Overview: Most equity markets in the Asia Pacific region lost ground today. China’s Shenzhen, Hong Kong, and India were notable exceptions. The MSCI Asia Pacific Index is at its lowest level since June 2020. Europe’s Stoxx 600 is forging a base ahead of 4000 and is trading quietly with a small upside bias. The French stock market lagging after Macron lost his parliamentary majority, is raising questions about his reform agenda. US equity futures are firm, but the cash market is closed today. European bond yields are narrowly mixed, though French bonds are underperforming, and the 10-year yield is around three basis points higher. The US dollar is trading with a lower bias against all the major currencies. Sterling is the weakest and is practically flat. The Norwegian krone’s 1.2% gain leads the majors followed by the Australian and New Zealand dollars. Most emerging market currencies are also firmer, led by central Europe. Gold is consolidating quietly around $1840. August WTI is in a narrow range below $110. US natgas is extending last week's 21.5% collapse. It is off another 2.3% today. Europe’s natgas benchmark exploded almost 48% last week and is up another 3.5% today. Iron ore's precipitous drop is also extending. It fell 14% last week and is off another 7.6% today, its eighth consecutive losing session. July copper is off for a third session. It is down about 1% today after falling nearly 10.5% over the past two weeks.
Asia Pacific
As widely expected, China's
loan prime rates were held steady at 3.70% and 4.45% for the one-year and
five-year rates, respectively. Meanwhile, China's recovery from the Covid lockdowns is spotty,
but sufficient to embolden investors and helping Chinese stocks outperform
lately. However, the first reported Covid cases in Macau in several months
weighed on casino shares. Separately, reports suggest that around a third of
China's oil refining capacity is off-line due to Covid restrictions. That said,
some reports suggest a rebound in car sales, higher oil refinery run rates, and
a rising in trucking transport suggest the nascent recovery remains
intact.
The Bank of Japan bought a
massive amount of Japanese government bonds last week to defend its 0.25% cap
on the 10-year. The BOJ
added almost $81 bln of bonds to its balance sheet. It disrupted both the cash
and futures market last week. Reports suggest that a personnel shift has also
bolstered its efforts and market contacts. For dollar-based investors, the
paltry 10-year JGB yield of 0.24% can earn closer to 2.65% if the yen is hedged
back into dollars. Still, foreigners have been sellers and year-to-date (through
June 10) have sold about JPY2 trillion (~$14.8 bln) of Japanese bonds. The
economic highlight of the week is the May CPI figures due first thing Friday in
Tokyo. The Bloomberg survey shows a median forecast of no change, leaving the
year-over-year rate at 2.5% and the core measure, excluding fresh food at 2.1%.
Excluding fresh food and energy, a 0.8% gain is expected. April saw the first
reading above zero since July 2020 as last year's cut in cell phone charges
dropped out of the 12-month comparison.
The dollar held below last
week's high against the yen, seen around JPY135.60. It is in a tighter range than has been
seen in recent sessions. It found support near JPY134.55. The consolidative
tone may not persist as the divergence of monetary policy will likely intensify
further next month. The Australian dollar is also consolidating. It is
trading within the pre-weekend range (~$0.6900-$0.7050). It is firm but with
the US holiday, the gains may be limited. The Chinese yuan reached seven-day's
high today, extending its recovery that began last week. The dollar reached a
high last week near CNY6.7610 and recorded a low today around CNY6.6735. The
dollar's reference rate was set at CNY6.7120 compared with expectations (median
from Bloomberg's survey) of CNY6.7126.
Europe
French President Macron
appears to have been denied a parliamentary majority in yesterday's
election. It did not
do the euro any favors initially, but the immediate policy implication is not
clear. The center did not hold as the alliance on the left of Macron, Nupes,
and the far-right National Rally gained ground. The left-green coalition may be
the main opposition party, but Le Pen (National Right) is the big winner with
around a 10-fold increase in the number of seats than five years ago. There is
much speculation that Macron may reach out to the center-right Republicans and
their allies, who appear to have secured around 80 seats. Alternatively, Macron
could seek to govern as a minority government, cobbling together coalitions on
an issue-by-issue basis (e.g., raising the retirement age. Still, it seems reasonable
to expect the election results to be recognized with a cabinet reshuffle that
may include a new prime minister. France's strong presidential system may not
weaken Macron at the European summit on June 23-24 or the G7 meeting June
26-28.
Rightmove reported that UK
house prices rose to a new record this month for the fifth consecutive month. Its index is 9.3% above year ago levels.
Some find a glimmer of hope in the fact that the index rose by only 0.3% this
month, matching the slowest pace of the year. Supply has also increased. Separately,
the UK rail workers will strike tomorrow, Thursday, and Saturday as
negotiations over pay and jobs faltered over the weekend. Separately, the
workers in the underground subway will strike tomorrow too in a separate
dispute.
The euro recouped its early
losses that pushed it a little through $1.0465 and it recorded session highs in
the European morning around $1.0545. It is inside Friday's range (~$1.0445-$1.0560), which was inside
Thursday's range (~$1.0380-$1.0600). Ultimately, a move above $1.0620 is needed
to lift the technical tone. Sterling is also trading inside the pre-weekend
range (~$1.2175-$1.2365), which was also inside last Thursday's range
(~$1.2040-$1.2405). Today it found support near $1.2200. The session highs
have been made late in the European morning slightly above $1.2260. On
Wednesday, the UK reports May CPI figures. The headline rates are expected to
be steady to slightly higher, while the core rate may ease to 6.0% from 6.2%.
America
What the Fed means when it
says it will hike rates expeditiously is clearer. It means that the central bank will raise
rates as quickly. That speed limit is a function of market expectations, which
it seeks to shape through the communications channel and the economic data.
Just as Volcker used money supply to justify what he wanted to do in the first
place, the Powell Fed used the uptick in an inflation gauge it does not target
and the increase in inflation expectations that spurred speculation of a 75 bp
hike to raise rates faster than it had previously intended. Moreover, after
cautioning that the large move was unusual, Powell explicitly allowed for a
move of a similar magnitude next month. Governor Waller, a leading hawkish
voice, indicated over the weekend that another 3/4-point move was his base
case. He will support such a move if the economic data comes out as he
anticipates.
Waller, like Powell, played
down the fears of a recession, saying they were "a bit overblown." Powell said he saw "no sign"
of a broad slowdown. Cleveland Fed's Mester took a slightly softer line. On
"Face the Nation" she said that while she was not forecasting a
recession, the risks were rising "partly because monetary policy could
have pivoted a little bit earlier than it did." Both Powell and
Waller have argued that the Fed's pivot came six months before the first rate
hike in March. The two-year note yield climbed 100 bp between its pivot and the
hike. Financial conditions were tightening before the Fed formally began its
tightening cycle.
Mester acknowledged that
growth was slowing to a little below trend. The Federal Reserve estimates trend
growth, i.e., the non-inflationary pace, at 1.8%. The median forecast of Fed
officials is for growth to be at 1.7% this year and next (down from 2.8% and
2.2% in March, respectively). That seems like a broad slowdown compared with
what the Fed saw three months ago. For what it is worth, a couple of economic
models are considerably more pessimistic. The NY Fed runs an economic
model that was updated before the weekend. It puts the probability of
a soft-landing, which it defines as four-quarter GDP straying positive over the
next 2.5 years, around 10%. The odds of a hard land, which it defines as at
least one-quarter of growth in the next 10, which four-quarter GDP growth falls
more than -1% (similar to the 1990 recession) is seen at about an 80% chance.
It clearly states that this is not its forecast but an input into the research staff’s
“overall forecasting process." Bloomberg's model also sees a heightened
risk of a recession by 2024. It puts the probability at 72%.
The US dollar rose to a
marginal new high for the year against the Canadian dollar ahead of the weekend
(~CAD1.3080). The main
drag on the Canadian dollar seemed to come from the risk-off impulses but we
also note the narrowing of Canada's interest rate premium over the US. The
greenback has come back better offered today and is below CAD1.30. The
pre-weekend low was near CAD1.2945 and this needs to be taken out to improve
the Loonie's technical tone. Canada is expected to report a 0.8% increase in
April retail sales tomorrow, followed by a jump in May consumer prices on
Wednesday. The US dollar peaked last week near MXN20.70, the highest level
in three months. A possible shelf is seen around MXN20.2150. A break of it
could see MXN20.12. The highlight of the week is the bi-weekly CPI figures
Thursday morning ahead of the Banxico meeting that is expected to result in a
75 bp rate increase (to 7.75%). Separately, Petro won the run-off election in
Colombia to become the next president. He is advocating a major change in the
thrust of policy, including taxing large landowners and stopping awarding oil
exploration licenses. He will take office in early August. Over the past month,
the Colombian peso has been the strongest currency in Latam, rising almost 1.8%.
Year-to-date, the peso has appreciated by nearly 5.6%. Investors will not like
the leftist-turn and the peso looks vulnerable.
Disclaimer
Reviewed by Marc Chandler
on
June 20, 2022
Rating:
