Action Insight

The latest inflation report continues to portray a subdued CPI, high PPI environment in China. Headline CPI improved to +0.9% y/y in March from +0.8% a month ago. The market has anticipated stronger pickup to +1%. Core inflation (excluding food and energy) rose +2% y/y, up from +1.8% in February. The decline in food prices deepened to -4.4% y/y from -4.3% in February. Nonfood inflation improved modestly to +2.3% y/y, up from +2.2% in February. PPI eased to +7.6% in March, from +7.8% in the prior month, compared with consensus of +7.5%. Both seasonal factors and moderation in the commodity price rally were key reasons for the slowdown. Lunar New Year in the first week of February pushed prices higher and absence of such factor was reflected in the March reading. Meanwhile, mining input prices gained +3.7% y/y in March, compared with a +36.1% y/y rally in the prior month. Oil and gas price, gaining +68.5% y/y in the month, was the biggest driver of PPI inflation last month. We expect PPI to stay high in coming months but growth would be more gradual due to strong base effect. Meanwhile, the rally in commodity prices over the past months is seen passing through to downstream CPI.

The financial markets are clearly in risk averse mode on escalating geopolitical tensions. Gold jumps to as high as 1281.8 so far, comparing to last week's close at 1257.3, and is heading towards 1300 handle. WTI crude oil also extends recent rally to as high as 53.6, still on course to 55.24 key resistance. Safe haven flows into US treasury also pushed yield lower with 10-year yield losing -0.063 to close at 2.298. And 10-year yield is now having last week's spike low at 2.271 in sight. Reactions in stock were relatively muted as DJIA dipped to 20512.56 but closed at 20651, down just -0.03%. Though, notable weakness is seen in Nikkei as it's trading down -1.2% at the time of writing.

Euro recovers today as lifted by German investor sentiment data. Meanwhile, Dollar softens broadly after uninspiring comments from Fed chair Janet Yellen. German ZEW economic sentiment rose to 19.5 in April, up from 12.8, beat expectation of 14.8. That's also the highest level since August 2015. Current situation assessment rose to 80.1, up from 77.3, beat expectation of 80.1. ZEW President Achim Wambach said that the "German economic situation has proved fairly robust in the first quarter" And, that was highlighted by "solid figures for growth in industrial production, the construction sector and retail sales from February." Also, "consistently high labour demand has boosted private consumption." Eurozone ZEW economic sentiment rose to 26.3, up from 25.6, beat expectation of 25.0. Also from Eurozone, industrial production dropped -0.3% mom in February versus expectation of 0.1% mom rise.

Some selling pressure is seen in Euro in Asian session as the common currency is dipping through Monday's low against Yen and Sterling. French election in April and May is the main focus for the common currency for now. But it should be noted that instead of political uncertainties, Euro's current selloff is more due to adjustments on ECB expectations. That is, there is little chance for ECB to raise interest rate soon in spite of the "hawkish twist" back in March. There are talks that Euro could be given a lift after French election but that would likely be just temporary. The situation of the British Pound is indeed quite different as Sterling has survived news of Brexit and stayed firm. BoE outlook is the main support for the Pound as Kristin Forbes voted for a rate hike back in March. And that was accompanied by stronger than expected February headline inflation reading. UK CPI release today will be importantly to decide whether Sterling can hold on to its resilience.

While lacking surprises, the US-China meeting held last week managed to avoid a trade war between the world's two biggest economies. Donald Trump and Xi Jinping agreed on a 100-day plan on trade that aims at boosting US exports. Meanwhile, the North Korea issue has remained a deadlock. Trump's announcement to launch airstrike in Syria during the meeting, followed by the deployment of a US navy strike group near the Korean peninsula, is a call for China to take necessary measures to address North Korea's nuclear program. Intensified geopolitical tensions have continued to pressured Korean financial market with Korean won extending weakness for a 5th straight day against US dollar while the country's benchmark equity index, KOSPI, recording the biggest one-day selloff in 6 weeks.

The Japanese Yen is trading as the weakest major currency today as it's paring back this month's gain. Canadian Dollar is so far the strongest one for the day as supported by strength in oil price. Dollar attempted to extend Friday's rally earlier today but no follow through buying in seen yet. Meanwhile, Euro is weighed down mildly by news on French presidential election. Overall, trading activity is quite subdued today as traders are probably starting preparing for holiday and long weekend ahead.

Dollar edges mildly higher in early Asian session today but quickly turned mixed. The greenback is somewhat supported by comments from Fed officials. St. Louis Fed President James Bullard echoed some other officials and said Fed could start winding down its $4.5T balance sheet later this year. But in that case for Bullard, it would become less necessary to raise interest rate. On the other hand, New York Fed President William Dudley said on Friday that shrinking the balance sheet would only prompt a "little pause" in tightening.

"The market is always right". That's by no means saying that the market is efficient, that's a topic for the academics. But, the market always move with certain underlying forces. We may or may not always understand why stocks, yields, currencies commodities move that way. It doesn't matter. And indeed, the voice of the market is usually the loudest when it does something that doesn't make sense. It's up to us to hear it or ignore it. And, reading news is not about reading the news but the reactions to the news. It's our choice to see the reactions, or just to criticize the reactions.

US non-farm payroll report comes in much weaker than expected. Only 98k jobs were created in March, around half of expectations of 177k only. Prior month's figure was also revised down from 235k to 219k. Unemployment rate dropped 0.2% to 4.5%, hitting the lowest level in nearly 10 years. Average hourly earnings posted 0.2% mom rise in March, below expectation of 0.3%. Released from Canada, employment rose 19.4k in March versus expectation of 5.7k. Unemployment rate rose to 6.7%. Notable weakness is seen in USD/CAD after the releases, as Canadian dollar is additionally supported by surge in oil price. Some buying is seen in the Japanese yen, on risk aversion and possibly on expectation of fall in treasury yields too. Meanwhile, dollar is so far steady against European majors.

Risk aversion comes back to drive the market as US President Donald Trump, while he was meeting with China President Xi Jinping, ordered air strike on Syria. That was in response to Syrian government's use of chemical weapons on civilians. Nikkei reversed earlier gains and is trading in red at the time of writing while Hong Kong HSI is trading down -1%. Most Asian indices are generally in red. Gold soars through 1270 to as high as 1271.5 and takes out resistance at 1264.9 firmly. WTI crude oil surges to as high as 52.94, comparing to yesterday's close at 51.70. In the currency market, renewed buying is seen in the Japanese yen and Swiss Franc. Canadian Dollar decouples with Aussie and Kiwi thanks to oil prices.

Dollar trades in rather tight range as the markets await the summit between US President Donald Trump and China President Xi Jinping. They will greet each other at Trump's Mar-a Lago retreat in Florida late in the afternoon and dine together. The summit will conclude with a working lunch tomorrow. Pressure is on Trump's shoulder to deliver something concrete out of the meeting. Those would include bringing jobs "stolen" by the Chinese back to the US, ending China's "currency manipulation", push China to use its "great influence" on North Korea, etc. Some market participants might have high expectation on the outcome of the summit. But other might just prefer Trump to move his focus back to tax reform, which is, in our view, more essential in determining the financial markets' direction.

The tones in the financial markets remain unchanged for the week. US equities attempted for a rally overnight. DJIA surged initially on strong US ADP employment and reached as high as 20887.50. But the index then reversed to close down -0.20%, or -41.09 pts, at 20648.15. The hawkish FOMC minutes are seen as a factor weighing on sentiments. But more importantly, House speaker Paul Ryan's comments on tax reform further reduced market confidence on US President Donald Trump's ability to implement what he promised. 10 year yield closed mildly higher by -0.007 at 2.357 but it's kept in tight range well below 55 day EMA. In the currency markets, Japanese yen strengthens again on risk aversion is remains the strongest major currency for the week. Commodity currencies are suffering renewed selling in Asian session. Dollar and Euro are trading mixed.

The FOMC members had quite extensive discussions on the balance sheet policies, the minutes revealed. US Treasury yields declined as the market interpreted Fed's phasing out of the reinvestment policy might be a de facto tightening measure, reducing the urgency to hike interest rates. We expect the Fed might begin balance reduction in as soon as December 2017. The minutes also unveiled that the rationale behind the March rate hike was the solid economic growth developments. The members acknowledged that the labor market strengthened further in January and February and that real GDP was continuing to expand in the first quarter. The moderation in growth from the fourth quarter was mainly driven by 'transitory factors'.

Dollar strengthens mildly in early US session after stronger than expected job data. But there is no follow through buying seen yet. ADP report showed 263k growth in private sector jobs, versus consensus of 189k. Prior month's figure was revised down fro 298k to 245k, but was still solid. Markets will look into the FOMC minutes of March meeting to be released later today, as well as non-farm payroll report on Friday. The two-day meeting between US President Donald Trump and China President Xi Jinping will also be closely watched. But after all, directions of Dollar and treasury yields will remain dependent Fed expectations. And it's well known that Fed's base case is three hikes in total this year. Change in the base case will require solid input from Trump's implementation of his economic policies. And we're yet to see anything solid. Any movements in the greenback would likely be temporary before Trump delivers.

EURCHF recovered after declining over the past three weeks. Political uncertainty and diminished expectations of ECB's QE tapering has pressured the single currency and raised demand for safe-haven assets. Despite the selloff to as low as 1.0629 in February, EURCHF had then rebounded to a 3-month high of 1.0825 in mid-March, before settling at 1.068 at end-1Q17. This came in line with over forecast of 1.07 for the first quarter. Movement of USDCHF was, however, more volatile than we had anticipated. The currency pair indeed broke below 1, plunging to a 4.5-month low of 0.9812 on March 27 before returning to parity on March 31. We attribute the sharper-than-expected weakness in US dollar over the past quarter to the inability of Trump's administration. Indeed, the market has turned less optimistic over the president's pro-growth policy, after the withdrawal of the healthcare bill. However, the price movements in the first quarter do not alter our view that SNB has turned more tolerable to franc's appreciation, although FX intervention would continue should euro's selloff accelerate.

The forex markets are pretty steady in Asian session today. Commodity currencies remain generally soft on mild risk aversion. Traders are cautious ahead of the meeting between US President Donald Trump and China President Xi Jinping. Yet, they are calm in spite of the news that North Korea fired another ballistic missile. Euro is also staying in range after French presidential election TV debate. Yen pares back some gains after treasury yields stabilized but more upside is still favored. In other markets, both gold and WTI crude oil extended recent rally but momentum is not too strong so far.

Japanese Yen remains the strongest major currency for the week on risk aversion. On the one hand, sentiments were weighed down by terrorist attack in Russia. On the other hand, markets are getting cautious ahead of the summit between US president Donald Trump and China President Xi Jinping. Dollar follows Yen as the second strongest one but it's losing some momentum against Euro. Commodity currencies are generally lower today with Aussie leading the way down on the perceived dovish RBA statement. In other markets, Gold seems to benefit from risk aversion and jumped to 1263.7 but lost momentum quickly. WTI crude oil is struggling around 55 day EMA around 50.67.

RBA left the cash rate unchanged at 1.5% in April, continuing to struggle between soaring property prices and subdued inflation. Policymakers appeared more optimistic over the global economic outlook than the domestic one. The central bank remained concerned over the rising property prices and warned of the situation that household borrowing growth was outpacing growth in income. We expect RBA to leave its monetary stance unchanged throughout the year.

Australian dollar weakens after the Reserve bank of Australia held cash rate unchanged at 1.50% as widely expected and maintained a neutral stance. RBA reiterated in the statement that "taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time." The statement itself is largely unchanged from the prior one.

The most imminent political event in the Eurozone is the French presidential election, with the first round taking place on April 23 and the second and final round on May 7. Polls have suggested that centre-left candidate Emmanuel Macron and populist far-right candidate Marine Le Pen would get the most votes in the first round, but then Macron would win the second and final round, and become the next French president.