Overview: Equities are mostly lower, while bonds have risen. The
dollar is trading in narrow ranges and mixed against the G10 currencies and
emerging markets. Most Asian bourses were lower. The Nikkei (though not the
Topix) and Hong Kong were the chief exceptions. Europe's Stoxx 600 is off for
the second consecutive day, in what looks like the first back-to-back loss
since early this month. US equity futures are lower, with the NASDAQ, which
eked out a small gain yesterday, is off more than 1% to lead the indices lower.
European benchmark 10-year yields are mostly off 1-3 basis points. The 10-year
US Treasury yield is down a couple of basis points to almost 3.56%. The US
2-year yield is off almost 4 bp to 4.20%.
The dollar is trading quietly, mostly within
yesterday's ranges. Softer than expected New Zealand Q1 CPI has helped drag the
Kiwi about 0.5% lower to lead the decliners today. The Swiss franc has edged up
by around 0.2% and solidifies its top-ranking performance among the G10
currencies this year (~3.25%). Weak March export orders has kept the Taiwanese
dollar under pressure, but most emerging market currencies are firmer. The JP
Morgan Emerging Market Currency Index is trying to snap a four-day drop. Gold
recovered yesterday from an intrasession low near $1970 and is now straddling
the $2000 area. June WTI is extending its sell-off. It is off by around 1.9%
today after dropping a little more than 2% yesterday. Today's low is about
$77.50. The lower end of the gap created in the reaction to OPEC+ cuts at the
start of the month extends to $73.90.
Asia Pacific
Japan's trade deficit swelled in March on
the back of stronger imports and weaker exports. On a year-over-year basis, Japanese exports slowed to
a 4.3% but better than economists surveyed by Bloomberg expected (2.5% median
forecast). In March 2022, they had risen by 14.7% over the previous 12-months.
Instead of increasing as economists expected, imports slowed to 7.3% from a
year ago after slowing to 8.3% in February. In March 2022, Japanese imports had
risen by almost 32% on a year-over-year basis. The combination of stronger
exports and weaker imports than expected resulted in a smaller trade deficit of
JPY758 bln, which is a little more than half of the median forecast. It puts
the Q1 23 deficit at JPY5.16 trillion (~$38.5 bln). The Q1 22 deficit was
JPY3.39 trillion, and it run a trade surplus of around JPY400 bln in Q1
21.
There were two highlights to Japan's
Ministry of Finance's weekly portfolio flows report that covers last week's activity.
First, foreign investors bought a
large amount of Japanese equities for the second consecutive week. In fact, its
purchases over the past two weeks were a record JPY4.13 trillion. Note that
yesterday the Nikkei and Topix snapped an eight-day rally that carried the
indices to highs for the year. Today, the Nikkei rose slightly, while the Topix
slipped marginally. Second, after selling foreign bonds for the previous two
weeks (~JPY1.3 trillion) and returned to the buy side (JPY500 bln). In the first
15 weeks of this year, Japanese investors bought JPY10 trillion foreign bonds. In
the same period last year, they sold JPY4.7 trillion foreign bonds. Tomorrow,
Japan reports the tertiary sector index for February, and the preliminary April
PMI, but the highlight is the March CPI figures. The Tokyo CPI reported last
month is a reasonably good gauge. The headline and core (excludes fresh food)
may have slowed slightly, but the measure that exclude fresh food and energy
likely edged up to a new cyclical high.
As widely expected, China's one- and
five-year loan prime rates were unchanged at 3.65% and 4.30% respectively. With the stronger than expected Q1 growth reported
earlier this week, speculation of new monetary (and fiscal) stimulus measures
have eased, and several banks have revised higher this year's growth forecasts.
Meanwhile, talk about the dollar's role in the world economy being threatened
continues, and the yuan is seen as the biggest beneficiary. We distinguish the
dollar's role as a store of value (e.g., reserves) from its use as a means of
payment (trade settlement). Yet, the alternative payments systems seem
fragmented and limited. Today's SWIFT data showed the yuan's share of global
payments remains marginal at 2.26% last month. In March 2022, its share was
2.20%.
The dollar briefly breached JPY135
yesterday for the first time in a little more than a month. Although, it was not sustained, the market does not
appear to have given up, though we anticipate a consolidative tone. Today's low
has been about JPY134.40. Speculation that the BOJ would adjust policy at next
week's meeting, Governor Ueda's first, has dissipated. The Australian dollar
is mired in narrow trading ranges in recent days. This week's range is
roughly $0.6680-$0.6745. For the past month, it has largely been confined to a
$0.6600-$0.6800 range. It is hovering around the middle of that range. The New
Zealand dollar is the weakest of the G10 today following a softer than expected
inflation report. CPI in Q1 rose 1.2% (vs. expectations for a 1.5% increase).
It was the smallest quarterly increase since Q1 21 and puts the year-over-year
rate at 6.7% (down from 7.2% in Q4 22). The New Zealand dollar was sold to
about $0.6150, its lowest level in a month. The Chinese yuan continues to trade
quietly in well-worn ranges. The greenback is trading within
yesterday's range. It briefly traded above CNY6.90 yesterday for the first time
this month but have moved between roughly CNY6.8790 and CNY6.8960 today. The
PBOC set today's reference rate at CNY6.8987. The median projection in
Bloomberg's survey was for CNY6.8978.
Europe
After reporting the February current
account surplus yesterday, the eurozone February trade balance today is less
interesting. The current account
balance improved for the sixth consecutive month in February to stand at 24.3
bln euros. That is the largest surplus since September 2021. February's trade
was almost in balance, but a small deficit (-0.1 bln euros) was reported. It
has been in deficit since October 2021. Tomorrow, the eurozone's preliminary
April PMI will be reported. Economists expect a small improvement in the
manufacturing PMI, but it likely remained below the 50 boom/bust level. A minor
pullback in the service PMI is expected. The two are seen offsetting each other
and leaving the composite unchanged at 53.7. Next week's highlight is the first
estimate of the eurozone's Q1 GDP. Economists in Bloomberg's monthly survey see
the second consecutive stagnating quarter. We suspect a small expansion was recorded.
The stronger than expected UK inflation
figures yesterday have helped underpin sterling on ideas that the Bank of
England will have to raise rates more than previous expected. Today offers a respite in data before Friday's retail
sales and flash PMI. Retail sales are reported in volume terms, and after
rising in January and February (0.9 and 1.2%, respectively) after expected to
have pulled back by around 0.5%. Meanwhile, the same pattern expected in the
eurozone PMI may be also seen in the UK: an improvement in the
manufacturing PMI, which likely remained below 50, and a slightly pullback in
the service PMI, leaving the composite unchanged at 52.2.
The euro is particularly narrow trading
range today, staying inside $1.0950-$1.0980. In fact, this week's range was set on Monday (~$1.0910-$1.1000).
The daily momentum indicators are falling, favoring selling into euro bounces,
though consolidation rather than a proper downside correction may be unfolding.
Sterling is also trading quietly, inside yesterday's range. Today it has
been confined to about $1.2415-$1.2450. Yesterday's high was near $1.2475. Key
support is seen near $1.2350, where there are options expiring today and
tomorrow (~GBP865 mln today and GBP545 mln, respectively). Here, too, the daily
momentum indicators are falling.
America
Weekly jobless claims may draw a bit of
attention as the report covers the same week as the monthly BLS survey is
conducted. While the four-week
moving average has moved up to around 240k from around 200k in early Q1, it has
stabilized in the last few weeks. March existing home sales will also be
reported. They snapped a 12-month slide with a 14.5% jump in February, but
likely slipped lower last month. That said, many economists think the worst has
passed. The US also reports March Leading Economic Indicator index. It most
likely extended its decline that is uninterrupted since last April. The
six-month annual rate of decline has been more than 7% beginning last October.
Such a sharp decline has been associated with recessions since at least 1980.
No fewer than five Fed officials speak, a
flurry before the quiet period ahead of the May 2-3 FOMC meeting. Governors Waller and Bowman, of course vote, and among
the three regional presidents that speak, Mester, Bostic, and Harkin only the
last votes this year. The Fed funds futures see a May hike as nearly a done
deal. But just as the market thought the March hike was the last, it thinks the
May hike is the last. After his former boss, St. Louis Fed President Bullard,
suggested further hikes may be necessary, Waller's views may begin swaying some
participants. Bullard argued there has been little progress on inflation, and
undeterred by the banking stressing, sees a 5.50%-5.75% terminal rate as
appropriate. Note that Goolsbee, the Chicago Fed President, said late yesterday
that his comments about the need for patience and prudence did not signal his
voting intentions at the May meeting.
Mexico reports February retail sales today. Although it reported a heady 1.6% jump in
January retail sales, the median forecast in Bloomberg's survey is for a 0.5%
increase in February. Last year, Mexico's retail sales rose by an average of
0.3% a month. Canada reports its February retail sales on Friday. After they
rose 1.4% in January, weak auto sales are expected to have seen them fall by
0.6%. Excluding autos, retail sales are expected to be flat. They rose by an
average of 0.5% in 2022. Also, ahead of the weekend, preliminary US April PMI
will be released. The manufacturing PMI is seen slipping a little, keeping it
below the 50 boom/bust level for the sixth consecutive month. The service PMI
likely held above 50 for the third consecutive month, but a bit lower than last
month. The composite gauge reached 52.3 in March. This matched the June 2022
level before it fell below 50 and remained below it until February.
The US dollar is edging higher against the
Canadian dollar. It is rising for the
fourth session in the past five. It absorbed the offers in the band of
resistance (~CAD1.3430-60) to reach CAD1.3480 today. The next technical hurdle
is seen in the CAD1.3500-20 area. There are options for about $715 mln at
CAD1.3510 that expire today. The daily momentum indicators have turned higher,
favoring the greenback. This week's US dollar range was also set Monday
against the Mexican peso (~MXN17.9315-MXN18.1540). Our bias favors the
greenback but has not traded above the 20-day moving average since March 27. It
is found near MXN18.14 today. The dollar is holding above MXN18.00 for the
second consecutive session. Options for almost $800 mln expire there
today.
Disclaimer
Reviewed by Marc Chandler
on
April 20, 2023
Rating:
