Hawkish ECB Comments Boost Risk Of A 50 Bp Hike Next Month

Overview

The 0.5% decline in US March producer prices pushed on the door opened by the softer-than-expected CPI on Wednesday. The Fed funds futures market sees the year-end rate at 4.33%, while still pricing in a nearly 70% chance of a hike on May 3 to 5.25%. The dollar tumbled to new lows for the year against the euro, sterling, and Swiss franc. The Dollar Index made a new low for the year today, a few hundredths of an index point below the low set in early February. US equities rallied strongly, with the major indices up more than 1%, and this has carried over to Asia-Pacific and European trading today. The MSCI Asia Pacific Index is at its best level in two months. Europe's STOXX 600 is up for the fifth consecutive session and is approaching the year's high set in February. US equity futures are softer.

Benchmark 10-year yields were mostly higher in Asia-Pacific and Europe, while the US 10-year Treasury yield is slightly softer near 3.43%. The two-year yield is near 3.96%. It moved above the 4% mark on an intrasession basis earlier this week but was unable to do so yesterday. After extending its decline in the Asia-Pacific session, the dollar has turned slightly higher against several of the major currencies. Among emerging market currencies, the Mexican peso, South African rand, Turkish lira, and Polish zloty are sporting softer profiles. The J.P. Morgan Emerging Market Currency Index is a little lower but still in the upper end of its two-month trading range. Gold reached almost $2049 yesterday and is consolidating today with a heavier bias. It found support slightly below $2032. June WTI set the high for the year on Wednesday near $83.40. It consolidated yesterday and is doing so again today. It is holding above Wednesday's low (~$81.20).

Asia-Pacific

Brazil's President Lula told his Chinese hosts exactly what they wanted to hear, and it follows on the heels of French President Macron bemoaning the "extraterritoriality" of the dollar. Lula asks who decided that the dollar was "the currency" after the gold standard. He should ask a Brazilian company like Vale (VALE) or Bunge (BG) why they sell their products in dollar. He should ask his own central bank why 80% of its reserves are kept in US dollars. He should ask his Treasury why they issue dollar bonds instead of yuan bonds. The Financial Times (here and here) claims that the yuan's share on SWIFT has more than doubled to 4.5% since Russia invaded Ukraine. This is simply factually not true. Even China's own newspaper (China Daily) does not make such a claim. The share of yuan on SWIFT stood at 2.19% in February, and March's data will be reported next week. In January 2022, the yuan's share stood at 3.2% (which was the peak), and in February 2022, it was 2.23%.

The US dollar is trading in a narrow range against the Japanese yen but holding above yesterday's low near JPY132.00. That roughly matched the (61.8%) retracement of the rally from last week's low close to JPY130.65. Still, after advancing in four consecutive sessions through Tuesday, the greenback is under pressure for the third day in a row. That said, the dollar finished near JPY132.15 last week and could close higher on the week. The Australian dollar retested last week high near $0.6800 yesterday and held it today. There are around A$400 million in options struck there that expire today. There is another set of options for A$965 million that expire there next Tuesday. It is in about a third of a cent range below there today. The Aussie has not traded above $0.6800 since late February. A close below $0.6745 would weaken the technical tone. After trading in exceptionally tight ranges, the yuan jumped on the back of the broad-based US dollar weakness. The greenback gapped lower and fell to CNY6.8320, its lowest level since late March. It recovered back to nearly CNY6.8550 but still could not re-enter yesterday's range (~CNY6.8675-6.8785). The PBOC set the dollar's reference rate at CNY6.8606. The median projection in Bloomberg's survey was for CNY6.8618.

Europe

Sweden's Riksbank meets on April 26. It is the next G10 central bank meeting. The key policy rate stands at 3.0%. March CPI was reported earlier today. It fell more than expected to 10.6% from 12.0% in February and a peak of 12.3% last December. It has the highest inflation among the G10. The underlying measure, which excludes energy and fixed interest rates, made a new cyclical high of 9.3% in February and eased to 8.9% in March. Inflation is more stubborn that the Riksbank expected, and while a 50 bp hike seems to be the base case, some were looking for a 75 bp move. Today's softer-than-expected inflation report may make the larger move somewhat less likely. The Riksbank forecasts that the economy will contract by 1.1% this year, which is a bit more pessimistic than the Bloomberg survey that found a median forecast for a 0.7% contraction. A challenge for the Riksbank is the sharp drop in house prices. They are off 12% from last year's peak, and although they stabilized in March, the risk is for further declines. In comparison, Norway's house prices are off around 2% from their peak last August. The Swedish krona is up about 1.7% against the dollar this year and 1.6% weaker than the euro. Its 2.1% advance leads the G10 currencies this week. The Norwegian krone is the weakest of the G10 currencies, off almost 5% this year against the dollar and 8.3% against the euro.

Hawkish comments from some ECB officials have spurred a reaction in the swaps market. It now prices in about a 25% chance of a 50 bp move instead of 25 bp when it meets on May 4. This has helped lift the euro to about $1.1075 today. It is the fourth consecutive advance. The euro settled slightly above $1.09 last week. With this week's gain, the euro has rallied for seven weeks in a row, the longest advance since July-August 2020. While the momentum indicators are stretched and the euro is toying with the upper Bollinger Band range, the next important chart area is $1.1185-1.1275. Sterling initially extended its gains to $1.2545 but was sold in early European turnover today. It found new bids near $1.2500. Sterling has risen for the past three sessions. It finished last week near $1.2420. Barring a significant surprise, this will be the fifth consecutive weekly gain for sterling, its longest advance since January-February 2021.

America

Given the stress on US banks that erupted last month, today's earnings may receive more attention than usual. The market seems to be interested in two aspects. The first is deposits. Analysts quoted in the press see around a $520 billion outflow over the past year with around $60 billion in the first quarter. This is matched by a $600 billion increase into money market funds. Second is the forward guidance or outlook that is shared. Investors and businesses are looking for insight into the extent of the tightening of lending. Separately, the Fed reported yesterday that emergency borrowing slowed to $139.5 billion from $148.7 billion previously. This was the sum of discount window borrowing ($67.6 billion, slight lower than the $69.7 billion in the prior week) and the new repo facility, the Bank Term Funding Program ($71.8 billion vs. $79 billion). The week through April 12 was the fourth consecutive one that emergency borrowing was reduced. Foreign central banks also reduced their use of the Fed's repo facility to $30 billion from $40 billion.

The US also reports March retail sales and industrial output. The data is expected to be soft. Several factors flattered the increase, including the cost-of-living increase in Social Security, unusually warm weather, seasonal adjustments, and "payback" after a weak end of last year. Recall that retail sales surged 3.2% in January after the nearly 2% decline in November and December. It was practically inevitable that retail sales would pull back. In fact, they fell by 0.4% in February and are expected to have declined by the same magnitude in March. Moreover, the core measure, used in some GDP models, which excludes autos, gasoline, food services and building materials, is forecast (median, Bloomberg survey) to fall by 0.5%, offsetting the February gain (January +2.3%). After declining for four of five months through February, industrial production is expected to have risen by 0.2% even though manufacturing is seen falling by 0.1%. Manufacturing rose by 0.1% in February after surging 1.4% in January. Economists will use February business inventories to also help fine-tune Q1 GDP estimates, and the Atlanta Fed's GDP tracker (now 2.2%) will be updated. The preliminary University of Michigan consumer survey may pose headline risk but is unlikely to change market views.

The minutes from the last month's Bank of Mexico meeting that hiked the overnight interest rate by 25 bp to 11.25% underscored that the central bank is nearly done with its tightening cycle that began in June 2021, nine months before the Federal Reserve. The next meeting is on May 18. The issue is whether it matches a Fed hike that will be likely be delivered a couple of weeks before Banxico meets. Economists favor it, but the swaps market has about a 1-in-3 chance discounted.

The Canadian dollar is trading at levels not seen in about two months. The US dollar settled last week around CAD1.3510 and reached nearly CAD1.3315 earlier today. The greenback is extending its slide for the fifth consecutive session after rallying in the last four sessions of last week to snap a six-day slide. The next important technical area are the year's lows set in February (~CAD1.3260-1.3275) and then last November's low near CAD1.3225. The US dollar settled below the 200-day moving average (~CAD1.3400) yesterday for the first time since last June. The lower Bollinger Band comes in around CAD1.3295 today. The greenback briefly traded below MXN18.00 but failed to close there and has come back better bid today. So far, it is holding just below yesterday's high (~MXN18.1230). There is a set of options for $520 million at MXN18.00 that expire today, and the dollar has not settled below MXN18.00 in a month. While the peso has been a market favorite, it appears to have been eclipsed by the Brazilian real. The real is up 2.6% for the week coming into today, while the peso is nearly flat.

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