Overview: Yesterday’s late rally in US shares
carried into the Asia Pacific session where all of the large markets advanced. However,
the bears are not abdicating and Europe’s Stoxx 600 is off for the sixth
consecutive session and US futures are trading lower. The sell-off in the bond market
continues. European benchmark yields are mostly 8-10 bp higher and the US 10-year
Treasury yield is up nearly five basis points to approach 3.54%. The two-year continues
to knock on 4%. The US dollar is firmer against all the major currencies. Despite
Sweden’s 100 bp rate, the krona is among the weakest of the G10 currencies,
losing ground against all but the Norwegian krone and New Zealand dollar. The
central bank of South Korea has requested hourly reports from the foreign
exchange traders. This seems to have deflected some selling pressure away from
the won, while most other emerging market currencies are lower. Gold stalled
near $1680 and near $1666 in Europe. December WTI is firm near $85. US natgas
is trying to snap a three-day tumble, while Europe’s benchmark is doing the same
but with greater conviction. It is up about 4.25% after falling more than 20%
over the past three sessions. Iron ore fell for the fifth consecutive session
and has fallen nearly 7% over this run. December copper is about 0.5% softer
today after slipping marginally yesterday. December wheat has stabilized. It
fell 3.4% yesterday.
Asia Pacific
Japan reported slightly
higher than expected August inflation. The headline CPI rose to 3.0% from 2.6%, while the core rate,
which excludes fresh food, increased to 2.8% from 2.4%. Both were 0.1% above
the median forecast in Bloomberg's survey. Excluding fresh food and energy,
Japan's inflation rose to 1.6% from 1.2%, also 0.1% above the median forecast. The
Bank of Japan meets later this week. Today's data is unlikely to sway the BOJ
to change its monetary policy. However, its challenge will intensify. It had
forecast core inflation at 2.3% this year. This will have to be revised higher.
Yet, the key to policy might not be this year's core but the next year and 2024.
The BOJ projects a 1.4% core rate next year and 1.3% in 2024. The median
forecast in Bloomberg's survey puts it at 1.6% and 0.5%, respectively.
As widely expected, China
left its loan prime rate unchanged at 3.65% and 4.30% for the one-year and
five-year, respectively. The
President of the World Bank said that China's unwillingness more stimulus puts
more pressure on the US. Malpass noted that in the past, China offered more
counter-cyclical support, but acknowledged that while this may be good for the
PRC, and in the long-term, it puts pressure on the US. While this sounds
intuitive clear, it is anything but. The more the "pressure" is
looked at the more elusive it becomes. The US is aggressively tightening
monetary and fiscal policy. How do decisions in Beijing impact the thrust of US
policy? It does not. US policy, of course is set independently. If
Malpass is referring to world growth, which the World Bank estimates at 0.5%
next year (-0.4% on a per capita basis), then it is simply mathematical. The
weaker growth in China means the US may account for a greater share of world
growth. Ironically, the World Bank forecast that the US grows 2.5% this year
and 2.4% next is wildly out of date. The IMF is at 2.3% and 1.0%, respectively.
The Federal Reserve's median forecast will be revised later this week. In June,
it was at 1.7% this year and next.
The dollar is trading at the
upper end of the three-day range against the Japanese yen of roughly
JPY142.65-JPY143.80. Session
highs are being recorded in the European morning and the intraday momentum
indicators are stretched. Yet the market may feel emboldened by the divergence
of monetary policy that is on full display this week. A move above JPY143.80
would target the JPY145 area that has capped it on at least a couple attempts
this month. The minutes from the Reserve Bank of Australia's meeting early
this month underscored the message that rates are getting to levels that may
encourage a slower pace of increase. It has boosted its cash target rate by
50 bp in each of the last four meetings. It meets again on October 4. The
futures market is nearly evenly split between a quarter point and half-point
move. The Aussie extended its two-day advance to almost $0.6750 and has been
turned back. It found support a little below $0.6700. A break of $0.6690 could
signal a retest on the base near $0.6670, but suspect a consolidative North American
session is likely. The Chinese yuan consolidated its recent losses. The
US dollar trading in a narrow range within yesterday's range, which was within
the pre-weekend range (CNY6.9870-CNY7.0255). The PBOC set the dollar's
reference rate at CNY6.9468. The medina in Bloomberg's survey was CNY6.9984.
Europe
The idea that the BOJ could
simply raise rates and that would stop the yen from falling seems naive. Ask Sweden. The Riksbank delivered a 100
bp hike today to 1.75%. Most economists had expected a 75 bp move, while the
swaps markets saw the risk of a larger move. The Riksbank sees the deposit rate
at 2.5% a year from now. The krona initially rose but is weaker now against the
dollar and euro. Swedish inflation reached 9% last month. The Riksbank cut next
year's growth forecast to -0.7% from previously expecting growth to be of that
magnitude.
The eurozone reported a
nearly 20 bln euro current account deficit in July. It swamped the 15.6 bln euro surplus
reported in the first half. Consider that in the first seven months of 2021,
the EMU reported an average monthly current account surplus of about 30.6 bln
euros. While goods trade balance has eroded, the service surplus has grown. The
primary income account, which includes profits, dividends, coupon payments,
royalties, licensing fees, and the like has swung into deficit, but also its
deficit on its secondary income account (transfer payments) widened. We suggest
that the deterioration of the eurozone's external balance is important, it is
worth considering the secondary effects, such as beneficiaries of its export of
surplus savings.
The euro rose to a five-day
high near $1.0050 but was quickly sold back off to $1.0000 in early European
turnover. There are large
options struck there that expire tomorrow and Thursday (2.3 bln euros and 3.9
bln, respectively). Given that the euro has been straddling that level for
several weeks, it is difficult to know or have a sense of what has been hedged
or neutralized. Broad consolidation still seems to be the most likely near-term
scenario. Sterling extended yesterday's recovery to $1.1460 today, stopping
short of the pre-weekend high closer to $1.1480. So far, today is shaping
up to be the third consecutive session that sterling has not traded above $1.15.
Note that strike activity is set to resume with dock workers in Liverpool for
two weeks, and next week Felixstowe dock workers also strike. More rail strikes
are planned too.
America
The US reports some housing
data before the conclusion of the FOMC meeting tomorrow. On tap today are August housing starts. They
are getting a bad rap. Since the end of last year, US housing starts have
alternated between gains and declines on a monthly basis. July was down, so
August should be higher. The median in Bloomberg does in fact look for a small
increase. In the first seven months of the year, they have averaged 1.65 mln
(seasonally adjusted annual rate). During the first seven months of 2021, when
rates were lower and the economy more vibrant, housing starts averaged 1.58 mln.
In the Jan-July period in 2019, housing starts averaged 1.2 mln a month.
Canada report August CPI
today. The broad pattern
is expected to echo what we saw in the US. While the headline pace is slowly
moderating the core rates ae proving sticky, that speaks to the breadth of the
price pressures. Headline CPI is expected to have slowed for the second month,
after peaking at 8.1% in June. The 7.3% projected by the median forecast in the
Bloomberg survey would be the lowest since April. The Bank of Canada has three
core measures (common, median, and trim). They are likely to have firmed to an
average of 5.4% from 5.3%. The average was 3.4% at the end of last year. It
stood at almost 3.8% in Q1 and 5.2% at the end of Q2. After lifting rates by
100 bp in July and 75 bp earlier this month, the Bank of Canada is expected to
hike by 50 bp next month and 25 bp at the last meeting of the year. That would
put the target rate at 4%. The swaps market has the terminal about 4.25%.
The potential bearish
shooting star candlestick in the dollar-CAD exchange rate seen yesterday has
gone for nought. Initial
follow-through USD selling was quickly exhausted near CAD1.3225 and the
reversal of US equities helped lift the greenback toward CAD1.33. Yesterday's
new two-year high was set by CAD1.3345, meeting the 38.2% retracement of the US
dollar's decline from the March 2020 pandemic peak (~CAD1.4670). That said, the
intraday momentum indicator is stretched, but watch stocks for the cue. The
US dollar posted its lowest settlement against the Mexican peso in five
sessions yesterday, but here too follow-through has been minimal. The US
dollar is bouncing off the MXN19.90 area. In the broader picture, the greenback
has been in mostly confined to a MXN19.80-MXN20.20 range since mid-August.
Disclaimer
Reviewed by Marc Chandler
on
September 20, 2022
Rating:
