Saturday, June 3, 2023

Strong Gains In U.S. CPI And PPI Don’t Stop The Bond Market Rally

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Strong inflation prints this week have not prevented the long-term US interest rates from tumbling. The was about 10 bp lower than where it closed on Tuesday after the lackluster auction. The yield itself was 11 bp lower.

Fed Chair Powell did not break new ground yesterday and insisted that the bar of “significant further progress” has not been met to begin reducing its bond purchases.

A possible deal in OPEC saw a sharp drop in prices, and there was some follow-through selling today. European yields were lower, though hawkish comments are weighing on UK Gilt prices.

Australia’s data was also better than expected, and the Aussie bond yield fell five basis points and was again at a discount to the US. The was mixed against the majors. The , , and the were faring best. The Antipodeans and Scandis were off by 0.2%-0.3%.

Advancing emerging market currencies were being led by (no change in policy rates at today’s ) and , while the beleaguered was leading the losers. The JP Morgan Emerging Markets Currency Index was slightly firmer, trying to post back-to-back gains for the first time in a few weeks.

The Index rose for the third session this week, despite and shares not participating.

Europe’s Dow Jones was threatening to post its second consecutive loss for the first time since mid-June. NASDAQ futures were higher, but the was slightly heavier.

Lower yields seem to be aiding , which saw follow-through buying after taking out the 200-day moving average (~$1825) yesterday. Gold has advanced in nine of the past 11 sessions. It was oscillating around unchanged levels near midday in Europe. The next upside target was seen near $1845. was snapping a three-day slide with a 1% gain. September was at $737 at the end of June and settled yesterday near $612. The fell yesterday (-0.35%) to end a four-day advance.

Asia Pacific

China’s Q2 GDP was not a game-changer. For a country where the data is often opaque and whose credibility is frequently questioned by outside observers, the market’s forecasts tend to be fairly good. The median forecast in Bloomberg’s survey was for the world’s second-largest economy to have expanded by 1.0% in Q2, and instead, the government showed a expansion.

On the other hand, Q1 GDP was revised to 0.4% from 0.6%. June retail sales and industrial output year-over-year were stronger than expected, but the base effect means slower sequentially. Retail sales were above year-ago levels  (12.4% in May and 10.8% expected). Industrial output rose year-over-year, off from 8.8% in May, but better than the 7.9% forecast.

While fixed-asset investment was consistent with the pattern, property investment missed expectations for a 16% increase and rose 15% (down from 18.3% in May). The surveyed joblessness remained at , as anticipated. The takeaway was that there was no strong urgency for Chinese officials to change macro policy.

Australia’s immigration limits appear to be helping the labor market. Australia reported a 29k increase in employment in June, while the Bloomberg median was for 20k. This understates the strength of today’s report. Full-time positions rose by after 97.5k in May. Although the participation rate was unchanged at , the unemployment unexpectedly fell to 4.9% from 5.1%. It is the lowest unemployment rate since 2011.

Separately, note that the July consumer inflation expectations eased to 3.7% from 4.4%. Ir was at 4% at the end of 2019 and 3.5% at the end of last year.

The pullback in US yields appeared to be the main driver of the Japanese yen. Yesterday’s drop in US rates saw the greenback post a bearish outside down day against the yen, and follow-through selling today brought it to nearly JPY109.70. Last week’s low was near JPY109.55, and a break of it would target the JPY109.00-JPY109.10 area.

The BOJ’s concludes tomorrow. It is likely to reduce its growth and provide more details about how it will incorporate climate change into the conduct of monetary policy.

The Australian dollar remained within the range seen on Tuesday (~$0.7425-$0.7505). It didn’t appear to be going anywhere quickly, though it had the feel of building a base.

The was firm, advancing for the fourth session in the past five. The greenback finished the mainland session below the 20-day moving average (~CNY6.4690) for the first time in a month. If CNY6.49-CNY6.50 marks the upper end of the dollar’s range, the market may be fishing for the lower end. Maybe it is CNY6.45 or CNY6.42. The PBOC set the dollar’s reference rate at CNY6.4640. The median projection was for CNY6.4626.

Europe

The UK’s June employment report seemed to capture a labor market in transition. Still, a clear read may not be possible until after the furlough program that subsidizes wages concludes at the end of September. Those claiming jobless benefits fell by after falling by a revised 151k in May (initially reported at almost -93k).

Employment (three-month over three-month) in May rose by after 113k in April. The unemployment rate measured by ILO ticked up to from 4.7%. Average weekly earnings jumped (three-months year-over-year) as the composition of the workforce seemed to be shifting with a loss of low-paid jobs.

The Bank of England’s chief economist Haldane stepped down last month, but his voice as the resident hawk may have been replaced by Deputy Governor Ramsden. He warned that monetary policy may have to tighten earlier than previously anticipated and warned that CPI may peak near 4% (yesterday, it was reported at ).

MPC member Saunders also echoed these remarks, warning that stimulus may have to be withdrawn soon. However, BOE Governor Bailey was explicit earlier this week that the rise in prices will be temporary. The market is not pricing in any change in the base rate before H2 22.

Tensions between the EU and Poland are escalating. Poland’s Constitutional Court ruled yesterday that injunctions by the European Court of Justice about the country’s judiciary violated Poland’s constitution and therefore were not binding. When Poland joined the EU in 2004, it accepted that European law was paramount.

Some observers argue that is a step toward Poland leaving the EU. Yet, when the German high court second-guessed the European Court of Justice, there was no talk of a German exit for the EU. Still, the ECJ reaffirmed its judgment that the new disciplinary chamber set up by the Polish government violates the commitment toward impartiality and independence. Separately, the EC initiated legal measures against Poland and Hungary for violating LGBT rights.

The was firm, and although it was extending yesterday’s gains, it remained below the recent highs in the $1.1875-$1.1880 area. It has not traded above $1.19 in July so far. Initial support was seen near $1.1820, and there are options struck at $1.18 that expire today (~653 mln euros) and tomorrow (~777 mln euros). Sterling remained confined to the range it saw on Tuesday (~$1.38-$1.39). The daily momentum indicators looked supportive, but quiet consolidative turnover was the most likely scenario.

America

Neither the first leg of Powell’s testimony nor the generated much fresh light on the trajectory of the US economy or Fed policy. The takeaway was that the uneven recovery continues, and the tapering was still some ways off. Powell reiterated that it seeks to avoid a taper tantrum by giving investors ample warning of when it decides to reduce bond-buying.

The Fed chief also played down the direct role of the MBS purchases in lifting house prices. He seems more sympathetic to slowing both Treasury and MBS purchases when tapering does begin.

Powell vigorously defended the official judgment that price pressures are largely transitory, even while acknowledging the increase is more than expected. Today, Powell testifies before a Senate panel. The questions may differ, but the answers are likely the same. Typically, the market “corrects” the move from the first day of testimony.

Today’s high-frequency data includes the , the and manufacturing surveys (July) and June /¬†prices, and . Note that Q2 GDP will be reported on July 29, the day after the FOMC meeting concludes.

The Bank of Canada did not surprise . It reduced its bond-buying to C$2 a week and maintained its view that the output gap would close in H2 22. Still, it shaved this year’s growth forecast but lifted next year’s. At the same time, the central bank was more confident in its economic outlook.

Like, the Fed, ECB, and BOE, the Bank of Canada see upward pressure on prices as transitory. The derivatives market appears to have four hikes priced over the next two years. Canada reports existing home sales today, and , and tomorrow. The highlight for next week is the May retail sales report.

Despite the Bank of Canada’s continued tapering, the was unable to draw much succor. The greenback closed firmly above CAD1.25 after a knee-jerk move after the central bank’s decision saw it spike to a low slightly below CAD1.2430. Follow-through buying lifted the US dollar to almost CAD1.2550 earlier today, but it was better offered in the European morning. A break of CAD1.2500 would re-target yesterday’s lows.

The greenback remained within the range set on Tuesday against the (~MXN19.8150-MXN20.0820). It has not traded above MXN20.00 so far today, and if sustained, it would be the first time in nearly two weeks. Intraday support was seen near MXN19.85.

As widely anticipated, Chile hiked its cash target rate by 25 bp to 0.75% and signaled that it was the start of the tightening cycle. The rose around 0.6% yesterday ahead of the announcement, which took place after the markets closed. The central bank meets again at the end of August. Before that, though, Brazil (Aug. 4) and Mexico (Aug.12) are likely to raise rates again.





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