Overview: The markets are mostly treading water
ahead of the FOMC decision later today. Tech stocks tumbled in Hong Kong
and the Hang Seng fell a little more than 1%, while India was the worst
performer in the region falling over 2% following an unexpected and inter-meeting
hike by the Reserve Bank of India. It raised the repo rate to 4.4% from
4.0%. Europe's Stoxx 600 is a little lower and has been unable to close
the gap from Monday created from the lower opening. US futures are
firm. A gain today would be the third in a row for the S&P 500 and
NASDAQ and the longest streak since March. The US 10-year yield is little
changed near 2.96%, while European benchmark yields are 3-4 bp higher. The
US dollar is mostly heavier, with the dollar-bloc currencies taking the lead. Norway's
krone and the Swiss franc are trading lower. Norway's central bank meets
tomorrow and is expected to hold until June. Most emerging market
currencies are firm against the US dollar. The notable exceptions today
are the Turkish lira, the Philippine peso, and the South African rand.
Turning to commodities, gold is steadying after yesterday’s test on
$1850. It needs to resurface above $1878 to signal a low is in
place. June WTI is firm and set a new three-day high near $106.50.
US natgas price is lower for the fourth session, while Europe's benchmark has
jumped 6.5% after yesterday's 1% gain. Iron ore fell for a third session,
while copper is edging higher. July wheat is stabilizing after falling
for the past five sessions.
Asia Pacific
China's markets re-open
tomorrow. It
will report Caixin service and composite PMI. The economy is reeling, and
the composite will likely fall toward 40 (below 50 means that output is
falling). The situation may get worse. The Shanghai lockdown has
not been fully lifted and elements are spreading to Beijing. Reports
suggest that as many as 60 metro stops (15%) have been shut and nearly 160 bus
routes altered. Zhengzhou, a city of around 12.6 mln people has been
locked down.
A day after the Reserve Bank
of Australia started its tightening cycle, it reported a surge in March retail
sales. The
1.6% rise compared with economists (median in Bloomberg's survey) projected a
0.5% gain. Meanwhile, the April service and composite PMI were revised to
show more modest acceleration from March then initially reported. The
service PMI stands at 56.1, down from the 56.6 flash reading, but still above
the 55.6 in March. The April composite PMI is 55.9, not quite as strong
as the 56.2 initial estimate but still better than the 55.1 reading in
March.
With Japanese markets closed
until Friday, the dollar is consolidating in a narrow range against the
yen. Today it
has been confined to a little less than a quarter of a yen below
JPY130.20. For the fourth session it is trading within the previous
session. The pattern often acts like a spring coiling. It is often
associated as a continuation pattern, which in this case points to a stronger
dollar. However, the technical indicators are still
over-extended. The Australian dollar is firm but within the
cent-range traced yesterday (~$0.7045-$0.7145). Recall that the
low set earlier this week was near $0.7030. It is trading around $0.7120
in Europe. Yesterday's high is the first obstacle, but a move above $0.7200 is
needed to signal the upside correction is at hand, rather than a broad sideways
consolidation. The US dollar reversed lower yesterday after
approaching CNH6.70. Follow-through selling today saw the losses
extend to CNH6.6315. Recall that end at the end of last week, before the
mainland holiday, it settled a little above CNH6.64.
Europe
The final April EMU service
and composite PMI were unchanged from the flash estimate at 57.7 and 55.8,
respectively. However,
the composition changed a bit. Germany figures were revised lower.
The service PMI still showed improvement over March (57.6 vs. 56.1), but not
quite as much as the preliminary reading (57.9). The composite stands at
54.3. The flash report put it at 54.5. In March it was 55.1.
Recall that at the end of last year, it slipped below the 50 boom/bust
mark. The final French PMI was revised slightly higher. The service
PMI is at 58.9 rather than 58.8 preliminary estimate. The composite is at
57.6 up from 57.5 flash estimate and 56.3 in March. However, it was Italy
and Spain that offered the larger surprise. Italy's service PMI rose to
55.7 from 52.1 and the composite improved to 54.5 from 52.1. Spain was
even stronger. The service PMI rose to 57.1 from 53.4 and the composite
rose to 55.7 from 53.1. The takeaway is that through April, EMU was
showing greater economic resilience than expected.
On the other hand, Germany's
March trade figures give a sense that all is not right. It is not so much that the trade
surplus fell to 9.7 bln euros from a downwardly revised 11.0 bln surplus in
February (initially 11.4 bln euros). Rather it was the larger than
expected fall in exports (3.3%, the largest since April 2020) and it is the second
month in Q1 that shipments fell and the surge in imports, which reflect higher
energy costs. Imports rose by 3.4% after a 4.7% rise in February.
German critics often have harangued it for not importing enough and now that
imports are rising it is not helping the EMU.
The euro is holding above
$1.05 today but is well below yesterday's $1.0580 high. The $1.06 area is still key to the
consolidative/corrective phase. There are options for 1.9 bln euros that expire
there today and another set for 1.5 bln euros tomorrow. The downside
momentum has broken but there is little enthusiasm on the upside.
Yesterday's upticks were sold. We suspect that Friday's US jobs report will
keep the bottom-picker at bay at bit longer. Sterling slipped to
a marginal new low for the week today slightly below $1.2470. A
bounce has lifted it to around $1.2525. Yesterday's high was near
$1.2565. Sterling has been recording descending highs for the past couple
of sessions. Today could be the third session of lower highs. The
Bank of England meets tomorrow, and expectations are solid for a 25 bp
hike. UK local elections are likely to stir the political climate.
The Tories are face a two-prong setback. They are poised to lose a few
hundred council seats. and Sinn Fein may garner a majority in Northern
Ireland's assembly. The latter would impinge on the Tory's Brexit
strategy involving Northern Ireland.
America
There is near universal
consensus that the Federal Reserve will hike the Fed funds target to
0.75%-1.00% with a 50 bp hike. It will also confirm the forward guidance in the March minutes
about the balance sheet run-off that will quickly (a few months?) reach a pace that nearly doubles the previous experience (to $95 bln a month). In light of
the unexpected contraction in Q1 GDP, the wording of the statement will likely
be tweaked to recognize the recovery in consumption and capex. St. Louis
Fed President Bullard dissented from the March decision to hike 25 bp favoring
a 50 bp move at the time. Subsequently, he suggested a 75 bp hike may be
appropriate at some juncture, but he said it was not his base, and it did not
appear to win much support from other Fed officials. Governor Waller, the
previous head of research at the St. Louis Fed is perceived to be the closest
to his former boss. A Governor dissent is rarer and weightier than a dissent
by a regional president. To be sure, the statement will point to continued rate
hikes. After tomorrow's move, the Fed funds futures are pricing in
another nearly 200 bp increases in the year's remaining five meetings.
The pricing of the
individual contracts shows the perception of a slight risk of a 75 bp move in
June or July. This has helped lift the dollar broadly. However, we are wary of "buy the
rumor sell the fact" type of activity. First, most of this news has
been discounted. Second, there again is talk of demand for US long-end
yields as the long-term yields hover around 3%. Third, looking ahead into
next week, there is a reasonably good chance that both consumer and producer
prices ease (year-over-year). It would be the first time since April 2020.
Fourth, the dollar's upside momentum stalled in recent days, and after a
significant run the technical indicators are stretched. Still, the US
April employment picture will be released before the weekend, and around
another 400k non-farm payroll additions are expected. The ADP private
sector jobs estimate will be reported today. Through Q1, it has estimated
an average of 484k private sector jobs were filled. The BLS data puts the
average at 552k, and little higher (562k) including government jobs.
Yesterday, we mistakenly
expected the Canadian March trade figures were going to be reported. They are due today. But the analysis
holds: Canada is benefitting from a
positive terms-of-trade shock. The 3-month average trade surplus has
risen to C$1.43 bln. A year ago, it was practically zero. It is the
highest three-month since 2014. A C$3.75 bln surplus is expected today,
which would be the largest since 2008. In Mexico, President AMLO is
expected to announce the deal he has negotiated with a dozen or two primary
goods producers to voluntarily limit price increases, and in exchange, the
government may boost some income and consumption support spending. Some
estimates suggest the agreement might be worth 100-200 bp off headline inflation.
Still, the market is looking for Banxico to lift the overnight target rate by
125 bp over the next three months to 7.75%.
The US
dollar recorded the year's high near CAD1.2915 on Monday. It has since come
off. Yesterday, with the help of rising US equities, the greenback
eased to around CAD1.2825. There has been a little follow-through selling
that took the US dollar to almost CAD1.28. Support is seen slightly
lower, and a break of CAD1.2790 could see a test on the CAD1.2750 area.
However, the intraday momentum indicators suggest it is over-extended and the
US dollar is likely to tick higher in the North American morning, perhaps back
to the CAD1.2850 area. The US dollar fell to around MXN20.2630
yesterday and remains at the lower end of yesterday's range. It has
held below MXN20.31 today. Yesterday's high was close to
MXN20.4850. Chart support is seen in the MXN20.1600-MXN20.1850 area.
Disclaimer
Reviewed by Marc Chandler
on
May 04, 2022
Rating:
