Overview: The US avoided a government shutdown,
barely, and this eased one of the headwinds that were anticipated. In turn,
this is spurring new gains in US interest rates and helping underpin the dollar
at the start of the new quarter. The 10-year Treasury is holding above 4.60%
and nearing last week's high (4.68%). The two-year yield gapped higher and is
near 5.10%. The high from September 21 was almost 5.20%. The Swiss franc is the
only G10 currency holding its own against the dollar today. Among emerging
market currencies, three currencies are slightly firmer, the Hungarian forint,
Polish zloty, and the Taiwanese dollar.
European benchmark yields are
mostly 2-4 bp higher, but UK Gilts yields are six basis points higher to 4.50%.
Many bourses in the Asia Pacific area are closed for holidays today. The ones
that did trade were mostly lower, including Japan and Australia, Taiwan was an
exception. After rising by about a third of a percent last Thursday and Friday,
Europe's Stoxx 600 is a little softer today, while US index futures are showing
a firmer profile. Gold is taking another leg lower. It fell every day last
week, falling nearly 4%, its weekly decline since June 2021. After closing a
little below $1849 at the end of last week, it has been sold to nearly $1831
today, its lowest level since March. The 200-day moving average is near $1815
and the year's low is about $1805. November WTI peaked near $95 last Thursday
and fell to about $90.35 before the weekend. It has come back better bid and is
near $91.55 in the European morning. Note that OPEC+ meets on Wednesday.
Asia Pacific
Chinese markets are closed
this week for national holidays, but the September PMI was released over the
weekend. The takeaway is
that the world's second-largest economy is performing somewhat better, even if
the underlying structural problems remain. The official manufacturing PMI rose
to 50.2 (49.7 in August), the first expansion, above 50 boom/bust level since
March. Autos and electrical machinery were particularly strong. The
non-manufacturing PMI rose to 51.7 from 51.0. Here, strength was seen in
median, communication, financial services, and construction. The property
sector is still weak, and exports are falling. Another issue that requires
monitoring is that output is outstripping new orders. The composite to a
three-month high of 52.0 (from 51.3). Public investment and monetary easing appear
to be helping large firms more than smaller businesses. And that is appears to
be reflected in the underperformance of the Caixin PMI, where the manufacturing
reading slipped to 50.6 (from 51.0) and the services PMI fell to 50.2 (from
51.8), The Caixin composite PMI moved in the opposite direction of the official
one, dropping back to 50.9 from 51.7.
Japan reported the results
of the Tankan Survey. The
takeaway is that Japan's manufacturing sector continues to struggle, and this
is especially true of small manufacturers. The Tankan results and confirmation
that the manufacturing PMI is at its lowest level since February (48.5 from 48.6
flash reading) will underscore efforts to draft a supplemental budget this
month. Tourism may be helping to lift services, drawn in part by the weak yen. The
weak yen also may be discouraging outbound tourism, keeping leisure and
entertainment spending at home too. Japanese businesses also see the dollar
falling to JPY135.75 (~JPY132.45 in the previous survey. The more tax cuts are
discussed as part of the package, the more likely an election later this year
or early next year will seem. There had been earlier speculation that Prime
Minister Kishida wants to secure his own mandate, they faded, only to be
resurrected now, despite the low support for the Kishida's government.
Australia's final September
manufacturing PMI ticked up to 48.7 from the flash 48.2 reading, but down from
49.6 in August. It
has not been above 50 since February. The low was set in April at 48.0 and it
has been languishing since then. The Reserve Bank of Australia meets tomorrow,
and these is practically no chance of a change in policy. The futures market
has not fully given up on another hike in the cycle but see the chances
greatest in Q1 24. The Reserve Bank of New Zealand meets Wednesday. The cash
target rate is 5.50% (4.10% in Australia). It too will remain on hold. Voting
in national election begins today and runs through October 14. A center-right
coalition had an early lead in the polls, but the latest batch showed a tighter
contest, with current Labor government gaining support. It is possible that the
New Zealand First party which has supported center-right and center-left in the
past will key to the formation of the next government.
Bank of Japan Governor Ueda
said over the weekend that that sustainable 2% inflation goal is not yet in
sight and there is still some distance to cover before an exit for easy
monetary policy can be contemplated. This, coupled with the US government shutdown averted, has seen
the dollar build on its pre-weekend gains. It had fallen to a four-day low
around JPY148.55 before recovering to JPY149.50 even though the US 10-year
yield eased for the second consecutive session for the first time in more than
two weeks. The dollar slightly above JPY149.80 today. Intervention does not
seem imminent, and the market may continue to gentle probe for the official
pain threshold. The JPY150 level of psychological importance is being
approached. Today, there are options for about $730 mln that expire there.
Related, the BOJ announced it will buy 5–10-year JGBs on Wednesday after the
10-year yield edged up to a new high (~0.775%), which may have been encouraged
by the record of last month's BOJ meeting where an exit of easy monetary policy
was discussed. The Australian dollar was greeted with heavy selling
after it traded above $0.6500 before the weekend and settled about 1% lower. It
has not closed above $0.6500 since August 10. Options for around A$680 mln
struck at $0.6500 expire today. The Aussie slipped below $0.6400 but held above
$0.6390. A break of that now confirms a rejection of the $0.6500 area and warns
the risk of a retest of the year's low set last week near $0.6330. The
offshore yuan rose to an eight-day high before the weekend, but the upside
momentum faded. When mainland market closed last Thursday for the extended
holiday, the dollar was a little below CNH7.30. It is little changed net-net.
We continue to see the same forces that are weighing on the yen, a drag on the
yuan: policy divergence. Moreover, the PMI will not deter investors from
looking for additional easing by the PBOC this year.
Europe
The eurozone's final
manufacturing PMI is a reminder of its economic challenges. At 43.4 (unchanged from the flash reading)
it is struck in the trough set in July at 42.7. German, Italy, and Spain's
manufacturing sectors appear to be stabilizing, but France is deteriorating. Germany's
manufacturing PMI stands at 39.6 (39.8 flash). It reached a low in July at
38.8. Italy's is at 46.8, having bottomed in June at 43.8. The French
manufacturing PMI is at 44.2, not as weak as the flash reading of 43.6 in
September, but it was at 46.0 in August. This is the lowest reading since 2020.
Spain's manufacturing PMI rose to 47.7 in September from 46.5 in August. This
is the low for the year. Last year's low was 44.7.
The UK's final September
manufacturing PMI confirmed the modest improvement to 44.3 (44.2 flash) from
43.0 in August. Still, it
has not been above 50 since July 2022. Last week, the UK confirmed Q2 GDP rose
0.2%, but the market sees slower growth for next four quarters according to
Bloomberg's monthly survey. Politics may overshadow economics in the coming
days. The Tory Party annual conference got underway yesterday. There seems to
be two trajectories. First, is Prime Minister Sunak trying to reinvigorate his
base ahead of next year's election. Second is the maneuvering of his rivals to
replace him if he fails. Separately, even if not totally unrelated, Russia's
Medvedev warned that the reported UK decision to train Ukrainian soldiers in
Ukraine make them legitimate targets. Sunak has subsequently backtracked and
said the proposal is not for the "here and now." This coupled his
warning that Germany's factories producing Taurus missiles that may be set to
Ukraine are also legitimate military targets speaks to our concern that the war
in Ukraine may broaden and escalate. Even if it mostly bluster, Ukraine will
soon have long-range missiles and its pilots will be trained by early next year
to fly the F-16 fighter jets. The appropriations bill that was approved by both
chambers of the US legislature and signed by President Biden did not authorize
more funding for Ukraine. Remedial action over the next few days is possible,
but the national consensus appears to be fraying, and this says nothing about
the strains in Europe, including the possible return of pro-Russia Fico in
Slovakia.
The euro was sold ahead of
the weekend after reaching the (50%) retracement of the leg down from the
September 20 high near $1.0735. That retracement objective was found a little above $1.0610, and
the euro peaked a few ticks north of $1.0615. It fell half-of-a-cent from the
high in the North America on Friday. It is slipped below $1.0550 in the
European morning and a break of $1.0530 re-targets the last week's low a little
below $1.0490. There are options for a little more than 1 bln euros struck at
$1.0495 that expire tomorrow. There still does not seem to be a climactic
capitulation that marks an extreme, like last September. The next important
chart area is around $1.04, the (50%) retracement of the euro's rally from last
September's low (~$0.9535). Sterling also reversed lower before the
weekend, but unlike the euro, it settled lower on the day. It is being
pushed through the pre-weekend low (~$1.2180). It does not appear to have
bottomed and a re-test on the six-month low set last week near $1.2110 seems
likely. The next target is $1.2075, the (38.2%) retracement of the rally from
last September's record low near $1.0350 to this year's high set in July near
$1.3140 and then $1.20, the measuring objective of the large head and shoulders
pattern.
America
With no time to spare,
limited spending authorization of the US federal government was extended to
November 17. The measures
did not provide new funding for Ukraine, as we have noted, and House Speaker
McCarthy promised a separate bill to authorize it. However, there is a move
underway within the Republican Party to replace him after relying on the
Democratic Party to pass the authorization bills. Meanwhile, other important
headwinds to the US economy remain. The UAW strike is expanding. Credit
conditions appear to be continuing to tighten. The high interest rates and high
credit card debt will squeeze the consumer, as will higher energy prices. Student
loan debt servicing is resuming. Job growth is slowing, and that likely will be
underscored by this week's data, which includes JOLTS and the nonfarm payroll
report.
The market has all but given
up on a Fed hike next month.
The futures market has a less than a 20% chance. The odds of a hike by end of
the year are about 40%, down from about 50% three weeks ago. Nine Fed officials
speak this week, with Chair Powell (and Harker) participating at a roundtable
discussion today. Most views seem to be well known and the general statement is
that rates are near or at their peak and they will stay elevated for some time.
Meanwhile, the US Treasury will sell $244 bln in bills this week (no coupons)
and that does not include the 4- and 8-week bills.
Canada's July GDP stagnating, disappointing economists who had expected a 0.1% expansion after June's 0.2% contraction. The Canadian dollar was punished severely, suffering its largest since day loss since mid-July (~0.65%). The odds of a rate hike were downgraded to about 30% this month from 45% in the middle of last week and around 58% before the end of the year from nearly 78% midweek. The greenback recorded a huge outside up day (trading on both sides of Thursday's range and closing above its high). It met the (61.8%) retracement of the dollar's decline from almost CAD1.37 on September 7 to CAD1.3380 on September 27. It is found near CAD1.3575. The pre-weekend move seemed exaggerated but the Canadian dollar sell-off has carried into today, with the greenback rising a little above CAD1.3600. The risk is that the greenback's downside correction is over, and it may run again toward CAD1.37. Amid risk-off moment and the broad gains, the US dollar approached its 200-day moving average against the Mexican peso in the middle of last week, reaching almost MXN17.82. The dollar has experienced eight bounces this year of more than 2.25% against the peso. The largest was in March around the US banking stress that saw the greenback surge 7.45%. The bounce in September was about 5.75%. and since the September 20 low slightly below MXN17.00, the dollar rose by almost 5% into the middle of last week. At the first sign that it was stabilizing sellers emerged and drove the dollar to MXN17.35 before the weekend, slightly above the 20-day moving average (~MXN17.33). It has stabilized today and some backing and filling looks likely. A move above MXN17.46 cold see MXN17.53-58. As widely anticipated Banxico stood pat last week and continued to signal its intention to keep the target rate at 11.25%.
Reviewed by Marc Chandler
on
October 02, 2023
Rating:
