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Nervous Calm Hangs over the Markets

Nervous Calm Hangs over the Markets

Overview:  San Francisco Federal Reserve President Daly spoke aloud what many are thinking. The US labor market may be at an inflection point. The four-week moving average of weekly jobless claims is at the highest since last September and the early call for July nonfarm payrolls is about 185k, which if true, would be a sub-200k reading for the second time in three months. The high-flying Nvidia has fallen 13% in the past three sessions coming into today. The 10-year US Treasury yield is near its Q2 trough (~4.20%). European political uncertainty and the threat of Japanese intervention are also factors. The dollar is narrowly mixed today is +/- 0.1% against most of the G10 currencies. It is consolidating in about a 25-tick range around JPY159.45. The euro is little changed and the French 10-year premium over Germany is near its lowest level in more than a week. 

Equities in Asia Pacific mostly traded high and the MSCI index for the region snapped a three-day slide. Among the large market, only China's did not participate in today's advance. Europe's Stoxx 600 is also struggling. It is giving back nearly half of year's roughly 0.75% gain. Futures on the S&P 500 and the NASDAQ are trading firmer after yesterday's losses, and the Dow is trading slightly lower after yesterday's gains. European benchmark 10-year yields are 1-3 bp lower, while the 10-year US Treasury yield is little changed near 4.24%. Gold is little changed near $2333 and its trading in the upper end of yesterday's narrow range. August WTI edged a little closer to $82 a barrel but was turned back and is trading near $81.25. 

Asia Pacific

The light local session featured cautiousness ahead of possible Japanese intervention and a mild slowing in Japan's May services PPI (2.5% from 2.7%). The apprehension about possible intervention makes more some choppy trading activity as yesterday's 0.5% dollar drop in less than 10 minutes in late European morning turnover illustrated. The weakness of the yen and comments from BOJ Governor Ueda, who did not rule out the central bank announcing a plan to reduce JGB purchases and raising rates at the next meeting at the end of July., contributes to the nervous tone. The swaps market is pricing in almost a 60% chance of a 10 bp hike, the most in more than a week. 

Short-term market participants realized they were skating on thin ice. Even though it had pulled a little away from JPY160, the nerves showed as the dollar fell from around JPY159.50 to almost JPY158.80 in a few minutes in that thin period after Asia Pacific markets had closed and before the US markets opened yesterday. The dollar ran back up to about JPY159.75 in North America. So far today, it has been confined to about half a yen range below JPY159.70. There are options for almost $1.4 bln at JPY160 that expire today. The Australian dollar continues to hug the middle of the $0.6600-$0.6700 range. It has largely confined the price action (especially on a settlement basis) for the better part of two months. In recent sessions, it has hardly traded more than a quarter-of-a-cent away from $0.6650. While $0.6670 has traded today, where options for A$300 mln expire today, there is another set for about A$435 mln at $0.6675, which has not traded. The PBOC fixed the dollar yesterday above CNY7.12 for the first time since last November. Today's reference rate was set at CNY7.1225, the fifth consecutive increase. The weakness of the yuan relative to its band disrupts the swaps and forward markets. Still, next to the Hong Kong dollar, which is fixed against the greenback, and the Indian rupee (off about 0.3% this year) the yuan is the strongest in the region, having depreciated by about 2.2% so far this year. The yuan has also appreciated against all the G10 currencies here in 2024 but sterling, which has eased by less than 0.3% against the US dollar. We have argued Chinese officials missed an opportunity by not taking strong action around the same time as Japan's intervention in April/May. A sense of simultaneity, even if not coordinated, could be a force multiplier. Bloomberg reports that major Chinese banks and some foreign banks sold dollars in the onshore market. In the offshore market, where Chinese banks also were reportedly dollar sellers, the greenback held below the CNH7.2945 high seen yesterday. 

Europe

Economics is taking a backseat to politics. The economic diary is light outside of the Sweden's Riksbank meeting on Thursday. It is most likely to stand pat after delivering its first rate cut last month. In central Europe, Türkiye and Czech central banks meet on Thursday, too. Türkiye is expected to keep its one-week repo rate at 50%, where it has been since the 500 bp hike in March. Czech's central bank is likely to slow the pace of its easing to 25 bp after delivering three half-point cuts this year. It initiated the cycle last December with quarter-point move. After this week's cut, the repo rate will at 5.0%. With CPI at 2.6% in May and falling, the central bank has scope to continue to ease policy. The European heads of state meet on June 27-28 to sort out a new European Commission after the recent EU parliamentary election. We suspect a deal will be cut with the Greens instead of Meloni's faction (ECR) to form the new EC. Meloni may feel snubbed, but she has little immediate recourse. France goes to the polls on June 30 and the latest polls shows (Le Pen's) National Front solidifying it led but still shy of the 289 seats needed to secure a majority. Meanwhile, a new scandal has broken out in the UK where a few Tory officials, including PM Sunak's closest parliamentary aide, may have wagered on the timing of the election. The UK goes to the polls on July 4, and there is little to prevent a historic loss by the Conservatives. 

The euro retreated from its probe above $1.09 in early June to about $1.0670 in the middle of the month. It retested that low before the weekend and it held. With daily momentum indicators have corrected and now if anything, oversold, the euro could be bottoming. Specifically, a convincing move above last week's high (~$1.0760) could mark a double bottom and project toward $1.0850. That said, several moving averages and retracement objectives converge slightly below $1.08. The euro is in a narrow range of almost a quarter of a cent above $1.0720. Sterling settled last week below $1.2650 for the first time since early April. It recovered to nearly $1.27 in North American activity yesterday, and trading briefly and slightly above there today. Nearby resistance is around $1.2730-40. Sterling rose in the last three weeks of May and has fallen in the first three weeks of June. Net-net, it is up about 1.5 cents. The market seems unconcerned about the election. Speculators in the futures have switched from a net short position in late April through mid-May to its largest net long position in nearly three months. The 10-year Gilt yield peaked in late May near 4.40% and briefly traded below 4% before the weekend. It is near 4.06% now. 

America

The US sees a flurry of high-frequency data points today, including several Fed surveys, the Conference Board's measure of consumer confidence, and April house prices. Between 1953 and 1983, house prices were included in the US CPI measure. It has been replaced with owner equivalent. S&P CoreLogic Case-Shiller 20-city composite house price index may have slowed on a year-over-year basis for the first time since May 2023. Its nationwide index eased in March, snapping a nine-month advance. Weaker house prices coupled with the higher weekly jobless claims (four-week moving average of almost 233k, the highest since last September) plays on ideas that the US economy is struggling. Canada report May CPI today. A 0.3% increase would translate into a 5.6% three-month annualized rate after a 3.6% pace in Q1. The Bank of Canada puts more emphasis in the averages of the underlying core rates. That average has fallen from 3.3% in January to 2.7% in April. The average in May could be unchanged after rounding. Ahead of the report, the market has around a 60% chance of a follow-up rate cut next month. We suspect that is a bit high and see it as less than a 50/50 probability. April's monthly GDP, at the end of the week, is expected to have grown by 0.3% after a flat March. 

The Canadian dollar has quietly risen for nine of the past 11 sessions coming into today. As we have noted it has not really gone anywhere. The greenback closed May near CAD1.3630 and settled near CAD1.3650 yesterday. It was the first time the dollar traded below CAD1.3660 since June 4. Follow-through selling saw the US dollar slip to nearly CAD1.3640 before stalling. Nearby resistance is in the CAD1.3660-80 area. The peso was no slouch. It extended its recovery by almost 1% after recouping 1.7% in the previous two sessions. The greenback settled below MXN18.00 for the first time since June 6 and below the 20-day moving average for the first time since May 27. The greenback is consolidating today in the lower end of yesterday's range and is trading a little above MXN18.00 in the European morning. For an assortment of idiosyncratic reasons, Latam currencies have underperformed this month. The four worst performing emerging market currencies (Colombian peso -5.5%, Mexican peso -5.1%, Chilean peso -2.9%, Brazilian real, -2.6%) are from the region. With yesterday's losses, the dollar has retraced half of its post-election gains against the Mexican peso (~MXN17.95). There is potential for the greenback to recover toward MXN18.10-MXN18.12. Inflation for the first half of June came in a little higher than expected, but the market did not give much of a chance of a rate cut at this week's meeting. Lastly, an agreement was reached that will allow a resumption of Mexican avocado shipments to the US (~$3 bln in 2023). 


 

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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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