Overview: Equity markets are mostly weaker, and
benchmark 10-year yields are a little softer. The foreign exchange market is subdued
ahead of today’s US CPI. The large bourses in Asia Pacific region with the
exception of India worked lower and Europe’s Stoxx 600 is off for the second consecutive
session. US futures have a heavier bias. Yesterday the US bank share indices
filled the gap created at the end of last week but recovered. Today’s price
action will be important from a technical perspective. Benchmark 10-year yields
in the US and Europe are mostly around two basis points lower, which leaves the
10-year Treasury yield near 3.50%.
The dollar has been confined to narrow ranges against the G10 currencies. The derivatives markets have begun pricing in a small chance of a hike (~15%). Leaving aside the Norwegian krone, the greenback is +/- 0.1% against the major currencies. Emerging market currencies are mixed, but we note that the Mexican peso has made a marginal new six-year high. Gold is trading quietly in about a $6 range on either side of $2032 as in consolidates. June WTI stalled after reaching nearly $73.80 yesterday. It is near $72.45 as it too consolidates its recovery from last week’s low near $63.65.
Asia Pacific
The rapprochement between
Japan and South Korea may be among the most important diplomatic developments
this year. This is seems to
be one of the unforeseen indirect consequences of Russia's invasion of Ukraine,
heightened sensitivity to similarities with Taiwan. Beijing may be its own
worst enemy here too, as its bullying in the region is forcing new alliances.
This is the same strategic error the US is accused of by fostering a stronger
alliance among its adversaries (China and Russia). Henry Kissinger recently
opined that Russia-Ukraine war is entering a new phase. He expected
"actual negotiations" to begin later this year, with China's
help.
Russia invaded Georgia in
2008, and outside of some sanctions and chin-wagging, little changed. Russia took Crimea in 2014, and
again some sanctions and chin-wagging but little changed. Putin went to the
"cookie jar" a third time in 2022 and this time it produced a
reaction that likely surprised western leaders as much as Putin. With money,
aid, and intelligence, the US turned it into a proxy war, of sorts. Although
Ukraine was part of the Soviet Union, it is now claimed that the future of
western democracy depends on Ukraine's territorial integrity. China sees this
as a potential trap for the west, in general and the US in particular. The harm
done to China's strategic interests by Russia's invasion of Ukraine cannot be
undone, but Beijing can try to secure advantage elsewhere and it is not clear
that keeping the west heavily invested in the war in Ukraine does not serve it
purposes. Moreover, Ukraine-fatigue seems to be setting and there is serious
risk that the US election next year, for example, could result in less money
and aid for Ukraine. To China, this may be a preferable outcome than a
negotiated settlement.
The dollar continues to be
mired in a narrow range against the Japanese yen. Ahead of the US CPI, the greenback
is in less than a half of a yen range below JPY135.50. It did make a marginal
new five-day high slightly below JPY135.50 today. It is the fourth consecutive
session of higher lows, and so far, it is holding above JPY135.00, which if
sustained would be the first time in two months. Below there, nearby support is
seen in the JPY134.60-70 area. Australia's budget was in line with previous
press reports and the Australian dollar seemed unaffected. It was turned
back from the upper end of its three-month trading range near $0.6800 on Monday
and is hovering near yesterday's low slightly below $0.6750. Support may be
around Monday's low (~$0.6725) and then $0.6700, the middle of the well-worn
range. The greenback ground slightly higher against the Chinese yuan to
trade above CNY6.93 for the first time since last April. It is holding
above CNY6.92 for the first time in two months. The PBOC set the dollar's
reference rate at CNY6.9299, tight to the median in Bloomberg's survey of
CNY6.9296.
Europe
The European economic
calendar is light, and the focus is on tomorrow's Bank of England meeting. The market has little doubt that the BOE
will deliver another rate hike and lift the base rate to 4.50%. The swaps
market sees the terminal rate between 4.75% and 5.0%, with a bias toward the
latter. The Bank of England was among the first to raise rates in this cycle,
with a small hike delivered in December 2021. Ahead of this week's meeting, it
has hiked by a cumulative 415 bp. Yet, its inflation remains stubbornly high.
Headline CPI peaked in October at 11.1%, but through March it has remained
above 10%. Still, a sharp fall is expected when the April figures are reported
on May 24, as the April 2022 2.4% surge drops out of the year-over-year
comparison.
There has been further
confirmation that Italy will exit China's Belt Road Initiative. It is the only G7 and NATO member to have
joined, and apparently sidelined in some diplomatic circles since joining.
Prime Minister Meloni reportedly told US House of Representative Speaker
McCarthy that is the government's leaning ahead of a formal decision expected
before the end of the month. Under former Prime Minister Conte, Italy joined
the BRI in 2019. In the absence of a formal decision to leave, Italy's
membership in the BRI would automatically be renewed next year. Of course, the
US is pressing Italy to break from the BRI, but Rome has its own pressures too.
A decision is also expected about Sinochem, which is the largest shareholder of
Pirelli, Italy's large tire company, with a 37% stake. Last month, Pirelli
announced it was postponing its annual shareholder meeting until late June due
to Rome's review of governance agreement with Sinochem.
The euro settled below its
20-day moving average yesterday for the first time since March 16. Even though there has not been
follow-through euro selling today, and the $1.0940 level is holding, the
five-day moving average (~$1.0990) is slipping through the 20-day moving
average (~$1.0997) for the first time since March 14. A break of $1.0940 signal
a test on the $1.0875-$1.0900 area. That said, the intraday momentum is stretched,
and initial resistance may be encountered near $1.0980. Note that tomorrow,
options for 1.1 bln euros at $1.0925 expire. Sterling is trading in
about a third-of-a-cent range today below $1.2645 and is hovering around little
changed levels. It may continue to consolidate ahead of tomorrow BOE
meeting. The underlying tone remains firm without the moving average violations
and turns seen in the euro. Lastly, Poland's central bank is expected to remain
on hold with its key rate at 6.75% today.
America
Even though the debt ceiling
and the elevated concerns about US regional banks continues to hang over the
market, attention today turns to the April CPI. The year-over-year pace of inflation is
moderating, and there is scope for further declines in here in the first half. In
fact, by the end June, US year-over-year headline CPI could slip below 4% and
the core rate could be below 5%. However, there are two problems on the horizon.
First, a good part of the decline reflects the base effect, as last year's high
numbers drop out of the 12-month comparison. That comparison is more difficult
in the second half of the year. It is when CPI may prove stickier even if
updated shelter costs are included. Second, assuming that the median forecasts
for today's report are in line with expectations (0.4% headline and 0.3% core),
the annualized pace through the first four months of the year will be around
5.2% and 5.8%, respectively. This is a challenge for the Fed, which continues
push against expectations of rate cuts this year. The Fed funds futures imply a
year-end effective rate of about 4.37%. The effective rate hovers closer to the
lower end of the target rate (5.00%-5.25%) and has been averaging about 5.08%
since last week's hike. Recall that before the bank stress erupted the market
was leaning toward a 5.75% terminal rate.
The debt ceiling looms large.
While many see this as
another chapter in a familiar drama, some warning that the intransigence this
time is different. The extreme pricing in the T-bill market as being consistent
with a few days delay. The idea being bandied about by observers and investors
is that it will take some kind of shock to motivate the politicians to reach a
settlement. Short of a default, some observers suggest that a significant
decline in equities could help facilitate an agreement. Recall that in 2011,
the brinkmanship tactics were alone were sufficient to prompt S&P to cut
the US rating. House of Representatives Speaker McCarthy ruled out a short-term
extension, seemingly affirming through negation that it was being discussed,
but the White House denied it and insisted on a clean bill. Still, the basis
for an agreement is there: A clean debt ceiling lift and a separate
budget agreement (broad strokes) for the next fiscal year.
The greenback is trading
quietly in a CAD1.3370-CAD1.3400 range, just inside yesterday's range. It takes a break of the CAD1.3360 area to
signal a retest on this week's low near CAD1.3315. On the upside a move above
CAD1.3415 may signal a range extension toward CAD1.3450. Meanwhile, the US
dollar has slipped to a marginal new multi-year low against the Mexican peso
near MXN17.7350. The carry and low vol make it among the market favorites. Note
that the lower Bollinger Band is near MXN17.74. Mexico's April CPI was in line
with expectations and probably did not change anyone's mind about next week
Banxico meeting. Some look for a pause in the tightening cycle with the
overnight target rate at 11.25%.
Reviewed by Marc Chandler
on
May 10, 2023
Rating:
