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April 2023 Monthly

There were three
ways the monetary cycle was going to turn. First, unemployment could have
reached unacceptable levels. This did not happen. Labor markets…



There were three ways the monetary cycle was going to turn. First, unemployment could have reached unacceptable levels. This did not happen. Labor markets have proven thus far to be resilient among most G10 countries. Second, a significant and sustained drop in price pressures could end the tightening cycle. This has yet to materialize in a meaningful way. In some countries, governments have energy subsidies, and these measures only offer temporary relief.

Instead of macroeconomic developments turning the cycle, it is the perceived threat to financial stability. Repricing assets to a higher interest rate environment would be disruptive no matter how it was achieved. At the end of 2020, there were $17.76 trillion of negative-yielding bonds in the world. It fell to about $24.5 bln by the end of last year. This time, the weak link arose from small and medium-sized US regional banks, where deposits were less sticky than anticipated, partly due to higher returns available in money markets and the US bill market and risk management decisions. There are over 4100 US banks, and less than 5% are the focus.

The financial stress was a challenge to investors, and the policy response added to the dislocation. The US decision that banks too small to be regulated like systemically important banks posed systemic risk requiring all depositors to be made whole added another level of confusion. A few hours before Fed Chair Powell said that all depositors were safe at the press conference that followed the conclusion of the FOMC meeting on March 22, Treasury Secretary Yellen told a congressional hearing that the government was not considering insuring all depositors, and the key was systemic risk. This did not prove helpful in staunching the deposit flight from the small and regional banks.

The difficulties of Credit Suisse have been widely known for some time. It was not so much about coping with a higher interest rate environment. The stress on US banks had ripple effects, which seemed to be the proverbial last drop of tea that overflows the cup. In the forced merger between UBS and Credit Suisse, officials wiped out the AT1 bonds ahead of shareholders. AT1 bonds typically offer a high yield and are sold by banks to raise capital. They are intended to provide a capital cushion that can avoid using public funds. 

As US officials cited "systemic risks" for choosing to make whole uninsured depositors the Silicon Valley Bank and Signature Bank, Swiss officials declared the pressure on Credit Suisse a "viability event." Given that government support was drawn upon, the Swiss regulator argued that the contractual conditions of completely writing down the AT1 bonds were necessary.

Officials in the UK and EU were quick to say the AT1 bonds in their jurisdictions were senior to equity holders. However, AT1 bonds were marked lower, and the new issuance market was frozen. The exchange-trade-fund of AT1 bonds enjoyed a four-month rally through January (15%) despite it being widely understood that rising interest rates would be challenging for financial institutions. It slipped by a littlewas less than 2% in February before tumbling more than a quarter at its worst in March (settling down 15%).

With scars from the 2008-2010 Great Financial Crisis and the European sovereign debt crisis still fresh for many investors, there was no waiting "for the other shoe to drop." Bank shares came under pressure, challenging official efforts and assurances that banking systems were robust. One of the consequences of the US strain will likely be greater regulatory framework for medium-sized banks. There is a risk of greater deposit concentration, which may also help spur further consolidation in the US banking sector. Going forward, official stress tests will likely include a dramatic change in interest rates. AT1 bonds as an asset class may be questioned.

Financial stress is understood to be deflationary because banks will likely tighten lending standards. This was already beginning, according to the Federal Reserve's survey of senior loan officers. The new restrictions on lending are seen as doing some of the heavy lifting for central banks still combatting elevated prices. In early March, the swaps market was discounting almost 5.75% peak Fed funds rate and a 4% eurozone deposit rate. By the end of March, the market thought the terminal rate in the US was at hand (5.0%). After the March hike, and despite Fed Chair Powell's claim to the contrary, the market is pricing in at least 50 bp in cuts this year. The ECB's deposit rate sits at 3% after last month's 50 bp hike. The market now sees a peak near 3.50%, down from 4.0% before the banking stress. At the start of March, the swaps market saw a peak base rate in the UK around 4.75%. Now, the market sees 4.5% at the most.

The Bank of Canada announced a "conditional pause" in late January. The market understood that to mean that the tightening cycle was likely over, and subsequent developments have boosted the market's confidence. At the start of March, the market still thought that another hike was possible, but by the end of the month, the swaps market had discounted a rate cut by midyear. Likewise, the market expects the Reserve Bank of Australia to announce a "pause" at its April 4 meeting, but a cut is discounted for Q4.

The first meeting for the Bank of Japan's new governor is on April 28. The decline in global interest rates has done what massive buying of government bonds failed to do, and that is to push Japan's 10-year yield away from its 0.50% cap. The decline in inflation, driven by energy subsidies, the appreciation of the yen on a trade-weighted basis, and the decline in energy prices, makes action to adjust monetary policy somewhat less urgent. Still, excluding fresh food and energy, Japan's February CPI accelerated to a new cyclical high of 3.5% from 3.2% in January and 3.0% in December. Changing monetary policy risks disrupting the capital markets even if telegraphed the way officials do. Yet, changing monetary policy when the boundaries are under pressure is arguably more risky than when the yield-curve cap is being challenged.

Emerging markets wobbled with the banking stress in the developed economies but finished the month on a firm note. The MSCI Emerging Market equity index recouped about a third of its February losses (~2.2% vs. -6.5%) and outperformed MSCI's developed market equity index (1.6% vs. -2.5% in February). For the quarter, though, the developed market index rose 6%, while the EM equity index rose half as much.

Emerging market bonds pared February's losses, while JP Morgan's Emerging Market Currency Index rose 1.3% after falling nearly 2% in February. On the quarter, it rose by about 2%. Moreover, it rose by 3% in Q4 22, and the back-to-back quarterly gain was the first since H2 20. The Colombian peso (~5%) and Chilean peso (~4.5%) led most of the emerging market currencies higher. The Argentine peso (~-5.5%), Russian rouble (-3.5%) and the Turkish lira (-1.5%) were exceptions, falling against the greenback.

Most of the G10 currencies also appreciated against the dollar. This was reflected in Bannockburn's World Currency Index (BWCI), a GDP-weighted basket of the dozen largest economies, 1% gain, which recouped about half of February's decline. It is the fourth gain in the past five months. The biggest contributors were the euro (19.1% weighting), with a roughly 2.8% gain, and the Chinese yuan (21.7% weighting), which rose by almost 1%. Brazil's real posted the month's biggest gain (~3.2%), but its share of the index share is only 2.1%. Sterling's 2.9% gain was a close second, and it has a 4% weighting. Only two components fell in March; the Australian dollar fell by about 0.7% (1.9% weighting), and the Russian rouble fell by around 3.5% (2.1% weighting). 

Although the BWCI finished near its best level for the month, we suspect it may struggle to advance significantly in the weeks ahead. With the banking stress receding, the pendulum of market sentiment may swing back toward greater confidence in a Fed hike in May and reconsider the prospects of a rate cut this year. The focus may return to the strength of the US labor market and that price pressures remain elevated. Leaving aside the base effect, as last year's increases drop off from the year-over-year measure, the PCE deflator has risen at an annualized rate of nearly 4.5% over the three months through February after a 3.2% annualized pace in Q4 22.


Dollar:  Previously, it seemed that market sentiment had swung too hard to a 5.75% or higher terminal Fed funds rate. Now, it seems the market is exaggerating in the other direction. The market leans toward believing that the peak in the Fed funds rate was set with the 25 bp hike to 5.0% in March and has a quarter-point cut priced in by the end of July. At the end of the year, the Fed funds futures reflect expectations of a rate near 4.60%. At the end of February, the year-end rate was seen nearly 75 bp higher. While it is widely recognized that the financial stress will likely spur a tightening of lending standards, which was already flagged in the Fed's Survey of Senior Loan Officers, the key to the economic impact is the magnitude and duration of restrictions. Economists seemed to prejudge the banking crisis and estimated the disinflationary result was worth 50-75 bp of tightening. While some survey data for March has softened, we expect the real sector data to encourage more moderate views and strengthen expectations for a soft landing. Nonfarm payrolls (April 7) are expected to have risen by 225-250k in February, while average hourly wage growth may slow. Meanwhile, consumer price growth is expected to have slowed for the ninth consecutive month on a year-over-year basis. In March 2022, CPI jumped 1%. Suppose it is replaced with a 0.4%-0.5% gain that was reported in January and February. In that case, the year-over-year pace can slow to about 5.5%, the lowest since September 2021, when the Fed first signaled its intention to take away the proverbial punchbowl. It may matter more to Fed officials that a 0.4% increase would put the Q1 rise above 5% at an annualized rate, twice the H2 22 pace. In addition to the interest rate outlook, the market expectations also diverge from the Fed's in terms of growth. The median Fed forecast puts growth this year at 0.4%. Economists are more optimistic at 1.0%, according to the median estimates in Bloomberg's survey. However, the Atlanta Fed sees the economy tracking around 3.2% growth in Q1(the first official estimate is April 27), and the economists in Bloomberg's survey project 1% growth. In either case, the forecasts seem to imply significant weakness going forward.


Euro:  The euro takes a five-week rally into April. It matches the euro's longest advance since July-August 2020. Most of March's 2.5% rally took place in the second half of the month amid ideas that the ECB would continue to tighten policy after the Federal Reserve ceases. The year-end deposit rate is seen above the current 3% target, while the market is pricing in more than 50 bp of Fed cuts. The stickiness of eurozone inflation, especially the core rate, where the preliminary estimate in March was an acceleration to a new cyclical high of 5.7%, and a perceived reduction of downside macro risks, encourage speculation of a rate hike at the ECB's next meeting (May 4). The composite eurozone PMI moved back above the 50 boom/bust level after spending H2 22 below. The financial stress did not spur drama in the core-peripheral spreads. Nor did the widespread demonstrations in France weigh unduly on the French-German spread, which traded in about a 10 bp range. The euro traded in a $1.0485-$1.1035 range in the first quarter. Although it approached the upper end in late March, we expect the range to hold in April.

(March 31 indicative closing prices, previous in parentheses)
Spot: $1.0840 ($1.0575)
Median Bloomberg One-month Forecast $1.0825 ($1.0635)
One-month forward $1.0860 ($1.0600)   One-month implied vol 7.7% (8.1%)    

Japanese Yen:  The dollar recorded a high in Q1 near JPY138.00 amid talk of higher US rates for longer in early March. It peaked on March 8 after having pushed through the 200-day moving average for the first time since last December's Bank of Japan surprise. As the banking stress reached a fevered pace, the dollar trended lower and briefly dipped below JPY130 late last month. Japanese banks, who also bought low-yielding bonds, were tarred with the same brush that tarnished US and European bank shares. The Topix bank index reached a five-year high on March 9 before plummeting nearly 19% the following week. It stabilized but finished the month off about 11.5%. The exchange rate correlation (rolling 60-day) with 10-year US rates had weakened to near two-year lows (~0.23) in early March but recovered to new highs for the year (~0.55) by the month's end. The Bank of Japan meets on April 28, and it will be the first as governor for Ueda. New forecasts will be announced, which could signal Ueda's intentions. 
The decline in global rates and the sharp decline in Japanese inflation, owing in good measure to the fiscal subsidies for energy, have removed pressure from the 0.50% cap on Japan's 10-year bond. Tactically, it may be best to adjust policy when it is not being tested. Previously, we thought a chance of a move in late April was unlikely, but the changing circumstances create more degrees of freedom for the BOJ's new leadership.

Spot: JPY132.85 (JPY136.20)    
Median Bloomberg One-month Forecast JPY131.85 
One-month forward JPY132.20 
(JPY135.55) One-month implied vol 13.0% (12.2%)

British Pound: Through the first quarter, sterling is the strongest G10 currency, rising by about 1.8% against the US dollar. It has been supported by an improved economic outlook. Toward the end of last year, the Bank of England offered a sobering forecast of a prolonged recession. However, by the end of Q1, it was more optimistic and suggested a recession could be avoided. Indeed, the year has begun off on better footing than expected. January's monthly GDP expanded by 0.3% (rather than 0.1% per the median forecast in Bloomberg's survey). The labor market remains strong. February retail sales jumped 1.2%, well above expectations, and the composite PMI averaged 51.3 in Q1 after averaging 48.5 in Q4 22. Still, it is the only G7 country not to have regained pre-pandemic output. Prime Minister Sunak scored two important victories in March.  First, the new accord on Northern Ireland ("the Windsor Framework") finally gives some closure to Brexit.  Second, the UK is set to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the first new member of the trade bloc.  It culminates two years of negotiations.  The direct impact on the UK economy is likely minor at best, but the importance is signaling about the UK's future post-Brexit. The Bank of England does not meet until May 11, and the swaps market leans toward another quarter-point hike, bringing the base rate to 4.50%. That is seen as the likely terminal rate, down almost 25 bp from the beginning of last month. Sterling has been in the $1.1800-$1.2450 range since the middle of December 2022. We suspect the range will remain intact for a bit longer.


Spot: $1.2335 ($1.2015)   
Median Bloomberg One-month Forecast $1.2290 
One-month forward $1.2345 
($1.2025) One-month implied vol 8.5% (9.8%)

Canadian Dollar:  The divergence of monetary policy between the Bank of Canada, which announced a "conditional pause" in its monetary cycle in late January, and the Fed, signaling higher for longer,  weighed on the Canadian dollar. The greenback reached a five-month high near CAD1.3860 as the financial stress hit. The shift in interest rate expectations saw the US dollar surrender much of its gains and pushed back to almost CAD1.35 at the end of March. The Canadian dollar has become somewhat less sensitive to the US S&P, and the rolling 6,0-day correlation has fallen to about 0.59, a two-year low (from almost 0.80 in early February). The exchange rate seems somewhat more sensitive to the two-year interest rate differential. The Canadian dollar's correlation with oil prices has eased from almost 0.50 at the end of last year, on a 60-day rolling basis, to around 0.10 in late March. Although the Canadian economy is more resilient than the Bank of Canada expected, it is still convinced cumulative effects of the past tightening have begun restraining demand. The Bank of Canada meets on April 12 and is expected to keep the overnight target rate at 4.50%. The March CPI is reported on April 18, and the year-over-year rate will likely fall sharply as the March 2022 gain of 1.4% drops out of the 12-month comparison.

Spot: CAD1.3515 (CAD 1.3640) 
Median Bloomberg One-month Forecast CAD1.3475 (CAD1.3535)
One-month forward CAD1.3510 (CAD1.3635)   One-month implied vol 6.7% (7.1%) 

Australian Dollar: Even before the banking stress last month, the Reserve Bank of Australia seemed to have been edging toward a pause in its tightening cycle. After the central bank's minutes, softer than expected February CPI, and the change in the outlook for monetary policy in the US and elsewhere, the market is more convinced that the RBA will not hike rates at its April 4 meeting. At the end of February, the market had seen the year-end rate near 4.25%. Now the futures market implies a year-end rate near 3.40%. RBA Governor Lowe's term ends in September, and following a formal review of the central bank, we suspect he will not be offered a second term. The Australian dollar recorded the lows for Q1 23 on March 10 near $0.6565, holding above the $0.6550 we had thought was possible. That support area is still key. The Aussie's recovery faltered near $0.6760 (March 22-23), where the 200-day moving average was found. Still, a move above $0.6800 boosts confidence a low is in place and could spur a return toward $0.7000.


Spot: $0.6685 ($0.6735)     
Median Bloomberg One-month Forecast $0.6760 
One-month forward $0.6700 ($0.6740)    One-month implied vol 11.1% (12.5%)


Mexican Peso: The banking stress and the unwind of market positioning took a toll on the Mexican peso. However, as the pressure seemed to abate, the peso recovered. The US dollar recorded nearly six-year lows on March 9 (~MXN17.8980) and surged a little over MXN19.23 on March 20. At the end of the month, it was fraying the MXN18.00 level again. The interest rate differential continues to attract investors, and near-shoring/friend-shoring also favors the peso. Still, the sharp jump in the greenback saw implied volatility soar from below 11% to a peak near 15.4% for a three-month tenor, which was the highest in nearly a year. Still, as soon as there were preliminary signs that the financial stress was easing, the peso strengthened, and volatility softened. We remain concerned about what appears to be a deterioration of the domestic political situation and growing tensions with the US. Yet, institutional strength, including the central bank and judiciary, continues to be evident and helps underpin the peso. Therefore, the peso has scope to continue recovering in the coming weeks. It is difficult to talk about support with the greenback at five-year lows, but the next interesting chart points are around MXN17.45 and MXN17.60.


Spot: MXN18.05 (MXN18.31)  

Median Bloomberg One-Month Forecast MXN18.26 (MXN18.50)  
One-month forward MXN18.15 (MXN18.43) One-month implied vol 11.5% (10.5%)

Chinese Yuan:  Benefitting from the pullback in the dollar, the yuan rose by almost 1% in March after falling 2.6% in February. Although local investors did not appear exposed to the decline in AT1 bonds or western banks, China has its own challenges. The high-yielding bonds from the property developers suffered their biggest loss in five months. Reports suggest property sales have improved with the aid of government measures, but the underlying problems of overcapacity continue to plague the sector. The median forecast in Bloomberg's survey sees the world's second-largest economy expanding by 5.3% this year, the same as the IMF. We suspect the risk is on the upside. According to the IMF, China could account for a third of the world's growth this year. Economists estimate that the economy grew by almost 2% quarter-over-year in Q1 (to be reported on April 18). Beijing appears content to have the yuan track the movement of the euro and yen. The rolling 60-day correlation of the changes in the yuan and yen reached a six-year high in late March (~0.58) and a five-year high against the euro (~0.66).

Spot: CNY6.8735 (CNY6.9355)
Median Bloomberg One-month Forecast CNY6.8480 (CNY6.9020) 
One-month forward CNY6.8560 (CNY6.9300) One-month implied vol 6.5% (9.5%)  



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GBP/USD extends losses on mixed UK data

UK retail sales improve, PMIs remain in contraction The British pound is in negative territory after two days of losses. In the European session, GBP/USD…



  • UK retail sales improve, PMIs remain in contraction

The British pound is in negative territory after two days of losses. In the European session, GBP/USD is trading at 1.2245, down 0.40%. The struggling pound is down 1.1% this week and is trading at its lowest levels since late March.

UK retail sales improve, PMIs mixed

It is a busy day on the data calendar for UK releases. Retail sales rose in August by 0.4% m/m, following a 1.1% decline in July and was just shy of the market consensus of 0.5%. The sharp decline in July was largely due to unusually wet weather. On an annual basis, retail sales fell by 1.4%, compared to -3.1% in July. Consumer spending has been in a nasty rut, as annualized retail sales have now declined for 17 straight months. The silver lining was that the -1.4% drop marked the slowest pace of contraction in the current streak.

The September PMIs were a mixed bag. The Services PMI slowed to 47.2 in September, down from 49.5 in August and missing the consensus estimate of 49.2. This marked a second straight deceleration and the sharpest contraction since January 2021. The Manufacturing PMI increased to 44.2 in September, up from 43.0 in August and above the consensus estimate of 43.0.

The decline in activity in both services and manufacturing points to a UK economy that continues to cool. The Bank of England, which held interest rates on Thursday, will be hoping that the slowdown translates into lower inflation and that it can continue to hold interest rates.

UK consumer confidence remains low, but there was a bit of an improvement in September. The GfK consumer confidence index rose to -21, up from -25 in August and beating the consensus estimate of -27. This was the highest reading since January 2022, but the economy has a long way to go before consumers show optimism about the economic outlook.


GBP/USD Technical

  • GBP/USD is testing support at 1.2267. The next support level is 1.2156
  • There is resistance at 1.2325 and 1.2436

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“Go To Hell”: Brave EU Politician Delivers Damning Message To Global Tyrants

"Go To Hell": Brave EU Politician Delivers Damning Message To Global Tyrants

Via The Vigilant Fox,

Member of the European Parliament Christine…



"Go To Hell": Brave EU Politician Delivers Damning Message To Global Tyrants

Via The Vigilant Fox,

Member of the European Parliament Christine Anderson has been an unyielding opponent to Klaus Schwab’s ‘Great Reset’ Agenda. Known best for her famous smackdown on Justin Trudeau, MEP Anderson has established herself as one of the few politicians left who represent the interests of the European people.

September 13 was no different as MEP Anderson took no prisoners in her latest warning to the globalitarian elite. Before the European Parliament, in a session specifically focused on the COVID-19 response and the World Health Organization, MEP Anderson ended the meeting with a powerful statement.

Here’s what she said, word for word:

“We just need to find a way to wake the people up. Because the point is simply this: it comes down to a choice. It’s either freedom, democracy, and the rule of law — or enslavement.

“There is no such thing in between. There is no such thing as a little freedom, a little democracy, a little rule of law, just as there is no such thing as a little enslavement. So that’s the choice. It comes down to – it’s either the globalitarian misanthropists or the people. It comes down to – it’s either us or them. And that’s, I think, what this really is all about.

“Now, when my colleagues and I were elected to this parliament, there was no question about it. We were on the side of the people because the people actually pay us to act in their best interests. That’s our job. And once again, I will say to every single elected representative around the world, to every single member in every elected government around the world, if you do not unequivocally stand with the people and serve in their best interests, act in their best interests, you have no place in any parliament or in any government. You belong behind bars. You may even rot in hell for all I care at this point because that’s exactly what you deserve if you sell out the people.”

*Applause ensued*

MEP Anderson continued. “Now, I would like to make a promise to the people, and I’m pretty sure I can speak or speak on behalf of my colleagues. We will continue to stand with you, the people. We will continue to fight for freedom, democracy, and the rule of law. We will not shut up, and we will not stop going after those despicable globalitarian misanthropists.

“But we would also like to have you make a promise to us. You may have heard it’s all coming back. The first country is already starting [to talk about] mask mandates in Israel. They’re already imposing it. I’ve heard of a few universities in the United States. They’re already bringing it all back. And I would really like for you, the people, to not go along. Simply say no! They want you to wear a mask; say no. They want you to put in another mRNA shot; say no. They want to impose a curfew on you; say no. That’s really all you have to do.

“And it might not be or might sound a little hard, but it’s actually not that hard. Because once you have made it clear to them that you will no longer go along, once you’ve let them know, they cannot scare you anymore. Because as long as you are afraid of what they might do if you don’t comply, they have power over you. Take the power away from them! Simply say no. Once you do that, they don’t have power over you anymore. You will feel so free. Simply say no.

“And considering what we’ve heard today, and considering what we’ve seen in the last three years. Considering what we know they want to implement, heck, you might even be well within your right to tell them to screw themselves and go to hell! That’s where they belong. What will you get out of that? I can tell you. Once you’ve done that, once you’ve told them to just go to hell, they no longer have power over you. You will have an incredible feeling — kind of like a sensation of freedom will swap through your body. I promise you will feel so relieved.

“And this is the state of mind that I would ask all of you to get to. Simply don’t let them grind you down anymore. You are worth it. You are deserving of just standing up for yourselves. And tell them all to go to hell. Thank you very much.”

*  *  *

Subscribe to Vigilant News here to receive updates on the latest and most newsworthy stories.

Tyler Durden Fri, 09/22/2023 - 06:30

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Yen Drops After BOJ Does Nothing and Says Little

Overview:  The BOJ’s failure to do anything or
further ideas that an exit of the negative target rate, despite the firm CPI
report helped the dollar…



Overview:  The BOJ's failure to do anything or further ideas that an exit of the negative target rate, despite the firm CPI report helped the dollar recover the ground lost yesterday against the yen. The focus has returned to "intervention watch" and the market continues to press for the official pain threshold. Sterling is the weakest of the G10 currencies, off another 0.5% today following the BOE's decision not to hike yesterday. The dollar-bloc currencies enjoy a firmer tone. Emerging market currencies are mostly firmer, including the Chinese yuan.

Reports that Beijing is considering reducing some capital controls helped lift Chinese and Hong Kong equities today. Taiwan and Australian equities also advanced, while the other large bourses headed south. Europe's Stoxx 600 is extending yesterday's 1.3% drop, while US index futures are slightly higher. Yesterday's 1.6% drop in the S&P was the largest drop in six months and it was unable to recover from the gap lower opening. That gap (~4375-4401) has technical significance. European bond yields are narrowly mixed, but UK Gilts continue to rally. The US 10-year Treasury yield is slightly softer near 4.48%. Gold has come back firmer after falling more than 0.5% yesterday (its largest loss in around three weeks) and is near the 200-day moving average ($1925). November WTI has steadied and looks to snap a three-day decline. It is back above $90 a barrel and looks poised to settled higher for the fourth consecutive week. 

Asia Pacific

The Bank of Japan did not change its stance, and Governor Ueda gave little hint that a change in rates is possible before the end of the year, as he did earlier this month. Indeed, he suggested those remarks were intended simply to keep the BOJ options open. The dollar, which had fallen to around JPY147.30 yesterday recovered to back toward the recent highs near JPY148.40. Japanese officials underscored they are prepared to counter excessive fx moves. 

Before the BOJ's meeting concluded, Japan reported August CPI figures, which were largely anticipated by the Tokyo CPI previously reported came in a little firmer. The headline rate slipped to 3.2% from 3.3%. The core rates were unchanged. Excluding fresh food, Japan's CPI remained at 3.1% and the measure excluding both fresh food and energy stayed at the cyclical high of 4.3%. Separately, the flash PMI came in softer. The manufacturing PMI eased to 48.6 from 49.6 and the services PMI stands at 53.3, down from 54.3. This saw the composite fall to 51.8 from 52.6. Lastly after buying the most foreign bonds since 2020 in the week ending September 8 (~JPY3.6 trillion or ~$24.5 bln), Japanese investors bought another JPY885.5 bln. Meanwhile, while foreign investors bought JPY438 bln of Japanese bonds, they dumped JPY1.58 trillion of Japanese stocks, most in four years.

Australia's flash PMI showed the service sector grew (50.5 vs. 47.8), while the manufacturing sector slump deepened (48.2 vs. 49.6). Manufacturing new orders were the weakest since May 2020. The composite rose above 50 (to 50.2 from 48.0) for the first time in three months. The central bank meets on October 3 and the market sees practically no chance of a change in rates. 

Yesterday, the dollar traded on both sides of Wednesday's range but the close was within the range, which removed much of the technical significance of the outside day. The broad range may be best explained by short covering of the yen ahead of the BOJ meeting. The dollar is trading back above JPY148.00 as the market continues to test the official resolve. The dollar settled near JPY147.85 last week and has only falling in one week since the end of July. The Australian dollar peaked before the FOMC meeting outcome near $0.6510 and found some bids near $0.6385 yesterday. It settled at $0.6415. It is trading with a firmer bias today and is knocking around $0.6440. To help stabilize the technical tone, the Aussie needs to get back above the $0.6465 area. However, the intraday momentum indicators are stretched in the European morning, suggesting some back and filling in early North American activity. Reports suggesting China is considering lifting some capital controls helped the yuan steady today. The greenback has been in about a 35-pip range on either side of CNY7.30. The dollar's reference rate was set at CNY7.1729. The average in Bloomberg's survey was CNY7.3028 and the gap with the fix was the widest yet. Offshore liquidity is being squeezed.


Following the flurry of European central bank meetings yesterday, the preliminary September PMI lost some of its luster. Norway, where we thought there was scope for surprise, turned out to be the least surprising. Sweden hiked but was more cagey about another hike, lifting its policy path by 10 bp. Milquetoast. It announced it would liquidate a quarter of its currency reserves, which was unexpected. The Swiss National Bank stood pat, surprising economists. But the swaps market did not think a hike was the most likely scenario, but the franc sold off hard anyway. The market went into the BOE meeting with an almost 50/50 outlook after the soft August CPI. In a 5-4 vote, where Governor Bailey cast the deciding vote, the BOE stood pat. It cut Q3 GDP forecast to 0.1% from 0.4%. However, it increased the pace of the balance sheet unwind to GBP100 bln in the fiscal year beginning next month from GBP80 bln this fiscal year.

The eurozone flash September PMI was mixed. The manufacturing PMI slipped to 43.4 from 43.5 and the services PMI edged up to 48.4 from 47.9. The composite stands at 47.1, up from 46.7. New orders softened to 44.5 from 44.6, which is the lowest since November 2020. Germany's preliminary readings were poor but better than August. The manufacturing PMI is at 39.8 (from 39.1). The services PMI is at 49.8 (47.3). The composite rose to 46.2 from 44.6, the first uptick since April. France moved in the opposite direction. Its PMI fell. The manufacturing tumbled to 43.6 from 46.0. The services PMI is at 43.6, down from 46.0. The composite now stands at 43.5 compared with 46.0 in August, a new low since late 2020. 

The UK reported August retail sales. After falling a revised 1.1% in July (initially -1.2%), UK retail sales rose 0.4% in August, slightly less than the median projection in Bloomberg's survey. The flash PMI was disappointing. While the contraction in manufacturing eased (44.2 from 43.0), the contraction in services deepened (47.2 from 49.5). The composite PMI fell to 46.8 from 48.6, a new three-year low.

After posting an outside down day on Wednesday, the euro extended its decline to almost $1.0615 yesterday, a six-month low, and retested it today. Since the low was recorded, the euro's high has been about $1.0650. The price action, however, is uninspiring and an important low does not seem in place. Sterling was punished for the BOE's failure to deliver a hike, which was roughly 50% discounted. Yesterday's six-month low was near $1.2240 has been taken out today, and a marginal new low closer to $1.2230 has been recorded. Like the euro and yen, sterling recovered into the close of the European session to trade a little above $1.2300. It spent the North American afternoon in about a 10-tick range and settled a couple of hundredths of a cent below $1.23, and today, was sold when it briefly poked above it. Nearby support is seen near $1.22, but the next important target is the $1.2000-$1.2075 area. 


US data was mixed yesterday. The Q2 current account deficit was slightly smaller than expected but it was inconsequential. Weekly jobless claims were lower than expected and the four-week average (217k) is the lowest since February. Continuing claims fell to their lowest since January. The September Philadelphia Fed survey was showed a sharp deterioration (to -13.5 from 12.0) and existing home sales fell for the third consecutive month, defying expectations for a small gain, after falling nearly 5.5% in the previous two months. The August index of Leading Economic Indicators continued it uninterrupted decline that goes back to Q1 22. Attention today turns to the preliminary September PMI, where economists expect slightly firmer readings. Still, the market is trying to adjust to the signal by the FOMC sees an economy growing faster than its non-inflationary speed limit, requiring policy to be restrictive for longer. The Fed funds futures strip does not have the first fully discounted in late Q3 24. By comparison, the swaps market has the first ECB cut fully discounted by early Q3. 

Canada reports July retail sales today. Somewhat better numbers than June are expected when retail sales rose 0.1%, driven by autos. With them, retail sales fell by 0.8%. The swaps market has almost an 80% chance of another Bank of Canada rate hike by the end of the year. No cut its priced through Q3 24. Inflation for the first half of September will be reported by Mexico today. The bi-weekly reading may accelerate slightly, but the downtrend in the year-over-year rate should continue. The central bank meets next week, but policy is expected to be steady well into next year. The swaps market seems to be pushing the first cut into Q2 24.

The US dollar popped up to almost CAD1.3525 yesterday. The week and month's low were set on Tuesday near CAD1.3380. The greenback's momentum stalled, and it settled slightly below CAD1.3485. It is trading with a heavier bias but is holding above yesterday's low near CAD1.3450. Support now is seen around CAD1.3440, but the US dollar looks set to trade higher in North America today. After briefly dipping below MXN17.00 before the outcome of the FOMC meeting, the dollar reached MXN17.25 yesterday. That is a little shy of the (38.2%) retracement of the leg down from the nearly four-month high set on September 7 around MXN17.7080. The next retracement (50%) is slightly above MXN17.35. It is consolidating in the European morning mostly MXN17.16. 


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