EMU CPI Surges and the Market sees about a 75% chance of a 50 bp Fed hike next month before the Jobs Report

Overview: May WTI extended the retreat sparked by the US intention to draw down its strategic oil reserve by 180 mln barrels over the next six months, but US 10-year yield has jumped six basis points to 2.40%.  This leaves the benchmark yield off about six basis points for the week, ahead of the US employment report.  European 10-year yields are 2-5 bp higher on the day and pares this week's decline.  The 10-year Japanese government bond yield is ending the week near 0.21%, off about 3 bp.  European equities are firm and the Stoxx 600 is up about 1.0% this week.  US futures are higher ahead of the jobs report.  Among the large markets in the Asia Pacific region, only China and India posted gains.  Trading in almost 3 dozen HK companies were suspended due to missing a deadline for reporting results.  The US dollar is mostly higher, though the Scandis and Australian dollar are stronger.  Among emerging markets currencies, the South African rand and Philippine peso are the best performers.  Gold is inside yesterday's range, trading between $1930-$1940 today.  It is off about 1.3% this week.  May WTI extended its decline, falling to $97.80, its lowest since March 17 before recovering to probe the $100 area.   US natgas is softer after a two-day advance.  Still, it is up for the third consecutive week.  Europe's natgas benchmark is slightly firmer.  If sustained, it would be up a little more than 24% this week.  Iron ore edged higher to gain a little more than 4% this week.  Copper is off about 1.25%, which threatens to snap a four-day advance.  May wheat is paring this week's loss.  The 1.5% gain still leaves it off  7.3% this week. 

Asia Pacific

Japan's flash March manufacturing PMI was revised up to 54.1 from 53.2.  In February it was 52.7.  However, the Tankan Survey showed a deterioration of sentiment.  It was the first pullback among the large manufacturers since June 2020.  Sentiment among small companies worsened as well.  Most worrisome was weak capital expenditure plans. Across the industries, capex was projected to rise by 2.2%, half of what was anticipated by the median forecast in the Bloomberg survey and down sharply from the 9.3% increase seen in December. 

Australia, like Japan, saw the final manufacturing PMI revised up from the initial estimate. It rose to 57.7 from the flash reading of 57.3.  It was 57.0 in February.  The economy has started the year on solid footing and the central bank is likely to recognize this at next week's meeting.  The market has the first hike priced in for June and an aggressive 170 bp discounted for this year, which seems a bit exaggerated.  

China's Caixin manufacturing PMI was weaker than expected at 48.1.  It was expected to have slipped slightly through the 50 boom/bust level after 50.4 in February.  Recall the "official" measure fell to 49.5 from 50.2.  Note that the western part of Shanghai is shutdown today for the next few days for testing, while the eastern half re-opened.  Note that the manufacturing PMIs weakened throughout the emerging market economies in the region. 

If the JPY125 area marks the initial estimate of the upper end of the new range, the market has tentatively found the lower end a little above JPY121.30.  The greenback tested the first retracement target near JPY122.75.  Above there, the JPY123.20 may offer resistance.  The Australian dollar is firm, poking back above $0.7500, but it continues to consolidate.  The $0.7540-$0.7550 caps the upside and the lower $0.7460-$0.7470.  The US dollar rebounded by almost 1/3 of a percent today against the Chinese yuan, the largest advance in nearly three weeks.  But it was not enough, and without further gains, it will end a four-week advance.  The PBOC set the dollar's reference rate at CNY6.3509, while the median projection (Bloomberg survey) was CNY6.3496. A new range may be emerging--CNY6.34-CNY6.38.  

Europe

The eurozone's initial estimate of March CPI jumped to 7.5% from 5.8% in February.  After the firmer national readings out earlier this week, the upside risks materialized.  The median forecast in Bloomberg's survey projected a 6.7% year-over-year pace.  The monthly increase was s stunning 2.5% after 0.9% rise in February.  The rise is due primarily to food and energy, whose link to monetary policy is tenuous at best.  The core rate rose to 3.0% from 2.7%.  The median forecast was for 3.1%. 

There has been a further slowing in the eurozone manufacturing since the preliminary March PMI was released a week ago.  The German final reading fell to 56.9 from 57.6.  It was at 58.4 in February and 57.4 at the end of last year.  This is the lowest reading since September 2020. France's manufacturing PMI is at 54.7, slightly lower than the flash reading of 54.8, and down from February's 57.2.  It is the lowest since last October.  Economists had expected some weakness in Italy and Spain, but it was more than anticipated.  Italy's manufacturing PMI fell to 55.8 from 58.3.  The median forecast (Bloomberg survey) was for 57.0.  Spain's manufacturing PMI was to ease to 55.7 from 56.9, but instead it fell to 54.2.  The net result is the that the aggregate manufacturing PMI stands at 56.5, off from the 57.0 preliminary estimate, and 58.2 in February.  It is the lowest since last January.  To be sure, it is not recessionary, but it is slowing.  Next week, the final service and composite readings will be reported.  

The UK's final March manufacturing PMI slipped to 55.2 from 55.5, the preliminary estimate.  It stood at 58.0 in February.  It is the lowest since February 2021.  When the final service PMI is reported next week, the risk is that it too has deteriorated further since the flash estimate.  Recall that last month, the BOE tempered its forward guidance due to the heightened uncertainty.  To be sure, the swaps market continues to price in a 25 bp hike at the next BOE meeting in May, but the probability of a 50 bp move has been downgraded to about 20%, about half of where it stood a week ago.  

The euro posted a key reversal yesterday by making a new high for the move (~$1.1185) before falling and closing below the previous day's low.  There has been a little follow-through selling today to a little below $1.1045. A break of $1.1040 could signal a test of the $1.10 area ahead of the weekend.  Sterling is trading inside yesterday's range, which was inside Tuesday's range (~$1.3085-$1.3185).  It has risen by about 1.1% over the past two weeks and is giving back nearly half this week.   Lastly, recall that Hungary holds elections Sunday.  Prime Minister Orban is expected to prevail though the opposition has united behind a single candidate.  A victory for Orban will likely sharpen the confrontation with Hungary. Counting this week’s roughly 1.4% gain, the forint has risen for four consecutive weeks against the euro as the initial losses spurred by the Russian invasion of Ukraine are unwound with the help of the aggressive tightening by the Hungarian central bank.  

America

The US monthly jobs report is center stage today.  The market expects another strong rise in nonfarm payrolls even if matching last month's 678k increase.  The median forecast in Bloomberg's survey has crept up to 490k, which would still be consistent with the Fed's assessment of a robust labor market, which Fed Chair Powell has suggested may be too strong.  The unemployment rate is expected to slip to 3.7% while the year-over-year pace of hourly earnings is expected to have accelerated.  The Fed funds futures market sees a 77% chance that the Fed raises the target rate by 50 bp at its next meeting in early May.  Meanwhile, the preliminary manufacturing PMI is expected to be revised higher to 58.5 from 57.3, in contrast to the eurozone and UK.  The ISM manufacturing index is expected to concur and report an increase in prices paid.  New orders, however, may be softer.  The US is also expected to report another strong rise in construction (1.0% in February after a 1.3% gain in January).  Auto sales may be an exception to the string of favorable economic reports.  The median forecast (Bloomberg survey) sees auto sales slumped to 13.4 mln unit pace from 14.07 in February.  In March 2021, the US sold 17.75 mln vehicles at a seasonally adjusted annual pace.  

Canada and Mexico's PMI do not draw much attention.  The Bank of Canada meets on April 13, and the market is split on whether a 25 or 50 bp hike is delivered.  In addition to the PMI, Mexico also sees its IMEF surveys and softer results are expected.  Still, what has captured market attention is the worker remittances report.  February remittances are expected to have slowed (to ~$3.9 bln).  It would be the second consecutive decline, but it is not unusual to see some softness in the beginning of the year.  Last year's monthly average was sharp $4.3 bln.  This compares with an average of $3.3 bln in 2020 and $3.0 in 2019 and $2.8 bln in 2018.  

The US dollar is softer against the Canadian dollar, but within yesterday's range (~CAD1.2465-CAD1.2535).  The week's low, which is also the year's low was set on Wednesday near CAD1.2430.  While this area may be re-visited, the momentum indicators are stretched and look poised to turn higher.  A move above CAD1.2535 could signal a test on CAD1.2600.  Meanwhile, the greenback is stuck in its trough against the Mexican peso below MXN19.85.  It has not been this low since last July and the next area of chart support is near MXN19.80. Last year's low was closer to MXN19.50.  It has not traded above MXN20.00 since Tuesday.  Without a strong US dollar recovery today, it will be the fourth consecutive weekly decline against the peso.  As one would expect, the momentum indicators are getting stretched.  

Disclaimer