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Overview: With the US warning about a “vertical escalation” by a stymied Moscow and the EU cautioning that Beijing may send semiconductors and other tech hardware to Russia, it is little wonder that risk appetites are being curtailed ahead of the weekend. Japan eked out a small gain, most of the major bourses in the Asia Pacific region were lower. Of note the Hang Seng's 2.4% fall left it virtually flat on the week. Europe's Stoxx 600 is flat after posting two consecutive losing sessions. US futures are narrowly mixed. Benchmark yields are a couple of basis points lower, putting the US 10-year around 2.36%. European yields are 2-4 bp softer. Following a firmer than expected Tokyo March CPI, the 10-year JGB yield rose to a new high, just shy of 0.24%. In the foreign exchange market, the cautious risk stance is evident with the yen and Swiss franc showing modest strength. An exception to the risk-off is the relative strength of emerging market currencies. The JP Morgan Emerging Market Currency Index is up for the fourth sessions to put the finishing touches on the second weekly advance. Turning to commodities, gold is consolidating above $1950 and is up about 2% this week. May WTI is off around 1.4% after falling 2.2% yesterday. Nevertheless, it is up about 7% this week. US natgas is softer, trying to snap a four-day advance. It was up almost 11% this week coming into today. Europe's natgas benchmark is more than 2% lower to pare this week's gain to about 6.5%. Iron ore rose 3.5% to recoup this week's loss. Copper is a little firmer to be flat on the week. The price of wheat is falling for a fourth session following a 5.2% rally to start the week. It is up less about 1% for the week. It had fallen around 12.3% in the previous two weeks.
Asia Pacific
Tokyo's CPI accelerated this month as the weaker yen and higher commodity prices fed through. The 1.3% headline increase was slightly stronger than expected. Excluding fresh food, the core measure edged up to 0.8% from 0.5%. Electricity, gas, and imported food lifted the core measure. Excluding fresh food and energy, the deflationary pressures slackened to -0.4% from -0.6%. Meanwhile, the 10-year JGB yield approached the 0.25% cap imposed by yield-curve control and a more active defense may be necessary next week. At the same time, Prime Minister Kishida has reportedly instructed the cabinet to put together a supplemental budget next week.
China's Security Regulatory Commission is still apparently negotiating with the America's Public Company Accounting Oversight Board. Earlier this week, Chinese accounts made it seem that a deal was imminent that would allow mainland-based companies to remain listed on US exchanges. The issue are US laws that require audit reports to be made to authorities. Chinese authorities appear to make some concessions but wanted to withhold some “sensitive” data. If the US rules are flaunted for three years, the violator faces de-listing. That could begin in 2024.
Reports suggest China has sent Russia 30k tons of alumina following Australia's ban that provided Russia's Rusal with 40% of its alumina supply. Another 30k tons are expected to follow quickly. The US and Europe have cautioned China against material support for Russia. However, officials say there is so far no evidence of Chinese assistance. The alumina deal is being cast as a commercial transaction rather than state sponsored. Meanwhile, China's lockdown this week of Tangshan (steel producing region) and Shandong (oil refineries) have knock-on effects that are disrupting the world's second-largest economy, with potential to further disrupt supply chains.
The dollar is falling for the first time in six sessions. If the 0.66% pullback is sustained, it would be the largest loss since last November. Even with the decline, the greenback is up nearly 2% against the yen this week. The profit-taking began after the dollar had risen to almost JPY122.50 in North America yesterday. The pullback brings the dollar back to where it was in Tokyo on Thursday. Initial resistance is now seen near JPY122.00. The momentum readings are stretched, but the move does not seem complete. The Australian dollar set a new high for the year near $0.7535 before succumbing to some light profit-taking. It found support a little below $0.7500. Even with the pullback, it is the strongest of the major currencies this week, gaining almost 1.25%. The intraday technical indicators favor a recovery in North America. The US dollar slipped against the Chinese yuan for the second session but is still poised to extend its gain for the fourth consecutive week. The Chinese 10-year premium over the US narrowed by about 20 bp this week to 45 bp. The PBOC set the dollar's reference rate at CNY6.3739, a little above projections for CNY6.3726 (Bloomberg survey).
Europe
The UK's retail sales last month were unexpectedly poor, and it plays on fears that the surge in the cost-of-living is sapping households, while the government's Spring budget offered little consolation. The Bloomberg survey found a median forecast of a 0.7% gain, and instead, retail sales fell by 0.7%. Excluding gasoline, retail sales fell by 0.7%. Economists had looked for a 0.5% increase. The risk is that things get worse. Many households will experience a sharp price increase in energy bills next month, and the tax for the national health service increases too.
On one hand, the EU and the US appear to be striking a deal for gas to begin supplanting the dependence on Russia. Europe does not appear ready to ban energy imports from Russia and this may help explain the pullback in oil prices. On the other hand, Europe agreed to a a Digital Markets Act, which will force large internet companies to open their platforms and compete fairer. Many US-based companies, much to their chagrin will be forced to comply. Of course, some large European internet companies will be subject to the new rules too.
Hungary was the only EU country not invited to last year's US-sponsored “democracy summit.“ Nevertheless, national elections will be on April 3. Orban and his Fidesz party are seeking a fourth term. The opposition has united behind a single candidate, Marki-Zay, who has not run an inspired campaign, and is lagging in the polls by a couple of percentage points. Orban has pursued a pro-Russian foreign policy, pleads neutrality in the war, and will not send Ukraine weapons. One recent poll found that 57% of Hungarians see their chief allies in the West not East. The opposition does not seem to be exploiting this effectively. Instead, the opposition has the adoption of the euro as a key plank, and it is supported by less than half the people. Despite the closeness of the polls, the wagers at PredictIt.Org strongly favor Fidesz (95%).
For the fourth consecutive session, the euro remains mired in a $1.0960-$1.1045 trading range. The sideways movement is sufficient to allow the momentum indicators to extend their correction higher. The weakness in the German IFO survey illustrates the headwind on confidence. The current assessment dipped slightly (97.0 vs. 98.8), but the expectations component fell to 85.1 from 98.4. It is the lowest since May 2020 and reflects a larger decline than when the pandemic struck. Sterling reached almost $1.33 in the middle of the week but has struggled to sustain upticks since then. It has found support around $1.3160 but looks vulnerable. The week's low is near $1.3120, which seems like a reasonable near-term target.
America
Fed officials, especially Chair Powell, have couched his commitment to a more aggressive course with “if needed” or “if necessary.” Yesterday's data showed weekly jobless claims falling to their lowest level in a generation, and the preliminary March PMI showed the economy accelerating, with the composite rising to its best level in eight months. On the other hand, February durable goods disappointed. The big drag came from the nearly 30.5% decline in civilian aircraft orders. Non-defense and non-aircraft orders slipped 0.3% but after the upward revision to the January series to 1.3% from 1.0%. Still, the Atlanta Fed's GDPNow tracker puts this quarter's growth at 0.9%, down from 1.2% last week as real domestic investment was downgraded. However, the data that underscored a tight labor market, resilient economy, and elevated price pressures (PMI) saw the market grow marginally more confident of a 50 bp hike at the May FOMC meeting. The market also edged closer to fully pricing in two 50 bp moves this year.
Malfeasance or incompetence? What was behind Mexican President AMLO's announcement of the 50 bp rate hike by Banxico a few hours before the official announcement? He seemed confused and referred to the move as happening “yesterday.” Some read more sinister motives and see an encroachment on the central bank's independence. Despite the chin-wagging, there was no sign that investors as a whole were put-off, and AMLO apologized. The dollar settled on its lows, a little above MXN20.07, levels not seen since last September. The decision to hike by 50 bp was unanimous. The lone dissenter at the last two meetings, favoring 25 bp moves, Esquivel capitulated. The central bank nudged up its (average) inflation forecast to 6.4% this year from 6.1%, and next year from 3.4% to 3.6%. It sees inflation peaking in Q2, but not falling back within the 3% (+/- 1%) target until Q2 23.
Brazil reports March IPCA inflation figures today. The median forecast in Bloomberg's survey sees it slipping to 10.69% from 10.76%. Central bank Governor Neto has signaled a 100 bp hike in the Selic Rate in May (to 12.75%). However, following yesterday's quarterly inflation report, it suggested inflation may peak soon and a rate hike in June may be unnecessary. Bank economists ae less convinced and the swaps market sees a peak in the policy rate closer to 13.25%.
The US dollar has fallen against the Canadian dollar for the past eight sessions coming into today. It has found support near CAD1.25 but closed below a six-month trendline yesterday and could retest it today from underneath today. It is found around CAD1.2560. The Slow Stochastic appears to be poised to curl higher from over-sold territory. The greenback slipped a little lower against the Mexican peso to test the MXN20.05 area, a new six-month low. The MXN20.00 offers psychological support, but the low from last September was near MXN19.85. The lower Bollinger Band is by MXN19.94.
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