Federal Reserve Governor Brainard's suggestion of a rapid unwind of the Fed's balance sheet stoked a bond market sell-off that was continuing today, rippling through the capital markets.
The US 10-year yield was rising for the fourth consecutive session. The six-basis point gain today put the yield near 2.62%, which represented a little more than a 25 bp increase since the jobs data on Apr. 1. European benchmark yields were 3-6 bp higher. Japan's 10-year yield was poking above 0.23% to again challenge the BOJ's Yield Curve Control.
Equity markets were taking it on the chin. The major markets in the Asia Pacific region fell, led by a 2%+ sell-off in Hong Kong. China's markets re-opened after a two-day holiday, and although the Shanghai and Shenzhen markets posted minor gains, the CSI 300 slipped by 0.3%. Europe's Stoxx 600 was off around 1.1% and US futures were about 0.75% weaker.
The dollar was mixed. The Swiss franc, Norwegian krone, and Japanese yen were weaker. The Swedish krona, sterling, and euro posted small gains.
Among the emerging market complex, the South African rand led the few currencies higher. Poland, which was expected to lift rates 50-75 bp today did not prevent the zloty from softening. The Hungarian forint and Indian rupee led the decliners today.
Gold was edging higher within its consolidative range, after the $1915 area held. May WTI was firm near $104, but within yesterday's range (~$99.90-$105.60). US natgas was extending yesterday's 5.6% gain by another 2% today. It was up roughly 40% since mid-March. Europe's benchmark was snapping a three-day 13% decline with a 2.75% gain today. Iron ore was off around 1.3%, while copper was slipping lower for the first time this week. May wheat was paring the two-day 6% rise.
Asia Pacific
China's mainland markets re-opened after the two-day holiday. The news was poor. The Caixin services and composite PMI were weaker than expected. The services PMI slumped to 42.0 from 50.2. The median forecast (Bloomberg). The composite dropped to 43.9 from 50.1.
In some ways, the news confirmed what the market already knew in broad strokes. The world's second-largest economy was struggling mightily as the zero-COVID policy was disrupting activity. The lockdown in Shanghai, for example, was extended. The economic disappointment will underscore expectations for additional policy support.
New Zealand was placing a 35% tariff on imports from Russia while extending its export prohibitions. Australia reports February trade figures tomorrow. Weaker exports and stronger imports were projected to translate into a smaller surplus. The new pact between the US, UK, and Australia (AUKUS) was not just about the nuclear-powered submarines. It was announced that they were also working on developing hypersonic weapons.
Meanwhile, a Quad (Australia, Japan, India, and the US) meeting slated for next month may be delayed until after the Australian election. This also meant that US President Biden's first trip to Japan will also be rescheduled.
Rising US yields helped lift the greenback to JPY124. The dollar's multiyear high set in late March was almost JPY125.10. The market looked set to challenge it again and a marginal new high was possible. Recent comment by the Minister of Finance and the BOJ Governor showed continued sharp depreciation of the yen was not desirable. A month ago, the dollar was near JPY115.
The Australian dollar surged yesterday as the central bank appeared to signal the likelihood of an earlier hike, but it was trading quietly today. The Aussie was in around a 15-tick range on either side of $0.7575. Although it reached $0.7660 yesterday, the $0.7600 area may offer a cap today.
China's mainland market re-opened today, and the dollar initially jumped to a five-session high near CNY6.3765. It spent local sessions drifting lower and was near CNY6.3600, back within the Apr. 1 range. The PBOC set the dollar's reference rate at CNY6.3799. The median projection (Bloomberg survey) was CNY6.3791.
Europe
German factory orders slumped 2.2%. It was the first decline in four months. The median forecast (Bloomberg) anticipated a 0.3% decline. The January series was revised to 2.3% from 1.8%, offering a small consolation. Domestic orders fell for the second consecutive month, while foreign orders slid 3.3%.
That said, foreign orders have been alternating between gains and losses since at least last August. A group of economic advisers to the German Chancellor cut this year's growth forecast to 1.8% from 4.6%, while warning that a recession was possible.
Tomorrow, Germany is to report February industrial production figures. The median forecast is for a 0.2% gain after the 2.7% surge in January. The risks were on the downside. Note that yesterday, France reported February industrial output fell by 0.9%, three-times the decline the median forecast anticipated. The aggregate report was due next week.
Poland's central bank was expected to deliver its seventh consecutive rate hike today. The reference rate was standing at 3.5%. The median forecast was for a 50 bp hike, while the average forecast leant toward a 75 bp move. Poland began the tightening cycle last October with a 40 bp move. It was followed by 75 bp in November and then three 50 bp moves before a 75 bp hike last month.
Meanwhile, the EU wasted no time since Hungary's Orban handily won the weekend election to begin pressing the untested "conditionality mechanism" which could lead to the denial of EU assistance (~40 bln euros) for violating core values.
Since posting a key downside reversal last Thursday, the euro was unable to sustain even modest upticks. It was turned back from around $1.1185 tested $1.0875 today, its lowest level since Mar. 8. The low was recorded in Asia, and early European dealing squeezed it to about $1.0925 before it ran out of steam. The single currency looked poised to re-test the $1.08 area seen on Mar. 1.
Sterling posted an outside down day yesterday, trading on both sides of Monday's range and then settling below Monday's low. Follow-through selling pushed it briefly below $1.3050 before it too bounced in the European morning to almost $1.3110. There may be scope for additional minor gains, but we expected it to come off in the North American morning.
America
Many observers seemed confused. They had the Fed's Brainard as a dove. Yet her comments yesterday were as hawkish as they have come. Reducing inflation was paramount. She seemed to be part of the growing consensus to hike 50 bp next month. It was her comments about the balance sheet that may have done the most damage to stocks and bonds. She referred to a "rapid" pace.
The previous exercise saw the unwind limited to $50 bln a month and it took several months to ramp up to the limit. Brainard appeared to confirm a more aggressive unwind that could begin as early as next month. The 2-10-year yield curve steepened back to a positive slope, but it was not because investors thought that the balance sheet adjustment will take some pressure off the need to raise interest rates.
On the contrary, the implied yield on the December Fed funds futures contract rose to a new high and was now implying 220 bp of hikes this year. Hawk and dove labels may be helpful for analytic purposes, but they are always contextual. Bullard, the leading hawk now, may not have gotten what he wanted, hence the dissent at the March meeting.
However, the rest of the FOMC was converging to his broad position. Consider that in March, there were only two dots above 2.38% for the Fed funds target at year-end. The December Fed funds futures contract implied a year-end rate of 2.54%.
Brainard did not steal all of thunder from the FOMC minutes. The market still wanted to have a better idea of the pace of the unwind. Anything more than around $100 bln would surprise. The phase-in period likely begins next month and will quickly ramp-up toward the caps.
The US dollar rebounded off CAD1.24 yesterday and settled near the session high just below CAD1.25. A bullish hammer candlestick pattern was left in its wake. Follow-through buying today was minimal and the greenback tested CAD1.2510. It looked like the move that in early March near CAD1.29 had been completed. A consolidative/corrective phase looked likely from a technical perspective. Initial resistance was seen near CAD1.2550, we suspected a move toward CAD1.2600 was likely. The 200-day moving average was around CAD1.2620.
The greenback's slide against the Mexican peso appeared to have ended. The move began on Mar. 9 after peaking the day before near MXN21.4675. At the start of this week, it fell to MXN19.7275. That move ended with aplomb yesterday and the greenback raced above MXN20.00 for the first time since Mar. 29. Momentum and trend-followers were caught leaning the wrong way. A short-squeeze could lift the dollar toward MXN20.14 and then, possibly MXN20.35-MXN20.40.