Overview: The banking stress that roiled the markets
this month has eased. However, the emergency lending by the Federal Reserve,
vias the discount window and new Bank Term Funding Program hardly slowed in the
past week ($152.6 bln vs. $163.9 bln). Money markets took in more funds. Almost
$305 bln has flowed to them over the past three weeks. The US KBW bank index is
up 3.75% this week coming into day (after pulling back 1.2% yesterday). Europe's
Stoxx 600 bank index is snapping a four-day advance today but is up nearly 6.2%
this week. The Topix bank index in Japan rose 2% this week.
Asia Pacific and European
equities are finishing the month on a firm note, and US futures are slightly
positive. Bond market are mostly little changed today. The 10-year US Treasury
yield is near 3.56%, up a few basis points this week, while European yields are
up 14-18 bp on the week. Two-year yields are up around 25 bp in Europe this
week and about 16 bp in the US. The dollar is paring this week's losses today
and is up again nearly all the G10 currencies. The Dollar Index is firmer but
is poised to finish the week lower, and this would be the third consecutive
weekly decline. Emerging market currencies are mostly higher against the dollar
today, with the notable exception of eastern and central Europe. Gold is hovering
near its best level for the week, reached today near $1985, before slipping
toward $1973 as the US dollar recovered from its early weakness. May WTI is
little changed around $74.25, which is near a two-week high and the (61.8%)
retracement of the loss since the month's high (~$81) was recorded on March 7.
Asia Pacific
Tokyo's headline and core (excludes fresh
food) inflation slipped a bit in March, though in line with expectations. It is a good approximation of the national
figures, which are not released until April 20. The headline rate stands at
3.3% and the core at 3.2%. However, the challenge immediate challenge is coming
from processed foods, while the government subsidies are masking energy
inflation. Excluding fresh food and energy, Tokyo's CPI ticked up to 3.4% from
3.1% (revised from 3.2%). It is a new cyclical high. Separately, Japan reported
February retail sales by jumped 1.4% after the January's gain of 0.8%
(previously revised from 1.9%, oops). The median forecast in Bloomberg's survey
anticipated a 0.3% increase, which was last year's average. Japan's
industrialized production jumped back after crashing by 5.3% in January. It
rose by 4.5%, easily surpassing expecting expectations of a 2.7% gain. The
Lunar New Year skews not only Chinese economic readings but also many of its
trade partners. Stronger Japanese exports in February (1.5% vs. -5.3% in
January) point to a recovery in industrial output. Despite stronger than
expected industrial production and retail sales, Japan's labor market
disappointed. Japan reported its unemployment rate unexpectedly rose to 2.6% in
February (from 2.4%) while the job-to-applicant ratio slipped to 1.34 (from
1.35). The ratio was in the averaged 1.61 in the 2018-2019 pre-Covid period and
inflation was lower.
China's PMI is showing an economy in
recovery. The
manufacturing PMI eased to 51.9 from 52.6, and the non-manufacturing PMI rose
to 58.2 from 56.3. Construction, as in infrastructure efforts, is included in
the non-manufacturing PMI. The new orders sub-index for non-manufacturing rose
to 57.3, the highest since 2007. The new orders for manufacturing eased to 53.6
from February's five-month high of 54.1. New export orders slowed to 50.4
from 52.4. The composite rose to 57.0 from 56.4. Last March, the composite
stood at 48.8.
Politics rivals economics for attention
by the market and the focus may shift back to politics, given that the economic
reports next week include only the Caixin PMI and likely March reserve figures. Given the dollar's decline this
month and the rally in bonds suggests on a purely valuation calculation, the
dollar value of Chinese reserves likely recouped the $51.3 bln decline in
February plus a bit more. China has threatened to respond to the Taiwanese
president's meeting with the US Speaker of the House in California. Taiwanese
President Tsai-Ing-wen had proposed meeting the House Speaker in California
rather than Taipei to minimize antagonizing Beijing.
Separately, and likely to annoy Beijing,
the Biden administration is considering an agreement that would end the double
taxation, as the US has with many other countries. The problem is that the agreement
typically takes the form of a treaty, despite the mental and verbal gymnastics,
the US does not recognize Taiwan as a sovereign nation. An agreement with
Taiwan that is reserved for sovereigns, even if not a treaty, would likely
antagonize Beijing. Taiwan officials argue that the effective tax rate its
companies' profits in the US is 51%, some 10 percentage points higher than South
Korean and Australian firms for example, after accounting for withholding taxes
on dividends that are setback to headquarters.
The dollar rose to almost JPY133.60
against the Japanese yen today. It is the best level since in two weeks. The JPY133.80 area corresponds to
the (61.8%) retracement of the dollar's losses from the month's high near
JPY138. The 20-day moving average, which the greenback has not closed above
since March 9, is found around JPY137.35. A possible head and shoulders bottom
(neckline is about JPY133) projects toward JPY136.50. The Australian
dollar was bid to six-day highs near $0.6740 before stalling and being pushed
back to reach $0.6670 in early Europe. Like last week, it was greeted by
sellers as the 200-day moving average was approached (~$0.6750). A close below
the $0.6660 area would weaken the technical tone. The greenback gapped
lower against the Chinese yuan, mostly reflected its weakness in the North
American afternoon yesterday. It fell to CNY6.8445, a new low for the week,
before rebounding to nearly CNY6.8740. The PBOC again set the dollar's
reference tight to expectations (CNY6.8717 vs. CNY6.8721).
Europe
Although the aggregate CPI reading for the
eurozone slowed to 6.9% in March from 8.5% in February, ECB officials cannot be pleased. The 0.9%
month-over-month increase means that prices rose at an annualized rate of a
little more than 6.0% in Q1. Moreover, the core rate (excludes food, energy,
alcohol, and tobacco) rose to a new cyclical high of 5.7% (from 5.6%). If there
is a kernel of good news in eurozone inflation, it is that Germany's is running
especially hot. It means that Germany is not exporting deflationary forces, and
other countries are gaining competitiveness. German CPI rose an annualized rate
of more than 10% in Q1. French inflation rose slightly less than 10% at an
annualized clip. The comparable pace in Spain was about 4.4% and Italy's harmonized
CPI fell at an annualized rate of almost 2.5% in Q1.
The market is feeling more comfortable
with an ECB hike at the May 4 meeting. The swap market shows that during the heightened financial
stress the odds had been reduced to almost a 50% chance but is now near 90%.
The market sees the ECB's terminal rate near 3.5% in late Q3 or early Q4. We
suspect expectations may continue to recover toward 3.75%. Prior to the banking
stress, the swaps market had discounted a peak rate of 4%. In the
holiday-shortened week for most European centers, the highlight is the final
March PMI readings. The preliminary estimate usually is sufficient close to the
final report as to steal its thunder.
After running up to about $1.0925
yesterday, its best level for the week, but just shy of last week's $1.0930
high, the euro has steadied. It is consolidating above $1.0870. The intraday momentum
indicator has turned back up in the European morning, but we suspect the upside
is limited now ahead of the weekend. Still, the euro settled at $1.0760 last
week and this week's ~1.2% gain is more than cumulative gain of the past three
weeks. It is the fifth consecutive weekly rally. Sterling has been sold
after poking above $1.24 for the first time in nearly two months. It was
pushed back to almost $1.2350 before finding bids. Sterling settled near
$1.2235 last week, and barring a stunning reversal in North America today, it
would be the third consecutive weekly gain and the fourth in five weeks. This
month, the low for the year was recorded near $1.18 (March 8) before recovering
to the two-month high. The momentum indicators are stretched and the $1.2450
high from December and January offer formidable resistance.
America
Today's highlight is supposed to be
February's PCE deflator but don't be surprised by a non-plus market
reaction. First, in
this cycle, the CPI is more important even though the Fed targets the headline
deflator. It is taken for granted that the headline rate eased, while the core
rate is proving sticky. There seems to be a consensus expecting lower housing
cost to begin showing up around the middle of the year, and that this will
moderate measured inflation. Second, the Fed will see another CPI and PCE
report before it meets again in early May. By the time it meets then today's
data is less relevant. Third, in terms of the Fed's reaction function price
pressures clearly remain elevated and, all things being equal, there still
seems to be a majority thinking that additional rate hike are desired. The
problem is the key to the extent of the Fed's work that lies ahead is now seen
as a function of the extent and duration of the tightening of lending. And that
will not be learned today.
Canada's January GDP is too old to elicit
much of a market reaction. It
does underscore, though, the Bank of Canada's acknowledgement that the economy
is doing better early this year than it expected. The 0.4% expansion of the
median forecast in Bloomberg's survey would be the best since last March and
would roughly match the growth of the last third of 2022. The Bank of Canada
estimates that the economy will grow by 1.0% this year. The IMF is more
optimistic and puts Canadian GDP at 1.5%. this year. The market (median
forecast in Bloomberg's survey) is more pessimistic at 0.8% (up from 0.6% last
month).
As expected, Mexico's central bank lifted
the overnight target rate by 25 bp to 11.25%. After falling to MXN18.05 in the European morning
yesterday, the dollar recovered to new session highs (~MXN18.1625) early in
North American morning before sliding back toward the lows before the decision
was announced. The dollar bounced a little through MXN18.12 and stabilized in
the MXN18.08-10 area. After last month's surprise 50 bp hike, the central bank
signaled a smaller move. This time it changed its forward guidance to greater
dependency on incoming inflation developments, which it characterized was on a
"stable trajectory." Its updated forecast sees this year's CPI
at 4.8% at the end of year, down from 4.9% in February's forecast. The
core rate forecast was unchanged at 5.0%. The central bank does not meet again
until May 18. The swaps market thinks it’s done. Still, as we suspect the risk
of another Fed hike is greater than the market has discounted, by extension,
the same may be true of Banxico. That said, March CPI will be reported next
week (April 5). It has already been reported that CPI in the first half of the
March ticked down (7.12% vs. 7.48%). As widely expected, Colombia's central
bank also delivered a quarter- [point hike (to 13%). Its inflation was at
nearly 13.3% in February. Like Banxico, the Colombian central bank conditioned
policy on the performance of inflation. The swaps market thinks it is done.
The Canadian dollar is the strongest G10
currency this week. With
today's slippage it is still up nearly 1.5% on the week. Initially, in Asia
Pacific, the Canadian dollar extended the week's gains before reversing lower. The
US dollar held support near CAD1.3500 and recovered to around CAD1.3565. Yesterday's
high was by CAD1.3580, where this week's average is found, and a move above
there, and especially a close, would sour the near-term tone. Some momentum
indicators are stretched, warning of the risk of some retracement. Meanwhile,
the greenback has returned to yesterday's lows against the Mexican peso near
MXN18.05. The dollar snapped a five-day decline yesterday and eked out a
negligible gain (~0.02%). Even if central bank is done tightening, which may
not be the case, the carry is very attractive. The momentum indicators show
scope for additional peso gains. That said, while volatility (another important
element of carry strategies) has pulled back from the spike above 15% earlier
this month, remains elevated near 12.7%. Before the financial stress struck,
the benchmark three-month implied volatility was closer to 11.0%-11.5%.
Reviewed by Marc Chandler
on
March 31, 2023
Rating:
