Federal Reserve Chairman Powell stopped an intraday equity rally in its tracks yesterday, after he signalled a 0.50% rate hike in May and that he was not unamenable to “front-loading” more 0.50% rate hikes. Mr Powell cited a tight labour market and inflation at multi-decade highs. Fellow President Mary Daly also suggested 0.50% hikes, while the bull in the monetary China shop, James Bullard, reiterated his enthusiasm for 0.75% hikes.
The sell-off of the US dollar the previous day abruptly reversed course in the major currency space. Notably, it never really had downside momentum in the EM space. US yields also finished the day earlier with the 5-year to 30-year tenor moving into inversion. The prospect of even faster more aggressive rate hikes, and whether the Fed can achieve a soft landing, was enough to sharply reverse equity markets, sending them to a sharply lower finish. That is already spilling over into Asian equity markets today.
In China, the Yuan sell-off is threatening to become somewhat of a rout in relative terms as it tumbled again. A neutral USD/CNY fixing by the PBOC this morning will settle the ship for now, but the price action this week suggests that foreign money leaving the China equity and bond markets is in danger of becoming a flood. That isn’t being helped by the PBOC seemingly looking to weaken the Yuan anyway, potentially a poor man’s path to supporting the manufacturing sector whilst allowing it to maintain neutral monetary policy at home.
With the Shanghai lockdown dragging on, and fears ever-mounting that China’s Covid-zero policy will torpedo 2022 growth, President Xi Jinping disappointed markets yesterday by reiterating his support for the policy in a speech at the Baoa Forum. Similarly, the head of the Peoples Bank Of China today, said the bank would concentrate on targeted support for small businesses and those impacted by Covid-19. That continues a recent trend of talking up support intentions from officials but failing to deliver on a scale the market is looking for. All we have is a 0.25% RRR cut, while the 1-year MTR and 1 and 5-year LPRs have been left unchanged. Until markets see the colour of China’s money, China equities will remain challenged and 6.5000 looks set to arrive for USD/CNY much sooner than I expected.
Australian Preliminary Manufacturing and Services PMIs for April held steady in expansion territory today at 56.6 and 56.2. Fears of a slowdown in China have not impacted Australia at all thus far, as the Russia/Ukraine war lifts global demand for everything that is pumps, digs or grows out of the ground. The swing in sentiment to negative has left AUD/USD dangerously close to technical support though, and with an RBA stubbornly pushing back on inflation chasing rate hikes, the US/Australia rate differential may start to weigh on the currency in the weeks ahead.
Japan’s Jibun Bank March Manufacturing and Services PMIs clung to expansionary territory, coming in at 53.4 and 50.5 respectively, a steady result from last month. More attention was focused on Inflation and Core-Inflation for March. Headline Inflation jumped (I say that relatively because it's Japan) to 1.20% thanks to rising fresh vegetable prices. Core Inflation which has no vegetables, but does include energy, was benign, rising just 0.80%. None of that will sway the Bank of Japan at next week's policy meeting, which makes sense given its intervention to cap 10-Year JGB yields at 0.25% this week. With the US yield curve still marching higher, and the BOJ maintaining multi-decade low rates, 130.00 in USD/JPY is going to arrive sooner, rather than later.
The United Kingdom could well be back in the headlines again in the coming week thanks to a word I hoped I would never have to say again, Brexit. Firstly, I note the UK GFK Consumer Confidence released this morning plummeted to -38, thanks to the war in Eastern Europe and soaring inflation. Add into that mix now, the regional Northern Ireland elections on May 5. Due to the nightmarish nuances of Northern Irish politics, an increasing number of stories are now circulating that the British Government may unilaterally change the Brexit agreement.
Why you would do that when both it and Europe are fighting a proxy military and economic war in the East, I do not know. Maybe it was one too many wines at the infamous No.10 garden parties. Whichever way you look at it, it won’t be good for Sterling. Notably, GBP/USD’s price action has been underwhelming at best in April, and its recovery rally halted right at its two-month resistance line around 1.3090 yesterday. A soft set of UK Retail Sales data today could see support at 1.2975 aggressively tested. On a happier note, Happy Birthday Your Majesty.
Turning to Europe, President Macron of France has widened his lead over challenger Marine Le Pen ahead of this weekend’s presidential runoff. That has eased fears of a regime change that would shake Europe’s foundations. Options volatility on Euro for Monday has fallen back sharply. Euro still retreated in the face of a US yield pumped US Dollar yesterday, and German, France and Eurozone PMIs all have downside risk when released today. That combined with an increasing amount of noise that Germany may be nearing a decision to ban Russian natural gas imports should limit any gains by the single currency or European equities, especially with the weekend also upon us. We’ll talk more about the latter next week, but my initial thoughts are that EUR/USD would start with a 0.9, and not a 1.0.
The pre-FOMC Fed speaker blackout starts on Saturday, and it looks like they are thin on the ground today. That just leaves US PMIs as the main ppint of interest data-wise. A high print should keep the hiking noise going, while a low print could bring some relief to bond and equity markets into the weekend.
Asian equities tumble on Wall Street rout
The incipient recovery rally on Wall Street yesterday ran into a brick wall of Fed speakers, notably Jerome Powell who was very hawkish. That sent Wall Street tumbling to a negative close as US yields shot higher, notably at the short end. The S&P 500 fell by 1.47%, the NASDAQ slumped by 2.07%, and the Dow Jones fell by 1.02% as concerns mount about whether the Fed will send the US into a hard or soft landing.
That has spilt over into Asian markets, already nervous about a deeper slowdown in China. The Nikkei 225 has slumped by 2.0%, with South Korea’s KOSPI falling by 1.15%, and Taipei losing 1.0%. Mainland China stocks are lower, but showing some resilience, making me think that China’s “national team” are doing some pre-weekend “smoothing. A lower Yuan may also be supporting exporters. The Shanghai Composite has fallen by 0.45%, while the CSI 300 is down just 0.25%. However, the Hang Seng has lost 1.0% as President Xi emphasised digital security in his speech yesterday.
Across regional markets, Singapore, Jakarta, and Manila are down just 0.20%, while Kuala Lumpur is unchanged, Bangkok has lost 0.55%. Again, weaker currencies may be supporting local markets. Australian markets have taken fright at the losses on Wall Street overnight, falling heavily. The ASX 200 and All Ordinaries have slumped by 1.50%.