Markets
A Chinese growth slowdown ranks as one of the biggest risks to future global growth. March data already showed the impact of lockdowns in Shanghai (still in place), with an outbreak in Beijing over the weekend adding to worries. Risk sentiment soured in Asian and European dealings with main equity indices losing over 2%. Wall Street eventually made it off the intraday lows to close in positive territory in an intriguing comeback.
Core bonds corrected significantly higher following last week’s sharp hawkish repositioning. The decline at the longer end tenors was mostly driven by a decline in inflation expectations resulting from uncertainty around future growth/demand. European bonds significantly outperformed US Treasuries, again risk sentiment turned after the European bell (thus pulling US T’s off best intraday levels). US yields eventually closed 4 bps (2-yr) to 8.3 bps (7-yr) lower with the belly of the curve outperforming the wings. German yields lost 8.3 bps (30-yr) to 16.3 bps (5-yr). The UK Gilt curve bull steepened with yields sliding by 9 bps (30-yr) to 15.5 bps (2-yr).
The dollar remains markets’ favorite both in the risk-off setting and because of the Fed’s determination to tackle the inflation problem. The trade-weighted greenback (DXY) closed at 101.86, eying the 2020 top at 102.98. EUR/USD closed at a new cycle low of 1.0713 from an open at 1.0807. Commodities and commodity-related currencies suffered a setback as well. Brent crude for example touched $100/b from a >$105/b open, before bouncing back above $103.
Asian markets this morning join WS’s better shape yesterday evening. Core bonds are slipping away again. It’s still early days, but it could be that yesterday’s moves on bond markets was some profit taking on short positions with markets gradually keeping next week’s FOMC meeting in mind. The trend on bond markets has been very strong with an aggressive Fed tightening cycle discounted by now. Why not lock in some gains awaiting some fresh guidance? The dollar stabilizes near yesterday’s closing levels.
Today’s eco calendar is interesting in the US with March durable goods orders, housing data, consumer confidence and Richmond Fed manufacturing. We especially eye consumer confidence to see how Joe Sixpack stomachs the inflation surge. The US Treasury starts its end-of-month refinancing operation with a $48bn 2-yr Note auction. It will be interesting to see whether demand picks up at current absolute yield levels (2.64%). It might be just a little bit too early with US money markets pricing a 3%+ policy rate peak next year. Q4 corporate earnings and a speech by ECB Villeroy are wildcards.
News Headlines
South Korean GDP expanded by 0.7% q/q in the first quarter of this year, or 3.1% y/y. The quarterly increase was exclusively driven by net-exports, adding 1.4 ppts to the headline figure. Private consumption (-0.2 ppts) and gross capital formation (-0.5 ppts) were a drag as the country in Q1 grappled with the highest virus tally ever. Economic momentum is set to hold up in the current quarter, thanks to a rebound in consumption and ongoing strong exports. This allows for the central bank of Korea to continue its hiking cycle (policy rate now 1.5%) to tackle above-target inflation (4.1% in March). A key risk going forward is China’s growth slowdown affecting exports. Rising commodity prices meanwhile will impact both consumption and inflation and increase the BoK’s policy dilemma. The SK won trades stoic around USD/KRW 1248.5 this morning. Barring the volatile period in the early pandemic days, that is near the weakest level for the won since 2010.
Bank of Canada governor Macklem was the most explicit about another 50 bps rate hike at the next policy gathering in June yet. Speaking at a parliamentary committee hearing, he said the MPC “will be considering taking another 50-basis point step”. The idea of an even larger hike (eg. 75 bps) floated last week would be “very unusual”, Macklem said. Canadian short-term swap yields fell almost 10 bps but were already declining before his speech. Markets did price in lower odds of such even larger increase. Instead they stick to three consecutive 50 bps hikes at every meeting through September. The Canadian dollar eased to USD/CAD 1.273.
