Bond Sell-Off Continues
• The dollar is consolidating in fairly narrow ranges against the major currencies ahead of the Jackson Hole symposium where Powell speaks tomorrow. In recent days, selling pressure has been seen in the North American session.
• The backing up of bond yields continues today. The US 10-year yield is up about 10 bp this week.
• South Korea became the first large Asian country to lift rates. The central bank kept its 4% GDP forecast but increased the inflation forecast to above target, suggesting another hike before the end of the year.
• Supply chain and labor shortages plague the UK auto sector, where output fell to its lowest level last month in 65 years.
• The US may report its first increase in weekly jobless claims in five weeks, and helped by stronger consumption, may revise Q2 GDP a little higher.
Overview: The new equities high in the US failed to carry into today’s activity. Asia Pacific markets were mostly lower, led by Hong Kong and the mainland to snap a three-day advance. Europe’s Dow Jones Stoxx 600 is off nearly 0.5% through the European morning. US futures are soft. The bond market sell-off continues, with the US 10-year pushing above 1.35%, a 10 bp increase on the week. European benchmark yields are 1-2 bp higher on the day and 7-12 bp higher on the week. The dollar is firm, with the Swiss franc and Australian and New Zealand dollars leading with a 0.20%-0.25% loss. The euro and Norwegian krone are fractionally higher. Emerging market currencies are also mostly lower, with the Turkish lira and South African rand posting modest gains. Gold appears to be rejecting the $1800 area and is pinned near yesterday’s lows below $1785. Oil is paring its three-day rally, and the October WTI contract is around $1, lower than yesterday’s $68.55 high. China’s iron ore contract rose for a fourth session, during which time it has gained nearly 8.5%. On the other hand, copper is giving back yesterday’s gains to end a four-day bounce that followed a four-day slide, leaving it off around 5.2% for the month.
South Korea became the first large Asian country to raise rates. It was a close call, and we had thought the spike in the virus would encourage the central bank to wait until next month. The seven-day repo rate was raised 25 bp to 0.75%. Headline inflation was at 2.6% in July, and the core rate was at 1.7%. The central bank left its growth forecast unchanged at 4%, signaling it does not expect the pathogen to have much lasting impact. It lifted its inflation forecast to 2.1%, above target, which signals another hike is coming, even if not at the October meeting. There was one dissent. The won softened for the second consecutive session after rising more than one percent in the first two sessions of the week, leaving it about 0.80% higher on the week.
Japan extended the formal emergency to more prefectures and now covers the area where 70% of the population lives. The formal emergency is not legally binding or enforceable, which may help explain many cases. Still, the vaccination efforts have improved, and an estimated 43% of the population has been fully vaccinated compared with 52% in the US and 66% in Canada. Prime Minister Suga, who received the endorsement today of an LDP faction that supported him early in the last leadership contest, has set the goal of fully inoculating 60% of the population by the end of next month. It could surpass the US.
The rise in US rates seems to have given the greenback a lift against the Japanese yen. A new high for the week was recorded today, just shy of JPY110.25. It is where it stalled on August 19 too. Above there, and the JPY110.50 cap comes into view. Support is seen near JPY109.80. The Australian dollar settled last week slightly above $0.7130 and rose to $0.7280 in a three-day advance before today. It is consolidating in a fairly narrow range above $0.7250. A break of $0.7240 could signal a return toward $0.7190-$0.7200. The US dollar moved up against the Chinese yuan for the second session after slipping in the first two sessions of the week. The greenback is holding the middle of the CNY6.45-CNY6.50 range that has dominated for the past two months. After the largest deviation from expectations in several days yesterday, the PBOC’s dollar reference rate today was again set tightly to forecasts (CNY6.4730 vs. CNY6.4728). The PBOC has stepped up its liquidity provisions this week, perhaps ahead of month-end pressures, and the overnight repo rate eased two basis points (to 2.19%) after falling by six yesterday. The seven-day repo rate, which covers the month-end period, rose a single basis point to 2.33%.
Eurozone M3 growth last month met expectations, rising by 7.6% year-over-year. Lending to households improved slightly to 4.2% year-over-year compared with 4% in June. However, loans to non-financial firms eased to 1.7% from 1.8%. Separately, Germany and France reported survey results. In Germany, the September GfK consumer confidence deteriorated to -1.2 from -0.4 (initially -0.3). It is the second consecutive deterioration. It comes on the heels of yesterday’s IFO survey that showed expectations faltering even as the current conditions measure ticked higher. Recall that the Bundesbank warned earlier this week that this year’s growth may fall shy of the 3.7% projection made in June. In France, August business confidence softened (110 vs. 113) while manufacturing confidence stands at 110 as well (the July results were revised to 109 from 110).
Confidence is also waning in the UK. The CBI’s quarterly survey showed optimism had fallen to -17% this month from +47% in May. It was the worst showing since the pandemic first struck. The survey found the highest number of companies reporting labor shortages as a constraint on investment since the survey began in the early 1990s. Supply chain disruptions were behind the collapse of British auto production last month. An industry group estimated that output vehicle production fell 38% from a year ago. The number of autos produced was the least in July since 1956. The UK manufacturing PMI peaked in May at 65.6. It has fallen for the past three months, and the preliminary July reading of 60.1 is the lowest since March, though still consistent with strong growth. The manufacturing PMI stood at 57.5 at the end of 2020.
The euro is in a narrow range of less than 20-pips below $1.1775. It is consolidating in the upper end of yesterday’s range, hovering around the 20-day moving average (~$1.1768). The euro has tended to make its session highs in North America in recent days, and the intraday momentum indicators suggest it could happen again today. Still, important resistance is seen at $1.18, and the euro has not closed above it since August 5. Sterling managed to take out yesterday’s high (by 1/100 of a cent) to reach a five-day high slightly below $1.3770. However, it too is consolidating yesterday’s advance. Today could be the first session in six that sterling does not trade below $1.3700. Support near $1.3730 may suffice.
The market’s attention may be shifting to the Jackson Hole conference, though Powell does not speak until tomorrow. Today, the market will digest weekly initial jobless claims, a revision to Q2 GDP, and the KC Fed’s manufacturing survey. Note that the Bloomberg survey calls for a small uptick in weekly jobless claims. It would be the first in five weeks, and the four-week moving average is still expected to fall. Second-quarter GDP may be revised higher (to 6.7% from 6.5%) on the back of stronger consumption. Like the PMI and other Fed August manufacturing surveys, the KC manufacturing survey is expected to have softened. The other reports were consistently weaker than expected. Yesterday’s five-year note auction was not as well-received as the two-year sale the previous day, but Treasury comes back today, selling seven-year notes (as well as four and eight-week bills).
Canada’s Trudeau has tacked to the left as the campaign gets underway. Two new initiatives were unveiled. First, Trudeau promises to introduce a 3% surtax on large banks and insurance companies on profits of more than C$1 bln. It would bring the marginal tax rate to 18% from 15%. It ostensibly could raise C$2.5 bln over four years. Second, Trudeau is also promising to ban foreign purchases of houses in Canada for two years and will propose a 1% tax on vacant homes (non-resident, non-Canadian owned residential real estate).
Mexico reported a Q2 current account surplus of $6.3 bln, well above the $3.8 bln that economists had projected. It follows a $5.5 bln deficit in Q1. Many observers might not appreciate the importance of worker remittances (primarily from the US). These remittances rosed $12.9 bln in Q2 after $10.5 bln in Q1. Mexico reported a small goods surplus. It is expected to report another trade surplus for July tomorrow. Today, it reports July unemployment figures. They are expected to be little changed from the 4%-level seen in June. Brazil’s inflation firmed a little more than expected this month, according to the IPCA measure. The 0.89% monthly increase lifts the year-over-year rate to 9.3%, a new five-year high. The central bank meets next on September 22 and has already signaled its intention to lift the Selic rate another 100 bp.
After peaking near CAD1.2950 at the end of last week, the US dollar has entered a trading range over the past two sessions (~CAD1.2580-CAD1.2660) and remains in that range today. The directional cues often seem to be provided by external considerations (risk appetites and commodities). A move below the 200-day moving average (~CAD1.2545) would draw attention. On the upside, a break above CAD1.2660 could signal a move back toward CAD1.2800. The greenback is threatening to sustain a new range against the Mexican peso. Yesterday’s dip below MXN20.20, a new low for the week, was snapped up, and the dollar is trading north of MXN20.30 in the European morning. Indeed, it is the weakest of the emerging market currencies, off a little more than a third of a percentage point.
Bannockburn Global Forex