Overview: The
dollar is trading heavily against the G10 currencies and most of the currencies
from emerging markets. The market expects softer US CPI (and retail sales)
today. Any decline in the year-over-year core rate would put it at its lowest
level since April 2021. Still, this has been anticipated, and the market seems
vulnerable to "sell the rumor, buy the fact" type of activity. After
all, the Fed will see another employment and CPI report before the June 12
meeting. Moreover, comments by Fed officials have encouraged the market to push
out the first cut to September (~85%) and about an 80% chance of a second cut
before the end of the year. Of course, the dollar would likely rally on an
unexpected increase in CPI too.
US interest rates are softer today. The
two- and 10-year Treasury yields have eased in three of the four sessions
before today. Near 4.42%, the US 10-year yield is at its lowest level since
April 10, the day that March CPI was reported. European benchmark 10-year
yields are 5-7 bp lower today. That leaves peripheral benchmark yields lower
over the past three months, while German and French yields are up a dozen basis
points. Equities are mostly firmer today. China, Hong Kong, and India are the
main exceptions from the Asia Pacific region. Europe's Stoxx 600 is extending
its advance for the ninth consecutive session, while US index futures are
little changed. Softer yields and a weaker dollar have lifted gold to a new
high for the week near $2375. June WTI has steadied after falling 1.4%
yesterday. It is nearly flat on the week near $78.25. July copper is extending
its rally to new record levels. It is up 3% today after a 2.7% rally yesterday.
It has not fallen since last Wednesday.
Asia Pacific
The Biden administration estimates that
the various tariffs announced yesterday would impact around $18 bln of imports. Last year, the US imported almost $450 bln
of goods from China, and total goods imports were around $3.1 trillion. Many
media accounts accept at face value that the goal is to boost domestic
manufacturing in critical industries. On the contrary, there are good reasons
to suspect the tariffs are more show than substance. They are more targeted
than the 60% across-the-board tariffs that Trump has floated. Still, the
quadrupling of tariffs on electric vehicles, for which the US hardly imports
any from China directly, is unlikely to boost US domestic production or US
inflation. Separately, as widely expected, the PBOC left is benchmark one-year
Medium Term Lending Facility rate unchanged at 2.50% and replaced the maturing
CNY100 bln of loans with CNY125 bln. Japan reports Q1 GDP first thing tomorrow
and a small contraction is expected, from which it already appears to be
recovering. Australia reported wages rose by 0.8% in Q1 for a 4.1%
year-over-year pace from 4.2%. It is the first easing since late
2020. Tomorrow, Australia reports April employment data. A net gain of
jobs is expected after a loss of 6.6k in March. However, full-time jobs rose
nearly 28k and that may not be repeated. The unemployment rate is expected to
tick up to 3.9% (from 3.8%). It was at 3.7% last April.
The one-way market in the yen was
threatening again. The
dollar rose in six of the past seven sessions coming into today. Over that
seven-day span, the US 10-year yield has slipped a net of five basis points.
The dollar traded quietly in Asia before breaking down in early European
turnover. Selling accelerated when JPY156 was yield, perhaps related to the
expiration today of $1.25 bln options struck there. The greenback fell to about
JPY155.60, a near the week's low set on Monday closer to JPY155.50, before
steadying. The intraday momentum indicators are stretched. The
Australian dollar is in the upper end of its recent range. It is
testing the hurdle around $0.6650, which it has not closed above since
mid-January. The momentum indicators are getting stretched (after the 3-cent
rally in the past month). Be careful of a false break. Initial support is seen
in the $0.6620-30 area. The PBOC set the dollar's reference rate at
CNY7.1049 (CNY7.1053 yesterday). The average in Bloomberg's survey was
CNY7.2274 (CNY7.2309 yesterday). The yuan is strengthening today for the first
time in four sessions. The greenback has been sold from CNH7.2465 yesterday to
CNH7.2173 today. A break of CNH7.2150 could spur a move toward CNH7.2060.
Europe
Today's eurozone data is old news. Growth in Q1 was confirmed at 0.3% and
more details were made available. Consumption was little changed from Q4 23
(0.6%), but government spending increased (1.7% vs. 1.2%) but gross fixed
investment slowed (0.6% vs. 15%). The contraction in exports and imports
moderated. Industrial output rose by 0.6% in March after the 0.8% gain in
February was revised to 1.0%. It recouped half of January's 3.2% decline.
Sweden, which became the second G10 country to cut interest rates last week,
reported April CPI figures earlier today. The headline rate slowed to 3.9% from
4.1%, but the underlying rate quickened to 2.3% from 2.2%. Still, the swaps
market prices a little more than an 80% chance of a cut at the August 20
meeting. The Riksbank meets on June 27 and market has about a 30% chance of a
cut discounted. The minutes from the recent meeting point to two more cuts this
year.
The euro reached $1.0825 in North America
yesterday, its best level in a month. It managed to settle above $1.08 and the 200-day moving
average for the first time since April 9. The $1.0835 area, which it has tested
today, represents the (61.8%) retracement of the euro's loss since the March 8
high (~$1.0980) and $1.0870 is the halfway mark from the high set at the end of
last year (~$1.1140) and the mid-April low of the year (~$1.06). Sterling
posted a bullish outside up day, trading on both sides of Monday's range and
settling above Monday's high. It approached but remained below $1.26,
which is the halfway point of its decline from the year's high on March 8
(~$1.2895). Follow-through buying today lifted sterling to almost $1.2620. Some
buying may be related to the GBP560 mln $1.26 options that expire there
tomorrow. The next retracement target is near $1.2665, and last month's highs
were set slightly above $1.27.
America
US April CPI and retail sales are keys for
market psychology, though before the Fed meets next month it will see the PCE
deflator, which it targets, and the May employment and CPI. Still, expectations for a June hike are de
minimis, though as recently as early February, the futures market had two cuts
discounted. Now nearly 80% chance of a cut in September and about a 66% chance
of a second cut this year. We think the US economy has lost some momentum after
the strong final sales to domestic private parties in Q1 24 (strips away trade,
inventory, and government spending). It is still early in the Q2 data cycle to
put much weight on the Atlanta Fed's GDP tracker, which will be updated after
today's data. If our suspicions are right, we need to see confirmation in
consumption. Retail sales accounts for around 30%-40% of US consumption. We
know that headline retail sales will likely be lifted by the stronger auto
sales, but slowing consumption will likely see be evident. Excluding autos, the
median forecast in Bloomberg's survey looks for a 0.2% increase (1.1% in March)
and the core measure (excludes autos, gasoline, building materials, and food
services) is seen slowing to 0.1% from 1.1%. Canada reports housing starts and
existing home sales but will be overshadow by the US data. The market will be
more sensitive to next Tuesdays Canadian CPI report.
The US dollar tested last week's low
against the Canadian dollar (~CAD1.3635) before stalling yesterday, but the
greenback's heavier today has seen it extend the move to CAD1.3625 today. The month's low was set on May 3 near
CAD1.3610. Although the greenback recovered yesterday, it spent little time
above Monday's low (~CAD1.3660). These past three sessions forged a cap in
front of CAD1.3700. Today's high was near CAD1.3655. The Mexican peso
traded heavily yesterday and posted its first back-to-back decline in
two-and-a-half weeks. It is flat today. Leaving aside Argentina, the
other major LATAM currencies gained on the US dollar yesterday. Some attributed
the peso's underperformance to ideas the Banxico will cut rates before the Fed
again. That may be likely, but its overnight rate is 11%, higher than most in
the region, and others in the region will likely cut rates again too. We
suspect it was more about positioning and the US dollar's downside momentum
stalled on Monday. Last week's dollar high was near MXN17.0350. Yesterday's
high was about MXN16.8780. Argentina cut rates for the sixth time this year
(40% from over 100% at the end of 2023) following news that April CPI rose 8.8%
month-over--month after 11% in March. In Brazil, President Lula fired the head
of Petrobras following a dispute over dividends.
Reviewed by Marc Chandler
on
May 15, 2024
Rating:
