The USD opened the North American trading session lower on the day, and continued that move in the first few hours of trading in the session. However, flash manufacturing and services PMI came in stronger than expected and a rotation to the upside was started. The manufacturing PMI came in at 50.3 vs 47.6 estimate and 47.9 last month. The Services PMI was even better at 52.9 vs 51.4 estimate and 51.4 last month. Recall, the regional indices including the Empire, Philadelphia and Richmond indices were weaker than expectations this month. As a result, the data was a surprise.
US yields started to move from negative on the day to positive. Looking at the US debt market, the:
- 2 year yield moved from a low of 4.287% to 4.388%. The current yield is at 4.381%, up 3.4 basis points
- 5-year yield moved from a low of 3.991% to 4.096%. The current yield is at 4.093% up 4.3 basis points.
- 10-year yield moved from a low of 4.086% to 4.186%. The current yield is at 4.182%, up 4.0 basis points.
- 30-year yield moved from a low of 4.328% to 4.421%. The current yield is at 4.411%, up 3.2 basis points.
Not helping the US yields was the auction of $61B of 5-year notes which was met with tepid demand with a +2.0 basis point tail (6-month avg of 0.1 bps), and bid to cover of 2.31X vs 2.50X average over 6 months. The international demand was way below the 6-month averages (60.9% vs 66.8% average). Dealers were forced to absorb 20.4% of the issue which was well above the 14.8% average.
IN other news, the Bank of Canada today announced its rate decision and as expected kept rates unchanged at 5.0%. The USDCAD moved higher after the report and is looking to close the day near the highs for the day (lower CAD) at 1.35244. The high price from last week extended to 1.35411 and is the next upside target, followed by the 100-day MA at 1.3568.
The rise marks the first time this year that the USD/CAD will close above 1.3500. The drop in the CAD is largely attributed to the BOC’s removal of explicit mentions of potential further rate hikes. However, as Adam Button points out, this explanation is somewhat contested as no further BOC hikes were anticipated, and the BOC’s overall message wasn’t perceived as dovish.
The analysis suggests that the BOC, particularly under Governor Macklem, might be lagging in its response to the rapidly slowing Canadian economy, which is burdened by high interest rates amidst a move toward the inflation target. The BOC’s focus on wages and core inflation, being lagging indicators, may result in delayed and potentially more drastic measures later, particularly if a recession becomes evident in Q1.
As Adam points out, the market is moving beyond concerns about inflation, and the BOC’s continued focus on this issue might lead to them falling behind in supporting economic growth. It is expected that the Canadian dollar will face further challenges, especially if the BOC needs to implement deeper rate cuts than the Federal Reserve. The upcoming spring housing market and its impact on prices will be critical in assessing the economic outlook.
Looking at the strongest to the weakest of the major currencies today, the CHF is the strongest and the CAD is the weakest. The USD is ending the day still lower on the day, but is well off its lows for the day.
The strongest to the weakest of the major currencies. Jan 24
The US stock run higher continued today with the Nasdaq melting up to intraday gain of over 200 points (up 203.13 points) before falling back lower after the worse than expected auction and the rise in yields. The S&P did close higher and in doing closed at yet another all-time high (4 new highs in a row). The Dow industrial average could not sustain momentum, however, and moved from a gain of 158.76 points to a loss of -99.06 points.
The final numbers are showing:
- Dow down -99.06 points or -0.26% at 37806.40
- S&P up 3.93 points or 0.08% at 4868.54
- Nasdaq up 55.96 points or 0.36% at 15481.91.
The small cap Russell 2000 closed lower by -14.40 points or -0.73% at 1961.86.
After the close, Tesla earnings disappointed and the shares are trading down -$5.53 or -2.66%. IBM beat, however and it’s shares are now up 5.21%. ServiceNow also reported. Its shares are down -1.31%.
Crude oil is trading up near $1 at $75.33 after trading to a high of $75.83. The PBOC cut the reserve requirements today opening up the spigots in an attempt to kickstart the economy after its extended Covid shutdown. If CHina can turn things around that is good news for crude oil and potentially bad news for inflation (time will tell).