Stocks were rallying. Nearly all the large bourses in the Asia Pacific region rose with China being the noted exception. In Europe, the Stoxx 600 was up over 1% to post gains for the third consecutive session, the longest advance this month. US futures were up around 2% as they returned from yesterday’s holiday.
While the US 10-year yield edged up 3.26%, European yields were mostly softer, with the peripheral premiums falling more than core rates. The US dollar was mostly heavier. The Scandis were leading the move, ahead of Norway’s expected 25 bp hike on Thursday.
The yen was the only G10 currency that was not gaining on the greenback today. Emerging market currencies were also mostly higher, lead by central Europe and the South African rand.
Gold appeared to be going no place quickly and was trading within the broad range set last Thursday. Today, it was in a $5-range on either side of $1837. After trading as low as $106.40 yesterday, in a big outside down day, August WTI returned bid today and popped back above $110. A move above $112 could sign a run at the highs (~$121).
US natgas was off a little more than 3% after plummeting 21.5% last week. Europe’s newest gas shock continued. Its benchmark was up another 2.2% today to bring the seven-day surge to 53%.
For its part, iron ore snapped an 8-day, 24% drop with an almost 3.7% rally today. July copper has fallen by more than 10% over the past two weeks but was up 0.7% today.
July wheat extended last week’s 3.4% fall initially and reached its lowest level in two months earlier today before recovering. It remained around 0.7% below last week’s settlement.
Asia Pacific
With the BOJ determined to protect the 0.25% cap of the 10-year yield, the risk of material intervention to support the yen seemed small. Verbal intervention was successful on two fronts. First, while it has not prevented a marginal new dollar high, the five-day moving average was consolidating between JPY134.00 and JPY134.50.
Second, the protests about the pace of the movement may be sufficient to help cushion the adjustments (like pumping under a parachute to slow the descent) and keep its protectionist competitors from thinking Japan was purposely seeking a competitive devaluation to help exports.
Still, the BOJ's massive bond purchases last week (~$81 bln) disrupted the link between the cash market and futures. One consequence was the relatively poor reception of today's JPY2.5 trillion five-year bond sale.
The 3.17 bid-cover was the lowest in two years. The next challenge is the JPY1.2 trillion sale of 20-year bonds on Thursday. There were no takers of the BOJ's offer to buy 10-year bonds at 0.25% today.
Governor Lowe of the Reserve Bank of Australia pushed against speculation that it would hike the cash rate by 75 bp when the central bank meets again on July 5. He indicated that the discussion would be between a 25 bp and 50 bp move.
The swaps market took the message to heart. The market had been showing a small bias toward a 75 bp for the past week. Today the implied yield fell to about 43 bp, the lowest since June 10.
Reports suggest China's COVID outbreak was spreading to the south coast while infections were getting under control, it appeared, in Beijing and Shanghai. Shenzhen, a technology hub has seen a rise in the number of cases and mass testing and some neighborhood lockdowns have been ordered.
Separately, Hong Kong was experiencing an increase in cases, and the restrictions in Macau grew (though the casinos were still open). The border crossing to Zhuhai has been closed.
The dollar came within a whisker of last week's multi-year high against the yen around JPY135.60. The greenback was confined to more than a half of a yen range above JPY135.00. The range was tighter in the Asia Pacific sessions and the highs were seen in early European turnover.
The Australian dollar was trading firmly but quietly within yesterday's range (~$0.6915-$$0.7000). There were options for A$1.1 bln at $0.7000 that expire today. The $0.6940-$0.7000 may confined the price action in the near-term.
The greenback fell to a seven-day low against the Chinese yuan yesterday (~CNY6.6735). It stabilized today and traded in yesterday's range. It barely rose above CNY6.70. The PBOC set the dollar's reference rate at CNY6.6851, lower than usual compared to the median projection of Bloomberg's survey (~CNY6.6874).
Europe
This is an important week for the UK and Prime Minister Johnson. The rail workers striking Tuesday, Thursday, and Saturday. London tube workers were out today. Some postal workers have been on strike since earlier this month, and a Reuters report estimated that over 100 post offices have been closed.
Criminal barristers have voted to strike as of June 27. Telecom workers were being balloted to see commitment to strike. The check-in staff at British Airway were considering a strike, which could happen next month. The Teachers Union will vote on whether to strike later this year if its demand for a 12% salary increase was not met.
Waste collection in some areas has been disrupted by strike activity. If it was the most industrial action in 30 years, it was also the biggest cost-of-living squeeze on households.
The economic news this week was going to be poor. Price pressures continued to accelerate (CPI and PPI are reported tomorrow). The preliminary June PMI on Thursday will show the economy slowing, and with the consumer being squeezed. Retail sales likely fell in May for the third time in the past four months.
The political news this week will add to Johnson's challenges to regain his footing after narrowly winning the confidence vote. There are two special elections on Thursday (Wakefield and Tiverton-Honiton. Surveys have the Tories losing both, the first to Labor and the second to the Liberal-Democrats. The results would seem to weaken the case Johnson can lead the party into victory in 2024.
After prolonged negotiations and some warning activity, German steel workers accepted a 6.5% pay-increase in an 18-month contract, plus a one-off 500-euro payment. The 4.3% annualized pay increase was the largest in a couple of decades, but inflation at 7.9% in Germany (national measure, compared worth 8.7% using the EU-harmonized basket) was only the highest in more than 30 years.
Negotiated wages settlements in the euro area averaged 2.8% in Q1, this was within the 3% threshold identified by the ECB chief economist to cover productivity growth and inflation.
Focus will turn to the metal and engineer workers' negotiations this summer. They were reportedly seeking a 7-8% pay increase. German unemployment stood at 5.0% in April. The lowest since at least the early 1990s was recorded in April 2019 at 4.9%.
The euro was trading at a three-day high in the European morning near $1.0575. Last week's high was slightly above $1.06. There was an option for almost 700 mln euros at $1.0585 that expires today. The ECB's verbal intervention, warning the market participants that it will resist the divergence in yields, was proving effective.
The 10-year German-Italian yield spread narrowed almost 10 bp today to around 185 bp. It peaked last week near 250 bp. Similarly, Spain's 10-year premium over Germany peaked a little above 135 bp last week and was slipping below 105 bp today.
The intra-session momentum studies for the euro were stretched, warning that follow-through in North America today may be limited.
Despite the industrial action, sterling was firm. It peaked yesterday around $1.2280 and traded up to $1.2325 in the European morning. It remained within last Friday's range (~$1.2175-$1.2365).
Similar with the euro, the gains in the European morning have stretched in the intra-day momentum indicators, suggesting the scope for additional gains may be limited. The UK reports inflation figures tomorrow.
America
The US reports May existing home sales. They are expected to have fallen for the fourth consecutive month. Limited supply of new homes, and later, rising prices and interest rates are taking a toll. While they have slowed sharply, the pace is only now returning to more "normal" levels (2015-2019), around 5.0-5.5 mln (seasonally adjusted annual pace). In late 2020 and early 2021, activity surged above 6.5 mln.
The Biden administration was expected to announce its decision on the Federal gasoline tax by the end of the week. Efforts to ease price pressures, and especially gasoline prices, which act as a bit of a political lightening rod, has been talked about for several weeks. The average retail price was near $5 a gallon. The Federal tax is a little more than 18-cents a gallon.
One drawback was that the tax was used for the Federal Highway Trust Fund that maintains the roads. Biden has called on industry to boost capacity, but reports suggested that the US had lost around a million barrels a day of refining capacity since COVID.
Around half was lost as a few refiners failed during the economy shutdown. The other half appeared to have shifted toward biofuels. There were some calling to cap or bar exports, but it was not clear the support levels. Congressional approval for the gas tax holiday appeared to be needed.
The St. Louis Fed President Bullard spoke yesterday. His comments suggested our speculation that the Fed saw the market discounting the likelihood of a 75 bp hike and took advantage of the "free option" to hike rate more "expeditiously" was fair.
He argued that the Fed must meet market expectations as part of its effort to rein in inflation. He argued that the Fed's communication had been effective and now it was up to the Fed to deliver and ratify its forward guidance. Today, Barkin and Mester were scheduled to speak. Tomorrow, Powell begins his two-day semi-annual testimony before Congress.
Canada reports April retail sales today. The median forecast in Bloomberg's survey is for a 0.8% rise after a flat March report. Excluding autos, retail sales are expected to have risen by 0.6% after a headed 2.4% increase in March.
The US dollar peaked before the weekend near CAD1.3080, a marginal new high for the year. It pushed lower yesterday and settled near CAD1.2980. It approached CAD1.29 today. The intra-day momentum indicators were stretched, suggesting that the CAD1.2865 (38.2%) retracement objective of the leg up that began from the June 8 low (~CAD1.2520) may not be seen today.
The Mexican peso was bid today and was trading at its best level since last Monday. The greenback stalled last week MXN20.69-MXN20.70 area. Today's low was near MXN20.1250. Although Banxico’s Deputy Governor Heath played down speculation of a 100 bp hike later this week, he did allow for 2-3 bp three-quarter point moves.
Several banks have pushed back against the need for three 75 bp moves, which the swaps market appeared to have largely discounted. That would lift the target rate above 9%, while inflation in May was 7.65%. The biweekly estimate for the first half of June will be reported on Thursday, several hours before the central bank decision.
It was expected to have stabilized around 7.7%. The MXN20.1170 area corresponded to the halfway point of the rally from June 9 low near MXN19.5330 to the recent high around MXN20.70. A convincing break, which seemed unlikely today, could signal a move toward MXN20.00.