Investors Skeptical Fed Can Achieve A Soft-Landing. Can The BOE Do Better?

The markets continued to digest the implications of yesterday's Fed move and Beijing's signals of more economic supportive efforts as the Bank of England's move was awaited.

The US 5–10-year curve was straddling inversion and the 2-10 curve flattened as the Fed moved from one horn of the dilemma (behind the inflation curve) to the other horn (recession fears).

Asia Pacific equities extended yesterday's surge. The Hang Seng led the charge with a 6.7% gain. Taiwan's benchmark rose 3% and the Nikkei gained 2.5%. Europe's Stoxx 600 was posting small gains and US futures were paring yesterday's late gains. The US 10-year yield was near 2.11% after poking briefly above 2.2% yesterday. European bond yields were mostly 2-3 bp lower.

Hong Kong Monetary Authority and Saudi Arabia hiked 25 bp as their currency pegs required. The dollar initially rallied on the Fed statement, but unwound the gains during Chair Powell's press conference. It was lower against most currencies today. The Australian dollar was the strongest of the majors, helped by better-than-expected jobs report. The emerging market currencies were led today by the South Korean won, whose gains appeared to be fueled by strong demand for its bonds today.

Gold traded below $1900 yesterday before recovering. That recovery was being extended today and the yellow metal was near $1944. There may be potential toward $1962 in the next day or two. April WTI appeared to have forged a base around $93-$94 and was trying to test $100.

US natgas was firm after yesterday's 4% gain. Europe's natgas benchmark was recouping half of yesterday's 6.7% decline. Iron ore eased after jumping 8.5% yesterday. Copper was extending yesterday's gains and was up about 1.4%. May wheat was consolidating after falling near 7.5% yesterday. 

Asia Pacific

China underscored the shift from structural reforms to growth, which many market observers had already detected. However, investors now need to see the proof of the pudding, so to speak, which is to say policy adjustments. It could happen with the setting of the loan prime rates on Monday in Beijing, but more observers were talking about a cut in reserve requirements in the coming weeks.

Australia employment rose 77.4k, more than twice the median forecast in Bloomberg's survey. The details were even stronger. Full-time positions rose by nearly 122k last month after a revised 6.1k decline in January (originally it fell by 17k). The unemployment rate fell to 4.0% from 4.2%, even though the participation rate rose to 66.4% from 66.2%. Australia’s short-term bond yields rose 3-4 bp as many believed the data was bringing forward an RBA rate hike. The odds of a move at the end of Q2 had increased.

The BOJ meeting concludes tomorrow and standing pat will underscore the growing divergence with the US and others' monetary policy. The fiscal year end is approaching, and Japanese purchases/sales of foreign bonds and stocks remained subdued, but foreign investors for the second week have been significant sellers of Japanese stocks and buyers of Japanese bonds. 

The dollar rose slightly through JPY119.10 yesterday and was consolidating below that today. The JPY118.60, which we targeted last week, offered support. Note that the upper Bollinger® Band came in today near JPY118.70. 

The Australian dollar jumped 1.35% yesterday, its largest rise since early November 2020. It was extending the gains today and was approaching the (61.8%) retracement objective of the decline since reached $0.7440 earlier this month. That retracement objective was near $0.7335. and above there, last week's high near $0.7375 may draw attention.

Recall that the greenback gapped higher against the Chinese yuan on Monday and Tuesday. It filled Tuesday's gap yesterday and entered Monday's gap today without filling it. The bottom of the gap was just below CNY6.34. The PBOC set the dollar's reference rate at CNY6.3406. The median projection in Bloomberg's survey was for CNY6.3360.

Europe

The Bank of England was awaited. The swaps market had about a 1-in-4 chance that it would deliver a 50 bp move today, with odds-on favorite scenario of a 25 bp move. The BOE was likely to raise its inflation outlook, and this will serve to underscore the policy path. Today's move will be the third hike in a row and will bring the base rate up to where it was before the pandemic struck. A 25 bp increase will bring the base rate to 0.75%. When it reaches 1.0% (May), the BOE has said it could (but not will) reduce its balance sheet more actively by selling securities rather than just passively through not re-investing maturing proceeds.

The Governor of Sweden's Riksbank indicated that its first rate hike will likely be delivered before the second half of 2024, which it had previously anticipated. Ingves warned that inflation was too high. Using fixed mortgage rates, the underlying inflation stood at 4.3% in February, and the core underlying rate, which excludes energy is at 3.4%. The next Riksbank meeting is late next month, but the focus of the first hike is now in September.

The US said that the sanctions on Russia did not prohibit Moscow from servicing its dollar debt until May. Russia, trying to conserve its hard currency reserves that it had access to, had also made this more difficult and many were expecting a default in Q2.

Separately, note that India, which abstained in the UN vote condemning the Russian invasion, appeared to be exercising an option in an earlier agreement to buy more Russian oil. Russian oil has been trading, as one would imagine, at a deep discount, and Russia covers shipping and insurance costs. The White House press secretary indicated that India's purchases were not violating US sanctions.

The euro reached a five-day high in early European turnover today, slightly above $1.1065. Last week's high was near $1.1120. Ahead of that was the 20-day moving average around $1.1095. Recall that in response to the Fed's statement yesterday, the euro recorded session lows by $1.0950 before recovering to new session highs. We suspected the high for the day may have been approached, with initial support pegged in the $1.1000-$1.1020 band.

When the euro was on its lows yesterday, sterling dipped below $1.3050 and then reversed higher to rally a cent. Those gains were extended today to $1.3190. Sterling also looked poised for a buy the rumor sell the fact type of trading like the dollar did yesterday in response to the Fed. Initial support was seen near $1.3150 and then $1.3100. 

America

The dollar typically rallies ahead of the first Fed hike in recent cycles and then weakens as the tightening phase progresses. Research from the Bank of International Settlements found an average decline of a little more than 4%. Part of the reason may stem from the Fed's inability to achieve the proverbial "soft-landing" to bring down inflation without inducing a recession. Many were skeptical that a soft-landing can be achieved now, in part because the Fed waited too long to halt the asset purchases.

And despite the drama when "transitory" was jettisoned from Fed-speak about inflation, the Fed's new forecasts showed that it was still the median case. The PCE deflator stood at 6.1% in January, and the median Fed forecast sees it at 4.3% at the end of this year and 2.7% next year, and 2.3% in 2024. Moreover, many observers were also finding it hard to reckon the Fed's tightening pace and slower GDP with the median dot seeing unemployment at 3.5% this year and next.

The Fed meeting probably reduced the focus on today's high-frequency data, which includes industrial production, housing starts and permits, weekly jobless claims and the March Philadelphia Fed survey. Note that after yesterday's retail sales data, the Atlanta Fed's GDPNow tracker increased its Q1 estimate to 1.2% from 0.5% (from Mar. 8). For many, like ourselves, that saw the odds high of a recession, did not see the contraction as imminent, but perhaps beginning late this year or, more likely a 2023 story.

Canada's February CPI reported yesterday was stronger than expected at 5.7% (median forecast was for 5.55) after 5.1% in January. The average of the underlying measures also rose. The Bank of Canada meets next on Apr. 13. The swaps market was pricing in almost a 68% chance of a 50 bp move. The balance sheet could begin shrinking in May. 

As widely anticipated, Brazil's central bank hiked the Selic Rate by 100 bp to 11.75%. It has now hiked rates 975 bp over the past 12 months. Inflation was running above 10%. Petrobras (NYSE:PBR) lifted diesel prices by 25% and this warned of more upside inflation risk. Still, a survey by the central bank found expectations for inflation to fall back to 6.45% at the end of this year and 3.7% next year. Mexico and Chile also expected to hike rates later this month (Mar. 24 and Mar. 29, respectively).

The US dollar peaked on Tuesday near CAD1.2870 before reversing lower. It continued to give back its recent gains yesterday, falling to CAD1.2675. It continued to trade heavily and approached CAD1.2650 in the European morning. There was an option for about $325 mln at CAD1.2635 that expires today. The low from earlier this month was set near CAD1.2585 and the 200-day moving average was found slightly above CAD1.2600.

The greenback's high for the month was set on Mar. 8 against the Mexican peso a little below MXN21.47. It slipped below MXN20.60 yesterday and was in a tight range near there today. The month's low was recorded close to MXN20.39, a little below the 200-day moving average (~MXN20.42). The US dollar was turned back earlier this week after approaching BRL5.17. It looked poised to re-challenge the BRL5.00 area.