When everything was said and done last week, the
market did not change its mind. There was still a better than 90% chance that
the Federal Reserve delivers its first rate cut in June. Fed Chair Powell told
Congress that the central bank was not far from the level of confidence needed
to cut rates. The market understands "not far" to mean three months. The US
reported a 275k gain in February's nonfarm payrolls. Taking the past two
month's downward revisions into account, it was the third consecutive month of
more than 225k jobs being created. The 265k average over the past three months
is the highest since last June. The unemployment rate rose to 3.9% from 3.7%.
The Japanese yen appreciated 2% last week amid
speculation that the Bank of Japan could lift rates later this month and the
decline in US rates. Japan is likely to revise away the contraction in Q4 23 on
the back of strong business investment, but the economy is off to a poor start
this year. While US rates fell, European rates fell more. The market also
attributes high probability to an ECB hike in June. Yet, the dollar fell
against all the G10 currencies. The true to form, the Canadian dollar was the
laggard in weak US dollar environment, rising by about 0.55%. This lends
support to our understanding that current phase is for exchange rates to driven
by US rates (and expectations). In the coming days, we expect a firm headline
CPI reading and strong bounce in retail sales helped by autos and gasoline. In
turn, this could put a floor under US rates and lend the greenback support. Technically,
it is stretched, testing Bollinger Band (two-standard deviations for the 20-day
moving average) and beyond. This is to say that we think the most likely
scenario is for dollar-supportive economic news to hit after the dollar's
sell-off seems extreme in a quantitative sense.
United States: The February CPI is the most important data point of the
week. From the central bank's point of view, the labor market remains strong
enough to allow it to focus on its price stability mandate. The year-over-year
headline rate fell to 3% in June 2023 and has not fallen further since then. It
recovered to 3.7% last August and September. It fell to 3.1% in November before
bouncing to 3.4% in December. It returned to 3.1% in January and probably
remained there last month. The median in Bloomberg's survey is for a 0.4%
increase in headline CPI in February. Such an increase would bring the
three-month annualized rate to 3.6% from 2.8% for the previous three months. The
six-month annualized rate, which some Fed officials have cited, would be around
3.2%, down from 3.4% annualized rate in H1 23. The core rate is expected to
rise by 0.3% in February, which would bring the year-over-year rate to 3.7%
from 3.9%. That would be the lowest since May 2021. The three-month annualized
rate would rise to 4% from 3.2% in the previous three months. The six-month
annualized rate would be 3.6% compared with 4.6% in H1 23. The market pays less
attention, of course, to the producer prices due two days later March 14, and
so-called pipeline inflation, looks modest. Economists will use some components
of the report, alongside the CPI to estimate the PCE deflator, which is what
the Fed targets.
At the same time as the PPI, February retail
sales will be reported. While we do think the economy is slowing, the heady
0.8% decline in January retail sales overstates the case. Retail sales likely
increased in February, and we already know that auto sales did (15.81 mln
vehicles, seasonally adjusted annual rate vs. 15.0 mln in January). Retail
sales accounts for around 40% of personal consumption expenditures. Retail
sales were virtually flat in Q4 23, but consumer spending rose by 3%, according
to the latest GDP revision. The 1% jump in January's personal income, well
above expectations, is seen as fuel for more consumption. January industrial
production will be reported at the end of the week. It fell by 0.1% in January
and likely repeated that in February. It was flat in December, so it may be
that the last time US industrial output increased was last November.
Manufacturing output fell by 0.5% in January, offsetting the gains in the
previous two months. A small gain is likely but not to fully offset the January
slump. Lastly, the facility the Federal Reserve offered last year to provide
liquidity to large banks (Bank Term-Funding Program) no longer will be make new
loans as of Monday, March 11.
The Dollar Index peaked in mid-February, the day
after the January CPI, near 105.00. It fell to about 102.35 before the weekend. It
recovered but still settled below the previous day's low (~102.80) and closed below the lower Bollinger Band (~102.90) for the second consecutive session.
Nevertheless, we suspect that this leg down may be over or nearly so. Technically,
many of the currency pairs look stretched. The US 2-year yield bounced off
4.40%, and the Fed funds futures briefly had four cuts full discounted as it
again strayed from the Fed's December dot plot. The upcoming data will support
Fed chief Powell's claim that the central bank's confidence, while rising, is
not quite sufficient to justify the first rate cut.
China: Coming
out of the National People's Congress and the Chinese People's Political and Consultative Conference
and the 5% growth target, many are looking for more concrete supportive
measures. It could include a cut in the one-year Medium-Term Lending Facility
Rate at the end of the week. However, Beijing may be focusing more on
quantities (lending volumes) rather than prices (rates). This could be
expressed in an increase in volume of one-year loans. Separately there appears
to be clear seasonal patterns in Chinese aggregate lending: February slows from
January, but typically recoups in full in March.
China reported consumer prices rose by 0.7% year-over-year in February, apparently helped by spending over the Lunar New Year holiday. It is the first such increase since last August and was well above expectations. Overall, food prices fell by 0.9% in February (-5.9% in January). However, prices of pork and fresh vegetables increased by 0.2% and 2.9% respectively. The price of fruit fell by 4.1%. Although many observers linked the deflationary phase to weak demand, the food prices play an important role and seem more driven supply than demand. Note that food and tobacco account for nearly 30% of China's CPI basket. The core measure, which excludes food and energy rose 1.2% after January's 0.4% increase. It is the highest since February 2022. Deflation in producer prices deepened. Producer prices fell by 0.2% last month and fell 2.7% year-over-year after a 2.5% decline in January. China's producer prices have been falling since October 2022. They had appeared to bottom in the middle of last year at -5.4%.
The dollar's broad losses, and especially the
deeper pullback against the Japanese yen made it easier for Chinese officials
to continue to cap the dollar near CNY7.20. The dollar fell to 2.5-week lows
ahead of the weekend near CNY7.1820. Chart support may be around CNY7.1750. The
dollar fell to CNH7.1850 against the offshore yuan and recovered to make a
marginal new session high (~CNH7.2035) in the North American afternoon before the weekend.
Japan:
The initial estimate of contraction in Q4 23 looks now likely to be revised
away with a jump in capex. Still, the Japanese economy continues to struggle at
the start of the 2024. In late February, we learned that industrial output
collapsed by 7.5% in January, spurred by the earthquake on New Year's Day and
other disruptions in the auto sector. At the end of the week, Japan reports the
January tertiary industry index. A decline would boost the risk that the
world's third-largest economy may be contracting in Q1. Machine tool orders
fell by 14% in January (year-over-year) after a 9.6% decline in December. This
reflects a decline in domestic as well as foreign orders. The February figure
is due on March 11. Comments from a Bank of Japan board member boosted
confidence that officials are preparing to abandon the negative in interest
rate policy. The comments coupled with the stronger wage growth could signal a
hike at the March 19 BOJ meeting, though we are still inclined, even if less
confidently, to an April hike.
The increased confidence that Japan will exit
its negative interest rate policy later this month or next month while at the
same time, US interest rates fell, dragged the greenback to JPY146.50 after the
US employment data. At its lows, the dollar was approaching four standard
deviations below the 20-day moving average (~JPY146.35), twice the Bollinger Band. After the
low was set within 15 minutes of the US jobs data, the dollar recovered but
stalled near JPY147.25, which also the three standard deviation mark. Note that
the five-day moving average fell below the 20-day moving average last week for
the first time since early January, illustrating the turn in the near-term
trend and momentum. The Q4 24 GDP revision may pose headline rise, but the
recovery in US rates could see the dollar trade higher. Initial resistance may
now be around JPY147.50 and then JPY148.00-10.
Eurozone: The only notable high-frequency data point is January's
industrial output. Several countries reported last week: (Germany 0.6%, France
-1.1%, and Spain 0.4%). The Netherland's reported a 1.0% rise in January
manufacturing production. It had jumped 6.8% in December. Ironically, the Dutch
manufacturing PMI stood at 48.9 in January, up from 44.8 in December. It has
not been above 50 since July 2022. Last week's ECB meeting was unsurprising. It
is too early to cut rates but the small downward revisions to this year growth
(0.6% vs. 0.8%) and CPI (2.3% vs. 2.7%) underscore expectations (~90%) of a
rate cut in June, which is about the same as a week ago.
The euro peaked slightly above $1.0980 within
a quarter-of-an-hour of the US jobs data. It briefly overshot the (61.8%)
retracement of the losses ($1.0970). But then the euro drifted about a
half-of-a-cent lower and settled near $1.0940. The loss before the weekend
snapped a five-day rally. The session low around $1.0920 was set a couple
minutes before the jobs report. It settled slightly inside the upper Bollinger Band. Initial support may be found in the $1.0890-$1.0910 area.
United Kingdom: The
UK will provide January/February jobs data. As also seen in the US and
eurozone, the UK's labor market is proving resilient, and this is especially
notable given that the economy declined in H2 23. The key element for the Bank
of England is the weekly earnings. The three-month moving average has fallen
steadily from the 8.5% peak in July 2023 to 5.8% in December. Separately, note
that as the price surge from early 2023 drops out of the 12-month measure, the
year-over-year CPI is likely to fall below 2% in Q2. At the same time, the UK
economy may have stopped contracting but activity does not appear to be
improving. The January monthly GDP and details is due March 13.
Sterling fared better than the euro. It held on to more
of its gains after the US jobs data and extended the advance for the sixth
consecutive session, matching sterling's longest advance since July 2020. It
reached almost $1.29 on the flurry of activity after the US employment report,
which is the highest it has been since last July. It settled (~$1.2860) well
above the upper Bollinger Band (~$1.2805) after trading slightly beyond three
standard deviations from the 20-day moving average (~$1.2870). Last year's high
was around $1.3140. Initial support may be around the old cap of $1.2800 and
then $1.2750.
Canada: After
the Bank of Canada meeting last week, which as widely expected, maintained the
current policy rate and stance (neutral) and the February employment data, the
economic calendar is light in the coming days. The highlight is arguably the
portfolio flow report for January. Recall that 2023, foreign investors bought
almost a net CAD33 bln of Canada's stocks and bonds. That is down from around
CAD138 bln in 2022. In fact, last year was the least since the outright
divestment in 2007. At the end of last year, Canadian's bought a record CAD29.4
bln of foreign financial assets, mostly US equities (CAD23.2 bln). Foreign
investors sold about CAD530 mln of Canadian stocks in December 23 after
liquidating CAD5 bln in November. Foreign investors bought CAD11 bln of debt
instruments, mostly central government bonds and money markets.
Canada created more full-time jobs in February (70.6k)
than it did in the September 2023-January 2024. Nevertheless, with the
unemployment rate ticked up to 5.8% (from 5.7%) and hourly wages moderated
(4.9% year-over-year from 5.3%). The US dollar had fallen to CAD1.3420 after
repeatedly finding offer around CAD1.3600. However, the greenback's broad
recovery and the sell-off in US equities, helped it recover against the
Canadian dollar. It stalled near CAD1.3500. The price action reinforces the
technical significance of the CAD1.3400 area. Initial resistance is likely
around CAD1.3500-35, which houses retracement objective and the five- and
20-day moving averages.
Australia: The
economic diary has no government reports in the days ahead. The Reserve Bank of
Australia meets on March 19, followed by the February employment data on March
21. There is little chance of a cut in the coming months. The futures market
has almost a 70% chance of a cut in June (~75% probability at the end of last
week) and nearly a 90% chance of a cut in August (also was near 75% at the end
of last week). Separately, Australia reported 0.2% growth in Q4 23 last week,
which was in line with expectations. However, for the fourth consecutive
quarter, due to rising population, per capita GDP fell. Note that many
countries in East Asia, including China, Japan, Taiwan, and South Korea have
shrinking populations. Any growth is an increase in per capita GDP.
The Australian dollar had its best week so far this year,
rising almost 1.5% against the US dollar. That lagged the yen and sterling
among the G10 currencies. The Aussie's surge also lifted it beyond three
standard deviations from the 20-day moving average (~$0.6655) in the immediate
reaction to the US jobs data. It reached almost $0.6670, overshooting the
(61.8%) retracement of this year's decline. However, it returned to the session
lows near $0.6615 in the North American afternoon. Still, it was barely within
the previous day's range (the high was $0.6625). The $0.6600 area may offer
initial support but a push back toward $0.6650 seem possible without inflicting
much technical damage.
Mexico: After
falling by 0.7% in December, the second-consecutive monthly decline, Mexico's
industrial production likely bounced back in January, led by a sharp rise in
auto production (~307k vehicles vs 216k in December). The peso is proving more
resilient than expected. It has risen in nine of the last 10 sessions and
begins the new week with a seven-day advance in tow. Its nearly 1% gain this
year has overtaken the Indian rupee (~0.5%) as the strongest emerging market
currency. The dollar recorded a new low for the year ahead of the weekend
around MXN16.7640. The eight-year low set last July was near MXN16.6260. The greenback
approached three standard deviations from the 20-day moving average against the
peso (~MXN16.7570) The downtrend line we have been tracking that has not been
violated on a closing basis begins the new week near MXN17.0150 and finishes
the week around MXN16.97.
Reviewed by Marc Chandler
on
March 09, 2024
Rating:
