Overview: The BOJ underscored its commitment to
capping the 10-year yield at 0.25% and sent the yen reeling. The dollar
rose to JPY131, a new 20-year high. Sweden's Riksbank caught many
wrongfooted with a 25 bp hike to initiate the tightening cycle. The
krona shot up and is the strongest of the major currencies, rising about 0.65%
against the US dollar. Most of the other currencies are =/- 0.25% against
the greenback. The euro briefly traded below $1.05 late Asia. Better than expected results for Meta helped lift Asia Pacific
equities. Of the large markets in the region, only Taiwan and China failed to
rise by more than 1% today. The Chinese yuan is the weakest among the
emerging market currencies, sliding about 0.75%, which puts the greenback above
CNY6.60 for the first time since November 2020. Europe's Stoxx 600
gapped slightly higher at the open and its gains are being led by tech, energy, consumer discretionary, and financials (also helped by favorable
earnings). The US 10-year yield is little changed near 2.82%. The
drop in the yen appears to have no impact. European yields are mostly 1-2 bp higher. Gold was sold to a new two-month low near $1872 but has
steadied in the European morning and is now a little higher on the day. June WTI continues to consolidate.
It has not been above $103 this week and for the second session is finding
support around $100. US natgas prices are struggling to extend the
roughly 11% gain over the past three sessions, while Europe's benchmark is off
almost 4.4% after rallying almost 17% in the past two sessions. Iron ore
rose for a third session, but it still has not recouped Monday's 9.5%
drop. Note that China announced it would remove tariffs on coal (3%-6%)
to ensure adequate energy supplies. Copper is little changed. July wheat is trading higher and has recouped yesterday's 0.35% decline.
Asia Pacific
The Bank of Japan did not
back down an inch, and instead reinforced its message. The coming rise in inflation is not going
to be sustainable and the economy still needs robust monetary support. A
weaker yen is overall beneficial but too quick of a pace could hurt
companies. The BOJ stands ready to buy an unlimited amount of 10-year
Japanese government bonds to defend the 0.25% cap on 10-year yields
indefinitely. As expected, the BOJ raised this year's inflation forecast
to 1.9% from 1.1% and left the next two year's forecasts unchanged at
1.1%. It also reduced this year's growth forecast to 2.9% from 3.8% but
lifted next year's projections to 1.9% from 1.1%.
Separately, Japan reported
weaker-than-expected March industrial output. The earthquake last month disrupted
output and a 0.3% gain was recorded after a 2.0% rise in February. On the
other hand, March retail sales were stronger than expected, rising 0.9%, not
the 0.3% that the median in Bloomberg's survey anticipated. Meanwhile,
according to the weekly MOF portfolio report, Japanese investors continue onto the campaign that goes back to the second half of October of selling foreign
bonds. In those subsequent 29 weeks, Japanese have sold foreign bonds in
all but eight weeks. The monthly breakdown that is included in the
current account report does not appear to show that US Treasuries are being singled out,
but rather a bear market in global bonds seems to be the main consideration.
And at this point, indirect bidders, where foreign demand is recorded, at US
auctions, continues to be strong.
After forging a down sloping
pennant formation (bullish) against the yen for the past several sessions, the
dollar surged higher today. It reached JPY131 in the European morning on the apparent
greenlight from the BOJ. It is the highest level since May 2002. In 2002,
the dollar peaked slightly above JPY135. That is the next important
level. We suspect that the JPY129.50-JPY130.00 area now will provide
support. The Australian dollar fell to new two-month lows near
$0.7075 before finding bids that lifted it back toward $0.7160. It
is consolidating the recovery in the European morning. It needs to remain
above $0.7100 now to give hope that a low is in place. After the higher
Q1 CPI figures earlier this week, many are looking for the Reserve Bank of
Australia to hike rates next week. If the PBOC cut reserve
requirements on foreign currencies to signal the desire for a slower yuan descent,
it did not work. The yuan lurched lower today. It may have
fallen partly in sympathy with the yen, but the Covid response weighs on
sentiment and undermines the attractiveness of Chinese assets. Many banks
have slashed their yuan forecasts. The PBOC set the dollar's reference rate
at CNY6.5628. The median in Bloomberg's survey was CNY6.5664. The
lower dollar fix may also be a signal that market forces are driving the
move. The dollar gapped higher and has not looked back. It is
trading above CNY6.61. There is some talk about a return to CNY7.0 but
that seems particularly aggressive. We suspect that the CNY6.70-CNY6.72
area may be the next target.
Europe
Like the Reserve Bank of
Australia, Sweden's Riksbank resisted pressures to raise rates. As recently as February, Governor Ingves
was talking about the first hike in 2024. However, he softened his stance
recently in light of the stronger price pressures and today it lifted the repo
rate by 25 bp. Moreover, the Riksbank signaled that the repo rate will be hiked
2-3 more times this year. Lastly, the central bank also announced it will
slow the pace of asset purchases in H2 so that the balance sheet begins
shrinking. Bill purchases end as of today.
Spain is the first eurozone
member to report April CPI. The harmonized measure slipped 0.2% to bring the
year-over-year rate to 8.3% from 9.8%. The Bloomberg survey had found a
median projection of a 0.4% gain on the month and a 9.0% year-over-year
pace. Yet within the silver lining is a cloud. The core rate rose
to 4.4% from 3.4%.
Several German states have
reported their inflation figures and the national figures are due shortly. The state figures are not directly
comparable with the harmonized national measure, but of the five states that reported,
only one was lower than the median forecast for the aggregate national
figure. That would suggest there may be upside risk to the median
forecast of 0.4% in the harmonized measure. A 0.4% monthly gain would leave
Germany's harmonized measure at 7.6% year-over-year. Tomorrow, the eurozone's
preliminary April CPI will be reported. It is expected to have risen by
0.5%, which would keep the year-over-year measure steady at 7.5%. The
core rate is expected to rise to 3.2% from 2.9%. Also, the eurozone will
announce its Q1 GDP figures and a 0.3% quarterly expansion is
anticipated.
The euro is trading lower
for the sixth consecutive session. Since March 30, it has risen in only four
sessions, and two of them were last week. The euro settled last week near
$1.0810, and it slipped slightly through $1.0485 earlier today, a new five-year
low. The low from 2017 was set in January around $1.0340, and that is the
last notable low before parity. The euro has not traded below $1.00 since
2002. Initial resistance may be near $1.0570. Sterling
briefly traded at a new two-year low, slightly below $1.2500. The
reactive bounce took it to $1.2570, the lower Bollinger Band, where sellers
were lurking. It needs to regain a foothold above $1.26 to help stabilize
the technical tone. The Bank of England meets next week and a 25 bp hike
is anticipated.
America
In recent days, economists
have become more pessimistic about today's US Q1 GDP report. Recent benchmark retail sales revisions
spurred the Atlanta's GDPNow tracker to cut its projection from 1.0% to
0.4%. After US reports a much larger than expected goods trade deficit
for March (a record $125.3 bln) mitigated on the margins by the stronger
inventory build, other economists shaved their forecasts as well. Inventories
are particularly challenging to assess. It is difficult to distinguish
volumes from price. Rising prices likely bolstered the nominal value of
inventories, but was there some real accumulation as
well? Also, what is important for GDP, is the change in the change, so to
speak. Inventory accumulation accounted for the lion's share of Q4 21's
6.9% annualized growth rate. Consumption may have also contributed more,
and it looks like business investment increased.
There are two other
considerations here. First,
it had generally acknowledged, including by Fed Chair Powell that the economy was
going to slow markedly in Q1. It does not represent the state of
underlying growth. In some respects, the details of Q1 GDP may be better
than Q4 21. Measures that exclude trade and inventories may have
risen. Also, final sales to domestic parties (personal consumption plus
gross private fixed investment) looks to have improved. A strong rebound
in Q2 is expected, and it could prove to be the peak before a more gradual slowdown
in the coming quarters. Second, in this important way, it may not matter
very much: Regardless of the rhetoric, the Fed is on a pre-determined course
to remove the monetary accommodation "expeditiously" and
the vagaries of the high-frequency economic data notwithstanding. The
weekly jobless claims, reported at the same time as the GDP figures, illustrate
why. The labor market is strong, and next week's employment report is
expected to see another 400k positions being filled.
The US dollar edged up to
almost CAD1.2860, its highest level since mid-March. It tested the trendline drawn off
last December and the March high. The greenback has settled above the
upper Bollinger Band for the last four sessions. It comes in near
CAD1.2835 today. If the US equity market bounce can be sustained, the
Canadian dollar may recover. A close below CAD1.2800 would help its
tone. Mexican President AMLO is expected to announce a deal with
some large companies to limit price increase next week. Although some
will see it as a form of price controls, these seem to be self-imposed, and the
government may also help subsidize some food production. It does not seem
materially different from Bank of England Governor Bailey calling on workers to
show wage restraint. No one called that wage controls. In any
event, the greenback has been knocking against MXN20.50 in recent days and is
better offered today but within yesterday's range
(~MXN20.3255-MXN20.5365). However, after finding support near MXN20.35 in
the European morning, the dollar may try the upside again.
Disclaimer
Reviewed by Marc Chandler
on
April 28, 2022
Rating:
