The Reserve Bank of New Zealand raised policy rates by 0.50% to 2.0% this morning, with Governor Orr setting a hawkish tone in the press conference afterwards.
In the statement itself, the RBNZ’s “least worst choices” policy seemed to imply that although external risks remained, the domestic economy was strong and could tolerate tighter monetary conditions.
Mr. Orr seemed to be saying much the same, suggesting that terminal rates could go above 3.0% and would get there sooner, rather than later. We’ll see just how strong the New Zealand economy is in due course, but a hawkish RBNZ has seen the New Zealand Dollar rally by 0.70% to 0.6505 today, making it the biggest currency gainer in Asia today.
Elsewhere, Singapore’s GDP Growth came in tight on expectations, rising by 3.70% YoY for Q1. With inflation data yesterday also less worse than expected, expectations for another unscheduled tightening by the Monetary Authority of Singapore have receded for now.
That may bring some relief to the Malaysian ringgit, which has fallen to 3.20 against the Singapore dollar.
In Malaysia itself, Inflation data for April continues to remain benign as domestic demand stays subdued. Inflation YoY rose by just 2.30% and will leave Bank Negara, like Bank Indonesia yesterday, in no hurry to tighten monetary policy.
Ominously though, the Malaysian ringgit has shown no strength versus the US dollar. USD/MYR remains at recent highs at 4.4000 even as the greenback is experiencing an extended bull market correction versus the G-10 and EMFX elsewhere.
If the US dollar turns higher once again, and the MYR resumes its sell-off, Bank Negara’s hand might be forced.
Overnight, the recession word weighed on stock markets once again. European PMI data was a mixed bag. Manufacturing PMIs held steady, while Services PMIs fell as consumer demand takes a hit from the rise in the cost of living. That wasn’t enough to stop the euro rally, powered by suddenly hawkish ECB heavyweights.
The picture was rather grimmer in the United Kingdom where the most honest central bank in the world, the Bank of England, has already signaled a white flag on bringing down inflation and penciled in a recession next year.
UK Manufacturing PMI held steady at 54.6, but Services PMIs plummeted to 51.8. The UK is facing a winter of discontent as the cost of living soars, with the railways RMT union voting to strike over pay negotiations.
Expect more of this going forward. Additionally, the Chancellor is apparently preparing to widen the scope of the windfall tax on energy companies, probably to help pay for his cost of living mini-budget.
UK stock markets didn’t like that. Finally, the “party gate” report on those lockdown wine frenzies in the No 10 garden is due for release today, potentially putting more pressure on PM Johnson’s leadership. Little surprise that the sterling slumped versus the euro and the US dollar overnight.
In the United States, the recession world hit particularly hard after the Snap (NYSE:SNAP) induced a meltdown by NASDAQ stocks overnight.
US New Home Sales plummeted to 591,000 in April, while Richmond Fed Manufacturing slumped to -9 in May. The S&P Global Services Flash PMI for May fell to 53.5, with Flash Manufacturing easing to 57.5.
It was the new home sales that really frightened the street, though, as house building, and its ancillary services and suppliers are a good chunk of US domestic GDP. Soaring mortgage interest rates and gasoline prices appear to be doing a lot of the Fed’s work for it before it even gets started.
If there is one takeout from all of this for me, it is that rising inflation and borrowing rates are already crimping the demand side of the equation. Unfortunately, we are seeing very little sign of price pressures reducing due to a combination of factors, all of which have been thrashed to death here and in research everywhere.
The uncomfortable reality is that central banks are going to be forced to continue the tightening path, even as growth slows around the world, because inflation has proven sticky and not transitory.
That is the least worst choice central banks need to make in a stagflationary environment. I am asked every day if we have seen the low in the equity market sell-off. Hopefully, I have answered the question.
Finally, US President Joe Biden’s trip around Asia continues. Unfortunately, with its emphasis on containing China and hawking a trade agreement empty of potential access to the US domestic market (Congress needs to approve that), the trip is not going to make much headway in re-establishing US leadership in the region.
Asia really needs to see the color of America’s money. Furthermore, the reliability of the US as a partner has taken a further hit today, with White House officials explicitly refusing to rule out the possibility that the US could enact crude oil export restrictions to help cap energy prices domestically.
The US doesn’t have a crude oil problem, it has a refining and transportation problem, but let’s not let facts get in the way.
I have warned about food nationalism previously, but if President Biden prioritizes November’s mid-term elections over the economic war with Russia, and supporting Europe, it really is every man for himself globally.
I can’t see that being positive for equities anywhere, or European asset markets full stop, or for Ukraine. Only the Kremlin is likely to be popping champagne as the US does Russia’s divide and conquer for them.
A mixed day for Asian equities
Overnight, a procession of poor US data delivered another kidney punch to US equities, with the tech-heavy NASDAQ bearing the brunt once again, as the more value-heavy Dow Jones remained steady.
The S&P 500 fell by 0.80% as the NASDAQ slumped by 2.35%, while the Dow Jones managed a tiny 0.16% gain. In Asia, US index futures were seeing their usual counter-trend move. S&P 500 futures were 0.65% higher, NASDAQ futures jumped by 0.95%, and Dow futures gained 0.40%.
Asian markets were a mixed bag but appeared to be focusing on the overnight moves on Wall Street being counterbalanced by Mainland China equities rising modestly.
The latter is a big surprise as Beijing COVID-19 cases climb and the port city of Tianjin nearby locks down its city center. It wouldn’t surprise me if China’s “national team” was taking advantage of a relatively quiet day to buy.
Japan’s Nikkei 225 gave up some early gains and was down by 0.10% for the day. South Korea’s KOSPI though, ignored the missile tests from North Korea to post a 0.85% gain. In a similar vein, the NASDAQ futures rally lifted Taipei1.05% higher.
Mainland China’s Shanghai Composite rose by 0.60%, with the CSI 300 edging 0.15% higher. Hong Kong climbed by 0.70%. Singapore though fell by 0.20%, with Kuala Lumpur rising by 0.20%.
Jakarta fell by 0.45%, while Bangkok climbed by 0.70%, with Manila adding 0.45%. Australian markets were also cheering the US futures rally, the ASX 200 rallying by 0.65%, and the All Ordinaries gaining 0.55%.
Asia’s mixed bag is unlikely to give European markets many clues. The underperformance by more value-orientated markets in Asia today may translate to early weakness, but I feel that the US refusal to rule out oil export restrictions will weigh more heavily.
At the frontlines of the economic war with Russia, any sort of threat to Europe’s tenuous energy security, either by supplies or higher prices, won’t be good news for European equities.
UK markets could be in for a frisky day as the No.10 “party gate” report comes out. I’m not sure whether BoJo going would be bullish or bearish for UK equities though.
US dollar’s orderly retreat continues
The US dollar eased once again overnight, as US recession fears continue to lead to a repricing lower of Fed tightening expectations. With quantitative tightening starting next week and no signs of inflation falling, that may be more hope than reality.
Nevertheless, one must respect the momentum in the short term, and the US dollar bull market correction still looks to have legs in it. The dollar index fell by 0.32% to 101.77 overnight, but Asia was doing its usual countertrend moves today, pushing the dollar index back up to 101.95.
The multi-year breakout line was at 102.40 today, forming initial resistance, while 101.50 and 101.00 loomed as immediate supports.
EUR/USD continued edging higher overnight, rising 0.42% to 1.0735 before falling by 0.28% to 1.0705 in Asia. Momentum already appeared to be waning for EUR/USD, but I do not rule out at least a test of 1.0750 and 1.0825, the multi-decade breakout line.
A weekly close above the latter is needed to suggest a medium-term low is in place. GBP/USD fell overnight, crushed by EUR/GBP buying, poor data and tax and political risk. It finished 0.42% lower at 1.2535 where it remained in Asia today.
Sterling faced political risks, outlined above, today, and these will limit gains. It had support at 1.2470, with a double top at 1.2600. Even if the US dollar sell-off continues, sterling will remain euro’s poor cousin.
Lower US yields saw USD/JPY fall 0.85% to 126.85 overnight where it remained in Asia, just below support, now resistance, at 127.00. A deeper selloff, potentially targeting the 125.00 support area, remained entirely possible given the market was still clearly very long USD/JPY.
Once again, at those levels though, given the trajectory of US and Japan interest rates, being short becomes a dangerous game.
AUD/USD remained steady at 0.7100 today, having probed the downside overnight. AUD/NZD buying was capping gains for now. A hawkish RBNZ today sent the Kiwi dollar flying, NZD/USD jumped 0.65% to 0.6500.
The rally was already showing signs of fatigue and a weekly close above 0.6550 was required to signal a potential medium-term low. Support was distant at 0.6420.
Asian FX continued gaining against the US dollar overnight, but a stronger greenback in Asian time erased those gains. A neutral USD/CNY fixing by the PBOC gave Asian markets little to go on today, with USD/CNY, USD/CNH and USD/THB rising by around 0.30%, while USD/KRW rose by 0.10%.
An impending Bank of Korea hike on Friday should limit won's weakness. The Malaysian ringgit looked like the most vulnerable regional currency right now, USD/MYR trading near 4.4000 today.
With policy tightening gaining momentum among other Asian central banks, today’s benign inflation data reinforced that outlook. USD/MYR could potentially test 4.4500 by early next week.
White House unnerves oil markets
Oil prices continued to range trade overnight, finishing almost unchanged in New York. Asia, though, has seen both Brent crude and WTI rise. A couple of items seem to be behind the move. A sharp 4.50 million drop in gasoline inventories late in New York from the API Inventory data is likely supportive, with gasoline prices becoming a major issue in the US.
Following on from that, White House officials explicitly refusing to say possible crude export restrictions were off the table appears to have spooked Asian suppliers. The last thing the world needs right now is US crude oil export restrictions with global supplies already tight.
That saw both Brent crude and WTI spike 1.0% higher in early Asian trade, although those gains have eased as the session has gone on. Brent crude was 0.90% higher at $114.70 a barrel, and WTI was 0.65% higher at $110.90 a barrel.
The White House likely needs to “clarify” its stance, least it creates unintended consequences by pushing crude prices higher. Brent crude, notably, is testing multi-week resistance today.
Brent crude was testing resistance at $114.70 today, which was followed by $116.00, with support at $112.00. Failure of $116.00 could set up a retest test of my medium-term resistance at 120.00.
WTI was taking comfort from the White House stance and was sitting in a 108.00 to 112.00 a barrel range. Nevertheless, a topside breakout by Brent crude will almost certainly drag WTI higher as well, precisely what President Biden doesn’t want.
Gold rises once again
Gold had another decent overnight session, buoyed by lower US yields and a still-weakening US dollar. Gold finished 0.69% higher at $1866.50 an ounce. In Asia, some US dollar strength saw it weaken slightly by 0.40% to $1859.00 an ounce.
Overall, although I acknowledge gold’s upward momentum, I remain skeptical of its longevity until it manages to hold on to material gains in the face of US dollar strength.
The technical picture continued to remain supportive, and it seemed only a marked US dollar recovery will cap gold’s rally. Gold took out resistance at the double top at $1865.00 an ounce which became intraday support, followed by $1845.00 and $1840.00 an ounce.
It should now target $1886.00, its 100-day moving average. That would open up a test of $1900.00, although I suspect there will be plenty of option-related selling ahead of that level.