Overview: There is a fragile calm in the capital
markets today ahead of the long holiday weekend for many. The poor US economic
data yesterday and third consecutive decline in the KBW bank index weighed on
risk sentiment. Most of the large bourses in the Asia Pacific region fell, with
Hong Kong and India notable exceptions. In Japan, the Topix bank index fell
1.1% after a 1.9% decline yesterday and is now lower on the week. Europe's
Stoxx 600 is trying to snap a three-day fall and is up around 0.25% in late
morning turnover. The Stoxx 600 bank index is up 1%, recouping yesterday's loss
(~0.6%) in full. If sustained, it would be the seventh advance in the past nine
sessions. US futures are trading with a slightly softer bias. Benchmark 10-year
yields are softer, 1-3 bp in Europe and around two in the US, leaving the
10-year Treasury a little below 3.30%.
The dollar is mostly firmer but
is consolidating for the most part in narrow ranges. The New Zealand dollar,
which struggled yesterday to sustain gains after the initial reaction to the 50
bp surprise hike, is the weakest of the G10 currencies today, off around 0.55%.
The Australian dollar is next, off about a third of one percent. The Swiss
franc and sterling are the best performers and are little changed. Most
emerging market currencies are heavier today. The JP Morgan Emerging Market
Currency Index is extending its losses for the fifth consecutive session. Gold
spiked to $2032 yesterday and little changed today. It is holding above $2008.
May crude gapped higher on Monday in response to OPEC+ unexpected cut in output.
It has been trading sideways, within Monday's range (~$79.00-$81.70).
Asia Pacific
China's Caixin service and
composite PMI confirm what the "official" PMI showed. The service sector is recovering faster
than the manufacturing sector. The Caixin service PMI rose to 57.8 from
55.0. This is the strongest since November 2020. Economists surveyed by
Bloomberg anticipated an unchanged result. Infrastructure projects appear to be
a key impetus behind the recovery, and it is fueled by significant credit
growth. Consider that the March aggregate lending figures may be released next
week. The median forecast in Bloomberg's survey calls for a CNY4.53 trillion
expansion. That would boost the Q1 average to CNY4.56 trillion, which is more
than 10% above the Q1 22 average. It would make aggregate lending in Q1 23 was
greater than in H2 22. Meanwhile, the decline in US yields on the back of
disappointing economic data has seen it premium over China on 10-year rates
fall to nearly 40 bp, the least since last August. At the end of last year, the
US premium was a little more than 100 bp. At the same time, China's CSI 300 and
the S&P 500 have risen by 6.3% and 6.5%, respectively in dollar terms.
Australia's February trade
surplus was larger than expected at A$13.87 bln. It averaged A$12.57 bln in the first
two months of 2023 compared with A$9.95 bln in the first two months of 2022. However,
exports and imports fell (-3% and -9% respectively). The Lunar New Year seems
to have distorted commodity exports. Iron ore shipments fell by 11% and coal by
12.7%. Natural gas exports tumbled by 18.5% and gold shipments fell by 5%.
The dollar is trading inside
yesterday's range against the Japanese yen (~JPY130.65-JPY131.85). Resistance is being encountered near
JPY131.50. The dollar has slipped lower against the past three sessions. It
settled slightly below JPY133.35 yesterday. The Australian dollar has been
confined to the lower half of yesterday's range (~$0.6675-$0.6780). Today's
high of $0.6725 also is where nearly A$650 mln of options have been struck that
expire later today. The week's low was set on Monday near $0.6650, and a break
of it would weaken the technical outlook. The greenback is in a narrow range
against the Chinese yuan today after the mainland markets were closed yesterday
for a national holiday. It has been a quiet week for the exchange rate as
most of the price action has been within Monday's range (~CNY6.8745-CNY-6.8945).
The reference rate was set tight to expectations at CNY6.8747 vs. CNY6.8753. Lastly,
we note that the Reserve Bank of India unexpectedly kept its key rates steady
today. The market had looked for a quarter-point hike.
Europe
Germany February industrial
product jumped 2.0% after surging a revised 3.7% (from 3.5%) in January. Manufacturing and mining rose by 2.4%
after a 2.0% gain in January. Construction rose by 1.5% after a 13.6% jump in
January. While Germany's manufacturing sector is proving resilient, helped
by a recovery in exports in January (2.5%) and February (4.0%) after the slide
in December (-6.1%), consumption remains soft. Retail sales slumped 1.3% in
February (excluding autos adjusted for inflation) after January's 0.3% decline
was revised to a 0.1% gain. And labor market is softening. The unemployment
queues grew 16k in March, more than any of the 20 economists in Bloomberg's
survey forecast. On a quarterly basis, German unemployment has not fallen since
Q1 22.
The euro is trading in about
a 15-tick range on either side of $1.09 in quiet turnover. The $1.0880 area is the halfway mark of
this week's range (~$1.0790-$1.0975). There are options for around 1 bln euros
at $1.0875 that expire today and another set for about 975 mln euros at $1.0920.
After jumping up to $1.2525 on Tuesday, sterling has been consolidating. Yesterday,
and again today, support has been found in near $1.2435. The intraday momentum
indicators warn that the support may be tested again in North America
today. It may fray but the next area of support (~$1.2400) may be
stronger.
America
US data continues to
disappoint. At the end of
last week, the Federal Reserve reported a nearly $30 bln decline in commercial
industry loans in the week ending March 22. It offset increase reported for the
previous three weeks and leaves lending slightly lower since the end of last
year. Most of the economic data this week has disappointed. The PMI was revised
lower from the flash reading. Both the manufacturing and services ISM were
sequentially decline and were weaker than expected. February's trade deficit
was wider than expected and February factory orders fell for the third month in
four, and this is true even when the volatile transportations orders were
excluded. JOLTS saw a much larger decline in job openings than projected and
the January series was revised lower. The ADP private sector jobs estimate for
March was 145k compared with a median forecast in Bloomberg's survey for 210k.
Even though the ADP's estimate for January and February were 367k vs. the BLS
private sector estimate of 651k, some may talk about a "whisper
number" for the national report on Friday somewhat lower than the 220k
median forecast in Bloomberg's survey. The Atlanta Fed's GDP tracker, which in
late March, saw above 3% growth in Q1 has made several cuts and it now stands
at 1.5%.
The soft data coupled with a
three-day decline in the KBW bank index (~-3.5%) has made the market less
confident of a Fed hike next month. It was seen as around a 60% probability at the end of last week
and is now not even 50/50. The two-year note yield, which was near 4.14% on
Monday dropped 50 bp through yesterday's low. Yesterday, the 10-year yield
extended its decline for the sixth consecutive session, falling to almost
3.26%, its lowest level since last September, before stabilizing. Ironically,
the dollar found yesterday after the Dollar Index fell to a two-month low
(~101.40). It stalled in the North American afternoon near previous support
around 102.00. We had expected the dollar to bounce but had anticipated
it would be goosed by higher, not lower US rates. Yesterday, the US two-year
premium over Germany made a marginal new low below 124 bp, a level not seen
since November 2021. It peaked last August slightly below 280 bp.
Canada reported a much
smaller than expected February trade balance (C$0.4 bln rather than C$1.7 bln
median forecast in Bloomberg's survey). The January surplus was revised to C$1.2 bln form C$1.9 bln. The
focus turns to today's jobs report. The latest responses in Bloomberg's survey
have lowered the median forecast to 7.5k net new jobs. Canada has reported
filling 152k full-time posts in January and February. That is greater than any
of the first three quarters of last year. The market is as certain as it gets
that the Bank of Canada will standpat at next week's meeting. It takes
something on par with January's surprise 121k increase and, maybe, a rise of
hourly wages above 6%, a new post-2020 high (~4.50% in December).
The greenback approached
CAD1.3400 on Tuesday, its lowest level since mid-February. It had been probing the CAD1.38 area on
March 24. It snapped a six-day slide on Tuesday and is edging higher for the
third consecutive session today. It is approaching CAD1.3500. Monday's high was
near CAD1.3535 and the CAD1.3560 area corresponds to a (38.2%) retracement of
the slide since March 24. The Mexican peso was the weakest emerging market
currency yesterday, losing almost 1%. Mexico's inflation slower and the
pace in the second half of last month was slower than the first half. The core
measures were a bit firmer than expected but still less than the previous
readings. Still, the peso's weakness seemed to be more about the risk-off
impulses and market positioning. The dollar retraced a little more than half of
its decline from the late March spike to almost MXN18.80. Above The MXN18.40
level seen yesterday, the next corrective target is around MXN18.48 and 20-day
moving average is slightly below it.
Disclaimer
Reviewed by Marc Chandler
on
April 06, 2023
Rating:
