by Marc Chandler
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Overview: A 15 bp hike by the BOJ and plans to halve its bond purchases by the end of FY25 (in March 2026), coupled with a hawkish press conference by Governor Ueda sent the dollar to nearly JPY150, its lowest level in four months. A soft-core inflation reading in Australia send the Aussie lower and is the weakest of the G10 currencies. The others are little changed. The focus is now on the Federal Reserve, which is expected to signal that its confidence has grown that inflation is on its way back to the target and that it may be appropriate to reduce the restrictiveness soon. This will likely be understood as validating market expectations of a cut at the next meeting in September. A stronger endorsement by come at the Jackson Hole conference at the end of next month, when another employment and CPI report will be in hand.
Equities are rallying today. Nearly all the bourses in the Asia Pacific region but Taiwan rallied. China and Hong Kong were up by more than 2%. Australia's ASX advanced by 1.75%, while the Nikkei gained nearly 1.5%. The Stoxx 600 is up about 0.8% and US index futures are up around 1%. The 10-year JGB yield jumped 5.5 bp to 1.04%, while Australian 10-year yields tanked by 16 bp (to 4.11%). European yields are mostly 1-2 bp softer. The 10-year US Treasury yield is flat near 4.14%. Gold is firm and trading near a five-day high above $2420. It is the fourth consecutive session of higher lower. Escalating Middle East conflict, falling US inventories, and talk of a Saudi price increase have helped lift September WTI from the below $75 yesterday to near $77 today.
Asia Pacific
The Bank of Japan announced plans to reduce its bond buying and hiked its overnight interest rate target by 15 bp to 25 bp. Earlier in the session, the Japan reported a 0.6% rise in June retail sales (1.6% in May) and a 3.6% slump in industrial production (offsetting May's increase in full). The Bank of Japan also updated its macroeconomic forecasts. This fiscal year's growth forecast was shaved to 0.6% from 0.8% while growth in the next two fiscal years was left unchanged at 1.0%. Core CPI (excludes fresh food) is now forecast at 2.5% (from 2.8% previously), as energy subsides were extended) for this fiscal year and pushed next fiscal year's forecast to 2.1% from 1.9% and left the FY26 forecast at 1.9%. The BOJ announced it would reduce its bond buying by half (to JPY3 trillion) by Q1 26, which translates cut of about JPY400 bln a quarter. Market speculation had been halving the purchases over a two-year period. A report due shortly will shed light on talk of intervention earlier this month. confirms intervention to buy yen in the foreign exchange market. The market seemed to waver at first, but Governor Ueda's press conference seemed more hawkish than expected. He confirmed further rate hikes are likely provided inflation outlook rises and that the weak yen also contributed to the decision.
China's PMI softened slightly. The manufacturing PMI slipped to 49.4 from 49.5. It has not risen since March. It finished last year at 49.0 and was at 47.0 at the end of 2022. The non-manufacturing PMI eased to 50.2 from 50.5. It was the fourth consecutive monthly of a weaker growth, but it has not been below 50 since the end of 2022. The composite stands at 50.2 after slowing for the fourth month in a row. It has not been lower since December 2022. Officials are acknowledging the need for a shift in economic policy with greater focus on domestic demand but have not announced concrete measures and the market responded by driving 10-year yields to new record lows. Turning to Australia, June retail sales and CPI were reported. Retail sales rose by 0.5%, twice expectations, following the 0.6% gain in May. The average in gain in H1 24 was 0.4%. In H1 23, retail sales slipped by an average of 0.1% a month. Yet, two adjustments are worrisome. First, adjusting for inflation, Australian retail sales fell for the second consecutive quarter. Second, on a per capita basis (working age population) retail sales are down more than 1% this year. The Reserve Bank of Australia meets next week. Headline CPI was as expected, rising 1.0% in Q2 for a 3.8% year-over-year increase (3.6% in Q1 24). However, the underlying core rates were softer than expected. The trimmed mean measure eased to 3.9% from 4.0% and the weighted median stands at 4.1% from 4.4%. The futures market had a small chance of a hike discounted through the end of the year, and this has been reversed. Now, the futures market has almost a 60% chance of cut discounted by the end of the year. Previously, the markets did not have a cut fully discounted until next July. Now, it is seen in February 2025.
After some initial choppiness while the market digested the BOJ actions, the dollar fell decisively and reached almost JPY150, its lowest level since mid-March. The lower Bollinger Band is near JPY150.85. Since the low was recorded in late Asia Pacific/early European activity, the dollar has been unable to resurface JPY151. The 200-day moving average is near JPY151.60 and the dollar has not closed below it since January 2. As one would expect, the intraday momentum indicators are oversold. The shift in the outlook for the Reserve Bank of Australia took the Australian dollar to $0.6480, its lowest level since early May. Since the low was recorded, Aussie upticks have been limited to about $0.6510. Yesterday's low was near $0.6530. Like the dollar's performance against the yen, the greenback set a four-day high against the offshore yuan yesterday (~CNH7.2760) before reversing lower and falling to CNH7.2350. The dollar fell to CNH7.22 today. The PBOC set the dollar's reference rate at CNY7.1346 (CNY7.1364 yesterday). The skewed pricing in the options market suggests a greater demand for dollar puts against the yuan over dollar calls. Still, the offshore yuan continues to trade weaker than the onshore yuan, i.e., the more accessible one is cheaper than the one that is more controlled.
Europe
The preliminary estimate of eurozone inflation was flat in July, and the year-over-year rate ticked up to 2.6% from 2.5%. Yesterday, Germany reported a 0.5% increase for a 2.6% year-over-year rise, a little firmer than expected. Spain reported a larger than expected decline (-0.7% vs. expectations for a 0.4% fall) and a 2.9% year-over-year rate, down from 3.6% in June. Earlier today, France reported its EU harmonized CPI measure rose by 0.2% for a 2.6% year-over-year pace (up from 2.5% in June). Also today, Italian CPI showed a sharp 0.8% drop in the month-over-month rate, which saw the year-over-year rate rise to 1.7% from 0.9%. At an annualized rate, eurozone CPI rose by 4% in Q1 and Q2. It rose by 2.8% in Q3 23 and 1.2% in Q4 23, seemingly making for tough comparisons for the remainder of this year, after next month. The Bank of England meets tomorrow. It remains a close call. About three-quarters of the economists surveyed by Bloomberg anticipate a cut while the swaps market is more cautious, but the odds of a cut have crept up to about a 60% chance of a cut.
The euro briefly and barely slipped below $1.08 yesterday for the first time since July 4. It recovered but could get much beyond $1.0820, where the 200-day moving average is found. The euro has edged up to $1.0830 today but must get above $1.0875 to be anything of note. Yet, the momentum indicators are still falling, and a low does not seem in place. The near-term risk may extend to $1.0750-75. Sterling has fared better. Barely. Indeed, against the euro is practically flat this week. Sterling managed to hold set on Monday slightly above $1.2800. It hovered around $1.2830 most of the North America session, which the (50%) retracement of this month's sterling rally. It is in about a third of a cent range today above $1.2820. The next retracement (61.8%) is about $1.2780.
America
There seems to be little doubt over the outcome of today's FOMC meeting. It will standpat but signal that its confidence that inflation is on a sustainable path toward its target will allow it to reduce rates soon. This will validate market expectations for a cut in September, when a new Summary of Economic Projections will be published. The derivatives market has a cut fully discounted and almost a 10% chance that the first move is for 50 bp, which we think is exaggerated. The futures market has another cut fully discounted in Q4 and a little less than a 65% chance of a third cut. Although Q2 GDP was stronger than expected at twice the pace of Q1, the Fed's statement is likely to recognize the slowing of the labor market, and some slowing in consumption. One thing that caught our attention was the decline in same store sales at McDonalds for the first time since 2020. Attention will more formally turn to the US employment data on Friday. The ADP private sector jobs estimate is not particularly helpful in anticipating the month-to-month change in nonfarm payrolls, but over the medium-term, it appears to track well. In the 12-months through June, the ADP estimated that the private sector added 1.94 mln jobs, while the BLS estimate was slightly more than 2 mln. For its part, Canada reports May GDP today. The Canadian economy is thought to have eked out a 0.1% expansion after growing by 0.3% in April. Separately, Mexico's Q2 GDP disappointed yesterday. The 0.2% growth was half of what the median in Bloomberg's survey anticipated. However, the interest rate outlook was little changed, with the swaps market anticipating a cut, the second in the cycle, in the next three months. Lastly, while Brazil's central bank may deliver a hawkish hold, Colombia's central bank is expected to cut by 50 bp (to 10.75%) and Chile's central bank will likely cut by 25 bp (to 5.50%).
The US dollar is a narrow range against the Canadian dollar. It remains in the range set Monday (CAD1.3815-CAD1.3865). The greenback is straddling the five-day moving average (~CAD1.3840), which it has not settled below for three weeks. A close below CAD1.38 is needed to suggest a top is being formed. Meanwhile, the Mexican peso is rapidly returning to the extremes in respond to the election in early June. The disappointing GDP yesterday did not do it any favors, and the peso's 0.70% drop was the most among emerging market currencies. The dollar reached almost MXN18.82 and extended the gains to MXN18.9440 today. It traded below MXN18.00 as recently as last Tuesday. There is little in the way of the post-election high near MXN19.00. Above MXN19.00, there could be another relatively quick 1% gain in the dollar before chart resistance.
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