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Overview
A consolidative tone is mostly the theme of the day. The revisions to the US CPI announced before the weekend add to the uncertainty and focus on tomorrow’s report. At the same time, investors watch ongoing air space activity that has led to a few objects being shot down over the US and Canadian airspace. Yet, the fear of escalation seems too mild still, but China’s ability to secure a rapprochement and leave its “wolf diplomacy” behind is strained, even as it renews imports (coal) from Australia. Its aerial harassment of Taiwan reportedly continued over the weekend.
Chinese bourses were the only large market in the Asia-Pacific region that advanced today. Despite the yen’s pullback, Japanese stocks were sold, with the Nikkei off almost 0.9%. Meanwhile, Europe’s STOXX 600 has recouped about half of last week’s 0.6% loss. US equity futures are narrowly mixed. US and European bonds have steadied after last week’s sharp sell-off. The 10-year US Treasury is little changed near 3.73%, while European benchmark yields are mostly 2-3 bp lower. The dollar is mostly softer, but mostly +/- 0.15%. The yen is the weakest of the G10 currencies. The greenback has recovered to within spitting distance of last week’s high (~JPY132.90), after slipping briefly below JPY130 before the weekend. Most emerging market currencies are softer. Gold is finding support ahead of $1850, its low in a little more than a month. March WTI is consolidating within the pre-weekend range. Tomorrow OPEC makes its monthly report, and the IEA follows on Wednesday.
Asia-Pacific
The market is still trying to grasp the meaning of the pre-weekend news that Bank of Japan deputy governor Amamiya turned down the promotion and that former deputy governor Ueda will formally get the nod tomorrow. First, if Amamiya was Prime Minister Kishida’s first choice and that represented continuity, it reveals the government’s preference. Second, as Ueda did in 2000, when the BOJ pre-maturely raised rates, as recently as last July, he cautioned against too early of an exit from the extraordinary monetary policy. Third, the reported appointment of Uchida as a deputy governor may also be telling. He was an important aide to Amamiya and supported BOJ Governor Kuroda. Finally, although there may not be a substantive change in policy in the coming months, led by Ueda, the BOJ may begin providing insight into the sequencing of an exit strategy.
Separately, Japan reports Q4 ’22 GDP tomorrow. It looks to have rebounded after a 0.8% contraction (at an annualized rate) in Q3. Government spending and a recovery in consumption likely offset weaker investment and inventory accumulation. Net exports likely contributed around 0.4%, rather than cut 0.6% as it did in Q3. Still, the focus is squarely on the outlook for monetary policy. It was a bear market for global bonds, and speculation that the BOJ was going to exit extraordinary monetary policy may have encouraged Japanese investors to sell around $180 billion of foreign bonds (~8%) of their holdings.
The dollar briefly dipped below JPY130 before the weekend, a six-day low, but recovered to settle near JPY131.35. The greenback’s gains have been extended through the Asia-Pacific session and through the European morning to reach slightly above JPY132.75. There are options for about $610 million at JPY133 that expire today. The high so far here in February has been JPY132.90. Some accounts are seen positioning ahead of tomorrow’s US CPI. The Australian dollar initially extended the pre-week slippage and recorded a low near $0.6890, before recovering to $0.6940. Recall that last week’s low was closer to $0.6855, the low since January 6. The highlight of the week is the employment report on Thursday. The greenback gapped higher against the Chinese yuan today, largely reflecting its pre-weekend gains. After closing at its highs near CNY6.8145, the US dollar has not traded below CNY6.8210 today. Today’s price action filled the old gap left on the charts from January 9. If the yuan were a freely floating currency, the dollar looks to have carved out a technical bottom that suggests near-term potential toward CNY6.90. The PBOC set the dollar’s reference rate at CNY6.8151, slightly above the median in Bloomberg’s survey for CNY6.8146.
Europe
During the 2021 local election in Berlin, a snafu prompted the city’s high court to rule a “do-over.” The problem arose from the marathon being held on the same day, which caused a logistical nightmare. Berlin has been plagued by an assortment of local problems while its government was led by a center-left coalition (SPD, Greens, and Die Linke). The SPD took the brunt of the voter dissatisfaction, and it ran a weak campaign to boot, according to the press. Yesterday, the CDU received the most votes (~28.2%), but it is not clear that it can put together a majority government of the center-right. A center-left government seems likely, but perhaps with a green mayor. As one would expect, there did not seem to be market reaction to the election results.
While the Berlin election was driven by local politics (despite the Financial Times headline), Italy’s elections in Lombardy and Lazio are being framed as a referendum on the right-of-center national government. The voting began yesterday and continues today. The Lombardy government is led by the League, and the drama here is whether Prime Minister Meloni’s Brothers of Italy gain ground at the expense of Salvini’s League. The Lazio region, which includes Rome, is a different story. The right hopes to seize control from the center-left, which has been in disarray since losing the national election last September. It is fragmented and has been unable to form a united front. On the national level, the fractious coalition has found common ground with its anti-immigration efforts, while toeing a mainstream line on other international issues, including aid to Ukraine. Meloni’s popularity and the support of the Brothers of Italy (~29% in recent polls vs. ~9% for the League and ~7% for Berlusconi’s Forza Italia) irk and threaten Salvini and Berlusconi. The Brothers of Italy garnered 26% of the vote in the general election. Ironically, success in these local elections, especially if the Brothers of Italy does well, could increase the tensions in the national coalition.
The euro traded poorly ahead of the weekend and extended marginally to almost $1.0655 (~1/10th of a cent below Friday’s low). It has recovered but is little changed on the day. There are large options that expire at $1.07 today and tomorrow (1.15 billion euros and 2.25 billion euros, respectively) that may help cap upticks. Sterling is trading with a heavier bias as well. It settled last week slightly above $1.2060 and has not been able to rise much above $1.2070 today. It looks set to retest last week’s low near $1.1960 and the 200-day moving average closer to $1.1945. A break could spur a test on last month’s low around $1.1850.
America
Ahead of the weekend, the US revised the CPI basket weights; the net impact is that it showed less deceleration in Q4 ’22 than the previous basket. This is a technocratic exercise and is not about the preferences of either the Biden administration or the Federal Reserve. A judgment call is how often the weighting should be adjusted. It had been every other year, which has been changed to annually. The adjustment shows the headline rate finished the year at 5.1%, not 4.3%, and the core rate is at 4.6% rather than 3.1%. The seasonal revisions showed CPI rise by a little less than 10% in Q1 ’22 at an annualized pace and slightly more than 10% in Q2. This slowed to about 2.5% in Q3 and around 1.6% in Q4 ’22. Even with a 0.5% in the headline rate in January (and 0.4% in the core rate), the base effect will show a slowing of price pressures and, barring a new shock, will continue through H1 ’23. In broad terms, as supply chains are repaired and demand normalizes, the disinflation in goods prices may have largely run its course. The next phase of the adjustment will likely come from services, and here, the BLS calculation of shelter costs lags what is happening on the ground.
The surge in nonfarm payrolls reported on February 3 helped spur the adjustment to US rate expectations that, in turn, helped fuel one of largest bounces in the US dollar since it topped out last September/October. Canada reported its own hellacious employment report before the weekend. It created 10x more jobs than the median forecast in Bloomberg’s survey project. Moreover, of the 150k jobs, slightly more than 121k were full-time positions. The participation rate jumped to 65.7% from a revised 65.4% (initially 65.0%), though the unemployment rate was unchanged at 5.0%. The risk is that the Bank of Canada’s pause, announced last month, is a bit shorter than expected. The risk of a rate a final rate hike around the middle of the year is being reflected in the swaps market. The US two-year yield rose almost 23 bp last week, the most since November. Canada’s two-year yield rose almost nearly 28 bp, the most since last August.
The US dollar recorded an outside down day against the Canadian dollar in response to the strong Canadian employment data before the weekend. There has been no follow-through selling today, and the greenback rose from about CAD1.3345 to CAD1.3380, where the 20-day moving average is found. A move above CAD1.3380 could see CAD1.3420. The US dollar peaked last week against the Mexican peso near MXN19.29. It was dragged down by the more aggressive than expected rate hike (50 bp), falling to about MXN18.64 ahead of the weekend before settling at MXN18.67. It is consolidating today, as if the market is catching its breath before challenging the support near MXN18.50 seen earlier this month. Separately, concerns about a change in Brazil’s inflation target and President Lula’s rhetoric about the central bank’s independence helped lift the US dollar a little above BRL5.30 at the end of last week, the highest in about a month. The greenback reversed lower and settled on its low near BRL5.2140. Support today is seen around BRL5.16-5.17.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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