Interest rates continued to rise, but the equities were looking through it today and the dollar was drawing less succor. Asia Pacific equities were mostly higher. With half of Shanghai in lockdown, Chinese equities were unable to join the regional advance. Europe's Stoxx 600, led by energy and consumer discretionary sectors, rose for the third consecutive session. US futures had a small upward bias.
The US 10-year yield was up a few basis points to 2.50%, while the 2-year yield was up around five basis, flattening this part of the curve to less than 10 bp. Europe's 10-year benchmarks were 8-9 bp higher. The BOJ defended the 0.25% cap of the 10-year bond. The greenback was softer against all the major currencies today but the Swiss franc. The Scandis lead the move. Emerging market currencies were also mostly higher. Leaving aside the Russian ruble, the Hungarian forint, and South Korean won were best performers.
Gold was softer and appeared poised to test last week's low near $1911. May WTI was consolidating after falling almost 7% yesterday. US natural gas prices were off a little more than 2.5% after falling 1.1% yesterday. Europe's benchmark was up nearly 4% after jumping 10.6% yesterday. Iron ore and copper were softer. May wheat steadied after shedding 4.1% Monday.
Asia Pacific
The Bank of Japan bought JPY528.6 bln of its 10-year bond as it continued to defend the 0.25% cap of its Yield Curve Control policy. It pre-committed to buying an unlimited amount of the bond tomorrow and Thursday. However, it was allowing the longer end of the curve to rise. For example, the 30-year yield rose for the fifth consecutive session and was up 10 bp this week to 1.07%, a new six--year high. It finished last month slightly below 0.90%. Still, many participants did not think Japan's efforts were sustainable and recalled the dramatic moves when the Reserve Bank of Australia gave up its cap on the three-year bond last year.
The weaker yen helps the Japanese economy and boosts corporate earnings. A BOJ study out a couple of months ago estimated that a 10% depreciation of the Japanese yen boosts GDP by 1%. A separate report by a Japanese research group found that a 10-yen appreciation of the dollar boosted operating profits by JPY1.5 trillion (~$12 bln).
Yesterday, a government spokesperson cautioned against rapid movements and the MOF's Kanda reportedly talked to the Baukol, the US Under-Secretary for International Affairs about a range of issues including the foreign exchange market. The primary drag on the yen was coming from the economic divergence that was being reflected in contrasting monetary policy.
The US was likely concerned that Japan would take advantage of the situation. Tokyo officials’ expressions of concern about rapid moves or that they were watching the fx market may have been a way to show it was not adding fuel to the fire. Separately, and unrelated, Japan reported an unexpected decline in February unemployment to 2.7% from 2.8% and small upticks in the job/applicant ratio to 1.21 from 1.20.
Australia's February retail sales rose 1.8%, twice the median forecast in Bloomberg's survey. It overshadowed the small downward revision in the January series from 1.8% to 1.5%. Recall that the COVID-related restrictions led to a sharp 4.1% slump in December retail sales. Retail sales stood 9.1% above a year ago, the strongest in 10 months. The consumer was recovering smartly as were jobs.
The central bank meets next week (Apr. 5) and was gradually recognizing it will likely have to raise rates this year. The market had the first move priced in for June and had around 180 bp of tightening discounted this year. Meanwhile, the government was submitting a stimulative budget which was seen as part of the campaign for the national election that must be held by May 21.
The dollar traded in a three-yen range yesterday and today it traded in a little more than a one-yen range (~JPY123.10-JPY124.30). We had noted that back in 2015, BOJ Governor Kuroda seemed to have drawn a line around JPY125 (it peaked near JPY125.85 then). The market became cautious. Look for more consolidation. A break of JPY123 could see JPY122.
The Australian dollar reached $0.7540 yesterday before briefly dipping below $0.7470. It was consolidating in yesterday's range. The bulls were seeing if it can re-gain a foothold above $0.7500.
The US dollar slipped to CNY6.3645 before recovering back above CNY6.3700. The PBOC set the dollar's reference rate again weaker than the Bloomberg survey projected (CNY6.3640 vs. CNY6.3661). The market was concerned that the lockdown in Shanghai, following other cities, will weaken the economy and disrupt supply chains, despite the announcement of tax rebates and low interest rate loans.
Europe
Russia-Ukraine were talking in Turkey today. There were hopes for a ceasefire, but the lack of trust on both sides was palatable. Observers remained unsure of Russia's war aims. The Ukraine government appeared willing to accept that it will not join NATO, but refused to recognize any loss of territory, and of course refused to resign. Reports suggested Russia was holding out the possibility that a de-militarized Ukraine could join the EU.
The cost of rebuilding Ukraine was not one that Russia wanted to bear. Claiming that Putin was a war criminal made good politics, and there was little doubt that it violated international norms, however, neither Russia nor the US (nor China) are members of the International Court of Justice, which has no jurisdiction over non-members. Still, calling Putin a war criminal made it difficult to negotiate with him and was consistent with seeking regime change, even if that was not the declaratory policy.
Russia's invasion of Ukraine appeared to remove some political pressure on UK Prime Minister Johnson, and at least one Tory MP retracted his letter calling for a leadership challenge. Johnson was back in the hot seat, however, after the London police were set to issue 20 fines to government officials for violating the COVID restrictions. The Prime Minister was not expected to be fined personally, though he attended the parties, claiming he thought they were work events. Still, Labor was calling for him to take responsibility and resign. The next major political hurdle for the Prime Minister was the May local elections.
The euro rose back above the $1.10-level, which held nearly 8 bln euros of expiring options between today and Thursday. Last week's high was near $1.1070 but had been capped near $1.1040-$1.1045 more recently. After a consolidative session in Asia, early European activity saw it bid to around $1.1035, apparently on hopes of a ceasefire. Macron and Putin will reportedly talk later today, and the Kremlin was calling for US-Russian talks despite the "personal insults." The next day or two could prove pivotal in the negotiations.
Sterling extended yesterday's nearly one-cent decline and fell to nearly $1.3050 before finding a bid. It recovered to $1.3100. A move above the $1.3115 area could spur a move toward $1.3150-$1.3160 where it peaked in North America yesterday. The UK's February consumer credit was stronger than expected, but mortgage lending weaker. The serious squeeze on the cost-of-living was raising concern that the UK economy was recession-bound.
America
The US reports house prices and the JOLTS report on job openings. Federal Reserve Governor Waller estimated that the Fed's purchases of mortgage-backed securities lowered house-loan costs by around 40 bp. The S&P CS index of house prices rose 18.84% in the 12-month period through January. The JOLTS estimate of jobs opening will remain elevated even off from the 11.26 mln seen in January.
After the University of Michigan reported a significant drop in consumer confidence, the Conference Board's measure today will be closely watched. The Fed's Williams, Harker, and Bostic speak, as well. Meanwhile, the FY23 budget proposed by the White House yesterday looked dead on arrival as Senator Manchin was opposed.
Canada and Mexico have light economic calendars today. Yesterday, Canada reported a decline in consumer confidence, but the swaps market had a 50 bp hike by the Bank of Canada at its Apr. 13 meeting fully discounted.
Mexico reported a $1.29 bln February trade surplus yesterday. The median forecast in Bloomberg's survey anticipated a $226 mln deficit. Still, Mexico's trade balance appeared to be deteriorating. First, the February balance improved over January for the past several years. Second, the January deficit of $6.3 bln compared with a $1.2 bln deficit in January 2021. February surplus was half of the February 2021 surplus.
Chile's central bank was expected to hike its target rate by 175 bp today to 7.25%. February's CPI stood at 7.8% year-over-year. Wages in January were 7.5% above year ago levels. Growth in Q4 21 was a solid 1.8% quarter-over-quarter. The dollar has fallen for the past three weeks against the Chilean peso. The peso was up 7.3% year-to-date after depreciating by 16.5% last year.
The Canadian dollar snapped a nine-day advance yesterday but came back bid today. The greenback topped out just shy of CAD1.2600 yesterday and settled near CAD1.2520. It was back near yesterday's low in the European morning below CAD1.2500. The low from the end of last week was near CAD1.2465. The low for the year was set in January by CAD1.2450.
The 11-day advance in the Mexican peso was snapped yesterday, and it was consolidating so far today. The US dollar high yesterday was almost MXN20.19. Today, the greenback was not above MXN20.1375. Last week's low was near MXN19. 9125.