Overview: The capital markets are calmer
today. The market is digesting the FOMC minutes, where officials tipped
an aggressive path to shrink the balance sheet and confirmed an
"expeditious" campaign to lift the Fed funds rate to
neutrality. Benchmark 10-year yields are softer, with the US off a couple basis points to 2.58%. European yields are 1-3 bp lower. After
the equity losses in the US yesterday, including a 2.2% drop in the NASDAQ,
Asia Pacific equities struggled. The largest markets, Japan, China, Hong
Kong, South Korea, and Taiwan all fell by over 1%, driving the MSCI Asia Pacific
Index lower for the third consecutive session. With the help of health
care and utilities, the Stoxx 600 is posting modest gains after
dropping 1.5% yesterday. US futures are firmer. In the
foreign exchange market, the dollar-bloc currencies are heavy. The Swedish krona, sterling, and the yen are posting small
gains. Among emerging markets, the Hungarian forint and South African rand
are laggards, while the Polish zloty is still bid after the central bank
surprised yesterday with a 100 bp hike. Gold remains quiet, near the
middle of this week's $1915-$1945 range. May WTI is hovering near
yesterday's low (~$95.75). The low from last month was closer to
$92. US natgas is quiet above $6, while Europe's benchmark has unwound
yesterday's 1.2% gain plus more. It is near a two-week low. Iron ore fell 3%
to record its third consecutive decline. Copper prices are off around 1%
for the second session. Wheat continues to pare the 6% gain scored
Monday-Tuesday.
Asia Pacific
The Japanese yen's decline
has reached a preliminary pain threshold. We have tracked the changing tone of
official comments. They are not earthshattering, but what we describe as
low rungs on an escalation ladder. Industry has also begun expressing
concerns. First, it was the chair of Japan Iron and Steel Federation, who
said the risks from a weaker yen are "unprecedented." Earlier today,
the chair of the Japan Chamber of Commerce and Industry said a weaker yen was
having a bigger negative impact on the economy than positive. This does
not mean that the yen will strengthen. The point is that the easy part of
the move is behind it. We see the dollar-yen exchange rate as usually a
range-bound pair, and when it is trending it is often moving from one range to
another. We suspect a new range is being forged. The
JPY125.00-JPY125.50 may mark the upper end. We had thought the lower end of the
range is in the JPY119.50-JPY120.00 area, but at least initially the JPY121.00
may suffice.
China reported that its
reserves fell $25.8 bln in March. It is the third consecutive decline after rising every
month in Q4 21. The decline brings the dollar-value of China's reserves
to their lowest level since last March. The combination of a stronger
dollar and weaker bonds drove what appears to have been a valuation
adjustment. We do not think there is much to read into it in terms of
policy or intervention. More worrisome is the extended lockdown in
Shanghai and doubts that it will prevent the spread of Covid to other
areas. Some estimates suggest that China's demand for oil has fallen by
around 450k barrels a day. Reports also suggest that tankers from Russia,
Iran, and Venezuela are congesting the ports, and creating a logistic
nightmare.
Australia's February trade
balance was considerably smaller than expected. The A$7.46 bln surplus contrasts
with the expectation (median forecast in Bloomberg's survey) for A$11.65
bln. And adding insult to injury, the January surplus was revised A$1 bln
lower. What happened? Exports were flat in February and the 8%
January increase was revised to 6%. Imports fell by 2% in January and
were expected to rise 2% in February. Instead, they rose by 12%.
Ironically, Australia's trade surplus was about 15% lower than February
2021. Iron ore exports were off 6.7% on the month, while coal exports
slumped 9%. Natgas exports fell 5.3%. Gold, wheat, and meat exports
increased. The surge in imports were led by industrial supply and fuels,
reflecting the surge in prices. Separately, senior Australian
intelligence officials are calling on the Solomon Island's prime minister after a
security pact was recently signed with Beijing. Solomon's Prime Minister
Sogavare offered reassurances that Australia remained its "partner of
choice," Sogavare denied that the pact allows China to set up a
permanent military base. Nor has the deal apparently been
signed.
The dollar tested the
JPY124.00 level yesterday and is holding below it today. It is finding support near
JPY123.50. Continued near-term consolidation is the most likely
scenario. The Australian dollar continues to unwind its recent
gains. On Tuesday, in response to the RBA dropping the word
"patience" from its forward guidance, lifted the Aussie to
$0.7660. It fell to around $0.7485 yesterday and is pushing a little
lower today. A break of the $0.7470 area will weaken the technical tone
and opening the door to a test on the $0.7400 area. The greenback
was confined to an unusual narrow range against the Chinese yuan today
(~CNY6.3580-CNY6.3645). The PBOC set the dollar's reference rate
at CNY6.3659, slightly lower than the median projection in Bloomberg's survey
of CNY6.3662.
Europe
The unexpectedly large drop
in German factory orders reported yesterday appeared to have little impact on
industrial output. It rose by 0.2%, which was as the median (Bloomberg survey)
forecast. However, the sharp downward revision to January (1.4% from
2.7%) takes some shine from the report. The German economic calendar is
light next week. The highlight is the April ZEW investor survey, which
deteriorated markedly in the face of higher energy and the war in
Ukraine.
The record from last month's
ECB meeting is still awaited. It tends not to be a significant mover of the capital
markets. Meanwhile, ECB President Lagarde has reportedly contracted
Covid. The symptoms are said to be "reasonably mild”, but this seems
to imply that she will not attend next week's ECB meeting. The meeting,
which does not feature new forecasts, was expected to focus on the bond buying
program that continues through Q2. Purchases in Q3 were said to be data-dependent
but would seem to need to come to end to allow the central bank the flexibility
to hike rates. The swaps market has about 55 bp of tightening discounted
for the second half.
The euro is extending its
losses. It has been
recording lower highs and lows since the key reversal on March 31, when it
peaked near $1.1185. In Europe today, it has tested the $1.0865
area. Last month's low was near $1.08. It seems too far away today,
and an option for 1.52 bln euros will roll off. There is another set at
$1.09 for 1.83 bln euros that also expire today. Sterling is
little changed in the European morning near $1.3070. It is
consolidating above yesterday's low a little below $1.3050. The outside
down day on Tuesday saw follow-through selling yesterday and sideways action
today.
America
The FOMC minutes yesterday
confirmed what the market had come to expect. The balance sheet reduction will likely
start next month. It will quickly (a few months) ramp up to $95 bln a
month ($60 bln Treasuries and $35 bln mortgage-backed securities). Recall
that in the 2017-2019 period, the roll-off was capped at $50 bln. At the
new pace, the Fed's balance sheet will shrink from around 37% of GDP to around
23% by the end of 2024. It was a little less than 20% of GDP at the end
of 2019.
Separately, as the Summary
of Economic Projections indicated, there was a dramatic shift in inflation
expectations between December 2021 and March 2022 (PCE deflator projections
rose to 4% from 2.6%). Some Fed officials that wanted to hike 50 bp to initiate the cycle
held back due to the uncertainties sparked by Russia's invasion of
Ukraine. Those reservations apparently have been eased and the minutes
confirm what we have called a "campaign" that will bring the Fed
funds rate to neutral (~2.25%-2.50%). The Fed funds futures market has
212 bp of tightening discounted for the remainder of the year.
The US reports weekly
jobless claims and February consumer credit. However, Canada, Mexico, and Brazil have
more interesting/important releases today. The focus in Canada is on the
budget. Trudeau's minority government appears more committed to its
social objectives and appears less concerned about reining in fiscal policy.
Several measures are expected to address the housing market, including a
two-year ban on foreign purchases for non-primary residences. Rising oil
prices will give the government a windfall and this should help pay for the new
spending initiatives. Tomorrow, Canada reports March employment
figures. Mexico and Brazil report March CPI figures. Mexico's CPI
is expected to have edged up toward 7.4% (7.28% in February). The core
rate is also expected to edge higher. The central bank does not meet
until May 12. Brazil's IPCA measure of inflation is expected to have
accelerated to 11% from 10.54% in February. The Brazilian central bank
meets next on May 4. Lastly, Peru's central bank is expected to hike 50
bp today to lift the reference rate to 4.5%.
The US dollar posted a
bullish hammer candlestick on Tuesday as it bounced off the CAD1.2400
area. It rose
sharply yesterday and has tested the CAD1.2570 today. The CAD1.2580 area
corresponds to the (38.2%) retracement of the decline since the March 15 high (~CAD1.2870). Th next retracement (50%) is near CAD1.2635. The
greenback bottomed against the Mexican peso on Monday around MXN19.7275. It
reached MXN20.1950 yesterday and is consolidating in a narrow range today
(~MXN20.1155-MXN20.1825). The MXN20.14 area is interesting from a
technical perspective, but the (38.2%) retracement objective of the leg down
that began a month ago is by MXN20.39.
Disclaimer
Reviewed by Marc Chandler
on
April 07, 2022
Rating:
