Ueda’s Comments Weigh on Yen as the Market Awaits US CPI

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Marc Chandler
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Overview: The US CPI has become one of the most important high-frequency economic reports for the capital markets. The dollar is going into the report narrowly mixed against the G10 currencies. Comments by BOJ Governor Ueda about the weakness in consumption of non-durable goods was seen by some as reducing the likelihood of a change in policy next week. The greenback is threatening to snap a five-day drop against the yen. Most of the G10 currencies are in narrow ranges ahead of the US CPI. Emerging market currencies are also mixed, Russia, Thailand, and Hungary are the weakest, while the South African rand, Czech koruna, and the Chinese yuan lead the advancers. The Chinese yuan on- and offshore traded at their best levels since the end of January.

Equities are trading higher. Most of the large markets in the Asia Pacific region rose but Japan, which saw continued profit-taking. The Hang Seng and mainland shares that trade in Hong Kong surged by more than 3% led by the tech sector Europe’s Stoxx 600 is recouping most of the yesterday’s 0.35% decline, which ended a three-day advance. US index futures are firmer. European 10-year yields are 1-3 basis points lower, with the 10-year UK Gilt yield off by more than three basis points after a soft employment report, which saw a larger than expected decline in wage pressure. The 10-year US Treasury yield is off almost one basis point ahead of today’s data and auction. Gold continues to consolidate after reaching almost $2200 at the end of last week. Initial support is seen near $2170 and then $2150. April WTI fell to a two-week low yesterday around $76.80 before recovering to settle slightly below $78. Today, it has reached $78.70.

Asia Pacific

Many observers think that communist China simply orders its state-owned banks to do it bidding, and voila, it gets done. It does well from propaganda purposes, but there seems to be space between them. Beijing wants the banks to boost their lending to the property developers, but a couple of the largest are balking. Industrial & Commercial Bank of China and China Construction Bank have not agreed yet to the syndicated loan for one of the largest residential property developers. They want more collateral.

The Bank of Japan’s target rate stands at 0.10% but the effective rate is -0.01%. A series of firmer data (CPI, labor cash earnings, reports of strong wage demands, and an upward revision to Q4 23 GDP) coupled with comments from a couple BOJ officials have fanned speculation that a rate hike could come as early as next week. A local press report suggested that the Yield Curve Control could, which caps the 10-year yield at 1.0% could also be jettisoned. The idea is that the BOJ would revert to setting a fixed amount of JGB buying. There also is much discussion about the trajectory BOJ policy. The overnight swaps market is pricing an overnight target rate of around 0.25% by year-end. Before the Diet earlier today, BOJ Governor Ueda recognized weakness in the consumption of non-durable goods but saw an overall moderate improvement in consumer sentiment as inflation slowed and wage increases were expected.

The dollar spent most of the North American session yesterday hovering around JPY147.00. It barely traded above last week’ settlement (~JPY147.05). US rates traded firmer even after solid demand at the sale of $56 bln three-year notes. Today, Treasury comes back selling $39 bln of 10-year note. The yield on the three-year note was almost nine basis points higher than the previous auction but yield on the 10-year note is little changed. The dollar has edged higher a re-entered the lower Bollinger Band today (~JPY147.25) and reached JPY147.60. Nearby resistance is seen in the JPY147.75-JPY148.00. The Australian dollar recorded session lows yesterday in North America slightly below $0.6600. After the low was set, the Aussie was unable to rise much above $0.6610. It is in a narrow range mostly between $0.6610 and $0.6620 today. It probably takes a move above $0.6640 to lift the tone. Despite the yen’s losses, the Chinese yuan strengthened. The dollar fell to about CNY7.1725, its lowest level since the end of January. The dollar fell to CNH7.1760 against the offshore yuan, which is also the lowest since the end of January. The PBOC set the dollar’s reference rate at CNY7.0963 (CNY7.0969 yesterday). The average projection in the Bloomberg survey was CNY7.1855 (CNY7.1879 yesterday).

Europe

The UK labor market is gradually slowing gradually. Employment fell in Q3 but rose in Q4 23. It began Q1 24 on a weak note, falling 21k in the three-months through January compared to the previous three months. The 3-month unemployment rate bottomed in August 2022 at 3.5%. It reached 4.3% last July and has since pulled back to 3.8% before rising to 3.9% in the three-months through January. Average weekly earnings (three-month year-over-year) remain elevated, but slowly easing, apparently, slow enough to deter BOE. Average weekly earnings peaked at 8.5% last July and has slowed every month since to stand at 5.6% (three-month average through December and January). The swap market increased on the margins the likelihood of a June rate cut to about 57% chance from about 51% yesterday. This does not sound like much, but it is the highest probability since in three weeks.

Too much may be being made of the fact that after contracting in Q3 23 and Q4 23, the British economy may expand here in Q1 for the first time since Q1 23. The contraction was shallow, and the recovery is likely to be shallow. The median forecast in Bloomberg’s survey is for 0.1% growth. The January GDP is due tomorrow, and 0.2% growth is expected after a 0.1% fall in output was reported in December. The industrial sector looks flat, and construction likely slowed. The trade deficit may have widened. The service sector may be the only bright spot.

Bank of Italy announced plans at the end of last week to impose a systemic risk buffer of 1% of domestic exposure (weighted by counterparty and credit risk) by the end of next year. Half is due this year. This is the lower end of the 1%-2% range that had been discussed. The buffer may be around 7.5 bln euros, which is around half of the excess capital (above management targets in Q4 23 of the six largest banks. An index of Italian bank shares fell by about 1% yesterday, though financial services were down around 3.4% and the market as a whole was off 0.5%-0.6%. European banks in the Stoxx index (EMU) ended a six-day advance yesterday, with less than a 0.1% decline. It had fallen in three sessions in the past four weeks.

The euro consolidated at modestly lower levels yesterday after rallying for the third consecutive week. It reached $1.0980 after the US employment report and recorded a low yesterday as European activity was winding down near $1.0915. After the low was made, the euro could hardly rally 15-ticks. Initial support is in the $1.0890-$1.0910 band. It is in an exceptionally narrow range today between $1.0920 and $1.0940, as the market awaits the US inflation report. Sterling made a new high for the year before the slightly shy of $1.29 at the end of last week. It pulled back yesterday to test the $1.2800 area, the upper end of its previous range and slipped to almost $1.2775 today. Yesterday’s loss ended a six-day advance during which sterling rose by about 2 3/4 cents. Nearby support is seen near $1.2750 initially.

America

The CPI is arguably the most important release in the monthly data cycle. The Fed targets the headline PCE deflator but knowing the CPI (and PPI) allows economists to have a fairly good idea of the PCE deflator. Headline CPI is expected to have risen by 0.4% last month for a 3.1% year-over-year rate. It rose by 0.3% in January and the year-over-year rate was 3.1%. However, the risk is that the CPI ticks up this month as the base effect (0.1% in March 2023) makes for a tough comparison. A 0.4% increase lifts the three-month annualized rate to 3.6% (Dec-Feb) from 2.8% previously (Sept-Nov). The six-month annualized pace would be 3.2%. The median forecast in Bloomberg’s survey has the core rate rising 0.3% (0.4% in January), with a favorable base effect, allowing the year-over-year rate slow to 3.7% from 3.9%. However, the three-month annualized pace would tick up to 4% from 3.2%. The takeaway is the CPI data, like the employment report, underscore the lack of urgency from Fed officials to cut rates.

Mexico reports January industrial production figures today. While the economy has slowed the 0.7% contraction in December industrial output overstates the case. A recovery is widely expected despite a soft manufacturing PMI (50.2 vs. 50.0). The IMEF manufacturing index rose to 51.6 from 50.0. Job creation improved and vehicle production surged by 42%, recouping most of December’s drop. The market appears nearly evenly divided about the outlook for next week’s Banxico meeting, with a small lean toward standing pat (overnight rate target at 11.25%). Brazil reports the IPCA CPI today. It is expected to have slowed to around 4.45%. The central bank’s meeting concludes next week a few hours after the FOMC meeting. The swaps market is pricing a strong likelihood of another 50 bp cut to 10.75%. It would be the sixth such move in the cycle that began last August.

After the US dollar recovered before the weekend from CAD1.3420 to almost CAD1.3500, it edged slightly higher yesterday to around CAD1.3510. It has held below CAD1.3490 so far today but has yet take out yesterday’s low near CAD1.3470. Meanwhile, benchmark three-month implied volatility fell to a new four-year low yesterday below 4.9%. The greenback trading in a narrow range against the Mexican peso yesterday after posting its biggest weekly decline so far this year (~-1.20%). The dollar has not settled above its five-day moving average (~MXN16.8350) for the past ten consecutive sessions. Yesterday, was the fourth consecutive session that the US dollar settled below the lower Bollinger Band, which comes in today near MXN16.7880. The dollar’s downside momentum seems to be stalling. It settled last week near MXN16.8125.