Overview: Surging yields and plummeting equities are
the main developments today. The US 10-year yield pushed above
1.80% and the two-year yield is above 1% for the first time since February
2020. European yields are pulling back after jumping 2-5 bp. The MSCI Asia Pacific Index is off for the fourth consecutive
session. Only Shanghai among the large bourses escaped the carnage.
Europe's Stoxx 600 is off around 1.1% to test last week's lows after rising
0.7% yesterday. US futures are 1.0%-1.5% lower. The dollar is
firmer against most currencies today. Among the majors, the Canadian dollar, yen, and Swiss franc are proving the most resilient as the precipitous drop in equities offset the rise
in yields. The Scandis and Antipodeans are the hardest hit, off around 0.25%-0.50%. Nearly all the emerging market currencies, but the South Korean won
are being sold. The Turkish lira, South African rand, and Russian rouble
(~-0.6%-0.7%) are leading the move. Don't look for gold to be much of a
haven. The yellow metal is near a five-day low around $1810. Oil
prices are extending their rally with March WTI pushing toward $85. Recall
it finished last month slightly below $75.00. US natgas is firm after
falling more than 12% in the last two sessions, while European natgas (Dutch
benchmark) is off about 4.5% to a three-day low. Iron ore stopped a
three-day slide with a 2.6% gain, while copper is extending the loss seen in
the last couple of sessions.
Asia Pacific
BOJ Governor Kuroda pushed
hard against creeping speculation that the central bank was poised to adjust
interest rates any time soon. There has been some talk that the BOJ could raise rates well before
the 2% core inflation target was met. He was clear: "We're
expecting long and short-term policy rates to remain at the current levels or
fall even lower...Raising rates is unthinkable." Kuroda seemed to
all but rule out a rate hike during his term that expires in April
2023.
As expected, the BOJ
adjusted its inflation (up) and growth (down) forecasts. Inflation in the new fiscal year
beginning April 1 is expected to be 1.1%, up from 0.9%. It is expected to
remain there in the following fiscal year too (up from 1.0%). This fiscal
year growth forecast was reduced to 2.8% from 3.4%, but next year's was lifted
to 3.8% from 2.9%. However, growth in the following fiscal year was
shaved to 1.1% from 1.3%.
China's real estate market
remains distressed, and dollar bonds of many developers are under
pressure. There is more talk about a new infrastructure initiative. The CSI 300 Infrastructure Index
rose 3.7% today, its largest rise in four months. The PBOC cut the
one-year medium-term lending facility rate and the seven-day repo rate
yesterday for the first time in two years. The loan prime rate is set on
Thursday, and although the one-year was trimmed by five basis points last
month, a cut in the five-year would ostensibly allow for lower rate
mortgages. The takeaway is the PBOC has many levers to ease policy and it
is expected to use them, and this in in stark contrast with most of the
countries who are tightening monetary and fiscal policies.
With the early buying that
lifted the greenback to slightly above JPY115.00, the dollar retraced half of
the loss that saw it tumble from the multi-year high on January 4 (~JPY116.35)
to the pre-weekend low (~JPY113.50). The risk-off mood has seen the dollar ease back to
the JPY114.50 area in the European morning. Initial support is seen in
the JPY114.20-JPY114.40 area. The Australian dollar is trading
near five-day lows below $0.7200, where a A$950 option expires today.
Near-term potential extended toward $0.7155. It may take a move now above
$0.7230 to stabilize the tone. The broad US dollar recovery
helped Chinese officials who have made it clear that they prefer a weaker
yuan. The deputy governor of the PBOC was explicit, one-way bets
on the currency will not be allowed. The greenback initially fell to
CNY6.3380, a new three-year low, before recovering above CNY6.35, where a $775
mln option rolls off today. The reference rate was set tightly to
expectations today (CNY6.3521 vs Bloomberg survey median of
CNY6.3520).
Europe
The UK employment data were
stronger than expected, and the unemployment rate eased to 4.1% from
4.2%. Payrolls
increased by 184k in December, well above the median forecast (Bloomberg) of
130k. The November payroll gains of 257k was revised to a still strong
162k. The unemployment claimant could fall by 43.3k, after the November
series was revised to show a 95k decline rather than 50k fall. Average
earnings growth slowed in the three-months through November, which are reported
with an additional one-month lag. The report saw the market edge up the
odds of a hike at the February 3 MPC meeting to a little more than 90%.
Separately, the UK political
drama continues to play out. Cummings, who some suspect was the source of the leaks
about the parties at 10 Downing Street, is strongly claiming that Johnson knew
about the party that the Prime Minister denied. Chancellor Sunak is seen
as a likely successor, and some media reports are playing up his lukewarm
support for Johnson. One such report compared Sunak's recent actions with
Major during Thatcher's last days.
Germany's ZEW survey showed
a larger than expected improvement in expectations but a more pessimistic
assessment of the current situation. Recall that at the end of last week, the federal statistics
office estimated that the economy contracted by 0.5%-1.0% in Q4. The ZEW
measures of expectations rose to 51.7 from 29.9. It is the highest since
last July. The current situation was marked down to -10.2 from
-7.4. This is the worst since last May.
Reports suggest that Europe
has resisted US efforts to threaten to cut Russia off the SWIFT system if it
invades Ukraine. Apparently,
to show a solid front, the US may be agreeing. Meanwhile, the UK has
confirmed that it will expand military aid to Ukraine to provide light anti-armor
and defensive weapon systems. There may still be a reluctance to send
Ukraine offensive weapons.
The euro posted a key
downside reversal before the weekend, but follow-through selling has been
modest. It reached
a four-day low in Asia near $1.1385 and this has held so far in the European
morning. The euro has not closed below $1.14 since last Tuesday.
There is an option for almost 420 mln euro at $1.1370 that expires today, while
the (50%) retracement of this year's gains is slightly below $1.1380, and the
next retracement (61.8%) is closer to $1.1355. Sterling is off
for the third consecutive session, the longest losing streak in over a month.
It has rallied more than a nickel since mid-December and faltered near the
200-day moving average (~$1.3735) last week. Initial support is
seen around $1.3600. A break would confirm a high is in place and the
first target may be the $1.3530 area. The euro is forging a possible
rounded bottom against sterling. Today's low is about GBP0.8350, where an
option for roughly 340 mln euro expires today.
America
The market has turned more
aggressive about the outlook for Fed policy. At the end of last year, the market had
less than a 2-in-3 chance of a March hike. Now it has a hike fully
discounted and about a 1-in-3 chance of a 50 bp move. At the end of last
year, the market had almost three hikes fully discounted for this year.
Now the market has about 107 bp completed priced in.
Meanwhile, as the Beige Book
warned and the preliminary University of Michigan consumer survey showed,
economic confidence has waned. This may be reflected in the Empire State manufacturing
survey today. On the other hand, the Philadelphia survey due Thursday is
expected (Bloomberg survey) to have improved. However, the takeaway is
that after the dismal retail sales and the unexpected decline in industrial
production reported last week, estimates for Q4 GDP are being reduced.
The Atlanta Fed had seen the economy tracing 7.3% annualized growth in Q4 and is
now at 5.0%. The US also reports November TIC data today. In October, the
net inflows surged by $143 bln. The monthly average this year through
October is almost $88 bln. In 2020, the average monthly portfolio capital
inflow was a little less than $50 bln, and in 2019 was almost $5.5 bln.
Canada reports December
housing starts, and another strong gain is expected. However, the more important
development is that the market has become more convinced that the first Bank of
Canada rate hike could come as early as next week. At the end of last
year, the market has a slight leaning in favor of a January 26 rate hike, but the
odds have increased to 70%. Tomorrow's December CPI report, which is
expected to see the core measures tick up, may see the probability of a hike
increase further. November retail sales out at the end of the week are expected
be strong, with the second consecutive monthly increase of more than 1%.
The US dollar appears to
have entered a consolidative phase against the Canadian dollar after falling
almost 4% from the December 20 high (~CAD1.2965) to the January 13 low
(~CAD1.2455). In
this phase the CAD1.2600 area, the neckline of the head and shoulders pattern
we are tracking, offers initial resistance. The greenback has tested the
CAD1.2485 in early Asia and bounced to CAD1.2535 to mark the range so far
today. The risk-off mood has seen the dollar rise to a three-day high
against the Mexican peso (almost MXN20.41). It is the first time
since January 10 that the greenback has risen above the previous session's
high. However, before that, it was sold marginally through yesterday's
lows. This sets up for a possible key upside reversal for the
dollar. The close is key to this one-day pattern. It needs to close
above yesterday’s high (~MXN20.3530) to confirm it. If confirmed the
first target may be the MXN20.50-MXN20.55 area.
Disclaimer
Reviewed by Marc Chandler
on
January 18, 2022
Rating:
