Consolidative Tone Emerges Ahead of Tomorrow’s US Jobs and EMU CPI

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Marc Chandler
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The bond market stands out as continuing the trend seen this week, with higher yields. European benchmark 10-year rates are mostly 4-6 bp higher. The 10-year US Treasury yield is up four basis points to 3.95% and the two-year is steady near 4.33%. Gold's four-day slide is being halted today and the prices for the yellow metal are up by about 0.3% to around $2048. A sharp drop in US oil inventories (-7.9 mln barrels, according to API estimates), disruption with Libyan supplies, and heightened tensions in Iran and the Middle East has seen February WTI extend yesterday's strong (~3.3%) gains. It is trading near $73.50 after finishing last year around $71.65.  

Asia Pacific

There are three highlights from today's Asia Pacific Session. First, Japan returned from the extended holiday. The greenback closed slightly above JPY141 on December 29, the last day Japanese markets were open and reached JPY143 yesterday. While the local markets were closed, the MSCI Asia Pacific equity index was down by almost 1%. In the past, large natural disasters have seen Japanese insurance companies repatriate funds to cover domestic claims. Japan's final December manufacturing PMI edged up to 47.9 from the flash reading of 47.7 (from 48.3 in November). It is still a 10-month low. Second, China's Caixin services and composite PMI improved. Services rose to 52.9 from 51.5, a five-month high, while the composite PMI rose to 52.6 from 51.6, a seven-month high. The Caixin PMI fared better than the official PMI. The Caixin survey includes more small businesses. This did not blunt the impact on Chinese stocks from Fitch's downgrade of four managers of bad debt in China on grounds of weaker official support. China may report reserve figures in the next day or two. Given the dollar's decline and the rally in bonds, our back-of-the-envelope estimate is for an increase of around $50 bln. Third, the improvement initially reported in Australia's services and composite PMI were pared in the final reading. the preliminary estimate. The services PMI stands at 47.1, down from 47.6 initially, but still up from November's 46.0. The composite is at 46.9, up from November's 46.2, but below the initial estimate of 47.4. 

Taiwan holds national elections on January 13. No new polls are allowed ahead of the vote, while the last three showed the DPP candidate and current vice president running three to 11 percentage points ahead of the main opposition candidate from the KMT. If the Ching-te wins, it would be the third consecutive term for the DPP, unprecedented since presidential elections began in 1996. He has tempered some of his rhetoric that provoke China (and the US) claiming he was a political worker for the independence of Taiwan and that Taiwan is a de facto sovereign state and does not need to declare independence. China reportedly continues with its aerial harassment of Taiwan. In line with the US dollar's broad weakness in November and December, the greenback fell by about 5.75% against the Taiwan dollar reaching six-month lows near TWD30.64. It has recovered toward TWD31.03 as of today. Note that the policy rate (discount rate) is 1.875%. December CPI is due tomorrow. It is expected to have eased to 2.7% from 2.9%.

The dollar rose to nearly JPY143.75 yesterday, returning to levels last seen on December 20. After some hesitancy is pushed above JPY144 in the European morning were options for almost $1 bln expire today to reach JPY144.30. The next technical target may be in the JPY144.70 area. The Australian dollar peaked on December 28 near $0.6870 and yesterday's low was almost $0.6700. The halfway mark of the rally from last month's low (~$0.6525) is slightly lower. Today is a consolidative session, as the Aussie is well within yesterday's range. A close above $0.6760 would help stabilize the technical tone. The greenback rose to almost CNY7.16 today, further entering the gap from the sharply lower opening on December 14, but unable to close it (~CNY7.1710). The dollar subsequently has been sold back to CNY7.1470. The PBOC set the dollar's reference rate at CNY7.0997 (CNY7.1002 yesterday). The average projection in Bloomberg's survey was CNY7.1488 (CNY7.1467 yesterday). 

Europe

The final eurozone services and composite PMI readings do not add to the market's information set. The services PMI has gone sideways between 47.8-48.7 since August. The initial estimate for December was 48.1. It was revised to 48.8. Similarly, the composite also continues to bounce along its trough (46.5-47.6) in the last five months of 2023. The final December reading is 47.6, up from 46.0 initial estimate but unchanged from November. New information was provided by the German states' and France's December CPI ahead of the eurozone aggregate figures tomorrow. After falling by 0.7% in November, Germany is expected to report 0.2-0.3% increase in December's harmonized measure. That would lift the year-over-year rate to around 3.8-3.9% from 2.3% in November, which is more about the base effect. Recall that in December 2022, CPI fell by 1.2% (reflecting gas subsidies). Still, the comparison is easier in Q1 24, as CPI rose by over 10% at an annualized pace in Q1 23. The French harmonized CPI rose by 0.1% in December, less than expected lifting the year-over-year rate to 4.1% from 3.9%. 

The UK reported a small gain in consumer credit and mortgage approvals but are not sufficient to turn the economy. The final services and composite December PMI were slightly better than the preliminary estimates of 52.7 and 51.7, respectively. The final reading put them at 53.4 and 52.1. It is the third consecutive rise in the composite. However, note that composite averaged 53.9 in Q2 and 49.3 in Q3 while GDP was flat in Q2 and contracted in Q3 (-0.1%). It averaged 50.5 in Q4, and economy may have contracted. The monthly GDP contracted by 0.3% in October and November's print is out at the of next week.

The euro traded below $1.09 yesterday for the first time since December 18. Since peaking on December 28 near $1.1140, the euro has fallen nearly 2.5-cents in the past five sessions. The next technical targets are in the $1.0875-85 area and the 200-day moving average is slightly below $1.0850. Consolidation is today's theme, ahead of the eurozone CPI and US jobs data. The euro reached $1.0970 in the European morning but stretched the intraday momentum readings, suggesting a pullback in the North American morning is likely. Sterling was the standout performer yesterday; the only G10 currency to rise against the dollar (~0.35%). It found offers near the 20-day moving average (~$1.2670). Sterling has been bid to $1.2730 in Europe today, but here too the intraday momentum indicators are stretched. Some of sterling's apparent strength against the dollar seemed to reflect demand on the crosses. It rose to two-week highs against the euro and traded above its 20-day moving average against the yen for the first time since December 1.

America

The dollar's gains were briefly pared yesterday in response to the softer ISM manufacturing prices and new orders, and the lowest job openings since March 2021. Yet, the reports prompted the Atlanta Fed's GDP tracker to firm to 2.5% from 2.0%. However, the greenback quickly recovered and returned toward its highs. We did not see much new in the FOMC minutes except that some wanted to discuss the balance sheet, which seems like the first time. Even this is not surprising given the decline in the use of the reverse-repo facility. The prospects for a March cut diminished marginally to about 75% chance from 87%. This still seems too confident. The market's attention is shifting to tomorrow's jobs report, so today's Challenger job cut report, the ADP private sector job estimate, and the weekly jobless claims are of key interest, and likely to overshadow the final services and composite PMI. Separately, in addition to unwinding the late December rally, there may be a drag from investment grade (domestic and corporate) bond issuance, which is typically high at the start of a new year. 

Canada sees its December services and composite PMI today ahead of its employment report tomorrow. Recall that the manufacturing PMI fell to 45.4, a new low for the 2023 (from 47.7 in November). The 2.3-point drop was the second largest last year. The services PMI was at a new cyclical low of 44.5 in November, as was the composite (44.8). Still, despite the Canadian economy's weaker performance than the US, the market has less than a 40% chance that the Bank of Canada cuts rates by the end of Q1compared with an almost 80% chance of a Fed cut. 

The greenback traded above its 20-day moving average (~CAD1.3370). It has done so on a handful of occasions since it last closed above it on November 13. It is inside yesterday's range today amid the consolidative theme. There are options at CAD1.3395 for almost $1 bln that expire today, but the threat has lessened. The dollar is testing support in the European morning in the CAD1.3300-15 area. The Mexican peso was fairly resilient in the face of the continued recovery of the US dollar. The dollar reached above MXN17.10 yesterday, and eight-day high, but pulled back to settle below MXN17.02. Follow-through selling today has seen the dollar ease to about MXN16.9770. The intraday momentum indicators favor a modest greenback recovery in the North American morning.