Yields Continue to Climb

Overview: Macron's victory in the first round of the French presidential contest lifted the euro, which is resilient to the broader greenback gains scored on the back of the continued rise in yields.  The US 10-year yield is up around five basis points to 2.75% after increasing by more than 30 bp last week. European yields are higher, but the euro-sensitive Germany-Italy spread has narrowed by almost seven basis points.  Japan's benchmark is nearing the 0.25% cap and China's premium briefly switched to a discount for the first time since 2010.  The dollar rose to new highs against the yen, reaching almost JPY125.45.  Central European currencies are being pulled higher by the euro, but most emerging market currencies are weaker.  Equities are heavy.  In the Asia Pacific, the Hang Seng and China's CSI 300 is off 3% in a sea of red.  Australia was a notable exception, eking out a small gain for the second consecutive session.  Europe's Stoxx 600 is giving back half of last week's 0.6% gain, while US futures are softer.  The rising yields have not sapped gold, which is knocking on $1960.  Concerns about weakening Chinese demand as it struggled to get the pandemic under control are keeping oil on the defensive.  May WTI is off 2.5% near $95.75  It remains in the range set last Thursday roughly $94-$99.  OPEC and the IEA update their forecasts tomorrow and Wednesday. US natgas is higher.  Last week, it gained nearly 9.8%, in its fourth weekly advance for a cumulative increase of about 33%.   European natgas benchmark is lower after falling 6.6% last week.  Iron ore is off for a fifth session.  It is down 2% after falling almost 4% last week.  May copper is paring last week's 1% gain.  July wheat is extending the pre-weekend gain of 3.2% and is at its highest level in around two and a half weeks.  

Asia Pacific

Shanghai's lockdown and economic disruption overshadows much of China's economic news.  Still, it reported a rise in March CPI to 1.5% from 0.9%.  A surge in the price of vegetables narrowed the drop in food prices to -1.5% from -3.9%.  Non-food prices rose by 2%.  Excluding food and energy prices, China's core CPI was steady at 1.1%.  China reported the fifth consecutive monthly slowing of PPI.  It eased to 8.3% from 8.8%, a little less than expected.  

Separately, China reported a surge in lending last month.  New yuan loans from the banks rose CNY3.13 trillion, well above expectations, and a multiple of the CNY1.23 trillion in February.  Aggregate financing, which includes shadow banking activity, jumped by CNY4.65 trillion from CNY1.19 trillion. This was about a third more than expected.  The three-month average of CNY4.0 trillion may be the largest on record.  Unlike in the US and Europe in the Great Financial Crisis, Chinese bank lending has continued, which is seen as a cushion for the economy.  

Before the weekend, India's central bank signaled a shift in priorities that could lead to a rate hike later this year. First, it dropped the reference to maintaining an accommodative stance. Second, it lifted the floor of its liquidity adjustment facility to the standing deposit facility of 3.75% rather than the reverse repo rate of 3.35%. Third, the RBI lifted its CPI forecast to 5.7% from 4.5%. It shaved its GDP forecast to a still robust 7.2% from 7.8%. India reports March CPI tomorrow. The median forecast in Bloomberg's survey calls for an acceleration to 6.35% from 6.07% in February.  Biden and Modi hold a video call today ahead of a high-level meeting later between the US Secretaries of State and Defense and their Indian counterparts.  India is part of the Quad and an important bulwark against the expansion of China.  However, it also has had longstanding military ties with Russia and has been cautioned about helping Russia evade the sanctions.  

The Bank of Japan reduced its assessment of eight of the nine economic regions in its quarterly report.  The virus and supply-chain bottlenecks are the main challenges. The sobering assessment will feed into the BOJ's quarterly economic outlook due at the end of the month.  The report is consistent with the need for a supplemental budget the government is pulling together, which is also due later this month.  The BOJ appears determined to continue to defend its 0.25% cap on the 10-year JGB.  

The dollar reached almost JPY125.45 in late Asian turnover.  The next chart point of note is the 2015 high near JPY125.85.  Although it traded above JPY125 last month, it did not manage to close above it.  The rising US yield is the key driver, and its gains suggest upward pressure may remain.  Australia has set its election for May 21 and shortly afterward the central bank is expected to begin its tightening cycle.  Still there is little reprieve for the Australian dollar, which has continued to bleed lower for the fourth consecutive session.  It is trading near three-week lows near $0.7430. It has now retraced roughly half of its gains since the March 15 low near $0.7165.  A break of the $0.7400 area could spur another half-cent loss.  The greenback is firm against the Chinese yuan for the third consecutive session.  The PBOC set the dollar's reference rate a little lower than the market (median in Bloomberg's survey) for also the third consecutive session CNY6.3645 vs. CNY6.3652).  China has fallen out of favor among global asset managers. 


Reports ahead of the weekend suggested that at least some at the ECB would like to have a new tool that would allow it to act against fragmentation of the eurozone debt market that may be caused by external shocks. A challenge is that it may need to be rules-based instead of discretionary to appeal to creditor countries (hawks). At the end of last year, as discussions about the Pandemic Emergency Purchase Program that was going to end in March, there was also an attempt to create a new precautionary tool. However, the hawks insisted on attaching conditionality to such an effort. In the end, the compromise struck was to introduce flexibility in the reinvesting of maturing bonds. 

The UK's February GDP disappointed with a 0.1% gain.  Industrial output unexpectedly fell by 0.6% and manufacturing was off 0.4%.  Poor weather appeared to be behind the disappointing 0.1% fall in construction, which economists had expected to have risen by 0.5%.  Services slowed as expected to 0.2% after rising 0.8% in January.  The trade deficit with the EU narrowed sharply but a change in methodology means that it may not be directly comparable with the January figures.  It is an important week for UK data.  Tomorrow sees the employment update and CPI and PPI are due Wednesday.  The swaps market is discounting a 25 bp hike at the May 5 and June 16 meetings and about another 90 bp in the second half of this year.  

UK Chancellor of the Exchequer, Sunak, was among the most popular politicians during the early days of the pandemic as he doled out support. There was speculation that he was the leading candidate to replace Johnson.  According to the latest YouGov polls, his support has been more than halved since last month's Spring Statement. Some attribute it to pressing forward with the National Health Service tax increase. However, today shows another dimension. The basic rate of unemployment benefits increased by 3.1% today, based on inflation in September. Since then, it has more than doubled and is likely to have accelerated further last month. March CPI will be reported on Wednesday.   News that Sunak's wife held non-domestic tax status, which meant no UK taxes were paid on overseas earnings does not appear illegal, and Sunak has requested a formal review.  However, it strikes many as unseemly even if legal.  

The euro initially gapped higher in Asia as the French election news spurred a quick short-covering rally that lifted the single currency to almost $1.0955.  The gap that extended to last Friday's high (slightly above $1.0890) was closed.  It found new bids on the pullback and is probing the $1.0920 area in the European morning.  While the intraday momentum indicators suggest it may not be likely, an extension of the euro's gains in North America would likely meet resistance around $1.0970. Sterling frayed the $1.30 support ahead of the weekend and dipped below it again today.  However, buyers emerged in late Asian activity carrying through the European morning.  Sterling has recovered to session highs near $1.3045.  Initial resistance is seen in around $1.3060.    


It might not seem like it, but Covid is rising in 21 states, and hospitalization rates are rising in 11 states. The war in Ukraine, inflation and Fed policy seem to eclipse the virus. Some polls show that immigration is also weighing on Biden's support in addition to inflation. About two-thirds of Americans blame Putin and oil companies for the increase in gasoline prices. Meanwhile, one of the most outspoken critics of the Biden Administration and the Federal Reserve, former Treasury Secretary Summers, argues that the US has not been able to avoid a recession when inflation gets above 4% and unemployment below 4%.  

This is a big week for US data, but it begins quietly today.  The main feature is the Fed-speak (Bostic, Bowman, and Evans).  However, participants recognize a consensus has formed in favor a 50 bp hike next month and a campaign to lift the funds rate toward neutrality.  It is also expected to let the balance sheet unwind beginning next month.  The Fed speeches and the high-frequency data may pose headline risk but is unlikely to alter the underlying view.  Tomorrow sees the March CPI, which is expected to have accelerated toward 8.4% from 7.9%.  The core is expected to poke above 6.5%.  Some economists expect it to peak shortly, partly due to the base effect.  In Q2 21, US CPI jumped 2.2% cumulatively over the three months. It repeated this in Q4 after a 1.2% cumulative rise in Q3.  However, the elevated level and the tight labor market means that the Fed will not be distracted.  

The Reserve Bank of New Zealand will likely hike rates a few hours before the Bank of Canada does on Wednesday.  The swaps market has a little less than a 65% chance of a 50 bp move by the RBNZ. However, the market is more confident that the Bank of Canada hikes by 50 bp.  In fact, the swaps market has 66 bp of tightening discounted.  That would seem to imply a split market between a 50 bp and 75 bp move.  We think that is a bit exaggerated, especially given that the Bank of Canada is also expected to announce its balance sheet reduction strategy.  It also suggests that even if the Bank of Canada hikes by 50 bp, it might not be enough to spur a strong Canadian dollar recovery.  The swaps market currently shows the terminal rate for both the US and Canada is a little more than 3%.  

The US dollar settled near session lows before the weekend on the back of another strong Canadian jobs report.  However, the broadly stronger US dollar, helped it hold the pre-weekend low (~CAD1.2565) and test the CAD1.2620 area that capped last week's gains.  The market may be reluctant to extend short CAD positions ahead of the central bank meeting.  We see scope for the greenback to retest the lows and maybe a bit more in the North American session today.  The US dollar ran into offers since the middle of last week around MXN20.19.  We see potential to around MXN19.96 today.  It has not traded below MXN20.00 since last Wednesday.  It reports February industrial output figures today.  A small gain is expected.  AMLO's referendum on his tenure was seen more as a political stunt than a real threat to his remaining three years.  The turnover was low (less than 20%) and appears to have little significance, though it could boost the attention to the regional elections in early June. 


Yields Continue to Climb Yields Continue to Climb Reviewed by Marc Chandler on April 11, 2022 Rating: 5
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