Good Friday

Overview

Activity throughout the capital markets remains light, as most financial centers in Europe are closed for the Easter celebration. The Hong Kong, Australia, New Zealand, and Indian markets were closed as well. Still, most of the equity markets in Asia-Pacific advanced, led by South Korea's Kospi's nearly 1.3% advance. The market responded favorably to news that Samsung (OTCPK:SSNLF) would cut its production of memory chips and shrugged off its smaller-than-expected profits. US equity futures are little changed as the US employment report is awaited.

The dollar is trading in exceptionally narrow ranges, as one might expect, given the lack of participation. The median forecast (Bloomberg survey) is for a 230k increase in nonfarm payrolls. However, given the recent string of data, we suspect the risk is to the downside. The key to the Fed's decision next month may be more linked to the state of the financial stress and the tightening of lending. Yesterday's data showed that emergency borrowing from the Fed remained high in the week ending April 5. Discount window borrowing fell by $18 billion to $70 billion, while borrowing from the newly created facility (Bank Term Funding Program) increased by $15 billion, nearly a wash. Late today, US bank commercial and industry loans will be reported. Last week's report covered through the weekend ending March 22, and C&I lending fell by nearly $30 billion, offsetting the increase of the previous three weeks. It was largest decline since mid-2021. The Fed funds futures, which priced in around a 60% chance of a May hike at the end of last week, is going into the jobs report with a 50% chance discounted.

Asia-Pacific

Japan's workers have seen the average monthly cash earnings rise by 1.1% in the 12 month through February. Wages rose by 1.8% in 2022 after a 0.4% increase in 2021. Like elsewhere, Japanese wages have not kept pace with inflation, and in real terms fell by 2.6% year-over-year in February. They fell by 1.1% last year. Separately, household spending rose by 1.6% in the year through February. The median forecast in Bloomberg's survey was for a 4.8% surge. On a seasonally adjusted basis, it fell by 2.4% from January.

Bank of Japan Governor Kuroda's term ends this weekend, after two five-year. Ueda is taking the reins. Surveys suggest many expect the Yield Curve Control will be abandoned in June-July period. Still, what appears to be a minority expects the Ueda to eventually take the IMF's counsel and target a shorter-term maturity than the 10-year. Yet, even then, when many fear is a destabilizing jump in Japanese long-end yield, which in turn, the argument goes, would encourage Japanese investors to keep more of their savings at home. As a thought experiment, imagine the 10-year JGB doubling in yield to 1.0%. The US premium narrows. Yet, this year the US premium has narrowed by more than 60 bp and Germany's premium has fallen by more than 40 bp. The Italian premium has fallen by around 70 bp. As we noted before, Japanese investors have been buying foreign bonds at twice the pace they sold last year. According to the MOF's weekly portfolio data, foreign investors bought JPY3.2 trillion (~$24 billion) of Japanese bonds in the past four weeks. However, the figures were flattered by a record purchase of JPY4.1 trillion in the week ending March 17.

The dollar has been confined to less than half of a yen below JPY132.00. It peaked on Monday near JPY133.75 and recorded the week's low on Wednesday around JPY130.65. It has averaged JPY131.80 this week, which is where it is languishing in the European morning. The Australian dollar is in about a third of a cent range below $0.6700. After trading in a wide range on Monday (~$0.6650-0.6790), it has remained within it. Initial resistance is seen in the $0.6700-20 area. The greenback is little changed against the Chinese yuan around CNY6.8750. The dollar has settled with a CNY6.87 handle since March 29. The PBOC set the dollar's reference rate at CNY6.8838, a little stronger than expected (~CNY.6818). China reported that its reserves rose by $50.7 billion to $3.184 trillion, essentially recouping the decline reported in February (-$51.3 billion). It was a bit stronger than the market had expected, but in line with our projections based purely on some valuation projections.

Europe

The market is very confident that the ECB will hike again at its May 4 meeting. The swaps market has priced in 90% chance of a 25 bp hike (50% chance in US and 74% chance in the UK). ECB Chief Economist Lane is often seen as a dove and his remark that provided the baseline view holds through the banking stress, then a rate hike next month is likely. While core inflation is falling gradually in the US, it made a new high in the eurozone last month. Earlier this week, Austria's central bank governor Holzmann played up the possibility of a 50 bp hike if the banking stress did not become more aggravated. The STOXX 600 bank index rose nearly 2% this week after a 6.25% rally last week.

The euro is about a 15-tick range below $1.0925. It rallied from a brief dip below $1.0790 on Monday and reached the week's high near $1.0975 the following day, and has been confined to Tuesday's range (~$1.0885-$1.0975). The euro, which has rallied since the March 15 low near $1.0515, looks a bit toppish and the daily momentum indicators appear poised to turn lower. The year's high was set on February 2 near $1.1035. Sterling has followed a similar pattern this week. Monday was the low (~$1.2275). Tuesday was the high (~$ 1.2525). And rest of the week's activity has been inside Tuesday's range (low ~$1.2395). It has trended higher since the March 8 low a little above $1.1800. The daily momentum indicators appear to be rolling over.

America

Between the miss on the ADP, the rise in Challenger lay-offs and the rise in weekly jobless claims, with new seasonal adjustments, the market ought not to be surprised if US payroll growth was subdued last month. The JOLTS report (with an extra month lag) was also consistent with a slowing of the labor market. We think the risk is on the downside (closer to 200k), but if the median in Bloomberg's survey is accurate, the 230k increase would put the Q1 average near 350k. In Q1 '22, the average monthly gain was 560k. Last year, the nonfarm payrolls averaged 400k. Economists assume no change in the participation rate (62.5%) and see the unemployment rate steady at 3.6%. Hourly earnings growth is gradually slowing, and a 0.3% monthly increase would see the year-over-year pace slow to 4.3% (from 4.6%) and would match the lowest rate since June 2021. Late in the session, February consumer credit will be reported, too late to draw much interest. A small increase is expected (~$18 billion vs. $14.8 billion in January). In the first two months of 2022, consumer credit rose by almost $47.5 billion.

Canada's March jobs report shows the labor market remains strong but is most unlikely to push the Bank of Canada off the sidelines when it meets next week. Canada filled nearly 19k full-time positions, more than twice the number of overall job gains expected in Bloomberg's survey. The full-time job growth was on par with Q1 '22 (171k vs. 153k). The unemployment rate was unchanged at 5.0% as the participation rate ticked down (65.6% from 65.7%). Average hourly wage growth slowed to 5.2% from 5.4%. Economists in Bloomberg's survey had expected a slight increase. Canadian did not get traction from the report, and the six-basis point increase in Canada's two-year yield still leaves the yield down almost 12 bp for the week.

Talking about streaks, the Canadian dollar ended a six-day advance on Monday and is now easing for the fourth consecutive session. Yet, the greenback has remained within Monday's range (~CAD1.3410-1.3535). We had suggested corrective potential into the CAD1.3550 area. However, with the daily momentum indicators turning higher, we suspect potential can extend toward CAD1.3600-20 next week. The US dollar was testing the MXN18.00 at the end of last week and in the first couple days of this week before being squeezed to MXN18.40 in the middle of the week. It drifted lower yesterday and is trading quietly near yesterday's lows (~MXN18.20). Below there, support may be found around MXN18.12. That said, corrective forces are still in control, and the daily momentum indicators warn of upside risks in the coming days.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.