Overview: The US dollar is weaker against all the
G10 currencies today but the Swiss franc. The backdrop seems fragile even
though a few regional bank shares have done better in after-hours trading and
Apple's earnings were received well by the markets. Due to seasonal factors and
other considerations, many are warning about a US jobs report, even though
ADP's estimate surprised to the upside earlier this week. Equities were mixed
in the Asia Pacific region, while Europe's Stoxx 600 is edging higher to pare
this week's losses. Its bank index is snapping a three-day drop and is up about
1.5%. US equity futures are firmer, will see the jobs report before the opening.
Despite a simply dreadful German factory orders report (-10.7%), European bonds
are selling off. Yields are 6-8 bp higher and the 10-year Gilt yield is up
nearly 10 bp.
The 10-year US Treasury yield
is up 1-2 bp near 3.40%. The two-year yield has steadied (up 2 bp to 3.81%)
after falling 35 bp over the past three sessions. Although emergency borrowing
from the Fed fell last week, it seemed mostly a question of reallocating in
light of the First Republic's takeover by JP Morgan. The Fed's balance sheet
continued to shrink (QT), falling by nearly $59 bln in the week through
Wednesday. The greenback has fallen against all the G10 currencies this week
going into the jobs report. The Antipodeans are the strongest (1.75%-1.90%),
while the euro is the weakest (~0.10%). The JP Morgan Emerging Market Currency
Index is up about 0.4% in what could be the first back-to-back weekly gain
since the end of March. After reaching nearly $2063 yesterday, gold is seeing
profit-taking that is pushing it below to around $2037. Yesterday's low was
near $2030.50. June WTI is snapping a four-day decline after reversing
yesterday from a plunging to $63.65. It is up about 2% today and is knocking on
$70.
Asia Pacific
Yesterday the Caixin
manufacturing PMI confirmed the slippage back into contraction
territory telegraphed by the "official" PMI. Today, Caixin reported growth in services
slowed to 56.4 from 57.8. The "official" reading had also moderated
to 56.4 from 58.2. The Caixin composite stands at 53.6, down from 55.0. China
is restricting access to economic data, which makes it difficult to triangulate
the high-frequency economic data for support or not. After China reported
stronger than expected Q1 GDP, many economists revised up this year's growth
prospects, but the disappointing PMI fanned speculation of a rate cut. The
first opportunity may be on May 15, when the one-year medium term lending
facility rate is set. It has been at 2.75% since it was shaved by 10 bp last
August. We are a bit more skeptical of the urgency for a rate cut. Reports
suggest spending over the May Day holiday was strong and the drop sharp drop in
oil prices is a net positive for the world's largest importer.
In its monetary policy
statement earlier today, the Reserve Bank of Australia lowered its inflation
and growth forecasts. It
seems to be signaling that the recent hike may be the last as the new forecasts
ae based on a 3.75% cash target rate, which now stands at 3.85%. The trimmed
mean inflation is now seen at 6.0% in the 12-months through June, down from
6.25% seen in the previous forecast three months ago. It anticipates inflation
falling to 4.0% by year-end (vs 4.25% previously). The new forecasts put GDP
growth at 1.25% this year, down from 2.7% last year, with consumption slowing
to 1.3% by the end of this year from 5.4% in 2022.
Tokyo markets remained
closed for the spring holidays and the yen is in a narrow range, consolidating
this week's gains (~1.65%). The greenback peaked Tuesday slightly above JPY137.75, and
pressured by sharply lower US rates, and fallen to JPY133.50 yesterday before
settling near JPY134.50. Today, the dollar is in less than half a yen range
(~JPY133.90-JPY134.30). There are options for nearly $1.4 bln at JPY133.50 that
expire today. The Australian dollar showed no reaction to the new central
bank forecasts that had been hinted at when the RBA hiked rates earlier this
week. It approached a two-week high today near $0.6745 and took out the
200-day moving average (~$0.6730). It settled last week near $0.6615 and has
risen every day this week, which it last did in the final week of 2022. The upper
end of the two-month range is around $0.6800 and the daily momentum indicators
are constructive. Initial support is seen in the $0.6700-20 area. The
Chinese yuan is little changed today. The greenback is in a narrow range
between roughly CNY6.9055 and CNY6.9155, inside yesterday's range. It settled
near CNY6.9125 at the end of last week. Mainland markets were closed
Monday-Wednesday. The reference rate was set at CNY6.9114 today compared with
expectations (median in Bloomberg's survey) or CNY6.9121.
Europe
The ECB delivered the
quarter-point hike that was widely expected, and by characterizing inflation
"too high for too long", it was understood to confirm market
expectations for another hike at the mid-June meeting. Lagarde was clear that the ECB was not
pausing. The swaps market leans toward another hike in Q3. The managed
reinvestment of the Asset Purchase Program (APP) is helping reduce the ECB's
balance sheet by 15 bln euro a month, but starting in July it will stop the
reinvestment of maturing proceeds entirely. This means a 25 bln euro reduction
in bond buying a month. The maturing issues from the Pandemic Emergency
Purchase Program (PEPP) will continue to be reinvested through the end of next
year.
Separately, after Germany
reported that March retail sales plunged 2.4% (median forecast in Bloomberg's
survey was for a 0.4% gain), it was clear that there were downside risks to
today's aggregate retail sales data. Eurozone retail sales fell by 1.2%, and small compensation
was that the February decline of 0.8% was revised to -0.23%. Recall that
consumer spending slid by 1.3% in France (the median in Bloomberg's survey was
for a 0.5% increase). As we have seen with other recent data, the periphery is
doing better than the core. Spanish retail sales rose 0.5% in March. Italy's
was reported today, and it fell by 0.5%. Also, Germany shocked today with a
whopping 10.7% collapse of factory orders. This is five-times the decline
expected. The auto sector was particularly hard. Auto and part orders slumped
12.2%, which reflects a 7.3% decline in domestic orders and a 14.5% drop in
foreign orders. Sharp declines were also report for computers/electronics
(-7.9%) and engineering (-5.9%). Germany reports industrial production figures
on Monday, and after today's dismal news, there is downside risk to the 1.6%
decline economists project.
The UK economy continues to
show resilience. As we
noted yesterday, the final reading of the April PMI (54.9) was unexpectedly
revised higher from the preliminary estimate (53.9) and is the highest since
last April. Separately, mortgage approvals rose to a five-month high in March
and consumer credit rose more than expected. Split roughly evenly between
households and businesses, nearly GBP11 bln was withdrawn from banks in March
amid US and Swiss banking woes. Still, in local elections, the Tory Party was
not rewarded for the economic improvement. All the results have not been
tabulated, but among the first 1600 results, the Tories lost 200 seats, which
seems be on pace with worst-case scenarios. Labour won more than half of those
seats, and the Liberal Democrats made inroads into Tory territory in the
south.
The poor eurozone data
hardly impacted the euro, which is holding above $1.1000 and trading well
within yesterday's range (~$1.0985-$1.1090). It settled near $1.1020 last week. The 20-day moving
average is near $1.0990 today, and although it had been penetrated on an
intraday basis earlier this week, it has not closed below it since March 16. There
are options for 1.7 bln euros at $1.10 that expire today. Sterling is
trading firmly and reached almost $1.2635, its highest level since early last
June, when it peaked near $1.2665. It finished last week slightly
above $1.2565. After falling for the first two days of the week, it is
advancing today for the third consecutive session. The BOE meets next week, and
the resilience of both the economy and inflation will likely see a hawkish hike.
America
The Federal Reserve's June
decision looks to be a function of three variable: inflation, labor market, and
the extent that credit tightens. Today's data speaks the labor market and next week inflation. Bloomberg's
survey found a median expectation for nonfarm payrolls to rise 182k after a
236k increase in March. The ADP estimate of private sector employment does not
do a good job tracking the BLS estimate on a monthly basis, and after the
methodological change recent announced, its tracking ability on a medium-term
basis is an open question. Still, the ADP estimate of 296k was nearly twice the
expectation, and some observers will say the whisper number (which seems like
intuitive guesses) will be higher than the Bloomberg median of 156k for the
private sector job growth. The unemployment rate is seen rising to 3.6% from
3.5% while hourly earnings are seen steady at 4.2% year-over-year. The
participation rate is also seen unchanged at 62.6%. Federal Reserve Chair
Powell was clear that from the Fed's point of view the labor market remains
strong, and citing various measures, labor costs are in excess of what is
consistent with the Fed's inflation target. We note that nonfarm payrolls
increased by more than one million in Q1. That compares with 852k in Q4 22.
Canada also reports April
jobs data. The
median forecast in Bloomberg's survey is for an increase of 20k jobs. In Q1,
Canada filled 206k posts, or which a little more than 170k were full-time
positions. This is compares with 165k jobs (~183k full-time) in Q4 22. This is
pretty impressive given that Canada's population is about an eighth of the US
population. That said, the bar to get the Bank of Canada to renew is tightening
cycle after announcing a "conditional pause" in January seems high
and too high to be met by today's jobs report, even though it will not see another
jobs report before it meets on June 7. The next report with the heft to impact
expectations is the April CPI due May 16.
Some observers are
attributing the recovery of the Canadian dollar to comments from Bank of Canada
Governor Macklem who warned that inflation too high. However, he also noted that price
pressures were easing in line with the central bank's forecasts. He said that
its focus was on employment growth, wages, corporate pricing behavior and
short-term inflation expectations. There was no adjustment in rate expectations
in response but the 0.55% gain in the Canadian dollar was the most since late
March. Follow-through CAD buying today has pushed the US dollar through
CAD1.3500 for the first time in two weeks. The CAD1.3485 area corresponds to
the halfway point of the US dollar's rally from the mid-April low near
CAD1.3300. Some of the USD selling may be related to expiring options. The next
important chart area is around CAD1.3450 and is also where the 200-day moving
average is found. For its part, the Mexican peso is trading quietly, a
little above six-year high set earlier this week. The greenback has
steadied after being sold to MXN17.8315 in the middle of the week. To be
anything of note, the US dollar needs to resurface above MXN18.0350, and
ideally MXN18.08.
Reviewed by Marc Chandler
on
May 05, 2023
Rating:
