Overview: The markets have not sustained the powerful
reaction seen yesterday after the Fed hike. Japan and South Korean
markets were closed, but many bourses including Taiwan, Australia, and India
rose. Europe's Stoxx 600 rallied more than 1% and closed the gap created
by Monday's sharply lower opening. US futures are 0.5%-0.7% lower.
The NASDAQ may end its three-day rally that lifted it around 5%. The US
10-year yield is firm near 2.95%, while European benchmark yields have also
firmed. The US dollar, which was sold hard yesterday has returned better
bid today. The Australian dollar and Norwegian krone are off the most
(~0.6%). The Canadian dollar is the most resilient among the major
currencies. Emerging market currencies are mostly lower, except for
handful of Asian currencies. Gold set new high for the week above
$1900. June WTI is firm ahead of the outcome of OPEC's meeting. US natgas
is up for the fifth session and is at new highs. Europe's benchmark is
off around 1% after surging nearly 7.5% yesterday. Iron ore jumped 2% to
snap a three-day slide. Copper is up for a third day but is still below the
high set on Monday. Reports suggesting India may limit grain exports has
seen July wheat jump almost 2.5% after a 2.7% gain yesterday.
Asia Pacific
China's markets re-opened after the long holiday, and the Caixin services
and composite PMI were poorer than expected. The service
component fell to 36.2 from 42.0, well below the 50 boom/bust level. The
composite sank to 37.2 from 43.9. The news will add further pressure on
Beijing to provide new support for the economy. At the same time,
although the Shanghai and Shenzhen composites posted modest gains (~0.65%), the
CSI 300 slipped. The yuan also traded heavily.
Australia reported a larger than expected trade surplus of A$9.3 bln in
March after A$7.4 bln in February. It is experiencing a positive
terms-of-trade shock. In Q1 22, its average monthly trade surplus was
A$9.72 bln, up from A$8.49 bln in Q1 21. The average monthly trade
surplus last year (A$10 bln) was almost twice as high as the average in 2019
(A$5.68 bln). However, what is striking about today's report is that
exports were flat, while import fell by 5%. That said Australia's exports
to China rose 13.2% month-over-month and nearly as much with the EU. We
learned yesterday about the yawning US trade deficit, and Australia's figures
showed a 76% jump in exports to America in March.
Japan returns from holiday tomorrow. Tokyo's April CPI
will be released. It leads the national figures and what makes tomorrow's
number especially important is that it will show a significant jump as the cut
in mobile phone charges drops out of the 12-month comparison. It is worth
about one percentage point. The headline is expected to jump to 2.3%
year-over-year, and the core rate, which excludes fresh food, will rise to
around 1.8%. The measure that excludes fresh food and energy will turn
positive for the first time since March 2021. The BOJ is well aware of this,
and Governor Kuroda was explicit: the central bank would look through it on the
grounds it is not the material for a sustainable rise in price pressures.
Recall too that Prime Minister Kishida's fiscal initiatives are expected to
take off as much as 0.5% from the headline CPI readings.
The push lower in US rates following the FOMC meeting saw the dollar fall
to about JPY128.65 yesterday. It has bounced back to JPY129.85
today. The importance of the price action is that it remains within the
range set on April 28 (~JPY128.35-JPY131.25). Japanese officials
complained about the pace of the move and the combination of jawboning, US
yields, and the local holiday have contributed to the
consolidation. The Australian dollar bounced in the post-Fed
adjustment to about $0.7270, meeting the (38.2%) retracement of drop from last
month's high near $0.7660. There was no follow-through buying
and the Aussie has come back offered. It is approaching $0.7200.
Below there, support is seen in in the $0.7150-$0.7175 area. The
greenback rose against the Chinese yuan as local markets re-opened. It
reached CNY6.6250. Before the holiday, the dollar came off from the CNY6.65
area. The PBOC set the dollar' reference rate a little softer than
expected (CNY6.5672 vs median in the Bloomberg survey of CNY6.5699).
Europe
The UK is center stage today. The Bank of England is
widely expected to lift rates by 25 bp. With the move, the base rate will
be 1%, which is the threshold to allow active selling of the assets accumulated
under QE instead of passively through not re-investing maturing proceeds.
However, Governor Bailey is likely to reiterate that it is not an automatic
trigger and that the passive approach will be maintained. Local elections
in England, Wales, and Northern Ireland will likely shake up UK politics.
The Tories are expected to lose a few hundred council seats and in Northern
Ireland, Sinn Fein is tipped to lead the NI assembly for the first
time.
Germany's March factory orders crashed by 4.7%. The median
in the Bloomberg survey called for a 1.1% decline. Some of the sting may
have been mitigated by the upward revision to the February series to -0.8% from
-2.2%. Still, today's news is disappointing. Domestic orders fell
by 1.8% and foreign orders tumbled by 6.7%. It warns of heightened risk
of a sharp fall in industrial production figures due tomorrow.
Separately, France reported a 0.5% decline in March industrial output, which
was a little more than twice the expected fall. Adding insult to injury,
the February series was revised lower to show a 1.2% decline rather than 0.9%
drop. The hard data seems to take some of the shine off the apparent
resilience of the manufacturing PMI. It rose in February, fell back in March,
but rose in April.
In other notable regional developments, Norway's central bank left rates
on hold. It is expected to continue its tightening cycle next
month. Later today, Poland is expected to deliver a 100 bp hike while the
Czech central bank may lift rates by 50 bp. Turkey's April inflation
soared 7.25% month-over-month to lift the 12-month rate to nearly 70%.
The core rate is almost 52.5%. Prime Minister Erdogan's unorthodox ideas
about high interest rates causing inflation to seem to be bearing the fruit
that had been widely anticipated.
The post-Fed dollar setback saw the euro rise to slightly above $1.0640
today but it has run out of steam and is straddling the $1.06 in late morning
turnover in Europe. The high met the (38.2%) retracement
objective of the sharp decline since the April 21 high near $1.0935.
The 1.8 bln euro option at $1.06 that expires today has likely been
neutralized. A break of $1.0580 would disappointment the bottom
pickers. Sterling posted a big outside up day by trading on both
sides of Tuesday's range and closing above its high. However,
there has been no follow-through buying after it too approached the (38.2%)
retracement objective of the decline from the April 21 high. The
retracement objective was near $1.2670 and cable's high has been around
$1.2635. Barring a hawkish surprise from the Bank of England, sterling
may slip back below $1.25. There is an expiring GBP500 mln option at
$1.2550 that also has likely be neutralized.
America
The FOMC delivered the expected 50 bp rate hike and confirmed starting
the balance sheet unwind next month. However, Chair Powell
clearly played down the likelihood of a 75 bp move. The market, it
seemed, worked itself into a lather because it was mentioned once by St. Louis
Fed President Bullard, who also quickly played it down, explicitly saying it was
not his base case. The Fed stressed that it was focused on inflation and
even a question at the press conference about Russia and China inflationary
shocks, Powell's answer drew attention back to the tightness of the labor
market.
The FOMC meeting may have contributed to the market shrugging off three
disappointing high-frequency economic reports earlier in the day. The
ADP private sector jobs estimate was nearly a third lower than forecasts at
slightly less than 250k. It was the weakest in the recovery.
The ISM services fell to 57.1 from 58.3. Economists had forecast an
increase. Some of the details were weak including new orders and
employment. The third disappointment was with the larger than expect
trade deficit, swelling to $109.8 bln from $89.8 bln. The takeaway here
is that trade, which took 3.2 percentage points off Q1 GDP in the initial
estimate, probably took a slightly bigger bite.
Once again, buying emerged in the US 10-year yield when it poked above
3%. The surprising development was the 14 bp decline in the
2-year yield. The June two-year note futures contract recorded a key
reversal by making a low (in price) for the move and then spiking higher and
closing above Tuesday's high. The bullish steepening move saw the
2-10-year curve trade above 30 bp for the first time in a couple of
weeks. Today's data includes Q1 productivity and unit labor costs.
They are derived last week's GDP, and as we noted at the time the contraction
in GDP while aggregate working hours increased means that productivity fell,
and unit labor costs rose. Weekly jobless claims may lose a bit of
interest given that the national figures are out tomorrow.
There continues to be a steady stream of warnings about the dollar's role
in the world economy. Most focus on reserves and payment
systems. However, there is another dimension that is underscored by the
immediate aftermath of the Fed's hike. Hong Kong, Saudi Arabia, Kuwait,
Bahrain, and the UAE followed suit, lifting local policy rates by 50 bp. There
is no need to belabor the obvious, but simply say actions often speak louder
than words. Separately, Brazil delivered the much anticipated 100 bp hike
yesterday to 12.75%. The central bank's earlier hopes that this could be
the last hike has faded and another increase, albeit smaller, is expected next
month. Chile is expected to lift its overnight target rate to 8% (from
7%) ahead of tomorrow's April CPI that is projected to accelerate over 10% from
9.4%.
The US dollar peaked on Monday a little above CAD1.29. Follow-through
selling after the reaction to the Fed has seen the greenback fall to around
CAD1.2715. However, in line with the pullback in US equity futures and
the broader bounce in the greenback, the US dollar has recovered to CAD1.2765
in Asia. Look for it trade broadly sideways today ahead of tomorrow's
employment reports, though a steeper sell-off of US shares could see the
greenback push toward CAD1.28. The dollar peaked near
MXN20.50 at the start of the week and tested the MXN20.00 area. It
has not traded below there since April 21. The greenback has run into
offers in the MXN20.10 area. Above there, resistance is seen near
MXN20.20.
Disclaimer
Reviewed by Marc Chandler
on
May 05, 2022
Rating:
