Overview: With the US warning about a "vertical escalation" by a
stymied Moscow and the EU cautioning that Beijing may send semiconductors and
other tech hardware to Russia, it is little wonder that risk appetites are
being curtailed ahead of the weekend. Japan eked out a small gain,
most of the major bourses in the Asia Pacific region were lower. Of note the
Hang Seng's 2.4% fall left it virtually flat on the week. Europe's Stoxx
600 is flat after posting two consecutive losing sessions. US futures
are narrowly mixed. Benchmark yields are a couple of basis points lower,
putting the US 10-year around 2.36%. European yields are 2-4 bp softer.
Following a firmer than expected Tokyo March CPI, the 10-year JGB yield rose to
a new high, just shy of 0.24%. In the foreign exchange market, the
cautious risk stance is evident with the yen and Swiss franc showing modest
strength. An exception to the risk-off is the relative strength of
emerging market currencies. The JP Morgan Emerging Market Currency Index
is up for the fourth sessions to put the finishing touches on the second weekly
advance. Turning to commodities, gold is consolidating above $1950 and is
up about 2% this week. May WTI is off around 1.4% after falling 2.2%
yesterday. Nevertheless, it is up about 7% this week. US natgas is
softer, trying to snap a four-day advance. It was up almost 11% this week
coming into today. Europe's natgas benchmark is more than 2% lower
to pare this week's gain to about 6.5%. Iron ore rose 3.5% to recoup this
week's loss. Copper is a little firmer to be flat on the week. The price
of wheat is falling for a fourth session following a 5.2% rally to start the
week. It is up less about 1% for the week. It had fallen around 12.3% in
the previous two weeks.
Asia Pacific
Tokyo's CPI accelerated this
month as the weaker yen and higher commodity prices fed through. The 1.3% headline increase was slightly
stronger than expected. Excluding fresh food, the core measure edged up
to 0.8% from 0.5%. Electricity, gas, and imported food lifted the core
measure. Excluding fresh food and energy, the deflationary pressures
slackened to -0.4% from -0.6%. Meanwhile, the 10-year JGB yield
approached the 0.25% cap imposed by yield-curve control and a more active
defense may be necessary next week. At the same time, Prime Minister
Kishida has reportedly instructed the cabinet to put together a supplemental
budget next week.
China's Security Regulatory
Commission is still apparently negotiating with the America's Public Company
Accounting Oversight Board. Earlier this week, Chinese accounts made it seem that a deal was
imminent that would allow mainland-based companies to remain listed on US
exchanges. The issue are US laws that require audit reports to be made to
authorities. Chinese authorities appear to make some concessions but
wanted to withhold some "sensitive" data. If the US rules are
flaunted for three years, the violator faces de-listing. That could begin
in 2024.
Reports suggest China has
sent Russia 30k tons of alumina following Australia's ban that provided
Russia's Rusal with 40% of its alumina supply. Another 30k tons are expected to
follow quickly. The US and Europe have cautioned China against material
support for Russia. However, officials say there is so far no evidence of
Chinese assistance. The alumina deal is being cast as a commercial
transaction rather than state sponsored. Meanwhile, China's lockdown this
week of Tangshan (steel producing region) and Shandong (oil refineries) have
knock-on effects that are disrupting the world's second-largest economy, with
potential to further disrupt supply chains.
The dollar is falling for
the first time in six sessions. If the 0.66% pullback is sustained, it would be the largest
loss since last November. Even with the decline, the greenback is up
nearly 2% against the yen this week. The profit-taking began after the
dollar had risen to almost JPY122.50 in North America yesterday. The
pullback brings the dollar back to where it was in Tokyo on Thursday.
Initial resistance is now seen near JPY122.00. The momentum readings are
stretched, but the move does not seem complete. The Australian
dollar set a new high for the year near $0.7535 before succumbing to some light
profit-taking. It found support a little below
$0.7500. Even with the pullback, it is the strongest of the major
currencies this week, gaining almost 1.25%. The intraday technical
indicators favor a recovery in North America. The US dollar
slipped against the Chinese yuan for the second session but is still poised to
extend its gain for the fourth consecutive week. The Chinese
10-year premium over the US narrowed by about 20 bp this week to 45 bp.
The PBOC set the dollar's reference rate at CNY6.3739, a little above
projections for CNY6.3726 (Bloomberg survey).
Europe
The UK's retail sales last month
were unexpectedly poor, and it plays on fears that the surge in the
cost-of-living is sapping households, while the government's Spring budget
offered little consolation. The Bloomberg survey found a median forecast of a 0.7% gain, and
instead, retail sales fell by 0.7%. Excluding gasoline, retail sales fell
by 0.7%. Economists had looked for a 0.5% increase. The risk is
that things get worse. Many households will experience a sharp price increase in
energy bills next month, and the tax for the national health service increases
too.
On one hand, the EU and the
US appear to be striking a deal for gas to begin supplanting the dependence on
Russia. Europe does
not appear ready to ban energy imports from Russia and this may help explain
the pullback in oil prices. On the other hand, Europe agreed to a a
Digital Markets Act, which will force large internet companies to open their
platforms and compete fairer. Many US-based companies, much to their
chagrin will be forced to comply. Of course, some large European internet
companies will be subject to the new rules too.
Hungary was the only EU
country not invited to last year's US-sponsored "democracy
summit." Nevertheless,
national elections will be on April 3. Orban and his Fidesz party are
seeking a fourth term. The opposition has united behind a single
candidate, Marki-Zay, who has not run an inspired campaign, and is lagging in
the polls by a couple of percentage points. Orban has pursued a
pro-Russian foreign policy, pleads neutrality in the war, and will not send
Ukraine weapons. One recent poll found that 57% of Hungarians
see their chief allies in the West not East. The opposition does not seem to be
exploiting this effectively. Instead, the opposition has the
adoption of the euro as a key plank, and it is supported by less than half the
people. Despite the closeness of the polls, the wagers at PredictIt.Org
strongly favor Fidesz (95%).
For the fourth consecutive
session, the euro remains mired in a $1.0960-$1.1045 trading range. The sideways movement is sufficient
to allow the momentum indicators to extend their correction higher. The
weakness in the German IFO survey illustrates the headwind on confidence.
The current assessment dipped slightly (97.0 vs. 98.8), but the expectations
component fell to 85.1 from 98.4. It is the lowest since May 2020 and
reflects a larger decline than when the pandemic struck. Sterling
reached almost $1.33 in the middle of the week but has struggled to sustain
upticks since then. It has found support around $1.3160 but looks
vulnerable. The week's low is near $1.3120, which seems like a reasonable
near-term target.
America
Fed officials, especially
Chair Powell, have couched his commitment to a more aggressive course with
"if needed" or "if necessary." Yesterday's data showed weekly
jobless claims falling to their lowest level in a generation, and the
preliminary March PMI showed the economy accelerating, with the composite
rising to its best level in eight months. On the other hand, February durable
goods disappointed. The big drag came from the nearly 30.5% decline in
civilian aircraft orders. Non-defense and non-aircraft orders slipped
0.3% but after the upward revision to the January series to 1.3% from
1.0%. Still, the Atlanta Fed's GDPNow tracker puts this quarter's growth
at 0.9%, down from 1.2% last week as real domestic investment was
downgraded. However, the data that underscored a tight labor market,
resilient economy, and elevated price pressures (PMI) saw the market grow
marginally more confident of a 50 bp hike at the May FOMC meeting. The
market also edged closer to fully pricing in two 50 bp moves this year.
Malfeasance or incompetence? What was behind Mexican President
AMLO's announcement of the 50 bp rate hike by Banxico a few hours before the
official announcement? He seemed confused and referred to the move as happening
"yesterday." Some read more sinister motives and see an
encroachment on the central bank's independence. Despite the
chin-wagging, there was no sign that investors as a whole were put-off, and
AMLO apologized. The dollar settled on its lows, a little above MXN20.07,
levels not seen since last September. The decision to hike by 50 bp was
unanimous. The lone dissenter at the last two meetings, favoring 25 bp
moves, Esquivel capitulated. The central bank nudged up its (average)
inflation forecast to 6.4% this year from 6.1%, and next year from 3.4% to
3.6%. It sees inflation peaking in Q2, but not falling back within the 3%
(+/- 1%) target until Q2 23.
Brazil reports March IPCA
inflation figures today.
The median forecast in Bloomberg's survey sees it slipping to 10.69% from
10.76%. Central bank Governor Neto has signaled a 100 bp hike in the Selic Rate
in May (to 12.75%). However, following yesterday's quarterly inflation
report, it suggested inflation may peak soon and a rate hike in June may be unnecessary.
Bank economists ae less convinced and the swaps market sees a peak in the
policy rate closer to 13.25%.
The US dollar has fallen
against the Canadian dollar for the past eight sessions coming into
today. It has found
support near CAD1.25 but closed below a six-month trendline yesterday and could
retest it today from underneath today. It is found around
CAD1.2560. The Slow Stochastic appears to be poised to curl higher from
over-sold territory. The greenback slipped a little lower against the
Mexican peso to test the MXN20.05 area, a new six-month low. The
MXN20.00 offers psychological support, but the low from last September was near
MXN19.85. The lower Bollinger Band is by MXN19.94.
Disclaimer
Reviewed by Marc Chandler
on
March 25, 2022
Rating:
