Overview: Concerned about the political wrangling over servicing US
debt, Fitch put the US on negative credit watch. Besides chin
wagging and finger pointing, it has had little perceptible impact. The dollar
is mostly higher, reaching new highs for the year against the Japanese yen,
Chinese yuan, and the Antipodean currencies. The euro and sterling met
retracement objective we have targeted (~$1.0735 and $1.2435, respectively).
The greenback is also firmer against nearly all the emerging market currencies but
a small handful that includes Russia, Mexico, and Taiwan. Gold reversed lower
yesterday from $1985, the upper end of a five-day trading range and settled
slightly below $1957. Follow-through selling today has been limited ($1955) the
intraday momentum is stretched with it near $1965 in the European morning. Benchmark 10-year yields in Europe and the US are up around slightly, but the sell-off in UK Gilts following yesterday's higher than expected CPI, continues. The 10-year UK yield is up almost 10 bp, bringing the cumulative gain in the seven consecutive increase to almost 50 bp.
Most of the large Asia Pacific equity markets are weaker,
led by s sharp 2.2% sell-off of mainland shares that trade in Hong Kong. The
CSI 300 is lower on the year but both Shanghai and Shenzhen composites are
still positive. Japan's Nikkei rose (0.4%) and Taiwan's Taiex rose by 0.8%. After
tumbling 1.8% yesterday, Europe's Stoxx 600 has steadied today (~+0.1%).
S&P 500 futures are up about 0.6%, which could put the cash market near the
upper end of yesterday's range when it gapped lower. NASDAQ futures are around
1.8% higher and this could translate into a gap higher following yesterday's
gap lower. If sustained, a bullish one-day island could be left in its wake. Lastly,
July WTI is paring yesterday's surge that had been encouraged by warnings by
Saudi Arabia against speculative shorts and the largest drawdown of US stocks
(~14.1 mln barrels) in more than six years, according to the EIA. July WTI
approached $75 yesterday, it highest in more than three weeks. Now it is near
yesterday's low (a little above $73).
Asia Pacific
It was a largely news-less Asia Pacific
session and the price action itself was the news. Japan's weekly portfolio flow report
showed foreign buying of Japanese bonds and stocks continued and Japanese
investors continued to buy foreign bonds though with a weaker yen. The other
main development was the Bank of Korea's decision to keep its seven-day repo at
3.5%, where it has been since mid-January. Consumer inflation stood at 3.7% in
April, the lows since January 2022, and the base effect allows for additional
slowing over the new few months. It has risen at an annualized rate of 2.8%
over the last three months. The central bank also shaved this year's GDP
forecast to 1.4% from 1.6%. Separately, the central bank of Indonesia also
stood pat.
Tomorrow, Japan reports Tokyo's May CPI. While the headline and core rates may slow
slightly from the 3.5% year-over-year pace in April, the underlying rate, which
exclude fresh food and energy, is seen edging to a new high (3.9%). The Tokyo's
CPI is a good estimate of the national figures which come with a few weeks lag.
Ahead of the weekend, Australia reports April retail sales. A 0.3% increase is
the median forecast in Bloomberg's survey, which is the average of the February
and March.
The dollar broke out of the four-day
consolidative pattern against the yen to trade at its best level since last
November yesterday and extended the gains to JPY139.70 today. We have been suggesting potential into the
JPY139.50-JPY140 area, which corresponds to the (50%) retracement of the
dollar's decline since peaking last October near JPY152. The area is also of
some chart significance and psychological importance. Options for about $765
mln expire today at JPY139.50 have likely been neutralized. Another set of $920
mln options expire tomorrow at JPY140.00. The Australian dollar was
dragged to new six-month lows yesterday by the plunging New Zealand
dollar. By falling to around $0.6530, the Aussie exceeded the (61.8%)
retracement of its rally from low set last October (~$0.6170). It fell
fractionally more today to almost $0.6520. Although the price action is poor,
it looks overdone. The Aussie closed below its lower Bollinger Band
(two-standard deviations for the 20-day moving average), which is found near
$0.6530 today. Other momentum indicators are getting stretched. That said, a
break of $0.6500 leaves little chart support ahead of $0.6400. The New Zealand
dollar took out March's low (~$0.6085) earlier today and is also below its
lower Bollinger Band ($0.6100). Given the yen and euro's weakness, it
may not be surprising that the dollar also made new highs for the year against
the Chinese yuan (~CNY7.0750). The dollar entered but did not
completely close the downside gap created by Tuesday's higher opening and then
rallied through Tuesday's high. The greenback is climbing the five-day moving
average, which is found near CNY7.0460 today. The dollar has entered a band of
chart resistance in CNY7.07-CNY7.11.
Europe
Europe also has a light economic calendar
today. Germany
revised down Q1 GDP to -0.3% from flat, making it the second consecutive
quarterly decline meeting some textbook definitions of a recession. Consumption
contracted by 1.2% after a 1.0% decline in Q4 22. It was roughly twice the
decline that economists projected. Government spending fell by a dramatic 4.9%,
which was also considerable worse than expected. The drags were blunted by a
recovery in fixed investment (3.0% vs. -2.6% in Q4 22). Net exports also
contributed. Germany reported a nearly 47.5 bln euro trade surplus in Q1. It is
the largest since Q3 21 and is more than 60% larger than Q4 22. Separately the
GfK consumer confidence measure for May was released. The improvement seen since
the end of last year seems to be slowing. France reported some business
confidence measures that were little softer than expected and April retail
sales. They had fallen by 5.6% year-over-year in March and in April were 6.8*%
below year ago levels. Germany reports April retail sales next week. The UK
reports April retail sales tomorrow. A small rise is expected after the 0.9%
decline in March.
The euro has been driven to new two-month
lows slightly below $1.0715. It has surpassed the (61.8%) retracement of the euro's rally
from the March low ($1.0515), found near $1.0735. The momentum indicators are
oversold even if they have not turned higher. Additional chart support is seen
in around $1.07. A close much below $1.07 will likely spur talk of a move back to
the March low. Sterling posted a big outside down day yesterday by
trading on both sides of Tuesday range and settling below its low. It
posted its lowest settlement in more than a month and just inside its lower
Bollinger Band (~$1.2355). We have been anticipating a test on the $1.2345
area, the (38.2%) retracement of sterling's rally off the May 8 low near
$1.1800, which it met today with a push today to almost $1.2330 before
stabilizing. The next retracement (50%) is about a cent lower. The momentum indicators
are stretched and a close above $1.2400 would help the technical tone. Still
up, South Africa's central bank is expected to lift its key rate 50 bp to
8.25%, while Turkey may hold the one-week repo rate steady at 8.50%.
America
The FOMC minutes did not seem to tell
investors anything they did not already know. The consensus that Chair Powell has forged
has been remarkable, but it appears to be fraying as the endpoint is
approached. The outlook is not as clear as the "Powell signaled a
pause" consensus view would have it. That makes it seem that the bar to
another hike is not so high after all. The Fed's staff continued to project a
shallow recession later this year and a "moderately paced
recovery." We suspect that the economy peaks this quarter around
twice the pace of Q1 (1.1%) and then slows markedly in H2. In terms of interest
rate expectations, there are two moving pieces. First, the odds of a June hike
are around 30%. Recall that they were near 40% before Powell spoke at the end
of last week. Second, the market has pared rate cut speculation. The year-end
effective rate is seen near 4.83%, the highest in two months. It has risen in
12 of the past 14 sessions coming into today. The yield has risen by 17 bp in
the first three sessions this week after 26 bp last week and seven the week
before. We anticipated the markets to converge toward the Fed and that this
would be dollar positive. However, the lion's share of the interest rate
adjustment may be behind us.
Today's US data is unlikely to be impactful
barring a significant surprise. Updated estimates of Q1 GDP will be noted in passing but the focus
is on Q2 and H2. Pending home sales in April may have stabilized, but the
year-over-year rate shows the damage. It was 23.3% lower in March year-over-year.
The KC Fed manufacturing survey and the Chicago Fed's national activity index
do not draw much market attention even in the best of times. Boston and
Richmond Fed presidents (Collins and Barkin) speak today. Both are seen to be
middle of the road, though neither votes this year. Tomorrow, the US reports
April income, consumption, and deflators, along with the trade balance,
inventories, durable goods orders, and the final University of Michigan survey.
Monday is a holiday and liquidity will likely dry up after the data and
Europe's close tomorrow.
The risk-off mood, captured by the gap lower opening in the S&P 500 and the rise in US rates may have pressured the Canadian dollar lower, even if the Australian and New Zealand dollars did not sell-off so sharply. The US dollar broke out of the consolidation pattern to poke above CAD1.36 for the first time since May 4. It closed above the downtrend line we have been monitoring (drawn off the March and April highs) that came in yesterday near CAD1.3570. Follow-through dollar buying has been limited to almost CAD!.3615 today. The next important chart area is around CAD1.3650. After trying to sell its branch operations for over a year, Citibank changed course and will now look to offer them in an IPO. Although the fight between the government and Grupo Mexico, which had been the suspected buyer of Citi's branch network in Mexico (~$7 bln) may have been a precipitating factor, the decision has likely been in the works. This (the absence of an outflow) and the lower-than-expected CPI for the first half of May helped the peso recoup the ground lost in the first couple days of the week. It snapped a six-day decline and posted its largest gain in two weeks (slightly more than 0.9%) yesterday. In fact, the dollar gave back (38.2%) of the gains since the May 15 low near MXN17.4205. The greenback is being sold below MXN17.76 in the European morning (20-day moving average is around MXN17.7640). The next retracement (50%) is near MXN17.71.
Reviewed by Marc Chandler
on
May 25, 2023
Rating:
