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US Futures Drop As Chinese Stocks Soar On Reopening Optimism

US Futures Drop As Chinese Stocks Soar On Reopening Optimism

US stock futures fell on Monday as investors weighed the outlook for economic…



US Futures Drop As Chinese Stocks Soar On Reopening Optimism

US stock futures fell on Monday as investors weighed the outlook for economic growth against the possibility of a softening in the Federal Reserve’s policy, or in other words, whether bad news is again bad news. At the same time, and just one week after China was swept by violent anti-covid zero protests, Chinese stocks in listed in the US rose sharply after Hong Kong-listed peers rallied and the offshore yuan strengthened past the key 7.00 level after Chinese authorities eased Covid testing requirements across major cities over the weekend. The financial hub of Shanghai scrapped PCR testing requirements to enter outdoor public venues such as parks or use public transportation starting Monday. Hangzhou, home to tech giant Alibaba dropped obligations to enter most public venues including offices and supermarkets, while Shanghai also eased rules.  As a result, Hong Kong’s Hang Seng Tech Index closed at session highs, soaring some 9.2%, the biggest jump since Nov. 11, after China eased Covid testing requirements across major cities over the weekend.

Meanwhile in the US, Nasdaq 100 futures were down 0.4% by 7:30 a.m. in New York, while S&P 500 futures dipped 0.5%. The indexes shrugged off a hotter-than-expected jobs report on Friday as investors and erased almost all early losses as they remained optimistic that the Fed would slow the pace of interest rate hikes at its meeting this month. The dollar remained near session lows, boosting most Group-of-10 currencies. Treasury yields climbed across the curve. Oil advanced after OPEC+ kept its 2 million production cut and amid growing signs China is reopening, while gold was little changed. Bitcoin rose more than 1%, gaining for a second day.

The S&P 500 is on course for its biggest fourth-quarter gain since 1999 as signs of a cooling in US inflation have led to a pullback in bond yields, but market participants warn the outlook for next year remains uncertain amid the risk to corporate earnings from the specter of a recession.

Among notable moves in premarket trading, US-listed Chinese stocks extended their torrid rally as easing Covid curbs in major Chinese cities fueled optimism that Beijing is hastening the shift away from its Covid Zero strategy; Alibaba rose 5.2%, Baidu +5.6%, Pinduoduo +5%, +5.6%, Bilibili +16%, Nio +6.3%, XPeng +11%. Cryptocurrency-exposed stocks rose as Bitcoin extended gains for a second day. Tesla slipped as much as 4.8% after a Bloomberg News report said that the electric vehicle maker planned to lower production at its Shanghai factory. Here are the other notable premarket movers:

  • Activision Blizzard rises 2.3% after Bloomberg News reported that Microsoft is ready to fight for its $69 billion acquisition of the video gaming company if the US Federal Trade Commission files a lawsuit seeking to block the deal.
  • Marathon Digital and Riot Blockchain lead cryptocurrency-exposed stocks higher as Bitcoin extends gains for a second day. Marathon Digital +4.9%, Riot Blockchain (RIOT US) +2.8% and Coinbase  +2.3%
  • Keep an eye on airlines’ shares as Morgan Stanley says 2023 could be a “Goldilocks” year for air travel, boosting earnings beyond current expectations, as the broker upgrades United Airlines to overweight and cuts Allegiant Travel to equal-weight.
  • Alaska Air is initiated with a buy recommendation at Citi, saying the carrier has attributes to offset headwinds facing domestic airlines in 2023. Additionally, the broker begins coverage on JetBlue with a neutral rating.
  • Watch Terex as Deutsche Bank cut its rating to hold from buy on recent outperformance, saying that it’s best to stay defensively-positioned on US industrial stocks into 2023.
  • Keep an eye on Ameris Bancorp and Atlantic Union (AUB US) as Piper Sandler resumed coverage on US mid-Atlantic and southeast banks, saying the two lenders are its preferred larger-cap names with both at attractive entry points.

“Despite an increasingly optimistic end to the year, the main indexes seem unlikely to recover their lost ground and the current rally may be too little, too late,” said Richard Hunter, head of markets at Interactive Investor. Moreover, “doubts still linger” on how much more the Fed will still need to raise interest rates and the impact of higher-for-longer inflation, he said.

Morgan Stanley strategist Michael Wilson said the year-end rally he had predicted had now run its course and investors are better off booking profits from here on. He sees an “absolute upside” for the S&P 500 at 4,150 points -- about 2% above current levels -- which could be achieved “over the next week or so.”

Notable other US headlines:

  • WSJ's Timiraos writes that Fed officials have signalled plans to hike by 50bp at the December gathering, though elevated wage pressures could lead them to continue increasing rates to levels higher than investors currently expect.
  • Delta Air Lines (DAL) confirmed it reached an agreement in principle for a new pilot contract after it offered a 34% pay increase to pilots over 3 years, according to Reuters.
  • Apple (AAPL) supplier Foxconn (2317 TT) expects full production at its COVID-hit plant in China to resume from late December to early January, while the Co. and the local government are pushing hard on the plant's recruitment drive but many uncertainties remain, according to sources cited by Reuters.
  • Moldova’s central bank is to conduct an extraordinary meeting on Monday to assess its main policy indicators including the policy rate, according to Reuters.
  • Iran’s Attorney General announced that Iran abolished its morality police and is considering changing hijab laws following the protests, according to WSJ.

Euro Stoxx 50 falls 0.2%. FTSE 100 outperforms peers, adding 0.3%. Here are some of the biggest European movers today:

  • Tech investors Naspers and Prosus both gain more than 5% in Johannesburg trading Monday after Chinese authorities accelerate a shift toward reopening the economy.
  • European mining stocks in focus as metals advance after Chinese authorities eased Covid testing requirements across major cities over the weekend. Rio Tinto and Glencore shares rise as much as 3.7% and 2.4% respectively.
  • Credit Suisse shares climb as much as 3.7% in early trading after the Wall Street Journal reported that Saudi Arabia’s Crown Prince Mohammed bin Salman is preparing to invest in the Swiss lender’s investment-bank unit.
  • Grifols shares rise as much as 6.5% in early trading after Morgan Stanley raised to overweight from equal-weight on the expectation that 2023 will be a “strong growth year” supported by accelerating plasma collections and early signs of declining donor fees.
  • Bayer shares slide as much as 2.8%, the most in about a month, after Bank of America cut its recommendation for the German agropharmaceutical giant to neutral on the company’s lack of catalysts after a 2022 outperformance.
  • FlatexDEGIRO shares fall as much as 38%, the biggest intraday drop since its 2009 listing, after the online brokerage firm cut its revenue forecast and said it was working on measures to address shortcomings in some business practices and governance identified by a BaFin audit.
  • German catering equipment company Rational sinks as much as 9%, making them the worst performer in the Stoxx 600, after Bank of America initiated coverage on the stock with an underperform recommendation, citing a “demand crunch” in 2023.
  • Swedish Orphan Biovitrum shares drop as much as 2.2% after Morgan Stanley downgrades the stock to equal-weight from overweight.

Asian stocks rebounded, inching closer to bull market territory, as Chinese equities resumed their rally on further relaxation of Covid rules in Asia’s biggest economy. The MSCI Asia Pacific Index climbed as much as 1.4%, led by communication services and consumer discretionary shares. Benchmarks in Hong Kong led gains in the region with the Hang Seng Tech Index soaring more than 9% and the Hang Seng China Enterprises Index up roughly 5%. Morgan Stanley upgraded China to overweight.

Investors cheered latest signs of China pivoting from its strict virus rules as authorities eased Covid testing requirements across major cities over the weekend, including the financial hub of Shanghai. The move fueled gains in reopening stocks in China and its neighboring countries such as South Korea. Markets were closed in Thailand for a holiday. The moves coincided with growing bullish calls from Wall Street banks on Chinese equities, with more market watchers calling a bottom in the nation’s shares. Morgan Stanley upgraded China stocks to overweight from an equal-weight position held since January 2021, while abrdn’s Asia Pacific chief executive Rene Buehlmann urged investors to “go back” into Chinese markets.

Elsewhere, stock benchmarks were mixed with gauges in Japan and South Korea trading lower while those in Australia, Singapore and Vietnam rose.  After falling for much of the year, Asian stocks staged a dramatic rally in the past few weeks with a surge in foreign inflows into emerging Asian shares, supported by the dollar’s weakness and expectations for a slowdown in the Fed’s hikes.  The key Asian stock benchmark still remains about 17% lower so far this year, on course for its worst annual performance in more than a decade.

A closer look at Japanese stocks reveals that they ended mixed as investors gauged the impact of China’s shift toward reopening and US employment data. The Topix fell 0.3% to close at 1,947.90, while the Nikkei advanced 0.2% to 27,820.40. Toyota Motor Corp. contributed the most to the Topix decline, decreasing 1%. Out of 2,164 stocks in the index, 741 rose and 1,304 fell, while 119 were unchanged. “Japanese stocks are a bit weak at the moment as economic indicators are becoming a little more globally skewed,” said Mamoru Shimode, a chief strategist at Resona Asset Management. 

Australian stocks rose: the S&P/ASX 200 index rose 0.3% to close at 7,325.60, led by gains in mining and real estate shares, as traders bet on further reopening of the Chinese economy from Covid restrictions.  Shares of iron ore miners and steel companies were among top performers advancing as commodity prices rallied on China reopening bets.  In New Zealand, the S&P/NZX 50 index rose 0.3% to 11,677.75.

Stocks in India ended flat on Monday as investors likely took profits in recent outperformers, while the focus shifts to the central bank’s monetary policy announcement later this week. The S&P BSE Sensex ended flat at 62,834.60 in Mumbai, while the NSE Nifty 50 Index was also little changed, as both indexes overcame declines of as much as 0.6% each. The key gauges rose for eight consecutive sessions before declining on Friday. The Reserve Bank of India’s rate-setting panel will commenced its three-day meet Monday for the monetary policy to be announced on Wednesday. All of the economists surveyed by Bloomberg expect the benchmark lending rate to be increased, with the median estimate for a 35 basis points hike. Polls in India’s Gujarat, also the home state to Prime Minister Narendra Modi, end today and results will be announced on Dec. 8. Investors will be watchful of the outcome as the results will indicate Modi’s popularity for national elections next in 2024. 

In rates, treasuries are mixed as the curve bear flattens with 2s10s narrowing 1.6bps as US trading day begins, extending the flattening move unleashed Friday by stronger-than-estimated November employment data. All Treasuries apart from the very long end fell, with the largest decline seen in the belly of the curve, as traders added to Fed hike wagers ahead of US ISM services numbers for November. Yields remain inside Friday’s ranges, though inverted 2s10s reached -81.4bp, new low for the cycle. 2- to 7-year yields higher by 3bp-4bp on the day, 30-year lower by ~1bp; 10-year higher by ~2bp at 3.50% Most European 10-year yields are lower, led by UK as expectations for BOE rate hikes are pared. IG credit issuance slate blank so far, however dealers expect $10b-$15b this week and $20b for December. Three-month dollar Libor fell for a third straight day, longest streak since February, to 4.72343%.

The Bloomberg Dollar Spot Index snapped a four-day drop as the greenback rose 0.1%. CAD and AUD are the strongest performers in G-10 FX, JPY and GBP underperform. ZAR (1.7%) leads gains in EMFX.

  • The yen underperformed all its Group-of-10 peers while the Australian and Canadian dollar were the top gainers as commodities got a boost on hopes that China is engineering a gradual shift away from its strict Covid Zero policy. Chinese stocks and the yuan also rallied.
  • The yuan strengthened past the key 7 per dollar level after Shanghai and Hangzou relaxed Covid testing rules. Hong Kong dollar surged to the strongest level since June 2021. Te onshore yuan extended gain to 1.5% to 6.9450 per dollar, the most since Nov. 11 as reopening optimism continues to boost the currency. 
  • The euro steadied after rising to a fresh five-month high of $1.0585. Euro options bets suggest a run above $1.06 before FOMC meeting. Bunds, Italian bonds swung between modest gains and losses amid a slew of ECB speeches.
  • The pound slipped after posting four consecutive weeks of gains. Money markets eased BOE rate-hike wagers after policy-maker Swati Dhingra said in a newspaper interview that interest rates should peak below 4.5%. The central bank will conduct bond sales later on Monday

In commoidties, Crude benchmarks have been choppy, but are ultimately firmer post-OPEC+ and as the Russian oil cap comes into effect at USD 60/bbl. Brent rises 1.8% near $87.15 while WTI Jan was at 81.50/bbl, with the latest easing of China's COVID controls also factoring. OPEC+ ministers formally endorsed the output policy rollover and will hold the next JMMC meeting on February 1st, while it vowed to stand ready to adjust oil output to stabilize markets. Russian Deputy PM Novak said they will not operate under the oil price cap even if they have to cut production and the price cap may affect other countries as well, while he added that they are working on mechanisms to ban supplies which are capped. Russia is analysing the price cap imposed by G7 and allies on its oil and made preparations for this, while it will not accept the oil price cap, according to state news agencies citing the Kremlin. Russia's Kremlin, on price cap, said Russia is preparing a decision and will not recognise the price cap; price cap will destabilise global energy market but will not affect Russia's ability to sustain the military operation in Ukraine.

US economic data include November final S&P Global US services and composite PMIs (9:45am), October factory orders and November ISM services (10am)

Market Snapshot

  • S&P 500 futures down 0.3% to 4,062.75
  • STOXX Europe 600 little changed at 442.85
  • MXAP up 1.1% to 159.66
  • MXAPJ up 1.7% to 521.41
  • Nikkei up 0.2% to 27,820.40
  • Topix down 0.3% to 1,947.90
  • Hang Seng Index up 4.5% to 19,518.29
  • Shanghai Composite up 1.8% to 3,211.81
  • Sensex down 0.1% to 62,798.89
  • Australia S&P/ASX 200 up 0.3% to 7,325.60
  • Kospi down 0.6% to 2,419.32
  • German 10Y yield little changed at 1.85%
  • Euro up 0.2% to $1.0555
  • Brent Futures up 1.9% to $87.16/bbl
  • Gold spot down 0.0% to $1,797.23
  • US Dollar Index little changed at 104.47

Top US News From Bloomberg

  • ECB Governing Council member Francois Villeroy de Galhau said it’s too early to discuss where interest rates will peak, saying the monetary-tightening process should be carried out at the appropriate pace
  • The ECB should raise borrowing costs by at least a half-point this month to curb surging consumer prices, according to Governing Council member Gabriel Makhlouf
  • ECB Governing Council Member Mario Centeno said “everything indicates” that the peak of inflation may be reached in the fourth quarter
  • “Decisive monetary tightening must continue” as inflation persists above target, Croatian Central Bank Governor Boris Vujcic told the newspaper Jutarnji List, weeks before the Balkan nation joins the euro zone
  • The US dollar has erased more than half of this year’s gains amid growing expectations the Federal Reserve will temper its aggressive rate hikes, and as optimism grows over China’s reopening plans
  • Swedish central bankers are divided on the prospects for bringing inflation back to its target after a string of interest-rate increases, minutes from the bank’s latest policy meeting show
  • Emerging-market central banks face a Catch-22 where plunging economic growth means they can’t keep monetary conditions tight, but elevated inflation doesn’t allow them to halt rate hikes either
  • OPEC+ responded to surging volatility and growing market uncertainty by keeping its oil production unchanged
  • The world’s worst- performing major currency looks poised for an impressive turnaround in 2023 as its two key drivers -- a hawkish Federal Reserve and dovish Bank of Japan -- swap places in the eyes of some investors
  • The BOJ may achieve its inflation target in 2023 as the cost of living has consistently exceeded market expectations this year, according to Takatoshi Ito, a contender to replace Governor Haruhiko Kuroda in April
  • The PBOC injected a record monthly amount into state policy banks in November to help spur infrastructure spending and boost a struggling economy
  • Turkish inflation slowed for the first time in over a year-and-a-half, though measures to revive the economy ahead of elections in 2023 may keep it elevated for some time

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks traded mostly positive as Chinese markets led the advances on reopening optimism after several large cities further loosened COVID-19 restrictions, although the gains for the rest of the region were limited after Friday’s mixed post-NFP performance on Wall St and a further deterioration in Chinese Caixin Services and Composite PMI data. ASX 200 was higher with the index supported by strength in mining and energy as underlying commodity prices benefitted from the China reopening play. Nikkei 225 was indecisive and just about kept afloat throughout the session with price action contained by a lack of pertinent drivers to propel the index closer to the 28,000 level. Hang Seng and Shanghai Comp shrugged off the weak Chinese PMI data with risk appetite supported by reopening hopes and as the PBoC’s previously announced RRR cut took effect, while developers were boosted after reports last week that China's top four banks intend to issue loans for domestic developers’ overseas debt repayments.

Top Asian News

  • Chinese Caixin Services PMI (Nov) 46.7 vs. Exp. 48.0 (Prev. 48.4); Composite PMI (Nov) 47.0 (Prev. 48.3)
  • Several Chinese cities accelerated the loosening of COVID-19 restrictions over the weekend including Shanghai and Shenzhen which scrapped requirements for commuters to present PCR tests for travelling on public transport, while apartment complexes in Beijing indicated that those that tested positive could quarantine at home, according to FT.
  • China could announce 10 supplementary COVID measures as soon as Wednesday, via Reuters citing sources; could downgrade COVID to category B management as early as January. Subsequently, Shanghai scraps COVID testing requirement at more public venues from Tuesday, according to Bloomberg.
  • PBoC is reportedly expected to reduce the amount of open market operations towards the end of the year to avoid excess liquidity, according to China Securities Journal.
  • Morgan Stanley upgraded MSCI China to overweight from equal weight and said the ROE is likely to rise to 11.1% by end-2023, according to Reuters.

European bourses are under modest pressure, Euro Stoxx 50 -0.2%, following on from fairly contained action in futures overnight. In APAC hours, Chinese stocks were the marked outpeformers given the loosening of COVID restrictions, though the region's PMIs slipped. Stateside, futures are are in-fitting with European peers and are under slight pressure, ES -0.3%, with specific developments light during the Fed blackout window. Tesla (TSLA) reduced Shanghai output by up to 20% due to sluggish demand, according to Bloomberg; output cuts set to take effect as soon as this week, sources state. Foxconn (2317 TT) November sales -11.4% YY. Q4 outlook expected in-line with consensus. November was the month most affected by COVID; due to off-peak seasonality and COVID November revenue declined MM.

Top European News

  • BoE’s Dhingra said higher interest rates could lead to a deeper and longer recession which is what she thinks they should all be worried about, while she sees few signs that demands for higher wages are raising the risk of a wage-price spiral, according to the Observer.
  • Confederation of British Industry warned the UK will fall into a year-long recession next year as a combination of rising inflation, negative growth and declining business investment weigh on the economy, according to FT.
  • UK Conservative Party Chairman and Minister without Portfolio in the Cabinet Office Zahawi said the government is looking at bringing in the military if strikes go ahead in various sectors including the health sector, according to Reuters and Sky News.
  • UK RMT union rejected the Rail Delivery Group offer and demanded a meeting on Monday to resolve the dispute, while UK Transport Secretary Harper said the situation is disappointing and unfair to the public, according to Reuters.
  • ECB’s Villeroy said that inflation should peak in H1 next year and that he favours a 50bps rate hike at the December 15th meeting, while he added that rate hikes will continue after that but cannot say when they will stop and he expects to beat inflation by 2024-2025, according to Reuters.
  • ECB's Makhlouf sees a 50bps increase at a minimum at the December (15th) meeting, expects the eventual magntude to be 50bp; have to be open to policy rates moving into restrictive territory for a period in 2023; pre-mature to be talking about the endpoint for rates
  • EU Commission President von der Leyen said the US Inflation Reduction Act is raising concerns in Europe and there is a risk it could lead to unfair competition, close markets and fragment supply chains that have already been tested by the pandemic, while she added that competition is good but it must be a level playing field and that they must take action to rebalance the playing field where the IRA or other measures conduct distortions, according to Reuters.


  • DXY bid despite an earlier move to 104.10 lows, with the index recovering to 104.75+ parameters amid favourable technical levels US yields.
  • Action which has been felt most keenly against the JPY, USD/JPY testing 135.50 at best from an initial 134.10 low, action which has offset the Yuan's impact on the USD.
  • Yuan outperforms given the latest easing of COVID restrictions and source reports pointing to additional measures being forthcoming.
  • AUD the next-best ahead of the RBA policy announcement with a 25bp hike expected.
  • Both EUR and GBP were unreactive to the latest PMIs, with hefty OpEx in EUR/USD of note for the NY Cut; though, GBP has felt the USD's bid more keenly, sub-1.2250 at worst.
  • PBoC set USD/CNY mid-point at 7.0384 vs exp. 7.0368 (prev. 7.0542)

Fixed Income

  • Core benchmarks are experiencing choppy trade, but retain an underlying bid with Bunds surpassing touted 142.17 resistance and Gilts briefly breaching 106.00.
  • A move which leaves USTs lagging slightly with corresponding yields bid, though the curve is mixed and action is once again most pronounced at the short-end ahead of ISM & Factory Orders.


  • Crude benchmarks have been choppy, but are ultimately firmer post-OPEC+ and as the Russian oil cap comes into effect at USD 60/bbl.
  • Currently, WTI Jan & Brent Fed are pivoting USD 81.50/bbl and USD 87/bbl respectively, with the latest easing of China's COVID controls also factoring.
  • OPEC+ ministers formally endorsed the output policy rollover and will hold the next JMMC meeting on February 1st, while it vowed to stand ready to adjust oil output to stabilise markets, according to Reuters and FT.
  • Iraqi Oil Minister said OPEC members are committed to the agreed production rates until the end of 2023 and the Algerian Energy Minister said the decision to keep output unchanged is appropriate to market fluctuations. Kuwaiti Oil Minister said OPEC+ decisions are based on market data and ensure its stability, while he added the impact of slow global economic growth on oil demand is a cause for continuous caution, according to Reuters.
  • G7 and Australia announced on Friday that a consensus was reached on a price cap for Russian seaborne oil at USD 60/bbl which will enter into force on December 5th or very soon thereafter and they will ‘grandfather’ any revision of the price cap to allow compliant transactions concluded beforehand. Furthermore, US Treasury Secretary Yellen said that the price cap will immediately cut into Russia’s most important source of revenue and preserve stable global energy supplies, while a senior Treasury official stated that the price cap will create an anchor for Russian oil and has already driven prices lower, according to Reuters.
  • Ukrainian President Zelensky’s chief of staff commented that the price cap on Russian oil should be capped to USD 30/bbl, according to Reuters.
  • Russian Deputy PM Novak said they will not operate under the oil price cap even if they have to cut production and the price cap may affect other countries as well, while he added that they are working on mechanisms to ban supplies which are capped.
  • Russia is analysing the price cap imposed by G7 and allies on its oil and made preparations for this, while it will not accept the oil price cap, according to state news agencies citing the Kremlin.
  • Russia's Kremlin, on price cap, said Russia is preparing a decision and will not recognise the price cap; price cap will destabilise global energy market but will not affect Russia's ability to sustain the military operation in Ukraine.
  • EU countries cut their gas demand by a quarter last month despite a fall in temperature which shows an effort in reducing the reliance on Russian energy, according to FT.
  • Moldova’s Deputy PM Spinu said they will not pay a 50% advance to Gasprom by December 20th for its December gas supplies, according to Reuters.
  • Spot gold has pulled back below USD 1800/oz and now resides in proximity to its 200-DMA at USD 1795/oz while base metals remain bid, but have eased from initial best levels.


  • US Defense Secretary Austin accused Russia of deliberate cruelty in its war in Ukraine and that it was intentionally targeting civilians, according to Reuters.
  • US Director of National Intelligence Haines said they expect a reduced tempo in Ukraine fighting to continue in the coming months, while she added that Russia is not capable of indigenously producing munitions they are expending, according to Reuters.
  • US Indo-Pacific Commander Aquilino said it is in China’s strategy to encourage nations like North Korea to create problems for the US and he is not optimistic about China doing anything helpful to stabilise the Indo-Pacific region, according to Reuters.
  • N.Korea has fired around 130 artillery shots off its East & West Coast, via Yonhap; Subsequently, N. Korean military says the firing of artillery shells was a warning to S. Korean military action, via KCNA.

US Event Calendar

  • 09:45: Nov. S&P Global US Composite PMI, est. 46.3, prior 46.3
  • 09:45: Nov. S&P Global US Services PMI, est. 46.1, prior 46.1
  • 10:00: Oct. Durable Goods Orders, est. 1.0%, prior 1.0%
    • Durables-Less Transportation, est. 0.5%, prior 0.5%
    • Cap Goods Ship Nondef Ex Air, prior 1.3%
    • Cap Goods Orders Nondef Ex Air, prior 0.7%
  • 10:00: Oct. Factory Orders, est. 0.7%, prior 0.3%
    • Factory Orders Ex Trans, prior -0.1%
  • 10:00: Nov. ISM Services Index, est. 53.3, prior 54.4

DB's Jim Reid concludes the overnight wrap

Although there is little question that I feel fully aware that someone has cut my back open with a knife within the last few days and sawed off some bone inside, I feel remarkably mobile and spritely. However, I'm trying not to appear too mobile as I've been signed off housework for a few weeks as I'm not supposed to bend, twist or lift. Don't waste a crisis as they say. I also resisted any urge to celebrate England waltzing into the last 8 of World Cup last night. Still plenty of time for it to go spectacularly wrong. No need to stress the back needlessly at this stage!

As the World Cup builds to the business end of the tournament, we welcome in a week with limited US data and one with the Fed now on their blackout period ahead of next week's FOMC. In fact, could it actually be quite a quiet week ahead? Famous last words in a year like this, but next week should be much more interesting than this week given that we also have US CPI and the ECB meeting to go alongside the Fed.

The data we do see in the US starts today with the ISM services index (DB forecast 53.9 vs 54.4 in October) and ends with PPI and the UoM consumer confidence number on Friday with the latest inflation expectations numbers included.

Elsewhere we’ll also get CPI and PPI from China (Friday), industrial production from Germany (Wednesday) and trade data from key economies.

While central bank speak will be sparse, Lagarde speaks today and for this week some attention will shift to Canada and Australia. The former meet on Wednesday and as a reminder, their last meeting's dovish tilt spurred a pivot trade in the US on the back of expectations the Fed would mimic the message. So this meeting may be a driver of sentiment more broadly. The consensus is split on Bloomberg between 25bps and 50bps which makes it interesting. The Reserve Bank of Australia will also decide on policy tomorrow, and consensus expects a 25bp rate hike that takes the cash rate to 3.1%. Wednesday will also likely see the Reserve Bank of India downshift to 25bps after three 50bps hikes. So by midweek we’ll have a better feel for whether these central banks are trying to downshift. The full day-by-day week ahead is at the end as usual on a Monday.

Staying on the topic of where central bank rates are going, payrolls from last Friday merit some closer attention. The headline (263k vs 284k last and 200k consensus) and private (221k vs. 248k last and 185k consensus) payrolls numbers beat with unemployment steady at 3.7%. However, market focus was squarely on the upside surprise to average hourly earnings (+0.6% vs. +0.5% last and +0.3% consensus) which boosted the year-over-year growth rate by a couple of tenths to 5.1% vs consensus at only 4.6%. This big upside miss got our economists digging into the data and they found that the response rate for the establishment survey, which measures nonfarm payrolls, hours and earnings, was just 49.4%, well below the normal 65-70% range and the lowest since 2002. So it feels like you could see decent sized revisions. In addition, our economists found that most of the upside surprise to AHEs was due to the transportation and warehouse sector, which showed a +2.5% monthly gain - over five standard deviations above the average and by far a record increase. Information services AHEs (+1.6% vs. Unch.) also showed an unusually large gain that was about 2.5 standard deviations outside of the average. Combined, the unusually large increases in these two sectors likely boosted overall AHEs by around one to two tenths in their view.

Nevertheless, income growth from our economists’ payroll proxy was still up 7.6% compared to a year ago and inflation is not going to be coming down to trend with labour markets like this. There is more and more evidence that the supply side is normalising on the inflation front but it's seems inconceivable that inflation can normalise overall when we see the type of employment numbers we saw last week, not just from the employment report but also from the JOLTS data which still pointed towards a tight labour market.

Indeed, in Powell's mid-week speech which caused a major bond/rates rally, he did cite the latest JOLTS data as still showing a large imbalance between supply and demand for labour, referencing the roughly 1.7 job openings for every unemployed worker. Powell also noted that for "the principal wage measures that we look at, I would say that you're one and half or two percent above that (which is consistent with two percent inflation over time)". So it's fascinating that at the moment the market is focusing squarely on the very strong likelihood that we'll ratchet down to 'only' a 50bps hike next week and extrapolating that level of dovishness rather than focus on any risks that the terminal rate could end up being nearer say 6% than 5%. Indeed Larry Summers was doing the rounds over the weekend suggesting that markets were likely under-pricing terminal and seemingly being more comfortable suggesting a peak nearer 6 than 5%, even if he wasn't specific over a particular number.

In terms of weekend news OPEC+ decided to keep production at current levels as expected. This follows the EU decision on Friday, after months of negotiations, to cap the price of Russian crude at $60 per barrel, starting today. This morning in Asia trading hours, oil prices are trading higher with Brent crude futures (+0.82%) trading at $86.27/bbl and WTI futures (+0.83%) at $80.64/bbl following China’s further easing of its Covid Curbs.

Elsewhere, Shanghai and Hangzhou have followed other Chinese cities in easing some Covid restrictions over the weekend. They announced that from tomorrow, they will remove the requirement to have a PCR test to enter outdoor public venues and to use public transport. Chinese equities surged on the news with the Hang Seng rising +3.3% in early trading to its highest since mid-September, leading gains across the region with the CSI (+1.60%) and the Shanghai Composite (+1.55%) also rallying. Outside of China, the Nikkei (+0.01%) is struggling to gain traction this morning whilst the KOSPI (-0.51%) is slipping back slightly. In overnight trading, US stock futures are indicating a negative start with contracts tied to S&P 500 (-0.14%) and the NASDAQ 100 (-0.17%) edging lower. Meanwhile, yields on 10yr USTs (+4.55 bps) have climbed higher, trading at 3.53% with the 2s10s curve at -79.15 bps as we go to press.

Data out from China today showed that services activity contracted further in November as Covid restrictions continued to restrain growth, with the Caixin China services PMI falling to a six-month low of 46.7 from 48.4 in October. Elsewhere, the final estimate of Japan’s services PMI fell to 50.3 from October's 53.2, hitting the lowest since August as cost pressures remained acute. The composite PMI contracted to 48.9 in November from 51.8 a month earlier.

In FX, the Chinese currency strengthened to 6.96 against the US dollar, moving below 7 for the first time since mid-September on hopes of reopening.

Recapping last week now and for the second week running major sovereign bond markets and equity indices rallied, after perceived dovishness from Fed Chair Powell in his last remarks before the December FOMC communications blackout period, troubling global growth data, and further confirmation of China moving on from the strictest form zero Covid policies that have plagued global supply chains.

Treasury and Bund yields fell over the week, a largely parallel shock to the already inverted US yield curve while Bund yields flattened slightly. All told, 2yr Treasuries fell -18.1bps (+4.4bps Friday) while 10yr yields were -19.1bps lower (-1.9bps Friday). 2yr Bunds fell -8.7bps, though climbed +8.0bps Friday, while 10yr yields were -11.8bps lower after climbing +4.2bps Friday following the US jobs report. But note that 10yr US yields fell c.7bps after the European close and c.15bps lower than their highs for the day just after payrolls were released.

Terminal Fed Funds fell c.8bps on the week but were first c.6bps higher pre-Powell's speech and then c.22bps lower into payrolls, before climbing 8bps after and into the close for the week.

A second straight week of falling discount rates led to a second straight week of decent equity performance. The S&P 500 climbed +1.13% (-0.12% Friday) with the more rate-sensitive NASDAQ outperforming, up +2.09% (-0.18% Friday). One area of weakness was bank stocks, where the S&P 500 banks sector fell -2.03% (-1.04% Friday) as slower growth and flatter curves weighed. Performance was more mixed in Europe, but the STOXX 600 still managed to post a +0.58% weekly gain (-0.15% Friday), while the regional indices took their cues from the World Cup: the DAX fell -0.08% (+0.27% Friday) with Germany failing to reach the knockout round again while the CAC and FTSE 100 increased +0.44% (-0.17% Friday) and +0.93% (-0.03% Friday), respectively.

Tyler Durden Mon, 12/05/2022 - 08:03

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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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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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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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