The recovery of the NASDAQ yesterday and the slight easing of the US 10-year Treasury yield was setting the stage for today's market moves.
That said, Japan's equities had to play catch-up after being on holiday yesterday and yen's strength took a toll. Among the large Asia Pacific bourses, only Taiwan, South Korea, and Australia rose. It was difficult to detect the impact of what appeared to be the second test of North Korea's hypersonic missile in about a week. Europe's Stoxx 600 was snapping a three-day decline with broad gains led by information technology and consumer discretionary sectors. US futures were also trading modestly higher.
After probing 1.8% yesterday, the US 10-year yield was flat near 1.76%. European yields were narrowly mixed. The dollar was trading heavier against all the majors but the yen and most emerging market currencies, except the Taiwanese dollar and Turkish lira. The JP Morgan Emerging Market Currency Index was up small, which if sustained would be the third rise in four sessions.
Gold was higher for the third session and was back above the 200-day moving average (~$1801). Last week's high was a little above $1830. Oil was recovering from yesterday's setback and February WTI was again poised to challenge the $80-a-barrel level. Natgas prices in the US and Europe were off more than 1%. Iron ore jumped nearly 3% to recoup its past two sessions of losses plus some. Copper was firmer to recover a little more than half of yesterday's 1.3% decline.
Asia Pacific
Japan continued to struggle against deflationary impulses seen clearly in the GDP deflator (-1.2% in Q3) and measures of CPI excluding fresh food and energy (-0.6% in November). Wages have been flat for nearly 20 years. However, a BOJ survey released earlier today showed that inflation expectations rose to their highest level in 13-years. They see 5% inflation next year, according to the quarterly survey, and 3% a year on average over the next five years. There was some speculation that the BOJ will drop its characterization of downside risks for inflation at next week's policy meeting.
Australia reported November trade figures and retail sales. The former disappointed while the later was twice as strong as expected. Australia's trade surplus fell for the fourth consecutive month, and it may suggest that the positive terms of trade shock was easing. The average monthly surplus through November last year was A$10.44 bln. November's surplus was A$9.4 bln. In the first 11 months last year, the average trade surplus was A$5.93 bln and in 2019 it was almost A$5.7 bln.
Separately, retail sales soared by 7.3% month-over-month. It followed a 4.9% rise in October and 1.3% in September. That provides an average in the past three months of 4.5%. In the three months through August, Australian retail sales fell by an average of 2.1%, as the social restrictions and lockdowns pinched.
The dollar held JPY115.00 yesterday and so far, the recovery has been limited to slightly more than JPY115.40. An option for around $440 mln at JPY115.50 expires today. It appeared that the dramatic slide in stocks overwhelmed the impact of higher rates. Consider that the 30-day correlation between the change in the exchange rate and change in the S&P 500 was near 0.6%, while the 100-day correlation was half as much. The correlation of the change in the exchange rate and the change in the US 10-year yield slipped to about 0.55% over the past 30 days. The 100-day correlation was around 0.65% before Xmas.
The Australian dollar was firm within yesterday's range. It was holding below $0.7200. A move above there may encounter resistance near $0.7220. It appeared to be a consolidative session.
The Chinese yuan edged a little higher, but it remained in last Thursday's range (~CNY6.3675-CNY6.3850). The reference rate was set for the dollar a little softer than expected at CNY6.3684 (compared with the median projection in the Bloomberg survey for CNY6.3695).
Europe
US-Russian talks did not lead to a narrowing of the differences. It seemed clear that the key Russian demand was to be giving iron clad assurances that Ukraine (and Georgia) will never be allowed to join NATO. So even if the other demands were met, without this one, Russia cannot be secure. Talks continued today with NATO.
The eurozone aggregate November industrial production figures will be reported tomorrow. Recall that last week, Germany and France disappointed. German industrial output was expected to rise by 1%. Instead, it fell by 0.2%. French industrial production was expected to rise by 0.5% but fell by 0.4%. Spain offered a big upside surprise today. Its industrial output jumped 4.5% in the month, more than 10x what economists projected.
In a little less than two weeks, Italy's presidential selection process gets underway. Italian politics was slowly making its way back into the market's field of vision. The problem was that if Draghi becomes president, it leaves the premier role open. Polls showed the right League and Brothers of Italy could possibly secure it over the center-left PD. The parties on the right tended to be more hostile to the EU. If Draghi does not become president, the right may secure it for Berlusconi. Draghi, who was not leading a political party, would likely be out in next year's election.
Revelations about a party in 10 Downing Street May 2020 encouraged by PM Johnson hours after a social gathering were banned was the latest blow against the government. The cavalier attitude and hypocrisy were undermining support for Johnson. It was emboldening Labor, which was running ahead in some polls. Labor was taking the initiative and forcing a parliament debate on dropping the sales tax on energy bills.
The euro was confined to about a third of a cent in the upper half of yesterday's range. The North American market took the euro toward the lower end of its recent range (~$1.1270). The market seemed to have plenty of reasons to unwind the post-US jobs data gains, but it snapped back and settled above $1.13. Today's high was slightly above $1.1350. It pulled back in early European turnover but looked poised to test the highs again. Still, given the more aggressive Fed posture being discounted, the political backdrop with Russia and Italy, we continued to view the euro as vulnerable.
Sterling was trying to establish a foothold above $1.36. It reached $1.3620 in late Asia, its best level since Nov. 4 before the BOE's disappointment (stood pat). There was no follow-through buying in the European morning. Initial support was seen near $1.3580. Sterling's outperformance was seen as the euro slipped to new lows since February 2020.
America
The Fed's Vice Chairman Clarida is stepping down at the end of this week, a couple weeks before his term ends. He already has a teaching gig lined up. Although no official reason was given for the early departure, many were linking it to new disclosures that he first sold $1-$5 mln of an equity fund and then bought it back a couple days later, just before the Fed announced emergency measures to combat the disruption trigged by the pandemic.
At first the Fed had said it was a pre-scheduled rebalancing, but it appeared to be more than that now. He was the third Fed official to resign under such a cloud. No doubt the issue will be raised in Powell's confirmation hearings today. While the focus was on Fed officials, note that members of the House of Representatives, Senators, and judges (and their immediate families) haven't been held to as high a standard as Fed officials. Meanwhile, President Biden was expected to announce additional nominations to the Federal Reserve board shortly. FOMC voting members and perceived hawks Mester and George also speak today, before Powell's testimony.
The US and Canada have light data calendars today, while Mexico reports November industrial output (0.6% expected the same as October) and Brazil reports IPCA inflation (which is expected to have eased for the second consecutive month). The market has almost 300 bp of tightening by Brazil discounted over the next three months. This seemed to imply two more 150 bp hikes. While the first, on Feb. 2 was pre-committed, the second one seemed somewhat less likely. Note that the swaps curve was pricing in a cut in the second half of the year.
The US dollar bounced from the CAD1.26 yesterday, which we suggested was the potential neckline of a head and shoulders topping pattern that would project toward CAD1.2250. The bounce carried the greenback to almost CAD1.27, but it was back to around CAD1.2640. The intraday momentum indicators suggested the CAD1.26 was safe for another day.
The greenback was pinned near its recent trough against the Mexican peso. The low on New Year’s Eve was about MXN20.3270. Today's low was slightly below MXN20.36. Dollar bounces toward MXN20.50 last Friday and yesterday were sold. The 200-day moving average may be the next downside target. It was near MXN20.2750.