Overview: The dollar was threatening to break higher
at the end of last week, and the euro and sterling closed below key supports. However,
so far this week, the greenback is consolidating and has not seen
follow-through buying. The key data this week, US consumption and jobs, and the
eurozone's CPI still lay ahead. The Antipodeans and Norwegian krone enjoy a
firmer today. A 0.8% contraction in Sweden's Q2 GDP was not as deep as had been
feared, but enough to keep the Swedish krona on the defensive. The G10 currencies
are mostly trading in narrow ranges. Emerging market currencies are mixed. The
South African rand and Hungarian forint lead the advancers. There is some
speculation that Hungary may cut its base rate today.
Stocks in the Asia Pacific extended yesterday's
rally, led by Hong Kong and China. Europe's Stoxx 600 is up about 0.5% after
gaining 0.9% yesterday. US index futures are narrowly mixed. Bond yields are
mostly lower. Benchmark 10-years yields are 2-4 bp lower in Europe, with the
exception of UK Gilts, where the yield is slightly firmer after yesterday's
holiday. The 10-year US Treasury yield is off one basis point to about 4.19%.
The two-year yield has slipped slightly below 5.0%. Note that yesterday, the
sold $222 bln in bills and notes and comes back for another $96 bln today
(bills and notes). Softer yields help support gold prices. Recall that the
yellow metal bottomed last week near $1885 and reached $1926 yesterday. It is
firm now near yesterday's highs. October WTI bottomed last week near $77.60 and
reached almost $80.90 yesterday. It is holding just below there so far today,
testing the 20-day moving average (~$80.75). Talk that OPEC+ may extend
production cuts, ostensibly in reaction to anticipated weaker demand from China
seems to be neutralizing what appears to be increased Iranian supply.
Asia Pacific
At the Jackson Hole symposium last week,
Bank of Japan Ueda justified the current monetary stance, saying that the
central bank's assessment of the underlying rate of inflation is below 2%. Japan's five- and 10-year breakeven rates
(the difference between the yield of the conventional and inflation-linked
securities is below 120 bp. Meanwhile, Japan's July jobs data was
disappointing. The unemployment rate, reported earlier today, jumped to 2.7%
from 2.5%. rising further from the cyclical low of 2.4% seen in January. Note
that at the end of 2019 it was at 2.2%. The number of employed people fell by
100k and the unemployed rose by 110k. Hiring slowed in retail and business
services. The job-to-applicant ratio slipped to 1.29 from 1.30. This is the low
since last July. Lastly, we note the weak demand for Japan's two-year note that
was sold today. To be sure, it was well over-subscribed but lowest since 2010
(3.20 vs 3.95 last). The average yield was a little more than one basis point.
Many are arguing China's problems stem
from its Communist ideology. This seems too simplistic. After all, under Mao, there was
an extensive social safety net, dubbed "Mao's iron rice bowl". This
is to say that Xi's shunning of efforts to bolster consumption is not derived
from Marxist-Leninist precepts but Xi's own idiosyncratic thought, which as we
have noted shared with some political right views the US and Europe that sees
welfare spurring laziness. There is a genre of literature claiming the Chinese
system was terminal before the pandemic, but it seems policy choices since
Covid have exacerbated the challenges. Meanwhile, Chinese officials argue the
US is in decline, and point to the serial financial crises, illustrating its
instability. The conventional wisdom in both countries seems to be that the
other is in some kind of systemic decline. Moreover, there is nothing that the
various bilateral talks or even a Biden-Xi meeting on the sidelines of next
month's G20 meeting can address. Yet, it seems that such an assessment risk
misjudging the other's reaction function and may violate a basic precept of
under-estimating an adversary.
The dollar rose to a marginal new high for
the year against the shortly after European markets closed yesterday, reaching
nearly JPY146.75 but has remained below it today. Indeed, the greenback is consolidating in
a narrow range so far today (~JPY146.30-JPY146.55). Options for
slightly more than $1 bln at JPY147 expire today. The market is probing for the
official pain threshold and are pressing gingerly, with an eye on the 10-year
JGB yield. The Australian dollar held above $0.6400 yesterday. While
it was unable to surpass the pre-weekend high near $0.6440, it did so today,
rising to about $0.6455. However, it was greeted with new selling that knocked
it back to $0.6435. Still, the intraday momentum indicators are constructive
suggesting another attempt at the highs is likely. Nearby resistance is seen in
the $0.6465-75 area. The greenback remains firm against the Chinese yuan but
is consolidating below CNY7.30. Of course, Chinese officials could do more
if they wanted, as they have plenty of reserves and policy tools. Yet, the
focus seems misplaced. The yuan is weak but not extremely so. Rather, according
to the OECD's model of purchasing power parity, it is the yen (and euro) that
are historically undervalued by more than 50%. Surely, they too could do more
if desired. The PBOC fixed the dollar at CNY7.1851 today. The average estimate
in Bloomberg's survey was for CNY7.2764 (range of projections was
CNY7.1860-CNY7.2918). Press reports suggest the large banks are considering
another cut in deposit rate as soon as later this week.
Europe
The highlight of the week is Thursday's
preliminary EMU August CPI. The median forecast in Bloomberg's survey is for a 0.4%
month-over-month increase, which is consistent with the year-over-year rate
slipping to 5.1% from 5.3%. The core rate is expected to ease to 5.3% from
5.5%. Still, the ECB is looking at the same thing many market participants are
and that is outsized 1.2% rise last September and the 1.5% gain in October
2022. As these drop out of the 12-month comparison, inflation is likely to fall
sharply on a year-over-year basis. Today's high frequency data included
consumer confidence surveys in Germany and France. Germany softened and France
was unchanged. Also, Spain reported slightly better July retail sales. They
accelerated to 7.7% year-over-year from 6.9%.
The market has all but given up on the
idea that the Bank of England could hike rates by 50 bp next month. There is around a 6% chance discounted by
the swaps market but before the BOE meets on September 21, the employment/wage
data (September 12) and CPI (September 20). The UK still enjoys a premium on
10-year rates. It peaked a little above 70 bp in June, which was the largest
since 2009. The premium has been trending lower and briefly traded below 20 bp
last week, the smallest since early May. It is now near 25 bp.
The euro settled above $1.08 and back
above the 200-day moving average that is a little above $1.0805. The high recorded as the Fed's
Powell spoke at Jackson Hole was slightly higher than $1.0840 and it held below
it today. The euro looks set to challenge $1.08 again in North America. Yesterday's
low was slightly below $1.0790 and the pre-weekend low as about $1.0765. Sterling,
too, managed to close above key support ($1.26), which it closed below at the
end of last week. It rose to about $1.2635 today, stalling in front of
the pre-weekend high (~$1.2655). Overcoming resistance in the $1.2650-75
area may be the key to a better technical tone.
America
Fed Chair Powell talked a bit about house
prices and rents in his Jackson Hole speech. He seemed to recognize the recent data
points to recovery of prices and rents. S&P CoreLogic Case Shiller 20-city
price index has risen every month this year after falling eight months in 2022.
The FHFA house price index has not fallen since last August. In the first five
months of the year, the FHFA index has risen at an annualized pace of about 7%.
In the last five months of 2022, the FHFA index was flat.
This week, US labor market is in focus
with nonfarm payrolls at the end of the week. The median forecast in Bloomberg's survey
is for 170k increase, having crept up a little with the newest forecasts.
Today's see the JOLTS report and job openings are expected to have continued to
trend lower. Job openings have fallen every month this year but April. Job openings
at the end of last year was about 11.23 mln. In June, openings fallen to 9.58
mln, the lowest since April 2022. The 1.65 mln decline in the first half
dovetails well with the BLS nonfarm payroll gain in H1 of 1.62 mln.
Mexico's trade balance deteriorated in
July. The $881 mln
deficit was the largest in three months but considerably smaller than the $1.8
bln median forecast in Bloomberg's survey. There are some strong seasonal
patterns in Mexico's trade figures. In all but two years in the past 20, the
trade balance weakens in July. Imports and exports fell. Today's data includes
the IGAE indicator of economic activity. It is sometimes used as a proxy for
month's GDP. It is expected to rise by 0.5% in June after a 0.03 decline in
May. The IGEA will be overshadowed by the final read of Q2 GDP. Revisions point
to the possibility that the 0.9% quarter-over-quarter gain is tweaked higher.
The US dollar was mired in a
roughly CAD1.3570-CAD1.3610 yesterday, holding inside the pre-weekend
range. The high set
at the end of last week was near CAD1.3640. On the downside, a break of
CAD1.3560 is needed to denote anything important technically, and there are
options for nearly $1.2 bln that expire there tomorrow. The dollar
dipped below MXN16.70 yesterday but turned better bid in the North American
afternoon and settled at new session highs scored late near MXN16.7920. A
small hammer candlestick may have been formed. Follow-through dollar buying
today has so far been limited to MXN16.8020. Nearby resistance is seen in the
MXN16.87-90 area. It probably takes a move above MXN17.00 to shake out some of
the new peso longs.
Reviewed by Marc Chandler
on
August 29, 2023
Rating:
