Overview: The markets continue to digest the
implications of yesterday's Fed move and Beijing's signals of more economic
supportive efforts as the Bank of England's move awaited. The US 5–10-year
curve is straddling inversion and the 2-10 curve has flattened as the Fed
moves from one horn of the dilemma (behind the inflation curve) to the other
horn (recession fears). Asia Pacific equities extended yesterday's
surge. The Hang Seng led the charge with a 6.7% gain. Taiwan's
benchmark rose 3% and the Nikkei gained 2.5%. Europe's Stoxx 600 is
posting small gains and US futures are paring yesterday's late gains. The US 10-year
yield is near 2.11% after poking briefly above 2.2% yesterday. European
bond yields are mostly 2-3 bp lower. The Hong Kong Monetary Authority and Saudi
Arabia hiked 25 bp too as their currency pegs required. The dollar
initially rallied on the Fed statement but unwound the gains during the Chair
Powell's press conference. It is lower against most currencies
today. The Australian dollar is the strongest of the majors, helped by
better-than-expected jobs report. The emerging market currencies
are led today by the South Korean won, whose gains appeared to be fueled by
strong demand for its bonds today. Gold traded below $1900 yesterday
before recovering. That recovery is being extended today and the yellow
metal is near $1944. There may be potential toward $1962 in the next day or
two. April WTI appears to have forged a base around $93-$94 and is trying to test $100. US natgas is firm after yesterday's 4% gain.
Europe's natgas benchmark is recouping half of yesterday's 6.7% decline.
Iron ore eased after jumping 8.5% yesterday. Copper is extending
yesterday's gains and is up about 1.4%. May wheat is consolidating after falling near 7.5%
yesterday.
Asia Pacific
China has underscored the
shift from structural reforms to growth, which many market observers had
already detected. However, investors now need to see the proof of the pudding, so to
speak, which is to say policy adjustments. It could happen with the
setting of the loan prime rates on Monday in Beijing, but more observers are
talking about a cut in reserve requirements in the coming weeks.
Australia employment rose
77.4k, more than twice the median forecast in Bloomberg's survey. The details were even
stronger. Full-time positions rose by nearly 122k last month after a
revised 6.1k decline in January (originally it fell by 17k). The
unemployment rate fell to 4.0% from 4.2%, even though the participation rate
rose to 66.4% from 66.2%. Australia’s short-term bond yields rose 3-4 bp
as the data brought forward an RBA rate hike. The odds of a move
at the end of Q2 has increased.
The BOJ meeting concludes
tomorrow and standing pat will underscore the growing divergence with the US
and others' monetary policy. The fiscal year end is approaching, and Japanese
purchases/sales of foreign bonds and stocks remains subdued, but foreign
investors for the second week have been significant sellers of Japanese stocks
and buyers of Japanese bonds.
The dollar rose slightly
through JPY119.10 yesterday and is consolidating below that today. The JPY118.60, which we targeted
last week, now offers support. Note that the upper Bollinger Band comes in
today near JPY118.70. The Australian dollar jumped 1.35% yesterday, its
largest rise since early November 2020. It is extending the gains
today and is approaching the (61.8%) retracement objective of the decline since it reached $0.7440 earlier this month. That retracement objective is near
$0.7335. and above there, last week's high near $0.7375 may draw
attention. Recall that the greenback gapped higher against the
Chinese yuan on Monday and Tuesday. It filled Tuesday's gap
yesterday and entered Monday's gap today without filling it. The bottom
of the gap is just below CNY6.34. The PBOC set the dollar's reference
rate at CNY6.3406. The median projection in Bloomberg's survey was for
CNY6.3360.
Europe
The Bank of England is
awaited. The
swaps market has about a 1-in-4 chance that it delivers a 50 bp move today,
with odds-on favorite scenario of a 25 bp move. The BOE is likely to
raise its inflation outlook, and this will serve to underscore the policy
path. Today's move will be the third hike in a row and will bring the
base rate up to where it was before the pandemic struck. A 25 bp increase
will bring the base rate to 0.75%. When it reaches 1.0% (May), the BOE
has said it could (but not will) reduce its balance sheet more actively by
selling securities rather than just passively through not re-investing maturing
proceeds.
The Governor of Sweden's
Riksbank indicated that its first rate hike will likely be delivered before the
second half of 2024, which it had previously anticipated. Ingves warned that inflation was too
high. Using fixed mortgage rates, the underlying inflation stood at 4.3%
in February, and the core underlying rate, which excludes energy is at 3.4%.
The next Riksbank meeting is late next month, but the focus of the first hike
is now in September.
The US says that the
sanctions on Russia do not prohibit Moscow from servicing its dollar debt until
May. Russia,
trying to conserve its hard currency reserves that it has access to, has also made
this more difficult and many expect a default in Q2. Separately, note
that India, which abstained in the UN vote condemning the Russian invasion,
appears to be exercising an option in an earlier agreement to buy more Russian
oil. Russian oil is trading, as one would imagine, as a deep
discount, and Russia covers shipping and insurance costs. The White House press
secretary indicated that India's purchases are not violating US
sanctions.
The euro reached a five-day
high in early European turnover today, slightly above $1.1065. Last week's high was near
$1.1120. Ahead of that is the 20-day moving average around $1.1095.
Recall that in response to the Fed's statement yesterday, the euro recorded
session lows by $1.0950 before recovering to new session highs. We
suspect the high for the day may have been approached, with initial support now
pegged in the $1.1000-$1.1020 band. When the euro was on its lows
yesterday, sterling dipped below $1.3050 and then reversed higher to rally a
cent. Those gains were extended today to $1.3190. Sterling
also looks poised for a buy the rumor sell the fact type of trading like the dollar
did yesterday in response to the Fed. Initial support is seen near
$1.3150 and then $1.3100.
America
The dollar typically rallies
ahead of the first Fed hike in recent cycles and then weakens as tightening
phase progresses. Research from the Bank of International Settlements finds an
average decline of a little more than 4%. Part of the reason may stem
from the Fed's inability to achieve the proverbial "soft-landing" to
bring down inflation without inducing a recession. Many are skeptical
that a soft-landing can be achieved now, in part because the Fed waited too
long to halt the asset purchases. And despite the drama when
"transitory" was jettisoned from Fed-speak about inflation, the Fed's
new forecasts show that is still the median case. The PCE deflator stood
at 6.1% in January, and the median Fed forecast sees it at 4.3% at the end of
this year and 2.7% next year, and 2.3% in 2024. Moreover, many observers
are also finding it hard to reckon the Fed's tightening pace and slower GDP
with the median dot seeing unemployment at 3.5% this year and next.
The Fed meeting probably
reduces the focus on today's high-frequency data, which includes industrial
production, housing starts and permits, weekly jobless claims and the March Philadelphia
Fed survey. Note
that after yesterday's retail sales data, the Atlanta Fed's GDPNow tracker
increased its Q1 estimate to 1.2% from 0.5% (from March 8). For many,
like ourselves, that see the odds high of a recession, we do not see the
contraction as imminent, but perhaps beginning late this year or, more likely a
2023 story.
Canada's February CPI
reported yesterday was stronger than expected at 5.7% (median forecast was for
5.55) after 5.1% in January. The average of the underlying measures also rose. The Bank of Canada meets next on April 13. The swaps market is
pricing in almost a 68% chance of a 50 bp move. The balance sheet could
begin shrinking in May.
As widely anticipated
Brazil's central bank hiked the Selic Rate by 100 bp to 11.75%. It has now hiked rates 975 bp over
the past 12 months. Inflation is running above 10%. Petrobras
lifted diesel prices by 25% and this warns of more upside inflation risk. Still, a survey by the central bank found expectations for inflation to fall
back to 6.45% at the end of this year and 3.7% next year. Mexico
and Chile also expected to hike rates later this month (March 24 and March 29
respectively).
The US dollar peaked on
Tuesday near CAD1.2870 before reversing lower. It continued to give back its recent
gains yesterday, falling to CAD1.2675. It continues to trade heavily and
approached CAD1.2650 in the European morning. There is an option for about $325
mln at CAD1.2635 that expires today. The low from earlier this month was
set near CAD1.2585 and the 200-day moving average is found slightly above
CAD1.2600. The greenback's high for the month was set on March 8
against the Mexican peso a little below MXN21.47. It slipped
below MXN20.60 yesterday and is in a tight range in near there today. The month's low was recorded close to MXN20.39, a little below the
200-day moving average (~MXN20.42). The US dollar was turned back earlier
this week after approaching BRL5.17. It looks poised to rechallenge the
BRL5.00 area.
*Note due to business travel, there will be no commentary tomorrow
Disclaimer
Reviewed by Marc Chandler
on
March 17, 2022
Rating:
