Japan's Q4 23 Contraction Revised Away, Helping Keep Yen Bid

Yen, Money, Wealth, Japanese Yen

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Overview: News that the Japanese economy expanded rather than contracted in Q4 23 has fanned expectations that rates could be as early as next week. This is helping keep the yen supported, though it remains in the pre-weekend range, albeit barely. While the dollar is softer but consolidating against the euro, Swiss franc, and Canadian dollar, it is slightly firmer against the Antipodeans and Scandis. Sterling is also in a narrow range, but with a softer bias. Most emerging market currencies are firmer, with the Hungarian forint and Turkish lira the notable exceptions. A quiet North American session looks likely with a light economic calendar ahead of tomorrow's US CPI. 

The yen's recovery and rate speculation weighed on Japanese stocks. The Nikkei and Topix fell by more than 2%. It is the biggest decline since last October. Outside of China and Hong Kong, the other large regional bourses fell. Australia's ASX 200 tumbled by 1.8%, the most in nearly a year. Europe's Stoxx 600 is off by 0.4%, threatening the three-day advance in the second half of last week. US index futures are nursing small losses. Japan's 10-year yield rose 2.5 bp, and at 0.75%, is approaching the year's high. Core European benchmark yields are mostly slightly softer, while the peripheral yields are a little firmer. UK 10-year Gilt yields are off a couple of basis points. The 10-year US Treasury yields is little changed near 4.07%. Gold is consolidating after approaching $2200 before the weekend. It has held above $2176 today. April WTI fell to a nine-day low near $77.25 today before recovering. It is near session highs now near $78.30.

Asia Pacific

China reported February CPI and PPI over the weekend. Deflation in consumer prices ended for the first time since last August as the CPI rose by 0.7% year-over-year. It was twice the gain economists expected (0.3% median forecast in Bloomberg's survey). While conventional wisdom attributes the gain to spending over the Lunar New Year holiday, given the construction of China's CPI basket, food prices are key. Food prices fell 0.9% year-over-year in February after a 5.9% decline in January. Pork, a staple in diets, rose by 0.2% in February following a 17.3% drop in January. Excluding food and energy, China's core CPI stood at 1.2% in February, up from 0.4% in January. On the other hand, deflation in producer prices deepened to -2.7% from -2.5% previously. On the month, producer prices fell by 0.2%, matching the January decline. 

The surge in Japanese capital spending excluding software reported earlier this month prepared the market for upward revision in Q4 23 GDP. Capital spending jumped 11.7% year-over-year. The median forecast in Bloomberg's survey was for a 1.5% increase. In GDP terms, private investment rose 8.4% and that means that rather than contract by 0.1% as initially estimated, the Japanese economy expanded by 0.1%. Recent BOJ comments, the larger than expected rise in labor earnings and wage demand have spurred increased speculation that the BOJ could raise rates at the March 19 meeting. We still lean toward April, the start of the new fiscal year, the end of energy subsidies for households will lift measured inflation, the wage round results will have been digested, and the Tankan survey results will be in hand. Also, note that despite the better Q4 23 GDP, the economy could be contracting this quarter. Household spending, industrial production, and housing starts fell sharply in January, partly as a function of the earthquake on January 1.

After falling for the first eight weeks of the year, the yen strengthened for the second consecutive week, and its nearly 2.1% gain was the most since last August. The move was too rapid as the greenback briefly traded beyond four standard deviations from its 20-day moving average. It bottomed around JPY146.50 before US rates recovered following the US jobs data. The dollar held near JPY146.55 in Asia Pacific turnover today, but the upside has been limited to about JPY147.15. The low from early February was near JPY145.90 and the 200-day moving average is around JPY146.20. The dollar is trading slightly inside three standard deviations from its 20-day moving average (~JPY146.35). The Australian dollar reached almost $0.6670 before the weekend, more than three standard deviations from the 20-day moving average. It subsequently returned toward session lows (~$0.6615) before settling near $0.6625. The Aussie met the (50%) retracement objective of this year's decline (~$0.6655). We look for some back and filling over the next few sessions and would not rule out a move toward $0.6560-75. It has tested initial support near $0.6600. The CNY7.20 cap remains in place and the broad pullback in the US dollar, especially against the yen, in our understanding, helped drive the dollar to almost CNY7.1815 before the weekend. It slipped a little further today to about CNY7.1800. That is the lowest level since February 21. The PBOC set the dollar's reference rate at CNY7.0969 (CNY7.1002 on before the weekend). The average in Bloomberg's survey was CNY7.1879 (CNY7.1905 previously). Against the offshore yuan, the dollar also fell to its lowest level since February 21 (~CNH7.1850).


The economic news stream is light and political developments are more notable. Many are looking for some insight into the mood of voters ahead of the June European parliamentary election. In a defeat for the Irish government, two referendums on changing the language about women and family in the constitution were defeated. The first referendum sought to widen the definition of family to include other "durable" relationships. The second referendum proposed modernizing and making more inclusive language about care duties in the home. Both referendums were defeated by more than 2/3. Turnout was almost 45%, almost a 20-percentage point drop from the 2018 referendum on abortion. 

Portugal's Socialist Prime Minister Costa resigned late last year amid a scandal over lithium and green hydrogen deals. Costa led the Socialist government for eight years. There was a national election yesterday. A center-right coalition led by the PSD (Social Democrats) did best, but not sufficient to secure a majority. The populist right Chega (Enough) won around 50 seats, up from a dozen, two years ago. The head of the center-right coalition, though, has refused to invite Chega into a coalition, meaning a minority government is the most likely outcome. Minority governments have been stable in Portugal. Still, there has been little reaction in Portugal's bond or stock markets. 

The euro reached $1.0980 after the US employment data, its best level since January 12. However, the momentum faltered after a six-day rally, and the euro settled fractionally lower. Still, the weekly gain, its third consecutive one of 0.95%, was the largest so far this year. It is trading quietly in about a fifth of a cent range above $1.0935. Initial support may be in the $1.0890-$1.0900 area. Sterling powered to its best level to its best level since last July, reaching almost $1.29 before the weekend. It traded beyond three standard deviations above the 20-day moving average. It is consolidating in about a third of a cent range today below $1.2865. The upper Bollinger Band (two standard deviations above the 20-day moving average) is near $1.2835. Some consolidation seems necessary, and support may be initially in the $1.2780-$1.2800 area. The euro had fallen to almost GBP0.8500. It has not closed below there since August 2022. It is trading with a slightly firmer bias today and reached nearly GBP0.8530. 


With February employment data in hand, the attention turns to tomorrow's CPI. The headline is expected to be unchanged at 3.1%, though the core may tick down to 3.7% from 3.9%. Fed Chair Powell told Congress last week that the central bank's confidence was "not far" from allowing it to cut rates. The market understands this to mean a cut in June rather than March or May. The February jobs data apparently did not change economic assessments, and odds of a June hike were little changed at about 92%, down from 96% the previous day and at end of previous week (March 1). Powell previously explained that while the PCE deflator is the best measure for price stability, the full employment mandate does not lend itself to a signal number. Note that when the downward revisions are taken into account, the US created an average of 265k jobs a month over the past three months, the most since last June. The private sector has created an average of 205k jobs a month in the three months through February. That is also the highest for a three-month period since June 2023. Still, the pop in the unemployment rate to 3.9%, the highest since January 2022 is a yellow flag, underscoring the gradual slowing of the labor market. The median Fed forecast in December saw the unemployment rate rising to 4.1% this year. 

For its part, Canada created twice the number of jobs economists expected (40.7k). That included 70.6k full-time posts, more than the past five months combined. Still, the unemployment rate crept up to 5.8% (from 5.7%), matching last year's high. Average hourly pay (for permanent workers) slowed to 4.9% from 5.3%. It is the first back-to-back slowing since last May-June. Still, the swaps market showed little change in the likelihood of a June cut (~75%). 

The US dollar fell to CAD1.3420 after the employment data, its lowest level in a month. It recovered to new session highs in the waning hours of last week's activity, and nearly reached CAD1.3500. There are options for about $305 mln at CAD1.3550 that expire today. That said, we see initial resistance in the CAD1.3500-20 area, while the price action reinforces the importance of support near CAD1.34. Ahead of that, support today may be seen in the CAD1.3450-60 area. The five-day moving average is slipping below the 20-day moving average for the first time in over a month. The US dollar has risen against the Mexican peso in one session in the past two weeks. It has fallen by about 1.8% over those two weeks. Last week was the first in eight weeks that the dollar settled below MXN17.00. It set a new low for the year near MXN16.7640. It is holding above MXN16.78 so far today. Last year's low was set in July around MXN16.6260. Indeed, that was an eight-year low. A steep downtrend line has formed since the end of February, and it comes in today near MXN16.86. Note that every session last week, the dollar settled below its lower Bollinger Band. The Brazilian real got tagged for about 1% at the end of last week amid news of a smaller-than-expected dividend from Petrobras. It was the weakest among the emerging market currencies. Not only was the dividend smaller than expected, but Petrobras also did not announce an extraordinary dividend either. The dollar gapped higher and traded above BRL4.99 briefly. It has not closed above BRL5.00 since the end of last October. 

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Read more by Marc on his site Marc to Market.

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