The poor Chinese March PMI and talk that the US could tap its strategic oil reserves by as much as one million barrels a day for six months rippled through the capital markets.
After the S&P 500 snapped a four-day advance yesterday, equities in the Asia Pacific region may have been on the defensive today, but the sub-50 boom/bust reading in China took a toll, which only South Korea and India among the large bourses were able to escape.
European markets were softer, while US futures were recovering from yesterday's losses. US and European 10-year benchmark yields were mostly 3-6 bp lower. The dollar was trading higher against most of the major currencies. The Scandis and dollar-bloc currencies were bearing the brunt of the losses, with the Norwegian krone off more than 1.6%. Emerging market currencies were mixed. Central European currencies were underperforming.
Gold was off around $7 and in the $1920-$1934 range. Oil, as one would expect, fell (~6%) on the possibility of a substantial draw down of US reserves, but May WTI was holding above $100 a barrel, even though earlier this week it slipped briefly below $98.50.
US natgas was off about 1.5% after gaining 5% yesterday. Europe's natgas benchmark was up about 3.7% after an almost 9% gain yesterday. It was up more than 20% this week. Iron ore was a little higher today after rising almost 3.5% yesterday. Copper was threatening to snap a three-day advance. May wheat was little changed ahead of the USDA planting update report.
Asia Pacific
China's March manufacturing PMI fell to 49.5 from 50.2. The non-manufacturing PMI fell to 48.4 from 51.6. Both were weaker than expected. The composite now stands at 48.8, down from 51.2 in February. As disappointing as the report was, the situation was worse because the survey closed a few days before Shanghai was locked down.
It did catch the shuttering of Shenzhen. The weakness of the report fanned expectations for easier monetary policy and other initiatives to support the economy. A separate report indicated that the issuance of special bonds by the provinces set a record pace in Q1 (CNY1.25 trillion). The money was thought to help fund infrastructure spending in Q2.
Japan's February industrial output rose a meager 0.1%. The median forecast in Bloomberg's survey looked for a 0.5% gain. This pared the year-over-year gain to 0.2%, not 0.8% that had been expected. The March Tankan will be released the first thing tomorrow and was expected to also reflect the deterioration in sentiment.
The BOJ's operations and the decline in US Treasuries helped push the 10-year JGB yield slightly below 0.21% after briefly poking above 0.25% earlier this week. The central bank indicated that next quarter it will boost the amount of 1-10-year bonds it buys. It shaved the amount of 10-25-year bonds will buy at a time, but will increase the number of operations over the quarter.
The BOJ's balance sheet will grow. The BOE has already begun shrinking its balance sheet. The Bank of Canada indicated it will do the same in a couple of weeks and the Fed was expected to announce its intention at the net FOMC meeting in May.
The dollar found support ahead of JPY121.10, which was the (38.2%) retracement of the rally since Mar. 4 that began from around JPY114.65 and peaked this week slightly above JPY125.00. The momentum indicators were rolling over, but we expected a period of consolidation rather than a trend-reversal.
Australia reported a surge in February building approval (43.5% vs. median forecasts in Bloomberg survey for 5%, but a volatile series to be sure) and it may build a new port in Darwin after current facilities had been leased to China. The Aussie was turned back yesterday after approaching $0.7540, which had repeatedly capped it in recent sessions. The week's low was a little below $0.7460. A break would initially target $0.7400 and then, possibly, $0.7350.
The greenback fell to a three-week low against the Chinese yuan, a touch below CNY6.34. The PBOC set the dollar's reference rate a softer than expected (CNY6.3482 vs. CNY6.3494, according to the Bloomberg survey). Note that the mainland markets will be closed next Monday and Tuesday for a national holiday.
Europe
Following the surprisingly strong Spanish and German March CPI reports, the French reading was comparatively tame. The harmonized version rose 1.6% in the month, a tad more than expected. The year-over-year rate rose to 5.1% from 4.2% and was ironically stronger the median forecast in Bloomberg's survey for 4.9%. A 25 bln euro measure to cap electricity and natgas prices, and offer a rebate, reduced measured inflation by 1.5 percentage points, according to INSEE.
Italy was the only one of the Big Four in the EMU to report lower than expected price pressures. The harmonized measure rose by 2.6% instead of 2.8% on the month, and 7.0% instead of 7.2% year-over-year. In February, the year-over-year rate was 6.2%. The eurozone aggregate figures are due tomorrow.
Separately, France reported disappointing consumption figures. Consumer spending rose by 0.8% in February. Economists expected a rise of a little more than 1%. On top of that, the cutback in January was revised to 2.0% from 1.5%. Note that the first round of the French presidential election is on Apr. 10. The pattern was for no candidate to win in the first round, forcing a run-off (Apr. 24) and voters to unify behind the "establishment" candidate over Le Pen.
After German Chancellor Scholz talked with Putin yesterday, the conclusion was that Moscow was backing off of its earlier demand to be paid in rubles for its gas. Meanwhile, some reports indicated that talks between Ukraine and Russia may resume tomorrow. We continued to believe Russia will secure military objectives in the separatist regions before negotiating more seriously. Also, some reports indicated that Georgia's breakaway region in South Ossetia may seek to join Russia. This seemed to be the idea in the separatist regions in Ukraine as well.
The euro initially extended its recent gains to reach $1.1185, its best level since Mar. 1, before reversing lower to almost $1.1110. There were two sets of expiring options to note today. The first was for nearly 2.15 bln euros at $1.12. The other was for 1.55 bln euros at $1.11. Yesterday's low was slightly below $1.1085.
Sterling was sidelined. It was trading quietly in a narrow range (~$1.3110-$1.3150). It was hovering around unchanged levels (~$1.3130) in late morning turnover in the UK. If there was to be a range extension in North America today, we favor the upside, but saw the $1.3175-$13200 as the cap. Lastly, note that the Czech Republic is expected to lift the repo rate by 50 bp to 5.0% today. The risk may be on the upside.
America
We have argued that the Biden administration had been thinking too small in its previous two efforts to draw down its Strategic Petroleum Reserves if it wanted to have more impact on energy prices. In November it announced a 50 mln barrel release and earlier this month, 30 mln barrels. Surely, these were the conditions that the SPR was created for.
In the past, sometimes, Washington would agree to sell some of the oil for budgetary purposes. As of Mar. 25, the US stockpile was estimated at almost 570 mln barrels. Reports suggested that under consideration was a 180 mln barrel draw over six months, or about 1 mln barrels a day. Ideally, it would be a coordinated effort with other countries.
As we noted yesterday, there was strong correlation between the change in oil prices and the change in inflation expectations as expressed through the 10-year breakeven rates. OPEC+ meet today and were unlikely to boost their output. On the other hand, some reports suggested that Washington may allow a US-based oil company to speak directly with the Maduro government in Venezuela, to ostensibly prepare for a lighter sanction regime, which officials deny was currently under consideration.
Ahead of tomorrow's jobs report, the US reports February income, consumption, and deflators. Personal income and consumption were expected to have risen by 0.5%. Income was lagging behind inflation, and the real drop in income may cap consumption. The headline deflator, which the Fed targets, was forecast to rise by about 0.6% to lift the year-over-year rate to 6.4% from 6.1%.
The core measure, which gets plenty of airplay but is not targeted, is expected to rise to 5.5% from 5.2%. Although the Fed does not target the CPI measure, its earlier release steals the thunder from the PCE deflators.
The weekly jobless claims fell to a new low since 1969 last week. A small tick up that was expected today will not change views of the strength of the US labor market. The median forecast in Bloomberg's survey sees March nonfarm payrolls rising by 490k.
Canada reports January GDP. A 0.2% gain was expected after a flat December. The report was too old to have much market impact. Earlier this week, the swaps market appeared to have a 50 bp hike fully discounted for the Apr. 14 Bank of Canada meeting. It slipped to about a 66% chance now.
Mexico reports worker remittance tomorrow, which have been a surprisingly strong source of hard currency. Later today, Colombia was expected to hike its overnight lending rate by 150 bp to 5.50%. Consumer inflation was running a little north of 8%. It last hiked by 100 bp in January. The swaps market had about 500 bp of tightening priced over the next six months.
The Canadian dollar and Mexican peso recorded new 2022 highs yesterday. The peso made a marginal new high today, but both were a bit better offered now. The US dollar was at a new three-day high against the Canadian dollar near CAD1.2530. There may be some resistance in the CAD1.2555 area, but the potential may extend toward CAD1.2580-CAD1.2600, if not today, then tomorrow.
Recall that the peso began this week with an 11-session rally in tow, the longest in half a century. Even with the small loss today, it has gained in 13 of the past 15 sessions. The MXN20.00 area, which previously offered the greenback support, now may serve as resistance.