Last
week will be remembered for several things. First, the Bank of Japan lifted its
interest rate target for the first time in 17 years and formally ended its
Yield Curve Control and ceased buying ETFs. The yen sold off and the dollar
approach the 2022 and 2023 cap slightly below JPY152. Japanese officials have
used the language that has signaled heightened risk of intervention in the
past. Second, the Swiss National Bank became the first G10 central bank to cut
rates. Its low inflation and soft growth impulses provided a conducive
backdrop, and there may be some tactical advantage in cutting before others to
minimize the risk of the franc strengthening. Third, the PBOC relented and
allowed the dollar to rise above the CNY7.20 cap that has held it back this
year. The near-term risk may extend toward CNY7.25 and possibly CNY7.30.
Fourth, the central bank of Mexico delivered its first rate cut. The 25 bp move
contrasts with Brazil and Colombia's 50 bp cuts last week and underscores the
caution at Banxico.
Finally, the median projection for Federal
Reserve officials maintained the three cuts for the year, while the forecast
for growth was raised, the unemployment forecast shaved, and the headline PCE
deflator, the measure that is targeted, was left unchanged at 2.4%. The dollar
initially sold off hard on what seemed like a dovish hold but recovered to
trade at new highs for the week ahead of the weekend. The week ahead is lighter
in terms of events and data, and shorter for many due to the long Easter holiday.
The dollar finished last week on a firm note and the momentum indicators are
not over-extended. Further gains seem likely over the next few days, even if
unevenly distributed before consolidating in the latter part of the week ahead.
United States: US consumption is holding up better
than retail sales suggest. January and February combined showed retail sales
falling by 0.5%. Personal consumption expenditures are more comprehensive, the
median forecast in Bloomberg's survey is for a 0.5% increase in February after
a 0.2% rise in January. To be sure, the US consumer is pulling back but the
shopping is continuing even as a slower pace. Recall that PCE rose by 1.6% in
January 2023 and by 0.4% in February. Income rose by 1% in January, flattered
by the cost-of-living adjustment for social security and a surge in dividend
payments. Personal income rose by an average of 0.4% for the last three years.
It is likely to slow this year. The median forecast in Bloomberg's survey is
for a 0.3% increase in February, which would match the average of H2 23.
Market participants and policymakers may
be more interested in the PCE deflator. Yet, the new information in the
deflator is minimal. The CPI and PPI anticipate the PCE deflator. The variance
from expectations is considerably less with the deflators than the CPI and PPI.
And based on the CPI and PPI, the median forecast in Bloomberg's survey calls
for a 0.4% and 0.3% rise in the headline and core PCE deflators, respectively.
Given the base effect, such increases would leave the year-over-year pace steady
at 2.4% for the headline deflator and 2.8% for the core. Assuming the headline
deflator rose 0.4%, it would mean the six-month annualized increase was about
2.4%. down from 3.2% in H1 23. A 0.3% rise in the core deflator would translate
to a 2.86% annualized rate, down from nearly 4% in H1 23.
The Dollar Index set a new high for the
month ahead of the weekend near 104.50. There is little to prevent a turn to
the Q1 high set in mid-February slightly below 105.00. The momentum indicators
have turned higher, and the five-day moving average has crossed back above the
20-day moving average for the first time since late February. We suspect the
Dollar Index could rise toward 106.00 ahead of the next jobs data (April 5).
The early projections suggest another solid report with around 200k new jobs.
Japan: As the US CPI (and PPI) provide a robust
gauge of the PCE deflator, and the preliminary eurozone CPI does an excellent
job of anticipating the final reading, Tokyo's CPI is a useful proxy of the
national figures, which are reported with a few weeks lag. Tokyo's CPI peaked
at 4.4% in January 2023. The national CPI peaked the same month at 4.3%. At the
end of the last year, Tokyo's CPI was at 2.4% and the national CPI was at 2.6%.
In February, Tokyo's CPI was at 2.6% and the national rate was 2.9%. Measured inflation
in Japan is expected to rise further in April, when the government subsidies to
for household consumption end. The core rate, which excludes fresh food, is the
measure the BOJ targets. Tokyo's core CPI was at 2.1% at the end of last year,
while the national core was at 2.3%. The base effect took Tokyo's core CPI to
2.5% in February from 1.8% in January. It is expected to ease to 2.2% in March.
The national core CPI was 2.8% in February after a 2.0% reading in January. The
BOJ will update its projections next month, but its current forecast is for the
core CPI to fall to 2.4% in the fiscal year that begins next week and 1.8% in
the following fiscal year, which one must acknowledge is not independent of
what the BOJ does.
Japan will also report February
employment, retail sales, industrial production and housing starts. Japanese
employment figures rarely elicit a market response, and the insight offered by
the retail sales report has already been reported by household spending. Recall
that Japan has already reported that February household spending fell a
dramatic 2.1% (a 6.3% year-over-year decline, the most in three years).
Industrial production tumbled by 6.7% in January. The earthquake that struck on
January 1 and the safety scandal at Daihatsu were the main culprits. The issue
now is the strength of the recovery. Industry surveys by METI suggest output
may rise by almost 5% in February and 2.0% in March.
The dollar's eight-day rally against the
yen ended before the weekend with a modestly lower close after reaching a new
high near JPY151.85. Still, in the first 12 weeks of the year, the dollar has
risen in all but two. The one-way market and higher volatility (three-month
implied volatility surged from near a two-year low around 7.6% at the start of
last week to almost 8.6% before the weekend, coupled with the word cues from
the Minister of Finance after the BOJ hike, raises the risk of intervention. The
low since the FOMC meeting is around JPY150.25. The JPY152 area capped the
greenback in 2022, 2023, and so far, this year. A move above there would target
the JPY155 area, though the 1990 high was closer to JPY160.
China: Industrial profits for January-February
will be reported. The picture often depicted of China being the factory of the
world and eating everyone's lunch contrasts with slump in industrial profits,
which have been falling on a year-over-year basis every month beginning July
2022. Indeed, going back to 2019, industrial profits have been falling except
for October 2020-June 2022. Yet, at the same time, the correlation with
industrial profits and equities (CSI 300) is weak. China will also report its
final estimate for Q4 23 current account balance. The initial estimate was
$55.2 bln, which was the smallest since the contraction in Q1 20 and puts last
year's surplus at $264.2 bln down from a little more than $400 bln in 2022. The
2022 surplus was about 2.2% of GDP and it looks to have fallen to about 1.5% of
GDP last year. The IMF projects 1.4% this year and 1.1% next year. China's
current account surplus is reported about a third of the size of its trade
surplus. China reported a $823.2 bln trade surplus last year.
Through formal and informal means, the
CNY7.20 level capped the dollar this year. But the pressure proved too much and
Chinese officials relented and the dollar jumped to almost CNY7.23 ahead of the
weekend. The dollar's surge of a little more than 0.4% was the
largest gain since January 2. Like the yen, the yuan has fallen in all but two
weeks here in Q1 24. It is difficult to know Beijing's pain threshold, but we
suspect near-term potential extends toward CNY7.25 and possibly CNY7.30.
Eurozone: It is a quiet week for Europe, given the
holiday that thins activity from the middle of the week through next Monday.
The economic diary features the European Commission business and consumer
surveys and M3 money supply. The takeaway from the surveys will likely be that
industrial and services confidence remains in the trough but are no longer
falling. Consumer confidence has gone nowhere since the middle of last year. M3
was contracting in the July through November last year but has turned higher in
recent months. Still, growth is anemic and credit impulses are weak.
The euro slumped to almost $1.08 before
the weekend. It recorded its lowest level since March 1. It practically met the
(61.8%) retracement of the rally from the Q1 low (mid-February, ~$1.0695). The
momentum indicators are trending lower, and the five-day moving average has
fallen below the 20-day moving average for the first time in a month. A break
of $1.08 targets the $1.0760 area initially, but the risk extends back to the
mid-February low, and maybe $1.06.
United Kingdom: The light economic schedule
features another look at Q4 GDP, which on the initial estimate contracted by
0.3% after a 0.1% contraction in Q3 24. The BOE uses two consecutive quarters
of a decline in economic activity as its definition of a recession. Still,
central bank officials do not seem too alarmed, noting the downturn was
shallow, and that the UK economy already appears to be returning to growth.
Sterling reached $1.28 in the buying frenzy after the FOMC meeting, but it
reversed lows and fell below $1.26 before the weekend. It found support near
$1.2575, the lowest level since February 16. The low for the year was set
earlier in February near $1.2520. Momentum indicators are falling, and the
five-day moving average pushed below the 20-day moving average for the first
time since late February. Sterling pierced the lower Bollinger Band and the
200-day moving average (~$1.2590-5) but settled slightly higher. A break of $1.2570
could signal another half-of-a-cent drop, but risk may extend toward $1.2465.
Canada: After contracting by 0.5% in Q3 24, the
Canadian economy bounced back in Q4, expanding by 1%. Consumption actually
slowed in Q4, but government spending jumped. It has shrunk by 1.9% in Q3 and
rose by 1.2% in Q4. Capex fell in both Q3 and Q4 23. Fourth quarter growth was
also supported by stronger exports and fall in imports. Canada reports its
monthly GDP for January. It likely grew by 0.1%-0.2%, making a small down
payment for Q1 24 growth around 0.5%. The US dollar held support near CAD1.3450
in the sell-off after the FOMC meeting and rebounded to almost CAD1.3590 ahead
of the weekend. Canada's soft CPI report earlier last week helped lift the
greenback to a marginal new high for the year near CAD1.3615. and a marginal
new high was set in the waning hours of last week’s activity. The band of
resistance extends to around CAD1.3625. A push above there targets the
CAD1.3700 area.
Australia: Australia reports February CPI.
Price pressures have been trending lower in Australia, but the central bank, as
we saw last week, is not yet persuaded that inflation is on a sustainable path
toward its target. Still, the monthly CPI (the RBA still puts more weight on
the quarterly report) peaked at 8.4% at the end 2022 and fell to 3.4% by the
end of last year, where it still was in January. Australia will also announce
its retail sales for February. Recall that retails sales plunged by 2.1% in December
and then recovered by 1.1% in January. A smaller gain is likely in February.
The Australian dollar was turned lower after jumping to $0.6635 in the
post-FOMC frenzy. It fell to $0.6510 before the weekend. Last week's low as set
on Tuesday a little lower (~$0.6505). It is holding above the trendline drawn
off the mid-February and early March lows. It comes in near $0.6505 at the
start of the new week and finishes the week (and month) closer to $0.6515. A
break could signal a test on the year's low near $0.6450 set in mid-February,
and possibly closer to $0.6400.
Mexico: Mexico's trade balance shows strong
seasonal factors. It has deteriorated without fail in Januarys since 2012 and
has improved in Februarys since 2007. Mexico's imports from China are emerging
as a campaign issue for Trump. The USMCA agreement, which was signed by Trump,
had a higher domestic content requirement. Some American observers suspect
Mexico is not enforcing it. Some reports have emphasized Chinese exports to
Mexico are mostly semifinished goods that are assembled in Mexico before consumed
at home or exported. Last year, the US recorded a $152 bln trade deficit with
Mexico.
The central bank initiated an easing cycle
last week, cutting the overnight rate target to 11.0% from 11.25%. The cautious
language around the cut and the (small) upward revision of its inflation
forecast (3.6% year-end from 3.5%) gave the move an aura of hawkishness. The
carry (and taking into account the low volatility) is still attractive. The
greenback surged to almost MXN16.95, a two-week high early last week and
finished the week near MXN16.7650. The low for Q1 was set on March 14 a little
above MXN16.6460 and the multi-year low set last July was closer to MXN16.6260.
Still, it looks like a consolidative phase has begun, maybe between MXN16.67
and MXN16.85.
Reviewed by Marc Chandler
on
March 23, 2024
Rating:
