Overview: The market sentiment remains fragile.
Equities are mostly lower. Japan was a notable exception, and concerns about
China's economy after a sharp decline in imports took mainland and Hong Kong
listed companies sharply lower. Europe's Stoxx 600 is giving back yesterday's
0.35% gain plus more. Bank shares are off 0.65% after rallying 4.20% over the
past two sessions. US equity futures are heavier. Benchmark 10-year yields are
mostly a couple basis points softer in Europe, but the 10-year Gilt yields are
a little higher. The 10-year US Treasury yield is about three basis points
lower to 3.47%, and the two-year yield is back below 4%.
The dollar recovered in the
North American session yesterday and is mostly firmer today. Yet, given its
recent losses, today's upticks look more consolidative than a reversal. The
focus is on the debt ceiling, where a meeting of Congressional leaders and
President Biden takes place today at the White House. Bank shares also remain
in focus. Tomorrow the US reports April CPI figures. The greenback is also
enjoying a firmer bias against most emerging market currencies today. Gold is
firm but in about a $10 range on either side of $2020. Last week's high was
near $2063. June WTI peaked yesterday near $73.70 and has pulled back to around
$72.15 today. News of softer Chinese demand may be a weight today, after a
sharp run-up in recent days. Nearby support is seen near $71.80.
Asia Pacific
Japan reported March labor
cash earnings and household spending. They will allow economists to fine-tune expectations for next
week's Q1 GDP. Consumption had been a bright spot of the Japanese economy, but
household spending slumped by 1.9% year-over-year in March. The median forecast
in Bloomberg's survey was for a 0.8% increase. Labor cash earnings rose 0.8%,
missing expectations for a 1.0% gain. Adjusted for inflation, labor earnings
dropped 2.9% from a year ago, more than expected. These figures do not bode
well for Q1 GDP, which had been projected to expanded by 0.2% quarter-over-quarter.
Business investment appears to have fallen for the second consecutive quarter.
Net exports also appear to have been a drag. It had fallen in the three months
through January. Labor cash earnings rose 1.0% from a year ago. They averaged
slightly better than a 1.4% year-over-year in Q1 22 and a little less than 0.9%
this year.
China's trade surplus
widened to $90.2 bln in April, up from $88.2 bln in March, and $49.5 bln in
April 22. Economists had
expected the trade surplus to narrow. Exports were weaker but imports even
weaker still. Exports rose 8.5%, down from 14.8% in March, but were slightly
above expectation. Imports had been projected to rise by 0.2% in Bloomberg's
survey, but instead fell by 7.9%, the second-consecutive year-over-year decline.
Despite the larger surplus, the weakness of imports reinforces the sense that
the Chinese economy is struggling, which was not shaken-off fully even though
Q1 GDP was stronger expected. Many look for the some more monetary
accommodation before the end of the quarter.
Australia's government is
expected to announce its the first budget surplus since 2008. It is seen around A$4 bln (~$2.7
bln) in the year ending next month. Still, it is widely understood to be
temporary, helped by surging revenue and a strong rise in immigration, helping
to boost growth. In the 12-months through March, Australia recorded an A$1 bln
surplus and the last quarter of the year is typically strong, boosted by
corporate tax revenues. Earlier today, Australia reported its second
consecutive quarterly decline in real retail sales.
The dollar is straddling the
JPY135 area. It has been
confined to almost a third of the yen on either side of JPY135, essentially
duplicating yesterday's range. The market looks comfortable in that range,
and penetration in the North American session could lead to a quarter-of-a-yen
widening of the range in either direction amid this consolidation phase, which
is unlikely to last past tomorrow's US CPI figures. The Australian
dollar briefly flirted with the upper end of its two-month trading range near
$0.6800 yesterday. It has pulled back toward about $0.6755 but is likely to
find some support near here. The Aussie had tested the lower end of its range
near $0.6575 at the end of April and was near $0.6630 last Thursday. The
greenback is firm against the Chinese yuan. It reached a four-day high near
CNY6.9290. The 200-day moving average is around CNY6.9380 and it has not closed
above it since the Ides of March. The PBOC set the dollar's reference rate at
CNY6.9255. The median in Bloomberg's survey was CNY6.9238.
Europe
In response to softer than
expected CPI before the weekend, the Swiss franc was sold-off. The nearly 0.60% fall was the most since
late March. Last month, CPI was flat, while the median forecast was for a 0.2%
increase. The year-over-year rate eased to 2.6% from 2.9%, and the core was
unchanged at 2.2% (economists had looked for a small increase). Separately,
total sight deposits appear to have resumed their downtrend after jumping amid
Credit Suisse-related turmoil. Last month, sight deposits fell by almost CHF40
bln after rising nearly CHF43 bln in March. The Swiss deposit rate is at 1.50%.
The Swiss National Bank meets on June 22, and the swaps market favors
quarter-point hike after the last two moves were of 50 bp and the one before
that was 75 bp.
The Swiss franc is the
second best G10 performer this year with a 3.9% gain against the dollar
(sterling is first, up ~4.4%) and about 1.1% better than the euro. The Swiss franc's 2022 loss of 1.25%
against the dollar was the least among the G10. The underlying demand for the
franc likely remains and if the euro falls through the CHF0.9780 area it could
spur a move to CHF0.9740 area where it was trading before the Swiss CPI. However,
the real play is for a break of CHF0.9700 and a retest on the
CHF0.9400 area seen last September, the lowest level since the lifting of the
euro's floor/franc's cap in early 2015. The dollar has fallen in five of the
past six months against the Swiss franc. It fell to about CHF0.8820 last month
to approach the low set in early 2021 near CHF0.8760, a six-year low.
The euro was turned lower
after trading $1.1055 yesterday and settled slightly above $1.10, the session
low. Today is has pushed
below there and slipped a little below $1.0975. Support is seen in the
$1.0940-65 band. Note that the 20-day moving average is found near $1.10 today
and the euro has not closed below it since March 17. Good buying was seen on
pullbacks last week. The poor German and French data recently reported adds to
the sense that the best news for the eurozone, that it dodged a winter energy
crisis is fully known and discounted. Sterling reached a new high
yesterday near $1.2670 but has not been able to sustain the momentum. It
settled near $1.2620 yesterday and has been confined to about a fifth of a cent
in either direction. Consolidation may be the order of the day, and only a
break of $1.2550 would likely be technically significant.
America
Fed Chair Powell indicated
at last week's press conference that the Senior Loan Officer Opinion Survey
(SLOOS) would be consistent with the previous survey that showed weaker loan
demand and tighter lending conditions. True that. The Fed's tighter monetary policy was already
having the desired effect before the flare-up of banking stress. The percentage
of banks reporting tighter lending standards for medium and large businesses
increased marginally, to 46% from 44.8% in Q4 22. To be sure, it is not just
supply. Demand for loans is also waning. The proportion of banks reporting
weaker demand for commercial and industrial loans fell by 55.6% in the first
quarter after a 31.3% decline in Q4 22. The Fed hiked rates last week, fully
cognizant of the SLOOS report. The key question remains about the extent and
duration of the tightening of lending conditions spurred by the regional banks
stress. Before the bank stress emerged, the market was favoring a terminal Fed
funds rate of 5.75%.
The US economy continues to
be resilient to the headwinds, and the Atlanta Fed's GDP tracker sees Q2 growth
at 2.7%. From their
model, the increase employment will boost consumption while the sharp decline
in wholesale trade (-2.1% rather than 0.4% that the median in Bloomberg's
projected) translates into weaker private investment growth. The two
practically offset each other, leaving the Atlanta's Fed's tracker virtually
unchanged since May 4. The quarter is nearly half over. Bloomberg's monthly
survey will be updated on May 19. The median in last month's survey has the US
economy practically stagnating this quarter, which seems unduly pessimistic.
Mexico's central bank meets
on May 18. Of the six
economists in Bloomberg's survey, two look for a hike and the others do not. Last
month Governor Rodriguez indicated a pause would be discussed, and previously
commented on the decline in the core rate. Today, Mexico announces April CPI.
The core rate is expected to fall 7.70% from a little above 8% in March. It
peaked last November at 8.50% but was at 8.45% in January. The headline rate
reached a high of 8.7% in September and October 2022. It was at 6.85% in March,
and the median forecast in Bloomberg's survey is for a decline to 6.22% last
month. Any disappointment with today's report, especially the core rate, and
opinion may swing toward another hike. Mexico's core CPI rose at an annualized
rate of 7.2% in Q1 23, slight faster than in Q4 22.
Congressional leaders meet
with President Biden in the White House today to talk about the debt ceiling. The impact of the brinkmanship continues
to be evident in the bill market. The US dollar recovered from CAD1.3315
yesterday to almost CAD1.3390. It is consolidating in a narrow range below
there today (~CAD1.3365-CAD1.3385). Recall that last week, it peaked near
CAD1.3640. The expulsion of a Chinese diplomat yesterday will, of course, irk
Beijing, who can be expected to retaliate in some fashion. Meanwhile, the
greenback is consolidating in its trough against the Mexican peso
(~MXN17.75-MXN17.82) in dull dealings. The lower Bollinger Band is near
MXN17.78. There seems to be little to no reaction to news that Mexico's Supreme
Court has annulled part of AMLO's controversial electoral reform.
Reviewed by Marc Chandler
on
May 09, 2023
Rating:
