Overview: The poor Chinese March PMI and talk that
the US could tap its strategic oil reserves by as much as one million barrels a
day for six months have rippled through the capital markets. After the
S&P 500 snapped a four-day advance yesterday, equities in the Asia Pacific
region may have been on the defensive today, but sub-50 boom/bust reading in
China took a toll, which only South Korea and India among the large bourses
were able to escape. European markets are softer, while US futures are recovering from
yesterday's losses. US and European 10-year benchmark yields are mostly 3-6 bp lower. The dollar is trading higher against most of the major
currencies. The Scandis and dollar-bloc currencies are bearing the brunt
of the losses, with the Norwegian krone off more than 1.6%. Emerging market
currencies are mixed. Central European currencies are
underperforming. Gold is off around $7 and is in the $1920-$1934 range. Oil, as one
would expect, fell (~6%) on the possibility of a substantial draw down of US
reserves, but May WTI is holding above $100 a barrel, even though earlier this
week it ahead slipped briefly below $98.50. US natgas is off about 1.5%
after gaining 5% yesterday. Europe's natgas benchmark is up about 3.7%
after an almost 9% gain yesterday. It is up more than 20% this
week. Iron ore is a little higher today after rising almost 3.5%
yesterday. Copper is threatening to snap a three-day advance. May
wheat is little changed ahead of the USDA planting update report.
Asia Pacific
China's March manufacturing
PMI fell to 49.5 from 50.2. The non-manufacturing PMI fell to 48.4 from 51.6. Both were
weaker than expected. The composite now stands at 48.8, down from 51.2 in
February. As disappointing as the report was, the situation is worse
because the survey closed a few days before Shanghai was locked down. It
did catch the shuttering of Shenzhen. The weakness of the report fans
expectations for easier monetary policy and other initiatives to support the economy.
A separate report indicated that the issuance of special bonds by the provinces
set a record pace in Q1 (CNY1.25 trillion). The money is thought to help
fund infrastructure spending in Q2.
Japan's February industrial
output rose a meager 0.1%. The median forecast in Bloomberg's survey looked for a 0.5%
gain. This pared the year-over-year gain to 0.2%, not 0.8% that had been
expected. That March Tankan will be released the first thing tomorrow and
is expected to also reflect the deterioration in sentiment. The BOJ's
operations and the decline in US Treasuries helped push the 10-year JGB yield
slightly below 0.21% after briefly poking above 0.25% earlier this week.
The central bank indicated that next quarter it will boost the amount of 1-10-year
bonds it buys. It shaved the amount of 10-25-year bonds will buy at a time
but will increase the number of operations over the quarter. The BOJ's
balance sheet will grow. The BOE has already begun shrinking its balance
sheet. The Bank of Canada indicate it will do the same in a couple of
weeks and the Fed is expected to announce its intention at the net FOMC meeting
in May.
The dollar found support
ahead of JPY121.10, which is the (38.2%) retracement of the rally since March 4
that began from around JPY114.65 and peaked this week slightly above
JPY125.00. The
momentum indicators are rolling over, but we expect a period of
consolidation rather than a trend-reversal. Australia reported a
surge in February building approval (43.5% vs. median forecasts in Bloomberg
survey for 5%, but a volatile series to be sure) and it may build a new port in
Darwin after current facilities had been leased to China. The
Aussie was turned back yesterday after approaching $0.7540, which has
repeatedly capped it in recent sessions. The week's low was a little
below $0.7460. A break would initially target $0.7400 and then, possibly,
$0.7350. The greenback fell to a three-week low against the
Chinese yuan a touch below CNY6.34. The PBOC set the dollar's reference
rate a softer than expected (CNY6.3482 vs. CNY6.3494, according to the
Bloomberg survey). Note that the mainland markets will be closed next Monday
and Tuesday for a national holiday.
Europe
Following the surprisingly
strong Spanish and German March CPI reports, the French reading was
comparatively tame. The
harmonized version rose 1.6% in the month, a tad more than expected. The
year-over-year rate rose to 5.1% from 4.2% and was ironically stronger the
median forecast in Bloomberg's survey for 4.9%. A 25 bln euro measure to
cap electricity and natgas prices, and offer a rebate, reduced measured
inflation by 1.5 percentage points, according to INSEE. Italy was
the only one of the Big Four in the EMU to report lower than expected price
pressures. The harmonized measure rose by 2.6% instead of 2.8% on the
month, and 7.0% instead of 7.2% year-over-year. In February, the year-over-year
rate was 6.2%. The eurozone aggregate figures are due tomorrow.
Separately, France reported
disappointing consumption figures. Consumer spending rose by 0.8% in February. Economists
expected a rise of a little more than 1%. On top of that, the cutback in
January was revised to 2.0% from 1.5%. Note that the first round of the
French presidential election is on April 10. The pattern is for no
candidate to win in the first round, forcing a run-off (April 24) and voters to
unify behind the "establishment" candidate over Le Pen.
After German Chancellor
Scholz talked with Putin yesterday, the conclusion was the Moscow was backing
off of its earlier demand to be paid in roubles for its gas. Meanwhile, some reports indicate that
talks between Ukraine and Russia may resume tomorrow. We continue to
believe Russia will secure military objectives the separatist regions before
negotiating more seriously. Also, some reports indicate that Georgia's
breakaway region in South Ossetia may seek to join Russia. This seems to
be the idea in the separatist regions in Ukraine as well.
The euro initially extended
its recent gains to reach $1.1185, its best level since March 1, before
reversing lower to almost $1.1110. There are two sets of expiring options to note today.
The first is for nearly 2.15 bln euros at $1.12. The other is for 1.55
bln euros at $1.11. Yesterday's low was slightly below $1.1085. Sterling
is sidelined. It is trading quietly in a narrow range
(~$1.3110-$1.3150). It is hovering around unchanged levels (~$1.3130) in
late morning turnover in the UK. If there is to be a range extension in North
America today, we favor the upside, but see the $1.3175-$13200 as the
cap. Lastly, note that the Czech Republic is expected to lift the repo rate
by 50 bp to 5.0% today. The risk may be on the upside.
America
We have argued that Biden
administration has been thinking too small in its previous two efforts to draw
down its Strategic Petroleum Reserves if it wants to have more impact on energy
prices. In November
it announced a 50 mln barrel release and earlier this month, 30 mln
barrels. Surely, these are the conditions that the SPR was created
for. In the past, sometimes, Washington would agree to sell some of the
oil for budgetary purposes. As of March 25, the US stockpile was
estimated at almost 570 mln barrels. Reports suggest that under
consideration is a 180 mln barrel draw over six months, or about 1 mln barrels
a day. Ideally, it would be a coordinated effort with other
countries. As we noted yesterday,
there is strong correlation between the change in oil prices and the change in
inflation expectations as expressed through the 10-year breakeven rates.
OPEC+ meet today and are unlikely to boost their output. On the other
hand, some reports suggest that Washington may allow a US-based oil company to
speak directly with the Maduro government in Venezuela, to ostensibly prepare
for a lighter sanction regime, which officials deny is currently under
consideration.
Ahead of tomorrow's jobs
report, the US reports February income, consumption, and deflators. Personal income and consumption are
expected to have risen by 0.5%. Income is lagging behind inflation, and
he real drop in income may cap consumption. The headline deflator, which
the Fed targets is forecast to rise by about 0.6% to lift the year-over-year
rate to 6.4% from 6.1%. The core measure, which gets plenty of airplay
but is not targeted, is expected to rise to 5.5% from 5.2%. Although the
Fed does not target the CPI measure, its earlier release steals the thunder from
the PCE deflators. The weekly jobless claims fell to a new low since 1969
last week. A small tick up that is expected today will not change views
of the strength of the US labor market. The median forecast in Bloomberg's
survey sees March nonfarm payrolls rising by 490k.
Canada reports January
GDP. A 0.2%
gain is expected after a flat December. The report is too old to have
much market impact. Earlier this week, the swaps market appeared to have
a 50 bp hike fully discounted for the April 14 Bank of Canada meeting. It
has slipped to about a 66% chance now. Mexico reports worker remittance
tomorrow, which has been a surprisingly strong source of hard currency.
Later today, Colombia is expected to hike its overnight lending rate by 150 bp
to 5.50%. Consumer inflation is running a little north of 8%. It last
hiked by 100 bp in January. The swaps market has about 500 bp of
tightening priced over the next six months.
The Canadian dollar and
Mexican peso recorded new 2022 highs yesterday. The peso made a marginal new high
today, but both are a bit better offered now. The US dollar is at a new
three-day high against the Canadian dollar near CAD1.2530. There may be
some resistance in the CAD1.2555 area, but the potential may extend toward CAD1.2580-CAD1.2600,
if not today, then tomorrow. Recall that the peso began
this week with an 11-session rally in tow, the longest in half a century. Even
with the small loss today, it is gains 13 of the past 15 sessions. The
MXN20.00 area, which previously offer the greenback support now may serve as
resistance.
Disclaimer
Reviewed by Marc Chandler
on
March 31, 2022
Rating:
