Overview: The market is judging China's response to Speaker Pelosi's visit in a mild way and risk appetites returned. Equity markets are higher, even though Chinese shares weakened. Europe's Stoxx 600 is edging higher after two days of small loses, and US futures enjoy a firmer bias. The surge in US rates yesterday has calmed. The US 10-year yield is firm near 2.76% and the 2-year yield is up a couple of basis points near 3.07%. European yields are 4-5 bp higher and the peripheral premium has narrowed a little. The dollar, which was buoyed by the jump in rates yesterday, is mostly softer today. The Scandis lead the move, while the Swiss franc and New Zealand dollar are softer. Swiss CPI was in line with expectations, with the EU-harmonized measure, rising to 3.3% from 3.2%, easing fears of an intermeeting move by the SNB. Among emerging market currencies, Asian currencies underperformed, along side the Turkish lira, sandbagged by another rise in CPI (79.6%). Gold reversed lower yesterday from $1788 and found support today near $1755. September WTI is consolidating $93-$95 a barrel, inside yesterday’s range, which was inside Monday’s. OPEC+ announcement is awaited on September quotas. US natgas collapsed 7% yesterday but is around 1% higher today. Europe’s benchmark natgas is around 1.25% higher after rising about 4.5% over the last two sessions. Iron ore is off 3.8%, roughly matching the decline of the past three sessions. Copper snapped a six-day rally on Monday. It edged lower yesterday and is trading slightly heavier today. September wheat is trying to snap a three-day, nearly 5.5% drop. It is trading about 1.7% better today.
Asia
Pacific
China
escalated its protest of the third highest US government official's visit to
Taiwan. It the most senior visit since Gingrich 25 years ago. Beijing
announced live-munition drills and missile tests as it sent ships surrounding
Taiwan. It also sent nearly two dozen aircraft into Taiwan's air defense
identification zone. It is thought to be the most provocative military activity
in as much as 20 years. Beijing has also announced some trade restrictions with
Taipei. A Chinese-based electric vehicle battery manufacturer, Contemporary
Amperex Technology has halted plans to build plants in North America. Nevertheless,
on balance, so far, the market is judging Beijing's response as mild. How it
plays out in Chinese domestic politics is not clear.
Reports
suggest that the US has sent four warships into the area, including an aircraft
carrier. Speaker Pelosi defended her visit in a Washington Post op-ed piece
claiming that her trip was a "signal to the world
that Washington stands with the self-governed island’s “vibrant, robust”
democracy and has a “sacred vow” to support its defense amid growing threats
from Beijing. The underlying question is not about her intention but the
timing. It seemed not to have been coordinated
with the Commander in Chief. Nor does the visit now seem part of the broader
American strategy. Moreover, the signal has been sent numerous times and
various channels. That is to say, the benefits are repeating the signal seems
minor compared with the costs, which will likely include any hope that Beijing
participates in cooperative ventures, including a cap on Russian oil prices. The
US appears to have lowered the price of China being a free rider. Ironically,
and importantly, both the US and China share one thing and with some justice,
both claim the other is trying to change the relationship with Taiwan
unilaterally.
The
17 bp jump in the US 10-year yield yesterday helped lift the dollar from nearly
two-month lows near JPY130.40. It jumped back to almost JPY133.20
before the North American close and has edged higher today, reaching JPY133.90.
That nearly retraced half of the dollar's slide from the July 27 high
(~JPY136.45). The next retracement objective (61.8%) is closer to JPY134.75. The
Australian dollar fell almost 1.5% yesterday, its biggest decline in nearly
three weeks. The Aussie peaked on Monday around $0.7045 and fell slightly
through $0.6915 yesterday. Follow-through selling today saw it approach
$0.6885, before bouncing back to $0.6940. A move above $0.6950-60 would lift
the technical tone. However, the buying enthusiasm has waned in Europe, and the
risk is a return to the lows and possibly a test of the $0.6865 area. The
Chinese yuan recovered yesterday and is little changed today in a narrow range
(~CNY6.7450-CNY6.7600). The PBOC set the dollar's reference rate at
CNY6.7813 vs. median expectations (Bloomberg's survey) for CNY6.7806.
Europe
Data
from the ECB confirms what many in the market suspected. Officials are
already drawing on the flexibility negotiated at the end of last year for
recycling the proceeds of maturing bonds bought under the Pandemic Emergency
Purchase Program. The ECB reports the data in two-month intervals. In
June/July, the Eurosystem's holdings of Italian, Spanish, Portuguese, and Greek
bonds increased by 17.3 bln euros. The holdings of German, French, and Dutch
fell by 18.9 bln euros. The Transmission Protection Instrument is an emergency
tool.
Germany
and France's final July service and composite PMIs were higher than the
preliminary reports. Spain's reading was not as weak as expected, but Italy's
disappointed. Italy's composite, like Germany's, is below the 50. Germany's was
revised to 48.1 from 48.0, while Italy's came in at 47.7 (median forecast
Bloomberg's survey was for 49.7). France's service PMI was revised to 53.2 from
52.1, to pare the decline from 53.9 in June. The composite is at 51.7 rather
than 50.6 of the flash estimate and 52.5 in June. The aggregate composite is at
49.9, down from 52.0 in June but slightly better than the 49.4 initial estimate.
The UK's final services and composite PMI were revised down to 52.6 and 52.1
from the flash estimates of 53.3 and 52.8, respectively. Lastly, we note that
the German trade balance jumped to 6.4 bln euros from a revised 900 mln euros
in May, which was initially reported as a 1 bln euro deficit. Exports rose 4.5%
while imports crept up by 0.2%. And Italy's retail sales dropped 1.1% in June,
while earlier this week, Germany reported an unexpected 1.6% plunge (the median
forecast in Bloomberg's survey was for a 0.3% increase).
The
euro posted key downside reversal yesterday (traded on both sides of Monday's
range and settled below Monday's low). However, follow-through selling today
has been limited to the $1.0150 area were options for nearly 700 mln euros
expire today. The session high is just shy of $1.02, where another set of
expiring options (for 1.14 bln euros) have been struck. Sterling also saw
some follow-through selling today, but it was limited to the $1.2135 area. A
break of the $1.2120 area could spur further losses. However, ahead of
tomorrow's BOE meeting where the swaps market has about an 80% chance of a 50
bp hike discounted, sterling sales may be limited.
America
The
June JOLTS report added to the accumulating evidence that the labor market has
lost momentum. We have been tracking the four-week moving average of jobless
claims. It stands slightly below 250k. Jobless claims bottomed in late
March/early April near 170k. In raw terms, jobless claims bottomed around 166k
in mid-March, the week that the Fed began its tightening cycle, and were at
256k in the week ending July 23. Job openings collapsed by 605k in June, the
most on record outside of when Covid first struck. It is the third consecutive
monthly decline for a cumulative drop of 1.16 mln, and near 10.7 mln are at a
nine-month low. In the Summers/Blanchard debate with the Fed's Waller/Figura,
the nearly 10% drop in job openings has not boosted unemployment. Let's see
what happens with the next 10%. That said, the JOLTS data and the rise in
weekly jobs claims during the survey week warn of downside risks to the 250k
median forecast (Bloomberg survey) for the July jobs report out Friday.
The
Federal Reserve is tightening financial conditions and the market pushed back
recently. The S&P 500 rallied 9.1% last month, the most since November
since 2020. The 10-year note yield tumbled 36 bp in July and the two-year yield
fell by nearly twice as much, even though the Fed delivered its second
consecutive 75 bp rate increase. On a broad trade-weighted basis, the dollar
appreciated by the most since March 2020 (2.2%), on the other hand, moving the
desired direction by the Federal Reserve. The Goldman Sachs Financial
Conditions Index eased by 0.47% last month. It has been alternating between
tightening and loosening of financial conditions on a monthly basis for the
past six months.
It
is understandable, and should be expected, that the Fed pushes against
pre-mature easing of financial conditions. The market clear
recognizes that the Fed is not done. The Fed funds futures are pricing in
another 100 bp in hikes this year. That would raise the target to 3.25%-3.50%. The
median June dot (Fed's Summary of Economic Projections) was at 3.38%. The
divergence is a 2023 story. The median dot is 3.75%. The implied yield on the
December Fed funds futures briefly approach 3.75% in the middle of July. It
traded near 2.65% last week. It rose to 2.92% yesterday as the market heard the
pushback from the Fed's Kashkari, Evans, Daly, Mester, and Bullard. The former
two do not have the vote but cited to illustrate the uniformity of the message.
Still, the implied yield of the December 2023 Fed funds contract is more than 40 bp
below the implied yield of the December 2022 contract. More of the same in
terms of Fed officials today, with Barkin and Harker joining Bullard, Daly, and
Kashkari. Data includes the final PMI, ISM services, and factory orders with
the final durable goods report.
The
US dollar bottomed on Monday against the Canadian dollar slightly ahead of
CAD1.2765 and by the end of the yesterday it had recovered to almost CAD1.29. It edged a bit
higher earlier today but remained below CAD1.29 but has come back offered to
test CAD1.2850. Support is seen in the CAD1.2815-30 area. The greenback
jumped 2.2% against the Mexican peso yesterday, its biggest advance since
mid-June. The momentum carried it a little higher today (~MXN20.8335)
before sellers emerged to knock it back below MXN20.64 in the European morning.
Support is seen in the MXN20.55-59 band.
Disclaimer
Reviewed by Marc Chandler
on
August 03, 2022
Rating:
