Overview: The pendulum of market psychology is
swinging dramatically. Amid the US banking crisis, Credit Suisse's long-running
pressures percolated back to top-of-mind, sending ripples through the capital
markets, trigging a sharp slide in the euro. The SNB support is helping the
markets calm today. The odds of a 50 bp hike by the ECB today have been cut to
about 50% compared with a nearly 100% a week ago. The market has about a 66%
chance of a 25 bp hike by the Fed next week discounted and about a 50% chance
of a quarter-point move by the Bank of England priced into the overnight index
swaps.
Asia Pacific equities continued
the rout, while European stocks have stabilized, including the bank index. US
equity futures are narrowly mixed. Benchmark 10-year bond yields are jumping
back. European rates are up 8-15 bp and the peripheral premiums are falling. The
10-year US Treasury yield is up almost four basis points to 3.50%. The US
two-year yield is up a dozen basis points to poke back above 4%. The US dollar
is weaker against nearly all the G10 currencies, led by a rebounding Swiss
franc (~0.6%). The notable exception is the New Zealand dollar, which was
punished for a much weaker than expected Q4 GDP (-0.6%). Gold ran up a bit
through $1937 yesterday and is consolidating today above $1900. May WTI is also
stabilizing after falling to the lowest level since late 2021. Yesterday's low
was a little below $66 and today's bounce has carried to back to almost $69. It
finished last week slightly be $77.00.
Asia Pacific
As the Chinese economy finds
better traction, it ought not be surprising that so do Japanese exports. Japanese exports increased on a
year-over-year basis for the first time since last September. Imports slowed
for the fourth consecutive month. The result is that Japan's trade deficit fell
sharply. It was nearly JPY900 bln in February down from the record JPY3.5
trillion in January. Japan recorded a JPY711.5 bln deficit in February 2022. As
we have noted, seasonal influences are powerful, and Japan's trade balance
always (past 20 years) improves in February from January. The seasonal pattern
for March is not as strong, but the trade balance often improves then as well,
before deteriorating in April and May. Imports rose 8.3% year-over-year (slowing
from 17.5% in January), while export accelerated to 6.5% (from 3.5%). Of note,
shipments to the US rose by nearly 15% and 18.6% to Europe. Exports to China
fell by nearly 11%, the third consecutive decline. Separately, January
industrial output was revised to show a larger contraction (5.3% vs. -4.6%,
month-over-month), and Japanese investors stepped up their purchases of foreign
bonds last week after selling the week before. Through the first ten weeks of
the year, Japanese investors have bought JPY6.26 trillion (~$47 bln) of foreign
bonds. In the first ten weeks of 2022, they sold JPY1.82 trillion.
Australia filled nearly 75k
full-time positions last month, more than the previous three months combined. It lost 10.3k part-time positions. The
unemployment rate fell to 3.5% from 3.7%, while the participation rate was
unchanged at 66.6%. The market focused European and US financial problems, the
market shrugged it off and took Australian yields lower. The three-year yield
fell 22 bp to 2.81% but the Australian dollar traded higher. In New Zealand, Q4
22 GDP was considerably weaker than expected, falling by 0.6% (instead of
0.2%), and Q3 was revised to 1.7% from 2.0%. It raises questions over whether
the central bank can raise rates another 75 bp as it had previously
signaled.
The dollar is pinned in the
lowest end of its range against the Japanese yen. Support has been found around
JPY132.20. The upper end of this week's range is around JPY135.00. We suspect
the greenback has scope to recover a bit, and a move above JPY133.50 would lift
the tone. The Australian dollar is firm, though well within yesterday's range
(~$0.6590-$0.6710). It reached about $0.6660 in early European turnover where
it met a wall of sellers. Initial support now is seen near $0.6620. The
greenback is slightly heavier against the Chinese yuan in quiet turnover. It
rose slightly above CNY6.91 for the first time since Monday but is closer to
CNY6.90 now. The PBOC set the dollar's reference rate at CNY6.9149. The median
in Bloomberg's survey anticipated CNY6.9159.
Europe
Credit Suisse shares are
rebounding today. The
SNB will lend CHF50 bln to the bank, which has also offered to repurchase CHF3
bln in senior debt. The funds from the national bank are huge, a little more
than 6% of GDP. The Stoxx bank index of EMU banks, which tumbled 8.4%
yesterday, has stabilized and is trading about 1.3% higher in the European
morning.
There were reverberations
through the capital markets.
Interest rates plunged. The euro fell the most in six months (~1.45%). The ECB
is seen less likely to deliver the half-point hike that had seemed to be a done
deal a weak ago. The swaps market sees about a 50% chance of a 50 bp move
today. Before the financial tensions erupted, the market was nearly fully
confident of a half-point move. The swaps market has also slashed the odds that
the Bank of England delivers a quarter-point hike next week. Even at the end of
last week, the probability was seen near 90%. It is a little above 50% now.
The euro posted a big
outside down day, trading on both sides of Tuesday's range and closing well
below Tuesday's low. It
has stabilized today, ostensibly helped by the Swiss move. It has reached a
high near $1.0635 after falling to around $1.0525 yesterday. A move above
$1.0665 would lift the tone. However, intraday momentum indicators suggest it
may initially first test support near $1.0580. Sterling has stalled after
recovering a cent from yesterday's low around $1.2010. It was sold in early
European turnover. There are about GBP500 mln in options at $1.2150 that roll
off today. Ahead of yesterday's low, support is seen near $1.2050.
America
US retail sales fell for the
third time in four months. Yet,
in some ways, the American consumers, are providing to be resilient. Excluding
auto sales (-1.8%) and gas station sales (-0.6%), retail sales were flat. The
core measure (excludes auto, gas station, food services, and building
materials) rose by 0.5%, after the January estimate was revised to 2.3% from
1.7%. The median forecast in Bloomberg's survey was for a 0.3% decline. This
may spur some economists to revise up their Q1 GDP estimate. Perhaps, the most
troubling part of the retail sales report was the 2.2% decline in food service
sales (restaurants and bars). It was the largest decline in more than a year. It
does follow a 5.6% jump in January. Separately, producer prices were softer
than expected. The headline year-over-year pace slowed to 4.6% and the core to
4.4% from revised January readings of 5.7% and 5.0%, respectively.
European developments seem
to shake fragile sentiment in the US and drove the US two-year yield to fresh
six-month lows near 3.70%. Recall
that last week, the yield poked above 5%. After Tuesday's CPI report and the
weekend initiatives, the comments by Fed Governor Bowman, the market was
feeling more comfortable with a 25 bp Fed hike next week. At the close on
Tuesday, the probability was seen near 80%. It was halved yesterday to 40% and
is now near 66%. Moreover, the Fed funds futures strip is consistent with a
rate cut in Q2. Consider the implied yield of the January 2024 Fed funds
futures contract, which offers the cleanest read of the end of 2023. It is
about 3.95% now and last week, the implied yield of the Jan 2024 Fed funds
futures contract was approaching 5.60%. Today's data seems likely overshadowed
by the ECB meeting and financial concerns. The data includes weekly jobless
claims, which rose by more than expected, housing starts and permit, the
Philadelphia Fed survey, and the NY Fed services survey.
The US dollar settled near
CAD1.3770 yesterday and has spent little time above there so far today. A consolidative tone has emerged, and the
greenback has traded down to almost CAD1.3720. The risk-off mood negated the
positive impulse from the sharp decline in US short-term rates. Note that
yesterday's high was just shy of CAD1.3815, where options for around $860 mln
expire today. The greenback remains firm against the Mexican peso and
is trading a little above MXN19.00. The high for the week was set on
Monday at almost MXN19.18. Initial support is seen by MXN18.90, while a move
above the week's high would target the MXN19.25-30 area.
Disclaimer
Reviewed by Marc Chandler
on
March 16, 2023
Rating:
