US inflation data will come back into focus; US yields are creeping higher and giving the dollar some support; all of this comes on top of heavy US Treasury issuance this week
Delays to the EU recovery fund continue; weekly ECB asset purchases picked up despite the holiday last Monday; eurozone data came in weak; UK February data dump was mixed
Reports suggest Treasury Secretary Yellen will not name China as a currency manipulator; we see no implications for the yuan, which should continue to trade along with the broader EM FX; China reported March trade
The dollar is getting some traction as US yields rise ahead of CPI data and a 30-year auction. With US data expected to come in strong this week, we believe the dollar’s rise can continue and perhaps even intensify. DXY has found support near 92 for the past four sessions but has not yet been able to break above the 200-day moving average that’s currently near 92.329. Likewise, the euro rally has fun into stiff resistance near $1.19, which coincides with its 200-day moving average. Sterling has been unable to break back above $1.38 after finding support at the March 25 low near $1.3670. Lastly, USD/JPY has been unable to break back above 110 and has been stuck in the 109-110 range in recent days.
US inflation data will come back into focus. March CPI will be reported today, with headline expected at 2.5% y/y vs. 1.7% in February and core expected at 1.5% y/y vs. 1.3% in February. Last week, March PPI came in higher than expected, with headline at 4.2% y/y vs. 3.8% consensus and 2.8% in February and core at 3.1% y/y vs. 2.7% consensus and 2.5% in February. While there is never a one-to-one correlation, the PPI readings point to upside risks to the CPI data. Some acceleration is to be expected due to low base effects that will boost y/y readings in March, April, and May. However, there is a growing belief in the markets that inflation isn’t as transitory as the Fed believes. Annualized 3-month and 6-month changes are showing clear acceleration and bears watching. Harker, Daly, Barkin, Mester, Bostic, and Rosengren all speak.
US yields are creeping higher and giving the dollar some support. The 10-year yield is trading around 1.69%, up from last week’s 1.61% low that was the lowest since March 26. Still, the 10-year remains well below the March 30 peak near 1.77% and a break of the 1.71% level is needed to set up a test of that cycle peak. Similarly, the 30-year yield is trading around 2.35%, up from last week’s 2.30% low that was the lowest since March 25. Here too, the 30-year yield remains well below the March 18 peak near 2.51% and break of the 2.40% level is needed to set up a test of that cycle peak.
All of this comes on top of heavy US Treasury issuance this week. Yesterday’s $58 bln 3-year and $38 bln 10-year auctions were both relatively strong. Indirect bidders, which largely represent foreign buyers, rose to 51.1% and 59.6% from 47.8% and 56.8% at last month’s auctions, respectively. Bid-to-cover ratios were not as strong, which fell to 2.32 and 2.36 from 2.69 and 2.38 at last month’s auctions, respectively. Today, there will be a $24 bln 30-year bond auction. At last month’s 30-year auction, indirect bidders took 60.6% and the bid-to-cover ratio was 2.28.
Delays to the EU recovery fund continue. Poland’s government unexpectedly cancelled plans to discuss its ratification as tensions rise in the ruling coalition. Deputy Speaker Terlecki said that parliament may have to gather for an extra sitting later this month to meet the deadline to ratify the program, which suggests there are currently not enough votes to pass it. Poland is in line to receive EUR58 bln euros from the fund, but intra-party bickering has grown. Indeed, Law and Justice head Kaczynski warned last week that the three-party ruling coalition is at risk of collapse unless the plan is approved. Of note, hardline Justice Minister Ziobro has vowed to oppose the fund on the grounds that it may make Poland liable for the debts of Greece and other debtor nations. He also argued that tying the disbursement of funds to the so-called rule of law gives Brussels too much control over Poland. Sound familiar?
This is clearly zloty-negative, but also underscores the reasons to be negative on the euro too. Poland is not the only hurdle, as the recovery fund has also gotten tied up in the German courts. We are coming up on nearly a year since the recovery fund was supposedly finalized and yet as the French Finance Minister pointed out recently, not a penny has been spent. Without this added fiscal support, it is up to the individual governments and the ECB to provide stimulus.
Weekly ECB asset purchases picked up despite the holiday last Monday. the ECB reported net purchases of EUR17.1 bln last week, up from the previous week’s EUR10.6 bln that was about half the pace seen for the two weeks previous. We will get more details today about redemptions and gross purchases for last week. The ECB account of the March meeting shows that the accelerated pace of purchases was seen as temporary. We expect the accelerated pace to be maintained until at least the June meeting, when the ECB will likely reassess its program.
Eurozone data came in weak. Italy reported February IP up only 0.2% m/m, a third of the consensus 0.6% and down from a revised 1.1% gain (was 1.0%) in January. Eurozone February IP will be reported Wednesday and is expected at -1.2% m/m vs. 0.8% in January. April ZEW survey was also reported softer. Eurozone expectations fell to 66.3 from 74.0 in March, the lowest since January and the first drop since November. Of note, German expectations fell to 70.7 from 76.6 in March while current situation expectations rose to -48.8 from -61.0 in March.
UK February data dump was mixed. IP rose 1.0% m/m vs. 0.5% expected and a revised -1.8% (was -1.5%) in January, construction rose 1.6% m/m vs. 0.5% expected and a revised flat (was 0.9%) in January, services rose 0.2% m/m vs. 0.6% expected and a revised -2.5% (was -3.5%) in January, and GDP rose 0.4% m/m vs. 0.5% expected and a revised -2.2% (was -2.9%) in January. Lastly, a huge trade deficit of -GBP7.1 bln was reported vs. -GBP2.4 bln expected. With the lockdowns easing and vaccinations rising, January may have been the worst of it for the UK economy. However, it’s clear from the limited pace in February that it will take months and months to fully recover.
Reports suggest Treasury Secretary Yellen will not name China as a currency manipulator in her first semiannual FX report. The report is not yet finalized and is due out Thursday. Furthermore, reports suggest that Treasury has discussed the possibility of reversing the Trump administration’s decision in May 2019 to lower thresholds for the criteria used to determine if a country is manipulating its currency. The threshold for the current account surplus was lowered from 3% of GDP to 2%. The criteria for persistent one sided intervention was also modified. A country was now flagged if net purchases are conducted in at least 6 out of 12 months (vs. 8 previously) and these net purchases total more than 2% of GDP over a 12-month period. Current Treasury officials admitted that this reversal could lead to a fewer number of nations under scrutiny by nearly half.
In the last report from December 2020, the so-called Monitoring List was made up of China, Japan, Korea, Germany, Italy, Singapore, Malaysia, Taiwan, Thailand, and India. Movements of note in that report: 1) Switzerland and Vietnam were designated currency manipulators, 2) Taiwan, Thailand, and India were placed on the monitoring list, and 3) Ireland was removed from the monitoring list. That was the first report since January 2020. In previous administrations, the semi-annual reports were typically released in April and October. However, the trade war disrupted this cycle. In 2019, only one report was issued and that was in May. In between reports, China was designated a currency manipulator in August 2019 despite meeting inly one of the criteria. That designation was the final sign that under President Trump, the report had become highly politicized. That is likely to change under President Biden.
We see no implications for the yuan, which should continue to trade along with the broader EM FX. However, the PBOC has allowed only limited weakness so far this year and we expected this to continue. CNY is one of the top performers in EM, down only -0.3% vs. the dollar YTD. This is behind only ZAR (+0.8%), CLP (flat), and PEN (-0.1%). If dollar strength reasserts itself as we expect, USD/CNY should continue to move higher. Retracement objectives from the November-January drop come in near 6.5480 (38%), 6.5865 (50%), and 6.6250 (62%).
China reported March trade. Exports rose 30.6% y/y vs. 38.0% expected and imports rose 38.1% vs. 24.4% expected. This led to a surplus of $13.8 bln. It’s worth noting that China’s overall surplus has surged over the past year, with the 12-month total at $638 bln vs. $361 bln in March 2020. The bilateral surplus with the US did fall to $311 bln in 2020 from $345 bln in 2019 and a peak $420 bln in 2018, but it appears China has managed to maintain a strong external position by shifting its exports to other countries. Of note, the current account surplus rose to 2% of GDP in 2020 from around 1% in 2019, according to IMF data. While a far cry from surpluses near 10% of GDP back in 2006-2008, the 2% surplus along with the bilateral surplus with the US means China still belongs on the Monitoring List using the current criteria.