Overview: A combination of month-end adjustments and
positioning ahead of the outcome of tomorrow's FOMC meeting has taken the shine
off equities and has helped lift the dollar. On the heels of yesterday's sharp
decline on Wall Street, several large markets in the Asia Pacific region,
including China's CSI 300, the Hang Seng, and both South Korea's Kospi and
Taiwan's Taiex fell by more than 1%. Although the eurozone eked out a small
expansion in Q4 22, the Stoxx 600 is sliding 0.8% in late morning turnover. In
US futures, trading the S&P 500 is off about 0.35%, half as much as the
NASDAQ. Bond markets are drawing some support with most European benchmark
yields off 1-2 bp, while the 10-year US Treasury yield is slightly lower near
3.53%.
The US dollar is firm, with the Norwegian krone and Australian dollar leading the way, pulling back around 1%. The Dollar Index is at nine-day highs, having reached 102.60. Despite repeated attempts, the euro was unable to establish a foothold above $1.09 and was sold back to around $1.08 today. Sterling was turned back from $1.24 yesterday and approached $1.23 today. The Japanese yen is the best performer in the G10 and is little changed, though the greenback has held above JPY130. Among emerging market currencies, only the Taiwanese dollar has escaped the US dollar's advance. Gold has taken it on the chin. It held $1950 last week and has approached $1900 today, slipping through the 20-day moving average (~$1904) for the first time this month. It has not closed below the 20-day moving average since November 3.
Asia Pacific
China's January PMI readings
will strengthen optimism around the re-opening. The manufacturing and non-manufacturing
(includes construction and services) both move above the 50 boom/bust level for
the first time in four months. Economists anticipated the improvement in the
manufacturing PMI to 50.1 (from 40.7), but the non-manufacturing PMI surprised
to the upside. It surged from 41.6 to 54.4. The median forecast in
Bloomberg's survey was for 52.0. The composite rose to 52.9 from
42.6. Still, it seemed to confirm what was more or less assumed and
market showed little initial reaction. Separately, weaker output and falling
producer prices (someone's income) led to a further decline in total industrial
profits in December (-4.0% year-over-year cumulative). It is the biggest loss
since August 2020.
Japan reported December
employment, retail sales, and industrial production figures today. The labor market was little changed with
2.5% unemployment. Retail sales recovered (1.1%) after falling 1.3% in November.
Industrial output slipped 0.1% in December. The median forecast in Bloomberg' s
survey was for a 1% decline. 1% last month. Q4 GDP is not out until the middle
of next month, but expectations are for a strong recovery after a 0.8%
contraction in Q3. Foreign demand, as reflected in exports, has been softening,
and domestic demand has been weak (household spending flat in Oct-Nov). Consumption
accounted for about 57.1% of Japan's GDP in Q3 22 and 55.4% in Q2 22 (China
consumption, which many argue is very low, was about 54.5% in 2021).
Australia reported dreadful
December retail sales. Instead
of falling by 0.2% as the median forecast in Bloomberg projected, Australian
retail sales tumbled 3.9%. It is the largest decline since August 2020. Some
sales were brought into November and Black Friday, and the November gain was
revised to 1.7% from 1.4%. Consumption is about 60% of Australia's GDP. At the
same time, Australia reported slower than expected credit growth in last month.
The futures market looks for a peak in the overnight target rate of 3.75% from
the current 3.10%.
The dollar traded on both
sides of the pre-weekend range yesterday against the Japanese yen and closed
above its high. However,
there is has been no follow-through buying, and the greenback remains mired in
a narrow range of about half a yen above JPY130. Last week's high was slightly
above JPY131.10. The Australian dollar peaked last week near $0.7140, and
today's setback has seen it approach $0.7000. It has now retraced about half
of its rally from the January 19 low near $0.6870. The next retracement (61.8%)
is around $0.6975 and the 20-day moving average, which it has not closed below
since January 3 is about $0.6965. Despite the favorable PMI readings, China's
CSI 300 fell a little more than 1% today, its biggest loss since before
Christmas. Still, the yuan resilient in the face of the broader dollar gains
and traded quietly within yesterday's range (~CNY6.7450-CNY6.7930). The PBOC
set the dollar's reference rate tightly against expectations (CNY6.7604 vs.
CNY6.7601).
Europe
A few hours before the
aggregate Q4 eurozone was reported, France announced that its economy grew by
0.1% in Q4, defying expectations for a flat quarter. Spain surprised to the upside last
week. Its GDP expanded by 0.2% increase of 0.1%, helped, it appears, by a
decline in import and stronger household spending in December. On the other
hand, Italy joined Germany in reporting a small contraction. In aggregate the
eurozone economy grew by 0.1% in Q4 for a 1.9% year-over-year pace.
Tomorrow, ahead of
Thursday's ECB meeting, the preliminary estimate of January's CPI will be
published. Early
indications from Germany states, which were due today, have been postponed
until next week, due to base year changes. French figures today showed an
increase in the EU harmonized measure to 7.0% from 6.7%. The cyclical high was
reported in October and November 2022 at 7.1%. Recall that yesterday's Spain's
figures also disappointed with the harmonized measures accelerating at 5.8%
from 5.5%. The aggregate CPI is expected to rise 0.1% this month after a 0.4%
decline in December. The year-over-year rate is seen easing to 8.9% from 9.2%,
while the core is expected to slip 5.1% from 5.2%.
The UK reported weaker than
expected mortgage lending and approval last month. Net consumer credit rose by about half of
the GBP1.1 bln increase that was projected. The news played into IMF's report
that see the UK economy the only G7 country to be in a recession this year and
anticipates a 0.6% contraction. In October, the IMF had forecast a 0.3%
expansion. Note that the expansion that the IMF had projected was calculated
before the unfunded stimulus of the short-lived Truss government was proposed.
The IMF did not cut its forecast of the other G7 countries in its update and
lifted the global projection to 2.9% this year from 2.7%.
The euro's push above $1.09
yesterday was not sustained and it settled near $1.0850. Follow-through selling today saw it
approached $1.08, matching its lowest level since January 19. Broadly speaking
the price action looks like position adjustment on month-end and ahead of
outcome of the FOMC meeting tomorrow. The 20-day moving average comes around
$1.0795. The euro last closed below it on January 5. With the help of the
better-than-expected GDP figures, the euro recovered to about $1.0835, where
sellers re-emerged. Resistance may extend back to the $1.0850 area while the
initial downside risk may extend to around $1.0760 on a break of the $1.08 area.
Sterling again was turned back yesterday from the $1.24 area and today's
pressure pushed it to close to $1.23, a four-day low. Last week's low was
near $1.2265, and the 20-day moving average is slightly lower (~$1.2260). They
represent the next target. There is little chart support below there until
closer to $1.2170.
America
Both Adam Smith and John
Maynard Keynes wrote about the globalization of their eras. What we call globalization these days
seems incomprehensible if one does not accept the distinction between two
strategies of servicing foreign demand: exports, the traditional channel,
and direct investment, which, in deed, even if not in word, is the preferred US
strategy. Sales by majority-own affiliates of US multinationals have exceeded
US exports since data began being collected in the early 1960s. Direct
investment entails building/buying production facilities abroad. The rise of
trade in parts and semifinished goods speaks the to the extension of the
division of labor. Owing to advancements in command, control, and
communication, and the decline in shipping cost, the different parts of the
production process can be disbursed across national frontiers. The tax
arbitrage and shuffling of intellectual property is an excess and parasitic,
but they are not intrinsic to globalization. Those activities are largely
accounting entries more than the part of the circuit of capital. The US direct
investment strategy was being implemented long before capital was liberated,
which started in earnest only in the late 1970s and early 1980s.
Looking for concrete
measures? Take a look at
the Activities
of US Multinational Companies in a recent BEA report for 2020.
Let's focus on something that is unlikely to be exaggerated or distorted for
tax purposes, employment. The multinational businesses employ about 28.4 mln
employees in the US in 2020 and around 14 mln abroad. More than half are in
high-wage economies, such as Australia/New Zealand (1.35 mln, though ~85% in
Australia), 1.18 mln in Canada, 780k in Japan, and 4.76 mln in Europe
(including 1.5 mln in the UK). If our first point is that modern globalization
is about direct investment, the second point is that US direct investment does
not appear mainly driven by low wages, but the proximity of demand. Even in
developing regions, the US multinationals typically employ more people in high
wage areas. Israel, for example, accounts for more than half of the US
companies' employment in the Middle East. Mexico accounts for almost 80% of US
affiliate employment in Central America. As the economist Joan Robinson
quipped, "The misery of being exploited by capitalists is nothing compared
to the misery of not being exploited at all." Still, China and India
stand out. Of the roughly 4.9 mln employed by US majority owned affiliates
found in the Asia-Pacific region, India (1.5 mln) and China (1.2 mln) account
for about 55%. Even then, other considerations besides cheap labor standout,
like English-speaking Indians, and the size of China's domestic market (e.g.,
GM, McDonalds, Starbucks, etc.).
The US reports Q4 Employment
Cost Index, which is understood as a better measure that average weekly
earnings, whose frequency captures the market's attention. The ECI remains elevated compared with
pre-Covid levels. House prices are also on tap and expected to have continued
to soften in November. The Conference Board's consumer confidence survey is
unlikely to elicit much of a market reaction. Canada reported November GDP. A
0.1% expansion is expected for a 2.7% year-over-year pace. Still, with the Bank
of Canada declaring a pause last week, the data will be of little consequence. Mexico
reports Q4 GDP. A 0.3% expansion is projected, which translates into a 3.4%
year-over-year rate. That is down from almost 4.3% in Q3, but still a
relatively good number for Mexico, and better than the first two quarters of
2022 and Q4 2021.
After finding good demand
near CAD1.3300, the US dollar jumped to CAD1.3390 yesterday and has surged to
nearly CAD1.3460 today. The
risk-off mood seems to be the key driver. Resistance is seen in the
CAD1.3500-20 area. Initial intraday support may be in the CAD1.3420-40 band. Some
US dollar buying may be related to the $1.22 bln option at CAD1.3400 that
expires today. The greenback is bid against the Mexican peso. It
initially slipped through yesterday's low near MXN18.75 but has now recovered
through yesterday's high (~MXN18.81). A close above there would be a favorable
technical development and suggest potential toward last week's high around
MXN18.9250.
Disclaimer
Reviewed by Marc Chandler
on
January 31, 2023
Rating:
