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Bi-Polar Market: It Is And It Isn't

Published 01/14/2022, 06:34 AM
Updated 07/09/2023, 06:31 AM

Sentiment is unhinged. It has swung from fears that the Fed is behind the inflation curve and unemployment is below the long-term equilibrium rate to the central bank is going to kill the economy by raising rates and allowing the balance sheet to shrink too quickly.

Today's US data for retail sales and industrial output may play on such fears. Both are expected to have slowed sequentially (retail sales may fall outright even when the dismal auto sales and gasoline are excluded). NASDAQ snapped a three-day advance, and its 2.5% slide retraced the gains of the past two sessions.

The US 10-year yield weathered the CPI and Fed rhetoric, and after probing 1.80% to start the week, slipped to almost 1.69% yesterday. Asia Pacific and European equities are lower today. Japan, South Korea, and Australian markets lost more than 1%, and the regional index pared this week's gains. Europe's STOXX 600 is nearly flat on the week coming into today and is off about 0.6% near midday in Europe. US futures are little changed. Bond yields are firmer, with the US benchmark yield near 1.75%, leaving it a couple basis points lower on the week. European yields are 2-3 bp higher today, but off mostly 3-5 bp on the week. Of note, Japan's 5-year yield is approaching zero to reach its highest level since 2016. Led by the Norwegian krone and Canadian dollar, most major foreign currencies are stronger, with the minor losses of the Antipodeans being the exception. For the week, the euro's 0.9% gain is the least among the majors. Most emerging market currencies are firmer, with India bucking the move. The JP Morgan Emerging Market Currency Index is edging higher but looks set to post its first back-to-back weekly gain since last August-September.

Gold is little changed around $1823, which puts it nearly 1.5% higher for the week. Oil has pushed to marginal new highs (~$83.20)  Iron ore is off around 1% for the second session to give back this week's gains plus 0.5%. Copper is trading off for the second day, but is up around 2.6% for the week, its best showing since mid-October. After jumping more than 22% in the first three sessions this week, US natural gas prices fell 12.1% yesterday and are off another 2.5% today. Net-net, it is up about 6.4% this week on top of last week's 5% advance. Europe's benchmark continues to be volatile but was flat for the week coming into today, where it is rising by around 7.3%.

Asia Pacific

China's trade surplus soared last month. Exports were stronger than expected and imports weaker. The surplus reached almost $94.5 bln. Economists (median in Bloomberg's survey) expected a little less than $74 bln. They had expected the surplus to fall in yuan terms, but it did not. In dollar terms, exports rose 20.9% year-over-year (to $340.5 bln), slower than November, but stronger than expected. Imports rose by 19.5% (~$246 bln) after November's 31.7% rise. Economists had projected 27.8% gains. Last year, China recorded a $676 bln surplus. Exports of steel and aluminum remained strong. Consumption goods shipments showed strong increases (e.g., toys 23.6%, shoes 29.3%). In real terms, the import of oil rose 19.9% last year and copper imports increased by 15%. Imports of iron ore declined year-over-year in December. 

Exports to the US rose 21.2% year-over-year in last month, while imports rose 3.3% to produce a $39.,2 bln surplus. Exports to the EU rose 25.6%, while imports fell by nearly 3%. The bilateral trade surplus stood at $25.1 bln. China's shipments to ASEAN rose 12%, but its imports for 22.5%. China's trade was more balanced with Australia. Exports for almost 20% while imports rose by 19.5%. Note the Regional Comprehensive Economic Partnership, the ASEAN, China, Japan, South Korea, Australia, and New Zealand trade pact was officially launched Jan. 1. It will eventually eliminate tariffs on 90% of the goods trade. 

As widely anticipated, South Korea's central bank delivered its third rate hike since last July. The 25 bp increase brings the 7-day repo rate to 1.25%. The swaps market has 75 bp of tightening discounted for the rest of the year. Consumer inflation rose 3.7% year-over-year in December (2.7%) core rate. The economy expanded by 0.3% quarter-over-quarter in Q3 and is expected to have accelerated to around 1% in Q4 (due January 24). Separately, and with little market impact, North Korea appears to have conducted its third missile test of the year.

After setting multi-year highs in the first few days of 2022 trading, the dollar reversed hard against the yen. It reached JPY116.35 on January 4. It has been sold every day since but one and today reached a low of about JPY113.65. We fell for what has turned out to be a false breakout. The JPY113.60 area corresponds to the (38.2%) retracement of the dollar's rally that began in late September around the FOMC meeting. A break signals a test on the JPY112.70-JPY113.00 area. On the upside, JPY114.25-JPY114.50 offers the first hurdle.

The Australian dollar peaked yesterday near $0.7315, its best level since mid-November but gave the gains up by the close. It has come back offered today to pare weekly gain. Around $0.7270, it is up around 1.25% for the week. Initial support is seen in the $0.7250-$0.7260 area. The booming trade surplus and broad US dollar weakness is making it difficult for the PBOC to resist yuan gains. The dollar fell to just above CNY6.34 today to match the year-end spike. It is still trading below CNY6.35, where the central bank seemed to want it above. State-owned banks (redundancy?) were seen buying dollars near the end of the mainland session. The PBOC set the dollar's reference rate at CNY6.3677. The Bloomberg survey found a median projection of CNY6.3662.


The UK economy expanded by 0.9% in November, twice what economists projected, and October's expansion was revised to 0.2% from 0.1%. This leaves the UK economy about 0.7% largest than it was on the eve of the pandemic. The details were strong with a 1% gain in industrial production and a 0.7% increase in services, but better than anticipated. The overall trade balance remains in surplus for the second month (GBP626 mln after GBP151 mln in October). The market continues to expect (~88%) of a 25 bp hike at next month's MPC meeting on Feb. 3. The swaps market has four hikes discounted for this year. 

Germany became the first G7 country to report 2021 GDP. It grew 2.7%, in line with expectations. Few details were announced with this preliminary estimate. However, the Federal Statistics Office warned that Europe's largest economy may have contracted between 0.5% and 1% in Q4. This would leave the German economy around 2% smaller than it was before the pandemic struck and appears to have lagged the other large eurozone countries. There is some risk that the German economy contracts this quarter as well.

Of course, the US will not recognize a Russian sphere of influence in eastern and central Europe. It was never a realistic possibility. It is like free trade, which often means in practice that the other should reduce their trade barriers. The more critical issue is whether the US will defend its sphere of influence in South America and the Caribbean. Russia made pointed comments about possibly putting troops in Cuba or Venezuela?  We have already noted that China's Belt Road Initiative is finding a more receptive audience in Jamaica and Barbados. Do not forget that the Cuban Missile Crisis nearly 60 years ago was resolved by the Soviet Union pulling its missiles out of Cuba and the US pulling its missiles out of Turkey. If the US does not recognize Russia's sphere of influence (or China's) why should they respect America's?  

Meanwhile, the Russian ruble has been sold. Since the start of the year of the year it has rivaled the Turkish lira for the dubious distinction of weakest emerging market currency, off almost 1.7%m with today's small gain. The price of insurance against a sovereign default has doubled since late October and has risen by a third this year (to about 1.65%). There had been some hope that Russian inflation was near a peak as the central bank doubled the key rate last year to 8.5%. The year-over-year CPI slipped ever so slightly in December (8.39% from 8.40%). Ruble weakness could boost price pressures, forcing the central bank to extend the tightening cycle and slow growth. The World Bank's new projections put Russian growth at 3% this year, and the market (Bloomberg median) is at 2.6%. 

The euro took out yesterday's high by 1/00 of a penny, according to Bloomberg data, to reach $1.1483. The market seems hesitant about extending the gains ahead of the weekend, perhaps given the geopolitical backdrop. But the intraday momentum indicators suggest the North American market may have another go. Initial support is seen in the $1.1440-$1.1450 area. If it closes above $1.1455, it would be the fourth consecutive advance. Barring a dramatic reversal, it will be the third weekly gain in four weeks. Despite the robust November GDP figures, sterling has held below yesterday's high of almost $1.3750. It is still there and hovering around the 200-day moving average (~$1.3735). The next upside target is the $1.3800-$1.3840 area, the last high from October. The intraday momentum indicator seems consistent with consolidation ahead of the weekend.


There are three US issues for investors to consider today. First, the White House has indicated its three nominations for the Federal Reserve Board of Governors:  Raskin, Cook, and Jefferson. All have been discussed in the press, so there is not surprise. We are more reluctant than others in projecting how they will vote. Being hawkish or dovish is very contextual, as we have seen with many of the current members. It is clearer now than it was a couple of weeks ago that to preserve the flexibility for four (or more) hikes this year, the Fed must start early and that means a March hike. 

The second consideration is the economic data. December retail sales and industrial production are the highlights. Import/export prices and the preliminary University of Michigan consumer confidence and inflation expectations are also due. The surging virus likely weighed on activity and the Beige Book hinted at this. Monthly changes in retail sales last year ranged from -2.9% to +11.3%. The average (1.7%) and median (4.2%) are misleading. In any event, a small decline in the headline and ex-auto/gasoline measure is likely. Monthly industrial output ranges from around -3% to +2.8%. It is expected to have edged up by 0.2% after a 0.5% rise in November. Note that the capacity utilization rate is forecast to rise to 77%. It stood around 76.5% at the end of 2019. The third consideration are the large bank earnings (JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC) (NYSE:WFC), and Citigroup (NYSE:C). Bank earnings, like US corporate profits more broadly had a strong year. With rising interest rates, many see the bank shares outperforming this year.

After falling to CAD1.2455 yesterday, the greenback bounced back to close at new session highs near CAD1.2520. Follow-through buying was limited to the CAD1.2525 area before dollar sellers reemerged. There are two sets of large options expiring today. The first is for $1.38 bln at CAD1.2500 and the other is at CAD1.2525 for $1.42 bln. The US dollar traded below its lower Bollinger Band® for the past two sessions but is holding above it so far today (~CAD1.2470). Consolidation is likely the flavor of the day. The greenback traded quietly against the Mexican peso this week but made a new low near MXN20.28 earlier today, its lowest level since late October. The 200-day moving average is found slightly lower (~MXN20.2780). It has been recording lower highs since Monday's peak near MXN20.5230. Today is the sixth session that the dollar has taken out the previous session's low.

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