Overview: Stocks are rallying. Nearly all the large bourses in the Asia
Pacific region rose with China being the noted exception. In Europe, the Stoxx
600 is up over 1% to post gains for the third consecutive session, the longest
advance this month. US futures are up around 2% as they return from yesterday’s
holiday. While the US 10-year yield has edged up 3.26%, European yields are
mostly softer, with the peripheral premiums falling more than core rates. The
US dollar is mostly heavier. The Scandis are leading the move, ahead of Norway’s
expected 25 bp hike on Thursday. The yen is the only G10 currency that is not gaining
on the greenback today. Emerging market currencies are also mostly higher, lead
by central Europe and the South African rand. Gold appears to be going no place
quickly and is trading within the broad range set last Thursday. Today, it is
in a $5-range on either side of $1837. After trading as low as $106.40 yesterday,
in a big outside down day, August WTI has returned bid today and popped back
above $110. A move above $112 could signal a run at the highs (~$121). US natgas is
off a little more than 3% after plummeting 21.5% last week. Europe’s newest gas
shock continues. Its benchmark is up another 2.2% today to bring the seven-day
surge to 53%. For its part, iron ore snapped an 8-day, 24% drop with an almost
3.7% rally today. July copper has fallen by more than 10% over the past two weeks
but is up 0.7% today. July wheat extended last week’s 3.4% fall initially and
reached its lowest level in two months earlier today before recovering. It
remains around 0.7% below last week’s settlement.
Asia Pacific
With the BOJ determined to
protect the 0.25% cap of the 10-year yield, the risk of material intervention
to support the yen seems small. Verbal intervention has been successful on two fronts. First,
while it has not prevented a marginal new dollar high, the five-day moving
average is consolidating between JPY134.00 and JPY134.50. Second, the protests
about the pace of the movement may be sufficient to help cushion the
adjustments (like pumping under a parachute to slow the descent) and keep its
protectionist competitors from thinking Japan was purposely seeking a
competitive devaluation to help exports. Still, the BOJ's massive bond
purchases last week (~$81 bln) disrupted the link between the cash market and
futures. One consequence was the relatively poor reception of today's JPY2.5
trillion five-year bond sale. The 3.17 bid-cover was the lowest in two years. The
next challenge is the JPY1.2 trillion sale of 20-year bonds on Thursday. There
were no takers of the BOJ's offer to buy 10-year bonds at 0.25% today.
Governor Lowe of the Reserve
Bank of Australia pushed against speculation that it would hike the cash rate
by 75 bp when the central bank meets again on July 5. He indicated that the discussion would be
between a 25 bp and 50 bp move. The swaps market took the message to heart. The
market had been showing a small bias toward a 75 bp move for the past week. Today
the implied yield fell to about 43 bp, the lowest since June 10.
Reports suggest China's
Covid outbreak is spreading to the south coast while infections are getting
under control, it appears, in Beijing and Shanghai. Shenzhen, a technology hub has seen a rise
in the number of cases and mass testing and some neighborhood lockdowns have
been ordered. Separately, Hong Kong is experiencing an increase in cases, and
the restrictions in Macau grow (though the casinos are still open). The border
crossing to Zhuhai has been closed.
The dollar has come within a
whisker of last week's multi-year high against the yen around JPY135.60. The greenback has been confined mostly
to more than half of a yen range above JPY135.00. The range was tighter
in the Asia Pacific sessions and the highs were seen in early European turnover.
The Australian dollar is trading firmly but quietly within yesterday's range
(~$0.6915-$$0.7000). There are options for A$1.1 bln at $0.7000 that expire
today. The $0.6940-$0.7000 area may confine the price action in the near-term. The
greenback fell to a seven-day low against the Chinese yuan yesterday
(~CNY6.6735). It stabilized today and traded in yesterday's range. It
barely rose above CNY6.70. The PBOC set the dollar's reference rate at
CNY6.6851, lower than usual compared to the median projection of Bloomberg's
survey (~CNY6.6874).
Europe
This is an important week
for the UK and Prime Minister Johnson. The rail workers striking Tuesday, Thursday, and Saturday. London tube
workers are out today. Some postal workers have been on strike since earlier
this month, and a Reuters report estimated that over 100 post offices have been
closed. Criminal barristers have voted to strike as of June 27. Telecom workers
are being balloted to see commitment to strike. The check-in staff at British
Airway are considering a strike, which could happen next month. The Teachers
Union will vote on whether to strike later this year if its demand for a 12%
salary increase is not met. Waste collection in some areas has been disrupted
by strike activity. If it is the most industrial action in 30 years, it is also
the biggest cost-of-living squeeze on households. The economic news this week
is going to be poor. Price pressures continue to accelerate (CPI and PPI are
reported tomorrow). The preliminary June PMI on Thursday will show the economy
slowing, with the consumer being squeezed. Retail sales likely fell in May
for the third time in the past four months. The political news this week will
add to Johnson's challenges to regain his footing after narrowly winning the
confidence vote. There are two special elections on Thursday (Wakefield and
Tiverton-Honiton). Surveys have the Tories losing both, the first to Labour and
the second to the Liberal-Democrats. The results would seem to weaken the case
Johnson can lead the party into victory in 2024.
After prolonged negotiations
and some warning activity, German steel workers accepted a 6.5% pay-increase in
an 18-month contract, plus a one-off 500-euro payment. The 4.3% annualized pay increase is the
largest in a couple of decades, but inflation at 7.9% in Germany (national
measure, compared worth 8.7% using the EU-harmonized basket) is only the
highest in more than 30 years. Negotiated wages settlements in the euro area
averaged 2.8% in Q1, this is within the 3% threshold identified by the ECB
chief economist to cover productivity growth and inflation. Focus will turn to
the metal and engineer workers' negotiations this summer. They are reportedly
seeking a 7-8% pay increase. German unemployment stood at 5.0% in April. The
lowest since at least the early 1990s was recorded in April 2019 at 4.9%.
The euro is trading at a
three-day high in the European morning near $1.0575. Last week's high was slightly above $1.06.
There is an option for almost 700 mln euros at $1.0585 that expires today. The
ECB's verbal intervention, warning the market participants that it will resist
the divergence in yields, is proving effective. The 10-year German-Italian
yield spread has narrowed almost 10 bp today to around 185 bp. It peaked last
week near 250 bp. Similarly, Spain's 10-year premium over Germany peaked a
little above 135 bp last week and is slipping below 105 bp today. The
intra-session momentum studies for the euro are stretched, warning that
follow-through in North America today may be limited. Despite the
industrial action, sterling is firm. It peaked yesterday around $1.2280 and
traded up to $1.2325 in the European morning. It remains within last Friday's
range (~$1.2175-$1.2365). Similar with the euro, the gains in the European morning
have stretched the intra-day momentum indicators, suggesting the scope for
additional gains may be limited. The UK reports inflation figures tomorrow.
America
The US reports May existing
home sales. They are
expected to have fallen for the fourth consecutive month. Limited supply of new
homes, and later, rising prices and interest rates are taking a toll. While
they have slowed sharply, the pace is only now returning to more
"normal" levels (2015-2019), around 5.0-5.5 mln (seasonally adjusted
annual pace). In late 2020 and early 2021, activity surged above 6.5 mln.
The Biden administration is
expected to announce its decision on the Federal gasoline tax by the end of the
week. Efforts to ease
price pressures, and especially gasoline prices, which act as a bit of a
political lightening rod, has been talked about for several weeks. The average
retail price is near $5 a gallon. The Federal tax is a little more than
18-cents a gallon. One drawback is that the tax is used for the Federal Highway
Trust Fund that maintains the roads. Biden has called on industry to boost
capacity, but reports suggest that US has lost around a million barrels a day
of refining capacity since Covid. Around half has been lost as a few refiners
failed during the economy shutdown. The other half appears to have shifted
toward biofuels. There are some calling to cap or bar exports, but it is not
clear the support levels. Congressional approval for the gas tax holiday
appears to be needed.
The St. Louis Fed President
Bullard spoke yesterday. His
comments suggest our speculation that the Fed saw the market discounting the
likelihood of a 75 bp hike and took advantage of the "free option" to
hike rates more "expeditiously" was fair. He argued that the Fed must
meet market expectations as part of its effort to rein in inflation. He argued
that the Fed's communication has been effective and now it is up to the Fed to
deliver and ratify its forward guidance. Today, Barkin and Mester are scheduled
to speak. Tomorrow, Powell begins his two-day semi-annual testimony before
Congress.
Canada reports April retail
sales today. The median
forecast in Bloomberg's survey is for a 0.8% rise after a flat March report. Excluding
autos, retail sales are expected to have risen by 0.6% after a headed 2.4%
increase in March. The US dollar peaked before the weekend near CAD1.3080, a
marginal new high for the year. It pushed lower yesterday and settled near
CAD1.2980. It approached CAD1.29 today. The intra-day momentum indicators are
stretched, suggesting that the CAD1.2865 (38.2%) retracement objective of the
leg up that began from the June 8 low (~CAD1.2520) may not be seen today. The
Mexican peso is bid today and is trading at its best level since last Monday. The
greenback stalled last week MXN20.69-MXN20.70 area. Today's low is near
MXN20.1250. Although Banxico’s Deputy Governor Heath played down speculation of
a 100 bp hike later this week, he did allow for 2-3 bp three-quarter point moves. Several banks
have pushed back against the need for three 75 bp moves, which the swaps market
appears to have largely discounted. That would lift the target rate above 9%,
while inflation in May was 7.65%. The biweekly estimate for the first half of
June will be reported on Thursday, several hours before the central bank
decision. It is expected to have stabilized around 7.7%. The MXN20.1170 area
corresponds to the halfway point of the rally from June 9 low near MXN19.5330
to the recent high around MXN20.70. A convincing break, which seems unlikely
today, could signal a move toward MXN20.00.
Disclaimer
Reviewed by Marc Chandler
on
June 21, 2022
Rating:
