Monday, January 30, 2023

Eyes Turn To The ECB And The First Look At Q3 U.S. GDP


The market was awaiting the and the first look at the US .

The pullback in US shares yesterday was a drag on the Asia Pacific equities. It was the first back-to-back loss of the in a few weeks. Europe’s was recovering from early weakness and US future indices were firm.

The US yield was flat, around 1.55%, after falling around 15 bp over the past four sessions. European bonds were paring yesterday’s gains, and yields were up 2-6 bp.

was mixed. Among the majors, the , , and were firm, while the and dollars, , and were slightly lower. Emerging market currencies were also mixed. The and were the weakest, while the , , and led the advancers. The JP Morgan Emerging Market  Currency Index was slightly heavier after falling about 0.3% yesterday.

was faltering after yesterday’s recovery but remained within Tuesday’s range (~$1782-$1808). Plans to resume talks between Iran and Europe and a larger than expected increase in US saw December initially extend yesterday’s losses, but new buying emerged as the 20-day moving average (~$80.70) area was approached. It has not closed below this moving average in two months. After losing around 3% over the past two sessions, bounced more than 1% today. and were softer.

Asia Pacific

As well anticipated, the Bank of Japan left . It shaved this year’s growth and inflation forecasts. The economy is now projected to grow 3.4% rather than 3.8%, while the CPI forecast cut to zero from 0.6%. While growth projection in the next fiscal year was raised to 2.9% from 2.7%, it is not enough to make up for this year’s reduction. Growth in FY23-24 was left unchanged at 1.3%. The CPI forecasts in the next two fiscal years were unrevised at 0.9% and 1.0%, respectively. Separately, September retail sales rose 2.7%, almost twice the 1.5% the median forecast in Bloomberg’s survey anticipated. As a result, the decline narrowed to -0.6% from -4.0%.

The Reserve Bank of Australia did not defend its target on the April 2024 bond, though the yield was well above the level seen last Friday when it intervened (A$1 bln) for the first time since mid-February. Its yield surged 19 bp (to 1.12%, the highest level in two years). That followed a nearly 16 bp jump yesterday on the back of the above 2% underlying CPI. There is still a window of possibility that it shows its hand tomorrow. Still, today’s absence was fueling speculation that at next week’s central bank meeting, the RBA may abandon its yield-curve control policy. 

The dollar was trading in about a 20-tick range on either side of JPY113.70. There are $1.7 bln of options in the JPY113.70-JPY113.75 area that expire today. The greenback has not traded above JPY114.00 since the Asian session yesterday. Support in the JPY113.40-JPY113.50 area looked solid.

The Australian dollar slipped to a three-day low near $0.7480 before recovering to almost $0.7525 before stalling. There are options for a little more than A$1 bln at $0.7475 that expire today. The nearby cap was seen in the $0.7530-$0.7550 area.

The traded above CNY6.40 for the first time this week and but it has not been sustained. The PBOC set the dollar’s reference rate at CNY6.3957 compared with expectations (Bloomberg survey) for CNY6.3949. Against the CFETS basket, the yuan was trading at its best level in five years. Some demand for dollars by the large state-owned banks appears linked to month-end adjustments.


The main focus today is the ECB meeting, though no new action will be forthcoming. ECB President Lagarde is expected to stick to the view that price pressures will prove transitory. Earlier today, Spain reported its EU jumped from 4.0% in September to 5.5% in October. The median forecast (Bloomberg survey) was for a 4.6% pace. German states are reporting their October figures, and around Lagarde’s, the national figure will be reported.

German is expected to tick up to 4.5% from 4.1%. Tomorrow the eurozone aggregate figures will be released. The rate is expected to be steady at 1.9%, while the risk is that the rises above the 3.7% median forecast (from 3.4%). The ECB was expanding its balance sheet before the pandemic and will do so after the emergency buying ends (March). What is being debated is the “modalities” of that facility. No decision is expected until December.

Rising energy prices are an important source of price pressures in Europe. Reports indicate that late yesterday Russia’s President Putin indicated that Gazprom (MCX:) will begin boosting gas supplies to Europe after Nov. 8. This is the day after Gazprom finished rebuilding its inventories. Also, press accounts indicator gas flows from Norway are increasing.

The implication of Sunak’s budget for debt issuance was lapped up by the bond market, and the Gilt yield tumbled 12.5 bp to move below 1% for the first time this month. It eased back to about 0.98%, where it was at time of writing. The market was already moving in this direction, and the yield had fallen for the previous three sessions by nearly nine basis points. The Debt Management Office projects a nearly GBP58 bln reduction in issuance. Most projections had been for around a GBP33 bln reduction. We suspect that this spurred the most significant market reaction, though, of course, the pub stocks like the fact that Sunak canceled the pending hike in the alcohol tax.

The 50% cut for one year for the hospitality, leisure and retail companies seemed welcome, but most British equity benchmarks fell. The did eke out a small gain (0.05%), but it was primarily due to two sectors, utilities and real estate, which seemed to be a function of the drop in long-term rates more than the other content of the budget. All told, the tax cuts and cancelations and spending increases amounted to about GBP75 bln.

After the budget, the market boosted the chances of a rate hike by the Bank of England as early as next week. The December futures contract’s implied yield rose 4.5 bp to 0.465%. It was the first increase in half a dozen sessions, during which time the yield slipped 13 bp. The yield was up another 6.5 bp today. Sterling underperformed. It was one of two major currencies that could not muster traction against the greenback (the other one being the Norwegian krone, where Norway is more likely to hike rates next week).

The euro slipped to a marginal new low for the week around $1.1580. Below here, the focus will turn to the year’s low set on Oct. 12 near $1.1525. The euro has been capped near $1.1625, and there are 1.57 bln euros of options struck in the $1.1600-$1.1610 area that expire today. Given speculation of more aggressive central banks and the ECB positioned to be a laggard, we suspect the risk is on the downside. The $1.1490 area corresponds to a (50%) retracement of the euro’s rally from last March to (ironically) January 6. The next retracement (61.8%) is found a little below $1.13.

Sterling was trading quietly inside yesterday’s range (~$1.3710-$1.3780). It has not been able to resurface above $1.38 since the shooting star candlestick on Tuesday. A break of $1.3685 would be technically significant.


The Bank of Canada was more hawkish than expected. It ended its bond-buying program, which had been tapered down to C$2 bln a week. It will be buying C$4-C$5 bln of bonds a month as it reinvests maturing issues. Governor Macklem also acknowledged that a rate hike may be warranted earlier than it previously thought. Due to supply constraints, the output gap may be closed in the middle quarters next year rather than the second half. Still, the updated economic forecasts are a bit incongruous.

Consider that this year’s GDP was cut to 5.1% from 6.0%, and next year’s was shaved to 4.3% to 4.6%. Next year’s CPI forecast was revised to 2.1% from 2.2%. The US dollar, which began the local session at its best level in two weeks around CAD1.2425, reversed lower to test the CAD1.2300 area. Last week’s low was slightly below CAD1.2290. Canada’s yield jumped 20 bp to pop above 1% for the first time since early March last year. Macklem confirmed the direction the market had been leaning. Rather than simply bringing the rate hike forward, the market is pricing in more hikes. The swaps market is pricing in five hikes over the next 12 months. 

While the weekly are the closest thing to a live read on the labor market, the first estimate of Q3 GDP, which is subject to potentially statistically significant revisions, will grab the headlines’ attention today. The Atlanta Fed’s GDPNow’s final assessment stands at 0.2% (annualized), down from 0.5% previously. The median forecast in Bloomberg’s survey is 2.6% after a 6.7% pace in Q2.

The pullback in consumption (~70% of the economy) appears to have been the critical drag. It may have slowed from a 12% annualized pace to less than 1%. Despite the slower consumption, the merchandise trade deficit swelled to a record $271.3 bln in Q3. The GDP deflator is another measure of inflation. Although some economists think it is a better measure of prices than the CPI or PCE deflator, it remains under-appreciated. Still, both the GDP deflator and the quarterly deflator for personal consumption expenditures are expected to have eased from the Q2 readings.

After a dramatic swing yesterday, the US dollar-Canadian dollar exchange rate was subdued today. It was in about a 30-tick range (~CAD1.2355-CAD1.2385). The inability of the Canadian dollar to make new highs yesterday after the Bank of Canada’s announcements warns of the risk of further near-term consolidation. Recall that the greenback recorded a high yesterday before the central bank meeting of slightly above CAD1.2430. A break of this area could spur a recovery toward CAD1.2475, which we suspect would coincide with a pullback in equities.

The US dollar approached the upper end of its recent range against the (~MXN20.35) yesterday. A move above there could signal a move toward MXN20.42 and then MXN20.50. Yesterday, Brazil’s central bank a 150 bp hike in the Selic rate (to 7.75%) and promised another move of the same magnitude next month. The two-month trend line comes in near BRL5.5050 today. A break could target the BRL5.4350 low of the middle of the month. 

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