Overview: The higher-than-expected US CPI
coupled with strong comments from the Federal Reserve's leading hawk saw a
surge in interest rates, knocking stocks and lifting the dollar. Japanese
markets were closed today for a national holiday, but nearly all the other
equity markets in the MSCI Asia Pacific Index fell to pare this week's gains.
Europe's Stoxx 600's 0.8% loss is shaving this week's gain to about 1.35%. US futures
are modestly lower. Australian and New Zealand benchmark yields rose 10
bp and 8 bp respectively to play catch-up. The ECB's Lagarde and Lane
argued against "hasty" action, helping to take some pressure off
European bonds. However, the widening of the core-periphery spreads warns
that it may be temporary. The US 10-year yield is a little softer, hovering around 2%. The two-year soared by 21 bp and is firm today slightly below
1.60%. The US dollar is trading higher against most currencies. The
Australian dollar is the weakest of the majors, off about 0.5%, as the central
bank governor continues to push against market expectations for the beginning
of the tightening cycle. On the week, however, the Aussie, along with the
New Zealand and Canadian dollars are holding on to modest gains. The South African rand and Mexican peso are resisting
the pressure that is weighing on emerging market currencies. This week
five of the eight strongest emerging market currencies are in Latam. JP
Morgan's Emerging Market Currency Index is posting a gain of around 0.8% this
week, its fifth gain in the past eight weeks. As widely expected, the
central bank of Russia delivered a 100 bp hike (bringing the key rate to
9.5%). Gold is recovering from a test on $1820 and is up about 1% on the
week. Crude oil is firm for a third session, but not enough to prevent
March WTI from posting its first weekly loss in nearly two months. US
natural gas prices are flat a little below $4 and is holding on to its biggest
weekly losses since mid-December. European natgas is consolidating the
week's 10.6% decline after falling nearly 12% the previous week. Iron ore
fell 2% today and is up about 5% on the week. Copper is off around 2.5% to
leave the red metal up 1.3% for the week after a 4.1% rise last week.
Asia Pacific
Governor Lowe of the Reserve
Bank of Australia continues to resist market pressure that sees an early start
to the tightening cycle. He argued that it is too early to conclude that inflation is
sustainably in the 2%-3% target. Without formally accepting the average
inflation target like the Federal Reserve did, Lowe argued that after a
sustained undershoot, he is willing to tolerate the near-term overshoot.
The risk, he says, of hiking too early would deal a blow to the labor
market. On February 17, Australia reports January employment figures and economists
look for a flattish report.
Next week, Japan reports Q4
GDP and the January CPI figures. The world's third-largest economy likely bounced back
strongly after the Q3 Covid-induced contraction. However, new
quasi-emergency measures that went into effect last month risks another
contraction in Q1. The GDP deflator is expected to have fallen by about
1.3%, the third consecutive quarter of a more than 1% deflation.
Similarly, the CPI report should show less price pressures, and more deflation
when fresh food and energy prices are excluded. China reports
January CPI and PPI. Both are expected to have softened.
Yesterday, the dollar tested
last month's multiyear high against the Japanese yen near JPY116.35. It backed off to find support near
JPY115.75, where a $750 option expires today. The greenback met
resistance in Asia, where Tokyo markets were closed, around JPY116.20.
The Australian dollar reversed lower after approaching $0.7250
yesterday and the retreat has continued today. The Aussie
tested $0.7100 today, and support below there is seen around $0.7075. The
greenback continues to trade quietly against the Chinese yuan. It is
a little firmer but below CNY6.36 after reaching CNY6.3660 earlier. It is
virtually flat on the week. The PBOC set the dollar's reference rate at
CNY6.3681, slightly above the market projection (Bloomberg survey) for
CNY6.3674.
Europe
ECB President Lagarde and
Chief Economist Lane pushed back against calls for more imminent action to
combat price pressures. Some press reports have been playing up the "loss of
confidence" in the ECB's forecasts. Leave aside that the EC's
updated forecasts also see inflation falling back below 2%. The issue is
who takes their case to the press? Those that are coming on top of the
internal debate have no need. The hawks that go to the media lap
it up as if it were gospel instead of part of the internecine struggle. That
said, Lagarde and Lane have not been particularly persuasive and the swaps
market now prices in about 65 bp in tightening over the next 12 months.
The UK economy grew by 1.0%
quarter-over-quarter in Q4, the same as Q3 after the revision (from
1.1%). Consumption
slowed from 2.9% in Q3 to 1.2% in Q4. Government spending, which was flat
in Q3, increased by 1.9% in Q4. Fixed capital formation rose by 2.2%,
well above expectations after falling by a revised 0.2% (from -0.9%) in
Q3. The UK also reported that the expected contraction in December was
less than feared, hobbled by the Omicron variant. Output fell by 0.2% not
the 0.5% of the median forecast in the Bloomberg survey, helped by stronger
than expected industrial production, construction, and a smaller than expected
decline in services. A week ago, the market had about a 45% chance of a
50 bp hike in March and now it is about 80%.
The euro stopped 5/100 of a
cent below the $1.15 level yesterday, where about 3.25 bln euros in options
expire today. The
single currency made a new low for the week near $1.1370. Nearby support is
seen closer to $1.1350, and a break could spur a test on the $1.13 area early
next week. The US 2-year premium is widening for the sixth
consecutive session, and at 190 bp, it is the most since February 2020.
At the end of 2019, it was near 225 bp. Sterling made a new high for the
month yesterday near $1.3645 before surrendering the gains in the face of the
broader greenback recovery. It found support today near the lower end of
its recent range around $1.35. Nearby resistance is seen in front of
$1.3580. Sterling settled at $1.3530 last week.
America
The higher-than-expected US
CPI panicked market participants and drove the 2-year yield up a whopping 21 bp
and the implied yield of December up 26.5 bp. One inflation report that was 0.2% above
the median in the Bloomberg poll is worth another 25 bp rate hike this
year? The Fed's leading hawk, St. Louis Fed's Bullard talked about a 100 bp
increase in rates here in H1, which implies a 50 bp move. However, it
seemed like professional courtesy more than conviction deterred him from
calling for a 50 bp at next month's meeting. Two other Fed officials that
spoke, Barkin and Daly, seemed more measured in their remarks. That said,
there is a perception that if the market has 50 bp priced in (~86%), it makes
it more likely in and of itself for the Fed to deliver it. It offers the
Fed a free option, as it were. Yet, it makes it more difficult for the
Fed to get ahead of expectations. At the same time, it may reinforce
perceptions that the Fed is often a slave to the markets.
The vaccine-mandate protest continues to roil Canada. The disruption is estimated to be costing Canada around
CAD350 mln a day. There is some fear that a similar protest may be coming
to Washington DC in time for President Biden's State of the Union speech on
March 1, even though the judiciary has circumscribed the vaccine mandate on the
federal level. However, the vaccine mandate may spur demonstrations in
France as early as this weekend.
The new governor of Banxico
led the central bank in delivering the second 50 bp hike in a row. It was widely expected, especially
after the firm CPI reading above 7%. The swaps market has another 100 bp
discounted over the next three months and 260 bp over the next 12 months.
The next meeting is March 24th. Peru also delivered a 50 bp hike
yesterday. It has raised its target rate by 50 bp for six consecutive
meetings now and it stands at 3.5%. Lima's CPI rose by almost 5.7% last
month after 6.4% in December.
The US dollar recorded an
outside up day against the Canadian dollar by trading on both sides of
Wednesday's range and closing above Wednesday’s high. The greenback briefly took out the
shelf in the CAD1.2650-CAD1.2660 area where about $4.9 bln in options expire
today, before rallying to about CAD1.2730. Follow-through buying lifted
the US dollar to almost CAD1.2755 earlier today. The CAD1.28 area has
held back the greenback a couple of times in the past few weeks. The
risk off move yesterday saw the US dollar bounce from the 200-day moving average
against the Mexican peso (~MXN20.35) to almost MXN20.59. Some
follow-through buying lifted it to around MXN20.64 today before backing off and
it looks set to fall back below MXN20.50 today. Initial support is seen
around MXN20.44.
Disclaimer
Reviewed by Marc Chandler
on
February 11, 2022
Rating:
