Overview: The market continues to monitor
developments in Israel and the Middle East. The economic calendar is light
today and the market is showing a strong appetite for risk. Except for China
and South Korea, large bourses in the Asia Pacific rallied. Japan's indices
jumped more than 2% and Australia by 1% to lead the region. Europe's Stoxx 600
is up 1.5% near midday, which, if sustained would be the largest in nearly a
month. US index futures are firmer. After yesterday's partial US holiday, US
Treasury yields have fallen sharply. The 10-year yield is off 13 bp (to about
4.67%) in the European morning and the two-year is off almost nine basis points
to straddle the 5% level. Note that the heavy supply of bills and coupons
begins today. Europe's 10-year benchmark yields are mostly 1-2 bp higher. The
10-year JGB yield eased a few basis points to about 0.77%.
The dollar is mixed. The euro and sterling
are trading firmer and above their 20-day moving averages, building on a move
that began last week and survived the stronger optics of the US jobs report. The
dollar rebounded from slipping below its 20-day moving average against the yen
to return to the JPY149 area. That said, the moves seem to be stalling ahead of
the US open. Emerging market currencies are mostly firmer. Gold gapped higher
yesterday and is trading quietly in about a $5 range on either side of $1860. November
WTI also gapped higher yesterday and it too is consolidating. It has been
confined to about a $0.70 range on either side of $86.00. Last week's low was
near $81.50.
Asia Pacific
Japan's current account surplus narrowed
to JPY2.28 trillion in August from JPY2.77 trillion in July. Arguably, under-appreciated, Japan's
current account surplus is not driven by the trade balance. June and July stand
out as exceptions, when Japan did run a trade surplus on the balance of
payments basis, but it reverted to deficit in August. In fact, before June, the
last time Japan ran a monthly trade surplus was in October 2021. The trade
deficit on a balance of payment basis through August was JPY5.95 trillion
compared with a JPY9.3 trillion in the first eight months of 2022. In the
January-August 2019 period before Covid, Japan reported a JPY64 bln deficit.
This speaks to the continued though easing terms of trade shock Japan has
experienced.
The dollar traded heavily against the yen
yesterday, within the pre-weekend range (~JPY148.35-JPY149.55). No help from the Treasury market,
which was closed on Monday. Still, the futures showed softer yields. The 20-day
moving average is about JPY148.20 and the dollar briefly dipped below it but
snapped back and returned to the JPY149 area. The dollar has not closed below
this moving average for more than two months. At the same time, the greenback
remains within the range set last week, when it rose briefly above JPY150 and
reversed lower spurring talk of intervention. The range day (Oct 3) was roughly
JPY147.45 to JPY150.15. The Australian dollar traded lower yesterday, but as
the session progressed, it gradually recovered and pushed above the pre-weekend
high near $0.6400 in late North American turnover. It settled above the 20-day
moving average (~$0.6405). It rose to a high so far today slightly below
$0.6435. Re-establishing a foothold above $0.6420 would improve the technical
tone and re-target $0.6500, which it penetrated on an intraday basis but has
not closed above in nearly two months. The greenback traded below
CNY7.27, its lowest level since mid-September. Country Garden woes seem to
be coming to a head amid reports of a pending default and creditor group being
formed for restructuring. The dollar bounced back to approach CNY7.2970. The
PBOC set the dollar's reference rate at CNY7.1781. The average projection in
Bloomberg's survey was CNY7.2776. The spread between the two narrowed while the
reference rate continues to slip.
Europe
Italy is the last of the large eurozone
members to report August industrial production. It unexpectedly rose by 0.2% instead of
fall by 0.3% as the median forecast in Bloomberg’s survey had it. Still, the
July drop was revised to -0.9% from -0.7%. The Italian economy expanded by 0.6%
in Q1 (quarter-over-quarter) before contracting by 0.4% in Q2. The median
forecast in Bloomberg's monthly survey has the economy expanding by 0.1% in Q3
(and Q4). Meanwhile, the Italy's interest rate premium over Germany continues
to widen. The 10-year premium began the year slightly over 210 bp. As the
Meloni government was not an extreme as many expected the spread spent most of
H1 between 170-190 bp. It fell to almost 155 bp in mid-June, but since early
last month, it has traded back and is near the year's high set in January a
little over 200 bp. It has widened for the past six consecutive weeks. Italy's
two-year premium began the year near 50 bp and recorded the low for the year in
mid-January near 27 bp. It spent most of Q2 and Q3 around 60-70 bp. It reached
nearly 92 bp yesterday, the largest premium since last October and has narrowed
by a few basis points today. The Spain's 10-year premium has also widened
recently. The low for the year was reached in mid-June near 91 bp. The high
since last October was set yesterday, almost 115 bp. It has narrowed slightly
today. Most of the time, the widening of the core-periphery spreads has been
euro negative, but the rolling 60-day correlations are now positive.
The euro had the dubious distinction of
being the only G10 currency (along with the Danish krone that shadows it) to
have lost ground to the US dollar. It tested the $1.0520 area in Europe and then again in early North
American turnover yesterday and recovered back toward session highs by late in
North America (~$1.0570). Follow-through buying today has lifted through $1.06
and above the 20-day moving average for the first time since the end of August.
The next target is near $1.0640, then $1.0700. Sterling also traded
quietly inside last Friday's range, but recorded session highs late in the day
and settled well, and above $1.2230. Like the euro, sterling looks
like it is carving out a bottom. It has moved above the 20-day moving average
(~$1.2255) for the first time since late August. Nearby resistance is seen in
the $1.2300-10 area.
America
The wholesale trade and inventories data
and the results of the Fed's survey of consumer inflation expectations are
typically not market movers. The main data point this week is the September CPI, where the
headline rate is expected to slow for the first time in three months. This week
also sees almost a dozen Fed officials speak, though the views are largely
known. The takeaway is that the futures market as about a 20% chance of a hike
when the next FOMC meeting concludes on November 1. The market is discounting
almost a 37% chance of a hike before year-end. The FOMC minutes from last
month's meeting will be released tomorrow. Remember that the new economic
projections showed 12 of the 19 Fed officials still thought another hike this
year would be appropriate. The others expected to stand pat. The median
"dot" for 2024 Fed funds was raised to 5.1% from 4.6%. This implies
two cuts rather than four was previously signaled in the June iteration. Note
that the January 2025 Fed funds futures imply a 4.57% yield. The current
effective rate is 5.33%. This suggests the market is discounting three cuts
next year.
The US dollar extended its pullback
against the Canadian dollar. Recall it had surged to a six-month high last Thursday near
CAD1.3785. It reversed lower and continued to fall after the jobs data and
settled around CAD1.3660. Yesterday, it marginally pushed to almost CAD1.3580.
The greenback's decline extended marginally to CAD1.3570 today before new bids
were found, lifting it back to nearly CAD1.3620. The recovery could extend
toward CAD1.3640-50. The said, a break now of the CAD1.3550 area could signal a
return toward CAD1.3400. Mexico's September inflation was largely in
line with expectations as headline and core rates continued to slow. However,
the peso completely recovered from the early slide that lifted the greenback
almost to MXN18.42. The US dollar settled around MXN18.21. Colombian peso was
the strongest in the region, gaining about 0.5%. A combination of slowing
inflation that is fanning speculation that Colombia could join others in the
region (but not Mexico) in cutting rates. Also, the jump in oil was seen as
benefitting Colombia the most. Meanwhile, the dollar was sold to MXN18.1475
today but has returned to MXN18.20-21 area. Nearby resistance is seen in the
MXN18.30 area.
Reviewed by Marc Chandler
on
October 10, 2023
Rating:
