Subdued Start to Quiet Week

Overview:  The Lunar New Year celebration made for a quiet Asian session while a light diary in Europe saw subdued turnover.  Equity markets are narrowly mixed.  Among the three large markets open in Asia Pacific, Australia and Japanese equities rose while India slipped.  European bourses are little changed, putting the Dow Jones Stoxx 600 four-day advance at risk. Benchmark 10-year bond yields have edged up.  The dollar is firmer against most of the major and emerging market currencies. Of note, the dollar is knocking on JPY110, while the euro remains pinned near the lows seen after the US employment data (~$1.1450).  The March light sweet crude oil future contract is pushing further through key resistance near $55.  

Asia Pacific

China reported is Caixin service and composite PMIs over the weekend.  The services PMI eased to 53.6 from 53.9, holding up a little better than expected, and helped by an increase in new export orders.  The composite fell to 50.9 from 52.2.  The impact of the numerous stimulus efforts has yet to be felt.  However, it does seem as if the pace of decline is ebbing.  Economic readings around the Lunar New Year holiday are skewed, which means clean data, as it were, may not available for another month, by which time we expect the stabilization to be more evident.  That said, further easing of monetary policy (interest rates and/or required reserve ratio) is still expected to be delivered.  

The Reserve Bank of Australia meets tomorrow.  The 8.4% drop in December building approvals after a revised 9.8% decline in November brings the overall level of approvals to their lowest level since the middle of 2013 and 40% off the cyclical peak in November 2017.  The central bank will likely offer a less optimistic economic assessment, but it will probably stop shy of signaling a rate cut.  

The dollar reached JPY108.50 after the Fed’s pivot last week, a two-week low.  It began today near JPY109.50 and firmed to almost JPY110, its high for the year.  There are two options that are defending it:  A $360 mln option at JPY109.85 and $1.6 bln at JPY110.00 expire today.   There is also a $450 mln option struck at JPY110.10 that will also be cut today.   The Australian dollar is pulling back after almost reaching $0.7300 after the FOMC.  The A$1.58 mln in expiring options at $0.7240-$0.7250 are less impactful now given the Aussie’s pullback below $0.7230.  Support is seen between $0.7185 and $0.7200.   


Brexit uncertainty seems to be behind Nissan’s indication that it was canceling plans to build the X-Trail SUV in the UK.  Brexit is spurring a re-examination of the division of labor and the auto sector in the is vulnerable.  Nissan’s announcement is latest from foreign auto producers.  Airbus may also step up its threats too.  Meanwhile,  Prime Minister May has formed a new working group to look for alternative arrangements for the Irish border. Ideas that it can unite the party are probably an exercise in wishful thinking.  

Separately, the UK reported a rather dismal construction PMI.  It fell to 50.6 from 52.8, the weakest since January 2018.  The high from last year was reached in July at 55.8.  It follows on the heels of a disappointing manufacturing PMI as well.  The service sector reports tomorrow, and a small decline is expected.  

Investors are considering how the ECB policy will respond to the newly recognized downside risks.  .The composite PMI is due tomorrow.  Today Italy reported subdued inflation of 0.9% (from 1.2% in December).  It was 1.7% in Germany, implying some competitive gain.  Separately, Spain, which is one of the few economic bright spots, reported an unexpectedly large (85k) rise in January unemployment.  There seems to be a large seasonal component.  

The euro is trading inside the pre-weekend range.  For a third consecutive session, it is finding support near $1.1435.  The 20-day moving average is a little lower near $1.1425.  The upside may be capped by 2 bln euro options at $1.1450-$1.1465 that expire today.  Sterling was turned back from $1.32 last week the risk of a no-deal exit seemed to increase.  Initial support is seen near $1.3040 and then $1.30.  


President Trump sounded upbeat about the prospects of striking a trade accord with China.  Ahead of the early March deadline, two more trade talks are being planned.  The first, as early as next week, Mnuchin and Lighthizer go back to Beijing.  The second, which is to ostensibly close the deal will be a meeting between the two presidents on February 27-28, according to the South China Morning Post.  No matter what kind of trade deal is reached, the rivalry between the US and China is set to continue on different fronts.  Note that China and Russia are scrambling to prevent Venezuela from moving back into the US orbit. 

With the US government re-opening, the backlog of data has to be worked through, and today November factory and durable goods will be reported.   Both are expected to improve after a soft October.   The first estimate for Q4 GDP is now expected next week, and most anticipate that the world’s largest economy expanded by around 2.5%.  Growth here in Q1 19 is expected to have been hit by three separate developments:  the extended shutdown of the government, the arctic weather, and the usual soft start to the year.  Separately, activity in the energy belt appears to be slowing.  Another 15 rigs were idled last week, leaving the total number a little below 850, the lowest since last May.  

No fewer than seven Fed officials speak this week.  Cleveland Fed’s Mester kicks it off with a speech this afternoon about the economy.  The highlight will be Powell’s town hall meeting in the middle of the week, and Clarida the following day on the global considerations of the neutral rate.  Many observers see the Fed’s patience as a sign that the monetary cycle is over.  We are less convinced and see some parallels with the adoption of “patience” in December 2014 before it was jettisoned in March 2015 and a rate hike delivered in December 2015. 

There is no data of consequence of Canada today.  Trade, housing starts, and employment are the highlights.  The Canadian dollar is the best performing major currency year-to-date (~4.2%) and today (0.1%, only currency to gain on the dollar through the European morning).  Partly, this is a function of it selling off nearly every week but one in Q4 18.  It is hovering a little above CAD1.3070, the low from the end of last week.  Several of the technical indicators are stretched, and the US dollar is threatening to slip below the lower Bollinger Band (two standard deviations from the 20-day moving average), warning against chasing the market.  The US dollar is a little higher against the Mexican peso after a nine-week losing streak was broken last week.  The greenback has been confined to a MXN18.88-MXN19.25 range over the last few weeks. For the first time since early December, the five-day moving average is crossing above the 20-day.  This warns that short-term trend followers may be looking to buy the US dollar.  


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