Overview: New week, same refrain. Stocks down, yields up,
and the dollar is broadly higher. The Nikkei and Taiwan fell by more than
2% and South Korea and Australia were off more than 1%. China's Shanghai
and Shenzhen rose, but the CSI 300 fell again. Europe's Stoxx 600 is off around
1.5% near midday in Europe. US futures are 1.5%-2.0% lower. The US
10-year yield is near 3.20%. European bond yields are 3-8 bp
higher. The core-periphery spreads are widening, and Italy now offer
around 205 bp more than Germany on 10-year bonds. The dollar rules the
roost. Among the majors, the Antipodean are leading the losses with
declines of about 1%. In the emerging market complex the Russian rouble
is off 3.4% followed by the South African rand's 1% decline. Gold is off
more than 1% near $1863. It peaked last week on Thursday near
$1910. June WTI is a couple of bucks softer as its pulls away from $110
to trade near $107. US nat as is up 2.3% after falling 8.4% before the
weekend. Europe's benchmark is off 4%, extending the pre-weekend 9.7%
drop. Iron ore is off 6%, matching the loss from all last week.
June copper sliding 2.6%. Last week it fell 3.2% and is off more than 10% in
the past three weeks. It is at new lows for the year today. July wheat is
rising for the fourth session. It rose 5% last week and is up around 1.4%
today.
Asia Pacific
China reported April reserve and trade data. The dollar
value of reserves fell 2.1% (~$68.3 bln), the most since November 2020.
While there were portfolio capital outflows, the primary driver was valuation
as foreign currencies slumped against the dollar and the price of financial
assets fell. April was the fourth consecutive month; the dollar value of
the reserves fell. At $3.120 trillion, they are at the lowest since June
2020.
China's trade surplus increased to $51.1 bln in April from $47.4 bln in
March. Exports slowed to 3.9% year-over-year from 14.7% in
March. Still, they held up better than expected. Imports for flat
after slipping 0.1% in March. The rise in prices concealed a decline in
the volume of commodity imports, including coal, oil, natural gas, and
steel. The 57% rise imports from Russia were impacted by
this. China's exports to Russia slowed. Exports to the US rose
9.4%. Separately, China's Premier Li, who will not serve a third term as
President Xi is expected to secure later this year, gave his gravest warning
about the economy, calling it "complicated and grave". He
called on all levels of government to help businesses retain employment.
The lockdowns in Beijing and Shanghai intensified over the weekend.
Japan, the world's third-largest economy, likely contracted in Q1, but is
recovering. The April service and composite PMI were revised
higher from the flash estimates. The service PMI rose to 50.7 from 50.5
of the preliminary estimates and 49.4 in March. It was the first reading
this year above the 50 boom/bust level. The composite PMI stands at 51.1,
up from 50.9 initially, and 50.3 in March. It is the highest print this
year. Japan also reported somewhat better than expected wages. The
largest umbrella labor organization estimates that negotiations boosted wages
by an average of 2.1%, up from 1.8% last year. In March, labor cash earnings
rose 1.2% year-over-year, the same pace as February. This is twice the
pace of March 2021. However, when adjusted for inflation, average wages
fell by 0.2%, the first decline since December. A year ago, they had
risen by 1.0%. Wage growth is the key to the BOJ outlook. Governor
Kuroda is willing to look through the rise in commodity prices and the fading
last year's cut in cell phone charges to maintain the easy monetary policy
because wage growth has been weak.
The Philippines appears likely to elect former President Marcos' son and
current President Duterte's daughter as President and Vice President in today's
election. They have been running well ahead in the polls.
For the first time in 20 years, Hong Kong only had one candidate running and lo
and behold he won some 1416 of the 1426 votes cast. Lee will take office
July 1. He will oversee the further Sino-ification of Hong Kong,
including controversial laws banning treasons and sedition that previously
spurred large-scale demonstrations.
The dollar made a marginally new 20-day year high against the Japanese
yen near JPY131.35. It is now finding support near
JPY131.00. The greenback has risen for the past nine weeks. It is
risen from below JPY115. The next target that is widely noted is JPY135.
The upper Bollinger Band is near JPY132 today. The gains scored
last week in response to hawkish central bank that lifted the Aussie to around
$0.7265 have completely been unwound. The low for the year, set
in late January was near $0.6970. A break could spur another half-cent decline,
but it would weaken the technical outlook, and suggest potential toward the
$0.6750 area. The US dollar has continued to surge against the
Chinese yuan. It is up nearly 1% today to poke above
CNY6.73. The dollar rose by 0.9% in last week's two sessions after the
long holiday. These levels have not been seen since October 2020.
The 200-day moving average is slightly higher, around CNY6.7330. We note
that the (50%) retracement of the US dollar's slide from the Covid-high (June
2020 near CNY7.1780) is around CNY6.7420. For the fifth session, the PBOC
set the dollar's reference rate lower than the market (Bloomberg survey)
projected (CNY6.6899 vs. CNY6.6938). This suggests it may be trying to
moderate the pace of the yuan's decline not explicitly or directly fueling
it.
Europe
The G7 have agreed to phase in a ban on Russian oil, but the EU has not
fully agreed. Trying to get Hungary, Czech, and Slovakia on
board is proving difficult. The EU offered to give them more time to
implement but it has not proven sufficient yet. Negotiations will
continue.
The election in the German state of Schleswig-Holstein showed support of
the SPD fall about 11 percentage points. The state previously
was governed by a coalition of CDU, Greens, and the FDP. The election results
showed the Greens moving into second place in the state, with the SPD slipping
into third. The results mean that the FDP are not needed to form a
government. We suspect that they will still be included, though their
support was nearly halved to 6.4%. The AfD and Left parties did not make
the 5% threshold for representation. Germany's most populous state, North
Rhine-Westphalia, voted this coming Sunday. Currently it is governed by a
CDU-FDP coalition. The CDU is running slightly ahead in the polls.
The UK local elections have complicated the government's Northern Ireland
policy. The nationalist Sinn Fein took the most votes but in the
complicated checks and balances, the unionist DUP support is still needed to
form a government. It says it won't play ball if the Northern Ireland
protocol is retained. The poor showing for the Tories more
generally is expected to prompt a cabinet reshuffle before the summer recess in
late July. In the Queen's Speech tomorrow, the Tory's legislative agenda
will be outlined.
The euro is trading inside its pre-weekend range (~$1.0485-$1.06) as the
consolidative phase continues. The 500 bln euro option at $1.0520 that expires
today has likely be neutralized. The speculative (non-commercials)
future accounts had been net long the euro since mid-January. While they
have been scaling out of their position in recent weeks, the CFTC data shows
that as of last Tuesday (May 3), they switched to a new short
position. While the euro is consolidating, sterling is continuing
to struggle. It has been sold to a new low near $1.2260
today. There may be support another cent lower, but the next important
chart point is in the $1.20-$1.21 area. The $1.2350-$1.2360 band offers a
nearby cap.
America
The FOMC meet last week, and market participants still want more color
and insight into the central bank's thinking. However, the Fed's
critics do not like what they hear. Chair Powell is accused to taking a
75 bp move off the table. He said it was not under active consideration.
Outside of Barkin, a non-voting member (Richmond President) no one else seem to
demur. Specifically, the most hawkish members--Bullard and Waller--argued
that the Fed is not as behind the curve as some argue. They noted that
through the Fed's communication, the financial conditions were tightening as of
September 2021--six months before the March hike. Minneapolis Fed
President Kashkari, among the more dovish members (and does not vote this year)
opined that the neutral rate may be around 2%, a bit lower than usually
projected. No fewer than six Fed officials speak tomorrow.
A week that could feature the first decline in both CPI and PPI in two
years begins slowly with revisions to wholesale sales and inventories on tap
for today. GDP revisions often stem from inventory and trade
data. From last week’s March trade balance, it appears that the
contraction in Q1 GDP may be slightly larger than the 1.4% initial estimate. If
the GDP contraction was a statistical fluke arising primarily from importing too
much and slower grow in inventory accumulation, the productivity and unit labor
costs, which are derived from the GDP were also exaggerated.
Canada reports March building permits, but data highlight of North
America today will be Mexico's April CPI. The headline rate is
likely to accelerate (7.73% vs. 7.45%, according to the median forecast in
Bloomberg's survey) and the core may rise to 7.18% from 6.78%. The
central bank meets on May 12 and a 50 bp rate hike, which would bring the
overnight rate to 7.0% is expected. If there is a surprise, it will
likely a 75 bp move instead of 25 bp.
The US dollar is making new highs for the year against the Canadian
dollar today, reaching CAD1.2950. We see solid Canadian macro
fundamentals. However, the Canadian dollar seems particularly sensitive
to the risk environment and the fall in equities is the main drag. The US
dollar has not traded above C AD1.30 since December 2020. The CAD1.3025 area
corresponds to the (38.2%) retracement objective of the decline since the March
2020 Covid-high near CAD1.4670. The 200-week moving average is found near
CAD1.3045. There is a $1.15 bln option at CAD1.30 that expires in the
middle of the week. The greenback consolidated against the
Mexican peso in the second half of last week, but the risk-off is proving too
much and it is threatening to break higher. A move above
MXN20.35 would target the MXN20.50 area. Initial support is seen around
MXN20.20.
Disclaimer