Overview: Beijing's seemingly steady stream of measures to support the economy and steady the yuan are beginning to produce the desired effect. The yuan is snapping a four-week decline and the CSI 300 halted a three-week drop. Some economists estimate that the bevy of measures may be worth as much as 1% for GDP. The dollar is narrowly mixed ahead of the US employment data, which is expected to see the pace of job growth slow to around 170k. Of note, the Mexican peso extended yesterday's losses following news that the central bank was winding down its forward hedge program. After the peso dropped 1.75% yesterday, it is off another 0.7% today.
The MSCI Asia Pacific Index
rose for the fifth consecutive session today and the Stoxx 600 gain (~0.4%) is
recouping the losses of the past two sessions. US index futures are posting
small gains. European benchmark 10-year yields are up 2-3 bp to trim this
week's decline to 7-8 bp. The 10-year US Treasury yield is little changed near
4.11%. It is off about nine basis points this week. Gold is trading quietly and
remains within Wednesday's range (~$1935-$1949). It is up around $29 this week
or 1.5%. Oil is extending its rally after OPEC+ indicated plans to extend
export cuts through October. October WTI is trading at new highs for the year
near $84.55. It is up about 5.9% this week, making it the biggest weekly gain
since March.
Asia Pacific
After hinting as much in
recent days, Beijing announced that as of September 25, existing mortgage rates
for first homes will be reduced. Officials also announced that the minimum down payment for
first-time home buyers of 20% and a 30% for second-time buyers. The moves are
designed to lend support to the residential real estate market and boost
consumption. Estimates suggest that existing mortgages can fall 80-100 bp. The
announcement saw a surge of yuan buying, sending the dollar below its 20-day
moving average (~CNY7.26) for the first time since August 4 and to its lowest
level since mid-August. Follow-through dollar selling today pushed it to
CNY7.24 before rebounding. Preparing for a cut in mortgage rates, large
commercial banks cut deposit rates. Separately, the Caixin manufacturing
PMI was reported. Unlike the "official" one, the Caixin measure rose
to 51.0 from 49.2. That is the highest since February. Lastly, press reports
suggest that China's Xi does not plan to attend the G20 summit next weekend
that India is hosting. It would be the first G20 meeting that Xi does not
attend since becoming China's president in 2013. Observers are wrestling with
the motivation. Is it in defense of the BRICS? Is it a snub of Modi?
Japan and Australia saw the
final August manufacturing PMI. The initial gain in Japan's PMI was revised away and the final
reading showed it was unchanged at 49.6 (flash 49.7). The push above 50 in May
seemed to be a fluke and barring that, Japan's manufacturing PMI has been below
50 since last October. If it were not for net exports (which includes tourism),
Japan's economy would have contracted in Q2. The weakness in July's industrial
output (-2.0%) and drop in housing starts (-4.1%) point to a tough start for
Q3, though July retail sales jumped (2.1%, matching the best since June 2020).
The final reading of Australia's manufacturing PMI went in the other direction.
The slippage to 49.4 from 49.6 that was initially report was revised away. It
too was unchanged at 49.6. Australia's Q2 GDP will be reported the day after
next week's RBA meeting (September 5). No change in policy is expected at
Governor Lowe's last meeting. The Australian economy is forecast to have
expanded by 0.4% in Q2 after a 0.2% expansion in Q1.
The dollar extended the
retreat after staging a key downside reversal on Tuesday and set a new low for
the week near JPY145.25 earlier today. The dollar frayed the 20-day moving
average (~JPY145.35) for the first time since July 31. Still, last week's
low around JPY144.90 remains intact. A break could signal a move toward the
JPY143.80-JPY144.00 area. The momentum indicators have turned lower and did not
confirm the new high set earlier this week, leaving a bearish divergence in
their wake. The Australian dollar consolidated yesterday in about a
quarter-cent range on either side of $0.6480. After being turned back
from $0.6500, it was sold to about $0.6445 today in late Asian turnover. It
recovered to $0.6480 in the European morning. Nearby resistance is seen in the
$0.6520-25 area, where options for about A$1.85 bln expire today. The momentum
indicators are moving higher and barring a fresh sell-off, the five-day moving
average is crossing above the 20-day moving average first time since late
July. In addition to the measures to support the residential property
market, Chinese officials also announced a cut in required reserves for foreign
currency deposits (to 4% from 6%). The PBOC again set the dollar's
reference rate below the previous session and well below expectations. The fix
was set at CNY7.1811 and the average in the Bloomberg survey (after the high
and low are excluded, leaving eight responses) was CNY7.2880. However, in
subsequent trading, the dollar recovered from CNY7.24 to CNY7.2660. The 20-day
moving average is near CNY7.2650, and dollar has not closed below it since
August 3.
Europe
The eurozone's preliminary
August manufacturing PMI was revised from 43.7 to 43.52, but importantly,
preserving the first uptick since January. It was at 42.7 in July. Germany's stands at 39.1,
unchanged from the preliminary reading and slightly better than July's 38.8. It
is also the first gain since January but is seems too small to be meaningful.
France's flash estimate of 46.4 was revised to 46.0. It was 45.1 in July. It
matches the best reading since March, but it is still in contraction territory.
The last time it was above 50 was August 2022. Italy's manufacturing PMI rose
for the second consecutive month in August, but at 45.4, the slump continues.
Like Italy, Spain's manufacturing PMI was above 50 in Q1, but has slumped since
then. Spain's manufacturing PMI fell to 46.5 from 47.8 in July. It was at 46.4
at the end of last year. The market is going into the weekend having downgraded
the probability that the ECB cuts rates at this month's meetings. On Wednesday,
there was almost a 55% chance discounted in the swaps market. It was halved
yesterday and is near 22% today.
While the eurozone
manufacturing PMI seems to be stabilizing albeit at weak levels, the UK's
manufacturing PMI has yet to bottom. The final August reading was 43.0 compared with the
preliminary estimate of 42.5 after July's 45.3. The last time it rose was in
February and the last time it was above 50 was in July 2022. Meanwhile, expectations
for the BOE meeting (September 21) have come in a complete circle. In early
August, the swaps market did not fully discount a 25 bp hike. Then, after firm
wage data and sticky core inflation, the market sentiment swung toward a little
better than a 1-in-3 chance of a 50 bp move. Cooler heads prevailed and the
market returned to a quarter point hike but the swing in sentiment continued.
While a quarter-point hike is still the odds-on favorite scenario, the swaps
market no longer has it fully discounted (~90%). Separately, Nationwide house
price index fell by 0.8% in August, twice the projected decline. The 5.3%
year-over-year decline is the largest since 2009.
With yesterday's losses, the
euro retraced (61.8%) of the rally from the Powell-induced lows last Friday. The losses were extended to about $1.0830
today but it has stabilized in the European morning. Last Friday's low was near
$1.0765. Since it broke below $1.0860 yesterday, it has not been above it. There
are 1.42 bln euros in expiring options at $1.08. S till, the daily momentum
indicators are beginning to turn higher. For its part, sterling gave back
nearly half of its gains from last Friday's lows as it approached $1.2650
yesterday. It slipped a little further today (~$1.2650) but held above
the (61.8%) retracement is closer to $1.2625. It is trading near session
highs late in the European morning around $1.2680-90. The week's high was set
on Wednesday near $1.2745.
America
After weaker than expected
JOLTS (July) and ADP (private sector employment in August), attention turns to
the BLS August employment report. The issue is not if the US labor market is
easing, but the pace of it. Our bias is for weaker jobs growth than the median
(Bloomberg survey) of 170k. Many still put much stock in the ADP private sector
estimate, but it has been habitually stronger than the BLS estimate, with an
average of 165k in the three months through July. While the average illustrates
our point, the variance has been dramatic. ADP doubled down and revised up its
July estimate to 371k from 324k. The BLS estimate that 172k private sector jobs
were created in July, pending today's revisions. That tentatively points to a
199k gap. In June, ADP estimated 455k private sector jobs were grown. The BLS
say 128k. In May, the ADP estimate was only 12k on top of the BLS estimate.
Other elements of the employment report may be benign. The unemployment rate is
not expected to change from 3.5%. Hourly earnings are seen rising by 0.3%,
which would allow the year-over-year rate to tick down to 4.3% from 4.4%. The
participation rate is expected to remain at 62.6%, where it has been since
March. Last August, the participation rate was 62.3%.
Canada reports the June and
Q2 GDP figures today. The
median forecast in Bloomberg's survey looks for a 0.2% contraction in June,
which StatsCan has warned of based on preliminary data. It would be the first
monthly contraction this year. Growth in Q2 is seen slowing to 1.2%
(annualized) from 3.1% in Q1. Recall that the Canadian economy shrank slightly
in Q4 22, encouraging the Bank of Canada to pause it monetary tightening
earlier this year. Then, the economy proved more resilient in Q1 and hence the
later resumption of the tightening cycle. The Bank of Canada meets on September
6. The market has downgraded the changes of a rate hike to less than 16%, down
from nearly 25% at the end of last week, and 33% a month ago. The odds in the
swaps market have gently fallen for the past four sessions coming into today.
The US dollar reversed lower on Wednesday after retesting the CAD1.3640 area. Continued
follow-through selling took it below CAD1.3500 today for the first time in
about two weeks. In so doing, the 20-day moving average was violated for the
first time since August 1. The next target is near CAD1.3450-60, and a break
would boost confidence that a high is in place.
The Mexican peso tumbled
about 1.8% in response to news that the central bank will cut its currency
hedge (currency swaps) facility by 50% starting this month. The nine- and 12-month terms will be
allowed to expire, while the six-month facility will be reduced to one-month
and the renewal will be 50%. The program was launched in 2017 and boosted
during Covid. The exact amount of short dollar positions that will expire each
month is not clear, but overall, the outstanding position was about $7.5 bln.
The first instinct was to buy pesos as it approached a two-week low. The US
dollar rose from around MXN16.80 before the announcement to slightly above
MXN17.1060. After the high was seen, the dollar held above MXN16.87 and made
another run at the highs but ran out of time steam near
MXN17.0650 and settled near MXN17.0380. Today, the squeeze has continued, and
the dollar approached MXN17.20, the highest level since August 17. A trendline
connecting the May high (~MXN17.9980) and the early August high
(~MXN17.4260-80) comes in today near MXN17.2250. A push above there could
target the August high.
Reviewed by Marc Chandler
on
September 01, 2023
Rating:
