The sentiment that fueled the recovery in US equities before the weekend carried over into today. Several Asia Pacific centers, including China, Taiwan, and South Korea were closed today, but Japan, Hong Kong, and India rose by more than 1%. Europe's Stoxx 600 had a four-week drop in tow, was up around 0.6%, led by information technology and industrials.
The S&P and Dow Jones futures were lower but the NASDAQ was up around 0.4%. The US 10-year yield was around 1.79%, while European yields were mostly 2-4 bp higher except in Italy, where the presidential contest resulted in the status quo. Italy's 10-year yield was slightly lower and its premium over Germany was around 127 bp, the least since November.
The dollar came back softer. The Antipodeans and Sweden led the charge today, while the yen and Swiss franc were softer. Emerging market currencies, led by the freely accessible Turkish lira and South African rand, The JP Morgan Emerging Market Currency Index snapped a three-week advance last week and lost almost 1%. It was about 0.2% higher around midday in Europe.
Gold lost about 3% in the last three sessions and was trading quietly today within the pre-weekend range. March WTI was firm in the $87-$88 area. US natgas prices jumped 6%, while Europe's benchmark was off around 6%. Copper was about 0.8% higher after falling more than 4.5% over the past two sessions. Note that lumber prices fell by 23% in the seven days through last Thursday and rallied 3% ahead of the weekend to snap a losing streak.
Asia Pacific
The Chinese economy grew more than expected in Q4. The 1.6% quarterly pace compared with 1.2% median forecast in Bloomberg survey and 0.2% in Q3. Still, leaving aside the accuracy of its estimate provided two weeks after the end of the quarter, the quality of the growth was suspect. The doubts were borne out by the January PMI figures released over the weekend.
The manufacturing PMI slipped to 50.1 from 50.3. The new order component fell to 49.3 from 49.7 and has been below the 50 boom/bust level since last August. Export orders were also contracting. The Caixin manufacturing PMI fell to 49.1 (from 50.9), its lowest level since February 2020. Non-manufacturing held in a little better at 51.1 (from 52.7) but the services themselves fell to a five-month low.
Transportation and hospitality sectors were hit hard, suggesting the impact of the virus. The composite fell to 51.0 from 52.2. The other parts of the Caixin PMI survey will be leased on Feb. 6. COVID and seasonal factors may have contributed to the weakness, but the takeaway underscores that Chinese officials have shifted from de-leveraging to supporting growth. Fiscal and monetary policy levers were being pushed. Soft power levers were also coming into play.
Support for Japan's new government warmed in the most recent Nikkei survey to 59% from 65%. There was a lingering concern that Japan was going to experience another phase of relatively short-term governments. The first electoral test is a few months away. In July, about half of the upper house of the Diet will be elected (124 or 245 seats).
Meanwhile, Japan's 10-year yield edged up to 0.185%, its highest level since January 2016. International pressure seemed to be the major driver here and the BOJ yield-curve-control limits it to around 25 bp. The IMF recommended that Japan target a short-term rate instead of the 10-year to be more effective.
The dollar was consolidating in a narrow range against the Japanese yen inside the last Friday's range (~JPY115.10-JPY115.70). Today was the first session in five that the dollar had not (yet) risen above the previous session's high. A move above JPY115.70 would signal a test on JPY116.00 and the multi-year high set on Jan. 4 near JPY116.35.
The Australian dollar settled poorly last week. All told it fell by 2.75% last week, its largest weekly decline in five months. Technically, it was oversold, and speculators in the futures market had a near-record net short position. These seemed vulnerable to a less dovish central bank (first thing tomorrow in Sydney) and the better appetite for risk more generally. Near-term potential may extend into the $0.7100 -$0.7120 area.
With the mainland markets closed, the offshore yuan continued the downside correction that began last week. The US dollar rose to CNH6.3865, its highest-level since Jan. 10. It had re-entered the CNH6.35-CNH6.40 area that mostly marked the range since the middle of last October.
Europe
The UN Security Council will discuss Ukraine, but given the unanimity that would be required, no action will be forthcoming. The Security Council has a presidency that rotates on a monthly basis. Russia will hold the presidency as of Feb. 1. Reports suggested the UK was considering doubling the number of troops it was offering to NATO. This sounded big and bold, but estimates suggested that this translated to less than 1000 troops.
Last week, the US said that 8500 troops were on heightened alert for possible deployment to assist NATO. Meanwhile, the Pentagon reported Russia was still boosting its troop mobilization. Separately, and noteworthy, the President of Ukraine, no Russian-sympathizer, cautioned that the US was spurring panic that was not helpful.
On another front, Russia acquiesced to Ireland's formal request and shifted its military exercises (Feb. 3 - 8) away from Ireland's exclusive economic zone. It may have planned its exercises there with the intent of relenting when asked to stir further divisions.
After several rounds without a winner, a compromise was struck in Italy. The current president, Matterella will serve another term. All the parties but the Brothers of Italy endorsed this outcome. Although the term was for seven years, don't expect Matterella to complete his term. The most likely scenario was that he serves until next year's parliamentary election. Draghi's role as caretaker Prime Minister will have come to a natural end and Matterella can resign.
Draghi would once again be the favored candidate to succeed him. Mattarella’s predecessor, Napolitano, served about 20 months of his second term. Napolitano accepted an unprecedent second term to also help the country through a fragmented parliament. Some observers were claiming that Draghi was weakened by losing his presidential bid. We were less convinced but recognized that the agenda in Italy would not shift toward enacting the reforms needed to secure the EU funding and implementation of the new electoral law that will govern next year's election.
Spain and German states reported January CPI figures. Spain's harmonized measure fell 0.9%, which was less than expected. The year-over-year rate eased to 6.1% from 6.6%. The median forecast (Bloomberg survey) was for 5.5%. Most German states reported softer year-over-year pressures, but aggregate harmonized measure may come in a little above the unchanged reading expected.
The eurozone figure is due out on Wednesday and the latest (Bloomberg) survey results put it at 4.4% down from 5.0%. Separately, the eurozone Q4 GDP grew by 0.3% quarter-over-quarter, to lift the year-over-year rate to 4.6%, in line with expectations.
The euro snapped a four-day drop ahead of the weekend, but only after falling to new lows since June 2020 (~$1.1120). It extended the recovery to about $1.1180. A move above the $1.1200 area would boost ideas that the breakout was fake as was the upside break around the middle of the month. There were two chunk options that expire tomorrow that were worth noting. There was one for nearly 2 bln euro at $1.1225 and the other for 1.3 bln at $1.1150.
Sterling's pullback from the $1.3750 seen near mid-month stalled at the end of last week near $1.3360. It recovered to almost $1.3450 today. A move above $.3460 could see $1.3500-$1.3550 ahead of what is expected to be a hawkish central bank message on Thursday.
America
Comments by Atlanta Fed's Bostic that the Fed could raise rates by 50 bp in March seemed to reinforce the hawkish tilt by the market. Recall that several banks revised their Fed call last week. Many economists were looking for more than four hikes this year. The range appeared to be 3-7 and 2-4 next year. We did not read in Bostic's comments containing new information. He essentially repeated Chair Powell's effort to secure the maximum of flexibility in these uncertain times. Moreover, while Powell said at his press conference that if he could re-do his December dot he would recognize higher inflation, Bostic said he continued to see three rate hikes as appropriate this year.
Powell noted that Q1 growth was going to be weak. He was referring to the virus interruption. However, qualitatively Q4 GDP left something to be desired. Inventory accumulation accounted for nearly five percentage points of the 6.9% expansion. Note that the final sales to domestic purchasers (excludes trade and inventories), a measure of the underlying strength of the domestic economic, rose by 1.9% after 1.3% growth in Q3.
Before the weekend, the Atlanta Fed GDPNow's first estimate for Q1 22 stood at 0.1%. It is the beginning of the quarter, and of course, it is subject to significant adjustments. Still, expectations for the January jobs data at the end of the week have been scaled back. The median in the Bloomberg survey is now at 150k, and at least a couple of banks, including some with very aggressive Fed forecasts, have warned of the risk of an outright loss of jobs.
The busy week begins quietly with the Chicago PMI and the Dallas manufacturing Index. Neither are typically market-movers. The Fed's Daly speaks today and on Thursday, the new Fed nominees with have their confirmation hearings.
Canada's employment data on Friday is the highlight, but tomorrow Canada reports November GDP (expected to rise by 0.3% after expanding by 0.8% in October). Mexico provides its preliminary Q4 GDP figures today. It may have contracted for the second consecutive quarter. Brazil's trade and industrial production will be reported ahead of the central bank meeting on Wednesday. It has pre-committed to a 150 bp hike that would lift the Selic rate to 10.75%.
The US dollar rose 1.5% against the Canadian dollar last week, the most since August. We see the Bank of Canada to be as hawkish as the Federal Reserve, but the falling two-Year premium Canada offers and the risk-off mood took its toll. The greenback's bounce stalled near CAD1.2800. Initial support was seen now around CAD1.2680-CAD1.2700. Look for the CAD1.2750-CAD1.2770 to cap it in North America today.
The greenback rose on average every day last week against the Mexican peso. It peaked around MXN20.9140 before the weekend, its highest level this month. During the dollar's decline since the middle of the month, the five-day moving average has offered support, especially on a closing basis. The five-day average was near MXN20.74. A close below it may suggest a near-term dollar top may be in place.