Overview: The rise in global interest rates continues. The US 10-year yield is a few basis points near 3.15% and European benchmarks are mostly 5-6 bp higher. Of note, the sharp sell-off in UK Gilts has being extended. Yesterday’s 10 bp rise has been followed by another 14 bp surge today. Italian bonds are also getting hit. The 10-year yield is up a little more than 10 bp. The US dollar is mostly firmer against the major currencies, though the yen and Australian dollar are little changed. Among the emerging market currencies, a small number of Asian currencies, including the Chinese yuan and South Korean won are firmer, but most are under pressure. Equity markets in the Asia Pacific region were mixed, but the downside bias is evident in Europe, where the Stoxx 600 is lower for the fourth consecutive session and seven of the last nine. It is at new lows since mid-July. US futures are narrowly mixed and have a three-day loss in tow. Gold is also making new lows for August and traded at $1711 having been above $1800 in the middle of the month. Iraq says its exports will not disrupted by the violent demonstrations which helped the October WTI contract reverse lower yesterday (possible key downside reversal). Today it is testing the 200-day moving average near $89. US natgas is steady after falling 3.3% yesterday. Europe’s Dutch benchmark is up nearly 5% to snap a three-day slide of over 20%. Iron ore jumped nearly 3.8% to resurface above $100 and halt the two-day slide of almost 8%. December copper is slipping lower for the fourth session and is trading near four-week lows below $354. December wheat is slipping further after falling 2.7% yesterday.
Asia Pacific
China's composite
August PMI eased to 51.7 from 52.4. The contraction in the manufacturing sector continued with the PMI
below 50 for the second consecutive month (49.4 vs. 49.0). The drought, power
outages, Covid disruptions, and the ongoing drag from the end of the property
bubble are hobbling the economy. The drop in supplier delivery times (49.5 from
50.1) are illustrative. Output and new orders continued to fall. The
non-manufacturing PMI slowed to 52.6 from 53.8. Construction, reflecting, the
emphasis of government efforts on manufacturing remained a bright spot at 56.5,
albeit down from 59.2 in July.
Japan's industrial
production and retail sales were better than expected. Industrial production has surged 9.2% in
June (month-over-month) in a response to the re-opening of Shanghai from Covid
lockdowns and many expected a small pullback in in July. Instead, the
preliminary estimate has it growing by another 1% in July. Autos, boilers, and
turbines output grew, according to the report. Retail sales rose by 0.8% in
July, more than twice the median in Bloomberg survey after the June series was
revised to show a 1.3% decline rather than 1.4%. Autos, food, and beverages led
the better-than-expected report. Today's data suggests a firm start to Q3. Economists
expect the world's third-largest economy to expand by around 2.0% in Q3.
The US claims, echoed by
many media outlets, that it is not seeking to change the status quo about
Taiwan, but that Beijing is. Beijing claims that it is the US that is the antagonist. Both assessments
seem correct. Leave aside Pelosi's visit and the other official visits, often
using US military aircraft. Forget about reports of US military advisers in
Taiwan for nearly two years. Consider a bill before Congress that proposes to
declare Taiwan an important non-NATO ally. Consider Senator Blackburn's
suggestion earlier this week that it is "may be" time to revisit the
US one-China policy President Biden has intimated as much on several occasions
only to have his comments "walked back." Beijing is no innocent
bystander. It continues to harass Taiwan and challenge others in the South
China Sea, including the Philippines and Japan. Yesterday, Taiwan fired warning
shots for the first time at a PRC drone near an offshore island. Beijing struck
a secret deal with the Solomon Islands a few months ago and one of the
consequences has become clearer in recent days. Last week, a US coast guard
ship was denied refueling permission by the Solomon Islands, which has declared
a moratorium on all US Navy visits pending an update of its protocol of
procedures. The US embassy was closed in the Solomon Islands nearly two decades
ago, but plans on re-opening it, according to press reports earlier this year.
The yen did not react much
to the better-than-expected local data, and the firm US yields kept the US
dollar firm. The
greenback is little changed, but so far, holding below yesterday's high
slightly above JPY139.05. It is also holding above yesterday's low just above
JPY138.00, where the five-day moving average is found. The Australian dollar
finished the North American session on its lows yesterday, near $0.6855. There
has been no follow-through selling yet today and the Aussie poked above $0.6900
before finding new offers, which is also where the five-day moving average is
found. Position-adjusting around the expiration of options for A$400 mln
today at $0.6875 and tomorrow for A$720 mln at $0.6867 may be contributing to
the choppy tone. For the sixth consecutive session, the PBOC set the
dollar's reference rate below market expectations (Bloomberg survey) as
CNY6.8906 vs. CNY6.9083. The dollar gapped higher on Monday against the
yuan. It entered the gap today, which extends to last Friday's high around
CNY6.8730 and recorded a low near CNY6.8870. Its sideways movement follows a
two-and-a-half week gain of about 2.3%.
Europe
France reported slightly
softer inflation but also considerably weak consumer spending. The EU harmonized CPI rose 0.4% in August
for a 6.5% year-over-year rise (6.8% in July). French caps on energy prices run
until the end of the year, but the government is considering new measures and
the EU is considering collective action. Service price inflation was sustained,
and food and manufactured goods prices accelerated. Consumer spending fell 0.8%
in July compared with a 0.2% decline median projection in Bloomberg's survey. June's
0.2% increase was shaved to 0.1%. The third quarter is off to a weak start. After
contracting by 0.2% in in Q1, the French economy expanded by 0.5% in Q2. The
0.3% forecast for Q3 might be a bit optimistic. Italy's harmonized CPI jumped
to 9.0% from 8.4%. Many economists had hoped for a dip to 8.2%. The
month-over-month gain of 0.8% followed a 1.1% decline in July. Recall that
yesterday's German inflation edged up to 8.8% from 8.5% and Spain's eased to
10.3% from 10.7%.
The aggregate eurozone
inflation figures were worse than expected. The headline rose to 9.1% from 8.9%. However, more
troubling was the jump in the core rate to 4.3% from 4.0%. The median forecast
in Bloomberg's survey looked for a 4.1% year-over-year core rate. The euro was
sold to session lows (~$0.;9975) a few minutes before the report. The swaps
market is pricing in a slightly greater chance of a 75 bp hike next week by the
ECB, just shy of a 66% chance. It was about 50% at the end of last week.
There is a dramatic interest
rate adjustment taking place in Europe, which over time, will likely impact the
foreign exchange market. Yesterday,
we noted that the German two-year interest rate more than doubled in the past
two weeks (from about 0.50% on August 16 to almost 1.20% on Monday and about
1.18% today). This has overwhelmed the increase in US yields and sliced the US
premium to about 230 bp, the lowest since early July. The UK 2-year Gilt is no slouch. It has played a bit of catch-up yesterday and traded above 3% for the
first time since 2008. It spent most of July and the first half of August below
2%. At the start of the year, the UK and US two-year yields were near parity. The
more aggressive trajectory of Fed policy had given the US a 135 bp premium as
recently as mid-August. The premium has collapsed to around 45 bp, the least
since mid-March.
After holding above $0.9900
on Monday's test, the euro reached $1.0055 yesterday before sold in North
America back down to $0.9980. Today's low has been about $0.9975, and the intraday momentum
indicators suggest it could stabilize for a little. The nearby cap may be
around $1.0020. With the August CPI estimate behind it, the next two key events
are this Friday's US jobs report and next week's ECB meeting. Sterling was
sold to new two-year lows yesterday near $1.1620 and remains pinned in the
trough today. It has recorded lower highs this week, and today, for the
first, time has not traded above $1.1700. However, like the euro, the intraday
momentum indicators for sterling suggest some consolidation is likely in the
North American morning.
America
Two recent business surveys
have caught our attention. First,
a survey of CFOs by Deloitte found that 73% regarded persistent inflation as
bigger threat than a recession, with the other 27% more concerns about a
recession. What is a bit surprising by this is that judging from the recent
earnings many businesses have been able to lift prices to more than covering
rising costs, including wages. Adjusted pre-tax profits rose 6.1% in Q2 over
Q1, which had seen a 2.2% decline quarter-over-quarter. By another metric that
measures pre-tax profits as a percentage of gross value added, corporate profit
margins rose 15.5% in Q2, the widest in more than 70 years. Separately, and
somewhat less surprising, a survey by the US-China Business Council of its 117
members found over half attributed plans to cancel or delay investment plans in
China due to its Covid-related restrictions. Most said the negative effects
were reversible, but 44% said it would take "years" to restore
confidence.
ADP launches a new
methodology for its estimate of private sector employment today. In its press release, it claims the report
will be more robust, using granulated data based on payrolls covering 25 mln US
workers. In addition, estimates of the current month's nonfarm private sector
employment will change, it will also provide weekly data from the previous month by
industry and business size. A new pay measure is also being introduced. ADP did
not provide an estimate for July, pending this methodological change. The
median forecast in Bloomberg's survey of 15 economists is for a 300k increase,
though the average is a bit lower at 280k. Yesterday's report on job openings
(July JOLTS) was around 850k more than expected and the June series was revised
higher. The Fed funds futures are pricing in about a 75% chance that the third
75 bp hike will be delivered next month. It was about a two-thirds chance
before Fed Chair Powell spoke at Jackson Hole.
The dramatically smaller
than expected Canadian Q2 current account surplus reported yesterday (C$2.7 bln
rather than the C$6.8 bln expected warns of downside risks with today's Q2 GDP
report. The current
account surplus in the first quarter was revised sharply as well (C$2.7 bln
from C$5.0 bln). Bloomberg' survey of a dozen economist generated a median
forecast of 4.4% annualized pace after 3.1% expansion in Q1. The monthly GDP
figures are more troubling. The cumulative monthly increases in Q1 were 1.4%. June
figures will be reported today. The median forecast calls for a 0.1% increase,
which would bring the Q2 cumulative increase to 0.4%. We note that Canada's
10-year breakeven has risen from about 1.93% at the start of last week to 2.20%
today. On the other hand, the five-year breakeven has eased about six basis
points at the same time and is below 2.10% today. The Bank of Canada meets next
week, and although the market flirted with another 100 bp increase, it appears
to recognize a 75 bp move is more likely. Separately, a small and minor cabinet
reshuffle is expected later today, with no policy implications.
The US dollar is trading at
new highs for the month today against the Canadian dollar. Yesterday, it traded above CAD1.31 for
only the third time this year but closed slightly below it. It is extending the
leg up that began last week near CAD1.29 and has approached CAD1.3115. The
spike high recorded in the middle of last month was near CAD1.3225. The
intraday momentum indicators are stretched but the key remains the broader risk
appetite (S&P 500 proxy). Initial support now may be in CAD1.3060-80 area. The
greenback is trading firmly against the Mexican peso and is near a seven-day
high above MXN20.22. The high set on August 19 around MXN20.2670 is the key
to the immediate outlook. A move above it, could spur a move toward MXN20.35-37.
But, if it holds, it may signal a consolidative phase. That said, note that the
five-day moving average is poised to cross above the 20-day moving average for
the first time since late July.
Disclaimer
Reviewed by Marc Chandler
on
August 31, 2022
Rating:
