Overview: We came into this week
expecting the dollar to rise on the back of a recovery in rates. The two-year
note has risen from 4.40% after the jobs report to 4.60%. The dollar's rise has
been less impressive. The Dollar Index had begun with week with a six-day fall
in tow. Today is it is rising for the third session. However, the gains have
been a modest 0.80% off the pre-weekend lows. The dollar broadly is
consolidating in narrow ranges thus far today in quiet turnover. Despite
promising reports on wage negotiations in Japan, the yen is softer for the
second session. A quiet North American session is expected ahead of tomorrow's
retail sales report. The US Treasury sells $22 bln 30-year bonds today. Yesterday's
10-year sale tailed and saw lighter indirect bids.
Asia Pacific equities were mixed today. Japan,
Hong Kong, China, and Indian markets fell, while Taiwan, South Korea, and
Australia advanced. Led by utilities and financials, Europe's Stoxx 600 is
edging higher after rallying 1% yesterday, the most since the end of January.
US index futures are little changed but softer. European 10-year yield are 2-3
basis points lower. The UK 10-year Gilt yield is slightly firmer after the
January GDP rose 0.2%, in line with expectations. The US 10-year yield near
4.16% after slipping below 4.05% after last Friday's employment data. Gold
ended a nine-day advance yesterday with a 1.1% drop. The yellow metal is steady
today near $2158. April WTI is trading firmly but inside yesterday's roughly
$77.35-$78.75 range.
Asia Pacific
Facing intense price pressures from Chinese
brands and shift to EV, reports suggest a couple Japanese producers may reduce
their production capacity in China. Japanese press reports Nissan is
considering a 30% cut and Honda is contemplating a 20% reduction. Nissan has
capacity to produce 1.6 mln vehicles in China and Honda can produce about 1.5
mln vehicles. Although some pundits attribute Chinese competitiveness to
subsidies, part of the problem is that the Japanese producers do not have
electric car offerings. It is not just the vehicle, but reports suggest that
more than 80% of EV battery cells are made in China, with the benefits of
mining and processing of the critical materials (lithium, cobalt, manganese,
and rare earths. According to Bloomberg, on a volume-weighted basis, batteries
cost 11% more in the US and 20% more in Europe. There are three levels of
Chinese subsidies: consumer incentives (now mostly from local governments
rather than a national program, which was discontinued in 2022,), manufacturer
subsidies (typical of China, let many bloom before culling through
consolidation), and infrastructure, including charging stations, standardized
plus, and battery-swapping stations.
Japan's two-year yield has trended higher. Its
eight-week climb has seen the yield nearly double to 0.20% over the run. It is
stalling. Not only is there uncertainty about whether the BOJ moves next week
or waits for next month, but there is also a range of views of what the central
bank may do when it does move. Some look the initial move to bring the
overnight target rate to zero from -0.10%. Others favor a 20 bp move to bring
the target rate to 0.10%. A scenario calls for another move later this year to
brink the target rate to 0.25%. Reports in the local press suggested that the
BOJ could also end its Yield Curve Control, which now caps the 10-year yield at
1.0%. It could revert to announcing a set about of JGBs it would buy. Note that
massive JGB holdings entail large annual expirations. This year's estimate is
about JPY70 trillion (~$470 bln). Preliminary results from Rengo (Japanese
Trade Union Confederation, representing around 7 mln employees) will be known
at the end of the week. Last year an average of 3.8% increase was agreed,
though labor cash earnings were 0.8% higher year-over-year in December. Rengo
is seeking a 5.85% average wage increase. Toyota's union is seeking a bonus
payment of almost eight months of salary. Last month, Honda announced a 5.6%
pay increase, and Mazda agreed to a 6.8% increase. Nissan is giving a 5%
increase.
The dollar's range against the yen yesterday
was set in the first 10 minutes after the US CPI report. It traded between
almost JPY146.60 and slightly above JPY148.10. It was the third consecutive
session that the dollar found support in the JPY146.50-60 area. The bounce saw
the dollar meet the (38.2%) retracement target of the decline from late last
month. For the first time in four sessions, the dollar settled back inside the
Bollinger Band (lower end is now near JPY147.10). The dollar is firm in the
upper end of yesterday's range. The next retracement target (50%) is closer to
JPY148.60. The Australian dollar traded on both sides of Monday's range
in response to the US CPI. After the low was set, the Aussie struggled to
overcome offers near $0.6600. It has not traded above $0.6620 today. While
support may be seen now around $0.6575, we suspect the risk it a bit lower. The
dollar's recovery against the yen yesterday foretold the yuan's weakness today.
The greenback had fallen to its lowest level since the end of January
(~CNY7.1715) yesterday before recovering to slightly above CNY7.18. The
greenback snapped back to CNY7.1950 today. The PBOC set the dollar's reference
rate at CNY7.0930 (vs, CNY7.0963 yesterday). The average in Bloomberg's survey
was CNY7.1769 (CNY7.1855 yesterday). Against the offshore yuan, the dollar has
recovered from yesterday's low near CNH7.1720 to slightly above CNH7.20.
Europe
The UK's January GDP showed the economy
expanded by 0.2% after contracting in two of the three months in Q4 23 for a
0.3% quarter-over-quarter contraction. While the Bank of England officially
accepts that two consecutive contracting quarters denote a recession, a
qualitative judgement suggests it may be fairer to think the UK economy is has
stagnated. Note that the UK population increased by about 0.34% (~230k), while
the economy expanded by about 0.3% year-over-year. Despite the headline, the
details were poor. Industrial output fell by 0.2%, while manufacturing was flat.
Construction output unexpected surged 1.1% (after three months of declines). It
was fueled by public construction. The trade deficit widened. A 0.2% gain in
services was recorded after a 0.1% decline in December.
Hungary, rather than Italy, is in the center
of the maelstrom in Europe, and it is scheduled to assume the rotating EU
presidency in the second half. The immediate issue, which has set the
Hungarian forint to new lows against the euro since last March is about central
bank's independence and its access to EU funding. Prime Minister Orban has
pressed hard for more aggressive monetary easing. He has also sought to broaden
the central bank's supervisory board. Headline CPI has fallen every month since
January 2023 when it peaked at 25.7%. It stood at 3.7% last month. The central
bank targets 3%, +/-1%. Excluding food and energy, core CPI stands at 5.1%. The
central bank began cutting rates last October and delivered four 75 bp cuts in
the base rate to 10% in January. Last month, it delivered a 100 bp cut. The
swaps market is pricing in another 275 bp of cuts in the next six months. An EU
Parliament committee voted on Monday to proceed legal action against the EU for
releasing part of Hungary's suspended funding (~10.2 bln euros of more than 30
bln euros allocated). A formal decision by the EU Parliament is expected before
the end of the week.
The euro recorded a three-day low yesterday,
slightly above $1.09. It met the (50%) retracement of last week's rally (~$1.0910)
and held above the next retracement (61.8%) near $1.0895. The euro is trading
quietly today in a narrow range (~$1.0920-$1.0935). So far this week, it has
traded between roughly $1.09 and $1.0955. It is hovering near the middle of
that range as the North American session is about to begin. The paring of
sterling's recent gains took it to nearly $1.2745 yesterday, meeting the (50%)
retracement of the rally from the March 1 low near $1.2600. The next
retracement (61.8%) is near $1.2710. It recovered to almost $1.28 in the North
American afternoon and has largely been confined to a quarter-cent below $1.28,
so far today. The $1.2820-30 area may cap upticks. The euro helped support near
GBP0.8500 on Monday and recovered to a three-day high yesterday near GBP0.8555.
It has not closed above GBP0.8575 for almost two months. On the downside,
support is seen in the GBP0.8525-30 area.
America
The US February CPI does not change anything. The
first Fed cut was not expected this month or in May. And whatever the Fed
decides in June, it will not be determined by February prices. That said, the
odds of a June cut slipped below 70% from a little above 85% on Monday. After
the jump in the February unemployment rate, reported at the end of last week,
the Fed funds futures priced in about an 80% chance of a fourth cut this year. This seemed
to us to be a bit excessive. After the CPI, the market had downgraded the
chances of a fourth cut to about 37%. Of note, core goods prices rose (0.1%)
for the first time since May 2023. Core services, rose by 0.5%, and roughly the
same excluding rent and owners' equivalent. Looking forward, pending additional
information in the PPI, the CPI suggests the core PCE deflator may be up
0.2%-0.3%, which suggests the year-over-year pace could moderate for the 13th
consecutive month to 2.6%-2.7%. Also, note that the risk is for a higher
headline CPI here in March. Consumer prices rose by 0.1% in March 2023. This
will drop out of the 12-month comparison and will likely be replaced by a
higher number. Still, a key point to us is the bar Fed Chair Powell set at the
January post-FOMC press conference. The inflation data, he said, does not need
to be better, just good.
The Canadian dollar, like the other
dollar-bloc currencies, traded heavier against the US dollar yesterday. Even
the rise in the US S&P 500 failed to lift the Loonie, which fell to
three-day lows. The US dollar reached CAD1.3525, a little shy of the (61.8%)
retracement of last week's slide (~CAD1.3535). Itis consolidating in a narrow
range below CAD1.3500 today. A move above the CAD1.3550 area may signal a
re-test on the CAD1.3600 area that capped the greenback in late February and
early March. The US dollar traded on both sides of Monday's range against
the Mexican peso, but it remains in the range set last Friday
(~MXN16.7640-MXN16.8890). Outside of the reaction to the US CPI, which set
the day's range, trading was mostly uneventful, and the dollar chopped in a
MXN16.80-MXN16.84 range. The greenback is trading mostly below MXN16.80 today.
The multiyear low set last July was near MXN16.6260. Mexico reported a 0.4%
increase in January industrial output. It follows a cumulative decline of
almost 1.75% last November and December. Brazil's February IPCA inflation was
little firmer than expected. The dollar pulled away from BRL5.0 and slipped
below Monday's low to trade below BRL4.96. Brazil's stock market, which was one
of the sources of pressure on the real on Monday, bounced back with a nearly
1.5% gain (it lost about 0.75% on Monday). Petrobras, which had fallen 13% over
the previous two sessions, rose 3.5% yesterday, its biggest gain since late
January.
Reviewed by Marc Chandler
on
March 13, 2024
Rating:
