Gerville
Preview
San Francisco Federal Reserve President Daly said out loud what many are thinking. The US job market may be at an inflection point. The four-week moving average of weekly jobless claims is at its highest since last September and the The advance call for July nonfarm payrolls is about 185,000, which, if true, would be below 200,000 for the second time in three months. The high-flying Nvidia (NVDA, NVDA:CA) fell 13% in the last three sessions today. The 10-year US Treasury yield (10 American years) is close to its low point in Q2 (~4.20%). European political uncertainty and the threat of Japanese intervention are also factors to consider. The dollar is today very mixed, at +/- 0.1% against most G10 currencies. It is consolidating in a range of around 25 ticks around 159.45 JPY. The euro has changed little and the French 10-year premium compared to Germany is close to its lowest level in more than a week.
Stocks in the Asia-Pacific region generally traded high and the region’s MSCI index ended a three-day decline. Among the major markets, only China did not participate in today’s advance. The European Stoxx 600 (STOXX) is also in difficulty. It returns almost half of the annual gain of around 0.75%. S&P 500 and Nasdaq futures are trading firmer after yesterday’s losses, and the Dow is trading slightly lower after yesterday’s gains. European benchmark 10-year yields are 1 to 3 basis points lower, while the 10-year U.S. Treasury yield was little changed, near 4.24%. Gold is little changed near $2,333 and is trading at the upper end of yesterday’s narrow range. August WTI inched closer to $82 a barrel, but has pulled back and is trading near $81.25.
Asia Pacific
The light local session was marked by caution before a possible Japanese intervention and a slight slowdown in the PPI of Japanese services in May (2.5% against 2.7%). The apprehension of a possible intervention makes commercial activity even more unstable, as illustrated by the fall of the dollar by 0.5% in less than 10 minutes yesterday late in the European morning. The weakness of the yen and the comments of BoJ Governor Ueda, who did not rule out that the central bank announces a plan to reduce JGB purchases and raise rates at the next meeting at the end of July, contribute to the tone nervous. The swaps market is pricing in a nearly 60% chance of a 10 basis point hike, the most in more than a week.
Short-term market participants realized they were skating on ice. Although it edged away from JPY 160, nervousness showed as the dollar fell from around JPY 159.50 to near JPY 158.80 in a matter of minutes during this thin after-hours period. Asia-Pacific markets and before US markets opened yesterday. The dollar rose to around 159.75 JPY in North America. So far, it has been limited to about half a yen below JPY 159.70. There are options for almost $1.4 billion at 160 JPY expiring today. The Australian dollar continues to hover in the middle of the $0.6600 to $0.6700 range. This largely limited price action (especially on a settlement basis) for almost two months. In recent sessions, it has barely traded more than a quarter of a cent away from $0.6650. While $0.6670 traded today, where the A$300 million options expire today, there is another set of around A$435 million at $0.6675, which n was not negotiated. The People’s Bank of China yesterday pegged the dollar above CNY7.12 for the first time since last November. Today’s benchmark rate was set at CNY 7.1225, the fifth consecutive increase. The yuan’s weakness relative to its band is disrupting swaps and futures markets. Yet after the Hong Kong dollar, which is pegged to the greenback, and the Indian rupee (down about 0.3% this year), the yuan is the region’s strongest, having depreciated by about 2.2% so far this year. The yuan also appreciated against all G10 currencies here in 2024, except for the British pound, which appreciated less than 0.3% against the US dollar. We have argued that Chinese authorities missed an opportunity by failing to take strong action around the same time as the Japanese intervention in April/May. A sense of simultaneity, even if uncoordinated, could be a force multiplier. Bloomberg reports that major Chinese banks and some foreign banks sold dollars in the onshore market. On the offshore market, where Chinese banks are also sellers of dollars, the greenback remained below the high of 7.2945 CNH observed yesterday.
Europe
The economy takes a back seat to politics. The economic calendar is weak outside of Sweden’s Riksbank meeting on Thursday. It is very likely that it will hold on after making its first rate cut last month. In Central Europe, the Turkish and Czech central banks also meet on Thursday. Turkey is expected to keep its one-week repo rate at 50%, where it has been since the 500 basis point hike in March. The Czech central bank is expected to slow the pace of its easing measures to 25 basis points after making three half-point cuts this year. It started the cycle last December with an increase of a quarter point. After this week’s cut, the repo rate will stand at 5.0%. With the CPI at 2.6% in May and falling, the central bank has the opportunity to continue easing its policy. European heads of state are meeting on June 27-28 to determine the new European Commission after the recent European parliamentary elections. We believe that an agreement will be reached with the Greens rather than with Meloni’s faction (ECR) to form the new EC. Meloni may feel snubbed, but she has few immediate recourses. France goes to the polls on June 30 and the latest polls show that the National Front (of Le Pen) is in the lead, but still short of the 289 seats needed to obtain a majority. Meanwhile, a new scandal has erupted in the United Kingdom, where some conservative officials, including Prime Minister Sunak’s closest parliamentary aide, are said to have bet on the election timetable. The UK goes to the polls on July 4, and nothing can prevent a historic defeat for the Conservatives.
The euro returned from its investigation above $1.09 in early June to reach around $1.0670 by mid-month. He retested this minimum before the weekend and it held. With the daily dynamics, the indicators have corrected and now, in case of oversold, the euro could reach its lowest level. Specifically, a convincing move above last week’s high (~$1.0760) could mark a double bottom and project towards $1.0850. That said, several moving averages and retracement targets are converging slightly below $1.08. The euro is in a tight range almost a quarter of a cent above $1.0720. Sterling stabilized last week below $1.2650 for the first time since early April. North American activity recovered to near $1.27 yesterday and is trading briefly and slightly above it today. Nearby resistance lies around $1.2730-40. The British pound rose in the last three weeks of May and fell in the first three weeks of June. Net-net, it’s up about 1.5 cents. The market doesn’t seem to care about the elections. Futures speculators went from being net short from late April to mid-May to their largest net long position in nearly three months. The 10-year Gilt yield peaked in late May at nearly 4.40% and briefly traded below 4% before the weekend. It is now close to 4.06%.
America
The United States is receiving a wealth of high-frequency data today, including several Fed surveys, the Conference Board’s consumer confidence measure, and April housing prices. Between 1953 and 1983, real estate prices were included in the U.S. CPI measure. It has been replaced by a proprietary equivalent. The 20-city S&P CoreLogic Case-Shiller Composite Home Price Index may have slowed year-over-year for the first time since May 2023. Its national index declined in March, ending an advance nine months. Falling housing prices, coupled with rising weekly jobless claims (four-week rolling average of nearly 233,000, the highest since last September), reinforce the view that the U.S. economy is in trouble. Canada releases its May CPI today. An increase of 0.3% would result in a three-month annualized rate of 5.6% after a pace of 3.6% in the first quarter. The Bank of Canada places more emphasis on underlying policy rate averages. This average went from 3.3% in January to 2.7% in April. The average for the month of May could remain unchanged after rounding. Ahead of the report’s release, the market has about a 60% chance of seeing another rate cut next month. We think this is a bit high and consider the probability to be less than 50/50. Monthly GDP for April, at the end of the week, is expected to have increased by 0.3% after a stable March.
The Canadian dollar has risen slightly in nine of the last eleven sessions today. As we noted, this didn’t really go anywhere. The greenback closed May near 1.3630 CAD and stabilized near 1.3650 CAD yesterday. This was the first time the dollar had traded below CAD 1.3660 since June 4. Subsequent selling saw the US dollar slide to near CAD 1.3640 before stagnating. Nearby resistance lies in the CAD1.3660-80 area. The peso was not to be outdone. It extended its recovery by almost 1% after recovering 1.7% in the previous two sessions. The greenback stabilized below MXN18.00 for the first time since June 6 and below the 20-day moving average for the first time since May 27. The greenback consolidates today at the lower end of yesterday’s range and trades slightly above 18 MXN. 00 a.m. European morning. For a variety of idiosyncratic reasons, Latin American currencies have underperformed this month. The four worst-performing emerging market currencies (Colombian peso -5.5%, Mexican peso -5.1%, Chilean peso -2.9%, Brazilian real, -2.6%) come from the region. With yesterday’s losses, the dollar retraced half of its post-election gains against the Mexican peso (~17.95 MXN). It is possible that the greenback will recover towards MXN18.10-MXN18.12. Inflation for the first half of June was a little higher than expected, but the market left no chance of a rate cut at this week’s meeting. Finally, an agreement was reached that will allow the resumption of shipments of Mexican avocados to the United States (~$3 billion in 2023).
Editor’s note: The summary bullet points in this article were chosen by the Seeking Alpha editors.
