Via Marc Chandler at Brown Brothers Harriman:
Dollar Pushed Lower in Subdued Activity
- Geopolitical concerns continued to be elevated
- Oil is threatening to snap a five-day rally
- There is little concession built for today’s $20 bln auction of US 10-year notes
- South Africa and Mexico report February manufacturing and industrial production
The dollar is mostly softer against the majors. The Scandies are outperforming, while the dollar bloc is underperforming. EM currencies are mixed. ZAR and RUB are outperforming, while MXN and KRW are underperforming. MSCI Asia Pacific was down 0.1%, with the Nikkei falling 0.3%. MSCI EM is down 0.1%, with China markets rising 0.3%. Euro Stoxx 600 is flat near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is down 2 bp at 2.34%. Commodity prices are mixed, with oil down 0.3%, copper up 0.2%, and gold up 0.2%.
The US dollar has a slight downside bias today through the European morning. The market does not seem particularly focused on high frequency data, though sterling traded higher after an unchanged year-over-year CPI reading of 2.3% while the euro traded higher after a stronger Germany ZEW survey.
Geopolitical concerns continued to be elevated. The South Korean won’s slide has been extended for the sixth consecutive session and ten of the past 11 sessions. Its 0.3% decline today brings this week’s loss to 1.0% after a 1.4% loss last week. Korea’s Kospi’s nearly 0.5% loss today is also its sixth consecutive loss and also was among the larger losers in today’s session that saw the MSCI Asia Pacific Index slip 0.1%.
European shares are also trading with a slight downside bias. Information technology and financials are leading the way lower, while consumer discretionary and real estate are doing better. With tightening seen in the French polls ahead of the election in a couple of weeks, pressure is staying on France, where bonds are under pressure and the 10-year premium over Germany continues to trend back to the high seen in February.
Since the end of March, the French premium on 10-year yields has risen a little more than 10 bp to 75 bp. The late February high was 79 bp. The 2-year premium investors are demanding to hold French paper is making new multi-year highs today near 56 bp. It has more than doubled since late March. The February high was 45 bp. It has been nearly five years since the 2-year premium was this large. Earlier today, the German 10-year yield slipped briefly below 20 bp for the first time since late February. It is trading a little above there near midday in Europe.
The German ZEW investor survey rose more than expected. The assessment of the current situation rose to 80.1 from 77.3. This is a new six-year high. The expectations component rose to 19.5 from 12.8. This is the highest since August 2015. With the DAX up four consecutive months through March and a euro that makes German businesses extremely competitive and low yields, it is hardly surprising that investor confidence is buoyant in Germany. That said, sentiment is running ahead of real sector data.
As we noted yesterday after seeing the large states report national figures, the risk on the eurozone aggregate industrial output was on the downside, despite relatively upbeat PMI data. Industrial output in February fell 0.3%. The Bloomberg consensus was for a 0.1% gain. Adding insult to injury, and underscoring the gap between real sector data and the surveys, the January gain was slashed to 0.3% from 0.9%.
BRC like-for-like UK retail sales in March fell 1.0%. This matches the largest decline in since April 2015. The 0.8% decline in non-food sales was the worst in nearly six years. Part of the reason for weaker sales may be higher inflation. Separately, the UK reported March CPI unchanged at 2.3% year-over-year while rising 0.4% on the month. Many look for UK inflation to push toward 3.0% before peaking later this year, as last year’s oil rally and sterling’s slide drop out of year-over-year calculations. The UK’s core rate slipped to 1.8% from 2.0%, but also probably has not peaked. Producer prices were a little firmer than expected. Input prices (17.9% year-over-year) continues to outstrip output prices (3.6% year-over-year), which is often seen as pressure on profits. Tomorrow the UK reports the latest employment figures.
Oil is threatening to snap a five-day rally. The May light sweet crude oil futures contract rallied more than a dollar a day over the past three sessions and four of the past five. Disruptions in Libya and reports that Russia is considering extending its cuts helped fuel the last gains. We note that the May contract is running into a technical area that may give the bulls a pause. The 61.8% correction of this year’s decline is found near $53.50, which also corresponds to trend line resistance off of the early January and late February highs. The upper Bollinger Band is just above $53.20.
Oil prices have done little to lend support to the US Treasuries. The 10-year yield currently near 2.33% is six bp below yesterday’s high. Yellen’s comments yesterday failed to inspire the bears despite saying nothing to deter the expectations of a June hike. She did acknowledge that the Fed has a different posture now. Previously, the Fed was concerned about ensuring the economy was recovering from the financial crisis. Now it is engaged in trying to extend the expansion.
There is little concession built for today’s $20 bln auction of 10-year notes. This maturity is the fourth most popular among foreign investors and central banks, behind the 10- and 30-year TIPS and the 7-year note. Foreign official demand is often picked up in the indirect bids. In the last dozen auctions, the indirect bids took almost 2/3 of the 10-year sale.
The US economic calendar is light, featuring the JOLTS report on job openings. Minneapolis Fed President Kashkari, the lone dissent to the last month’s decision to hike rates, speaks late in the session.
South Africa reports February manufacturing production, which is expected to rise 0.2% y/y vs. 0.8% in January. It then reports February retail sales Wednesday, which are expected to contract -1.6% y/y vs. -2.3% in January. The economy remains weak, but the high inflation and a softening rand are preventing rate cuts. Next SARB policy meeting is May 25. While steady rates seem likely, much will depend on the external environment.
Mexico reports February IP, which is expected at -1.5% y/y % y/y vs. -0.1% in January. Banco de Mexico will release its minutes Wednesday. At that meeting, it hiked rates 25 bp, down from 50 bp at its last several meetings. For now, we think the bank would like to pause its tightening cycle and keep rates steady at 6.5% at the next policy meeting May 18. However, we think it may hike 25 bp at the June 22 meeting if the Fed hikes June 14.