Overview: The dollar is having one of the largest setbacks in recent weeks. We
expected the dollar to soften ahead of next week’s CPI, which may fan ideas/hopes
of a peak in US price pressures, but the magnitude and speed of the move is
surprising, and likely speaks to the extreme positioning. Still, we caution
that the intraday momentum indicators are stretched, and the underlying bullish
sentiment, may see North American operators take advantage of the dollar’s pullback.
More broadly, risk assets are performing well. After a respectable equity performance
in the US yesterday, Asia Pacific equities rose, led by Hong Kong, China, and
Taiwan. Europe’s Stoxx 600 is up 1.6%, which if sustained, will be the most in
a couple of months, and the first weekly gain in four. US futures are trading broadly
higher. The 10-year US Treasury yield is off 5 bp to around 3.26%. The dollar’s
pullback is helping lift commodity prices. Gold reached a new high for the week
near $1730. October WTI, which fell to $81.20 yesterday, its lowest since February,
is near $85. US natgas is up 2.25% but is still down 8% for the week. Europe’s
natgas benchmark is off 5.3% today and is practically flat on the week. China’s
drive to complete unfinished houses has helped lift iron ore prices. They rose
3.7% yesterday and almost 3% today. At $103, it is at a new two-week high. December
copper has caught a bid and today’s 2.25% gain puts it up 5.7% on the week after
falling 7.7% last week. December wheat is 1.3% firmer and, barring a reversal
today, is poised to its third consecutive advancing week.
Asia Pacific
China reported lower than
expected inflation and stronger than expected lending figures. August CPI surprisingly slowed to 2.5%
from 2.7%. Food inflation stayed firm at 6.1% (vs. 6.3%) reflecting a 22.4%
jump in pork prices from a year ago. This helps explain yesterday's decision by
the National Development and Reform Commission to release 37.7k tons of frozen
pork from reserves. Wholesale pork prices have surged by 70% over the past six
months. Floods and droughts have lifted vegetable and fruit prices. Non-food
prices rose 1.7%, slowing from 1.9% in July. Core inflation (excluding food and
energy) were steady at 0.8%. Producer prices continue to drop. August was the
10th consecutive month that producer price inflation has slowed. It is now below
CPI at 2.3%, down from 4.2% in July and 10.3% at the end of last year. Falling
commodity prices and production disruptions from electricity curbs weigh on PPI. Of
note, and speaking to weaker demand, consumer durable goods producer prices
fell by 0.6% in August year-over-year. It was the fifth consecutive negative
print. Despite the lower inflation prints, the one-year medium term lending
rate is unlikely to be cut next week after the 10 bp point reduction was
delivered last month.
Separately, China reported
that aggregate lending jumped to CNY2.4 trillion, recovering more than expected
from the dramatic weakness in July (CNY756 bln). Chinese officials have encouraged more
lending to the property sector and government infrastructure projects. What is
notable about today's figures is that was that non-bank lending accounted for
the bulk of the improvement. Bank lending rose to CNY1.25 trillion, accounting
for a little more than half of the overall lending. In July, bank loans were
almost CNY680 bln of the CNY756 bln lent. The difference between the aggregate
figures and bank loans (new yuan loans) is shadow banking.
It is interesting to review
Japanese investors fixed income moves in the latest balance-of-payments data
for July. Japanese
investors continue to sell their foreign bond holdings. It could be both
contributing to the bear market and responding to it. It also may be taking
profits on foreign assets that repatriate into more yen given the dramatic
depreciation. Given the size of the US bond market, divesting foreign bonds means
selling US Treasuries. Japanese investors sold US bonds for the ninth
consecutive month, the longest selling spree since at least 2005. They sold
JPY1.04 trillion (~$7.7 bln) of US Treasuries in July after selling an average of a little more than twice as much on average over the previous four months. After
Treasuries, Japanese investors sold the most amount of French bonds (JPY723.30
bln), the most since March 2002. Of the ten largest country allocation, there
was only one country's bonds that Japanese investors bought in July: Italy. Its
JPY29 bln of purchases did not quite replace the JPY31.7 bln Italian bonds sold
in June.
Japanese officials who have
stepped up their rhetoric in recent day may enjoy the weekend as the dollar
weakens broadly. The
dollar reached a high of almost JPY145 in the middle of the week and approached JPY141.65 today. It corresponds with to a (61.8%). retracement objective of the last leg higher. The Australian dollar probed the $0.6700 area in the
middle of the week. After an inside day yesterday, the Aussie has
jumped to day to around $0.6875, where the 20-day moving average is found. The
next technical target is seen near $0.6900-10. The greenback is off a little
more than 0.5% against the Chinese yuan. If sustained, it would be the
biggest loss since May. It would also be the first back-to-back loss since May.
The PBOC set the dollar's reference rate at CNY6.9098 compared with
expectations (median in Bloomberg's survey) of CNY6.9484. There were reports of
net foreign inflows into Chinese stocks for the first time this month.
Europe
The ECB delivered the 75 bp
hike with a unanimous decision. For the most part, President Lagarde stuck with a hawkish script.
Additional rate hikes were signaled. Lagarde warned that while the labor market
was still robust, that the normalization of monetary policy would likely mean
higher unemployment. She also responded to critics who worry about the
debasement of the euro as its traded at 20-year lows. Lagarde pushed back and
noted that while the euro has fallen 12% against the dollar so far this year,
it overstates the case. On an effective basis (weighed index of trading
partners and competitors) it is off 4%. At the same time, we note the euro is
42% undervalued according to the OECD's purchasing power parity model.
Interest rates surged in
Europe, without spreads widening. Two-year rates were up 21-22 bp in Germany, France, and the
Netherlands, and 16-17 bp in Italy, Portugal, and Greece. Spain acted more than
a "donor" country with a nearly 24 bp rise in its two-year yield. Two
years rates are up 5-9 bp Benchmark 10-year yields rose by 10-11 bp in Italy,
Spain, and Portugal, while rising 11-13 bp in Germany, France, and the
Netherlands. Rates are up another 3-5 bp today. The market initially began to
price in a 75 bp hike in October rather than a half-point move, but in answer
to question, Lagarde was explicit while rates would be raised at future
meetings, it would not necessarily be 75 bp. This seems an unnecessary even if
true statement. Here is where strategic ambiguity may have been more useful.
After peaking a little above
the 20-day moving average (~$1.0025), the euro was coming off, perhaps on this
seemingly less than hawkish comment, ahead of Fed Chair Powell's hawkish
comments that sent the euro to almost $0.9930. Powell, as we note below, did not break
new ground and after Europe went home yesterday, the market took the single
currency back to parity. Lastly, we note that the two-tier of reserves at the
ECB was suspend, and the net effect is a gift to banks who can earn a higher
deposit rate with cheap TLRO funds. Yet whatever this subtle extra cushion is
worth, it did not prevent the MSCI index of eurozone banks from underperforming
yesterday. It weakened by almost 0.3%, while the broader market gained about
0.5%. Today the bank index is playing catching, rising 3% compared with nearly
1% gain in the broader market.
European energy ministers
are meeting today to coordinate efforts to contain energy prices. There are several different proposals that
involve capping prices, decoupling gas and electricity prices, and conservation
efforts. In addition, the volatility has lifted required margins (collateral),
which is also disrupting activity and forcing power companies to seek more
liquidity. Sweden and Finland have already announced an initiative to address
this. Separately, note that Sweden has a general election Sunday. The far-right
Swedish Democrats appear to be in ascendancy on the back of a surge in violent
crime. The Swedish Democrats have campaigned on a law-and-order and
anti-immigration platform and is seen emerging as the second largest party in
the country.
The short squeeze has lifted
the euro to nearly $1.0115, its highest level since August 18. This meets the (50%) retracement objective
of the slide since the August 10 high near $1.0370. Above there, the next
retracement (61.8%) is $1.0175. Initial support now is likely around $1.0050. For
its part, sterling ran up to almost $1.1650, its best level this month. The
gains, thus far, are not particularly impressive. The previous high for the
week was set on Monday, almost $1.1610. Still, a move above $1.1650 could
signal a test on the $1.1715-35 area, which houses some short-term retracement
targets and the 20-day moving average. Sterling has not closed above its
20-day moving average since August 12. The swaps market has had second
thoughts about a 75 bp hike that was seen as an 82% probability at the start of
the week. Now pricing is consistent with a 50 bp hike. The euro is hovering
around GBP0.8700. The high for the year was set in mid-June near GBP0.8720.
America
US rates rose yesterday, but
the market did not learn anything new, except, perhaps that weekly initial
jobless claims fell for the fourth consecutive week. At 222k, they are the lowest since the end
of May. Continuing claims continued to creep higher. With last week's 36k
increase, they have risen in five of the past six weeks. It is what you would
expect if it were becoming more difficult to get a new job, though to be sure,
the level (1.473 mln) is still low by nearly any measure. The odds of a 75 bp
Fed hike this month seemed to diminish at the end of last week, perhaps placing
too much importance of the rise in the unemployment rate, but it has risen
every day this week. What was about a 55% chance a week ago is now closer 86%. The
Fed's Waller, Evans, and George speak today, but it will be difficult to add to
the signal from Powell (Jackson Hole comments reinforced yesterday) and
Brainard on Wednesday.
Canada reports August jobs
data. The labor
market improvement appears to have stalled. It has lost 17k full-time jobs
between June and July. Part-time positions have fallen for three months through
July for a cumulative loss of 152k jobs. The participation rate has not risen
since February. The Bank of Canada lifted its target rate by 75 bp earlier this
week 3.25%. The swaps market favors a 50 bp hike next month (82% discounted). The
market sees the terminal rate between 3.75% and 4.0%.
Mexico's August CPI,
released yesterday, was slightly firmer than expected at 8.7% and the core rate
poked above 8.0%. Banxico
is seen as having little choice but to follow the Fed's move later this month. Today,
it reports July industrial output figures. They are expected to have slowed
sequentially. The government assumptions in the budget seemed optimistic, with
next year's growth seen at 3% and inflation to slow to 3.2%. The central bank's
forecast was updated last week. It concurs with the government projection of
3.2% CPI at the end of next year, but its growth forecast was cut to 1.6% from
2.4%. Separately, Brazil reports IPCA inflation. Brazil's inflation appears to
have peaked near 12.1% in April. It approached 10% in July and is expected to
have slipped below 8.7% in August. The Selic rate is at 13.75% and the central
bank has not ruled out another hike. That said, it is likely to stand pat when
it meets on September 21.
After fraying CAD1.32 on an
intraday basis in middle of the week, the US dollar has come off and is now at
new lows for the month, trading below CAD1.30 in Europe. The risk-on mood has pushed the greenback
below its 20-day moving average (~CAD1.3030) for the first time since August 17.
The CAD1.2970 area is the halfway mark of the greenback's advance that began on
August 11 near CAD1.2730. A break of it could signal a move toward CAD1.29. The
US dollar is heavy against the Mexican peso and is also at new lows for the
month. It reached MXN19.87 in the European morning. There is a band of
support between MXN19.81 and MXN19.85. A convincing break of that area leaves
little to stop a test on MXN19.50.
Disclaimer
Reviewed by Marc Chandler
on
September 09, 2022
Rating:
