BJ Moves to Slow JGB Sell-Off, While Month-End is Making for Subdued Price Action

Overview: The Bank of Japan took the market by surprise with its adjustment of the cap on the 10-year yield before the weekend, and then stepped in to buy the government bond as yields rose in reaction today. The move helped lift the dollar to JPY142.50. from where it had settled on Friday (~JPY141.15). The dollar is mostly softer, however, with only the yen and Swiss franc weaker. The Australian dollar is leading the other currencies higher ahead of tomorrow’s RBA meeting. Emerging market currencies, outside of a handful of central European currencies and the Malaysian ringgit and South Korean won are lower.

Asia Pacific equities rallied with Taiwan being the only notable exception. Europe’s has edged higher after falling 0.2% before the weekend. US index futures are narrowly mixed. Benchmark 10-year yields are higher. In Japan, the 10-year JGB is near 0.60%. European yields are mostly 3-4 bp higher. The 10-year US Treasury yield is near 3.98%, up 3.5 bp. Gold is a little lower but inside the pre-weekend range, which itself was inside last Thursday’s wide range (~$1942.65-$1982.15). September WTI has rallied for the past five consecutive weeks and is higher today, pushing above $81. The contract reached $81.75 in January and $81.45 in April.

Asia Pacific

China’s July PMI softened in line with expectations. The manufacturing PMI firmed to 49.3 from 49.0 and is the fourth consecutive month it is hovering around 49.0. The non-manufacturing PMI continued to slow as it has done since the peak in March. The 51.5 (from 53.1) is the lowest of the year. The slippage in the composite to 51.1 from 52.3 also brings it to a new low for the year. The data may not be relevant in the aftermath of last week’s Politburo meeting and new even if vague efforts to bolster the private sector, property market, and foreign investment. The CSI 300 rallied 4.5% last week, the most since in nearly eight months. It was up another 0.55%t today. 

The Bank of Japan adjusted its Yield-Curve Control stance ahead of the weekend. The 0.50% cap is now a reference point, and the central bank will conduct fixed-rate purchases at 1.0%. Governor Ueda explained he did not expect the 10-year yield to rise to that and that it was not a step toward normalization. The 10-year yield closed near 0.54% at the end of last week and poked above 0.60% and prompting an unexpected bond-purchasing operation by the Bank of Japan. It was the first such operation since February. It reportedly offered to buy the equivalent of $2 bln of bonds at market rates. Note that a few hours before the BOJ’s decision, Tokyo’s July CPI, which is good indicator of the national report, saw the measure that excludes fresh food and energy rise to a new cyclical high of 4.0%. Today, Japan reported June retail sales and industrial production. Retail sales fell 0.4% after rising by 1.4% in May. The median forecast in Bloomberg’s survey was for a 0.7% decline. The BOJ argues that inflation is coming from supply shocks more than excessive demand. Industrial production, on the other hand, recovered from the outsized 2.2% drop in May, rising 2.0% in June. Auto-related products and electronics led the recovery. 

The Reserve Bank of Australia meets first thing tomorrow. The futures market has all but given up on hike. Less than a 10% chance has been discounted. Yet, 60% of the economists in Bloomberg’s survey anticipate a quarter-point hike that would bring the target rate to 4.35%. The strong employment data was offset by the mostly softer-than-expected inflation readings. Still, Governor Lowe, who will be replaced in September, has been criticized for communication lapses may be loath to spring another surprise in the market.

Although the Bank of Japan adjusted its Yield-Curve Control procedures to cap the 10-year yield at 1.0% rather than 0.50%, the response in the foreign exchange market was considerably more muted than after last December’s surprise. The dollar initially fell to a nine-day low near JPY138 before recovering smartly and settling above the 20-day moving average (~JPY141) for the first time since July 6. Follow-through buying today has lifted the greenback to JPY142.50. There may be near-term potential into the JPY143.20-60 area. The Australian dollar posted a bearish outside down day last Thursday after peaking near $0.6820. Follow-through selling before the weekend saw it test $0.6625 before steadying. Today, it pushed above $0.6680, where options expire today (~A$430 mln) and Thursday at $0.6685 for A$903 mln) and is knocking on $0.6700 in the European morning. A move above $0.6710 targets $0.6745-60. In the bigger picture, the has been in a $0.6600-$0.6900 range for two months. Last week’s greenback loss (~0.55%) against the was the third weekly decline in the past four weeks. This seemed to be more of a Chinese development than a dollar event, as the greenback was mostly firmer against the G10 currencies and most emerging market currencies. Vague but persistent signals of more efforts to support the economy, including initiatives for the private sector, encouraged foreign flows into Chinese equities. The PBOC set the dollar’s reference rate at CNY7.1305. The median forecast in Bloomberg’s survey was for CNY7.1532. Last Thursday’s range (~CNY7.12-CNY7.1760) contained the price action Friday and today.

Europe

The eurozone reported Q2 GDP and the preliminary July CPI. Neither report was surprising given the national reports at the end of last week. France reported 0.5% growth, helped by the export of a cruise ship. Spain’s economy grew by 0.5%, but the German economy stagnated, making it the best quarter in the past three. Italy reported that it too unexpectedly contracted by 0.3% (after growing by 0.6% in Q1). The eurozone in aggregate grew by 0.3% in Q2. Before the weekend, Germany reported that its harmonized measures of inflation rose by 0.5% in July. In France, it was unchanged, and in Spain, it fell by 0.1%. Italy reported today a 1.5% decline in July, helped by a nearly 20% decline in clothing and shoes, and a 1.3% decline in housing, water, and electricity. The year-over-year rate softened to 6.4% from 6.7%. That translates into a 0.1% increase in the aggregate, allowing the headline rate to slip to 5.3% from 5.5%. The core rate disappointingly was unchanged at 5.5%. The August CPI will be in hand before the ECB’s September decision (September 14).

The UK reported consumer credit and mortgage lending data. The June data were in line with expectations and economists expect that the UK economy stagnated in Q2 after eking out 0.1% growth in Q1. GDP for Q2 will be reported next week (August 11). The focus is on the Bank of England meeting on Thursday. Recall that before the softer-than-expected June CPI figures were reported on July 19, the swaps market was discounting a little more than a 2/3 chance of a 50 bp hike. Expectations have been scaled back and the swaps market now has about a 1-in-3 chance of a half-point hike priced. That said, several large banks continue to forecast a 50 bp move. 

The euro posted an outside down day on July 27, following the string of stronger US data and the ECB’s press conference, where President Lagarde was less committal about a September rate hike than she was about the June and July hikes. Follow-through euro selling ahead of the weekend was limited to about a fifth of a cent, and the euro rebounded from about $1.0945. The recent pullback was sufficient to drive the five-day moving average through the 20-day moving average for the first time since mid-June. Still, the euro settled above $1.10. The euro has traded in a narrow range between about $1.1005 and $1.1035 today. There are about 1.33 bln euros in options that expire at $1.10 today and about 1.5 bln euro at $1.11 tomorrow. We see initial resistance in the $1.1045-70 area. Sterling also posted a bearish outside down day on July 27 and settled below $1.28 for the first time since July 6. Follow-through selling ahead of the weekend was limited to a little more than $1.2765. It rebounded back to the 20-day moving average near $1.2890. Today, it is trading quietly in a roughly $1.2835-70 range. About GBP366 mln in options expire tomorrow at $1.29. There is another set of options struck at $1.2855 for around GBP365 mln also expires tomorrow. Position adjustment ahead of the BOE meeting may make for some choppy trading conditions.

America

After a series of mostly stronger-than-expected economic data and softer inflation data, including the Q2 Employment Cost Index, which Fed Chair Powell explicitly called attention to in his press conference following the FOMC’s decision to hike rates after the June pause, attention turns back to the labor market this week. Economists expect nonfarm payrolls to rise by 200k. The private sector is forecast to have filled 175k jobs in July, after averaging 215k a month in H1 23, and 317k in H2 22. Several labor market indicators point to some easing of the tightness of the labor market, though last week’s weekly initial jobless claims (week ending July 22) to 221k, the lowest in five months. The fact that the US unemployment rate in June was 3.6%, unchanged from March 2022, when the Fed began the historically aggressive tightening, is simply astounding. The initial estimate of Q2 GDP was 2.4%, the fourth consecutive quarter that the economy grew faster than what the Fed thinks is the non-inflation speed limit. The early estimate from the Atlanta Fed’s GDP tracker is for 3.5% growth here in Q3. With such little input, this far out, the tracker is not particularly accurate. Still, the futures market sees less than a 20% chance of a hike in September, and this is too low, especially given that next week’s CPI could see the first increase in the year-over-year rate since last June. 

Canada also reported July jobs data at the end of the week. Canada created an average of 48.4k jobs a month through H1, of which, 40.3k were full-time positions. In H2 22, Canada grew an average of 30k jobs a month and again the bulk (27.8k) were full-time. In H1 21, job growth averaged 38.3k a month and 46.6k full-time posts. Recall that in June, full-time employment surged by 109.6k, which in proportional terms, would be as if US nonfarm payrolls grew by well over 1 million. The unemployment rate has crept higher to stand at 5.4% in June, up from 4.9% in June 2022. The Bank of Canada meets next in early September, and the swaps market sees almost a 1-in-3 chance of a hike.

Mexico will report Q2 GDP shortly. It is expected to have expanded by 0.6% after 1.0% growth in Q1. The economy is expected to slow in H2, and with falling price pressures, is seen creating space for the central bank to cut rates in Q4. Before the weekend, Chile became the first Latam country to cut rates, and it delivered a larger-than-expected 100 bp cut (to 10.25%). Brazil is poised to cut the Selic rate later this week. The swaps market favors a 50 bp cut to 13.25%, but the six economists polled by Bloomberg were evenly divided between 25 bp and 50 bp.

The US dollar rose to a nearly three-week high before the weekend around CAD1.3255 and made a marginal new high today near CAD1.3260, where about $343 mln in options expire today. before pulling back. Initial support is seen in the CAD!.3200-20 area. A move above CAD1.3275 could see the greenback extend its recovery to the CAD1.3320-50 area. The daily momentum indicators favor the greenback. The dollar recorded an outside down day against the Mexican peso before the weekend and saw its low level (~MXN16.6260) since 2015. The lower Bollinger Band (two standard deviations below the 20-day moving average) is near MXN16.6160. It is consolidating so far today below MXN16.7880. The next downside target is in the MXN16.50 area.