Overview: China and Hong Kong re-opened after the
Friday holiday and equities rallied strongly. Japan, Taiwan, and South Korea
advanced as well. However, India and Australia equities fell. Europe’s Stoxx 600
is up around 0.9% to recoup its pre-weekend loss and more. US futures are broadly
higher. Benchmark 10-year yields are mostly firmer. The US 10-year yield is up
about three basis points to 2.96%. European core yields are firmer but the yields
in the periphery are lagging amid speculation that the ECB will announce a new
facility to support them if needed. The 10-year UK Gilt yield is up nearly five
basis points to 2.20%, a new three-month high. The dollar is trading lower against
all the major currencies. Sterling is the strongest with almost a 0.6% gain. The
yen and Swiss franc are the weakest, rising about 0.1%. Emerging market currencies
are also mostly higher today. The main exceptions are a few Asian currencies
and the Turkish lira. Turning to commodities, gold steadied after the
pre-weekend reversal. It found support a little below $1850. July WTI reached
almost $121 for easing back below $120. US natgas has jumped 4.3% today and
Europe’s benchmark is up marginally. With China re-opening, iron ore prices extended
their three-day rally into today with a 1% gain. It is trading at its best level
in a month. Copper extended its reversal. At the end of last week, it reached 457.70
before reversing to close a little below 446.00. It fell to 440.60 today before
stabilizing. July wheat has rallied 4.7% today after falling 10% last week.
Asia Pacific
China's May services Caixin
PMI rose to 41.4 from 36.2, disappointing expectations for a larger rise. The composite rose for the first time this
year (from 37.2 to 42.2). With the lockdown lifted in Shanghai and restrictions
easing in Beijing (public transportation resume today), and the investigation
into Didi completed (mobile app may appear in store again later this week), the
world's second-largest economy appears to have turned the corner.
While BOJ Governor Kuroda
has persuasively argued that the rise in Japan's CPI, with the core reaching
the target will not spur a change in monetary policy, fiscal policy in play. Prime Minister Kishida offers a "new
form of capitalism." It seems like it is the traditional
LDP-economics of easy monetary and fiscal policies with an emphasis on greater
economic equality. To be sure this is not a warmed-over socialism. Kishida
thinks it can be done through growth efforts, including mid-career educations
(retraining and acquisition of new skills). At the same time, he wants to
promote an equity culture and is working on efforts to encourage households to
participate in the returns to capital. Household financial assets were
estimated to be worth around JPY2 quadrillion at the end of last year, or about
$15.5 trillion. Over half is invested in low yielding savings accounts. Last
year's supplemental budget had a commitment to record a primary budget surplus
(excludes debt servicing costs) by the end of the fiscal year ending in March
2026. This year budget dropped the reference. Still, there is no sign that
Japan's fiscal stance is an important market consideration. The 30-year bond
yield is slightly above 1%. It set a six-year high in late March near 1.10%. Japan's
10-year breakeven poked above 1.0% in early May for the first time in seven
years. It rose 11 basis points last week, the first increase in four weeks.
The RBA meets first
thing tomorrow in Canberra. The swaps market has almost 30 bp of tightening discounted. Economists,
in Bloomberg's latest survey, look for a bit more, 40 bp. Since the end of
April, the Australian dollar appreciated by about two cents, but the
speculators in the futures market have boosted their net short position to
almost 48.7k contracts (each contract is for A$100k) five weeks in a row
through last Tuesday (May 31) and for a cumulative 20k contracts during the run.
As we noted in the weekly
commentary on prices, the Australian dollar's bounce faltered after
retracing a little more than half of the decline from April's high (~$0.7660)
to the mid-May low (~$0.6830). Australia's new Treasurer, Chalmers, warned that
he may revise sharply higher this year's inflation forecast next week, and
plans on publishing a new budget in early Q4.
The dollar held JPY131 and
is consolidating in about a half a yen below there. Support is seen in the JPY130.40 area,
which has been the low since the better-than-expected US jobs data before the
weekend. The greenback may be bolstered if the 10-year yield resurfaces above
3%. After reversing lower after the US jobs data, the Australian dollar fell
further today to a slightly below $0.7190 before finding a solid bid. Its
recovery began in the middle of the Asia Pacific sessions and carrying into
the European morning, where it approached $0.7230. Recall, the pre-weekend high
was near $0.7285. China's mainland markets were closed last Friday, and the
offshore yuan was virtually unchanged. The dollar gapped lower today and
fell to CNY6.6415, its lowest level in a month. A small gap remains
(~CNY6.6568-CNY6.6595). The PBOC set the dollar's reference rate at CNY6.6691
compared to the median (Bloomberg) projection of CNY6.6708.
Europe
The euro bottomed against
the dollar on May 13 (~$1.0350). The same day, the swaps market slipped to price in 60 bp of ECB
rate increases through October. It has been trending higher and rose 13 bp last
week to a little more than 100 bp. A similar force has seen the US two-year
premium over Germany narrow by 50 bp over the past two months to approach 200
bp. To put this in some context, consider that the US premium peaked in the
last cycle near 350 bp (November 2018) and around 220 bp at the end 2019. It
bottomed ahead of 75 bp during the acute phase of the pandemic. Speculators in
the futures market were long from early January through early May when the net
position switched briefly to favor the shorts. However, in the last four CFTC
reporting periods, the bulls stepped in and have been net buyers of euros for
the past four weeks. At almost 52.3k contracts (125k euros per contract) the
net long position is the largest in two-and-a-half months. The median forecast
in Bloomberg's survey shows a near-term flat view ($1.0705 in three months),
but a bullish outlook after. The median for year-end is $1.0850 and $1.1050 for
the middle of next year. The year-end forecast (median) is $1.1500.
Sterling is the strongest of
the major currencies today, nearly recouping in full the roughly 0.7%
pre-weekend decline. The
gains appear to come as Prime Minister Johnson is expected to win the vote of
confidence, which will take place later today. The vote of confidence requires
at least 54 MPs to call for Johnson's resignation, but it appears the Prime
Minister still enjoys the support of a majority of Tories in Parliament and the
leading contenders in the government, including Sunak and Truss say they
support Johnson. Surviving a vote of confidence today protects the PM from
another such vote for a year. However, recall that Johnson's predecessor May
survived a vote of confidence but resigned shortly after. Assuming Johnson
survives today, the next challenge is the June 23 two special elections to
replace two Tory officials that resigned amid separate sex scandals. Labour
looks set to re-take its traditional stronghold in Wakefield, while the
Lib-Dems may take the Tiverton and Honiton district from the Tories.
The euro is trading inside
the pre-weekend trading range (~$1.0705-$1.0765). The single currency is near the middle of
the $1.07-$1.08 range protects by expiring options of a little more than 1.4
bln euros each side today. The risk of a hawkish hold by the ECB later this
week may underpin the euro. Sterling's advance from the sub-$1.22 low in
mid-May ran out of steam last week near $1.2660. It fell back two cents and
has been confined to last Tuesday's range ($1.2460-$1.2655). The intraday
momentum got stretched as sterling approached $1.2580 in the European morning. The
consolidative tone looks likely to persist a bit long.
America
There are several reasons
why gasoline prices are high and the size of last year's stimulus or the easy
monetary policy are not among the major drivers. One factor that does not appear fully
appreciated is the loss of around 1 mln barrels a day in refining capacity. Some
was shuttered. Some was converted to biofuels. Another factor that has not
received much attention is the strong gasoline exports, the most in a few years.
Mexico's demand has been strong. Brazil and Argentine demand for distillates
have been robust as in the face domestic shortages. Europe is shipping gasoline
to the US East Coast, which may be cheaper than that from the Gulf due to the Jones
Act. OPEC+ agreed last week to boost output by 648k barrels a day next
month. It had problems fulfilling their previous quotas. An unscientific survey
found a range of 132k to 350k barrels a day are expected to be provided. It was
not seen as sufficient to ease the shortage with given the EU sanctions, the
re-opening of China, and the seasonal demand in the US. The potential game
changer is Iran. However, talks for the US to re-enter and for Iran to move
back in accordance stalled in March. Some have raised the possibility that the
US does not enforce the sanctions. However, the latest confrontation was late last month when the US confiscated Iranian oil on a Russian-operated ship near
Greece and Iran retaliated by seizing two Greek ships. News that Saudi Arabia
was boosting next month's premium for Asian customers $2.10 a barrel to $6.50
on top of its benchmark was more than expected and helped lift July WTI to a
new high of almost $121 a barrel today before pulling back toward $119.
The US jobs data did not
sway economic views. The
390k increase in nonfarm payrolls was a little stronger than expected,
especially after the ISM and ADP reports. It was the least number of jobs
created in a year and was consistent with other high-frequency data points
suggesting that the world's largest economy has lost momentum. However, the
report was seen as sufficiently strong to keep the Fed on course. In fact, the
implied yield of the December Fed funds rose every session last week for a cumulative
17 bp increase (to 2.70%). The Federal Reserve has committed to lifting the
target rate by 50 bp at the next two meetings. Although some officials have
been reluctant to venture what will happen at the September meeting, the market
has increased the chances of another 50 bp hike. The Fed's quiet period ahead
of the June 14-15 FOMC meeting has begun.
Today is a subdued start
to the week's data releases. Tomorrow sees the US trade balance and consumer
credit. The trade deficit
may be less of a drag on Q2 GDP than it was in Q1. American's have sustained
consumption partly by drawing down savings, using credit cards (record increase
in revolving credit in March) and monetizing the rise in house prices, through
equity withdrawal refinancing. The highlight of the week is the May CPI figures
on Friday. Little change is expected. Canada also reports trade figures
tomorrow, but the highlight is the employment report at the end of the week.
Employment is expected to rise by about 25k after a 15k increase in April. Mexico
reports May CPI on Thursday. The year-over-year pace may steady around 7.6% and
the core around 7.2%. Brazil's IPCA inflation measure is due the same day, and
it is expected to moderate. April retail sales will be reported the following
day and are expected to have edged higher. Chile has raised rates every other
month this year but after hiking by 125 bp last month, many expect it to move
again tomorrow. The overnight target rate stands at 8.25%. May CPI is due
Wednesday and is expected to have risen by 1.1% for an 11.4% year-over-year
rate (from 10.5%). Peru's central bank meets Thursday and is expected to hike
rates 50 bp for 10th consecutive meeting. The tightening cycle began last
August with a 25 bp move. The reference rate stands at 5.0% now with Lima
inflation running near 8%.
The US dollar settled last week on the session highs a little shy of CAD1.26. It briefly poked above there today before sliding back to almost CAD1.2555, just above the pre-weekend low (~CAD1.2550). Little technical support is seen ahead of CAD1.2500, where a $600 mln option expires today. The greenback looks more likely to return to the CAD1.2580-CAD1.2600 area. The Mexican peso is bid, and the US dollar is slipping through the low from the end of last week (~MXN19.50). The two-year low was set last Monday near MXN19.4135. Here too, the North American market may be more favorable disposed to the greenback. Initial resistance now is seen near MXN19.55.
Disclaimer
Reviewed by Marc Chandler
on
June 06, 2022
Rating:
