The recent US employment data led to notable fluctuations in currency exchange rates and US interest rates throughout the day. However, by the end of the trading day, the dollar remained relatively stable against most major currencies, and the anticipated FED policy changes were largely unaffected. The futures market indicates roughly a 70% likelihood of a rate cut at the March meeting. The Dollar Index showed a marginal decline of less than 0.1%. December’s job figures were more robust than anticipated, with stable unemployment rates and slight increase in average wages. Despite this, there were adjustments downward in previous job growth estimates (-71K), a decrease in the labor force participation rate to 62.5% from 62.8% and a reduction in the average work week (34.3 hours from 34.4 hours), signalling a deceleration in the job market. The average job growth in Q4 2023 was 165K, the lowest since the post-Covid period began. Following the job report, the ISM services index also showed a significant drop, especially in the employment component (43.3 ve 50.7), hitting its lowest point since mid-2020.
Global attention is shifting towards inflation data as the US, China, and Japan, the world’s largest economies, are set to release their latest inflation figures. In the US, despite a potential increase in overall CPI, the market is expected to concentrate on a predicted decrease in the core inflation rate.
In Japan, both headline and core inflation rates are anticipated to continue their downward trend, reinforcing the view that the Bank of Japan is under no pressure to alter its policies, particularly following the recent earthquake. China’s upcoming report is likely to show a slight improvement in deflation compared to November, yet the economy still requires acquires an additional support. This situation makes a reduction in the benchmark one-year Medium Term Lending Facility later in the month more probable. In Australia, the November CPI is forecasted to demonstrate a reduction in inflation to 4.5% year-overyear, a significant drop from the 8.4% recorded at the end of 2022.The features market is not anticipating the first rate cut by the Reserve Bank of Australia (RBA) until August.
The upcoming US December Consumer Price Index (CPI) is a key economic indicator to watch. Forecasts suggest both headline and core inflation rates will increase by 0.2% month-over-month. Due to base effects, year-over-year rates are expected to converge, with headline rate predicted to rise slightly to 3.2% from 3.1%, and the core rate projected to decrease to 3.8% from 4.0%. This implies that the headline CPI’s annualized pace in Q4 2023 would be around 1.2%, a decrease from 4.8 in Q3 2023.
The anticipated 0.2% increase in the core rate suggests an annualized rate of 2.8%, compared to 3.0% in Q3 2023 and 4.0% in Q2 2023.
Other significant data releases include December’s Producer Price Index (PPI), indicating ongoing disinflation. A 0.2% increase in headline producer prices is expected to bring the year-over-year rate to about 1.4%, up from 0.9%, although producer prices likely fell on an annualized basis in Q4 2023. Core producer prices, potentially rising for the first time since September, are expected to maintain the year-over-year rate at 2.0%. The US will also report on its December budget deficit, where an average monthly shortfall of approximately $150.4 billion was recorded in the first 11 months of 2023, compared to a $121.3 billion average monthly deficit in the same period of 2022.
Regarding currency markets, the Dollar Index saw gains following stronger-than-expected job and earnings growth data, reaching the 61.8% retracement target of the post-employment data losses near 102.90, before stalling around 103.10. However, details from the jobs report, including hours worked and a weak household survey, along with a disappointing ISM services report, led the Dollar Index to relinquish its gains, finding support around 101.90. Despite a trading range that encompassed the previous day’s range, the closing was essentially unchanged, indicating a neutral stance. A near-term consolidation appears to be the most likely scenario.
In the coming days, the Eurozone is set to release its November retail sales and unemployment figures. These data points, not typically influential in market movements, are not expected to significantly alter interest rate expectations. In the third quarter of 2023, Eurozone retail sales declined each month, with a marginal increase of 0.1% recorded in October. Additionally, household consumption, a broader measure, decreased by 0.4% in Q3 2023. Despite expectations of a rebound in consumption for Q4 2023, a median forecast from Bloomberg’s survey suggests that the regional economy likely experienced a 0.1% contraction in aggregate. Detailed national reports from Germany, including trade, factory orders, and industrial production, and from France, covering trade, industrial production, and consumer spending, will assist economists in refining their GDP forecasts. On a positive note, the Eurozone’s unemployment rate remains a bright spot amidst generally lackluster economic data. Since May 2022, the unemployment rate has fluctuated between 6.5% and 6.7%, notably lower than the pre-COVID rate of 7.5% at the end of 2019 and early 2020.
In currency markets, the euro recently achieved the 61.8% retracement target of its rally from the December 8 low of approximately $1.0885, following the initial reaction to the US jobs data. It then rebounded to nearly $1.10 before settling around $1.0950 with little change. Given the dramatic price action prior to the weekend, near-term consolidation appears likely as market participants reassess their positions. The technical indicators, including the crossing of the five-day moving average below the 20-day moving average and the euro’s close below both, combined with declining momentum indicators, suggest that the correction in the euro’s value might not be complete.
The UK is set to conclude a relatively quiet week in terms of economic news with the release of its November Gross Domestic Product (GDP) and related details on Friday. The UK’s economy experienced a slight contraction of 0.1% in Q3 2023, largely attributed to a significant reduction in net exports. The start of Q4 has seen further economic challenges, with the economy shrinking by 0.3% in October, more than the 0.1% decline predicted in Bloomberg’s median forecast. This contraction marks a rare instance of the UK economy shrinking in consecutive months since the early days of the COVID-19 pandemic. Contributing to the contraction in October were declines in industrial production, services output, and construction activity, along with a substantial widening of the trade deficit (GBP 4.48 billion versus a GBP 1.57 billion deficit in September). Looking ahead, the median forecast in Bloomberg’s survey suggests a flat GDP for Q4 2023, indicating a potential improvement in economic performance for November and December.
In the currency market, the British Pound Sterling displayed notable volatility ahead of the weekend, trading within the entire week’s range. It initially dropped to around $1.2610, then rebounded to a high of $1.2770, making it the strongest G10 currency against the dollar on Friday with a gain of approximately 0.3%. Sterling enters the new week on a three-day rising streak. Except for one day (December 29), it has been trading within a $1.26-$1.28 range since December 14. In the options market, the one-week risk-reversal has shifted from favoring sterling calls at the end of 2023 to favoring puts. Although the five-day moving average has fallen below the 20-day moving average, caution suggests maintaining the assumption that the existing range will persist until proven otherwise.
The subdued Purchasing Managers’ Index (PMI) readings suggest that the world’s second-largest economy, China, is struggling to generate inflationary pressures. However, this conventional view overlooks the significant impact of food prices, particularly pork prices, on China’s recent negative Consumer Price Index (CPI) figures. According to estimates by Bloomberg’s economists, food prices contributed to a 0.8% reduction in the headline CPI, bringing it down to -0.5% in November. Service prices, on the other hand, saw a year-over-year increase of 0.4%. While overall demand is weak, it’s not in a state of collapse. In fact, China’s retail sales rose by 7.2% year-over-year up to November, and fixed asset investment increased by 2.9% during the same period.
Chinese producer prices have been declining on a year-over-year basis since October 2022, a trend reminiscent of the situation in the second half of 2019, before the COVID-19 pandemic. There is a slight easing in deflationary pressures as of December. Consequently, there seems to be a fair chance that the People’s Bank of China (PBOC) may lower its benchmark one-year Medium-Term Lending Facility rate by 10-20 basis points on January 15.
Additionally, China is set to release its December lending figures and new house price data. Notably, new house prices began to rise in the early months of 2023, halting a decline that started in September 2021. However, this recovery was short-lived, as house prices fell by 1.62% in the six months through November, marking the sharpest decline in any six-month period since the downturn began.
China’s December trade figures are also forthcoming. In dollar terms, China’s trade surplus decreased by nearly 3% in the first 11 months of 2023, but in yuan terms, it increased by a similar margin. Rising trade tensions with the US and Europe could further complicate matters. However, the ongoing efforts to “de-risk” and diversify trade away from China may lead to unintended outcomes. For instance, the United States has overtaken China as the largest destination for South Korean exports for the first time in two decades.
Before the weekend, the US dollar experienced a significant movement in relation to the Chinese yuan (CNY). It managed to close an old gap from mid-December, which extended to nearly CNY 7.1710. Following the release of US jobs data, the dollar experienced a pullback, briefly dropping below CNY 7.14. This fluctuation in the dollar’s value against the yuan might have been influenced by actions from the People’s Bank of China (PBOC), potentially intervening to moderate the dollar’s rise amidst falling stock markets.
The currency pair has been trading within a relatively broad range, approximately between CNY 7.10 and CNY 7.20. This range has been consistent since late November, indicating a period of relative stability in the exchange rate between the US dollar and the Chinese yuan. The movements within this range are reflective of various economic factors, including market reactions to economic data releases and potential interventions by the PBOC to maintain currency stability in the face of global market fluctuations.
The Consumer Price Index (CPI) for Tokyo has consistently served as a reliable early indicator of national price trends in Japan. The upcoming December reading, expected on January 9, will be closely watched. In November, Tokyo’s headline inflation was recorded at 2.7%, the lowest since July 2022. The core rate, which excludes fresh food and is a key focus for the Bank of Japan (BOJ) with its 2% target, slowed to 2.3% in November, tying with the lowest rate since mid-2022. Notably, services prices have remained robust, and processed food prices have been a significant contributor to inflationary pressures. Additionally, government subsidies for electricity and gas are expected to reduce headline inflation nationwide by about 0.5%, with these subsidies set to continue until the end of April.
Most economists anticipate that the BOJ will abandon its negative policy rate (-0.10%) in April, though some speculate that this shift could occur as early as the end of January at the BOJ’s meeting. Japan is also set to report November data for household spending and labor earnings. Japanese household spending has been chronically weak and has contracted in the middle two quarters of 2023. Despite less attention compared to China’s consumption, Japanese household spending fell year-over-year in the first ten months of 2023, except for February, and is expected to have declined by 2.2% year-over-year in November.
Labor cash earnings in Japan, through October, increased by an average of 1.3% over 2022, a decrease from the 1.5% growth in the first ten months of 2022. However, when adjusted for inflation, real labor earnings have been declining year-over-year since April 2022, continuing a trend observed even before the COVID-era inflation increase. In 2019, real labor earnings fell every month except for September.
In currency markets, the US dollar (greenback) experienced significant volatility against the Japanese yen (JPY). It surged from around JPY 140.80 in the last week of December to a peak near JPY 146 following the US jobs report, just shy of the 50% retracement objective from last year’s high of almost JPY 152. However, the dollar then reversed sharply lower, influenced by weaker details in the jobs data and a poor ISM services report, dropping to around JPY 143.80 before settling at approximately JPY 144.70. While the five-day moving average crossed above the 20-day moving average for the first time since mid-November, a consolidation phase between JPY 143.50 and JPY 146 seems likely.
The key high-frequency economic report expected in the coming days is Canada’s merchandise trade balance, due on January 9. Canada has seen a significant shift in its trade balance in 2023, moving from a surplus to a deficit. In the first ten months of the year, Canada recorded a merchandise trade deficit of C$1.5 billion, a stark contrast to the C$19.3 billion surplus reported in the same period of 2022. This decline in the merchandise trade surplus is notable, and there has also been a marked reduction in foreign portfolio inflows. Net foreign purchases of Canadian bonds and stocks fell dramatically, from about C$104 billion in the first ten months of 2022 to just around C$5.2 billion in the same period in 2023.
In the currency markets, the Canadian employment report’s impact appeared weaker compared to the US data, but the volatility of the US dollar (greenback) predominantly influenced the exchange rate with the Canadian dollar (CAD). The US dollar’s recovery from its previous lows of around CAD 1.3175 extended to CAD 1.3400. However, following a sell-off that brought it slightly below CAD 1.3290, buyers re-entered the market, pushing the US dollar back to approximately CAD 1.3375. Despite the disappointing job growth in Canada in December, the increase in wages balanced the economic outlook, leaving the likelihood of a Bank of Canada rate cut around 30%, compared to a roughly 70% chance of a Fed cut in the US.
Yet, the upward correction of the greenback does not seem to be over. A break above CAD 1.3400 could indicate a potential move towards the CAD 1.3480-CAD 1.3500 range. This range includes the 200-day moving average and the 50% retracement of the November-December slide, marking significant technical levels for traders and analysts monitoring the currency pair.
Australia is set to release several key economic reports in the coming days, including November retail sales, CPI (Consumer Price Index), and trade data. November’s retail sales are expected to show a rebound after an unexpected 0.2% decline in October. Australia’s trade balance has worsened over the year, with the surplus decreasing to A$99.7 billion in the first ten months of 2023, down from A$114.4 billion in the January-October 2022 period. This change has been driven by a monthly average decline of 0.8% in exports and a 0.7% increase in imports.
The monthly CPI in Australia rose by 4.9% year-over-year in October, a decrease from 5.6% in September and 7.0% in October 2022. This matches the lowest inflation rate since January 2022. The Reserve Bank of Australia (RBA) was not as aggressive in its monetary policy actions as most other G10 central banks in 2023, with the exception of Japan. The persistent nature of inflation in Australia leads market analysts to anticipate less aggressive monetary easing in 2024.
In currency markets, the Australian dollar faced downward pressure following the US jobs report, with a significant drop to nearly $0.6640. This movement reached the 38.2% retracement of the gains from last year’s low, set in late October, and the 61.8% retracement of the upward trend following the last US employment data, both of which were slightly above $0.6655. With momentum indicators still declining and the five-day moving average on the verge of falling below the 20-day moving average, a period of consolidation appears likely. The pre-weekend low provides initial support, and a break below that level could target the $0.6580 area. On the upside, a move above the $0.6760-85 range could signal the end of the current downward correction.