by Marc Chandler
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Overview: The US budget agreement passed a House committee vote by 7-6 and the bill is scheduled to be voted on by the entire House today before the Senate take it up with the idea of passing it Monday. The procedural step plus the weakness of China and Japanese data and soft CPI figures from Europe has lifted the greenback against all the major currencies. The euro and Australian dollar have been sold to new lows, while the dollar holds ever so slightly below JPY140. Despite a stronger-than-expected Q1 GDP (4.0% vs. 3.5%), the Turkish lira leads emerging market currencies lower. The weakness of the euro and escalating hostilities in Kosovo is weighing on the central European currencies. The Philippine peso and Mexican peso have edged higher and stand out among the emerging market currencies today.
The weaker growth impulses send Asia Pacific stocks lows and snapped a three-day advance in MSCI regional index. Europe's Stoxx 600 is off for the third consecutive session and the sixth in the past seven. US equity futures are trading with a slightly heavier bias. European benchmark 10-year yields are off 8-9 bp with some soft inflation reports in hand. The 10-year US Treasury yield is around four basis points lower to 3.65%. It peaked at the end of last week near 3.86%. Gold posted a potential key reversal to the upside, recovering from almost $1930 to $1963.50. It is stalling today after nearing $1965.50, as it is pulled between falling rates and a stronger dollar. July WTI fell 4.4% yesterday to almost $69 a barrel. The selling pressure was not satiated, and it is trading below $68.50 now. OPEC is meeting in a few days and the sharp fall in prices may encourage a few to enact more voluntary cuts.
Asia Pacific
Japan's economy grew by a stronger than expected 1.6% at an annualized pace in Q1 and the question is whether the growth impulses carried over into Q2. Today's report for April retail sales and industrial production figures give some evidence Q2 is off to a slower start. Retail sales fell 1.2% month-over-month in April. Economists had expected a 0.5% rise. It is the first decline in five months. Industrial production also disappointed. It fell by 0.4%. The median forecast in Bloomberg's survey looked for a 1.4% gain. After a sharp 5.3% drop in output in January, industrial production bounced back 4.6% in February and another 1.1% in March. Chip fabrication equipment and aircraft parts production slowed, while the auto sector output improved.
China's May PMI disappointed and underscores fears that the Covid recovery was short and shallow. At 48.8 (vs. 49.2 in April), the manufacturing PMI was below the 50 boom/bust level for the second consecutive month. It has spent the first quarter above it after being below it in Q4 22. Economists in Bloomberg's survey had looked for a small bounce. The non-manufacturing PMI slowed more than expected: 54.5 (from 56.4) and expectations for 55.2. The composite eased to 52.9 from54.4. The Caixin manufacturing PMI will be reported tomorrow. It stood at 49.5 in April and peaked at 51.6 in March, the highest since last June.
Australia's newly minted monthly CPI rose for the first this year in April. The year-over-year pace rose to 6.8% from 6.3% in March. The median in Bloomberg's survey was for 6.4%. This measure peaked in December at 8.4%. The surprise has boosted the risk of another rate hike. The central bank meets next week, and the odds of a hike risen to a little more than 20%, the most this month. Still, a hike is nearly priced in for the August 1 meeting.
The dollar's potential key reversal yesterday against the yen saw follow-through selling today to almost JPY139.30. However, it has recovered smartly in the European morning back to almost JPY140. It has stretched the intraday momentum indicators. US rates are also softer, which if sustained may help cap the greenback. A close above JPY140.10-30 would lift the greenback's tone. After stabilizing in the first two sessions of the week, the Australian dollar has broken down to new lows near $0.6475. There are options for about A$570 mln at $0.6450 that expire today, which is near the lower Bollinger Band. Still, there appears to be little meaningful support ahead of $0.6400. Disappointing Chinese data and the broad strength of the dollar saw the Chinese yuan weaken to new six-month lows. The dollar pushed above CNY7.11 after settling near CNY7.08 yesterday. The yuan has fallen in 15 of the past 18 sessions. The PBOC set the dollar's reference rate today slightly below expectations (CNY7.0821 vs. CNY7.0824). Yesterday's fix was at CNY7.0818.
Europe
The focus is eurozone inflation. The aggregate preliminary estimate for May will be reported tomorrow. Spain's national figure on Tuesday may have set the tone. The EU harmonized measure fell by 0.2% in May. The median forecast in Bloomberg's survey was for a 0.2% increase. The year-over year rate fell back to 2.9% after April's spike to 3.8% (from 3.1% in March). Today, Germany and France reported their figures today. France's harmonized measure unexpectedly fell by 0.1%. It is the first decline this year after rising by an average of about 0.8% in the first four months of the year. The year-over-year rate eased to 6.0%, the least since last May. Germany's EU harmonized measure also rose by an average of around 0.8% in the first four months of the year. The states' reports were soft, and suggests that the EU harmonized national figure, which is due shortly, may undershoot expectations for a 0.2% increase. There are downside risks the median forecast in Bloomberg's survey for a 6.7% year-over-year rate (from 7.6% in April).
The euro recovered from the yesterday's pushed below $1.0680 and close near $1.0735. However, selling pressure re-emerged in Asia, sending it to $1.0660 where it is finding some bids in the European morning. Some pressure on the euro may have come from option-related selling: options for a billion euros at $1.0675 expires today. The large net long position in the futures market was scaled back but remains historically large. The lower Bollinger Band is found slightly below $1.0625 today. The US-German two-year rate differential is near 173 bp, the most since the banking stress emerged in March. The $1.0680-$1.0700 offers nearby resistance. Sterling is trading heavily, off around a half-of-a-cent, but is within yesterday's range. It saw a low yesterday near a little above $1.2325. Last week's low was closer slightly below $1.2310. It too found a bid in the European morning. Initial resistance is seen $1.2380-$1.2400.
America
In the US, employment moves front and center. Starting with today's April JOLTS report is expected to show a continued decline in job openings. Tomorrow's ADP's May private sector jobs estimate is projected to slow to 170k from almost 300k. It has been alternating between increases and declines this year and has averaged 204.5k this year. In the first four months of the last year, ADP estimated that private sector payrolls increased by nearly 347.5k jobs. The comparable numbers from the BLS establishment survey are 225k average in Jan-Apr this year and 473k in the first four months of 2022.
The Beige Book will be released later in the session as input into the June 13-14 FOMC meeting. The pendulum of market sentiment has swung from pricing in steady policy as recently as May 11 to discounting slightly more than a 60% chance. A quarter-point hike is fully discounted at the July 25-26 meeting. Today, two Fed governors speak (Bowman and Jefferson). Boston Fed President Collins (non-voter) and Philadelphia Fed President Harker (vote) speaks, as well. Note that the May CPI will be reported as the June FOMC meeting gets under way. Given the base effect (CPI rose 0.9% in May 2022 and 1.2% in June), making some conservative assumptions, the year-over-year rate is likely to fall to around 3.5% in by the end of H1 23. That said, the comparison will be considerably more difficult in H2 23 as headline CPI rose at an annualized rate of 2.8% in H2 22.
Canada reports March and Q1 GDP today. The Canadian economy began the year on a strong note, with output rising by 0.6% in January. It slowed to 0.1% in February. The median forecast in Bloomberg's survey calls for a 0.1% contraction in March. For the quarter, the Canadian economy is seen expanding by 2.5% at an annualized rate after stagnating in Q4. There has been a dramatic swing in rate expectations in Canada. The market is pricing in about a 30% chance of a hike next week, up from less than a 10% chance at the end of April. A hike is fully discounted by the end of Q3. As recently as May 4, indicative pricing in the swaps market had greater than a 50% chance of a cut. The year-end policy rate is seen near 4.75%, up from 4% on May 12.
Mexico's central bank publishes its quarterly economic outlook today. It will likely reinforce expectations for a prolonged period that the overnight target rate will remain at 11.25%. After the Banxico meeting earlier this month, officials saw average inflation falling to 4.7% in Q4 and 3,1% next year. The core rate is seen averaging 4.9% in Q4 23 and 3.1% in 2024. Today's forecasts are unlikely to deviate much from the post-meeting indications. Given the relatively strong Q1 performance, this year's growth forecast may be revised higher from the current 1.6% projection. This implies that the output gap is closing faster than the central bank anticipated.
The US dollar closed slightly above CAD1.3600 yesterday and reached CAD1.3650 today. Last week's high was about CAD1.3655 and the high from the end of April was just shy of CAD1.3670. Initial support is now seen near CAD1.3625 and a close below CAD1.3600 would suggest a near-term top for the greenback. However, a close above the CAD1.3655 area could signal a move toward CAD1.3700-30. The US dollar also recovered yesterday in North America against the Mexican peso. Support near Monday's low (~MXN17.5350) held and the dollar bounced to MXN19.6930. It rose a little more today to MXN17.7050 where offers emerged and sent it back to about MXN17.6355. A convincing move above MXN17.71 could spark gains toward MXN17.80, but we favor a consolidative session.
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