Overview: Interest
rates continue to rise, but equities are looking through it today and the
dollar is drawing less succor. Asia Pacific equities were mostly
higher. With half of Shanghai in lockdown, Chinese equities were unable
to join the regional advance. Europe's Stoxx 600, led by energy and
consumer discretionary sectors, is rising for the third consecutive
sessions. US futures have a small upward bias. The US 10-year yield
is up a few basis points to 2.50%, while the 2-year yield is up around five basis points flattening
this part of the curve to less than 10 bp. Europe's 10-year benchmarks are 8-9 bp higher. The BOJ defended the 0.25% cap of the 10-year bond.
The greenback is softer against all the major currencies today but the Swiss
franc. The Scandis lead the move. Emerging market currencies are
also mostly higher. Leaving aside the Russian rouble, the Hungarian
forint and South Korean won are best performers. Gold is softer and
appears poised to test last week's low near $1911. May WTI is
consolidating after falling almost 7% yesterday. US natural gas prices
are off a little more than 2.5% after falling 1.1% yesterday. Europe's
benchmark is up nearly 4% after jumping 10.6% yesterday. Iron ore and
copper are softer. May wheat has steadied after shedding 4.1%
Monday.
Asia Pacific
The Bank of Japan bought
JPY528.6 bln of its 10-year bond as it continued to defend the 0.25% cap of its
Yield Curve Control policy. It has pre-committed to buying an unlimited amount of the bond
tomorrow and Thursday. However, it is allowing the longer end of the
curve to rise. For example, the 30-year yield rose for the fifth
consecutive session and is up 10 bp this week to 1.07%, a new six-year
high. It finished last month slightly below 0.90%. Still, many participants
do not think Japan's efforts are sustainable and recall the dramatic moves when
the Reserve Bank of Australia gave up its cap on the three-year bond last
year.
The weaker yen helps the
Japanese economy and boosts corporate earnings. A BOJ study out a couple of months
ago estimated that a 10% depreciation of the yen boosts GDP by 1%. A
separate report by a Japanese research group found that a 10-yen appreciation
of the dollar boosted operating profits by JPY1.5 trillion (~$12 bln).
Yesterday, a government spokesperson cautioned against rapid movements and the
MOF's Kanda reportedly talked to the Baukol, the US Under-Secretary for
International Affairs about a range of issues including the foreign exchange
market. The primary drag on the yen is coming from the economic
divergence that is being reflected in contrasting monetary policy. The US's likely concern is that Japan takes advantage of the situation. Tokyo officials’
expressions of concern about rapid moves or that they are watching the fx
market may be a way to show it is not adding fuel to the fire. Separately,
and unrelated, Japan reported an unexpected decline in February unemployment to
2.7% from 2.8% and small upticks in the job/applicant ratio to 1.21 from
1.20.
Australia's February retail
sales rose 1.8%, twice the median forecast in Bloomberg's survey. It overshadowed the small downward
revision in the January series from 1.8% to 1.5%. Recall that the
Covid-related restrictions led to a sharp 4.1% slump in December retail
sales. Retail sales stand 9.1% above a year ago, the strongest in 10
months. The consumer is recovering smartly as are jobs. The central
bank meets next week (April 5) and is gradually recognizing it will likely have
to raise rates this year. The market has the first move priced in for
June and has around 180 bp of tightening discounted this year. Meanwhile,
the government is submitting a stimulative budget which is seen as part of the
campaign for the national election that must be held by May 21.
The dollar traded in a three-yen
range yesterday and today it has traded in a little more than a one-yen range
(~JPY123.10-JPY124.30).
We had noted that back in 2015, BOJ Governor Kuroda seemed to have drawn a line
around JPY125 (it peaked near JPY125.85 then) and the market has become cautious
around it. Look for more consolidation. A break of JPY123 could see
JPY122. The Australian dollar reached $0.7540 yesterday before
briefly dipping below $0.7470. It is consolidating in
yesterday's range. The bulls are seeing if it can re-gain a foothold
above $0.7500. The US dollar slipped to CNY6.3645 before
recovering back above CNY6.3700. The PBOC set the dollar's reference
rate again weaker than the Bloomberg survey projected (CNY6.3640 vs.
CNY6.3661). The market is concerned that the lockdown in Shanghai, following
other cities, will weaken the economy and disrupt supply chains, despite the
announcement of tax rebates and low interest rate loans.
Europe
Russia-Ukraine are talking
in Turkey today. There
are hopes for a ceasefire, but the lack of trust on both sides is
palatable. Observers remain unsure of Russia's war aims. The
Ukrainian government appears willing to accept that it will not join NATO, but
refuses to recognize any loss of territory, and of course refuses to
resign. Reports suggest Russia is holding out the possibility that a
de-militarized Ukraine could join the EU. The cost of rebuilding Ukraine
is not one that Russia wants to bear. Claiming that Putin is a war criminal
makes good politics, and there is little doubt that he has violated
international norms, however, neither Russia nor the US (nor China) are members
of the International Court of Justice, which has no jurisdiction over
non-members. Still, calling Putin a war criminal makes its difficult to negotiate
with him and is consistent with seeking regime change, even if that is not the
declaratory policy.
Russia's invasion of Ukraine
appeared to remove some political pressure on UK Prime Minister Johnson, and at
least one Tory MP retracted his letter calling for a leadership
challenge. Johnson
is back in the hotseat, however, as the London police are set to issue to 20
fines to government officials for violating the Covid restrictions. The
Prime Minister is not expected to be fined personally, though he attended the
parties, claiming he thought they were work events. Still, Labour is
calling for him to take responsibility and resign. The next major
political hurdle for the Prime Minister is the May local elections.
The euro has risen back
above the $1.10-level, which holds nearly 8 bln euros of expiring options
between today and Thursday. Last week's high was near $1.1070 but had been capped near
$1.1040-$1.1045 more recently. After a consolidative session in Asia,
early European activity saw it bid to around $1.1035, apparently on hopes of a
ceasefire. Macron and Putin will reportedly talk later today, and the
Kremlin is calling for US-Russian talks despite the "personal
insults." The next day or two could prove pivotal in the
negotiations. Sterling extended yesterday's nearly one-cent
decline and fell to nearly $1.3050 before finding a bid. It recovered
to $1.3100. A move above the $1.3115 area could spur a move toward
$1.3150-$1.3160 where is peaked in North America yesterday. The UK's February
consumer credit was stronger than expected but mortgage lending weaker.
The serious squeeze on the cost-of-living is raising concern that the UK
economy is recession-bound.
America
The US reports house prices
and the JOLTS report on job openings. Federal Reserve Governor Waller estimates that the
Fed's purchases of mortgage-backed securities lowered house-loan costs by
around 40 bp. The S&P Corelogic CS index of house prices rose 18.84%
in the 12-month period through January. The JOLTS estimate of jobs
opening will remain elevated even off from the 11.26 mln seen in January.
After the University of Michigan reported a significant drop in consumer
confidence, the Conference Board's measure today will be closely watched.
The Fed's Williams, Harker, and Bostic speak, as well. Meanwhile, the
FY23 budget proposed by the White House yesterday looks dead on arrival as
Senator Manchin was opposed.
Canada and Mexico have light
economic calendars today. Yesterday, Canada reported a decline in consumer confidence, but
the swaps market has a 50 bp hike by the Bank of Canada at its April 13 meeting
fully discounted. Mexico reported a $1.29 bln February trade surplus
yesterday. The median forecast in Bloomberg's survey anticipated a $226
mln deficit. Still, Mexico's trade balance appears to be
deteriorating. First, the February balance has improved over January for
the past several years. Second, the January deficit of $6.3 bln compares with
a $1.2 bln deficit in January 2021. February surplus was half of the
February 2021 surplus.
Chile's central bank is
expected to hike its target rate by 175 bp today to 7.25%. February's CPI stood
at 7.8% year-over-year. Wages in January were 7.5% above year ago levels.
Growth in Q4 21 was a solid 1.8% quarter-over-quarter. The dollar has
fallen for the past three weeks against the Chilean peso. The peso is up
7.3% year-to-date after depreciating by 16.5% last year.
The Canadian dollar snapped
a nine-day advance yesterday but has come back bid today. The greenback topped out just shy of
CAD1.2600 yesterday and settled near CAD1.2520. It is back near
yesterday's low in the European morning below CAD1.2500. The low from the
end of last week was near CAD1.2465. The low for the year was set in
January by CAD1.2450. The 11-day advance in the Mexican peso was
snapped yesterday, and it is consolidating so far today. The US
dollar high yesterday was almost MXN20.19. Today, the greenback has not
been above MXN20.1375. Last week's low was near MXN19. 9125.
Disclaimer
Reviewed by Marc Chandler
on
March 29, 2022
Rating:
