Overview: The capital markets
are calmer today, but the re-pricing of interest rates continues. The
German 2-year yield is rising for the tenth consecutive session. The
yield is minus 23 bp. It was at minus 65 bp when the sell-off
began. Japan's 10-year yield reached its highest level since 2016 and no
response from the BOJ as the yield approaches the cap of the yield-curve
control policy. Equities are mixed. China's market re-opened with
solid gains; Hong Kong and Taiwan markets also rose. Japan, South
Korea, Australia, and India moved lower, among the regional markets. Europe's
Stoxx 600, which lost 3% in the past two sessions is slipping after opening higher. US futures are slightly softer. The US 10-year yield is hovering around
1.90%. Italy's 10-year yield is up nearly 13 bp, and Greece's benchmark yield has risen twice as much. Core
yields are 3-5 bp firmer. The greenback is mixed. Among the
majors, the Australian and Canadian dollars, alongside the yen are posting
small gains. The euro, sterling and Norwegian krona are off 0.25-0.50% lower. Most emerging market currencies are weaker The Russian rouble is
the chief exception. It snapped a five-week drop with a nearly 2.7% rise last
week. With today's gains its year-to-date loss is pared to about
1.1%. The JP Morgan Emerging Market Currency Index is slightly
softer after rising about 0.75% last week, the fourth weekly gain in the first
five weeks of the year. Turning to commodities, gold tested a seven-day
high around $1815. Crude is around $2 off last week's high, which culminated in a seven-week rally. After pushing to almost $93.20 last week, March WTI slipped below $91 today. Natural gas in Europe and the US is under
pressure. Iron ore eased 0.7% last week, but rose in the last four
sessions, and advanced 2.4% today and is at new six-month highs. Copper is
paring last week's 4% gain.
Asia Pacific
China's markets re-opened today after last
week's holiday. There were three notable developments.
First, the Caixin January service PMI fell to 51.4 from 53.1, which was not
quite as weak as expected. Recall that the Caixin manufacturing PMI had
fallen to 49.1 from 50.9. The net result is that the composite fell to
50.1, just above the 50 boom/bust level. Second, China's reserves fell
for the first time in four months to stand at $3.221 trillion. Even
though the other major reserves currencies and bonds fell, economists surveyed
by Bloomberg expected a small increase. The $28.5 bln decline can be
accounted for by valuation adjustments, it appears. Third, the PBOC set
the dollar's reference rate at CNY6.3580. The median projection
(Bloomberg survey) was CNY6.3328. The big miss likely reflects 1)
the difficulty the market had in its assessment after the long holiday and 2)
the PBOC making its desires known.
The rise in Japan's leading economic indicator
in December to 104.3 was higher than expected but seems dated. Japan
reintroduced quasi-emergency protocols late last month and have a cooling off
effect on the economy. Last week, the Markit January composite PMI slipped below 50 for the first time since last September. Meanwhile,
progress has been reported that will soon allow the US steel tariffs to be
partly lifted, while the aluminum tariffs look likely to remain in
place.
The dollar is trading quietly within the pre-weekend
range against the Japanese yen (~JPY114.80-JPY115.45). The market
appears to be finding support around JPY115.00 near midday in Europe. A
$570 mln option at JPY115.00 expires today. The trendline drawn off last
month's highs comes in today around JPY115.50. Australia's Q4
real retail sales were stronger than anticipated and this appears to have
helped the Australian dollar stabilize after falling nearly 1% before the
weekend that snapped a four-day advance. The Aussie is
straddling the $0.7100 level, where a A$730 mln option expires tomorrow.
Last week's high was near $0.7180 and a move above there lifts the technical
tone. We noted the much stronger dollar fix today in China, but
the greenback was confined to the pre-holiday range (~CNY6.3545-CNY6.3615). Many
participants expected more stimulus measures to support the economy, while
its lockdown Covid policy is working in the opposite direction, it would seem.
Europe
Given dramatic reaction to last week's ECB
meeting and Lagarde's reluctance to pledge no hikes this year, the focus
remains on the ECB. Lagarde speaks later today. A
leading hawk (Dutch central bank Governor Knot) spoke over the weekend in favor
of an early end to bond purchases and a hike in Q4 followed by another in early
2023. Finland's Rehn, a dove, suggested a hike "by
2023", Latvia's Kazaks pushed against a July hike, but seemed to think
an early end to QE is possible.
Investors already know that the German economy
contracted in Q4 22. This should take away the sting from today's
industrial output figures. Industrial production fell by 0.3% while the
median forecast in the Bloomberg survey called for a 0.5% increase. The
November series was revised to show a 0.3% gain rather than a 0.2%
decline. It is a quiet week for eurozone data, and today's small
gain in the Sentix investor survey (to 16.6 from 14.9) is it. Still,
later in the week the European Commission updates its economic
forecasts.
It is a bigger week for the UK, where the highlight is Q4 GDP and the December details. Politics threatens
to overshadow the data. Prime Minister Johnson is re-staffing after last
week's flurry of resignation. Reports suggest that 35-40 Tory members of
parliament have signed letters of no confidence, while 54 are needed trigger a
vote. Some ministers, including Sunak and Javid are seen
offering lukewarm support.
According to Bloomberg, the euro made a
marginal new high (1/100 of a cent) before the weekend but has come back
offered today. It has held above the pre-weekend low (slightly above
$1.1410) in the European morning. A break of $1.1400 could push more
momentum traders to the sidelines. There are options for about 960 mln euros
that expire there tomorrow. The US two-year premium was a little above
181 bp on January 27. Today it is near 153 bp. Sterling is
trading heavily in the European morning and is testing the $1.3500, where a
GBP410 mln option expires tomorrow. A convincing break sees sterling
test the $1.3450-$1.3460 area. The upside many be capped near $1.3560,
where a GBP1.04 bln option also expires tomorrow.
America
The implied yield of the December Fed Funds
futures contract jumped 13.5 bp to 2.37% after the stronger than expected jobs
growth. The perceived odds of a 50 bp hike next month doubled to
a little more than 40%. Many accept that the data were flattered by the
new seasonal adjustment factor and revised population estimate. It does
not jive with other readings of the labor market. The increase of 151k
leisure and hospitality jobs seems at odds with other signs of the cooling
effect from the virus. Still, the 709k upward revision in November and
December goes a long way recasting the sluggish job growth in late 2021.
In fact, the Q4 average now sits at 611k, the third consecutive quarterly
acceleration.
Last week, several Fed officials, including
St. Louis Fed's Bullard, the leading hawk, argued against the need for a 50 bp
move. Many do not appear to expect officials to push against market
expectations, but the next FOMC meeting is not until mid-March. There
will be another employment report. The dramatic flattening of the yield curve
is also a key issue for market participants and official remarks will be
closely monitored. Even if one recognizes that the yield curve is often
not driven by only one factor, and that the curve's predictive vs. contemporaneous
value is debatable, the flattening is a yellow flag. The 2-10-year curve
peaked near 160 bp at the end of Q1 21. It hovers now around 60 bp, the
flattest since Q4 20. Meanwhile, the 10-year breakeven (difference
between the yield of the inflation protected security and the convention
10-year note) peaked in the middle of last November near 272 bp and is now
slightly above 240 bp.
A flattening curve and a falling breakeven is
what one would expect with a credible central bank policy. However,
much further in these directions and a stronger case of a policy error could be
made. Many pundits have focused on the Fed being arguably behind the
inflation curve. But the more serious risk may be that to overcome the
pundits' criticism, it impales itself on the other horn of the policy
dilemma. Aggressive rate hikes in combination of tightening fiscal policy
and the energy shock (experienced by households like a tax) act as a brake on the
economy.
Given the state of emergency declared in Ottawa following the protest over the vaccine mandate over the weekend, the
Canadian dollar is faring fine. Prime Minister Trudeau heads up a
minority government and polls show he is being blamed for the rising
inflation. Canada's economic schedule is light this week with the main feature
being tomorrow's December trade report. Mexico reports January CPI
figures on Wednesday, the day before the central bank meets. Most
economists in Bloomberg's survey look for the new central bank governor to
start with a 50 bp rate hike (which would bring the overnight rate to
6%). The economy contracted slightly in Q3 and Q4 22. Still a
25 bp hike could disappoint, leading to pressure on the peso. Brazil
reports January IPCA inflation figures Wednesday and December retail sales the
following day.
The US dollar has chopped in a
CAD1.2650-CAD1.2800 range in recent days. After rising a
little more than 0.6% ahead of the weekend, matching its largest rise since
January 4, it is a bit softer today near CAD1.2730 near midday in Europe.
It looks likely to remain rangebound today. The broad risk environment
seems more important than crude oil prices. The greenback rose by
around the same amount against the Mexican peso before the weekend and is also
a little softer now. It is consolidating in a narrow range
around last week's close (~MXN20.68). Consolidation in the MXN20.50-MXN20.80
range seems the most likely near-term scenario. The dollar rose against
the Brazilian real ahead of the weekend as well. It settled near
BRL5.3260. A move above BRL5.3650 may confirm a low is in
place.
Disclaimer
Reviewed by Marc Chandler
on
February 07, 2022
Rating:
