Overview: What
appears to be a powerful short-covering rally in the US debt market has helped
steady equities and weighed on the dollar. Singapore and South Korea
joined New Zealand and Canada in tightening monetary policy. Attention
turns to the ECB now on the eve of a long-holiday weekend for many
members. The tech-sector led the US equity recovery yesterday, snapping a
three-day decline. Most of the major markets in Asia Pacific advanced but
Taiwan and India. Europe's Stoxx 600 is posting small gains for the second
day, and US futures are little changed. The 10-year Treasury yield is a little softer at 2.69%. It peaked on April 12 near 2.83%. The
two-year yield is almost one basis point lower to about 2.34%. It peaked on
April 6 around 2.60%. The drop in US yields yesterday and softer than
expected jobs data conspired to spur a 10 bp drop in Australia's 10-year
yield. European yields are 3-4 bp higher, with the periphery leading, perhaps on ideas that the ECB will signal the end of
its bond-buying. The dollar is mostly heavier against the major
currencies, with the Swedish krona and New Zealand dollar the strongest.
Among emerging market currencies, those from central Europe have been helped by
the euro's bounce. The high-flying South African rand and Mexican peso
have come back a bit lower. Gold is softer but consolidating inside yesterday's range. June WTI is pulling back a little after testing the $104
area. US natgas prices are higher for the fourth session and have risen by
around 58% since mid-March. Europe's benchmark is off about 3% and is
near its lowest level since March 25. Iron ore rose 1.6% after
yesterday's 2.5% decline as the sawtooth pattern of alternating gains/declines
this week continues. July copper is edging higher for the third
session. July wheat is struggling after four days of gains.
Asia Pacific
Australia's March employment
report fell shy of expectations. Overall, employment rose by 18k, not the 30k the median forecast
(Bloomberg survey) anticipated. Full-time positions rose by 20.5k after
increasing by nearly 122k in February. The unemployment rate was steady
at 4.0% rather than slipping as expected. The participation rate was steady
at 66.4%. It had been expected to increase slightly. Separately, the
Melbourne Institute's measure of inflation expectations rose to a new high of
5.2% from 4.9%. The central bank is waiting for stronger signs of wage
pressures to build before lifting rates, but this risks putting it further
behind the curve. A rate hike is expected after next month's
election.
How are Japanese investors
responding to the slide in the yen? For the 10th week of the past 11, Japanese investors
have been selling foreign bonds. US Treasuries are their largest holding,
so the divestment hit them hardest. Given the developments in the foreign
exchange market, the repatriation of unhedged proceeds buys more yen.
Sometimes in the past, it appears that the weakness of the yen encouraged
Japanese investors to export more savings.
The market will be
disappointed if China's benchmark one-year medium-term lending facility rate is
not cut tomorrow. It
was last cut by 10 bp to 2.85% in January. This was the first cut since
the pandemic struck in early 2020. The MLF rate was cut by 20 bp in April
2020 after a 10 bp cut in February. Covid and the associated lockdowns
are hitting an economy that already appeared to be struggling. More than
a token 10 bp cut is necessary. There are heightened expectations for a
cut in reserve requirements as soon as next week. Prime loan rates may
also be reduced next week. China reports Q1 GDP early next week. It
has expected to have slowed to 0.7% quarter-over-quarter after growing 1.6% in
Q4 21.
The pullback in US yields
has helped the yen stabilize after sliding for the past nine consecutive
sessions. Still,
the greenback has found support ahead of JPY125.00. A break of the
JPY124.80 area is needed to signal anything important technically. On the
upside, the JPY125.60-JPY125.70 area may offer an immediate cap. Support
at $0.7400 for the Australian dollar frayed yesterday but it recovered to
almost $0.7470 today before new offers proved too much. It is finding
support in the European morning near $0.7440. The Chinese yuan
has not drawn much benefit from the heavier US dollar. The
greenback did make a new low for the week near CNY6.3625 but recovered and
resurfaced above CNY6.3700. The PBOC set the dollar's references rate slightly
lower than expected at CNY6.3540 (vs. median forecast in Bloomberg's survey for
CNY6.3547).
Europe
The ECB meets amid claims by
its first chief economist Issing that its approach to inflation has been
misguided. The
preliminary estimate of last month's CPI was 7.5% (3% core)
year-over-year. At the same time, growth forecasts are being cut. There
has also been a serious blow to consumer and business confidence.
Monetary policy, as is well appreciated, has impact with variable lags.
That is partly why simply subtracting inflation from the bond yield may not be
the most robust way to think about real interest rates. Nominal rates
should be adjusted for inflation expectations. In any event, the takeaway
from the ECB meeting will be about the forward guidance on its asset purchases.
Does it pullback from last month's decision in which it indicated its monthly
bond purchases here in Q2 or does it commit to suspending the Asset Purchases
Program at the end of the quarter? What about the other policy tool
discussed in the press that would give the ECB a way to counter a surge in yields
that could lead to diverging rates? It seems like it is not imminent, but
more importantly this may be an effort to modify the Outright Monetary
Transactions facility that Draghi launched. Note that there were
conditions attached and although the facility has not been used, it seemed to
have helped ease the crisis mentality. It reveals something about the power of
the communication channel.
Turkey's central bank sets
the one-week repo rate today and it is likely to remain at 14%. What may prove more interesting are the
weekly portfolio flows. In the week ending April 1, foreign investors
were net buyers of Turkish bonds for the first time in six weeks. The $104 mln
was slightly more than the cumulative total of the last three weeks that they
were net buyers (late Jan-mid-Feb). The Turkish lira has stabilized.
Consider that actual volatility (historic) over the past month is about
7.1%. A month ago, it was around 13%. At the end of last year, it was
almost 100%.
The Johnson government lost
its junior Justice Minister Wolfson over the "repeated
rule-breaking." Meanwhile,
reports suggest the prime minister will likely be fined a second time.
However, sterling is unperturbed by these developments. It is extending
yesterday's dramatic recovery. Sterling posted a key reversal yesterday by
falling to new lows before rallying and settling above the previous day's
high. There has been follow-through buying that has lifted sterling to
almost $1.3150 today. Yesterday, it recorded a low near $1.2975.
The $1.3175-$1.3200 area may offer stronger resistance. The euro is also
extending its recovery. Buying emerged yesterday ahead of $1.08. It
reached a three-day high slightly below $1.0925. There is a 600-euro
option at $1.0920 that expires today. Nearby resistance is seen around
$1.0950.
America
US retail sales look to have
strengthened, but the devil is in the details. The median forecast (Bloomberg survey)
sees retail sales rising 0.6% after a 0.3% gain in February. However,
high price gasoline can again skew the data. Recall that the CPI figures showed
an 18% rise in gasoline prices last month (which accounted for more than half
of the 1.2% monthly gain). What Bloomberg calls the control measure, which
excludes food services, gasoline, autos, and building materials, is used by
some economic models of GDP, which pick up those items through a different time
series than the retail sales report. After being crushed in February,
falling 1.2%, the median in Bloomberg's survey calls for a 0.1% gain. The
risk is that rising gasoline prices slams discretionary purchases.
Separately, import and
export prices are expected to have continued to accelerate last
month. Although
export prices are rising faster than import prices, the US trade deficit has
deteriorated. The US reports weekly jobless claims. Revisions to the seasonal adjustment may be exaggerating the recent decline, but the labor
market remains tight in any event. Business inventories are expected to
have risen in February (~1.3%) after a 1.1% gain in January. While it
would be strong, for GDP purposes the key is the change in the change, as it
were. In Q1 business inventories grew by an average of about 1.7% a
month. The slower inventory growth is part of the slowing we anticipate
in Q1. Lastly, the University of Michigan's consumer confidence measures
is likely to have deteriorated, but it may be the inflation gauges that draw
the most attention. Many economists suspect US CPI, especially the core
measure, may have peaked.
The Bank of Canada delivered
the much anticipated 50 bp hike yesterday. The market has fully priced in a 25
bp hike at the next meeting in early June. The risk seems to be for
another 50 bp hike. The central bank lifted the neutral rate to 2.50% from
2.25% and suggests that is where it was headed. It lifted its inflation
forecasts. It now expects CPI to average 5.3% this year, up from the 4.2%
forecast in January. Next year's forecast was lifted to 2.8% from
2.3%. Also, as anticipated, the Bank of Canada will stop recycling
maturing proceeds and allow its balance sheet to shrink. Over the next
12-months about a quarter of the bonds bought on net basis during the pandemic
(C$350 bln) will roll-off.
The US dollar posted a key
downside reversal against the Canadian dollar yesterday and follow-through
selling has been seen. Initially the greenback made new highs for the move to around
CAD1.2675 yesterday before turning around and settled below the previous
session's low (~CAD1.2580). It has been sold to around CAD1.2540 today,
which is the (50%) retracement of the greenback's rally off the April 4 low for
the year near CAD1.2400. The next retracement (61.8%) is closer to
CAD1.2500. The Mexican peso's run is getting stretched.
It managed to extend the most recent streak to its fifth consecutive advance
yesterday, but the upticks are getting harder to secure. The peso is better
offered today, with the dollar near MXN19.80. Initial resistance may be
in the MXN19.88-MXN19.92 area.
Disclaimer
Reviewed by Marc Chandler
on
April 14, 2022
Rating:
