Overview: The US dollar is trading with a heavier bias ahead of the July CPI report. The intraday momentum indicators are overextended, and this could set the stage for the dollar to recover in North America. Outside of a handful of emerging market currencies, which include the Mexican peso and Hong Kong dollar, most are trading lower. Losses in US equities yesterday and poor news from another chip maker (Micron) weighed on Asia Pacific equities. Europe’s Stoxx 600 is steady and US futures are a little higher. The US 10-year yield is going into the CPI report softly around 2.76%. The US Treasury sells 10-year notes today as the second leg of the quarterly refunding. European benchmark yields are 2-3 bp lower. Gold continues to press against the $1800 cap. It has not closed above it for over a month. September WTI is hovering around $90. It appears stuck for the time being in an $87-$93 range. US natgas is about 1.1% higher after rising 3.2% yesterday. Europe’s benchmark is up 3%. It rose 1.5% yesterday. Iron ore is flat, while September copper is about 0.5% stronger after a small loss yesterday snapped a three-day advance. September wheat is up 1%, as it extends this week’s rise. If sustained, it would be the third consecutive gain, which matches the longest rally since March.
Asia Pacific
China's July inflation
readings underscore scope for easier monetary policy, but officials have shown
a reluctance to use this policy lever. The key one-year medium term lending rate will be set in the
coming days, but it is unlikely to be reduced from the 2.85% rate since January. July
CPI rose to 2.7% from 2.5%, its highest level in two years, but shy of the 2.9%
median forecast in Bloomberg's survey. Food prices were up 6.3% from a year
ago, driven by a 20.2% jump in pork prices, the first rise since September 2020.
Fresh food prices rose 16.9% and vegetable prices rose almost 13%. However,
this seems to be a function of supply, while demand still seems soft. Service
prices pressures slowed to 0.7% from June's 1.0% increase. The core rate eased
to 0.8%. Meanwhile, producer price increases slowed to 4.2% from 6.1%. The
median forecast (Bloomberg's survey) was for a 4.9% increase. Chinese producer
prices have slowed for nine consecutive months. It peaked at 13.5% last October.
Japan's well-telegraphed
cabinet reshuffle was not about policy. Key ministers kept their posts, including the finance minister and
chief cabinet secretary. Former Prime Minister Abe's brother, Defense Minister
Kishi was replaced by Hamada, but he will stay on as a national security
adviser. Trade Minister Hagiuda, an Abe acolyte was replaced by Nishimura, also
for the Abe faction, but will become party policy chief. Prime Minister Kishida
named his one-time rival Takaichi as minister of economic security. The reshuffle seemed to be about re-balancing power among the key factions and
solidifying the government whose support has waned. The next economic policy
focus may be on the drafting of a supplemental budget. In terms of monetary
policy, BOJ Kuroda's term ends next April, while the term of his two deputies
ends in March.
The dollar is in narrow
range of less than half a yen today, hovering around JPY135.00. It did edge above yesterday's JPY135.20 high
but held below Monday's high slightly below JPY135.60. The exchange rate will
likely take its cues from the reaction of the US Treasury market to today's CPI
report. The US 10-year yield remains within the range set at the end of last
week with the stronger than expected employment report (~2.67%-2.87%). The
Australian dollar held support near $0.6945 but has stalled near $0.6975 in the
European morning, where this week's hourly trendline is found. Intraday
momentum indicators are stretched, suggesting that even if there is some
penetration, follow-through buying may be capped. There are options for A$400
mln at $0.6985 that expire today. The greenback edged a little higher against
the Chinese yuan, but it remains subdued. It is well within recent ranges. The
dollar's reference rate was set at CNY6.7612, slightly above expectations
(median in Bloomberg's survey) for CNY6.7606.
Europe
The more potent risk is not
that the center-right wins next month's Italian election. That is increasing looking like a foregone
conclusion. It is hard difficult to tell how much this reflects the judgment of
voters and how much reflects the ineptitude of the center-left parties. The
risk is that the center-right secures a two-thirds majority in both chambers,
which would make constitutional changes possible. A poll published yesterday by
Istituto Cattaneo shows the center-right drawing 46% of the vote and securing
61% of the deputies and 64% of the Senators. Analysis by Istituto Cattaneo
suggested that even if the center-right saw its share of the votes go up, it
might not be able to increase the number of deputies or senators. Italy's
10-year premium over German has fallen in eight of the past ten sessions, including today. It is around 2.10% today, slightly more than 25 bp off its
recent peak, and a little below its 20-day moving average. Italy's 2-year
premium fell to 0.73% yesterday, the lowest since mid-July. It peaked above
1.30% in late July.
Ironically as it may sound,
but it is not Italy's center-right that is attacking the Bank of Italy or the
European Central Bank. It
is Truss who is leading Sunak to become the next leader of the Conservatives
and Prime Minister. BOE Governor Bailey warned that UK was about to go into a
five-quarter contraction (that does not even count the 0.2% contraction that
economists expect the UK will announce for Q2 ahead of the weekend). Truss
quickly responded that her GBP39 bln tax cuts (~$$7 bln) could avert that
scenario. Sunak hiked the payroll tax this past April. She would unwind it.
Truss would suspend the green levy on household energy bills and nix Sunak's
corporate tax increase that was to be implemented next year. The swaps market
is 85% confident of a 50 bp hike at the mid-September MPC meeting, less than a
fortnight after the new Tory leaders is chosen. In the last two meetings of the
year, the swaps market is pricing another 75 bp in hikes.
The euro is first firm holding
above $1.02 so far today, the first time since August 1. However, it remains within last Friday's
range (~$1.0140-$1.0250). The 1.2 bln euro options at $1.0210 that expire
today likely have been neutralized ahead of today's US CPI report. The session
high, slightly above $1.0225 was set in the European morning. This stretched
the intraday momentum indicator, and we suspect it will probe lower now. Initial
support below $1.02 is seen in the $1.0170-80 area. Sterling is in the same
boat. It too is consolidating within the range seen before the weekend
(~$1.2000-$1.2170). The push to session highs, a little above $1.21, in Europe has stretched the intraday momentum indicators. The risk is for a return
to the $1.2050-60 area.
America
Today's CPI report is
interesting but at the risk of exaggerating, it does not mean much. First, the strength of the employment
data, even if flattered by seasonal adjustments or is incongruous with other
labor market readings, suggests the labor market slowdown that the Fed wants to
see is still in the very early stages. Second, as we have noted, financial
conditions have eased recently, and the Fed has pushed back against this. Third,
before the FOMC meets again, it will have the August CPI in hand. Fourth, no
matter what the data shows today, it will not and cannot meet the Fed's
definition of a sustained move toward the 2% target. The median in Bloomberg's
survey has converged with the Cleveland Fed's Inflation Nowcast. The median in
the survey is for an 8.7% headline rate (down from 9.1%) and a 6.1% core rate
(up from 5.9%). The Cleveland's Fed Nowcast has it at 8.8% and 6.1%,
respectively. The Fed funds futures market has about an 80% chance of a 75 bp
hike next month discounted. It may not change very much after the CPI
report.
The US Treasury sold $34 bln
1-year bills yesterday at 3.20%. That represents a 24 bp increase in yield. The bid-cover dipped
but was still three-times oversubscribed and the indirect bidders took down
almost 63%, a sharp rise from a little less than 51% last time. The US also
sold $42 bln 3-year notes, also at 3.20%. This was an 11-bp increase in yield. The
bid-cover edged up to 2.5% and the indirect participants took 63.1% of the
issue, up from 60.4% previously. Today, Treasury goes back to the well with $30
bln 119-day cash management bill and $35 bln 10-year notes. At the last
auction, the 10-year was sold at 2.96%. In the when-issued market, the 10-year
yield is about 2.79%.
The US dollar traded between
around CAD1.2845 and CAD1.2900 yesterday and remains in that range today. There are options for almost 1.15 bln at
CAD1.29 that expire today. The greenback slipped to session lows in Europe but
as in the other pairs, we look it to recover. A move above the CAD1.2910 area
could spur a move toward CAD1.2950. Mexico reported slightly higher than
expected inflation yesterday. It underscored expectations for a 75 bp hike by
Banxico tomorrow. The US dollar is offered against the peso today and it is
pressed near yesterday's low around MXN20.20. The top side is blocked around
MXN20.27-MXN20.30. Options for around $765 mln at MXN20.30 expire today. A
convincing break of the MXN20.20 area could target the MXN20.05 area
Disclaimer
Reviewed by Marc Chandler
on
August 10, 2022
Rating:
