by Marc Chandler
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Overview: The greenback is lower against most currencies today as it consolidates ahead of the weekend. The Dollar Index's eight-week advance is the longest since a 12-week rally 2014. The Chinese yuan is an exception. Its losses were extended today. Against the offshore yuan, the dollar traded above the onshore band, which is most often respected. Equities ae extending this week's slump. All the large bourses in the Asia Pacific region but India fell. Europe's Stoxx 600 is off for the eighth consecutive session, the longest losing streak of the year. US index futures are trading lower and have not risen since last Friday.
European benchmark 10-year yields are mostly marginally lower. Italy is a small exception, where its yield is up slightly, perhaps encouraged by reports of the government's internal debate about how to rein in the budget deficit as the Stability and Growth rules come back into effect next year. The 10-year US yield marginally softer near 4.24%. It and the two-year yield have risen by about six basis points this week. Gold found support this week near the 20-day moving average (~$1916.50) and enjoys a firmer tone today. The midweek high was set near $1929.20 and that offers nearby resistance. October WTI is consolidating within Wednesday's range (~$85.95-$88.10) and is little changed around $87. Partial strikes at Chevron's liquified natural gas facilities in Australia are underpinning LNG prices. The union's warning strikes will turn into a two-week stoppage starting September 14. Europe's benchmark rose by about 7% yesterday and another 8% today. The US futures contract rose 2.75% yesterday and is up another 1.3% today.
Asia Pacific
China will report its August CPI and PPI figures the first thing tomorrow. We continue to believe the risk is that sentiment has swung too far--from China stands astride the world to China cannot do anything right until it gives up what it calls communism. The news stream is likely to begin improving, and the inflation data may point in that direction. The deflation that so many observers wrung their hands probably is ending. CPI, which was negative in July, is expected to have returned into positive territory, and the deflation that was evident in producer prices is seen moderating. China is having problems post-Covid and with the end of the property bubble, but it is hardly an outlier, and the economy is not contracting. The eurozone revised lower Q2 GDP yesterday to 0.1% from 0.3%. The UK grew by 0.2% in Q2. The US has been able to go from strength-to-strength, with a hiccup (Q1 22 and Q2 22 the economy contracted) by what appears to be a nearly doubling of the budget deficit this year (according to the Committee for a Responsible Federal Budget) and an increase in real wages, while rising default rates on consumer credit points to excesses.
Japan offered revisions to Q2 GDP. It was shaved to 1.2% from 1.4% quarter-over-quarter. Consumption was slightly weaker (-0.6% vs. -0.5%), but as hinted at by the recent capex report, the business spending was a bigger drag (-1.0% vs. flat). Bloomberg's survey conducted late last month found a median forecast for a 1.3% (annualized contraction) this quarter. Net exports were the difference between Japan expanding and contracting in Q2. It was unrevised, contributing 1.8 percentage points to GDP. In Q3, exports are expected to be flat (13.6% in Q2), while imports are expected to rise by 9.8% after dropping 16.2% in Q2. The July current account was also reported, and while the surplus was larger than expected (JPY2.77 trillion, vs. the median forecast in Bloomberg's survey for JPY2.25 trillion, the trade surplus itself was less than half of the projection near JPY68.2 bln.
We learned last week that Japanese household spending in July was 5% lower year-over-year. Today, we got some color into a possible driver: Labor cash earnings are 1.3% higher year-over-year, and this is after what was regarded as a successful spring round of wage negotiation. This is well below economists' projection for a 2.4% gain. In real terms, when adjusted for inflation, cash earnings are down 2.5% year-over-year. The median forecast in Bloomberg's survey was for a 1.4% decline.
The dollar continues to consolidate against the Japanese yen. It remains within Tuesday's range (~JPY146.40-JPY147.85) as the market turned more hesitant since Tuesday and the stepped-up verbal intervention by the Finance Ministry who sets exchange rate policy. In the previous three sessions, the greenback rallied from JPY144.45 to JPY147.80. The upper Bollinger Band is near JPY147.75. One-month implied volatility has edged up to about 9.3% from 9.05% at the end of week but is virtually in changed since the end of August. The Australian dollar has also been consolidating since Tuesday. It reached a three-day high near $0.6415 but was greeted with fresh selling that has pushed it back below $0.6400. Recall that the Aussie fell for six consecutive weeks through the end of September, bounced by about 0.8% last week, before the bears resumed the campaign and near $0.6390, is off about 1% this week. The Chinese yuan continues to dribble lower, despite several measures officials have taken. Ideas that the PBOC is targeting a fixed rate does not give them sufficient credit. Previously, some said CNY7.30, now the scuttlebutt is CNY7.35. The dollar stopped just shy of that today. The PBOC set the dollar's reference rate at CNY7.2150. The median projection in Bloomberg's survey was CNY7.3260. That puts the upper band at CNY7.3593. The offshore market most often respects the onshore band but not today. The dollar reached CNH7.3625. Last year's high was CNH7.3750. The yuan is trading at the lows for the year against the dollar, but it is holding considerably better against the euro and yen. The euro is at the lower end of a three-month range against the yuan. It is below the 50-day moving average. The yuan set the high for the year against the Japanese yen earlier this week (~JPY20.2350) and has been consolidating over the last few days, trading between JPY20.02 and almost JPY20.10 today.
Europe
The eurozone's industrial sector is off to a rough start in Q3. As we noted yesterday, the contraction in German industrial production was twice as large as economists expected (-0.8%) and is the third consecutive monthly decline. France and Spain reported today. French output was stronger than expected rising 0.8%, and nearly offsetting in full the June's 0.9% decline. The median forecast in Bloomberg's survey was for a 0.1% gain. Manufacturing itself fared rose by 0.7% after a revised 1.1% decline in June (initially -1.0%). The auto sector was particularly strong, with output rising by 2.8% in the month. Spain's industrial production's 0.2% increase was also better than the small decline expected after a 1% decline in June. Italy reports Monday, ahead of the aggregate estimate in the middle of next week. Industrial output in Italy is seen falling by 0.1% after a 0.5% increase in June. The combination of some hawkish rhetoric and the weaker euro has encouraged a small upgrade of the likelihood of an ECB rate hike next week to about 35% in the swaps market from a little less than 25% a week ago.
The euro fell to about $1.0685 yesterday after taking out $1.07 for the first time three months. Although it closed below $1.07, we had expected more follow-through selling given the psychological significance and optionality around $1.07. It reached almost $1.0730 in Asia Pacific turnover before turning better offered in Europe and retuning to the $1.07 area. The dead cat probably needs to bounce above $1.0750 to encourage anyone to take its pulse. That said, the two-year US-German interest rate differential has stabilized, and this may help ease the selling pressure. Still, the next technical target is the $1.0600-35 area. Sterling has steadied after slumping for its third consecutive session yesterday. It has settled the past two sessions below the lower Bollinger Band (~$1.2465 today) and met sellers today after poking a little above $1.2500. Chart support is in the $1.2400-$1.2425 area and a break could send it down another cent. In the bigger picture, the potential head and shoulders pattern, with a neckline near $1.26 could see a move toward $1.20 (perhaps spurred if the Bank of England does not hike rates at the September 21 meeting). Next week, the market-sensitive jobs and wage data, and the day before the BOE meeting, August CPI will be reported.
America
The soft-land scenario, which now seems to be the base case for most economists, got more support from yesterday's weekly jobless claims report. Unexpectedly, initial claims fell to 216k, the lowest in seven months. The four-week moving average, used to smooth the week-to-week volatility fell to 229.2k, a five-week low. Continuing claims fell to 1.68 mln, a seven-week low. Today's wholesale sales and inventories will not draw much attention, but Q2 household net worth and consumer credit will draw interest, even if limited market impact. Recall that household net worth jumped by a little more than $3 trillion in Q1, recouping 2/3 of what the $4.6 trillion lost last year (and the losses suffered reduced tax revenues, exacerbating this year's budget deficit). That is more than the entire GDP of India. The S&P 500 rose by about 8.3% in Q2 and the NASDAQ was up around 12.8%. FHFA house prices slipped by 0.2%. Over the last 10 years (40 quarters), household net worth has risen by an average of $1.8 trillion a quarter, which is roughly Russia's GDP in 2022. Over the last 20 years, US household net worth has risen by an average of about $1.28 trillion, which is a little more than the Netherland's annual GDP. The US will also report July consumer credit. Consumer credit growth in H1 of $102 bln (~$17 bln a month on average) was the weakest six-month period since H1 21 and the $49.6 bln extended in Q2 was least since Q1 21. Note that consumer delinquency rates are rising. In Q2, delinquency rates on consumer loans, credit cards, and auto were the highest in a decade.
Canada reports August employment data today. Barring a significant surprise, it is unlikely to impact expectations for interest rate policy. The swaps market has about a little more than a 30% chance of a hike at next month's meeting and about a 38% chance of a hike at the last meeting of the year (December 6). Canada has created about 40.6k jobs a month so far this year, of which 34.8k are full-time posts. In the first seven months of 2022, Canada grew 36.8k jobs a month and 45.9k full-time positions (a net loss of part-time positions). Nevertheless, jobs growth is slowing, and it has fallen in two of the past three months. Wage growth (average hourly earnings for permanent employees) is expected to moderate to around 4.7% from a little above 5% year-over-year in June. The unemployment rate is seen rising for the fourth consecutive month. It was at 5.0% as recently as April and may have risen to 5.6% last month, which would be the highest since January 2022.
The US dollar rose to nearly CAD1.3700 yesterday, its highest level since late March. It has been knocking at the upper Bollinger Band for the last few sessions and closed above it yesterday. It is near CAD1.3685 today. Without a big recovery today, the Canadian dollar would have fallen for the ninth week in the past 11. It has lost about 3.65% in this retreat. It has performed better than the Antipodeans and Swedish krona over this period. It is holding below CAD1.3700 today but a break could spur a test of the next important chart area (CAD1.3770-CAD!.3800). The Mexican peso's slide continued yesterday, but the extreme was set in Asia. Even though the Mexican peso is practically the only emerging market currency that trades 24-hours a day, we imagine liquidity in Asia is lighter. While the yen-peso carry trade has been popular, we do not think that was the driver. The dollar's high was set in Asia on Thursday near MXN17.7080 and by early North American trading it had fallen back to MXN17.4235. The greenback recovered and reached almost MXN17.6145 in late dealings yesterday, but it has returned to yesterday's lows. The peso has declined by almost 5% over the past two weeks, its worst performance in six months. The fundamentals have not changed significantly, and net-net short-term US rates (two-year yield) is lower over the period. We are looking for some technical sign that reduces the risk of new peso longs. A close today below MXN17.40 would be a step in that direction.
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