Russia's invasion of Ukraine and the global response was a game-changer, as Fed Chair Powell told Congress yesterday. The UK-based research group NISER estimated that world output will be cut by 1% by next year or $1 trillion, and boost global inflation by three percentage points this year and two the next.
The recovery in US stocks yesterday may have helped lift Asia Pacific shares today (China and India were notable exceptions). However, Europe's Stoxx 600 was softer as were US future. The 10-year US Treasury was hovering around 1.86%, while European yields were mostly 3-6 bp higher.
The US dollar remained strong. The Canadian and Australian dollars were among the most resilient. CAD traded at its best level since late January, but was consolidating those gains in the aftermath of yesterday's 25 bp rate hike and the risk-on move. The Australian dollar was at its best level since mid-November.
While most of the major European currencies were faring better, the Swiss franc, and emerging market currencies were bearing the brunt. Even the Hungarian forint was finding little traction after the central bank hiked the one-week deposit rate by 75 bp instead of the 50 bp that were expected.
Gold was in a narrow $13 range mostly below $1935. Last week's peak near $1975 had not been approached and this week's high was around $1950. April WTI poked briefly above $116.50 a barrel and was still firm. US natgas prices were up another 1.5% after climbing 8% in the past two sessions.
Europe's natgas benchmark reversed early gains and was off about 7.5% after jumping more than 65% over the past two sessions. Industrial metals, from iron ore, copper, to zinc and aluminum were extending their rallies. May wheat prices were up 4.5% to bring this week's gain to around 25%.
Asia Pacific
China's Caixin services PMI was stronger than expected but still falling to 50.7 from 51.4. The composite was unchanged at 50.1, suggesting little momentum. Reserves and trade are due next, followed by CPI next week. Both PPI and CPI are expected to have slowed.
Japan's final PMI services and composite readings were revised up but remained in contraction territory and more pronounced than in January. The services PMI stood at 44.2 rather than 42.7 of the flash report and 47.6 in January. The composite fell to 45.8, not 44.6, from 49.9. The report underscored the challenge to the world's third-largest economy this quarter. However, it appeared to be largely a result of COVID and the social restrictions. This could set the stage for a recovery in Q2.
Australia's final services and composite PMIs were revised higher, and the January trade surplus was much larger than expected. The final services PMI stood at 57.4, up from 56.4 of the preliminary estimate and 46.6 in January. The composite PMI was at 56.6. The flash reading put it at 55.9 after January's 46.7 final report.
The January trade surplus swelled to A$12.9 bln from A$8.8 bln in December. The January surplus was about a third larger than the median forecast in Bloomberg's survey, helped by an 8% rise in exports in the month, while imports fell by 2%. The one disappointing report today from down under, came from the January building approvals, which tanked by almost 28%. Economists (Bloomberg survey) saw a 3% decline.
The dollar was trading near two-week highs against the yen around JPY115.80. The JPY116.00 area offered initial resistance and a $450 mln option expires there today. The high seen in January and retested in February was JPY116.35. Support was now pegged in the JPY115.35-JPY115.50 area.
The Australian dollar rose to its best level, almost $0.7325, since mid-November. The 200-day moving average came in today near there and it last was tested late last October. It has not closed above it since last June. Note that the (61.8%) retracement of its losses since that October high was near $0.7330.
The Chinese yuan was confined to yesterday's range (~CNY6.3110-CNY6.3225). The PBOC fixed the dollar at CNY6.3016, while expectations (Bloomberg survey) were for CNY6.2997. The PBOC has not set the dollar's reference rate below CNY6.30. Note that Chinese bond futures fell to their lowest level in nearly four months as some have second thoughts about the aggressiveness of the expected easing.
Europe
The financial choke hold on Russia continued to tighten. MSCI and FTSE were dropping Russian stocks, which were untradeable given the sanctions. Moody's and Fitch slashed Russia's rating to junk. Some oligarchs' assets have been confiscated. The number of refugees fleeing Ukraine was approaching a million. Reports suggested that the US held off a scheduled ICBM test to avoid any possible misinterpretation.
The German and French flash services and composite PMIs were revised lower in the final estimate, while Italy, and especially Span, surprised on the upside. Of note Italy and Spain's services PMIs recovered back above the 50 boom/bust level that had been violated in January. The aggregate services PMI rose to 55.5 from January's 51.1, a little below the flash estimate of 55.8. The composite PMI was also at 55.5, not the 55.8 of the preliminary estimate, and better than the 52.3 seen in January.
The UK followed the similar pattern seen in Germany and France. The flash PMI was revised lower, but the final reading still was an improvement from January. The UK services PMI stood at 60.5, not 60.8, after January's 54.1. The composite PMI was at 59.9. The flash reading had it at 60.2 after January's 54.2.
Turkey's CPI accelerated to 54.44% from a year ago, up from 48.69% in January. The month-over-month increase was 4.81%. The median in Bloomberg's survey called for a 3.75% increase. The core rose to 44.05% from 39.45%. Producer prices jumped another 7.22% in the month of February after a 10.45% increase in January. The year-over-year pace accelerated to 105.01% from 93.53%.
Elsewhere, we note that Hungary's central bank hiked the key one-week deposit rate to 5.35% from 4.60%. A 50 bp hike was expected and a 75 bp move was delivered. It was the largest move since the one-week deposit rate was activated for policy purposes in Q4 21.
The euro was spending more time below $1.11. The session high was slightly above $1.1120. Yesterday's high was a little below $1.1150. Today was the eighth consecutive session that the euro was setting lower highs. Yesterday it has briefly dipped below $1.1060. Today's low so far was just above $1.1070. There was an option for almost 900 mln euros at $1.11 that expires tomorrow.
Sterling fared better than the euro but seemed range-bound between $1.3270 and $1.3440. Late in the European morning, it was trading around $1.3380. Two BOE officials were quoted on the news wires. Deputy Governor Cunliffe warned of downside risks to growth while Tenreyro noted the upward risks to inflation. The intraday momentum indicator favored a test on the highs.
America
Fed Chair Powell testifies in the Senate today. His prepared remarks were the same, even if the questions were different. Still, the Chair got good reviews from yesterday's measured comments and clear endorsement of a 25 bp hike later this month, while reserving the right to accelerate later if needed. At the same time, the 2-10-year curve flattened further yesterday, dipping below 35 bp.
There was a full slate of US data. The Q4 productivity and unit labor costs are derived from Q4 GDP, but it is notable that despite the worries that higher wages were spurring inflation, unit labor costs—which reflect wages, benefits and output—rose by 0.3% in Q4, and the final estimate today was expected to confirm it.
The US also sees the final Markit services and composite PMI and the ISM services. January factory orders and the final durable goods reading were also due. Economists may use the ISM data to help fine-tune forecast for tomorrow's jobs report. The median forecast (Bloomberg's survey) crept a little higher to 418k from 400k.
The Bank of Canada delivered the first hike in sequence that will run well into next year. The 25 bp hike lifted the bank rate to 0.50%. There was no new forward guidance on the balance sheet strategy, which took many observers by surprise. Perhaps it was the way the central bank could acknowledge the uncertainty spurred by Russia's invasion of Ukraine. Governor Macklem speaks today and holds a press conference, where more insight into the central bank's thinking is likely.
Mexico's central bank cut this year's GDP forecast to 2.4% from 3.2%. A little was pushed into next year (now seen at 2.9% rather than 2.7%) but some was simply lost. It expects CPI to peak shortly and head back to 4% toward the end of the year. That still seemed optimistic. Meanwhile, Deputy Governor Heath indicated he suggested a 75 bp hike last month, but voted for the 50 bp move.
The US dollar set the high for the year last week near CAD1.2880. Yesterday, it fell below the CAD1.2650-CAD1.2660 shelf that had been forged last month and settled on its lows slightly below CAD1.2630. Follow-through selling saw the greenback slip below CAD1.2590 in early European turnover. However, it snapped back to almost CAD1.2640. Old support may now act as resistance.
The US dollar rose slightly above last month's high yesterday against the Mexican peso (~MXN20.7850) but did not sustain the momentum and fell back to around MXN20.58. It was inside yesterday's range today but looked poised to re-challenge the highs. The year's high, set in late January, was near MXN20.9150.
