- The US dollar is paring yesterday’s gains while the 10-year Treasury yield has slipped back below the 2.70% level
- Japanese unemployment unexpectedly ticked up to 2.8% from 2.7%; in the eurozone, Q4 GDP was in line with expectations
- The shape of the dollar’s pullback will give better indication of whether or not the long overdue technical correction is at hand
- Hungary central bank is likely to keep all rates steady; Mexico Q4 GDP is expected to rise 1.6% y/y
The dollar is broadly weaker against the majors on Turnaround Tuesday. Swissie and yen are outperforming, while Aussie and Nokkie are underperforming. EM currencies are mixed. RUB and TRY are outperforming, while KRW and IDR are underperforming. MSCI Asia Pacific was down 1%, with the Nikkei falling 1.4%. MSCI EM is down 1.1% on the day, with the Shanghai Composite falling 1%. Euro Stoxx 600 is down 0.5% near midday, while S&P futures are pointing to a lower open. The 10-year US yield is down 1 bp at 2.68%. Commodity prices are mixed, with WTI oil down 0.6%, copper down 0.5%, and gold up 0.4%.
The US dollar is paring yesterday’s gains while the 10-year Treasury yield has slipped back below the 2.70% level after pushing above 2.73% briefly. European bonds have also eased, with yields one-two basis points lower. It is thus far a mild Turnaround Tuesday, but suggests that the market psychology that has driven the dollar lower and yields higher persistently since mid-December has not been broken.
One implication is that since these markets do not act in a vacuum is that equities will likely also recover, though it is not evident yet. The MSCI Asia Pacific Index pulled back by a little more than 1% for the largest loss since early December. No regional market was unscathed, though the regional leader has been Korea’s KOSDAQ and it was down marginally (almost 0.7%), leaving it up 15.3% so far this month. The Hong Kong Enterprise Index that tracks China’s H-shares fell nearly 2% to bring this month’s gain to a still-amazing 14.4%.
In Europe, the Dow Jones Stoxx 600 gapped lower. It is trying to fill that gap in the early turnover, but all the main bourses are still lower on the day, and the S&P 500 is trading about 0.25% lower.
The news stream is picking up. Japan reported employment and consumption, while the focus in Europe is on Q4 GDP and Germany’s preliminary inflation reports ahead of tomorrow’s advance estimate for EMU. In the US, the focus is on President Trump’s first State of the Union speech.
Japanese unemployment unexpectedly ticked up to 2.8% from 2.7%. It appears to have been driven by people leaving jobs, which in this context is a sign of tightness in the labor market. Jobs-to-applicants rose to a new high of 1.59 from 1.56. On the other hand, overall household spending was poor. In December, it stood at -0.1% year-over-year. The median in the Bloomberg survey was for a 1.3% rise after 1.8% in November. Retail sales held up better, rising 0.9% rather than fall by 0.4% as the median had forecast.
In the eurozone, Q4 GDP was in line with expectations. It rose 0.6% q/q for a 2.7% y/y rise. The asymmetrical risk we thought was on the upside, but this impulse was picked up in Q3, with an upward revision to 0.7% from 0.6%. German states reported January CPI figures and the national one will be reported shortly. German inflation typically falls in January. A 0.7% decline is needed to keep the y/y pace steady at 1.6%. The risk may be on the down side after the state reports.
The shape of the dollar’s pullback will give better indication of whether or not the long overdue technical correction is at hand. A move above $1.2440-$1.2460 might see the euro re-challenge its recent highs above $1.25 and probe into the band of technical objectives that extends from around $1.26 to $1.28. Sterling needs to overcome the $1.4120-$1.4160 area to reignite the move higher. Most observers cannot feign surprise that new official studies suggest that under numerous scenarios, the UK will be poorer after Brexit. A break of the JPY108.00-JPY108.30 would be understood as extending the greenback’s slide. The key level in the Dollar Index is a little below 89.00.
Hungary central bank is likely to keep all rates steady. For now, the bank is focusing on unconventional measures to boost the economy. For instance, the central bank recently tweaked its interest rate swap facility in an effort to bring down long-term interest rates. CPI rose 2.1% y/y in December, right at the bottom of the 2-4% target range.
Mexico Q4 GDP is expected to rise 1.6% y/y. Growth was only 1.5% y/y in Q3, the slowest since Q4 2013. Monthly indicators suggest Q4 growth near 1.5% y/y, yet price pressures remain high. The firmer peso may give the central bank leeway to stand pat for now. Next policy meeting is February 8.