Risk on, Dollar sold

Overview: The post-close rally in US tech stocks after Nvidia's earnings has fueled risk-on activity today. The Nikkei closed at record highs with a 2.2% rally. China's CSI rose for the eighth consecutive session as official discourage sales at the open and close, and short sales in general. Europe's Stoxx 600 is up more than 0.5% to recoup the small losses seen in the last two sessions. US indices are poised to gap higher at the open. Benchmark 10-year yields are mostly1-2 bp lower in Europe and the US Treasury yield is slightly lower near 4.30%.

The dollar is heavier across the board. The euro, sterling, and the Australian dollar reached their best levels since the February 2 US employment report. The Canadian dollar and Swiss franc are at the best level since the US CPI on February 13. The yen remains in its well-worn recent range. Nearly all the emerging market currencies are also firmer. The softer greenback has helped gold extended its bounce for the sixth consecutive session. It reached almost $2035, the highest since February 9. April WTI trading with a firmer bias slightly below this week's high ($78.50), despite the API estimate of a 7.2 mln barrel build in US inventories. 

Asia Pacific

Japan's preliminary PMI disappointed. The February manufacturing PMI was eased to 47.2 (48.0 in January), the lowest since August 2020. It was last above the 50 boom/bust level in May 2023, which was a bit of a fluke. Before then, the last time it was above 50 was in October 2022. The service sector has been faring better, but it slipped to 52.5 in January. It held above 50 consistently last year. In February 2023, it was at 54.0. The composite fell for the first time in three consecutive months, easing to 50.3 from 51.5. It was at 51.1 last February. It averaged 52.3 in Q3 23 and 50.0 in Q4 23, but the economy contracted at annualized rates of 3.3% and 0.4%, respectively.

Australia was one of the few G10 countries that had an expanding manufacturing sector in January, according to the PMI, but it fell back below 50 in February (47.7 vs. 50.1). Before January, the last time Australia's manufacturing PMI was above 50 was last February (50.5). Australian services PMI, on the other hand, propped back above 50 (to 52.8 from 49.1). It had been below 50 in H2 23, with the lone exception being last September. The composite was carried higher by services and improved for the third consecutive month in Feb to 51.8, the highest since last April.

Rising US yields were already giving the dollar a bid against the yen yesterday, but the poor reception to the 20-year bond sale helped extend the greenback's gains to a marginal new session high near JPY150.40. That is around the trendline drawn off last week's highs. It made a marginal new high today near JPY150.45. The broad dollar pullback today has seen it test the JPY150 area. The consolidative phase is continuing. The Australian dollar snapped a five-day advance yesterday, but it has come back bid today. It reached $0.6595, its best level since February 2 when it last traded above $0.6600 before the US jobs data. Nearby resistance extends to $0.6625. India's preliminary PMI is what one would expect from robust economy. The preliminary February composite PMI is at 61.5 (61.2 in January). The dollar fell to the lower end of the range that has dominated this month's activity: INR82.80-INR83.10. It has approached the 200-day moving average (~INR82.84) and has not traded below it since the end of last July. The offshore yuan is slightly firmer today, and if sustained, it would be the seventh consecutive advancing session. Against the onshore yuan, the dollar had its widest range for the month yesterday (~CNY7.1780-CNY7.1970) and is comfortably within it today. The PBOC set the dollar's reference rate at CNY7.1018 (CNY7.1030 on Wednesday). The average in Bloomberg's survey was CNY7.1863 (CNY7.1890 previously).

Europe

The preliminary February PMI shows that the pace of eurozone's contraction is moderating, but growth impulses are weak. The manufacturing PMI slipped for the first time in four months, falling to 46.1 from 46.6. It has not been above 50 since June 2022. It bottomed last July at 42.7. The services PMI had held in better and rose to 50.0 from 48.4. After spending H1 23 above 50, it stayed below the threshold in H2 23. It finished 2023 at 48.8. The composite PMI rose to 48.9 from 47.9 in January and 47.6 in November and December 2023. That is the best since last July, but it has not been above 50 since last May. Only a flash estimate is provided for the aggregate, Germany, and France. Of note, the Italy and Spain are outperforming. Consider that Italy's composite PMI rose above 50 in January for the first time since last May, while Spain's composite was above 50 last year, with exceptions in August (48.6) and November (49.8). Germany's composite PMI has not been above 50 since the end of H1 23 and fell to 46.1 in February, a new four-month low. France's composite was last above 50 in May 2023. It rose to 47.7 in February from 44.6 in January. The takeaway is for more the same: the regional economy struggles to establish forward momentum. 

The UK's composite PMI averaged 49.3 in Q3 23, when the economy contracted by 0.1%. It averaged 50.5 in Q4 23, and the economy contracted by 0.3%. The preliminary estimate for February edged up to 53.3 from 52.9, which is the highest since last May. The February increase was the fifth consecutive month of improvement. British manufacturing continues to contract (47.1 vs. 47.0). The manufacturing PMI was last above 50 in July 2022. However, UK manufacturing output rose by 0.8% in November and December last year. The services PMI rose for four months through January (54.3) and was unchanged in February. Yet, the ONS index of service activity contracted 0.10% in Q3 23 and by 0.7% in Q4 23. Still, the median forecast in Bloomberg's survey sees the UK economy returning to growth this quarter with a minor 0.1% expansion.

The euro is extending its recovery into the seventh consecutive session today and its rally for a sixth consecutive session and the 11 of the past 13 sessions. In this run, the traded between roughly $1.0695 and today's high of almost $1.0890. Yesterday's settlement near $1.0815 is the highest since February 1. The five-day moving average has crossed above the 20-day moving average for the first time since January 4. The next hurdle is seen in the $1.0900-20 area. Initial support now may be in the $1.0840 area. Yesterday, sterling was confined to about a fifth of a cent on either side of Tuesday's settlement (~$1.2625), but today it briefly traded above $1.2700 for the first time since February 2. It met the (61.8%) retracement objective of this year's decline. Initial support has been found in the European morning by $1.2670. Nearby resistance is seen in the $1.2750 area.

America

The FOMC minutes showed that more officials were concerned about the risks of easing too early than waiting too long. However, there was nothing in the minutes that suggested that Fed officials were considering that another hike would be needs as some economists have opined is possible. Policy is restrictive, but officials are looking for more evidence that the moderating trend is not due simply to one-off factors, like re-opening of supply chains. With economic activity stronger than expected, it also allows the Fed to focus on its price stability goal. Fed Chair Powell already telegraphed the start of the formal discussion of the central bank's balance sheet at the March meeting. The Fed's staff noted that a general consensus on Wall Street for the tapering of the roll-off to begin by early Q3. Previously, we suggested June, but the fact that bank reserves are little changed since Qt began, gives us pause. Note that five Fed officials speak today, and we do not expect much deviation from the script: Inflation has fallen but greater confidence is needed that the moderation in sustainable. The economy is reasonable strong. Once again, it seems to us, that the markets deviated from the Fed's signal and have nearly converged with it. At the end of last year, the market was pricing in nearly 170 bp of cuts. The Fed's dot plot showed a median thought 75 bp of cuts would be appropriate. Now the futures market has about 87 bp of cuts discounted. 

The 20-year US Treasury is unloved, and the poor reception at yesterday's $16 bln sale weighed prices. The bid-cover was the lowest in 18 months, and the tail looks like a record (~three basis points). Primary dealers were stuck with more than a fifth, the most nearly three years. The 20-year bond auctions have notoriously seen among the weakest demand since the maturity was issued in 2020. Today, the US Treasury sells $185 bln of T-bills (four- and eight-week bills) and $9 bln 30-year TIPS. The TIPS offering is $1 bln largest than the last offering (August) that produced a bid-cover of 2.42, which is about average. The yield in August was slightly below 2%. It is now near 2.15%. 

The North American economic diary is packed today. First, the US, weekly jobless claims could be dampened by the poor weather. The preliminary February PMI is likely to be little changed, but still showing a divergence with the Europe and Japan. The median forecast in Bloomberg's survey is for a nearly 5% rise in January existing home sales. It would the best since the surge last February (13.75%) and would recoup the decline seen in Q4 23. Second, Canada reports December retail sales. Bloomberg's survey produced a median forecast for a 0.8% increase after a 0.2% decline in November. The 0.8% increase matches the preliminary estimate for StatsCan. The impact on rate expectations may be minimal. The swaps market does not have the first cut fully discounted until July but has nearly an 80% chance of a move in June. Third, Mexico gives another look at Q4 23 GDP (0.1% quarter-over-quarter and 2.4% year-over-year). It also reports the December IGAE survey result. It likely contracted for the third consecutive month. Yesterday's December retail sales point in the same direction. They fell by 0.9% compared with economists looking for a 0.1% increase. CPI for the first half of February is expected to continue to moderating trend. The combination of the weakening economy and softer inflation likely featured at the recent central bank meeting that signaled that it would soon begin considering lowering interest rates. 

The US dollar tested the CAD1.3535 area yesterday in late Asia Pacific activity yesterday. It trended lower in Europe and recorded session lows near CAD1.3495 in North American dealings. Follow-through selling today, amid risk appetites, has seen the greenback fall toward CAD1.3440, a seven-day low. This met the (61.8%) retracement of this month's gains. The break of CAD1.3470, where about $540 mln options expire today may have contributed to the selling pressure. The next support area is seen in the CAD1.3400-10 area, but the intraday momentum indicators are stretched. The market snapped up the greenback when it briefly slipped below MXN17.00 on Tuesday but there was practically no follow-through yesterday. The dollar traded in a narrow range mostly between MXN17.04 and MXN17.07. It traded to almost MXN17.01 today in late Asia Pacific turnover. The dollar bounced to about MXN17.0550 early Europe where it has been sold again. It has not closed below MXN17.00 since mid-January, and the last time it settled above MXN17.10 was February 13.