by Marc Chandler
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Overview: There are three themes today. First, the sharp decline in US rates seen yesterday (-14 bp on the two-year yield) on the back disappointing economic data seemed a bit exaggerated and the two-year yield has bounced back to almost 3.90% from around 3.81%. This appears to be helping the dollar consolidate today. Second, bank shares are coming under renewed pressure. The US KBW bank index fell almost 2% yesterday after a 0.5% decline on Monday. Today, the Topix bank share index fell 1.9%, snapping a three-day advance. The Stoxx 600 bank shares are off 0.9%, offsetting the gains of the past two sessions in full. Third, market participation is set to thin over the coming days. China and Hong Kong markets were closed today. The Easter holiday begins tomorrow and extends through Monday in many European centers.
Japanese shares fell but other large bourses in the Asia Pacific region advanced. Europe's Stoxx 600 is off for the third consecutive session and US futures are trading lower. European benchmark 10-year yields are 4-6 bp higher and the 10-year US Treasury yield has edged up a couple of basis points to 3.36%. The dollar is mostly firmer among the G10 currencies. The Swiss franc is an exception and is eking out a negligible gain. The New Zealand dollar rallied around 1% after the central bank surprised with a 50 bp hike but has nearly given it all back. The JP Morgan Emerging Market Currency Index is flat after drifting lower for the past three sessions. Gold rallied strongly yesterday, jumping to $2025 after testing $1950 on Monday. It reached $2028 earlier today. May WTI continues to consolidate after surging on the back of OPEC+ cuts announced over the weekend.
Asia Pacific
The Reserve Bank of New Zealand surprised with a 50 bp hike, lifting the cash rate to 5.25%. The swaps market anticipates one more hike in the cycle. The RBNZ has been hiking rates since October 2021. Australia began in May 2022. Through the end of last year, as New Zealand is one of the few high-income countries that does not report a monthly inflation figure, inflation has risen 7.2%. Australia's inflation was running a little hotter at 7.8% in Q4 22. Its newly minted monthly reading was 6.8% in February. For most of last month, the NXN1.08 area capped the Australian dollar. The March low was near NZD1.0665. It was sold below NZD1.06 today, a new low for the year. The next target is the lows set in December around NZN1.0470. Separately, Australia's March composite PMI stands at 48.5, better than the preliminary estimate of 48.2, but back below the 50 boom/bust level. February's pop back above 50 seems like a fluke. It spent Q4 22 and January below that boom/bust level and returned below it in March. In most high-income countries, expanding services output kept the composites above 50, but not in Australia as the service PMI is also below contracting (48.6).
Japan is a case in point. Its March manufacturing PMI stood at 49.2. It was the fifth consecutive month below 50. The services PMI reach a new post-Covid high in March of 55.0, up from the flash estimate of 54.2. The composite reading was revised to 52.9 from the preliminary estimate of 51.9. This is the highest since last June when the 2022 high was recorded at 53.0. Tomorrow, the Ministry of Finance reports weekly portfolio flow data that covers the last week of the fiscal year (ended March 31). In the first 12 weeks of the year, Japanese investors bought an average of almost JPY900 bln or ~$6.8 bln of foreign bonds per week. Last year, they sold an average of JPY418 bln a week. That means that Japanese investors have already replaced about half of the international bonds sold last year.
The US dollar slipped to a new low for the week against the Japanese yen around JPY131.25. It has steadied in the European morning as US rates edge higher. There are options for almost $1.2 bln at JPY131 that expire today. The greenback has not traded above JPY132.00 since yesterday's weaker-than-expected US data. The Australian dollar was turned backed from its approach toward $0.6800 Monday and Tuesday. It is now trading below $0.6700. Monday's low was around $0.6650 and that may be the next target. Some of the selling pressure may be option-related today. Options at $0.6700 and $0.6760 for A$560 mln and A$422 mln, respectively, expire today. The New Zealand dollar spiked to $0.6380 on the central bank's 50 bp, a little more than 1% from its opening level. However, it has given it all back. Support now is seen around $0.6300. Chinese and Hong Kong markets are closed today and the offshore yuan steady around CNH6.88.
Europe
The US and German curves (2-10 year) are still inverted, even if less than before the banking stress emerging. At -51 bp, the US 2-10 curve is around the 200-day moving average. The similar German curve is about 35 bp inverted. Last year, the slope averaged +43 bp. The UK's 2–10-year yield curve averaged +17 last year but spent some time in Aug-September and Nov-Dec inverted. So far this year, it has averaged almost minus 7 bp. It is now near 8 bp, and the 200-day moving average is not quite one basis point.
The easing of the Europe's downside risks has been one of a few positive surprises at the start of 2023. Recession fears have eased, including in the UK. Today's reports reinforce that observation. The eurozone's March composite PMI was stands at 53.7 (slightly lower than the flash estimate of 54.1). Recall that the composite was below 50 consistently in H2 22. It has averaged 52.0 in Q1 (and 48.5 in H2 22). Of note, Italy, and Spain, the two largest economies in the EMU "periphery" are holding their own. The have reported lower inflation than Germany and France in Q1. Their manufacturing PMIs were above 50, unlike Germany and France. And today, we learned that the average of Italy and Spain's composite PMI was above the German-French average.
Separately, Germany reported February factory orders. They jumped by 4.8%, edged higher defying expectations for a 0.3% increase. The January gain was revised to 0.5% from 1.0%. Domestic orders recovered from recent softness. Germany will report February industrial production figures. It is difficult to envision another gain on top of the 3.5% surge seen in January. France reported strong gains in manufacturing and industrial output after the heady decline (-1.5% and -1.4%, respectively, after small upward revisions) in January. Manufacturing production rose 1.3%, while the broader measures of industrial output rose 1.2%. Both were more than twice the median forecast in Bloomberg's survey. Lastly, Italy reported a small decline in February retail sales (-0.1%), after a 1.7% jump in January.
The UK's final March services and composite PMI were in line with the flash estimate. The composite PMI stands at 52.2. It had been below 50 for the six months through January, and the move back into expansion territory gives comfort to those who feared a recession. Next week, the UK reports February monthly GDP and the details. The UK economy expanded by 0.3% in January (0.1% expected), and we anticipate a small gain. Sterling has rallied 7 1/4 cents (~6%) from the year's low set on March 8 near $1.1800. The historic low was set last September near $1.0350.
The euro is in a narrow range mostly between $1.0940 and $1.0970. There are nearly 2.2 bln euros in options expiring today at $1.10. Support is seen near $1.09, where there is another set of options (~4.3 bln euros) that expire. The long holiday weekend for many means that after today, full liquidity may not return until next Tuesday. Sterling reached $1.2525 yesterday, its best level in nine months. It has stalled and consolidating back to $1.2460. The next support is seen near $1.2430 before $1.2400.
America
Disappointing US data on Monday pushed the US 2-year yield back below the 200-day moving average (3.98%). Yesterday's JOLTS report and factory orders were weaker-than-expected, and the 2-year yield tumbled to nearly 3.82%. That brings the three-day decline to around 28 bp. Although the reports were released at the same time, the manufacturing challenges have been recognized and both the PMI and ISM surveys points to contracting output. Instead, the JOLTS report was the catalyst. Not only did the jobs opening fall by nearly 6%, but the January estimate was also cut and now shows a 6% decline as well. Hirings slowed and the February pace was the lowest since mid-2021. Layoffs continue to capture the attention of many observers, but as the nonfarm payroll report on Friday is likely to showed, on a net basis there have been more hired. The JOLTS report showed the number of layoffs fell 13% in February after rising 17% in January. The takeaway: the labor market is still strong but shows clear signs of softening.
Following the yesterday's data, the market moved back to a 50/50 chance of a Fed hike next month from better than a 60% chance on Monday. Even though the methodological revisions to ADP's private sector jobs estimate make it (purposely) less useful in tracking the monthly government estimate, a market may be sensitive today's report. And perhaps in an asymmetrical fashion, where a weaker number stokes a bigger reaction than a stronger report. In Jan-Feb, ADP estimated private payrolls rose by 348k, less than half of the Jan-Feb 2022 period (747k). The BLS survey found the private sector boosted payrolls by 651k in the Jan-Feb period (and 1.242 mln in Jan-Feb 2022). These days, the US monthly trade balance hardly elicits a market response, and the flash PMI takes most of the thunder from the final reading. That leave ISM services. A modest softening is likely. The market may be most sensitive to the prices paid and new orders components. Both were strong in February (65.6 and 62.6, respectively).
Canada reports its February merchandise trade balance. The median forecast in Bloomberg's survey is for a C$1.7 bln surplus. If so, this would bring the three-month average to C$1.6 bln, a nearly three-fold increase from the previous three months. The Bank of Canada acknowledged that the economy is off to stronger start than it had expected. The recent string of data has disappointed, including the March manufacturing PMI and Bank of Canada surveys. Canada will report the March jobs data tomorrow, and it would seem that only another shock, like in January where 121k full-time positions were filled, could spur some speculation over next week's Bank of Canada meeting.
Mexico reports March CPI. The figures for the whole month are expected to surpass the readings for the second half of March, pointing to the downward drift of price pressures. The median forecast in Bloomberg's survey sees the headline easing to 6.89% from 7.62% and the core rate slipping to 8.07% from 8.29%. The bi-weekly readings are seen at 6.60% and 8.0%, respectively. The swaps market favors the 11.25% overnight cash target rate as the peak and is pricing in about a 1-3 chance it is not.
The US dollar tested support near CAD1.3400 yesterday and recovered to CAD1.3480 today. The recovery began yesterday, and the greenback snapped a six-day slide. Initial resistance is seen near CAD1.3500 and then CAD1.3550. There are options for around $310 mln at CAD1.35550 that roll off today. The intraday momentum indicators are overbought as the North American session is about to begin. The greenback dipped below MXN18.00 on Monday, but the downside momentum has eased. It reached MXN18.18 yesterday. Corrective forces could see an extension of the dollar's gains, especially if Mexican inflation comes in soft. A move above MXN18.20 could see MXN18.25-28 and then MXN18.38-40.
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