by Marc Chandler
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Overview: With many financial centers, especially in Europe, closed for the long holiday weekend, risk-appetites remain in check. Most Asia Pacific markets fell, and poor earnings from Infosys and Tata Consultancy, saw India pace the decline with a 2% drop. US futures are also trading with a heavier bias. Interest rates remain firm. The US 2- and 10-year yields are up a couple of basis points to 2.47% and 2.85% respectively. China’s GDP inexplicable rose though March details were poor and the yield on the Chinese 10-year bond rose almost 3 bp to 2.80%. The dollar rises high. Despite more official expressions of concern by Japanese officials over the pace of the move, the dollar is rising for the 12th consecutive session against the yen and has reached a new high of almost JPY126.80. The euro has been trading around a 20-pip range on either side of $1.08. The dollar bloc and sterling are the weakest. Emerging market currencies are also mostly lower. Gold is up about $14 and is closing in on the $2000-mark, which has not been seen since March 10. June WTI extended its three-day rally to $108 but has returned to the $106 area in quiet turnover. It rose almost 9% last week. Iron ore fell 2.4% today, giving back last week’s gains in full. Copper is firmer, extending its advance for the fourth consecutive session. US natural gas prices are up more than 3%. It is the fifth session of higher prices and last week’s 16.3% advance was the fifth consecutive weekly gain. July wheat prices are trading around 2% higher. It rose 4.4% last week.
Asia Pacific
China reported that Q1 GDP rose twice as fast the economists expected (median in Bloomberg’s survey) with a 1.3% quarter-over-quarter expansion. The year-over-year rate increased to 4.8% from 4.0%. However, the details do not jive. Investment rose but production of steel and cement fell by 10%. Industrial output rose 5.0% year-over-year. in March. Economists expected a 4% increase. Real estate sales fell 29% year-over-year in March, while the 100 largest property developers reported a 50% decline. Still, the takeaway is that March was poor, and April will likely be weaker still. Retail sales fell 3.5% year-over-year in March. The median forecast was for a 3% fall. Joblessness rose to 5.8% from 5.5%. It was expected to be unchanged.
Japanese officials appear to have stepped up their rhetoric about the yen, but the focus is still on the pace of the move. This takes some of the sting away from the jawboning. BOJ Governor Kuroda has slowly ratcheted up his remarks, telling the Diet today that the recent yen moves have been rapid. Finance Minister Suzuki said excessive and disorderly moves have negative impact. Still, if officials want to stem the tide, they need to climb the next rung of the escalation ladder, which would seem to be an acknowledgement that the level that has been reached is problematic. However, with the divergence of monetary policy and low inflation (deflation, if fresh food and energy are excluded), it is difficult to make a compelling case that the yen’s weakness does not reflect fundamentals.
South Korea will formally apply to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership before President Moon Jae-in’s term ends early next month. Since last year, South Korea has been moving in this direction but made the formal announcement before the weekend. The incoming government (President Yoon Suk-yeol) apparently supports the accession process, which could take a year or more. The ostensible goal is to diversify exports, but a state-run economic institute forecasts that joining the CPTPP would boost GDP by around 0.33%.
The dollar’s is pushing higher against the yen for the 12th consecutive session. It rose 1.7% last week, its sixth weekly gain in a row. It remains below the upper Bollinger Band (two standard deviations from the 20-day moving average), which is found near JPY127.15 today. Support is seen in the JPY126.00-JPY126.25 area. The JPY130-level is the next target continues to draw attention. After probing the $0.7400 area repeatedly last week, the Australian dollar settled below it last week and has continued to fall today. It found support near $0.7350, the (61.8%) correction objective of the rally from the March 15 low (~$0.7165). Initial resistance is seen in the $0.7380-$0.7400 area. The US dollar softened a little against the Chinese yuan but remains within the range set last Thursday (~CNY6.3625-CNY6.3800). As we have noted, the PBOC’s use of the fix to send signals appears to have waned. Again today, the dollar’s reference rate was set weaker than bank models suggested. Today, the PBOC’s fix was at CNY6.3763. The median in Bloomberg’s survey was CNY6.3779.
Europe
In addition to the energy, foodstuffs, and fertilizer that Russia produces, it is also a significant gold miner. It produces around 340 tons a year, worth around $20.5 bln. The sanctions are hitting the gold producers, and to help blunt the impact, the Russian central bank offered to resume its gold purchases that had been suspended in 2020. On March 25, it offered to pay RUB5000 for a gram of gold. If the dollar is around RUB82, its offer is about $1700 an ounce. Some observers may have mistakenly thought that this was Putin pegging the rouble to gold. It was no such thing. It was about aiding the gold producers, not hardening the rouble. Moreover, its commitment to buy gold at a fixed price until the end of June lasted around two weeks. According to press reports, Russia has apparently been buying gold at market/negotiated price since April 8. The rouble’s appreciation in recent weeks reflects, in part, the positive terms-of-trade shock (the rising price of its exports while sanctions have reduced imports). However, the critical driver is a key capital control: businesses must convert 80% of their hard currency earnings within three days, which is understood to be around $1 bln a day. This is too much for the domestic market to absorb, hence the apparent appreciation of the rouble.
There is a game of chicken afoot. In effect, Putin said that Europe pays for its gas with euros but has imposed sanctions on its use of the euros. Gas, after March 31, would be paid for in roubles, he declared. Europe objected because it violated existing contracts. Not to worry, Russia explained that Gazprombank, which is still on the SWIFT system, would take the euros and convert them for European customers, who would have both rouble and euro accounts. Many Europeans are balking. EU lawyers claim that abiding by Putin’s scheme violates the sanctions. The issue may come to a head soon. Payments for the gas shipped since April 1 will begin being due shortly. Obviously, Europe is not ready to stop buying Russian gas. They have not agreed to ban Russian oil or coal, for which the dependency is less. There does not appear to be any economic advantage of the proposed arrangement. Rather, it seems like politics, causing an adversary to be uncomfortable.
The weekend press reported that UK Prime Minister Johnson was the host and poured drinks for colleagues at one of the staff parties during Covid. Reports at the end of last week suggested he will face another fine. Johnson is expected to issue yet another apology as early as tomorrow before Parliament. Meanwhile, the Tory’s performance at next month’s local election in England and Wales may tip his political fortunes. A YouGov polls found nearly 2/3 want Johnson to resign if there are more fines.
The euro briefly slipped through $1.0760 last week in the immediate reaction to the ECB’s steady hand. Since then, the euro has not spent much time above $1.0820. It is continuing to absorb bids below $1.08. Today’s low was slightly below $1.0785 in light dealings. The euro is off for the third consecutive session, and so far this month, it has enjoyed only two advancing sessions. That said, despite intraday penetration, it has not settled below $1.08 since May 2020. Sterling posted a key upside reversal in the middle of last week, but the follow-through buying quickly exhausted itself (around $1.3150). It is back near $1.30 today. Like $1.08 in the euro, the $1.30 support for sterling has been frayed on intraday but not on a closing basis. We target the $1.2830 area in sterling and the $1.06 area for the euro.
America
The US reported a mixed batch of data last week. The headline CPI was a touch higher than expected (8.5% vs. 8.4%) but the core rate was slightly softer than anticipated. Many economists suspect that US CPI may be peaking even if it proves sticky. Producer prices were stronger than expected. We already knew that auto sales disappointed, but retail sales excluding autos, rose 1.1%, a little better than expected. Yet the core measure, which excludes autos, gasoline, building materials, and food services expectedly fell (0.1%) for the second consecutive month. The rise in gasoline prices is sapping discretionary spending. Ahead of the weekend, the US data surprised on the upside. February business inventories rose 1.5% (1.3% expected) and the January series was revised higher (1.3% vs. 1.1%). The April Empire State manufacturing survey jumped to 24.6 from -11.8 (1.0% expected). March industrial output rose by 0.9%, twice the gain expected, and February’s 0.5% increase was revised to 0.9%. This means that Q1 industrial production increased by a little more than 8% at an annualized rate, the strongest quarter since Q4 20. The capacity utilization rate stood at 78.3% last month, the highest since 2007. Lastly, defying expectations, the University of Michigan’s preliminary April consumer confidence survey increased while the inflation outlook was steady.
It is a quieter week for US data. March housing starts and existing home sales may begin seeing the impact of higher interest rates. The Fed’s Beige Book for next month’s meeting is due in the middle of the week. Several Fed officials are scheduled to speak this week, beginning with Bullard late today. The highlight may be on Thursday when Fed Chair Powell shares the IMF stage with the ECB’s Lagarde on a panel about the global economy. At the end of the week, the flash April PMI will be released, and a mixed report is expected (softer manufacturing and an uptick in services).
Canada’s highlights include March CPI, which is expected to have accelerated, and February retail sales, which likely fell. The Bank of Canada does not meet again until June 1 and the swaps market has 48 bp of tightening discounted. Mexico’s data diary is light this week, and the most important release, the bi-weekly CPI reading through mid-April is due at the end of the week. Economists (Bloomberg survey) expect the headline to soften a little while the core rate ticks above 7%. Late yesterday, the Mexican Congress defeated AMLO’s controversial initiative that would have expanded the state’s control of the electricity market. It did win a simple majority but was well shy of the 2/3 majority needed. AMLO is not deterred and will open new a front as early as today with a bill to exert more state control over lithium. His resource nationalism estranges investors
Weak stocks and defensive attitudes weigh on the Canadian dollar. The greenback is at three-day highs near CAD1.2640. Last week’s high was closer to CAD1.2675 and a retracement objective is around CAD1.2700. Initial support today is pegged by CAD1.2620. The Mexican peso appreciated 3% last month, but its strong run has morphed into a consolidative phase. The greenback appears have entered a MXN19.72-MXN20.20 range. It is straddling the MXN20.00 area today, where a $525 mln option is set to expire. A close above MXN20.00 would the first since April 11.
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