Chinese officials offered reassuring words and sparked a dramatic rally in equities and risk appetites more broadly. At the same time yields were surging as the markets were anticipating the Fed to signal a more aggressive tightening course as it upgrades its inflation forecasts.
China's CSI 300 rallied 4.3%, while the Hang Seng soared 9% and an index that tracks mainland shares listed in HK jumped 12.5%. Most equity markets in the region rose 1-2%. Europe's Stoxx 600 was around 2.2% better and US futures pointed to a strong opening.
The US 10-year yield was a little firmer at 2.15%. European benchmark yields were mostly 2-5 bp higher. The 10-year JGB yield was a little near 0.20%, as it approached the top of the Yield-Curve Control band (0.25%).
The dollar was on its heels. The Scandis were leading the charge followed by the dollar bloc. The dollar managed to extend its advance against the Japanese yen for the seventh consecutive session yesterday and was edging higher today. Emerging market currencies were also gaining on the greenback, and the JP Morgan Emerging Market Currency Index was rising for the third consecutive day.
Rising yields seemed to be tarnishing gold. It was little changed, after falling for the past three sessions. It was holding above yesterday's low near $1907. April WTI was consolidating inside yesterday's range. So far, it held below $100 a barrel for the first time this month. US natgas was jumping 3.0% to recoup most of what was lost in the past two sessions.
Europe's benchmark was up almost 1% after a nearly 2% advance yesterday. Recall that it dropped 17.3% on Monday. The supportive comments by Chinese officials arrested the six-day slide in iron ore prices with an 8.3% bounce today. Copper was rising for the first time in four sessions. Nickel was trading briefly upon its re-open and then shut again, citing a technical issue with the new daily limit. May wheat was about 3% weaker after rallying 5.3% yesterday.
Asia Pacific
Chinese officials confirmed the shift from structural reforms to supporting the economy and growth. In a meeting chaired by Vice Premier Liu He promised to keep the stock market stable, support foreign listings, new policies for property developers, and signaled the end of its effort to "rectify" internet platform companies. It could be that Chinese officials understood that the recent batch of economic data was not very convincing, such as the 12.2% jump in fixed-asset investment despite a sharp drop in cement and steel output (-17.8% and -10% respectively).
Reports suggested that Saudi Arabia was considering allowing China to pay for its oil in yuan. It was important to recognize that this was not the first time such a story has circulated. China has been Saudi Arabia’s single biggest customer, taking around a quarter of the Kingdom’s oil exports. At $100 a barrel, it runs around $155 mln a day. What would Saudi Arabia do with the equivalent amount of yuan? It was not like Saudi companies needed yuan to service their RMB-debt or other obligations like they do with the dollar or euro.
The Saudi riyal is pegged to the dollar. If Riyadh pushes too hard, will speculators test the commitment to the dollar peg? Will it be costly, like when it decided to grow wheat in the desert and cost it a quarter of its aquifer?
Riyadh could boost the allocation of its reserves to yuan, but to what end? Given that the yuan shadows the dollar closely, the diversification argument was weak. The yield premium over 10-year Treasuries has fallen below 70 bp for the first time in three years. Saudi Arabia and US interests have diverged in several areas over the past year or two, including Yemen, Iran, and Afghanistan.
It has rejected the US and others’ entreaties to boost oil output, even though OPEC+ is not meeting the 400k barrel addition a month commitment. The US used to buy 2 mln barrels of oil a day from Saudi Arabia. At the end of last year, it was about 500k bpd and surpassed by Russia, Mexico, and Canada.
Japan's February trade balance always improves from January, but this time the improvement was much smaller than expected. Japan reported a JPY668 bln shortfall after a JPY2.19 trillion deficit in January. Exports rose 19.1% year-over-year, which was a little less than expected. On the other hand, imports soared by 34%, well above the 26.4% expected (median forecast in Bloomberg' survey). The surge in the cost of energy drove the imports. Japan reports February CPI figures Friday ahead of the outcome of the BOJ meeting. Excluding fresh goods and energy, Japan was expected to show that deflationary forces persisted.
The US dollar was about a quarter yen range as it held above JPY118.15. Provided the greenback closes above JPY118.30, it will be the eighth consecutive advance. Our JPY118.60 target was approached. Above there, the JPY120 area beckoned. Still, we cautioned chasing it higher. The technical indicators were stretched, and the dollar closed above its upper Bollinger® Band for the past three sessions and remained above it now (~JPY118.15).
The Australian dollar extended its recovery that began yesterday. It was approaching $0.7240, which was the (38.2%) retracement of the leg down that began at the end of last week from about $0.7365. Note that the five and 20-day moving averages converge near $0.7255 today.
The Chinese yuan rallied for the first time in five sessions today. The dollar gapped higher on Monday and again on Tuesday. It reversed lower yesterday, but the opening gain was not closed. Today, the dollar closed Tuesday's gap and entered Monday's without closing it. It extended to last Friday's high slightly below CNY6.34. The greenback's decline of a little more than a third of 1% would be the biggest drop of the year, if sustained. Today the PBOC's dollar fix was a weaker than expected at CNY6.38 (vs. CNY6.3811, the median in Bloomberg's survey).
Europe
Reports suggested that the US promised that if the 2015 nuclear accord with Iran could be re-started, its sanctions would not impact Russia's atomic supply arrangements with Iran. This appeared to be a key issue behind the suspension of talks at the end of last week. The revival of talks, which appeared to be moving in the right direction in recent weeks, would likely allow some phasing in of Iranian oil as adherence to the pact met certain benchmarks.
The Bank of England meeting concludes tomorrow. The swaps market had about little more than a 25% chance of a 50 bp hike. There was a 60% chance discounted on Feb. 10, the day before the US warned that a Russian attack on Ukraine could happen at any moment. Recall that last month's 25 bp hike was delivered by a 5-4 majority, with the minority seeking a 50 bp hike. The BOE's balance sheet was to begin shrinking this month as the large maturity will not be recycled into new purchases.
The euro was trading inside yesterday's range (~$1.0925-$1.1020). There was a 1.23 bln euro option at $1.10 that expires today. It looked likely to consolidate until the reaction to the FOMC meeting later today. We note that the US two-year premium over Germany widened to almost 228 bp yesterday, the most since late 2019.
Despite the anticipation of the BOE's rate hike tomorrow, sterling remained pinned near the $1.30-trough seen on Monday and Tuesday. Yesterday's high was about $1.3090, and today, it was unable to sustain upticks abovoe $1.3070. The $1.3100 area corresponded the (50%) retracement objective of the leg down since reversing lower from $1.3200 on Mar. 10.
America
Before the outcome of the FOMC meeting is announced, February retail sales were reported. It was unreasonable to expect a strong gain on top of the 3.8% surge in January (even without autos and gas). The dramatic gain was in reaction to the COVID-related 2.5% slump in December. The data was reported in nominal terms, reflecting volumes and prices.
We know that auto sales, as reported by the manufacturers, disappointed. The median forecast in Bloomberg's survey was for a 0.4% increase in the headline pace month-over-month and slightly slower for the components that feed into GDP models (excludes autos, gasoline sales, building materials, and food services). Economists will scrutinize the data to see how much the increase in gasoline prices was compressing discretionary purchases.
It is Fed Day, and this was the main focus. There seemed little doubt that the Fed will hike the target rate by 25 bp. That was probably the element that there could be the most certainty about. The market had about a 13% chance that it could be 50 bp after Chair Powell clearly endorsed a 25 bp hike in testimony before Congress earlier this month. Still, there was greater uncertainty over the other two elements of the Fed's announcement.
The pace of the balance sheet unwind has been anxiously awaited. We penciled in $40-$50 bln a month of Treasury and $20-$25 bln a month in Agencies. Talk circulated for a few months, but it seemed to pick up recently that the Fed could avoid an inversion of the curve if it relied more on QT (quantitative tightening) than rates. Powell had insisted that the interest rate target was its primary monetary policy tool.
Is this cast in stone?
The dot-plot was the third element. In December, the median projection was for rates to rise about 75 bp this year, with a 0.75%-1.0% target at the end of the year. The Fed funds futures market had about 175 bp in tightening discounted. The median Fed dot saw the longer-term equilibrium rate at 2.5%. In December, only five Fed officials anticipated that the target rate would be above there at the end of 2024. The swaps curve saw rates peaking between 2.25% and 2.50% in 2024.
Canada's February CPI was expected to have accelerated to 5.5% from 5.1%. More important for the central bank may be the acceleration in the underlying core rates. The average may rise to 3.4% from 3.2%. The Bank of Canada meets next on Apr. 13 and was widely expected to hike again and signal the roll-off of its balance sheet. Late in the session, Brazil's central bank will likely raise the Selic Rate by 100 bp to 11.75%. The past three hikes have been in 150 bp increments. The IPCA measure of inflation edged up to 10.54% last month from 10.38%. The central bank may warn that inflation has not peaked. The swaps market had the peak in rates near 13.75% later this year.
The US dollar reversed lower after testing CAD1.2870 yesterday. It settled on its lows (~CAD1.2760) and follow-through selling pushed to about CAD1.2720 in the European morning. Initial support was seen at CAD1.27, where a $1.1 bln option expires today. Last week's low was near CAD1.2685. The CAD1.2650-CAD1.2660 area had previously offered support.
The greenback was pushing lower against the Mexican peso for the fourth consecutive session. It had fallen from MXN21.05 before last weekend to MXN20.7635 earlier today. It had been finding bids near MXN20.81. If the break can be sustained, the next target would be the MXN20.60-MN20.66 band. On the other hand, the dollar has risen for the past four sessions against the Brazilian real. The risk-on mood coupled could help stem the tide. Resistance was seen near BRL5.20. A break of yesterday's low near BRL5.10 may signal a top may be in place.
