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Overview: The dollar remained firm yesterday, even after the ECB's hawkish stance, reaffirming its intention to hike rates by another 50 bp next month. We had expected the greenback to have been sold in North America yesterday. That this did not materialize warns that despite its pullback in Asia and especially Europe today, that near-term sentiment may be changing with the Fed and ECB meetings over and die cast for next month, where the Fed is seen hiking by a quarter-point and the ECB by half. This suggests a consolidative/corrective phase for the dollar may be seen in the coming days, ahead of the January CPI on February 14. We expect US consumer inflation to slow considerably in the coming months, beginning with this report. Still, the market must get through today's US employment report and the services ISM, both of which sent the dollar reeling last month.

US Nasdaq futures are trading sharply lower following the poor news from Alphabet, Apple, Amazon, and Qualcomm. However, the Asia Pacific bourse mostly rose with China and Hong Kong as notable exceptions. Europe's Stoxx 600 is marginally lower after surging 1.35% yesterday, its strongest gain in a month. European bonds are selling off and benchmark yields are 6-9 bp higher. The US 10-year Treasury yield is soft at 3.39%. Gold posted a key reversal yesterday. After making new highs (almost $1960) it reversed and settled below Wednesday's low. Follow-through selling has pushed it to about $1910 today. A break of $1900 would be a potentially ominous technical development. March WTI is holding the $75 a barrel level, a three-week low.
 

Asia Pacific

Confidence that Chinese growth is set to rebound was supported by the Caixin service and composite PMI. The services PMI jumped to 52.9 from 48.0 and the composite rose to 51.1 from 48.3. Next week China reports January lending figures, which are set to surge. Separately, it will report consumer and producer prices. CPI is expected to accelerate to a four-month high near 2.3%. The decline in producer prices may moderate but is expected to be negative for the fourth consecutive month. Lastly, the appreciation of other major currencies suggests the dollar value of Chinese reserves rose in January. 

Japan's service and composite PMI suggest that the recovery of the world's third-largest economy from the contraction in Q3 is strengthening at the start of the new year, even though both were pared. The services PMI is at 52.3 rather than 52.4 of the flash estimates, but still up from 51.1 in December. The composite PMI is at 50.7, not 50.8, but in December it was below 50 for the second consecutive month. Next week, Japan reports December labor earnings, household spending, and trade figures. The data seems dated but may help economists fine-tune forecasts for Q4 GDP, which currently are a little below 2% at an annualized rate.

Ideas that the re-opening of China bodes well for Australia have thus far not been confirmed and the final service and composite PMI remain below the 50 boom/bust level (48.6 and 48.5, respectively). Still, the higher-than-expected Q4 22 and December CPI favors a 25 bp hike by the Reserve Bank of Australia when it meets on February 7. That would bring the cash target rate to 3.35%. The futures market sees a peak between 3.50% and 3.75%. The monetary policy statement at the end of the week will be scrutinized for confirmation. Australia's trade surplus widened in the four months through last November. However, in December, it may have narrowed a little.

The dollar fell to about JPY128.10 yesterday and is holding in a tight range between about JPY128.45 and JPY128.85. It is trading marginally lower for the fourth consecutive session. The greenback is off about 1% this week against the yen and is approaching the lower end of the recent range that extends to JPY127.25-50. Softer US rates make it difficult to for the greenback to stage much of a recovery. After making a new high yesterday near $0.7160, the Australian dollar sold off and was unable to recover in North America yesterday, contrary to our expectations. Follow-through selling took it to about $0.7045 today, a little above the mid-week low near $0.7035, though the low for the week was set the day before near $0.6985. Initial resistance now may be around $0.7070-80. Without a recovery above $0.7100 today, it would only be the fourth weekly decline since mid-October. The dollar gapped slightly higher against the Chinese yuan after gapping lower yesterday. This leaves a bullish one-day island, which would be bullish if it were a freely floating currency. The dollar is trading about 0.65% lower on the week. However, more broadly speaking, the dollar continues to churn in a CNY6.70-CNY6.80 range. The PBOC set the dollar's reference rate at CNY6.7382, a little below the CNY6.7399 median projection in the Bloomberg survey. 
 

Europe

The ECB is the most hawkish of the G7 central banks. Among the G10, only the Reserve Bank of New Zealand may be more aggressive on rates in the coming months. The ECB delivered the as-expected 50 bp hike yesterday and gave a strong signal that barring an unexpected development, another 50 bp increase will be delivered in March. The Bank of England hiked by 50 bp, defying forecasts from some banks of a quarter-point move. The BOE also saw the recession, which it sees beginning this quarter, to be shallower and shorter than it projected last November. The swaps market favors a 25 bp hike next month to finish the "normalization" cycle that began in December 2021. Next week, the eurozone reports December retail sales, which the collapse in the German figures (-5.3% vs. median forecast of -0.2% in Bloomberg's survey) warns of a poor number, and PPI. The highlight of the UK calendar comes at the end of next week with Q4 22 GDP. After contracting by 0.3% in Q3, economists expect a flat Q4.

The final service and composite PMI readings were a bit better than the flash reading for the eurozone suggested. The service PMI stands at 50.8 from 50.7 preliminary, but importantly, confirming the recovery back above 50. The same is true for the composite. It is at 50.3, up from the 50.2 initial estimates and 49.3 in December. It had been below 50 since June. It was the third monthly gain. German and France's preliminary readings inched higher. Spain was stronger than expected and the composite rose to 51.6 from 49.9. Italy's composite also regained the 50 boom/bust level, rising to 51.2 from 49.9. The UK's final service and composite PMI improved from the flash readings but at 48.7 and 48.5 both remain below 50.

The euro extended yesterday's reversal today and fell to almost $1.0880 before finding bids that took it to session highs in the European morning near $1.0935. The intraday momentum indicators are stretched, and the $1.0950 area may cap it. We suspect yesterday's high slightly above $1.1030 is important but the dip buying remains impressive. Sterling posted an outside down day yesterday by trading on both sides of Wednesday's range and settling below its low. Follow-through selling saw it slip fractionally through $1.2185, to record a two-and-a-half-week low. It found a strong bid in the European morning to lift it to $1.2265. Here too intraday momentum indicators are stretched. A sell-off in North America could see the five-day moving average move below the 20-day moving average for the first time in about three weeks.
 

America

Weekly initial jobless claims fell for the third consecutive week and at 183k last week are the lowest since last April. The Challenger job layoffs rose to their highest year-over-year level last month since July 2020, but this is only one-half of the churn. It is like looking at liabilities and ignoring assets. Between the ADP data and the weekly jobless claims, there is little doubt that the US economy is growing jobs on a net basis. Still, both point to a slowing net jobs growth. The monthly average in Q4 22 was a little shy of 250k a month. In Q3, the average was 366k. The median forecast in Bloomberg's survey is for a 190k increase last month, which if true, would be the least since a loss of jobs was recorded in December 2020. A wild card is revisions, which include updated population estimates that impact the household survey (and unemployment rate). Today, the BLS also adjusts the survey-based payroll figures with data from the state unemployment insurance. The revisions also incorporate more updated data through Q1 22, and the preliminary work by the Philadelphia Fed for Q2 22, which will not show up in the BLS data until next year suggests that job growth was less robust than initial data showed.

Hourly earnings are expected to have slowed. The year-over-year pace peaked last March at 5.6% and finished last year at 4.6%. A 0.3% increase last month would bring the year-over-year rate to 4.3%, matching the low since June 2021. This is still elevated from a policy point of view, but unit labor costs, which include productivity slowed to 1.1%, the smallest increase since Q1 21. The average in H2 22 was about 1.55% down dramatically from 7.6% in H1 22. Watch hours worked too. The average workweek fell to 34.3 hours in December. That is the shortest since Covid struck. Pre-Covid, it was also at 34.3 hours. Aggregate hours worked feed into an estimate of GDP. The US also sees the final services and composite PMI, but this may be old news compared with the service ISM, which last month's report seemed to have a greater market impact than the employment data itself. The median forecast in Bloomberg's survey looks for a recovery to 50.5 from 49.2. Note that the preliminary services PMI rose to 46.6 from 44.7.

The US has a light economic calendar next week but note Fed officials begin speaking again following the FOMC meeting, and the US Treasury's quarterly refunding involves the sale of $91 bln in notes and bonds. Only about $28.5 bln is new cash. Canada's January employment data will be reported at the end of next week. Canada grew about 160k full-time jobs in the last two months of 2022. Full-time jobs rose an average of 28.5k a month in the Jan-Oct period. Mexico's central bank meets on February 9, several hours after the release of January CPI. Price pressures may have edged up, but Banxico will likely match the Fed's quarter-point hike.

The US dollar is recovering from the CAD1.3260 low approached yesterday and traded to almost CAD1.3375 today. It approached the 20-day moving average (slightly below CAD1.3380) but has not closed above it since January 3. Initial support now is seen in the CAD1.3300-20 area. The greenback bounced smartly off the MXN18.50 level, a new low since Covid, and ran up to MXN18.7075. It has been in a narrow range so far today near yesterday's highs. A move above MXN18.73 could see MXN18.80-MXN18.85 today. This seems more like a question of positioning than a change in sentiment. 

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