dollar was hit with a one-two punch of what was
understood to be a dovish Fed and the second consecutive contraction in the
quarterly GDP. The US 10-year yield, which we note has strong correlation to
the exchange rate, fell to its lowest level (~2.65%) since early April. Moreover,
what has reportedly gotten some levered accounts to cover short yen positions
is the growing conviction that the US 10-year yield has peaked. In mid-May
through mid-July, as the dollar rallied from below JPY129 to a little over
JPY139, speculators (non-commercials) in the futures market were dramatically
reducing their net short yen position from around 100k contracts to 50-60k
(each contract is for JPY12.5 mln, roughly $92k).
Japanese data were a mixed bag today. Tokyo July CPI was firmer than expected. The headline
rose 2.5% from 2.3%, while the core measure that excludes fresh food, rose to
2.3% from 2.1%. The measure that excludes fresh food and energy climbed above
1.0% (1.2%) for the first time since 2015. The unemployment rate was steady in
June at 2.6%, though the job-to-applicant ratio edged higher (1.27 from 1.24). Industrial
output has been disrupted with a lag by China's lockdowns. After collapsing
7.5% in May, Japan's industrial output jumped back in June, surging 8.9%, more
than twice the Bloomberg median projection. The year-over-year rate was
unchanged at -3.1%. While housing starts and consumer confidence were weaker
than expected, the major disappointment was with retail sales. Economists in Bloomberg's
survey anticipated a 0.2% gain, but instead retail sales slumped 1.4%, the
steepest monthly decline since April 2021.
Reports indicated that US President Biden
and China's Xi have instructed their staffs to prepare for a face-to-face
meeting. Meanwhile, US Speaker
Pelosi's once-tipped trip to Taiwan is unconfirmed. Separately, China's
Politburo seemed realistic if even dour about the growth prospects. Few, if
any, expect China's target of "around 5.5%” can be achieved. The IMF's new
forecast is for 3.3% this year and 4.6% next. Over the weekend, China will
report its July PMI and Caixin's manufacturing PMI. The composite stood at 54.1
in June and may have slipped a little.
The dollar fell to JPY132.50, its lowest
level in six weeks today. The week's
high, set on Wednesday was nearly JPY137.50. With today's loss, the greenback
has retraced half of the rally off late May low near JPY126.35. The next
retracement target (61.8%) is around JPY131.35, which also corresponds to the
mid-June low. One of the most important takeaways is that like the Great
Financial Crisis and the pandemic, there was no intervention. Officials seemed
to say within the G7/G20 framework, expressed concerns about volatility. Also,
the 10-year JGB yield, capped at 0.25% is around 0.18%, around the middle of
this year's range. The Australian dollar poked above $0.7030 to trade at its
best level since mid-June. However, profit-takers stepped in a knocked it
back to $0.6990 in the European morning. Support is seen in the $0.6960-80
range. The greenback is slipping lower against the Chinese yuan for the
third consecutive session and is near 2.5-week lows around CNY6.7360. It is
the first back-to-back weekly loss since February. The PBOC set the dollar's
reference rate at CNY6.7437, a little firmer than expected (CNY6.7422) in the
Bloomberg survey.
Europe
The aggregate EMU figures showed higher
than expected July inflation and stronger than expected Q2 growth. Inflation edged up 0.1% on the month, which lifted the
year-over-year CPI to 8.9% from 8.6%. The core rate ticked up to 4.0% from 3.7%.
The preliminary estimate of Q2 GDP was 0.7%. The median in Bloomberg's survey had
forecast 0.2% growth. Growth in Q1 was revised to 0.5% from 0.6%. Germany
stagnated, though Q1 GDP was revised to 0.8% from 0.2%. Separately, it reported
that July unemployment rose to 5.4% from 5.3%. France grew 0.5% in Q2. The
market had looked for a 0.2% expansion. French CPI rose 6.8% year-over-year, up
from 6.5%. Italy surprised with 1% growth in Q2, and its CPI slipped to 8.4%
from 8.5%. Spain's growth was also a pleasant surprise, accelerating to 1.1%
after 0.2% in Q1. The median forecast was for a 0.4%. Spanish CPI also
surprised. It accelerated to 10.8% from 10.0% in June.
The Swiss National Bank's 66-page
report, reiterated that the central bank can adjust monetary policy when it
sees fit, not just at meetings. Recall
that the SNB hiked rates 50 bp at the June 16 meeting (the deposit rate is now
-0.25%), ahead of the ECB, and opined that the Swiss franc was no longer
excessively overvalued. Since the day before that meeting, the euro has fallen
by slightly more than 7.3% against the euro. It is at its lowest level since
the chaos following the SNB's lifted the franc's cap (euro's floor) in early
2015. In fact, the euro fell to new lows near CHF0.9700 yesterday. It has held
that level today. The global rate development that helped the yen may have also
given a fillip to the franc, but the sharpest move happened as the newswires
publicized the report. The conventional narrative is that the SNB was
highlighting the fact ahead of next week's (August 3) July CPI figures. While
possible, it seems unlikely. Intermeeting moves are for emergencies. The July
CPI may have declined on the month though the year-over-year rate is expected
(median Bloomberg survey) to held steady at 3.4%.
The euro briefly pushed above $1.0250 but
met a wall of sellers that pushed it back below $1.02 as the European morning
progressed. Some of the selling may
have been related to the 3 bln euros in options struck between $1.0247 and
$1.0250 that expire today. Month-end flows may have also played a role. Initial
support is seen in the $1.0160-80 area. Recall that the euro settled last week
slightly below $1.0215. Sterling reached almost $1.2250, a new high for the
month. However, it also has come off sharply, and is trading nearly a cent
lower in Europe. Initial support is seen around $1.21. That was also around
yesterday's low and a close below it would be a bearish technical development. That
said, sterling closed a smidgeon below $1.20 last week.
America
Exactly what you call the fact that the
preliminary Q2 GDP contracted after a 1.6% contraction in Q1 doesn't really
matter much outside of cocktail conversations. Excluding inventories, the economy grew by 1.1%. The
real issue is will it have policy implications and what does it mean for the
capital markets. The Fed funds futures reduced the odds of a 75 bp hike in
September to about a 25% chance from around a 37% chance after the FOMC meeting.
The implied yield of the June 2023 Fed funds futures is trading about 18
bp below the implied yield of the December 2022 contract. At the end of
June, it was at a 5.5 bp premium. The December 2023 contract's implied yield
implies the market is almost 50 bp below the yield of the December 2022
contract.
For those who pour over the data releases,
the personal income, consumption, and deflator data could be derived from
yesterday's GDP figures. But for
most of us mortals, we will look at income growth (steady around 0.5%) and
consumption (GDP warns of risk of soft numbers including possible downward revision
to the 0.2% gain in May). The deflator is expected to accelerate on the
headline level but possibly unchanged at the core (4.7%). The Chicago PMI may
only matter if it misses dramatically misses expectations for 55.0 (from 56.0).
Shortly after it, the University of Michigan's final July reading. Sentiment is
at levels associated with recessions. The troublesome 5–10-year inflation
expectation stood at 2.8% in the preliminary estimate, which if confirmed,
would match the lows since April 2021. At his press conference yesterday, Fed
Chair Powell cited the Employment Cost Index. The Q2 iteration is out tomorrow.
It is expected to have moderated from 1.4% to 1.2%, which would match the new
four-quarter average. It would be the fourth consecutive quarter of at least 1%
increases. There had not been even one since the end of 2006. The five-year
average before the pandemic was 0.63%, though this is meant to provide context
and not a normative claim.
Canada reports May GDP figures. The median forecast (Bloomberg's survey 13 estimates)
is for a 0.2% contraction. An occasional decline in Canada's monthly GDP is not
that unusual. It last fell in January (-0.1%). With the expected decline, it
puts the year-over-year growth pace at 5.4%, the strongest since the middle of
last year. It should not be an important driver of the Canadian dollar. Mexico
reports Q2 GDP. The median forecast (Bloomberg's survey 11 estimates) is for a
0.9% quarter-over-quarter expansion after 1.0% in Q1. After the much larger
than expected trade deficit (June $3.96 bln vs. the median in Bloomberg's
survey for $1.2 bln), the risk may be on the downside.
The US dollar initially extended its
losses and fell to CAD1.2790, its lowest level since mid-June before rebounding
to new session highs around CAD1.2835 in the European morning. Options for almost $600 mln at CAD1.2830 expire today.
Initial resistance is seen near CAD1.2840-50. Still, the US dollar settled last
week near CAD1.2915, and barring a dramatic surge, will close lower for the
second consecutive week, something it has not done since late May/early
June. The greenback fell to MXN20.2080, the lowest level since July 1. Yesterday's
low was around MXN20.2750, and the dollar is back above there. It is knocking
on initial resistance in the European morning in the MXN20.31-MXN20.32 area.
The US dollar has fallen for the past five sessions against the peso. It
settled near MXN20.53 last week.
Disclaimer
Reviewed by Marc Chandler
on
July 29, 2022
Rating:
