Overview: The market was gearing up for a June Fed
hike and officials and this helped lift the greenback. However, the Fed
Governor Jefferson, nominated to be the next vice-chair, pushed back against it.
His views are thought to reflect the Fed's leadership. Philadelphia Fed's
Harker, who is a voting member of the FOMC also backed a pause. This is not
quite what we expected when we suggested the US interest rate adjustment was
complete or nearly so. Still, it broke the dollar's upside momentum, though
follow-through dollar selling today has been limited. It is narrowly mixed,
with the Swiss franc and euro leading G10 with 0.15-0.20% gains. The dollar
slipped through JPY139 briefly but as US rates have come back a bit firmer, the
greenback has recovered to almost JPY140. Emerging market currencies are also
mixed, but of note the Turkish lira, South African rand, and Chinese yuan are
sporting softer profiles.
The House of Representatives
approved the US debt-ceiling bill late yesterday and now goes to the Senate,
which is expected to pass it will less drama. Asia Pacific equities were mixed,
but Europe's Stoxx 600 is snapping a three-day slide and is up about 0.75%. US
equity futures are trading with a firmer bias. Benchmark 10-year yields are 1-2
bp higher in Europe and the 10-year Treasury yield is up about three basis
points to 3.67%. If sustained, it would be the first increase since last
Thursday. Gold is little changed as it consolidates the recover that took it
from near $1932 on Tuesday to almost $1975 yesterday. It held above $1950 on
the early attempt at support and is around $1960 in late European morning
dealings. July WTI dropped from about $73.35 Tuesday to a low yesterday near
$67. It is little changed now near $68. API reportedly estimated US stocks rose
5.2 mln barrels and there continues to be speculation that some OPEC members
may extend voluntary production cuts at the weekend meeting.
Asia Pacific
It is not that China's May
PMI was out of line with other major economies, experiencing a contraction in
manufacturing and expanding services. Rather, after the end of the zero-Covid policy, many had
hoped for a stronger and more sustained recovery. Headwinds from longer-term
structural challenges are cited as the reason for the disappointment. Earlier today,
Caixin manufacturing PMI unexpectedly rose to 50.9 from 49.5. It was expected
to be unchanged. Yet, because it relies on a smaller sample and does not match
the "official" PMI many are dismissive, suggesting no change in
sentiment. After falling by 1% yesterday, the CSI 300 edged up by 0.2% today.
Even before the disappointing industrial profits and PMI, there had been
speculation of some more monetary support in the form of interest rates
reductions and/or a cut in required reserves. In addition, there are reports
suggest Beijing is considering new tax incentives for high-end manufacturing.
This seems to be a reflecting both economic support and concern about supply
chain security.
Japan's preliminary Q1 GDP
estimate of 0.4% (quarter-over-quarter) was boosted by stronger-than-expected
business investment (0.9% vs. forecasts for a contraction). Today's Q1 cap spending report showing an
11% surge was nearly double the median projection in Bloomberg's survey and
warns of the risk of an upward revision to Q1 GDP. It is the biggest quarterly
increase since Q2 18. Separately, the final May manufacturing PMI slipped to
50.6 from the flash estimate of 50.8, but still up from 49.5 in April and the
first reading above 50 in seven months. Lastly, the weekly MOF portfolio flow
report show the foreign buying spree of Japan assets went into reverse from the
nearly JPY1.98 tln (~$14.3 bln) to a liquidation of JPY267.5 bln. Japanese
investors continued to return to the global bond market after divesting heavily
last year. Their appetite for foreign stocks remains soft. Japanese investors
bought JPY1.03 trillion foreign bonds and sold JPY657 bln of foreign stocks.
Australia's May
manufacturing PMI final reading was 48.4, up from 48.0 of the flash estimates. It was at 48.0 in April and stood at 50.2
at the end of 2022 and was 55.7 in May last year. Governor Lowe of the Reserve
Bank of Australia said, like other central bankers, that it is data dependent.
But it begs the question of which data. The monthly CPI rose in April for the
first time this year. April jobs and retail sales were weaker than expected.
There has been a significant adjustment in Australian short-term rates in May
as the market reassesses the outlook for central bank policy. The two-year
yield rose from 3.0% on May 1 to 3.65% at the end of last week. It is now a
little below 3.60%. The odds of a quarter-point by the end of Q3 has risen from
no chance to fully discounted. The Australian dollar fell by about 1.7% in May,
its fourth consecutive monthly loss.
Europe
Germany, France, and Spain
all reported softer than expected May CPI. Italy was the disappointment among the
large EMU member, with a 0.3% month-over-month gain. It had been forecast
(median in Bloomberg's survey) to fall by 0.2%. Due to the base effect, the
year-over-year pace eased to 8.1% from 8.7%. The aggregate figure showed
unchanged monthly rate and a 6.1% year-over-year pace, down from 7.0% in April
and amid forecasts for a 6.3% rate. The core rate ticked down for the second
consecutive month, though at 5.3% it remains near the peak of 5.7% set in
March. Separately, Eurostat reported that EMU's unemployment rate remains at
its record low of 6.5%.
The eurozone final
manufacturing PMI was edged slightly higher from the preliminary read of 44.6
to 44.8. It was at
45.8 in April and 47.8 at the end of last year, and 54.6 in May 2022. Germany's
final reading was at 43.2 (from 42.9 flash and 44.5 in April), the weakest
since May 2020. France's final manufacturing PMI reading slipped back to 45.7
from the initial estimate of 46.1 and 45.6 in April. Spain's manufacturing PMI
slowed to 48.4 from 49.0, a little better than expected, while Italy's ticked
down to 45.9 from 46.8. There is no sign that the contraction in manufacturing
is ending.
The UK may have avoided the
worst-case scenarios of a protracted recession, it is not out of the woods. Inflation is stubborn. It is running
at a 7.5% annualized clip through the first four months of the year. That
compares with a 4.2% pace in the US and 6.3% in the eurozone. Nationwide
reported today that its house price index in May is off 3.4% from a year ago,
the biggest decline since 2009. The UK's manufacturing sector is remains under
pressure. The PMI has been below 50 since last August. Today's final reading
slipped to 47.1. While better than the flash estimate of 46.9, it is the lowest
this year. There has been a dramatic increase in UK rates. The two-year yield
rose from about 3.66% on May 4 to 4.57% at end of last week. It is near 4.35%
today. The swaps market has a quarter-point hike fully discounted for the June
22 meeting and has about a 10% chance of a 50 bp move. The year-end rate is
seen near 5.35%, up from 4.80% as recently as mid-May.
After falling to $1.0635
yesterday, the euro stabilized with the help of the broader dollar pullback on
the decline in US rates. It
has been confined to about a third of a cent below $1.07, where options for
nearly 2.2 bln euros expire today. There is another set for 1.15 bln euros at
$1.0730. It may take a soft US jobs report tomorrow for the euro to begin
repairing the technical damage inflicted when the market had a nearly 70%
chance of a quarter-point Fed hike discounted. The intraday momentum indicators
warn that the market may sell euros like it did yesterday when it briefly poked
above $1.07. For the third consecutive session, sterling has run into offers
in the $1.2450 area. That said, it has held $1.2400, just above the
five-day moving average. Even if the $1.2450 area yields, the $1.2475-$1.2500
area may offer formidable resistance. On the downside, the $1.2300 area offers
support.
America
The unexpected surge in the
April US jobs openings (10.1 mln after an upwardly revised 9.75 mln in March
helped sustain the dollar's firmer tone and injected some volatility in the
debt market. The
April results were above all the estimates in Bloomberg's survey. Openings were
led by retail trade, health care, transportation, and warehousing. Job openings
fell in hotels and food services, business services, and manufacturing, still
overall the ratio of openings to the number of unemployed, often cited by Fed
officials rose to 1.8 in April, the highest in three months. Hiring increased,
while layoffs slowed (led by construction, leisure, and hospitality). The quits
rate (voluntary jobs leavers as a share of total employment) fell to more than
a two-year low. A caveat with this survey has seen a sharp drop off in the
response rate. It is around 30%, half of what it was before the pandemic.
There is a slew of US economic
data due today. The
market may be most sensitive the ADP private sector jobs estimate (even though
it does a poor job tracking the BLS monthly estimate) and the ISM manufacturing
survey. Weekly jobless claims on the eve of the national figures loses some of
its potential impact. The final manufacturing PMI will not contain much new
information. Because auto sales trickle out over the course of the day, they do
not have as much market impact as their importance would suggest. After a
strong rebound in April to 15.9 mln vehicles on a seasonally adjusted annual
basis, the most since May 2021, they are expected to have softened in May. That
said, the median projection in Bloomberg for a 15.3 mln pace would be a 20%
increase over May 2022. The Atlanta's Fed's GDP tracker will be updated today.
It was slashed last week to 1.9% from 2.9%.
The market may be delivering
the Fed a fait accompli for a hike at the June 13-14 meeting, but the Fed
pushed back yesterday. Governor
Jefferson and Philadelphia Fed President Harker (voter) talked about the
benefits of a hawkish pause. Fed Chair Powell opened the door to a possible
pause at the May 3 FOMC meeting and made a robust defense of it a couple of
weeks later. A combination of better-than-expected data, including strong
demand and resilient labor market, and hawkish comments be several Fed members,
including a couple of middle-of-the road officials, has spurred a significant
adjustment. The market was pricing in about a 2/3 chance of a quarter-point
hike on June 14 before Jefferson and Harker spoke and knocked the odds back
below 35%. We had argued that the interest rate adjustment in the US was over
or nearly, and the US two-year yield has fallen 25 bp since the high from the
end of last week. The interest rate adjustment was a key part to the dollar's
three-week rally, and we had expected the dollar to become better offered when
the interest rate support softened. That said, it often happens with a lag.
Canada and Mexico see the
manufacturing PMI, which tend to have limited market impact. Mexico also reports the IMEF surveys, the
central bank minutes when it paused (completed?) its rate hiking cycle. Mexico
also reports April work remittances. In Q1 23, they have averaged $4.65 bln a
month. In Q1 22, remittances, which mostly come from the US, averaged $4.17
bln. Worker remittances have emerged an important source of capital inflows
into Mexico. Consider that in Q1 19, worker remittances averaged $2.65 bln a
month. Banxico Governor Rodriguez signaled the intention to keep the cash
target rate at 11.25% for the next couple of months before even discussing a
rate cut. The central bank raise this year's GDP forecast to 2.3% from 1.6% it
projected in March, while shaving the year-end inflation forecast to
4.7% from 4.9%.
Stronger-than-expected Q1
Canadian GDP (3.1% annualized after Q4 22 was revised to a 0.1% contraction)
lent the Canadian dollar support amid the strong greenback performance. However, the risk-of mood, exemplified by
the sharp drop in the S&P 500 seemed to deter much CAD buying. The swaps
market marginally increased the chances of hike next week to about 35%. It was
less than 10% in early May. Canada's two-year yield has risen from 3.46% on May
4 to 4.33% at the start of the week. The US dollar held slightly below last
week's high (~CAD1.3655) but found support near CAD1.3575. It has given way to
a marginal new low toward near CAD1.3560. A break of the CAD1.3550 area could
signal a return to CAD1.3500. The risk-off mood soured the demand for the Mexican
peso. The US dollar rose to a three-day high, slightly above MXN17.77. A move
above MXN17.80 would re-target the MXN18.00 area that was tested (and held) on
May 23-34. The peso is trading quietly at little changed levels. Initial dollar
support is seen around MXN17.63.
Reviewed by Marc Chandler
on
June 01, 2023
Rating:
