Overview: The US dollar has extended its post-employment
gains today, helped by firmer rates and several countries seeing downward
revisions from the preliminary May PMI. The greenback is trading with a firmer
bias against all the G10 currencies and most of the emerging market currencies,
including Turkey, India, and China. July WTI gapped higher after the Saudi
Arabia announced a voluntary and unilateral cut of one million barrels a day in
output starting next month. July WTI opened at $75 after settling near $71.75
before the weekend. However, that was more or less than the high, and it is
near $73 now.
The US 10-year yield gapped higher today too and is near 3.73%, a four-day
high. European 10-year benchmark yields are 5-7 bp higher. After strong
pre-weekend equity gains in the US, most bourses rose in the Asia Pacific
regions though China's CSI 300 slipped by almost 0.5%, despite unexpected gains
in the Caixin services and composite PMI. Europe's Stoxx 600 is slightly
firmer, after rising more than 2.2% in the past two sessions. US equity futures
are narrowly mixed. The combination of a stronger dollar and firmer rates saw
gold extended pre-weekend losses from about $1948 to about $1938.50. Last
week's low was set near $1932, a two-month low.
Asia Pacific
China's Caixin services and composite PMI were in stronger than
expected. The services PMI rose to 57.1 from 56.4. The market had
looked from a small decline. The combination of the stronger manufacturing PMI
last week and the services PMI today lifted the composite to 55.6 from 53.6.
It is the highest since December 2020. Many remain skeptical about the
strength of the world's second largest economy, and expect more support for be
forthcoming, perhaps later this month. Weakness in exports and prices price
pressures to be reported later this week may help build the case. The CSI 300
was one of the few bourses in Asia to decline today (-0.45%).
One cannot tell it by the yen's 6.3% depreciation against the dollar this
year, but the Japanese economy is 1.6% (annualized growth) in Q1 was second
best in G7 behind Canada. The preliminary May's service PMI
record high (56.3) was revised to a still strong 55.9, while the composite
slipped to 54.3 from the 54.9 flash reading. Tomorrow, Japan reports April
labor cash earnings. They are expected to have accelerated to 1.8%
year-over-year from 1.3%. However, support for consumption is weak. It fell
1.9% year-over-year in March and is expected to have fallen by 2.2% in April.
In April 2022, household consumption was 1.7% lower from April 2021. The BOJ
meets next week, and positioning ahead of what many see as a window of
opportunity for an adjustment, the exchange rate may become somewhat less
sensitive to the change in US yields.
The final May PMI reading is unlikely to impact the Reserve Bank of
Australia rate decision tomorrow. The services PMI was revised to 52.1 from
51.8 and the composite to 51.6 from 51.2. The higher-than-expected April CPI
(6.8% from 6.3% and median projections for 6.4% in the Bloomberg survey) and
the 5.75% increase in the minimum wage (as of July 1) prompted the market to
take more seriously the possibility of a hike this week. The odds of a hike
rose from practically nothing on May 26 to about a 36% chance the end of last
week. It slipped to about 25% today. The probability of a hike at the July 5
meeting is almost 75%. A quarter-point hike puts the overnight target rate at
4.15%. The terminal rate is now seen near 4.20% by the end of Q3. It has edged
higher for the past four sessions before slipping today. It was slightly below
3.85% a month ago. The Aussie has not been rewarded for the shift in rate
expectations. A month ago (May 5) the Australian dollar settled near $0.6750.
Rising US rates helped lift the dollar to nearly JPY140.45 today, a four-day
high. Recall that last Thursday, the dollar traded down to JPY138.45 after
it peaked near JPY140.95 last Tuesday, May 30. It looks set to challenge that. As
next week's BOJ meeting comes into view, the market may turn more cautious. The
Australian dollar recovered last week from near $0.6460 at end of May to nearly
$0.6660 before the US employment data. It is inside the pre-weekend
range today. The session high was a little below $0.6625, where options for
nearly A$550 mln expire today. It has drifted down and slipped below $0.6590.
Last Friday's low was near $0.6560. The yuan's weakness in the face of the
dollar's broad strength ought not to be surprising. The greenback gapped
above last Friday's high (~CNY7.1030), went down to fill the gap before rising
to a new high near CNY7.1250. The PBOC set the dollar's reference rate slightly
lower than expected at CNY7.0904 rather than at CNY7.0909.
Europe
Most of the reaction to the PMI comes from the preliminary estimate which
frequently comes close enough to the final reading. The final services PMI stands at 55.1, down from 55.9 preliminary estimate and
from 56.2 in April. The final composite reading stands at 52.8. The flash
estimate was 53.3, a three-month low. Among the largest EMU members, Italy and
Spain do not have a flash estimate. Today's reports showed activity slowed from
strong levels. At the end of the week, Eurostat is seen revising its estimate
for Q1 growth to flat from 0.1%. Economists expected EMU to grow by 0.1% in Q2.
Germany also reported April trade figures. The key takeaway is that
although exports fell for the second consecutive month, the terms-of-trade
shock is waning, and Germany's surplus is "normalizing.". In Q1,
Germany recorded a trade surplus of 15.8 bln euros. That compares to 8.6 bln
euros in Q1 22, 18.4 bln euros in Q1 21 and 19 bln euros in Q1 19. The April
surplus stood at 18.4 bln euros compared with 3.6 bln last April. Exports rose
1.2% in the month, and imports fell by 1.7%. Tomorrow, Germany reports April
factory orders. They are seen rebounding from the March's dramatic 10.7%
month-over-month plunge. Industrial production, reported on Wednesday is also
expected to have recovered after declining by 3.4% in March.
The UK's economic calendar is light this week and today's final PMI
readings are the highlight. The UK economy has avoided a recession, but
growth remains slows. The service PMI spent Q4 22 and January 23 below the 50 booms/bust
level. It reached 55.9 in April before slipping to 55.2 in May (55.1 flash
estimate). After spending August through January below 50, the composite PMI
has been above 50 since February and reached 54.9 in April before falling back
to 54.0 in May (53.9 flash estimate).
The euro reached almost $1.0780 before reversing lower on the US jobs
data and jump in US rates ahead of the weekend. It held above $1.0700,
but today follow-through selling saw it dip below $1.0685. It retraced more
than (61.8%) of its bounce from $1.0635 on May 31. There are options for around
950 mln euros that expire today at $1.0675. It needs to resurface above $1.0720
to stabilize the technical tone. Sterling reversed from $1.2545 and settled
a cent lower. Selling pressure did not abate over the weekend and
sterling fell slightly below $1.2390. There are options for GBP300 mln at
$1.2375 that expire today. It too exceeded its (61.8%) retracement objective of
the rally from the May 25 low (~$1.2310). A break of $1.2365 signals a re-test.
America
US economic data and the Treasury's bill auctions are front-loaded this
week. In terms of the data, the final services and composite PMI are on
tap, as are factory and durable goods orders (factory orders are likely to be
softer than the 1.1% increase in the preliminary durable goods orders report),
leaving the ISM services survey to be the new news. The preliminary PMI
services rose for the fifth consecutive month in May and at 55.1 was the
highest since April 2022. ISM services have trailed. April's 51.9 was off this
year's high set in January at 55.2. In terms of Q2 GDP, the most important
report this week will be the April trade deficit on Wednesday. Based on the
advanced merchandise report, the largest shortfall in six-months (~$75.5 bln)
is expected. The Atlanta Fed's GDP tracker, which stands at 2.0% as of June 1
will be updated after the trade figures.
It was well understood that after the debt ceiling drama ended, Treasury
would sell a ton of bills and it would rebuild its cash account at the Fed
(TGA). No time is being wasted. Today, 3- and 6-month bills ($123 bln) will
be sold, and a 44-day cash management bill ($100 bln). Wednesday, Treasury will
see $90 bln of 4- and 8-week bills. The impact on financial conditions is
understood to be a function how the bills are bought. If it pulls funds away
from the Fed's reverse repo facility, it is seen as less impactful. On the
other hand, it banks buy, and their reserve balances fall, it is seen as
tightening. Meanwhile, the Fed's quantitative tightening continues and that
targets $95 bln a month. In addition, there is the June 15 tax date
approaching, which also serves to drain liquidity. Note too that window dressing
is often evident beginning a couple of weeks before quarter-end, which has seen
the funds in reverse repo increase. One cushion could be foreign buying. As we
noted (here),
foreign central banks have been on a buying spree and have lifted their
holdings at the Federal Reserve by $110 bln over the past nine weeks
Canada and Mexico have busy weeks, but it begins slowly. The Bank of
Canada meets Wednesday, and the May employment report is out on Friday. The
odds of a quarter-point hike stand near 40%, up from less than 15% two weeks
ago. Canada's two-year yield has risen 30 bp over those two weeks, fueled by ongoing
resilience of the economy and the stronger than expected Q1 GDP (3.1%
annualized), and arguably the rise in US rates. The US dollar tested support
near CAD1.34 ahead of the weekend. In the past three sessions, the greenback
has dropped from CAD1.3650. A break of CAD1.3400 targets CAD1.33, which it has
not traded below since mid-February. It is trading quietly in roughly
CAD1.3420-CAD1.3450 range. A move above CAD1.3450 could see CAD1.3500. The
US recorded a marginally now seven-year low against the Mexican peso
(~MXN17.42) before reversing higher and closing virtually flat near MXN17.5560. A
possible bullish hammer pattern was created and buying today lifted the US
dollar to almost MXN17.60. AMLO's Morena Party candidate Gomez was elected
governor of Mexico State, one of the last PRI holdouts. A move above MXN17.60
could target MXN17.75-MXN17.77 initially.
.
Reviewed by Marc Chandler
on
June 05, 2023
Rating:
