Rates and the Dollar Come Back Firmer

Overview: Weekend accounts seemed to try to understand what Fed Chair Powell said by beginning with the large drop in US rates. Yet, most accounts miss the fact that no matter what Powell has said, the market has more often than not reacted as if he were a dove. Rates have come back firmer today, perhaps as some recognized the overshoot. The US two-year yield is up nearly seven basis points after falling 14 before the weekend. The 10-year yield is almost six basis points higher around 4.25%. The dollar's losses were initially extended but it has recovered. Ahead of the start of the North American session, the greenback is firmer against all the G10 currencies, except the Japanese yen. Most of the freely accessible emerging market currencies, are also softer. Gold has been on a wild ride. It shot up to a little more than $2135 before reversing lower and is now near $2065.

The MSCI Asia Pacific Index has rallied for the past three weeks but struggled to start the new week. South Korea, Australia, and India were notable exceptions. India's stocks were encouraged by Prime Minister Modi's party's (BJP) success in the weekend state elections. The 2% gain is the largest of the year. After rallying the past three days, Europe's Stoxx 600 is treading water: little changed in a narrow range. US index futures trading with a softer bias. The market is judging that OPEC+ voluntary cuts may not materialize so much, and demand may weaken. After peaking near $80 last Thursday, January WTI is slipped below $73 a barrel earlier today but is returned to near $74. Resistance is now seen near $75. 

Asia Pacific

Caixin reports November services and composite PMI first thing tomorrow. Like the manufacturing PMI before the weekend, Caixin services and composite PMI are seen ticking up unlike the "official" (Chinese Federation of Logistics) PMI. It would be the second consecutive increase in the services PMI. A rise in the composite would be the first in six months. November trade and inflation data are due later this week. The soft economic data and deflationary conditions underpin expectations that the PBOC could cut reserve requirements before the end of the year.

Japan's final PMI composite reading is also due first thing tomorrow. The preliminary reading of 50 was the lowest of the year. Still, the focus turns back to prices with tomorrow's Tokyo CPI. The Tokyo CPI, like the eurozone's preliminary estimate, and the US CPI, provides a reasonably good estimate of the national figures (for Japan and the eurozone) and the PCE deflator, which the Fed targets in the US. Price pressures in Japan are moderating and inflation is expected to have slowed at both the headline and core measures. 

The Reserve Bank of Australia meets early tomorrow after its final PMI readings. After November's hike, a December hike was never credible. The data since the last meeting have been mixed, but most recently, October retail sales unexpectedly decline, and October's CPI slow more than expected (4.9% from 5.6%). On the other hand, the labor market stabilized, growing 17k full-time positions in October after losing 36.5k in September. The participation rate rose to 67.0% from 66.8%. There is no reason to expect a substantive change in Governor Bullock's hawkish message, but the market is not buying it. The odds of a hike in H1 24 have been downgraded to slightly less than 20% from nearly 75% a week ago.

Ahead of the weekend, and encouraged by the precipitous drop in US rates, the dollar posted its lowest settlement of against the yen since mid-September. Momentum indicators are stretched but have not begun turning. The lower Bollinger Band is near JPY146.25, which the dollar tested in Asia Pacific early turnover. Firmer US rates may have helped stabilize the greenback. It looks poised to retest the JPY147.00-10 session high in North America, and near-term potential may extend toward JPY147.50. The Australian dollar settled last week at its best level since July. The gains were extended toward $0.6690 today, stopping shy of the resistance band seen in the $0.6700-25 area. The momentum indicators are stretched and seem poised to turn down. A break of the $0.6600-$0.6615 would boost the chances of a deeper correction. The US dollar traded between roughly CNY7.1175 and CNY7.1465 in the second half of last week. It is consolidating quietly today mostly with a CNY7.13 handle. The PBOC set the dollar's reference rate at CNY7.1011 (Friday's fix was CNY7.1104). It was the weakest reference rate for the dollar in six months. 

Europe

There have been two developments in the eurozone last month that will help shape this month's investment climate. First was the German constitutional court ruling, which blew a large hole in this year's budget and raised questions about some expenditures next year. The net effect is three-fold:  It suggests more government supply, perhaps slower growth, and new strains in the governing coalition. Second was the lower-than-expected preliminary November CPI. It stands at 2.4% (core at 3.6%). An important implication of the slowing price pressures and weak economy is about the trajectory of ECB policy. The market now has slightly more than a 70% chance that the first cut is delivered in Q1 24.

The euro underperformed at the end of last week, perhaps because low eurozone CPI print lends more credibility to an early cut. Last week, the US two-year yield slid 41 bp. The yield on the German two-year yield tumbled 39 bp. The two-year UK yield fell 17 bp. The euro retreated from slightly above $1.1015 in the middle of last week to about $1.0830. It recovered to around $1.0895 as the market took US rates lower despite Powell's protest, which Bloomberg explained was not "full throated." Initial resistance is likely in the $1.0900-25 band. It is trading inside the pre-weekend range (~$1.0830-$1.0915) today. Sterling held above the $1.2600 area before the weekend and rallied back to about $1.2715. Last week's high was almost $1.2735 and follow-through buying saw $1.2725 today before the selling pressure emerged, which took sterling down to almost $1.2650 in the European morning. We noted that the momentum indicators for yen and Australian dollar had not yet turned lower, that is not the case with the euro and sterling. Their momentum indicators have clearly rolled over. A break of $1.2600 could sign a deeper correction.

America

Fed Chair Powell was crystal clear: "It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so." Initially rates rose and the dollar extended its gains, but quick these moves were unwound. The two-year yield fell to a new low on the day (4.57%) and dollar turned broadly lower. The market is pricing in nearly a 67% chance of a Fed cut in Q1 24. This seems exceptionally aggressive ahead of Friday's jobs report, where the median in Bloomberg's survey looks for a 180k increase in nonfarm payroll. The crucial link may not be between wages and inflation but between employment, income, and demand. Today, the US sees factory orders and revisions to durable goods orders. We already know the auto strike was disruptive and Boeing orders were halved from September.

Canada created nearly 60k full-time positions last month, more than in the previous four-months combined. Wage growth remained at 5.0%, defying expectations for a little softening. However, the decline in hours worked warns that the job growth does not herald an economic recovery. The swaps market shows around a 70% chance of the first cut being delivered by the end of Q1 24. Governor Macklem will have an opportunity to push back at the conclusion of Wednesday's meeting.

The resilience of the Mexican economy is striking. The November manufacturing PMI edged up to 52.5 from 52.1 and is the highest in four months, the IMEF indices pointed to moderating activity. Worker remittances in October reached a new record high (~$5.8 bln), underscoring the solid external position. Mexico reports vehicle sales today. Auto and truck sales are up 25% this year. China's brands, incidentally, account for around a fifth of Mexico's car sales this year. Auto production is up almost 18% this year, while exports have risen by nearly 15%. The highlight this week is Thursday's CPI. The median forecast in Bloomberg's survey is for the first increase, albeit small, since January (from 4.26% to 4.39%).

The greenback fell by 1% against the Canadian dollar last week, its biggest weekly loss since mid-June. It has three-week downtrend in tow to start this week and settled below the 200-day moving average for the first time since September. Still, the dollar has bounced back after its losses were first extended to CAD1.3480. Nearby resistance is seen in the CAD1.3555-70. The intraday momentum indicators are over-extended, suggesting limited scope for additional gain. The US dollar approached MXN17.50 last Thursday, but a combination of the resilient Mexican data and the broad rally in risk assets saw to fall to nearly MXN17.16. The dollar has come back better bid and is recording session highs in Europe above MXN17.27. Resistance is seen in between MXN17.29 and MXN17.33.

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