(Business trip will interrupt the commentary over the next few days. Check out the March monthly here. Back with the Week Ahead on March 9. May have some comments on X @marcmakingsense.)
Overview: Outside of the Australian and New Zealand
dollars, which are off by 0.20%-0.25%, the other G10 currencies are little
changed and mostly softer in narrow ranges. A firm Tokyo CPI, mostly on base
effects and softer rates helped keep the US dollar below the recent highs
against the Japanese yen. Most emerging market currencies are lower, led by the
Malaysian ringgit. Meanwhile, the Hungarian forint is stabilizing after
extending losses to new record levels against the euro. The new news among US
data today is the ISM services. It is expected to have softened, but
disappointment could weigh on US rates.
The US 10-year yield is off
about 2.5 bp to 4.19%. The 200-day moving average is near 4.17%. It has not
closed below it since the January jobs report on February 2. European benchmark
yields are 2-3 bp lower and the UK Gilt yield is off slightly more than four
basis points ahead of tomorrow's Spring Budget. The US Commerce Department's
decision to require AMD to get license to sell chips tailored for China because
they are still too powerful may have contributed to the 2.6% slide in mainland
shares that trade in Hong Kong, while the CSI 300 itself was up about 0.7%. Tokyo's
equities were mixed, while Taiwan and New Zealand saw small gains, while the
other larger bourses traded off. Europe's Stoxx 600 is down by 0.3% in late
morning dealings. US index futures are also trading with a heavier bias.
Meanwhile, gold's surge has continued. It is closing in on the high set last
December near $2135.40. It is up $100 an ounce since last Monday. April WTI
initially extended yesterday's pullback but found support ahead of $78 and has
recovered back to session highs, just inside yesterday's range, of almost
$78.90.
Asia Pacific
Tokyo's CPI jumped back in
February after both the headline and core slipped below 2% in January to 1.8%
(previously revised from 1.6% initially). The headline rose to 2.6% and the core is
at 2.5%. The increase appears to be mostly the result of base effects and the
subsidies introduced last year for utility prices. This warns of a rise in the
national measure due March 22. The measure that excludes fresh food and energy
did tick down to 3.1% (from 3.3%). Still, the firmer headline and core prints
still point to the BOJ finally exiting the negative interest rate policy
probably next month even though the economy is struggling after contracting in the
second half of 2023. That said, Q4 23 capex was reported early yesterday that
point to an upward revision in Q4 23 GDP. The initial GDP assumed that private
investment contracted by 0.3%. That was the third consecutive quarterly
decline. Japan's Q4 23 GDP will be revised on March 11. The capex figures were
sufficiently strong that the contraction looks likely to be revised away.
In the seemingly
ever-expanding definition of national security, the US Commerce Department
announced last week it will investigate potential data and cybersecurity risks
posted by Chinese EV and internet-connected vehicles. Is it too cynical to suspect the
conclusion is already known? China imposes a 40% tariff on US auto imports (15%
on vehicle imports from other countries). This encourages US producers to build
autos inside China. That is the source of the some 2.1 mln vehicles sold by GM
in China last year (that reflected an 8.7% decline and for the first time in
more than a decade, reports indicate GM sold more cars in the US than China in
2023). The Trump administration boosted the tariff on Chinese auto imports to
27.5% and that has been maintained by the Biden administration. The EU is
moving toward challenging China-made EVs too, but on economic grounds not
national security. The Biden administration recognizes that China is using
unfair trade practices. Isn't that the jurisdiction of the WTO? There is a
sense among many Americans that the WTO has failed. Yet, the facts suggest
something different. The US has challenged China before the WTO 20 times since
2004 and won 17 cases. The other three are still pending before the US
sabotaged the conflict resolution mechanism by blocking the appointment of
appellate judges (Trump and Biden).
The dollar traded firmly
against the yen on Monday, assisted by the firmer US rates. However, the greenback held below
the JPY150.70-JPY150.85 cap seen last week. The firm Tokyo CPI readings saw the
dollar slip to JPY150.35. Nearby support is seen near JPY150.20. The firm Tokyo
CPI reading with implications for the national report due next week and may
reinforce speculation of a rate hike next month. Note that the final Japanese
service and composite PMI were revised a little higher from the preliminary
readings. Since session high was recorded in the Asia Pacific session
yesterday near $0.6535, it trended gently lows and dipped below $0.6510 in
quiet afternoon turnover in North America. Follow-through selling
today pushed it below the shelf forged in the second half of last week in the
$0.6485-90 area. It has found bids slightly below $0.6480. There is little
technically standing in the way of a return to the mid-February lows around
$0.6445. That said, the final service and composite PMI were a little higher
than the flash estimate, confirming the return over the 50 boom/bust level. China's
National People's Congress targeted 5% growth this year, which was largely
expected. Although the general government deficit target is 3%, there will
be CNY1 trillion in special bond issuance by the central government (on top of
the CNY3.9 trillion) in special local government bonds. The PBOC set the
dollar's reference rate at CNY7.1027 (CNY7.1020 yesterday). The average
projection in Bloomberg's survey was CNY7.1985 (CNY7.1890 on Monday). The fix
allows the dollar to trade between about CNY7.9605 and CNY7.244, 8but CNY7.20
has been a formidable cap. It has not been violated in three months.
Europe
There are two highlights
from Europe this week. First, Tomorrow's is the UK Spring budget. Chancellor of the
Exchequer Hunt is widely expected to deliver some tax relief. The scope looks
limited unless there are also some revenue-enhancing measures. The Office for
Budget Responsibility projects that the budget deficit for FY24 will narrow to
3% of GDP form 5.0% in FY23. We anticipate a sharp drop in UK inflation in the
coming months as the surge in early 2023 drops out of the 12-month comparison.
This will likely prove more important from the Bank of England's perspective
that some modest net tax relief. The market has the first cut nearly fully
discounted for August and almost 2 1/2 quarter-points moves this year. Second
is the ECB's meeting Thursday. It is still too early to expect a rate cut. The
swaps market has a cut nearly priced in for June (90%). However, a cut in
growth and inflation forecasts helps set the stage. In December, the ECB's
staff forecast 0.8% growth this year and 2.7% CPI. Growth might be half of that
while inflation could be below 2.5%.
The final February PMIs were
a slightly firmer than the preliminary estimates. There are three takeaways. First, the
eurozone economy appears to be stabilizing but at weak levels. The 49.2
composite reading (unchanged from the flash reading) is the best since last
June, even if still below the 50 boom/bust level. Second, while the
manufacturing sector is still a drag, with the manufacturing PMI at 46.5 (It
has not been above 50 since June 2022), the services PMI is rose above 50
(50.2), for the first time since last July. Third, Italy and Spain are showing
greater strength then Germany and France. The February composite PMI were 51.q
and 53.9, respectively. The conventional narrative is that before monetary
union, the loss of peripheral (and French) competitiveness would be offset by
an occasional devaluation. Under monetary union, the argument goes, real wages
bear the burden of the adjustment. There is some merit to the argument but note
that the competitiveness is also restored by the periphery having lower
inflation than Germany. This was the case last year when Italy's harmonized CPI
rose 0.5% in December year-over-year, while Germany's was 3.8%. Spain's CPI was
3.3% last December and Portugal's was stood at 1.9%.
Separately, while the
British economy contracted in Q3 23 and Q4 23, the composite has been moving
higher. It bottomed
last September at 48.5. It has steadily recovered and moved above 50 last
November and reached 53.0 (rather than 53.3 preliminary estimate) in February,
the best since last May, up from 52.9 in January. In recent comments Bank of
England Governor Bailey recognized the green shoots. The next key data point
from the UK is the employment report on March 12.
Yesterday, the euro barely
traded in the pre-weekend range, and remained firm through the North American
session. According to
Bloomberg's data, the euro traded 1/100 of a cent above last week's high,
slightly north of $1.0865. The euro did not trade below $1.0840 in North
America. The euro bottomed in mid-February slightly below $1.07. It appears to
have taken much energy to lift it this far. It has gone nowhere today and has
been trading inside a $1.0840-$1.0860 range today. The intraday momentum is
getting overbought in the European morning. Ideas that the UK's Spring
Budget will mean a longer delay before the BOE cuts rates appeared to help
sterling yesterday. It briefly rose above $1.27, which it was unable to do
last week. Recall that in the bigger picture, sterling was in a $1.26-$1.28
trade range from mid-December 2023 through early last month. It, too, is in a
narrow range today, roughly $1.2670-$1.2695.
America
The final services and
composite PMI and another look at January durable goods orders (alongside
factory orders) may pose some headline risk but the market may be most
sensitive to the ISM services. Recall that last week, the ISM manufacturing survey was weaker
than expected and softer than the manufacturing PMI. This saw yields fall,
which pulled the greenback lower. Recall that the January services PMI showed a
large jump in prices (64.0 vs. 56.7 in December) and the market will watch this
closely. Still, as the focus shifts to the US labor market the services ISM
employment (January 50.5 and 43.8 in December) will also be a focus.
Around the time Powell
begins to testify tomorrow, the JOLTS report on job openings and the ADP
estimate of private sector employment developments will be published. The JOLTS report seems to have lost much
of its previous market impact and the ADP is not a good guide to forecasting
the government's assessment of the labor market. The BLS estimates the US
created 867k jobs in the three months through January. This seems unreasonably
strong. However, we note that the median forecast in Bloomberg's survey has
edged higher in recent days and now stands at 200k. While it is lower than H2
23 average of 220k a month, it would still be seen as a resilient if not robust
number. Note too that the poor weather that may have been responsible for the
0.2 of an hour decline in the average work week (to 34.1 hours) likely snapped
back and the 0.6% rise in average hourly earnings is not going to be repeated,
allowing the year-over-year rate to return to 4.3%, where it was steadily in Q4
23.
There is practically no
chance of a change in interest rates by the Bank of Canada when it meets on
Wednesday. The
better growth profile (Q3 GDP's contraction was revised to -0.5% from -1.1% and
Q4 growth was 1.0%) takes some pressure off the central bank. Canada's labor
market is not proving as resilient as the US. The unemployment rate is likely
to return to 5.8%, where it was at the end of last year before slipping to 5.7%
in January. It was at 5% as recently as last April. Mexico reports February CPI
tomorrow. The headline and core rates are expected to continue to moderate.
While we favor a cut at the March 21 central bank meeting, our confidence is
not strong. However, the next meeting (May 9) could be too close to the
election to announce a shift in policy by the fiercely independent central bank.
For the fourth consecutive
session, the US dollar is trading inside last Thursday's range
(~CAD1.3525-CAD1.3605) against the Canadian dollar. The consolidative price action still looks
constructive and even the late rally in the S&P 500 yesterday failed to
lend the Canadian dollar much support. The CAD1.3600-25 area offers the nearby
cap, and a break of could signal a move toward CAD1.37. The US dollar fell
by nearly 0.35% against the Mexican peso yesterday, the most in about 2 1/2
weeks. The greenback settled near session lows, around MXN16.9560, its
lowest level since mid-January. It eased to about MXN19.9525 in early Asia
Pacific turnover before recovering to about MXN16.98. The low for the year was
recorded on January 8 near MXN16.7850. In the futures market as of the
reporting week ending February 27, the gross long speculative position slipped
for the second consecutive week, but at 93.8k contracts, it is among the
largest in nearly four years (MXN500k per contract or ~$29.500). The gross
longs at 146k are the most since last March, while the gross shorts are up
about 8k contracts since the end of last year to 52.3k. The downtrend line we
are tracking comes in near MXN17.06 today.
Reviewed by Marc Chandler
on
March 05, 2024
Rating:
