by Marc Chandler
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Overview: Weak preliminary PMI readings in Europe, Japan, and Australia, underscore the apparent divergence with the US, sending the dollar broadly higher. The euro is currently recovering from the sell-off that took it to $1.0335 and sent sterling below $1.25. Only the yen, among the G10 currencies, has weathered today's dollar surge. Most emerging market currencies, especially from central Europe, are weaker. Despite the stronger dollar, gold is extending this week's recovery and is up nearly 1.4% to resurface above $2700. It settled last week near $2563.
Equities are mixed. Outside of China and Hong Kong, Asia Pacific equities rallied, led by India's more than 2% surge. Poor earnings saw the CSI 300 tumbled more than 3%. The euro's drop is seen as good news for European exporters, and the Stoxx 600 is up almost 0.25% after rising 0.4% yesterday. If it can hold on to these gains, it will post its first advancing week in five. US index futures are pointing to a softer opening. Bond are bid. The 10-year benchmark yields are 5-6 bp lower in Europe and the 10-year Treasury yield is off nearly three basis points to slightly below 4.40%. January WTI reached a new high for the week near $70.75 today and is consolidating quietly ahead of the US open.
Asia Pacific
Japan's October CPI was in line with expectations that were shaped by the release of the Tokyo reading nearly a month ago. The headline pace slipped to 2.3% from 2.5% and the core measure, which excludes fresh food, softened to 2.3% from 2.4%. However, as we saw with the Tokyo report, the improvement was largely in energy. The measure that excludes both fresh food and energy ticked to 2.3% from 2.1%. The swaps market continues to price in around 15 bp increase at the December 19 BOJ meeting. Separately, Japan saw the preliminary November PMI. Japanese markets are not typically sensitive to the PMI data. Manufacturing slowed to 49.0 from 49.2. The services PMI rose to 50.2 (from 49.7) and the composite stands at 49.8 (vs. 49.6). Likewise, the PMI tends not to be market-moving in Australia. The contraction in manufacturing slowed (49.4 vs. 47.3) while service activity contracted (49.6 vs. 51.0). The composite is at 49.4 (50.2). It was at 46.2 last November.
The dollar approached JPY156 on Tuesday and slipped below JPY154 yesterday partly on speculation that the BOJ may in fact hike next month. The dollar recovered to about JPY154.70 with the help of the US 10-year Treasury yields that recouped the initial decline to resurface above 4.40%. It is trading in an almost JPY154-JPY155 range today. At JPY154, options for almost $1 bln expire today. A more convincing top in US rates may be necessary to signal a top in the greenback. Still, a move below Tuesday's low (JPY153.30) or a close below the 20-day moving average (~JPY153.75), which it has not done since late September would weaken the near-term technical outlook. The Australian dollar's consolidative phase is being threatened today as four-day lows are probed. The Aussie bottomed last week near $0.6440 and had been in a $0.6480-$0.6545 range for the past three sessions. It met the (38.2%) retracement of its losses since the US election (~$0.6535) before retreating to almost $0.6470 today. Despite the strength of the yen yesterday, the yuan softened. The dollar settled for the second consecutive session above CNH7.25. The dollar has moved a little above last week's high today to reach CNH7.2670, to set a new high since late July. Above there, CNH7.2750 beckons but the real target is CNH7.30. The PBOC set the dollar's reference little changed for the third consecutive session: CNY7.1942 (CNY7.1934 yesterday and CNY7.1935 Wednesday). It seems a clear signal of not wanting the yuan to depreciate quickly. And still it is not even utilizing the flexibility offered by the 2% permitted band. The upper end of the band is near CNY7.3380 today.
Europe
The eurozone preliminary November PMI were miserable. The manufacturing sector PMI was fell to 45.2 from 46.0. It has not been above the 50 boom/bust level since June 2022. The high for the year was 47.3 in May. Germany's manufacturing PMI is at 43.2 (from 43.0) and France's fell to 43.2 (from 44.5). The eurozone's service sector slunk to 49.2 (from 51.6). It had been above 50 since February. Germany's service PMI is 49.3 (vs 51.6). It was at 49.6 last November. France's service PMI remained below 50 for the third consecutive month in November (45.7 vs. 49.2). It peaked at 55.0 in August, illustrating the deterioration in recent months. The composite PMI at the aggregate level fell to 48.1 from 50.0. Germany and France's composite readings tumbled to 47.3 and 44.8 (from 48.6 and 48.1, respectively). The UK reported October retail sales and the preliminary PMI. Retail sales were twice as weak as expected. Including gasoline, retail sales fell by 0.7% in October after rising 0.1% in September (initially 0.3%). Excluding gasoline, retail sales fell 0.9%. This points to a slow start for the British consumer in Q4 after rising by an average of 0.7% a month in Q3. Its preliminary PMI was softened. The manufacturing PMI fell to 48.6 after from 49.9 in October from 51.5 in September. It was at 47.2 last November. The service PMI was slowed to 50.0 from 52.0. It was at 50.9 in November 2023. The composite reading slipped fell to 49.9, a new low for the year. Keep in mind the composite is a combined measure of output--not a weighted-average of the manufacturing and service PMI.
The euro and sterling's slide accelerated yesterday and has been extended today. It appeared that the dealer euro and sterling position adjustment into yesterday's European close turned into a rout as buying interest evaporated. In the two hours before midday in NY, the euro fell from $1.0540 to almost $1.0460. The break of $1.05 took place after the 10:00 ET option settlement and where options for 1.7 bln euros expired yesterday Another stack of options struck there for nearly 2 bln euros expires today. That $1.05 support area offered resistance and encouraged by the dreadful PMI, European dealers took the euro to $1.0335 today, cutting through last year's low (~$1.0450) like a hot knife in butter. The $1.0450 now offers resistance. Sterling was encountering steady offers around $1.2660 from Wednesday's North American afternoon through early North American trading yesterday. And then it was as if the buyers stepped back and sterling fell to about $1.2575 before short covering lifted it back below $1.2600, the new cap. Sterling has been sold to slightly below $1.2490 today. Sterling has not been this low since May. The 2024 low was set in April near $1.23.
America
The US also sees its preliminary November PMI today and the final University of Michigan survey. The PMI is expected to be little changed, with the manufacturing PMI holding below the 50 boom/bust level since June. It stood at 49.4 last November and is expected to come in near 48.9 (48.5 in October). It may be enough to lift the composite to 54.4, (from 54.1) which would the highest since June. Meanwhile, the University of Michigan measure of consumer confidence has risen from the year's low in July (66.4) to a preliminary reading of 73 in November, and it could be revised higher. The cyclical high set in March was 79.4. It gauges of one-year inflation expectations slipped to 2.6% in the preliminary reading. That is the lowest since the end of 2020. The measure of the 5-10-inflation expectation has been between 3.0% and 3.1% since April and the initial November reading put it at 3.1%. Canada reports September retail sales today. Retail sales fell in Q1 and Q2. Through August, they averaged a 0.1% decline a month this year. However, retail sales have bounced back strongly in Q3. They rose by 0.9% in July and 0.4% in August. The median forecast in Bloomberg's survey is for another 0.4% increase in September. We expected such a number to encourage the market to continue to pare wagers of another 50 bp cut next month. Ahead of the report, the pricing in the swaps market is consistent with around a 31% chance of a 50 bp cut, which is down from about 45% chance at the end of last week. Mexico reports the final Q3 GDP estimate (1.0% quarter-over-quarter), IGAE economic survey, but most important is the CPI for the first half of November. Given the Governor Rodriquez comments earlier this week, a soft report will encourage speculation of another rate cut at the December 19 Banxico meeting.
At the end of last week, the US dollar frayed CAD1.41 to set a new 4.5-year high. Yesterday, the greenback traded below the 20-day moving average for the first time since the FOMC meeting on November 7. It fell to almost CAD1.3930. Still, given that the US two-year premium over Canada narrowed for the fifth consecutive session (to its smallest level in more than a month), the US equities staged an impressive rally, and oil prices jumped, yet the US dollar recovered back to nearly CAD1.3970, negating the potential intraday breakout. Follow-through US dollar buying saw it test CAD1.4020 today, but it is straddling the CAD1.40 area in late European morning turnover. The greenback rose to a new high for the week against the Mexican peso yesterday near MXN20.4640 and slightly through MXN20.51 today. There are about $335 mln options at MXN20.50 that expire today. Recall that the dollar fell for five sessions through Tuesday, but it more of a feel of consolidation that a reversal. It looks as if the market is gearing up for a run at the recent highs (~MXN20.70-80), though it has pulled back toward MXN20.42. The greenback settled firmly against the Brazilian real, above BRL5.80 for only the second time, though it has frayed it frequently on an intraday basis this month. The high for the year was near BRL5.8750 on November 1.
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