Overview: With mixed elements, the market took the
US jobs data as relatively strong and took the dollar and US rates higher. The
EU Parliament election has shaken up European politics, with the Belgium
government collapsing and French President Macron calling a snap legislative
election for the end of the month. Holidays in China, Hong Kong, Taiwan, and
Australia made for thinner Asia Pacific trading, but the euro was sold and has reached to
one-month lows slightly below $1.0740 in the European morning. The dollar is mostly firmer today
against the G10 currencies and emerging market currencies. Ahead of Wednesday's
US CPI and FOMC meeting, the greenback is likely to remain firm.
Japanese stocks moved higher, but
that is the notable exception. Most other markets in the region fell, and
Europe's Stoxx 600 is off around 0.8%. US index futures are trading heavily. They
lost ground after the US jobs report after the S&P 500 and NASDAQ set
record highs the previous day. Bond markets are under more pressure. The
10-year JGB yield jumped seven basis points to 1.03%. European benchmark
10-year yields are mostly 4-9 bp higher, with the French bond yields rising
most, and Italy not far behind. Near 3.19% and 4.04%, respectively, both are
near six-month highs. The 10-year US Treasury yield rose nearly 15 bp after the
employment report, is up another couple of basis points today to 4.45%. The
stronger dollar and higher rates at the end of last week, sent gold sharply
lower and it has not recovered today. It settled below $2300 for the first time
in a month and has been unable to re-establish a foothold above it today. July
WTI is trading quietly inside the pre-weekend range between about $75.25 and
$76.00.
Asia Pacific
This week begins off in some sense
reacting to last Friday's US jobs report and the EU Parliament elections. China, Hong Kong, Taiwan, and Australian
markets were closed today for national holidays. There are three
highlights this week in the region: Australia's May employment report
tomorrow, and the BOJ meeting conclusion and China's CPI on Friday. Australia's
disappointing Q1 GDP reported last week has boosted the market's perception of
a rate cut this year, but a firm employment report, with a possible tick lower
in the unemployment rate, given the high inflation may keep the central bank on
the sidelines. The BOJ is unlikely to do anything but may hint at the next step
in the normalization process, slow bond purchases from the current roughly JPY6
trillion (~$38.5 bln) a month. It owns almost JPY600 trillion of JGBs, more
than half of the outstanding marketable debt, which is also roughly the size of
Japan's GDP. The BOJ's balance sheet has other assets, including equities and
is closer to 125% of GDP. In China, CPI is expected to have edged up and the
PPI may show slightly less deflationary pressures. Despite the speculation that
the PBOC will ease monetary policy as early as this month or next, the swaps
market sees this as a low probability event. The PBOC set the one-year
Medium-Term Lending Rate next Monday. It has been at 2.50% since last August.
Rather than cut the rate, we expect the PBOC to boost the lending through the
facility.
The dollar posted a bullish outside up day
against the Japanese yen on Friday by trading on both sides of Thursday's range
and closing above it high. Rising US rates again facilitated the dollar's recovery. The
greenback reached almost JPY157.10 ahead of the weekend before settling near
JPY156.75. It edged up to JPY157.20 in the holiday-thinned Asia Pacific
sessions. It has not been above JPY157.70 since the BOJ's intervention on May 1
(shortly after the FOMC meeting). Support is seen in the JPY156.50-70
area. The Australian dollar was pushed out of its $0.6600-$6700 range
ahead of the weekend. Support at $0.6680 held, but the close below
$0.6690 was the lowest settlement since May 8. A marginal news low near $0.6675
was recorded today. The next technical target is near $0.6540. The jump
in US yields and dollar rally, especially against the yen, warned that the yuan
would be under pressure today. Although the mainland market was closed
today, the offshore yuan was weaker. The dollar looks poised to approached
CNH7.2725 area against the offshore yuan. It is approaching the year's high,
set near CNH7.2825 in mid-April.
Europe
Given the ECB's rate cut last week and the
market sensitivity to the US CPI and FOMC meetings, the eurozone economic
considerations are out of focus this week. It is about politics and the post-mortem
of the European Parliament elections. Macron, in what seems to be a bold
and desperate move, called for snap legislative elections for June 30 (second
round July 7). Le Pen garnered more than twice the votes of Macron's party. Macron's
term as president has three more years, but poor showing will leave him
mortally wounded politically. The seven-party governing coalition in Belgium
has collapsed and new elections will be called. In Germany, the Afd received
more votes the Social Democrats. EC President von der Leyen looks likely to
secure a second term. The UK reports employment data tomorrow, and, given the
market's understanding of the BOE's reaction function, the average weekly
earnings often are more of the focus that the job growth or claimant count. On
Wednesday, the UK reports April GDP with the details. That said, the data is
unlikely to persuade the market that the BOE will cut rates next week.
Moreover, the market has had less than a 50% chance of an August cut since May
22 when the higher-than-expected April CPI was reported.
The euro was flirting with the upper end
of its recent range around $1.09 before the US jobs data sent it to the lower
end of the range near $1.08. Several technical considerations converge around $1.0785. New of
Macron's gambit pushed the euro through it in early Asia Pacific activity today. It has fallen further in Europe, slightly below $1.0740. The next area of support is seen around
$1.0700-20. Sterling shed a cent after the US jobs data. It
frayed the 20-day moving average (slightly below $1.2720 before the weekend)
and $1.2690 today in Europe turnover. A
break of the $1.2675 area would confirm a top is being formed. It would target
next the $1.2630-40 area.
America
The US labor market has many dimensions
and Fed Chair Powell has noted this. There is no single number that does for the labor market
what the PCE deflator does for inflation. There are often contradictory mixed
signals. The establishment survey showed a stronger than expected increase of
jobs while the household survey, which is the source of the tick up in the
unemployment showed a large decline. The key takeaway is that the data is
consistent with a gradual slowing of the labor market but is unlikely to move
the needle for Fed officials. The US labor market remains sufficiently resilient
that the Fed can take more time to ensure inflation is indeed on its way to the
target.
Canada's labor market is
slowing more than in the US and this reinforced the sense that the Bank of
Canada could deliver another rate cut before the Federal Reserve moves. The US two-year premium over Canada rose
20 bp last week and near 90 bp it is the highest since 2005. With last week's
close above CAD1.3750, for the first time since the end of April, there is
little technically that stands in the way of CAD1.3785-CAD1.3800 initially, and
then the year's high from mid-April near CAD1.3850. The broad dollar movement
(think Dollar Index), the general risk sentiment (think S&P 500) and rates
(policy divergence, two-year rate differentials) may be the main drivers. News
that the Trudeau government will call for a vote on its plan, still not
finalized, to increase the inclusion rate for capital gains tax is doing the
Canadian dollar no favors. Capital struck Mexico after voters gave the
Morena party and its allies sufficient representation to change the
constitution. The peso itself was crushed, dropping by about 7.5% last
week. The Bolsa lost almost 4%. Mexico's 10-year dollar bond yield rose 10 bp
last week compared to the four-basis point increase in the US Treasury yield.
The unwinding of the overweight position among asset managers will take some
time. In the week covering the first two sessions after the election,
speculators (non-commercials) in the futures market added about
3.7k contracts to the net long peso position. Many late longs likely bailed but
the point is the position adjustment is likely not over. At the end of last
week, the dollar approached the highs from Q4 23, a little below MXN18.50. News
that the Morena party did not capture a 2/3 majority in the Senate, offered the
peso initial support, but it is close enough that finding a few allies seems
possible. The dollar briefly traded below MXN18.2250 but rebound to approach
MXN18.47. Above MXN18.50, the next important chart area is not until
MXN19.00.
Reviewed by Marc Chandler
on
June 10, 2024
Rating:
