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New Week Same Refrain: Stocks Down, Yields Up, Stronger Greenback

, May 10, 2022, 0 Comments

treasury-yields-markets-marketexpress-inNew week, same refrain.  Stocks down, yields up, and the dollar is broadly higher.  The Nikkei and Taiwan fell by more than 2% and South Korea and Australia were off more than 1%.

China’s Shanghai and Shenzhen rose, but the CSI 300 fell again.  Europe’s Stoxx 600 is off around 1.5% near midday in Europe.  US futures are 1.5%-2.0% lower.  The US 10-year yield is near 3.20%.  European bond yields are 3-8 bp higher.  The core-periphery spreads are widening, and Italy now offer around 205 bp more than Germany on 10-year bonds.  The dollar rules the roost.  Among the majors, the Antipodean are leading the losses with declines of about 1%.  In the emerging market complex the Russian rouble is off 3.4% followed by the South African rand’s 1% decline.  Gold is off more than 1% near $1863.  It peaked last week on Thursday near $1910.  June WTI is a couple of bucks softer as its pulls away from $110 to trade near $107.  US nat as is up 2.3% after falling 8.4% before the weekend.  Europe’s benchmark is off 4%, extending the pre-weekend 9.7% drop.  Iron ore is off 6%, matching the loss from all last week.  June copper sliding 2.6%. Last week it fell 3.2% and is off more than 10% in the past three weeks.  It is at new lows for the year today. July wheat is rising for the fourth session.  It rose 5% last week and is up around 1.4% today.

Asia Pacific

China reported April reserve and trade data.  The dollar value of reserves fell 2.1% (~$68.3 bln), the most since November 2020.  While there were portfolio capital outflows, the primary driver was valuation as foreign currencies slumped against the dollar and the price of financial assets fell.  April was the fourth consecutive month; the dollar value of the reserves fell.  At $3.120 trillion, they are at the lowest since June 2020.

China’s trade surplus increased to $51.1 bln in April from $47.4 bln in March.  Exports slowed to 3.9% year-over-year from 14.7% in March.  Still, they held up better than expected.  Imports for flat after slipping 0.1% in March.  The rise in prices concealed a decline in the volume of commodity imports, including coal, oil, natural gas, and steel.   The 57% rise imports from Russia were impacted by this.  China’s exports to Russia slowed.  Exports to the US rose 9.4%.  Separately, China’s Premier Li, who will not serve a third term as President Xi is expected to secure later this year, gave his gravest warning about the economy, calling it “complicated and grave”.  He called on all levels of government to help businesses retain employment.  The lockdowns in Beijing and Shanghai intensified over the weekend.

Japan, the world’s third-largest economy, likely contracted in Q1, but is recovering.  The April service and composite PMI were revised higher from the flash estimates.  The service PMI rose to 50.7 from 50.5 of the preliminary estimates and 49.4 in March.  It was the first reading this year above the 50 boom/bust level.  The composite PMI stands at 51.1, up from 50.9 initially, and 50.3 in March.  It is the highest print this year.  Japan also reported somewhat better than expected wages.  The largest umbrella labor organization estimates that negotiations boosted wages by an average of 2.1%, up from 1.8% last year. In March, labor cash earnings rose 1.2% year-over-year, the same pace as February.  This is twice the pace of March 2021.  However, when adjusted for inflation, average wages fell by 0.2%, the first decline since December.  A year ago, they had risen by 1.0%.  Wage growth is the key to the BOJ outlook.  Governor Kuroda is willing to look through the rise in commodity prices and the fading last year’s cut in cell phone charges to maintain the easy monetary policy because wage growth has been weak.

The Philippines appears likely to elect former President Marcos’ son and current President Duterte’s daughter as President and Vice President in today’s election.  They have been running well ahead in the polls.  For the first time in 20 years, Hong Kong only had one candidate running and lo and behold he won some 1416 of the 1426 votes cast.  Lee will take office July 1.  He will oversee the further Sino-ification of Hong Kong, including controversial laws banning treasons and sedition that previously spurred large-scale demonstrations.

The dollar made a marginally new 20-day year high against the Japanese yen near JPY131.35.  It is now finding support near JPY131.00.  The greenback has risen for the past nine weeks.  It is risen from below JPY115.  The next target that is widely noted is JPY135. The upper Bollinger Band is near JPY132 today.  The gains scored last week in response to hawkish central bank that lifted the Aussie to around $0.7265 have completely been unwound.  The low for the year, set in late January was near $0.6970.  A break could spur another half-cent decline, but it would weaken the technical outlook, and suggest potential toward the $0.6750 area.  The US dollar has continued to surge against the Chinese yuan.  It is up nearly 1% today to poke above CNY6.73.  The dollar rose by 0.9% in last week’s two sessions after the long holiday.  These levels have not been seen since October 2020.  The 200-day moving average is slightly higher, around CNY6.7330.  We note that the (50%) retracement of the US dollar’s slide from the Covid-high (June 2020 near CNY7.1780) is around CNY6.7420.  For the fifth session, the PBOC set the dollar’s reference rate lower than the market (Bloomberg survey) projected (CNY6.6899 vs. CNY6.6938).  This suggests it may be trying to moderate the pace of the yuan’s decline not explicitly or directly fueling it.


The G7 have agreed to phase in a ban on Russian oil, but the EU has not fully agreed.  Trying to get Hungary, Czech, and Slovakia on board is proving difficult.  The EU offered to give them more time to implement but it has not proven sufficient yet.  Negotiations will continue.

The election in the German state of Schleswig-Holstein showed support of the SPD fall about 11 percentage points.  The state previously was governed by a coalition of CDU, Greens, and the FDP. The election results showed the Greens moving into second place in the state, with the SPD slipping into third.  The results mean that the FDP are not needed to form a government.  We suspect that they will still be included, though their support was nearly halved to 6.4%.  The AfD and Left parties did not make the 5% threshold for representation.  Germany’s most populous state, North Rhine-Westphalia, voted this coming Sunday.  Currently it is governed by a CDU-FDP coalition.  The CDU is running slightly ahead in the polls.

The UK local elections have complicated the government’s Northern Ireland policy.  The nationalist Sinn Fein took the most votes but in the complicated checks and balances, the unionist DUP support is still needed to form a government.  It says it won’t play ball if the Northern Ireland protocol is retained.   The poor showing for the Tories more generally is expected to prompt a cabinet reshuffle before the summer recess in late July.  In the Queen’s Speech tomorrow, the Tory’s legislative agenda will be outlined.

The euro is trading inside its pre-weekend range (~$1.0485-$1.06) as the consolidative phase continues. The 500 bln euro option at $1.0520 that expires today has likely be neutralized.  The speculative (non-commercials) future accounts had been net long the euro since mid-January.  While they have been scaling out of their position in recent weeks, the CFTC data shows that as of last Tuesday (May 3), they switched to a new short position.  While the euro is consolidating, sterling is continuing to struggle.  It has been sold to a new low near $1.2260 today.  There may be support another cent lower, but the next important chart point is in the $1.20-$1.21 area.  The $1.2350-$1.2360 band offers a nearby cap.


The FOMC meet last week, and market participants still want more color and insight into the central bank’s thinking.  However, the Fed’s critics do not like what they hear.  Chair Powell is accused to taking a 75 bp move off the table.  He said it was not under active consideration.  Outside of Barkin, a non-voting member (Richmond President) no one else seem to demur.  Specifically, the most hawkish members–Bullard and Waller–argued that the Fed is not as behind the curve as some argue.  They noted that through the Fed’s communication, the financial conditions were tightening as of September 2021–six months before the March hike.  Minneapolis Fed President Kashkari, among the more dovish members (and does not vote this year) opined that the neutral rate may be around 2%, a bit lower than usually projected.  No fewer than six Fed officials speak tomorrow.

A week that could feature the first decline in both CPI and PPI in two years begins slowly with revisions to wholesale sales and inventories on tap for today. GDP revisions often stem from inventory and trade data.  From last week’s March trade balance, it appears that the contraction in Q1 GDP may be slightly larger than the 1.4% initial estimate. If the GDP contraction was a statistical fluke arising primarily from importing too much and slower grow in inventory accumulation, the productivity and unit labor costs, which are derived from the GDP were also exaggerated.

Canada reports March building permits, but data highlight of North America today will be Mexico’s April CPI.  The headline rate is likely to accelerate (7.73% vs. 7.45%, according to the median forecast in Bloomberg’s survey) and the core may rise to 7.18% from 6.78%.  The central bank meets on May 12 and a 50 bp rate hike, which would bring the overnight rate to 7.0% is expected.  If there is a surprise, it will likely a 75 bp move instead of 25 bp.

The US dollar is making new highs for the year against the Canadian dollar today, reaching CAD1.2950.  We see solid Canadian macro fundamentals.  However, the Canadian dollar seems particularly sensitive to the risk environment and the fall in equities is the main drag.  The US dollar has not traded above C AD1.30 since December 2020. The CAD1.3025 area corresponds to the (38.2%) retracement objective of the decline since the March 2020 Covid-high near CAD1.4670.  The 200-week moving average is found near CAD1.3045.  There is a $1.15 bln option at CAD1.30 that expires in the middle of the week.  The greenback consolidated against the Mexican peso in the second half of last week, but the risk-off is proving too much and it is threatening to break higher.  A move above MXN20.35 would target the MXN20.50 area. Initial support is seen around MXN20.20.