Overview
As the long holiday ends, risk appetites have returned. Equities and yields are mostly higher. The dollar is seeing yesterday’s gains pared. Yesterday’s setback in the yen helped lift Japanese stocks, with the Nikkei advancing 1%. Several other markets in the region also gained more than 1%, including Australia and South Korea. China’s CSI was an exception. It slipped fractionally. Europe’s STOXX 600 is up nearly 0.6% through the European morning, and bank shares are posting small gains. US equity futures enjoy a firmer bias. European bond yields are playing a little catch-up today, rising 5-7 bp, while the US 10-year Treasury yield is a few basis points softer near 3.39%.
The dollar rose yesterday but is trading with heavier bias today, though mostly confined to yesterday’s ranges. The dollar bloc and the Norwegian krone are the laggards, while the Swiss franc, Swedish krona, the euro, and sterling are up around 0.5%. Emerging market currencies are mixed. The euro is giving a boost to central and eastern European currencies, while most Asia-Pacific currencies, save the Thai baht, are softer. The Russian rouble continues to fall. It is lower for the tenth session in the past 11. Gold caught a new bid after falling to a three-day low yesterday near $1981.75. It is back above $2000, but the intraday momentum indicators are overbought. June WTI is consolidating, straddling the $80 level. The EIA publishes its short-term energy outlook today and OPEC’s monthly report is due Thursday, followed by the IEA report on Friday.
Asia-Pacific
At his first press conference as BOJ Governor, Ueda was circumspect. While open to a policy review from a long-term perspective, he continues to see the monetary policy stance as appropriate. He linked the current yield curve control to current economic conditions. Surveys suggest many look for a change in June or July. Some policy announcements cannot be tipped, and the abandonment of yield curve control may be one of those policies. Ueda did not rule a surprise move out but said that he would explain any shift. The gradualism that Ueda seemed to hint at weighed on the yen.
China’s March CPI rose 0.7% from a year ago. The median forecast in Bloomberg’s survey expected an unchanged pace at 1%. It is the smallest increase in September 2021. Food prices rose 2.4% year over year, slowing slightly from the 2.6% pace seen in February. Pork was 9.6% from a year ago, and the gain in fruit prices (11.5%) was nearly offset by the fall in vegetable prices (-11.1%). However, the sign of weak demand is in non-food prices, which edged up by 0.3%, half of February’s pace. Core inflation, excluding food and energy, rose to 0.7% from 0.6%. Producer price deflation deepened. PPI fell 2.5% from year ago, the sixth consecutive negative reading. Producer prices fell 1.4% in February. The March decline was the fastest pace since June 2020. Separately, China reported that aggregate lending soared to CNY5.38 trillion (~$785 billion) in March, up from CNY3.16 trillion in February. This was well above the CNY4.5 trillion expected. The increase from February was the result of stepped-up bank lending rather than the shadow banks. Of note, not only did corporate lending increase, but medium- and long-term household lending – which is a proxy for mortgages – increased to the highest level since January 2022, reflecting the increase in home sales.
The dollar surged by 1.1% against the Japanese yen yesterday. It reached almost JPY133.90, its best level since March 15. The gains have been pared today, and the greenback found initial support near JPY133.00. If that is not the session low, the JPY132.80 may offer additional support. The Australian dollar fell to $0.6620 yesterday, its lowest level since March 16. It has come back firmer today, but it is holding below yesterday’s high, a little above $.6680. A break of $0.6650 would likely confirm the high is in place. The greenback is little changed against the Chinese yuan. It initially rose to CNY6.8920, its best level in a little more than a week. It slipped to around CNY6.8825 in quiet turnover. The reference rate was set tight to expectations (CNY6.882 vs. CNY6.8881). Two other developments to note. First, the Hong Kong Monetary Authority intervened to defend the peg. It sold $485 million (bought HK$3.807 billion). It had intervened a week ago too. The HKMA intervened for a couple of days in February as well. Second, as expected, the central bank of South Korea left its key 7-day repo rate unchanged at 3.50%.
Europe
The Russian rouble appreciated by 1.3% last year. It is off around 10.6% this year. The central bank governor Nabiullina felt compelled to deny rumors that pension payments will be made in part or in full in digital rouble. Pressure on the rouble has intensified amid weakening oil revenues and fears of capital flight. Oil and gas income fell by 45% in Q1 ’23 over Q1 ’22. Reports that Moscow will “permit” a Russian gas producer (Novatek) to purchase Shell’s (SHEL) stake in Sakhaliin-2 LNG project for RUB95 billion (~$1.2 billion). Shell has said in a public filing that it did not apply to have its stake bought by Novatek. However, shortly after Russia invaded Ukraine last year, Shell did say it planned sell its investment and took a $1.6 billion write-down linked to the Sakhalin-2 project. Reports suggest that more than 2000 companies are waiting for Russian authorities to approve their exit, which is seen as pent-up interest in exiting the country.
The eurozone retail sales fell by the expected 0.8% in February, while January’s 0.3% gain was revised to 0.8%. While survey data, especially for the service sector, has been strong, the weakness of aggregate demand is problematic. Economists surveyed by Bloomberg last month project a 0.2% contraction in Q1 ’23 after a stagnant showing in Q4 ’22. On Thursday, the eurozone will publish February’s industrial output figures, and a 1% gain is expected after January’s 0.7% increase.
The euro was sold from last week’s settlement at slightly above $1.09 to about $1.0830 yesterday. It snapped back to $1.0920 in the European morning, stretching the intraday momentum indicators. With the risk of a firm US core CPI reading tomorrow and the shifting expectation toward a May Fed hike, we suspect the euro’s upside is limited in North America today. The $1.0920 area also corresponds to the (61.8%) retracement objective of the decline from last week’s high. Similarly, sterling was sold to a six-day low yesterday near $1.2345 and has rebounded to almost $1.2450 today. The (61.8%) retracement of the decline from last week’s high is found near $1.2455 today. Intraday momentum indicators are stretched, suggesting limited follow-through potential in North America.
America
The NY Fed’s March consumer survey showed both a tick-up in inflation expectations and tighter credit expectations. The one-year inflation expectation rose for the first time since October (4.75% vs. 4.23%). It was at 4.95-4.99% in December 2022 and January 2023. Still, it is the second lowest since May 2021. For the three-year time horizon, the median expectation edged up by 0.1% to 2.8%. It was almost at 3% at the end of last year. The five-year expectation slipped to 2.5% from 2.6%. The share of households reporting that credit was harder to obtain than a year ago rose to its highest level since the survey began in 2014. The percentage of consumers who expect that they will not be able to make the minimum debt payment over the next three months rose to 10.87% from 10.63%. It stood at 12.12% in January.
Tomorrow, the US reports March CPI figures and the Bank of Canada meets. If it were not for the banking stress, there likely would be little doubt of a Fed hike next month. Job growth and wages are slowing, but for Fed officials, the labor market remains resilient. And even though headline CPI is slowing, price pressures remain elevated. The odds of a May rate hike have increased from a little less than 50% in the middle of last week to a bit above 70% now. A hike would bring the top of the target range to 5.25%. The pricing of the Fed funds futures strip has the year-end rate near 4.40%. The rate was around 5.50% on March 8 before the banking stress erupted. The Bank of Canada announced a conditional pause in late January, and although the economy appears to be performing better than it had expected, with job growth having exceeded expectations each month in Q1, the bank is not expected to change policy. The swaps market is pricing in the next move to be a cut, later this year.
Mexico reports February industrial production and manufacturing output today. After the strongest quarterly expansion in Q4 ’22 industrial production, it eased slightly in January (-0.1%) and is expected to have recovered fully in February (~0.3%). We note that Mexico’s auto sector typically enjoys a strong first quarter showing, and this year is consistent with the pattern. Vehicle output rose by near 45% in Q1 ’23, which is about what it rose in Q1 ’22 and Q1 ’19. The slight variation on the theme is that his year, an increase in vehicle output was reported in each month of the quarter, which has not been seen since Q1 2018. Brazil reported March IPCA measure of inflation. The year-over-year pace peaked slightly shy of 12% last June and has been trending lower. The median forecast is for a 4.71% read in March, which would be the lowest since January 2021. The central bank meets on May 3, a few hours after the FOMC meeting concludes. The Selic rate remains 13.75%, where it has been since last August. The market favors a rate cut late this year, but fiscal policy needs to be clarified first.
The US dollar snapped a four-day rise against the Canadian dollar, slipping fractionally yesterday. It is finding support near CAD1.3480, which is the halfway mark of the greenback’s four-day rally. The (61.8%) retracement is found closer to CAD1.3465. Intraday resistance is seen near CAD1.3520 and then yesterday’s high around CAD1.3555. The greenback is consolidating within yesterday’s range against the Mexican peso (~MXN18.0765-18.2840). The dollar has unwound most of the gains that had lifted it from a little below MXN18.00 on April 3 to MXN18.40 two days later. The daily momentum indicators suggest there are still upside risks for the US dollar.
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