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Futures Rise On First Trading Day Of 2023 But Far From Record High Hit Year Ago Today

Futures Rise On First Trading Day Of 2023 But Far From Record High Hit Year Ago Today

US stock futures rose on the first trading day of 2023,…



Futures Rise On First Trading Day Of 2023 But Far From Record High Hit Year Ago Today

US stock futures rose on the first trading day of 2023, with some of the most beaten down and shorted stocks and sectors outperforming, as optimism crept - however briefly - into the market on the one-year anniversary of the S&P 500’s last record high.  Contracts on the S&P 500 climbed as much as 1.1% before fading much of their earlier gains. One year ago, the S&P closed at 4,796.56: since Jan. 3, 2022, the US stock benchmark endured its biggest annual decline since the global financial crisis, ending the year down 19%. Nasdaq 100 futures rose 0.6% Tuesday. The dollar jumped as the euro tumbled, while Treasuries were headed for their strongest start to a year in more than two decades as investors scooped up government debt on wagers the Federal Reserve will further slow its pace of rate hikes.

Stocks that were among last year’s worst performers rise in the first US premarket trading session of the new year, with riskier names like meme stocks, cryptocurrency-related shares and electric- vehicle makers gaining amid a return in risk appetite and renewed optimism over China’s reopening. However, not all beaten down names jumped: Tesla fell 3.8% after the electric-car maker delivered fewer vehicles than expected. Analysts noted that the company is facing significant demand issues as it ramps up production capacity and offers hefty incentives in of its two biggest markets. Here are some other notable premarket movers:

  • Chinese stocks rose in US premarket trading amid signs that Covid infections in China may have peaked, boosting optimism over the nation’s reopening.
  • Gilead Sciences is downgraded to sector perform from outperform at RBC Capital Markets as the broker says it will take time to gain more definitive visibility on the next sets of potential drivers.
  • Mondelez International was downgraded to sector perform from outperform at RBC Capital Markets, with the brokerage saying that it is now difficult to justify further upside to EPS estimates as the macro environment weakens.

Stocks are set to gain at the open despite concern that the Fed's interest rate increases will cause the economy to slow significantly in 2023, if not contract. The Big Short Michael Burry said on Twitter late Sunday that the US this year is likely to be “in recession by any definition”, in other words, Powell will be able to declare mission accomplished. Optimists are counting on inflation to slowly cool even as the labor market remains strong. Some pressure eased in the final months of 2022 as Fed officials pointed to a less-aggressive tightening path, while China’s exit from its Zero Covid policy also helped sentiment.

“The Fed has pushed up rates well into restrictive levels and has signaled a willingness to go further,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management, who’s cautious on US stocks. “I would become more comfortable with US equities when we are closer to a pause. Even after the 2022 decline, some US equities still trade at high valuations.”

“Hopes that supply chain issues in China will continue to ease, which could help bring down inflation, may be feeding into sentiment,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. Traders are “seizing onto glimmers of hope that once the winter waves die down, China’s recovery could be back on track.”


In Europe the Stoxx 50 rallied as much as 1.4% before fading some gains after a surprise drop in German unemployment signaled resilience in the region’s biggest economy; FTSE 100 outperforms, higher by 1.5% on the day. Travel and leisure and tech stocks led gains while defensive sectors including utilities and telecoms underperformed. Here are some of the biggest European movers:

  • UK stocks outperformed as the London Stock Exchange reopened following Monday’s New Year holiday. Domestic-focused shares, which slumped last year, rose, with homebuilders Barratt Developments and Persimmon up at least 4% and banks Lloyds and NatWest up at least 2%.
  • Travel stocks rose, with TUI up as much as 6.6% and carrier IAG up as much as 5.6%. Strong pricing power driven by the reopening of Asian and trans-Atlantic routes is one of the multiple catalysts that should benefit European long- haul carriers in 2023, according to Citigroup.
  • AstraZeneca and Novo Nordisk both rose more than 2% after JPMorgan said the firms were its most favored in the European pharma-biotech sector alongside Merck KGaA.
  • Brenntag shares rose as much as 6% after the German chemicals distributor said it was no longer proceeding with discussions to potentially acquire US rival Univar Solutions.
  • Zalando shares rose as much as 4.3%, touching the highest since June, after Hauck & Aufhaeuser predicted the company would remain a winning platform in European online fashion.
  • Aker Carbon Capture gained as much as 13% after it signed a Letter of Intent for the delivery of two Just Catch units for an undisclosed European customer.
  • Fresenius Medical Care fell as much as 5.2% after JPMorgan flagged “significant” risks to estimates for the dialysis provider in the near term in a review of the European medtech sector. The shares were also downgraded at Jefferies, while parent Fresenius SE was upgraded.
  • Gaztransport & Technigaz fell as much as 7.7% after the French maker of cargo containment systems for liquefied natural gas said it’s ceasing activities in Russia.

Earlier in the session, Asian stocks erased an initial decline, spurred by a rebound in Chinese equities as traders assessed peaks in China’s Covid-19 infections and the outlook for the economy.  The MSCI Asia Pacific ex-Japan Index was 0.2% higher, reversing a drop of as much as 1.5% and poised for a third straight daily gain. Chinese stocks listed in Hong Kong had their best start to a year since 2018 as subway use recovered in nearly a dozen major cities.  A decline earlier in the day in Chinese stocks was triggered by weak manufacturing for December as well as tourism data for the New Year holiday.

“While it is inevitable to see further surges and more widespread infections at the initial stage of opening, the outlook for the Chinese economy has brightened for 2023,” Saxo Capital Markets strategists wrote in a note. China’s renewed support for private enterprise and the property sector, and an improved credit impulse mean “Hong Kong and mainland Chinese equities have a more positive tendency,” they added. Korea’s Kospi gauge fell to a two-month low as local funds sold tech stocks such as Samsung amid worries about the earnings outlook. Japan and New Zealand were closed for a holiday.  After a dismal 19% slide in 2022, strategists are expecting the MSCI Asia Pacific Index to outperform US peers this year with a stronger rebound in the second half. China’s full reopening, a pivot in Fed policy and an end to the chip downcycle are among the positive catalysts seen to outweigh a slowdown in global growth.

Indian stocks rose for a second straight session, helped by gains in lenders after most banks reported strong growth in credit offtake for the previous month. Gains in local shares tracked most Asian peers, with Chinese equities rallying as traders assess the outlook for economic recovery on signs of Covid peaking in some cities.  The S&P BSE Sensex rose 0.2% to 61,294.20 in Mumbai, while the NSE Nifty 50 Index was higher by a similar measure. Fifteen out of BSE Ltd.’s 20 sector sub-indexes advanced, led by consumer durables makers.  Axis Bank and HDFC Bank were the key gainers among Sensex’s 30 companies, 17 of which ended higher, while the rest declined. Tata Consultancy Services led the gains in software companies.  Reliance Industries fell after the Indian government revised windfall tax on domestic crude and diesel exports higher.

In Australia, the S&P/ASX 200 index fell 1.3% to close at 6,946.20, its lowest since Nov. 7. All sectors dropped on the benchmark’s first trading day of the year, with banks and miners contributing the most to its decline. In New Zealand, the market was closed for a holiday.

In FX, the Bloomberg dollar spot index rallied by as much as 0.9% as the greenback strengthened against all Group-of-10 peers save the Japanese yen. The JPY is the only G-10 currency that’s up against the dollar. NZD and AUD underperform. The yen briefly reversed gains against the dollar in early European trading before resuming its advance; the Japanese currency advanced to a six-month high in the Asian session after an initial bout of stop-loss selling through a key technical level was followed by momentum buying against the dollar and euro. Front-end volatility in the majors is better bid as the new year kicks off, with the yen being at the forefront of traders’ attention. The euro fell by as much as 1.3% to a three-week low of 1.0534 following some weaker than expected German inflation prints. The Australian and New Zealand dollars flipped to gains amid signs that Covid cases in major Chinese cities may have peaked. Positive comments toward Americans from China’s Foreign Minister Qin Gang also lifted risk sentiment

In rates, Treasuries traded sharply higher, outperforming core European rates with yields as much as 11bp richer on the day across intermediates vs Friday’s closing levels. US 10-year yields around 3.765%, richer by 11bp on the day and outperforming bunds and gilts by 6bp and 3bp; belly-led gains richen 2s5s30s Treasuries fly by 4.2bp vs Friday’s close while 2s10s curve flattens ~4bp. Gilts and Treasuries yields across the curve decline, led by the 10-year yields, each down about 13bps. Comparative bunds underperform, declining some 8bps.  There is no fresh catalyst for the first trading day of the year, as investors look to fade current rate-hike premium priced into front-end. In Europe, Treasury and bund curves bull-flattened while money markets eased Fed and ECB tightening wagers after German regional inflation figures signaled slowing inflation. Fed-dated swaps price Fed peak rate at around 4.95% by June meeting, down from 4.98% at Friday’s close.

In commodities, oil declined under pressure from a stronger dollar, reversing earlier gains. European gas prices slid as a warmer-than-expected start to winter across large parts of the world rapidly have eased fears of a natural gas crisis. Most base metals trade in the green. Spot gold rises roughly $12 to trade near $1,836/oz.

In crypto, bitcoin traded flat, just below $17K. Sam Bankman-Fried is expected on Tuesday to enter a plea of not guilty to criminal charges that he cheated investors and looted billions of dollars at his now-bankrupt FTX cryptocurrency exchange, according to a source cited by Reuters.

Today's calendar is relatively quiet with just S&P Global Manufacturing PMI and US Construction spending on deck.

Market Snapshot

  • S&P 500 futures up 1.1% to 3,902.00
  • MXAP up 0.6% to 156.64
  • MXAPJ up 0.3% to 507.14
  • Nikkei little changed at 26,094.50
  • Topix down 0.2% to 1,891.71
  • Hang Seng Index up 1.8% to 20,145.29
  • Shanghai Composite up 0.9% to 3,116.51
  • Sensex little changed at 61,227.58
  • Australia S&P/ASX 200 down 1.3% to 6,946.19
  • Kospi down 0.3% to 2,218.68
  • STOXX Europe 600 up 1.8% to 436.53
  • German 10Y yield little changed at 2.38%
  • Euro down 1.1% to $1.0549
  • Brent Futures up 0.5% to $86.30/bbl
  • Gold spot up 0.9% to $1,840.74
  • U.S. Dollar Index up 1.03% to 104.59

Top Overnight News from Bloomberg

  • German unemployment unexpectedly fell in December. Joblessness dropped by 13,000 in December, the Federal Labor Agency said in a statement on Tuesday. All 15 economists surveyed by Bloomberg anticipated an increase. The unemployment rate was 5.5%, also better than expected
  • British rail workers will walk off the job much of this week, paralyzing transport and adding to the troubles piling up for Prime Minister Rishi Sunak’s government
  • A warmer-than-expected start to winter across large parts of the world is rapidly easing fears of a natural gas crisis that had been predicted to trigger outages and add to pressure on power bills
  • Nearly a dozen major Chinese cities are reporting a recovery in subway use, a sign that an ‘exit wave’ of Covid infections may have peaked in some urban areas
  • Official Chinese data over the weekend showed the decline in manufacturing worsened last month, while activity in the services sector plunged the most since February 2020. Separately, a private survey of businesses by China Beige Book International on Monday suggests the economy contracted in the fourth quarter from a year earlier
  • Turkey’s consumer prices rose an annual 64.3% in December, down from 84.4% the previous month, according to data released by state statistics agency TurkStat on Tuesday. The median forecast of economists surveyed by Bloomberg was 66.7%

A more detailed look at global markets courtesy of Newsquawk

Stocks in Asia were a mixed bag (Japan and New Zealand are away from market). ASX (-1.3%) is the laggard whilst Chinese bourses are on a firmer footing (Shanghai Comp +0.8%, Hang Seng +2.1%). Weekend developments focused around China's NBS PMIs, with the official NBS manufacturing PMI dropping to 47.0 (exp. 48.0) in December from 48.0 in November, the largest monthly decline since the start of the pandemic in February 2020, and remaining below the neutral 50-mark for the third consecutive month. Reuters notes that the data gives the first glimpse of the manufacturing sector after China removed its COVID restrictions in early December. Meanwhile, the Caixin version of the manufacturing PMI declined to 49.0 in December (exp. 48.8, prev. 49.4). EU Health Commissioner Kyriakides has reportedly contacted China offering variant-adapted EU vaccine donations alongside public health expertise, via FT citing sources which add China has not responded yet. IMF chief Georgieva said one-third of the global economy will be hit by recession this year, and 2023 will likely be tougher for the world economy than the previous 12 months.

Top Asian News

  • Evergrande Vows Debt Payment After Restructuring Delay
  • Samsung Veteran Sounds Alarm on Korea Losing Global Chip War
  • Copper Advances as Chinese Stimulus Eyed After Poor Factory Data
  • Garuda Shares Fall as Trading Resumes After Debt Restructuring
  • Marcos Seeks to Move China Ties to ‘Higher Gear’ in Trip
  • More Flight Delays as Philippine Airport Reels From Glitch

European bourses are firmer across the board, Euro Stoxx 50 +1.4%, as the region's strong start to 2023 continues. Post-APAC individual developments have been somewhat limited and primarily focused on Chinese PMIs and USD action. Stateside, futures are firmer across the board with the ES back above 3900 ahead of the week's risk events from Wednesday onwards. TikTok owner ByteDance has cut hundreds of jobs at multiple departments in China, according to SCMP sources; the job reductions came after the CEO told employees in December that the company needs to ‘get fit and beef up the muscle’ to streamline operations.

Top European News

  • European Stocks Extend Recovery on China as Traders Await Data
  • UK Stocks Outperform, Catching Up With Europe After Holiday
  • Genus, Scor, Aroundtown, Royal Unibrew Short Sellers Active
  • Bulgaria Starts New Bid to Form Coalition as Snap Elections Loom


  • Dollar erases and reverses losses on positional, fundamental and technical grounds
  • DXY picks off late December peaks within 103.460-104.820 range, Yen retreats after testing multi-month peaks vs Buck in holiday-thinned trade overnight, USD/JPY back on 130.00 handle from circa 129.51 low
  • Kiwi and Aussie unable to evade Greenback revival with NZD/USD eyeing 0.6200 and AUD/USD probing 0.6700 vs 0.6360+ and 0.6830+ highs
  • Euro deflated by sub-consensus German state CPIs ahead of prelim. national data
  • EUR/USD towards bottom of 1.06830-1.0526 band and Pound unable to benefit from upward revision to final UK manufacturing PMI, Cable closer to 1.1900 than 1.2100

Fixed Income

  • Bunds boosted by softer than forecast German regional inflation reports as stops are triggered between 133.79-135.55 parameters
  • Gilts catch up and carry on after the extended UK New Year break as 10 year bond hits 101.66 from 99.97 low and 99.90 prior close
  • T-note climbs without cash-backing to 113-02 from 112-12+ ahead of final US manufacturing PMI and construction spending data


  • Crude benchmarks have come under modest pressure as the European morning progresses, with the benchmarks currently lower by circa. USD -0.70/bbl having more than retracted a concerted bid that occurred around the European cash equity open.
  • Spot gold and silver are firmer despite the mentioned USD strength with Chinese data points perhaps proving favourable for the traditional haven. Albeit, the yellow metal has retreated from a USD 1850/oz peak.
  • Base metals are supported despite the China metrics as the overall tone remains constructive amid a relatively thin docket to start a particularly busy week.
  • Indian gov't is reportedly considering selling 2.1mln/T of wheat, with a decision due in the next 10-days, via Reuters citing sources.
  • Chinese Foreign Ministry says some nations restrictions on Chinese travellers lack scientific basis and are unreasonable; will take corresponding measures accordingly.

US Event Calendar

  • 09:45: Dec. S&P Global US Manufacturing PM, est. 46.2, prior 46.2
  • 10:00: Nov. Construction Spending MoM, est. -0.4%, prior -0.3%
Tyler Durden Tue, 01/03/2023 - 08:05

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Industrial Production Decreased 0.1% in January

From the Fed: Industrial Production and Capacity Utilization
Industrial production edged down 0.1 percent in January after recording no change in December. In January, manufacturing output declined 0.5 percent and mining output fell 2.3 percent; winter…



From the Fed: Industrial Production and Capacity Utilization
Industrial production edged down 0.1 percent in January after recording no change in December. In January, manufacturing output declined 0.5 percent and mining output fell 2.3 percent; winter weather contributed to the declines in both sectors. The index for utilities jumped 6.0 percent, as demand for heating surged following a move from unusually mild temperatures in December to unusually cold temperatures in January. At 102.6 percent of its 2017 average, total industrial production in January was identical to its year-earlier level. Capacity utilization for the industrial sector moved down 0.2 percentage point in January to 78.5 percent, a rate that is 1.1 percentage points below its long-run (1972–2023) average.
emphasis added
Click on graph for larger image.

This graph shows Capacity Utilization. This series is up from the record low set in April 2020, and above the level in February 2020 (pre-pandemic).

Capacity utilization at 78.5% is 1.1% below the average from 1972 to 2022.  This was below consensus expectations.

Note: y-axis doesn't start at zero to better show the change.

Industrial Production The second graph shows industrial production since 1967.

Industrial production decreased to 102.6. This is above the pre-pandemic level.

Industrial production was below consensus expectations.

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Week Ahead: Will Soft US CPI and Retail Sales Mark the End of the Interest Rate Adjustment and Help Cap the Greenback?

markets are still correcting from the overshoot on rates and the dollar that
took place in late 2023. The first Fed rate cut has been pushed out of…



The markets are still correcting from the overshoot on rates and the dollar that took place in late 2023. The first Fed rate cut has been pushed out of March and odds of a May move have been pared to the lowest since last November. The extent of this year's cuts has been chopped to about 4.5 quarter-point move (~112 bp) from more than six a month ago. The market has reduced the extent of ECB cuts to about 114 bp (from 160 bp at the end of January and 190 in late 2023). The Bank of England is now expected to cut rates three times this year (75 bp), which is nearly 100 bp less than was discounted at the end of last year. The extent of Bank of Canada rate cuts this year has been halved to less than 80 bp from 160 bp in late December 2023. We suspect that the interest rate adjustment is nearly over. A soft US CPI and weak retail sales report next Tuesday and Wednesday could help cap US rates and signal the end of the dollar's New Year rally. 

The UK reports CPI on February 14, and given the base effect (-0.6% in January 2023), even a 0.3% decline in prices last month, the year-over-year rate is likely to rise (to 4.2%-4.3%). However, the bigger story for the UK, the eurozone, and Canada is that inflation rose sharply in the Feb-May period last year, and as these drop out of the 12-month comparisons, the year-over-year rates will fall dramatically. The UK and Japan will report Q4 23 GDP. The UK economy likely contracted slightly for the second consecutive quarter. Japan, the world's third-largest economy, likely returned to growth after contracting at an annual rate of almost 3% in Q3. Consumer spending and capex fell in Q2 and Q3 24. Both likely recovered. The UK and Australia report new labor market figures. In the UK wages are moderating and the economy likely lost full-time positions for the second consecutive month in January. It is difficult to image a worse employment data than Australia reported last month. It lost 106k full-time jobs, which, outside of the pandemic, looks like the worst on record. 

United States:  The data and official guidance have pushed out expectation of the first Fed cut and reduce the extent to this year's cut. The market's confidence (~73%, down from 90% after the employment data) of a May move still seems too high given the apparent momentum the economy enjoys in early 2024, even if we do put too much emphasis on the Atlanta Fed's GDP tracker (3.4%) this early in the quarter. The market has about 4.5 Fed cuts discounted this year, down from more than six cuts as recently as mid-January. The May decision is unlikely to be determined by January data. That counts even this week's highlights of CPI, retail sales, and industrial production.

At his post-FOMC press conference, Fed Chair Powell called attention to "six months of good inflation." This looks to have continued into this year. The headline CPI rate is seen rising by 0.2% (February 13), which, given the base effect (0.5% in January 2023), would see the year-over-year rate fall to 3.0%-3.1% from 3.4%  Yet, the median forecast from the nine economists that participated in Bloomberg's survey (by end of last week) see it falling to 2.9%. The core rate is expected to rise by 0.3% for the third consecutive month and the fifth time in six months. That may be more important that the softer year-over-year rate (~3.7% vs 3.9%). 

January retail sales (Feb 15) may have been dragged down by disappointing auto sales (15 mln SAAR, down from 15.83 mln in December). Consumption would appear be off to a slow start after retail sales rose by an average of 0.2% in Q4 23 after a blistering 0.7% average gain in Q3 23. The median forecast is for a 0.2% decline in headline retail sales (+0.6% in December). On the other hand, industrial production (Feb 15) appears to have accelerated and the 0.3% increase the median in Bloomberg's survey is looking for would be the strongest in six months. However, manufacturing itself may be flat. Other high frequency data points include producer prices (year-over-year rates are below 2%), housing starts and permits (small gains expected), and a number of early regional Fed surveys. Of note, the Empire State Manufacturing Survey crashed in January (-43.7 from -14.5) and a sharp snap back is expected in February. On balance, the data is likely to be consistent with the US economy expanding somewhat faster than what the Federal Reserve believes is the long-term non-inflation pace (1.8%). 

The big outside day for the Dollar Index after the US employment data on February 2 saw follow-through buying at the start of last week. It reached 104.60, the highest level since the middle of last November and spent the rest of the week consolidating above 103.95. A move above the 104.80 is needed to reignite the upward momentum. Despite the stretched momentum indicators and the proximity of the upper Bollinger Band (~104.50), there is little technical sign of a top. That said, given the nearly 4% rally off the late December lows, this is the area where we are beginning to look for a reversal pattern.

Eurozone:  Details for Q4 23 GDP (flat and 0.1% year-over-year) will be released with the revisions on February 14. It may be interesting for economists, but the general thrust is sufficiently known for businesses and market participants. The eurozone economy is stagnating or worse. In the last five quarters through Q4 23, in aggregate, there has been no growth. Still, the details of fourth quarter GDP saps much interest in high frequency data from the end of last year. More importantly is the momentum at the start of the new year and the data so far have been limited to some surveys and a preliminary estimate of January CPI (-0.4% month-over-month and minus 3.2% at an annualized rate in the last three months). There seems to be little reason to expect new growth impulses, leaving this quarter to be flat to +0.1%.

The euro's low for the year was set at the start of last week slightly below $1.0725. The subsequent recovery stalled in the $1.0790-95 area, meeting the (38.2%) retracement objective from the Feb 2 high set shortly before the US January jobs report. The momentum indicators remain stretched, as one would expect, given the five weeks of losses in the first six weeks of the year. And if there is a more of a recovery, the $1.0810-40 area may offer stiff resistance. The 20-day moving average, which the euro has not closed above since January 2 is found at the upper end of that band. Note that there are options for 2.5 bln euro at $1.0725 that expire Monday and options for 1.5 bln euros at $1.07 expire shortly after the US CPI report on February 13.  There is another 1.4 bln euro s at $1.07 that expire Wednesday. 

Japan:  In each of the past six years, the Japanese economy contracted in at least one quarter (in 2018 and 2022 there were two contracting quarters). Last year, it was the third quarter, when output fell by 0.7% (quarter-over-quarter). A stabilization in consumption and a recovery in private investment, both of which fell in Q2 23 and Q3 23, likely helped return the world's third largest economy to growth. Exports also increased. The GDP deflator appears to have peaked in Q3 23 at a 5.3% year-over-year pace. On the back of firmer US Treasury yields and comments by BOJ officials that downplayed the likelihood of a tightening cycle even after negative interest rate policy is jettisoned, the dollar rose to nearly three-month highs against the yen (~JPY149.60). Although Japanese officials have not expressed concern about the price action in the foreign exchange market, the yen's six-week drop is the kind of one-way market that is resisted. The November high was near JPY149.75, in front of the psychologically important JPY150 level. There are $1.4 bln in options at JPY150 that expire shortly after the US CPI report on February 13. A move above JPY150 brings last year's high near JPY152 into view.

United Kingdom: It is an important week for UK data and the jobs report and the CPI, in particular will likely impact expectations for interest rate policy. Average weekly earnings have slowed for four consecutive months through November and look poised to continue to slow as the labor market cools. The key message on UK CPI is that it will fall sharply starting the February report and running through May. In those four months in 2023, UK CPI rose by an average of 1.0% a month. In the last four months, through January, the UK's CPI rose by an average of 0.2% a month. Due to 0.6% decline in January 2023 UK CPI, the 0.3% decline expected for last month's CPI will translate into a small increase in the year-over-year rate. But that is not the signal. Even if UK's inflation averaged 0.4% in the Feb-May period this year, the headline year-over-year rate would still slip below 2% (from 4% in December). The core rate is firmer, but the direction is lower. It peaked at 7.1% last May and finished the year at 5.1%. The UK also reports Q4 23 GDP. Recall that the monthly print showed a 0.3% contraction in October followed by 0.3% growth in November. It is seen contracting by 0.2% in December. That would likely translate to a 0.1% contraction quarter-over-quarter for the second consecutive quarter. Surveys suggest manufacturing remains weak while the services are finding traction. The swaps market has about a 70% chance that the first cut is delivered by midyear. Three cuts and about a small chance of a fourth cut is discounted for this year. 

Sterling broke out of its $1.26-$1.28 trading range to the downside at the start of last week, largely on follow-through selling after the US jobs report on February 2. It bottomed near $1.2520 and recovered to settle above $1.26 for the past three sessions. Sterling's recovery stalled near $1.2645, the (50%) retracement of the losses from February 2 high (~$1.2770). The next retracement (61.8%) is around $1.2675, which is also where the 20-day moving average is found.

Australia: The January employment data will be reported early on February 15. It is difficult to imagine a worse report than December's, even though the unemployment rate held at 3.9% (up from 3.5% at midyear). Australia lost a stunning 106.6k full-time posts, which wiped out half of the increase reported in the Jan-November period (~211k). Part of the reason that the unemployment rate did not rise was that the participation rate fell by a sharp 0.5% to 66.8%. At the same time, other hard data have been poor. Remember December retail sales tumbled 2.7% in the face of expectations of a 0.5% gain. November gain itself was revised lower by nearly as much as economists had forecast a December gain (1.6% vs. 2.0%). Building approvals dropped 9.5%. Here, too, economists (median in Bloomberg's survey) forecast a 0.5% increase. November's 1.6% gain was revised to 0.3%. There may be scope for the market to bring forward the first rate cut by Reserve Bank of Australia to June from August. 

The Australian dollar recorded a new low for the year last Monday near $0.6470, its lowest level since mid-November as it extended the post-US jobs data drop. However, it stabilized and largely traded in a range mostly between $0.6480 and about $0.6540. The upper end of the range corresponds to the (50%) retracement of the decline from the pre-jobs data high a little above $0.6600. The next retracement (61.8%) is near $0.6555, and the 20-day moving average, which the Aussie has not closed above since January 3 is a little higher (~$0.6560).

Canada:  Canada has a light economic diary in the coming days. January existing home sales and housing starts, and Canada' portfolio investment account (December) rarely moves the market in the best of times. In terms of drivers, the 30- and 60-day correlations with the changes in the exchange rate seem to be the general direction of the dollar (DXY) and risk-appetites (S&P 500). The Canadian dollar seems less sensitive to oil and two-year rate differentials (less than 0.2 correlation for both period). The US dollar took out the January high marginally and rose to about CAD1.3545 early last week before consolidating at lower levels ahead of the Canadian employment data reported before the weekend. The Canadian dollar strengthened initially on the news, even though full-time jobs fell for the second consecutive month. The greenback found support ahead of CAD1.3400 and recovered back to set new session highs near CAD1.3480. The risk seems to be on the upside. 

Mexico:  After the January CPI figures and the central bank decision to hold policy steady, there may not be market-moving economic data February 22 with another look at Q4 23 GDP (0.1%), first half of February CPI, and minutes from the Banxico meeting. The central bank raised quarterly inflation forecasts through Q3 but left the Q4 24 projection at 3.5%. The target is 3%, +/- 1%. The dollar initially moved higher in response, but the upticks (to ~MXN17.17) were short-lived. The greenback settled last week below MXN17.10, to post its second consecutive weekly decline. The MXN17.00 area had been approached before Mexico's CPI and central bank meeting. It has not traded below there since January 16, but it could if the US CPI and retail sales data are soft and cap US rates. 



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The Greenback is in Narrow Ranges to Start the Week

Overview: The foreign exchange market is quiet. The
Lunar New Year holiday shut most Asian markets. That, coupled with the light
news in Europe, have…



Overview: The foreign exchange market is quiet. The Lunar New Year holiday shut most Asian markets. That, coupled with the light news in Europe, have served to keep the dollar in narrow ranges against the G10 currencies. The Swedish krona, Norwegian krone, and Japanese yen are posting minor gains against the greenback. The New Zealand dollar, which was strongest major currency last week (1.4%) is off by almost 0.5% today, making it the weakest today. RBNZ Governor Orr underscored the recent message that inflation is still too high (~4.7%). Emerging market currencies are narrowly mixed (+/-0.2%). Of note, India reports December industrial production and January CPI shortly.

The few equity markets in the Asia Pacific region that were not on holiday today, including Australia, India, and New Zealand slipped. Political uncertainty in Pakistan saw its stock market tagged for 3%. On the other hand, Europe's Stoxx 600 is trying to snap a three-day fall (less than 0.4%). Of note, real estate is the strongest sector today, rising by more than 1%. US index futures are trading firmly after new record-highs before the weekend. Benchmark 10-year bond yields are 3-6 bp lower in Europe. The 10-year US Treasury yield is off a basis point to around 4.16%. Gold is trading with a softer bias near $2020. Last week's low was around $2015. April WTI set this month's high before the weekend near $77.15. It is approaching the pre-weekend lows slightly below $76. Support is seen closer to $75. 

Asia Pacific

The top two BOJ officials played down speculation that the central bank’s from negative interest rates will signal the start of a tightening cycle, and for good reason. First, inflation is already well off its peak and could easily fall below the 2% target before the April BOJ meeting that is widely expected to adjust policy. Second, despite a shortage of workers, (Japan's working age population peaked nearly 30 years ago) and the gradual opening to foreign workers, wage growth continues to lag inflation. Third, and related, domestic demand is soft. Toward the end of the week, Japan will publish its initial estimate of Q4 GDP. Consumption is likely to have recovered weakly from the contraction in Q2 and Q3 23. In the five years (20 quarters) before the pandemic, Japan's private consumption component in its GDP contracted by an average of 0.2% a quarter. Also, note that although the BOJ set the overnight target rate at minus 0.10%, the effective rate at the end of last week was 0.005%. Governor Ueda is determined to exit the negative interest rate policy for technical and strategic reasons. Arguably, there was windows of opportunity previously, where the macroeconomic setting was conducive to exiting the negative policy rate. 

Most Asian markets were closed today, and China's mainland markets are closed all week for the Lunar New Year holiday. We expect that after the holiday, more efforts to support the economy and fight deflation will be forthcoming. Despite the stimulus in H2 23, the economy does not seem responsive. The assumption that the state-owned banks are just arms of the government is challenged by the same banks not fully passing on the PBOC's lower rates. The one- and five-year loan prime rates will be set on Feb 20. The same state-owned banks have also been reluctant to lend to the property market and enact the support measures Beijing unveiled in 2022. Lastly, consider the offshore yuan. It does not have to but with few exceptions respects the onshore band (2% for the dollar around the reference rate). Why? While the PBOC could intervene there, but when it does it is fairly clear. The last reference rate creates a band of ~CNH6.9640-CNH7.2485. Is it too much to suggest that the same mechanism that keeps the offshore yuan within the onshore band explains a great deal of how the PBOC manages the exchange rate? To paraphrase an old Chinese saying, "kill an occasional chicken to scare the monkeys."  

The dollar edged a little closer to the JPY150 level ahead of the weekend (~JPY149.60) before settling virtually unchanged near JPY149.30. There are around $1.4 bln in options at JPY150 that expire tomorrow. During the six-week decline in the yen, speculators in the futures market have grown their net short yen position by more than 50% to 84k contracts (~$7 bln). The greenback is a narrow range of about a third of a yen above JPY149. The price action looks like a bullish pennant or flag, The Australian dollar's range last week, roughly $0.6470-$0.6540, is the key to the near-term direction. We favor an upside break and watching the possible bullish divergence with some of the momentum indicators but recognize the $0.6555-75 area to be an important hurdle. The Aussie eked out a small gain last week (~0.20%), the first of the year. Speculators in the futures markets added to their net short Australian dollar position for the fourth week in a row. It now stands at about 71.8k contracts (~$7.2 bln), up from 32.3k before the streak began. The Aussie is trading in about a fifth of a cent range above $0.6510.


The European economic calendar is light this week, and what there is, may be a sad reminder of the Europe's sad state. Eurostat will publish the details of Q4 23 GDP. The initial estimate had the regional economy stagnating after a 0.1% contraction in Q3. The dramatic 1.6% drop in Germany December industrial output (-3.0% year-over-year) underscores the lack of growth impulses to start the new year, and the weakness of what had been the European engine. At the same time, leadership is weak. Among the large members, Italy's Meloni, right-government seems among the strongest, and incidentally, the economy is doing better (but still not well). In 2022, Germany grew by 1.8%. Italy grew twice as fast. Last year, the German economy contracted by 0.3%, while Italy expanded by 0.7%. On the other hand, Italy's budget deficit was about 5.4% of GDP last year, while Germany's was less than 2.5%. Italy's 10-year premium over German narrowed to about 140 bp at the end of January, almost a two-year low, after rising to a nine-month peak last October over 200 bp. It is snapping back this month is near 155 bp. Italy's two-year premium peaked near 95 bp in the middle of last October and fell to almost 45 bp late last month. Last year's low was below 30 bp. It has jumped to about 65 bp now, the most since last November.

The Swiss franc was the strongest G10 currency in Q4 23 as dollar fell across the board. It rose 8.8% and so far, this year, the franc has fallen by about 3.9%. The dollar approached the (50%) retracement objective (~CHF0.8790). Above there is the 200-day moving average (~CHF0.8845) and the (61.8%) retracement near CHF0.8900. The euro is recovering from multiyear lows set against the franc in Q4 23 (~CHF0.9255). It traded up to almost CHF0.9475 last month but pulled back to support near CHF0.9300 earlier this month. There may be potential toward CHF0.9500-CHF0.9550. Switzerland reports January CPI tomorrow. The EU harmonized measure is expected to slip to 2.0% from 2.1%. Its own measure is seen easing to 1.6% (from 1.7%) and the core rate to 1.4% (from 1.5%).

The euro reached a six-day high late in thin Asia Pacific turnover near $1.0805. It was quickly sold to almost $1.0765 before finding a bid in early European turnover. It is the fourth session of higher highs. The pre-weekend low was almost $1.0760, and a break of the $1.0755 area would weaken the fragile technical tone. There are options for about $755 mln euros at $1.08 that expire today. There are large (1.4-1.5 bln euros) at $1.07 that expire tomorrow and Wednesday. Stiff resistance is seen in the $1.0830-40 area. Sterling recovered after breaking down at the start of last week (~$1.2520) but settled back into the $1.26-$1.28 trading range in the past three sessions. The $1.2640 area had capped but, like the euro, set a new six-day high before Europe opened and took sterling down to almost $1.2615. Before the weekend, sterling briefly frayed the $1.26 level. It is an important week for UK data, including the labor market report tomorrow and the January CPI on Wednesday. Soft data may encourage bringing forward the first rate cut to June from August. 


Interest rates and expectations are a key force driving exchange rates. The market has gradually reduced the odds May rate cut to about 73% from 90% chance after the strong January jobs growth. It also scaled back the magnitude of Fed cuts by about 50 bp (to ~112 bp) in the past month. Tomorrow's CPI, more than last week's historic revisions, is a key input into the Fed's reaction function. Fed Chair Powell recently indicated the central bank was looking for more confirmation that inflation was on a sustained path back to its target. The January figures will give the Fed that. Ahead of it, the results of the NY Fed's inflation survey are of little consequence.

Canada reported a loss of full-time jobs in January for the second consecutive month. Wage growth slowed. The decline in the unemployment rate to 5.7% (from 5.8%) can be explained by the decline in the participation rate (65.3% vs. 65.4%). The takeaway is that the market boosted the chances of a June rate cut (to ~77% vs. ~67%). Despite the risk-on mood, which lifted the S&P 500 to a new record high, the Canadian dollar found no traction. It fell slightly for the first time in three sessions. The US dollar made session highs near midday in NY ahead of the weekend near CAD1.3480. The greenback is in a narrow 20-tick range above CAD1.3450 so fat today. Nearby resistance is seen in the CAD1.3500 area but the greenback has been turned back from the CAD1.3540 area three times. There are options for about $630 mln at CAD1.35 that expire tomorrow. The Mexican peso weakened after the central bank seemed to prepare the market for a rate cut as early as next month. However, it recovered and returned to pre-central bank levels near MXN17.08. It has edged low today to MXN17.0640. MXN17.00 was tested early last week. Around $580 mln of options expire there on Thursday. The US dollar reached BRL5.0175 at the start of last week. On the pullback, it found support near BRL4.95. It settled last week just above there. There is a band of technical support between BRL4.91 and BRL4.93.



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