BBGFX | Don’t be Burned in the Churn

Overview: The broad consolidation in the dollar after the gyrations at the end of last week continues, and within it the greenback is a bit softer today. Among the G10 currencies, only the yen is failing to post gains. Most emerging market currencies, led by central Europe, are also firmer today. The market’s focus is on tomorrow’s US CPI. Meanwhile, the US 10-year yield is lower for the third consecutive session and is below the 4% threshold ahead of today’s Treasury auction. European benchmark 10-year yields are also 2-4 bp lower.

Europe’s Stoxx 600 is steady after slipping by 0.2% yesterday. US index futures are trading with a slightly firmer bias. Several large banks kick off the earnings season at the end of the week. Gold is trading quietly mostly between $2025 and $2040 today, well within the recent range. February WTI is in a narrow range of a little more than a dollar below $72.75. API estimated that private crude inventories fell by about 5.2 mln barrels, which is a much larger drop that expected from the government’s calculation due later today.

Europe

Germany reported a dismal 0.7% drop in November industrial output yesterday. Today, France reported that the three-month drop in industrial production (-4% at an annualized rate) ended in November with a 0.5% gain, well above the flat report expected. While industrial output may be stabilizing, goods consumption is more precarious. The November figures are due tomorrow and household consumption is expected to have fallen by 0.2%, after a 0.9% fall in October. Through October, monthly consumption was unchanged on average, and this is after adjustment for inflation. However, in the three months through October, an average of a 0.5% decline was recorded. In GDP terms, French consumption rose by 0.2% in Q2 23 and 0.3% in Q3 23. The French economy contracted by 0.1% in Q3 23 and may have expanded by 0.1% in Q4. The central bank forecast 0.9% growth this year. The EC is more optimistic and forecasts 1.2% expansion this year and the IMF is at 1.3%.

French President Macron has begun the new year with a government shakeup that has seen Prime Minister sacked. She shepherded Macron’s controversial legislation (retirement reform in 2022 and last month, a contentious immigration bill. Borne has led a minority government since 2022 and relied on conservative votes to pass the immigration legislation. Attal, the education minister, replaces Borne. Macron, who cannot run again when his second term ends in 2027, has seen his approval rating fall to around 27%, according to the latest Elabe survey (Borne’s at 23%, trailed Macron). Attal is the second-most French politician now with 39% support. Former PM Philippe is slightly ahead. Macron’s new government appears aimed at positioning ahead of the June EU Parliament elections and trying to influence the competition for his successor. The market (bonds and equities) seemed to barely react to France’s political developments.

The euro continues to chop inside the range set after the US employment data at the end of last week: ~$1.0875-$1.10. On Monday and Tuesday, the day’s range was limited to about a half-of-a-cent. It is in slightly more than a quarter-cent range above $1.0920 today. It has held below $1.0985, where options for 2.2 bln euros expire today. Although the euro reached approached the initial retracement target ($1.0875-85), the price action does not suggest a low is in place and the momentum indicators are still falling. We can envision another leg lower toward $1.08 or so. It is difficult to get excited about sterling, which continues to be mired in a two-cent range (~$1.26-$1.28). It is straddling the middle of the range (~$1.2685-$1.2735) There are options expiring at both ends of the range on Thursday (GBP400 mln at $1.2790) and Friday (GBP655 mln at $1.2600). We are more inclined to see a downside break and the first test may be on the $1.2500-40 area, which houses the 200-day moving average and last month’s lows.

America

The focus is really on tomorrow’s US December CPI report. Today’s final November wholesale inventory report is more for economists than market participants. The supply chain disruptions led to an accumulation of inventories (2021 and into 2022) and spent most of 2023 in a liquidation phase. Through November, wholesale inventories fell by an average of 0.3% a month in 2023, after growing by an average of 1.5% a month in the Jan-Nov 2022 period. Following the inventory report, the Atlanta Fed will update is GDP tracker. After the recent batch of data, including the PMI, ISM, and trade reports, the tracker slipped to 2.2% from 2.5% on January 3. Late in the session, NY Fed President Williams gives a speech on the 2024 economic outlook. As the vice-chair of the FOMC, the NY Fed is the only Fed president that has a permanent vote. He is part of the central bank’s leadership and is typically on message.

Canada reported a smaller-than-expected goods surplus for November, but the October surplus was revised slightly higher. However, the figures were sufficient to turn what had been a trade deficit though October into a small surplus in the first 11 months of 2023. However, neither that nor the 2.4% jump in WTI were about to offset the risk-off mood on the Canadian dollar. The greenback posted a higher high for the third consecutive session, rising to CAD1.3415, which it had not seen since December 15. It has come back softer today. We suspect the CAD1.3350-60 area will hold.

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