Overview: Macron's victory in the first round
of the French presidential contest lifted the euro, which is resilient to the
broader greenback gains scored on the back of the continued rise in
yields. The US 10-year yield is up around five basis points to 2.75% after
increasing by more than 30 bp last week. European yields are higher, but the
euro-sensitive Germany-Italy spread has narrowed by almost seven basis
points. Japan's benchmark is nearing the 0.25% cap and China's premium
briefly switched to a discount for the first time since 2010. The dollar
rose to new highs against the yen, reaching almost JPY125.45. Central
European currencies are being pulled higher by the euro, but most emerging
market currencies are weaker. Equities are heavy. In the Asia
Pacific, the Hang Seng and China's CSI 300 is off 3% in a sea of red.
Australia was a notable exception, eking out a small gain for the second
consecutive session. Europe's Stoxx 600 is giving back half of last week's 0.6% gain, while US futures are softer. The rising yields have not
sapped gold, which is knocking on $1960. Concerns about weakening Chinese
demand as it struggled to get the pandemic under control are keeping oil on the
defensive. May WTI is off 2.5% near $95.75 It remains in the
range set last Thursday roughly $94-$99. OPEC and the IEA update their
forecasts tomorrow and Wednesday. US natgas is higher. Last week, it
gained nearly 9.8%, in its fourth weekly advance for a cumulative increase of
about 33%. European natgas benchmark is lower after falling 6.6% last week. Iron ore is off for a fifth session. It is down 2% after falling almost 4% last week. May copper is paring last week's 1% gain.
July wheat is extending the pre-weekend gain of 3.2% and is at its highest
level in around two and a half weeks.
Asia Pacific
Shanghai's lockdown and
economic disruption overshadows much of China's economic news. Still, it reported a rise in March CPI to
1.5% from 0.9%. A surge in the price of vegetables narrowed the drop in
food prices to -1.5% from -3.9%. Non-food prices rose by 2%.
Excluding food and energy prices, China's core CPI was steady at 1.1%.
China reported the fifth consecutive monthly slowing of PPI. It eased to
8.3% from 8.8%, a little less than expected.
Separately, China reported a
surge in lending last month. New yuan loans from the banks rose CNY3.13 trillion, well
above expectations, and a multiple of the CNY1.23 trillion in February. Aggregate
financing, which includes shadow banking activity, jumped by CNY4.65 trillion
from CNY1.19 trillion. This was about a third more than expected. The
three-month average of CNY4.0 trillion may be the largest on record.
Unlike in the US and Europe in the Great Financial Crisis, Chinese bank lending
has continued, which is seen as a cushion for the economy.
Before the weekend, India's
central bank signaled a shift in priorities that could lead to a rate hike
later this year. First,
it dropped the reference to maintaining an accommodative stance. Second, it
lifted the floor of its liquidity adjustment facility to the standing deposit
facility of 3.75% rather than the reverse repo rate of 3.35%. Third, the RBI
lifted its CPI forecast to 5.7% from 4.5%. It shaved its GDP forecast to a
still robust 7.2% from 7.8%. India reports March CPI tomorrow. The median
forecast in Bloomberg's survey calls for an acceleration to 6.35% from 6.07% in
February. Biden and Modi hold a video call today ahead of a high-level
meeting later between the US Secretaries of State and Defense and their Indian
counterparts. India is part of the Quad and an important bulwark against
the expansion of China. However, it also has had longstanding military
ties with Russia and has been cautioned about helping Russia evade the
sanctions.
The Bank of Japan reduced
its assessment of eight of the nine economic regions in its quarterly
report. The
virus and supply-chain bottlenecks are the main challenges. The sobering
assessment will feed into the BOJ's quarterly economic outlook due at the end
of the month. The report is consistent with the need for a supplemental
budget the government is pulling together, which is also due later this
month. The BOJ appears determined to continue to defend its 0.25% cap on
the 10-year JGB.
The dollar reached almost
JPY125.45 in late Asian turnover. The next chart point of note is the 2015 high near
JPY125.85. Although it traded above JPY125 last month, it did not manage
to close above it. The rising US yield is the key driver, and its gains
suggest upward pressure may remain. Australia has set its
election for May 21 and shortly afterward the central bank is expected to begin
its tightening cycle. Still there is little reprieve for the
Australian dollar, which has continued to bleed lower for the fourth
consecutive session. It is trading near three-week lows near $0.7430. It
has now retraced roughly half of its gains since the March 15 low near
$0.7165. A break of the $0.7400 area could spur another half-cent
loss. The greenback is firm against the Chinese yuan for the
third consecutive session. The PBOC set the dollar's reference rate a
little lower than the market (median in Bloomberg's survey) for also the third
consecutive session CNY6.3645 vs. CNY6.3652). China has fallen out of
favor among global asset managers.
Europe
Reports ahead of the weekend
suggested that at least some at the ECB would like to have a new tool that
would allow it to act against fragmentation of the eurozone debt market that
may be caused by external shocks. A challenge is that it may need to be rules-based instead of
discretionary to appeal to creditor countries (hawks). At the end of last year,
as discussions about the Pandemic Emergency Purchase Program that was going to
end in March, there was also an attempt to create a new precautionary tool.
However, the hawks insisted on attaching conditionality to such an effort. In
the end, the compromise struck was to introduce flexibility in the reinvesting
of maturing bonds.
The UK's February GDP
disappointed with a 0.1% gain. Industrial output unexpectedly fell by 0.6% and
manufacturing was off 0.4%. Poor weather appeared to be behind the
disappointing 0.1% fall in construction, which economists had expected to have
risen by 0.5%. Services slowed as expected to 0.2% after rising 0.8% in
January. The trade deficit with the EU narrowed sharply but a change in
methodology means that it may not be directly comparable with the January
figures. It is an important week for UK data. Tomorrow sees the
employment update and CPI and PPI are due Wednesday. The swaps market is
discounting a 25 bp hike at the May 5 and June 16 meetings and about another 90 bp
in the second half of this year.
UK Chancellor of the
Exchequer, Sunak, was among the most popular politicians during the early days
of the pandemic as he doled out support. There was speculation that he was the
leading candidate to replace Johnson. According to the latest YouGov
polls, his support has been more than halved since last month's Spring
Statement. Some attribute it to pressing forward with the National Health Service
tax increase. However, today shows another dimension. The basic rate of
unemployment benefits increased by 3.1% today, based on inflation in September.
Since then, it has more than doubled and is likely to have accelerated further
last month. March CPI will be reported on Wednesday. News that
Sunak's wife held non-domestic tax status, which meant no UK taxes were paid on
overseas earnings does not appear illegal, and Sunak has requested a formal
review. However, it strikes many as unseemly even if legal.
The euro initially gapped
higher in Asia as the French election news spurred a quick short-covering rally
that lifted the single currency to almost $1.0955. The gap that extended to last
Friday's high (slightly above $1.0890) was closed. It found new bids on
the pullback and is probing the $1.0920 area in the European morning.
While the intraday momentum indicators suggest it may not be likely, an
extension of the euro's gains in North America would likely meet resistance
around $1.0970. Sterling frayed the $1.30 support ahead of the weekend and
dipped below it again today. However, buyers emerged in late Asian
activity carrying through the European morning. Sterling has
recovered to session highs near $1.3045. Initial resistance is seen in around
$1.3060.
America
It might not seem like it,
but Covid is rising in 21 states, and hospitalization rates are rising in 11
states. The war in
Ukraine, inflation and Fed policy seem to eclipse the virus. Some polls show
that immigration is also weighing on Biden's support in addition to inflation.
About two-thirds of Americans blame Putin and oil companies for the increase in
gasoline prices. Meanwhile, one of the most outspoken critics of the Biden
Administration and the Federal Reserve, former Treasury Secretary Summers,
argues that the US has not been able to avoid a recession when inflation gets
above 4% and unemployment below 4%.
This is a big week for US data,
but it begins quietly today. The main feature is the Fed-speak (Bostic, Bowman, and
Evans). However, participants recognize a consensus has formed in favor a
50 bp hike next month and a campaign to lift the funds rate toward
neutrality. It is also expected to let the balance sheet unwind beginning
next month. The Fed speeches and the high-frequency data may pose
headline risk but is unlikely to alter the underlying view. Tomorrow sees
the March CPI, which is expected to have accelerated toward 8.4% from
7.9%. The core is expected to poke above 6.5%. Some economists
expect it to peak shortly, partly due to the base effect. In Q2 21, US
CPI jumped 2.2% cumulatively over the three months. It repeated this in Q4
after a 1.2% cumulative rise in Q3. However, the elevated level and the
tight labor market means that the Fed will not be distracted.
The Reserve Bank of New
Zealand will likely hike rates a few hours before the Bank of Canada does on
Wednesday. The
swaps market has a little less than a 65% chance of a 50 bp move by the RBNZ.
However, the market is more confident that the Bank of Canada hikes by 50
bp. In fact, the swaps market has 66 bp of tightening discounted.
That would seem to imply a split market between a 50 bp and 75 bp move.
We think that is a bit exaggerated, especially given that the Bank of Canada is
also expected to announce its balance sheet reduction strategy. It also
suggests that even if the Bank of Canada hikes by 50 bp, it might not be enough
to spur a strong Canadian dollar recovery. The swaps market currently
shows the terminal rate for both the US and Canada is a little more than
3%.
The US dollar settled near
session lows before the weekend on the back of another strong Canadian jobs
report. However,
the broadly stronger US dollar, helped it hold the pre-weekend low (~CAD1.2565)
and test the CAD1.2620 area that capped last week's gains. The market may
be reluctant to extend short CAD positions ahead of the central bank
meeting. We see scope for the greenback to retest the lows and maybe a
bit more in the North American session today. The US dollar ran into
offers since the middle of last week around MXN20.19. We see potential to
around MXN19.96 today. It has not traded below MXN20.00 since last
Wednesday. It reports February industrial output figures today. A
small gain is expected. AMLO's referendum on his tenure was seen more as
a political stunt than a real threat to his remaining three years. The
turnover was low (less than 20%) and appears to have little significance,
though it could boost the attention to the regional elections in early
June.
Disclaimer
Reviewed by Marc Chandler
on
April 11, 2022
Rating:
