Consolidation Featured
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipdpTgkJC94kpmtOdXPx6N0OW8uSqe0U8W0zChKzi_8ZAqH1u1_NXYlXZofmcjH6N_cNeSLviM7_23VexnonfWtg4Mv7p1a5ZN0L06pWHUgjymCIhXPZcV3MSBFtHqrUqug_RtAx4GBHpAx28S14JswPLNPH_jCQS9tSeL8UjMGj32Ez0jzV1lsWe8M25G/s810/mon%202.png"><img alt="" border="0" data-original-height="810" data-original-width="807" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipdpTgkJC94kpmtOdXPx6N0OW8uSqe0U8W0zChKzi_8ZAqH1u1_NXYlXZofmcjH6N_cNeSLviM7_23VexnonfWtg4Mv7p1a5ZN0L06pWHUgjymCIhXPZcV3MSBFtHqrUqug_RtAx4GBHpAx28S14JswPLNPH_jCQS9tSeL8UjMGj32Ez0jzV1lsWe8M25G/s400/mon%202.png" /></a></div><p><b><span>Overview: </span></b><span>After dramatic intraday price swings after
the US jobs data and service ISM figures before the weekend, the dollar is
consolidating today in mostly narrow ranges. The prospect for a March cut by
the Federal Reserve finished last Friday virtually unchanged (73% vs 70%) and
is about 66% chance today. There was interest in Dallas Fed's Logan's
suggestion that the tapering of QT be discussed, though it seems to simply
confirm what many has suspected as the use of the reverse repo facility
diminishes. We <a href="http://www.marctomarket.com/2023/12/january-2024-monthly.html" target="_blank">suggested</a> it
could wind down by the middle of the year. Also, over the weekend, a tentative
deal to re-authorize the federal government spending to avoid a partial
government shutdown beginning January 19 was struck but it is not clear that
the congressional votes are there. <o:p></o:p></span></p><p><span>Meanwhile, the selling pressure
on Chinese stocks that trade in Hong Kong or the mainland continues. The CSI
300 was off 1.3% today to bring this year's decline to about 4.25%. The MSCI
Asia Pacific Index was off 2% last week and those losses were extended today. Europe's
Stoxx 600 is trading about a quarter-of-a-percent lower to start the week. The
temporary grounding of Boeing's Max 9 (171 aircraft, mostly in the US) is
weighing on the company's shares and a drag on the index futures today, after
small gains before the weekend. European 10-year yields are mostly 2-3 bp
firmer while the 10-year US Treasury yield has come back a little softer
(~4.03%). Gold is trading heavily and is just holding above the pre-weekend low
(~$2024.60). February WTI is trading through its pre-weekend low (~$72.20). The
low set in the middle of last week was closer to $71. <o:p></o:p></span></p><p><b><span>Asia Pacific</span></b><span><o:p></o:p></span></p><p><b><span>China is likely to report
its December lending figures in the coming days. </span></b><span>It appears that bank loans (new yuan
loans) increased but this may have been more than offset by a pullback in
shadow banking activity. Aggregate financing may have slowed last month. Still,
the takeaway is lending has increased in recent months after slowing for a few
months around mid-year. The PBOC injected CNY350 (~$50 bln) into the policy
banks last month via the Pledged Supplemental Lending facility at 2.4%. That is
below the benchmark one-year Medium-Term rate (2.50%), which may be a tell for
a 10 bp rate cut on January 15. Separately, China reported that the dollar
value of its reserves rose by $66.2 bln. Based on a roughly calculation of
changes in exchange rates and bond, we suggested reserves could rise by $50 bln
or almost twice the median forecast in Bloomberg's survey for a $26.7 bln
increase. For the year as a whole, the value of China's reserves increased by
about $110 bln after falling by $123 in the 2022. <o:p></o:p></span></p><p><b><span>Japanese markets were closed
today but the first thing tomorrow, Tokyo reports December CPI. </span></b><span>Small declines in the headline and core
rates are expected. The headline rate may ease from 2.7% to 2.5%. The core
rate, which the BOJ targets at 2.0% may draw a little closer after falling to
2.3% last November. However, the measure that excludes fresh food and energy is
may be stubborn at 3.6%. The BOJ does not seem to be under much pressure to
adjust monetary policy and the recent earthquake reduces the pressure further. November
household spending is due as well. It is expected to have fallen by 2.2%
year-over-year and that is after a 1.2% decline in the year through November
2022, and a 1.3% decline year through November 2021. Demographics likely played
a role, but also so did the decline in real earnings. Average monthly real cash
earnings are expected to have fallen by 2.2% in the year through November 2023.
They fell by 2.5% in the year ending in November 2022. In fact, on a
year-over-year basis they have been falling without fail since April
2022. <o:p></o:p></span></p><p><b><span>The dollar approached the
(50%) retracement of the sell-off from last November's high after the US jobs
data on Friday near JPY146.00.</span></b><span> This area needs to be overcome to continue to strong upside
momentum seem for most of last week, and the next target is the
JPY147.50-JPY148 area. The key may be US Treasuries. Ahead of the weekend, the
10-year yield settled above the 200-day moving average, seemingly to confirm
the completion of the bottoming pattern. The five-day moving average has
crossed below the 20-day moving average in the March 10-year note futures for the
first time since early last November. A minimum target may be a yield near
4.20%-4.25%. However, today, the 10-year yield is a little softer and the
greenback is consolidating with a JPY144 handle. <b>The Australian dollar
plunged to almost $0.6640 on Friday before clawing its way back to settle
slightly below $0.6715. </b>We anticipate some near-term consolidation but
the downside correction, after rallying around six cents off in the last two
months of last year does not appear over. The Aussie approached initial
resistance ($0.6645) and peaked in the local session near $0.6735. It tested
support near $0.6680 in the European morning. <b>Consolidation may continue,
and that applies to the Chinese yuan as well. </b>The dollar is trading within
the pre-weekend range with a firmer tone. The range is roughly
CNY7.1460-CNY7.1635. The high last week was recorded before the weekend near
CNY7.1710, filling an old gap. The PBOC set the dollar's reference rate at
CNY7.1006 (CNY7.1029 on Friday). The average projection in Bloomberg's survey
was CNY7.1498 (~CNY7.1589 on Friday). <o:p></o:p></span></p><p><b><span>Europe</span></b><span><o:p></o:p></span></p><p><b><span>News that eurozone retail
sales fell by 0.3% in November reinforces ideas that the economy has no
traction and likely contracted in Q4 23 (-0.1%) for the second consecutive
quarter. </span></b><span>Still, October's
0.1% gain was revised to 0.4% and the EC's sentiment surveys ticked up. However, Separately,
disappointing German November factory orders kept the pressure on the euro. and
trade figures. Factory orders stabilized after falling 3.8% in October, but the
0.3% increase disappointed expectations for a 1.1% gain. Germany's trade
figures were better, and exports rose 3.7% in November, well, above forecasts
for a 0.5% gain after a revised 0.4% decline in October (initially -0.2%).
Imports also rose more than expected (1.9% vs. 0.4%). The trade surplus of 20.4
bln euros was more than expected, and the largest monthly trade surplus since
January 2021. However, the takeaway is that that German industry remains weak,
hampered in part by high energy costs, and trade disruption. It has already
been reported that non-EU exports were off 4.7% year-over-year in November. Exports
to the US were off slightly more than 1%, to Switzerland down nearly 7%, and
exports to China fell almost 8% year-over-year. Exports to Russia are a third
of what they were in November 2021 at 800 mln euros. Still, Germany's trade
surplus has nearly returned to pre-Covid levels: The surplus in the first
11 months of 2023 has been about 187 bln euros and in the same period in 2019,
it was about 207 bln euros. The current account surplus was about 7% of GDP in
Q4 19 and may have been around 6.5% in Q4 23. <o:p></o:p></span></p><p><b><span>The odds of an ECB rate hike
did not change materially at the end of last week following initial estimate of
the region's December CPI (2.9% headline and 3.4% core). </span></b><span>It remains around 50%. The euro approached
the support we identified near $1.0875 after the US jobs data and recovered
dramatically to $1.10 before stalling. While we look for near-term
consolidation, the downside correction. It is in a narrow range of about a
quarter-of-a-cent above $1.0925 today. It rallied about 6.5-cents in Q4 23, and
the risk is that the downside correction is not over. <b>Sterling performed
well in the volatile pre-weekend session. </b>It held the lower end of the
three-week trading range (~$1.26) rallied to a new high for the week (~$1.2770).
There are likely to be option-related interest and stops around $1.28, which
sterling has not closed above since the end of last July. It, too, is trading
quietly in a little less than a third-of-a-cent range on both sides of $1.2700.
<o:p></o:p></span></p><p><b><span>America</span></b><span><o:p></o:p></span></p><p><b><span>If last week was about the
US labor market, then this week's focus is on prices. </span></b><span>Ahead of the CPI and PPI later this week,
today sees the NY Fed's inflation expectation survey. It was at 3.4% in
November, down from 3.6% in October and 5% in December 2022. Average retail
gasoline prices fell by 4.25% in December and the short-term inflation
expectation seems to have become more sensitive. The rolling 24-month
correlation of the changes in the Fed's survey results and the average retail
price of gasoline ranged roughly +/- 0.25 in the 2018-2020 period, but in the
subsequent three years, the correlation has risen to about 0.65% and has been
fairly stable there since Q3 22. It is notable that the median expectation for
three years was at 3.0% in November, net unchanged from December 2022. It
peaked at 4.2% in October 2021, while the one-year expectation peaked eight
months later. Surveys are on way to discover expects. The market also has a way.
The three-year breakeven is the difference between the yields of the
conventional three-year and the inflation protected security. It peaked in late
March last year near 4.35% and is now hovering a little above 2.10%. <o:p></o:p></span></p><p>
</p><p><b><span>The US dollar stalled near
CAD1.34 after the employment reports, but the risk is that the correction has
not be completed. </span></b><span>The
greenback is fine and recorded the session high so far near $1.3395 in the
European morning. A trendline off the mid-November and mid-December highs comes
in near CAD1.3410. A convincing break of it could spur a move toward
CAD1.3475-80. <b>Despite the volatility in the other currencies and in the
capital markets more broadly after the US employment data, the Mexican peso
showed surprising strength. </b>The greenback got tagged by about 0.8%, its
biggest loss since December 1. It settled slightly below MXN16.88, the lowest
close since the end of last August and has slipped to about MXN16.8630 today.
We had thought the recent price action was more consistent with a bottoming
pattern. The price action needs to be respected, but the momentum indicators
have not confirmed it. <o:p></o:p></span></p><p><br /></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" target="_blank"><span face=""Open Sans", sans-serif">Disclaimer</span></a></p>
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