China’s Measures Begin to Find Traction, US Employment Report on Tap

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Marc Chandler
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Overview: Beijing's seemingly steady stream of measures to support the economy and steady the yuan are beginning to produce the desired effect. The yuan is snapping a four-week decline and the CSI 300 halted a three-week drop. Some economists estimate that the bevy of measures may be worth as much as 1% for GDP. The dollar is narrowly mixed ahead of the US employment data, which is expected to see the pace of job growth slow to around 170k. Of note, the Mexican peso extended yesterday's losses following news that the central bank was winding down its forward hedge program. After the peso dropped 1.75% yesterday, it is off another 0.7% today. 

The MSCI Asia Pacific Index rose for the fifth consecutive session today and the Stoxx 600 gain (~0.4%) is recouping the losses of the past two sessions. US index futures are posting small gains. European benchmark 10-year yields are up 2-3 bp to trim this week's decline to 7-8 bp. The 10-year US Treasury yield is little changed near 4.11%. It is off about nine basis points this week. Gold is trading quietly and remains within Wednesday's range (~$1935-$1949). It is up around $29 this week or 1.5%. Oil is extending its rally after OPEC+ indicated plans to extend export cuts through October. October WTI is trading at new highs for the year near $84.55. It is up about 5.9% this week, making it the biggest weekly gain since March.

Asia Pacific

After hinting as much in recent days, Beijing announced that as of September 25, existing mortgage rates for first homes will be reduced. Officials also announced that the minimum down payment for first-time home buyers of 20% and a 30% for second-time buyers. The moves are designed to lend support to the residential real estate market and boost consumption. Estimates suggest that existing mortgages can fall 80-100 bp. The announcement saw a surge of yuan buying, sending the dollar below its 20-day moving average (~CNY7.26) for the first time since August 4 and to its lowest level since mid-August. Follow-through dollar selling today pushed it to CNY7.24 before rebounding. Preparing for a cut in mortgage rates, large commercial banks cut deposit rates. Separately, the Caixin manufacturing PMI was reported. Unlike the "official" one, the Caixin measure rose to 51.0 from 49.2. That is the highest since February. Lastly, press reports suggest that China's Xi does not plan to attend the G20 summit next weekend that India is hosting. It would be the first G20 meeting that Xi does not attend since becoming China's president in 2013. Observers are wrestling with the motivation. Is it in defense of the BRICS? Is it a snub of Modi?

Japan and Australia saw the final August manufacturing PMI. The initial gain in Japan's PMI was revised away and the final reading showed it was unchanged at 49.6 (flash 49.7). The push above 50 in May seemed to be a fluke and barring that, Japan's manufacturing PMI has been below 50 since last October. If it were not for net exports (which includes tourism), Japan's economy would have contracted in Q2. The weakness in July's industrial output (-2.0%) and drop in housing starts (-4.1%) point to a tough start for Q3, though July retail sales jumped (2.1%, matching the best since June 2020). The final reading of Australia's manufacturing PMI went in the other direction. The slippage to 49.4 from 49.6 that was initially report was revised away. It too was unchanged at 49.6. Australia's Q2 GDP will be reported the day after next week's RBA meeting (September 5). No change in policy is expected at Governor Lowe's last meeting. The Australian economy is forecast to have expanded by 0.4% in Q2 after a 0.2% expansion in Q1.

The dollar extended the retreat after staging a key downside reversal on Tuesday and set a new low for the week near JPY145.25 earlier today. The dollar frayed the 20-day moving average (~JPY145.35) for the first time since July 31. Still, last week's low around JPY144.90 remains intact. A break could signal a move toward the JPY143.80-JPY144.00 area. The momentum indicators have turned lower and did not confirm the new high set earlier this week, leaving a bearish divergence in their wake. The Australian dollar consolidated yesterday in about a quarter-cent range on either side of $0.6480. After being turned back from $0.6500, it was sold to about $0.6445 today in late Asian turnover. It recovered to $0.6480 in the European morning. Nearby resistance is seen in the $0.6520-25 area, where options for about A$1.85 bln expire today. The momentum indicators are moving higher and barring a fresh sell-off, the five-day moving average is crossing above the 20-day moving average first time since late July. In addition to the measures to support the residential property market, Chinese officials also announced a cut in required reserves for foreign currency deposits (to 4% from 6%). The PBOC again set the dollar's reference rate below the previous session and well below expectations. The fix was set at CNY7.1811 and the average in the Bloomberg survey (after the high and low are excluded, leaving eight responses) was CNY7.2880. However, in subsequent trading, the dollar recovered from CNY7.24 to CNY7.2660. The 20-day moving average is near CNY7.2650, and dollar has not closed below it since August 3.

Europe

The eurozone's preliminary August manufacturing PMI was revised from 43.7 to 43.52, but importantly, preserving the first uptick since January. It was at 42.7 in July. Germany's stands at 39.1, unchanged from the preliminary reading and slightly better than July's 38.8. It is also the first gain since January but is seems too small to be meaningful. France's flash estimate of 46.4 was revised to 46.0. It was 45.1 in July. It matches the best reading since March, but it is still in contraction territory. The last time it was above 50 was August 2022. Italy's manufacturing PMI rose for the second consecutive month in August, but at 45.4, the slump continues. Like Italy, Spain's manufacturing PMI was above 50 in Q1, but has slumped since then. Spain's manufacturing PMI fell to 46.5 from 47.8 in July. It was at 46.4 at the end of last year. The market is going into the weekend having downgraded the probability that the ECB cuts rates at this month's meetings. On Wednesday, there was almost a 55% chance discounted in the swaps market. It was halved yesterday and is near 22% today. 

While the eurozone manufacturing PMI seems to be stabilizing albeit at weak levels, the UK's manufacturing PMI has yet to bottom. The final August reading was 43.0 compared with the preliminary estimate of 42.5 after July's 45.3. The last time it rose was in February and the last time it was above 50 was in July 2022. Meanwhile, expectations for the BOE meeting (September 21) have come in a complete circle. In early August, the swaps market did not fully discount a 25 bp hike. Then, after firm wage data and sticky core inflation, the market sentiment swung toward a little better than a 1-in-3 chance of a 50 bp move. Cooler heads prevailed and the market returned to a quarter point hike but the swing in sentiment continued. While a quarter-point hike is still the odds-on favorite scenario, the swaps market no longer has it fully discounted (~90%). Separately, Nationwide house price index fell by 0.8% in August, twice the projected decline. The 5.3% year-over-year decline is the largest since 2009.

With yesterday's losses, the euro retraced (61.8%) of the rally from the Powell-induced lows last Friday. The losses were extended to about $1.0830 today but it has stabilized in the European morning. Last Friday's low was near $1.0765. Since it broke below $1.0860 yesterday, it has not been above it. There are 1.42 bln euros in expiring options at $1.08. S till, the daily momentum indicators are beginning to turn higher. For its part, sterling gave back nearly half of its gains from last Friday's lows as it approached $1.2650 yesterday. It slipped a little further today (~$1.2650) but held above the (61.8%) retracement is closer to $1.2625. It is trading near session highs late in the European morning around $1.2680-90. The week's high was set on Wednesday near $1.2745. 

America

After weaker than expected JOLTS (July) and ADP (private sector employment in August), attention turns to the BLS August employment report. The issue is not if the US labor market is easing, but the pace of it. Our bias is for weaker jobs growth than the median (Bloomberg survey) of 170k. Many still put much stock in the ADP private sector estimate, but it has been habitually stronger than the BLS estimate, with an average of 165k in the three months through July. While the average illustrates our point, the variance has been dramatic. ADP doubled down and revised up its July estimate to 371k from 324k. The BLS estimate that 172k private sector jobs were created in July, pending today's revisions. That tentatively points to a 199k gap. In June, ADP estimated 455k private sector jobs were grown. The BLS say 128k. In May, the ADP estimate was only 12k on top of the BLS estimate. Other elements of the employment report may be benign. The unemployment rate is not expected to change from 3.5%. Hourly earnings are seen rising by 0.3%, which would allow the year-over-year rate to tick down to 4.3% from 4.4%. The participation rate is expected to remain at 62.6%, where it has been since March. Last August, the participation rate was 62.3%.

Canada reports the June and Q2 GDP figures today. The median forecast in Bloomberg's survey looks for a 0.2% contraction in June, which StatsCan has warned of based on preliminary data. It would be the first monthly contraction this year. Growth in Q2 is seen slowing to 1.2% (annualized) from 3.1% in Q1. Recall that the Canadian economy shrank slightly in Q4 22, encouraging the Bank of Canada to pause it monetary tightening earlier this year. Then, the economy proved more resilient in Q1 and hence the later resumption of the tightening cycle. The Bank of Canada meets on September 6. The market has downgraded the changes of a rate hike to less than 16%, down from nearly 25% at the end of last week, and 33% a month ago. The odds in the swaps market have gently fallen for the past four sessions coming into today. The US dollar reversed lower on Wednesday after retesting the CAD1.3640 area. Continued follow-through selling took it below CAD1.3500 today for the first time in about two weeks. In so doing, the 20-day moving average was violated for the first time since August 1. The next target is near CAD1.3450-60, and a break would boost confidence that a high is in place.

The Mexican peso tumbled about 1.8% in response to news that the central bank will cut its currency hedge (currency swaps) facility by 50% starting this month. The nine- and 12-month terms will be allowed to expire, while the six-month facility will be reduced to one-month and the renewal will be 50%. The program was launched in 2017 and boosted during Covid. The exact amount of short dollar positions that will expire each month is not clear, but overall, the outstanding position was about $7.5 bln. The first instinct was to buy pesos as it approached a two-week low. The US dollar rose from around MXN16.80 before the announcement to slightly above MXN17.1060. After the high was seen, the dollar held above MXN16.87 and made another run at the highs but ran out of time steam near MXN17.0650 and settled near MXN17.0380. Today, the squeeze has continued, and the dollar approached MXN17.20, the highest level since August 17. A trendline connecting the May high (~MXN17.9980) and the early August high (~MXN17.4260-80) comes in today near MXN17.2250. A push above there could target the August high.