Overview: The markets are continuing to be impacted by the possibility that Fed officials planted a press report to put 50 bp cut back on the table after the market had moved away from it after the recent jobs data and CPI. In the Fed funds futures, there is around an 80% of a half-point move on Wednesday discounted and about an 80% chance of a second 50 bp cut this year. This has taken a toll on the greenback and cut short the technical correction to last month's slide. The US dollar is off against most of the world's currencies and has been sold below JPY140 for the first time since July 2023, though Japan, China, and South Korean markets were closed for local holidays. It managed to resurface above JPY140 in late European morning activity. The Canadian dollar continues to lag in the move against the greenback amid speculation that the Bank of Canada may also move by 50 bp in one of its last two meetings of the year. Emerging market currencies are mostly higher, led by central European currencies.
Asia Pacific equity markets were mostly higher, and Europe's Stoxx 600 is posting a small gain, which if sustained would be the fourth consecutive advance. US index futures are narrowly mixed. European 10-year yields are mostly slightly higher today, while the 10-year Treasury yield is practically flat at 3.65%. The two-year yield is off nearly two basis points to3.56%. Gold likes the weaker dollar and lower rates and has set a record high near $2590. After settling near session lows before the weekend (~$67.75), November WTI is trading firmer though within Friday's range. It is near $68.20. It rose 1.15% last week to snap a four-week, 10.5% drop.
Asia Pacific
Japan's markets were on holiday today, for Respect-for-the-Elderly. They will be closed next Monday for the autumn equinox. Chinese markets are closed today and will remain shut tomorrow for the mid-autumn festival. Remember Chinese markets are closed October 1-7, celebrating the national foundation, known as "Golden Week." South Korean markets also closed, and for the next two day for the Harvest Moon holiday. The Bank of Japan's meeting at the end of week is the regional highlight, though it is not expected to move, its hawkish bias will likely be underscored. It seems as if every BOJ official that has spoken embraces the need for higher rates barring a new shock. Still, it would be a surprise if the BOJ moved this week. Most, like us, see a move at the end of the year (December 19), though there is a small chance that another rate hike is delivered next month (October 31). Chinese rates could fall this week, especially after the recent softer than expected inflation readings and weak growth impulses. Nearly every high frequency data point, including CPI, PPI, industrial production, retail sales fixed asset investments, and bank lending were weaker than expected. We suspect PBOC will wait until after the Fed's rate cut before it eases again, and a cut in reserve requirements may be preferred over a cut in interest rates.
In the last six weeks of 2023, the dollar fell from nearly JPY152 to JPY140.25. The US 10-year yield fell by around 120 bp over roughly the same period from 5.0%. In thin markets today before the European session got under way, the dollar was sold through JPY140 (to ~JPY139.60) but recovered back above the previous support, while the US 10-year yield is at levels seen 15 months ago. Initial resistance is seen near JPY140.50. The Australian dollar initially extended its pullback from the late August high (~$0.6825) last week and fell to almost $0.6620. It enjoyed a strong bounce but ran out of steam ahead of the weekend near $0.6735, the 20-day moving average and a little beyond the halfway mark of the pullback. It rebounded to $0.6745 today, holding below $0.6750 where options for A$455 mln a expire today. An economy faltering by Beijing's own standards and a stock market at seven-month lows did not prevent the yuan from strengthening. The yuan is trading near its best level of the year. Although its gain this year is miniscule, it is one of the few currencies that have risen against the US dollar. After bouncing at the start of last week, the dollar returned toward the lows before the weekend against the offshore yuan. Even though the dollar recovered a bit and settled above CNH7.10, it was the lowest settlement of the week. With the strengthening yen, broadly weaker dollar, and lower US rates, the greenback has been sold to a five-day low near CNH7.0880 today. Last week's low was closer to CNH7.0735.
Europe
After last week's ECB rate cut, the eurozone moves off center stage this week. The decline in its July trade surplus reported earlier today is not surprising. Germany had already reported a dramatically narrowing of its trade surplus from 20.4 bln euros to 16.8 bln euros, the smallest since May 2023. Still, what should not be lost in the details is that eurozone's trade surplus, which drives the current account, has recovered dramatically this year. In the first seven months of the 2024, the eurozone recorded an average monthly surplus of 17.67 bln euro compared with a small deficit in the Jan-July 2023 period. The US two-year premium over Germany widened slightly last week after falling for the previous four weeks. At the end of Q2, the US premium was above 190 bp and has now near 133 bp. Norway's Norges Bank and the Bank of England hold policy meetings this week, but neither is expected to change policy. Norway's rhetoric may soften a little after the recent news of moderating inflation. If there is a surprise, among the four G10 central banks that meet this week, the Bank of England would be the most likely candidate. Officials have seemed to play down the likelihood of a cut this week after beginning the easing cycle last month. However, the market is confident of a cut in November and leans heavily toward another cut in December. August CPI will be released a day before the BOE meeting. The base effect warns of downside pressure in August and September before a more challenging Q4. Also, the UK economy unexpectedly stagnated in July for the second consecutive month, warning of sharper slowdown after the 0.6% expansion in Q2. The BOE had anticipated 0.4% growth in Q3.
The heightened uncertainty about the size of this week's Fed hike helped push the euro above $1.11 before the weekend, a new marginal high for the week. Although it stalled buying was seen into modest pullbacks. It is bid since the open today and is near $1.1130 in late European morning turnover. There are options for 2.15 bln euros that expire at $1.1145 today. Sterling has also returned bid after stalling near $1.3150 before the weekend, a five-day high. It reached almost $1.3195 in the European turnover. The next target is the high from September 6 (US employment) when it reached almost $1.3240, through a three-week downtrend off the highs is near $1.3220.
America
The markets converged to the Fed and had narrowed the odds of a 50 bp cut after the CPI. Some critics of the Fed have accused it of being a slave to the markets, but that has not been the case. Yet, many suspect that the Chair itself planted a press story last week to put a 50 bp cut back on the table. The derivatives market now has about an 80% chance of a 50 bp cut discounted. And more. The derivatives market is discounting 120 bp of easing over the three remaining meetings of the year. That is tantamount to at least one 50 bp cut and about an 80% chance of a second half-point move. The September Empire survey today is among the first data points (in addition to weekly jobs claims and mortgage applications) foe the new month and tends to elicit much of a market response. On the other hand, tomorrow's data are more substantive. Headline retail sales were likely held back by the drop in auto sales and weaker gasoline prices. Industrial production likely recovered after contracting by 0.6% in July. Still, without the help from manufacturing, where output is expected to have fallen for the second consecutive month, the uptick in industrial output may be restrained. Canada is expected to report soft CPI figures tomorrow, and it may take a downside surprise to boost speculation that the Bank of Canada could become more aggressive. The swaps market is discounting about 40% chance of a 50 bp cut at next month's meeting and is pricing in a little more than an 80% chance of a 50 bp hike in one of the last two meetings of the year.
The US dollar forged a bit of a shelf in recent sessions near CAD1.3565. It is from here that it launched a move higher to challenge last week's high almost at CAD1.3625. It is trading quietly today, largely in the pre-weekend range. It is held CAD1.36 on the topside and CAD1.3565 on the downside. Surpassing the (38.2%) retracement of August's slide (~CAD1.3635) would target the CAD1.3700 area. There are options for $1 bln at CAD1.3650 that expire today. The Mexican peso exploded in the last three sessions. The dollar has fallen by about 4.7% from last Wednesday's high (~MXN20.1475) to the pre-weekend low (~MXN19.1960). The dollar broke below the up trendline connecting the mid-July and mid-August lows and remains below it today (~MXN19.43). The news stream has been read constructively--the US presidential debate, the drop in US rates, the risk-on, S&P's indication that how Mexico selects judges will not impact its credit, and the judicial reform is now done. The carry itself makes the peso painful to short without it trending lower. The peso's gains were scored as the yen, too, rallied, indicating that something other than unwinding carry trades driving the exchange rate. Still, today, after falling to MXN19.1580, the greenback has recovered and is trading above MXN19.21 in the European morning.
Reviewed by Marc Chandler
on
September 16, 2024
Rating:
