Riksbank Cuts, Oil Slips, and the Yen Remains Under Pressure

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Marc Chandler
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(On business trip over next few days. Commentary to resume Monday.  Thanks for your patience.) 

Overview: Sweden's Riksbank became the second G10 central bank to cut rates this year. The Swiss National Bank cut its deposit rate in March. A couple other large central banks, including the European Central Bank, and possibly the Bank of Canada, may cut rates next month. The Swedish krona is the weakest of the G10 currencies today, off by about 0.45%, but the Australian dollar and yen are down nearly as much. The market has taken the dollar up by about 0.5% against the in each of the past two sessions and is up by about the same amount today. Most emerging market currencies are softer too, with the Indonesian rupiah and Turkish lira hovering around unchanged. 

Japanese, Chinese, Hong Kong, and Indian equities fell today, though South Korean, Taiwanese, and Australian bourses advanced. Europe's Stoxx 600 is extending its advance for the fourth consecutive session. If these gains are sustained, it could be the best week since January. US index futures are little changed but softer. Benchmark 10-year yields are 3-4 basis points higher in Europe and the 10-year Treasury yield is almost three basis points higher at 4.48%. The US auctions $42 bln of the 10-year notes today after the strong reception to yesterday's $58 bln three-year offering. Tomorrow finishes the quarterly refunding with $25 bln 30-year bonds. Gold continues to trade quietly within Monday's range (~$2291-$2332). Crude oil, on the other hand, is breaking down. June WTI is straddling the $77 area, its lowest level since mid-March. Recall that it peaked in mid-April near $87. It took out the 200-day moving average on an intraday basis yesterday, but without a recovery today, it will close below it (~$77.90) for the first time since early February.

Asia Pacific

Capital markets were quiet in the Asia Pacific session today. Economic data was light. Tomorrow, Japan reports labor earnings. Despite the hoopla about rising wages, employees have yet to see anything substantial. They rose a revised 1.4% year-over-year in February (revised from 1.8%) and 1.5% in January. In December 2023, labor cash earnings were 0.8% above December 2022. What this means is that Japanese wages, unlike US and Canada, continue to fall when adjusted for inflation. The last time that Japanese real wages rose on a year-over-year basis was March 2022. Conventional wisdom holds that the decline in real wages drags spending down. While there is good intuitive sense of this, it is not so compelling, if one assumes that not everyone behaves like Americans. Imagine a country with small living quarters, a strong respect for tradition, with moderately high capita GDP and a high propensity to save and a low propensity to consume. Japan's GDP per capita in PPP terms is near $50k a year. The average apartment in Tokyo is about 66 square meters (less than a third of the average size apartment in NYC). Recent years of data have been skewed by the pandemic and natural disasters in Japan. But consider 2016, the last year that real monthly cash earnings rose on a year-over-year basis every month. Household spending fell on a year-over-year basis every month but February. Lagged effect? Household spending also fell in the first five months of 2017.

The market pushing the dollar higher and challenging Japan's efforts on the yen. The dollar rose about 0.5% on Monday and again on Tuesday. It is up another 0.5% today. Still, we expect the market to be cautious in the JPY156.00 area on a risk/reward basis. BOJ Governor Ueda seemed to shift to emphasize the weaker yen's impact on prices but to little avail Looking out into next week, a little moderation in US consumer prices, demand (retail sales), and industrial output lend Japanese officials some help. The $0.6650 area is proving a formidable cap for the Australian dollar. It peaked near there in April, stalled there after the US jobs data at the end of last week and was turned back from approaching yesterday. After trading on both sides of Monday's range yesterday, the Aussie settled just inside in yesterday. However, the losses have been extended to about $0.6560 today. Nearby support is seen around $0.6535 but we see better support closer to $0.6500. The PBOC set the dollar's reference rate at CNY7.1016(CNY7.1002 yesterday). The average in Bloomberg's survey was CNY7.2159 (CNY7.2148 yesterday). The offshore yuan is back within the onshore band, but it might not be for much longer. The onshore band is CNY6.9596-CNY7.2436. The dollar tested the (61.8%) retracement of the losses since the April 25 high (~CNH7.2740) found near CNH7.2325. It is approaching the 200-day moving average (~CNH7.2370).

Europe

Sweden's Riksbank cut the deposit rate today by 25 bp and signaled two more cuts may be appropriate in H2 24. At the las meeting, the Governor Thedeen signaled a rate cut in May or June. Sweden became the second G10 central bank to cut rates in the cycle, after the Swiss National Bank. The economy is weak, and net-net has not grown since H2 22. Sweden's composite PMI slumped to 49.0 in April from 53.0 in March. It was the lowest since November 2023, after spending Q1 above the 50 boom/bust level. The manufacturing sector of many European countries remains under pressure. However, that was not Sweden's problem. The manufacturing PMI to 51.4 in April from a revised 50.4 in March (from 50.0). Services inexplicably fell. The services PMI tumbled to 48.1 from a revised 54.1 (from 53.9), the lowest in seven months. Underling March inflation was softer than expected (2.2% vs.2.5% in February). The seasonally adjusted unemployment rate stood at 8.6% in March, up from 7.1% in March 2023. 

The Bank of England meets tomorrow. There is practically no chance of a cut. At best, what can be reasonable hoped for is some clear sign of the central bank's intentions by Governor Bailey. The BOE's leadership has sounded dovish- steering closer to the ECB than the Fed. But does that mean June or August? Due to the adjustment of energy prices, inflation is expected to fall below 2% year-over-year. The swaps market has about a 50% chance of a June cut and a reduction is fully discounted for August. 

The euro slipped to a three-day low today near $1.0735. It settled poorly yesterday and today's of another fall in German industrial output did it no favors. Speculators (non-commercials) at the IMM have for the past two weeks, through April 30 (the latest CFTC data) have been net short euros for the first time since September 2022. This is aligned with what seems to be the conventional view that the euro has not put into place a durable low. The two-cent rally since mid-April lows are seen as corrective as the ECB is seen cutting earlier and more than the US. The $1.0730 area is the (38.2%) retracement and the next (50%) is a little above $1.07. Watch the downtrend line connecting the March, April and early May high comes in near $1.08 today and about $1.0775 May 15 (US CPI and retail sales reports due). Sterling's pullback is being extended today. It peaked after the US jobs report around $1.2635 and has approached last week's low today near $1.2465. This is also the halfway point of the rally from the April 22 low for the year (~$1.23). The next retracement target (61.8%) is around $1.2430. Similar as the euro, speculators in the IMM futures have switched to a net short sterling position in the last two weeks of April for the first time in six months. The euro has been recording higher lower every session so far this month against sterling. It overcame resistance near GBP0.8600 today. The next target is last month's high (~GBP0.8645), which was the best level since the first few trading days of the year.

America 

It is a light week for US economic data, and I am beginning a business trip that will prevent me from proving fresh commentary until Monday, May 13. So let me expand on something I have alluded to in recent analysis and why I have a weaker dollar bias. Recent survey data (especially the ISM) and softer jobs data (including shorter work week) point to the economy losing steam. This may be echoed in May 15 CPI and retail sales. Headline inflation on a year-over-year basis may slow a little for the first time in three months. Core inflation is also likely to have eased last month. In March, the year-over-year core rate was unchanged at 3.8%. It has not risen since March 2023. Slower job and wage growth and consumer debt stress levels warn that the US consumer may pullback from the March shopping spree that saw headline retail sale rise by 0.7% and core (excluding autos, gasoline, food services, and building materials) surge 1.1%. It is obviously unsustainable. That said, we already know that auto sales rose a bit more than expected to a 15.74 mln seasonally adjusted annual pace, but overall retail sales may have returned to the mean (12–24-month average), 0.3-0.4%. Core retail sales look considerably weaker around 0.1%-0.2%. If accurate, the reports will weaken ideas that the economy is re-accelerating, though still, it seems far from the stagnation some are discussing. 

Canada's April employment reports is due Friday, but barring a significant upside surprise, the odds of a rate cut next month have steadily risen in recent days. On April 26, the swaps market had slightly less than a 50% chance of a June cut. The perceived probability of a rate cut has increased for seven consecutive sessions through yesterday to stand around 70%. Brazil is set to slow the pace of its rate cuts to 25 bp tomorrow (to 10.25%). Colombia cut 50 bp at the end of April (to 11.75%) after a 50 bp cut in March. Colombia's central bank had delivered 25 bp cuts in December 2023 and January 2024. Chile's central bank meets on May 23. It is likely to extend its easing cycle that began last July at 11.25%. Its policy rate stands at 6.50% now. Mexico's central bank meets Thursday. It does not sure the other central banks' urgency to cut rates. It shaved a quarter-point of its target in March, and it stands at 11% now. Headline inflation (year-over-year) likely rose for the fifth month in the past six (to be reported Thursday morning). The core rate may slip but the pace of moderation seems to be slowing.

The US dollar recorded a nearly four-week low around CAD1.3610 after the US jobs report at the end of last week. It recovered to almost CAD1.3735 yesterday. Today it is fraying trendline connecting the mid- and late April highs is found near CAD1.3755. Last week's high was near CAD1.3785 and is the near-term objective. The high for the year, set in mid-April was around CAD1.3845. Initial support now is seen in the CAD1.3720-40 area. The greenback held last Friday's low against the Mexican peso yesterday (~MXN16.8275) and recovered to MXN16.95. It has held below MXN16.94 so far today. The downtrend line off the post-flash crash high is found near MXN16.9450 today. Above there, resistance is seen in the MXN17.04 area. A move above there could signal a move into the MXN17.11-MXN17.18 band. The net long speculative position in the future reached a four-year high (140k contracts) in early April. The position has been pared for the past three reporting weeks, but among the top eight currency futures, speculators are only net long the peso. Brazil reports a series of data, including March retail sales and April trade. Late today, the central bank is expected to deliver a 25 bp cut in the Selic rate that would bring it to 10.5%.