Week Ending on Mixed Note as Year of Rooster Begins

<br /> Week Ending on Mixed Note as Year of Rooster Begins – Marc to Market<br />


The Lunar New Year celebration thinned participation in Asia,
where several centers are closed. 
 Although the MSCI Asia Pacific Index slipped
slightly, it rose 1.5% on the week, the
fourth weekly gain in the past five weeks.  The Nikkei advanced 0.35%, the
third rise in a row.  The 1.75% gain for the week snaps a two-week
The pullback in
the yen this week lent support to Japanese equities. 
 The yen is off
about 0.5% today against the dollar, which is trying to establish a foothold
above JPY115.00.  If the greenback holds today’s gain, it will be the
second consecutive weekly gain and the third in the past four weeks. 
With the
10-year JGB yield near 10 bp, it is not
surprising that the BOJ entered the market to buy bonds earlier today,
according to reports. 
 Earlier, Japan reported CPI figures.
 Although in absolute terms, the numbers were soft, they were a little
better than had been expected and reinforces ideas that the worst of deflation has passed.   Headline CPI rose 0.3%
year-over-year, down from 0.5% in November and better than the 0.2% consensus.
 Excluding fresh food, prices were off 0.2%.  Excluding food and
energy, CPI was off 0.2% compared with -0.4% in November.  Tokyo, which
reports CPI with a smaller lag saw better
than expected January readings.  
The BOJ meets
next week.
  Although it most likely will not change policy, it will
review its economic assessment.  The yen’s pullback over the past few
months and higher oil prices, coupled with stronger exports may encourage guard
optimism.   There is scope for it to tweak higher its outlook for both
growth and inflation.
We have been
tracking the potential double bottom in the dollar near JPY112.50  forged
over the past two weeks. 
 The neckline is near JPY115.60.
 If and when it is taken out, the measuring objective is near JPY118.60.
 The dollar has not closed above the 20-day moving average since January
4.  It is found today just below JPY115.10.
equities are trading with a heavier bias.
  The Dow Jones Stoxx 600 is off
around 0.4% near midday in London and is
poised to snap a three-day advance.  It is
holding on to almost a 1% gain on the week, which would be the fourth weekly
advance in the past five.  The push lower today filled the gap created
with yesterday’s sharply higher opening, but the gap from Wednesday may still
attract prices.  It is found between
362.42 and 363.04.  
reported December money supply and lending figures.
  After year-over-year growth slowed below a 5% pace in October and November,
it accelerated back to 5% in December.  Lending also improved slightly.
 Credit extension to non-financial businesses rose 2% from 1.9%.
 Lending to households increased to 2.3% from 2.1%.  Improving credit
conditions and rising price pressures may keep the hawks pressing for more
tapering soon.  
Next week’s
preliminary January CPI may provide more ammunition.
  Recall that the aggregate headline
rate jumped to 1.1% in December from 0.6% in November.  It is expected to
have risen toward 1.5% in January.  However, the increase is largely a
function of energy prices.  The core rate is expected to remain at 0.9%.
 The trough was near 0.6%.  
After testing
yesterday’s low (a little below $1.0660) in late Asia turnover, the euro turned
bid in Europe.  
The fate of the euro’s five-week uptrend
will depend on the North American session. The euro finished last week a little
above $1.07.  The high yesterday’ afternoon in the US was almost $1.0705.
 The intra-day technical readings suggest that if that area is violated it is unlikely to spur a strong
There are three
highlights from the North American
session today.  
investors will receive the first estimate of US Q4 GDP.  After yesterday’s
inventory and trade data,  the Atlanta Fed’s GDPNow estimate ticked up to
2.9%.  The New York Fed tracker is for
2.1%, while the Bloomberg consensus is for a 2.2%.  This compares with a 3.5% pace in Q3.  It
is not just the pace, but the composition
of growth changed.  There were a bit
less consumption and a larger drag from the external sector.  The core PCE
deflator may have eased to 1.3% from 1.7%.  
Second, the
University of Michigan provides its final consumer confidence reading for
January and the results of its inflation expectations survey. 
The preliminary report showed the 5-10 year inflation
expectation at 2.5% vs., 2.3% in
December.  The 12-month average is 2.5%, and
the 24-month average is 2.6%.  
The third
highlight is UK Prime Minister May’s meeting with US President Trump. 
 The most May can hope for are some friendly words
about the potential for a free-trade agreement with the US.  It does fit
in with Trump’s seemingly antipathy toward the EU and his support for Brexit.
 Trump also favors bilateral agreements over the multilateral efforts.
 However, such an agreement is hardly imminent.  The UK is still a
member of the EU  and cannot negotiate a bilateral agreement.  The
new US Administration’s trade focus is on NAFTA.   Ironically, May is
embracing global trade and international cooperation as the US seems to be
distancing itself from such goals.  Although she shares the criticism of
the liberal internationalist interventionism, she recognizes that if the UK and
US take a step back, others (like Russia and China) take a step forward.  
between the US and Mexico may be the worst since
1920 were when US President Coolidge threatened to invade.
  Trump has some discretion as US
President but the idea of a 20% tariff on Mexican imports to pay for the wall
is bluster.  First, it violates the NAFTA agreement. Second, if there were not NAFTA,
it would violate the WTO.  Third, the President would need Congressional
support.  He can impose a 15% temporary tariff claiming a balance of
payments emergency, but this is extreme.  Fourth, Mexico could retaliate.
Trade between
the two countries is very complex.
  Some goods may cross the border
several times before final good is finished.
 Research suggests that as much as 40% of the content of Mexico’s exports
originate in the US.  Several European and Japanese automakers have
production facilities in Mexico.  If new tariffs become onerous, their
production may not be moved to the US, but it could go home or to a third country.
Earlier in the
week, we noted the potential double top in the dollar near MXN22.00.
neckline near MXN21.50 was violated. 
 The minimum measuring objective was near MXN21.00,
which has been marginally surpassed (yesterday’s low was near MXN20.86). The
peso has fared well despite the escalation of tensions. The peso is trading
with a lower bias today,  but it is poised to snap a six-week slide.
 Even with the small losses showing now, the peso is up a little more than
1.6% on the week.  

The Canadian
dollar is up nearly as much as the peso this week, making it the strongest of
the majors.  
The Canadian dollar has been helped by three considerations. First, it is not the target of new
US Administration, and to the contrary, Trump’s support for the pipelines was seen as
favorable. Second, the 10-year rate differential has moved in Canada’s favor
this week, and the two-year is stable.  Third, oil prices are firm for the
second consecutive week.  It is the sixth advance in seven weeks.
 Important support is seen near
CAD1.30.  A move now above CAD1.3135 could spur a push into the
CAD1.3185-CAD1.3220 area.  


Week Ending on Mixed Note as Year of Rooster Begins
Week Ending on Mixed Note as Year of Rooster Begins

Reviewed by Marc Chandler

January 27, 2017

Rating: 5

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