Overview: The market took US short-term rates and
the dollar lower after the CPI data, which was largely in line with
expectations. On the one hand, the odds of a quarter-point hike next month
increased slightly (73.6% vs. 71.6%) to 5.25%, but it reinforced that sense
that it is last hike and that the Fed will unwind this hike and more before the
end of the year. The year-end implied policy rate fell by about six basis points to
4.33%. The dollar was sold against all the G10 currencies, and it fell by
almost 0.5% on a trade-weighted basis. The dollar remains offered today. The
euro and sterling are testing the year's highs. Most emerging market currencies
are also higher against the US dollar, and the JP Morgan Emerging Market
Currency Index is rising for the third consecutive session.
Asia-Pacific equities were
mixed. China, Taiwan, and Australia slipped lower. Japan, South Korea, Hong Kong,
and India gained. Europe's Stoxx 600 is up for the fourth consecutive session
and US equity futures are posting modest gains. Benchmark 10-year yields are
2-4 bp higher, putting the US 10-year yield near 3.42%. The 2-year yield
continues to hover near 4.0%. Gold is trading near $2028 to approach last
week's high near $2032. A combination of apparently slower Russian oil sales,
OPEC+ cut and six weekly declines in oil stocks at Cushing, has lifted June WTI
to almost $83.40 yesterday, the high for this year. It is trading in a narrow
range slightly below there today.
Asia Pacific
China's trade figures
surprised. Exports
unexpectedly rose for the first time in six months. The 14.8% increase
(year-over-year) contrasts with the median forecast in Bloomberg's survey for a
7.1% decline. Imports fell by 1.4%, holding in considerably better than the
6.4% decline forecast. The net result was an $88.2 bln monthly trade surplus,
twice as large as expected and twice the March 2022 surplus. The trade surplus
in Q1 23 stood at $205 bln and in Q1 22 it was nearly $154 bln. China's auto
exports were particularly strong, and as we have seen from recent press
converge, this may turn into a new trade flash point.
Australia reported a
stronger labor market in March than expected. Australia created 53k new jobs, more than
twice what economists expected. Of these jobs 72.2k were full-time positions,
slowing ever so slightly from the 79.2k full-time positions filled in February.
The unemployment rate was unchanged at 3.5%, defying expectations for a small
increase. The cyclical and record low were set last October at 3.4%. The
participation rate was unchanged at 66.7%, following February's upward revision
from 66.6%. The record high was seen in June and November last year at 66.8%.
Next week, the minutes from this month's central bank meeting, which announced
the pause, will be published next Tuesday followed by the preliminary April PMI
ahead of next weekend.
Foreign investors poured
into Japan in the first week of April, the new fiscal year. They bought a record amount of Japanese
stocks (JPY2.37 trillion or ~$17.8 bln). They also bought JPY1.31 trillion of
Japanese bonds. Japanese investors, who had been buying foreign bonds in Q1 at
twice the pace they sold in 2022, pared back and sold JPY788 bln of foreign
bonds last week, while buying a small amount of foreign equities (~JPY28.2 bln).
The dollar is consolidating
in a narrow range (~JPY133.40-JPY133.90) in the lower end of yesterday's range
when the greenback reached JPY132.75. Firmer US rates are not helping the greenback recoup more of
yesterday's losses. A break of yesterday's low could spur a move toward
JPY132.00-35. On the upside, JPY134.00 may offer firm resistance. Although
rate expectations did not change after Australia's strong jobs data, but the
Aussie reached a six-day high near $0.6735. The Australian dollar has
approached the 200-day moving average (~$0.6745), which stands in the way of a
return to last week's high near $0.6795. The intraday momentum indicators are
stretched. A close below $0.6700 would disappoint now. A doubling of China's
trade surplus and the broadly weaker US dollar failed to push the yuan out of
its recent narrow trading range. The greenback traded between CNY6.8680 and
CNY6.8785. It traded between CNH6.8660-CNY6.8945 last week. The PBOC set the
dollar's reference rate at CNY6.8658 while the market expected CNY6.8673. Lastly,
Hong Kong Monetary Authority intervened again to defend the peg and bought
HKD9.05 bln.
Europe
The UK economy stagnated February
rather than eke out a small gain, but January's growth was revised to 0.4% from
0.3%. The recovery
industrial output did not materialize (-0.2% vs. -0.5% in January) but
construction was stronger than expected (2.4% vs. 1.0%). The trade deficit was
also a little larger than expected. Next week the UK reports its latest
employment figures, March CPI and retail sales, and the preliminary April PMI.
The market remains confident (~79%) of a BOE hike next month. That would bring
the base rate to 4.50% and the swaps market leans toward one more hike in the
cycle after that.
The eurozone reported
industrial output rose by 1.5% in February, which was stronger than
expected. Previously,
Germany reported its industrial production rose by 2.0% (the median forecast in
Bloomberg's survey was for a 0.1% decline), and it follows a 3.7% surge in
January. France reported a 1.2% increase (median forecast was for a 0.5% gain).
Spain also beat expectations with a 0.6% gain in industrial output (median
forecast was for 0.4%). Italy was the exception. Industrial output slipped by
0.2%. The market expected a 0.5% increase.
The euro pushed above $1.10
to come with a hundredth of a cent of the high set two months ago near $1.1035. Some of the euro buying may be
linked to large option expirations at $1.10 today (~3.4 bln euros) and tomorrow
(1.7 bln euros). We also note that the US 2-year premium over Germany has
fallen to around 117 bp, the least since Q4 21. The intraday momentum
indicators are overbought in the European morning. Sterling is firm and
matched the high from earlier this month near $1.2525. The intraday
momentum indicators are also overbought ahead of the start of the North
American session. Initial support now is seen around $1.2480.
America
The deceleration in headline
CPI to 5.0%, slightly lower than expected, appeared to reinforce the sense the
market had prior to the report that after a likely hike at the May 3 FOMC
meeting, the Fed will "pause" its tightening cycle. The pricing in the derivative markets see
5.25% as the terminal rate. Moreover, the market continues to price in rate
cuts later this year and the year-end rate is seen near 4.33%. That implied a
policy rate between 4.25% and 4.50%. While possible, it seems aggressive. The
FOMC minutes showed that the general sense was that the data had, as Chair
Powell previously suggested, warranted a higher terminal rate than the Fed had
previously (December) projected. However, the fallout from the bank failures
steadied their hand: the median remained at 5.1%, though seven of the 16
members thought higher would be appropriate. The minutes said that
"some" had wanted a 50 bp hike in March before the banking stress,
and "several" officials considered a pause. The Federal Reserve's staff
forecast a mild recession starting this year. The median Fed forecast was for
growth to slow to 0.4% year-over-year here in 2023. Given the kind of growth
that looked likely when the Fed met, it would seem to imply a contracting
quarter if not more. In December, the median dot forecast was 0.5%.
Today, the US reports weekly
jobless claims and March PPI. As of the end of March, the four-week moving average stood at
almost 238k. It finished last year near 209k. Weekly initial jobless claims of
235k in the first week of April will see the four-week moving average tick up
slightly. More interest will be in the PPI. The median forecast in Bloomberg's
survey expects an unchanged reading month-over-month (after a 0.1% decline in
February). The year-over-year rate is seen slowing to 3.0% from 4.6%, which
would match the low from February 2021. It would be the ninth consecutive
deceleration. The core rate is expected to slow to 3.4% from 4.4. The
last time the year-over-year rate rose was in March 2022.
Surprising no one, the Bank
of Canada heled its policy rate steady at 4.50%, where it has been since
January's quarter-point hike. It does not meet again until early June (June 7), a week
before the Fed. It seems that the bar of lifting the central bank's
"conditional pause" is relatively high. Despite, officials
acknowledging that economic activity has been stronger than it expected at the
start of the year, the central bank still sees signs that the tightening of
monetary policy is in fact cooling the economy. The Bank of Canada raised its
Q1 GDP forecast to 2.3% (annualized) slightly higher than the 2% seen
previously. It puts Q2 GDP at 1.0%. Next week, Canada report March CPI figures.
Given the base effect (March 2022, CPI rose by 1.4%), the year-over-year rate
could slow toward 4.2% from 5.2%. The official forecast is for 3.3% in Q2.
The US
dollar has been sold through CAD1.3400 for the first time in nearly two months. It has punched through
the 200-day moving average (also near CAD1.3400) for the first time since
August 2022. There is little meaningful support ahead of the CAD1.3335 area and
this year's lows set in February (~CAD1.3260-75). The Mexican peso is not
participating much in today's move against the greenback. The US dollar is
holding above yesterday's low near MXN18.02. Trading is subdued and perhaps,
the peso has been eclipsed by the Brazilian real. The Brazilian
real led the world's currencies higher yesterday, rising almost 1.8% against
the dollar. Many attributed it to the general move out of the US dollar
after the CPI figures. However, note that the real appreciated by 1.2% on
Tuesday. It is trading at a 10-month high against the greenback. The government
claims that it is its credible fiscal policy that is boosting demand for
Brazilian bonds. The dollar's sharp drop has left it oversold--momentum
indicators are stretched, and it closed below the lower Bollinger Band
(BRL4.9340).
Disclaimer
Reviewed by Marc Chandler
on
April 13, 2023
Rating:
