Overview: The re-emergence of bank stress
reverberated through the US markets yesterday, downgrading the perceived
chances of a Fed hike next week and sending the US 2-year yield sharply lower. The
yield settled 13 bp lower, the largest drop in three weeks. The risk-off sent
the US dollar higher against most of the major and emerging market currencies. Follow-through
US dollar gains today has been mostly limited to the Australian dollar, where
after today's CPI figures has given up any residual chance of a hike next week,
and the Swedish krona, where two dissents give a dovish twist to the Riksbank's
50 bp hike. The euro and sterling are leading the G10 currencies today. The
euro's strength is helping to lift the eastern and central European currencies
higher to lead the emerging market complex.
The US 2-year rate has
stabilized today near 3.92%, and the perceived odds of a Fed hike next week is
slightly above 80%. Equities were mixed in the Asia Pacific region, but of note
China's CSI 300 fell for the sixth consecutive session. Europe's Stoxx 60 is
off around 0.7%, for its third consecutive decline. Its bank share index is off
1.1% after falling 2.7% yesterday. Favorable earnings by a regional US bank and
Microsoft and Alphabet are encouraging bottom picking after yesterday's sharp
US equity losses. The 10-year US Treasury yield is little changed near 3.41%,
while European benchmark yields are mostly 2-4 bp lower. Sweden's 10-year yield
is off six basis points. Gold has recovered from yesterday's low near $1976 to
again straddle the $2000 area. June WTI made a marginal new low for the month
yesterday ($76.50) amid demand concerns, reports suggesting there was no sign
of Russian output cuts and worries that refiners' demand will slow. Late
yesterday's API reportedly estimated that US inventory fell by 6 mln barrels. June
WTI is trading with a $77-handle today.
Asia Pacific
Japanese life insurers are
announcing their investment strategies for new fiscal year that began this
month. There seems to a
few common themes. First, last year, there was a broad move to cut hedged and
unhedged foreign bonds and the proceeds were mostly shifted to the domestic
bond market. Second, there still seems to be some work to do. One company said
it was exiting the remaining fx-hedged debt holdings. Third, many of the
companies expected the Bank of Japan's Yield Curve Control policy to be
adjusted in the first half of the fiscal year and that the cap could be raised
to 0.75% or 1.00%. Lastly, many seem to be modestly dollar bearish, but in line
with the median view in Bloomberg's survey that has the dollar the current
fiscal year (March 31, 2024) at JPY123.00.
China's CSI 300 reached a
two-month high last week near 4170. It fell for the sixth consecutive session today, the longest spill
since last October. The more than 6% decline over the run will likely draw some
official attention, it would not be surprising to hear talk of some state-owned
enterprises buying. Through yesterday, the NASDAQ Golden Dragon China Index of
Chinese companies that trade in the US fell for the sixth consecutive session.
It fell by more than 2% Monday and Tuesday after dropping more than 1.5% a day
in the final three sessions last week. It gapped lower yesterday to new lows
since the end of last November. With yesterday's losses, it has given back
nearly half of the gains from last year's low set in October. The index of
mainland shares that trade in Hong Kong is off about 5.3% this month, giving
back most of last month's gain after dramatic volatility early in the year (+10.7%
in January on re-opening hopes and fell almost 11.4% in February).
Australia's Q1 inflation
rose 1.4% quarter-over-quarter, slightly more than expected, but less than the
1.9% rise in Q4 22. The
year-over-year rate eased to 7.0% from 7.8%. The median forecast was for a 6.9%
pace. The underlying trimmed mean and weighted median measures both rose by
1.2%, which was a little less than forecast. The futures market has given up
any chance of a hike next week. The Reserve Bank of Australia announced a pause
earlier this month, with the cash target rate at 3.60%. The market thinks that
its monetary tightening cycle is over, and the year-end rate is now seen near
3.48%. It had been almost at 3.70% for the last several days.
The dollar is in a half-yen
range below JPY133.90. It
is holding slightly above yesterday's low (~JPY133.35) and the 20-day moving
average (~JPY133.25). A break of below there could signal test on the
JPY132.00-20 area. The US 10-year yield rose above 3.60% last week and is now hovering
around 3.40%. The Australian dollar is extending its sell-off to test the
$0.6600 area. Recall that last week it briefly traded above $0.6770. The
lows for the year were set on March 10 near $0.6565. A push below it opens the
door to $0.6400. The greenback reached CNY6.9335 yesterday, the highest
level since March 10 and slightly above the 200-day moving average. It
steadied today in narrow CNY6.9165-CNY6.9290 range. Yesterday's nearly 0.55%
gain was the biggest for the US dollar this month. Today's softer tone is
snapping a three-day advance. The dollar's reference rate was set near
expectations (CNY6.9237 vs. CNY6.9226).
Europe
As widely expected, Sweden's
Riksbank lifted its repo rate 50 bp to 3.50%. The swaps market sees a terminal rate near
4.0%. Indeed, another 50 bp hike at the June 29 meeting cannot be ruled out yet.
That said, in February, the Riksbank forecast that the policy rate would peak
at 3.33%, which required lifting the policy path today. Underlying inflation
remains high at 8% (peaked at the end of last year at 10.2%) and the base
effect suggest further slowing in Q2 and Q3. Central bank officials also are
aware of that the roughly 11.5% depreciation of the krona since the end of 2021
may also feed into higher domestic prices. Nevertheless, two members (First
Deputy Governor and Deputy Governor) dissented in favor a quarter-point move
and did not want to signal another hike in June or September, which the
majority did. The combination of the dissents and the signal that the central
bank is nearly done, gave the 50 bp decision a dovish tint and the krona as
weakened against the dollar (~0.25%) and euro (0.95%).
Norway's central bank meets
next week (May 4, same day as the ECB). Its underlying measure of CPI peaked in January at 6.4% and
the policy rate is at 3.0%. a 50 bp hike. It began its tightening cycle in
September 2021 and hiked by a quarter-point three times through March 2022, and
then delivered three consecutive 50 bp moves. Starting last November and
running through March 2023, it reverted to quarter-point steps. Another 25 bp
hike is most likely and a follow-up hike at the June 22 meeting also seems
likely. Note that the Norwegian krone is the weakest of the G10 currencies this
year, off about 7.7%. The Swedish krona is up about 0.90% year-to-date, after
today's fall.
The Swiss franc is the best
performing G10 currency so far in 2023. It has appreciated by almost 4.0%. The euro and sterling are
jostling for second place with around a 3.2% gain. Last year, the franc also
did best among the major currencies, falling almost 1.2% against the dollar.
The euro was in second place too, with a nearly 5.5% decline. Domestic sight
deposits trended lower starting last April and bottomed at the start of the
year. It seems clear that Credit Suisse was experiencing an exit of deposits
before the banking stress erupted last month. Since the end of February,
domestic sight deposits have risen by almost 3% through the end of last week
(~CHF14.3 bln). International banks saw an increase in sight deposits about
CHF3.4 bln. Switzerland's EU harmonized measure of CPI rose 2.7% year-over-year
in March. The deposit rate is at 1.50%. The swaps market has a 25 bp hike
practically fully discounted for the June 22 meeting, and another hike in
September.
The euro traded heavily
yesterday, but second thoughts about a Fed hike next week, has seen it
practically fully recover. It
settled yesterday slightly below $1.0975 and has traded to almost $1.1055 today.
Yesterday's high was a little above $1.1065 and Monday's high was $1.1050. A
one-year high was set on April 14 near $1.1075. The intrasession momentum
indicators are stretched and the upper Bollinger Band is by $1.1065. Sterling's
recovery today is just as impressive. Yesterday's sterling posted an
outside down day by trading on both sides of Monday's range and closing below
Monday's low. Despite this bearish price action, there was no follow-through
selling, and sterling held above $1.2400 today to approach $1.2485. The five-
and 20-day moving averages, which had looked poised to cross to the downside,
have not. The intraday momentum indicators ae overbought. A pullback in early
North American trading could test initial support near $1.2440-50.
America
The 3.4% drop in the KBW
Bank Index yesterday, the most since March 22 and fourth consecutive decline
and to levels not seen since very early this month sent ripples through the US
rates market. The Fed
funds futures waivered about a hike next week. and had downgraded the
probability for 90% to around 75%. After PacWest better than expected earnings,
the odds have recovered to about 84%.
When the financial stress
hit, and liquidity concerns became acute, the ECB did not offer euro swap lines
with central and eastern Europe. The Bank of Japan did not provide more liquidity. Nor did the
People's Bank of China. Despite the talk of de-dollarization, when the push
came shove, the Federal Reserve offered a daily dollar swap facility instead of
the weekly operations. The daily frequency seems to us from the start to be
more preventative than preemptive and also a signaling element to reassure. In
point of fact, the daily operations were hardly used. So, reverting to weekly
operations next month will have little direct impact, but may also be a
reassuring signal that the stress has ebbed.
The most important
high-frequency data points over the next two weeks are the first estimate of Q1
GDP due Thursday and the April jobs report on May 5. Today's data, March goods balance,
inventories, and durable goods orders will help fine turn Q1 GDP expectations. The
Atlanta Fed's GDP tracker will be updated (from 2.5% on April 18). The median
forecast in Bloomberg's survey is for 2.0% annualized growth. Surveys have
found a weakening of capital investment plans. However, today's durable goods
orders will likely be inflated by a jump in Boeing's orders (60 aircraft orders
in March after five in February). Excluding transportation orders, durable
goods orders are likely to have fallen for the second consecutive month and the
third time in four months. A 0.1% in core shipments (excluding transportation
and defense orders) would offset the 0.1% decline in February.
The risk-off mood saw the US
dollar surge to almost CAD1.3650 yesterday. It is the (61.8%) retracement of the
dollar's decline from the year's high set on March 10 (~CAD1.3860) to the April
14 low (CAD1.3300). The greenback is in a narrow range today
(~CAD1.3615-CAD1.3645). A move below CAD1.3600 would weaken the US dollar's
technical tone but a break of CAD1.3550-70 is needed to spur ideas a top is in
place. The combination of the risk-off and comments from Banxico Governor
Rodriguez that central bank will discuss pausing at the next meeting (May 18)
helped lift the dollar to MXN18.1440 yesterday, its best level in a week. Last
week's high, tested twice, was closer to MXN18.1540. There has been no
follow-through dollar gains, and the greenback is consolidating between about
MXN18.0520 and MXN18.1275. The intraday momentum indicators favor the dollar's
upside in early North America provided support near MXN18.05 holds.
Disclaimer
Reviewed by Marc Chandler
on
April 26, 2023
Rating:
