Markets Continue to Struggle
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcIJsBKjq0HCMI1aQRtn0D-TxBXjVHB50SMXWV9Al2ARlhml2aHj2cskAyTndnmmlDYvAUgQk21zI3YsDP9XYQYtrU7Qd8VlbnidOTlbgaxamNMsJGp0pgu2rOtdr3QR5X-w6bh3KJNLzoX8gQM9_fjHDS6SPb73Fv8wyZLihkvoRj_7Xg3rl5-2490ifT/s626/thurs.jpg"><img alt="" border="0" data-original-height="482" data-original-width="626" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcIJsBKjq0HCMI1aQRtn0D-TxBXjVHB50SMXWV9Al2ARlhml2aHj2cskAyTndnmmlDYvAUgQk21zI3YsDP9XYQYtrU7Qd8VlbnidOTlbgaxamNMsJGp0pgu2rOtdr3QR5X-w6bh3KJNLzoX8gQM9_fjHDS6SPb73Fv8wyZLihkvoRj_7Xg3rl5-2490ifT/s400/thurs.jpg" width="400" /></a></div><p><b>Overview: </b>The markets remain unsettled. Follow-through
dollar selling has been limited today after yesterday's pullback. Narrow ranges
are prevailing, but the Norwegian krone and Canadian dollar, the weakest G10
currencies in recent days, are heavier again today. Although it seems that the
BOJ did not intervene earlier this week, but the dollar bulls has been
chastened just the same and the greenback is holdings below yesterday's high
(~JPY149.30). Higher than expected South Korean CPI (3.7% vs 3.5%)- is helping
the won recoup yesterday's 1% decline to lead the emerging market complex. The
South African rand and Mexican peso are worst performing emerging market
currencies today, off 1.1% and 0.7%, respectively. <o:p></o:p></p><p>Japanese stocks led the recovery in most Asia Pacific bourses today,
with a 2% gain in the Topix. Taiwan’s Taiex gained 1%. The MSCI's regional
index rose for the first time this week. Europe's Stoxx 600 is trying to snap
its three-day slide, but it is struggling. And US index futures have been
unable to build on yesterday's gains. Bond markets are under pressure. European
yields are up mostly 3-6 bp, and the peripheral premiums are widening. The
10-year US Treasury yield is little changed near 4.73%, while the 2-year yield
that fell almost 10 bp yesterday is slightly below 5.04%. Gold remains in the
range set on Tuesday (~$1815-$1833). Despite OPEC+ efforts (Saudi Arabia and
Russia mostly) to support prices, November WTI continues to retrace last
month's rise. Recall, it peaked last week near $95 and today is below $84, its
lowest level since September 1. It settled below its lower Bollinger Band
yesterday for the first time since June and remains below it now (~$84.40).<span> </span></p><p><o:p></o:p></p><p><b>Asia Pacific</b><o:p></o:p></p><p><b>If the BOJ intervened on Tuesday, no one has stepped up to confirm
it. </b>Japanese officials, as we have suggested, have a tactical interest
in preserving an element of uncertainty, but even journalist, often drawing
from unnamed sources violating confidentiality, do not appear to have quoted
any banker claiming to have seen or conducted the intervention. The <a href="https://www.ft.com/content/8bad0833-c293-44e0-899b-dad537110a07?FTCamp=engage/CAPI" target="_blank">Financial
Times</a> reported that "Foreign exchange analysts and dealers in
Tokyo, however, mostly agreed that direct currency intervention had not taken
place." Moreover, a review of the BOJ's government fund flows also makes
it seem that intervention was unlikely. Still, the market has stayed away from
the JPY150 level. <o:p></o:p></p><p><b>Yesterday, the BOJ bought the equivalent of about $12.7 bln (JPY1.9
trillion). </b>Nevertheless, Japanese yields crept up to new highs. The
MOF's weekly portfolio flows seem to run counter to the narrative that no one
is prepared for an exit from the BOJ's extraordinary monetary policy. Foreign
investors have been sellers of Japanese bonds and stocks in recent months.
After selling JPY5 trillion of bonds and stocks in the week ending September
22, foreign investors returned to the buy side but in smalls in the week ending
September 29 (~JPY97 bln).The other part of the narrative, that the Yield Curve
Control adjustments and higher Japanese domestic interest rates would encourage
Japanese investors to repatriate funds also has not been borne out by the
Ministry of Finance data. Since last December's doubling of the cap on the
10-year JGB and the doubling again at the end of July, Japanese investors have
been net buyers of foreign bonds and stocks. Moreover, bond auctions in Japan
have seen mostly soft demand, including today's 30-year auction. The tail
(the difference between average and cut-off prices) jumped and the bid-cover was
the lowest in almost three months. Tomorrow, Japan's Achille's Heel will be
shown. Despite what was heralded as a successful spring wage round, real cash
earnings continue to be lower than a year ago, while nominal earnings growth is
little changed from a year ago. In August, they are expected to have risen by
1.5% year-over-year. In August 2022, they were up 1.7% y/y). One consequence is
that weakness in household spending. In July, it was 5% below year ago levels,
the largest pullback since early 2021. It is expected to have moderated to
-3.9% in August, which still would be lower than any month last year.<o:p></o:p></p><p><b>Australia's August trade balance jumped to A$9.64 bln after the July
balance was revised to A$7.32 bln from A$8.04 bln. </b>It is the first increase
in three months. Last August, Australia reported a A$9.3 bln surplus. Imports
were flat after rising by 3% in July. Exports rose by 4% in August after falling
2% in July. Iron ore remains the biggest export (+4.5% to A$10.9 bln) followed
by coal (-10% to A$6.7 bln), and natural gas (+7.5% to A$5.8 bln). Gold exports
more than doubled to A$3.9 bln. Overall, Australia's trade surplus has averaged
A$10.7 bln a month this year, down from an average of A$11.2 bln in the first
eight months of 2022. <o:p></o:p></p><p><b>Since poking above JPY150 and falling to around JPY147.45, the greenback
has steadied in a range of mostly JPY148.50-JPY149.40, though briefly traded to
almost JPY148.25 in Asia earlier today. </b>One-week implied vol was near
7.3% before the US JOLTS report and spiked higher, reaching almost 9.8%
yesterday before falling to settled near 8.1%. 2It returned to the 20-day
moving average, about 8.6%, today. <b>Yesterday, the Australian dollar
held the low for the year set on Tuesday near $0.6285. </b>It encountered
offers around $0.6340 early in the North American morning and settled into a
range for the remainder of the sessions, mostly gravitating around $0.6320, the
lower Bollinger Band. However, it opened the local session higher today and
rose to almost $0. 6380.. It was sold into the European morning and found
support around $0.6320. A move above $0.6400-20 is needed to boost confidence
that a near-term low is in place. <b>The dollar is firm against the
offshore yuan, trading above CNH7.32.</b> The week's high was set on
Tuesday near CNH7.3315. Recall, it settled around CNH7.2950 when the onshore
holiday began. <o:p></o:p></p><p><b>Europe</b><o:p></o:p></p><p><b>France and Spain reported August industrial production figures
today. </b>The aggregate estimate for the eurozone is the one of the few
data highlights from the region next week. French manufacturing and industrial
output fell in August by 0.4% and 0.3%, after rising 0.8% and 0.7% respectively
in July. Spain's industrial output fell by a larger-than-expected 0.8% after a
0.2% gain in July and maintains the alternation between gains and declines
since April. The median in the Bloomberg's survey was for a 0.3% fall. The
year-over-year rate has not been positive since March. Germany reports factory
orders tomorrow (look for a recovery from a dramatic 11.7% slide in July)
followed by the industrial production report on Monday. Italy reports its
industrial production data next Tuesday, but tomorrow reports August retail
sales (flat is expected). The aggregate eurozone August retail sales report was
out yesterday, showing a sharp 1.2% decline, the largest slump of the
year. <o:p></o:p></p><p><b>Today, Germany reported that the August trade surplus narrowed to 16.6
bln euros from 17.7 bln euros in July.</b> Exports fell by 1.2%, twice as
much as expected and the first back-to-back monthly declines in shipments since
Aug-Sept 2021. Imports fell by 0.4%. Economists expected a 0.5% increase.
Despite the weakness of the euro, non-EU exports have fallen by about 4.3%
year-over-year in August. Russia unsurprisingly has seen the largest drop
(-36%), but shipments to South Korea are also off sharply (~18.5%). Exports to
India (27.7%) and Japan (17.6%) have been the strongest. Exports to China are
off 7% year-over-year and 2.2% lower to the US. Separately, Germany's September
construction PMI fell to what appears to be a new record low of 39.3 (from
41.5). The UK's construction PMI fell to 45.0 from 50.8, the lowest since May
2020. <o:p></o:p></p><p><b>The euro recovered from the $1.0450 area to a little more than $1.0530
yesterday and is trading in a little more than a quarter-of-a-cent range today
above $1.05. </b>The high was seen following the weak ADP private sector US
jobs estimate (89k vs median forecast in Bloomberg's survey of 150k). Just like
the market seemed to overreact to the JOLTS report, it also seems exaggerate
the significance of the ADP report. The $1.0530-50 offers nearby resistance,
but a move above $1.0600-20 may been needed to signal anything of importance
from a technical perspective. <b>Sterling posted a potentially bullish key
reversal yesterday by making a new low for the move (~$1.2035) and then
recovering and closing above the previous session's high (~$1.2100).</b> It
reached slightly above $1.2175 before pulling back, stalling in front of the
(61.8%) retracement of the last leg down, which began with last Friday's high
near $1.2270. It spent most of the remainder of the session consolidating in a
$1.2110-60 range. There has not been follow-through sterling buying today and
is in about a quarter-cent range on either side of $1.2140. <o:p></o:p></p><p><b>America</b><o:p></o:p></p><p><b>Today's US August trade balance and weekly jobless claims are
overshadowed by tomorrow's national jobs report. </b>We already know that
the good deficit narrowed to a five- month low of about $84.3 bln in August.
That is likely to translate into a possibly sub-$60 bln deficit for the first
time since September 2020. Still, note that the current account deficit, a
broader measure of trade and returns on investments (royalties, licensing fees,
profits, interest, dividends) is expected to be around 3.2% of GDP this year.
Before Covid, it was 2.1% of GDP. Weekly initial jobless claims have been below
205k for the past two weeks. The four-week moving average through September 22
is 211k, the lowest since mid-February. Despite what seemed like a strong JOLTS
report, with a 32% participation rate, and the decline in weekly jobless
claims, labor market growth is slowing. The three-month average is 150k for
nonfarm payrolls through August. In August 2022, the three-month average was
430k. Tomorrow's report is expected to be the fourth consecutive month of less
than 200k jobs created. One has to go back to the last four months of 2018 to
see that.<o:p></o:p></p><p><b>Canada reports is August goods trade balance and the IVEY PMI today ahead
of tomorrow's employment report. </b>After peaking in May 2022 near C$4.2
bln, Canada's merchandise trade balance has deteriorated. In the three-months
through July, it has averaged a <i>deficit</i> C$2.86 bln a month. In
the three-months through August 2022, Canada had an average trade <i>surplus</i> of
C$1.65 bln a month. The IVEY PMI rose to 53.5 in August, recovering from the
dip below 50 (48.6) in July. We suspect the 0.2% contraction in Canada's Q2 GDP
and the flat showing in July overstates the economic weakness. A strong
employment report may have calm anxiety. Note that through August, Canada has
created about 275k full-time jobs this year compared with about 250k in the
first eight months of last year. Lastly, we note that Mexico reported a 3.7%
increase in September vehicle sales which lifted the year-over-year rate to
35.6%. US vehicle sales rose by 4.2% in September and about 16% year-over-year. <o:p></o:p></p><p>
</p><p><b>The Canadian dollar sell-off has been brutal. </b>The US dollar
surged from almost CAD1.3415 last Friday to CAD1.3780 yesterday and recorded a
marginal new high today. Net-net, the Canadian dollar's 2.1% decline over these
few days is behind the Norwegian krone's 2.8% drop to lead the G10 currencies. Yesterday,
we <a href="http://www.marctomarket.com/2023/10/strategic-ambiguity-leaves-intervention.html">noted</a> the
pressure on US bank shares, but the same is true in Canada. An equal-weight ETF
of Canadian banks made a new low since March 2021 yesterday. It is off almost
9.5% since the recent peak on September 18. The US dollar settled above its
upper Bollinger Band yesterday and is above it (~CAD1.3750) now. Some may want
to link the Canadian dollar's weakness to the drop in oil prices but note that
the 30-day correlation of the changes of the two had steadily been falling and
was briefly inverted in late September for the first time in nearly eight
months. It has since recovered to around 0.27. In the May-August period, it was
often around 0.60. <b>While the Canadian dollar fell by 21%, the Mexican
peso has fallen by about 3.0%.</b> The greenback rose to MXN18.2165
yesterday in Asia before falling to MXN17.83 after the ADP report. It spent
most of the North American session between MXN17.90 and MXN18.10. It remains in
that range so far today but is near the upper end of it in the European morning.
Note that the MXN18.2370 area is the (61.8%) retracement of the dollar's losses
since the peak in March (~MXN19.2320). There are options for nearly $1 bln at
MXN18.20 that expire tomorrow. <o:p></o:p></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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