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Overview: The US debt ceiling talks resume at the White House today but a deal is unlikely to be announced. President Biden will attend the G7 summit in Hiroshima with the debt ceiling still looming. The dollar is mostly softer as last week's gains are pared. The Swiss franc and Japanese are the strongest in the G10. The Thai baht and South African rand, among the market's favorites yesterday are seeing those gains retraced. The JP Morgan Emerging Market Currency Index is giving back yesterday's gains in full. 

Disappointing Chinese data saw the CSI 300 fall by around 0.5%, but Japan, Hong Kong, Taiwan, and South Korea markets advanced. The Topix reached its best level in more than 30 years. Europe's Stoxx 600 is treading water, putting its two-day advance at risk. US equity futures are nursing small losses. Benchmark 10-year bond yields are softer. The 10-year US Treasury yield is off three basis points to about 3.47%. Most European bonds are off as much, but the 10-year Gilt yield is off six basis points (~3.75%) after some soft employment figures (but not wages). Crude oil initially traded higher on news that the US was seeking bids to replace up to 3 mln barrels of sour crude for delivery in August. Earlier this year, it rejects all the bids due to price or inability to meet other specifications. June WTI rebounded from about $69.40 to settle near $71.10. Those gains were extended to almost $71.80 today before sellers knocked it back to around $70.55, the session low. Gold is trading softer but within the range seen at the end of last week (~$2001-$2022). It has not closed below $2000 since May 1.
 

Asia Pacific

There continue to be doubts about the strength of the Chinese economy even though Q1 GDP exceeded expectations. Today's data showed economic activity continues to recover and at an accelerating pace but not as much as economists expected. Industrial output rose near 5.6% from a year ago last month after a slightly less than 4% pace in March. Year-to-date, it is 3.6% higher year-over-year. Retail sales accelerated to 18.4% from a year ago, up from 10.6% in March's pace. Through April, retail sales are 8.5% above the first four months of 2022. Fixed asset investment slowed. Year-to-date, it is running 4.7% above the year-ago level, down from 5.1% in March. Property investment is still falling (-6.2% year-to-date from a year ago vs. -5.8% in March). In April 2022, it fell by 2.7% and has been contracting ever since. However, residential property sales have stabilized after plummeting last year. Surveyed joblessness slipped to 5.2% from 5.3%%. Yet youth unemployment rose. For 16–24-year-olds, the unemployment rate in March was 19.6% and 20.4% in April. Nearly 11.6 mln people are expected to graduate from college/universities this year.

Minutes from the Reserve Bank of Australia's meeting earlier this month showed officials were concerned about an upside surprise from inflation arising from the strong labor market. Note that the April employment report is due early on Thursday. The RBA meets next on June 6 and the market expected it to standpat. The Reserve Bank of New Zealand meets next week (May 24). The swaps market has about an 85% chance of a hike discounted. 

The dollar has been confined to a narrow range of less than half a yen today and is inside yesterday's roughly JPY135.60-JPY136.30 range. It has trended gently lower since yesterday's high was recorded in the European morning. There are options for around $950 mln at JPY135.50 that expire tomorrow. The Australian dollar is finding the air above $0.6700, the mid-point of its two-cent range that has dominated for two-and-a-half months. Last week, it briefly traded above $0.6800 and fell to $0.6635 before the weekend. There are options for A$1 bln today that expire at $0.6700 and another A$485 mln at $0.6710. Initial support is seen near $0.6660. The Chinese yuan fell every day last week. It edged slightly higher yesterday but is under pressure again today. Indeed, the greenback reached almost CNY6.9685, its best level in two months. The year's high was set in early March near CNY6.9775. The dollar's reference rate was set at CNY6.9506. The median in Bloomberg's survey was CNY6.9512.
 

Europe

Poor exports, retail sales, factory orders, and a shocking 3.4% drop in March industrial production took a toll on Germany's ZEW investor survey. Expectations peaked in February and fell for the third consecutive month and are back into negative territory for the first time this year. It stands at -10.7, which is weaker than anticipated. The current assessment deteriorated a little, really giving back some of the improvement seen in April. It is at -34.8 from -32.5 in April. It was at -46.5 in March. Still, the last time it was positive was in November 2021. 

The UK labor market softened but the firmness of wages may offset the weakness in jobs growth to spur another rate hike from the Bank of England. Average weekly earnings rose by 5.8% in Q1 year-over-year. It is unchanged from March, and although that is the slowest pace since February 2022, it is more than twice the rate seen in December 2019. Moreover, excluding bonuses, the regular pay increased to 6.7% year-over-year in Q1. That is the strongest gain since June 2021. The number of people on UK payrolls fell by 136k in April. The median forecast in Bloomberg's survey was for a 25k increase. The jobless claimant count rose by 46.7k in April after a 26.5k increase in March. The ILO measure of unemployment ticked up to 3.9% in March from 3.8% in February. The Bank of England meets next on June 22. The market is pricing in a nearly 75% chance of a quarter-point hike that would bring the base rate to 4.75%, which is slightly lower than yesterday. However, the market is leaning toward that being the last hike in the cycle.

The euro is about a 1/4 of a cent today, roughly matching yesterday's advance. It has fallen by about 0.6% before the weekend. It is meeting some resistance in the European morning around $1.09. The $1.0940 area is the (38.2%) retracement of its decline from the May 4 high near $1.1090. It is also the pre-weekend high. Initial support is around $1.0880. Sterling was initially sold on the disappointing jobs data and spiked to almost $1.2465, where it was snapped up and driven to a new session high in the European morning near $1.2550. Its pre-weekend high was about $1.2540. The $1.2565 area is the halfway point of from last week's high around $1.2680.
 

America

The Empire State manufacturing survey for May was dreadful at -31.8. However, it has been extremely volatile (10.8 in April and -24.6 in March, -5.8 in February, and -32.9 in January). Today's data is more important. It will likely show that after retail sales snapped back after falling in February (-0.7%) and March (-0.6%). Still, half of January's 2.8% surge was sustained. The median forecast in Bloomberg's survey projects a 0.8% increase last month. We already know auto sales were strong, and without them, retail sales are expected to have risen by 0.4%, offsetting the 0.4% decline in March. The core measure, used in some GDP forecasts, excludes autos, gasoline, food services, and building materials, which may have risen by 0.3% after falling in February (-0.1%) and March (-0.3%). Separately, after manufacturing output fell by 0.5% in March, it is expected to have edged higher in April. As of May 8, the Atlanta Fed's GDP tracker saw the US economy expanding at a 2.7% annualized pace in Q2 after growing 1.1% in Q1. It will be updated today. The Federal Reserve's median forecast in March was for 0.4% year-over-year growth this year, which seems pessimistic. We argue that the median forecast is likely to be raised at the June iteration.

Canada reports April CPI today. The median forecast in Bloomberg's survey is for a 0.5% increase and a 4.1% year-over-year pace (4.3% in March). If so, the annualized rate of Canada's headline CPI in the first four months would be around 5.7%. It rose at an annualized rate of about 1% in the last four months of 2022. The Bank of Canada declared a "conditional pause" in January. Officials have already acknowledged that the economy was stronger than it expected to start the year. The underlying core measures (trimmed and median) are expected to have moderated to an average of 4.2% from 4.5% in March, and slightly above 5% in January. Ahead of the weekend, March retail sales will be released. The Bank of Canada's preliminary estimate is for a 1.4% decline. As in the US, Canada's retail sales surged (1.6% in January) and could not sustain such levels. Retail sales slipped by 0.2% in February. Barring a significant surprise, we do not expect the data to alter expectations for the trajectory of Canadian monetary policy. The market sees little chance (~15%) of a hike in June or July (overnight target rate is 4.50%, and still leans heavily (~90%) toward a cut late this year. Still, the jump in April housing starts to their best level since last September and the biggest rise in existing home sales (11.3%) since July 2020 points to the continued resilience of the interest-rate sensitive sectors. 

The US dollar posted a bearish outside down day against the Canadian dollar. It reached almost CAD1.3570, its best level in eight sessions, and then reversed to close below the pre-weekend low (~CAD1.3480). There has been a little follow-through selling today and the greenback slipped slightly below CAD1.3450. It is straddling the 200-day moving average in Europe (~CAD1.3465). A break of CAD1.3440 could signal a retest on CAD1.3400. The US dollar continued to be sold against the Mexican peso yesterday, visiting levels (~MXN17.42) it has not seen since 2016. The low that year was MXN17.05. Mexico's three-month cetes (bills) pay more than 11% and continue to offer an attractive carry and a lower vol with more liquidity than others in the region. The Bolsa set a record high in April 2022 and after selling off by around 22% over the next six months is approaching it again. The Bolsa is up 14% this year, which aside from Argentina and Venezuela, is the best in the region.

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