Overview: The dollar remained firm yesterday, even
after the ECB's hawkish stance, reaffirming its intention to hike rates by
another 50 bp next month. We had expected the greenback to have been sold in
North America yesterday. That this did not materialize warns that despite its
pullback in Asia and especially Europe today, that near-term sentiment may be
changing with the Fed and ECB meetings over and die cast for next month, where
the Fed is seen hiking by a quarter-point and the ECB by half. This suggests a
consolidative/corrective phase for the dollar may be seen in the coming days,
ahead of the January CPI on February 14. We expect US consumer inflation to
slow considerably in the coming months, beginning with this report. Still, the
market must get through today's US employment report and the services ISM, both
of which sent the dollar reeling last month.
US NASDAQ futures are trading
sharply lower following the poor news from Alphabet, Apple, Amazon, and
Qualcomm. However, Asia Pacific bourse mostly rose with China and Hong Kong
notable exceptions. Europe's Stoxx 600 is marginally lower after surging 1.35%
yesterday, its strongest gain in a month. European bonds are selling off and
benchmark yields are 6-9 bp higher. The US 10-year Treasury yield is soft at
3.39%. Gold posted a key reversal yesterday. After making new highs (almost
$1960) it reversed and settled below Wednesday's low. Follow-through selling
has pushed it to about $1910 today. A break of $1900 would be a potentially
ominous technical development. March WTI is holding the $75 a barrel level, a three-week
low.
Asia Pacific
Confidence that Chinese
growth is set to rebound was supported by the Caixin service and composite
PMI. The services
PMI jumped to 52.9 from 48.0 and the composite rose to 51.1 from
48.3. Next week China reports January lending figures, which are set
to surge. Separately, it will report consumer and producer prices. CPI is
expected to accelerate to a four-month high near 2.3%. The decline in producer
prices may moderate but is expected to be negative for the fourth consecutive
month. Lastly, the appreciation of other major currencies suggests the dollar value
of Chinese reserves rose in January.
Japan's service and
composite PMI suggest that the recovery of world's third-largest economy from
the contraction in Q3 is strengthening at the start of the new year, even
though both were pared. The
services PMI is at 52.3 rather than 52.4 of the flash estimates, but still up
from 51.1 in December. The composite PMI is at 50.7 not 50.8, but in December
it was below 50 for the second consecutive month. Next week, Japan reports
December labor earnings, household spending and trade figures. The data seems
dated but may help economists fine-tune forecasts for Q4 GDP, which currently
are a little below 2% at an annualized rate.
Ideas that the re-opening of
China bodes well for Australia has thus far not been confirmed and the final
service and composite PMI remain below the 50 boom/bust level (48.6 and 48.5,
respectively). Still,
the higher-than-expected Q4 22 and December CPI favors a 25 bp hike by the
Reserve Bank of Australia when it meets on February 7. That would bring the
cash target rate to 3.35%. The futures market sees a peak between 3.50% and
3.75%. The monetary policy statement at the end of the week will be scrutinized
for confirmation. Australia trade surplus widened in the four months through
last November. However, in December, it may have narrowed a little.
The dollar fell to about
JPY128.10 yesterday and is holding in a tight range between about JPY128.45 and
JPY128.85. It is trading
marginally lower for the fourth consecutive session. The greenback is off about
1% this week against the yen and is approaching the lower end of the recent
range that extends to JPY127.25-50. Softer US rates make it difficult to for
the greenback to stage much of a recovery. After making a new high yesterday
near $0.7160, the Australian dollar sold off and was unable to recover in North
America yesterday, contrary to our expectation. Follow-through selling took
it to about $0.7045 today, a little above the mid-week low near $0.7035, though
the low for the week was set the day before near $0.6985. Initial resistance
now may be around $0.7070-80. Without a recovery above $0.7100 today, it would
only the fourth weekly decline since mid-October. The dollar gapped slightly
higher against the Chinese yuan after gapping lower yesterday. This leaves a
bullish one-day island, which would be bullish if it were a freely floating
currency. The dollar is trading about 0.65% lower on the week. However, more
broadly speaking, the dollar continues to churn in a CNY6.70-CNY6.80 range. The
PBOC set the dollar's reference rate at CNY6.7382, a little below the CNY6.7399
median projection in the Bloomberg survey.
Europe
The ECB is the most hawkish
of the G7 central banks. Among
the G10, only the Reserve Bank of New Zealand may be more aggressive on rates
in the coming months. The ECB delivered the as expected 50 bp hike yesterday
and gave a strong signal that barring an unexpected development, another 50 bp increase
will be delivered in March. The Bank of England hiked by 50 bp, defying
forecasts some banks of a quarter point move. The BOE also saw the recession,
which it sees beginning this quarter, to be shallower and shorter than it
projected last November. The swaps market favors a 25 bp hike next month to
finish the "normalization" cycle that began in December 2021. Next
week, the eurozone reports December retail sales, which the collapse in the
German figures (-5.3% vs. median forecast of -0.2% in Bloomberg's survey) warns
of a poor number, and PPI. The highlight of the UK calendar comes at the end of
next week with Q4 22 GDP. After contracting by 0.3% in Q3, economists expect a
flat Q4.
The final service and
composite PMI readings were a bit better than the flash reading for the
eurozone suggested. The
service PMI stands at 50.8 from 50.7 preliminary, but importantly, confirming
the recovery back above 50. The same is true for the composite. It is at 50.3,
up from 50.2 initial estimate and 49.3 in December. It had been below 50 since
June. It was the third monthly gain. German and France's preliminary reading
inched higher. Spain was stronger than expected and the composite rose to 51.6
from 49.9. Italy's composite also regained the 50 boom/bust level, rising
to 51.2 from 49.9. The UK's final service and composite PMI improved from
the flash readings but at 48.7 and 48.5 both remain below 50.
The euro extended
yesterday's reversal today and fell to almost $1.0880 before finding bids that
took it to session highs in the European morning near $1.0935. The intraday momentum indicators are
stretched, and the $1.0950 area may cap it. We suspect yesterday's high
slightly above $1.1030 is important but the dip buying remains impressive. Sterling
posted an outside down day yesterday by trading on both sides of Wednesday's
range and settling below its low. Follow-through selling saw it slip
fractionally through $1.2185, to record a two-and-a-half week low. It found a
strong bid in the European morning to lift it to $1.2265. Here too intraday
momentum indicators are stretched. A sell-off in North America could see the
five-day moving average move below the 20-day moving average for the first time
in about three weeks.
America
Weekly initial jobless
claims fell for the third consecutive week and at 183k last week are the lowest
since last April. The
Challenger job layoffs rose to their highest year-over-year level last month
since July 2020, but this is only one half of the churn. It is like looking at
liabilities and ignoring assets. Between the ADP data and the weekly jobless
claims, there is little doubt that the US economy is growing jobs on a net
basis. Still, both point to a slowing net jobs growth. The monthly average in
Q4 22 was a little shy of 250k a month. In Q3, the average was 366k. The median
forecast in Bloomberg's survey is for a 190k increase last month, which if
true, would be the least since a loss of jobs was recorded in December 2020. A
wild card are revisions, which include updated population estimates that impact
the household survey (and unemployment rate). Today, the BLS also adjusts the
survey-based payroll figures with data from the state unemployment insurance. The
revisions also incorporate more updated data through Q1 22, and the preliminary
work by the Philadelphia Fed for Q2 22, which will not show up in the BLS data
until next year suggests that job growth was less robust than initial data
showed.
Hourly earnings are expected
to have slowed. The year-over-year
pace peaked last March at 5.6% and finished last year at 4.6%. A 0.3% increase
last month would bring the year-over-year rate to 4.3%, matching the low since
June 2021. This is still elevated from a policy point of view, but unit labor
costs, which include productivity slowed to 1.1%, the smallest increase since
Q1 21. The average in H2 22 was about 1.55% down dramatically from 7.6% in H1
22. Watch hours worked too. The average work week fell to 34.3 hours in
December. That is the shortest since Covid struck. Pre-Covid, it was also at
34.3 hours. Aggregate hours worked feeds into estimate of GDP. The US also sees
the final services and composite PMI, but this may be old news compared with
the service ISM, which last month's report seemed to have greater market impact
than the employment data itself. The median forecast in Bloomberg's survey
looks for a recovery to 50.5 from 49.2. Note that the preliminary
services PMI rose to 46.6 from 44.7.
The US has a light economic
calendar next week but note Fed officials begin speaking again following the
FOMC meeting, and the US Treasury's quarterly refunding involves the sale of
$91 bln in notes and bonds. Only about $28.5 bln is new cash. Canada's January employment data
will be reported at the end of next week. Canada grew about 160k full-time jobs
in last two months of 2022. Full-time jobs rose an average of 28.5k a month in
Jan-Oct period. Mexico's central bank meets on February 9, several hours after
the release of January CPI. Price pressures may have edged up, but Banxico will
likely match the Fed's quarter-point hike.
The US dollar is recovering
from the CAD1.3260 low approached yesterday and traded to almost CAD1.3375
today. It approached the
20-day moving average (slightly below CAD1.3380) but has not closed above it
since January 3. Initial support now is seen in the CAD1.3300-20 area. The
greenback bounced smartly off the MXN18.50 level, a new low since Covid, and
ran up to MXN18.7075. It has been in a narrow range so far today near
yesterday's highs. A move above MXN18.73 could see MXN18.80-MXN18.85 today. This
seems more a question of positioning than a change in sentiment.
Disclaimer
Reviewed by Marc Chandler
on
February 03, 2023
Rating:
