Overview: There is nervous calm in the capital
markets today. The weakness of US shares
yesterday is taking a toll today. An exception in the Asia Pacific region is
the Hang Seng and the index of mainland shares that trade there, which up
around 3.5% today on thUe easing of some Covid protocols. Europe’s Stoxx 600 is off for a fifth day,
its longest losing streak in nearly two months. US futures are posting minor
gains. Benchmark 10-year yields are mostly little changed. The exceptions are Italy, where the 10-year
yield is up about 2.5 bp and the US Treasury, where the yield is up nearly three
basis points to almost 3.45%. The dollar
is mostly a little firmer against most of the major currencies. The Norwegian krone and Australian dollar are
slightly firmer. Sterling’s 0.35% decline
leads the others to the downside. Rising
tensions with the EU and a jump in inflation are a drag on the Hungarian forint,
which is nearly 1% lower. The JP Morgan
Emerging Market Currency Index is slightly softer after two days of gains. Gold’s recovery stalled near $1790 yesterday
and it is a bit softer today, trading near $1783 in Europe. January WTI has steadied after falling to
$71.75 yesterday. The year’s low set on
January 3 was almost $69. US natgas is
up 1.75% to build on yesterday’s 4.6% rally after falling for the previous five
sessions. Europe’s benchmark is 2%
higher on colder temperature and additional maintenance in Norway. Iron ore rose
nearly 3%, while March copper is edging higher.
March wheat is around 0.4% better after a 2.8% rally yesterday ended a
four-day drop.
Asia Pacific
Japan's economy contracted
less than previously estimated (-0.2% rather than -0.3%). At an annualized rate this means a -0.8%
contraction instead of -1.2%. The weaker consumption (-0.3% vs. -0.1%) was
offset by an inventory build (0.1% vs. -0.1%) and a slightly smaller drag from
net exports (-0.6% vs. -0.7%). The economy is expected to rebound here in
Q4, helped by the fiscal stimulus measures. However, recent data point to
a soft start and weaker demand from the US and Europe may limit exports.
Separately, Japan reported its first monthly current account deficit since
January. The October shortfall was JPY64.1 bln (~$475 mln) from a JPY909
bln surplus in September. The deterioration was mostly a function of a
widening trade deficit (JPY1.875 trillion from JPY1.760 trillion) and primary
income (income from investments, dividends, interest, royalties, licensing,
etc.).
Australia also reported
October trade figures. It was slightly larger than expected at A$12.2 bln (~$8.2 bln)
though a touch smaller than September (A$12.4 bln). Exports and imports
slipped by about 1%. Coal, Australia's top exports, slipped, Natural gas,
a close second, increased, and with a small increase in iron ore shipments
helped offset the decline in coal. The decline in gold shipments (~A$1.5
bln from A$2.2 bln) tilted the scales. The report highlights a critical
challenge Australia faces. China is by far its largest trading
partners. Two-way traded accounted for A$27.1 bln in October, more than
twice as large as its second biggest trade partner Japan (A$12.9 bln).
The US is its fourth largest trading partner (A$5.9 bln). Yet, as is well
known, Australia's foreign policy and security interests are tightly linked to
the US and its allies.
The yen continues to track
the US 10-year yield. Yesterday's
decline in US yields coincided with a modest pullback in the dollar against the
yen, while today's firmer US yield has seen the greenback climb back above
JPY137. Yesterday's high near JPY137.85 may contain today's
recovery. The Australian dollar is in a narrow range (~A$0.6700-$0.6740) in the upper end of yesterday's range. This
~$0.6745 area has capped the Aussie since Tuesday's key downside
reversal. Note that the five-day moving average is poised to cross below
the 20-day for the first time since October 25. Also, options for a little
more than A$785 mln at $0.6700 expire today and another set for A$790 mln roll
off tomorrow. The Chinese yuan continues to consolidate in a
narrow range since jumping higher to start the week. On Monday, the
dollar gapped below CNY7.0 on ideas that reduced vaccination check and some
modification in quarantine protocols amount to a policy reversal and an opening
up. It has not traded above CNY7.0 since last Friday. Today's range
is roughly CNY6.9650-CNY6.9820. The PBOC set the dollar's reference rate
at CNY6.9606 today, slightly lower than the median in Bloomberg's survey
(CNY6.9636). Separately, news yesterday that the PBOC boosted its gold
holdings for the first time in three years last month sparked talk of reserve
diversification. Maybe, consider the relative amounts. The US
Treasury data shows China with around $933 bln of US bonds at the end of
September. The cost of the gold was likely around $1.65 bln. A proverbial
drop in the bucket.
Europe
The European economic
calendar is light and three political developments are the talking
points. First,
Putin again referred to Russia's nuclear arsenal after strikes by Ukraine at
some missile bases inside Russia. Russia refuses to rule out the first
use of nuclear weapons. Consider, in contrast, India, who reportedly
demonstrates its pledge not to use it its nuclear weapons first, by keeping the
key components separate. The US also has a partial no first use
policy. It says it will not use its nuclear weapons against countries
that do not possess nuclear weapons or other weapons of mass destruction.
Second, Germany foiled what
is said to be an elaborate coup attempt. More than two dozen people were arrested,
and another 27 individuals are under "initial suspicion" of being
involved with a plot to storm the Reichstag (parliament) and overthrow the
government. Reports suggested the raid involved 3000 police in 11 of
Germany's 16 states. A former MP in the AfD party who is now an active
judge was one of the arrests and the barracks of a unit of Germany's Special
Force Command (KSK) was raided. Of course, parallels between the events
on January 6, 2021, in the US are being drawn.
Third, the EU is preparing
its ninth package of sanctions on Russia. This package seeks to deny Russia access
to drones, and sanctions three more banks, including Russia's Regional
Development Bank, four media outlets, 136 individuals, and another 42
entities.
The euro is trading quietly
in a narrow range of less than half-of-a-cent, well within yesterday's
range. The
session high was set in late in the Asian session near $1.0530 (yesterday's
high ~$1.0550) and found some bid in early European turnover around
$1.0490). There are options for nearly 810 mln euros at $1.0450 that
expire today but they may have been neutralized yesterday when the euro slipped
through $1.0445. Sterling is confined so far today to a little
more than half-of-a-cent range below $1.2215. Yesterday's high was
closer to $1.2235. The intraday momentum indicators suggest
follow-through losses in the North American morning will likely be
limited.
America
The US 2–10-year yield curve
is the most inverted yesterday since 1981, at around -85 bp. Other parts of the curve are inverted as
well. Earlier this year, Fed Chair Powell played down the significance of
the 2–10-year curve and drew attention to the spread between the 3-month bill
in 18-months’ time and the three-month bill yield. At first, he suggests
the inversion of that would signal a recession. However, he latter
softened his position and said it could also reflect a sharp drop in inflation
expectations. His preferred curve went inverted on November 10, the same
day the US reported softer than expected CPI and the dollar was sold aggressively.
The inversion reached 45 bp on December 1. It recovered almost half by
this past Monday and has eased. The 2-year breakeven has fallen from
2.77% on November 9 to nearly 2.30% on November 18. It recovered to
almost 2.63% on after the US employment data last week but has since fallen
back and dipped below 2.35% yesterday. The 10-year breakeven bottomed at
the end of September near 2.10%. It reached a peak on October 24 a little
above 2.60%. It found support near 2.25% in the second half of November
before bounced back to 2.45% after the jobs data. It retested the 2.25%
yesterday.
While inflation
expectations, measured here by the breakevens have fallen, the risk of a
recession appears to be rising too. The layoffs announced capture imaginations in a way
that hiring does not. Remember, the nonfarm payroll is a net
figure. Every month there are layoffs and new employment, and despite the
sense may get from the media coverage, as of last month, there continues to be
more people hired than fired. Still fears of recession are increasing. At
the beginning of this year, the Bloomberg survey showed a median expectation a
recession in 12-months at 15%. It was stead from there from October 2021
through February 2022. The Russian invasion of Ukraine, the subsequent
energy shock saw the odds rise. Even in July, after two quarters of
negative growth, the median still put the odds at less than 50%. As of last month’s
survey, put the odds at 62.5%.
Today's US economic data
consists of weekly jobless claims, PPI, wholesale trade and inventories, the
preliminary University of Michigan consumer sentiment and inflation
expectations, and changes in household net worth (Q3). The market may be the most
sensitive to the PPI and University of Michigan survey. Headline PPI is
expected to extend is slowing streak for the fifth consecutive month and seven
of the past eight. It peaked in March, coinciding with the first Fed
hike, at 11.7%. The median forecast in Bloomberg's survey is for a 7.2%
year-over-year rate in November. If so, it would be the lowest since May
2021. The core rate has slowed since the 9.7% peak in March without
failure. It is expected to have slowed to 5.9% last month, which would
also be the lowest since last June. Consumer inflation expectations for
the 5–10-year period has been between 2.7% and 3.1% since the start of
2021. It was at 3.0% in November and may have remained there in the
preliminary results for this month. Note that the NY Fed's own survey of
consumer inflation expectations will be reported Monday, though is often not on
economic calendars.
The Bank of Canada delivered
a 50 bp hike yesterday to lift its policy rate to 4.25%. Even though many expected a quarter
point move, it was a dovish hike because the Bank of Canada
said this maybe it. The statement read that the central bank "will
be considering whether the policy rate needs to rise further to bring supply
and demand back into balance and return inflation to target." There
will be two more inflation reports before the BOC meets again on January 25
(November's CPI will be reported on December 21 and the December CPI will be
reported on January 17). Barring a major data surprise, the Bank of
Canada will likely reaffirm its pause. The swaps market is about 50/50
about a 25 bp hike early next year.
Mexico reports November CPI
today and the year-over-year rate is expected to slip below 8% for the first
time since June. The challenge for businesses, consumers, and policymakers is that
the core rate is still accelerating. It is expected to make a new
cyclical high of almost 8.6%. The central bank is expected to match what has
been tipped as a half-point hike by the Fed next week. The market expects
some separation between the Fed and Banixco later next year. While the
swaps market has the Fed raising 100 `bp between now and the middle of next
year, it has about 80 bp priced in for Mexico. As widely expected,
Brazil's Selic rate was left at 13.75% by the central bank yesterday.
Today, Brazil reports October retail sales. A small gain is expected
after a heady 1.1% increase in September. Lastly, the dollar soared
against the Peruvian sol yesterday as the President Castillo tried to dissolve
Congress. He was impeached and arrested instead. Vice President Dina
Boluarte is the new president and the dollar reversed lower and settled at a
new low for the week.
A 50 bp hike by the Bank of
Canada in what seemed to have been a close call did not help the Canadian
dollar very much though it settled little changed on the day. The possibility that the monetary cycle is
finished and the weakness in US stocks may have deterred buying. Initial
support today is seen around CAD1.3640. The risks though are for a weaker
Canadian dollar if US stocks continue to unwind the rally that began in
mid-October. After jumping on Monday, the greenback is carving a
range against the Mexican peso. A shelf has been carved around
MXN19.6200-50. And a cap has been formed around MXN19.86. Within
that range, a break of MXN19.63-MXN19.75 may signal the near-term
direction.
Disclaimer
Reviewed by Marc Chandler
on
December 08, 2022
Rating:
