Overview: The sharp sell-off of US equities yesterday weighed on global equities today. The Asia Pacific bourses were a sea of read with many of the large markets off 2%-3%. Japan, which returned from a three-day holiday was the exception and it managed to eke out a small gain. Europe's Stoxx 600 gapped lower after yesterday's outside down session and US futures are trading around 0.3%-0.5% lower. Meanwhile, the US 10-year yield is ending further above the 3% threshold, while European benchmarks are mostly 3-4 bp higher. Here UK Gilts are an exception with the 10-year yield a couple of basis points lower. The dollar is mixed. The Scandis and euro are firm, while the Australian dollar, Japanese yen, and sterling are heaviest. Among emerging market currencies, most central European currencies are higher as is the peso. Asian currencies and the Turkish lira are sporting modest losses. Gold is closing in on its third weekly loss and is trading around $1882. June WTI is flirting with $110. It has not closed above it since March 25. US natgas is extending its advance for a sixth session. It is up about 23.5% this week after rising nearly 11% last week. Europe's natgas benchmark is off 5.6% today to halt a four-day advance. It is up 6.6% this week and was up almost 3.2% last week. Iron ore slumped 4.7% today and is off nearly 5.9% on the week, its third consecutive weekly loss. Copper is a little heavier after reversing lower yesterday to lose 1%. It is off 2.7% this week after having fallen in the past two weeks. July wheat has come back lower after rallying around 5.8% in the past two sessions. It is up nearly 4% net this week.
Asia Pacific
Tokyo's April CPI jumped to
2.5% from 1.3%. This
was a touch higher than expected. The two key drivers were energy prices
and the base effect from the cut in last year's mobile phone charges.
Excluding fresh food prices, Tokyo's CPI rose to 1.9% from 0.8%.
Excluding fresh food and energy, Tokyo's consumer prices rose by 0.8% from
-0.4%. Energy prices are up about 25% year-over-year and lifted overall
rate by 1.1 percentage points. The mobile phone charges added 0.8%.
While influences of the Tokyo CPI will be evident in the national figures due
out later this month, the BOJ insists on looking through the data on the
grounds that the current spurs are not sustainable. Wage growth is not
strong enough. At the same time, the new economic package is projected to
lower inflation by 0.5 percentage points from May through
September.
The US appears to be getting
close to adding China's Hikvision to the "Special Designated Nationals and
Blocked Persons list on human rights violation grounds. Hivision sells surveillance software to
governments and corporations, including CCTV cameras. Although it
operates globally with some 53k employees, its biggest customer is China
itself. While the US has been escalating and expanding its use of
sanctions since 9/11, one of the things that draws attention to Hikvision, in
addition to its size, is that the category of violations, human rights, could
very broad and elastic. Meanwhile, we note that a bill passed the Senate
committee stage yesterday that would allow the US to sue OPEC for manipulating
the energy market. The White House expressed concerns but has not
formally opposed it yet.
Beijing announced that all
government and state-sponsored businesses should replace all foreign brand
personal computers with domestic ones within two years. This is the latest effort by Beijing
to reduce its reliance on foreign technology. Estimate suggest there are
some 50 mln personal computers at the central government alone. The shares of
many of non-Chinese brands sold-off on the news. Note too that has been
an effort elsewhere to reduce the use of Lenovo PCs, which is a Chinese
brand.
The dollar recovered from
about JPY128.75 yesterday and closed a little above JPY130 as US yields
jumped. Japanese
markets re-opened from the extended holiday today, and the greenback rose to
JPY130.80 in Asia, a new high for the week. Initial support now is seen
near JPY130. The US 10-year yield is extending its gains above 3.0%, and
this could help lift the greenback above the two-decade high recorded in late
April near of JPY131.25. The Australian dollar peaked on Wednesday and
Thursday near $0.7265 and between yesterday and today shed two cents to
hit a low around $0.7065. The week's low was set Monday
closer to $0.7030 and the low for the year was set in late January by
$0.6970. A close today below last week's low around $0.7055 would a
particularly bearish technical development. The yuan's slide
continued. Recall that at the end of last week, before the
holiday, the greenback settled near CNY6.6085. Today, it reached
CNY6.6955, its highest level since November 2020. The 200-dy moving
average, which it has not traded above since September 2020, is now near
CNY6.73 and is the next technical target. The PBOC set the dollar's
reference rate lower than expected for the fourth consecutive session.
Today's fix was at CNY6.6332, while the projections (median forecast in
Bloomberg's survey) was for CNY6.6379.
Europe
It almost seems that the
Bank of England goes out of its way to keep the market wrongfooted. The BOE delivered the 25 bp rate
hike, indicated that rates would likely rise further, and said, by the way, the
economy will contract sharply in Q4, and 2023 as a whole, before stagnating in
2024. And by the way, a technical recession (two quarters of shrinking
output) may be avoided. The vote to hike was with a 6-3 majority.
Despite the dour economic forecast, the dissenters favored a 50 bp hike,
concerned about wage growth. The swaps market has 30 bp of tightening
priced in for the June 16 meeting. The BOE also announced it would sell
its corporate bond holdings in September. It has a more passive
approach to its government bond holdings. As they mature, the proceeds
will not be reinvested. The BOE estimates that it may cost 600k jobs to
bring inflation under control.
Reports indicated that BOE
Governor Bailey will not take a raise this year, but the focus is on what the
government says about the tips for employees in the Queen's speech that lays
out the parliamentary program. The Tories have long promised to ensure that employees keep
the tips have not carried through with it. The reduction of cash payments
also means that the tips are increasingly charged taking it out of the employee
hands. The issue may also take on a larger political significance given
the largest cost-of-living squeeze in a generation and in the face of
regressive policies. Separately, the votes are still being counted in the
yesterday's local elections, in which the Tories appear to have lost many
councils. However, the fact that the Lib Dems may emerge as the chief beneficiary
rather than Labour is notable.
Following the sharp slide in
factory orders yesterday, Germany reported that industrial output collapsed by
4.7% in March. This
is more than four-times more than the median forecast in Bloomberg's
survey. Spain's industrial production was forecast to fall by 0.5%.
Instead, it contracted by 1.8%. The aggregate figure for the eurozone
will be reported at the end of next week and the 0.8% median forecast in
Bloomberg's survey will have to be re-thought.
The euro came within about a
tenth of a cent from the multi-year low set in late April slightly above
$1.0470 before bouncing in early European turnover to $1.0580. It stalled there. The market may be hesitant
to take it further ahead of the US jobs report. There are options for
almost 600 mln euros at $1.06 that expire today. The high for the week
was recorded yesterday near $1.0640. A move above there would target
$1.07. After an outside up day on Wednesday, sterling reversed
lower yesterday despite the BOE's hike. It collapsed 2% and fell
to $1.2325. The losses were extended to nearly $1.2275 today. A
break of the $1.2250 area could spur losses toward $1.2075 on the way to
$1.20. Of note, the lower Bollinger Band (two standard deviations below
the 20-day moving average) is around $1.2235 now. Initial resistance is
seen in the $1.2380-$1.2400 area.
America
The main narrative that
seems to have emerged is that Fed Chair made what some have dubbed an
"unforced error" in taking a 75 bp off the table. But was it ever really on the table?
Yes, the Fed funds futures market had thought it was possible in the coming
meeting or two. This was a fantasy of speculators and was not a policy
signal. The market and some in the media who cover them simply read the
Fed wrong and then blamed the Fed. The most hawkish FOMC member is the St.
Louis Fed President Bullard. In the context of talking about how the
central bank is not as far behind the curve as it may appear, using his own
calculation of the Taylor Rule, which links the GDP and labor market output
gaps to the overnight target rate, Bullard, said 75 bp move could be considered
at some juncture. He quickly added that was not his base case. It
does not seem as if any other Fed official endorsed a 75 bp hike and some
pushed against it. Central bankers seem to be characterizing their challenge as
threading a needle. Push the inflation genie back into the bottle without
driving the economies into recessions.
Powell is leading down the
middle. A
steady and predictable course might be the best tactic now. Strategic ambiguity
may be the more traditional approach, but these are not traditional times. It
seems common at recent FOMC meetings for the market to react one way initially
and subsequently reverse it. This time it was exaggerated in both
directions. The market "corrected" itself yesterday without a word
from a Fed official. In fact, the market has about a one-in-four chance
that the Fed hikes by 75 bp at the June 15 meeting. We note that
several Fed presidents will be speaking today (Williams, Kashkari, Bostic, and
Daly). As the Vice Chair of the FOMC, NY Fed President Williams has a permanent
vote. He can also be expected to articulate the opinion of the
leadership. Governor Waller speaks with Bostic and is seen as among the
more hawkish governors.
Solid but a bit slower job
growth may be exactly to the Fed's liking. The median forecast in Bloomberg's
survey has slipped recently but at 380k, it is still a "good" number.
At the same time, it would the slowest since last April. Nonfarm payrolls
rose by an average of 562k in the first quarter. In Q1 21, average job
growth was 645k. The risk may be on the downside after the ISM and ADP
reports. Weekly jobless claims rose a little. A rise in the
participation rate is also something that the Fed would like to see. A
greater participation rate would ostensibly help curb rising labor costs. The
participation rate was at 63.3% before the pandemic and was at 62.4% in
March. Anecdotal stories suggest it ticked up. Canada, which also
reports its April jobs data has seen its participation rate nearly fully return
to pre-pandemic levels. It was at 65.5% at the end of 2019 and 65.4% in
March. Canada grew 70k jobs a month in Q1, of which 44k were full-time
positions. In Q1 21, job growth averaged 114k a month, and 88k of them
were full-time. The market goes into the jobs data with 50 bp hike priced in
for Canada on June 1.
After approaching CAD1.27
yesterday, the US dollar surged to nearly CAD1.2870 as US stocks
cratered. The
greenback's high recorded on Monday was the high for the year by CAD1.2915. It
is consolidating ahead of the job reports and is holding above CAD1.2800.
A convincing break of CAD1.2770 would weaken the US dollar's technical
tone. There is an expiring option for $1.4 bln at CAD1.2840. The
equity market performance may be just as important for the exchange rate today
as employment reports. The US dollar has been in a roughly
MXN20.00-MXN20.31 range for the past two sessions. It peaked on
Monday near MXN20.50. Initial support is in the MXN20.10-MXN20.15
area. April CPI will be released next week, and it is expected to have
accelerated, but the highlight next week is the central bank meeting. A
50 bp hike is widely expected and the risk is a 75 bp move rather than 25
bp.
Disclaimer
Reviewed by Marc Chandler
on
May 06, 2022
Rating:
