Overview: The
capital markets are calmer today but the US (and Canadian) jobs data stand in
the way of the weekend. While equity markets are firmer, the rise in yields
continues with new highs for the week being recorded today. European benchmark
yields are 2-3 bp higher and the US 10-year Treasury yield is approaching 4.20%.
Most of the large market in the Asia Pacific region advanced, but South Korea
and Taiwan where the superconductor fascination eased. The Stoxx 600 in Europe
has steadied after a falling by almost 3% in the past three sessions. US index
futures are enjoying a firmer profile.
The dollar is mixed against the G10 currencies. The Scandis and Antipodeans are advancing. The Swiss franc is leading the losers, with a 0.4% decline after yesterday's softer than expected July CPI. The other major currencies are slightly softer. Emerging market currencies are also mixed. Central European currencies are joined by the Indonesian rupiah and Mexican peso to round out the top five performers today. The Russian ruble and South Korean won are the heaviest. Gold is little chanced and nursing this week's 1.3% decline. Saudi Arabia and Russia extended their oil production/export restraint another month. The Joint Ministerial Monitoring Committee of OPEC is expected to make a statement shortly. September WTI is extending yesterday's recovery and pushing back above $82 a barrel. Barring a significant setback, it is set to post its sixth consecutive weekly gain, during which time it has risen by more than 18%.
Asia Pacific
There are two significant
developments in the Asia Pacific region this week. First, Beijing continues to use soft power
to pursue its agenda. Reports suggest that the latest measures include stronger
guidance to banks to adjust lower mortgage rates to encourage new buying.
Beijing is also encouraging provincial governments to meet their borrowing
quotas, amid a dramatic reduction in investment and property sales in H1. Last
month, the government declared its intent to improve conditions for the private
sector and this week announced a whistle-blowing function on a
government-backed internet platform to collect complaints about barriers to
entry, unfair competition, local protectionism, arbitrary fines, and proposals
for improvement. Separately, Beijing has begun probing some speculative trades
in the commodity markets. President Xi also launched an anti-corruption
campaign in the military, and this resulted in a change in leadership of the
PLA's Rocket Forces, which controls China's nuclear arsenal and conventional
missiles. It follows the removal of the foreign minister last month.
Second, following the
doubling of the band for the 10-year JGB to 1.0% on July 28, the Bank of Japan
stepped into the market not once but twice to buy bonds well in front band. It first showed its hand at when yields
around 0.60% and then near 0.65%. Between the two operations, the first at
market prices since February, appeared to total the equivalent of about $5 bln.
The yen strengthened after both operations. Still, the 10-year (generic) yield
was near 0.45% on the eve of last week's BOJ meeting and reached 0.66% this
week. Many observers think that the rise in Japanese yields will encourage
domestic investors to repatriate for of their foreign investment. It may but
since the BOJ adjusted its policies last December, Japanese investors have been
net buyers of foreign bonds after being significant sellers in 2022. Moreover,
the sharp rise in US yields this week (~23 bp on the 10-year) seems to be more
a function of domestic issues (e.g., pending supply, downgrade) rather than
Japanese sales per se. The latest TIC data (May) showed Japanese investors
holdings of US Treasuries rose by about $20 bln so far this year.
The dollar is trading
quietly, hovering around a quarter-of-a-yen on either side of the roughly
JPY142.60 close. It is
caught between two sets of expiring options: JPY143 (~$900 mln) and
JPY142 (~$1.2 bln). The greenback settled near JPY141.15 last week. The
Australian dollar recovered from yesterday's low around $0.6515 to a high
slightly above $0.6585 today. It stalled in front of previous support, now
resistance near $0.6600. Options for about A$630 mln, struck at $0.6600 expire
today. The intraday momentum indicators suggest there is a good chance the
Aussie tests it later today. Still, it needs to close above $0.6650 to avoid
the third consecutive weekly loss, which would be the longest losing streak
since February. The US dollar was turned back from almost CNY7.20 yesterday
and fell slightly below CNY7.1530 today to fill the gap created with Tuesday's
higher opening. It bounced off the bottom of the gap to set the session
high near CNY7.1845. The dollar settled around CNY7.1485 last week. Note that
the US 10-year premium over China widened to more than 150 bp this week, a new
high since 2007. The PBOC set the dollar's reference rate at CNY7.1418 compared
with the median projection in Bloomberg's survey of CNY7.1797.
Europe
The eurozone finished the
week with the release of June retail sales. The 0.3% decline seemed more in line with the national
figures that the median in Bloomberg's survey of a 0.2% gain. It follows an
upward revision to the May series (0.6% vs. unchanged), which appears to have
bene fueled by the German figures that showed a 1.9% surge rather than a 0.4%
gain that was originally reported. However, with the first estimate of Q2 GDP
reported at the start of the week (0.3% and Q1 was revised to flat from -0.1%),
the data seems old, and, in any event, will not do much to shape expectations
for the ECB's next meeting in September. Next week's economic diary is light. After
today's German factory orders (surging 7.0%, after rising 6.2% in May) and the
market may be hopeful about Monday's industrial production figures, where
economists had anticipated a 0.5% decline. Large aerospace (Airbus?) orders
helped flatter today's report. Without them, orders would have fallen by 2.6%.
French industrial output figures were released today. It fell 0.9% compared with
expectations for a 0.3% decline. Industrial output fell by 1% in Spain but rose
0.5% in Italy.
The Bank of England
delivered the 25 bp hike yesterday, lifting the base rate to 5.25%. Only two members voted for a 50 bp hike
and one wanted to stay pat. While the swaps market is pricing in high
confidence of another quarter point hike next month (~95%), the anticipated
peak rate continues to be trimmed. A month ago (July 6) the swaps market was
pricing in a terminal rate of almost 6.50%. It now is near 5.75%. Today,
S&P reported that the construction PMI rose to 51.7 from 48.9, which is the
highest since February.
The initial market reaction
was that the key rates "may" rise (not will) was to see the statement
as dovish, and sterling was sold to a new low since June 30 near $1.2620. It recovered cent to a by a little
more than a cent to almost $1.2730. It reached $1.2740 today before finding
sellers. It found support slightly below $1.2700 and looks set to recover. The
$1.2750 area holds the five-day moving average and options for GBP330 mln that
expire today. The euro's recovery off yesterday's push to almost $1.0910 has
been weak. It peaked today slightly above $1.0960. But the market does not
look like it is done. A move above $1.0980 would help steady the tone, but not
prevent the third consecutive weekly loss. The euro settled last week near
$1.1015.
America
US (and Canada's) employment
report stand in the way of the weekend. The median forecast in Bloomberg's survey is for a 200k increase
(after 209k in June) in US nonfarm payrolls. Job creation is slowing, and if
the median is right the three-month average will fall to about 238k. Consider
that in 2019, nonfarm payrolls grew by an average of about 165k a month. The
market will be sensitive to revisions too. Last month's report saw 110k jobs in
April and May revised away. The participation and unemployment rates are seen
steady at 62.6% and 3.6%, respectively. After four months of 0.4% increases,
hourly earnings are expected to have risen by 0.3%, as they did in Q1. If so,
this will bring the year-over-year rate to 4.2%, which would the small such
increase since June 2021. It follows the softer than expected Q2 Employment
Cost Index (1.0%) and unit labor costs (1.6% vs 2.5% median forecast in
Bloomberg's survey and a downward revision in Q1 to 3.3% from 4.2%). It will
support the soft-landing view that seems to be gaining adherents.
Canada created 290.4k jobs
in the first half, of which 241k were full-time posts. And of those full-time positions, 109.6k
were filled in June. The median forecast in Bloomberg's survey looks for a 25k
increase in jobs after almost 60k in June. The unemployment rate bottomed a
year ago at 4.9% and was at 5.0% in the first four months of the year. It rose
to 5.2% in May and 5.4% in June. The unemployment rate is expected to have
risen to 5.5% last month, which would be the highest since January 2022.
The US dollar approached
last month's high against the Canadian dollar, slightly above CAD1.3885, and
turned down before taking it out. It reentered the Bollinger Band (upper band ~CAD1.3340) but is
back above it (~CAD1.3360) in the European morning. Last month's high was
slightly above CAD1.3385. There are options for $775 mln at CAD1.3400 that
expire today. A break targets the CAD1.3440-50 area. A move below CAD1.3300
would help boost confidence that a near-term high is in place but given today's
data and next week's expected rise in US CPI for the first time in a year, the
market may lack conviction. The risk-off mood took a toll on emerging market
currencies broadly yesterday and especially Latam currencies, which had been
among the outperformer this year. Latam currencies, led by the 2%
slide in the Colombian peso and 1.8% decline in the Mexican peso. Latam
currencies accounted for three of four worst performing emerging market
currencies (the odd man out was the South African rand). The greenback reached
MXN17.4260 yesterday, its best level in nearly two months. With the dollar near
MXN17.32 in Europe, the peso is off about 3.65% this week, which if sustained,
would be the largest weekly loss since November 2021. The dollar settled at
BRL4.9160 yesterday. The real is off 3.75% this week coming into today. It
could be the largest weekly loss of the year if it does not recover.
Reviewed by Marc Chandler
on
August 04, 2023
Rating:
