From Marc to Market:
CNY Softens after PBOC's Move; Equities Advance on Stronger World Outlook
Overview: The US dollar fell against most major currencies following the PBOC's modest move to reduce the upward pressure on the yuan. Follow-through selling was seen earlier today, and sterling reached a new three-year high. However, the dollar found a bid in the European morning, while the Scandi currencies held on to most of their earlier gains. Emerging market currencies were mixed, and the yuan eased. The JP Morgan Emerging Market Currency Index's four-day advancing streak is at risk. Equity markets have begun the new month on firm-footing. The MSCI Asia Pacific Index rose, led by Hong Kong, Thailand, and New Zealand, to post the third consecutive gain. It has risen 11 of the past 13 sessions. It has rallied from the year's low in mid-May to the upper end of its three-month trading range. Europe's Dow Jones Stoxx 600 snapped a seven-day rally yesterday but has come back strongly today to set new record highs. US futures are trading higher. The US 10-year yield is firm near 1.62%, after finishing last week slightly below 1.60%. Most European benchmark yields are slightly firmer. Gold's gains were extended above $1916, and it saw the best level since January 8 before easing back to little changed levels below $1908. OPEC+ underscored the tightness of markets, and oil prices were lifted to new highs, with oil rallying more than 2% to lift Brent to almost $71 a barrel and the July WTI above $68 a barrel. Other industrial commodities are mixed. Iron ore gained for a third session and is up more than 10% over the run. Steel rebar fell after rising around 6% over the past two sessions. After rising in four of five sessions last week, copper is slightly softer today.
Asia Pacific
Japan's final manufacturing PMI suggested the slowing of activity was not as great as initially feared. The 53.0 reading compares with the 52.5 flash estimate and 53.6 in April. Japan also reported a deeper than anticipated contraction in Q1 capital spending. It contracted by 7.8% year-over-year after a 4.8% decline in Q4 20. This risks a downward revision to its GDP estimate (-1.3% quarter-over-quarter).
The Reserve Bank of Australia left policy untouched today with a review of its asset purchases and three-year yield target on track for next month. It is focused on the labor market and acknowledged that some signs of a labor shortage were appearing. Separately, the May manufacturing PMI ticked up to 60.4 from the preliminary estimate of 59.9 and 59.7 in April.
South Korea and Taiwan's May manufacturing PMI eased but remain well in expansion mode. South Korea's slipped to 53.7 from 54.6. Seoul also reported strong trade figures, with exports accelerating to 45.6% year-over-year in May from 41.2% in April. Imports rose 37.9% from a year ago, after a 33.9% increase in April. Taiwan's May manufacturing PMI eased to 62.0 from 62.4. China's Caixin manufacturing PMI edged up to 52.0 from 51.9 in April. The official measures had eased to 51.0 from 51.1. They both told the same story of steady expansion in China's manufacturing sector.
Following the PBOC's move to increase the reserve requirements for foreign exchange from 5% to 7%, the dollar bounced about 0.35% against the offshore yuan, while the onshore yuan snapped a seven-day advance. It slipped further today. The move comes after the verbal intervention escalated (in terms of frequency) and the dollar's reference rate, set by the PBOC, began deviating a bit more than usual from market expectations. The unusual move on reserve requirements (the first since 2007) is just a warning shot. Some trigger, in terms of duration of the one-way market, the pace of the move, or perhaps, though unlikely a rather arbitrary line in the sand such as a level, has seen officials climb a few rungs on the escalation ladder. One implication is that if the yuan does not share in the dollar's devaluation, then the other major currencies may have to be a bigger adjustment.
Beijing took an unexpected and rather bizarre step. In the face of the limited response to allowing families to have two children (2016), the Politburo announced a three-child policy. It was not immediately clear when the policy begins. It could have abolished the birth limits altogether, as some researchers at the PBOC argued. The demographic changes are a slow grind, and it has been evident for years. The recent census report that showed a decline in the working-age population gave impetus to the move. China's population may begin to shrink by 2025. Yet, the Great Convergence is not just about the eightfold increase in per capita income since 1980 but also in fertility rates. The reason many, if not most high-income countries have experienced a decline in fertility rates is not due to government edict but to the dictates of the market and greater integration of women into the workforce. In China, like America, the high costs of housing and education are also formidable hurdles. Beijing would have only children support four elderly parents, and raise three children. Urbanization, modernity, and legal equality are powerful prophylactics. The risk is that this policy begins a pushback against Chinese women in the workforce and other social discriminations. At the same time, China announced intentions to gradually raise the retirement age from 60 years currently for men and as low as 50 for women....
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