Overview: The dollar is mostly consolidating
yesterday's losses ahead of month-end and the US income and consumption data. The
PCE core deflator may have risen by 0.2%, the least this, year, but the
year-over-year rate is expected to be steady at 2.8%. The dollar is recovering
from a five-day low against the yen recorded yesterday near JPY156.40 and is
near JPY157.30 in the late European morning turnover. The yen's retreat and a
disappointing Chinese PMI have weighed on the yuan. The euro is bid after the
firm year-over-year CPI reading. Sterling is little changed, in a narrow range
above $1.2700. Emerging market currencies are mixed. The ANC looks to have lost
its majority in South Africa and the rand is slightly lower today and is off
around 2% this week. It is the weakest in the emerging market space, closely
followed by the Mexican peso, which is off 1.9% this week. Mexico votes on
Sunday.
Bond yields are mostly firmer. In
Europe, benchmark 10-year yield are up 3-4 bp. That brings this week's increase
to around 12-15 bp. The 10-year US Treasury yield is slightly firmer at 4.55%. This
is about a nine-basis point increase on the week, but off the 4.63% high seen
mid-week. Asia Pacific equities were mixed. Japan, South Korea, and Australia
rose among the large markets. The index that tracks mainland shares in Hong
Kong, fell 1.1% today to bring the week's loss to 3.2%. Europe's Stoxx 600 is
slight changed buy firmer. It is off almost 0.8% this week, its second
consecutive weekly losses. US index futures are lower, and the S&P 500 and
NASDAQ are likely to snap a five-week advance barring a strong recovery today. Gold
is little changed, hovering around $2342. It settled near $2324 last week. July
WTI settled last week near $77.70. It traded between $77.50 and $80.60 this
week, with the low seen earlier today. It is slightly below $78 now.
Asia Pacific
Japanese economic data
confirmed a recovery is taking hold after the contraction in Q1. Still industrial output unexpectedly
slipped by 0.1% in April after rising 4.4% in March. Retail sales jumped twice
as much as expected. The 1.2% increase follows a 1.2% decline in March and were
up about 0.7% in the first quarter. The unemployment rate was steady at 2.6%. Meanwhile,
driven by higher energy costs, Tokyo's May CPI rose to 2.2% from the drop to
1.8% in April (from 2.6%) in March spurred by the high school tuition waiver. The
core rate, which excludes fresh food rose to 1.9% from 1.6%. This would be
consistent with a national core reading rising closer to 2.8% from 2.2%. This,
coupled with the yen's continued weakness, will likely strengthen the market's
conviction that the BOJ will hike rates by 10 bp at the end of July.
Separately, recall that earlier this week, the IMF revised up its forecast for
China's growth this year from 4.6%, a few weeks ago, to 5.0%, citing the strong
start to the year and recent moves to support the property sector. China's May
PMI disappointed. The manufacturing PMI surprised by falling back below the 50
boom/bust level to 49.5 a three-month low. The non-manufacturing PMI slipped to
51.1 from 51.2. It is the second consecutive decline. The composite also for
the second consecutive month. At 51.0 it is slightly above the year's low set
in January and February at 50.9. It finished last year at 50.3.
The market turned cautious
as the dollar approached JPY158, which is where the BOJ is believed to have
last intervened. This
coupled with the broadly softer US dollar and the biggest decline in 10-year
Treasury yields in two weeks (six basis points) pushed the dollar to a one-week
low against the yen slightly below JPY156.40. The greenback recovered, not with
the Japanese data, but a few hours later and reached session highs in the
European morning near JPY157.40. Data from the BOJ confirms JPY9.8 trillion (~$62.2 bln) intervention in the past month. This is largely in line with market expectations. The
Australian dollar recovered from a marginal new two-week low near $0.6590 and
returned to almost $0.6650 yesterday. Any higher, and sights would be
set on the recent high above $0.6700. It is trading in narrow range today,
roughly $0.6625-$0.6650. It settled slightly below $0.6630 last week. On the
same day that the Financial Times warns of downside pressure building on the
yuan, the yuan posted its biggest daily advance (~0.25%) in nearly three weeks.
The decline in US rates and the recovery of the yen, arguably, facilitated
the yuan's recovery. The dollar rose to nearly CNH7.2760, its highest level
since mid-April on Wednesday and traded at a six-day low (~CNH7.2475) yesterday.
The weak PMI and the setback for the yen saw the yuan give up about half of
yesterday's gains. Against the offshore yuan, the dollar found support a little
below CNH7.25 and is trading near session highs now near CNH7.2640. The PBOC
set the dollar's reference rate at CNY7.1088 (CNY7.1111 on Thursday), which is
the lowest this week. The average of Bloomberg's survey was CNY7.2398
(CNY7.2494 yesterday).
Europe
In an important way, the
tick up in the eurozone's May CPI does not matter. A rate cut by the ECB next week, its
first, is seen to be as done of a deal as these things get. In fact, in the
derivatives market is as confident that the ECB cuts as the Fed stands pat when
it meets on June 12. The 0.2% month-over-month increase in CPI translated into
a 2.6% year-over-year rate, up from 2.4% in April. The median in Bloomberg's
survey was for 2.5%. The core rate rose to 2.9% from 2.7%. Perhaps the reason
that there seems to be a disagreement among ECB officials going forward is that
the year-over-year rate may exaggerate the moderation in price pressures. The
0.2% increase in May means that at an annualized rate in the first five months
of the year, eurozone inflation rose by 4.3%. Consider the base effect going
forward. In June-September 2023, eurozone's CPI rose at an annualized rate of
3%. However, the real challenge will be Q4, when last year
prices fell at an annualized rate of 1.2%.
The euro briefly traded
below $1.0790 yesterday for the first time since May 14. We noted a converge of technical tools
pointing to important support near $1.0785. The euro sprung higher and traded
firmly throughout the European and North American session. It set session highs
near $1.0845 reached $1.0850 today in the European morning. Yesterday's
recovery was seemingly aided by the downward revision in Q1 US GDP. On the
upside, we note two sets of options expire today. The first is at $1.0875 for
almost 800 mln euros, and the other set is at $1.09 for around 850 mln euros.
The price action reinforces the importance of support around $1.0785 and
Tuesday's high near $1.0890 denotes the upper end of range. The euro snapped a five-week
advance last week and settled slightly below $1.0850. Sterling approached
support near $1.2675 and recovered to almost $1.2750 yesterday. It is
trading softer and in a narrow range of about $1.2700-$1.2735. A move above
$1.2750 leaves little standing in the way of a retest on $1.2800, the two-month
high set earlier this week. Sterling has not settled above $1.28 since March 11.
Sterling settled slightly above $1.2735 last week. A close above there today
would be the third consecutive weekly gain, the longest this year, and would be
the fifth weekly gain in the past six.
America
In this cycle, the US CPI
has stolen the thunder from the PCE deflator that the Fed targets. Based on the CPI and a few components in
the PPI, economists more accurately forecast the PCE deflator than CPI itself. The
takeaway is the headline and core PCE deflators are expected to be unchanged
from March at 2.7% and 2.8%, respectively. Little new information is contained
for investors or policymakers. Meanwhile, slower gains in both income and
consumption in April would be consistent with other high-frequency data, which
mostly disappointed in April. The GDP revisions warn of the risk of downward
revisions to the personal consumption expenditures in Q1. However, we suspect
that the weak data in April overstates the slowdown and expect May data to be
sequentially better. Also, although Q1 GDP softer than economists expected,
Chair Powell has commented that the real final sales to private domestic
parties (which excludes, trade, inventories, and government spending) was a
better signal and that was still solid, a little below 3%. Looking further
ahead, the median forecast in Bloomberg's survey for nonfarm payrolls has
slowly fallen and now is 175k, unchanged from April. The early forecast for May
CPI is for a 0.1% increase, which would be the smallest in seven months, but
would leave the year-over-year rate unchanged at 3.4%.
The US dollar gave back most
of Wednesday's gains against the Canadian dollar on Thursday. The upper end of this month's range was
around CAD1.3750 and it approached CAD1.3735 yesterday. It proceeded to move
lower and returned to CAD1.3660. It is marginally extended the move today,
recording a low slightly below CAD1.3655. Wednesday's low was near CAD1.3640. This
week's price action reinforces the importance of support near CAD1.36 and the
cap around CAD1.3750. The greenback's three-day surge against the Mexican
peso extended to MXN17.13 yesterday. The week's low was set Tuesday
near MXN16.6340. The dollar stalled in front of the 200-day moving average
(~MXN17.1560) and fell back to around MXN16.91 before finding solid bids. The
dollar has held above MXN17.00 so far today but has not traded much above
MXN17.07. Mexico goes to the polls Sunday. Even if the polls have consistently
shown Sheinbaum will most likely be elected president, the outcome of the
legislative election may be more important in term so the market's reaction.
Reviewed by Marc Chandler
on
May 31, 2024
Rating:
