Overview: Another bizarre US debt-ceiling episode is over. President
Biden will sign the bill that was approved by the Senate late yesterday. It is
a bit anticlimactic for the market, for which the US jobs data is the key focus
now. Outside of the fiscal drama, the Federal Reserve leadership has
effectively push against market expectations for a hike later this month. The
odds were around 70% earlier this week, and ahead of the jobs report, is near
30%. The dollar's three-week rally has been snapped. It is sporting a softer
profile ahead of the data and is lower against all the G10 currencies. It is
also weaker against nearly all the emerging market currencies today, with the
notable exception of the Turkish lira and Hungarian forint. The Chinese yuan is
posting its first back-to-back gain in a month and its 0.55% gain, if
sustained, would be the largest in more than two months.
Asia Pacific equities rallied, led by a dramatic 4% gain in HK and mainland shares that trade there. All the large bourses were higher. Europe's Stoxx 600 is up 1% and US futures have a firmer bias. European benchmark yields are mostly 2-3 bp higher today, but Italian bond yield is flat. The 10-year US Treasury yield is almost two basis points higher at 3.61%. The weaker dollar is helping gold extend its recovery from around $1932 on Tuesday to $1983.50 today. It is poised to snap a three-week decline. Ahead of the weekend OPEC meeting, the July WTI is pushing higher. It reached a three-day high near $71.55 before steadying. The week's low was set Wednesday near $67.
Asia Pacific
China's Caixin services and composite PMI
will be reported early Monday in Beijing. Yesterday, Caixin's manufacturing PMI unexpectedly
ticked up. Might the service PMI surprise too? The median forecast in
Bloomberg's survey is for a decline to 55.2 to 56.4. It was at 57.8 in March,
the highest since November 2020. China may also report May reserve figures.
Based on valuation shifts, a decline of around $50 bln seems reasonable.
Early Monday, Japan and Australia's final
services and composite PMI will be reported. Japan's service PMI has risen for six consecutive months through
the preliminary May reading of 56.3, a record high. The re-opening of Japan
post-Covid and the return of tourism has given the economy an added boost. A weak
yen and a restoration of flights in East Asia are helping, as well. The flash
estimate put the composite at 54.9 (from 52.9 in April). Given the small
decline in the final manufacturing PMI (from the flash estimate), if the
services PMI is not revised higher, the composite will slip. Unlike in Japan,
Australia's manufacturing PMI was revised higher (to 48.4 from 48.0 preliminary
estimate). The initial estimate of the services PMI was that it unwound a chunk
of April's surge (from 48.6 to 53.7, the largest rise in a little more than a
year). The initial estimate showed the composite tracking the service reading,
falling to 51.2 from 53.0, which was a jump from March's 48.5. The central bank
meeting is next week's highlight for Australia. The firmer inflation has
boosted ideas that the RBA, which paused, is not done raising rates. The
futures market prices in about a 33% chance of a quarter-point hike next week.
A week ago, it was perceived to be practically no chance of a hike.
The dollar's four-day decline against the
yen is at risk today. The dollar
settled at the end of last week near JPY140.60 and recorded a low yesterday
near JPY138.45 before closing at JPY138.80. It is in a JPY138.60-JPY139.10
range today. The key driver is the US 10-year yield and its reaction to the US
jobs data. There are options for $640 mln at JPY138.25. The dollar's rally that
carried it from dip below JPY130 (March 24) to almost JPY140.95 earlier this
week looks over and we expect a bounce in the dollar (that could extend to
~JPY139.50) will be sold. After falling to a new low for the year
earlier this week (~$0.6460), the Australian dollar has rebounded smartly and
is setting a new 8-day high in the European morning near $0.6635 and piercing
the 20-day moving average. It has nearly retracement half of the decline
since the May 10 peak near $0.6820. A move above $0.6640 targets the
$0.6680-$0.6700. The generally softer US dollar spilled over to activity
against the Chinese yuan. The greenback snapped a three-day rise yesterday
with a minor 0.15% decline. The move gained steam today and the dollar is off
about 0.55% and is below CNY7.06. The dollar's pullback today is the most since
late March. For the third consecutive session, the PBOC set the dollar's
reference rate below expectations (CNY7.0939 vs. CNY7.0948, the median
projection in Bloomberg' survey.
Europe
Europe's final May PMI will be reported
early Monday. Similar to China,
but for different reasons, after a strong start to the year, the eurozone
economy appears to have stalled. The manufacturing PMI rose in
November-January, but has fallen since, and has not been able to grow (above
50) since last June. The services PMI improved from December through April
before slipping in May (preliminary 55.9 vs. 56.2). The composite spent H2 22
below 50 and reached 54.1 in April, before slipping in May. The preliminary
reading of 53.3 was a three-month low. The UK's manufacturing PMI fell for the
three months through May. It has not been above 50 since last June. The service
PMI has been climbing higher in a sawtooth pattern, alternating between gains
and losses. It rose to 55.9 (from 52.9) in April and the preliminary reading
for May slipped to 55.1. Reflecting the weakness in manufacturing, the
composite PMI pulled back more than services in May (53.9 vs. 54.9).
There is a risk that later today, S&P
could cut its rating for French credit from AA, given its negative outlook and
Fitch's downgrade to AA- in April. Fitch
cited the high government debt and the dim prospects for future reforms after
the strong (and violent) public push back against the recent pension reforms.
The question is not if S&P should downgrade France, clearly the fiscal
health has deteriorated, but whether it matters. Operationally, for the ECB,
the highest rating is what counts and DBRS and Moody's have maintained their
rating of AA. Also, the French premium over Germany on 10-year yields is
unchanged around 55 bp since Fitch's announcement. The two-year differential is
also virtually unchanged a little below 20 bp. Separately, Fitch is
reviewing UK AA- credit rating today. It has a negative outlook. S&P
has the UK as an AA credit with a negative outlook. Moody's sees it as an AA- credit
and also has a negative outlook.
The euro bottomed Wednesday near $1.0635,
and it reached almost $1.0780 today. It
is in a narrow range of about a fifth of a cent, mostly above yesterday's close
(~$1.0760). Nearby resistance is seen in the $1.0800-30 area. The daily
momentum indicators have turned higher and month-long slide (from nearly $1.11
on April 26) appears complete. A break of $1.0725 now would be disappointing. Sterling
is rising for the sixth consecutive session today to reached $1.2545. It
has retraced (61.8%) of its losses from the May 10 high (~$1.2680) to last
week's low (~$1.2310) near $1.2540 today. The five-day moving average looks set
to cross back above the 20-day moving average early next week. It is holding in
a quarter-cent range (~$1.2520-$1.2545) ahead of the US jobs report. A break of
$1.2450 would be disappointing.
America
Most of the recent string of reports,
albeit different covering different elements and time periods, were stronger
than expected, speaking to the ongoing resilience of the US labor market. Still, at the same time, below the surface, it does
appear the tightness of the labor market is easing. Job growth is slowing on a
trend basis. Year-to-date, nonfarm payrolls has risen by 1.14 mln. In the first
four months last year, the US created almost 1.94 mln jobs. Or consider that
the three-month moving average fell to 222k in April, the lowest since January
2021. If the median in Bloomberg's survey is accurate (195k), the three-month
moving average is likely to have fallen toward 200k in May. The unemployment
rate has stopped falling and has bouncing between 3.4% and 3.6% for six months.
Average hourly earnings rose by 0.5% in April. This seems a bit of a fluke and
was the highest since last July. A reversion back to the recent average of 0.3%
could see the year-over-year rate ease back to 4.3% where it was in March from
4.4% in April. The average year-over-year pace this year has been 4.5% compared
with 5.7% in the Jan-Apr 2022 period.
Amid talk of foreign central bank demand
for Treasuries drying up, we looked at the Fed's custody account for foreign
central banks. During the last
nine weeks through May 31, foreign central banks have bought US Treasuries
every week without fail. During this buying spree, the longest since April-June
2020, they have bought more than $110 bln. At $2.986 bln, the holdings are the
largest since last September. The Federal Reserve also offers custody service
for the Agency securities as well. Over the past two months, they have risen
slightly (~$2.3 bln).
The Canadian dollar is extending its gains
today. The US dollar peaked in
the middle of the week near CAD1.3650, just shy of last week's high has
approached CAD1.3405 today. Coming into today, the greenback has fallen in four
of the past five sessions. A break of CAD1.3400 could signal a test to the low
of end of this year's range (CAD1.3260-CAD1.3300). The intraday momentum
indicators suggest a bounce is likely in early North American activity and
initial resistance is in the CAD1.3450 area. Note that in a soft US dollar
environment, the Canadian dollar often lags on the crosses. Meanwhile,
the greenback made a new two-and-a-half week low near MXN17.5150. Recall
that the multi-year low was set in mid-May near MXN17.42. Mexico State, the
more populous state holds elections on Sunday. It is likely to confirm that
AMLO's Morena Party is the force to be reckoned with in next year's general
election. Mexico touches on several key investment themes, including high
interest rates and near-shoring/friend-shoring. The peso is the strongest
currency in the world so far this year, appreciating about 11.3%.
Reviewed by Marc Chandler
on
June 02, 2023
Rating:
