Overview: Bonds
and stocks are higher today, and the dollar is mixed. A weak PMI reading seemed
to weigh on the euro, but the market shrugged the weak Australian PMI off and
the Australian dollar is the G10 currencies while the euro is among the weakest.
Yesterday, the North American session showed an appetite for foreign currencies
and with some of their intraday momentum stretched to the downside, the stage
is set for a possible repeat today.
The MSCI Asia Pacific Index
snapped a four-day drop today as the largest markets in the region, but Hong
Kong and India rose. Europe's Stoxx 600 is trying to end its five-day slide,
but it is struggling to maintain the early upside momentum. After gapping lower
yesterday and US S&P 500 and NASDAQ closed the opening gaps. The NASDAQ
closed slightly higher, but the Dow and S&P 500 settled lower. The indices
enjoy a firmer tone now. The unscheduled BOJ bond purchases may have helped
ease the pressure on JGBs, but yields are softer across the board today. Australia
and New Zealand 10-year yield are off 8-9 bp, while European benchmark yields
are mostly 4-7 bp lower. The 10-year US Treasury yield, which briefly traded
above 5% yesterday, is slightly softer today near 4.84%. Gold is hovering near
yesterday's low (~$1964). It held below yesterday's high (~$1983), as well. December
WTI made a marginal new low near $85, a five-day low, but has stabilized now.
Asia Pacific
Japan's flash October PMI
deteriorated. The
manufacturing PMI was unchanged at 48.5. It last was above 50 in May, which was
also the last time in ticked higher. The services PMI slipped to 51.1 from
53.8. It has not been below 50 since dipping below it in August 2022. The
composite PMI slipped below 50 for the first time this year. It stands at 49.9,
down from 51.2 in September. It had held above 50 this year after slipping
below it last November and December. Last October the composite was at 51.8.
More stimulus for the Japanese economy is expected shortly as Kishida
government shepherds a supplemental budget after extending and expanding
household subsidies for energy from the end of this year through early next
year. Income tax cuts for a year are also being considered.
Australia's flash PMI was
poor. The manufacturing
PMI remained below the 50 boom/bust level. It has not been above it since
February. The October preliminary reading of 48.0, down from September's
48.7. Its service sector also contracted. The preliminary reading fell to 47.6
from 51.8. The composite fell to 47.3 from 51.5. It is the weakest since
January 2022. Last October, the composite was at 49.8. Tomorrow, Q3 CPI will be
reported. It is expected to have slowed to 5.3% from 6.0% in Q2. The weighted
and trimmed mean measures are projected to have slowed too. The market expects
the Reserve Bank of Australia will stick with the hawkish hold at the November
7 meeting. The futures market is discounting about a 75% chance that the RBA
stands pat.
The dollar squeezed above
JPY150 briefly in early Asia Pacific activity on Monday. It looked like it was going to try again
in North American activity as the US 10-year yield pushed above 5.0%. However,
North American dealers caught their overseas counterparts leaning the wrong
way. The US 10-year yield tumbled to around 4.83% and the dollar was sold
broadly and fell to new session low near JPY149.50 in late dealings. Options
for $1 bln are struck at JPY149.50 and another set at JPY150 for $1.7 bln. The dollar
fell to almost JPY149.30 late in the Asia Pacific session, after the BOJ bought
bonds in an unscheduled operation. It took out the 20-day moving average
(~JPY149.40), but it has not closed below it since late July. The
Australian dollar posted a bullish outside up day, trading on both sides of
Friday's range and closing above it high. The disappointing PMI did
not stand in the way of follow-through buying that lifted the Aussie to almost
$0.6380. It had dipped below $0.6300 yesterday. The next target is last
week's high near $0.6395. The month's high was seen twice, once early in the
month and once toward the middle, around $0.6445. The dollar traded
inside the pre-weekend range against the Chinese yuan yesterday and settled on
its lows. The broader setback for the dollar aids Beijing's efforts to
moderate the pace. The dollar slipped to CNY7.2980 earlier today, an eight-day
low before rebounding back above CNY7.31. An arm of China's sovereign wealth
fund confirmed it has begun buying ETFS and will continue to buy shares in the
largest Chinese banks.
Europe
The eurozone economy has not
yet bottomed. The flash
PMI showed further weakness. The preliminary manufacturing PMI slipped to three-month
lows. It stands at 43.0 down from 43.7 in September. It has not been above 50
since last June. Germany's flash manufacturing PMI rose to 40.7 from 39.6.
France's preliminary reading tumbled to 42.6 from 44.2. The eurozone's flash
services PMI gave back September’s gain in fully, falling to 47.8 from 48.7. It
stood at 47.9 in August. German services PMI fell to 48.0 from 50.3. France's
services PMI firmed to 46.1 from 44.4. The preliminary EMU reading shows the
composite PMI ticked eased to 46.5 from 47.2. It is below from last October's
47.3, which means it completed unwound the gains from last October through
April that saw the composite peak at 54.1. The German fell to 45.8 from 46.4
while the French composite rose to 45.3 from 44.1. The highlight of the week is
the ECB meeting on Thursday. After September's hike, the market is confident
that it will standpat this week.
There are two batches of UK
data today. First is
the labor market. Recall that last week's report showed the number of employees
on payrolls fell for the third consecutive month in September while August
average weekly earnings slowed to 8.1% (three-months year-over-year, including
bonuses). Excluding bonuses, average earnings growth eased to 7.8% from the
revised 7.9% (initially 7.8%). Today's report showed that employment fell by
82k in the three months through August after 133k fall in the three months
through July, which under the previous methodology, would have been a 207k loss.
Jobless claims rose by 20.4k in September. Second, the UK's preliminary October
PMI was little changed from September's final reading: Manufacturing
improved to 45.2 from 44.3. It was the second increase, but it has not been
above 50 since last July. The services PMI was nearly flat 49.2 from 49.3. The
composite edged up to 48.6 from 48.5. It was the third consecutive sub-50
composite reading. Last October, the composite was 48.2. Separately, we had
been focused the upgrade of Greece's credit rating to investment grade and the
risks to Italy's investment grade status next month. We did not include Moody's
change in the outlook for the UK from negative to stable, while S&P
affirmed its AA rating, which is one step above Moody's Aa3.
As we noted, the euro's
five-day moving average crossed above the 20-day moving average before the
weekend for the first time in three months. After a slow start, the euro was lifted by
nearly 0.75% to its best level since September 20 (~$1.0680). Its gain was the
largest since mid-July. The move has been so sharp that the euro settled above
its upper Bollinger Band (~$1.0655). Follow-through buying initially lifted the
euro to almost $1.07. It has fallen back to almost $1.0635 in the
European morning. A break below $1.0600-20 will be disappointing. Like
the euro, sterling's advanced for the third session yesterday, rising to about
$1.2260, its best level in almost two weeks. The gains were extended
to almost $1.2290 before selling pressure re-emerged. It has returned to
session lows in the European morning near $1.2235. About GBP550 mln in options
expire at $1.2255 today. Support is seen in the $1.2200-20 area.
America
Expectations for a strong US
Q3 GDP will likely be confirmed later this week. The median forecast in Bloomberg's survey
has crept up to 4.5%, more than twice the Q2 pace. Investors and businesses are
looking forward to Q4. Although a couple of Fed surveys for October have
already been reported (and Philadelphi's non-manufacturing survey and Richmond
Fed's surveys are due today), the PMI is broader. The manufacturing PMI has
spent every month since last October below 50 except for April (rose to 50.2
from 49.2). In contrast, the services PMI has not been below 50 since January.
The median forecast in Bloomberg's survey is for it to slip to 49.9 from 50.1.
The composite (measures output) is seen easing to 50 from 50.2 in August and
September. Last October, it was at 48.2.
Mexico reported somewhat
better than expected IGAE activity yesterday (August 0.39% vs. 0.30% expected
and 0.16% in July). The
year-over-year pace improved to 3.70% (3.40% expected) after 3.19%. Today's
focus shifts to inflation with the bi-weekly reading covering the first half of
October. The year-over-year rate of both the headline and core are seen
softening (4.38% and 5.49%, from 4.47% and 5.74% respectively).
The US dollar made a
three-day low against the Canadian dollar yesterday slightly below CAD1.3670
and saw the range extend to CAD1.3660 today. Last week's low was a little above
CAD1.3600. To signal something important technically in underway, the greenback
must fall below last week's low and ideally the CAD1.3570 area. More
immediately, a break of CAD1.3660 could spur a move toward CAD1.3620. The
US dollar extended its pullback against the Mexican peso. It had
peaked before the weekend near MXN18.4665 and fell to around MXN18.0775
yesterday. MXN18.00 is a psychological level and the 20-day moving average,
which the greenback has remained above since late September is near MXN17.96.
Last week's low was closer to MXN17.87. It is trading in a narrow range today
between MXN18.0825 and MXN18.1610.
Reviewed by Marc Chandler
on
October 24, 2023
Rating:
