Overview: With many financial centers, especially in
Europe, closed for the long holiday weekend, risk-appetites remain in
check. Most Asia Pacific markets fell, and poor earnings from Infosys
and Tata Consultancy, saw India pace the decline with a 2% drop. US
futures are also trading with a heavier bias. Interest rates remain
firm. The US 2- and 10-year yields are up a couple of basis points to 2.47% and
2.85% respectively. China's GDP inexplicable rose though March details
were poor and the yield on the Chinese 10-year bond rose almost 3 bp to
2.80%. The dollar rises high. Despite more official expressions of
concern by Japanese officials over the pace of the move, the dollar is rising
for the 12th consecutive session against the yen and has reached a new high of
almost JPY126.80. The euro has been trading around a 20-pip range on either
side of $1.08. The dollar bloc and sterling are the weakest.
Emerging market currencies are also mostly lower. Gold is up about $14 and is closing in on the $2000-mark, which has not been seen since March
10. June WTI extended its three-day rally to $108 but has returned to the
$106 area in quiet turnover. It rose almost 9% last week. Iron ore
fell 2.4% today, giving back last week's gains in full. Copper is firmer,
extending its advance for the fourth consecutive session. US natural gas
prices are up more than 3%. It is the fifth session of higher prices and
last week's 16.3% advance was the fifth consecutive weekly gain. July wheat
prices are trading around 2% higher. It rose 4.4% last week.
Asia Pacific
China reported that Q1 GDP
rose twice as fast the economists expected (median in Bloomberg's survey) with
a 1.3% quarter-over-quarter expansion. The year-over-year rate increased to 4.8%
from 4.0%. However, the details do not jive. Investment rose but
production of steel and cement fell by 10%. Industrial output rose 5.0%
year-over-year. in March. Economists expected a 4% increase. Real
estate sales fell 29% year-over-year in March, while the 100 largest property developers
reported a 50% decline. Still, the takeaway is that March was poor, and
April will likely be weaker still. Retail sales fell 3.5% year-over-year
in March. The median forecast was for a 3% fall. Joblessness rose to
5.8% from 5.5%. It was expected to be unchanged.
Japanese officials appear to
have stepped up their rhetoric about the yen, but the focus is still on the
pace of the move. This
takes some of the sting away from the jawboning. BOJ Governor Kuroda has
slowly ratcheted up his remarks, telling the Diet today that the recent yen
moves have been rapid. Finance Minister Suzuki said excessive and
disorderly moves have negative impact. Still, if officials want to stem
the tide, they need to climb the next rung of the escalation ladder, which
would seem to be an acknowledgement that the level that has been reached is
problematic. However, with the divergence of monetary policy and low
inflation (deflation, if fresh food and energy are excluded), it is difficult
to make a compelling case that the yen's weakness does not reflect
fundamentals.
South Korea will formally
apply to the Comprehensive and Progressive Agreement for Trans-Pacific
Partnership before President Moon Jae-in's term ends early next month. Since
last year, South
Korea has been moving in this direction but made the formal announcement before
the weekend. The incoming government (President Yoon
Suk-yeol) apparently supports the accession process, which could take a year or
more. The ostensible goal is to diversify exports, but a state-run
economic institute forecasts that joining the CPTPP would boost GDP by around
0.33%.
The dollar's is pushing
higher against the yen for the 12th consecutive session. It rose 1.7% last week, its sixth
weekly gain in a row. It remains below the upper Bollinger Band (two
standard deviations from the 20-day moving average), which is found near
JPY127.15 today. Support is seen in the JPY126.00-JPY126.25 area.
The JPY130-level is the next target continues to draw attention. After
probing the $0.7400 area repeatedly last week, the Australian dollar settled
below it last week and has continued to fall today. It found support
near $0.7350, the (61.8%) correction objective of the rally from the March 15
low (~$0.7165). Initial resistance is seen in the $0.7380-$0.7400 area. The
US dollar softened a little against the Chinese yuan but remains within the
range set last Thursday (~CNY6.3625-CNY6.3800). As we have
noted, the PBOC's use of the fix to send signals appears to have waned.
Again today, the dollar's reference rate was set weaker than bank models
suggested. Today, the PBOC's fix was at CNY6.3763. The median in
Bloomberg's survey was CNY6.3779.
Europe
In addition to the energy,
foodstuffs, and fertilizer that Russia produces, it is also a significant gold
miner. It
produces around 340 tons a year, worth around $20.5 bln. The sanctions
are hitting the gold producers, and to help blunt the impact, the Russian
central bank offered to resume its gold purchases that had been suspended in
2020. On March 25, it offered to pay RUB5000 for a gram of gold. If
the dollar is around RUB82, its offer is about $1700 an ounce. Some observers
may have mistakenly thought that this was Putin pegging the rouble to gold. It was
no such thing. It was about aiding the gold producers, not hardening the
rouble. Moreover, its commitment to buy gold at a fixed price until the
end of June lasted around two weeks. According to press reports, Russia has
apparently been buying gold at market/negotiated price since April 8.
The rouble's appreciation in recent weeks reflects, in part, the positive
terms-of-trade shock (the rising price of its exports while sanctions have
reduced imports). However, the critical driver is a key capital control:
businesses must convert 80% of their hard currency earnings within three days,
which is understood to be around $1 bln a day. This is too much for the
domestic market to absorb, hence the apparent appreciation of the
rouble.
There is a game of chicken
afoot. In effect, Putin
said that Europe pays for its gas with euros but has imposed sanctions on its
use of the euros. Gas, after March 31, would be paid for in roubles, he
declared. Europe objected because it violated existing contracts.
Not to worry, Russia explained that Gazprombank, which is still on the SWIFT
system, would take the euros and convert them for European customers, who would
have both rouble and euro accounts. Many Europeans are balking. EU lawyers
claim that abiding by Putin's scheme violates the sanctions. The issue may come
to a head soon. Payments for the gas shipped since April 1 will begin
being due shortly. Obviously, Europe is not ready to stop buying Russian
gas. They have not agreed to ban Russian oil or coal, for which the dependency
is less. There does not appear to be any economic advantage of the
proposed arrangement. Rather, it seems like politics, causing an
adversary to be uncomfortable.
The weekend press reported
that UK Prime Minister Johnson was the host and poured drinks for colleagues at
one of the staff parties during Covid. Reports at the end of last week suggested he
will face another fine. Johnson is expected to issue yet another apology
as early as tomorrow before Parliament. Meanwhile, the Tory's performance
at next month's local election in England and Wales may tip his political
fortunes. A YouGov polls found nearly 2/3 want Johnson to resign if there
are more fines.
The euro briefly slipped
through $1.0760 last week in the immediate reaction to the ECB's steady hand. Since then, the euro has not spent much
time above $1.0820. It is continuing to absorb bids below $1.08.
Today's low was slightly below $1.0785 in light dealings. The euro is off
for the third consecutive session, and so far this month, it has enjoyed only
two advancing sessions. That said, despite intraday penetration, it has
not settled below $1.08 since May 2020. Sterling posted a key
upside reversal in the middle of last week, but the follow-through buying
quickly exhausted itself (around $1.3150). It is back near $1.30
today. Like $1.08 in the euro, the $1.30 support for sterling has been frayed
on intraday but not on a closing basis. We target the $1.2830 area in
sterling and the $1.06 area for the euro.
America
The US reported a mixed
batch of data last week. The headline CPI was a touch higher than expected (8.5% vs. 8.4%)
but the core rate was slightly softer than anticipated. Many economists
suspect that US CPI may be peaking even if it proves sticky. Producer prices
were stronger than expected. We already knew that auto sales
disappointed, but retail sales excluding autos, rose 1.1%, a little better than
expected. Yet the core measure, which excludes autos, gasoline, building
materials, and food services expectedly fell (0.1%) for the second consecutive
month. The rise in gasoline prices is sapping discretionary spending.
Ahead of the weekend, the US data surprised on the upside. February
business inventories rose 1.5% (1.3% expected) and the January series was
revised higher (1.3% vs. 1.1%). The April Empire State manufacturing
survey jumped to 24.6 from -11.8 (1.0% expected). March industrial output
rose by 0.9%, twice the gain expected, and February's 0.5% increase was revised
to 0.9%. This means that Q1 industrial production increased by a little
more than 8% at an annualized rate, the strongest quarter since Q4 20. The capacity utilization rate stood at 78.3% last month, the highest since
2007. Lastly, defying expectations, the University of Michigan's
preliminary April consumer confidence survey increased while the inflation
outlook was steady.
It is a quieter week for US
data. March
housing starts and existing home sales may begin seeing the impact of higher
interest rates. The Fed's Beige Book for next month's meeting is due in
the middle of the week. Several Fed officials are scheduled to speak this
week, beginning with Bullard late today. The highlight may be on Thursday
when Fed Chair Powell shares the IMF stage with the ECB's Lagarde on a panel about
the global economy. At the end of the week, the flash April PMI will be released,
and a mixed report is expected (softer manufacturing and an uptick in
services).
Canada's highlights include
March CPI, which is expected to have accelerated, and February retail sales,
which likely fell. The
Bank of Canada does not meet again until June 1 and the swaps market has 48 bp
of tightening discounted. Mexico's data diary is light this week, and the
most important release, the bi-weekly CPI reading through mid-April is due at
the end of the week. Economists (Bloomberg survey) expect the headline to
soften a little while the core rate ticks above 7%. Late yesterday, the
Mexican Congress defeated AMLO's controversial initiative that would have
expanded the state's control of the electricity market. It did win a
simple majority but was well shy of the 2/3 majority needed. AMLO is not
deterred and will open new a front as early as today with a bill to exert more
state control over lithium. His resource nationalism estranges investors
Weak stocks and defensive
attitudes weigh on the Canadian dollar. The greenback is at three-day highs near
CAD1.2640. Last week's high was closer to CAD1.2675 and a retracement
objective is around CAD1.2700. Initial support today is pegged by
CAD1.2620. The Mexican peso appreciated 3% last month, but its
strong run has morphed into a consolidative phase. The greenback
appears have entered a MXN19.72-MXN20.20 range. It is straddling the
MXN20.00 area today, where a $525 mln option is set to expire. A close
above MXN20.00 would the first since April 11.
Disclaimer
Reviewed by Marc Chandler
on
April 18, 2022
Rating:
