Overview: The pall of war shrouds the capital and
commodity markets ahead of the weekend. Indications that Ukraine
recognizes that it cannot join NATO is not sufficient for Moscow that appears
to be fighting for an unconditional surrender of the Kyiv government.
Chinese and Indian shares managed to buck the regional losses today. Of
note, the 1.6% decline in Hang Seng left Hong Kong equities off nearly 6.2%
this week. The Stoxx 600 in Europe is up about 1.0% today and has gained
around 2.3% this week. If sustained, it would be only the second weekly
advance this year. US futures are posting modest gains. The bond market
has seen its safe haven role tarnished. The 10-year US Treasury yield is little changed just below 1.98% and is up 20 bp this week. European yields are narrowly
mixed today and up mostly 25-30 bp this week. Chinese bonds caught
a strong bid today and 10-year yield fell seven basis points to slip below
2.80%. It was enough to reverse the week's increase and is off four bp on
the week. Among the major currencies, Norwegian krone is gaining the against the dollar. Sterling and the Canadian dollar have turned higher in Europe. The yen lurched lower and is off around 0.7% as the
greenback poked above JPY117.00 for the first time in five years.
Emerging market currencies are mostly heavier, led by the Turkish lira, which
has depreciated by about 5% this week. Central European currencies are
little changed on the day but are up 2.35%-2.60% this week. Gold peaked
on Monday near $2070 and is consolidating today in the $1980-$2000 range.
April WTI peaked Monday near $130.50 and is trading around $110 as it
consolidates at the lower end of this week's range. At $110 it is off
about 5% this week after rallying more than 26% last week. US natural gas
fell by about 10% in the first three days this week and pared the losses
yesterday and today. It is off around 6.8% this week, its first weekly decline
in four weeks. Europe's benchmark has been selling off since Monday and
is off about 33% this week after last week's 123% surge. Iron ore
fell for the fourth consecutive session, which practically offset Monday's
gain. It held on to a minor gain (0.2%) on the week after a 14.7% advance
last week. Copper is a little firmer today, extending yesterday's 1.75%
recovery. Still, it is off almost 5% this week to nearly halve last
week's advance. May wheat is trying to snap a three-day 17% tumble.
It is up around 2.2% today, which leaves it around 8.1% lower on the week
after rallying more than 47% over the previous two weeks.
Asia Pacific
China's February lending
figures were a little softer than expected. New yuan loans rose by
CNY1.23 trillion. However,
the more comprehensive measure, aggregate financing grew a more modest CNY1.19
trillion. This difference between the two is the shadow banking, which
includes the wealth management arms of banks as well as non-bank lenders. It
shrank. Premier Li Keqiang seemed to acknowledge what many observers noted
after the NPC adopted a 5.5% GDP target this year. Namely that it requires more
government support. Li also indicated that this will be his last year as
premier. Later this year, President Xi is expected to secure a third
term.
Separately, note that
yesterday Italy formally rejected 2018 sales of 75% stake in Alpi Aviation, a
military drone company to a Chinese entity. The government claims that under the
"golden power" 2012 legislation, it should have been consulted.
It is only the sixth deal that Italy has blocked under the legislation.
Five of those deals involved a Chinese company purchase and four of which have
been rejected by the Draghi government that is about 13 months old.
Japan's household spending
fell 1.2% in January.
It was the sixth drop in the past nine months. Spending on entertainment,
extra schooling, and clothing paced the pullback. The social restrictions
took a toll. It reinforces the sense that the world's third-largest
economy could contract this quarter. Household consumption accounts for
about half of Japan's GDP. The number of Covid cases rose from
about 500 a day to more than 100k. The quasi-emergency measures in Tokyo
and several other prefectures are in place until later this month. There
appears to be growing recognition that the government may offer a new stimulus
package ahead of the summer upper house election.
The dollar has risen every
day this week against the Japanese yen, for the first time since September
2020. The
greenback pushed above JPY117.00 briefly in late Asia/early European
turnover. The intraday momentum indicators are stretched. Initial
support is seen by JPY116.60. That said, there seems to be little
meaningful chart resistance ahead of the JPY118.00-JPY118.60 area. The
Australian dollar peaked on Monday near $0.7440 and fell about two-cent by the
end of the Tuesday. Its recovery Wednesday and Thursday stalled at
the (61.8%) retracement around $0.7365. It is trading back toward $0.7300
today, where a A$360 mln option expires today. The greenback
jumped 0.17% against the Chinese yuan today. It does not sound
like much, but it is the biggest advance in two-and-a-half weeks. The
dollar reached CNY6.3333, its highest level since February 22.
Ironically, the PBOC set the dollar's reference rate below where
the market anticipated (CNY6.3306 vs. CNY6.3315). As we noted yesterday,
the PBOC double the yuan-rouble band to 10% and the market may still be
struggling to adjust for the rouble.
Europe
Many were surprised that the
ECB slowed its asset purchases. The German 10-year yield jumped from around 0.20% to
0.30%. The yield of Italy's 10-year bond jumped from around 1.70% to
almost 1.93%. A possible explanation for the market shock was that many
drew the wrong conclusion about the indisputable fact of heightened
uncertainty. The conventional thinking held that such a condition would
paralyze policymakers. They would do nothing. However, in the
current context, and given the status quo ante (the situation before the war),
we argued that the ECB needed to secure greater flexibility and the chief
restraint was the forward guidance on the asset purchases.
The ECB maintained the
sequencing that also seemed necessary, though some observers doubted it.
Bond purchases end before raising rates. The time between the two events was tweaked, rather hiking
rates "shortly" after the bond buying stopped, it would do so
"some time after". ECB President Lagarde said it was meant to
encompass a wider range of possibilities (i.e., securing flexibility).
The ECB did say one thing that would limit its flexibility. It dropped a
reference to the possibility that official rate could be lower. The
message from the forecast may also be worth thinking about. This year
growth and inflation were revised lower and higher, respectively.
However, the 2023 and 2024 forecast were hardly changed. This is the
ECB's staff's base case, that the disruption is relatively short-lived.
Under more pessimistic assumption, inflation reaches a little above 7% this
year.
While Europe has taken many
strong steps in the past couple of weeks, the new unity may not be
limitless. And
those limits may be coming to the surface. First, for understandable
reasons, the Baltics and Poland are pushing for an even more resolute response
to Russia's aggression. Second, the old creditor/debtor issue is raising
its head when it comes issues a second round of joint bonds to ostensibly fund
the energy and defense projects that are now recognized in a way that it wasn't
after Georgia (2008) and Crimea (2014). It may be behind part of the
divergence of opinion about some fast-track path for Ukraine to join the
EU.
The UK economy grew 0.8% in
January, much faster than the 0.1% expansion the median projection in
Bloomberg's survey after contracting by 0.2% in December. Industrial production rose by 0.7%
(0.1% expected) and services output increased by 0.8% (0.2% expected).
Trade, on the other hand, was a larger drag. The trade deficit widened to
GBP16.16 bln. Exports fell 15.8% on the month and imports surged
21.8%. Note that as of the January trade figures, imports from the EU to
the UK are being collected using customs declarations data and are said not to
be directly comparable with previous reports.
The euro rallied to $1.1120
yesterday on the initial reaction to the ECB, but the gains were quickly unwound,
and the euro finished near the session lows (~$1.0975). Follow-through selling saw it test
the $1.0960 area, which is roughly the (50%) retracement of this week’s
recovery off Monday's low near $1.08. The next retracement (61.8%) is
about $1.0925. There are two chunky option expirations on Monday to
note. There are 1.4 bln euros options at $1.09 and $1.10. Sterling
posted an outside down day yesterday by trading on both sides of Wednesday's
range and settling below Wednesday's low. Follow-through selling
today pushed sterling to almost $1.3050, its lowest level since November 2020.
However, it is recovering as the European morning progressed and looks to test
nearby resistance in the $1.3100-$1.3120 area.
America
The US CPI was in line with
the median forecasts on Bloomberg. The headline pace accelerated to 7.9%
(from 7.5%) and the core to 6.4% (from 6.0%). We are all sensitive to
food and energy prices now. They rose 1% and 3.5% month-over-month,
respectively. That means food prices are almost 8% above a year ago, and
energy is 25.6% higher. Gasoline prices, which POTUS's voter support
seems particularly sensitive to, rose 6.6% in February after an 0.8% decline in
January. It is up 38% over the past 12 months. Owners’ equivalent
rent (accounts for almost a quarter of the CPI basket) and rent itself (7% of
CPI basket) have been posting solid monthly gains and are up 4.3% and 4.2% respectively
from a year ago. New and used vehicles (each account for 4% of the CPI basket)
continued to accelerate. New vehicle prices rose 0.3% in February, which
saw the year-over-year pace rise to 12.4% (from 12.2%). Prices for previously
owned vehicles slipped 0.2%, but the year-over-year rate accelerated to 41%
from 40.5%. Core services (58% of CPI basket) accelerated for the third
consecutive month to stand 4.4% above year ago levels. Judging from the
near-term Fed funds futures and swap rates, it does not appear that the data
changed anyone's mind about next week's FOMC meeting. The implied yields of the
March and April Fed funds futures actually eased yesterday ever so
slightly.
The preliminary University
of Michigan's survey for March may attract some attention, but the highlight of
the North American session is Canada's employment report. A strong report is expected.
Recall Canada loss 200k jobs in January, almost 83k of which were full-time
positions. However, a strong recovery is expected. The median
forecast in Bloomberg's survey sees the 127.5k jobs and the unemployment rate
falling to 6.2% from 6.5% while the participation rate increases to 65.2% from
65.0%. The January jobs losses were concentrated in Ontario and Quebec
and seemed to reflect the flare-up in Covid cases. The Bank of Canada,
which began its tightening cycle earlier this month, is widely expected to hike
again next month and to begin passively allowing its balance sheet to shrink in
Q2. Mexico reports January industrial production figures today. A small
decline is expected after a 1.2% rise in December. Brazil reports
its IPCA inflation measure. It likely ticked up from January's 10.38%
year-over-year increase. The central bank is expected to hike the Selic
rate next week 100 bp to 11.75%. Yesterday, Peru's central bank hiked its
reference rate by 50 bp to 4.0%. It was the eighth consecutive hike since
last August. The reference was at 0.25% in July 2021.
The US dollar peaked near
CAD1.29 on Tuesday, its high for the year. It backed off to nearly CAD1.2750 yesterday and is
consolidating today up to CAD1.28. The Canadian dollar is being torn by
contradictory forces. Higher commodities, and anticipated investment in
commodity sectors, should be supportive for the Canadian dollar. On the other
hand, the risk-off mood, reflected in the weaker equities tends to be a negative.
Also, note that the US 2-year premium over Canada has widened to about 16 bp,
the most since September 2019. There is an $1 bln option at
CAD1.2750 that expires today, and the 20-day moving average is a slightly below
there (~CAD1.2745). The greenback peaked near MXN21.50 on Tuesday
and fell to MXN20.8575 the following day. It has been
consolidating since then. It was capped by MXN21.0650 yesterday.
The MXN21.09 and MXN21.16 hold the nearby retracement objectives. The
Brazilian real continues to be resilient. The dollar briefly slipped
through BRL5.0 Wednesday for the first time since last July. After
jumping to BRL5.0750 yesterday, the greenback settled below BRL5.02. We
still like the dollar lower as foreign flows into the bond and stock market do
not appear exhausted.
Disclaimer
Reviewed by Marc Chandler
on
March 11, 2022
Rating:
