Overview: A consolidative tone is mostly the theme
of the day. The revisions to the US CPI announced before the weekend add to the
uncertainty and focus on tomorrow's report. At the same time, investors watch
ongoing air space activity that has led to a few objects being shot down over
the US and Canadian airspace. Yet the fear of escalation seems too mild still,
but China's ability to secure a rapprochement and leave its "wolf
diplomacy" behind is strained, even as it renews imports (coal) from
Australia. Its aerial harassment of Taiwan reportedly continued over the
weekend.
Chinese bourses were the only
large market in the Asia Pacific region that advanced today. Despite the yen's
pullback, Japanese stocks were sold with the Nikkei off almost 0.9%. Meanwhile,
Europe's Stoxx 600 has recouped about half of last week's 0.6% loss. US equity
futures are narrowly mixed. US and European bonds have steadied after last
week's sharp sell-off. The 10-year US Treasury is little changed near 3.73%,
while European benchmark yields are mostly 2-3 bp lower. The dollar is mostly
softer, but mostly +/- 0.15%. The yen weakest of the G10 currencies. The
greenback has recovered to within spitting distance of last week's high
(~JPY132.90) after slipping briefly below JPY130 before the weekend. Most
emerging market currencies are softer. Gold is finding support ahead of $1850,
its low in a little more than a month. March WTI is consolidating within the
pre-weekend range. Tomorrow OPEC makes its monthly report, and the IEA follows
on Wednesday.
Asia Pacific
The market is still trying
to grasp the meaning of the pre-weekend news that Bank of Japan deputy governor
Amamiya turned down the promotion and that former deputy governor Ueda will
formally get the nod tomorrow. First, if Amamiya was Prime Minister Kishida's first choice and
that represented continuity, it reveals the government's preference. Second, as
Ueda did in 2000, when the BOJ pre-maturely raised rates, as recently as last
July, he cautioned against too early of an exit from the extraordinary monetary
policy. Third, the reported appointment of Uchida as a deputy governor may also
be telling. He was an important aide to Amamiya and supported BOJ Governor
Kuroda. Finally, although there may not be a substantive change in policy in
the coming months, led by Ueda, the BOJ may begin providing insight into the
sequencing of an exit strategy.
Separately, Japan reports Q4
22 GDP tomorrow. It looks
to have rebounded after a 0.8% contraction (at an annualized rate) in Q3. Government
spending and a recovery in consumption likely offset weaker investment and
inventory accumulation. Net exports likely contributed around 0.4% rather than
cut 0.6% as it did in Q3. Still, the focus is squarely on the outlook for
monetary policy. It was a bear market for global bonds and speculation that the
BOJ was going to exit extraordinary monetary policy may have encouraged
Japanese investors to sell around $180 bln of foreign bonds (~8%) of their
holdings.
The dollar briefly dipped
below JPY130 before the weekend, a six-day low, but recovered to settle d near
JPY131.35. The
greenback's gains have been extended through the Asia Pacific session and
through the European morning to reach slightly above JPY132.75. There are
options for about $610 mln at JPY133 that expire today. The high so far here in
February has been JPY132.90. Some accounts are seen positioning ahead of
tomorrow's US CPI. The Australian dollar initially extended the pre-week
slippage and recorded a low near $0.6890 before recovering to $0.6940. Recall
that last week's low was closer to $0.6855, the low since January 6. The
highlight of the week is employment report on Thursday. The greenback gapped
higher against the Chinese yuan today, largely reflecting its pre-weekend gains.
After closing on its highs near CNY6.8145, the US dollar has not traded
below CNY6.8210 today. Today's price action filled the old gap left on the
charts from January 9. If the yuan were a freely floating currency, the dollar
looks to have carved out a technical bottom that suggests near-term potential
toward CNY6.90. The PBOC set the dollar's reference rate at CNY6.8151, slightly
above the median in Bloomberg's survey for CNY6.8146.
Europe
During the 2021 local
election in Berlin, a snafu prompted city's high court to rule a
"do-over." The problem arose from the marathon being held on the same day,
which caused a logistical nightmare. Berlin has been plagued by an assortment
of local problems while its government was led by a center-left coalition (SPD,
Greens, and Die Linke). The SPD took the brunt of the voter dissatisfaction,
and it ran a weak campaign to boot, according to the press. Yesterday, the CDU
received the most votes (~28.2%), but it is not clear that it can put together
a majority government of the center-right. A center-left government seems
likely, but perhaps with a green mayor. As one would expect, there did not seem
to be market reaction to the election results.
While the Berlin election
was driven by local politics (despite the Financial
Times headline), Italy's elections in Lombardy and Lazio are being framed
as a referendum on the right-of-center national government. The voting began yesterday and
continues today. The Lombardy government is led by the League, and the drama
here is whether Prime Minister Meloni's Brothers of Italy gain ground at the
expense of Salvini's League. The Lazio region, which includes Rome, is a different
story. The right hopes to seize control from the center-left, which has been in
disarray since losing the national election last September. It is fragmented
and has been unable to form a united front. On the national level, the
fractious coalition has found common ground with its anti-immigration efforts
while towing a mainstream line on other international issues, including aid to
Ukraine. Meloni's popularity and the support of the Brothers of Italy (~29% in
recent polls vs. ~9% for the League and ~7% for Berlusconi's Forza Italia) irk
and threaten Salvini and Berlusconi. The Brothers of Italy garnered 26% of the
vote in the general election. Ironically, success in these local elections,
especially if the Brothers of Italy do well, could increase the tensions in the
national coalition.
The euro traded poorly ahead
of the weekend and extended marginally to almost $1.0655 (~1/10 of a cent below
Friday's low). It has
recovered but is little changed on the day. There are large options that expire
at $1.07 today and tomorrow (1.15 bln euros and 2.25 bln euros, respectively)
that may help cap upticks. Sterling is trading with a heavier bias, as well.
It settled last week slightly above $1.2060 and has not been able to rise
much above $1.2070 today. It looks set to retest last week's low near $1.1960
and the 200-day moving average closer to $1.1945. A break could spur a test on
last month's low around $1.1850.
America
Ahead of the weekend, the US
revised the CPI basket weights; the net impact is that it showed less
deceleration in Q4 22 than the previous basket. This is a technocratic exercise and is not
about the preferences of either the Biden administration or the Federal
Reserve. A judgment call is how often the weighting should be adjusted. It had
been every other year, which has been changed to annually. The adjustment shows
the headline rate finished the year at 5.1%, not 4.3%, and the core rate is at
4.6% rather than 3.1%. The seasonal revisions showed CPI rise by a little less
than 10% in Q1 22 at an annualized pace and slightly more than 10% in Q2. This
slowed to about 2.5% in Q3 and around 1.6% in Q4 22. Even with a 0.5% in the
headline rate in January (and 0.4% in the core rate), the base effect will show
a slowing of price pressures and, barring a new shock, will continue through H1
23. In broad terms, as supply chains are repaired and demand normalizes, the
disinflation in goods prices may have largely run its course. The next phase of
the adjustment will likely come from services, and here the BLS calculation of
shelter costs lags what is happening on the ground.
The surge in nonfarm
payrolls reported on February 3 helped spur the adjustment to US rate
expectations that, in turn, helped fuel one of largest bounces in the US dollar
since it topped out last September/October. Canada reported its own hellacious employment report before
the weekend. It created 10x more jobs than the median forecast in Bloomberg's
survey project. Moreover, of the 150k jobs, slightly more than 121k were
full-time positions. The participation rate jumped to 65.7% from a revised
65.4% (initially 65.0%), though the unemployment rate was unchanged at 5.0%.
The risk is that the Bank of Canada's pause, announced last month, is a bit
shorter than expected. The risk of a rate a final rate hike around the middle
of the year is being reflected in the swaps market. The US two-year yield rose
almost 23 bp last week, the most since November. Canada's two-year yield rose
almost nearly 28 bp, the most since last August.
The US dollar recorded an
outside down day against the Canadian dollar in response to the strong Canadian
employment data before the weekend. There has been no follow-through selling today and the greenback
rose from about CAD1.3345 to CAD1.3380, where the 20-day moving average is
found. A move above CAD1.3380 could see CAD1.3420. The US dollar peaked last
week against the Mexican peso near MXN19.29. It was dragged down by
the more aggressive than expected rate hike (50 bp), falling to about MXN18.64
ahead of the weekend before settling at MXN18.67. It is consolidating today, as
if the market is catching its breath before challenging the support near
MXN18.50 seen earlier this month. Separately, concerns about a change in
Brazil's inflation target and President Lula's rhetoric about the central
bank's independence helped lift the US dollar a little above BRL5.30 at the end
of last week, the highest in about a month. The greenback reversed lower and
settled on its low near BRL5.2140. Support today is seen around BRL5.16-BRL5.17.
Disclaimer
Reviewed by Marc Chandler
on
February 13, 2023
Rating:
