China’s exports missed expectations, at 30.6% vs. 38.0% consensus, but imports beat, at 38.1% vs. 24.4% consensus, which means the trade surplus fell short of expectations for the first time since October. The data, while exceptionally noisy due to very large base effects, nonetheless points to a domestic revival that is good news for China rebalancing and might hint of openness to FX appreciation. It’s also good news for exporters to China.
Taiwan: A Currency Manipulator?
The US will not name China as a currency manipulator, according to reports. Such a move wasn’t widely expected in any case but could help CNH sentiment at the margin given strained high-level talks between the US and China in Alaska a few weeks ago.
Taiwan’s status will be of greater interest with economist Brad Setser installed at the US Treasury following a large body of work on cross-border flows and central banks. Taiwan has now reached three of the criteria the Treasury uses to label a country a currency manipulator: 1) trade surplus with the US exceeding $20 bn over 12 months, 2) current account surplus more than 2% and, 3) net FX purchasing above 2% of GDP over 12 months.
It’s difficult to see what Taiwan can do about large surpluses in the near term given likely strong demand from the US as its economy enters an upswing and drives demand for Taiwanese Tech. However, scrutiny of FX intervention should increase and encourage USDTWD downside unless there’s a repeat of the large equity market outflows seen in February
US consumer prices data are primed to lift off with Tuesday's March release
China's booming trade data has seen a relatively muted cross-asset reaction but indeed points to colossal consumer and manufacturing demand overseas. Investors possibly have bigger fish to fry, or more likely, both exports and imports were expected to be much stronger than the same period in 2019. The new export order index in NBS PMI rebounded in March, consistent with stronger PMIs in the US and Europe in February a throughput from US vaccination rollouts that helps boost global growth
Still, China shares are rebounding on the back of BaBa as investors are happy to see the company move forward to bolster current business operation and for long term investors who are more focused on post earnings revision resets, this is good news
US consumer prices data are primed to lift off with Tuesday's March release. Stronger-than-expected CPI data should fire up a debate around whether higher inflation through Q2 and Q3 reflects base effects from a slump in prices in 2020 or underlying cyclical drivers. But for now, tantrum fears remain low.
The extent to which bond markets start to price in an inflation tantrum that triggers much higher yields depends mainly on corporate pricing power and Fed credibility. Broader pass-through into the CPI relies on the ability of producers to push higher costs onto consumers. Although there is a significant amount of slack left in the labor market, a rapidly improving labor market suggests that firms should be increasingly confident in passing through higher prices.
The Fed is so far avoiding a credibility issue from expected higher CPI inflation. If you watched Powell on 60 Minutes suggesting, "if we take care of those on the margin, the economy will take care of itself." Think what you want to think about Powell, but you won't hear that kind of honesty every day from a central banker. If Powell's dovish and confident tempo during the interview doesn't betray something like intentness, then he's a damn good actor.
However, the confluence of a rapidly improving labor market, fiscal spending, and a relatively quick vaccine roll-out suggest the risks for inflation are skewed towards higher-for-longer growth in prices. If the Fed is deemed behind the curve, UST "real" rates that have stabilized recently will start to surge again.
For EM FX, gains from stabilizing UST real yields have been mixed, with the INR, RUB, TRY, IDR, and BRL underperforming. Removing a headwind, in this case, higher UST yields, does not automatically unwind a sell-off in EM assets if underlying problems have been building through Q1 like COVID resurgence and higher inflation remain the norm. These currencies' underperformance would then again be exacerbated by a renewed move higher in UST real yields.
The US will not name China as a currency manipulator in the Treasury's upcoming semi-annual Report on International Economic and Exchange Rate Policies due on Thursday. Such a move wasn't widely expected in any case but could help CNH sentiment at the margin given strained high-level talks between the US and China in Alaska a few weeks ago.
MARKETS
After a solid Monday and ahead of key earnings reports, where profit growth is expected to push the stock markets recovery bus forward, stocks veered into a late session very mild profit-taking mode as investors turn slightly less inspired, but more so wait and see, ahead of a week that promises no shortage of "rock the boat" type inflation data.
The market could also turn increasingly curious about how industry leaders will address two keen forward-looking items on the top of every investor mind. First, the margin outlook, including supply chain and commodity input cost pressures and any resulting planned price increase they might pass through. Second, how severe the potential negative EPS impact is if the Biden administration's new tax reform proposal is adopted, which could prove to be a significant hit to bottom lines even if the tax hike percentage gets water down.
The fact that stocks remain perched near record highs suggests investors still believe the economic acceleration should be a powerful tailwind for stocks this quarter and ensure earnings growth. Indeed, earnings tailwinds look set to outweigh concerns around supply chain shortages and rising commodity prices. Importantly, positive earnings and sales revisions have been broad across sectors and industries.
But with significant moves already in place and the "easy recovery phase, money" has been made; investors could still temper long duration and rates sensitive assets like gold if yields climb while struggling to resolve with what form and fashion the next leg of the reflation trade will take.
Yields Yields Yields
Bond yields are always the most critical macro concern in a rising interest rate environment, especially to the long-duration assets.
In the wake of the robust March jobs report and a slew of other indicators suggesting that economic activity has strengthened in recent weeks, Fed officials, including Chair Powell, have taken a more optimistic tone about the baseline economic outlook and the balance of risks around their forecasts. Indeed, this past week Powell highlighted that the economy could be reaching a positive inflexion point, with growth and hiring possibly on the cusp of accelerating.
Despite this rising sense of optimism about the economic outlook, the relentless push towards higher yields and steeper curves has stalled out in recent weeks as the market awaits fresh catalysts. This week's data docket could provide the opportunity for sparking the next leg higher, with Tuesdays' US CPI report providing the first peek at how more vigorous activity may begin to spill over to price pressure and Thursday's retail sales report likely to show a surge in consumer goods spending in March.
However, for 8.4 million reasons (US total unemployment), the market could remain in "don't fight the Fed mode," with most participants not expecting these strong data points will push the Fed in a more hawkish direction, although rates by their very self correcting nature due to solid economic activity could move higher. So, the global equity markets reaction to this week's data docket, possibly via the higher yields feedback loop, will be a keen litmus test that the equity investors are happy with growth driving higher yields and continue buying into the Fed AIT by allowing to let the economy run hot.
OIL MARKETS
The markets magnetic attraction to the $63 level should tell us much about the near-term outlook amid conflicting signal of new COVID waves coming to shore ahead of what should be a summer gasoline buying bonanza. But overall, this is an oil market that feels completely uninspired outside of a few micro lurches here and there.
Still, positive comments on the US economy from Fed Chairman Jerome Powell help to reassure the outlook for oil demand, balancing concerns about the continued spread of COVID-19 in some regions.
After a shaky Asia session yesterday the market then rallied almost 2.5% as the tide started to turn first on a weaker US dollar. Then price gains were amplified after Houthi rebels fired 17 drones and two ballistic missiles at targets in Saudi Arabia, including Saudi Aramco (SE:2222) refineries in Jubail and Jeddah. Still, with no damage reported, prices were faded hard after as Descartes Labs survey based on cellular devices' movements indicated US gasoline demand fell by 1.2% last week. And coming off a gasoline inventory glut the previous week, this news provided the ultimate rally capper.
Iran is reportedly insisting on the lifting of US sanctions as a precondition for re-engagement. An apparent cyberattack on Iran's Natanz nuclear facility over the weekend is likely to complicate discussions. However, as I've noted before, Iran had reportedly been ramping up production and exports since the US elections last year. Although progress on nuclear talks will affect sentiment, the supply impact is already getting baked into the price.
FOREX
The US dollar is opening with a slight bounce in its step this morning, and in the absence of any headlines, it appears more transactional than anything and could be little more than a Macro funds pre-US CPI order get put in the execution machine.
Treasury Secretary Yellen realizing that calling China a currency manipulator is entirely out of touch with reality, is considering removing the yuan from the watch list of countries that use the currency to gain a competitive advantage on trade. From an FX trade perspective, I suspect this fits into the "olive branch" but "who cares "category as PBoC with currency liberalization a long term priority, over the short term, they will do as they please to guide the currency as they see fit best to help the economy recover.
More broadly, the ringgit remains mired amid conflicting signal around stabilizing oil prices vs the expectation of higher US yields (strong US dollar) ahead of this week's US economic docket, which could point to higher US inflation base effects through the CPI lens and a strong rebounding economy supported by a US consumer spending bonanza via the US retail sales feedback loop.
Because of the new virus waves coming onshore in Thailand, India, and the Philippines, I think regional virus concerns are weighing on local sentiment, primarily via countries with slow vaccination roll-out, which might contribute to some market outflows.
The bond market, rather than the equity market, could be the FX market's primary focus to start the week. The USD has been on the back foot for most of April as more robust than expected US data alongside a still patient Fed has triggered a "risk-on" mood in stocks that has lessened demand for US dollar hedges globally. Still, rates could remain the primary near term drive for FX risk and trader could adopt a wait and see ahead of today’s US CPI report with the skew to buy dollars as a hedge for higher inflation" base effects."
GOLD MARKETS
After a failure to crack any significant topside levels, gold is likely to continue consolidating. Gold is broadly within the recent range, although the market has been trading better on balance. The pullback in the dollar has likely been a key supportive factor along with lean positioning. Central Banks in Europe have been more active in shoring up gold reserves.
Still, the improving US macro backdrop lessens the need for gold and a greater demand for stocks from the investment community as stocks act as competition for gold amid this type of cheery environment.
Anecdotally
As retailers prepare for the shopping summer bonanza to top all shopping bonanzas, anecdotally, I just took a peek at my splurge fund and realized I have already broken the bank after a two-month-long spending frenzy anticipating prices will climb higher this year; I wonder how many other folks are past peak spending. And given all the talk of an imminent boom in the US economy, a cursory glance under the proverbial hood of a US equity market perched at record highs shows something to all appearances odd. Expressions like the economic revival narrative and grand reopening themes have underperformed.