Weekly Fundamentals WC 03/04/2023
The start of the month brings the new PMI survey results – including the global PMI release. The majority of the surveys are ‘Final’ so are not as impactful as the ‘Flash’ results – although they are slightly more accurate. In a period of uncertainty this enhanced accuracy may be needed and watched.
The Chinese PMI is one of the major releases.
Caixin Manufacturing PMI
China manufacturing is expected to remain in expansion, before the last release which beat expectations, this survey has suggested the economy has been in contraction since August. In the wake of the banking crisis just potentially creeping into this survey, it will be interesting to see if there is any impact in both the manufacturing and services surveys this week.
The Global PMI (JP Morgan Global PMI) print is this week (Tuesday) – the previous print showed a big increase from contraction into expansion. This was helped by the potential china reopening story – as this didn’t really materialise then there is a risk that this falls back into contraction.
Linked to the PMI is the US ISM Survey due on Monday. This is a survey of about 300 purchasing managers which asks respondents to rate the relative level of business conditions including employment, production, new orders, prices, supplier deliveries, and inventories. The trend for this over the past few months is worsening and contracting – With the banking ‘crisis’ sentiment potentially weighing on this, the contraction may accelerate which could lead to weakness in US equities.
Employment plays a part in the PMI surveys, but there are some big releases this week.
There was a freakishly high NFP in February which has been attributed to seasonal adjustments, but the labour market is something that the Fed are watching – previously they said that further strengthening would be one reason why they may favour additional hikes. Early clues from JOLTS and ADP may give clues. If the labour market gains strength this would increase the potential for US rate increases and with everyone unwinding long USD positions following the banking crisis, bringing the higher for longer narrative back by the strong labour market would potentially cause a large move in USD.
Chile Copper Production/Exports
Due to issues in the production chain, looking at the Chilean copper production my show false slowing due to mining issues in Chile, looking at how much Chile is exporting should give a better look at demand.
The chart shows that copper exports have been trending lower since a peak in January 2022. The export figures for March are due on Friday.
South Korean Exports
Released on Friday, this shows another contraction in YoY export amounts. This hints at reduced global demand for higher value tech – this could potentially signal a slowdown in demand due to the higher global rates. A slowdown here may also translate into reduced demand in the domestic markets too, which in turn may reduce inflation.
Commodities – All Market Close on Friday
Oil – Brent (OPEC uses Brent due to shipping costs)
Oil is in a bearish trend, currently pulling back into the Daily 55ema which lines up with a 61.8% fib and a weekly gap. This is also in the area of previous broken support. A reversal around 81.00.
Nat Gas (Weekly)
Natural gas is finding a base around the pre-invasion levels – There has been a significant drop from over $7 in December to approaching the $2 level.
Coal, like nat gas, has fallen a long way from its peak and has found support around this level. LAst week coal had its largest weekly increase in 6months.
Copper has been consolidating around the $4 area for over a month. It has broken back above $4 and seems to be finding support on the weekly 55ema. Potentially could push back higher but this is driven more by demand. $4.50 would be the next target.
Gold is back up at the all-time highs – with uncertainty around the banking issues is helping push gold higher. $2,000 is a major level to break, but gold up at this level will certainly support the miners.
Silver has also increased in price over the past 3 weeks but is coming to an area of resistance.
The world dairy price index has shown good correlation to the NZDUSD, however since 2021 correlation has reduced. Dairy is a major part of the NZD economy and having a high dairy price is one part (of a lot) of factors which could lend strength to the Kiwi.
The extent of the banking crisis, although not fully known yet, seems to have calmed somewhat.
The VIX spiked but has since returned back to normal levels.
The S&P, on the back of the measures to combat the banking issues, has seen a short rally but is coming to an area of resistance. Also helping the S&P is the idea that the Fed will bring forward rate cuts. If either of these change, this could see money flow out of the equities.
Hang Seng 500
The China reopening story late last year and early this year boosted the Hang Seng, but the rebound and impact has not really materialised yet. However the index has found support at the 19,000 level.
The dollar index is in an area of previous support.
This week sees a lot of important data being released in the US. First is the PMI numbers, this may indicate if the banking issues have worried businesses – we are looking for any signs of credit restriction as the Fed estimated that tightening credit would be worth up to 50bps of hikes. If credit doesn’t get tightened then those 50bps could come back to the hiking table.
Labour market strength is another thing which could cause the Fed to hike again. Powell previously said that labour market strength is concerning (although this was on the back of super hot NFP numbers.
Seeing strong expansion numbers in the PMI and strong employment numbers could see USD strength.
It appears to be a quiet week ahead for timely news in the Eurozone – there are the Final PMIs out which if they are significantly different – the last flash release showed growth in the eurozone which was unexpected. If this changes then it could impact the EUR.
Unlike the other central banks, the BoJ are looking for signs that inflation can sustainably reach the 2% inflation target – their ultra easy policy to stimulate the economy into growing has not really delivered on this and maybe Ueda will reverse this; but for the meantime it doesn’t look like that will happen.
On Tuesday morning Japanese CPI missed expectation (2.7% against 3% expected).
Some important comments out of Japan:
BoJ’s Kuroda: Sustainable Inflation Target Still Not Met Yet
– Premature To Debate Exit From Easy Policy As More Time Needed
Finance minister Goto:
“we are going to use budget reserves to pay for a stimulus package worth 2.2 trillion yen.”
It doesn’t look like there will be a change under Kuroda, but with Ueda’s first conference rapidly approaching and comments from government such as [Japanese PM Kishida:] “Hope BoJ Work With Govt, Conduct Policy Appropriately” – this may signal a shift and a steer from government to change tactics.
Something interesting with the Japanese economy which I did not realise is how wages are set in Japan. ‘Shunto’ is the yearly wage negotiations which set the wages in sectors. This year has seen one of the largest wage rises in recent years. Where other central banks are worried about the wagerice spiral, the Japanese may be able to stimulate inflation to their target by actively driving wages up. If this happens, the likelihood of stepping away from the ultra easy policy under Ueda increases.
Earnings and Spending are released on Friday, other than that, it’s not a busy week for the JPY.
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Speeches from Bailey opened last week – with comments like”the economy is stronger than expected but wages are weakening” – This will help inflation by dampening demand.
“Additional tightening required if inflation continues” – There is no news out this week that is central to this view.
Central Bank Rate meeting this week – this and the statement will dominate the agenda for the AUD this week. The consensus is that rates will be increased but they are very close to their peak. But then there is some disagreement about the future. With inflation still very high and the labour market very strong some parties suggest this is a foundation for further hikes. Other analysts are concerned about the significant slowdown in the economy and this should speed up rate cuts.
The statement supporting the decision will be key to understanding the RBA’s stance.
Similarly to the AUD, the NZD has a major rate announcement this week. Waiting until the supporting statement will be key here.
PMI and BOC Business outlook surveys are due this week. The last two PMIs have shown accelerating expansion within Canada.
Later in the week is trade balance and then the biggest release of the week which is the CAD employment.
The CAD employment numbers have consistently been beating expectations by a wide wide margin.
With big impact news out this week for the USD, the S&P at resistance and the DXY at support means that any sign of strengthening labour, lower unemployment could see the dollar gain strength. Especially if there is no negative banking sector news.
Oil, nat gas and coal all potentially showing signs of weakness, the CAD may be vulnerable if employment figures miss expectation.
AUD and NZD both have significant releases this week so I will be avoiding trading into those.