Softer Tokyo CPI Buys BOJ Time while Moody’s Cuts the Outlook for China’s Debt following Fiscal Stimulus and the Continued Property Slump

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Marc Chandler
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Overview: Outside of the Australian dollar, which has fallen by around 0.6% following the RBA meeting and the softer final PMI, which may have dragged the New Zealand dollar a lower by around 0.25%, the other G10 currencies trading little changed ahead of the start of the North American session. The eurozone and UK final PMIs were revised higher. Central European currencies lead the emerging market currencies. China reported better than expected Caixin PMI and Moody's cut China's sovereign outlook to negative from stable. The yuan is little changed. 

Gold is quieter after yesterday's wild day that saw $115 range (~$2020-$2135). It is in around a $18 dollar range today centered near $2032. January WTI is largely steady. It has fallen by about 6.2% in the past three sessions. Among the equity markets in the Asia Pacific regions, only India is posting gains. Europe is treading water and US index futures are trading softer. Benchmark 10-year yields have fallen 3-4 bp in Asia (except in China, where the 10-year yield slipped about a quarter of a basis point) and mostly 4-6 bp lower in Europe. The US 10-year Treasury yield is off a basis point near 4.25%, while the two-year yield is slightly lower near 4.63%.

Asia Pacific

A couple of hours after the composite November PMI was revised slightly lower, Reserve Bank of Australia the central bank stood pat, with the cash target rate at 4.35%. The rhetoric appeared to downshift slightly, with the central bank emphasizing it is data dependent. After delivering a hike in November, the risk was never very high of a follow-up move. Still, as recently as last Monday, the futures market was pricing in around an 80% chance of another rate hike in H1 24. This has been completely unwound. Yet, the swaps market does not have a 25 bp cut fully discounted until the end of next year. For the record, the services PMI was revised to 46.0 from 46.3. This is new low for more than two years. Similarly, the composite fell to 46.2 from the 46.4 flash reading, and 47.6 in October. It is a 27-month low.

Japan's final November composite PMI was also revised lower. At 49.6, it is below 50 for the first time this year. The services PMI was revised to 50.8 from 51.7 preliminary reading and 51.6 in October. This is also a new low for the year. More importantly, Tokyo's CPI moderated more than expected last month. The headline peaked in January at 4.4% and now stands at 2.6%, a new low since July 2022. The core rate, which excludes fresh food, reversed the October gain and more, to fall to 2.3%. The measure that excludes fresh food and energy has been more resilient. It peaked in July and August at 4.0% and has fallen for three months through November to stand at 3.6%. With the modest recovery in the yen and the pullback in the 10-year JGB yields around 25 bp from its recent high, the pressure on the BOJ to move at the December 19 meeting has been reduced.

China's Caixin PMI did not seem to draw much attention. Recall that last week, Caixin's manufacturing PMI unexpectedly rose to 50.7 from 49.5. Today, a gain in the services PMI was reported (51.5 from 50.4), and the composite rose to 51.6 from 50.0. The November trade figures are more politically sensitive while Beijing may be more sensitive to the deflationary readings of the CPI and PPI due at the end of the week. Separately, Moody's cut its outlook for Chinese bonds to negative from stable and retained the A1 rating. The rating agency cited the fiscal support to local governments and the ongoing property slump posed risks to the economy. Note that end of the end of last week, the US announced tighter restrictions against using Chinese inputs for EV batteries to qualify for the full subsidies under recent government initiatives. Here, the US seems to be using "infant industry" protection rather than national security grounds. Separately, European Council President Michel, EC President von de Leyen, and the EC's top diplomat Borrell will meet China's top leadership in the second half of the week. The EU has launched a probe into Chinese subsidies for EV.

Afar falling to its lowest level since mid-September (JPY146.25), the dollar trended higher to near JPY147.50 yesterday, helped by a recovery in US interest rates. We had suggested that the double top near JPY152 projected toward JPY146, which yesterday's low came close to meeting. The dollar is consolidating inside yesterday's range today may be content in a JPY146.50-JPY147.50 rang today. Follow-through buying initially pulled the Australian dollar closer to $0.6700, but it reversed lows and fell to nearly $0.6600 in North America yesterday. Follow-through selling today after the RBA meeting saw it approach last week's lows ($0.6565-$0.6570) area. There are options for nearly A$1 bln at $0.6550 that expire today. A break could signal a test on the $0.6500-15 area, and possible the $0.6450-75 area. The greenback reached a four-day high against the Chinese yuan near CNY7.15. Reports said that Chinese banks were dollar sellers today after Moody's cut in its outlook and that commercial lenders were also featured sellers. The PBOC set the dollar's reference rate at CNY7.1127 (CNY7.1011 yesterday). The average in Bloomberg's survey was for CNY7.1438.

Europe

The eurozone saw the final November PMI. It was a little better than the flash reading at 47.6 rather than 47.1 (46.5 in October) and the best in four months. Still, it has not been above 50 since May. The combination of the softer-than-expected CPI and weak data encourages speculation of an early ECB rate cut. Also, one of the ECB's leading hawks, Schnabel, acknowledged that the soft CPI report last week makes another hike "rather unlikely."  The market was already there, and the Germany two-year yield fell almost 40 bp last week. It is down another five basis points today, and at 2.64%, is the lowest since March. Separately, the ECB's survey showed inflation expectations were little changed in October. The one-year CPI expectation was steady at 4.0%. It bottomed at 3.4% in June and July. The three-year survey was also unchanged at 2.5%. It bottomed in June at 2.3%. Separately, we note that Germany's 10-year breakeven (the difference between the yield of the inflation protected security and the conventional bond) has fallen from a 2.30% high last month to about 2.05% now. 

The BOE/Ipsos quarterly survey on 12-month inflation expectations will be reported at the end of the week. In August it stood at 3.6%. It peaked at 4.9% in August 2022 and moved down to 3.50% in May before firming in August. In August, UK headline CPI stood at 6.7%. The base effect (October 2022 2% rise dropped out of the 12-month comparison) helped drive the decline to 4.6% in October. The one-year UK breakeven is slightly below 1.60%. Separately, the UK final November PMI was better than the flash. The manufacturing PMI had already been revised to 47.2 from 46.7, and today, the final services PMI ticked up to 50.9 (from 50.5 flash), the first above-50 reading since July. The composite improved to 50.7 (50.1 flash) and is also the first reading above 50 since July.

The euro peaked last week near $1.1015, a bit higher than we anticipated, but despite two intraday moves above $1.10, the euro failed to close above it. The pre-weekend rally, seemingly encouraged by a less-than-adamant protest of expectations, we were told, was fully unwound and more yesterday. The euro found support ahead of $1.08, and it held today. Still, the euro settled below the 20-day moving average (~$1.0855) for the first time in a month. A convincing break targets $1.0735-55. A move above $1.0850-60 sees $1.09. Sterling traded on both sides of the pre-weekend range (~$1.2615-$1.2715) but the close was slightly inside the range, which neutralizes some of the negativity. For the fifth time in six sessions, sterling successfully tested the $1.26 area, forging a base. Options for about GBP425 mln at $1.2570 expire tomorrow. Initial resistance is seen in the $1.2650-60 area, but the upper end of the recent range is near $1.2725.

America

The highlight this week is the employment data on Friday. Today, the US sees the final PMI and the ISM services survey. Perhaps, more importantly, given Friday's release is the JOLTS report (October) on job openings. While the trend is toward lower job openings, they did unexpectedly rise in August and September after falling in six of the first seven months of the year. A three-month moving average smooths out some of the volatility of the report, and here the trend is clear. The three-month average has fallen in each quarter so far this year. The average in Q3 was 9.32 mln, down from 9.7 mln in Q2 and 10.1 mln in Q1. More broadly, after the 5.2% surge in Q3 GDP, a dramatic slowdown is unfolding this quarter. The latest iteration of the Atlanta Fed's GDP tracker puts it at 1.2%, almost the same as the median in Bloomberg's monthly survey (1.1%).

Canada sees its November services and composite PMI. The composite fell below 50 in June and has not looked back. The year's low was seen in October at 46.7, the lowest since August 2022. Canada will also report October's merchandise trade balance. Recall that in September, Canada reported a C$2.04 bln surplus, the largest since February 2022. The median forecast in Bloomberg's survey is for a C$1.8 bln surplus. The highlight of the week is the Bank of Canada meeting tomorrow. The swaps market has about a 70% chance of the first cut in Q1 24 and has four cuts fully discounted by the end of next October.

After being sold below the 200-day moving average against the Canadian dollar for the first time in two months ahead of the weekend, the greenback snapped back yesterday. It recovered most of the pre-weekend decline. It poked above CAD1.3560 yesterday, and a little further to test last Friday's high near CAD1.3570. A move above could target CAD1.3600-20. Despite the strongest Mexican auto sales last month since before the pandemic and a 4.5% year-over-year increase in consumption in September, a decline in capex (-1.5% month-over-month) seemed to be seized upon as more reason for the central bank to bring forward rate cuts. The peso lost 1.5% yesterday making it one of the weaker emerging market currencies. Still, note that on a year-over-year basis, Mexico's gross fixed investment was up nearly 22% in September. It peaked in August at 29.2%. This, coupled with the risk-off mood and broader dollar gains, saw the greenback climbed to almost MXN17.54, a three-week high. In fact, the four weakest emerging market currencies yesterday were from Latam. Follow-through buying today lifted the US dollar to about MXN17.5650 to approach the 200-day moving average (~MXN17.57) before reversing lower to return to session lows near MXN17.4570. A break of MXN17.45 could spur a move toward MXN17.35 today.