There were three outsized moves
last week. Gold had a $135 range on Monday, posted a key downside reversal, and
fell below $2000 at the end of the week after setting a record high slightly
above $2135. January WTI neared $80 on December 1 and traded below $69 on
December 7, its lowest level in five months. The seven-week slide matches the
longest since July/August 2015. Third, the dollar fell by a little more than 2.1% on December 7 against the Japanese yen as the market seemed to panic into concluding that the BOJ
would lift rates in a couple of weeks. The range that day was roughly JPY141.70
to JPY147.30. The greenback briefly traded below the 200-day moving average
for the first time in seven months. Given the softening inflation, the larger
contraction in Japan's Q3 GDP, and weak consumption at the start of Q4, there
is little pressure on the BOJ to act and an overwhelming majority (94%) of
economists polled by Bloomberg, expect not policy change until next year. About
half of the economists expect a move in April, the start of the new fiscal year
and when the extension of the energy subsidies expires.
The week ahead is chock fully
of central bank meetings. Among the G10 central banks, the Federal Reserve, the
European Central Bank, the Bank of England, the Swiss National Bank, and the
Norway's central bank meet. None are expected to change policy. The market has
been aggressive in pricing in cuts starting early next year for the Fed, ECB,
and SNB. The issue is how rigorously do officials push back against what the
market has done. Of these G10 central banks, the market seems most suspicious
of the Norges Bank, with the swaps market not convinced its tightening cycle
is over. The Fed and ECB will update their economic forecasts, and these should
be seen as part of their communication and forward guidance. In September, the
median Fed forecast was for one cut below the current target for 2024. The
market is pricing in four cuts. Several emerging market central banks also
meet, including Mexico and Brazil. Brazil is expected to continue its easing
cycle with a 50 bp cut (to bring the Selic rate to 11.75%, while Banxico
stands pat at 11.25%, but seems to be gradually preparing the market for a cut
in Q1 24.
United States: This is one of the busiest weeks of the
quarter. Of course, the FOMC meeting is the highlight, and Fed officials will
update the Summary of Economic Projections. The Fed is most unlikely to do
anything, and the general tenor of Chair Powell's comments are unlikely to deviate
much from his recent remarks on December 1. The market initially seemed to do
the exact opposite of what Powell said, as he pushed back against the rate cut speculation. Still yields recovered last week, even if not in full. The September
dot plot envisaged two cuts next year, but assumed one more hike this year The median projection also saw the headline CPE
deflator at 2.5% at the end of 2024 and the core rate at 2.6% (i.e., above target but approaching it). The unwinding
of the Fed's balance sheet may draw new attention as the recent sharp decline
in use of the reverse repo facility may begin the decline in bank reserves. At
the last meeting, a key issue was the tightening of financial conditions. Powell noted the moves have to "persistence" to be important from a policy-making point of view. The has tightening has been largely
unwound and the Fed confronts the opposite situation. Since the November 1 meeting, the 10-year yield has fallen by around 50 bp and the two-year yield by almost 40 bp. The S&P 500 is up over 9% and
a trade-weighted measure of the dollar is off around 2.6%.
Before getting to the FOMC
meeting, though, November CPI (and PPI) will be reported. Headline CPI could be
unchanged or up 0. 1% after a flat report in October. Given the base effect,
this will allow the year-over-year rate to ease to 3. 1% (from 3. 2%). The core
rate is more resilient. The median forecast in Bloomberg's survey is for a 0. 3%
increase (0. 2% in October) and for the year-over-year rate to be steady at 4. 0%.
After falling by 0. 5% in October, the biggest decline since April 2020, a
small rise in PPI last month is expected. That could see the year-over-year
rate easing toward 1% (1. 3% in October). The core rate is also expected to
have risen a little after being flat in October for around a 2. 2%
year-over-year rate (2. 4% in October). After the FOMC meeting, the US will
likely report softer retail sales, while the end of the labor dispute may help
bolster industrial output after the 0. 6% decline in October (manufacturing
fell by 0. 7%). The US economy is slowing after the 5. 2% surge in Q3. The
issue now is about the magnitude of the slowdown, which many still see as
leading edge of a contraction.
The near-term outlook for the Dollar
Index is constructive. The momentum indicators are moving higher, and the
five-day moving average crossed back above the 20-day moving average for the
first time in a month. A move above 104.25 targets 104.65-80 initially, on
the way to 105.35 and possibly 106.00.
Eurozone: The eurozone economy is stuck a
trough. The economy appears to be hovering around stagnation. Net-net the GDP
has been virtually flat over the past six quarters. Growth impulses remain poor.
The median forecast in Bloomberg's survey sees a flat Q4 and a 0.1% expansion
in Q1 24. The ECB meeting on December 14 is the main event, and like the
Federal Reserve, it will stand pat and update its
forecasts. Recall that in September, the GDP forecasts were for 0.7% this
year, 1.0% in 2024 and 1.5% in 2025. The IMF's latest forecasts are the same
as the ECB for this year, but a little more optimistic next year a 1.2% and in
2025 (1.8%). In September, the ECB saw inflation falling from 5. 6% this year,
to 3. 2% next and 2.1% in 2025. The IMF largely concurred (3.3% and 2.2% CPI
in 2024 and 2025, respectively). CPI has been softer than expected and the new
forecasts are likely to reflect that.
The swaps market has about a 65% chance that the first ECB cut will be delivered by the end of
Q1 24, and it has two-and-a-half cuts fully discounted by the middle of next
year. By the end of 2024, the swaps market is priced more more than 125 bp of cuts. Since the ECB met in late October,
the euro a bit firmer and oil and natural gas prices are lower. However, ECB
President Lagarde may push back against the aggressiveness that the market is
pricing in cuts. Lastly, the EU finance ministers meet on December 14-15 to see
if progress can be achieved in modifying the Stability and Growth Pact before
the old rules return next year.
The euro bottomed on October 3
near $1. 0450 and at the end of November pushed a little above $1. 1015. It has
been falling this month and the five-day moving average fell back below the
20-day moving average and the momentum indicators are trending lower. The euro
reached about $1. 0725 after the US jobs data. That met the 50% retracement
objective. The next retracement objective (61. 8%) is near $1. 0665.
United Kingdom: The Bank of England, like the ECB,
meets on December 14. No change in rates is the most likely outcome. Given the
weak economy and moderating price pressures, there seems to be no compelling
reason to tighten policy, though there are a couple of hawks on the MPC. Still,
inflation is still too high (4. 6% headline and 5. 7% core) to prompt a cut. The
swap market sees the first BOE cut to come after the Federal Reserve and ECB. There
is more than a 90% a cut by mid-year. The market is pricing in around two-and-a-half cuts in 2024.
Ahead of the BOE meeting,
investors and policymakers will see the latest employment data and October
monthly GDP and details. The UK economy was stagnant in Q3 and is expected to
be flat this quarter and next. Recall that the BOE's forecast sees no growth
next year. The IMF forecast 0.6% growth and the median forecast in Bloomberg's
survey is for a 0.4% expansion. Parliament will vote Tuesday on the
government's plan to send asylum seekers to Rwanda. A faction of Tories wants
tougher legislation than the government is proposing, leading to the
resignation of the immigration minister last week. However, Prime Minister
Sunak is not making it a confidence vote, which if the government lost, could
trigger a collapse of the government.
Sterling snapped a three-week
advance and lost about 1.3% last week. The five-day moving average has not
fallen below the 20-day moving average, as it has in the euro, but it looks poised to
do so in the coming days. The momentum indicators have turned down and sterling
looks set to fall back below the 200-day moving average (~$1.2485) and test
the (38.2%) retracement of its rally from the early October low (~$1.2035)
seen near $1.2365. The next retracement (50%) is around $1.2385.
China: It is a big week for Chinese data,
and it is mostly backloaded, with most of the important data at the end of the week. Still, the stronger deflationary forces reported early on December 9 will likely spur a policy response, even if the other data are stronger. CPI fell 0.5% year-over-year after a 0.2% contraction in October. Producers are 3% lower than a year ago from -2.8% previously. Still, it is possible, but seems a unlikely, that
the PBOC will cut its benchmark one-year Medium Term Lending Facility rate,
which stands at 2. 50%. It was last cut by 15 bp in August, but it has not been
fully passed through by the banks via the loan prime rates. Most recently, the
PBOC appears to be more focused on quantities than prices, but the continued
deflation in consumer and producer goods, while the market anticipates
aggressive rate cuts by several of the G10 central banks, including the Fed and
ECB, may create the space of a rate cut. Still, on balance, we suspect a cut in
reserve requirements may be delivered before a cut in rates. At the same time,
the impact of the numerous measures Beijing has announced should begin to be
picked up in the real sector data, outside of the property market. Sequentially,
on a year-to-date year-over-year basis, industrial output and retail sales
likely improved. Fixed asset investment may have also ticked up. Property
investment and residential property sales continue to be significant drag.
The dollar rose against the
yuan last week for the first time in four weeks, and the roughly 0.60% gain
was the largest in three months. There is scope for additional near-term gains.
A move above CNY7.1865 may signal potential toward CNY7.2080 and possibly
CNY7.23. Given the volatility of the yen and the approaching BOJ meeting, we
suspect the offshore yuan (CNH) may again be used as a funding currency
(borrowed and sold) for a higher yielding or more volatile asset carry trades
to cover into early 2024.
Canada: The Bank of Canada edged closer to a rate
cut by dropping the reference to the upside risks of inflation and the
recognizing that the labor market is loosening. Although the market is pricing
in a greater chance that the Fed eases before the Bank of Canada, the two-year
US premium is near 60 bp, the most in nine-months. Canada reports housing
starts, and they are holding up better than one might suspect given the rate
hikes and generally weak economic impulses. At a seasonally adjusted annualized
rate, Canada's housing starts have risen by about 10% in the September-October
period. The 274.7k (SAAR) in October was the best since June. In October 2022,
starts were around 264.4k. Existing home sales fell for four consecutive
months through October, and October's decline of 5.6% was the largest monthly
decline since May 2022. Canada also will report October portfolio flows. The
foreign appetite for Canadian securities has fallen sharply this year to nearly
C$20.5 bln. In the first nine months of 2022, net foreign portfolio inflows
were slightly more than C$95 bln. The Canadian dollar seems more sensitive the
risk-environment (S&P 500 proxy) and the broad movement of the US dollar
(trade-weighted index) than crude oil.
The US dollar rose for the
first time in four weeks against the Canadian dollar and looks technically
poised to rise further in the coming period. The momentum indicators have
turned higher. A move above CAD1.3620 could signal a move toward back to CAD1.3660-90 initially. That would likely push the greenback's five-day moving
average back above the 20-day, a proxy for signals by trend-following models.
Australia: Australia's calendar turns light after
following last week's central bank meeting (data-dependent hold after a 25 bp
hike in November), Q3 GDP (0.2%), and the October trade balance (A$7.5 bln vs
A$12.2 bln in October 2022). A few surveys will be reported, but the
Australian dollar is likely to be at the mercy of broader developments in the
capital markets. The market sees the Reserve Bank of Australia lagging the
other major central banks in the easing cycle that will begin next year. The
first rate cut is not fully discounted until late Q3/early Q4. The Australian
dollar fell for the first time in four weeks and only the second time in eight
weeks. A near-term cap is around $0.6620 and a move above it would signal a
retest on the $0.6700 area. On the other hand, a close below $0. 6560 warns of
the likelihood of a deeper correction after the rally that began with the
year's low in late October near $0.6270. The (38.2%) retracement was met near
$0.6530 last week, and it rebounded nearly a cent before stalling. The
momentum indicators are falling, and the five-day moving average could slip
below the 20-day moving average in the coming days.
Mexico: Banxico, the central bank of Mexico
meets on December 14, a day after the Federal Reserve. While it is still
reluctant to follow others in the region and launch an easing cycle, recent
comments suggest the first cut could come in Q1 24. The swaps market has two
cuts discounted by the end of Q2 24. The net long speculative position in the
futures market has doubled to more than 65k contracts in the past four weeks,
but the peso has begun underperforming other regional currencies (leaving aside
the Argentine peso). Last week, US Treasury Secretary Yellen visited Mexico and
one of the outcomes will be greater cooperation on scrutinizing foreign direct
investment, a thinly veiled effort to check China. Yellen said that the only US
concern about Chinese direct investment in Mexico was limited to national
security issues. National security, though seems to be an expansive category
that has included dual purpose sectors like technology and advanced
semiconductor chips, but also steel and aluminum. The dollar rose against the
Mexican peso for the second consecutive week. It is the first back-to-back
weekly gain since the since end of September/beginning of October. Still, the
greenback is a range, where the topside is capped around the 200-day moving
average (~MXN17.56) and the lower end around MXN17.16-MXN17.18. The momentum indicators are
pointing higher, and the five-day moving average is above the 20-day, but the
high rates make the peso expensive to short. Continued sideways movement could see
the momentum indicators reset.
Reviewed by Marc Chandler
on
December 09, 2023
Rating:
