Overview: Russia's decision to return some troops to
their bases following the completion of some military exercises has stoked a
relief rally in equities, while weighing on the dollar, gold, and oil.
The announcement was made too late for most Asia Pacific bourses, but those
open late, like India, are benefitting. A boost in China's policy loans
help lift the local shares. Europe's Stoxx 600 is recouping around half of
yesterday's 1.8% loss, while the US S&P and NASDAQ futures are 1.0%-2.0%
higher. The US 10-year yield is probing the highs near 2.03%, while European
yields are a little firmer with the peripheral premium narrowing, except for
Greece. The greenback is heavier against most currencies, while the other
"safe-havens" (Japanese yen and Swiss franc) are slightly softer. Among emerging market currencies, central European currencies are
leading the relief rally. The JP Morgan Emerging Market Currency Index is
up about 0.2% for the second day. Gold is reversing lower after reaching
an eight-month high near $1880, around $100 higher than late January.
Initial support is seen in the $1840-$1850 area. After poking above $95 a
barrel briefly yesterday, March WTI is giving back all of yesterday's
gains. Nearby support is seen near $92. US natural gas is up almost 4.5%
after a 6.5% gain yesterday. It fell nearly 14% last week. Europe's
benchmark is unwinding yesterday's 5.5% gain plus more today. China's warning against
speculation and hoarding took a toll on iron ore prices. They are off
around 7.2%, for the third consecutive decline. Copper prices are edging
higher for the second session.
Asia Pacific
Japan's economy returned to
growth in Q4 22, but it was not quite as strong as expected, and deflationary
forces seemed to strengthen. The world's third-largest economy expanded by 5.4% at an
annualized rate in the last three months of 2022, missing forecasts for 6%
(median in Bloomberg's survey). The contraction in Q3 was revised to 2.7%
from 3.6% with the help of an upward revision to consumption, which was also a
little stronger than projected in Q4. Business spending was slightly softer.
Net exports contributed 0.2% (not the 0.3% expected). The new social restrictions
introduced last month is expected to be a drag on Q1 22 growth. The GDP
deflator, which fell 1.1% in Q2 and 1.2% in Q3, fell 1.3% in Q4, the most in a
decade. The January CPI figures are due late this week. Excluding
fresh food and energy, prices are expected to have fallen around 1%, the most
since 2011.
The PBOC injected CNY100 bln
($15.7 bln) into the banking system via policy loans for the second consecutive
month. This is
understood to signal that Beijing is stepping up its support for the
economy. The medium-term lending facility (1-year) rate was kept steady
at 2.85%. It had been cut by 10 bp last month. Tomorrow, China is
expected to report that both CPI and PPI moderated in January. Less price
pressures are thought to underscore the scope for PBOC action, which is
expected to spur additional monetary easing.
The dollar is trading with a
firmer bias against the Japanese yen, though within yesterday's
(~JPY115.00-JPY115.75) range. There is an option for almost $765 mln at JPY115.75 that
expires today. There is another set of options for $1.13 bln at JPY116
that also roll off today. The softer yen, if sustained, and the risk-on
sentiment can help Japanese stocks on Wednesday. The Australian
dollar is trading inside yesterday's range as well (~$0.7085-$0.7160).
A move above yesterday's highs would lift the tone, but the expiring options (A$450
mln) at $0.7195 seem too far away. The US dollar slipped below
CNY6.35 for the first time this month. It recovered after
reaching about CNY6.3475. The PBOC set the dollar's reference rate slightly
lower than expected (CNY6.3605 vs. CNY6.3607, the median in Bloomberg's
survey). Separately, the PBOC's foreign exchange holdings appear to have risen
by around CNY33.6 bln last month.
Europe
Reports suggest the Russia's
top diplomat Lavrov got Putin's permission to continue to pursue diplomatic
solutions. At the
same time. the head of Ukraine's National Security and Defense Council
dismissed reports of a February 16-17 invasion. Some of Russia's troop
movement may have been part of its military exercises. Press reports
indicated that some of the exercises were completed in recent days, which was
linked to today's news that some forces are returning to their bases. A
key date may be February 20 with the end of the Russian-Belarus military
exercises. As part of the pressure on Russia is that the lower chamber of
parliament, the Duma, is considering a bill to request Putin officially
recognize the separatist region of Ukraine (Russia created in 2014). This
seems like a non-military move that could further Russia's influence.
Meanwhile, Germany's Foreign Minister Baerbock is encouraging other parts of
the of German government to consider China a "systemic rival" (like the
EU has already done), but Chancellor Scholz, who is meeting with Putin today in
Moscow, told Russia that Ukraine joining NATO is not a priority.
The UK's employment data
underscores the strength of the labor market. The number of employees rose by 108k in January
after a revised 131k in December (initially 184k). There are about 435k
more workers than on the eve of the pandemic. The unemployment rate was
steady at 4.1% in the three months to December. Vacancies reached a
record high of almost 1.3 mln in the three months through January.
Average weekly earnings rose 4.3%, up from 4.2%, while base wages (excluding
bonuses) slowed slightly to a 3.7% pace from 3.8%. However, note that
between taxes and inflation, real wage income is being squeezed. The
swaps market is pricing in about a 70% chance of a 50 bp hike next month.
The euro recovered from the
dip below $1.13 yesterday to reach almost $1.1355 today in the European
morning. It
stalled there where options for 1.35 bln euros will expire today
(~$1.1340-$1.1350). The focus shifts one negative development
(geopolitical tension) to another (diverging monetary policy). The US
premium on the 2-year month widened to around 195 bp, about 40 bp higher than on
the eve of the January employment data. A move above $1.1400 would lift
the technical tone. Sterling is going nowhere quickly. It
stays mired in a $1.35-$1.36 range, which has largely contained it this
month. Intraday penetration has taken place a few times, but the range
has been respected on a closing basis.
America
The Fed's Bullard did not
walk back last week's hawkish remarks. He advocates front-loading the rate hikes
and reiterated his call for 100 bp by July 1. He says the Fed's credibility is
on the line with inflation much higher than expected six months ago. Bullard
wants the central bank to ratify market expectations contained in the two-year
note. The yield is up more than 20 bp since January CPI print. The swaps
market implies a terminal Fed funds rate of 2.00%-2.25%. The Fed fund
futures are discounting almost a 66% chance of a 50 bp hike in March.
Almost 100 bp is priced by the end of H1.
The January US PPI is
expected to have risen by 0.5%, but given the base effect, the year-over-year
rate will likely pullback from the 9.7% year-over-year pace reported for
December. The
core rate may moderate to below 8%. The first look at February
survey data comes from the Empire State manufacturing survey. A modest
recovery is expected after a dramatic slump in January (31.9 in December, -0.7
in January). The median forecast in Bloomberg's survey is for a rise to
12. Late in the day the Treasury's December capital flow report (TIC)
will be reported. Capital flows increased markedly last year.
Consider that the monthly average through November was about $102 bln. In
the first 11 months of 2020, it averaged a little more than $47 bln and in 2019
$5.4 bln. The pattern with long-term flows is similar--almost $72 bln in
Jan-Nov 2021, compared with around $42 bln in the same period in 2020 and $32.5
bln in 2019.
Although the convoy protests
in Canada that had paralyzed the capital, disrupted production and trade have
dissipated, other border blockades (Alberta and Manitoba) persist. Downtown Ottawa was still
reportedly occupied yesterday. Prime Minister Trudeau invoked the 1988
Emergencies Act for the first time, claiming a serious challenge to law
enforcement. It will be divisive. Consider that a new Angus Reid poll
found that nearly 75% of the surveyed wanted the convoy protesters to go home,
but more than two-thirds think Trudeau has aggravated the situation.
Under the emergency powers, the federal forces (police not military) will
enforce municipal and provincial laws, and secure and protest places and infrastructure
critical to the economy (e.g., border crossings and infrastructure). It
authorizes financial institutions to prevent the funding of illegal protests
without a court order.
The motion must be presented
to the House and Senate over the next week. However, once a declaration of
emergency is made, it is considered to be in effect, unless it is revoked by parliament.
If not extended it will expire in 30 days. The opposition
Conservatives are unorganized. A caucus during the protests dismissed O'Toole and is now led Bergen, the interim leader. Bergen has been
among the most supportive of the convoy protests. Before Trudeau’s announcement,
Singh, the head of the New Democrat Party seemed to be opposed, saying use of
the emergency powers was a failure of leadership. After Trudeau's announcement,
Singh endorsed it, though in a backhanded way. He blamed Trudeau for allowing
the "siege" of Ottawa to continue for weeks without addressing
it.
The US dollar approached
CAD1.28 yesterday, the upper end of its recent range and it held. The risk on mood, reflected in
equity prices is overriding whatever negative impulse there may be from the
softer oil prices. So far, the low for the day is slightly above
CAD1.27. There are options for roughly $2.3 bln between CAD1.2695 and
CAD1.2700. A break returns to the greenback to the shelf forged in the
CAD1.2650-CAD1.2660 area. Meanwhile, the US dollar has returned to test
the 200-day moving average against the Mexican peso. It is found
a little below MXN20.35. It has not closed below the long-term moving average
since last September. Last month's low was set near MXN20.28. The deputy
governor of the central bank suggested that the magnitude of the Fed's rate
hike will influence the next Banxico move. A 25 bp move by the Fed would
be matched by Mexico.
Disclaimer
Reviewed by Marc Chandler
on
February 15, 2022
Rating:
