Wait Until Tomorrow

Overview: The rise in 10-year benchmark yields stands out.  The US 10-year yield is up four basis points to 1.36%, while European yields are 3-5 bp higher.  Australia, where the central bank indicated it would proceed with its tapering plans, saw no change in their benchmark, and its two-year yield remained a little below zero.  Equity markets are mixed.  The MSCI Asia Pacific Index has been up for the past seven sessions, struggled today, though Japanese and Chinese markets advanced by more than 1%, and Hong Kong’s Hang Seng rose for the sixth time of the past seven sessions.  Europe’s Dow Jones Stoxx 600 is paring yesterday’s gains, and US futures are posting small gains.  The dollar is mostly higher, and the dollar-bloc currencies are the heaviest, off 0.2%-0.35% through the European morning.  The Scandis are posting small gains, while the euro straddles unchanged levels and the yen is slightly softer.  Emerging market currencies are mostly lower, and the JP Morgan Emerging Market Currency Index is lower to extend yesterday’s loss.  Gold is lower for the second session after rallying 1% before the weekend.  October WTI lost 1% before the weekend and is still heavy today, but it remains within the range set last Thursday (~$69.00-$70.55).  China’s iron ore prices slumped for a sixth session, while Singapore’s contract rose 4% after sliding 8.3% yesterday.  Copper is off slightly more than 1%. 

Asia Pacific

The Reserve Bank of Australia kept its policy unchanged.  It will proceed with the weekly tapering to A$4 bln a week and hold that until February.  It is not so much as tapering, a gradual reduction as a means of exit, but rather a downshift in buying intentions.  The central bank does not expect the economy to return to its pre-Delta path until the second half of next year. 

Japan’s households cut spending for the third consecutive month in July.  On a monthly basis, seasonally adjusted, spending fell by 0.9%, leaving it 0.7% above the depressed year-ago levels.  Transportation and food expenditures rose, but medical spending and home goods purchases fell.   The government targets a 60% vaccination rate by the end of this month, up from about 48%, and the state of emergency may begin being lifted next month. On the other hand, wages are rising (fifth monthly increase year-over-year), which will help provide a lift to the economy in Q4.  Meanwhile, Kono, former foreign and defense minister and now Minister of Vaccination and Administrative Reforms, appears to be solidifying his lead to replace Prime Minister Suga.  A large supplemental budget is reportedly being prepared following the LDP leadership contest at the end of the month and ahead of the national election needed later this fall.  

Despite port and other logistic disruptions, China was surprised with a strong August trade figure.  Imports and exports were stronger than expected.  Imports surged 33.1%, and exports rose by 25.6%, both now at record levels.  The net result was a whopping $58.3 bln surplus, the biggest in seven months. Oil and natural gas imports fell, while iron ore and soy imports rose (10% and 9%, respectively).  The export of oil products and steel fell.   Many suggest that strong exports to the US and Europe were for the year-end holiday and consumer demand, which may be a little earlier this year as supply chain disruptions and other delays spur order adjustments. China’s large trade surplus did not translate into an increase in the PBOC’s August reserves, which eased less than $1 bln.  On a $3.23 trillion base, the change is meaningless.  Valuation adjustments may have helped lower reserves.  The other reserve currencies eased against the dollar, and bond prices fell.  

The dollar has edged a little higher against the yen but remains within the range set last Friday (~JPY109.60-JPY110.10).  There is an option for nearly $640 mln at JPY110 that expires today.  If rising US yields extend the dollar’s range, the next resistance area is seen around JPY110.25.  The Australian dollar is posting an outside down day.  A close below yesterday’s low (~$0.7425) would confirm the bearish pattern.  It could set up the first close below the five-day moving average (~$0.7415) close since the Aussie bottomed near $0.7100 on August 20.  There is also an option for almost A$360 that expires there ($0.7415) today.  Our initial target is near $0.7330 and then $0.7300.  At the end of last week, the dollar briefly fell below the lower end of the nearly three-month trading range against the Chinese yuan near CNY6.45. However, it recovered and remained within the range yesterday and today. It reached a three-day high near CNY6.4620 today.  The dollar’s reference rate was set at CNY6.4533, near the Bloomberg survey’s median projection of CNY6.4537.   


UK Prime Minister Johnson appears to be backsliding on two commitments.  First, its willingness to implement the food checks for Northern Ireland is questionable.  The current “grace period” (unilaterally taken) was to end this month but has been extended indefinitely.  Second, Johnson ran on a platform based on the Northern Irish protocol and the promise not to hike taxes for the national insurance.  That promise may be broken as early as today as the government prepares to formally unveil a GBP10 bln tax increase.  An income tax increase would be more progressive and cover a wider base.  

Following a stronger than expected factory orders report yesterday (3.4% rather than the Bloomberg median forecast of -0.7%), Germany reported a 1% jump in July industrial output, which was above expectations.  The June decline was pared to 1.0% from -1.3%.  However, the favorable news stream was disrupted by the September ZEW survey that showed expectations continued to deteriorate.  The expectations component fell to 26.5 from 40.4.  It was the fourth consecutive decline and brings the reading to its lowest level since March 2020.  It peaked in May at 84.4.  The assessment of the current situation ticked up to 31.9 from 29.3 and is a new cyclical high.  It is the seventh consecutive gain.  The takeaway appears that for many Geman investors, this is the best thing they will get.  

The euro is in about a quarter of a cent range so far today above $1.1860.  After briefly testing the air above $1.19 before the weekend (after the US jobs data), it remained below yesterday and today.  There is an option for around 465 mln euro at $1.19 that expires today and another for about 340 mln euros at $1.1845.  A break of the $1.1850 area could boost confidence that a high is in place.  The ECB meets Thursday, and a setback ahead of it would not be surprising.  Sterling slipped to a three-day low just ahead of $1.38, where an option for almost GBP360 mln will expire later today.  It is straddling the 200-day moving average found around $1.3820. A two-week trendline comes in around $1.3795.  Meanwhile, the euro is knocking on GBP0.8600, a formidable cap carved in the last couple of weeks.  


The US will be slow to come back from the long holiday weekend. As a result, the economic calendar is light today, with the week’s economic reports beginning tomorrow with the weekly mortgage applications, JOLTS report, and the Beige Book ahead of the upcoming FOMC meeting.  In light of last week’s disappointingly low non-farm payroll growth, the reaction from Fed officials is awaited.  The Fed’s Williams and Kaplan speak tomorrow, followed by Daly, Evans, and Bowman on Thursday. On balance, we expect the September FOMC statement to confirm the July minutes that tapering can begin later this year.  After this month’s meeting, there are only two meetings left in the year.  While the Fed will want to preserve the maximum flexibility, incorporating tapering into the statement would likely count as the ample notice Chair Powell has promised in a way that notification in the FOMC minutes does not.  On balance, we look for tapering to begin in December.  Recall too that the Treasury’s issuance is also expected to be reduced starting with the November refunding. 

The Bank of Canada meets tomorrow and is expected to stand pat.  The economy unexpectedly contracted in Q2.  The central bank cautioned that after growing in June, the economy may have contracted in July.  Its early forecasts are subject to revision, but it need not hurry to taper further. There is still plenty of time. Canada’s national election will be held on September 20.  Although the latest polls show the Conservatives are neck-to-neck with Trudeau’s Liberals, the Liberals appear to still be ahead in parliamentary seats.   

Mexico reports August CPI figures on Thursday and is expected to show a moderation to about 5.6% from 5.8%.  It may reinforce ideas that Banxico will pause when it meets on September 30 after hiking in July and August.  Brazil’s President Bolsonaro has called his supporters to take to the streets at today’s Independence Day celebrations.  Bolsonaro has been hinting at extra-constitutional measures as his disapproval rate rises to almost 65%.  After selling off for five weeks, the Brazilian real has pared its losses in the past two weeks.  The political backdrop may blunt the carry.  

The US dollar traded quietly against the Canadian dollar for the past two sessions but is jumping higher today.  The greenback briefly dipped below CAD1.25 ahead of the weekend and consolidated in the pre-weekend range yesterday.  It is trading at a three-day high in Europe near CAD1.2580.  The $840 mln option at CAD1.2540 that expires today looks to be out of play.  Resistance is seen near CAD1.2620, and here is an option for about $730 mln that expires at CAD1.2640 today and another option for roughly the same amount, and strike expires tomorrow.  The US dollar is also firm against the Mexican peso and appears poised to test the MXN20.00 area. Above there, the MXN20.10 may offer nearby resistance. 


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