Japan confirms intervention, China PMI disappoints, EMU CPI comps ahead of US PCE contraction

summary

The Dollar (DXY, USDOLLAR) mostly consolidates yesterday’s losses ahead of month-end US income and consumption data. The core PCE deflator may have risen by 0.2%, at least this year, but the rate is expected to rise on an annual basis. Stability at 2.8% The dollar is recovering from its lowest level in five days against the yen, which it recorded yesterday near 156.40 Japanese yen, which is close to 157.30 Japanese yen in late European morning trading. A weaker Japanese yen and a disappointing Chinese PMI weighed on the yuan. The Euro is on display after a strong CPI reading on a yearly basis. The British pound was little changed, in a narrow range above $1.2700. Emerging market currencies are mixed. The ANC appears to have lost its majority in South Africa, and the rand fell slightly today and is down about 2% this week. It is the weakest in the emerging markets space, followed closely by the Mexican peso By 1.9% this week. Mexico votes on Sunday.

Bond yields are often more stable. In Europe, the benchmark 10-year yield rose by 3-4 basis points. This brings this week’s rise to about 12-15 basis points. The yield on US 10-year Treasury bonds (US10Y) is slightly stronger at 4.55%. This represents an increase of nine basis points during the week, but less than the high of 4.63% seen mid-week. Asia Pacific stocks were mixed. Shares of Japan (NKY:IND), South Korea (KOSPI), and Australia (AS51) rose among large markets. The index tracking mainland Hong Kong shares (HSI) fell 1.1% today, bringing the week’s loss to 3.2%. The European Stoxx 600 Index (STOXX) saw little change but is more stable. It’s down about 0.8% this week, its second straight weekly loss. US index futures fell, and the S&P 500 (SPX) and Nasdaq are likely to snap a five-week advance unless a strong rebound occurs today. Gold was little changed, hovering around the $2,342 level. It settled near $2,324 last week. July WTI settled last week near $77.70. It has traded between $77.50 and $80.60 this week, with the low seen earlier today. It’s just under $78 now.

Asia Pacific

Japanese economic data confirmed that the recovery is beginning to take hold after the contraction in the first quarter. However, industrial production unexpectedly fell 0.1% in April after rising 4.4% in March. Retail sales jumped twice as much as expected. The 1.2% increase follows a 1.2% decline in March and rose about 0.7% in the first quarter. The unemployment rate stabilized at 2.6%. Meanwhile, Tokyo’s CPI for May, driven by higher energy costs, rose to 2.2% from a decline to 1.8% in April (from 2.6%) in March, driven by a tuition waiver for high schools. The base rate, which excludes fresh food, rose to 1.9% from 1.6%. This would be consistent with the national core reading rising to 2.8% from 2.2%. This, coupled with continued weakness in the yen, would reinforce market belief that the Bank of Japan will raise interest rates by 10 basis points at the end of July. Separately, recall that earlier this week, the International Monetary Fund revised its growth forecast for China this year from 4.6%, a few weeks ago, to 5.0%, citing a strong start to the year and recent moves to support the real estate sector. China’s May PMI is disappointing. The manufacturing PMI surprised by falling below the 50 boom/bust level to 49.5, the lowest level in three months. The non-manufacturing PMI fell to 51.1 from 51.2. This is the second decline in a row. Compound also for the second month in a row. At 51.0, this is slightly higher than this year’s low recorded in January and February of 50.9. He finished last year at 50.3.

The market has turned cautious with the dollar approaching the 158 yen level, which is where the Bank of Japan is believed to have last intervened. This coupled with broad-based US dollar weakness and the biggest drop in 10-year Treasury yields in two weeks (six basis points) pushed the dollar to a one-week low against the yen, just below JPY156.40. The US dollar rebounded, not with the Japanese data, but a few hours later and reached session highs in the European morning near JPY157.40. Data from the Bank of Japan confirms a 9.8 trillion yen (about $62.2 billion) intervention last month. This is largely in line with market expectations. The Australian dollar recovered from a new marginal two-week low near $0.6590 and returned to near $0.6650 yesterday. Any rally, eyes will be set on the recent high above $0.6700. It is trading in a narrow range today, roughly $0.6625 – $0.6650. It settled just below $0.6630 last week. On the same day that the Financial Times warned of increasing downward pressure on the yuan, the yuan posted its biggest daily advance (~0.25%) in nearly three weeks. It can be said that lower US interest rates and a rebound in the yen have facilitated the yuan’s recovery. The dollar rose to nearly CNY 7.2760, its highest level since mid-April on Wednesday and traded at a six-day low (about CNY 7.2475) yesterday. The weak Purchasing Managers’ Index (PMI) and setback in the yen saw the yuan give up about half of yesterday’s gains. Against the offshore yuan, the dollar found support just below CNH7.25 and is trading near session highs now near CNH7.2640. The People’s Bank of China set the reference rate for the dollar at 7.1088 CNY (7.1111 CNY on Thursday), the lowest level this week. The Bloomberg survey average was CNY 7.2398 (CNY 7.2494 yesterday).

Europe

Importantly, the surprise rise in the Eurozone CPI for May is not significant. The ECB’s interest rate cut next week, the first of its kind, is seen as a done deal as these things are. In fact, the derivatives market is confident that the ECB will cut interest rates by the same amount as the Fed when it meets on June 12th. The 0.2% monthly increase in the Consumer Price Index was translated into an annual rate of 2.6%, up from 0.2% monthly to an annual rate of 2.6%, up from 0.2% monthly to a rate of 2.6% over Annual basis. 2.4% in April. The average in the Bloomberg poll was 2.5%. The base rate rose to 2.9% from 2.7%. Perhaps the reason why there will be disagreement among ECB officials in the future is that the annual rate may lead to an exaggeration of the moderation of price pressures. The 0.2% increase in May means that Eurozone inflation rose at an annual rate in the first five months of the year by 4.3%. Consider the basic impact going forward. From June to September 2023, the Eurozone CPI rose at an annual rate of 3%. However, TRUE The challenge will be Q4, when prices last year He falls At an annual rate of 1.2%.

The euro briefly traded below $1.0790 yesterday for the first time since May 14. We observed a convergence of technical instruments indicating important support near $1.0785. The Euro rose and traded strongly during the European and North American session. It hit session highs near $1.0845 and reached $1.0850 today in the European morning. Yesterday’s recovery appears to have been supported by the downward revision in US GDP for the first quarter. On the upside, we note that two sets of options expire today. The first is priced at $1.0875 for approximately 800 million euros, and the other group is priced at $1.09 for approximately 850 million euros. The price action reinforces the importance of support around $1.0785 and Tuesday’s high near $1.0890 indicates the upper limit of the range. The euro snapped a five-week advance last week and settled just below $1.0850. The pound approached the support level near $1.2675 and rebounded to nearly $1.2750 yesterday. It is trading softer and in a narrow range between approximately $1.2700 and $1.2735. A move above $1.2750 leaves few obstacles in the way of a retest of $1.2800, the two-month high hit earlier this week. The British pound has not settled above $1.28 since March 11. The British pound settled just above $1.2735 last week. A close above this level today would be the third consecutive weekly gain, the longest this year, and would be the fifth weekly gain in the past six weeks.

America

This session, the US CPI stole the thunder from the Fed’s target PCE deflator. Based on the CPI and some components of the Producer Price Index, economists more accurately predict PCE contraction than the CPI itself. The bottom line is the headline Core PCE deflators are expected to remain unchanged from March at 2.7% and 2.8%, respectively. Little new information is available to investors or policymakers. Meanwhile, slower gains in both income and consumption in April would be consistent with other high-frequency data, which was mostly disappointing in April. GDP revisions warn of the risk of downward revisions to personal consumption expenditures in the first quarter. However, we believe that the weak data in April overstates the slowdown and expect May data to be sequentially better. Also, although first-quarter GDP was weaker than economists had expected, Chairman Powell commented that real final sales to private domestic parties (which exclude trade, inventories and government spending) were a better signal and were still strong, just below 3. %. Looking ahead, the median forecast in the Bloomberg Nonfarm Payrolls Survey has fallen slowly and is now 175K, unchanged from April. Early forecasts for the CPI for May call for a 0.1% increase, which would be the smallest in seven months, but would leave the annual rate unchanged at 3.4%.

The US dollar gave up most of Wednesday’s gains against the Canadian dollar on Thursday. The upper end of this month’s range was at C$1.3750, and approached C$1.3735 yesterday. It proceeded to move lower and returned to 1.3660 Canadian dollars. It extended its move marginally today, hitting a low just below C$1.3655. Wednesday’s low was near C$1.3640. This week’s price action reinforces the importance of support near C$1.36 and the maximum at C$1.3750. The dollar’s three-day rally against the Mexican peso extended to 17.13 Mexican pesos yesterday. This week’s low was recorded on Tuesday near 16.6340 MXN. The dollar stalled in front of the 200-day moving average (~17.1560 MXN) and fell to around 16.91 MXN before finding strong bids. The dollar has settled above MXN 17.00 so far but has not traded much above MXN 17.07. Mexico heads to the polls on Sunday. Even if polls consistently show that Sheinbaum is likely to be elected president, the outcome of the legislative elections may be more important in terms of market reaction.

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Editor’s note: The summary points for this article were selected by Seeking Alpha editors.