Overview: Nothing is decisive, but the recent
string of data pushes the needle a little more to a soft landing for the US
economy and gave the US dollar another leg up. The risk is that some of the buying
drained some of the interest that may materialize after today's US jobs report. The
greenback is softer against the major currencies except the Japanese yen. The
dollar is extending its rally against the yen for the sixth consecutive session
and reached almost JPY140.45 earlier today. The firmer euro tone, after holding
above $0.9900 on yesterday’s push is lending support to the central European
currencies, but most of the emerging market currencies are softer. Despite the
late rally in the S&P 500 yesterday and positive close, the large equity
markets in the Asia Pacific region continued to trade heavily. The MSCI Asia Pacific
Index was off more than 3.5% this week, its largest weekly decline since June. Europe’s
Stoxx 600 is trying to snap a five-day skid, but much depends on the post-US job’s
reaction. Even with today’s early gains, the benchmark is off 3.8% this week. US
futures are narrowly mixed. We note that the key (61.8%) retracement of the summer rally
in the S&P 500 and NASDAQ largely held yesterday. Benchmark 10-year bond yields
are firm. The US 10-year Treasury yield is near 3.25%, up more than 15 bp this
week. European yields are mostly 3-4 bp higher and are up around 10 bp this
week, with UK Gilts, and Italian and Greek yields up more. Gold reached a
six-week low yesterday slightly below $1690 but has recovered to around $1707 today.
Yesterday’s high was closer to $1711. October WTI extended its sell-off, briefly
slipping below $86, ahead of the OPEC+ output decision next week. It is bouncing today
to test the 200-day moving average a little above $89. US natgas is off almost
2% and nearly flat for the week coming into today. Europe’s benchmark is off
14% to bring this week’s decline to a dramatic 30%, the most since March. China’s
economic woes kept iron ore under pressure. It fell 1.1% after yesterday’s 5.1%
drop and is off 10.7% this week. December copper is off for the sixth consecutive
session and this week’s loss is a bit more than 8%. December wheat has been
particularly choppy, alternating daily between gains and losses since the
middle of last week. It was off 4.5% yesterday and is up almost 2% today, which
lifts it marginally on the week.
Asia
With the dollar pushing
above JPY140, and global rates surging, the BOJ's 0.25% cap on the 10-year
JGB is going to be challenged again. The BOJ has not had to defend it since July. It may be able to
count on help from dollar-based investors. As we have noted dollars can be
swapped for yen to buy JGBs and earn well more than the Treasury yield due to the
cross-currency swap basis. This is not just a paper exercise. Over the past
nine weeks, Ministry of Finance data shows foreign investors bought a record
amount of Japanese bonds (~JPY7.5 trillion or roughly $53.6 bln).
The lockdown in Chengdu is
the latest blow to China's recovery hopes. Shenzhen was rattled with fears of another
lockdown after a week-long episode in March. Reports indicate that at least
seven of the city's 10 districts have introduced restrictions, while parts of
Futian and Luohu districts have been locked down. Still, officials have
introduced the "closed loop" as a modification to the lockdowns,
which mean that some employees only move between work and home.
The dollar has a
five-session rally in tow coming into today and has extended its gains to a new
24-year high near JPY140.45. It has held above JPY139.85. It is difficult to talk about
meaningful technical resistance, i.e., where new US dollar supply or demand for
yen will be found. Risk management more than the charts may dominate. That
said, the 1998 high was set near JPY147.65. More immediately, we note three
considerations. First, there may be scope for "buy the rumor, sell the
fact" type of activity after the US employment data. Second, the upper
Bollinger Band is found slightly below JPY141.00. Third, in the bigger picture,
further dollar gains look likely and Japanese official rhetoric has been noticeably
quiet given the greenback's latest vault over JPY140. The Australian dollar
fell to almost $0.6770 yesterday, its lowest level since mid-July. It
peaked last week slightly above $0.7000. It is consolidating quietly today and
frayed the $0.6800 area in the European morning, which stretched the intraday
momentum studies. Look for it to be capped around $0.6820. The RBA meets on
September 6 and the market continues to price in almost a 2/3 chance that
another 50 bp hike will be delivered. The greenback gapped higher on Monday
against the Chinese yuan and that high (~CNY6.9225) marked the high. It has
been consolidating mostly above CNY6.89 in subsequent action. The dollar has
risen by about 0.55% this week, the third consecutive weekly gain. The PBOC has
consistently set the dollar's reference rate lower than the market expectations
(Bloomberg survey) and today was no exception (CNY6.8917 vs. CNY6.9162). However,
rather than regard it as a "blockage" as Bloomberg does, we have
suggested that the PBOC is trying to moderate the yuan's adjustment to the
latest divergence of policy.
Europe
The US and Europe appear to
be moving toward capping Russian oil. EU energy ministers will meet next week and EC President von der
Leyen will outline the measures at her annual address on September 14. Russia
indicated yesterday that it would stop selling oil to countries that impose a
price cap on its oil or petroleum products. The EU intends to stop buying oil
and gas next year. The expected intervention has seen the benchmark one-year
forward price of electricity collapse, with the price in Germany dropping more
than 50% from the high set at the start of this week. Gazprom's shipments
through the Nord Stream 1 pipeline are scheduled to resume tomorrow. The fear
is that Russia will soon find other pretexts for disrupting supply.
The euro made a new high for
the month against the Swiss franc on August 31. It bounced almost 3% off the Aug 23 low
(~CHF0.9550), its lowest rate in seven years. Heightened expectations that the
ECB could lift the deposit rate by 75 bp next week may have helped the euro
recover. However, the move may be over. The firm August CPI (3.5% vs. 3.4% in
July), the strong July real retail sales (2.6% after a revised 0.7% gain in
July that was initially reported as a 1.2% increase), and relatively strong
manufacturing PMI (56.4 vs. 58.0) point to another hike by the SNB when it
meets again on September 22. In addition, European politics is about to get
messier. A right-wing government looks practically inevitable in Italy, and it
will challenge the reforms agreed upon to free up EU funds. Poland is kicking the hornet's nest with Kaczynski, the head of the governing Law and Justice Party),
that he wanted to begin negotiating with Germany over the PLN6.2 trillion
(~$1.3 trillion) stemming from losses during WWII. Germany immediately rebuffed
the call, citing, as it does in such situations, the 1953 decision by Poland to
renounce claims against East Germany. The center-left opposition in Poland sees
the new report as meant to stir up domestic passions. Sweden's election a
couple of weeks could also lead to a change in government, and a shift to the
right. By time, US and Canadian markets open after the Monday holiday, the UK
will have a new prime minister. Truss has threatened to trigger Article 16 that
would allow unilateral action regarding the Northern Irish protocol, where the
current negotiated work around ends in the middle of the month. The threat as
also put the EC on edge. A break of the CHF0.9725 would boost our confidence in
the bearish euro-Swiss outlook.
For two weeks now, the euro
has found support in front of $0.9900. There have been large options struck there that have been
gradually rolling off, including around 2 bln euros today. In the bounce off
almost $0.9910 yesterday, the euro has approached parity, where options for 1.3
bln euros expire today. The intraday momentum indicators warn of that these may
be challenged. A squeeze in the reaction to the US jobs data could spur a push
toward yesterday's high slightly above $1.0055. Although the short-dated swaps
show about a 70% chance of a 75 bp hike by the ECB next week, the swaps that
cover the October meeting, indicated that 125 bp increase is fully discounted
between the two meetings (75 bp + 50 bp). Sterling was sold to new 2-year
lows yesterday, nicking the $1.15 level barely. It too is consolidating so
far today and reached $1.1570 early European turnover. There are options for
GBP560 mln struck at $1.16 that expire today. The lower Bollinger Band is near
$11.465 today, while the low set in March 2020 was a little below $1.1415. A
month ago, sterling was above $1.2150.
America
An important heuristic note
by Powell, which we keep coming back to, is that while there is a single report
that best captures price pressures, the PCE deflator, no such thing exists for
the labor market. Consider
this week's labor market data points. The JOLTS showed an unexpected increase
in job openings increased in July for the first time in four months, and June's
decline was revised to show a smaller decline. Weekly jobless claims fell for the
third week in a row, and at 232k, stood at their lowest level in Q3 last week. Continuing
claims edged higher but just below 1.44 mln are well below the year's high set
in January near 1.79 mln. The ISM manufacturing August survey showed a jump in
the employment component to 54.2, its highest level since March, after spending
the previous three months below the 50 boom/bust level.
The monthly nonfarm payroll
report is notoriously volatile and difficult to forecast. The two surveys, one of businesses
(establishments) and one of households introduce discrepancies sometimes, and
one can pull apart the seasonal adjustment. Yet, what is the point? It is
not like we are building a high-precision machine tool or etching onto the
latest generation semiconductor chip. Investors, businesses, and policymakers
need a broad understanding of the state of the labor market. The quibbling
nuances misses the big picture. The labor market is easing but is still strong
by any account. And that is the key takeaway, barring some incongruent
significant shock.
The US dollar briefly traded
above CAD1.3200 yesterday but settled near CAD1.3155. It is trading in a narrow band around
there today, having stopped slightly shy of the two-year high set in July
around CAD1.3225. Canada will report its August jobs data at the end of next
week, after the Bank of Canada meets on September 7. The market appears
comfortable with a 75 bp hike after the 100 bp surprise in July. The smaller
than expected current account surplus, the weaker than expected Q2 GDP, and
yesterday's sub-50 reading of the August manufacturing PMI, the weakest since
June 2020 underscores ideas that the period of Canada's economic outperformance
is over. However, main weight on the Canadian dollar stems from the sharp drop in
US equities. Watch the S&P 500 for directional cues. The greenback was
bid almost MXN20.2950 yesterday, its best level since August 9. It almost
reached the (50%) retracement of the drop from August's high set on August 3
(~MXN20.8335). Some near-term consolidation seems likely, but near-term support
is seen ahead of MXN20.10. The data highlight next week for Mexico is the
August CPI and it likely edged higher, with the core rate moving above 8%. Banxico
meets toward at the end of the month (September 29) and is expected to match
the Fed's move.
Disclaimer
Reviewed by Marc Chandler
on
September 02, 2022
Rating:
