by Marc Chandler
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Overview: Federal Reserve Chair Powell said that although confidence has risen that inflation is on course back to 2%, the Fed is not quite confident enough to cut rates. The market effectively eased for it. Since the FOMC meeting began on Tuesday, the two-year US yield tumbled from 4.40% to 4.10%. The US 10-year yield settled below 4% for the first time in six months. The risk-off spurred by the weaker than expected US manufacturing ISM helped lift the greenback against most foreign currencies despite the drop in US rates. The dollar is mostly softer today, the Canadian dollar and Mexican peso have fallen to new lows for the year. On the other hand, the risk-off mood and unwinding of carry trades are helping the Chinese yuan to have its best week of the year (onshore yuan ~+0.6%).
However, the meltdown in equities continues, with dramatic losses in the Asia Pacific region, led by more than a 6% decline in Japan's Topix, 4.4% loss in Taiwan, 3.6% drop in South Korea, and a 2.1% fall in Australia. The Hang Seng shed nearly 2.1% and China's CSI 300 fell 1%. Europe's Stoxx 600 is off almost 1.6% after dropping 1.2% yesterday. In the futures market, the S&P 500 is down more than 1% and the Nasdaq is off about 1.8%. Bonds are rallying. The 10-year JGB yield fell nearly 10 bp to 0.93%. European 10-year benchmark yields are mostly 1-3 bp lower. The US 10-year yield is three basis points softer, slightly below 3.95%. Gold reached a new high for the week ($2468.50) and is closing in on the record high set in mid-July near $2484. Middle East tensions notwithstanding, September WTI was turned back from almost $79 yesterday and fell to nearly $76. It is trading in a $76.60-$77.30 range today.
Asia Pacific
Outside of the inconsequential (for the capital markets) Q2 Australian PPI, the busy week ended on a quiet note for the region. The week's highlight was the Bank of Japan's 15 bp rate hike and the beginning of QT. The yen's surge has met the (61.8%) retracement of this year's rally. The swaps market has another 13 bp increase discounted at the end of the year, despite former BOJ Deputy Governor Wakatabe warning that the hike was a mistake and that it will be unwound in October. Another highlight was the softer than expected Australian CPI, which saw market expectations flip from a small chance of hike to an almost an 80% chance of a cut in December. Meanwhile, the market continues to anticipate more stimulative measures from Beijing and the small rate cuts in late July are not seen as material.
The US dollar has ground lower today against the yen and approached yesterday's low, but it is holding. The session lows yesterday were recorded in the Asia Pacific session near the (61.8%) retracement objective of this year's rally (~JPY148.50) and recovered through early North American turnover to set the session high (JPY150.90). The drop in US interest rates that followed the jump in weekly jobless claims and further in response to the disappointed ISM manufacturing survey saw the dollar return to the JPY149.50 area and today has returned to about JPY148.65. The Australian dollar softened in Asia Pacific trading yesterday but recovered in Europe and early North America at set the session high ($0.6560) but reversed lower amid the risk-off that follows the US ISM. It was sold to new session lows in the North American afternoon, slipping a little through $0.6490. Settlement was poor, the lowest since then end of April. However, Wednesday's low (~$0.6480) continues to hold. A break targets the $0.6450-$0.6465 area. On the topside, the Aussie met new sellers around $0.6525. The risk-off shift saw the Chinese yuan sell-off. The US dollar recovered from CNH7.21 to nearly CNH7.26. It finished slightly below Wednesday's high (~CNH7.2530). It has come back better offered today. The dollar traded near CNH7.1925, its lowest level in three months. Without a strong recovery, the greenback will have fallen for the fourth week in the past five against the offshore yuan. The PBOC set the dollar's reference rate at CNY7.1376, a new high for the year (CNY7.1323 yesterday).
Europe
The busy week ends with a quiet news stream from Europe. This week's highlights include a 0.3% Q2 eurozone expansion, despite a contraction in Germany, the once-locomotive of the regional economy. Headline July inflation was flat, which, given the base effect, saw the year-over-year rate creep up to 2.6% from 2.5%. At an annualized rate, eurozone CPI rose 1.6% in the three-months through July. In August 2023, eurozone CPI rose by 0.5%, making for an easy comparison. In Q4 23, eurozone CPI rose at an annualized clip of about 1.2%, making for a tougher comparison. Still, the market has little doubt that the ECB will cut rates in September and has another cut and a half discounted in Q4. The Bank of England delivered a quarter-point cut on a close 5-4 vote. Governor Bailey cast the deciding vote. While the forward guidance was minimal, the market has another cut fully discounted for the November meeting and almost a 50% chance of another cut before the end of the year.
After selling off in the Asia Pacific afternoon yesterday to a new low since July 3 (slightly below $1.0780, where the lower Bollinger Band is found, the euro was bid until the US ISM report. It peaked in front of $1.0820 and returned to the $1.0780 area. While holding yesterday's low, it reached $1.0825 in the European morning today, stretching the intraday momentum indicators. Without a recovery above $1.0855 today, it will record its third consecutive weekly loss. The trendline drawn off the mid-April (~$1.06) and late June ($1.0665) comes in near $1.07 today. Sterling settled below a similar trendline (~$1.2750), yesterday and extended the sell-off to below $1.2710 in late Asia Pacific/early European turnover today. It has recovered but is struggling near $1.2740. After a brief wobble in response to the BOE rate cut, sterling traded to $1.2840 before the broad risk-off before the US ISM report. Sterling sell-off accelerated and it took out the trendline in the North American afternoon and fell to almost $1.2725 in the North American afternoon. A break of $1.2700 targets the $1.2650-$1.2675 area.
America
The US July jobs report anchors the busy week. The median forecast in Bloomberg's survey is for nonfarm payrolls to rise by 175k, which is roughly the Q2 average after 267k average in Q1. The 222k average for H1 24 is almost a quarter less than the average of H1 23. The labor market is slowing, and it is a question of the pace. Some argue that businesses are still hoarding labor on anticipating a lift in activity from Fed cuts, but as Fed Chair Powell explained, businesses and investors should be cognizant that the lag effect of monetary policy works in both direction of rates. Given the other business surveys and the gradual rise in weekly jobless claims, continuing claims, and the duration of unemployment, the risks are on the downside. A downside surprise would likely weigh on the dollar, given it recent strength. The unemployment rate rose every month in Q2, and another uptick could trigger Sahm's Rule, which Powell recognized as a statistical regularity. Hourly earnings are set to slow and a 3.7% year-over-year rate, which the median projects in Bloomberg's survey would be the lowest in more than three years. The policy rate was set when the Fed (and many others) feared the economy was overheating. The normalization that Powell identified also seems to suggest the current level of restriction may not be necessary much longer. Canada, which often reported its jobs figures on the same day as the US, will publish its July employment data on August 9. Mexico reports its June unemployment rate today. It continues to hover slightly above 2.6%.
The risk-off proved too much for the beleaguered Canadian dollar, which was sold to a new low for the year. It was recovering before the big risk-off following the US ISM. The US dollar rallied from slightly below CAD1.38 to nearly CAD1.3890. It stopped just shy of the 2023 high, which was closer to CAD1.3900, where options for $533 mln expire today. The 2022 high was almost CAD1.3980. The risk-off move arrested the recovery in the Mexican peso. The greenback had fallen through Wednesday's low in early North American activity yesterday. It was trading below MXN18.50 when the US manufacturing ISM was reported, and the greenback rallied to nearly MXN18.87. Follow-through dollar buying brought the dollar closer to MXN19.00 today, to set a marginal new post-election high. The upper Bollinger Band is found near MXN19.02 today. The dollar surged to a new high for the year against the Brazilian real, slightly above BRL5.75. It has not closed above there since 2020. The record high was set that in May that year near BRL5.97.
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today than Monday and Tuesday, and the dollar is mixed. The yen, which rallied,
yesterday, has given back most of its gains and the wage data gave the market
second thoughts about next week’s BOJ meeting. The Mexican peso, which has been
sold aggressively in the face of the strong election showing of the Morena
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