Overview: Don't fight the Fed went the manta as the
market took the US two-year yield back up to 4.50% in the aftermath of the FOMC
minutes last week, the highest in over a month. The minutes warned of a
premature easing of financial conditions. And then bam, softer than expected
hourly earnings and a weak service PMI and bonds and stocks rallied, and the
dollar was sold. This is a key part of the backdrop for this week, for which
several Fed officials will speak, including Chair Powell at a Riksbank event
tomorrow, ahead of the US December CPI on Thursday. The US two-year yield is
stabilizing after slipping through 4.25% before the weekend. The pre-weekend
dollar losses have been extended, but the momentum appears to be stalling in
the European morning, perhaps setting the stage for turnaround Tuesday tomorrow.
Meanwhile, investors continue
to insist on looking past the current Covid disruption in China and instead are
focusing on the new support for the property sector and aid for the broader
economy. Iron ore prices have rallied about 7.5% in the past two weeks,
though traded a little heavier today. March copper futures are up more than 2%
today, which, if sustained, would be the third consecutive gain of 2%. The
Chinese yuan jumped today and the PBOC used to the fix to try to moderate its
gains.
Asia Pacific
Over the weekend, China
reported that the dollar value of its reserves rose by $10.2 bln to $3.13
trillion. The
increase was less than the median in Bloomberg's survey suggest ($3.15
trillion). It appears valuation adjustments were key. The yen rose by 5.3% and
the euro by 2.8% against the dollar, and other reserve currencies also
appreciated. The Canadian dollar was the notable exception. It lost about 1%.
Most observers regard the Canadian dollar as a minor reserve currency. At the
end of Q3 22, the IMF's COFER reported estimated that central banks had about
$265 bln worth of Canadian dollars in reserves. Consider, then, that it
estimates central banks had about $298 bln worth of the Chinese yuan in
reserves. While the FX adjustment would have lifted China's reserves, like
other central bank, the PBOC holds foreign bonds and those took a hit last
month. The BOJ surprise move lifted the 10-year JGB yield by 16 bp. The 10-year
German Bund yield rose 64 bp and the 10-year US Treasury yield rose by 27 bp.
Many pixels have been used talking about China diversifying away from the
dollar toward gold. We have played this significance down. Its gold holdings
did rise by about $5.5 bln to $117.2 bln or a little more than 5%. in December. This is a
little more than the valuation adjustment (the price of gold increased slightly
more than 3% in December. However, before getting too carried away, note that
at the end of 2020, China's gold holdings were worth $118.2 bln. As a
percentage of overall reserves, the share of gold was virtually unchanged over
the two years at around 3.7%.
The futures market is
pricing in about a 60% chance that the Reserve Bank of Australia lifts its cash
target rate by 25 bp when it meets on February 7. We suspect the odds may rise on Wednesday
after the release of November retail sales and CPI figures. After falling by
0.2% in October, the first decline this year retail sales likely rebounded. The
median forecast in Bloomberg's survey is for a 0.6% increase. The new monthly
CPI gauge eased in October to 6.9% from the cyclical peak of 7.3% in September.
However, the risk that it returned to its peak in November. Higher oil and gas
prices may be the primary culprit, but the trimmed mean reading may jump to a
new cyclical high (5.5% vs. 5.3%). The more comprehensive quarterly figures
will be reported before the RBA meets next month.
Tokyo markets were closed
today (Coming-of-Age), but first thing tomorrow, Tokyo's December CPI will be reported.
It offers good insight
into the national figures, which are not due until January 19, the day after
the BOJ meeting concludes. The yen is pulled between the weaker greenback and
the rise in US yields. It is the only G10 currency that is trading heavier
today. Initially, the US extended its pre-weekend loss, easing to almost
JPY131.30 before recovering toward JPY132.60 in the European morning. However,
overextended intraday momentum indicators warn not to chase it now. The
Australian dollar extended its sharp pre-weekend gains and traded to almost
$0.6950, its best level since last August. The next important resistance is
near $0.7000. Optimism about China adds to the attractiveness of the Aussie. Support
now is seen near $0.6880. The dollar gapped lower against the Chinese yuan,
encouraged by investors continuing to look past the current Covid disruption
and reports of further help for the property sector and support for the economy
more broadly. The dollar's low before the weekend was around CNY6.8280 and
today's high has been CNY6.8150. Like the Aussie, this is the best level for
the yuan since last August. The PBOC set the dollar's reference rate stronger
than expected at CNY6.8265 (vs. CNY6.8221) as it used its fix to lean against
the sharp market move.
Europe
The softer than expected
eurozone December CPI preliminary print did not change expectation for the
trajectory of ECB policy. ECB President Lagarde has pre-committed to a 50 bp hike at the
next meeting on February 2. More interesting the market leans strongly in favor
of another 50 bp hike at the following meeting on March 16. The core measure
inflation rose to a new cyclical high of 5.3%, giving more encouragement of the
ECB to look past the tax break/subsidies for energy. Indeed, it looks like
Germany's 1.2% drop in the headline rate explains the drop in the aggregate
measure. The ECB's staff forecast headline CPI to fall to 6.3% this year from
9.2% in December. The IMF sees it at 5.7%. The swaps market sees the terminal
rate between 3.25% and 3.50% in Q3. The ECB's Schnabel, and the governors of
the Dutch and Spanish central banks will also speak at tomorrow's Riksbank
function.
Germany November industrial
production rose by 0.2% instead of the 0.3% projected and the October series
was revised to show a 0.4% decline rather than the 0.1% initially
reported. Many are
still hopeful that a mild recession is still possible. The aggregate industrial
production figure for the eurozone is due at the end of the week and a 0.5%
gain is expected (median in Bloomberg's survey) after a 2.0% fall in October. Today,
the eurozone reported that is unemployment rate in November was unchanged at
the cyclical low of 6.5%. Recall that in December 2019, before Covid, the
eurozone unemployment rate was 7.5%.
The euro reached $1.07 in
late Asian turnover and pulled back in the European morning to about $1.0660. The session low is near $1.0645, and the
pre-weekend high was around $1.0650. The single currency reached almost $1.0715
on the last trading day in 2022 and had seen $1.0735 in mid-December. With the
euro at the upper end of its range, the market may be reluctant to push it much
higher without new incentives. Sterling gains have also been extended. The
pound rose to almost $1.2175. The next technical hurdle is seen in the
$1.2200-15 area ahead of the high last month near $1.2445. Here, too, euro,
has, at least initially, be reluctant to extend sterling's gains. Support is
seen in the $1.2080-$1.2100 area.
America
The combination of the
softer US average hourly earnings data and the weakness of the services ISM saw
the (Fed funds futures) downgrade the chances of a 50 bp hike on February 1 to
about 28% from 44%. The
strength of the Canadian jobs data spurred the market in the opposite
direction. The swaps market boosts the chances of a 25 bp hike from about 66%
to almost 81% on January 25. The median forecast in Bloomberg's survey was for
Canada to have created 5k jobs last month. Instead, it created 104k, of which
84.5k were full-time positions. Hours worked ticked up for the third
consecutive month, while aggregate hours worked in the US slipped for the
second month in a row. Despite weakness in the US and Canada's housing market,
it is striking that hiring in both construction sectors remain robust (28k in
the US and 35k in Canada). Still, more than a little counter-intuitive,
Canada's two-year yield slipped 6.5 bp ahead of the weekend, the biggest
decline in about 3.5-weeks. Indeed, the explanation for the pre-weekend move and
the larger (nearly 13 bp) decline on December 13, likely lies with the pull of
the US rates. The US two-year yield fell 21 bp before the weekend and on
December 13, in response to the softer than expected US CPI, the two-year yield
shed almost 16 bp.
The US reports November
consumer credit later today. It tends not to be a market mover. It is expected to have
slowed to around $25 bln from slightly more than $27 bln in October. Through
October, US consumer credit rose an average of nearly $30 bln a month. In the
same period last year, it rose by an average of $19.1 bln. In the first ten
months of 2019, consumer credit increased by an average of about $15.2 bln. The
revolving credit component (credit cards) has averaged $12.95 bln through
October and that compares with an average of $4.4 bln and $3.3 bln in the first
10 months of 2021 and 2019, respectively. Still, the market may be more
interested in the Fed-speak ahead of the December CPI figures on January 12.
Today, Atlanta Fed's Bostic and San Fran Fed's Daly are scheduled to speak.
Neither has the vote this year on the FOMC, but they participate in the Summary
of Economic Projections (dot plot), which seem to have been upgraded as policy
tool since days that Bernanke and Yellen played them down. That said, there is
much interest in whether Chair Powell who speaks at a Riksbank event tomorrow
uses the opportunity to underscore the December minutes, which pushed back
against the easing of financial conditions. Bank of Canada Governor Macklem
also speaks at the Riksbank's symposium.
Last week, the US Treasury
announced an increase in today's 3- and 6-month bill auctions by $3 bln to $57
bln and $48 bln, respectively. This is important for at least two reasons. First, increased bill
issuance may attract funds that are now utilizing the Fed reverse repo facility.
However, an underlying issue is that the reverse repos offer a higher yield
than bills. Second, the US statutory debt ceiling is approaching, and bill
issuance typically increases. The federal government is less than $80 bln away
from its $31.4 trillion cap. The election of the new House speaker may make the
negotiations to lift the cap more onerous. Still, this is the not the first
time, and there is a "playbook" of extraordinary measures that can be
taken that suggest the real crunch may be in Q3.
The reassessment of the
outlook for the Bank of Canada later this month after the strong jobs data, the
risk-on of rising equities, and the broad weakness of the greenback has seen
the Canadian dollar rise to its best level since late November. The US dollar is fraying support around
CAD1.34. The next near-term target is around CAD1.3320-45, while the
mid-November low was about CAD1.3225. That said, the downside momentum is stalling,
and a bounce may be seen in North America, but the CAD1.3450 should cap the
corrective bounce. Similarly, the greenback fell to about MXN19.1025 before
stabilizing. It is the lowest level since early last month. The downside
momentum faded, and the US dollar bounced to record a new session high in the
European morning near MXN19.1665. Above there, chart resistance is seen around
MXN19.20. Mexico reports December CPI figures today. The core rate is expected to ease (8.35% vs. 8.51%) but the headline rate may tick up to 7.84% from 7.80%, according to the median projections in Bloomberg's survey. After chaos in Brazil's capital yesterday, Bolsonaro's supporters
have been routed and the reaction from the markets is awaited. There is some
tentative indication that Brazil's equities may struggle. Bolsonaro did not
support the "insurrection".
Disclaimer
Reviewed by Marc Chandler
on
January 09, 2023
Rating:
