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EMU Q4 23 GDP Stagnates, Underscoring Divergence with the US

EMU Q4 23 GDP Stagnates, Underscoring Divergence with the US

Overview: The US dollar is mixed ahead of the start of the FOMC meeting and is mostly in its recent ranges. The euro, which was sold below $1.08 yesterday for the first time since mid-December is holding above it today. The less-than-expected projection of US Treasury borrowing requirements for Q1 and Q2 weighed on US rates, which, in turn, dragged the greenback lower against the yen. It is trading near a four-day low, a little above JPY147.00. The rally in US equities threatened to push the dollar below CAD1.34, a two-week low. The dollar trading with a softer bias against most emerging market currencies today, including the Hungarian forint, where the central bank is expected to cut the base rate by 75-100 bp today (fourth cut in the cycle).

A new security law in Hong Kong helped trigger a 2.3% slide in the Hang Seng. China's CSI 300 is off 1.8%. Japan's market was narrowly mixed, and outside of Australia, most of the other large markets fell. Europe's Stoxx 600 is rising for the fifth consecutive session, matching its longest advancing streak since last July. US index futures are slightly softer. European benchmark 10-year yields are mostly 1-2 bp higher, though UK Gilt yield is a little lower. The 10-year US Treasury yield is slightly lower near 4.06%. Gold is trading with a firmer bias, and traded to $2040 today, its best level since January 16. After yesterday's stunning reversal from nearly $79.30 to about $76.40, March WTI is trading quietly straddling $77 a barrel.

Asia Pacific

Japan's labor market ended 2023 little changed with an unemployment rate of 2.4% and a job-to-applicant ratio of 1.27. The unemployment rate at the end of 2022 was also 2.5%. The job-to-applicant ratio slipped to 1.28 in November, matching the low since June 2022 before slipping further in December. Japan reports December retail sales and industrial production tomorrow. Retail sales are expected to slow after the heady 1.1% surge in November. Industrial production is expected to have recovered strongly, rising by as much as 2.5%, helped by rising exports, after a 0.9% decline in November. Q4 GDP is due in mid-February. A recovery in consumption and private investment after two consecutive quarterly contractions is expected to have boosted GDP by 1.1% (annualized rate). 

Australia reported a sharp 2.7% drop in retail sales last month, and the 2.0% gain in November was revised to 1.6%. The median forecast in Bloomberg's survey anticipated a 1.7% decline in December retail sales. Australia reports Q4 CPI. It is expected to have moderation to a 4.3% year-over-year rate from 5.4% in Q3. The underlying measures are also expected to moderate, even if not by as much. The monthly calculation is seen falling to 3.7% from 4.3%, which would be the lowest since the end of 2021. It peaked in December 2022 at 8.4%. The Reserve Bank of Australia meets next week, and the market nearly has the first cut priced in at the August meeting and has nearly two cuts discounted for this year. As the Australian dollar rallied in Q4 23, its two-year interest rate discount to the US narrowed from around 100 bp to about 60 bp. It moved briefly below 40 bp in the middle of the month and is now near 46 bp.

US Treasury yields remained soft yesterday and this seem to help keep the yen bid. The three-day high set in local hours on Monday (~JPY148.35) was sold into in Europe and North America and the session low was recorded in late North American dealings slightly below JPY147.60. The pre-weekend low was about JPY147.45 and it was taken out today, with a low near JPY147.15. However, the session low does not seem in place. The next target is last week's low was closer to JPY146.65. We suspect the market will be reluctant to sell the greenback to aggressively ahead of the interest rate sensitive events in the coming days, starting with the quarterly refunding announcement and the FOMC meeting tomorrow. The employment data at the end of the week often injects volatility. The Australian dollar continues to straddle the $0.6600 area. The Aussie posted a close above there to post its highest close in two weeks and reached $0.6625 today. We are cautious about this being the breakout. That said, it may hard to resist, if it were to move above the $0.6630-50 area. Initial support is seen in the $0.6580-90 area. The dollar has traded in narrow range between about CNY7.1750 and CNY7.1800. The Chinese 10-year benchmark yield fell below 2.45%, a two-decade low amid expectations for a rate cut after the Chinese Lunar New Year holiday. The PBOC set the dollar's reference rate at CNY7.1055 (CNY7.1097 yesterday). The average forecast in Bloomberg's survey was CNY7.1739 (CNY7.1802 yesterday). 


The chief economic news today from the eurozone is the first estimate of Q4 23 GDP. It was flat amid expectations of a 0.1% contraction. Details are not included in the initial report. However, the largest four economies have reported their figures. The Bundesbank warned of downside risks to German growth and these materialized. Europe's largest economy contracted by 0.3%, but the 0.1% contraction in Q3 was revised to flat. The French economy stagnated in Q4 23, and its 0.1% in Q3 was also revised to flat. In contrast, Italy expanded by 0.2% (0.1% in Q3 23) and Spain grew by 0.6% while Q3 was revised to 0.4% from 0.3%. 

The euro was pressed below $1.08 in the North American morning yesterday for the first time since December 13. There apparently were not many stops below it as the euro held above $1.0795 and finished back within the pre-weekend range. The euro has held above $1.0810 today but has been unable to sustain gains through $1.0840. Although the momentum indicators are stretched from roughly 2.5-cent loss this month, and the speculators in the futures have cut their net long position (from 152k contracts in December to almost 88k contracts as January 23), we are not convinced a durable low is in place yet. We have suggested a target around $1.0765, and possibly $1.0725. Sterling set a four-day low yesterday near $1.2660 but recovered back to the middle of the $1.26-$1.28 trading range. It reached $1.2720 in early Asia Pacific activity before retreating to nearly $1.2670. Buying interest in the European morning helped keep yesterday's low intact. Speculators in futures market have larger net long sterling position as of last Tuesday that is the largest since last September (~31.5k contracts). In aggregate, it appears they are playing for an upside break.


House price data from November and the Conference Board's measure of consumer confidence are second fiddle today to the JOLTS report on job openings. The number of jobs opening trended lower last year, increasing only in two months (through November (April and August). At 8.79 mln in November, they were down about 18% year-over-year. In November 2019, they stood at 6.92 mln. The median forecast in Bloomberg's survey is for a decline to 8.72 mln, which would be the least since March 2021. Meanwhile, the estimate for Friday's nonfarm payrolls has crept up to 180k, according to the median in Bloomberg's survey. The average in Q4 23 was 165k, the lowest three-month average since January 2021. Note too, the busy day in a busy week of corporate earnings, including Alphabet (Google), Microsoft, Advanced Micro Devices, General Motors, Starbucks, and Pfizer. 

Mexico reports Q4 23 GDP today. Slowing growth and falling inflation is seen allowing the central bank to cut interest rates more likely in March than next week. Tomorrow, several Latam countries, are expected to continue the easing cycle that began last year. Mexico's economy expanded by 1% (quarter-over-quarter) in Q3 23 and is expected to have slowed to about 0.4% in Q4. Canada reports November GDP tomorrow. It may have eked out a 0.1% gain after stagnating in October. The economy contracted by 1.1% (annualized rate) in Q3 23 and forecasts of a 0.4% expansion in Q4 23 (median in Bloomberg's monthly survey) seems a bit high. It will be reported until the end of February. 

The US dollar closed at a two-week low against the Canadian dollar a little above CAD1.3400 and a marginal new low was recorded today, ever so slightly below CAD1.34. The strong recovery in US equities (risk-on) sent the greenback to new session lows in last dealings. It settled below the 20-day moving average for the first time since January 4. A possible double top is in place (~CAD1.3540) with a neckline at CAD1.3415. The measuring objective would be around CAD1.33, which would correspond roughly to the (61.8%) retracement for the US dollar rally from the end of December to mid-January. Still, the intraday momentum indicators are stretched, suggest that there may not be the convincing break today. A move above CAD1.3420-30 would stabilize the greenback's tone. Neither lower rates nor strong US equity market gains managed lend the Mexican peso much support. The price action lends credence to our suspicions that the strength of the peso's draw has weakened. In the futures market, the gross speculative longs have been trimmed for the past two weeks (~16k contracts) after building for the previous 11 weeks. The gross speculative shorts have risen in six of the past seven weeks and near 52.5k contracts, it is the largest since last June. Yesterday, the dollar recouped a little more than what it lost before the weekend to settle above MXN17.20. It is in a narrow range so far today:  ~MXN17.1900-MXN17.2330. Although the dollar is near its lows in Europe, we expected the greenback to recover in North America dealing today. 


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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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