Rate Adjustment Continues

Overview:  Most Asia Pacific equity markets moved lower after US losses yesterday and Tencent's earnings miss today.  Chinese and Hong Kong markets led the regional decline that spared only Japan and Australia among the larger markets.  A better than expected flash PMI reading is helping the Stoxx 600 stabilize after yesterday's 1% drop. US futures are recouping around half of yesterday's losses.  Bond markets remain under pressures.  The 10-year Treasury yield is up around nine basis points to 2.38%.  European yields are 5-7 bp higher.  The Scandis are proving most resilient to the stronger US dollar today.  The Norwegian krone, helped by a 25 bp rate hike, is the strongest of the majors.  As expected, the Swiss National Bank remained on hold.  The Swiss franc, Japanese yen and the Antipodeans are the weakest of the majors with around a 0.25%-0.45% loss in late morning turnover in Europe.  Among the emerging market currencies, which are mostly lower against the dollar, the Mexican peso has edged higher.  Banxico is expected to hike rates by 50 bp later today.  The Philippine peso, where the central bank stood pat, has also firmed.  Turning to commodities, gold approached the upper end of its recent range near $1950.  A break of it could spur a move toward $1962.  May WTI is steady.  The move above $113.35 targets the $118 area ahead of the $126 high set earlier this month.  US natgas is softer for the third sessions, while Europe's benchmark extends the two-day, ~16% advance by another 8% today.  Iron ore firmed and copper is testing the (61.8%) retracement target the pullback since March 7 near $480.  May wheat is softer for the third session.  

Asia Pacific

Japan's preliminary March PMI suggests the world's third largest economy has begun stabilizing and a Covid and natural disaster disrupted Q1 growth.  The manufacturing PMI rose to 53.2 from 52.7.  It finished last year at 54.3.  The contraction in services eased to 48.7 from 44.2.  This is the best reading in the first three months of the year.  The composite reading recovered to 49.3 after falling in February to 45.8 from January's 49.9.  

Australia's flash March PMI showed the economic momentum strengthened.  The manufacturing PMI rose to 57.3 from 57.0 and the services PMI improved to 57.9 from 57.4.  This saw the composite PMI increase to 57.1 from 56.6.  It is the strongest since last May.  The futures market has brought forward the anticipated first hike by the Reserve Bank of Australia to June from July.  

The dollar's run against the yen continues.  With today's advance, it has risen 13 of the past 14 sessions.  It began the move after closing around JPY114.80 on March 4.  It reached JPY121.75 today, where the upper Bollinger Band is found.  With rising US yields and no official pushback, the upside still beckons. There is little chart resistance until closer to JPY123.50. The Australian dollar is struggling near $0.7500 and was unable to extend yesterday's gain.  It too flirted with the upper Bollinger Band.   Yesterday's low around $0.7450 may offer initial support.  The greenback made a new seven-day high against the Chinese yuan near CNY6.3775 before backing off.  After selling Chinese bonds last month, foreign investors appear to have returned since the middle of the month.  The PBOC set the dollar's reference rate softer than expected today at CNY6.3640.  The median projection in Bloomberg's survey was for CNY6.3663.  The offshore yuan (CNH) strengthened for the first time in five sessions.  


The takeaway from the flash euro zone PMI is that the regional economy is proving more resilient than expected to the war and related economic disruption.  The aggregate manufacturing PMI slipped to 57.0 from 58.2 and better than the 56.0 median forecast. The German reading was stronger than expected at 57.6 (from 58.4), but the French report was slightly softer than expected at 54.8 (from 57.2).  The aggregate service PMI stands at 54.8 down from 55.5, and better than the 54.3 median forecast in Bloomberg survey.  The German report (53.7 vs. 55.8 in February) and the French (57.4 vs 55.5) were better than expected.  The EMU composite reading stands at 54.5, above the forecasted 53.8, even if lower than the 55.5 level seen in February.

The UK's flash PMI was mixed. Manufacturing slowed (55.5 from 58.0, and 57.0 expected). Services improved (61.0 from 60.5 and 58.0 expected). The composite held in much better than anticipated, slipping to only 59.7 from 59.9.  The median forecast in Bloomberg's survey was for 57.5.  Tomorrow, the UK is expected to report that retail sales slowed last month to 0.5% as auto fuel is excluded after a 1.7% gain in January. The market is still digesting the implications of yesterday's the Spring Budget statement.  This year's GDP forecast was cut to 3.8% from 6%.  Next year growth is seen slowing to 1.8%.  The fuel duty has been cut until next March.  The basic personal income tax rate will be cut to 19% from 20% in 2024, which is understood to be just before the next parliament election.  The Office of Budget Responsibility says that households still face a 2.2% loss of disposable income, and that Chancellor Sunak has offset about 1/6 of the tax increases imposed under his two-year tenure.  

Russia's demand to be paid in roubles for its gas exports to "unfriendly" nations is a ruse.  It is an irritant but of little substantive meaning.  Currently, the gas is primarily paid for in euros (58%) and dollars (39%). If Putin's order sticks, the euros and dollars would first be sold to a bank (e.g., in Bulgaria, or Gazprom's bank that has not been excluded from SWIFT) for roubles first. Russia needs hard currency not roubles.  The contracts may require euro or dollar payments, but arguably the sanctions have created conditions for force majeure if the legalistic framework prevails.  The move could help the rouble strengthen, and that seemed to be the initial market reaction yesterday, but the rouble trading is far from normal or transparent.    

As widely expected, the Swiss National Bank kept its policy rate unchanged at -0.75%.  Norway's Norges Bank delivered its third hike in the cycle that began last September.  Its deposit rate now sits at 0.75%.  It was seen as a hawkish hike as the central bank lifted its rate path and indicated plans to hike in June.  It anticipates the deposit rate to rise to 2.50% by the end of next year.  Previously, it had seen the policy rate at 1.75% at the end of 2023. 

The euro has gone nowhere in the past three days.  It continues to chop between $1.0960 and $1.1045.  It settled near $1.1050 last week.  The single currency has spent this week so far in its narrowest range in five weeks.  Last week's range was roughly $1.09-$1.1135.  Continued consolidation is the most likely near-term scenario.  Sterling is a different kettle of fish.  It reached almost $1.33 yesterday, its best level since March 4.   However, it seemed unimpressed with Sunak's budget and settled slightly above $1.3200.  It has pulled back further today, to almost $1.3155. Note that a large option (~GBP990 mln) is struck at $1.3150, which expires today.  It also corresponds to a (50%) retracement of the rally since the March 15 low near $1.30.  A close above $1.3200 would help stabilize the tone.  


The US has a busy economic calendar today.  The data includes the Q4 current account, weekly initial jobless claims, durable goods orders, the flash PMI and the Kansas Fed's manufacturing survey. In addition, at least four Fed officials speak (Kashkari, Waller, Evans, and Bostic). They have all spoken recently and their views are known.  A consensus appears to be emerging in favor of a 50 bp move at the May 4 FOMC meeting.  The Fed funds futures pricing implies about a 75% chance of a 50 bp rather than a 25 bp move.  In the next six meetings (the remainder of the year), the Fed funds futures strip has almost 190 bp of tightening priced in, which shows the leaning toward two 50 bp moves.  

Mexico will report its bi-weekly CPI figures and January retail sales today, but the focus is on the central bank.  It is expected to hike its overnight rate by 50 bp to 6.5%.  It would be the third such move in a row, and the second under the new governor.  The swaps market has about 220 bp of tightening priced in for the next six months. Chile and Colombian central banks meet next week and are also expected to hike.  

The US dollar fell to almost CAD1.2540 yesterday, its lowest level in two months. There has been no follow-through selling today.  Nearby resistance is seen in the CAD1.2600-CAD1.2625 area, which houses this week's high and the 200-day moving average.   The swaps market is pricing in about a 2/3 chance of a 50 bp move by the Bank of Canada when it meets on April 13. It may also begin to allow its balance sheet to shrink.   Latam currencies are five of the top six emerging market currencies this year.  The South African rand is second, up about 8% this year, to the Brazilian real's 15.5% gain.  South Africa's central bank is expected to lift its policy rate to 4.25% from 4.0% later today.  The Mexican peso is up nearly 1.6% this year.  It is near its best level since last October. There is little chart support for the greenback ahead of MXN20.00, but the low from October was near MXN20.12.  The dollar has convincingly broken below BRL5.00 and the next important area is near BRL4.70.


Rate Adjustment Continues Rate Adjustment Continues Reviewed by Marc Chandler on March 24, 2022 Rating: 5
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