Overview: The biggest development today in the capital markets is the jump in benchmark interest rates. The US 10-year yield is up five basis points to 2.86%, which is about 10 bp above Monday’s low. European yields are up 9-10 bp. The 10-year German Bund yield was near 0.88% on Monday and is now near 1.07%. Italy’s premium over Germany is near 2.18%, the most in nearly three weeks. Although Asia Pacific equities rallied, led by Japan’s 1.2% gain, but did not include South Korea, European equities are lower as are US futures. The Stoxx 600 is struggled to extend a five-day rally. The Antipodeans are the weakest of the majors, but most of the major currencies are softer. The euro and sterling are straddling unchanged levels near midday in Europe. Gold is soft in yesterday’s range, near its lowest level since August 5. While $1750 offers support, ahead of it there may be bids around $1765. October WTI is pinned near its lows around $85.50-$86.00. The drop in Chinese demand is a major weight, while the market is closely monitoring developments with the Iranian negotiations. US natgas is edging higher after yesterday 6.9% surge to approach last month’s peak. Europe’s benchmark is 4.5% stronger today after yesterday’s 2.7% pullback. Iron ore fell (3.9%) for the fourth consecutive decline. The September contract that trades in Singapore is at its lowest level since July 22. September copper is a little heavier but is still inside Monday’s range. September wheat is extending its pullback for the fourth consecutive session. It had risen in the first four sessions last week. It is moving sideways in the trough carved over the past month.
Asia Pacific
The Reserve Bank of New Zealand delivered the anticipated 50 bp rate hike
and signaled it would continue to tighten policy. It did not
help the New Zealand dollar, which is posting an outside day by trading on both
sides of yesterday's range. The close is the key and below yesterday's
low (~$0.6315) would be a bearish technical development that could spur another
cent decline. It is the RBNZ's fourth consecutive half-point hike, which
followed three quarter-point moves. The cash target rate is at
3.0%. Inflation (Q2) was stronger than expected rising 7.3%
year-over-year. The central bank does not meet again until October 5, and
the swaps market has a little more than a 90% chance of another 50 bp
discounted.
Japan's July trade balance deteriorated more than expected. The
shortfall of JPY1.44 trillion (~$10.7 bln) form JPY1.40 trillion in June.
Exports slowed to a still impressive 19% year-over-year from 19.3% previously,
while imports rose 47.2% from 46.1% in June. The terms-of-trade shock is
significant in both Japan and Europe. Japan's ran an average monthly
trade deficit of about JPY1.32 trillion in H1 22 compared with an average
monthly surplus of JPY130 bln in H1 21. The eurozone reported an average
shortfall of 23.4 bln euros in H1 22 compared with a 16.8 bln average monthly
surplus in H1 21. The two US rivals, China, and Russia, have been hobbled
by their own actions, while the two main US economic competitors, the eurozone
and Japan are experiencing a dramatic deterioration of their external
balance,
The 11 bp rise in the US two-year yield between yesterday and today has
helped lift the US dollar to almost JPY135.00, a five-day high. It has
met the (50%) retracement target of the downtrend since the multiyear peak in
mid-July near JPY139.40. The next target is the high from earlier this
month around JPY135.60. and then JPY136.00. Initial support now is
seen near JPY134.40. After recovering a bit in the North American
session yesterday, the Australian dollar has come under renewed selling
pressure and is trading at five-day lows below the 20-day moving average
(~$0.6990). It has broken support in the $0.6970-80 area to test
the trendline off the mid-July low found near $0.6965. A break could
signal a move toward $0.6900-10. The gap created by yesterday's high US
dollar opening against the Chinese yuan was closed today as yuan recovered for
the first day in three sessions. Monday's high was CNY6.775 and
yesterday's low was CNY6.7825. Today's low is about CNY6.7690. For
the second consecutive session, the PBOC set the dollar's reference rate a
little lower than the market (median in Bloomberg's survey) expected (CNY6.7863
vs. CNY6.7877). The dollar has risen to almost CNH6.82 in the past two
sessions and still trading a little above CNH6.80 today but was sold to nearly
CNH6.7755 where is has found new bids.
Europe
The UK's headline CPI accelerated to 10.1% last month from 9.4% in June. It
was above market expectations and the Bank of England's forecast for a 9.9%
increase. Although the rise in food prices (2.3% on the month and 12.7%
year-over-year) lifted the headline, the core rate, which excludes food,
energy, alcohol, and tobacco rose to 6.2% from 5.8% and was also above
expectations (median forecast in Bloomberg's survey was for 5.9%).
Producer input prices slowed, posting a 0.1% gain last month for a 22.6%
year-over-year pace (24.1% in June). However, output prices jumped 1.6%
after a 1.4% gain in June. This puts the year-over-year pace at 17.1%, up
from 16.4% previously. The bottom line is that although the UK economy
contracted in Q2 and the BOE sees a sustained contraction beginning soon, the
market recognize that the monetary policy will continue to tighten. The
market swaps market is fully pricing in a 50 bp hike at the mid-September meeting
and is toying with the idea of a larger move (53 bp of tightening is
discounted).
What a year of reversals for Germany. After years of pressure
from the United States and some allies in Europe, Germany finally nixed the
Nord Stream 2 pipeline with Russia. Putin also got Germany to do
something that several American presidents failed to achieve and that is boost
is defense sending in line with NATO commitments. The energy crunch
manufactured by Russia is forcing Germany to abandon is previous strategy of
reducing coal and closing down its nuclear plants. Ironically, the Greens
are in the coalition government and recognize little choice. A formal
decision on three nuclear plants that were to be shuttered before the end of
the year has yet to be made, but reports confirm it is being discussed at the
highest levels.
Germany's one-year forward electricity rose by 11% to 530.50 euros a
megawatt-hour in the futures market years, a gain of more than 500%. France,
whose nuclear plants are key to the regional power grid, is set to be the
lowest in decades, according to reports. France has become a net importer
of electricity, while the extreme weather has cut hydropower output and wind
generation is below seasonal norms. The low level of the Rhine also
disrupts this important conduit for barges of coal and oil. Starting in
October, German households will have a new gas tax (2.4-euro cents per kilowatt
hour for natural gas) until 1 April 2024. Economic Minister Habeck estimated
that for the average single household the gas tax could be almost 100 euros a
month, while a couple would pay around 195 euros. Also, starting in
October, utilities will be able to through to consumers the higher costs
associated with the reduction of gas supply from Russia. This poses
upside risk to German inflation.
The euro held technical support near $1.0110 yesterday and is trading
quietly today in a narrow (~$1.0150-$1.0185) range today. Yesterday
was the first session since July 15 that the euro did not trade above
$1.02. The decline since peaking last week a little shy of $1.0370 has
seen the five- and 20-day moving averages converge and could cross today or
tomorrow for the first time since late July. We note that the US 2-year premium
over German is testing the 2.60% area. It has not closed below there
since July 22. Sterling held key support at $1.20 yesterday and
traded to almost $1.2145 today, which met the (50%) retracement
objective of the fall from last week's $1.2275 high. The next retracement
(61.8%) is closer to $1.2175. The UK reported employment yesterday, CPI
today, and retail sales ahead of the weekend. Retail sales, excluding
gasoline have fallen consistently since last July with the exception of October
2021 and June 2022. Retail sales are expected to have slipped by around
0.3% last month.
America
The Empire State manufacturing August survey on Monday and yesterday's
July housing starts pick up a thread first picked up in the July composite PMI,
which fell from 52.3 to 47.7 of some abrupt slowing of economic activity. The
Empire State survey imploded from 11.1 to -31.3. Housing starts fell
9.6%, more than four-times the pace expected (median Bloomberg survey
-2.1%). It was small comfort that the June series was revised up 2.4%
from initially a 2.0% decline. The 1.45 mln unit pace is the weakest since
February 2021 and is about 9% lower than July 2021. However, offsetting
this has been the strong July jobs report and yesterday' industrial production
figures. The 0.6% was twice the median forecast (Bloomberg's survey) and
the June decline (-0.2%) was revised away. The auto sector continues to recover
from supply chain disruptions, and this may be distorting typically seasonal
patterns. Sales are rose in June and July, the first back-to-back gain in
over a year. To some extent, supply is limiting sales, which would seem to
encourage production. Outside of autos, output slowed (year-over-year)
for the third consecutive month in July.
Today's highlights include July retail sales and the FOMC minutes.
Retail sales are reported in nominal terms, which means that the 13% drop in
the average retail price of gasoline will weigh on the broadest of
measures. However, excluding auto, gasoline, building materials, and food
services, the core retail sales will likely rise by around 0.6% after a 0.8% gain
in June. The most important thing than many want to know from the FOMC
minutes is where the is bar to another 75 bp rate hike. The Fed funds
futures market has it nearly 50/50.
Canada's July CPI was spot on forecasts for a 0.1% month-over-month
increase and a 7.6% year-over-year pace (down from 8.1%). However,
the core rates were firm than average increased. The market quickly
concluded that this increases the likelihood that the central bank that
surprised the market with a 100 bp hike last month will lift the target rate by
another 75 bp when it meets on September 7. In fact, the swaps market
sees it as a an almost 65% probability, the most since July 20. Canada
reports June retail sales at the end of the week. The median forecast in
Bloomberg's survey is for a 0.4% gain, but even if it is weaker, it is unlikely
to offset the firm core inflation readings.
The dollar-bloc currencies are under pressure today, but the Canadian
dollar is faring best, off about 0.25% in late morning trading in Europe. The
Aussie is off closer to 0.75% and the Kiwi is down around 0.5%. US
equities are softer. The greenback found support near CAD1.2830 and is near
CAD1.2880. Monday and Tuesday's highs were in the CAD1.2930-5 area and a
break above there would target CAD1.2985-CAD1.3000. However, the intraday
momentum indicators are overextended, and initial support is seen in the
CAD1.2840-60 area. The greenback has forged a shelf near MXN19.81 in
recent days. It has been sold from the MXN20.83 area seen earlier
this month. It has not been above MXN20.05 for the past five
sessions. A move above there, initially targets around MXN20.20.
The JP Morgan Emerging Market Currency Index is off for the third consecutive
session. If sustained, it would be the longest losing streak since July
20-22.
Disclaimer
Reviewed by Marc Chandler
on
August 17, 2022
Rating:
