Thursday, January 27, 2022

Capital Markets: "When Maximum Fed Flexibility is Hawkish"

From Marc Chandler at Bannockburn Global Forex:

Overview: If equities had appeared to drive the other capital markets recently, the debt market took the bull whip yesterday. The surge in US rates saw equities reverse lower and the dollar rally. The MSCI Asia Pacific Index was sold to its lowest level since late 2020, led by more than 3% losses in the Nikkei and Kospi. Foreign investors have been notable sellers of South Korean and Taiwanese shares in recent weeks. Europe’s Stoxx 600 is flat near midday in Europe. The finance, energy, and utility sectors are most resilient. US futures are trading choppily but are now little changed. The US 10-year yield is around three basis points lower around 1.83%, but globally, bond markets have sold off in the aftermath of sharp losses seen following the FOMC meeting. Yields in Europe have recovered from their worst, and Australia/New Zealand yields surged 6-8 bp. Japan's 10-year yield closed near 0.16%, its highest level since last February when it reached 0.18%. The US dollar gains are being extended. The Canadian dollar and Norwegian krone are the most resilient, perhaps on anticipated rate moves. Yet, New Zealand, which reported a jump in Q4 CPI earlier today and solidified expectations for its third hike next month, has seen the Kiwi sink the most today among the majors, and it is off more than 0.5% to its lowest level since October 2020. Among the emerging markets complex, only a few currencies are higher, led by the Russian rouble's bounce and a small gain in the South African rand ahead of the central bank decision. It is expected to deliver the second hike in the cycle that began last November. Of note, the 0.67% decline in the Chinese yuan was the biggest loss in a little over a year and snapped a six-day advance. Gold had pushed above $1850 on Tuesday and slipped below $1810 today. The 200-day moving average and trendline off of the mid-December and mid-January lows comes in today near $1805. March WTI is little changed, consolidating after reaching a two-year high yesterday just shy of $88. Natural gas is higher for the fifth session in the US, while European gas is recouping most of yesterday's 3.8% decline. Iron ore edged higher, while copper is off 1%.

Asia Pacific
China's December industrial profits rose by 4.2% year-over-year, half the November pace and the weakest since the contraction in April 2020.
There are reports that plans to liquidate Evergrande’s assets to pay its liabilities are being considered. Separately, EC Commissioner Dombrovskis indicated that the EU would take China to the WTO over its coercive actions against Lithuania over its decision about the use of Taiwan in the de facto embassy.

While JGB yields spiked higher, the signal from the BOJ minutes from the meeting earlier this month, showed a determination to push back against speculation about policy normalization. In his press conference Governor Kuroda dismissed such speculation with the strong words "absolutely not." Still, the real challenge will come in April, when the sharp decline in mobile phone fees begins dropping out of the 12-month comparison. 

New Zealand's Q4 CPI rose to 5.9% year-over-year as the quarterly rate increased by 1.4%, slightly more than expected. It is the fastest pace in more than 30 years. The RBNZ hiked rates twice last year and meets next on February 23. The market has been anticipating another hike then, but the risk of a 50 bp move has grown and now is a little more than a 25% chance. The Reserve Bank of Australia meets next week and is expected to recognize the possibility of a rate hike this year, which so far it has resisted. It will also likely confirm the end of its bond purchases....