Overview: Ahead of the US Treasury's quarterly
refunding announcement and the outcome of the FOMC meeting, the dollar is
trading higher against all the G10 currencies. With US high-flying tech stocks
posting steep losses after disappointing earnings reports, the currencies most
sensitive to risk-appetites, the dollar bloc and the Norwegian krone are the
weakest. Emerging market currencies are mixed. The South African rand,
Philippine peso, and Hungarian forint lead the advancers. The Czech koruna,
Taiwanese dollar, and South Korean won are the laggards, off around 0.4%-0.5%.
The Nikkei recovered from
initial gap-lower losses and closed about 0.6% higher. However, Hong Kong and
mainland shares tumbled by more than 1%. Taiwan was off 0.8% and South Korea
slipped by less than 0.1%. Europe's Stoxx 600 is extending its rally for the
sixth consecutive session, but today's gains look particularly fragile. US index
futures are lower, and the Nasdaq 100 futures are off almost 1.3%. Lower,
German (states), French, and Spanish CPI may be giving European bonds a bid. Benchmark
10-year yields are off 3-4 bp. The 10-year US Treasury yield is off
fractionally near 4.02%-4.03%. Gold is little changed around $2037 and in a
narrow range (~$2033-$2040.50). March WTI recovered from below $76 to settled
near $77.80 yesterday. It is back on the defensive today below $77.
Asia Pacific
China's January PMI showed a
small gain, but nothing that will turn sentiment around. The manufacturing PMI remained below the
50 boom/bust level throughout Q4 23 and finished the year at 49.0, the lowest
for H2 23. The small gain to 49.2 in January may reflect the preparations for
the long Lunar New Year holiday that begins at the end of next week. The
non-manufacturing PMI average 50.4 in Q4 23, which is also where it finished
last year, having fallen to the year's low of 50.2 last November. It edged up
to 50.7. The non-manufacturing PMI includes construction and services. The
services sub-index rose above 50 for the first time since last October. The
construction sub-index fell to a three-month low. Many are skeptical about the
Q4 23 growth China reported in mid-January of 5.2% year-over-year. Yet, this
seemed to dovetail with reports that power generation rose 5.2% in 2023 and
electricity consumption rose by 5.8%. The point is that whatever China's GDP
is, the world's second-largest economy does not appear to be contracting. Yet,
mainland savers have been jettisoned from the real estate market and the stock
market has not been welcoming. Reports suggest there has been strong retail
demand for gold.
Japan reported an unexpected
and large 2.9% slump in December retail sales after a 1.1% increase in November.
The median forecast in
Bloomberg's survey was for a 0.2% gain. That put the year-over-year
increase at 2.1% (from 5.4% in November). However, this is in nominal terms,
and picks up price increases. Next week's household spending report (December)
is adjusted for inflation and is a broader measure. It was off 2.9% in
November. The decline is moderating in Q4 after steep decline in Q2 and Q3 23,
when consumption was a drag on GDP. Separately, reported a recovery of
industrial output in December. The 1.8% increase was less than economists
expected (median forecast in Bloomberg's survey was for a 2.5% rise) after the
0.9% decline in November. Test equipment, conveyor-belt systems, chemical and
semiconductor-related equipment helped lift the output. Auto and semiconductor
demand lifted exports 7.7% month-over-month in December.
Australia's reported weaker
than expected December softer Q4 23 CPI. The 0.6% quarter-over-quarter (0.8%
expected) increase brought the year-over-year pace to 4.1% from 5.4%, the
lowest since the end of 2021. Australia's CPI was 7.8% in Q4 22. The underlying
measures also moderated (trimmed mean to 4.2% from 5.1% and the weighted median
to 4.4% from 5.2%. Today's report is unlikely to change the outcome of
next week's RBA meeting but may impact its forecasts. Previously, the central
bank forecast growth to quicken this year to 1.8% from around 1.3% in 2023 (Q4
23 GDP due March 6), but it saw unemployment rising to 4.5% (from around 3.7%)
and expected CPI to ease from 4.5% to 3.3%. In late December, the futures
market had nearly three rate cuts discounted for this year. This had been pared
to two, but the softer CPI (following a sharp 2.7% drop in December retail
sales) has seen the market shift toward two-and-a-half cuts and the first is
nearly fully priced in by midyear. The three-year bond yield fell 14 bp today
after falling by almost nine in the previous two sessions. The yield finished
last week near 3.80% and is now around 3.57%.
The dollar held support near
JPY147, and US long-term rates were firm. The greenback recovered to new session highs near midday in
New York, a little shy of JPY148. It essentially duplicated that range today. In
the somewhat larger picture, the greenback remains in the range set last
Wednesday (~JPY146.65-JPY148.40). The Australian dollar reached two-week
highs yesterday near $0.6625 but the breakout was not convincing, thought it
settled above the $0.6600 cap for the second consecutive session. The
Aussie found support yesterday around $0.6575 and was sold to about $0.6560
after the softer CPI report. It recovered to $0.6590 before running out of
steam. The Chinese yuan remained in narrow range, with the dollar confined
to about CNY7.1750 to CNY7.1825. Some reports said that state banks were
buying dollars, but it is not clear if they were doing it for their own
accounts, customers, or officials. The PBOC set the dollar's reference rate at
CNY7.1039 (CNY7.1055 yesterday) and the average projection in Bloomberg's
survey was CNY7.1729 (CNY7.1739 yesterday).
Europe
Europe is challenged on many
fronts. Even before
the real possibility that Trump returns to the White House, the Biden
administration has been unable to persuade Congress to approve the corporate
tax reform that was negotiated under the auspices of the OECD. At the end of
last week, the Biden administration halted new liquified natural gas exports,
raising questions about the reliability of supply chains after the US largely
replaced Russia. The US is now advocating repurposing Russia's frozen reserves.
Roughly 260 bln euros of reserves have been immobilized and about 190 bln are
at Belgium's Euroclear. In a unanimous decision earlier this week, the EU
agreed that the profits Euroclear made on rolling over Russia's investments
should be set aside. To be clear, this is not confiscating Russian assets, which
Belgium apparently previously promised at risk of a large penalty not to do.
Europe has also stepped its challenges to China's trade practices.
However, tomorrow's special
summit is more about internal politics. Two issues dominate. First are the new fiscal rules, or
interpretation of the Stability and Growth Pact, which relates to the
reimposition of deficit and debt targets after the suspension due to Covid and
then Russia's invasion of Ukraine. Second, is about aid to Ukraine and
Hungary's opposition. Reports suggest that Ukraine's Zelenskyy may attend
remotely. The immediate issue is that most important EU decisions require
unanimity, and the strategy of pursuing broader rather than deeper membership
makes this increasingly more difficult. Hungary's Orban was able to block the
recent attempt of extending EU aid to Ukraine (~50 bln euros). Orban is not in
good standing in the EU, though he is scheduled to be the rotating EU president
in H2 24. EU aid to Hungary has been frozen due to a range of
"illiberal" policies. Under the threat of more retaliatory steps from
Brussels, Orban has offered a compromise: Ukraine aid should be separate
from the EU budget, and it should be review annually. The latter is sticking point.
It would allow Orban to use his veto to gain concessions every year. And on
practical grounds, an annual review.
Ahead of tomorrow's
aggregate report, Spain and France reported that their EU harmonized measure of
January CPI eased by 0.2%. This put the year-over-year rate at 3.5% (from 3.3%) and 3.4%
(from 4.1%), respectively. German states reported sharp declines in the
year-over-year rate and the national figure is due shortly. It is expected to
have fallen to 3.2% from 3.8%. The euro spent yesterday in about a
half-cent range centered near $1.0835 and is a little less than a half-cent
range today (~$1.0805-$1.0850). It remains within the range seen Monday
when it traded below $1.08 for the first time since mid-December. The euro
remains on the defensive. Sterling was sold to $1.2640 yesterday, its lowest
level in nearly two weeks. It recovered to almost $1.2700 but has spent
little time above there today. It retested the Asia Pacific low near $1.2665 in
the European morning. The Bank of England meets tomorrow. No change is expected.
The market has the first cut fully discounted around midyear with a little more
than 100 bp of cuts expected this year.
America
The Federal Reserve is front
and center. It is
not what the Fed does, which is nothing today, but what is says, and how the
market interprets what Fed Chair Powell says. While many participants thought
the Fed waited too long to stop QE and raise rates, since nearly the start of
the tightening cycle, the market has frequently had dovish vibes from Powell,
and has often looked for an earlier end to the tightening cycle and sooner and
larger rate cuts. At the end of last year, the futures market had discounted
almost 170 bp of cuts this year after the Fed's December Summary of Economic
Projections (SEP) median was for a reduction of 75 bp. After yesterday's
December JOLTs report, which was considerably stronger than expected, and the
strongest consumer confidence since the end of 2021, according to the
Conference Board, the market scaled back the anticipated rate cuts this year to
almost125 bp. That is the least since FOMC last met in mid-December. We suspect
they will meet in the middle--four rate cuts--in the March SEP. While Powell
may be more confident that policy is sufficiently restrictive, he is unlikely
to surrender the Fed's flexibility and signal a March rate cut. There is no
need, and it dilutes the message about being data dependent.
The market is also keen for
new insight into how the Fed is thinking about its balance sheet. Many observers, partly encouraged by
Dallas Fed President Logan (previously the manager of the System Market Open
Account for the FOMC) suggesting that tapering the unwind may be appropriate.
We had tentatively penciled in the end of so-called Quantitative Tightening for
around mid-year. We suspect the Fed is not ready yet to provide much more than
an acknowledgement that as excess reserves fall, it will be necessary to adjust
balance sheet unwind. At the same time, recall how bank reserves did not fall
as much as one would suspect from QT due to money markets stepping up. We
suspect more details will be forthcoming at the March meeting.
The US dollar appears to
have put in a bearish double top pattern against the Canadian dollar. The two high were near CAD1.3535-40
earlier this month and between them, a low was set near CAD1.3415, which has
been violated on a closing basis. The pattern projects to a little below
CAD1.3300. The (61.8%) retracement of this year's greenback rally is near
CAD1.3320. The daily momentum indicators have turned down. However, the
economic considerations are less constructive. Canada reports November GDP
today and if economists are right (median in Bloomberg's survey, and the
economy grew by 0.1%, it will be the first monthly expansion since last May.
Also, the Canadian dollar has traded higher in recent days as US equities rallied.
This is at risk today after the disappointing tech earnings yesterday. A move
above CAD1.3450-65 would lift the greenback's tone. Mexico's Q4 23 GDP
disappointed with a 0.1% quarter-over-quarter expansion. That saw the
year-over-year rate slow to 2.4% from 3.3%. The peso initially was sold, with
the dollar rising to almost Monday's high (~MXN17.2680) before reversing lower.
It fell through Monday's low near MXN17.14 and has seen follow-through selling
today toward MXN17.1235, a seven-day low. However, it appears to be finding
support there, and the dollar could recover toward MXN17.18 today. Note that
late today, Brazil, Chile, and Colombia are likely to extend the rate-cut cycle
that began last year.
Reviewed by Marc Chandler
on
January 31, 2024
Rating:
