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Market Awaits US Data and Leadership

Market Awaits US Data and Leadership

Overview:  The dollar staged a major technical reversal yesterday, in a dramatic reaction to a considerably weaker JOLTs report than expected, spurring a large drop in US interest rates. And this is despite press reports that the participation rate in the survey is half of what was three years ago. We suspect the price action said as much about market positioning as it did about the data. The path to the US jobs data on Friday goes through tomorrow's personal consumption figures, which will speak to robust demand. Follow-through selling of the dollar has been limited in Asia and the European morning. US leadership (and data) are awaited. The euro and sterling are firm, but the other G10 currencies are mostly softer. German states CPI may point to smaller than expected slippage in the national figure (median forecast in Bloomberg's survey is for a 0.3% month-over-month increase, which would allow the year-over-year rate to ease to 6.3% from 6.5%). This and the small rise in Spain's CPI (2.4% vs. 2.1%) have increased the perceived odds of an ECB hike next month. Emerging market currencies are mixed. Hungary and Mexico lead the advancers, while the Turkish lira and South African rand pace the declining EM currencies.

Most of the large Asia Pacific bourses advanced. Reports that Chinese mortgage and deposit rates could be cut today initially helped lift Chinese stocks both on the mainland and in Hong Kong, but the buying dried up and the CSI 300 and Hang Seng finished slightly lower. Europe's Stoxx 600 is falling for the first time this week, giving back about 0.3% after rallying around 1.8% in the past two sessions. US index futures are trading with a bit softer after yesterday's strong advance. European bonds are selling up and benchmark 10-year yield are mostly 6-7 bp higher. Gilts are holding in a bit better, and the 10-year yield is up two basis points, in line with 10-year US Treasuries, which now yield about 4.14%. Despite the rise in rates and the lack of much follow-through dollar selling, gold is consolidating yesterday's $17 rally. It is in an exceptionally narrow $3 range near yesterday's high slightly above $1938. October WTI is firm, extending yesterday's gains toward $81.75. Another sharp drop in oil inventories was reported by API. If the 11.5 mln barrel drop is confirmed, US private oil stocks would be the lowest in a year.

Asia Pacific

Australia's CPI slowed more than expected in July. Price pressures eased to 4.9% year-over-year from 5.4% in June. The median forecast in Bloomberg's survey was for dip to 5.2%. Recall that Australia traditionally reports inflation on a quarterly basis, and only recently has made a monthly report. In Q2, Australia's quarterly CPI was at 6.2% down from 7.0% in Q1. The monthly calculation peaked last December at 8.4%. The monthly CPI was at 7.2% last July. Bullock takes over from Lowe toward the middle of September, after the next RBA meeting (September 5).

First thing tomorrow, China releases the August PMI. It would hardly be a surprise to see softer data. Chinese officials continue to drip new measures into the market but still are relying on soft-power guidance, like encouraging funds to buy for shares than they sell or refrain or reduce dollar purchases. More monetary and fiscal policy efforts are likely. Japan reports July retail sales. Recall that retail sales in June fell by 0.4%, but subsequently were revised to -0.6%. Retail sales fell by an average of 0.1% in Q2, the first quarterly decline since Q2 21. The Q2 GDP figures showed a 2.1% contraction in consumption, nearly offsetting the lion's share of the first quarter's 2.5% gain. With the help of increased inbound tourism, retail sales are expected (median forecast in Bloomberg's survey) rise by 0.8%.

There has been no follow-through selling of the US dollar against the yen, yuan, or Australian dollar today after yesterday's JOLTS-led sell-off. The dollar posted a key reversal against the yen, making a new high for the year and then reversing and settling well below Monday's low. It reached about JPY145.65 yesterday but rebounded to JPY146.55 today. It effectively has retraced about half of yesterday's decline. Initial resistance now is seen closer to JPY146.70-75. The Australian dollar rallied from $0.6400 to almost $0.6490 yesterday, slightly above last week's highs and settled above the 20-day moving average for the first time since July 27. It too has retraced nearly half of yesterday's gains (~$0.6445). Even though the softer CPI reinforces the idea that the RBA remains on hold next week, the Aussie looks poised to rechallenge yesterday's highs in North America. The cut in mortgage rates and deposit rates initially helped Chinese stocks, though the buying dried up, the yuan remains soft. The US dollar has largely been confined to yesterday's range (~CNY7.28-CNY7.2955). The PBOC set the dollar's reference rate at CNY7.1816, slightly weaker than yesterday's fix (CNY7.1851), but well below average projections in Bloomberg's survey (CNY7.2741).


The focus turns to eurozone inflation. Ahead of tomorrow's aggregate figure, Spain and German states have reported their August CPI. Spain's harmonized measure rose by 0.5%. At an annualized rate, Spain's CPI has risen by 4% in the three months through August. The year-over-year rate stands at 2.4%, up from 2.1% in July. The year's high was set in February at 6.0% and last year's high was 10.7% (July 2022). 

Germany states' CPI is a different story. They are mixed. Six states have reported, and four saw an increase in the year-over-year rate and two fell. The EU harmonized measure stood at 6.5% in July. The states' reports seem consistent with the national rate rising by 0.4%, which, given the base effect, would allow the year-over-year rate to ease to 6.4%. A 0.4% increase in August means that at an annualized rate, German CPI rose by about 5.2% in the past three months, down from 6% in the previous three months. The odds of an ECB rate hike have edged up to the highest in a week, around 53%. At the start of the week, the swaps market has slightly more than a 40% chance discounted. 

Yesterday's euro price action was the most impressive in more than a month. It staged an outside up day and settled above the high recorded while Fed Chair Powell was speaking at Jackson Hole at the end of last week (~$1.0840) to record a six-day closing high. There are options for about 1.3 bln euros at $1.09 that expire today. That is also where the 20-day moving average is found, and the euro has not closed above in a month. The euro found support near $1.0855. Sterling also posted a bullish outside up day yesterday. It did not close above the Powell-inspired high (~$1.2655) but did settle firmly, nonetheless. Sterling has edged a little higher today to reached $1.2670, after support ahead of $1.2600 held. Today's low is about $1.2620. Nearby resistance is seen in the $1.2675-$1.2700 area.


The unexpectedly weak JOLTS report saw the dollar and US rates reverse lower. Not only did the July reading come in well below expectation (8.827 mln vs. median forecast in Bloomberg's survey for 9.50 mln), but the June estimate of 9.582 mln was revised to 9.165 mln. The number of job openings is now the lowest since March 2021. Job openings have fallen every month this year but April. The "quits rate", the percentage of voluntary job leavers of total employment fell to 2.3%, the lowest since the start of 2021, which also speaks to the easing of labor market conditions and the sense that jobs are less ample. The US labor market remains in focus. The ADP private sector employment estimate is not a particularly reliable guide to the official data, the market still has responded dramatically to surprises. The ADP has consistently exaggerated the private sector jobs growth this year. The difference over the past three months has averaged 165k. 

The US also reports the advanced merchandise trade figures for July. It is expected to have widened for the first time in three months. In fact, given the strength of the dollar, and, especially, the growth differentials, that there has not been greater deterioration is surprising. In the H1 23, the advance merchandise trade deficit averaged $90.3 bln. In H1 22, the average was about $106.3 bln. With Q3 two-thirds over, revisions to Q2 GDP are more for economists than businesses or investors. Indeed, for thinking about Q3 GDP, the wholesale and retail inventories are more important. The former has been trending lower, only rising in February during H1 22. Retail inventories have been trending higher. Tomorrow's report on July consumer expenditures will be more important. At the same time, it illustrates why the GDP trackers need to be taken with the proverbial grain of salt this early in the data cycle.

The Canadian dollar was the worst performing G10 currency yesterday, gaining 0.3% against the US dollar. Still, the greenback recorded a bearish outside down day against the Canadian dollar. There has been no follow-through US dollar selling. It has recovered from about CAD1.3550, yesterday's low to almost CAD1.3580 today. Initial resistance is seen in the CAD1.3585-CAD1.3600. If the greenback put in a double top (last Friday and yesterday near CAD1.3640, the neckline is Monday's low around CAD1.3570. The measuring objective would also be around CAD1.3500. The US dollar was resilient against the Mexican peso yesterday, and rose to MXN16.8880, extending its recovery off Monday's August low (~MXN16.6950). The dollar's broadly heavy tone proved too much, and it returned to the MXN16.78 area. One might have expected the peso to react stronger to the drop in US rates and a sharp equity market rally. Nevertheless, the US dollar slipped slightly through yesterday's low to near MXN16.75 where bids were emerging in the European morning. Initial support is seen near Monday's low, while a move above MXN16.80 would suggest continued consolidation. 

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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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