Treasuries: The Dog that Did not Bark

Overview: Like the dog that did not bark, the long-term US yields tumbled despite data that confirms the acceleration of the US economy and labor market.  The  10- and 30-year bond yields fell by the most since the end of February (~8.5 bp) and are little changed today.  European benchmark yields are 2-3 bp higher.  The greenback finished mostly softer, even though the euro and Canadian dollar nursed small losses.  It is mixed today against the majors, and the euro and Canadian dollar are among the firmer currencies, while the Antipodeans and sterling are softer.  The Russian ruble is recouping yesterday's sanction-inspired drop. The other large, liquid, and accessible emerging market currencies, like South Africa, Turkey, and Mexico, are seeing their currencies trade heavier. However, the JP Morgan Emerging Market Currency Index is higher for a fourth consecutive session.  Similarly, both the MSCI Asia Pacific Index and Europe's Dow Jones Stoxx 600 are also higher for the fourth consecutive session.  US futures have drifted a little lower.   Gold is firm near $1772 its best level since late February.  Crude oil is trading higher for the fifth consecutive session.  June WTI climbed to nearly $64 a barrel, having begun the week below $60.  

Asia Pacific

The optics may be breath-taking.  The world's second-largest economy grew by 18.3% year-over-year in Q1, but of course, this is due to the favorable comparison.  On the quarter, the economy disappointed, with a 0.6% expansion.  Bloomberg's survey showed a median expectation of 1.4%.   Even with the upward revision in Q4 20 to 3.2% from 2.6%, China's economy did not perform as well as expected.  Still, some of the details were promising, and better growth is expected here in Q2 (the median forecast is for the economy to expand by about 1.4%  quarter-over-quarter). March retail sales were stronger than expected (34.2% year-over-year), while industrial output missed with a 14.1% increase (median forecast was for 18.0%). Fixed asset investment was also slower than in February and less than expected at 25.6%.  Steel and aluminum production was at record levels in March, and pork production rose by 32% in Q1.   The surveyed unemployment rate slipped to 5.3% from 5.5%.  It was at 5.1%-5.2% at the end of 2019.

Japan's Prime Minister Suga will visit US President Biden today.  Suga is the first foreign leader to visit Biden in the White House, and the symbolism is not lost on political observers.  Japan is the only G7 country not to have sanctions China over its human rights violations in Xinjiang, but the media suggests that Biden Administration wants from Suga is a joint statement about Taiwan.  It appears that the last time the US and Japan made a joint statement about Taiwan may have been backing 1969, with Japan's Prime Minister Sato and US President Nixon.  At the same time, Suga's popularity has waned as the contagion spreads and the government continues to press for Olympics, which the overwhelming majority are opposed, according to polls.  Japan will hold national elections by late October. 

The dollar is stuck in yesterday's range against the Japanese yen.  It found support near JPY108.60 and has not been able to resurface above JPY109.  The greenback fell for the first four sessions this week and is threatening to end the streak today after settling near JPY108.75 yesterday.  There is a $715 mln option struck at JPY109 that expires today.  The Australian dollar reached $0.7760 yesterday, its best level since March 19, but is consolidating today and has pulled back before finding new bids near $0.7725.  Its 1.5% gain this week (~$0.7740) is the biggest weekly advance since early last November.  The greenback is little changed against the Chinese yuan (~CNY6.5225) but has pushed lower every day this week.  The dollar's 0.45% decline over the five sessions is the most since the end of January.  The PBOC set the dollar's reference rate at CNY6.5288, a little softer than the bank models surveyed by Bloomberg anticipated.  

Europe

As the US announced new sanctions on Russia, news of its decision not to deploy two destroyers in the Black Sea as it had previously intended.  The reason for this reversal, according to two (unnamed) officials in a Politico report, was "concerns about escalating tensions between Russia and Ukraine,"  which ironically was the apparent reason for the "routine transit" in the first place.  Informing Turkey of its intentions (under the 1936 Montreux Convention) was done after the Russians had begun amassing troops on the border.  One official said that there was a "myriad" of reasons the decision was made not to send the destroyers into the Black Sea, including a desire not to antagonize Putin.  At the same time, a summit between Putin and Biden, perhaps in Finland, appears to have begun being discussed.  Meanwhile, the ruble snapped a three-day advance yesterday, but the losses were pared after the sanctions were announced, and the ruble is stronger today. The ruble is up a little more than 2% for the week and is snapping a four-week slide.  

The US sanctioned six Russian companies that support Russia's cyberwarfare and will expel 10 Russian intelligence officers working in the US under diplomatic cover. The escalation was in barring US financial institutions from buying Russian (ruble and non-ruble bonds from the government (central bank, finance ministry, sovereign wealth fund) starting in the middle of June.  Previously, Americans financial institutions were barred from buying non-ruble debt from the government.  It is hardly an inconvenience as the bonds can be bought from Russian banks.  Russia's 10-year benchmark yield fell 11 bp today to bring the week's decline to 27 bp.   The US sanction is a small piece of sand in the wheels for US-based global bonds funds, for example, even if the prohibitions can be extended in the future.  Moreover, while the EU supported the US actions, it did not join even the mild sanctions on Russian debt.  

An ARD poll found that Bavarian leader Soeder is the overwhelming favorite of the CDU/CSU to lead the coalition into the coming national elections.  The poll showed him with 72% support compared sith the CDU leader Laschet with 17%.  No formal decision has been made yet, but it is expected in the coming weeks.  Some see the results as a sign that Merkel is losing her sway of the CDU, but the German Chancellor has also been critical of Laschet and other state leaders for not taking a stronger line on social restrictions.  Separately, a Bloomberg poll found that most expect the ECB to slow its bond-buying from the accelerated pace of Q2 and expect the program to end as currently scheduled at the end of Q1 next year.  The ECB meets next week.  

The euro remains firm, but the momentum seen earlier this week faded.  For the third session, the euro has approached the $1.20-level but turned back.  It has spent most of these three sessions between $1.1955 and $1.1985.  It appears to have held 1/100 of a cent below $1.1990, where a 400 mln euro option expires today.  The euro is posting its first back-to-back weekly gain since the first two weeks of the year. Sterling's momentum is also flagging.  After beginning the week with a four-session decline in tow, sterling advanced in the first four sessions this week before slipped marginally today.  However, yesterday, it stalled near $1.3810, where it had stopped at mid-week too.  Last week's high was near $1.3920.  Still, after slipping to almost $1.3715 in late Asian turnover, sterling found a good bid in the European morning, bringing it back to the $1.3780-area.  

America

Today's March housing starts should cap this week's series of stronger than expected data, beginning with the CPI figures earlier in the week and continuing yesterday with retail sales and the dramatic drop in weekly jobless claims.  Industrial production was the one notable exception.  We had been concerned that the chip shortage may have adversely impacted auto production in March, but this was the key story.  Auto and part production rose by 2.8% in March after falling 10% in February.  The unusually cold February saw a 9.2% jump in utility output, while the seasonally-adjust weather was warmer in March, and utility output fell by nearly 11.5%.  

The April data were strong as well. These included the Philadelphia and Empire State Fed surveys were stronger than expected (and at new multi-year highs) though the former had a quirky revision.  As the Beige Book suggested, producers are seeing costs rise due to supply bottlenecks and shortages.  The sharp (193k) drop in weekly initial jobless claims was sufficient to drag the four-week moving average below 700k since before the pandemic struck. To be sure, there is still a long way to go.  Recall weekly jobless claims were hovering a little more than 200k at the start of last year.  Encouraged by rising prices, cheap money, and better weather, housing starts are expected to have jumped by 13.4% last month, according to Bloomberg's survey's median forecast.  It would put the seasonally adjusted annual rate above 1.6 mln for only the third time since the Great Financial Crisis.  

Canada reports March housing starts (expected to be strong) and its February international transactions.  These reports are not typically market movers.  Ahead of the Bank of Canada's meeting on April 21, the March CPI will be reported.  The Canadian dollar is the worst-performing major currency this week, rising less than 0.2% against the US dollar (~CAD1.2505), which is not unusual in a soft greenback period.  The US dollar settled near CAD1.2530 last week.  Mexico's calendar is light and remains so until the second half of next week when it reports its bi-weekly reading of CPI, March unemployment, and February retail sales.  The peso has gained about 1% against the greenback this week (~MXN19.95) and reached its best level since mid-February. It's four-day advance under threat now. The US dollar settled near MXN19.94 yesterday.  

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