Overview: If equities had appeared to drive the
other capital markets recently, the debt market took the bull whip
yesterday. The surge in US rates saw equities reverse lower and the
dollar rally. The MSCI Asia Pacific Index was sold to its lowest level
since late 2020, led by more than 3% losses in the Nikkei and Kospi.
Foreign investors have been notable sellers of South Korean and Taiwanese
shares in recent weeks. Europe’s Stoxx 600 is flat near midday in
Europe. The finance, energy, and utility sectors are most resilient. US futures
are trading choppily but are now little changed. The US
10-year yield is around three basis points lower around 1.83%, but globally, bond markets have sold
off in the aftermath of sharp losses seen following the FOMC meeting.
Yields in Europe have recovered from their worst, and Australia/New Zealand yields surged 6-8 bp. Japan's
10-year yield closed near 0.16%, its highest level since last February when it
reached 0.18%. The US dollar gains are being extended. The Canadian
dollar and Norwegian krone are the most resilient, perhaps on anticipated rate
moves. Yet, New Zealand, which reported a jump in Q4 CPI earlier today
and solidified expectations for its third hike next month, has seen the Kiwi
sink the most today among the majors, and it is off more than 0.5% to its lowest
level since October 2020. Among the emerging markets complex, only a few
currencies are higher, led by the Russian rouble's bounce and a small gain in
the South African rand ahead of the central bank decision. It is expected
to deliver the second hike in the cycle that began last November. Of
note, the 0.67% decline in the Chinese yuan was the biggest loss in a little
over a year and snapped a six-day advance. Gold had pushed above $1850 on
Tuesday and slipped below $1810 today. The 200-day moving average and
trendline off of the mid-December and mid-January lows comes in today near
$1805. March WTI is little changed, consolidating after reaching a
two-year high yesterday just shy of $88. Natural gas is higher for the
fifth session in the US, while European gas is recouping most of yesterday's
3.8% decline. Iron ore edged higher, while copper is off 1%.
Asia Pacific
China's December industrial
profits rose by 4.2% year-over-year, half the November pace and the weakest
since the contraction in April 2020. There are reports that plans to liquidate Evergrande’s
assets to pay its liabilities are being considered. Separately, EC
Commissioner Dombrovskis indicated that the EU would take China to the WTO over
its coercive actions against Lithuania over its decision about the use of
Taiwan in the de facto embassy.
While JGB yields spiked
higher, the signal from the BOJ minutes from the meeting earlier this month,
showed a determination to push back against speculation about policy
normalization. In
his press conference Governor Kuroda dismissed such speculation with the strong
words "absolutely not." Still, the real challenge will come in April,
when the sharp decline in mobile phone fees begins dropping out of the 12-month
comparison.
New Zealand's Q4 CPI rose to
5.9% year-over-year as the quarterly rate increased by 1.4%, slightly more than
expected. It is the
fastest pace in more than 30 years. The RBNZ hiked rates twice last year
and meets next on February 23. The market has been anticipating another
hike then, but the risk of a 50 bp move has grown and now is a little more than
a 25% chance. The Reserve Bank of Australia meets next week and is
expected to recognize the possibility of a rate hike this year, which so far it
has resisted. It will also likely confirm the end of its bond
purchases.
Rising US rates are allowing
the dollar to put together its first back-to-back gain against the yen since
the first couple sessions of trading this year. Recall that amid the equity market,
the dollar had fallen about JPY113.50 at Monday's low. Today, it has
resurfaced above JPY115.00 for the first time in eight sessions. The JPY115.25 area corresponds to the (61.8%) retracement objective of
the decline since the multiyear high was recorded on January 4 near JPY116.35.
There is an option for almost $775 mln at JPY115.50 that rolls off today.
The Australian dollar was turned back from $0.7200 earlier Monday and
yesterday and briefly dipped below $0.7065 today. A move above
$0.7120 is needed to stabilize the technical tone. The $0.7000 area is
very important from a technical perspective. The jump in US rates
finally helped the PBOC stabilize the yuan. The dollar's
gains are the first since January 18. The roughly 0.67% gain today is
nearly as large as the cumulative gain the greenback has recorded in three
other times it has risen this year. Note that foreign investors were
reportedly large sellers of Chinese shares (~$2.3 bln, which would be the most
since July 2020). The PBOC set the dollar's reference rate at CNY6.3382
compared with expectations (Bloomberg median) of CNY6.3364.
Europe
The light economic calendar
in Europe keeps the focus on politics. In the UK, Gray's report is expected today or
tomorrow, but there has been a steady stream of leaks that would seem to
confirm the kind of petty disregard for rules that seemed part of Prime
Minister Johnson's persona. The pattern hardly surprises close followers
of UK politics. Johnson's enemies smell blood. The latest
development is the accusation by MPs that the government leaked market
sensitive information about the new national minimum wage increase a few days
before last October's budget. News that the London police would investigate
"partygate" sounded like a blow to Johnson, but while that
investigation goes on, it buys Johnson time. The May local elections are
looming.
Italy's selection process
for the next president enters a new phase today. Starting with today's vote, a
simple majority is needed. An outcome is possible today or tomorrow.
Draghi is still seen as the front-runner. Meanwhile, concern about the
political fallout has seen the Italian premium over Germany (10-year rates)
rise to almost 140 bp, the highest since late October 2020. The premium is easing by around three basis points near midday in Europe.
News that the "Normandy
Format" that includes Russia, Germany, France, and Ukraine will meet in
two weeks in Berlin is a constructive development. The idea is that as long as Russia
is engaged in talks, it will not invade Ukraine. Note the perverse
incentive too. NATO membership and German weapon sales to Ukraine are not
technically possible if it is in conflict. Doesn't that incentivize Russia to
do what it is doing? For its part, the Ukraine government has withdrawn a
bill that involved governing the separatist areas, which Moscow argued violated
previous commitment.
The euro, which approached
$1.1485 on January 14, returned to within a few ticks of last year's low set
last November near $1.1185. There is an option for almost 700 mln euros at $1.1150 that
expires today. A convincing break of that area would bring our $1.10 call
into view. The $1.1220 area may cap upticks now. Sterling
is also taking another leg lower. It has approached $1.34,
which corresponds to the (61.8%) retracement of the rally from the December 20
low near $1.3175 to the mid-January high of almost $1.3750. A break of
the $1.3390 area could signal another quick cent decline. Still, the BOE meets
next week and a hike is nearly fully discounted (~97%).
America
The market drama was not in
reaction to the Fed's statement. It was largely as expected. It wasn't until Powell's
press conference that risk appetites soured in a big way. The takeaway by
the great discounting mechanism was the Chair was sending a hawkish
message. He did not rule out rate hikes at all the meetings or a larger
move. He did not use code words, such as describing the evolving
adjustment as gradual. In effect, Powell has rightfully secured the
maximum amount of flexibility to adjust policy as the evolving data
requires. Also, the Fed's starting point is that growth is above trend, the labor market is strong, and inflation well above the target. Powell also
played down the impact of the coming rate hikes on the labor market. In
the context of noting the effectiveness of the Fed's communication, Powell
noted approvingly of the evolution of market expectations toward four hikes
even though the median dot for three.
There is a flurry of
economic reports at the same time in the US today, but the one that will get
the attention is the first look at Q4 GDP. The risk is on the upside of most
survey results after the jump in December inventories was reported yesterday.
Retail inventories surged by 4.4%, the most in at least 20 years, almost
three-times higher than expected. Wholesale inventories rose 2.1% against
expectations for a 1.2% gain and the November increase rose to 1.7% from
1.4%. To our list of headwinds to the US economy, which includes, the
tightening of monetary and fiscal policy, the doubling of the price of oil,
savings being spent by lower and middle-income earners, we need to add the maturation of the inventory cycle in some industries, even if not durable
goods. Of course, the record large goods deficit, also reported
yesterday, is a drag on GDP. Based on recent data, the Atlanta Fed's
GDPNow increased to 6.5% from 5.1%.
The Bank of Canada held
steady yesterday and the main reason seems to be caution over Covid. Perhaps, because the market was
split on it, that more messaging would be helpful. By saying the output
gap had closed, the central bank signaled a hike at the March 2nd meeting. Although
the market was divided and the Canadian dollar initially weakened, when all was
said and done, expectations for the rate change in the swaps market over the
next year was virtually unchanged between 180-185 bp. The greenback made
its highs for the session in the dramatic risk-off move during Powell's press
conference.
After the fireworks, and
just as the US cash equity market closed, the Chilean central bank surprised
with a 150 bp hike in the overnight target rate to 5.50%. Most expected a 125 bp move, partly
because that it was the size of the central bank's last two hikes last October
and December. Growth last year was around 12%. Pass-through from the peso's
large depreciation last year plus the higher import prices. Chilean inflation
rose 7.2% year-over-year in December. Interestingly, Governor Marcel who was
named by President-elect Boric as the next finance minister, refrained from
voting at the meeting, The decision was made by the other four board
members.
The head and shoulders pattern that we had been tracking since before the neckline near CAD1.26 was violated and has been negated. The greenback's loss was halted last week near CAD1.2450, well short of the CAD1.2250 objective. Earlier today a move above CAD1.2710 was its highest level since January 7. It has now retraced a little more than half of its losses from the December 20 high (~CAD1.2965). The next retracement (61.8%) is around CAD1.2770. Initial support is seen by CAD1.2650. A break, and ideally a close below it would likely coincide with a recovery in equities and would help improve the Canadian dollar's technical tone. Meanwhile, the greenback rose to new highs for the month against the Mexican peso, poking briefly above MXN20.81. It has been sold back off after approaching the (50%) retracement of the slide since mid-December's high (~MXN21.3640). Support is seen in the MXN20.55-MXN20.60 area.
Disclaimer
Reviewed by Marc Chandler
on
January 27, 2022
Rating:
