China Data Dump Keeps Market Looking for a Rate Cut Next Week

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Marc Chandler
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Overview:  The mostly consolidative week for the US dollar continues. Most for the G10 currencies are +/- about 0.25% today and only a slightly wider range for the week. The odds of a Fed rate cut in March is virtually unchanged on the week at around 75%. The JP Morgan Emerging Market Currency Index is practically flat on the day and week. The Russian ruble and Mexican peso lead today's advancers, while eastern and central European currencies are laggards. The Chinese yuan is flat despite moderating deflation and a larger trade surplus. Lending figures disappointed. The PBOC is likely to cut its one-year benchmark rate at the start of next week. 

The US and UK strike on the Houthi in Yemen has helped lift oil and gold prices, but otherwise the impact on the markets is minimal. Outside of Japan and India, most of the large markets in Asia Pacific saw modest losses. Europe's Stoxx 600 is up about 0.8%, which, if sustained, would be the largest gain since mid-December. Perhaps European equities have been helped by a 4-5 bp decline in 10-year yields today. The 10-year US Treasury yield is up slightly near 3.98%. US index futures are a little softer. Gold set a new high for the week, as it draws near $2050. February WTI has reached a new high for the year, a little above $75 a barrel.

Asia Pacific

Japan's November current account surplus narrowed as is the historical pattern, which was violated in 2022. For the first time in 16 years, Japan's current account surplus widened in November 2022. More broadly, Japan's current account has returned to its pre-Covid size. Through November, Japan's current account surplus has averaged about JPY1.8 trillion a month (~$12.8 bln). In the first 11 months of 2019, the average was around JPY1.7 trillion. In Europe and the US, the current account position is driven by the trade balance. This does not hold in Japan. On a balance of payments basis, Japan recorded an average trade deficit of a little more than JPY610 bln a month through November last year. In January-November 2019, Japan recorded a nearly balanced trade account (~JPY7.5 mln monthly average). 

China does not have a fixed schedule for many of its economic reports. Today, it updated inflation (really deflation), lending and trade figures. First, the deflation in CPI continued by at a slower rate. Consumer prices fell by 0.3% year-over-year in December. It as -0.5% in November and the median forecast was for -0.4%. Conventional wisdom attributes the deflation to weak demand, yet the deflation is primarily about food, where demand is not so elastic. Food prices are off 3.7% year-over-year, while non-food prices are up a 0.5%. CPI rose for the first time on a month-over-month basis since September. The core rate rose by 0.6% year-over-year for the third consecutive month. Producer price deflation slowed to -2.7% (-3.0% in November). Separately, aggregate lending figures slowed to CNY1.94 trillion from CNY2.45 trillion and was less than expected, despite a small improved in bank lending. Taken together, the inflation and lending figures add to expectation that the PBOC will cut the benchmark one-year Medium Term Lending facility rate Monday (from 2.50%). Lastly, China reported a larger-than-expected trade surplus of $75.3 bln, up from $68.4 bln in November. Exports rose by 2.3%, the second consecutive increase, while imports edged up 0.2% after falling by 0.6% previously. For the year as a whole, China's trade surplus narrowed for the first time since 2016. Exports were off 4.6% last year, though auto exports surged by almost 64% (and a little more than 4% domestically). Imports were off 5.5% last year.

Taiwan votes tomorrow. The most likely outcome is a continuation of the status quo. The current vice president (Lai Ching-te) was running a few percentage points (~3%-11%) ahead of his closest rival from the KMT Hou Yu-ih. There is a ten-day black out period of polling before the election. There was a brief possibility several months ago of a unified opposition ticket. Although there was some excitement, the deal could not be consummated. Beijing has been continuing its aerial harassment of Taiwan in the run-up to the election. Lai has previously said he was a political worker for the independence of Taiwan. He seems modified his position and now says that there need not be a formal declaration of independence because Taiwan is already de facto sovereign. The continuation of the status quo means tense cross-strait relations. After trending higher against the Taiwan dollar for most of 2023, the greenback peaked in early November near TWD32.50. The US dollar's broad decline in November and December saw it tumble 5.7% against the Taiwan dollar (~TWD30.64) It has recouped about 1.6% since the turn of the year. There may be scope for near-term dollar gains. The TWD31.35 area may be a reasonable initial target. It houses the 200-day moving average, the highs from the second half of December, and the (38.2%) retracement objective of the dollar's fall from last November.

The dollar reached JPY146.40, a new high since December 11, after the US CPI was reported. It was the third consecutive session that the dollar's highs were set in North America. It consolidated mostly in a JPY145.70-JPY146.20 range for most of the remainder of the session. The CPI was slightly firmer than expected, and Cleveland Fed President Mester, who votes this year (though retires in June), pushed against March rate cut, US rates softened, and this seem to weigh on the greenback. True to the recent pattern, there was no follow-through dollar buying in Asia Pacific hours. The greenback slipped to about JPY144.85 before resurfacing JPY145. It has been capped in the European morning near JPY145.25. Near there, the dollar is about 0.4% higher on the week. The Australian dollar was sold after the US data. It came within about 6/100 of a cent of last Friday's low (~$0.6540). It recovered to settled above the lows seen in the first three sessions of the week (~$0.6680). Today, it has been confined to about 15 ticks on either side of $0.6700. Australia reports December employment figures next week and disappointing news could help the Aussie finish the downside correction we envisioned. The PBOC set the dollar's reference rate at CNY7.1050. The fixings have been in a narrow range this week (CNY7.1006 to CNY7.1087). The average in Bloomberg's survey was CNY7.1584 today, but it too has been in a narrow range this week (CNY7.1498-CNY7.1696). The dollar has risen by a little more than 0.25% against the yuan this week after gaining about 0.65% last week. 

Europe

The 0.3% growth the UK reported for November was slightly better than expected and offsets the contraction of the same magnitude in October. However, the three-month change slipped into contraction for the first time since October 2022. Still, November details were somewhat encouraging. The key sectors had all contracted in October and recovered in November. Industrial output rose by 0.3% after falling 0.8%. Services output rose by 0.4%. It had declined by 0.2% in October. The trade deficit was halved to GBP1.4 bln. Construction was the exception. It failed to gain traction and fell by 0.2% after a revised 0.4% decline in October (initially -0.5%). The high-frequency data next week may have greater impact on BOE expectations, though there is practically no chance of a move at the next meeting on February 1. Next week's data includes an update on the labor market and wages, CPI, and retail sales. 

The euro recorded the session high slightly shy of $1.10 in the positioning ahead of the US CPI. The session low was recorded near $1.0930 in the subsequent dollar bounce. The euro recovered back toward $1.0980 in the North American afternoon. Recall that last Friday's range was roughly $1.0875 to almost $1.10. Yesterday's high, according to Bloomberg was 2/100 of a cent below last Friday's high. The market seems to lack near-term conviction, torn between softer US rates and the steady stream of poor eurozone economic new. Options for nearly 1.6 bln euros at $1.10 expire today. It is in a narrow range today between about $1.0955 and $1.0985. After falling by around 0.85% last week, the euro is up ~0.15% this week. Sterling set a marginal new high for the year today at $1.2785, where is stalled and slipped back to slightly below $1.2750 in the European morning where new buying materialized. The upper end of the range is around $1.28. There had been minor intraday penetration in thin markets at the end of last year, but sterling has not closed above it for nearly six months. Still, the sideways movement has alleviated the overextended momentum indicators. A move above $1.2825 will likely be seen as a breakout and could spur a move toward $1.30. Sterling is the strongest G10 currency this week, ahead of the North American session, with a nearly 0.3% gain. 

America

On the heels of yesterday's CPI is the December PPI to close out the week. The CPI print was slightly firmer than expected with a 0.3% increase in the headline rate (lifting the year-over-year rate to 3.4% from 3.1%). The 0.3% increase in the core rate puts the year-over-year rate at 3.9%, down from 4.0%. The core figure, excluding housing, which has been cited by several Fed officials, including Chair Powell, rose by 0.4% for a 3.9% year-over-year rate, unchanged from November. Producer prices are expected to have edged slightly higher last month. The base effect (PPI fell by 0.3% in December 2022), a minor rise like 0.1% would translate into a year-over-year rise to 1.3% from 1.9%. Still, producer prices would have fallen at annualized rate around 1.2% in Q4. Excluding food and energy, core PPI is likely steady at 2.0%. A 0.2% month-over-month increase would be the first increase in three months, after unchanged in October and November. 

The Fed funds futures market had a 25 bp cut fully discounted for March at the end of last year. After the December employment figures, it settled last week with a little less than a 75% chance priced and net-net is little changed this week. We still think that is too high, and suspect, based on the current information set that the odds are probably a little less than 50/50. Next week's real sector data, retail sales, industrial production, and housing starts will likely confirm that the US economy has not fallen off a cliff and that growth may still be running slightly ahead of what the thinks is the non-inflationary pace (1.8%).

In the post-CPI action, the US dollar reached slightly through CAD1.3440, its best level since December 14. The CAD1.3450 area holds the (38.2%) retracement of the dollar's losses since the November 1 high for last year near CAD1.39 and the (61.8%) retracement of the dollar's pullback from last month's high around CAD1.3620. The greenback is better offered today and looks poised to test the week's low near CAD1.3340. Meanwhile, disappointing Mexican industrial production (-1.0% compared with median forecasts in Bloomberg's survey for a 0.2% gain) did not deter the peso bulls. The greenback initially rose MXN17.0680, a new high for the week, and then reversed lower, and settled below Thursday's low to record a bearish outside down day. Follow-through dollar selling pushed it toward MXN16.87. The week's low was set on Monday near MXN16.7850, a little more than a four-month low. The swaps market has a quarter-point rate cut discounted for Q1. The central banks meet on February 8. Its March meeting is the day after the FOMC meeting concludes on March 20.