Overview: Some regional bank earnings were weighing
on investor sentiment but reports that the FDIC is running out of patience with
First Republic Bank to strike a private deal and could decide to downgrade its
assessment. This could lead to limits on its ability to use the Fed's emergency
facilities. Other reports said that the bank's advisers are securing
commitments to buy a new stock as part of a broader restructuring. Still, while
the KBW bank index of large banks fell for the fifth consecutive session, the
index of regional banks snapped a four-day slide with a 1.25% gain.
That was yesterday, and
today risk appetites have been rekindled, it appears. Most of the large Asia
Pacific bourses (but Australia) advanced, including China's CSI 300, which
snapped a six-day slide. Europe's Stoxx 60 is up the first time this week. US
equity futures are higher following some favorable earnings reports. Benchmark
10-year bond yields are 1-3 bp firmer in Europe and the 10-year US Treasury
yield is slightly firmer near 3.46%. The dollar is mixed but mostly confined to
narrow ranges. Gold is also trading inside yesterday's range and is struggling
to re-establish a foothold above $2000. It has not closed above it since April
20. June WTI closed the gap created at the start of the month when OPEC+
announced fresh output cuts. That gap extended to about $75.85, and yesterday's
sell-off took it to almost $74.00. It has steadied today below $75.00.
Asia Pacific
Australia and China have
light economic calendars for the remainder of the week. China reported a 21.4% decline in
industrial profits in Q1 23, with profits falling 19.2% year-over-year in March
alone. Weaker prices offset the rise in output. There were some pockets of
strength, including profitability in the auto sector, where China as emerged as
a significant exporter. China reports its April PMI over the coming weekend and
both the manufacturing and non-manufacturing readings are expected to slip a
little. Meanwhile, Xi and Zelensky talked by telephone yesterday. China has
tried to position itself as a mediator and seeks a political settlement. It is
not clear that Zelensky is prepared to make territorial concessions yet.
Reserve Bank of Australia's rate decision will be announced on May 2, and any
lingering speculation of a rate hike after last month's pause were dashed by
the downtick in Q1 CPI.
The focus is on Japan. Earlier today, the Ministry of Finance
showed portfolio flows for last week. After buying a record amount of Japanese
shares earlier in April, foreign investors slowed their purchases last week to
JPY343 bln (~$2.6 bln) from JPY1.88 trillion. Japanese investors sold nearly
JPY1.1 trillion of foreign bonds, the most last October. It is the third week
in four that Japanese investors have been net sellers of foreign bonds.
Before the outcome of the
BOJ meeting on Friday, Japan will report March employment, retail sales, and
industrial production. Tokyo's
April CPI will also be released. Japan's unemployment rate is expected to tick
down to 2.5% from 2.6%. Recall that in February, it unexpectedly popped up from
2.4% in January. Encouraged by subsidies for gas, electricity, and domestic
travel, Japanese consumers have been gone shopping. Retail sales rose 0.8% in
January and a dramatic 2.1% in February. The median forecast in Bloomberg's
survey is for a 0.3% gain in March. If so, that would put the average increase
in Q1 at 1.06%. In Q1 22, retail sales rose by 0.1%. Weak exports, seemingly
related to lunar new year, saw Japan's industrial output implode by 5.3% in
January. It jumped by 4.6% in February. The median forecast is for a 0.4%
increase in March., which would leave it around 1.2% lower year-over-year.
Tokyo's CPI increasingly looks like a preliminary estimate of the national figures.
The headline and core (excludes fresh good) look to have stabilized now that
the effect of the subsides has worked its way through (3.3% and 3.2%
respectively). The challenge is coming from the measures that excludes fresh
food and energy. It is seen rising to a new cyclical high of 3.5% (from 3.4%).
It was at 2.7% at the end of last year. and April 2022 was the first positive
print since March 2021.
Governor Ueda chairs his
first meeting at the Bank of Japan. His recent comments underscore the lack of urgency. Surveys
suggest that most look for an adjustment in the June/July period. However, the
updated growth and inflation forecasts will be scrutinized for insight into the
new leadership's thinking. Recall that the February forecasts saw 3% inflation
this year, 1.6% next and 1.8% the following year. If the new forecasts show
inflation above 2% in 2024 or 2025, it would be understood as hawkish. Growth
forecasts were for 1.9% this year, 1.7% next year, and 1.1% in 2025.
The dollar is trading
quietly against the Japanese yen, sandwiched, as it were, between the five-day
moving average (~JPY134) and the 20-day moving average (JPY133.30). It may hold +/- 20 pips in the North
American session. The Australian dollar frayed support yesterday near $0.6600
for the first time in over a month. It has steadied today inside
yesterday's range (~$0.6590-$0.6640). The issue is whether the Aussie is
breaking down or is at the bottom of its trading range. March's four-month low
was set near $0.6565. The greenback continued to flirt with the 200-day
moving average against the Chinese yuan (~CNY6.9325) as it consolidated
Tuesday's surge (~0.5% gain capping the three-day rally). The PBOC set the
dollar's reference rate at CNY6.9207. The median in Bloomberg's survey was for
CNY6.9203. Chinese markets are closed for the first three sessions next week.
Europe
The focus in Europe is not
so much on today's confidence numbers, but on tomorrow's Q1 GDP figures and
national April inflation reports from Germany, France, and Spain. The eurozone is thought to have expanded
by 0.2% in Q1 after Q4 22 was revised to -0.1% from flat. Germany, France,
and Italy are forecast (median Bloomberg's survey) to have grown by 0.2%, while
Spanish growth is seen at 0.3%. Turning to the CPI figures, German and French
year-over-year inflation is expected to be steady at 7.8% and 6.7% respectively
(EU harmonized measure), while Spain's CPI is seen jumped to 4.1% from 3.1%. Germany
CPI rose by more than 10% at an annualized rate in Q1, while France's CPI rose
slightly less than 10%. Spain's CPI rose near 6.5% at annualized pace in Q1 and
Italy's fell at an annualized pace of about 2.5%. The
divergence of inflation, the longer it is sustained, boosts competitiveness of
the periphery.
The euro set a new 12-month
high yesterday, just shy of $1.11. It is mired in a narrow range of less than a
third of a cent above $1.1035. The consolidative tone may persist through the North American
session. Note that the upper Bollinger Band is near $1.1075. Sterling topped
yesterday near $1.2515, its highest level since the April 14 high of $1.2545. It,
too, has been confined to about a 30-pip range below $1.2490. A push below
$1.2420-40 would be disappointing.
America
Today's first estimate of US
Q1 GDP is top of mind. It will steal whatever thunder there may have been from the weekly
jobless claims, pending house sales, and the KC Fed's manufacturing survey. Data
over the past week prompted the Atlanta Fed's GDP tracker to downgrade its
projection from 2.5% to 1.1%. The median forecast in Bloomberg's survey was for
a 2.0% annualized growth after a 2.6% pace in Q4 22. That said, of the 67
forecasts, five were updated yesterday. The average of those five forecasts was
around 1.1% too. The GDP report also will embed the March personal income and
consumption reports due tomorrow. Recall that in December, the median Fed
forecast was that the US economy would expand by 0.5% year-over-year. In March,
when the FOMC minutes noted that the staff now thinks a shallow recession is
likely later this year, the median forecast was shaved to 0.4%.
The KBW bank index ended a
four-day slide with a minor gain. As central bank officials have noted in word and deed,
interest rate policy is to help manage the business cycle. There are other
tools to address the bank stress in the current environment. Earnings from some
regional banks seemed to have triggered the renewed stress but this seems to
simply resurface the bank-specific challenges that have been known since SVB
and Signature's failures. Today's report on emergency borrowing from the Fed
and tomorrow's report that covers bank deposits and lending will update the
broader picture, but a repeat of 2008 memes still seem misplaced.
Separately, news that the US
House of Representatives passed a bill to lift the debt ceiling in exchange for
spending cuts failed to have much market impact. The vote was largely along party lines and
is intended to begin negotiations with the White House rather than important in
its own right on substantive grounds. Note that a surge in tax revenue has
prompted some push the X date further into July. Second, the record from the
Bank of Canada's recent meeting showed that officials debated whether a rate
hike was needed. It ultimately decided to extend its pause. The swaps market
seemed unimpressed and is continuing to price in a cut before the end of the
year.
The US dollar made a margin
new high for the move yesterday to CAD1.3650, which is a retracement target of
the greenback's losses since the CAD1.3860 peak last month. It is trading quietly in a
CAD1.3615-CAD1.3645 range today. The momentum indicators are getting stretched,
but the risk is that the high is not in place yet. That said, a break of the
CAD1.3600 area could be an early sign that it has peaked. The US dollar
poked above MXN18.19 for the first time in nearly three weeks but is trading
little changed in Europe near MXN18.15. The greenback's downside momentum
has faded, and the governor of the central bank suggested that Banxico may not
follow the Fed if it hikes rates next week.
Disclaimer
Reviewed by Marc Chandler
on
April 27, 2023
Rating:
