Overview: Federal Reserve Governor Brainard's
suggestion of a rapid unwind of the Fed's balance sheet stoked a bond
market sell-off that is continuing today, rippling through the capital markets.
The US 10-year yield is rising for the fourth consecutive session. The six-basis
point gain today puts the yield near 2.62%, which represents a little more than
a 25 bp increase since the jobs data on April 1. European benchmark
yields are 3-6 bp higher. Japan's 10-year yield is poking above 0.23% to
again challenge the BOJ's Yield Curve Control. Equity markets are taking
it on the chin. The major markets in the Asia Pacific region fell, led by
a 2%+ sell-off in Hong Kong. China's markets re-opened after a two-day
holiday, and although the Shanghai and Shenzhen markets posted minor gains, the
CSI 300 slipped by 0.3%. Europe's Stoxx 600 is off around 1.1% and US
futures are about 0.75% weaker. The dollar is mixed. The Swiss
franc, Norwegian krone, and Japanese yen are weaker. The Swedish krona,
sterling, and euro are posting small gains. Among the emerging market
complex, the South African rand leads the few currencies higher. Poland,
which is expected to lift rates 50-75 bp today has not prevented the zloty from softening.
The Hungarian forint and Indian rupee lead the decliners
today. Gold is edging higher within its consolidative range, after the
$1915 area held. May WTI is firm near $104, but within yesterday's range
(~$99.90-$105.60). US natgas is extending yesterday's 5.6% gain by another 2% today. It is up roughly 40% since mid-March. Europe's benchmark is
snapping a three-day 13% decline with a 2.75% gain today. Iron ore is off
around 1.3%, while copper is slipping lower for the first time this week.
May wheat is paring the two-day 6% rise.
Asia Pacific
China's mainland markets
re-opened after the two-day holiday. The news was poor. The Caixin
service and composite PMI were weaker than expected. The services PMI
slumped to 42.0 from 50.2. The
composite dropped to 43.9 from 50.1. In some ways, the news confirms what
the market already knew in broad strokes. The world's second-largest
economy is struggling mightily as the zero-Covid policy is disrupting
activity. The lockdown in Shanghai, for example, has been extended.
The economic disappointment will underscore expectations for additional policy
support.
New Zealand is placing a 35%
tariff on imports from Russia while extending its export prohibitions. Australia reports February trade
figures tomorrow. Weaker exports and stronger imports are projected to
translate into a smaller surplus. The new pact between the US, UK, and
Australia (AUKUS) is not just about the nuclear-powered submarines. It
was announced that they are also working on developing hypersonic
weapons. Meanwhile, a Quad (Australia, Japan, India, and the US) meeting
slated for next month may be delayed until after the Australian election.
This also means that US President Biden's first trip to Japan will also be
rescheduled.
Rising US yields have helped
lift the greenback to JPY124. The dollar's multiyear high set in late
March was almost JPY125.10. The market looks set to challenge it again and a marginal
new high is possible. Recent comments by the Minister of Finance and the
BOJ Governor show continued sharp depreciation of the yen is not
desirable. A month ago, the dollar was near JPY115. The
Australian dollar surged yesterday as the central bank appeared to signal the
likelihood of an earlier hike, but it is trading quietly today. The
Aussie is in around a 15-tick range on either side of $0.7575. Although
it reached $0.7660 yesterday, the $0.7600 area may offer a cap
today. China's mainland market re-opened today, and the dollar
initially jumped to a five-session high near CNY6.3765. It spent the local session drifting lower and is now near CNY6.3600, back within the April 1
range. The PBOC set the dollar's reference rate at CNY6.3799. The
median projection (Bloomberg survey) was CNY6.3791.
Europe
German factory orders slumped
2.2%. It was the
first decline in four months. The median forecast (Bloomberg) anticipated
a 0.3% decline. The January series was revised to 2.3% from 1.8%,
offering a small consolation. Domestic orders fell for the second
consecutive month, while foreign orders slid 3.3%. That said, foreign
orders have been alternating between gains and losses since at least last
August. A group of economic advisers to the German Chancellor cut this
year's growth forecast to 1.8% from 4.6%, while warning that a recession was
possible. Tomorrow, Germany is to report February industrial production
figures. The median forecast is for a 0.2% gain after the 2.7% surge in
January. The risks are on the downside. Note that yesterday, France
reported February industrial output fell by 0.9%, three-times the decline the
median forecast anticipated. The aggregate report is due next week.
Poland's central bank is
expected to deliver its seventh consecutive rate hike today. The reference rate stands at
3.5%. The median forecast is for a 50 bp hike, while the average forecast
leans toward a 75 bp move. Poland began the tightening cycle last October with
a 40 bp move. It was followed by 75 bp in November and then three 50 bp
moves before a 75 bp hike last month. Meanwhile, the EU has wasted no
time since Hungary's Orban handily won the weekend election to begin pressing
with the untested "conditionality mechanism" which can lead to the
denial of EU assistance (~40 bln euros) for violating core values.
Since posting a key downside
reversal last Thursday, the euro has been unable to sustain even modest
upticks. It
had been turned back from around $1.1185 and tested $1.0875 today, its lowest level
since March 8. The low was recorded in Asia, and early European dealing
squeezed it to about $1.0925 before it ran out of steam. The single
currency looks poised to re-test the $1.08 area seen on March 1. Sterling
posted an outside down day yesterday, trading on both sides of Monday's range
and then settling below Monday's low. Follow-through selling
pushed it briefly below $1.3050 before it too bounced in the European morning
to almost $1.3110. There may be scope for additional minor gains, but we
expect it to come off in the North American morning.
America
Many observers seem confused. They had the Fed's Brainard as a
dove. Yet her comments yesterday were as hawkish as they have come.
Reducing inflation was paramount. She seems to be part of the growing consensus
to hike 50 bp next month. It was her comments about the balance sheet
that may have done the most damage to stocks and bonds. She referred to a "rapid" pace. The previous exercise saw the unwind limited to
$50 bln a month and it took several months to ramp up to the limit.
Brainard appeared to confirm a more aggressive unwind that could begin as early
as next month. The 2-10-year yield curve steepened back to a positive
slope, but it is not because investors think that the balance sheet adjustment
will take some pressure off the need to raise interest rates.
On the contrary, the implied
yield on the December Fed funds futures contract rose to a new high and is now
implying 220 bp of hikes this year. Hawk and dove labels may be helpful for analytic
purposes, but they are always contextual. Bullard, the leading hawk now,
may not have gotten what he wants, hence the dissent at the March
meeting. However, the rest of the FOMC is converging to his broad
position. Consider that in March, there were only two dots above
2.38% for the Fed funds target at year-end. The December Fed funds
futures contract implies a year-end rate of 2.54%. Brainard did not steal
all of the thunder from the FOMC minutes. The market still wants to have a
better idea of the pace of the unwind. Anything more than around $100 bln
would surprise. The phase-in period likely begins next month and will
quickly ramp-up toward the caps.
The US dollar rebounded off
CAD1.24 yesterday and settled near the session high just below
CAD1.25. A
bullish hammer candlestick pattern was left in its wake. Follow-through
buying today has been minimal and the greenback tested CAD1.2510. It
looks like the move in early March near CAD1.29 has been completed.
A consolidative/corrective phase looks likely from a technical
perspective. Initial resistance is seen near CAD1.2550, we suspect a move
toward CAD1.2600 is likely. The 200-day moving average is around
CAD1.2620. The greenback's slide against the Mexican peso
appeared to have ended. The move began on March 9 after peaking
the day before near MXN21.4675. At the start of this week, it fell to
MXN19.7275. That move ended with aplomb yesterday and the greenback raced
above MXN20.00 for the first time since March 29. Momentum and trend-followers
are caught leaning the wrong way. A short-squeeze could lift the dollar
toward MXN20.14 and then, possibly MXN20.35-MXN20.40.
Disclaimer
Reviewed by Marc Chandler
on
April 06, 2022
Rating:
