Overview: News that the Japanese economy expanded
rather than contracted in Q4 23 has fanned expectations that rates could be as
early as next week. This is helping keep the yen supported, though it remains in
the pre-weekend range, albeit barely. While the dollar is softer and consolidating against the
euro, Swiss franc, and Canadian dollar, it slightly firmer against the
Antipodeans and Scandis. Sterling is also in a narrow range, but with a softer bias. Most emerging market currencies are firmer, with the Hungarian forint and
Turkish lira the notable exceptions. A quiet North American session looks
likely with a light economic calendar ahead of tomorrow's US CPI.
The yen's recovery and rate
speculation weighed on Japanese stocks. The Nikkei and Topix fell by more than
2%. Itis the biggest decline since last October. Outside of China and Hong
Kong, the other large regional bourses fell. Australia's ASX 200 tumbled by
1.8%, the most in nearly a year. Europe's Stoxx 600 is off by 0.4%, threatening
the three-day advance in the second half of last week. US index futures are
nursing small losses. Japan's 10-year yield rose 2.5 bp, and at 0.75%, is
approaching the year's high. Core European benchmark yields are mostly slightly
softer, while the peripheral yields are a little firmer. UK 10-year Gilt yields
are off a couple of basis points. The 10-year US Treasury yields is little
changed near 4.07%. Gold is consolidating after approaching $2200 before the
weekend. It has held above $2176 today. April WTI fell to a nine-day low near
$77.25 today before recovering. It is near session highs now near $78.30.
Asia Pacific
China reported February CPI
and PPI over the weekend. Deflation in consumer prices ended for the first time since last
August as the CPI rose by 0.7% year-over-year. It was twice the gain economists
expected (0.3% median forecast in Bloomberg's survey). While conventional
wisdom attributes the gain to spending over the Lunar New Year holiday, given
the construction of China's CPI basket, food prices are key. Food prices fell
0.9% year-over-year in February after a 5.9% decline in January. Pork, a staple
in diets, rose by 0.2% in February following a 17.3% drop in January. Excluding
food and energy, China's core CPI stood at 1.2% in February, up from 0.4% in
January. On the other hand, deflation in producer prices deepened to -2.7% from
-2.5% previously. On the month, producer prices fell by 0.2%, matching the
January decline.
The surge in Japanese
capital spending excluding software reported earlier this month prepared the
market for upward revision in Q4 23 GDP. Capital spending jumped 11.7%
year-over-year. The median forecast in Bloomberg's survey was for a 1.5%
increase. In GDP terms, private investment rose 8.4% and that means that rather
than contract by 0.1% as initially estimated, the Japanese economy expanded by
0.1%. Recent BOJ comments, the larger than expected rise in labor earnings and
wage demand have spurred increased speculation that the BOJ could raise rates
at the March 19 meeting. We still lean toward April, the start of the new
fiscal year, the end of energy subsidies for households will lift measured
inflation, the wage round results will have been digested, and the Tankan
survey results will be in hand. Also, note that despite the better Q4 23 GDP,
the economy could be contracting this quarter. Household spending, industrial
production, and housing starts fell sharply in January, partly as a function of
the earthquake on January 1.
After falling for the first
eight weeks of the year, the yen strengthened for the second consecutive week,
and its nearly 2.1% gain was the most since last August. The move was too rapid as the greenback
briefly traded beyond four standard deviations from its 20-day moving average.
It bottomed around JPY146.50 before US rates recovered following the US jobs
data. The dollar held near JPY146.55 in Asia Pacific turnover today, but the
upside has been limited to about JPY147.15. The low from early February was
near JPY145.90 and the 200-day moving average is around JPY146.20. The dollar
is trading slightly inside three standard deviations from its 20-day moving
average (~JPY146.35). The Australian dollar reached almost $0.6670
before the weekend, more than three standard deviations from the 20-day moving
average. It subsequently returned toward session lows (~$0.6615)
before settling near $0.6625. The Aussie met the (50%) retracement objective of
this year's decline (~$0.6655). We look for some back and filling over the next
few sessions and would not rule out a move toward $0.6560-75. It has tested
initial support near $0.6600. The CNY7.20 cap remains in place and the
broad pullback in the US dollar, especially against the yen, in our
understanding, helped drive the dollar to almost CNY7.1815 before the weekend. It
slipped a little further today to about CNY7.1800. That is the lowest level
since February 21. The PBOC set the dollar's reference rate at CNY7.0969
(CNY7.1002 on before the weekend). The average in Bloomberg's survey was
CNY7.1879 (CNY7.1905 previously). Against the offshore yuan, the dollar also
fell to its lowest level since February 21 (~CNH7.1850).
Europe
The economic news stream is
light and political developments are more notable. Many are looking for some insight into the
mood of voters ahead of the June European parliamentary election. In a defeat
for the Irish government, two referendums on changing the language about women
and family in the constitution were defeated. The first referendum sought to
widen the definition of family to include other "durable"
relationships. The second referendum proposed modernizing and making more
inclusive language about care duties in the home. Both referendums were
defeated by more than 2/3. Turnout was almost 45%, almost a 20-percentage point
drop from the 2018 referendum on abortion.
Portugal's Socialist Prime
Minister Costa resigned late last year amid a scandal over lithium and green
hydrogen deals. Costa
led the Socialist government for eight years. There was a national election
yesterday. A center-right coalition led by the PSD (Social Democrats) did best,
but not sufficient to secure a majority. The populist right Chega (Enough) won
around 50 seats, up from a dozen, two years ago. The head of the center-right
coalition, though, has refused to invite Chega into a coalition, meaning a
minority government is the most likely outcome. Minority governments have been
stable in Portugal. Still, there has been little reaction in Portugal's bond or
stock markets.
The euro reached $1.0980
after the US employment data, its best level since January 12. However, the momentum faltered after a
six-day rally, and the euro settled fractionally lower. Still, the weekly gain,
its third consecutive one of 0.95%, was the largest so far this year. It is
trading quietly in about a fifth of a cent range above $1.0935. Initial support
may be in the $1.0890-$1.0900 area. Sterling powered to its best level
to its best level since last July, reaching almost $1.29 before the weekend. It
traded beyond three standard deviations above the 20-day moving average. It is
consolidating in about a third of a cent range today below $1.2865. The upper
Bollinger Band (two standard deviations above the 20-day moving average) is
near $1.2835. Some consolidation seems necessary, and support may be initially
in the $1.2780-$1.2800 area. The euro had fallen to almost GBP0.8500. It has
not closed below there since August 2022. It is trading with a slightly firmer
bias today and reached nearly GBP0.8530.
America
With February employment
data in hand, the attention turns to tomorrow's CPI. The headline is expected to be unchanged
at 3.1%, though the core may tick down to 3.7% from 3.9%. Fed Chair Powell told
Congress last week that the central bank's confidence was "not far"
from allowing it to cut rates. The market understands this to mean a cut in
June rather than March or May. The February jobs data apparently did not change
economic assessments, and odds of a June hike were little changed at about 92%,
down from 96% the previous day and at end of previous week (March 1). Powell
previously explained that while the PCE deflator is the best measure for price
stability, the full employment mandate does not lend itself to a signal number.
Note that when the downward revisions are taken into account, the US created an
average of 265k jobs a month over the past three months, the most since last
June. The private sector has created an average of 205k jobs a month in the
three months through February. That is also the highest for a three-month
period since June 2023. Still, the pop in the unemployment rate to 3.9%, the
highest since January 2022 is a yellow flag, underscoring the gradual slowing
of the labor market. The median Fed forecast in December saw the unemployment
rate rising to 4.1% this year.
For its part, Canada created
twice the number of jobs economists expected (40.7k). That included 70.6k full-time posts, more
than the past five months combined. Still, the unemployment rate crept up to
5.8% (from 5.7%), matching last year's high. Average hourly pay (for permanent
workers) slowed to 4.9% from 5.3%. It is the first back-to-back slowing since
last May-June. Still, the swaps market showed little change in the likelihood
of a June cut (~75%).
The US dollar fell to
CAD1.3420 after the employment data, its lowest level in a month. It recovered to new session highs in the
waning hours of last week's activity, and nearly reached CAD1.3500. There are
options for about $305 mln at CAD1.3550 that expire today. That said, we see
initial resistance in the CAD1.3500-20 area, while the price action reinforces
the importance of support near CAD1.34. Ahead of that, support today may be
seen in the CAD1.3450-60 area. The five-day moving average is slipping below
the 20-day moving average for the first time in over a month. The US
dollar has risen against the Mexican peso in one session in the past two weeks.
It has fallen by about 1.8% over those two weeks. Last week was the
first in eight weeks that the dollar settled below MXN17.00. It set a new low
for the year near MXN16.7640. It is holding above MXN16.78 so far today. Last
year's low was set in July around MXN16.6260. Indeed, that was an eight-year
low. A steep downtrend line has formed since the end of February, and it comes
in today near MXN16.86. Note that every session last week, the dollar settled
below its lower Bollinger Band. The Brazilian real got tagged for about 1% at
the end of last week amid news of a smaller-than-expected dividend from
Petrobras. It was the weakest among the emerging market currencies. Not only
was the dividend smaller than expected, but Petrobras also did not announce an
extraordinary dividend either. The dollar gapped higher and traded above
BRL4.99 briefly. It has not closed above BRL5.00 since the end of last
October.
Reviewed by Marc Chandler
on
March 11, 2024
Rating:
