Overview: Better
earnings from Amazon, Pinterest, and Snap lifted US tech after the dramatic
loss on Wall Street yesterday. Most Asia Pacific bourses rose, led by the
3.75% rally as Hong Kong re-opened. India and New Zealand were exceptions
and slipped lower. Real estate and industrials are dragging the Stoxx 600
in Europe lower (~-0.75%). This is sufficient to offset the week's earlier gains and threatens to extend the losing streak for a fifth consecutive week. US futures are firm. The
adjustment in rates continues. Japan's 10-year is approaching the upper
end of the range permitted under yield-curve control (0.25%). The fx sensitive
two-year German yield is up for the ninth consecutive session, during which
time it has risen by more than 35 bp. The US premium is narrowing for the
sixth session, and it is more than 30 bp tighter. The swaps market is
pricing in about 10 bp of tightening by the ECB around mid-year. The US
10-year yield is hovering around 1.82%, a four-basis point increase on the
week. The dollar is mostly firmer, paring this week's losses. The
dollar-bloc and Swiss franc are under-performers today. The euro extended
yesterday's gains but is holding below last month's high near $1.1485. The
South Korean won, and Russian rouble lead the emerging market complex
higher. The rouble has appreciated 2.5% this week, leaving it off about
1.6% for the year. The JP Morgan Emerging Market Currency Index is little
changed. It is up about 1% this week before local Latam currency markets
open. It would be the fourth weekly gain in the past five. A winter
storm around Texas spurs fears of a disruption to the US energy market and is helping lift oil and gas prices. Beyond the weather, low inventories, and
limited capacity to boost output are underpinning prices. A couple of large
producers announced plans to boost shale production in the US. March WTI
is now above $91.50, as it rises for the seventh consecutive week.
Gold is firm and is making new highs for the week near $1815. It
is up about 1.2% for the week. Copper has little changed on the day, and is up about 3.7% for the week, after falling 4.7% last week.
Asia Pacific
The Reserve Bank of
Australia's monetary policy statement did not impress the market. The RBA continues to imply that the
rise in prices in temporary. It sees core CPI poking above 3.0%, but then
returning to 2.75% through mid-2024. The wage price index is expected to
rise 2.75% this year and 3% over 2023. Governor Lowe said earlier this
week that a rate hike this year is a "plausible scenario." The
market thinks it is a certainty. The swaps market has the first hike
priced in around mid-year and about 120 bp of hikes over the next 12
months.
South Korea's January CPI
rose 0.6%, a bit more than expected. The year-over-year rate eased to 3.6% from 3.7%. The
median forecast (Bloomberg survey) expected a 3.4% rate. The core rate
rose to 3% from 2.7%, which was also a little higher than expected. The
central bank meets on February 24. It hiked rates twice last year (August
and November) and hiked again last month, lifting the seven-day repo rate to
1.25%. While a hike is possible, March seems like a more likely
timeframe.
Before China's mainland
markets re-open, the Caixin non-manufacturing and composite PMI will be
reported. Weaker
readings are expected. Travel during the holiday appears to have not been
particularly strong. When the mainland markets closed last week, the
dollar finished at almost CNH6.3680 against the offshore yuan. It is
currently changing hands around CNH6.3580. The dollar settled last week
around CNY6.3610 against the onshore yuan.
Elevated yields and firmer
stocks helped the dollar extend yesterday's gains. The greenback is straddling the
JPY115 level and has hardly moved more than 15 ticks away in either
direction. Last week's settlement was close to JPY115.25, and the dollar
finished last year slightly above JPY115.00. At the end of last week, we
thought the Australian dollar looked best from a risk-reward point of view and
did not expect the $0.7000 break to be sustained. The Aussie
rallied to almost $0.7170 yesterday but has stalled. It is near $0.7100,
where a A$750 mln option expires today. A break of the $0.7090 area
could see it set back toward $0.7045-$0.7065.
Europe
The hawkishness of the Bank
of England was not only in the 25 bp rate hike and the confirmation that all maturing issues will no longer simply be recycled into new
purchases. This
was already widely expected and telegraphed. However, four of the
nine members favor a 50 bp hike, something the BOE has done since getting its
independence in 1998. Governor Bailey cast the deciding vote.
Recall, that Mervyn King (BOE Governor 2003-2013) was out-voted twice during
his tenure. Bailey's call for British workers to hold off demands for
higher pay may be tone deaf. Between higher energy bills and tax
increases, real incomes are set to fall the most in a generation. The
Bank of England governor gets paid nearly GBP500k a year. It does not put
the Tories in a sympathetic light.
Separately, tensions with
the EU over the Northern Irish border are likely to rise after the Northern
Ireland's agricultural minister ordered his staff to stop inspections, which
would seem to violate the Brexit agreement. Meanwhile, a new front was opened against UK
Prime Minister Johnson. His chief of policy resigned over what she said
were "scurrilous" claims by the prime minister about Labour leader
Starmer. This was quickly followed by three other resignations (private
secretary, chief of staff, and communications director).
The ECB's initial statement
offered little news, but there were hawkish indications. It has to do with the assessment of
inflation and the absence of the commitment not to raise rates this year.
President Lagarde acknowledged that inflation was more elevated and for longer
than anticipated. She attributed the elevation partly to the energy
shock but recognized that the risks were tilted higher. In March, the ECB
staff will provide updated forecasts and there will be a more intense
discussion about inflation. It is likely to see inflation above the 2%
target.
The sequence that the ECB
laid out in December is still operational. The Pandemic Emergency Purchase
Program will end in March and the pace of the pre-Covid Asset Purchase Program
would double to 40 bln euro for the next six months. Some
"sources" were quoted on the newswires suggesting that APP could end in
Q3, while the plan outlined previously would have it fall back to 20 bln a
month. The swaps market shows a 10 bp hike is discounted for around mid-year,
which seems like a stretch. Next month's ECB meeting will see new staff
forecasts (inflation higher) and new guidance on bond purchases.
Although the German economy
contracted in Q4 21, it appears to have finished the quarter on a firm note and it
is carrying over into this year. That was reflected in the manufacturing and service
PMI. That was echoed in the construction PMI reported today at 54.4, the
fifth monthly increase and above the 50 boom/bust level for the first time since February 2020. December factory orders jumped 2.8% (after a revised
3.6% increase in November from 3.7% initially). This may spill over into
next week's industrial production report.
The re-pricing of the
outlook for ECB policy and European rates has been critical for the euro's
nearly 3% surge this week, which if sustained would be the largest weekly
advance since March 2020. The adjustment in rates began before the ECB's
meeting, and Lagarde pushed on an open door. We anticipated a new low in
the euro and thought last week's move to almost $1.1120 was a down payment
toward our $1.10 objective. However, the subsequent price action may
point to last week's low being significant. On the upside, the
$1.1485-$1.1500 offers the nearby cap, but the more significant hurdle may
be closer to $1.16. Sterling's upward momentum stalled near $1.3630
yesterday. It is trading inside yesterday's (~$1.3540-$1.3630)
range. Recall, sterling settled near $1.3590 at the end of last week. It
is up about 1.2% this week, which if sustained would be among the largest since
late 2020. Provided the $1.3540 area holds, we anticipate another run at
the highs.
America
Nearly everything is pointing to a weak US jobs report. The Census Bureau's Household Pulse Survey found that more than 14
mln Americans did not work for some part of the December 29 to January 10
period because either they had Covid, or were caring for someone with it, or taking
care of a child who did not go to school or daycare. Weekly initial jobs claims
spiked in the week that the establishment survey was conducted.
Employment metrics of the PMI and ISM surveys softened. ADP shocked with
a 301k estimated loss of private sector jobs last month. Of course, it is
Covid-related. Roughly half the jobs lost, according to ADP were in the
leisure and hospitality industry. Another 20% were accounted for by the
trade, transportation, and utility sectors. Taken together with education
and health services these areas account for about three-quarters of the job loss.
More broadly, the US economy
appears slow to crawl at the start of 2022. Fed Chair Powell acknowledged the
sharp slowdown in the press conference after last month's FOMC meeting.
As of February 1, the Atlanta Fed's GDP tracker sees 0.1% growth here in Q1.
The January composite PMI was not quite as weak as the flash estimate had it
(50.8) but at 51.1, it marks the single biggest decline since April 2020.
It is the lowest reading since July 2020. While the magnitude of the decline is
striking, the fact of the matter is that is has been trending lower since
peaking last May. Indeed, the only month it has not fallen since then is
October 2021. One of our key thematic points is that monetary and fiscal
policy are being tightened as the US economy slows. The doubling of the
price of oil over the past year is a potent headwind that preceded that past
three recessions. The maturation of the inventory cycle reduces a
tailwind. The market expects policy makers to look through any downside
surprise, and there will be another employment report before the FOMC meets in
mid-March. The market is pricing in about a 1-in-5 chance of a 50 bp
move, even though no Fed official has endorsed this course even the noted hawk
Bullard.
A poor Canadian employment
report should also be expected. However, Canada's labor market has healed more than the
US. Canada lost 1.95 mln full-time positions as the pandemic
struck. It has subsequently grown 2.19 mln full-time jobs. Also,
consider that participation rate is at 65.3% compared with the pre-pandemic
rate 65.5%. Bank of Canada Governor Macklem confirmed that the labor market has
healed. The swaps market has 160 bp in seven meetings. Macklem suggested
that the balance sheet could begin unwinding as rates rise. The
implication is for Q2 move.
The US dollar has forged a
shelf in the CAD1.2650-CAD1.2660 area in recent days. The top side has been capped around
CAD1.2720. The intraday momentum studies suggest a new high is possible
but may not prove sustainable. The greenback has also been
finding bids against the Mexican peso around MXN20.50. Here too, while
the US dollar may move higher initially in the North American session, we are
more inclined to fade it and look for a test to the MXN20.55 area. The
central bank meets next week (after the January CPI figures). Many are
looking for a 50 bp hike (like in December) even though the economy contracted
n Q4 for the second consecutive quarter. Meanwhile, the government is
floating the idea of another infrastructure initiative.
Disclaimer
Reviewed by Marc Chandler
on
February 04, 2022
Rating:
