Sunset Market Commentary

Markets

Today’s empty eco calendar left plenty of room to further digest the PBOC’s regime shift in CNY fixings. They turn more tolerant to a weaker currency given the cyclical and structural headwinds the economy is facing. USD/CNY trades at the highest level since end 2007 (7.34). USD/JPY (147.40) is not impressed by Finance Minister Suzuki’s verbal intervention warning. USD/JPY 150, the previous line in the sand for strong action, comes closer step by step. Yesterday evening’s Wall Street risk off spilt to Asia and initially to Europe as well despite a decent start. The EuroStoxx 50 intensively tested the key 4200 support area which is the downside of the sideways trading band in place since May. A break didn’t occur with technical rebound action starting mid-way European dealings. Core bonds made a similar intraday U-turn though it started way faster. The new increase in the oil price ($89.5/b to $90.5/b) comes a good way in helping to explain the move. Changes on the German and the US yield curve are confined to +- 1 bp. The EUR/USD decline takes a breather, but at 1.07 no more than that. The dollar holds the upper hand in the current market environment. EUR/GBP is going nowhere neither at 0.8575. A report on jobs by KPMG and REC was overlooked. It signaled reduced activity across the UK during August with permanent placements falling at a rapid pace which was the sharpest in over three years while temp billings slipped into decline for the first time since July 2020. Nevertheless, competition for specific skills and the strong inflationary environment drove further increases in starting pay. The report adds to the picture scheduled by official data with the unemployment rate gradually picking increasing while wage growth accelerates. The Bank of England will likely take it as a sign to proceed slowly from here with markets expecting a final (or second-to-last) 25 bps rate hike.

News & Views

The Food Price Index of the Food and Agriculture Organization of the United Nations was down 2.1% in August from July, reversing the rebound registered last month and is currently 24% below its peak reached in March 2022. The drop reflected declines in the price indices for dairy products, vegetable oils, meat and cereals, while the sugar price index increased moderately. The Cereal Price Index declined 0.7% M/M to be down 14.1% Y/Y. Wheat prices fell 3.8%. Maize prices fell for the seventh consecutive month, hitting their lowest value since September 2020. By contrast, the Rice Price Index in August rose by 9.8% M/M to reach a 15-year nominal high, reflecting trade disruptions registered in the aftermath of India’s July ban on rice exports. Vegetable oil prices declined 3.1% in August. The FAO Dairy Price Index (-4.0% M/M) registered the eighth consecutive monthly decline, to be 22.4% below its corresponding value last year. Meat prices also declined 4% M/M. The FAO Sugar Price Index rose 1.3% from July to be 34% higher compared to August last year. The increase in world sugar prices was mainly due to heightened concerns over the impact of the El Niño weather phenomenon on global production prospects. In India, below-average rains in August were detrimental to sugarcane crop development, while dry weather conditions in Thailand are expected to negatively affect the 2023/24 production. In Brazil, rains hampered field operations in some areas; however, the large crop currently being harvested limited the upward pressure on world sugar prices. The weakening of the Brazilian Real against the USD and lower ethanol prices also contributed to curbing the rise in world sugar prices. Still recent futures prices suggest upside price pressures might continue.

Canadian employment in August still rose at a solid/faster than expected pace. The economy added 39.9k jobs, double expectations, mainly driven by a rise in full time employment (32.2k). The unemployment rate remained unchanged at 5.5% (5.6% expected). Hourly wages for permanent employment unexpectedly accelerated from 5% to 5.2% while an easing to 4.7% was expected. At the same, the labour force continues to expand at a faster pace than employment. This reduces the employment rate from 62% to 61.9% and might slightly/gradually ease the tightness in the labour market. The Bank of Canada this week left its policy rate unchanged at 5% but showed ongoing concerns on persistent underlying inflation. Today’s wage data at least won’t help to ease this concern. The 2-yr CAD government bond yield rose 4 bps after the release. After touching the weakest level against the dollar since March yesterday; the loonie after the data strengthens from 1.3675 to test the 1.361 area.