Overview: Equities are higher and bonds lower as the
week's activity winds down. Asia Pacific markets rallied, paced by more than 2%
gains in Hong Kong and South Korea. Japan's Nikkei rallied more than 1%, as did
China's CSI 300. Most of the large markets but South Korea and Taiwan advanced
this week, though only China and Hong Kong are up for the month. Europe's Stoxx
600 is up 1.3% through the European morning, its biggest advance of the week
and what looks like the first weekly gain in four weeks. US futures are
trading around 0.6%-0.8% higher. The NASDAQ is 4% higher and the S&P 500 is
3.3% stronger on the week coming into today. The US 10-year yield is virtually unchanged
today and around 3.08%, is off about 14 bp this week. European bonds are mostly
2-4 bp firmer, and peripheral premiums over Germany have edged up. The US dollar
is sporting a softer profile against the major currencies but the Japanese yen.
Emerging market currencies are also mostly higher. The notable exception is the
Philippine peso, off about 0.6% on the day and 2.2% for the week. Gold fell to
a five-day low yesterday near $1822 and is trading quietly today and is firmer
near $1830. August WTI is consolidating and remains inside Wednesday’s range
(~$101.50-$109.70). It settled at almost $108 last week and assuming it does
not rise above there today, it will be the first back-to-back weekly loss since
March. US natgas is stabilizing after yesterday’s 9% drop. On the week, it is
off about 10% after plummeting 21.5% last week. Europe is not as fortunate. Its
benchmark is up for the 10th consecutive session. It soared almost 48%
last week and rose another 7.7% this week. Iron ore’s 2% loss today brings the
weekly hit to 5.1% after last week’s 14% drop. Copper is trying to stabilize
after falling 7.5% in the past two sessions. It is at its lowest level since Q1
21. September wheat is up about 1.5% today to pare this week’s decline to around
8%.
Asia Pacific
Japan's May CPI was spot on
expectations, unchanged from April. That keeps the headline at 2.5% and the core rate, which excludes
fresh food, at 2.1%, slightly above the 2% target. However, the bulk of that
2.1% rise is attributable to energy prices. Without fresh food and energy,
Japan's inflation remains at a lowly 0.8%.
The BOJ says that Japanese
inflation is not sustainable, which is another way to say transitory. In turn, that means no change in policy. The
fallout though is increasing disruptive. The yield curve control defense roiled
the cash-futures basis and the uncertainty about hedging may have contributed
to the soft demand at this week's auction. In addition, interest rates swap
rates have risen as if the market is seeking compensation for the added
uncertainty. Meanwhile, for the fourth session there were no takers of the
BOJ's offer to buy bonds at a fixed rate.
The approaching month-end
pressures saw the PBOC step up its liquidity provisions and it injected the most
in three months today. Still,
the seven-day repo rate rose 16 bp to 1.17%. In Hong Kong, three-month HIBIOR
rose to 1.68%, the highest since April 2020. Australian rates moved in the
opposite direct. Australia's three-year yield fell 14 bp today after falling
10 bp in each of the past two sessions. It has fallen every day this week
for a cumulative 43 bp drop to 3.20%. It had risen by slightly more than 50 bp
the previous week. There was a dramatic shift in expectations for the year-end
policy rate. The bill futures imply a year-end rate of 3.17%, which is about 68
bp lower than a week ago. It had risen by a little more than 150 bp in the
previous two weeks.
The dollar traded in a
two-yen range yesterday, but today is consolidating in a one-yen range above
yesterday's low near JPY134.25. The pullback in US yields has been the key development and the
dollar is lower for the third consecutive day. If sustained, this would be the
longest losing streak for the greenback in three months. The Australian dollar
is straddling the $0.6900 level, where options for A$1 bln expire today. It
is mired near this week's low, set yesterday near $0.6870. Australia's two-year
yield swung back to a discount to the US this week after trading at a premium
for most of last week and the start of this week. The greenback was confined
to a tight range against the Chinese yuan below CNY6.70 today but holding above
CNY6.6920. The greenback traded with a heavier bias this week and snapped a
two-week advance with a loss of around 0.3% this week. The PBOC set the
dollar's reference rate at CNY6.7000, a little below the median forecast
(Bloomberg survey) of CNY6.7008. It was the fourth time this week that the fix
was for as weaker dollar/stronger yuan.
Europe
The week that marked the
sixth anniversary of the UK referendum to leave the EU could have hardly gone
worse. Consider:
The May budget report showed a 20% increase in interest rate servicing costs. Inflation
edged higher. The flash June composite PMI remained pinned at its lowest level
since February 2021. The GfK consumer confidence fell to -41, a new record low.
Retail sales slumped by 0.5% in May and excluding gasoline were off 0.7%. Separately,
as the polls had warned, the Tories lost both byelection contests held
yesterday. And perhaps not totally unrelated, the Cabinet Secretary revealed
that at the Prime Minister's request a position for his wife in the royal charity
was discussed. This continues a pattern that had included trying to appoint her
as Johnson's chief of staff when he was the foreign minister and plays on the
image of crass favoritism.
The risk of a new crisis in
Europe is under-appreciated. In retaliation for Europe's actions, which in earlier periods,
would have been regarded as acts of war, Russia has dramatically reduced its
gas shipments to Europe. Many Americans and European who scoff at Russia's
"special military operation" may be too young to recall that
America's more than 10-year war in Vietnam was a police action and never
officially a war. Now, the critics are incensed that Moscow has weaponized gas,
while overlook the extreme weaponizing of finance. Aren't US and European
sanctions a bit like weaponizing the dollar and euro? In any event, Putin
has ended the European illusion that it would determine the pace of the
decoupling from Russia's energy. Germany's Economic Minister and
Vice-Chancellor heralds from the Green Party. The gas "embargo" has
forced him to swallow principles and allow an increased use of coal. Habeck
increased the gas emergency warning system and drew parallels with the Lehman
crisis for the energy sector.
It is with this backdrop
that the Swiss National Bank felt obligated to hike its deposit rate by 50 bp
last Thursday (June 17). The
euro had been trading comfortable in a CHF1.02 to CHF1.05 trading range since
mid-April. Judging from the increase in Swiss sight deposits, the SNB may have
intervened in late April and early May. However, in recent weeks there was no
"need" to intervene and sight deposits fell for four consecutive
weeks through June 17. The euro traded at three-and-a-half week lows against
the franc yesterday, trading to CHF1.0070 for the first time since March 8. In
fact, the Swiss franc is the strongest of the major currencies this week,
rising about 1.15% against the dollar and about 0.75% against the euro.
The German IFO survey of
investor confidence weakened again but did not seem to impact the euro. The assessment of the business climate
slipped (92.3 from 93.0). This reflected the mild downgrade of existing
conditions (99.3 from 99.6) and the sharper drop in expectations (85.8 vs.
86.9). This is the most pessimistic outlook since March, which itself was the
poorest since May 2020. The euro remains within the range seen Wednesday
(~$1.0470-$1.0605). It closed near $1.05 last week. There are options for
almost 1.2 bln euros that expire there today but have likely been neutralized. Assuming
the euro holds above there, it will be the first weekly gain since the end of
May. Par for the course today, sterling is also trading quietly in a
narrow half-cent range above $1.2240. If it closes above there, it too
will be the first weekly gain in four weeks. Sterling's range this week has
been roughly $1.2160 to $1.2325. The US two-year premium over the UK has risen
for the Monday and is now around 110 bp, up from about 88 bp in the first part
of the week.
America
Bloomberg's survey of 58
economists produced a median forecast of 3.0% for Q2 US GDP. Only five of them see growth lower than 2%.
The median has it remaining above 2% in H2 before slowing to what the Fed sees
as long-term non-inflationary growth of 1.8% throughout next year. The market
does not share this optimism. The shape of the Fed funds and Eurodollar futures
curve suggests investors sees the Fed breaking something sooner. Given where
inflation is, it is hard to take seriously talk about the Fed front-loading tightening,
what it is doing is catching up. But monetary policy impacts with notorious
lag, and as several Fed officials have acknowledged, financial conditions began
tightening six months before the first hike was delivered. The Fed funds
futures strip has terminal rate around 3.5% by late Q1 23. The first cut priced
in for Q4 23.
The US reports May new home
sales. There are
supply issues that are important here, but it will likely be the fifth
consecutive monthly decline. Through April, they were off 30% so far this year.
New home sales stood at 591k (saar) in April. At the worst of the pandemic,
they were at 582k in April 2020. The University of Michigan survey was
specifically mentioned by Fed Chair Powell at his press conference following
the FOMC's decision to hike by 75 bp. The final report is rarely significantly
different than the preliminary report, but it cannot help by draw attention.
Mexico's central bank
unanimously delivered the widely expected 75 bp hike in its overnight rate to take
it to 7.75%. It was the
ninth hike in the cycle that began last June for a cumulative 375 bp. The move
followed slightly firmer than expected inflation in the first half of this
month (7.88%) and stronger than expected April retail sales. The key is that it
matched the Fed's move. It indicated that it will likely move just as
"forcefully" at its next meeting in August. The swaps market has
almost another 200 bp more of tightening this year. Banxico also revised its
inflation forecast. Previously, it saw inflation peaking in Q2 22 at 7.6% and
now it says the peak will be 8.1% in Q3. It has inflation finishing the year at
7.5%, up from 6.4%. Separately, reports suggest the US is escalating complaints
that President AMLO's energy policies, favoring the state companies, violates
the free-trade agreement.
The US dollar rose a little
more than 3.5% against the Canadian dollar in the past two weeks as the S&P
500 tumbled nearly 11%. With
today's roughly 0.25% pullback, the greenback doubled its loss to 0.50% this
week, and the S&P 500 is up about 3.3% this week coming into today. The
macro backdrop for the Canadian dollar looks constructive: strong jobs
market, better than expected April retail sales reported this week and firmer
May price pressures. The market has a 70 bp hike priced in for the July 13 Bank of
Canada meeting. The year-end rate is off four basis points this week to 3.41%. In
comparison, the US year-end rate is off about 13 bp this week to about 3.44%. The
US dollar is off for the sixth consecutive session against the Mexican peso. The
peso is the strongest currency in the world this week, leaving aside the
machinations of the Russian rouble, with a 1.8% gain, including today's 0.2%
advance through the European morning. The greenback frayed support around
MXN20.00 yesterday for the first time in nearly two weeks. It is spending more
time below there today with a move to MXN19.96. A convincing break of the
MXN19.94 area could signal a move toward MXN19.80. There is a $1 bln option
expiring at MXN20.00 today, and the related hedging may have weighed on the
dollar.
Disclaimer
Reviewed by Marc Chandler
on
June 24, 2022
Rating:
