- US yields are creeping higher and giving the dollar some support; US inflation data will come into focus; weekly jobless claims were disappointing; Canada reports March jobs data; Brazil reports March IPCA inflation
- The ECB account of its March 10-11 meeting is worth discussing; eurozone data came in largely weaker than expected; Norway reported softer than expected March CPI
- Japan reimposed restrictions in Tokyo, Kyoto, and Okinawa; China reported higher than expected March CPI and PPI data
The dollar is getting some traction as US yields rise ahead of PPI data (see below). DXY traded yesterday at the lowest level since March 23 near 92 but has since rebounded to trade around 92.548. We view recent dollar softness as temporary. The euro is trading back below $1.19 and feels heavy after being unable to sustain the move higher. Sterling traded at a new cycle low today and tested the March 25 low near $1.3670 but has since rebounded. Still, cable remains heavy and is likely to now test the February 4 low near $1.3565. USD/JPY has reversed higher after testing 109 yesterday and has retraced over a third of the April drop. Next major retracement objectives from that move come in near 110 (50%) and 110.20 (62%).
US yields are creeping higher and giving the dollar some support. The 10-year yield is trading around 1.67%, up from yesterday’s 1.61% that was the lowest since March 26. Still, the 10-year remains well below the March 30 peak near 1.77% and 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 yesterday’s 2.30% 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.
US inflation data will come into focus today. March PPI will be reported, with headline expected at 3.8% y/y vs. 2.8% in February and core expected at 2.7% y/y vs. 2.5% in February. The acceleration, while noteworthy, is due in large part to low base effects from the start of the pandemic that will boost y/y readings in March, April, and May. March CPI will be reported next Tuesday, with headline expected at 2.5% y/y vs. 1.7% in February and core expected at 1.6% y/y vs. 1.3% in February. February wholesale trade sales and inventories will also be reported today.
Weekly jobless claims were disappointing. Regular initial claims rose to 744k vs. 680k expected and a revised 728k (was 719k) the previous week. Regular continuing claims fell to 3.734 mln vs. 3.638 mln expected and a revised 3.75 mln (was 3.794 mln) the previous week. Emergency continuing claims are reported with a 2-week lag to initial claims. They rose to an unadjusted 13.2 mln total from 12.9 mln the previous week and it's also disappointing to see this rise. Overall, the data were disappointing given the accelerated vaccinations and reopening seen in recent weeks. The only bright spot in the entire report was that regular plus emergency initial claims fell to an unadjusted 893k from 960k the previous week and matches the cycle low from mid-March. Bottom line: the labor market continues to heal but progress remains spotty week-to-week.
Canada reports March jobs data. A 100k gain is expected vs. 259.2k in February, while the unemployment rate is expected to fall a couple of ticks to 8.0%. Like the US, Canada saw a loss of momentum in the economy going into year-end but is seeing a strong recovery in Q1. Yet the vaccine rollout in Canada has fallen behind even the laggards in Europe and so maintaining momentum will be hindered somewhat. We expect fiscal policy to carry the burden of stimulus in 2021.
Brazil reports March IPCA inflation. Inflation is expected at 6.2% y/y vs. 5.2% in February. If so, it would be the highest since December 2016 and further above the 2.25-5.25% target range. Next policy meeting is May 5 and the CDI market is pricing in a 75-100 bp move, followed by another 75 bp hike at the June 16 meeting. Investor confidence in the government has been shaken and it will be up to the central bank to help regain it. With inflation rising and the real remaining weak, it’s clear that a lot of front-loaded tightening is likely to be seen. The economy is already reeling from the pandemic and rate hikes will add to the headwinds.
The ECB account of its March 10-11 meeting is worth discussing. It noted that “the recent tightening of financing conditions was generally seen as premature for the euro area, which was still in a weaker cyclical position than the US.” The account showed that “A significant increase in the purchase pace for the next three months was seen as warranted by the observed tightening of financing conditions and the lack of a material improvement in the growth and inflation outlook.” That said, the main takeaway was that the elevated pace of PEPP purchases is likely being viewed as temporary because there was an “understanding that the total PEPP envelope was not being called into question in the current conditions and that the pace of purchases could be reduced in the future.” Lastly, “Members agreed that the Governing Council would undertake a quarterly joint assessment… to determine the pace of purchases.”
Next ECB meeting is April 22 and no change is expected then. It’s the June 10 meeting that becomes live as that marks three months since the PEPP purchases were accelerated. Much will depend on how yields are trading then. This current lull in the global bond sell-off is likely to prove temporary and so renewed upward pressure on eurozone yields would dictate that the accelerated purchases be extended for another three months. Stay tuned.
Eurozone data came in largely weaker than expected. Germany reported IP, trade, and current account data. IP was expected to rise 1.5% m/m but instead fell -1.6% vs. a revised -2.0% (was -2.5%) drop in January. Exports rose a tick lower than expected at 0.9% m/m vs. 1.6% in January, while imports jumped 3.6% m/m vs. 2.1% expected and -3.5% in January. France also reported weak IP, which slumped -4.7% m/m vs. an expected gain of 0.5% m/m and a revised 3.2% (was 3.3%) in January. Italy was the only bright spot as February retail sales jumped 6.6% m/m, over three times the expected 2.0% and more than reversing the revised -2.7% (was -3.0%) drop in January. Eurozone-wide IP and retail s ales will be reported next Monday and Wednesday, respectively, and there are clear downside risks. And with France going back into lockdown and Italy and Germany extending partial lockdowns, the weak eurozone outlook is likely to carry over into Q2.
Norway reported softer than expected March CPI. Headline unexpectedly slowed to 3.1% y/y vs. 3.4% consensus and 3.3% in February, while underlying remained steady as expected at 2.7% y/y. This moves headline inflation back towards the 2% target. Inflation readings have taken on more importance after the last Norges Bank meeting March 18, when it shifted its rate path up to show likely lift-off in Q4 followed by a policy rate near 1.0% by mid-2023 and 1.5% by end-2024 vs. 0% now. Next policy meeting is May 6 and will be held before April CPI data is released May 10. As a result, we think the subdued March CPI print will allow the bank to keep its rate path unchanged then in order to better gauge inflation trends.
Japan reimposed restrictions in Tokyo, Kyoto, and Okinawa. The measures are similar to the ones that just ended three weeks ago and are set to run from April 12 to May 11 in Tokyo and to May 5 in the other two. These dates were chosen to discourage travel during the Golden Week holiday, which runs this year from May 3-5. Osaka, Hyogo, and Miyagi are already under similar restrictions. Of note, the measures are not as draconian as those seen in most countries, with bars and restaurants being instructed to close by 8 PM. Those that fail to comply will face fines, while incentives will be provided for eateries to follow virus guidelines, such as maintaining proper social distancing.
Japan is lagging in its vaccine rollout and so Prime Minister Suga has little choice now but to reimpose restrictions now until the vaccinations can catch up. Q2 was expected to show a strong rebound from the depressed Q1 but recent developments suggest markets may have gotten too optimistic. That said, the weaker yen is a tailwind for the economy and so it’s too early to say how these conflicting factors will work out. Of note, there is rising chatter that Japan investors may adjust their hedge ratios on overseas bond portfolios lower from the full hedging seen last fiscal year. If so, this would signal less concern about a strong yen and would also put further downward pressure on the yen.
China reported higher than expected March CPI and PPI data. The latter rose a tick higher expected at 0.4% y/y vs. -0.2% in February, while the latter rose nearly a full percentage point higher than expected at 4.4% y/y vs. 1.7% in February. For now, inflation data have little policy domestic implications as the recovery remains solid and policymakers remain focused on rebalancing and deleveraging the economy. However, the PPI readings will surely make some investors nervous about rising global inflation. As the second-largest economy in the world, China will have considerable impact on global price pressures.