Markets Continue to Struggle

Overview:  The markets remain unsettled. Follow-through dollar selling has been limited today after yesterday's pullback. Narrow ranges are prevailing, but the Norwegian krone and Canadian dollar, the weakest G10 currencies in recent days, are heavier again today. Although it seems that the BOJ did not intervene earlier this week, but the dollar bulls has been chastened just the same and the greenback is holdings below yesterday's high (~JPY149.30). Higher than expected South Korean CPI (3.7% vs 3.5%)- is helping the won recoup yesterday's 1% decline to lead the emerging market complex. The South African rand and Mexican peso are worst performing emerging market currencies today, off 1.1% and 0.7%, respectively. 

Japanese stocks led the recovery in most Asia Pacific bourses today, with a 2% gain in the Topix. Taiwan’s Taiex gained 1%. The MSCI's regional index rose for the first time this week. Europe's Stoxx 600 is trying to snap its three-day slide, but it is struggling. And US index futures have been unable to build on yesterday's gains. Bond markets are under pressure. European yields are up mostly 3-6 bp, and the peripheral premiums are widening. The 10-year US Treasury yield is little changed near 4.73%, while the 2-year yield that fell almost 10 bp yesterday is slightly below 5.04%. Gold remains in the range set on Tuesday (~$1815-$1833). Despite OPEC+ efforts (Saudi Arabia and Russia mostly) to support prices, November WTI continues to retrace last month's rise. Recall, it peaked last week near $95 and today is below $84, its lowest level since September 1. It settled below its lower Bollinger Band yesterday for the first time since June and remains below it now (~$84.40). 

Asia Pacific

If the BOJ intervened on Tuesday, no one has stepped up to confirm it. Japanese officials, as we have suggested, have a tactical interest in preserving an element of uncertainty, but even journalist, often drawing from unnamed sources violating confidentiality, do not appear to have quoted any banker claiming to have seen or conducted the intervention. The Financial Times reported that "Foreign exchange analysts and dealers in Tokyo, however, mostly agreed that direct currency intervention had not taken place." Moreover, a review of the BOJ's government fund flows also makes it seem that intervention was unlikely. Still, the market has stayed away from the JPY150 level. 

Yesterday, the BOJ bought the equivalent of about $12.7 bln (JPY1.9 trillion). Nevertheless, Japanese yields crept up to new highs. The MOF's weekly portfolio flows seem to run counter to the narrative that no one is prepared for an exit from the BOJ's extraordinary monetary policy. Foreign investors have been sellers of Japanese bonds and stocks in recent months. After selling JPY5 trillion of bonds and stocks in the week ending September 22, foreign investors returned to the buy side but in smalls in the week ending September 29 (~JPY97 bln).The other part of the narrative, that the Yield Curve Control adjustments and higher Japanese domestic interest rates would encourage Japanese investors to repatriate funds also has not been borne out by the Ministry of Finance data. Since last December's doubling of the cap on the 10-year JGB and the doubling again at the end of July, Japanese investors have been net buyers of foreign bonds and stocks. Moreover, bond auctions in Japan have seen mostly soft demand, including today's 30-year auction. The tail (the difference between average and cut-off prices) jumped and the bid-cover was the lowest in almost three months. Tomorrow, Japan's Achille's Heel will be shown. Despite what was heralded as a successful spring wage round, real cash earnings continue to be lower than a year ago, while nominal earnings growth is little changed from a year ago. In August, they are expected to have risen by 1.5% year-over-year. In August 2022, they were up 1.7% y/y). One consequence is that weakness in household spending. In July, it was 5% below year ago levels, the largest pullback since early 2021. It is expected to have moderated to -3.9% in August, which still would be lower than any month last year.

Australia's August trade balance jumped to A$9.64 bln after the July balance was revised to A$7.32 bln from A$8.04 bln. It is the first increase in three months. Last August, Australia reported a A$9.3 bln surplus. Imports were flat after rising by 3% in July. Exports rose by 4% in August after falling 2% in July. Iron ore remains the biggest export (+4.5% to A$10.9 bln) followed by coal (-10% to A$6.7 bln), and natural gas (+7.5% to A$5.8 bln). Gold exports more than doubled to A$3.9 bln. Overall, Australia's trade surplus has averaged A$10.7 bln a month this year, down from an average of A$11.2 bln in the first eight months of 2022.

Since poking above JPY150 and falling to around JPY147.45, the greenback has steadied in a range of mostly JPY148.50-JPY149.40, though briefly traded to almost JPY148.25 in Asia earlier today. One-week implied vol was near 7.3% before the US JOLTS report and spiked higher, reaching almost 9.8% yesterday before falling to settled near 8.1%. 2It returned to the 20-day moving average, about 8.6%, today. Yesterday, the Australian dollar held the low for the year set on Tuesday near $0.6285. It encountered offers around $0.6340 early in the North American morning and settled into a range for the remainder of the sessions, mostly gravitating around $0.6320, the lower Bollinger Band. However, it opened the local session higher today and rose to almost $0.6380. It was sold into the European morning and found support around $0.6320. A move above $0.6400-20 is needed to boost confidence that a near-term low is in place. The dollar is firm against the offshore yuan, trading above CNH7.32. The week's high was set on Tuesday near CNH7.3315. Recall, it settled around CNH7.2950 when the onshore holiday began. 

Europe

France and Spain reported August industrial production figures today. The aggregate estimate for the eurozone is the one of the few data highlights from the region next week. French manufacturing and industrial output fell in August by 0.4% and 0.3%, after rising 0.8% and 0.7% respectively in July. Spain's industrial output fell by a larger-than-expected 0.8% after a 0.2% gain in July and maintains the alternation between gains and declines since April. The median in the Bloomberg's survey was for a 0.3% fall. The year-over-year rate has not been positive since March. Germany reports factory orders tomorrow (look for a recovery from a dramatic 11.7% slide in July) followed by the industrial production report on Monday. Italy reports its industrial production data next Tuesday, but tomorrow reports August retail sales (flat is expected). The aggregate eurozone August retail sales report was out yesterday, showing a sharp 1.2% decline, the largest slump of the year. 

Today, Germany reported that the August trade surplus narrowed to 16.6 bln euros from 17.7 bln euros in July. Exports fell by 1.2%, twice as much as expected and the first back-to-back monthly declines in shipments since Aug-Sept 2021. Imports fell by 0.4%. Economists expected a 0.5% increase. Despite the weakness of the euro, non-EU exports have fallen by about 4.3% year-over-year in August. Russia unsurprisingly has seen the largest drop (-36%), but shipments to South Korea are also off sharply (~18.5%). Exports to India (27.7%) and Japan (17.6%) have been the strongest. Exports to China are off 7% year-over-year and 2.2% lower to the US. Separately, Germany's September construction PMI fell to what appears to be a new record low of 39.3 (from 41.5). The UK's construction PMI fell to 45.0 from 50.8, the lowest since May 2020. 

The euro recovered from the $1.0450 area to a little more than $1.0530 yesterday and is trading in a little more than a quarter-of-a-cent range today above $1.05. The high was seen following the weak ADP private sector US jobs estimate (89k vs median forecast in Bloomberg's survey of 150k). Just like the market seemed to overreact to the JOLTS report, it also seems exaggerate the significance of the ADP report. The $1.0530-50 offers nearby resistance, but a move above $1.0600-20 may been needed to signal anything of importance from a technical perspective. Sterling posted a potentially bullish key reversal yesterday by making a new low for the move (~$1.2035) and then recovering and closing above the previous session's high (~$1.2100). It reached slightly above $1.2175 before pulling back, stalling in front of the (61.8%) retracement of the last leg down, which began with last Friday's high near $1.2270. It spent most of the remainder of the session consolidating in a $1.2110-60 range. There has not been follow-through sterling buying today and is in about a quarter-cent range on either side of $1.2140.

America

Today's US August trade balance and weekly jobless claims are overshadowed by tomorrow's national jobs report. We already know that the good deficit narrowed to a five- month low of about $84.3 bln in August. That is likely to translate into a possibly sub-$60 bln deficit for the first time since September 2020. Still, note that the current account deficit, a broader measure of trade and returns on investments (royalties, licensing fees, profits, interest, dividends) is expected to be around 3.2% of GDP this year. Before Covid, it was 2.1% of GDP. Weekly initial jobless claims have been below 205k for the past two weeks. The four-week moving average through September 22 is 211k, the lowest since mid-February. Despite what seemed like a strong JOLTS report, with a 32% participation rate, and the decline in weekly jobless claims, labor market growth is slowing. The three-month average is 150k for nonfarm payrolls through August. In August 2022, the three-month average was 430k. Tomorrow's report is expected to be the fourth consecutive month of less than 200k jobs created. One has to go back to the last four months of 2018 to see that.

Canada reports is August goods trade balance and the IVEY PMI today ahead of tomorrow's employment report. After peaking in May 2022 near C$4.2 bln, Canada's merchandise trade balance has deteriorated. In the three-months through July, it has averaged a deficit C$2.86 bln a month. In the three-months through August 2022, Canada had an average trade surplus of C$1.65 bln a month. The IVEY PMI rose to 53.5 in August, recovering from the dip below 50 (48.6) in July. We suspect the 0.2% contraction in Canada's Q2 GDP and the flat showing in July overstates the economic weakness. A strong employment report may have calm anxiety. Note that through August, Canada has created about 275k full-time jobs this year compared with about 250k in the first eight months of last year. Lastly, we note that Mexico reported a 3.7% increase in September vehicle sales which lifted the year-over-year rate to 35.6%. US vehicle sales rose by 4.2% in September and about 16% year-over-year. 

The Canadian dollar sell-off has been brutal. The US dollar surged from almost CAD1.3415 last Friday to CAD1.3780 yesterday and recorded a marginal new high today. Net-net, the Canadian dollar's 2.1% decline over these few days is behind the Norwegian krone's 2.8% drop to lead the G10 currencies. Yesterday, we noted the pressure on US bank shares, but the same is true in Canada. An equal-weight ETF of Canadian banks made a new low since March 2021 yesterday. It is off almost 9.5% since the recent peak on September 18. The US dollar settled above its upper Bollinger Band yesterday and is above it (~CAD1.3750) now. Some may want to link the Canadian dollar's weakness to the drop in oil prices but note that the 30-day correlation of the changes of the two had steadily been falling and was briefly inverted in late September for the first time in nearly eight months. It has since recovered to around 0.27. In the May-August period, it was often around 0.60. While the Canadian dollar fell by 21%, the Mexican peso has fallen by about 3.0%. The greenback rose to MXN18.2165 yesterday in Asia before falling to MXN17.83 after the ADP report. It spent most of the North American session between MXN17.90 and MXN18.10. It remains in that range so far today but is near the upper end of it in the European morning. Note that the MXN18.2370 area is the (61.8%) retracement of the dollar's losses since the peak in March (~MXN19.2320). There are options for nearly $1 bln at MXN18.20 that expire tomorrow. 

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