Overview: The unexpectedly large rise in US weekly
jobless claims, the largest since the end of last September and concerns about
the impact of the sharp rise in interest rates on the liquidity and value of
assets (bonds) owned by small and medium-sized banks saw the market unwind the
effect of Fed Chair Powell's comments. The yield on the US two-year note
slumped almost 20 bp to 4.87% yesterday and fell to 4.75% today before
stabilizing (~4.82%). It settled near 4.89% Monday, the day before Powell's testimony
began.
The sell-off of US bank stocks
and the broad decline in US equities drove down global markets today. In the
Asia Pacific region, Hong Kong led the decline with a 3% sell-off and the index
of mainland shares that trade in HK was also off by 3%. Europe's Stoxx 600 is
down by almost 1.6% to rival its biggest loss of the year. US equity futures
are nursing small losses. Safe haven buying of bonds is driving down yields. European
benchmark 10-year yields are off 3-9 bp. Falling rates often seem to coincide
with smaller premium in the periphery, but not today as spreads are widening a
few basis points. Gold is extended yesterday's gains to test the $1837
area. April WTI that had pushed above $80 at the start of the week is set
new lows since the end of February today below $75.
Asia Pacific
An era is ending. Governor
Kuroda chaired his last BOJ policy meeting. When he began his first term a decade ago, he offered a
stark contrast with his predecessor Shirakawa by taking bold action.
Traditional LDP policy mix was expanding fiscal policy and accommodative
monetary policy. Abenomics, of which Kuroda oversaw the monetary dimension, was
putting the traditional LDP policy mix on steroids. Kuroda's successor inherits
a policy that seems unsustainable, yet after Ueda endorsed the current policy
settings to the Diet, it would have been impolitic to change the settings. Policy
was left unchanged today and Ueda was approved by the Diet. His term begins
April 9, and the next BOJ meeting is April 28.
At the same time, it seems
clear that Japanese economy is still fragile, illustrated by dramatic 4.6%
decline (month-over-month) of industrial output and a 4.1% decline in real
wages in January. Real
household spending, reported earlier today, fell by 0.3% January (year-over-year),
the third consecutive month decline. The decline in consumption seems
intuitively understandable given the inflation-adjusted disposable income fell
by 2.8% year-over-year in January. The BOJ will update its forecast next at
next month's meeting, but its last forecast was for core inflation to fall to
1.6% this year from 3.0% last year. It stood at 4.2% in January. The Tokyo core
reading for February fell to 3.3% from 4.3%.
The dollar slipped to around
JPY135.80 before the BOJ meeting concluded, easing slightly below yesterday's
low, before rebounding smartly when no change in policy was confirmed. It reached almost JPY137 quickly, but was
sold back to nearly JPY136, from where it launched another attempt at JPY137 in
early European turnover. Yesterday's high was closer to JPY137.40 and the
week's high was set a little shy of JPY138. The 200-day moving average is found
at JPY137.50 today. Needless to say, the performance today rests on the US jobs
report and the reaction in the debt market, where US financial concerns are
also top of mind. The Australian dollar made a marginal new low since last
November earlier today near $0.6565. Recall that the (61.8%)
retracement of the Aussie's rally from last October's low is found slightly
below $0.6550. There may be some resistance in the $0.6610-20 area but
yesterday's high (~$0.6635) needs to be overcome to be of note. Last week,
the dollar snapped a five-week gain against the Chinese yuan nearly recouped
the 0.8% loss this week. However, today, the greenback is heavier but
consolidating within yesterday's range (~CNY6.9565-CNY6.9740). There did not
seem to be much of a reaction to 1) news that aggregate lending stronger than
expected last month around CNY3.1 trillion (median forecast in Bloomberg's
survey was for CNY2.3 trillion, following the nearly CNY6 trillion increase in
January) and 2) that Xi was "given" a third term as China's president.
Today's dollar fix was at CNY6.9655 compared with expectations for CNY6.9667.
Europe
While the German trade
surplus jumped more than expected in January (16.7 bln euros from 10.0 bln in
December and 12.1 bln euros in January 2022), the French trade deficit (12.9
bln euros) was a little smaller than the Q4 average (~13.4 bln euros). The record shortfall was reported last
September at almost 17.2 bln euros. However, France's broader external balance,
the current account deficit is considerably smaller. Still, current account in
December was a record deficit of about 8.5 bln euros was revised to a 7.6 bln
deficit and the January shortfall fell to 3.6 bln euros.
After contracting by 0.5% in
December, the UK economy grew by 0.3% in January, better than the 0.1% expected.
Services and a smaller
drag from trade were the bright spots, while manufacturing and (-0.4%) and
construction (-1.7%) were weaker than expected. Manufacturing output was seen
up slightly while the median forecast in Bloomberg's survey looked for a flat
construction report. Some economists have backtracked from ideas that the UK
economy has entered a recession. The highlight next week are the employment
report (March 14) and the presentation of the spring budget to Parliament
(March 15). The Bank of England meets the following week (March 23), and the
swaps market has nearly priced in a quarter point hike then and at the next
meeting (May 11). Those two hikes would bring the base rate to 4.50% and the
terminal rate is now seen likely at 4.75%.
The euro rose to a three-day
high a little through $1.0600 in late Asia Pacific turnover. It is struggling to maintain the upside
momentum in the European morning, ahead of the US jobs report. Nearby
resistance is seen in the $1.0610-35 area. The euro settled last week near
$1.0635. The increase in US weekly jobless claims and the concerns about US
small and medium-sized banks reduces speculation about a 50 bp hike by the Fed
later this month, while the ECB seems committed to a half-point hike next week.
Sterling has been lifted by the GDP figures and is the strongest of the G10
currencies today with a nearly 0.5% gain through most of the European morning. It
had fallen to a four-month low near $1.18 in the middle of the week and briefly
rose above $1.20 in early European turnover. The 20-day moving average is near
$1.2020, and sterling has not closed above it in over a month. Sterling settled
around $1.2035 last week.
America
Fed Chair Powell said the
pace and extent of further tightening of monetary policy will depend on the
"totality" of the economic data. Today's employment report is an important part of that
"totality" and set the general tone for the upcoming data. Job growth
is expected to slow to 224k, according to the median forecast in Bloomberg's
survey, which has crept up from 200k late last week. If accurate, it would be
the smallest job creation since the end of 2020. While this would be more
consistent with a 25 bp increase by the Fed instead of 50 bp, given the
sensitivity to price pressures, the market may focus instead on the
year-over-year increase in average hourly earnings. The 0.3% expected
month-over-month increase (for the consecutive month) is consistent with the
modest slowing that has been seen. However, in February 2022, average hourly
earnings for flat so the 0.3% increase will lift the year-over-year rate to
4.7% from 4.4%, which would be the largest increase since last March.
The focus on the jobs data
is being rivaled by concerns about the unrealized losses of US banks' (bond)
portfolios that do not have to be marked-to-market. It is estimated to be around $300 bln in
aggregate. While concern about Silicon Valley Bank may have sparked the
concern, the market sees it to be possibly symptomatic of wider issue. The KBW
Bank Index fell by around 7% yesterday, its steepest loss since June 2020.
Canada also reports is
February jobs data. The
121k surge in full-time positions in January is not sustainable and slower jobs
growth is expected. Overall, counting part-time positions, job growth is
expected to slow to 10k (median forecast in Bloomberg's survey) after a 150k
increase in January. The unemployment rate may tick up to 5.1% from 5.0%, where
it was in December and January. Average hourly pay for permanent workers may
have risen back above 5% for the first time since last November.
With risk assets under
pressure, the Canadian dollar continues to struggle, despite the decline in US
two-year rates that had seemed to be a bigger driver recently. The greenback made a new five-month high
today a little above CAD1.3860 and is extending its gains for the seventh
consecutive session. There is little in the way of technical barriers ahead of
last October's high near CAD1.3975. Support is seen around CAD1.3820. The
greenback settled by CAD1.3600 last week. In thin trading after the futures
market closed, the Mexican peso sold off dramatically. There did not seem
to be a local spark, but the peso is the only emerging market currency that
trades 24-hours a day and is often used a proxy for other EM currencies. The
dollar was bid most of the yesterday and was around MXN18.10 before surging to
around MXN18.44. It rose to almost MXN18.60 today but has come back offered in
Europe and approached MXN18.27. While recognizing the attractiveness of carry
and the near-shoring/friend-shoring meme, we had become concerned about
over-extended technical picture and what seemed to be the deterioration of
underlying political considerations. The dramatic correction seems to be more
an issue of market positioning (the Chilean peso, the second-best currency this
year, did not suffer was the Mexican peso did). The Mexican peso's relatively
low volatility also favored carry strategies. However, the one-month implied
vol has soared from about 11.5% at yesterday's lows to 13.2% today, its highest
level since last October. The peso's strength had deterred some buyers who did
not want to chase it has it appreciated. This setback is likely seen as an
opportunity for those participants who need to secure pesos.
Disclaimer
Reviewed by Marc Chandler
on
March 10, 2023
Rating:
