by Marc Chandler
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The Jackson Hole symposium marks the end of summer just as much as the autumn equinox next month. It has been a tough few months for bond markets as yields have soared. For the US economy, which has proven more resilient than many, including Fed officials thought, and a sharp increase in anticipated supply of Treasuries, the rise in yields may be understandable. The rise in Japanese government bond yields may also make sense given the rise in inflation and the adjustment of the cap on the 10-year JGB yield from 25 bp to 100 bp in two steps (December 2022 and July 2023). The 20-30 bp increase in eurozone benchmark yields is arguably less understandable.
Edward Yardeni, who coined the term "bond vigilantes" in the 1980s seems to think they have returned. It was proposed to explain how traders/investors protest lax fiscal policy by going on strike, i.e., withdrawing from the funding the government. In the futures market, non-commercials (speculators) have a near record short position in the US 2- and 10-year notes. Some suggest the rise in rates has to do with the BOJ adjusting its Yield Curve Control. Higher rates are home are supposed to reduce the demand for foreign bonds. However, since YCC was first changed last December, contrary to expectations, Japanese investors have been net buyers of JPY13.4 trillion (~$98 bln) of foreign bonds. They have also been net buyers of foreign bonds since the end of July, when YCC was tweaked again. The yen's weakness this month also does not support a repatriation thesis. That same can be said of China, which some think is at least partially responsible for the rise in US yields. It is possible, but the yuan is weak and the dollar sales apparently at the request of Chinese officials, including in Hong Kong, need not require the sales of Treasuries to do so. Other Asia Pacific central banks have reportedly intervened to support their currencies against the dollar. However, the Fed's custody of Treasuries and Agencies for foreign central banks has risen by about $10 bln in the past four weeks.
Attention in the week ahead turns toward two data points: the Eurozone's preliminary estimate of August CPI and the US August jobs report. The trends for the two reports are expected to remain intact. Eurozone inflation is subsiding. Given the base effect, there will likely be a sharp decline in EMU CPI in September and October, when prices rose by 1.2% and 1.5%, respectively, in September and October 2022. The US labor market is slowing. Yet, it is not slowing sufficiently to curb consumption. Personal consumption expenditures, of which retail sales account for a little more than a third, is expected to have risen by 0.7% last month, the most in six months. Meanwhile, as Japanese yields firm and the yen weakens, the market is wary of intervention. Chinese officials are using formal and informal levers to try to support the economy, and, at the very least, slow the yuan's descent. The market seems unconvinced of the efforts so far.
United States: Job openings in the US have been trending lower. They rose in one month in H1 23. Weekly jobless claims for the week ending August 12, the same week that the survey was conducted for the employment report (released on September 1, ahead of a long holiday weekend in the US and Canada) rose by about 11k from the July survey week. Continuing claims were also higher. The ADP is a wild card. While we have argued the market may not sufficiently appreciate the importance of US auto sales, which come in drips and drabs throughout the day, we think the market puts too much weight on the ADP report, though it will not prevent talk of a "whisper number" for nonfarm payrolls. It is important to recall that when ADP made its latest methodological changes it specifically said that tracking or predict the BLS estimate of private sector job change was not its intent. Good, because in the last three months, the BLS says that private sector hiring has averaged 185k a month and the ADP puts its close to 350k. In the year-to-date, the BLS estimates that the US private sector filled 1.43 mln positions. ADP's estimate was almost 1.86 mln. And it turns out that despite many dispersions, the BLS estimate was fairly accurate according to the preliminary revision and would reduce employment this past March by a minor 0.2% (to ~155.5 mln).The median forecast in Bloomberg's survey is for a 168k increase in nonfarm payrolls and a slightly slower increase in average hourly earnings.
Personal income and consumption data will attract attention. Consumption has risen by an average of 0.6% a month in H1 23 (twice the average of H2 22), while income has risen by an average 0.4% (slightly lower than the 0.5% average in H2 22). As the jobs market slows, savings are drawn down, and student debt servicing resumes, consumption is likely to moderate, but it has been more resilient than expected. The CPI steals most of the thunder from the PCE deflator. Still, the median forecast in Bloomberg's survey sees a 3.3% year-over-year headline rate (up from 3.0% in June) and the core rate ticks up to 4.3% (from 4.1%). The advance estimate of the July goods trade balance is expected to deteriorate slightly (less than 2%). Lastly, despite a small increase in incentives/discounts from July, auto sales are expected to slow from the July's 15.74 mln unit (SAAR).
The Dollar Index peaked last September near 114.75. The low was recorded in mid-July around 99.55. Fed Chair Powell appeared to have mostly summarized in broad strokes the performance of the economy and inflation over the past year and while he was speaking the Dollar Index recorded the session low (~103.75). As soon as he finished his remarks, the Dollar Index rallied (and interest rates rose) to new session highs (~104.45), its best level since June 1. The late May high was closer to 104.70, and it was the best level since the March bank stress, when the year's high was set around 105.90. The Dollar Index settled slightly above the upper Bollinger Band (~104.25).
Eurozone: Inflation peaked in the euro area last October at 10.7%. It is likely to fall below 5% this month for the first time since November 2021. Last August, EMU's CPI rose by 0.6% and it could be replaced by a 0.1%-0.2% gain this month. The core rate peaked in March at 5.7%. It was stuck at 5.5% in June and July. Economists identify two forces that lifted core services inflation: the unwinding of subsidized public transportation in Germany, and changes to the weights of the harmonized CPI basket. This suggests that underlying inflation is likely to fall more significantly starting next month. Given the strong base effect from last September and October, the year-over-year headline measure is likely to fall sharply in the next two months. After selling took the euro to almost $1.0765 before the weekend, it to managed to recover but met new sellers around $1.0810. It closed below key support at $1.08. It also settled below the 200-day moving average (~$1.0805), which it has not done since last November. The technical tone is weak. There appears to be little meaningful support ahead of the late May and early June lows (~$1.0635-65). The short-squeeze high during Fed Chair Powell's speech ($1.0840) needs to be overcome to stem the tide.
Japan: Japan has a full slate of data in the coming days, including employment, retail sales, industrial output, and capex. We know that the consumption and business spending slowed in Q2 and that the external sector was what prevented a contraction. While overall economic growth is expected to slow sharply this quarter (0.8%-1.0% annualized after 6% in Q2), consumption and private investment is seen rebounding, the external sector will likely be a drag. We suspect July retail sales may be the most important data point after a 0.6% decline in June. Developments in the capital markets may be more important still. The 10-year JGB yield has pushed to higher, and yen is recorded a new low for the year ahead of the weekend. The dollar reached almost JPY146.65. The market is on edge, knowing that the BOJ could offer to buy 10-year bonds as it did earlier this month at market prices. It bought about JPY700 bln bonds in the two operations (~$4.8 bln), or some suspect, intervene in the foreign exchange market like it did last year in this price range. There may be some chart resistance around JPY147.50 and then there are the secondary highs set last November (after October's peak shy of JPY152) in the JPY148.45-85 area.
China: The PMI used to attract attention and often spurred a market response. Now, this is less likely the case. Regardless of the precise data prints, the Chinese officials recognize the need for more support for the economy. Several banks have lowered their forecasts for China's GDP this year below the 5% target, which ostensibly was chosen as do-able target after last year's miss. Harking back to pre-Xi times and actions that former leaders took seems to miss the point that Xi has taken China off its previous course. As we have noted, his public stance on welfare, that is discourage work and efforts shares not with western leftists but conservatives. China has the means to support consumption, but Beijing is shunning such measures. The stance seems vaguely similar to ordo-liberalism, which four years ago last month, Draghi said was the DNA of the ECB. Barring an emergency, Xi may reject Keynesian use of fiscal policy for demand management. That said, as we have seen, a crisis of sufficient proportions spurs officials to eschew ideological values. The obvious conclusion is Xi does not think it has reached that point.
The dollar's strength ahead of the weekend suggest Beijing will struggle to deter further declines in the yuan. Some participants have suggested that the CNY7.35 level is the "line in the sand" for the PBOC. We are skeptical that such a level exists, fixed over time, but given the 2% band the dollar is allowed to trade around the daily reference rate, it suggests that a fix above CNY7.2058 would allow for a breach of CNY7.35. The offshore market (CNH) seems to mostly respect the onshore band, though it has not deterred Beijing from intervening directly or indirectly in the offshore market. The dollar peaked slightly below CNH7.35 on August 17 but the potential bullish flag pattern it appears to have traced out would project another test.
UK: The UK reports some housing price and mortgage data and consumer credit. They are not market movers in the best of times. Sterling has been mired in a $1.26-$1.28 trading range before breaking down to about $1.2550 before the weekend, its lowest level, and first close below $1.26 since mid-June. Besides the UK economy avoiding a recession (so far), the other notable and arguably related development has been a sharp swing in short-term interest rate developments. Consider that in early March, the UK's two-year yield discount to the US was more than 125 bp. By the middle of June, the UK began offering a premium, which rose to 55 bp on July 11. Sterling peaked a few days later (July 14). Last week, the UK two-year yield slipped back below the US rate. a nearly 30 bp swing. Meanwhile, the market's expectation for next month's BOE meeting is like a cat coming from the outside. At first it is too cold. For the better part of the first two weeks of the month, the market was not fully pricing in a 25 bp hike. The cat spotted the fireplace. After strong wage data and firm core CPI, the market priced in around a 35% chance of a 50 bp hike. Alas, the cat got too hot. The market downgraded the chances to less than 10%. seemingly contributing to the drag sterling. The poor close, suggest more downside has not been exhausted. Although some momentum indicators are stretched and sterling settled below its lower Bollinger Band (~$1.2605), for the last two sessions, the next important chart area is closer to $1.2400. The break and closed below $1.2600 could suggest a bleaker scenario. It may also be the neckline of a head and shoulders topping pattern. If valid, it warns of risk toward $1.20.
Canada: Canada and the US often report on the jobs market on the same day. At the end of the week, when the US August employment data are reported, Canada will report June and Q2 GDP. Bloomberg's new monthly survey found the median forecast for Q2 GDP was shaved from 1.4% to 1.2% (annualized). This would suggest the economy stagnated, or maybe a little worse in June. Indeed, in late July, StatsCan warned that preliminary data suggested the economy contracted by 0.2% in June. It also pointed to 1.2% growth at an annualized pace in Q2. Economists in Bloomberg's survey sees the economy slowing further here in Q3 to 0.7%. The US dollar's five-day advance against the Canadian dollar ended with a small (<0.1%) pullback to start last week. It spent most of the week chopping between CAD1.35 and CAD1.36 before jumping to CAD1.3640 before the weekend. The greenback extended its advancing streak for the sixth consecutive week. It is approaching the April and May highs in the CAD1.3650-70 area. A close below CAD1.3500 is needed to stabilize the tone.
Australia: There two economic reports in the coming days that could impact the capital markets. The first is July retail sales early on August 28. If retail sales do not recovery from the 0.8% slide in June (which brought retail sales down 0.5% in Q2, for the third consecutive quarterly decline), it could lead to a downgrade in Q3 GDP expectations. Second, July's monthly CPI is due on August 30. The June report showed a 5.4% year-over-year rate, while the quarterly year-over-year rate was put at 6.0%. The Australian dollar recorded the year's low on August 17 near $0.6365. It bounced back to almost $0.6490 last week before finding a wall of sellers that drove it back to almost $0.6380 ahead of the weekend. We have been monitoring a potential double top pattern at $0.6900 that projects to around $0.6300. The momentum indicators still appear to be bottoming, but it is not clear that a correction is at hand or sideways consolidation. A move above the $0.6500 may be needed to confirm a correction. The initial corrective target may be in the $0.6560-$0.6600 area.
Mexico: AMLO will not get the credit, but Mexico is in an enviable position. Nominal growth is around 8% year-over-year and inflation is falling. Last week's report for CPI in the first half of August showed it fall to a 4.67% year-over-year pace, the lowest since March 2021. The peso is strong, up 16.4% this year. That is second best among emerging market currencies between the Brazilian real 8.3% gain and the Colombian peso's 17.5% rise. The strength of the peso has not hurt its external account. In June, Mexico recorded its first monthly trade surplus of for the year. It was small at $38.2 bln, but last June it was a $3.97 bln deficit. The Q2 current account surplus of a surprising $6.25 bln (median forecast in Bloomberg's survey was for $3.4 bln since the end of 2020. July trade figures and worker remittances will be reported in the week ahead. The peso rose by about 1.8% last week, its second-best weekly performance since the end of Q1. The dollar fell to nearly MXN16.7270 before the weekend. It has only been lower a couple of sessions (in late July) since 2015. The lower Bollinger Band is around MXN16.7200 but there appears little to prevent a re-test of the multiyear low set last month near MXN16.6260. Below there, the next interesting chart area is closer to MXN16.50.
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