Overview: A pullback in US yields yesterday and the
Bank of Japan's stepped-up efforts to defend the Yield Curve Control policy
helped extend the yen's recovery. This spurred profit-taking on Japanese stocks, where the Nikkei had rallied around 11% over the past two weeks.
Hong Kong, China, and Taiwan led the regional advance. However, facing a
surge in inflation (Spain and German states) and a jump in European natural gas
prices (~9%) is snapping the Stoxx 600's three-day advance. US futures
are trading with a heavier bias. The US 10-year yield has edged a little higher to 2.40%, while the two-year that briefly traded above the 10-year yield
yesterday is off about four basis points. European benchmark yields are 3-6 bp
higher. The greenback is trading lower against all of the major currencies,
led by the yen's recovery. After poking above JPY125 to start the week,
the dollar fell to around JPY121.30 today before steadying. The Canadian
and Australian dollars are the laggards with minor gains. Among emerging
market currencies, the Turkish lira is the notable exception, and is posting a
modest decline. Gold appeared to post a bullish hammer pattern yesterday
but there has not been much follow-through and the yellow metal is in around a
$6 range on either side of $1922. May WTI is also in a narrow
range--mostly $105-$107 today. Copper and iron ore are trading firmer.
Wheat is still soft after losing around 8% over the past couple of
sessions.
Asia Pacific
The Bank of Japan stepped-up
its efforts to cap interest rates earlier today. It increased the amount of bonds it bought
at its regular scheduled operation. It offered to buy JPY600 bln (instead
of JPY450 bln) 3–5-year bond, and JPY725 bln (instead of JPY425 bln) of
5-10-year bonds, in addition to the pre-announced defense of the 0.25% cap on
the 10-year bond. It did not increase the amount of longer-term bonds.
Tomorrow, the BOJ is expected to announce next quarters asset purchase
plans.
Although BOJ Governor
Kuroda, who met with Prime Minister Kishida earlier today, does not seem
concerned about the yen's weakness, Finance Minister Suzuki seemed more
cautious. He
suggested continuing to check if the yen's weakness is harming the
economy. For example, the weaker yen is aggravating the surge in energy
prices, which Kishida was to cushion the blow to households and
businesses. If intervention is best understood as an escalation ladder,
as we suggest, then this might be seen as a low rung. Separately, Japan
reported that retail sales fell by 0.8% in February, which was more than twice
the decline expected by the median forecast in Bloomberg's survey. It
also drove the year-over-year rate below zero (-0.8%) for the first time since
last September.
Beijing has offered some
economic support for Shanghai, but the surge in Covid there, and lockdowns
there and elsewhere, are seeing economists slash growth forecast and lift
inflation projections. China's March PMI will be released tomorrow. A poor report
is expected, and the risks are on the downside. Thus far, though,
officials have used targeted measures and have not provided the overall economy with
new support.
The dollar did not trade for
long above JPY125 on Monday, but it seems to have completed something and the
greenback has traded down to JPY121.30 today. The (38.2%) retracement of
this month's rally is around JPY121.10 and the next retracement (50%) is a
little below JPY120. Month-end and fiscal-year end considerations may
also be at work but is often used as a catch-all narrative. Note that reports
suggested that Japanese retail accounts were beginning to buy yen toward the
end of last week. The Australian dollar bounced off four-day lows
slightly below $0.7460 yesterday and settled above $0.7500. It
is firm today but below this year's high set Monday near $0.7540. It
still feels like it is consolidating. The broad
US dollar weakness was evident against the Chinese yuan today. It is
trading nearly 0.25% lower, the most in about two weeks. The greenback is
trading at a nine-day low near the 20-day moving average, slightly below
CNY6.35. That is also around the middle of this month's range
(~CNY6.3080-CNY6.3860). The PBOC set the dollar's reference rate at
CNY6.3566. The median projection in Bloomberg's survey was
CNY6.3560.
Europe
The common narrative now is
that Putin initially anticipated a quick overwhelming victory over Ukraine and
as it has stalled, he is falling back to Plan B. Plan B is to secure the territorial claims
of the two separatist regions and later incorporate them into Russia. Russia is
curtailing the use of Hryvnia in the occupied areas and introducing the rouble.
This military objective has not been met. Turning Clausewitz on his head, the political
negotiations are a continuation of the war by other means. Putin has already
achieved a key strategic goal; Ukraine will foreswear joining NATO. One
cannot help but wonder that if Zelenskiy accepted this more than a month ago,
the course of events may have been different. The date for the next round of
negotiations has not been set. In a war, the losing side is more anxious
for negotiations by definition. After consolidating its forces and enlarging
the field of control of the separatist regions, Russia can then be in a
position to negotiate. This seems to be the key to the timeline that can
lead to a sustainable cease-fire. The cost of rebuilding Ukraine, which
had serious developmental challenges before the war, will fall to the EU, IMF,
World Bank, and UN.
A surge in eurozone
inflation was expected, but the Spanish and German state figures are over the
top. The market
(Bloomberg median forecast) was for a strong 1.3% monthly increase in Spain,
instead the national figure jumped 3%. The harmonized measure surged 3.9% this
month and lifted the year-over-year rate to 9.8% from 7.6% in February.
Details are sparse in the initial estimate, but the Economic Minister suggested that three-quarters of the rise was due to food and energy. Still, the
core rate rose by 0.4% on the month. Most of the German states reporting CPI
figures today showed a 2.6%-2.7% month-over-month increase in their CPI. The
national and harmonized figures are due shortly. There seems to be upside
risk to the expectations that the year-over-year rate of the harmonized
measures (HICP) will accelerate to 6.8% from 5.5% in February. The aggregate preliminary estimate for the euro area is due Friday.
The euro rallied yesterday
on the hopes that the Russian invasion of Ukraine may be near the endgame and
is extending the gains today amid further positioning squaring. We note that that the US premium
over Germany on two-year money has reversed sharply lower. It peaked on
Monday above 245 bp and is testing 230 bp today. The German two-year
yield is up around seven basis points today and is again trying to secure a
foothold above zero for the first time since 2014. Yesterday's attempt
was rebuffed. The surging inflation will strengthen the hawks’ hands,
many of whom see scope for two hikes this year that could bring the deposit
rate to zero. The euro is trading at its best level since March 1, which
was the last time it traded above $1.12. Its gains have now retraced a
little more than half of this month's decline (~$1.1150). The next
technical target is the $1.1200-$1.1230 area. Sterling is a laggard. It
is trading inside yesterday's range (~$1.3050-$1.3160). There may be scope for
additional gains, albeit marginal, as the intraday momentum indicators are
stretched. We suspect the $1.3180-$1.3200 cap may suffice
today.
America
The US 2-10-year yield curve
briefly inverted yesterday before finishing around three basis
points. It is
drawing a great deal of attention, but like any statistic it needs to be placed
in a context. Few believe the US is recession-bound. The median forecast
in Bloomberg's survey has the US economy growing 3.5% this year and 2.3% next
year. This is still above the Fed's estimates of the long-term growth
trend (1.6%-2.2%.). The most pessimistic forecasts in Bloomberg's survey do
have growth less than 1% this year or next. That said, there are those
who are warning of a recession, including ourselves, and the yield curve did
not enter the picture. Interest rates are not waiting for the Fed's
meetings to increase, as the 93 bp increase in the 2-year yield this month.
The halving of the deficit (as a percentage of GDP) this year still strikes us
as an under-appreciated drag. The rise in energy and food prices cuts the
purchasing power of households.
US inflation expectations
are not just a function of what the Fed is or is not doing. The correlation of the change in the
10-year breakeven (the difference between the yield of the inflation protected
security and the conventional note) and oil (the front-month light sweet crude
oil contact, WTI) over the past 30-days is nearly 0.65, the highest in seven
months. The 60-day correlation is almost 0.55, a five month-high. The price of
May WTI has risen by almost 25% ($20 a barrel) net since the US warned that a
Russian attack could happen at any moment on February 11. OPEC+ meets
tomorrow and there still seems little chance that it will boost
output. Most of OPEC's spare capacity is in Saudi Arabia (~1.6 mln
barrels a day) and the UAE (~1.3 mln barrels a day).
Today's ADP private sector
jobs estimate is the data highlight. We remind that it is not a particularly useful guide to the
BLS estimate for the particular month, though it gets the larger trend fairly
right. The median estimate for Friday's nonfarm payroll report has crept
up in recent days to stand at 490k. The US also reports another revision to Q4
21 GDP. It may be left at 7.0%. With Q1 22 nearly over, the market
will not be sensitive to Q4 data. The economy is expected to have slowed
to around 1.0%-1.5% this year from 7% last. The Fed's Barkin and George
speak today. While George is a voting member of the FOMC this year, Barkin,
like Harker and Bostic, who spoke yesterday, do not.
Mexico reports February
unemployment today. It
may have ticked up slightly. Canada's economic calendar is light, but there
is much talk about Ontario's imposition of a 20% tax on foreign purchases and real estate in the province. The "speculation levy" is meant
to slow the surge in house prices. Lastly, late yesterday Chile hiked its
overnight target rate 150 bp to 7.0%. This was a bit less than expected
and the central bank indicated that it may not need to make such big moves
going forward. Latam countries hiked rates early and many aggressively, and
ideas that the tightening cycles may end later this year appears to be
encouraging flows into local bond markets. That said, the swaps market
has about 300 bp of additional hikes over the next six months before a cut in
rates toward the end of the year or early 2023.
The US dollar is near the
recent trough against the Canadian dollar (~CAD1.2465-CAD1.2475). Below there is the year's low around
CAD1.2450. A break targets the CAD1.2400 area. However, the intraday
momentum indicators suggest the greenback may bounce first in early North
American activity and a retest of CAD1.2500-CAD1.2515 would not be
surprising. Meanwhile, the greenback is slipping to new lows for
the year against the Mexican peso (~MXN19.9120). The next
notable chart support is closer to MXN19.85, a shelf from last September. Here,
too, the intraday momentum indicators favor a US dollar bounce in the North
American morning.
Disclaimer
Reviewed by Marc Chandler
on
March 30, 2022
Rating:
