Overview: Stocks and bonds are
trading higher, and the dollar is narrowly mixed ahead of the December US CPI
report. Most of the large bourses in Asia Pacific advanced, led by Japan to new
30-year-plus highs. Hong Kong's Hang Seng snapped seven-day slide to post its
first gain of 2024. Europe's Stoxx 600 is up about 0.33%, to recoup most of its
losses in the past two sessions. US index futures enjoy a modest upside bias.
Benchmark 10-year yields in Europe are off 3-6 bp, with the peripheral premiums
narrowing slightly. The 10-year US Treasury yield is off four basis points to
slightly below 3.99%. The yield has remained in the range set after last
Friday's jobs report and soft ISM services (~3.95%-4.10%). The futures market
has about a 70% chance of that the first Fed cut is delivered in March.
The dollar's broad consolidative tone has continued into today. It is
sporting a slightly softer profile against the G10 currencies. Of note, after
surging against the yen yesterday, the dollar has stalled today. The euro and
sterling edged a little higher before being sold in early European turnover,
where they have steadied. Emerging market currencies are mixed, but central and
eastern European currencies are underperforming. The South Korean won, and
Philippine peso are recovering from their recent declines. Gold is trading
quietly and remains within the range set on Monday (~$2017-$2047). February WTI
is inside yesterday's range (~$71-$73.60) and remains within the range set on
Monday as well.
Asia
Pacific
Australia's
November goods trade surplus jumped to A$11.4 bln (from A$7.7 bln) to $7.3 bln
in October. It was than 50% higher than expectations and is the largest
surplus since March. the goods surplus fell last year. Through November,
the average monthly surplus was about A$10.1 bln. In the first 11 months in
2022 the average trade surplus was A$11.5 bln. Still, it is well above the
A$5.77 bln average in the Jan-Nov 2019 period pre-Covid. Exports have fallen on
average 0.6% a month in through November last year. They rose by an average of
1.1% a month in 2022. These figures are by value not volume, so they are
reflective of price changes as well as volumes. Australia's good imports plunged
by 7.9% in November and are off an average of 0.2% a month through November. In
2022, imports rose an average of 1.0% a month. Exports of coal, coke and
briquettes rose by almost 7%, likely reflected Chinese demand. The decline in
imports appears to reflect consumer goods, which may speak to weakening
domestic demand.
The
dollar extended its gains in the North American session to almost JPY145.85 but
is holding below it today. Recall that the high set after last
Friday's jobs report was near JPY146.00. That area also corresponds to the
(50%) retracement of the greenback's slide from the high set in the middle of
November (~JPY151.90). Above there, the next retracement (61.8%) is slightly
below JPY147.50. The Australian dollar is more typical of the
consolidation seen in the foreign exchange market this week. It
remains well within the range set before last weekend (~$0.6650-$0.6750). It
has found support this week around $0.6680. It has not traded above
$0.6735. The Chinese yuan is snapping a three-day decline to post minor
gains. The dollar opened lower and fell to almost CNY7.1550 before
finding bids that lifted it back toward CNY7.1635. The dollar's reference rate
was set at CNY7.1087 (CNY7.1055 on Wednesday). The average in Bloomberg's
survey was CNY7.1696 (CNY7.1625 previously). The gap is among the largest in
recent weeks.
Europe
The
UK reports November GDP figures early tomorrow. The economy appears to
have recovered after contracting by 0.3% in October. Next week's employment and
inflation report will likely have bigger impact on sterling, rates, and
expectation for the Bank of England. The Bank of England meets next on February
1. There is practically no chance of a move. The swaps market has about a 72%
chance of a cut in May and has nearly about 1 1/2 cuts (~37 bp) priced in for
the end of H1. For the entire year, the swaps market is discounting about 120
bp of cuts.
The
euro has not ventured outside of the range set last Friday (~$1.0875-$1.1000),
though it did make a new high for the week in early Asia Pacific turnover near
$1.0990. However, sellers knocked it down to $1.0960, where it has found
support in the European morning. There are options for about 1.5 bln euros
struck at $1.10 that expire tomorrow. A trendline connecting the November and
December lows caught last Friday's low. The trendline is slightly above $1.09
today and rises to about $1.0945 by the end of next week. Sterling,
too, has remained mired in last Friday's range (~$1.2610-$1.2770). It
was nicked earlier today, with sterling rising to almost $1.2775 before being
sold to $1.2735 in early European turnover. Options for GBP430 mln at $1.2790
expire today. Sterling has not settled above $1.28 since the end of last July.
America
The
US CPI has become among the most important high-frequency data points. The
Fed targets the PCE deflator, which is considerably more predictable after the
CPI report, which Fed Chair Powell cited during the tightening cycle that ended
last year. There is not just a debate about what inflation will do this year,
but there is disagreement about what drove prices higher in the first place.
Most observers seem to agree on drivers but disagree on the weight of them
individually (such as supply chain disruptions, "excessive" demand,
and money printing), the role of central bank policy and the tightening of
financial conditions.
The
market is looking for a 0.2% rise in the December US CPI. That would
translate into a 1.2% annualized rate in Q4 23. It would match the lowest
quarterly pace since Q2 20. However, given the base effect (a 0.1% rise in
December 2022), the headline rate may edge higher (3.2% vs. 3.1%). The
year-over-year rate bottomed at 3.0% in June 2023 but making some conservative
assumptions could be around 2.5% in February. The core rate continues to be
stickier. The anticipated 0.3% increase in December would mean a 3.2%
annualized pace in Q4, the same as in Q3. Given the base effect, the
year-over-rate is likely to continue to trend lower through the most of H1 24.
The year-over-year rate is expected to have slipped below 4% for the first time
May 2021. The core rate may ease toward 3.5% by mid-year. Of course, there are
other ways to slice and dice the CPI, but they seem to tell the same general
story. Price pressures have eased, faster than expected, and there is scope for
further moderation in the coming months.
The
US dollar has frayed the upper end of last Friday's range against the Canadian
dollar (~CAD1.3400), but it has not settled above there. Still, it
knocks on it, and the greenback bulls have not given up on it. A break could
spur a move toward CAD1.3445-80. It holds the next retracement objective, a
chunk option that expires tomorrow for about $700 mln (CAD1.3445), and the
200-day moving average. Initial support may be a little below CAD1.3350. The
greenback has recovered since setting a four-month low on Monday against the
Mexican peso (~MXN16.7850). Yesterday, it approached the 20-day moving
average (~MXN17.03), which it has not settled above in a month. Last week's
high was slightly above MXN17.10. We assume that the $580 mln options at
MXN17.00 that expire today have been neutralized, but there is another stack at
MXN17.05 for almost $700 mln that also expire today. Mexico reports November
industrial production today. The median forecast in Bloomberg's survey is for a
0.2% rise after October's 0.6% gain. The average monthly gain through October
was 0.40%. In the comparable 2022 period, Mexico industrial output rose by an
average of 0.35%.
Reviewed by Marc Chandler
on
January 11, 2024
Rating:
