Weak US Durable Goods may Herald Pullback in Capex

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Marc Chandler
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Overview: Most of the G10 currencies are trading quietly in narrow ranges today. After a slightly firmer than expected national CPI reading, which still moderated, and a pullback in US yields, the Japanese yen is the strongest of the major currencies. The dollar has pulled back from almost JPY151 to nearly JPY150. The New Zealand dollar is the weakest, off about 0.2% ahead of tomorrow's central bank meeting. After selling $127 bln of coupons yesterday, the US Treasury comes back with $42 bln seven-year note sales and $80 bln in a 42-day cash-management bill. A sharp drop in Boeing orders will make for a poor durable goods orders report, but more generally, capex looks set to slow after a sharp expansion in Q2 23 and Q3 23, perhaps ahead of the November election. Meanwhile, congressional leaders go to the White House today to see if a partial government shutdown at the end of the week can be averted and aid to Ukraine secured. 

After profit-taking was seen yesterday, most large Asia Pacific equity markets advanced today, including a 1.2% rally in China's CSI 300 and a nearly 1.5% rally in mainland shares that trade in Hong Kong. Taiwan and South Korean markets were exceptions and recorded modest losses. Europe's Stoxx 600 has steadied after losing about 0.35% yesterday, its biggest loss in nearly two weeks. US index futures are steady to slightly firmer. European 10-year yields are mostly two basis points lower. Ten-year Gilt yields are around three basis points lower after the BRC reported the smallest increase in shop prices (2.5% year-over-year) in two years. Gold is firm, but the yellow metal remains within last Friday's range (~$2016-$2041). April WTI recovered yesterday from a six-day low near $75.85 to $7800 and is trading quietly today with a $77-handle.

Asia Pacific

The moderation of Japan's January CPI was telegraphed by the Tokyo report out late last month that showed the headline and core rates falling below 2%. Due to methodological differences, the national figures run a little hotter than Tokyo, but the headline and core rates eased to 2.2.% and 2.0%, respectively from 2.6% and 2.3%. They have not been lower since March 2022. The measure that excludes fresh food and energy slowed to 3.5% from 3.7%. That is the lowest since January 2023. Tokyo's February CPI is due next week (March 5). Although the January CPI was a bit higher than the median forecast in Bloomberg's survey, the market took it in stride. Japan's two-year yield edged up by a single basis point and the dollar initially fell from about JPY150.70 to JPY150.50. It was sold from JPY150.50 to JPY150.10 several hours later into the end of local sessions, helped by the pullback in the US 10-year yield.

The question for many is whether the unexpected economic contraction in Q4 23 and core inflation below target will impact the outlook for BOJ policy. Indeed, we expect more poor real sector data this week, with a weak recovery in retail sales, and a sharp drop in industrial production and housing starts. We suspect an exit from negative interest rates at the April BOJ meeting remains the most likely scenario. Under Governor Ueda's leadership, the decision to lift the overnight target rate out of negative territory is more technocratic in nature, it makes the conduct of monetary policy more difficult, than a reflection of strong price pressures, as was the case in the US and Europe.

The Reserve Bank of New Zealand meets first thing tomorrow. Governor Orr has sounded among the most hawkish of G10 central banks. The quarterly CPI measure peaked at 7.3% in Q2 22 and stood at 4.7% at the end last year. The target rate has been at 5.5% since last May. The swaps market has about a 1-in-4 chance discounted for tomorrow and the odds rise to about 50/50 at the May meeting. However, by the end of the year, the swaps market has the overnight rate around 5.25%. The economy contracted by 0.3% in Q3 23 but looks to have returned to growth in Q4 23 (due March 21). The New Zealand dollar slipped by 0.5% last year after falling 7% in 2022. Amid the broad pullback in the US dollar in Q4 23, the Kiwi rose by almost 5.4%. It is off about 2.5% so far this year.

The rise in US yields yesterday, especially after the weak auction results for a record $64 bln five-year note sales. helped the greenback climb back up to almost the year's high set after the US CPI on February 13 near JPY150.90. There are options for around $830 mln expiring today at JPY151 and almost $1.8 bln struck there that expire tomorrow. Above there, the high from 2022 and 2023 near JPY152.00 beckons. However, with yields pulling back and some yen purchases after Japan's CPI figures, the dollar fell to nearly JPY150.10 in late Asia Pacific/early European turnover. The euro recorded an outside up day against the yen yesterday, trading on both sides of the pre-weekend range and settling above it high. It set a new 2024 high slightly above JPY163.70. A 15-year high was set last November near JPY164.30. The key, we think, is the 10-year US yield and a poor US durable goods orders report today could cap the yield today. However, tomorrow Japan will likely report a poor data that may warn of a continued economic contraction at the start of this year. The Australian dollar's eight-day rally ended yesterday. The nearly 0.5% decline offset in full last week's gains. Follow-through selling today was limited to the $0.6525 area. The Aussie recovered to almost $0.6560, where it has been greeted with by sellers in early Europe. A close above $0.6565 would be constructive. The bounce in the yen has failed to lift the yuan and the dollar continues to hover near CNY7.20, without moving above. The PBOC set the dollar's reference rate at CNY7.1057 (CNY7.1080 yesterday). Ten institutions contributed their forecasts leaving eight after the highest and lowest were excluded (range: CNY7.1072 to CNY7.1982) for an average of CNY7.1966 (unchanged from yesterday). The dollar is rising against the offshore yuan today for the fourth consecutive session after ending a six-day rally last Thursday. 

Europe

Eurozone money supply M3 bottomed last August, contracting 1.3%. The 0.01% year-over-year increase in January is the fifth consecutive month of improvement. Ironically, the better money supply and better credit figures are being seen as inflation is set to slow markedly. The preliminary estimate of February CPI, due Friday, is expected to ease toward 2.5%-2.6% (from 2.8% in January and 2.9% in December). The 0.6% month-over-month rise that the median forecast in Bloomberg' survey would put the three-month annualized rate around 1.2%. The base effect warns that the year-over-year measure will fall sharply in the next two months (March and April) and a sub-1.5% reading seems reasonable.

The euro reached $1.0860 yesterday, a little shy of $1.0865 where almost 2.4 bln euros in options expire tomorrow. It briefly traded above the strike in early European activity before sellers emerged and knocked it down to session lows near $1.0840. Another set of options for 1.75 bln euros expire at $1.0850 tomorrow too. The euro recorded the low for the year on February 14, the day after the US January CPI. Since then, it has risen in eight of nine sessions through yesterday. Last week's high was near $1.0890. We have identified the $1.0900-20 area as important resistance. So far, today is the fourth consecutive session the euro has not traded below $1.08. Nearby support is seen in the $1.0830 area and intraday momentum indicators are stretched. Yesterday, sterling traded inside the pre-weekend range, which itself was inside last Thursday's range (~$1.2610-$1.2710). Still, sterling managed to extend its advance for the fifth consecutive higher close. However, it does not seem to be going anywhere quickly. It is trading within yesterday's range (~$1.2655-$1.2700). A move- above $1.2710 may run into offers around $1.2750. The 2024 high was set on January 12 near $1.2785. The GBP400 mln of options at $1.28 will off today uneventfully. With the setback to session lows near $1.2670 in the European morning, the intraday momentum indicators are oversold. 

America

The US economy expanded by 4.9% in Q3 23 and 3.3% in Q4 23. The issue is not whether the growth is sustained but about the pace and extent of the economic moderation. In Bloomberg's survey with 71 respondents, only three economists have Q1 24 at 2.5% or above. The Atlanta Fed GDP tracker will be updated later today. It stood at 2.9% as of February 16. January durable goods orders likely were dragged lower by the dramatic drop in Boeing orders. Excluding aircraft and defense orders, durable goods orders may have risen by 0.1% in January, half of the Q4 23 average increase. Capex is expected to slow around 1.1% in H1 24 (annualized pace from a little more than 12% in H2 23. Meanwhile, 11 Fed officials are scheduled to speak this week. In general, there seems to be a broad agreement 1) there is little sense of urgency regarding rate cuts and 2) the median forecast among Fed officials in December was for three rate cuts this year, and this is unlikely to changed significantly when updated next month. 

Mexico reports January trade figures today. Mexico recorded a $5.5 bln trade deficit last year. The shortfall was $26.5 bln in 2022. There have been numerous articles in the financial press playing up China's exports to Mexico. If these exports are finished goods, then claims that Chinese companies are using Mexico to avoid US tariffs on Chinese goods is fair but there is still a domestic content requirement, which the USMCA toughened compared with the earlier iteration under NAFTA. If Chinese goods imported by Mexico are consumer goods, meant for domestic consumption, no harm no foul. On the other hand, Mexico's imports from China could be semifinished goods or capital equipment as plants are built to produce goods that will be later exported may cause greater consternation among American observers and policymakers who have argued that US production of goods in China, such a General Motors, should not be counted alongside US exports to China to arrive at a comprehensive measure of US penetration. We argue that for historical reasons (overvalued dollar and foreign protectionism) encouraged US companies to pursue a direct investment strategy as opposed to the more traditional export-orientation to service foreign demand. Sales by majority owned affiliate of US companies has consistently been greater than US exports for more than half a century. The same is now true for Japan and for similar reasons. China's movement in the same direction may be driven by real or threatened protectionism.

The implied three-month volatility of the Canadian dollar is slightly above 5%, a four-year low. As typically is the case, it is the lowest volatility among the G10 currencies. Although the greenback has settled higher in all but one week this year (first eight), for the better part of the past seven weeks, it has traded between roughly CAD1.3350 and CAD1.36. Moreover, for the tenth session today, the US dollar continues to trade in the CAD1.3440-CAD1.3585 range established on February 13, the day the US reported January CPI. There are $500 mln of options at CAD1.3550 that expire today. There are options for another $600 mln that expire tomorrow at CAD1.3570. The greenback slipped to almost $1.3490 in the European morning and found new bids. Meanwhile, the US dollar continues to fray the five-week downtrend line against the Mexican peso but has not settled above it. It comes in today around MXN17.1170. The dollar is trading near a three-day low against the peso near MXN17.05 in Europe. With intraday momentum indicators stretched, we do not look for strong follow-through selling in North America today. The US dollar also pulled back against the Brazilian real. After approaching BRL5.0 before the weekend, the dollar slipped to almost BRL4.97. Nearby support is seen in the BRL4.96 area. A small rise in Brazil's IPCA CPI today (to ~4.55% from 4.47%) is unlikely to deter the central bank from cutting the Selic rate again next month. At 11.25%, the real rate is punishing. That same applies to Mexico which has similar inflation and overnight target rate, but unlike Brazil (Colombia, Chile, and Peru), Banxico has not begun the easing cycle.