Overview: Chinese officials offered reassuring
words and sparked a dramatic rally of equities and risk appetites more broadly. At
the same time yields are surging as the markets anticipate the Fed to signal a
more aggressive tightening course as it upgrades its inflation forecasts.
China's CSI 300 rallied 4.3%, while the Hang Seng soared 9% and an index that
tracks mainland shares listed in HK jumped 12.5%. Most equity markets in
the region rose 1-2%. Europe's Stoxx 600 is around 2.2% better and US
futures point to a strong opening. The US 10-year yield is a little firmer
at 2.15%. European benchmark yields are mostly 2-5 bp higher. The 10-year
JGB yield is a little near 0.20%, as it approaches the top of the Yield-Curve
Control band (0.25%). The dollar is on its heels. The Scandis are
leading the charge followed by the dollar bloc. The dollar managed to
extend its advance against the yen for the seventh consecutive session yesterday
and is edging higher today. Emerging market currencies are also gaining
on the greenback, and the JP Morgan Emerging Market Currency Index is rising
for the third consecutive day. Rising yields seem to be tarnishing
gold. It is little changed, after falling for the past three
sessions. It is holding above
yesterday's low near $1907. April WTI is consolidating inside yesterday's
range. So far, it has held below $100 a barrel for the first time this
month. US natgas is jumping 3.0% to recoup most of what was lost in the
past two sessions. Europe's benchmark is up almost 1% after a nearly
2% advance yesterday. Recall that it dropped 17.3% on Monday. The
supportive comments by Chinese officials arrested the six-day slide in iron ore
prices with an 8.3% bounce today. Copper is rising for the first time in four
sessions. Nickel trading briefly re-opened and shut again, citing a
technical issue with the new daily limit. May wheat is about 3% weaker after
rallying 5.3% yesterday.
Asia Pacific
Chinese officials confirmed
the shift from structural reforms to supporting the economy and
growth. A
meeting chaired by Vice Premier Liu He promised to keep the stock market
stable, support foreign listings, new policies for property developers, and
signaled the end of its effort to "rectify" internet platform
companies. It could be that Chinese officials understood that the recent
batch of economic data was not very convincing, such as the 12.2% jump in
fixed-asset investment despite a sharp drop in cement and steel output (-17.8%
and -10% respectively).
Reports suggest that Saudi Arabia is
considering allowing China to pay for its oil in yuan. It is important to recognize that this is
not the first time such a story has circulated. China is Saudi Arabia’s
single biggest customer, taking around a quarter of the Kingdom’s oil
exports. At $100 a barrel, it runs around $155 mln a day. What is
Saudi Arabia going to do with the equivalent amount of yuan? It is
not like Saudi companies need yuan to service their RMB-debt or other
obligations like they do with the dollar or euro. The Saudi riyal is
pegged to the dollar. If Riyadh pushes too hard, will speculators
test the commitment to the dollar peg? Will it be costly, like when it decided
to grow wheat in the desert and cost it a quarter of its aquifer?
Riyadh could boost the allocation of its
reserves to yuan, but to what end? Given that the yuan shadows the dollar closely, the
diversification argument is weak. The yield premium over 10-year
Treasuries has fallen below 70 bp for the first time in three
years. Saudi Arabia and US interests have diverged in several areas
over the past year or two, including Yemen, Iran, and
Afghanistan. It has rejected the US and others’ entreaties to boost
oil output, even though OPEC+ is not meeting the 400k barrel addition a month
commitment. The US used to buy 2 mln barrels of oil a day from Saudi
Arabia. At the end of last year, it was about 500k bpd and surpassed
by Russia, Mexico, and Canada.
Japan's February trade balance always
improves from January, but this time the improvement was much smaller than
expected. Japan
reported a JPY668 bln shortfall after a JPY2.19 trillion deficit in
January. Exports rose 19.1% year-over-year, which was a little less than
expected. On the other hand, imports soared by 34%, well above the 26.4%
expected (median forecast in Bloomberg' survey). The surge in the cost of
energy drove the imports. Japan reports February CPI figures Friday ahead
of the outcome of the BOJ meeting. Excluding fresh food and energy, Japan is
expected to show that deflationary forces persist.
The US dollar is about a quarter yen range
as it holds above JPY118.15. Provided the greenback closes above JPY118.30, it will be
the eighth consecutive advance. Our JPY118.60 target has been approached.
Above there, the JPY120 area beckons. Still, we caution chasing it
higher. The technical indicators are stretched, and the dollar closed
above its upper Bollinger Band for the past three sessions and remains above it
now (~JPY118.15). The Australian dollar is extending its recovery
that began yesterday. It is approaching $0.7240, which is the
(38.2%) retracement of the leg down that began at the end of last week from
about $0.7365. Note that the five and 20-day moving averages converge
near $0.7255 today. The Chinese yuan rallied for the first time in five
sessions today. The dollar had gapped higher on Monday and again on
Tuesday. It reversed lower yesterday, but the opening gain was not
closed. Today, the dollar closed Tuesday's gap and entered Monday's
without closing it. It extends to last Friday's high slightly below
CNY6.34. The greenback's decline of a little more than a third of 1% would be
the biggest drop of the year, if sustained. Today the PBOC's dollar fix
was a weaker than expected at CNY6.38 (vs. CNY6.3811, the median in Bloomberg's
survey).
Europe
Reports suggest that the US
has promised that if the 2015 nuclear accord with Iran can be re-started, its
sanctions would not impact Russia's atomic supply arrangements with
Iran. This had
appeared to be a key issue behind the suspension of talks at the end of last
week. The revival of talks, which appeared to be moving in the right
direction in recent weeks, would likely allow some phasing in of Iranian oil as
adherence to the pact met certain benchmarks.
The Bank of England meeting
concludes tomorrow. The
swaps market has about little more than a 25% chance of a 50 bp hike.
There had been a 60% chance discounted on February 10, the day before the US
warned that a Russian attack on Ukraine could happen at any moment.
Recall that last month's 25 bp hike was delivered by a 5-4 majority, with the
minority seeking a 50 bp hike. The BOE's balance sheet begins
shrinking this month as the large maturity will not be recycled into new
purchases.
The euro is trading inside
yesterday's range (~$1.0925-$1.1020). There is a 1.23 bln euro option at $1.10 that expires
today. It looks likely to consolidate until the reaction to the FOMC
meeting later today. We note that the US two-year premium over Germany
widened to almost 228 bp yesterday, the most since late 2019. Despite
the anticipation of the BOE's rate hike tomorrow, sterling remains pinned near
the $1.30-trough seen on Monday and Tuesday. Yesterday's high was
about $1.3090, and today, it has been unable to sustain upticks abvoe
$1.3070. The $1.3100 area corresponds the (50%) retracement objective of
the leg down since reversing lower from $1.3200 on March 10.
America
Before the outcome of the FOMC meeting is
announced, February retail sales will be reported. It is unreasonable to expect a strong gain
on top of the 3.8% surge in January (even without autos and gas). The dramatic
gain was in reaction to the Covid-related 2.5% slump in December. The data is
reported in nominal terms, reflecting volumes and prices. We know that
auto sales, as reported by the manufacturers, disappointed. The median
forecast in Bloomberg's survey is for a 0.4% increase in the headline pace
month-over-month and slightly slower for the components that feed into GDP
models (excludes autos, gasoline sales, building materials, and food services.
Economists will scrutinize the data to see how much the increase in gasoline
prices is compressing discretionary purchases.
It is Fed Day, and this is the main focus. There seems little doubt that the
Fed will hike the target rate by 25 bp. That is probably the element that
there can be the most certainty about. The market has about a 13% chance
that it could be 50 bp after Chair Powell clearly endorsed a 25 bp hike in
testimony before Congress earlier this month. Still, there is greater
uncertainty over the other two elements of the Fed's announcement. The
pace of the balance sheet unwind is anxiously awaited. We penciled in
$40-$50 bln a month of Treasury and $20-$25 bln a month in Agencies. Talk
has circulated for a few months, but it seemed to pick up recently that the Fed
could avoid an inversion of the curve if it relied more on QT (quantitative
tightening) than rates. Powell has insisted that the interest rate target
is its primary monetary policy tool. Is this cast in stone? The dot-plot is the
third element. In December, the median projection was for rates to rise
about 75 bp this year, with a 0.75%-1.0% target at the end of the year.
The Fed funds futures market has about 175 bp in tightening discounted. The
median Fed dot saw the longer-term equilibrium rate at 2.5%. In December,
only five Fed officials anticipated that the target rate would be above there
at the end of 2024. The swaps curve sees rates peaking between 2.25% and
2.50% in 2024.
Canada's February CPI is expected to have
accelerated to 5.5% from 5.1%. More important for the central bank may be the acceleration
in the underlying core rates. The average may rise to 3.4% from
3.2%. The Bank of Canada meets next on April 13 and is widely expected to
hike again and signal the roll-off its balance sheet. Late in the
session, Brazil's central bank will likely raise the Selic Rate by 100 bp to
11.75%. The past three hikes have been in 150 bp increments. The
IPCA measure of inflation edged up to 10.54% last month from 10.38%. The
central bank may warn that inflation has not peaked. The swaps market has
the peak in rates near 13.75% later this year.
The
US dollar reversed lower after testing CAD1.2870 yesterday. It settled on its lows (~CAD1.2760)
and follow-through selling has pushed to about CAD1.2720 in the European
morning. Initial support is seen at CAD1.27, where a $1.1 bln option
expires today. Last week's low was near CAD1.2685. The CAD1.2650-CAD1.2660
area had previously offered support. The greenback is pushing
lower against the Mexican peso for the fourth consecutive session. It
is fallen from MXN21.05 before last weekend to MXN20.7635 earlier today.
It had been finding bids near MXN20.81. If the break can be sustained,
the next target is the MXN20.60-MN20.66 band. On the other hand,
the dollar has risen for the past four sessions against the Brazilian
real. The risk-on mood coupled could help stem the tide. Resistance
is seen near BRL5.20. A break of yesterday's low near BRL5.10 may signal
a top may be in place.
Disclaimer
Reviewed by Marc Chandler
on
March 16, 2022
Rating:
