sensory map
Overview
The market places more emphasis on the rise in the U.S. ISM manufacturing survey than on the downward revision of the manufacturing PMI and the unexpected sequential decline in construction spending. U.S. interest rates surged and boosted the dollar.Dollar index(Lilac Garden, U.S. Department of Labor) hit a new high for the year, slightly above 105, which was the new low expected by people. Bannockburn World Currency Index (GDP-weighted basket of currencies of the 12 largest economies) last week. The two-year Treasury yield surged nearly 9 basis points to settle above 4.7%, the highest level in two weeks. A little lower now. 10-year return rate (10 years USD) rose 11 basis points, the highest level since the January CPI was announced on February 13. It is slightly stronger today, approaching the first quarter high of 24 years (March) 18) Close to 4.35%. Sterling also joined the dollar group and Scandinavia in inching higher against the greenback. The Swiss franc suffered the heaviest sell-off, falling around 0.5%, as manufacturing PMI and consumer price index (CPI) weakened on Thursday. Most emerging market currencies were weaker, but the Turkish lira extended yesterday’s recovery momentum, while the South African rand and Mexican peso strengthened.
Although the Shanghai and Shenzhen CSI 300 Index (SHSZ300) fell 0.4%, Hang Seng Bank and mainland stocks traded there rose more than 2% today. Taiwan stocks rose 1.2%, led by the semiconductor sector. European markets reopened after an extended holiday, with the STOXX 600 picking up where it left off and extending gains for a fifth straight session. U.S. stock index futures (SPX, SP500) were trading slightly weaker. Rising U.S. interest rates and final European manufacturing PMIs are pushing European 10-year rates up 5-7 basis points, with UK government bond yields up nearly 11 basis points. A strong dollar and rising interest rates haven’t stopped gold buying. It hit a new record high just under $2,267. WTI also moved higher again in May, perhaps encouraged by the improvement in PMI, but there was also news that Mexico would cut Maya crude exports to increase domestic gasoline and diesel production. It is a sour crude, and the drop in exports comes as the United States reimposes sanctions on Venezuela, also a source of sour crude. WTI prices rose to last year’s high above $85 in May.
Asia-Pacific
With the Bank of Japan exiting its negative interest rate policy last month, speculation has turned to what’s next. A Bloomberg survey conducted on March 21 found that among 47 survey responses, 25% supported raising interest rates in June/July, while 37% believed the next high point would be in September/October. within the time range. Another 8% believe the next step will be in Q1’25, and 19% expect a follow-up after Q2’25. Former Bank of Japan official Watanabe said the next step would be as early as October. Recall that Watanabe was seen as a potential candidate to head the Bank of Japan last year. Watanabe noted that service prices remained subdued (2.2% in February, unchanged from January) and that the Bank of Japan acted just days before the new inflation data was released, which seemed to weaken the data-reliance argument. Japan’s two-year government bond yield peaked at 0.21% on March 22. Since then it has been consolidating above 0.18%.
There were no surprises in the minutes of last month’s Reserve Bank of Australia meeting. The central bank kept the cash rate unchanged at 4.35%, but abandoned its hawkish stance in the past regarding the risk of another rate hike. Amid an uncertain economic outlook, the Reserve Bank of Australia noted that risks are more balanced. Futures markets have reduced the likelihood of rate cuts at the Reserve Bank of Australia’s May and June meetings, but lowered the probability of an August rate cut from around 80% to below 70%.
The US dollar hit a three-day high during the North American session yesterday, slightly higher than 151.75 yen, and expanded slightly to 151.80 yen today. Last week’s multi-year high was one nanometer below 152.00 yen. The dollar has been almost flat over the past seven sessions and volatility remains low, with benchmark three-month implied volatility around 8.2%. The highest point during the year was close to 10.5%. The low in the first quarter was at the end of February, near 7.6%. The actual volatility in one quarter was about 7.5%. AUD/USD is trading lower on the outside for the day, trading on either side of its pre-weekend range and breaking below its lows. In fact, AUD/USD posted its lowest close since February 13, when the first quarter low was just below $0.6445. However, AUD/USD has held on to yesterday’s lows and hit an intraday high near $0.6510 in early European trade. However, with the intraday momentum indicator elongating, we suspect there may be little upside left in the North American market. Nearby resistance is the $0.6520 area. There is no doubt that China has the tools and resources to resist a stronger dollar, but why would it do so? Inflation is low; economic growth is fragile. However, it cannot win. If it intervenes openly, it is accused of impeding market forces, and if it does not intervene openly, it is criticized for “lowering export prices.” The yuan’s 1.9% decline against the dollar this year is smaller than any G10 currency except sterling. The yuan also appreciated against most emerging market currencies. The People’s Bank of China sets the US dollar reference exchange rate at RMB 7.0957 (yesterday it was RMB 7.0938, the lowest since March 13). The average in the Bloomberg survey was 7.2373 yuan (yesterday: 7.2196 yuan). There seems to be nothing to prevent the yuan from rising to the bottom of its previous range of 7.25 yuan against the dollar.
Europe
Europe is wrapping up its holiday weekend. The highlight of the week is tomorrow’s March CPI preliminary reading. Last week, France and Italy released their own data, both of which came in below expectations. France’s unified indicator fell to 2.4% from 3.2%. Italy’s growth rate rose from 0.8% to 1.3%. The median forecast in a Bloomberg survey was 1.5%. German states released data earlier today, showing an annual decrease of 0.3%-0.7%. National unified data will be released soon. It is expected to fall to 2.4% from 2.7%. Separately, the European Central Bank reported that its February survey found that one-year inflation expectations fell to 3.1% from 3.3%, while three-year expectations remained unchanged at 2.5%. The three-year forecast for February 2023 was 2.5%. Finally, the final manufacturing PMI value in March was 46.1, higher than the initial forecast of 45.7 to 46.5 in February. Forecasts were revised higher for Germany and France. Italy’s manufacturing PMI rose above 50 (50.4) for the first time since March last year. Spain remains above 51.0 (51.4) for the second month in a row. Turning to the UK, the final manufacturing PMI rose to 50.3 in February from the initial forecast of 49.9 and 47.5. This is the first time since July 2022 that it is above 50.
After falling for the past three weeks, the euro fell again yesterday. Last week was the first time since mid-February that the euro closed below $1.08. Prices were sold to nearly $1.0730 during yesterday’s North American session as US interest rates surged. It hit a new marginal low near $1.0725 earlier today. The euro has not traded below that level since mid-February. On February 14 (the day after the US January CPI was released), the first-quarter low was slightly less than $1.07. The euro has stabilized but faces resistance in the $1.0750-$60 area. Sterling trade is dismal. Breaking out of six days of sideways trading, it fell to its lowest since February 14 at $1.2540. Holding steady today, the pound is stable but remains below $1.2575. The momentum indicator was stretched intraday. The lowest price during the year was set on February 5 (the trading day after the release of the US January employment report), close to $1.2520. The pound has never dipped below $1.25 in four months.
USA
In the quarter before the COVID-19 outbreak, the number of job openings in the United States averaged nearly 7 million. This measure of the labor market is gradually normalizing. It peaked at nearly 12.2 million in March 2022 and nearly 8.86 million in January. The median forecast in the Bloomberg survey was 8.77 million, which, if accurate, would be the lowest level since March 2021. Factory orders are also due for February, but we already know that durable goods orders have rebounded after falling 6.9% in January. On the face of it, the challenge is that, excluding aircraft and military orders, durable goods orders have been flat over the past 18 months. Finally, U.S. auto sales are expected to rise slightly in March to 15.9 million units (seasonally adjusted annual rate), slightly below last year’s peak (15.91 million units in April 2023). U.S. car sales will be approximately 15.43 million vehicles in 2023 and 13.73 million vehicles in 2022. Just under 17 million units were sold in 2019.
The manufacturing ISM rose above 50 for the first time since 2022. The likelihood of a rate cut in June fell to about 60% from nearly 80% a week ago. This is the lowest since late October last year. In addition, the futures market has scaled back the Fed’s rate cut this year to about 68 basis points. This is the third consecutive day that the market did not price in a rate cut of at least 75 basis points. It had considered the idea three days before the FOMC meeting in mid-March.
The US dollar is bullish against the Canadian dollar on the day. Yesterday, trading volume in the Asia-Pacific region hit a 7-day low (about 1.3515 Canadian dollars), and then rebounded to 1.3585 Canadian dollars during the North American session. After hitting its highs, the US dollar did not fall below 1.3570 Canadian dollars, but it has recovered to nearly 1.3555 Canadian dollars today. The market doesn’t look like it’s ending up where it was at 1.3600-15 CAD in late February and last month. We note that a move above CAD 1.3625 could lead to a move towards CAD 1.37 in USD. Additional gains for the Canadian dollar appear to be limited due to oversold intraday momentum indicators and a bullish USD mentality in North America. The U.S. dollar also rose against the Mexican peso. However, the tone seemed more to reinforce than to correct. It stalled near three-day high MXN16.6730. The next obstacle appears in the MXN16.73-MXN16.78 region. Last week’s low was set near MXN16.5120. The peso is the only currency (G10 and emerging markets) to appreciate against the dollar this year. Meanwhile, the dollar rose to a new high for the year against the Brazilian real. It almost reached 5.07 BRL and although it stabilized in late trade, it remains above the upper Bollinger Band (~5.0425 BRL). The next chart point of note is near BRL5.10.
Editor’s note: Summary highlights for this article were selected by Seeking Alpha editors.
