The terribly mixed US jobs report spurred
dramatic intraday swings in exchange and US interest rates. But at the close,
the dollar was little changed against most major currencies, and expectations
for Fed policy was nearly unchanged. The futures market has about a 70% chance
of a cut at the March meeting. The Dollar Index was off by less than 0.1%. Job
growth held up better than expected in December, the unemployment rate held
steady, and average wages rose slightly more than expected. However, there were
again downward revisions to past job growth (-71k), the participation rate fell
to 62.5% (from 62.8%), and the work week slipped (34.3 hours from 34.4 hours).
There is little doubt that the labor market is slowing. Job growth in Q4 23
averaged 165k, the lowest since the post-Covid expansion began. On the heels of
the jobs report was the ISM services index which was considerably weaker than
expected driven by the employment component (43.3 vs. 50.7), the lowest since
mid-2020.
The
focus turns to inflation. In the coming days, the world's three-largest
economies, the US, China, and Japan will report inflation measures. In the US,
the market will likely look through a tick up in the headline CPI and focus on
what is expected to be additional slippage in the core rate. Tokyo's headline
and core rates are seen continuing to ease and that will underscore the lack of
pressure on the BOJ, especially in the aftermath of the recent earthquake, to
change policy. China is expected to report slightly less deflation than in
November. Still, the economy needs more support and a cut in the benchmark
one-year Medium Term Lending Facility later this month seems increasingly
likely. Australia's month CPI print for November is expected to show inflation
moderating to 4.5% year-over-year, down from 8.4% at the end of 2022. The
futures market does not have the first RBA cut fully discounted until August.
Lastly, Mexico's headline CPI may tick up in December but provided that the
core rate ticks down, market expectations for a rate cut in Q1 will likely
remain intact.
United
States: The most important high-frequency data point in the
coming days is the US December CPI. The median forecast is the headline and
core rates to rise by 0.2% month-over-month. Due to the base effect, the
year-over-year rates will continue to converge. The headline rate is expected
to tick up to 3.2% from 3.1%, while the core rate is seen slowing to 3.8% from
4.0%. A 0.2% rise in headline CPI means that in Q4 23, CPI rose an annualized
pace of about 1.2%, down from 4.8% in Q3 23 and 2.8% in Q2 23. The 0.2% rise
expected in the core rate translates into a 2.8% annualized rate. Core CPI rose
at an annualized pace of 3.0% in Q3 23 and 4.0% in Q2 23. Other data releases
include December PPI, where disinflation conditions persist. Due to the base effect,
the 0.2% rise in headline producer prices will lift the year-over-year rate to
about 1.4% from 0.9%, but at an annualized rate producer prices likely fell in
Q4 23. Core producer prices may have risen for the first time since September
and a 0.2% increase will keep the year-over-year rate stable at 2.0%. The US
also reports the December budget deficit. In the first 11 months of 2023, the
US recorded an average monthly shortfall of about $150.4 bln compared with a
$121.3 bln average monthly deficit in the January-November period in 2022.
The
Dollar Index extended its gains after the stronger than expected jobs and
earnings growth. It met the (61.8%) retracement target of the losses seen since
the last employment data near 102.90 and stalled near 103.10. The details of
the jobs report including hours worked and a poor household survey, coupled
with a disappointing ISM services report saw the Dollar Index give back the
session’s gains. Support was found around 101.90. Despite trading in range that
engulfed the previous day's range, the close was neutral, practically unchanged on the
day. Near-term consolidation looks the most likely scenario.
China: The
soft PMI readings mean that the world's second-largest economy is not mustering
the strength to lift prices. Yet, this conventional interpretation does not do
justice to the fact that food prices, and especially pork prices, are largely
responsible for the negative CPI readings. Bloomberg's economists estimate that
food prices took 0.8% off headline CPI, pushing it to -0.5% in November.
Service prices increased by 0.4% year-over-year. Demand is soft but it is not
collapsing. Indeed, China reported that retail sales rose by 7.2%
year-over-year in the year through November. Fixed asset investment rose 2.9%
in the same period. Chinese producer prices have been falling on a
year-over-year basis since October 2022. Recall that Chinese producer prices
were falling on a year-over-year basis in H2 19, before Covid struck.
Deflationary pressures may have eased slightly in December. Nevertheless, we
think there is a reasonably good chance that the PBOC cuts its benchmark
one-year Medium-Term Lending Facility rate on January 15 by 10-20 bp. China
also reports December lending figures and new house prices. New house prices
rose in the first few months of 2023, which stemmed a decline that began in
September 2021. However, the decline did not just resume but in the six-months
through November, house prices fell by 1.62%, the fastest in any six-month
period since the slump began. China will also report its December trade
figures. In dollar terms, China's trade surplus fell by almost 3% in the first
11 months of 2023, but in yuan terms, it rose by nearly as much. Trade tensions
between the US, Europe, and China may deepen and broaden in the coming months.
However, the "de-risking" and diversifying away from China may have
unintended consequences. The US has replaced China, for example, for the first
time in two decades, as the biggest destination of South Korean exports.
Before
the weekend, the dollar closed the old gap from mid-December that extended to
almost CNY7.1710. The post-US jobs data dollar pullback pushed it briefly below
CNY7.14. With falling stocks, the PBOC may have tried to slow the dollar's
rise. The broad range seems to be CNY7.10-CNY7.20 and is has been largely in
the range since late November.
Japan:
Tokyo's CPI has proven to be a reliable and early read on national price
patterns. The December reading is due January 9. Headline Tokyo inflation stood
at 2.7% in November, the lowest since July 22. The core rate, which is targeted
at 2%, excludes fresh food, slowed to 2.3% in November, matching the lowest
since mid-2022. Services prices are firm and processed food prices have been a
significant source of price pressures. Government subsidies for electricity and
gas are estimated to shave 0.5% off headline inflation nationwide and will
continue until the end of April. Most economists look the negative policy rate
(-0.10%) to be abandoned in April, but some still hold out the possibility of
the shift at BOJ meeting at the end of the month. Japan will also report
November household spending and labor earnings. Household spending in Japan is
chronically weak and it does not receive nearly the attention of China's
consumption. On a GDP basis, Japanese consumption contracted in the middle two
quarters of 2023. Household spending fell on a year-over-year basis in the
first ten months of 2023 but February. It is expected to have fallen by 2.2%
year-over-year in November. The recent decline began in November 2022. However,
note household consumption fell on a year-over-year basis in the last three
months of 2019, before Covid and it fell in three of the last four months of
2018. Through October, labor cash earnings rose an average of 1.3% over 2022,
down from 1.5% in the 10-months through October 2022. Adjust for inflation,
real labor earnings have been falling on a year-over-year basis since April
2022. Note that real labor earnings were negative even before the Covid-era
inflation increase. In 2019, real labor earnings fell on a year-over-year basis
every month but September.
The
greenback shot up from around JPY140.80 in the last week of December and peaked
near JPY146 shortly after the US jobs report. The high was slightly shy of the
(50%) retracement objective from last year's high set in mid-November of almost
JPY152. The dollar reversed sharply lower as participants focused on the weaker
details of the jobs data and a poor ISM services report. It fell to almost
JPY143.80. before settling little changed (~JPY144.70). The five-day moving average crossed above the 20-day moving average for the first time since mid-November. Still, consolidation may be in order between JPY143.50-JPY146.
Eurozone: The
eurozone sees November retail sales and unemployment reports in the coming
days. These are not typically market moving data points and are unlikely to
impact rate expectations. Eurozone retail sales fell each month in Q3 23 before
edging up by 0.1% in October. The broader measures, household consumption, fell
by 0.4% in Q3 23. Although consumption is expected to have bounced back in Q4
23, the median forecast in Bloomberg's survey is that in aggregate the regional
economy likely contracted by 0.1%. National reports from Germany (trade,
factory orders, and industrial production) and France (trade, industrial
production, and consumer spending) will help economists fine-tune GDP
forecasts. Separately, the eurozone's unemployment is bright spot in the
otherwise desert of constructive economic data. The unemployment rate has been
bouncing between 6.5% and 6.7% since May 2022. At the end of 2019 and early
2020, before Covid, the unemployment rate was 7.5%.
The
euro met the (61.8%) retracement objective of its rally from the December 8 low
(~$1.0885) initial reaction to the US jobs data before rebounding smartly to
almost $1.10 before settling little change around $1.0950. Near-term
consolidation may be likely as short-term participants collect their wits after
being shaken by the dramatic price action before the weekend. The five-day
moving average crossed below the 20-day moving average, and the euro closed
below both. This coupled with the falling momentum indicators, suggests the
downside correction may not be over.
United
Kingdom: A quiet week for British economic news ends on Friday with
the November GDP and details. Recall that the UK economy contracted by 0.1% in
Q3, mostly due to a sharp contraction in next exports. The economy is off to a
poor start in Q4, contracting by 0.3% in October (median forecast in
Bloomberg's survey was for a 0.1% decline). The economy has not contracted in
back-to-back months since the early days of Covid. In October, industrial
production, services output, and construction activity contracted. The trade
deficit widened sharply (GBP4.48 bln vs. GBP1.57 bln deficit in September). The
median forecast in Bloomberg's survey sees a flat Q4 23 GDP, which implies some
better number in November and December.
Sterling
traded the entire week's range ahead of the weekend. It initially fell to
almost $1.2610 before reversing higher to reach $1.2770. It was the strongest
G10 currency on Friday, gaining about 0.3% against the dollar. It
will begin the new week with a three-day advance in tow. With one exception
(December 29), sterling has been in a $1.26-$1.28 range since December 14. In
the options market, the one-week risk-reversal swung from favoring sterling
calls in the last week of 2023 to favor puts. The five-day moving average did
slip below the 20-day moving average. Still, prudence would suggest assuming
the range hold until it proves wrong.
Canada: The
chief high-frequency report in the coming days is Canada's merchandise trade
balance (January 9). Canada has experienced a sharp deterioration in its trade
balance in 2023. In the first ten months of the year, it reported a merchandise
trade deficit of C$1.5 bln. Small beer, but it had recorded a C$19.3 bln
surplus in the January-October 2022 period. Not only has the merchandise trade
surplus practically disappeared, but on a net basis, foreign portfolio inflows
have nearly dried up. In the first ten months of 2023, net foreign purchases of
Canada's bonds and stocks fell to about C$5.2 bln from C$104 bln in the same
period in 2022.
The
optics of Canada's employment report were weaker than the US, but the
greenback's volatility drove the exchange rate. The recovery off the lows from
last year (~CAD1.3175) extended to CAD1.3400. The sell-off carried it slightly
below CAD1.3290 before buyers stepped in and the US dollar returned to almost
CAD1.3375. The disappointing Canadian job growth in December was seemingly offset by the
increase in wages, leaving the odds of a cut near 30% (vs. ~70% chance of a Fed
cut). Nevertheless, the greenback's upside correction does not look over. A
break of CAD1.3400 could signal CAD1.3480-CAD1.3500, which houses the 200-day
moving average and (50%) retracement of the November-December slide.
Australia:
Australia reports November retail sales, CPI, and trade in the days ahead.
November retail sales likely bounced back after the unexpected 0.2% decline in
October. Australia's trade balance deteriorated. The surplus has fallen to
A$99.7 bln in the first ten months of 2023 from A$114.4 bln in the Jan-Oct 2022
period. Exports have fallen by an average of 0.8% a month while imports have
risen by an average of 0.7%. Australia's monthly CPI rose by 4.9%
year-over-year in October, down from 5.6% in September and 7.0% in October
2022. It matches the lowest reading since January 2022. The fact that the RBA
was not as aggressive as most other G10 central banks, leaving aside Japan, in
2023, the stickiness of its inflation contributes to the market looking for
considerably less aggressive easing in 2024.
The Australian dollar was offered, and the US jobs reports
saw it spike down to almost $0.6640. It met the (38.2%) retracement of the
gains from last year's low set in late October and the (61.8%) retracement of
the leg up from the last US employment data. Both were found slightly above
$0.6655. The momentum indicators are still falling, and the five-day moving
average is poised to fall below the 20-day moving average at the start of next week. A period of consolidation is likely, and we know that initial support
is around the pre-weekend low. A break of targets the $0.6580 area. On the
topside, a move above $0.6760-85 likely signal the end to the downside
correction.
Mexico: The most important data
point from Mexico in the coming days is the November CPI on January 9. Mexico's
inflation has been slowly moderating. However, given the base effect (last
December's 0.38% increase) and no month in H2 23 was below it, the risk is that
the headline measure ticks up for the second consecutive month. It would be the
first back-to-back increase since December 2022/January 2023. In recent
comments, a few of the central bankers seemed to have put more weight on the
core measure, and here the base effect (0.65% rise in December 2022) allows an
extension of the downtrend. The year-over-year core measure has fallen since
January 2023 (8.45%) to stand at 5.3% in November. The bi-weekly core measure
was at 5.2% in mid-December. Mexico also reports November industrial
production. It rose 0.6% in October, led by a 1.1% rise in manufacturing
output. Vehicle output fell by slightly more than 12% in November, and the
surveys were mixed (manufacturing PMI edged up, while the IMEF manufacturing
survey slipped by most since March). The swaps market is fully pricing in a
rate cut in the first quarter.
The
peso was one of the few currencies in the world to have risen against the
dollar last week (the Hungarian forint and Indian rupee were the others). The
big move took place after the US jobs data. The peso rose by about 0.6% before
the weekend. It had been up about 0.2% going into the US jobs report before the
weekend. The greenback stalled in the middle of last week near MXN17.1035, seen
before Christmas. It fell to slightly below MXN16.87 before the weekend to
approach the four-month low from the end of last year (~MXN16.8615). Last
year's low (set in late July) was about MXN16.6260. The momentum indicators are
mixed, and the dollar has fallen for the past three sessions. We had thought
the US dollar was carving out a bottoming pattern, but this seems to less sure
now, but the dollar looks technically more vulnerable now.
Reviewed by Marc Chandler
on
January 06, 2024
Rating:
