by Marc Chandler
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The US employment data blew away expectations, jumping by 353k, nearly twice the median forecasts. That, coupled with the 0.6% rise in average hourly earnings, which was also twice expectations, helped drive home the Federal Reserve's reluctance to endorse what had been market speculation of a March rate cut and an aggressive rate cutting sequence. The dollar had softened as US rates eased following the FOMC meeting and new strains among regional banks (and some foreign banks with exposure to the US property market), but the jobs data turned things around. US rates rose sharply, and the greenback rebounded. US regional bank shares stabilized.
The week ahead is bound to be quieter. The economic highlight is the final January PMI, which is rarely a market mover. The Reserve Bank of Australia meets, and it is too soon to consider unwinding last November's 25 bp hike. The central bank of Mexico also meets. It is likely to wait at least another month before joining other central banks in the region (Brazil, Chile, and Colombia) in the monetary easing cycle, which they extended last week. China's Lunar New Year celebration begins on February 9 and the holiday may offer a firebreak to the sell-off in the CSI 300 (-7.7% so far this year) to five-year lows. Reports of state funds purchases and new electronic game approvals did little to bolster sentiment. Lastly, we note that the simmering challenges emanating from the US commercial real estate market bubbled over. The KBW regional bank index fell about 7.3% last week, and a Japanese bank with exposure was also hit and Germany's largest bank quadrupled its provisions against its US real estate exposure.
United States: After the FOMC meeting and the jobs data, the US economic calendar is considerably lighter, though there is a heavy slate of supply amid the Treasury's quarterly refunding and normal heavy bill supply. At least in some quarters, the debate has shifted from soft-landing/recession to no-landing/reacceleration. The lighter data schedule includes the final January services PMI. The preliminary reading showed the fourth consecutive increase. At 52.9 it is the highest since last June. It is subject to revision, but typically they are minor. The ISM services index has lagged the PMI, but a modest rise is expected (52.4 vs. 50.6). In addition to the final reading of the PMI and the services ISM, the results of the senior loan officers survey on bank lending will also be reported on February 5. Banks were tightening credit standards in Q3 23. The December trade balance is due on February 7. A small improvement in the goods deficit has already been reported ($88.5 bln vs. $89.3 bln). If this is translated to the overall balance, the US trade deficit would have averaged about $65 bln a month in 2023, down from $78.6 bln in 2022. Given the growth differentials and the overvaluation of the US dollar, the improvement is notable. Our best guess at this juncture is that it may be related to inventory management and imports fell 1.7% in 2023. That said, an annual decline in imports is rare and typically associated with a recession.
After the US employment data, the Dollar Index made a marginal new high for the year above 104.00. It reached the halfway point of the decline from the November 1 high (~107.10). The December high was slightly above 104.25 and that is the next immediate target, while the (61.8%) retracement objective is 104.65-75.
China: The Caixin services and composite PMI will be released early Monday, but the highlight for the week is the January CPI and PPI that will be released at the end of the week. The CPI was negative throughout Q4 23. While price pressures are subdued, the headline was depressed by food prices. Non-food prices rose by 0.5% year-over-year in December, while food prices were off 3.7%. The core rate was steady at 0.8% in Q3 and softened to 0.6% throughout Q4 23. Bloomberg's monthly survey found a median forecast of Chinese CPI this year of 1.1%, but the pace of deflation is expected to quicken first (-0.5% median forecast in Bloomberg's survey after -0.3% in December). Deflation has gripped producer prices in Q4 22. They have not been positive on a year-over-year basis since September 2022. Deflation has eased since peaking at -5.4% last June. It stood at -2.7% in December. It looks little changed in January. Oil and iron ore prices, but steel and copper are softer. Meaningful improvement in China's producer prices may not be seen until H2 24, which has negative implications for industrial profitability. The PBOC will also announce January reserve figures. Given the dollar's rally and the sell-off of bonds, Chinese reserves most likely fell for the first time in three months. The dollar value of China's reserves rose by almost $134 bln last November and December as the dollar fall and bonds rallied. We would not be surprised to see around a $60 bln decline. Note that China's lunar new year celebration closes mainland markets starting on Friday, February 9 and re-opening Monday, February 19.
The dollar's broad gains after the January employment figures warn that Chinese officials may have to redouble their efforts to avoid a vicious cycle and preserve a stable yuan. The dollar has held below CNY7.20 since late November, but this will likely be threatened. Above CNY7.20, and the greenback can see CNY7.23 next.
Japan: Although there seems to be little doubt in the market that the BOJ will exit its negative interest rate policy this year, most likely in April, the economic case may be less compelling. Recall that Tokyo's CPI, which typically runs a couple of tenths of a percent above the national figures, fell to 1.6% (headline and core) in January. The BOJ has a 2% target for the core rate. Early Tuesday, December labor earnings will be published. The November figures have been revised to show a 0.7% year-over-year increase in the nominal cash earnings (from 0.2% initially), while the inflation-adjusted (or real) cash earnings fell 2.5% year-over-year (-3.0% initially). This seems to be a critical headwind to household spending in Japan, which will be reported at the same time. On a year-over-year basis, householding spending last increase in October 2022. The 2.9% decline in November was the most in five months. In GDP calculations, consumption contracted in Q2 23 and Q4 23. Japan reported last week that retail sales plunged by nearly 3% in December month-over-month. The median forecast in Bloomberg's survey was for a 0.2% gain. An interesting development in Japan is reports indicated that a growing number of publicly traded companies have begun granting employees equity as part of the compensation package. According to Sumitomo Mitsui Trust, almost 770 companies (about 20% of the listed companies) have such programs, nearly a seven-fold increase since 2015. Lastly, Japan's current account position has deteriorated in December without fail for the past 11 years. It is due on February 8. Previously, Japan reported an unexpected merchandise trade surplus for December, albeit small (~JPY62.1 bln or ~$422 mln).
The decline in US rates saw the dollar ease to JPY146. But the strong jobs report saw rates jump back, which fueled a dollar recover to nearly JPY148.60, a new high for the week. Last month's high was set near JPY148.80. Above there, minor resistance may be around JPY149.20 and then JPY150. The dollar has not traded above JPY150 since mid-November.
Eurozone: After the preliminary Q4 GDP last week (flat) and initial estimate of January CPI (-0.4% for a 2.8% year-over-year pace), the final PMI readings, the results of the December ECB inflation survey and the aggregate retail sales are unlikely to add to the information set. In the past seven years, the euro has fallen each February. Small samples often distort analysis. In the past 20 Februarys, the euro has depreciated in 12 years. The pattern in February is not statistically significant at a 5% threshold.
The euro recorded last week's high a couple of hundredths of a cent below $1.09 a few hours before the US jobs data. It quickly sold off on the news and fell through $1.08, but by the skin of its teeth, the euro held above the low for the year set a day earlier at $1.0780. Still, the euro closed below $1.08 for the first time since mid-December. We have suggested a $1.0765, and possibly a $1.0725 target. We may need to reconsider the $1.06 head-and-shoulders objective that we thought was unlikely to be met. In fairness, after FOMC meeting, we began thinking that the interest rate adjustment that we had anticipated may have run is course. However, the US jobs data dashed such thoughts and the US two-year premium over Germany bounced back to settle near three-week highs.
United Kingdom: As widely expected, the Bank of England left rates steady last week with the base rate at 5.25%. The swaps market sees little chance of a cut at the next meeting in March (<15%). However, it has about a 55% chance of a cut in May and two cuts are fully discounted in August. Remember, that due to the sharp rise in UK inflation last February-May, there is bound to be a dramatic drop in UK CPI. The market has four cuts priced in by the end of the year and a little more than a 50% chance of a fifth quarter-point cut. This week's final service and composite PMI and the construction PMI are unlikely to be market movers.
Sterling has been chopping in a two-cent range between $1.26 and $1.28 since the middle of December. Before the weekend, it traded in almost a 160-point range. Most may be best advised to assume the range remains intact until proven wrong. That would require at least a close outside the range. We are inclined to see an eventual break lower, which could spark a quick test on the 200-day moving average (~$1.2565) and then $1.2500, which the sterling has not traded below since last November.
Australia: The Reserve Bank of Australia meeting concludes on February 6. The Q4 23 CPI measure reported last week was 0.6% for a 4.1% year-over-year rate, the lowest since the end of 2021. Inflation is moderating and growth is slowing but the officials are not prepared to unwind the 25 bp hike delivered last November. The combination of poor retail sales and the soft inflation print has seen the market bring forward the first rate cut to June (from September). The futures market is discounting two cuts this year and almost a 60% chance of a third cut. This is the most since early January. We suspect these expectations will shift after the Fed begins cutting and as the Australian economy remains lackluster. The RBA will update its forecasts, which previously saw the economy expanding by 1.8% this year (from ~1.3% in 2023; Q4 23 GDP will not be reported until March 6). It forecast CPI to moderate to 3.3% in this year.
After the US employment data, the Australian dollar was sold to a marginal new low for the year, according to Bloomberg data, slightly above $0.6500. Before the report, the Aussie was near session highs around $0.6610. The $0.6500 area corresponds to the (61.8%) retracement objective of the Australian dollar's six-cent rally off last year's low (~$0.6270) in late October. A break below initially targets $0.6450.
Canada: The Canadian economy eked out a 0.2% expansion in November. It is the first month of growth since May. It contracted by 1.1% (annualized rate) in Q3 and may have grown by 0.4% in Q4 23 (due February 29). The week starts with the composite January PMI. It has not been above the 50 boom/bust level since May 2023 and set a new cyclical low in December (44.7). On the other hand, the Ivey PMI (Feb 6) improved every month in Q4 23 and was at 56.3 in December, the best since April. In December 2022, it was at 49.3. The December merchandise trade balance will be reported on Feb 7. Canada recorded about a C$18 bln goods trade surplus in 2022. Through November 2023, the trade surplus had evaporated to C$4.4 bln. However, the most important data point is the January job report on Feb 9. Disappointingly, Canada reported a loss of 23.5k full-time posts in December. For all last year, Canada created 324k full-time jobs and about 432k jobs overall. This was slower than the labor force growth, and as a result, the unemployment rate rose from 5.0% at the end of 2022 to 5.8% at the of last year. However, the average hourly wage for permanent workers has rose in November and December to stand at 5.65%, the highest since August 2020. A weak rebound from December's disappointment and softer wage growth could encourage the market to bring forward the first Bank of Canada rate cut, which is not fully discounted until June.
The US dollar fell toward support we pegged around CAD1.3360 and was near there before the employment report. It shot up to a new high for the week around CAD1.3475, hold barely below the 200-day moving average. The price action appears to negate the possible double top pattern that projected to a little below CAD1.3300. Indeed, a push above CAD1.3480 could re-target the CAD1.3540 area that capped the greenback last month.
Mexico: A few hours before the central bank meeting concludes on February 8, Mexico will report January CPI. The biweekly estimate has risen through November, December, and the first half of January. The monthly measure bottomed in October at 4.26% and was 4.66% in December. It may have risen for the third consecutive month, but the base effect provides some hope that it declined. In January 2023, Mexico's headline CPI rose by 0.68%. December 2023 was the only month that surpassed that (0.71%). In any event, offsetting the stickiness of the headline rate is the continued decline in the core rate. The last time the core rate on a year-over-year basis was January 2023. It stood at 8.45%. It finished last year at 5.09% and the biweekly measure has fallen to around 4.80%.
The dollar recovered from 2 1/2-week lows against the peso, slightly below MXN17.04, to above MXN17.18, in reaction to the US jobs report. Still, when everything is said and done, the peso was only Latam currency, and one of about 10 emerging market currencies (mostly in the Asia-Pacific region) that appreciated against the dollar last week. A close below MXN17.05 or above MXN17.25 would be meaningful from a technical perspective.
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