It was a new day, but with the continued rise in interest rates and weaker equities, it felt like yesterday.
Only China and Hong Kong among the major markets in Asia Pacific resisted the pull lower. Europe's Stoxx 600 was off by more than 0.5% led by health care and real estate. It was the fourth loss in five sessions and brought the benchmark to its lowest level since Mar. 18. US futures were flattish. Yesterday, the NASDAQ fell by more than 2% for the third session in the past five.
The US 2- and 10-year yields were firm at 2.52% and 2.79%, respectively. European benchmark 10-year rates were up 1-2p. The 10-year JGB yield was drawing closer to the 0.25% cap.
The greenback continued to draw support from the higher rates. Today, the Australian and New Zealand dollars were resisting. The Swiss franc and Canadian dollar were the weakest. Among emerging markets, the Mexican peso was faring best, up around 0.4%.
Gold was firm and straddling yesterday’s $1953.50 close. June WTI jumped back after falling to $92.60 yesterday, its lowest level since Mar. 17, to recoup most of yesterday's nearly 4% decline. Europe may be moving toward a ban on Russian oil imports, but a decision was not likely until next month at the earliest and may be phased in over several months.
US natgas rose another 1.2% after surging 5.8% yesterday. It was the third session in five in which it rose more than 5%. Europe's natgas benchmark snapped a three-day drop (~-5.6%) recouping 1.25%. Iron ore was up 2.5%, its first gain in six sessions. May copper was recovering about half of yesterday's 1.9% decline. July wheat was rising for a third session. It was up almost 3% after rising more than 6% over the past two sessions.
Asia Pacific
Despite the economic costs, Beijing was maintaining its zero-COVID policy. The disruption was weighing on metals and oil prices. However, the economic squeeze may encourage officials to ease efforts to restructure other parts of the economy. This may have been behind the decision to approve the first new video games since last July.
China's National Press and Publication Administration published a list of 45 new titles on its website late yesterday. Recall that last August, Chinese regulators introduced measures to cap the playing time for minors.
China's Huawei has reportedly furloughed its Russian staff for at least the next month. It suspended new orders. It wanted to avoid secondary sanctions from the US. Similarly, Ericsson (NASDAQ:ERIC) made a similar decision, suspending its business and putting its local employees on paid leave. While there may be attempts to find a workaround, these kinds of actions illustrate the power of the threat of secondary sanctions and will have impact over time. At first, inventories will be drawn down, but in a few months, the shortages will become more apparent.
Japan's Finance Minister Suzuki stepped up his warning about yen weakness, saying that officials were closing monitoring the foreign exchange market, "including the recent depreciation of the yen with a sense of vigilance." It produced a small pullback in the dollar, which remained firm, though just shy of the 2015 high (~JPY125.85). With today's move, the greenback extended its rally for the eighth consecutive session. A convincing break of that old high, and the next important chart area is around JPY130.
The Australian dollar found support at $0.7400 posting minor gains for the first time since last Tuesday. Still, the upticks looked vulnerable and may not be sustained after running into offers near $0.7440. A break of the $0.7400 area could spur another leg down toward $0.7320. Note that there was an option at $0.7400 for about A$726 mln that expires today.
The US dollar was little changed against the Chinese yuan near CNY6.3700. It was confined to yesterday's ranges in quiet turnover. The PBOC set the dollar's reference rate at CNY6.3795. The median projection (Bloomberg survey) was for CNY6.3775.
Europe
The UK employment data was mixed. Jobless claims fell 47k in March after a revised 58k decline in February (initially -48k), and the ILO measure of unemployment slipped to 3.8% from 3.9%. Average weekly earnings rose as expected 5.4% (from 4.8%) in the three-months year-over-year measure including bonus payments, and 4.0% (from 3.8%) without. However, job growth itself disappointed.
Payrolls gained 35k employees. The median forecast from the Bloomberg survey called for a gain of 125k. Moreover, the 275k increase reported in February was cut to 174k. The employment change (3-month-over-three months) was expected to be 52k in February but instead was a modest 10k.
A month ago, the swaps market was pricing in more than a 50 bp hike next month. It was now less than a 15% chance of a 50 bp move. That was ahead of tomorrow's March CPI figures. CPIH, which includes homeowner costs, was expected to have accelerated toward 5.9% from 5.5%.
Germany's ZEW investor survey was poor, but not quite as bad as the median guesstimates in Bloomberg's survey. The assessment of the current situation deteriorated to -30.8 from -31.4. It was the weakest since last May. The deterioration pre-dated Russia's invasion of Ukraine. The expectations component also weakened, slipping to -41.0. Here was where the war had taken a clear toll. It collapsed from 54.3 in February to -39.3 in March. The April reading was the lowest since March 2020 when the pandemic first struck.
It looked like the Swiss National Bank had been intervening in the foreign exchange market. In the past two week, the domestic sight deposits have risen by 1.2%, the most in at least a year. The euro may have put in a double high last month near CHF1.04. The break of the CHF1.02 neckline, and its inability to resurface above it yesterday looked ominous.
The objective of the technical formation suggested another run at CHF1.000, which it briefly traded below in early March for the first time since early 2015, when the SNB lifted the cap on the franc.
With a minus 75 bp policy rate, and a 75 bp 10-year yield, buying the franc was expensive. Its strength against the euro seemed to warn of downside risks for the euro and upside risks for European stress.
After sliding for seven consecutive sessions, the euro managed to post a small gain of a few hundredths of a cent yesterday. It completely unwound the short-covering gains on Macron's slim victory in the first round. The euro was under pressure again. It slipped below $1.0860 and found some bids in late Asia/early European activity. Nearby resistance was seen around $1.0880. There were options for almost 870 mln euros at $1.09 that expire today and almost 1.35 bln euros that expire there tomorrow.
For the third consecutive session, sterling was fraying $1.30 support. It had yet to close below it, but the bounce seemed to be getting smaller. A convincing break would bring our $1.2830 target into focus. It may not be today. Still, the $1.3020-$1.3040 area offered initial resistance.
America
The US reports March CPI today. No one in Bloomberg's survey with 48 respondents expected the year-over-year pace to slow. The question was the magnitude of acceleration from February's 7.9% pace. The range of forecasts was between 8.2% and 8.6%. The median and average converged in the middle near 8.4%. If the median was right in looking for a 1.2% month-over-month increase, it will be the first time since September 2005 that consumer prices increased by more than 1% in a month.
The core rate was expected to rise by 0.5%. It had been rising by 0.5%-0.6% a month since last October. Given the strong increase in CPI in Q2 21 (cumulative 2.2%), some economists were suggesting inflation could peak with today's report. It was possible, though if the median forecast in Bloomberg's survey was fair, then CPI would have risen by a cumulative 2.6% in Q1 22.
The core rate was a different story. It rose by a cumulative 2.4% in Q2 21 and with a 0.5% increase in March, it would have risen by a cumulative 1.6% in Q1 22. While there was headline risk, it was noise. The signal emanating from Fed officials was monetary accommodation will be removed and that the Fed funds target was on its way to neutral setting, for which the overwhelming majority see between 2.25% and 3.0%. The median dot was at 2.375%. The December Fed funds futures implied a year rate of a little more than 2.5%.
Mexico's CPI was also accelerating. When it was reported last week, the March CPI rose to 7.45% year-over-year. It was at the highest level in more than two decades. To be sure, under President AMLO Mexico did not use fiscal policy to replace lost incomes during the heart of the pandemic like many countries, including the US did.
Nevertheless, price pressures were acute. However, at the same time, the Mexican economy did not enjoy the strength of the US. Yesterday, Mexico reported that industrial output slumped 1% in February. The median forecast (Bloomberg) was looking for a 0.3% increase.
The US reports March industrial production later this week. In the Jan-Feb period, it rose by almost a cumulative 2%. The newswire survey showed that the median expectation was for the Mexican economy to expand by 2.0% this year (IMF's forecast for 2.8% may be revised lower at the upcoming Spring meetings).
Recall that the Mexican economy contracted by 0.2% in 2019 before the pandemic took another 8.2% of its output. It grew 4.8% last year. The swaps market had about 120 basis point of tightening by Banxico in the next three months and about 145 bp by the Federal Reserve. Despite the risk off mood, the jump in US rates, and the unexpected drop in industrial output, the Mexican peso strengthen yesterday to its best level in three days.
A few hours after the Reserve Bank of New Zealand hikes rates tomorrow, the Bank of Canada will follow suit. The odds of a 50 bp hike by the RBNZ ticked up to about 75%. That warned that a 25 bp hike may be seen as disappointing and weigh on the New Zealand dollar. The swaps market had been split between a 50 bp and 75 bp hike by the Bank of Canada. However, as cooler heads prevail, the market came back to 50 bp. The BoC was also expected to begin its balance sheet roll-off.
The Canadian dollar was extending its loss despite the widely expected hike. The US dollar continued to rebound off the year's low set near CAD1.24 a week ago. It retraced now over half of the losses seen since the Mar. 15 high near CAD1.2870. It was found by CAD1.2635. The next retracement (61.8%) was closer to CAD1.2700. That may be too far today. The main driver seemed to be the risk-off mood. Changes in the exchange rate were inversely correlated with changes in the S&P 500 (~0.75) by the most since last July. Many see the Canadian dollar as a petro-currency. The correlation of changes of the exchange rate and WTI was inverse by about 0.1.
The greenback was extending its losses against the Mexican peso. It was trading at a five-day low around MXN19.85 in the European morning. The year's low was set last Monday near MXN19.7275. There was little that stood in the way of a retest. There was little below it ahead of last week's low by MXN19.55.