by Marc Chandler
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There were three outsized moves last week. Gold had a $135 range on Monday, posted a key downside reversal, and fell below $2000 at the end of the week after setting a record high slightly above $2135. January WTI neared $80 on December 1 and traded below $69 on December 7, its lowest level in five months. The seven-week slide matches the longest since July/August 2015. Third, the dollar fell by a little more than 2.1% on December 7 against the Japanese yen as the market seemed to panic into concluding that the BOJ would lift rates in a couple of weeks. The range that day was roughly JPY141.70 to JPY147.30. The greenback briefly traded below the 200-day moving average for the first time in seven months. Given the softening inflation, the larger contraction in Japan's Q3 GDP, and weak consumption at the start of Q4, there is little pressure on the BOJ to act and an overwhelming majority (94%) of economists polled by Bloomberg, expect not policy change until next year. About half of the economists expect a move in April, the start of the new fiscal year and when the extension of the energy subsidies expires.
The week ahead is chock fully of central bank meetings. Among the G10 central banks, the Federal Reserve, the European Central Bank, the Bank of England, the Swiss National Bank, and the Norway's central bank meet. None are expected to change policy. The market has been aggressive in pricing in cuts starting early next year for the Fed, ECB, and SNB. The issue is how rigorously do officials push back against what the market has done. Of these G10 central banks, the market seems most suspicious of the Norges Bank, with the swaps market not convinced its tightening cycle is over. The Fed and ECB will update their economic forecasts, and these should be seen as part of their communication and forward guidance. In September, the median Fed forecast was for one cut below the current target for 2024. The market is pricing in four cuts. Several emerging market central banks also meet, including Mexico and Brazil. Brazil is expected to continue its easing cycle with a 50 bp cut (to bring the Selic rate to 11.75%, while Banxico stands pat at 11.25%, but seems to be gradually preparing the market for a cut in Q1 24.
United States: This is one of the busiest weeks of the quarter. Of course, the FOMC meeting is the highlight, and Fed officials will update the Summary of Economic Projections. The Fed is most unlikely to do anything, and the general tenor of Chair Powell's comments are unlikely to deviate much from his recent remarks on December 1. The market initially seemed to do the exact opposite of what Powell said, as he pushed back against the rate cut speculation. Still yields recovered last week, even if not in full. The September dot plot envisaged two cuts next year, but assumed one more hike this year The median projection also saw the headline CPE deflator at 2.5% at the end of 2024 and the core rate at 2.6% (i.e., above target but approaching it). The unwinding of the Fed's balance sheet may draw new attention as the recent sharp decline in use of the reverse repo facility may begin the decline in bank reserves. At the last meeting, a key issue was the tightening of financial conditions. Powell noted the moves have to "persistence" to be important from a policy-making point of view. The has tightening has been largely unwound and the Fed confronts the opposite situation. Since the November 1 meeting, the 10-year yield has fallen by around 50 bp and the two-year yield by almost 40 bp. The S&P 500 is up over 9% and a trade-weighted measure of the dollar is off around 2.6%.
Before getting to the FOMC meeting, though, November CPI (and PPI) will be reported. Headline CPI could be unchanged or up 0. 1% after a flat report in October. Given the base effect, this will allow the year-over-year rate to ease to 3. 1% (from 3. 2%). The core rate is more resilient. The median forecast in Bloomberg's survey is for a 0. 3% increase (0. 2% in October) and for the year-over-year rate to be steady at 4. 0%. After falling by 0. 5% in October, the biggest decline since April 2020, a small rise in PPI last month is expected. That could see the year-over-year rate easing toward 1% (1. 3% in October). The core rate is also expected to have risen a little after being flat in October for around a 2. 2% year-over-year rate (2. 4% in October). After the FOMC meeting, the US will likely report softer retail sales, while the end of the labor dispute may help bolster industrial output after the 0. 6% decline in October (manufacturing fell by 0. 7%). The US economy is slowing after the 5. 2% surge in Q3. The issue now is about the magnitude of the slowdown, which many still see as leading edge of a contraction.
The near-term outlook for the Dollar Index is constructive. The momentum indicators are moving higher, and the five-day moving average crossed back above the 20-day moving average for the first time in a month. A move above 104.25 targets 104.65-80 initially, on the way to 105.35 and possibly 106.00.
Eurozone: The eurozone economy is stuck a trough. The economy appears to be hovering around stagnation. Net-net the GDP has been virtually flat over the past six quarters. Growth impulses remain poor. The median forecast in Bloomberg's survey sees a flat Q4 and a 0.1% expansion in Q1 24. The ECB meeting on December 14 is the main event, and like the Federal Reserve, it will stand pat and update its forecasts. Recall that in September, the GDP forecasts were for 0.7% this year, 1.0% in 2024 and 1.5% in 2025. The IMF's latest forecasts are the same as the ECB for this year, but a little more optimistic next year a 1.2% and in 2025 (1.8%). In September, the ECB saw inflation falling from 5. 6% this year, to 3. 2% next and 2.1% in 2025. The IMF largely concurred (3.3% and 2.2% CPI in 2024 and 2025, respectively). CPI has been softer than expected and the new forecasts are likely to reflect that.
The swaps market has about a 65% chance that the first ECB cut will be delivered by the end of Q1 24, and it has two-and-a-half cuts fully discounted by the middle of next year. By the end of 2024, the swaps market is priced more more than 125 bp of cuts. Since the ECB met in late October, the euro a bit firmer and oil and natural gas prices are lower. However, ECB President Lagarde may push back against the aggressiveness that the market is pricing in cuts. Lastly, the EU finance ministers meet on December 14-15 to see if progress can be achieved in modifying the Stability and Growth Pact before the old rules return next year.
The euro bottomed on October 3 near $1. 0450 and at the end of November pushed a little above $1. 1015. It has been falling this month and the five-day moving average fell back below the 20-day moving average and the momentum indicators are trending lower. The euro reached about $1. 0725 after the US jobs data. That met the 50% retracement objective. The next retracement objective (61. 8%) is near $1. 0665.
United Kingdom: The Bank of England, like the ECB, meets on December 14. No change in rates is the most likely outcome. Given the weak economy and moderating price pressures, there seems to be no compelling reason to tighten policy, though there are a couple of hawks on the MPC. Still, inflation is still too high (4. 6% headline and 5. 7% core) to prompt a cut. The swap market sees the first BOE cut to come after the Federal Reserve and ECB. There is more than a 90% a cut by mid-year. The market is pricing in around two-and-a-half cuts in 2024.
Ahead of the BOE meeting, investors and policymakers will see the latest employment data and October monthly GDP and details. The UK economy was stagnant in Q3 and is expected to be flat this quarter and next. Recall that the BOE's forecast sees no growth next year. The IMF forecast 0.6% growth and the median forecast in Bloomberg's survey is for a 0.4% expansion. Parliament will vote Tuesday on the government's plan to send asylum seekers to Rwanda. A faction of Tories wants tougher legislation than the government is proposing, leading to the resignation of the immigration minister last week. However, Prime Minister Sunak is not making it a confidence vote, which if the government lost, could trigger a collapse of the government.
Sterling snapped a three-week advance and lost about 1.3% last week. The five-day moving average has not fallen below the 20-day moving average, as it has in the euro, but it looks poised to do so in the coming days. The momentum indicators have turned down and sterling looks set to fall back below the 200-day moving average (~$1.2485) and test the (38.2%) retracement of its rally from the early October low (~$1.2035) seen near $1.2365. The next retracement (50%) is around $1.2385.
China: It is a big week for Chinese data, and it is mostly backloaded, with most of the important data at the end of the week. Still, the stronger deflationary forces reported early on December 9 will likely spur a policy response, even if the other data are stronger. CPI fell 0.5% year-over-year after a 0.2% contraction in October. Producers are 3% lower than a year ago from -2.8% previously. Still, it is possible, but seems a unlikely, that the PBOC will cut its benchmark one-year Medium Term Lending Facility rate, which stands at 2. 50%. It was last cut by 15 bp in August, but it has not been fully passed through by the banks via the loan prime rates. Most recently, the PBOC appears to be more focused on quantities than prices, but the continued deflation in consumer and producer goods, while the market anticipates aggressive rate cuts by several of the G10 central banks, including the Fed and ECB, may create the space of a rate cut. Still, on balance, we suspect a cut in reserve requirements may be delivered before a cut in rates. At the same time, the impact of the numerous measures Beijing has announced should begin to be picked up in the real sector data, outside of the property market. Sequentially, on a year-to-date year-over-year basis, industrial output and retail sales likely improved. Fixed asset investment may have also ticked up. Property investment and residential property sales continue to be significant drag.
The dollar rose against the yuan last week for the first time in four weeks, and the roughly 0.60% gain was the largest in three months. There is scope for additional near-term gains. A move above CNY7.1865 may signal potential toward CNY7.2080 and possibly CNY7.23. Given the volatility of the yen and the approaching BOJ meeting, we suspect the offshore yuan (CNH) may again be used as a funding currency (borrowed and sold) for a higher yielding or more volatile asset carry trades to cover into early 2024.
Canada: The Bank of Canada edged closer to a rate cut by dropping the reference to the upside risks of inflation and the recognizing that the labor market is loosening. Although the market is pricing in a greater chance that the Fed eases before the Bank of Canada, the two-year US premium is near 60 bp, the most in nine-months. Canada reports housing starts, and they are holding up better than one might suspect given the rate hikes and generally weak economic impulses. At a seasonally adjusted annualized rate, Canada's housing starts have risen by about 10% in the September-October period. The 274.7k (SAAR) in October was the best since June. In October 2022, starts were around 264.4k. Existing home sales fell for four consecutive months through October, and October's decline of 5.6% was the largest monthly decline since May 2022. Canada also will report October portfolio flows. The foreign appetite for Canadian securities has fallen sharply this year to nearly C$20.5 bln. In the first nine months of 2022, net foreign portfolio inflows were slightly more than C$95 bln. The Canadian dollar seems more sensitive the risk-environment (S&P 500 proxy) and the broad movement of the US dollar (trade-weighted index) than crude oil.
The US dollar rose for the first time in four weeks against the Canadian dollar and looks technically poised to rise further in the coming period. The momentum indicators have turned higher. A move above CAD1.3620 could signal a move toward back to CAD1.3660-90 initially. That would likely push the greenback's five-day moving average back above the 20-day, a proxy for signals by trend-following models.
Australia: Australia's calendar turns light after following last week's central bank meeting (data-dependent hold after a 25 bp hike in November), Q3 GDP (0.2%), and the October trade balance (A$7.5 bln vs A$12.2 bln in October 2022). A few surveys will be reported, but the Australian dollar is likely to be at the mercy of broader developments in the capital markets. The market sees the Reserve Bank of Australia lagging the other major central banks in the easing cycle that will begin next year. The first rate cut is not fully discounted until late Q3/early Q4. The Australian dollar fell for the first time in four weeks and only the second time in eight weeks. A near-term cap is around $0.6620 and a move above it would signal a retest on the $0.6700 area. On the other hand, a close below $0. 6560 warns of the likelihood of a deeper correction after the rally that began with the year's low in late October near $0.6270. The (38.2%) retracement was met near $0.6530 last week, and it rebounded nearly a cent before stalling. The momentum indicators are falling, and the five-day moving average could slip below the 20-day moving average in the coming days.
Mexico: Banxico, the central bank of Mexico meets on December 14, a day after the Federal Reserve. While it is still reluctant to follow others in the region and launch an easing cycle, recent comments suggest the first cut could come in Q1 24. The swaps market has two cuts discounted by the end of Q2 24. The net long speculative position in the futures market has doubled to more than 65k contracts in the past four weeks, but the peso has begun underperforming other regional currencies (leaving aside the Argentine peso). Last week, US Treasury Secretary Yellen visited Mexico and one of the outcomes will be greater cooperation on scrutinizing foreign direct investment, a thinly veiled effort to check China. Yellen said that the only US concern about Chinese direct investment in Mexico was limited to national security issues. National security, though seems to be an expansive category that has included dual purpose sectors like technology and advanced semiconductor chips, but also steel and aluminum. The dollar rose against the Mexican peso for the second consecutive week. It is the first back-to-back weekly gain since the since end of September/beginning of October. Still, the greenback is a range, where the topside is capped around the 200-day moving average (~MXN17.56) and the lower end around MXN17.16-MXN17.18. The momentum indicators are pointing higher, and the five-day moving average is above the 20-day, but the high rates make the peso expensive to short. Continued sideways movement could see the momentum indicators reset.
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