The New Year begins slowly.
Japan, mainland China, Australia, New Zealand, and the UK markets remained closed. While Hong Kong shares traded heavily, Taiwan, South Korea, and India moved higher. Led by consumer discretionary and staple sectors, Europe's Stoxx 600 was up about 0.6%. US futures were 0.4%-0.6% higher. European yields drifted lower, with the periphery doing better than the core. The US 10-year yield will begin the local session at 1.51%.
The dollar was mostly firmer, after weakening broadly at the end of last year. The Norwegian krone and New Zealand dollar were the most resilient, while the Canadian dollar, off nearly 0.3% to pare the year-end gains, followed by the euro, which was in the middle of its $1.1335-$1.1380 range. The greenback was holding above JPY115.00. Emerging market currencies were mixed but mostly softer.
Higher than expected inflation was weighing on the Turkish lira. The South Korean won led the other softer EM currencies. It was off about 0.25%. The South African rand (~0.7%) and Russian ruble (0.5%) led the advancers. The JP Morgan Emerging Market Currency Index rose by about 2.5% in the last two weeks of the 2021 and was slightly firmer today (~0.2%).
Iron ore was higher for the third consecutive session and rallied more than 45% from the middle of November through Xmas, before falling 5.3% last week. Copper had a four-week 4.6% rally in tow but was slightly softer today. Gold was stalling near $1830, the (61.8%) retracement of its sell-off from $1880 mid-November high. Oil rallied for last two weeks, with February WTI gaining about 6.2%. OPEC+ meets tomorrow and WTI was up nearly 1.5% to push above $76.
US natural gas gained slightly more than 1% in the past two weeks and was hovering around little changed level. Recall that diverted shipments from the US and Asia to Europe saw natural gas prices collapse from above 180 euro on Dec. 21 to 65.5 euros at the end of last week.
Asia Pacific
China's property developers remained in the spotlight. Bloomberg estimated that the sector's debt servicing costs, including deferred wages, and maturing obligations were at $197 bln this past month. Evergrande (HK:3333) shares were suspended in Hong Kong. When the problems, bubbling below the surface for some time, emerged last September, global risk appetites were shaken, and many observers made comparisons to the Great Financial Crisis. However, so far, the problems seemed localized and unlike the US and Europe, new lending has not frozen.
The macro data highlights include China's Caixin PMI after the official one surprised on the upside. The preliminary PMIs for Australia and Japan stole the thunder from the final report. Japan's weekly MOF report on portfolio flows may be noteworthy. Foreign investors have been on a buying spree, buying the most Japanese bonds over the first three weeks of December in at least 20 years.
The dollar has risen for the past four weeks against the Japanese yen. It closed the last two sessions slightly above JPY115.00 and remained above it today. Recall, last year's high, set in late November, was near JPY115.50. Today's high thus far was about JPY115.35. The market may be reluctant to push the dollar much higher before Tokyo returns.
The Australian dollar advanced almost 2% in the second half of December. It was stalling near the (50%) retracement of its decline from around $0.7555 in late October, found close to $0.7275. Support was ahead of $0.7200.
Thin trading on New Year's Eve saw the dollar plunge to its low for the year near CNY6.34 before settling slightly above CNY6.3560. Chinese officials have signaled their desire to avoid further yuan appreciation. If the divergence of monetary policy and higher fx reserve requirements were not sufficient, investors must be wary that other tools could be deployed.
Europe
The uptick in the Germany's December manufacturing PMI was revised away, leaving it unchanged from November at 57.4. The flash estimate put it at 57.9. In contrast, the French reading was revised up to 55.6 from 54.9. This pared the decline from 55.9 in November. Italy's manufacturing PMI held in better than expected, slipping to 62.0 from 62.8, the post-COVID high. Spain, on the other hand, disappointed, with its manufacturing PMI falling to 56.2 from 57.1, its lowest since last February. The net result was the flash aggregate estimate of 58.0 was sustained (58.4 in November).
The final Eurozone aggregate PMI is of passing interest. The main takeaway from the preliminary estimate continued to resonate: the economic activity was slowing. The flash estimate put the composite at 53.4 (down from 55.4), the lowest since March. It has risen once in the last five months. More notable for the market will be the preliminary estimate of December inflation. Consumer prices are expected to have stabilized after reaching 4.9% year-over-year in November (2.6% core).
The Turkish government tried to absorb the currency-risk that it unleashed by forcing the central bank to cut key interest rates by 500 bp since mid-September. It managed to spur a powerful short-covering squeeze in the lira, which saw the dollar fall from around TRY18.36 on Dec. 20 to nearly TRY10.25 on Dec. 23. The greenback recovered to nearly TRY14.00 today, its sixth consecutive advance. Today's CPI report blew away expectations. Just in the month of December, Turkish consumer prices jumped nearly 13.6%. This sent the year-over-year rate to almost 36.1%. The core rate rose about 31.9% year-over-year.
Short covering helped lift the euro a little more than 1.1% over the past two weeks. It reached about $1.1385 on New Year's Eve. It has not traded above $1.14 since mid-February. Ahead of this week's two key economic reports (EMU CPI and US employment), the market may not have the conviction necessary to extend its year-end gains.
Sterling gained about 2.1% in the last two weeks. It reached $1.3550 at the end of last week, its best level since mid-November. It was little changed today. The $1.3575 area corresponded to the (50%) retracement of its sell-off from $1.3835 area in late October. Initial support was seen in the $1.3455-$1.3465 area.
America
The US economic diary is jammed packed to begin the New Year. The highlight is the jobs report at the end of the week. The median forecast (Bloomberg survey) calls for a 400k increase after being disappointed with the 210k increase in November. The unemployment rate is expected to ease to 4.1% from 4.2%, and average earnings growth likely moderated.
At the end of last year, an article in the Financial Times made two important observations. First, the uniqueness of the COVID-impact renders seasonal adjustments suspect. The response rate was less than two-thirds, the lowest for the month of November in more than a decade. In November, the raw establishment survey showed a 778k gain in nonfarm payrolls, but the BLS adjustment cut a record 568k. Second, also complicating the data is the participation by businesses. The response rate was less than two-thirds, the lowest for the month of November in more than a decade.
The monthly auto sales report seems under-appreciated as a broad economic indicator. The supply chain disruptions depressed auto production and, in turn, auto consumption (not just in the US). However, late in the year, there seemed to be some improvement. The median forecast (Bloomberg survey) December US auto sales (seasonally adjusted annual rate) at 13.1 mln, which would then be the most since July.
Elsewhere, the preliminary goods trade balance, like the flash PMI, is the real new news. The final reading tends not to be very meaningful. In any event, the trade deficit will widen considerably. The goods deficit widened to a record $97.8 bln from $83.2 bln. Lastly, the FOMC minutes will be looked at especially for clues about the timing of the first hike. March?
It is unreasonable to expect Canada to match the nearly 154k job increase reported for November. The median forecast is 25k. Canada also reports November trade figures. Canada's trade balance has steadily improved since March 2020, and the 12-month moving average through October was the highest in around six years. The swaps market has a little more than half of the first hike (25 bp) priced in at the January 26 Bank of Canada meeting.
Mexico's data highlights include worker remittances, which could be the most important source of private capital inflows. Without meaningful fiscal support and in the face of tightening monetary policy, the economy lacks much momentum. The December CPI is expected to have edged higher toward 7.5%.
Monetary policy is where the drama will be as the new central bank governor takes the reins (Rodriguez). The 50 bp hike in December lifted the overnight target to 5.5%. If the market was concerned about a policy mistake or possible erosion of its independence, you would not know it from looking at the peso. It was the strongest currency in the world in December, rising almost 4.5% against the dollar.
The Canadian dollar rallied about 2% over the past two weeks. This saw the US dollar retrace half of its rally from the mid-October low below CAD1.23 that peaked on Dec. 20 by CAD1.2965. That retracement came near CAD1.2625. The momentum indicators were still headed down, but the greenback was recovering today. Initial resistance was seen around CAD1.2700. A move above CAD1.2750 warned that a low may be in place.
The Mexican peso has rallied for the past five weeks, and despite the poor close at the end of the year, it was bid today. The US dollar was sold from near MXN20.55 to MXN20.45 in the European morning but found a bid near midday. The low from New Year's Eve was set around MXN20.3070 and the 200-day moving average was closer to MXN20.27.