Overview: Chinese markets were the notable exception amid sharp losses in many
of the large markets in the Asia Pacific.
A rebound in the Japanese yen, spurred by official comments about the
pace of its losses, saw Japanese shares tumble.
South Korea, Australia, and India markets were off more than 1%. Europe’s Stoxx 600 is also off more than 1%
as it the benchmark records the fourth consecutive decline. US futures are steady to a little
higher. Meanwhile, the US 10-year year
yield is hovering around 3.03%. In
Europe, the peripheral bonds are under pressure and the premium over Germany is
widening after the ECB did not unveil a new tool to combat “fragmentation.” The
dollar is mixed against the major currencies.
The Antipodeans join the yen in modest gains (~0.3%-0.5%) today while sterling
and the Canadian dollar lead the decliners (~0.3%). Emerging market currencies are mostly lower,
but the Turkish lira is the top performer with about a 0.25% gain (the central bank
doubled to 20% the required reserves on lira loans). Gold
is trading quietly between $1842 and $1848.
July WTI is firm above $122. US
natgas is slightly firmer after rising 3% yesterday. Europe’s natgas benchmark is off almost 1.5%
to pare yesterday’s nearly 10% surge. Iron
ore is pressured for the second day after fresh Covid-related restriction were
announced in Shanghai. With these
losses, iron ore prices fell on the week (~2.2%). July copper is extending yesterday’s losses. July wheat continues to unwind the 5.1% rally
seen at the start of the week.
Asia Pacific
Verbal intervention by
Japanese officials saw the yen trade modestly higher. Coming into today, the yen had fallen in eight
of the past nine sessions. In late April, with the US dollar probing
JPY131, Japanese officials warned about the sharp moves, which arguably helped
help the yen stabilize. If intervention is best thought of as an
escalation ladder, another small step was taken today. After Ministry of
Finance, Bank of Japan, and Financial Services officials met, a statement was
issued expressing concern about the pace of the yen's decline, and threatened
to "act appropriately, if needed.". The yen was trading near
seven-year lows against the euro and Australian dollar and 20-year lows against
the greenback. The dollar was around JPY134.50 before the statement and
pulled back to almost JPY133.35. The G7/G20 statements about foreign
exchange say that while the markets should determine rates, excessive
volatility should be avoided. The yen's weakness is driven by fundamental
considerations (e.g., divergence of monetary policy, terms-of-trade
shock). Perhaps, verbal intervention may be more effective than actual
material intervention in dampening volatility.
China report inflation and
lending figures today. The CPI was unchanged at 2.1% year-over-year. It
declined (0.2%) month-over-month for the first time this year. Food and
transportation gains were not demand driven, and the core rate, which excludes
food and energy, was steady at 0.9%. Pork prices were 21.1% lower than a
year ago and shaved 0.34 percentage points from CPI. On the other hand,
fresh vegetable prices were up 11% and fresh fruit prices rose 19%.
Together they added 0.58 percentage points to CPI. The price of gasoline
a little more than 27% year-over-year. Producer prices fell for the
seventh consecutive month. After peaking last October at 13.5%
year-over-year, China's PPI has slowed to more than half, to 6.4% in May.
This was in-line with expectations. The medium-term lending facility rate
will be set next week. Most do not look for a reduction. Inflation
does not stand in the way, but it hasn't, and Beijing shows a preference to use
fiscal levers, while interest rate adjustments have been meager thus far.
Separately, Chinese lending figures showed a larger than expected recovery from
depressed April levels. Overall aggregate financing rose CNY2.79
trillion, which was around 30% more than expected and a three-fold increase
from April's CNY910 bln.
The verbal intervention by
Japanese officials steadied the dollar-yen after probing near JPY134.50 in
early turnover today. However, yesterday's low near JPY133.20 was unchallenged. In
order there to be sustained impact, officials need to spur a short squeeze,
which is challenging as one is paid to be short the yen, given the rate
differentials. Some position adjustments today have also been encouraged by the
expiration of options for $570 mln at JPY134 that expire shortly. The
North American session may be skeptical that the verbal intervention can be
backed by material intervention as the FOMC is set to deliver a 50 bp hike next
week and will likely to continue at that pace in July, and likely September. The
Australian dollar losses were extended to $0.7085 today, a new low for the
month, but recovered to $0.7140 in late Asian turnover. However, it
found fresh offers in the European morning. We suspect a durable low is not in
place. The next technical target may be the $0.7055 area. Only a
move above $0.7160 would negate this bearish outlook. The US
dollar is firm against the Chinese yuan but confined to yesterday's range
(~CNY6.6650-CNY6.7000). It is up about 0.6% this week, recovering from
a loss of a similar magnitude last week. The PBOC set the dollar's
reference rate at CNY6.6994, slightly lower than the expected (CNY6.7017,
according to the Bloomberg survey).
Europe
One might not know it from
downside reversal in the euro that many banks that the market heard a hawkish
message from the ECB. The
swaps market for the year-end jumped 15 bp to almost 150 bp. There are four
meeting left this year. That implies expectations for not one by two 50 bp
hikes this year. Many banks concur. That said, ECB President Lagarde was clear
about the July move being only 25 bp. The possibility that the pace quickens in
September was conditional about prices not stabilizing or deteriorating.
The case for skepticism may
begin with an appreciation that interest rates are not waiting for the ECB to
move official rates. Consider
that since early March, the two-year German yield has surged by more than 160
bp to a little more than 0.8%, its highest level in 11 years. The US two-year
yield has risen by less, and this has resulted in the US premium has fallen
below 2.0% from over 2.50% as recently as mid-May. It has retraced half of this
year increase in the past three weeks. The relationship between the exchange
rate and the interest differential seems cyclical with the dollar rising as rates
more against it a late-cycle phenomenon.
After a big outside down day yesterday, follow through selling of the euro took the single curerncy below the $1.06 level for the first time since May 23. The next target is $1.0570 and then $1.0520. Still, the decline has stretched intra-day mometnum readings, but the $1.0650 area may cap the bounce. The big outside up day sterling enjoyed on Tuesday did not generate any follow through buying and the $1.26 cap held. It has been gradually unwinding the gains in the subsequent sessions and today's low near $1.2450 is a three-day low. A break of $1.24 would be ominous and suggest at least another two-decline.
America
Another month-over-month
rise in consumer prices boosts the risk that the year-over-year pace could tick
up. Last May, the
headline CPI rose by 0.7% and the core rate by 0.6%. The continued rise in
gasoline, retail food prices, and shelter costs warns that of sticky prices. However,
at the end of the day, the CPI is unlikely to alter views of investors or
policymakers. Put simply, the Fed seems to have committed to a 50 bp hike next
week and another in July. Officials have been a bit cagey as a whole about
September, but the markets are not waiting for them. The Fed funds futures has
more than a 90% chance of a 50 bp hike in September too. The first look at
June's consumer confidence from the University of Michigan is also due.
Sentiment has fallen in four of the past five months, and at 58.4, it is the
lowest since 2011. While confidence has deteriorated, inflation expectations
have stabilized. The one-year expectation was at 5.4% in March and April and
eased to 5.3% in May. The 5-10-year expectation has been at 3.0% since
beginning the year at 3.1%.
The May budget statement may
be under-appreciated in the current context where monetary policy is center
stage. The point is that the
Fed could engineer the proverbial soft-landing if it were operating in a policy
vacuum, but fiscal policy is also contracting dramatically. As we have noted,
the budget deficit is expected to fall from 10.5% of GDP last year to less than
5% this year. In terms of dollar, it means that the budget has been in surplus
by an average of $4.4 bln a month in the January-April period. Last year, it
recorded an average monthly deficit of $340 bln. In 2019, the average deficit
was $53 bln a month.
Canada reports May
employment figures. Job
growth is expected to have accelerated to 27.5k from 15.3k in April. In the
first four months of the year, Canada has created 227k jobs compared with 142k
in the same period last year. The unemployment rate fell to a new low of 5.2%
in April. Before the pandemic it was 5.8%. At 65.3%, the participation rate
slightly below where it was at the end of 2019. The takeaway is the Canadian
jobs market is strong and the Bank of Canada will continue to hike rates. The
swaps market has 50 bp hikes discounted in the next three meetings this year. There
is about a 1-in-3 chance seen of a 75 bp hike in July. With so much already in
the market, the Canadian dollar continues to appear sensitive to the general
risk appetite, for which we use the S&P 500 as a proxy. That said,
yesterday's sharp greenback advance (~1.1%, the biggest this year) coincided
with a dramatic narrowing of the Canadian premium over the US on two-year money.
The nearly eight basis point narrowing snapped a six-day widening move, but
simply brought it back to almost where it settled last week (25 bp).
The US dollar rallied strongly
against the Canadian dollar yesterday. In fact, the 1.1% gain was the most in a session this year. The
greenback's gains have been extended to CAD1.2730 today. It finished last week,
slightly below CAD1.2600. There are $820 mln in CAD1.2750 options that expire
today. With today's upticks, the US dollar is testing the (38.2%) retracement
objective of the slide since May 12 high (~CAD1.3075). The next retracement
objective (50%) is near CAD1.2800. Mexico's May CPI was a little firmer than expected, and
although speculation of a 75 bp hike later this month remains intact, lost
ground amid the risk-off mood. The US dollar is making new highs for the
week today, near MXN19.75. The high for the month is near MXN19.77. A move
above MXN19.82 could spur further dollar gains toward MXN19.95-MXN20.00. Note
that Brazil's CPI was a little softer than expected and but the real also
soften. It has fallen every session this week coming into today. The four-day
streak is the longest decline in nearly three months. The next big technical
target is BRL5.0.
Disclaimer
Reviewed by Marc Chandler
on
June 10, 2022
Rating:
