Weekly Outlook WC 10/04/2023

Global composite PMI rose to a 9 month high – this was mainly driven by services with manufacturing remaining the weaker of the two. The data showed that global PMI increased from 52.1 in February to 53.4 in March. However one of the leading sources of this increase was in the ‘financial services sector’. As there is a slight lag in the data, this will not include any data post SVB and banking issues.

Although the outlook showed that input prices (a leading indicator of inflation) were still increasing, they were lower than the February survey. Overall, services remain solid but it will be interesting to see the impact of the banking issues in the next survey release. Manufacturing output remains just about neutral. (https://www.pmi.spglobal.com/Public/Home/PressRelease/f6e97649cb0940f99469bc377171d1a3)

Employment Figures were released for CAD and several USD releases – employment, espcially in the US is a measure of global growth.

The Canadian figures showed another strong reading beating consensus by a wide margin – this was centred around services much more than the heavy industry – however with OPEC+ cutting their outputs this could give a boost to the oil and mining industry employment figures in the coming months, as well as a good boost to the CAD overall.

The chart shows the changes in employment by sector, this is from a very good article on the CAD labour market found here

In the US, the employment figures were a lot closer to consensus. JOLTS: this was the lowest level of job openings since July 7 2021 – less openings signal that figures in employment change will begin to drop. Cooling the labour market gives support to the pause argument from the Fed. Alongside the JOLT, the ADP figures showed a slowing in jobs in the US. NFP was also released which beat consensus which gives a bit of a mixed picture.

Copper exports are due to be released early next week, but with manufacturing showing weakness in the PMIs, I would expect this to show a lower print due to less demand.

China shows the same story regarding services vs manufacturing in China, with the Caixan surveys showing manufacturing is sitting at neutral (50) missing expectations (51.4) whereas services beat expectations (57.8 vs 55 expected). This signals slower global demand for Chinese exports. Next week will see the new loans and money supply in China, there was a push for stimulus to kickstart the Chinese economy which has yet to materialise. However, if there is a global slowdown and manufacturing/exports missing expectations then it’s unlikely that any amount of stimulus can increase global demand.

Oil was probably the biggest news last week, with OPEC+ announcing a reduction in outputs – this seems to be very much a geopolitical decision rather than an ‘attempt to keep price stability’ as OPEC announced. Whatever the reason, this caused oil prices to gap higher by around $5.

There are a few implications of this. First, the production cuts boost the price of oil. This is simple supply and demand. The increase in oil price will also help countries whose economies are tied into oil such as the CAD.

Another impact this may have is on inflation. With the cost of oil/fuel being a big factor in inflation, a new spike in oil prices could see inflation begin to rise again. There may be a lag of several weeks/months before higher oil prices translate into higher prices at the end point. If oil prices begin to trend higher, then the implications will be felt globally.

VIX: The spike seen in the VIX after the banking issues first hit has completely retraced and is back down under 20.

The Week Ahead: 

CAD rate announcement – Expectation is for the CAD to hold at 4.5% – It held the rate unchanged during March and although the strong jobs numbers and OPEC bring inflationary pressures, it is unlikely that the BoC will hike or cut, at least until there are signals in the hard data.

US releases CPI news – if inflation hits consensus, this would signal a speed up in inflation YoY, and give an indication that the Fed may hike at the next meeting. However it is these hikes in the battle to fight inflation that caused the issues in the banking sector so there will likely be some weighing up by the Fed what damage further hikes would do on the banks holdings. Also, the PPI is released a few days later, this again will give an indication on inflation in the US.

Retail sales, especially the non-core may be the first time we potentially see a slowdown in credit. Auto-sales, which are partly driven by credit availability, are already quite volatile but if it shows a big slow down the Fed’s prediction of credit tightening may be correct and is impacting the market. Lower sales = lower demand which should move into lower inflation in the coming months.

UK GDP is released this week. The last release showed that the UK unexpectedly avoided recession in 2022. But the associated releases in the UK production and output metrics showed a significant miss to the downside and into negative territory. This could weigh on the figures for this month.

Supporting Techincals

DXY – The DXY is currently sitting on a support level, a break below the 101 level would be significant and potentially signal a new trend.

S&P – sitting just under resistance at the 4155 area which could limit any further upside moves unless the underlying macros change which would likely be in the form of lower rates and a risk on shift. But the lower rates go against the Fed’s higher for longer guidance.

EXY – Due to the weighting of the USD in this basket, as the DXY heads toward support, the EXY will likely be hitting resistance, which is the case here. There are no major releases here next week, but with quite hawkish comments from the ECB, I would tentatively say there is a higher chance of the EXY breaking resistance than the DXY finding support. But any shift in sentiment towards higher US rates could change this.

 

Summary:

With CAD posting good hard data showing strength in their economy and then global news boosting oil prices, I am looking at CAD strength – but with the rate decision this week, it may be wise to hold off the CAD pairs.

As global demand falls and the manufacturing PMIs continue to disappoint, especially in China, this is quite bearish for the AUD – which was already looking pretty bearish after the RBA announced it was pausing the hikes. If the Aussie employment figures do not hit consensus then I would be looking to short the AUD due to lack of demand for its main exports (copper, iron, coal) and its cooling economy which could translate into rate cuts sooner.

The rest of the pairs are a bit of a mix and the technicals will likely take the lead until there is a clearer understanding on what is going on.