Overview: After being bludgeoned, the dollar
is having one of its best days of the month. It is rising against all the major
currencies. The Dollar Index is up about 0.5%, which is the most since the end
of October. The greenback is also firmer against all the emerging market currencies
but the Turkish lira and Russian ruble. Some of the demand for the dollar may
be a function of month end, but also the disappointing Chinese PMI, revisions
that show the French economy contracted in Q3, and softer than expected
eurozone CPI are also consideration.
After slipping below 4.25%, the US 10-year
yield has recovered and is near 4.29%. It has fallen for the past three
sessions by slightly more than 20 bp. European benchmark yields are narrowly
mixed, though the 10-year Gilt yield is up almost three basis points. Equities
are finishing the month on an up note. Nearly all the large bourses in Asia
Pacific rose today and among the large markets, only China and Hong Kong are
posting losing months. Europe's Stoxx 600 is adding to yesterday's recovery
after falling Monday and Tuesday. It is up about 6.3% this month. US index
futures are also higher. The S&P 500 has gained around 8.5% this month
coming into today. Rising rates and a stronger dollar arrested gold's rally
that reached $2052 yesterday. It found support, so far today, slightly below
$2037. Ahead of the OPEC+ meeting, January WTI is extending its two-day rally
and is trading above $79 a barrel. The low for the week, set Monday, was near
$74.00.
Asia Pacific
Following new measures to support the
economy, the property sector, and strapped local governments, the IMF revised
its forecast for China's GDP to 5.4% this year from 5.0% previously. But today's November PMI disappointed despite
the increase in the number of working days after the extended holiday in
October. The manufacturing PMI had recovered steadily in June through October.
It pushed above 50 in September (50.2, its best in six months) but set back to
49.5 in October. It slipped to 49.4 in November. The non-manufacturing PMI fell
from April through August but remained above the 50 boom/bust level.
September's rise was unwound in full in October, where the 50.6 reading was the
lowest of the year. However, the November reading fell to 50.2. The composite
(output) has also remained above 50 this year and November's 50.4 is a new low
for the year. Tomorrow Caixin's manufacturing PMI is due. A small increase from
49.5 in October is expected. Although after today's PMI some have concluded
that more stimulus is needed, Beijing cautious approach may be more inclined to
wait for recently announced measures to have to be implemented first.
Japanese consumption contracted in Q2 and
Q3, but economists expect it to stabilize here n Q4. However, today's retail sales report was
shockingly weak. Recall that the 0.1% decline in September retail sales
was revised to a 0.4% gain. Earlier today, Japan reported a whopping 1.6% drop
in October. The median forecast in Bloomberg's survey called for a 0.4% rise. Moreover,
recall that this is a nominal report that would also pick-up an increase in
prices. Despite what was heralded as a successful wage round earlier this year,
real cash earnings were 2.4% lower than a year ago in September, and in
September 2022, they had fallen 1.2% year-over-year. In September 2021, they
were flat, and in September 2020, were down 1.1% year-over-year. Separately,
Japan reported a stronger rise in industrial output. It rose by 1.0% in October
after a 0.5% gain in September. Lastly, the BOJ left its bond buying plans for
December unchanged. It had reduced its regular purchases twice recently and
many had anticipated another reduction. BOJ bond purchases reached a record of
nearly JPY24 trillion (~$163 bln) in January. This month it purchased about
JPY10 trillion.
Although the dollar fell to almost
JPY146.65 in Asia yesterday, it did not trade below JPY147 in Europe or the US
yesterday. The
session high was recorded in early North American turnover a little shy of
JPY148. Again, in Asia today, the dollar recorded the session low near
JPY146.85. It was snapped up and recovered above JPY147.50 in early European
activity. Yesterday's high near JPY148 may offer the nearby cap. The
Australian dollar looks tired after rallying almost four cents this month. The
softer than expected monthly CPI print and the unexpected fall in retail sales
encouraged market push back against Governor Bullock's recent seemingly hawkish
comments. The Aussie held above $0.6600 in North America yesterday and so far is holdings barely above it Europe today. A convincing break may signal move back
toward $0.6540 initially. The dollar is recovering against the Chinese yuan, as well. It closed yesterday's gap and approached CNY7.14. The PBOC set the dollar's reference rae at CNY7.1018 (CNY7.1031 yesterday). The average projection in Bloomberg's survey was CNY7.1259. The gap is the smallest of the week.
Europe
German and Spanish inflation surprised on
the downside yesterday and pointed to a soft aggregate figure today. Headline inflation fell by 0.5% this month
and brought the year-over-year rate to 2.4%, the lowest since July 2021. It
finished last year at 9.2% after peaking last October at 10.7%. The core rate
slowed to 3.6% from 4.2% and is the least since April 2022. It was at 5.2% at
the end of last year but peaked at 5.7% this March. The soft data reinforces
market ideas that the ECB could deliver its first rate cut in Q2 24. The swaps
market has about a 50% chance it is delivered in March and is fully discounted
by the end of April. Three rate cuts are fully discounted by the end of Q3 24
and with about 40% chance of a fourth cut.
Separately, as we noted,
despite the weak economy and tighter monetary policy, the eurozone unemployment
rate remains in its trough (6.4%-6.5%). And by trough, we should note, it is the lowest since well
before monetary union. It was unchanged in October at 6.5%. Italy's
unemployment rate is at 7.4%. The August rate of 7.3% was the lowest since
early 2009. Lastly, we note that disappointing French data. First, Q3 GDP was
revised to show a 0.1% contraction. Initially, a 0.1% gain was estimated. Second,
its October consumer spending fell a dramatic 0.9%. The median in Bloomberg's
survey was for a 0.2% decline. Adding insult to injury, the September's 0.2%
gain was revised away.
The euro’s four-day advance ended
yesterday with a small loss after briefly trading above $1.1015, its best level
since August. The
pullback initially held $1.0960 support but has been sold further today. If
sustained, today's 0.5% decline would be the largest fall this month. Since the
euro bottomed on October 3, there have been five pullbacks that have averaged
about 1.2-cents. The average would bring the euro toward $1.09 and the (38.2%)
retracement of the leg up from November 10 low (~$1.0655) is about
$1.0880. Sterling met the (61.8%) retracement of its losses since the
July high yesterday (~$1.2720) and stalled in front of $1.2735 and is around a
cent below there in Europe. Earlier this month, the euro reached a
six-month high against sterling near GBP0.8770. It has fallen now for seven of
the past eight sessions. It is approaching GBP0.8630, the halfway point of the
rally that began in late August. We attribute sterling's recent outperformance
to the relative hawkishness of the BOE compared with the ECB and market
positioning. Initial support is seen near $1.2600.
America
All else being equal, the larger US goods
trade deficit and the weaker inventories reported yesterday are consistent with
slower US GDP. The
Beige Book pointed in the same general direction and noted softer demand for
discretionary and durable goods. Still, today's data are more important
and the Atlanta Fed's GDP tracker will be updated after the reports (from 2.1%
last week). Personal income is expected to slow to 0.2% from 0.3%. Through
September personal income has risen at the same pace as the year ago period
(0.4% on average per month). The same is true of personal consumption
expenditures. They have risen by an average of 0.6% a month this year, the same
as last year through the end of Q3. An important element of the economic
slowdown expected this quarter is that consumption/demand slows. The median
forecast in Bloomberg's survey is for a 0.2% gain in consumption last month.
That would be the least since May.
Meanwhile, as already tipped by the CPI,
the deflator for personal consumption expenditures most likely slowed. The median forecasts in Bloomberg's survey
sees the headline pace rising by 0.1%, which would bring the year-over-year
rate to 3.0%-3.1%. The core deflator is seen rising by 0.2% for a 3.5%
year-over-year pace (down from 3.7%). Recall that in the September
"Summary of Economic Projections", the median Fed dot was for two
rate cuts next year, even though the median forecast had the PCE deflator at
2.5% (headline) and 2,6% (core) at the end of 2024.
Canada reported a C$3.2 bln Q3 current
account deficit yesterday (C$1 bln surplus expected), and this warns of
downside risks to Q3 GDP that will be reported today. The median forecast in Bloomberg's survey
was for 0.1% growth after a 0.2% contraction in Q2. On Friday, Canadian
employment data for November will be reported. The labor market is softening.
The issue is the pace. Canada's unemployment rate has risen to 5.7% in October
from 5.0% where is based at the end of last year and through April this year.
The swaps market has a 60% chance that the first cut will be delivered by the
end of Q1 24, and two cuts fully priced in by the end of Q3 and about a 72%
chance of a third cut.
Reviewed by Marc Chandler
on
November 30, 2023
Rating:
