Hawkish comments by Fed Chair Powell stoked a jump in yields and lit the dollar. News that Alibaba (NYSE:BABA) was boosting its share buyback program to $25 bln from $15 bln helped lift HK shares, while the weaker Japanese yen favored Japanese exporters. Most equity markets in the region advanced. European bourses were showing a modest upside bias with US futures and were little changed.
The US 10-year Treasury yield was pushing five basis points higher to 2.34%. European yields were also 3-5 basis point higher. The dollar was rising against most currencies today. The Antipodean currencies were the most resilient, while the yen and Norwegian krone were taking it on the chin. The dollar, which began last week near JPY117.30, was knocking on JPY121 today.
Emerging market currencies were also mostly softer, led by the central European complex. Hungary was expected to hike its base rate 100 bp to 4.4% today, while the key rate (one-week deposit rate) was expected to be raised by 30 bp to 6.15% later this week. Turning to the commodities, gold was consolidating inside yesterday’s range. The higher yields appeared to be sapping demand. May WTI was reversing lower after completing a (61.8%) retracement near $113.35.
US natural gas prices were also pulling back from better levels earlier today. Europe's benchmark was firm. Iron ore slipped by 2.5% after a 1.6% loss yesterday. Copper was recouping most of yesterday's loss, the first decline in four sessions. May wheat was up about 3%, adding to yesterday's 5.2% gain and soy fully recouped last week's 1.4% decline.
Asia Pacific
Japan lifted some COVID restrictions in Tokyo and outlying areas. This will help set the stage for a recovery in Q2. The earthquake earlier this month and the COVID restrictions hobbled the world's third-largest economy. As we have been tracking, Prime Minister Kishida was reportedly cobbling together a supplemental budget of around JPY10 trillion (~$83.5 bln). Meanwhile, with inflation set to jump starting next month (cell phone charges fell sharply a year ago) and global yields tugging the JGBs, the Bank of Japan may be forced again to defend its Yield Curve Control cap of 0.25% on the 10-year bond. The yield was pushing above 0.20%.
India, a member of the Quad (along with Japan, Australia, and the US) to ostensibly check China, has a more nuanced relationship with Russia. It bought the same air defense system from Russia as Turkey did without the fanfare. As we noted last week, India was exercising options to buy Russian oil at a discount. Indian officials hinted that three-day of the country's oil needs were being secured. That was about 15 mln barrels over the next 3-4 months.
Last year, India reportedly bought about 33 mln barrels from Russia. The amount was not so much. After all, consider that according to reports, about 9 mln barrels of Russian oil was headed to the US this month and another 1 mln at least next month. Businesses were given a 45-day wind-down grace period. Rather, what was more interesting was that some reports indicated that India could pay rupees for the oil, but the payment might be benchmarked to the US dollar.
The dollar extended its recent gains against the yen and was testing the JPY120.50 area. Such lofty levels have not been seen for 6-7 years. The next important chart point was not seen until closer to JPY121.50, but a move toward JPY125 over the slightly longer-term cannot be ruled out. The dollar's ascent pushed it through the upper Bollinger® Band (two standard deviations above the 20-day moving average) repeatedly last week. It came in near JPY120.30 today. As we noted, the exchange rate was more correlated to rising US yields than as a safe haven (when it is inversely correlated to equities). The JPY120 area, which was "resistance" may now offer support.
The Australian dollar was trading inside yesterday's range (~$0.7375-$0.7425). The high from earlier this month was near $0.7440, and the upper Bollinger Band was found slightly above it. A break of $0.7360 would weaken the technical tone.
After a few larger than normal moves, the dollar-yuan was confined to a narrow range today (~CNY6.3590-CNY6.3660). It remained within yesterday's range, which was itself within the pre-weekend range. Recall that in the first part of March, the dollar was in a CNY6.3070-CNY6.3270 range. It jumped to a higher range, roughly CNY6.3400-CNY6.3670. The PBOC set the dollar's reference rate at CNY6.3664 today compared with projections for CNY6.3660 (seen in the Bloomberg survey). Note that China's premium over US 10-year yields was about 50 bp, the least in three years.
Europe
Russia's invasion of Ukraine has been a watershed in a way that Moscow's 2008 invasion of Georgia or the war with Ukraine when it took Crimea was not. It was not only because of the widespread sanctions, but as many noted, it was spurring German (and others) military spending. While monetary and banking union was not complete, a common defense policy was strengthening. Europe was on the verge of establishing a rapid response force that could be ready for joint exercises as early as next year. Meanwhile, the debate about whether the EU can ban Russian oil imports continued and was one of the drivers of oil prices.
Tomorrow will be an important day for the UK. February inflation was expected to have accelerated. The swaps market was pricing in another 25 bp hike at the next BOE meeting (May 5). Chancellor of the Exchequer Sunak will deliver his Spring Statement. Today's data seemed to give him more room to maneuver. The deficit in the first 11 months of the fiscal year was about GBP26 bln smaller than projected.
Sunak was expected to offer some relief from the jump in food and energy prices, while going forward with the tax increase next month for the National Health Service. Still, on balance, given the great uncertainty, and the political considerations, Sunak was expected to be restrained in new commitments.
The euro fell to a four-day low near $1.0960 in late Asian turnover before recovering to almost $1.1015 in the European morning. Nearby resistance was seen in the $1.1020-$1.1040 area. Note two sets of option expirations today. The first was at $1.10 for about 935 mln euros and the second was for nearly 680 mln euros at $1.1025. The intraday momentum indicators were stretched, and North American participants may be inclined to buy dollars, for which they were increasingly paid to do. A break of $1.0960 could see $1.0930 tested.
Sterling was faring a bit better, but it remained for the third consecutive session in the range forged on Mar. 17 (~$1.3090-$1.3210). It flirted with $1.32, which we identified as a possible neckline of a bottoming pattern. It had yet to close above it, but if it does, it would still seem to target $1.34. The euro had been sold from nearly GBP0.8460 on Mar. 17 to almost GBP0.8340 today, almost a two-week low. A break of GBP0.8330 would target GBP0.8280-GBP0.8300.
America
Federal Reserve Chair Powell sharpened his hawkish message yesterday and reiterated that the central bank was prepared to move further and faster. The market responded as one might imagine and boosted the risk of a 50 bp move at the next meeting (May 4). The market had a little more than 190 bp of tightening discounted for the remainder of the year. There were six meetings left. This meant that the market was leaning toward two 50 bp hikes. Powell's remarks were conditioned with "if necessary" and "if appropriate." Some observers think it was necessary, and was so last week, though were disappointed that Governor Waller did not join his former boss, St. Louis Fed President Bullard in dissenting in favor of a 50 bp move.
While different parts of the US curve were flattening or, like the 5-10-year curve, turning inverted, Powell played it down. The Chair cited Fed staff research that found that 18-month curve to be more important and it had steepened not flattened as the market prices in a more aggressive tightening path. What can challenge this trajectory? Disappointing economic data.
The February durable goods orders due Thursday may not be it, as the series was volatile in any event. However, the preliminary PMI is due the same day. It was expected to have slipped, but a composite lower than expected and edging back toward the 50 boom/bust level would be a yellow flag.
The March employment data will be due on Apr. 1. A significant disappointment there could temper the rate hike fever. Separately, we noted that supply chain disruptions were hitting the auto sector and share prices fell to reflect it. That was in addition to surging oil and metal prices.
It will be a light economic calendar for North America today. The Fed's Mester, Daly, and Williams speak. Mester is a voting member of the FOMC, and Williams, the President of the NY Fed, has a permanent vote. Williams is part of the Fed's leadership, and we will see how much he echoes Powell. He had expressed doubts about a 50 bp move before this month's meeting, well ahead of Powell's endorsement of a 25 bp hike before Congress.
The US dollar was recovering from the dip to CAD1.2565 yesterday, its lowest level since late January. It was pushing back above CAD1.26 in the European morning. A move above CAD1.2650 would likely confirm that a near-term low was in place, with initial potential toward CAD1.2700.
The greenback recovered after dipping below MXN20.27 yesterday, a low here in March, but was turned back from MXN20.42, just shy of the 200-day moving average. Banixco was expected to hike its overnight target by 50 bp to 6.50% in a couple of days.
Still, this month, the peso gained almost 0.75% and was lagging behind the Brazilian real (~4.4%) and the Columbian peso (~3.2%). Strong demand for Brazilian equities was reported. Yesterday, the dollar fell to almost BRL4.93, which has not been seen since mid-2020. The next major chart point was near BRK4.82 and the 200-day moving average close to BRL4.71.