The bond market stands out as continuing the trend seen this week, with higher yields. European benchmark 10-year rates are mostly 4-6 bp higher. The 10-year US Treasury yield is up four basis points to 3.95% and the two-year is steady near 4.33%. Gold's four-day slide is being halted today and the prices for the yellow metal are up by about 0.3% to around $2048. A sharp drop in US oil inventories (-7.9 mln barrels, according to API estimates), disruption with Libyan supplies, and heightened tensions in Iran and the Middle East has seen February WTI extend yesterday's strong (~3.3%) gains. It is trading near $73.50 after finishing last year around $71.65.
Asia Pacific
There are three highlights
from today's Asia Pacific Session. First, Japan returned from the extended holiday. The greenback
closed slightly above JPY141 on December 29, the last day Japanese markets were
open and reached JPY143 yesterday. While the local markets were closed, the
MSCI Asia Pacific equity index was down by almost 1%. In the past, large
natural disasters have seen Japanese insurance companies repatriate funds to
cover domestic claims. Japan's final December manufacturing PMI edged up to
47.9 from the flash reading of 47.7 (from 48.3 in November). It is still a
10-month low. Second, China's Caixin services and composite PMI improved. Services
rose to 52.9 from 51.5, a five-month high, while the composite PMI rose to 52.6
from 51.6, a seven-month high. The Caixin PMI fared better than the official
PMI. The Caixin survey includes more small businesses. This did not blunt the
impact on Chinese stocks from Fitch's downgrade of four managers of bad debt in
China on grounds of weaker official support. China may report reserve figures
in the next day or two. Given the dollar's decline and the rally in bonds, our
back-of-the-envelope estimate is for an increase of around $50 bln. Third, the
improvement initially reported in Australia's services and composite PMI were
pared in the final reading. the preliminary estimate. The services PMI stands
at 47.1, down from 47.6 initially, but still up from November's 46.0. The
composite is at 46.9, up from November's 46.2, but below the initial estimate
of 47.4.
Taiwan holds national
elections on January 13. No new polls are allowed ahead of the vote, while the last three
showed the DPP candidate and current vice president running three to 11
percentage points ahead of the main opposition candidate from the KMT. If the
Ching-te wins, it would be the third consecutive term for the DPP,
unprecedented since presidential elections began in 1996. He has tempered some
of his rhetoric that provoke China (and the US) claiming he was a political
worker for the independence of Taiwan and that Taiwan is a de facto sovereign
state and does not need to declare independence. China reportedly continues
with its aerial harassment of Taiwan. In line with the US dollar's broad
weakness in November and December, the greenback fell by about 5.75% against
the Taiwan dollar reaching six-month lows near TWD30.64. It has recovered
toward TWD31.03 as of today. Note that the policy rate (discount rate) is
1.875%. December CPI is due tomorrow. It is expected to have eased to 2.7% from
2.9%.
Europe
The final eurozone services
and composite PMI readings do not add to the market's information set. The services PMI has gone sideways between
47.8-48.7 since August. The initial estimate for December was 48.1. It was
revised to 48.8. Similarly, the composite also continues to bounce along its
trough (46.5-47.6) in the last five months of 2023. The final December reading
is 47.6, up from 46.0 initial estimate but unchanged from November. New
information was provided by the German states' and France's December CPI ahead
of the eurozone aggregate figures tomorrow. After falling by 0.7% in November,
Germany is expected to report 0.2-0.3% increase in December's harmonized
measure. That would lift the year-over-year rate to around 3.8-3.9% from 2.3%
in November, which is more about the base effect. Recall that in December 2022,
CPI fell by 1.2% (reflecting gas subsidies). Still, the comparison is easier in
Q1 24, as CPI rose by over 10% at an annualized pace in Q1 23. The French
harmonized CPI rose by 0.1% in December, less than expected lifting the
year-over-year rate to 4.1% from 3.9%.
The UK reported a small gain
in consumer credit and mortgage approvals but are not sufficient to turn the
economy. The final
services and composite December PMI were slightly better than the preliminary
estimates of 52.7 and 51.7, respectively. The final reading put them at 53.4
and 52.1. It is the third consecutive rise in the composite. However, note that
composite averaged 53.9 in Q2 and 49.3 in Q3 while GDP was flat in Q2 and
contracted in Q3 (-0.1%). It averaged 50.5 in Q4, and economy may have contracted.
The monthly GDP contracted by 0.3% in October and November's print is out at
the of next week.
The euro traded below $1.09
yesterday for the first time since December 18. Since peaking on December 28 near
$1.1140, the euro has fallen nearly 2.5-cents in the past five sessions. The
next technical targets are in the $1.0875-85 area and the 200-day moving
average is slightly below $1.0850. Consolidation is today's theme, ahead of the
eurozone CPI and US jobs data. The euro reached $1.0970 in the European morning
but stretched the intraday momentum readings, suggesting a pullback in the
North American morning is likely. Sterling was the standout performer
yesterday; the only G10 currency to rise against the dollar (~0.35%). It
found offers near the 20-day moving average (~$1.2670). Sterling has been bid
to $1.2730 in Europe today, but here too the intraday momentum indicators are
stretched. Some of sterling's apparent strength against the dollar seemed to
reflect demand on the crosses. It rose to two-week highs against the euro and
traded above its 20-day moving average against the yen for the first time since
December 1.
America
The dollar's gains were
briefly pared yesterday in response to the softer ISM manufacturing prices and
new orders, and the lowest job openings since March 2021. Yet, the reports prompted the Atlanta
Fed's GDP tracker to firm to 2.5% from 2.0%. However, the greenback
quickly recovered and returned toward its highs. We did not see much new in the
FOMC minutes except that some wanted to discuss the balance sheet, which seems
like the first time. Even this is not surprising given the decline in the use
of the reverse-repo facility. The prospects for a March cut diminished
marginally to about 75% chance from 87%. This still seems too confident. The
market's attention is shifting to tomorrow's jobs report, so today's Challenger
job cut report, the ADP private sector job estimate, and the weekly jobless
claims are of key interest, and likely to overshadow the final services and
composite PMI. Separately, in addition to unwinding the late December rally,
there may be a drag from investment grade (domestic and corporate) bond
issuance, which is typically high at the start of a new year.
Canada sees its December
services and composite PMI today ahead of its employment report tomorrow. Recall that the manufacturing PMI fell to
45.4, a new low for the 2023 (from 47.7 in November). The 2.3-point drop was
the second largest last year. The services PMI was at a new cyclical low of
44.5 in November, as was the composite (44.8). Still, despite the Canadian
economy's weaker performance than the US, the market has less than a 40% chance
that the Bank of Canada cuts rates by the end of Q1compared with an almost 80%
chance of a Fed cut.
The greenback traded above
its 20-day moving average (~CAD1.3370). It has done so on a handful of occasions since it last
closed above it on November 13. It is inside yesterday's range today amid the
consolidative theme. There are options at CAD1.3395 for almost $1 bln that
expire today, but the threat has lessened. The dollar is testing support in the
European morning in the CAD1.3300-15 area. The Mexican peso was fairly
resilient in the face of the continued recovery of the US dollar. The
dollar reached above MXN17.10 yesterday, and eight-day high, but pulled back to
settle below MXN17.02. Follow-through selling today has seen the dollar ease to
about MXN16.9770. The intraday momentum indicators favor a modest greenback
recovery in the North American morning.
Reviewed by Marc Chandler
on
January 04, 2024
Rating:
