Overview: Hawkish comments by Fed Chair Powell
stoked a jump in yields and lit the dollar. News that Alibaba was boosting
its share buyback program to $25 bln from $15 bln helped lift HK shares, while
the weaker yen favored Japanese exporters. Most equity markets in the
region advanced. European bourses are showing a modest upside bias with
US futures and are little changed. The US 10-year Treasury yield is pushing five basis points higher to 2.34%. European yields are also 3-5 basis
point higher. The dollar is rising against most currencies today.
The Antipodean currencies are the most resilient, while the yen and
Norwegian krone are taking it on the chin. The dollar, which began last
week near JPY117.30, is knocking on JPY121 today. Emerging market
currencies are also mostly softer, led by the central European complex.
Hungary is expected to hike its base rate 100 bp to 4.4% today, while the key
rate (one-week deposit rate) is expected to be raised by 30 bp to 6.15% later this
week. Turning to the commodities, gold is consolidating inside yesterday’s
range. The higher yields appear to be sapping demand. May WTI is reversing lower after completing a (61.8%) retracement
near $113.35. US natural gas prices are also pulling back from better levels
earlier today. Europe's benchmark is firm. Iron ore slipped by 2.5% after a 1.6% loss
yesterday. Copper is recouping most of yesterday's loss, the first decline in four sessions. May wheat is up about 3%, adding to
yesterday's 5.2% gain and soy has fully recouped last week's 1.4%
decline.
Asia Pacific
Japan has lifted some Covid
restrictions in Tokyo and outlying areas. This will help set the stage for a recovery in
Q2. The earthquake earlier this month and the Covid restrictions hobbled
the world's third-largest economy. As we have been tracking, Prime
Minister Kishida is reportedly cobbling together a supplemental budget of
around JPY10 trillion (~$83.5 bln). Meanwhile, with inflation set to jump
starting next month (cell phone charges fell sharply a year ago) and global
yields tugging the JGBs, the Bank of Japan may be forced again to defend its
Yield Curve Control cap of 0.25% on the 10-year bond. The yield is
pushing above 0.20%.
India, which is a member of
the Quad (along with Japan, Australia, and the US) to ostensibly check China,
has a more nuanced relationship with Russia. It bought the same air defense
system from Russia as Turkey did without the fanfare. As we noted last
week, India is exercising options to buy Russian oil at a discount.
Indian officials hinted that three-days of the country's oil needs are being
secured. That is about 15 mln barrels over the next 3-4 months.
Last year, India reportedly bought about 33 mln barrels from Russia. The
amount is not so much. After all, consider that according to reports,
about 9 mln barrels of Russian oil is headed to the US this month and another 1
mln at least next month. Businesses were given a 45-day wind-down grace
period. Rather what is more interesting is the that some reports indicate
that India could pay rupee for the oil, but the payment might be benchmarked to
the US dollar.
The dollar extended its
recent gains against the yen and is testing the JPY120.50 area. Such lofty levels have not been
seen for 6-7 years. The next important chart point is not seen until
closer to JPY121.50, but a move toward JPY125 over the slightly longer-term
cannot be ruled out. The dollar's ascent pushed it through the upper
Bollinger Band (two standard deviations above the 20-day moving average) repeatedly
last week. It comes in near JPY120.30 today. As we noted, the
exchange rate is more correlated to rising US yields than as a safe haven (when
it is inversely correlated to equities). The JPY120 area, which was
"resistance" may now offer support. The Australian
dollar is trading inside yesterday's range (~$0.7375-$0.7425). The
high from earlier this month was near $0.7440, and the upper Bollinger Band is
found slightly above it. A break of $0.7360 would weaken the technical
tone. After a few larger than normal moves, the dollar-yuan was
confined to a narrow range today (~CNY6.3590-CNY6.3660). It has
remained within yesterday's range, which was itself within the pre-weekend
range. Recall that in the first part of March, the dollar was in a
CNY6.3070-CNY6.3270 range. It jumped to a higher range, roughly
CNY6.3400-CNY6.3670. The PBOC set the dollar's reference rate at
CNY6.3664 today compared with projections for CNY6.3660 (seen in the Bloomberg
survey). Note that the China's premium over the US of 10-year yields is
about 50 bp, the least in three years.
Europe
Russia's invasion of Ukraine
is a watershed in a way that Moscow's 2008 invasion of Georgia or the war with
Ukraine when it took Crimea was not. It is not only because of the widespread
sanctions, but as many noted, it is spurring German (and others) military
spending. While a monetary and banking union is not complete, a common defense
policy is strengthening. Europe is on the verge of establishing a rapid
response force that could be ready for joint exercises as early as next year.
Meanwhile, the debate about whether the EU can ban Russian oil imports
continues and is one of the drivers of oil prices.
Tomorrow is an important day
for the UK. February
inflation is expected to have accelerated. The swaps market is pricing in
another 25 bp hike at the next BOE meeting (May 5). Chancellor of the
Exchequer Sunak will deliver his Spring Statement. Today's data seems to
give him more room to maneuver. The deficit in the first 11 months of the
fiscal year is about GBP26 bln smaller than projected.
Sunak is expected to offer some relief from the jump in food and energy prices,
while going forward with the tax increase next month for the National Health
Service. Still, on balance, given the great uncertainty, and the
political considerations, Sunak is expected to be restrained in new commitments.
The euro fell to a four-day
low near $1.0960 in late Asian turnover before recovering to almost $1.1015 in
the European morning.
Nearby resistance is seen in the $1.1020-$1.1040 area. Note two sets of
option expirations today. The first is at $1.10 for about 935 mln euros
and the second is for nearly 680 mln euros at $1.1025. The intraday
momentum indicators are stretched, and North American participants may be
inclined to buy dollars, for which they are increasingly paid to do. A
break of $1.0960 could see $1.0930 tested. Sterling is faring a
bit better, but it remains for the third consecutive session in the range
forged on March 17 (~$1.3090-$1.3210). It has flirted with $1.32,
which we identified at a possible neckline of a bottoming pattern. It has
yet to close above it, but if it does, it would still seem to target
$1.34. The euro has been sold from nearly GBP0.8460 on March 17 to almost
GBP0.8340 today, almost a two-week low. A break of GBP0.8330 would target
GBP0.8280-GBP0.8300.
America
Federal Reserve Chair Powell
sharpened his hawkish message yesterday and reiterated that the central bank is
prepared to move further and faster. The market responded as one might imagine
and boosted the risk of a 50 bp move at the next meeting (May 4). The
market has a little more than 190 bp of tightening discounted for the remainder
of the year. There are six meetings left. This means that the market is
leaning toward two 50 bp hikes. Powell's remarks were conditioned with
"if necessary" and "if appropriate." Some observers
think it is necessary, and was so last week, though were disappointed that
Governor Waller did not join his former boss, St. Louis Fed President Bullard
in dissenting in favor of a 50 bp move.
While different parts of the
US curve are flattening or, like the 5-10-year curve turning inverted, Powell
played it down. The
Chair cited Fed staff research that found that the 18-month curve to be more
important and it has steepened not flattened as the market prices in a more
aggressive tightening path. What can challenge this trajectory?
Disappointing economic data. The February durable goods orders due
Thursday may not be it, as the series is volatile in any event. However,
the preliminary PMI is due the same day. It is expected to have slipped,
but a composite lower than expected and edging back toward the 50 boom/bust
level would be a yellow flag. The March employment data is due on April
1. A significant disappointment there could temper the rate hike fever. Separately, we note that supply chain disruptions are hitting the auto sector
and share prices have fallen to reflect it. That is in addition to surging
oil and metal prices.
It is a light economic
calendar for North America today. The Fed's Mester, Daly, and Williams speak. Mester is
a voting member of the FOMC, and Williams, the President of the NY Fed, has a
permanent vote. Williams is part of the Fed's leadership, and we will see
how much he echoes Powell. He had expressed doubts about a 50 bp move
before this month's meeting, well ahead of Powell's endorsement of a 25 bp hike
before Congress.
The US dollar is recovering
from the dip to CAD1.2565 yesterday, its lowest level since late January. It is pushing back above CAD1.26 in
the European morning. A move above CAD1.2650 would likely confirm that a
near-term low is in place, with initial potential toward CAD1.2700. The
greenback recovered after dipping below MXN20.27 yesterday, its low here in
March, but has been turned back from MXN20.42, just shy of the 200-day moving average. Banixco
is expected to hike its overnight target by 50 bp to 6.50% in a couple of
days. Still, this month, the peso has gained almost 0.75% and is
lagging behind the Brazilian real (~4.4%) and the Colombian peso (~3.2%).
Strong demand for Brazilian equities has been reported. Yesterday, the
dollar fell to almost BRL4.93, which has not been seen since mid-2020.
The next major chart point is near BRK4.82 and the 200-day moving average close
to BRL4.71.
Disclaimer
Reviewed by Marc Chandler
on
March 22, 2022
Rating:
