Overview: Yesterday's string of dismal US economic
data delivered a material blow to those still thinking that a soft-landing was
possible. Retail sales by the most in the a year. Manufacturing output fell by nearly 2.5% in the last two months of 2022. Bad
economic news weighed on US stocks. The honeymoon of New Year may have ended
yesterday. The US 10-year yield fell below 3.40% for the first time since the
middle of last September. The Atlanta Fed's GDPNow tracker reduced its
projection from 4.1% for Q4 22 to 3.5%, which is still higher than most
economists' forecasts. Ironically, this comes as former Treasury Secretary
Summers, a vocal Fed critic, conceded yesterday that a recession could
ultimately be avoided, and the headline of the Financial Times yesterday was
about the brighter outlook at the IMF.
The Chinese recovery meme
helped regional equities resist the tug from the US sell-off, but Europe's
Stoxx 600 is off 1.2%, the most since mid-December, gives back this week's
gains and stops the six-day advance. US futures point the possibility of a gap
lower opening today. Benchmark 10-year yield are a couple of basis points
firmer in Europe, but the 10-year US Treasury yield is off slightly to dip
below 3.36%. Demand worries weighed on the price of WTI yesterday and API
reported a large jump in US stocks (7.6 mln barrel build), snapped the
seven-day rally. February WTI peaked yesterday near $82.40 and fell to about
$78.15 today before steadying.
Asia Pacific
There are two developments
in Japan to note. First,
the December trade deficit was smaller than expected. Japan's trade balance
typically improves from November (16 of the past 20 years). The trade deficit
fell to JPY1.45 trillion from JPY2.03 trillion in November. Exports slowed to
11.5% year-over-year from 20.0% but were a bit better than expected. Imports
slowed to 20.6% from 30.3%, which were less than expected. Last year Japan's
monthly trade deficit averaged JPY1.66 trillion, after JPY148.6 bln in 2021 and
a surplus of JPY32.4 bln in 2020. Second, the weekly MOF figures show Japanese
investors were significant sellers of foreign bonds last week. The sold JPY3.9
trillion worth of foreign bonds. It was the fifth consecutive weekly sales. Only
twice last year was the weekly divestment greater.
Australia's December
employment data was stronger than the headline loss of 14.6k jobs suggests. There was an increase of 17.6k full-time
positions after a revised 33.3k in November (initially 33.3k). The loss of jobs
was limited to part-time employment. The unemployment rate was steady at 3.5%
(November's rate was revised to 3.5% from 3.4%) even though the participation
rate unexpectedly slipped to 66.6% from 66.8%. Separately, note that the
January inflation expected (survey by the Melbourne Institute) rose to 5.6%
from 5.2%.
The dollar has spent the
Asian session and most of the European morning below where it settled in North
American against the yen (~JPY128.90). The greenback also has held above yesterday's low near JPY127.55. The
Australian dollar reversed lower yesterday and has continued to retreat today
amid the risk-off environment. Today's low, slightly below $0.6880, which
is about the middle of this month's range. It still a little above last week's
low (~$0.6860) and a break would target the $0.6830 area initially. After
rising to $0.6530 yesterday, its best level since last June, the New Zealand
dollar also stalled and has come back offered today, to approach Wednesday's
low near $0.6370. The next area of support is seen around $0.6340. The Kiwi was
already under pressure before the unexpected resignation of Prime Minister
Ardern. A new Labour Party leader will be chosen over the next few weeks and
will lead the party into the mid-October election. The greenback edged
higher against the Chinese yuan. It is the third advance this week. The
dollar's reference rate was set at CNY6.7674, slightly lower than the median
forecast in Bloomberg's survey (CNY6.7685). The PBOC has continued to add
liquidity into the banking system ahead of next week's Lunar New Year holiday.
Europe
Switzerland's new finance
minister Keller-Sutter indicated that it will reluctantly accept the global
minimum tax rate of 15%, confirmed what was already recognized. It is slated to begin next January. She
warned that due to the "failsafe" clauses, if the host country does
not impose the 15% minimum tax, then another country will (this is the
so-called undertaxed profits rule). Last summer, the US congressional Joint
Committee on Taxation estimated the 15% global minimum tax would generate an
additional $318.7 bln in extra revenue over the next decade. While the White
House and Treasury support the international tax agreement, the Senate last
year failed to support the effort. There seems to the hope among some US
officials that if the other countries continue planning to implement the
minimum corporate tax (might apply to 40-50 US companies, according to some
estimates), it will force congressional action. The companies subject to the
minimum tax would still be paying it but not into US coffers. The loss of these
revenues as the debt ceiling looms could eventually lead to some deal to
implement the minimum corporate tax, but it looks unlikely.
There are two market metrics
to gauge the tension in Europe. The first is the yield differential between Germany and Italy. The
continues to show low-level anxiety. Italy's 10-year premium eased to 170 bp
yesterday, the least in nine months. Italy's 2-year premium approached 25 bp,
the lowest level since October 2021. On one hand, the Meloni government has not
be as disruptive as investors feared. The two-year spread was near 132 bp and
the 10-year differential was slightly above 250 bp in late Q3 22. That said, it
is not unusual for the Italian premium over German to be sensitive to the
direction of rates. When they decline, the Italian premium frequently does, and
that has been the case. In a rising rate environment, like today, the premium
typically increases. The other market metric is the Swiss franc-euro cross.
That is signaling a more cautious note. At the end of last week, the euro
traded at its best level against the Swiss franc (~CHF1.0098) since the middle
of last year and moving above the 200-day moving average. After reversing lower
before the weekend, the euro has tumbled to around CHF0.9875 and found support
yesterday and today. Additional chart support is seen in the CHF0.9800-30 area.
As widely anticipated,
Norway's central bank, Norges Bank, paused its tightening, with its key deposit
rate at 2.75%. Still,
the central bank was clear that another rate hike is March was "most
likely." At the end of last year, Norges Bank indicated that the
deposit rate would increase to around 3% this year. The krone pared is earlier
losses. Indicative pricing suggests that many participants look for a 3.25%
peak near mid-year.
The euro made a marginal new
high since April yesterday a little shy of $1.0890 but came off to a four-day
low near $1.0765 as the risk-off mood gathered momentum as US equities tumbled.
The euro has steadied
today and is straddling the $1.08-level. A break of the $1.0730 area is needed
to signify anything important from a technical perspective. The recovery to new
session highs in the European morning are stretching the intraday momentum
indicators, warning of the risk of a pullback in early North American turnover.
Sterling approached the mid December high (~$1.2445) yesterday but stalled.
It is in less than a half-cent range below $1.2350 today. If the $1.2300 area
does not hold, the next support area is seen around $1.2250.
America
It is difficult to imagine
an uglier set of data for the US. Consumption (retail sales), output (industrial production), and
prices (producer prices) were all weaker than expected. Not only did December
retail sales fall by 1.1% (median forecast in Bloomberg's survey envisioned a
0.9% decline) but the November series was revised to show a 1% loss instead of
a 0.6% decline as initially report. Industrial output contracted by 0.7%
(median forecast in Bloomberg's survey was for a 0.1% decline). And adding
insult to injury November's 0.2% loss was revised to a 0.6% fall. Manufacturing
production fell by 1.3% after a revised 1.1% drop in November (originally, a
0.6% decline). It is like the economy fell off a cliff, though the survey data
has warned of these cracks. Headline producer prices tumbled by 0.5% in
December, well more than 0.1% economists had projected.
Economists likely shaved Q4
GDP forecasts on the back of the data. The first estimate is due next week. Expectations for the
termina Fed funds rate has eased a bit and now looks to be in the middle of the
4.75%-5.0% range. The median Fed dot was a little above 5.0%. The implied yield
of the December Fed funds futures implies not only one quarter-point cut before
the end of the year, has about 30% of a second one discounted. The 2-year note
yield slipped briefly below 4.07%. It has not been this low since October 10,
when it last yielded less than 4%. The $12 bln 20-year bond auction was one of
the best for this tenor. It was awarded at yield nearly three basis points
below where it was in the When-Issued market despite the nearly 10 bp decline
before the auction deadline. The bid-cover was an impressive 2.83 and dealers
absorbed only 8.1%
So, the US debt ceiling is
at hand, but really? In
this repetitive macabre political dance, the US Treasury has a playbook that
Secretary Yellen says could extend through Q2 without significant disruption.
Recall that ceiling limits the US ability to pay for what is has already
authorized to spend. It is rather bizarre. In August 2011, in explaining its
removal of the AAA-rating of the United States several days after the debt
ceiling was lifted, S&P explained "The political brinksmanship of recent months
highlights what we see as America's governance and policymaking becoming less
stable, less effective, and less predictable than what we previously believed.
The statutory debt ceiling and the threat of default have become political
bargaining chips in the debate over fiscal policy." Shortly after the
downgrade, the US opened in a formal investigation in the S&P in rating
several mortgage-backed securities that may have helped precipitate the Global
Financial Crisis. Less than three weeks after the downgrade, the CEO of S&P
stepped down.
The
risk-off mood is taking a toll on the Canadian dollar. The greenback posted an
outside up day against the Canadian dollar and recovered to CAD1.3500 after
setting a three-day low near CAD1.3350. Follow-through buying today has lifted
it to CAD1.3520. The CAD1.3540 area is the (61.8%) retracement of the US
dollar's losses since the month's high was recorded on January 3 around
CAD1.3685. The greenback posted a key upside reversal against the Mexican peso
yesterday and there has been follow-through buying here as well. Yesterday,
the US dollar initially fell to its lowest level since March 2020 (~MXN18.5665)
and reversed sharply higher, reaching MXN18.9025, a four-day high. It
closed near its highs and has been bid to MXN18.9950 today in the European
morning. We suspect this is the kind of pullback in the Mexican peso that may
bring in new buyers, attracted to its high rates and relative political
stability. The greenback also recovered smartly against the Brazilian real. It
was mostly a risk-off story, but President Lula's questions about the
importance of an independent central bank does not set right with investors who
are concerned about the direction of the new government. A move above BRL5.2250
targets BRL5.2725 and maybe the BRL5.32 area.
Disclaimer
Reviewed by Marc Chandler
on
January 19, 2023
Rating:
