Overview: US yields eased yesterday after the
slightly lower than expected core CPI reading and "sell the rumor, buy the
fact" type of activity. The jump in the 10-year yield today to 2.78%
more than erased the decline. It has softened in the European morning to 2.74%. The yen tried to snap a seven-day decline yesterday
but failed and the higher US yields have lifted the dollar to new 20-year highs
against the yen. The weaker yen, in turn, seemed to help lift Japanese
stocks. Most large markets but China and India rose in Asia Pacific
trading. Europe's Stoxx 600 is struggling, after falling Monday and
Tuesday. European 10-year benchmark yields spiked 4-7 bp higher earlier today but are mostly 1-2 bp better. Following higher than expected CPI, the 10-year Gilt yield is up 5 bp. US equity futures are firm after yesterday's wobble. The greenback is broadly
mixed. The New Zealand dollar, where the central bank delivered a 50 bp
hike, is off twice as much as the yen (1.0% vs. 0.5%). Among emerging
market currencies, the South African rand is extending its gains for a fourth
session and the Mexican peso is higher for a fifth day. The Israeli
shekel is also extending its gains. It is gaining for the fourth session
following yesterday's 25 bp rate hike. Gold is pushing to new 4-week highs near $1980. June WTI
is firm. It jumped 6.6% yesterday to resurface above $100 a barrel. US
and European natural gas prices are firmer too. Iron ore saw its first
gain in six sessions yesterday but gave back the lion's share today. July
copper is flattish after yesterday's 1.7% advance. July wheat is edging higher again after a three-day 8%+ rally.
Asia Pacific
Economists favored a 25 bp
hike by the Reserve Bank of New Zealand but the swaps market favored a 50 bp
hike (75%). The
RBNZ delivered a 50 bp hike. It is the first time in more than two decades that
the central bank raised rates by more than 25 bp. It called the move "the
path of least regret." The swaps market favors another large move
next month (May 25). The New Zealand dollar initially jumped about
half-a-cent on the news but met a wall of sellers near $0.6900 and has reversed
lower to trade below yesterday's low (~$0.6800).
China surprised with a
larger than expected March trade surplus. The median forecast in Blomberg's
survey was for a $21.7 bln surplus after a $30.6 bln surplus in February.
Instead, on the back of stronger exports and weaker imports, the surplus rose
to $47.4 bln. Exports rose 14.7% from a year ago compared with 12.8%
expected. Imports fell (0.1%) for the first time since August 2020.
A wide range of imports fell, and this seems clearly related to the
Covid-related port and dock congestion in Shanghai and nearby areas. The
distortions are expected to persist. China's surplus with the US rose to
$32.1 bln from $26.7 bln. The surplus with the EU rose to $20.1 bln from
$17.8 bln. The surplus with ASEAN rose to $7.7 bln from $2.7 bln.
These three areas account for the increased overall surplus. Note that
China's deficit with Russia rose to $4 bln from $1 bln, playing on fears the
Beijing is assisting Moscow, which is increasing being isolated.
Japanese officials repeated
that rapid yen moves are undesirable, but has said little about the level, and
the market takes this as a sign to press ahead. The greenback poked above JPY126.35 in
late Asian turnover. As we mentioned previously, a move above JPY126
opens the door to JPY130, and there is indeed more talk of JPY130 today.
Support is seen in the JPY125.80-JPY126.00 area. In terms of orderliness
of the move, the upper Bollinger Band is around JPY126.60. The
Australian dollar barely failed to record a bullish outside day yesterday but
has come back offered today. The $0.7500 level capped it yesterday
and now looks set to retest $0.7400. The greenback is firm
against the Chinese yuan, but it is going nowhere quickly. For the
sixth session, it is posting a net change of less than 0.1%, though for the
second day it is making lower highs. The PBOC set the dollar's reference
rate at CNY6.3752, slightly higher than the median (Bloomberg survey) of
CNY6.3747.
Europe
The news stream from the UK
is not pretty. Both
the Prime Minister and Chancellor of the Exchequer Sunak, who earlier this
year, was a favorite to become the next Prime Minister will be fined by the
London police for attending parties during the lockdown. Both had denied
the initial accusations. Russia's invasion of Ukraine appears to have done more
to bolster Johnson's standing in polls than any action the Prime Minister
himself has taken. Our view remains that after the local elections early
next month, the political fallout will be clearer.
On top of this rather embarrassing
development (and the government's own investigation--Gray's report-- can only
proceed), the UK reported a larger than expected jump in inflation. The preferred measure of CPI that includes
home-owner costs (CPIH) rose to 6.2% from 5.5%. CPI itself rose 1.1% on the
month for a 7.0% year-over-year pace, the most in 30 years. At the same
time, it reported that producer input prices are rising faster than output
prices, warning of a squeeze on corporate profits. Output prices rose 2%
in March, not the 1.2% expected, for a year-over-year of 11.9%. Input
prices surged 5.2%, more than twice what was expected (2.0%). The
year-over-year increase rose to 19.2% from a revised 15.1%. The odds of a
50 bp at the next BOE meeting increased to a little more than 20% from around
12% yesterday.
The ECB meets
tomorrow. The
accelerating price pressures require an adjustment in ECB policy, but no move
is expected. Instead, the focus is on the forward guidance on the asset
purchases. The issue is that last month, the ECB adjusted its bond
purchases for Q2 under the Asset Purchase Program now that the emergency
program ended. It left open ended what it would do in Q3. The hawks
are pushing for a clear stop to the bond purchases, which need to end before rates
can be raised. The swaps market has about a 15 bp hike priced in before the
summer recess and almost 70 bp before the end of the year. There will
likely be questions at tomorrow's press conference about a new facility to
counter exogenous shocks that threaten to fragment (wider spreads between the
core and periphery) the debt market. It could be a quid pro quo for
ending the formal APP program, but the hawks may insist on some
conditionality.
The euro drew nearer $1.08
today (~$1.0810) after being turned back from $1.09 yesterday. A break of $1.08 would likely spur a move to
the March 2020 low near $1.06. Talk of parity is increasing. On the
upside, we suspect initial resistance is around $1.0860. It is
the fourth session sterling has traded below $1.30. Although
it has yet to close below there, it has made lower lows. Today, it
reached $1.2975, to take out last week's low (~$1.2985). We continue to
see potential toward $1.2830. The $1.3025 area may offer resistance
now.
America
US inflation is very much in
focus with today's PPI on the heels of yesterday's CPI report. The March CPI accelerated 1.2% on the
month for an 8.5% year-over-year pace. The core rose a little less than
expected (0.3% vs. 0.5%) for a 6.5% year-over-year pace. That was the
smallest monthly core increase since last September, and the second consecutive
decline in used car prices helped. The 18% surge in gasoline prices
accounted for more than half of the monthly increase in the headline
rate. Overall, energy prices rose 11% and the secondary impact is seen
with a 10.7% increase in airfares. Owner equivalent costs rose by 0.4%
for the second month and are up 4.5% from year ago. One survey found that
nearly 85% of American households expected to cut spending due to higher
prices. Meanwhile, as more Americans accept that Russia is responsible for the
most recent surge in energy prices, President Biden's support appears to have
begun to solidify. Senator Manchin is trying to resurrect the Keystone
pipeline that Biden nixed quickly when he took office. Today, the US
reports March producer prices. The headline is expected to have
accelerated (to 10.6% from 10%), but this is due primarily to food and
energy. The core rate may have stabilized around 8.4%.
A week ago, the swaps market
was pricing in a risk that the Bank of Canada would hike by 75 bp today. Now it’s not quite pricing in a
50 bp hike, but that seems to still be the most likely scenario. The
economy is performing well, with a positive terms-of-trade shock, and more
fiscal support, with employment higher than it was on the eve of the
pandemic. A recent survey by the central bank found that 70% of
businesses see inflation above the 1%-3% target over the next two years and 40%
see it above 4%. The swaps market is pricing in 115 bp hikes in the next
three months and almost 180 bp in the next six months. The Bank of Canada will
also likely signal the beginning of unwinding its balance sheet. It will do
so by stopping reinvesting maturing proceeds. It appears that the portfolio
of bonds the central bank bought are of a shorter maturity than the other major
central banks. This could lead to more rapid reduction of the balance
sheet.
Still, the Canadian dollar
remains on the defense.
The greenback poked above CAD1.2660 yesterday for the first time in almost a
month. When US equities turned higher, the greenback fell back toward
CAD1.2580 before bouncing to around CAD1.2640. It is pushing a bit above
there in the European morning. We suspect there is potential toward
CAD1.27, but the details of the Bank of Canada statement may make for a more volatile
North American session. Meanwhile, the greenback is approaching the low
for the year against the Mexican pest set earlier this month near
MXN19.7275. The demand for the peso has been quite
persistent. Today is the fifth consecutive gain, but consider that since
March 10, the peso has fallen in only three sessions and two of them were last
week. Last year's low was around MXN19.55.
Disclaimer
Reviewed by Marc Chandler
on
April 13, 2022
Rating:
