Overview: A combination of a surprisingly strong
prices paid component to the US manufacturing PMI, corporate supply, and US
debt woes spurred an almost 15 bp spike in the US 10-year yield and 13 bp jump
in the two-year yield. The rise in US rates appeared to lend the dollar support.
The greenback's gains have been extended today, but a surprise hike by the
Reserve Bank of Australia is seeing the Australian dollar (and New Zealand
dollar) traded higher. Emerging market currencies are also mostly lower today,
central European currencies, led by the Polish zloty are posting small gains,
as its the South African rand.
Asia Pacific equities were
mostly firmer as most markets re-opened from yesterday's holiday. Tokyo was
narrowly mixed and the almost 1% loss in Australia are notable exceptions. Europe's
Stoxx 600 is ending a three-day rally with real estate and energy sectors the
hardest hit today. US futures little changed. European 10-year bond yields are
6-7 bp higher, while the US benchmark is about 3.5 bp lower near 3.53%. Gold
tried but failed to sustain a move above the $2000-level yesterday and settled
near $1982.50. It is trading quietly in around a $4 range around yesterday's
close. For the second consecutive session, June WTI is trading within last
Friday's broad range (~$74-$77). It struggled to rise above $76 today and is
testing the $75 area.
Asia Pacific
The Reserve Bank of
Australia surprised the market by hiking the overnight cash target rate by 25
bp to 3.85% after pausing last month. The slowing of Q1 CPI, including the underling measures dashed
whatever lingering speculation there may have been for a hike. However, the
central bank added a new phrase about achieving its inflation target in a
"reasonable timeframe." Governor Low warned of "some"
further tightening, and the markets responded accordingly. This spurred the
markets to price in the risk of another hike. As one would expect from the
surprise move and hawkish statement, the Australian dollar rallied and interest
rates jumped, while the ASX200 equity index fell by almost 1%.
Japan's markets will be
closed for the remainder of the week due to various holidays over the next
three sessions. The
apparent lack of urgency to adjust monetary policy by the new leadership of the
BOJ last week sent the 10-year yield a little through 0.40% yesterday from
almost 0.49% before the BOJ meeting. It edged a little higher today. Although
the 30-bond yield is not targeted, it has been capped around 1.40% since
mid-March. It held above 1.20% yesterday and has not traded below there since
mid-March. The BOJ meets next on June 16. Surveys suggest that despite the
endorsement of the current monetary policy setting by Governor Ueda, many still
expect the Yield Curve Control policy to be modified or eliminated as early as
next month.
The dollar pushed slightly
above JPY137.75 before sellers emerged to knock it back to JPY137.30. The sharp gains since the BOJ meeting have
the greenback above the upper Bollinger Band, set two standard deviations above
the 20-day moving average. It is found near JPY137.15 today. The
JPY136.75-JPY137.00 band offers support. The Australian dollar had
approached the year's low before the weekend, recording a low near $0.6575. It
recovered yesterday and today was briefly bid through $0.6715 on the back of
the surprise rate hike. Note that there are almost A$1 bln in options that
expire today between $0.6700 and $0.6705. It stalled at the (61.8%) retracement
of the decline from the high on April 14 when it last traded above $0.6800. The
200-day moving average is near $0.6735. Initial support is seen in the
$0.6670-$0.6680 area. The US dollar made a marginal new high against the
offshore yuan (~CNH6.9645), its best level since March 10, before succumbing to
selling pressure, which knocked it back to around CNH6.9465. The next
chart support may be near CNH6.94. Mainland markets re-open Thursday. When they
closed at the end of last week, the greenback settled at about CNH6.9270.
Europe
Inflation in the eurozone ticked
up in April to 7.0% from 6.9%. It is the first increase since last October. The month-over month
increase of 0.7% puts the annualized pace in the first four months of the year
at a little north of 6.6%. In the Jan-April period last year, the aggregate CPI
rose by more than 12.5% at an annualized pace. It serves to reinforce the
hawkish outlook the swaps market is discounting. Of the next four ECB meetings
through the end of Q3, the market sees three quarter-point hikes. Separately,
the ECB's bank lending survey showed that credit standards "tighten
further substantially" in Q1, and more than had been anticipated in the
previous survey. The swaps market also has nearly 75 bp hikes by the Bank of
England before the end of Q3. In contrast, the market is very sure of one Fed
hike (tomorrow) and has begun to take more seriously (~30% chance) of a June
hike.
The final manufacturing PMI
was reported earlier today. The aggregate reading for the euro area was raised to 45.8 from
the flash reading of 45.5, recouping a small part of the decline from 47.3 in
March, despite disappointingly weak readings from Spain and Italy. The last
time it was above 50 was June 2022. Germany's final reading of the
manufacturing PMI was 44.5, up from the initial 44.0 estimate (from 44.7 in
March). It has not been this low since May 2020. Recall that last week, it
reported that the economy stagnated in Q1 after contracting by 0.5% in Q4 22.
France's manufacturing PMI fell to 45.6, slightly less than the 45.5 initial
estimate (from 47.3 in March). It briefly popped above 50 in January after
spending the last four months of 2022 below it but returned to sub-50 levels
for the past three months. Turning to Spain, the manufacturing PMI had been
above 50 in February and March, after spending the preceding seven month below
it. It slipped back to 49.0 last month from 51.3 in March. Italy's
manufacturing PMI was consistently below 50 in H2 22 but spent Q1 above it. In
April, it collapsed to 46.8. This is the weakest since last October.
Separately, German retail sales slid 2.4% in March. The median forecast in
Bloomberg's survey was for a 0.4% gain. The sting was hardly softened by the
revision that took the February decline of 1.3% to only -0.3%.
The eurozone's aggregate March retail sales will be reported at the end of the
week, and they look softer than the 0.1% decline expected.
In the UK, Nationwide
reported that April house prices unexpectedly snapped a seven-month slide and
rose by 0.5%. Still,
the year-over-year rate fell for the third consecutive month (-2.7%). The
UK also saw its final April manufacturing PMI. It was improved to 47.8 from the
flash reading of 46.6. It was at 47.9 in March. It was last above 50 in July
2022. GDP for Q1 23 will be reported on May 11. The median forecast in
Bloomberg's monthly survey sees a 0.1% contraction. The risk seems to be on for
a small increase after the monthly GDP showed 0.4% growth in January and a flat
February.
The euro briefly traded
below its 20-day moving average yesterday for the first time since March 17
though it failed to close below it. Its losses have been extended to slightly below $1.0950
today. The 20-day moving average is found near $1.0970 today. There are
options for 1.22 bln euros at $1.0960 that expire today and another set at
$1.0940 that roll off Thursday. The technical tone appears to be weakening, but
the euro is still mired in a consolidative phase. It may need to fall below $1.09
to shake out some of the late longs. Sterling reached its highest level
since last June before the weekend (~$1.2585) and pulled back by a little more
than a cent yesterday. The losses were extended to about $1.2455 today,
which is where its 20-day moving average is found. The pre-weekend low was
slightly closer to $1.2445. A break could signal a test on last week's low
(~$1.2385). Resistance now is seen in the $1.2485-$1.2500 area.
America
There were two important
developments on the fiscal front yesterday. First, Treasury Secretary Yellen warned that federal
government could run out of cash and exhaust extraordinary measures as early as
June 1. After the latest tax revenue figures, some had pushed the X-date out
toward late July. Second, the US Treasury also surprised the market with a huge
jump in Q2 borrowing ($726 bln vs. expectations for around $600 bln). Of
course, it assumes that Congress will raise or suspend the debt cap, but it
also reflects the projection of less revenue and more spending by $117 bln. At
the same time, the market is pricing in slightly greater odds of a June hike. In
the middle of last week, the market saw practically no chance of a June move
and now it is slightly better than a 20% probability.
The US has a busy economic
diary ahead of tomorrow's FOMC meeting. The JOLTS report should show a further easing of the labor
market. Job openings are seen falling for the third consecutive month in March
and to their lowest level since April 2021. Factory orders, like durable goods
orders, was likely inflation by aircraft and defense orders. March durable
goods orders fell by 0.4% when defense and aircraft orders were excluded. April
auto sales will be reported throughout the day. The median forecast in
Bloomberg's survey has auto sales rising to 15.10 mln seasonally adjusted
annual rate from 14.82 in March. US vehicle sales average 15.15 mln a month in
the first quarter. They averaged 14.15 mln in Q1 22. A rise in auto sales may
also have a positive knock-on effect on retail sales, which fell by 0.6% in
March (-0.4% excluding autos).
Mexico reports IMEF survey
data and the manufacturing PMI. Mexico's economy surprised on the upside in Q1, growing 1.1%
(quarter-over-quarter) and was helped by record exports in March. Rather than
report a March trade deficit of $900 mln, like the median projection in
Bloomberg's survey anticipated, Mexico recorded a strong surplus of $1.17 bln.
In March 22, Mexico's trade surplus was almost $104.5 mln. Mexico also reports
March worker remittances today. This has become an important source of capital
inflows. It was worth about $58.5 bln in 2022 and $51.6 bln in 2021. In 2019,
worker remittances were almost $36.5 bln. If March's remittances come in as
expected (~$4.975 bln), it would bring the Q1 total to about $13.7 bln compared
with $12.5 bln in Q1 22.
The greenback initially
extended its pullback against the Canadian dollar, recording a five-day low
slightly below CAD1.3530 today. It posted a potential key reversal from almost CAD1.3670 before the
weekend. However, the broad gains in the US dollar have lifted it back to yesterday's high, a little above CAD1.3580. Nearby resistance is seen in the the CAD1.3600-15 area. The greenback came within a couple of hundredths of a
peso from the multi-year low set on March 9 near MXN17.8980. It caught a bid
and recovered to almost MXN17.97 in Europe. Additional gains run into
resistance near MXN18.00.
Reviewed by Marc Chandler
on
May 02, 2023
Rating:
