Risk-Off Mood Dominates

Overview:  Perhaps it was the extent of First Republic Bank's loss of deposits that were reported with earnings yesterday, but risk appetites dried up today. Asia Pacific equities were trounced outside Japan today. Hong Kong and mainland shares that trade there set the tone today falling 1.7%-1.9%. China's CSI 300 fell for the fifth consecutive session. Taiwan and South Korean markets fell more 1.4%-1.6%. Europe's Stoxx 600 is off almost 0.5%, which if sustained would be the largest decline this month. Its bank index is down 2% today, the most since March 24. US equity futures are trading around 0.5% lower ahead of a slate of earnings. Benchmark bond yield are 6-8 bp lower in Europe and the 10-year US Treasury yield is down more than five basis points to about 3.43%.

The dollar is mostly firmer. The yen and Swiss franc are the notable exceptions among the G10 currencies. Emerging market currencies are almost mostly lower, led by the South African rand (~-0.40%) and the Chinese yuan (~-0.30%). The JP Morgan Emerging Market Currency Index is off slightly for the third consecutive session. It has fallen in seven of the past eight sessions. Gold recovered from yesterday's low near $1974 to retest $2000 earlier today but it has been greeted with new sales that has pushed to back toward $1987. Support is seen around $1970. June WTI recovered smartly yesterday from near $76.70 to almost $79.20. There has not been any follow-through buying and it is consolidating in a narrow range (~$78.35-$79.05).

Asia Pacific

Japan's highlight this week is the BOJ meeting that concludes on Friday. One-week implied volatility jumped from around 8% last week to 13% before the weekend as some participants sought protection from another surprise. Still, expectations of a surprise from Governor Ueda at his first meeting have subsided. Before the meeting concludes Japan, will report March employment, retail sales, industrial production, and April's Tokyo CPI. The first estimate of Q1 GDP is due May 17. After nearly stagnating in Q4 22 (0.1% at an annualized pace), the median forecast in Bloomberg's monthly survey is for growth to have accelerated to 1.3% in the January-March quarter. 

The first thing tomorrow, Australia reports March CPI and Q1 23 inflation figures. The newly minted monthly gauge is expected to fall for the third consecutive month. It peaked last December at 8.4%. It seen falling to 6.5% in March, the slowest pace since last May. The quarterly reading is expected to slow to 1.3% from 1.9%. This would translate into to a 6.9% year-over-year rate (down from 7.8% in Q4 22). The trimmed and weighted mean measures are stickier. The former may have eased by a couple of tenths of a percentage point, while the latter is expected to tick slightly higher, which would represent a new cyclical high (5.9%). The Reserve Bank of Australia paused last month ostensible to gather more data. We suspect the market may be underestimating the risk of another hike in the cycle. The futures market has less than a 20% chance of a hike discounted for the May 2 meeting.

The dollar has been confined to about a half a yen range below JPY134.50 in quiet dealings that leave the greenback inside yesterday's range (~JPY133.90-JPY134.75). The consolidation pattern carved in recent days may be a continuation pattern, but it requires a break above the JPY134.70 area to confirm it. On the other hand, a move below JPY133.80 would jeopardize it. The Australian dollar has been sold to ta nearly two-week lows near $0.6650 and it is the third consecutive session of lower lows. Trendline support is found near $0.6640 and a break of it signals a test on the $0.6600 area. The low for the year was set in mid-March near $0.6565. Falling Chinese equities is taking a toll on the yuan, which fell to its lowest level since March 10. The dollar reached CNY6.9200. The 200-day moving average is near CNY6.93. The PBOC set the dollar's reference rate at CNY6.8847 compared with the median projection in Bloomberg's survey of CNY6.8871. 

Europe

To the relief of Europe, China as played down the incendiary comments from its ambassador to France. He had seemed to suggest that the countries formed from collapse of the Soviet Union were not recognized as sovereigns. The text of the ambassador's remarks appears to have been deleted from official websites, and the Chinese embassy in Paris said that the comments reflect a personal point of view. A spokesperson for China's Foreign Ministry indicated at a regular press briefing yesterday that China recognizes the former Soviet republics as sovereign.

The ECB meets next week, and encouraged by hawks at the ECB, have nudged the chances of a 50 bp move slightly higher. It now sees it as about a 1-in-3 chance. At the end of March, a quarter-point hike was not fully discounted. In an interview with Politico, ECB board member Schnabel said that the data so far shows stronger price pressures and a more resilient economy than had been projected. The US two-year premium over German edged lower yesterday, making a new marginal low since November 2021 near 117 bp. It peaked last August slightly below 280 bp, its highest since pre-Covid. These considerations helped the euro settle above $1.10 for on the second time this year, though the level was first breached in early February. The high set in mid-April near $1.1075 was the best level since April 2022. A break of that targets $1.1130 area next, but the $1.1275 area is the next major area, corresponding to a (61.8%) retracement of the euro downtrend since the peak on January 6, 2021 (~$1.2350).

The euro poked slightly above $1.1065 to reach its best level since the seeing $1.1075 on April 14. Some buying maybe related to the 1.5 bln euro option that expires today at $1.1050. It stalled in Asia after the follow-through buying from a strong finish to yesterday's North American session. The subsequent pullback in late Asian/early European activity found support near $1.1025. It could be the first session since early April 2022 that the euro trades above $1.10 for the entire session. Still, the single currency has been climbing the 20-day moving average since around March 20. It is near $1.0945 today and only a break of it undermines the technical tone. Follow-through buying of sterling saw push briefly through $1.25 to reach its best level since April 14 when the high for the year was recorded near $1.2545. It has been sold to about $1.2455, but we suspect the low for the day is not in place yet. Nearby support is seen in the $1.2420-40 area.

America

The slew of US data today is unlikely to move the needle of expectations for Fed policy. Despite some officials who may be inclined to pause, the market is pricing almost a 90% chance of a quarter-point hike next week. That will bring the upper end of the target range to 5.25%. The Fed funds futures strip has the rate back below 5% by the end of Q3. This seems to be a stretch. The March statement said that the Committee "anticipates some additional policy firming may be appropriate."  It may modify this statement again. In February, the statement said that the Committee "anticipates ongoing increases in the target rate will be appropriate...". In March, seven of the 18 officials saw the rate at the end of the year above the median 5.1%. Today's high-frequency data includes February house prices and March new home sales (both expected to have fallen). Also, on tap are the April Philadelphia and Dallas Fed's non-manufacturing/service surveys. The Richmond Fed reports both its April manufacturing index and business conditions.

Mexico reports softer than expected headline and core inflation readings for the first half of April. Today it reports the IGAE surveys of economic activity. The week's highlights are the March trade balance on Thursday and Q1 23 GDP on Friday. The deficit is expected to fall to around $805 mln from $1.84 bln in February. In March 2022, Mexico reported a small surplus (~$104.5 mln). Growth in Mexico is expected to have quickened in the first quarter. The median forecast in Bloomberg's survey is for a 0.8% quarter-over-quarter expansion, which would snap a three-quarter streak of slower growth. That said, the year-over-year is seen slowing to 3.3% from almost 3.6% in Q4 22. While many economists expect Banxico to match the Fed's move next month, it is not completely discounted in the swap market. Meanwhile, we note that speculators in the futures market are net long about 56.2k peso contracts. This is among the largest net long positions since Covid, the third time is above 50k contracts.

The US dollar's push higher against the Canadian dollar extended to almost $1.3590 today, meeting the (50%) retracement target of its losses from the March 10 high (~CAD1.3860) to the April 14 low (~CAD1.3300). The next retracement (61.8%) is closer to CAD1.3650. Initial resistance now may be encountered in the CAD1.3600-15 area. Nearby support is seen around CAD1.3550-60. The attractive carry continues to make the Mexican peso resilient. While the greenback has recorded a lower low for the fourth consecutive session, it has been a grind. The new lows are marginal at best and still the dollar trades within the range seen last Monday (~MXN17.9315-MXN18.1540). Low volatility is another dimension of the carry-trade in addition to attractive rates. The actual (historic) peso volatility over the past month is around half of that seen in its regional competitors, Brazil, Chile, and Colombia.

 

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