Overview: News
that Russia's Lavrov and America's Blinken will talk next week is seen as pushing
potential invasion of Ukraine further out. That sigh of relief is seeing
a mild risk-on response in the capital markets. It was not so clear in
the Asian session where most bourses were lower, save China and South Korea.
The Stoxx 600 has edged higher to pare this week's loss to less than 1%. US
futures are trading 0.5%-0.7% better. The US 10-year Treasury is steady
around 1.97%, practically flat on the week. European yields are softer on the day, and off 6 bp (Germany) to 13 bp (Italy) lower on the week. The
10-year JGB is little changed near 20 bp, warning that the BOJ's defense of its
Yield Curve Control strategy is not over. The yen and Swiss franc are
lower, but most of the major foreign currencies are rising against the dollar,
led by the dollar-bloc and Swedish krona. On the week, only the Norwegian
krone (~-0.7%) has been unable to appreciate against the greenback. Emerging
market currencies are having another good week. The JP Morgan Emerging
Market Currency Index is up for the fifth consecutive session, the longest
streak in a couple of months. If sustained, the 1% gain this week would be the
largest of the year. It has had only one losing week so far this
year. Gold is softer as it stalls around $1900 but is set to post its
third weekly gain. Crude prices are heavier. April WTI is off about 2.4% after dropping nearly 2% yesterday. Barring a dramatic
recovery like last week, it will post its first weekly loss of the year.
US and European natural gas prices are down around 1% today, but on the week,
US prices are around 12.5% higher and Europe's is off about 4% for its third
consecutive weekly decline. Iron ore pared the weekly loss today to around
11.5%, while Dr. Copper is firmer and is closing in on its third consecutive
weekly advance.
Asia Pacific
Japan's January CPI was
softer than expected. The year-over-year increase slowed to 0.5% from 0.8%. Excluding
fresh food and energy, deflation's grip strengthened, -1.1% from -0.7%, the
most in a decade. On the one hand, the news would seem to justify the
BOJ's reluctance to step away from its course. On the other, despite a large debt, deficit, and central bank balance sheet, Japan has been unable to
generate inflation. The policy response has not worked. Still, some
relief is likely starting in April as the falling in mobile phone charges drops
out of the 12-month comparison.
The flash PMI for Japan and
Australia are the chief data highlights next week. Recall that the composite reading
for both was below the 50 boom/bust level in January. In terms of policy,
the Reserve Bank of New Zealand is expected to continue its tightening
cycle. It had hiked in November and December last year. A 25 bp
hike will bring the cash rate to 1.0%. The swaps market has about 185 bp
of tightening discounted over the near 12-months. South Korea is expected
to stand pat after hiking last month.
The dollar initially fell to
about JPY114.80, a two-week low, before resurfacing above JPY115.00. The week's high was on Tuesday, just
shy of JPY115.90. With a US holiday on Monday, the market is unlikely to
take the greenback much higher against the yen. Look for the
JPY115.30-JPY115.40 to cap the upside. The Australian dollar has made new highs for the week near $0.7230. It has not closed above
$0.7200 in nearly a month. The intraday momentum indicators are looking
toppish. A pullback toward $0.7180 ahead of the weekend would not be
surprising. The dollar fell below CNY6.33 to approach the late
January low near CNY6.32. Again, the PBOC set the dollar's
reference rate softer than the market expected (CNY6.3343 vs. CNY6.3347). The yuan's strength in the face of narrowing rate differentials continues to
surprise many. Note that dollar has taken out that late January low
against the offshore yuan (CNH).
Europe
Some observers argued that
Russia would not invade Ukraine during the Olympics. We put more emphasis on talks--no attack
while talking. Next week's meeting between the top US and Russian
diplomats is now more widely understood to be a constructive development.
Among other things, to join NATO, a country needs secure borders. This
gives Russia a perverse incentive to make sure that Ukraine is denied
this. Some observers think that by drawing attention to the simmering
security problem in Eastern Europe and getting the US and Europe to make
concessions that they had not done before, Putin has achieved some success.
However, if his aggressiveness leads Sweden and/or Finland to join NATO, it
would seem to be a strategic defeat.
UK retail sales bounced back
in January after Omicron depressed December shopping. Retail sales rose 1.9%, about half
again as much as expected, and without petrol, sales rose 1.1%. They had fallen
a revised 4% and 3.9%, respectively, in December. It was the largest
increase since April. This week, the UK has reported an increase in
average earnings, another rise in inflation, and today's stronger than expected
retail sales. The market has a little more than a 40% chance of a 50 bp
hike next month and is discounting about 150 bp over the next 12 months.
The balance sheet may begin shrinking next month passively. A decision to
reduce the balance sheet more actively, by selling off holdings, is unlikely before the second half, but some doubt that it will materialize at
all.
The euro is in less than a
quarter-cent range today.
It appears sandwiched between two large option expirations today. There
is one set at $1.1350 for 1.5 bln euros and the other set is struck at $1.1375
for 1.3 bln euros. In addition, there are options for another 1.4 bln
euros at GBP0.8350, which it has straddled today. Sterling closed
above $1.36 yesterday for the first time in a month. It has not traded
below there today. However, there is no upside momentum to speak of, and
a break of GBP1.36 could spur some disappointed selling. Nearby support
is seen in the $1.3560-$1.3580 area.
America
With US inflation running
hotter longer than expected, the leading hawk at the Fed, Bullard, draws much
attention. The
question is has he won over his colleagues. And it does not look like he
has fully. While the recent comments and the FOMC minutes show Fed
officials willing to accelerate the pace of tightening, they do not seem quite
ready to follow his aggressive call for a 100 bp hike in the next three meetings and
an aggressive unwind of the balance sheet. The Fed funds futures market
is roughly split between 75 and 100 bp here in H1. The odds of a 50 bp
hike next month has fallen from about 80% on February 10 to a little less than
35%, the lowest in two weeks. Williams, Evans, and Waller speak
about the economy today, while Brainard will discuss central bank digital
currencies. Elsewhere, note that the Senate passed a stop-gap funding
bill that buys three more weeks to get the budget done.
The US reports existing home
sales today. A
small decline is expected. Yesterday, investors learned that housing starts
fell for the first time in four months. A recent survey found a record low
number (25%) of Americans think it is a good time to buy a house. Canada
reports December retail sales. A poor number is expected. However,
it is seen as a bit of an outlier, and like the US experienced, a recovery is
expected to have held last month. Meanwhile, the Canadian government is
stepping up its effort to squash the protests in Ottawa. It is invoking its
emergency powers to disrupt the protesters by getting the financial
institutions involved. The confrontation does not appear
over.
The Canadian dollar is coiling. The greenback remains within the range seen Wednesday (~CAD1.2665-CAD1.2730), which itself is within a range capped by CAD1.2800. It is straddling the CAD1.2700 area, where a $1.25 bln option expires today. The US dollar is little changed against the Mexican peso and is holding below the 200-day moving average (~MXN20.3430), which it settled below on Wednesday for the first time since September. The dollar has lost about 1% against the peso this week, its third consecutive weekly decline. Indeed, since the end of last November, the peso has only depreciated for two weeks, both at the end of last month. Still, a consolidative session is likely to persist. We suspect that with a long US holiday weekend ahead, and great geopolitical uncertainty, the appetite for risk may be kept in check in the North American session.
Disclaimer
Reviewed by Marc Chandler
on
February 18, 2022
Rating:
