What Will Powell Say?

Overview: The dollar traded better into month-end but is softer today. The Scandis and dollar-bloc currencies are leading with around 0.2%-0.5% gains. In addition to US manufacturing PMI and ISM surveys, and construction spending, auto sales will trickle in, but key for market participants today will likely be Fed Chair Powell's comments and the extent that he pushes against the dramatic rate cuts, with more than a 50% chance of the first cut by the end of Q1 24 and two cuts nearly fully discounted by mid-2024. The JP Morgan Emerging Market Currency Index is slightly firmer today to narrow this week's loss, its first in three weeks.

Hong Kong and South Korea saw equity losses of more than 1% today. Some reports suggested that state entities were buying Chinese equities today. The CSI 300 still finished more that 0.35% lower today. Europe's Stoxx 600 is up around 0.55% for this third straight gain, and the fourth weekly increase in the past five weeks. US index futures are narrowly mixed. Asia Pacific bonds played catch-up to the rise in the US yesterday, while European benchmark yields are mostly 2-4 bp lower. Italy's six basis point decline is an outlier as is the small increase in the 10-year Gilt yield. The 10-year US Treasury yield is fractionally softer near 4.32%. Gold is firm, consolidating below the $2052 seen in the middle of the week. The market is still unimpressed with OPEC+ voluntary cuts and January WTI is hovering around $76 a barrel. Still, provided it closes above $75.55, it will snap a five-week slide.

Asia Pacific

That the Caixin manufacturing PMI unexpectedly rose to PMI ticked up to 50.7 from 49.5 is nearly meaningless. The fact is that the bevy of measures that have been announced to support the economy and the property sector have not had much impact yet. Next week's data include the November trade balance, where exports are likely to have fallen for the seventh consecutive month on a year-over-year basis. Through October, its trade surplus has fallen to about $680.4 from $703.1 bln in the first ten months of last year. China also reports its reserves. To be sure, all of China's foreign assets are not part of its reserves. The dollar's depreciation against the other reserve currencies in November and the dramatic rally in bonds suggests the dollar value of China's reserves may have risen by the most this year and maybe even more than the $65 bln increase reported in November 2022. Lastly, at the end of next week, deflationary reading on consumer and producer prices may fan expectations of a cut in reserve requirements, perhaps before year-end.

Japan's employment report improved marginally. The unemployment rate slipped to 2.5% in November at 2.6% and the job-to-applicant ratio firmed to 1.30 (from 1.29). The small uptick (0.3%) in capex (excluding software) in Q3 warns that next week's Q3 GDP revisions maybe slightly higher than the initial estimate of a 2.8% annualized contraction but may not alter the general picture. The highlight next week, though will be Tokyo's November CPI and labor earnings and household consumption. Tokyo's headline inflation is seen easing to 3.0% from 3.2% and the core rate to 2.4% from 2.7%. If so, the core would be the slowest since July 2022. The target is 2%. Meanwhile, wage growth is poor. September's 1.2% initial year-over-year estimate was revised to 0.6% and October is expected to match it. Household spending has not risen on a year-over-year basis since February and that was a one-month wonder. It fell in the previous three months. The median forecast in Bloomberg's survey is for a 3.1% contraction, which would be the most since July.

Australia has three highlights next week. First, early on December 5, the central bank announces its decision. Governor Bullock has kept the door open to another hike after last month's move, but the market is not buying it, especially after the softer than expected monthly CPI and outright fall in retail sales. Second, the next day, it reports Q3 GDP. It is expected to have grown by about 0.3% after expanding by 0.4% in Q2.

The biggest rise in US 10-year yields in three weeks and the largest rise in two-year yields in a couple of weeks helped the dollar recover from JPY146.85 to JPY148.50 yesterday. It is consolidating inside yesterday's range today. It has been in a little more than a 30-pip range around JPY148. Recall that the dollar put in a double top near JPY151.90 in late October and the first half of November. Between the two highs, it fell to about JPY149.20. The measuring objective was JPY146.50. Yesterday's low may have come "close enough" for this inexact art. A move above JPY148.65 could spur a move toward JPY149.30-70. After reaching a high near $0.6675 on Wednesday, the Australian dollar fell a cent to Thursday's low (~$0.6570). It is in a narrow range today: ~$0.6600-$0.6635. The momentum indicators have not turned down, but they look poised to do so shortly. Perhaps, the RBA meeting first thing next Tuesday, is discouraging more aggressive sales. Although it will not do anything, the hawkish guidance will likely be repeated. Consolidation seems to be the order of the day. The dollar edged higher against the yuan for the second consecutive session today, but it needs to rise a little more if it is to avoid its third straight weekly loss. That would match the longest losing streak since October 2021. The PBOC set the dollar's reference rate at CNY7.1104, the first time increase of the week (from CNY7.1018 yesterday). The average in Bloomberg's survey was for CNY7.1436 (CNY7.1259 yesterday).

Europe

The eurozone's final November manufacturing PMI did not improve the information set for businesses or investors. It has not been above the 50 boom/bust level since June 2022. It bottomed in July at 42.7 and now stands at 44.2, up from the initial estimate 43.8. German and French flash estimates were revised a little higher. Germany's increase confirmed the fourth consecutive monthly increase, but it remains well below 50 at 42.6. The French revision was sufficient to show a small rise from October (42.9 from 42.8). Spain's rose to 46.3 from 45.1. Italy disappointed, falling to 44.4 from 44.9. 

Next week, the eurozone reports October retail sales. Yesterday Germany reported a surprisingly strong 1.1% rise in its October retail sales and the September series loss was revised to -0.1% from -0.8%. However, yesterday France reported that its consumer spending (broader than retail sales) tumbled 0.9% in October (the market was looking for a 0.2% decline) and September's 0.2% gain was revised away. Earlier this week, Spain reported a 0.2% decline in its October retail sales. The eurozone's aggregate monthly retail sales have not risen since May. On December 7, the eurozone revises Q3 GDP. The risk is that it contracted more than the 0.1% initially estimated. 

The UK's manufacturing PMI also improved from the preliminary estimate to 47.2 from 46.7). It stood and 44.8 in October. Although it was the second straight improvement, it has not been above 50 since July 2022. Outside of the final PMI and November auto registrations (a proxy for sales), the results of the BOE's September survey of 12-month inflation expectations is due at the end of the week. It seems too dated to have material impact. Separately, note that Nationwide reported that last month, house prices rose for the third consecutive month.

The euro reached a little through $1.1015 on Wednesday before pulling back, and in yesterday's sell-off slipped below $1.0890. The $1.0880 area is the (38.2%) retracement of the euro's leg up from the $1.0655 low on November 10. The euro recovered to almost $1.0915 today as it consolidates the two-day decline. There are two risks for the euro today. First, Fed Chair Powell may push against the "premature" easing of financial conditions. Second, S&P reviews French credit today and after Fitch's downgrade earlier this year, and EC criticism of its 2024 budget, a change in outlook (from stable) is possible. S&P gives France a AA rating while Fitch has it as AA-. Sterling's upside momentum also faltered this week. It peaked Wednesday near three-month highs (~$1.2735) and tested support near $1.2600 yesterday. Today, it has held near $1.2620, but stalled in front of $1.2680. The (38.2%) retracement of its rally since November 10 is around $1.2525.

America

The US PCE deflators was slightly softer than expected. It was flat month-over-month, which is the lowest read for the year, but follows two months of 0.4% increases. The 3.0% year-over-year pace is the slowest since March 2021. The measure that Fed Chair Powell has frequently referred to the core services excluding housing) rose by 0.1% (3.9% year-over-year). It was at 5.2% a year ago. The Fed has also expressed concern about the strength of demand. Personal consumption moderated to 0.2% from 0.7% in September. However, it has risen at an annualized pace of about 5.2%, the same as the previous three-month period.

Initial jobless claims edged higher to 218k, but the four-week moving average has been practically flat near 220k for the past three weeks. Continuing claims jumped 86k to 1.927 mln, the most in three years. This is data seem consistent with other reports suggesting that hiring, though layoffs remain broadly subdued. The median forecast in Bloomberg's survey is for November nonfarm payrolls to increase by 175k when reported at the end of next week. 

Today sees the final manufacturing PMI and ISM manufacturing. Both say it is contracting. Meanwhile, construction spending is expanding but at a moderating pace. A 0.3% increase, which is what the median in Bloomberg's survey projects, follows a 0.4% increase in September and would be the slowest two months this year. The US also sees November auto sales, which look to be around flat from the 15.5 mln unit pace seen in October. US light vehicle sales have averaged 15.4 mln this year through October, a 12% increase from a year ago. Can that be repeated next year? Lastly, Chicago Fed President Goolsbee speak today, but the focus is on Fed Chair Powell. He speaks at 11:00 ET and then again with Cook at 2:00 pm ET. It seems that in their own way, nearly every Fed official has said the same thing: rates are restrictive, and it could be sufficient, but if not, they are prepared to hike again. In the past, Powell has said that Fed is not thinking about rate cuts, but apparently some officials, like Governor Waller, a noted hawk, who seemed to suggest that IF inflation continues to moderate, a lower rate can be considered toward midyear. The market will likely be sensitive to Powell's comments today. 

Canada had good news and bad news yesterday. The good news was that the 0.2% contraction in Q2 was revised to a 1.4% expansion. The bad news was that the preliminary estimate of Q3 GDP was a 1.1% decline in output. Today is Canada's jobs report. Its labor market is slowing, and full-time job were lost in October (3.3k). The unemployment rate is expected to tick up to 5.8% from 5.7% in October. It was at 5.0% as recently as April. The highlight next week is the Bank of Canada's last meeting of the year on Wednesday. Its tightening cycle ended in July, but it is too early to expect a cut. Still, the swaps market has almost a 55% chance of a cut in Q1 24.

The Canadian dollar held its own against the recovering greenback, and, in fact, was the only G10 currency to rise against the dollar, albeit ever so slightly. The US dollar's losses were extended slightly through CAD1.3520 today to approach the 200-day moving average, which is has not traded below since the end of September. Often it seems in a stronger USD environment, the Canadian dollar does better on the crosses. The Canadian dollar's implied volatility for most tenors is also the lowest among G10 currencies. The opposite is also true. In a soft USD period, the Canadian dollar often lags. During the greenback's rout in November, the Canadian dollar's 2.15% gain was the least among the major currencies. A disappointing employment report could see the US dollar rise in to the CAD1.3620 area. The US dollar extended its recovery against the Mexican peso. It was a function of the dollar's broad recovery but also somewhat more dovish comments by Banxico officials since Monday has spurred a bout of profit taking. The dollar peaked near MXN18.50 in October and trended lower. The month's low was scored Monday near MXN17.0340, near the MXN17.00 technical objective. It nearly reached MXN17.50 yesterday and settled above the downtrend line connecting the late October and mid-November highs (~MXN17.3385). The dollar is consolidating this week's gains against the peso in a roughly MXN17.2350-MXN17.3980 range today. Mexico sees the (November) manufacturing PMI and IMEF surveys today and the worker remittances (October).

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