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Overview:  Federal Reserve Chair push against speculation of a March rate cut as explicitly as could be imagined at yesterday's press conference lifted the dollar while weighing on stocks. US regional banks sold off sharply yesterday, and challenges emanating from US real estate adversely impacted Japan's Aozora Bank and Deutsche Bank quadrupled its loss provisions for such exposure. The greenback remains bid. The euro and Australian dollar have been sold through January's lows. The yen is the best performer among the G10 currencies despite the firmer yields. The US two- and 10-year yields are up about three basis points to about 4.24% and 3.95% respectively.

European benchmark yields are mostly 4-6 bp higher today. A dovish message from Sweden's Riksbank has limited the rise in the 10-year Swedish yield to about three basis points. Ahead of the outcome of the Bank of England meeting, the 10-year Gilts yield is up less than a single basis point. Asia Pacific equities were mixed. Japanese stocks were weaker, but China's CSI 300 eked out a small gain (less than 0.1%), while Taiwan and South Korean equities advanced. Europe's Stoxx 600 is threatening to snap a six-day advance. US index futures are trading with a firmer bias after yesterday's sharp losses. Gold is retreating after setting a two-week high yesterday above $2055. It has found support near $2030 in the past two sessions. March WTI set a new low for the week today near $75.45 near its 200-day moving average. It is recovering and it is near $76.70. Yesterday's high was slightly above $78.  
 

Asia Pacific

In contrast to the continued sub-50 reading of the official manufacturing PMI, China's Caixin manufacturing PMI at 50.8 remained above 50 for the third consecutive month. It will not deter expectations that Beijing provide more support for the economy after the Lunar New Year holiday which shuts Chinese markets starting February 9 and running through February 16.

Japan and Australia saw the final January manufacturing PMI reports. The final read was unchanged from the preliminary estimate putting Japan's manufacturing PMI at 48.0, a small rise from 47.9 in December. Last year, it was above 50 once (May). Despite a weak yen and easy monetary and fiscal policy, Japan's industrial sector is faltering. The 1.8% bounce in industrial output in December (after November's 0.9% decline) was less than economists expected. Moreover, the government warned of a sharp fall (6.2%) this month. Australia's final January manufacturing PMI (50.1confirmed the recovery back above 50 for the first time since last February which was signaled by the flash report (50.3). Still, with a weakening labor market and the unexpectedly large slump in December retail sales (-2.7% vs. median forecast in Bloomberg's survey for -1.7%), the market does not seem particularly impressed. Following the softer-than-expected Q4 23 CPI, the market now has a midyear cut fully discounted from slightly less than 50% at the end of last week. 

The sharp fall in US yields after the lower-than-expected Employment Cost Index and a sell-off in regional bank shares sent the greenback to about JPY146.15 yesterday. The dollar had recovered to near JPY146.90 as the FOMC statement hit the wires, but during Powell's press conference, the greenback slumped to a marginal new session low, though it still held above JPY146. It snapped back to about JPY147.45 by the end of the press conference but has held below JPY147.10 today, with support slightly below JPY146.50. The Australian dollar recovered from the six-session low seen in response to the soft CPI on Wednesday (~$0.6560). It rallied to almost $0.6620 during Powell's press conference before selling off to new session lows near $0.6550. It has begun February by taking out January's low (~ $0.6525). It is approaching the $0.6500 area that corresponds to the (61.8%) retracement of the rally seen in late 2023. It may offer support, and a break could see $0.6550. The dollar is firmer against the Chinese yuan after closing slightly lower over the past two sessions, and today's gains (CNY7.1825), put it higher on the week. The PBOC set the dollar's reference rate at CNY7.1049 (CNY7.1039 yesterday). The average in Bloomberg's survey was CNY7.1787 (CNY7.1729 yesterday).
 

Europe

The German, French, and Spanish CPI figures were released yesterday and stole the thunder from today's aggregate reading. The January eurozone CPI fell by 0.4% to 2.8% year-over-year (down from 2.9% at the end of last year). This gives a small taste of what it to come in the next three months. From February through April last year, eurozone CPI rose by an average of almost 0.8% a month. With conservative assumptions, as these fall out of the 12-month comparison, the eurozone CPI will likely slow below 2%. The core rate in January fell to 3.3%, the lowest since March 2022. It may fall toward 2.5% in the coming months. 

A similar inflation pattern is likely to unfold in the UK. From February through May last year, UK inflation rose by an average of slightly more than 0.9% a month. Those monthly prints will be replaced by considerably lower readings this year, which will see the year-over-year rate drop sharply toward 2% by midyear from 4% in December 2023. We suspect this will allow the Bank of England to cut rates before the market has currently discounted. The swaps market has the first cut fully discounted by midyear, and almost an 80% chance of a cut in May. The BOE meeting concludes shortly and there is little doubt it will stand pat with the base rate at 5.25%. While the market participants often bucket central bankers into hawks and doves, there is another category we think is helpful and that is activist. They are not hawks or doves but tend to support strong action in whatever direction the central bank is moving. A dovish dissent is possible.

Sweden's Riksbank has already met and announced its decision to keep this key rate steady at 4.0%. The central bank increased the pace of government bonds sales to SEK6.5 bln from SEK5 bln. At the same time, the Riksbank reserves hedging (involving the sales of dollars and euros), which supported the krona seems nearly complete. Last November, the central bank did not anticipate a rate cut until 2025. The swaps market anticipates the first rate cut around the middle of the year and the central bank moved closer to the market. It said that provided inflation continues to ease, the first rate cut could be delivered by the end of Q2. Underlying inflation fell to 2.3% in December from 3.6%. Yet, the risk seems to be on the upside here in Q1 24. Consider that in Q1 23, underlying inflation in Sweden was flat. That overstated the case as the underlying measure fell by 1.3% in January 2023. The dollar fell by almost 12% against the Swedish krona in November-December last year and recovered nearly half of that loss by mid-January. It broke below the 20-day moving average yesterday for the first time since January 5 but settled above it (~SEK10.39 vs SEK10.37). The dollar looks poised to test the cap carved near SEK10.50 in the second half of January. In the last two months of 2023, the euro fell by almost 7.1% against the krona and recouped a little more than half before falling out of favor. It slumped to three-week lows yesterday near SEK11.20 but is firmer today near SEK11.28. Still, the five-day moving average has fallen below the 20-day moving average for the first time in nearly a month. 

The euro initially slipped below $1.0820 after the FOMC statement and recovered to almost $1.0865. The upticks were quickly reversed the euro tumbled briefly below $1.08. It recovered but sellers reemerged in front of $1.0820 and set the euro to marginal new lows. It fell to $1.0780, a new low for the year in late Asia Pacific/early European turnover. It is struggling to re-establish a foothold above $1.08. We have suggested from a technical perspective, there may be potential toward $1.0765, and possibly $1.0725. Sterling traded in about a half-cent range from the middle of its two-cent range, yesterday. Session highs were recorded in the North American morning near $1.2750 and the low, shortly after Powell's press conference to nearly $1.2655. Tuesday's low was near $1.2640, and sterling has traded closer to $1.2625 today. If participants continue to color inside the lines, so to speak, and play the range, then the risk-reward shifts against new shorts below there. 
 

America

US yields fell after the ADP private sector jobs estimate was softer than expected (107k vs. 150k median forecast in Bloomberg's survey), but more importantly, the US Treasury confirmed that it did not anticipate additional increases in its quarterly issuance of long-term debt after next week's sales. The $121 bln in three-, 10- and 30-year Treasuries were in line with expectations with a $2 bln in the two shorter-dated securities and a $1 bln increase in the 30-year Treasury. The size of other coupon offers, including floating rate notes also will be increased. Treasury also indicated it will go forward with the buyback program, and the details will be announced at the May refunding announcement. The buyback decision seems mostly driven by concerns about liquidity in off-the-run issues.

Separately, US regional banks were dragged lower yesterday when New York Community Bancorp, which had acquired Signature Bank last year, reported a surprise loss related to the erosion of credit quality and slashed its dividend (to $0.05 from $0.17). The loan loss provision jumped to $552 mln, more than 10 times more than expected. The bank attributed the bulk of the $185 mln net charge-offs to two loans (a coop loan shifted to held-for-sales status and an office loan that went non-accrual. The KBW regional bank index closed down 6%, its biggest loss since last March. Ironically, the FOMC statement dropped the December reference to "The US banking system is sound and resilient."  Separately, though not completely unrelated, Japan's Aozora Bank shares dropped 20% today after warning of losses related to US commercial real estate, and Deutsche Bank increased its loss provisions for US real estate by four-fold (to 123 mln euros) from a year ago. 

The FOMC statement and press conference injected some volatility throughout the capital markets. Yet in many ways, the Fed did not say anything surprising. It was reluctant to surrender its flexibility but the takeaway for the market was a further reduction in the odds of a March rate. Fed Chair Powell was as explicit about this as possible: He said given today's meeting, "I don't think it's likely the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that. But that's to be seen." At the end of last year, the market had a quarter-point cut in March fully discounted. It has been straddling the 50% area for the past couple of weeks. It fell to about 37% yesterday at the close, the least since last November. At the same time amount of cuts this year that the derivatives market is discounting stands near 144 bp from 132 bp at Tuesday's close. Late last year, the market had 160 bp of cuts discounted. 

Canada's November GDP was stronger than expected, increasing by 0.2%. It was the first increase in the monthly GDP estimate since last May. This helped to lift the Canadian dollar to two-and-a-half-week highs. However, the risk-off mood, signaled by the sharp losses in US equities saw the greenback recover from CAD1.3360 to around CAD1.3445. Follow-through activity lifted the US dollar to CAD1.3465 today. Nearby resistance is seen in the CAD1.3470-80 area. Falling US rates may have lent support to most emerging market currencies, but not the Mexican peso. After initially rising to its best level in a little more than a week, the peso turned lower. The US dollar recovered from a dip below MXN17.10 to set a new session high near MXN17.2265. This may serve as initial support. Today, the greenback has risen to almost MXN17.28. The 200-day moving average is around MXN17.33, and the dollar has not closed above it since mid-November. Separately, as widely expected three other Latam countries continued the rate-cutting cycle that began last year. Brazil's Selic rate was cut by 50 bp to 11.25% (fifth 50 bp cut in the cycle). Chile delivered a 100 bp cut to 7.25%. It is also the fifth cut in the cycle (for a cumulative total of 400 bp). Colombia delivered a 25 bp cut to 12.75%. It was the second cut, and some expected a 50 bp.

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