Insight: Speculation that a midday statement from China’s Politburo signals new efforts to support the economy ahead of next week’s holiday appears to have stirred animal spirits. The unusual timing of the statement helped spark an Asia-Pacific rally that lifted most of the larger market more than 1%. The European Stoxx 600 nearly closed the gap created by Monday’s significantly weaker opening. It is up for the third consecutive session. US futures are struggling, however, after some earnings disappointments. The 10-year yield was virtually flat during the week today and rose five basis points to 2.87%. European benchmark rates are up 2 to 4 basis points. The dollar is heavier across the board. Among the majors, the Scandinavian and the Australian dollar lead the way. Among emerging market currencies, only the Turkish lira fails to gain against the greenback. Gold extends yesterday’s rally past the $1872 area and approached resistance near $1920. June WTI hits nine-day highs near $107. The US natgas is down a bit after yesterday’s 5.2% drop. Still, that only pares the gains from the start of the week, leaving it up around 5%. The European benchmark is up 2% and around 4.5% for the week. Iron ore prices rose 3%. Although it was the fourth consecutive gain, it ended down 2.8% for the week. Copper is up nearly 1% to recoup yesterday’s loss, dropping 2.7% this week. July wheat is firm, approaching a gain of nearly 2.5% for the week.
It was unusual for the Chinese Politburo to make a statement at noon, but it did, and it gave the statement more clout. He pledged to hit his economic targets (5.5% of GDP this year), and many took that as a signal that more stimulus will be forthcoming. Earlier this week, President Xi appeared to make similar hints that every effort was needed and emphasized infrastructure projects. On the other hand, discussions with the United States on on-site audits of Chinese companies have also supported Chinese technology companies which have given the Hang Seng an additional boost. Mainland China markets are closed until next Thursday. Over the weekend, the “official” PMI will be released. The composite fell below the 50 boom/bust level in March and likely stayed below that level in April.
Japanese markets were closed today and reopened on Monday, but are then on vacation again from Tuesday to Thursday. Next week’s economic highlight is Tokyo’s weekend CPI. It is expected to jump sharply as the fall in mobile service costs last year fades from 12-month comparisons. It’s worth about a percentage point. The Reserve Bank of Australia meets next week and this higher than expected Q1 CPI has fueled speculation of a small rise to start the tightening cycle. The market seems to have fully discounted a 15 basis point move that would bring the cash target down to 0.25%.
The US dollar peaked yesterday at nearly 131.25 JPY. It straddles the JPY130 zone in the European morning. Initial support is visible in the JPY129.40-JPY129.60 band. Momentum indicators were tight and consolidation needed. After BOJ Governor Kuroda’s comments yesterday, MOF’s Suzuki appeared to reinforce his rhetoric by threatening to take “appropriate action” if necessary. The Aussie dollar is recovering from a two-month low set yesterday near $0.7050. It took yesterday’s high down a few hundredths of a cent to $0.7165. It has to recoup the handful of $0.72 to be anything remarkable. The US dollar extended its gains against the Chinese yuan, hitting CNY 6.65 ahead of the Politburo statement. It reversed and fell to CNY 6.5850. The offshore yuan followed closely behind. The greenback fell from 6.6940 CNH to 6.61 CNY before stabilizing. The PBOC set the benchmark dollar rate at CNY 6.6177, lower than the CNY 6.6214 anticipated by the Bloomberg survey median.
Eurozone Q1 GDP and April CPI were in line with expectations. The economy grew 0.2% in the first three months of the year. This brings year-on-year growth to 5.0%, from 4.7% in Q4-21. Germany rose 0.2%, after contracting 0.3% in Q4-21. France disappointed. It was stable in the first quarter and the median forecast (Bloomberg survey) called for an expansion of 0.3%. It turns out that consumer spending fell 1.3% in March, rather than the 0.2% expected by economists. Spain also disappointed, as it rose 0.3% instead of the 0.6% expected. Italy was the poorest of the Big Four. It contracted by 0.2%, which was in line with expectations. The rope was only slightly loosened by the upward revision in Q4-21 to 0.7% from 0.6%.
April’s CPI rose 7.5% year-over-year as the median of Bloomberg’s survey forecast. However, the details were a bit stronger than expected. The monthly increase was 0.6%, not 0.5%, and the base rate rose more than expected. It now stands at 3.5% instead of the 3.2% expected, and up from 2.9% in March. The swap market almost fully discounted a 25 basis point rate hike at the July 21 ECB meeting. It still seems a bit aggressive. While possible, and maybe even likely, it’s not a done deal. So far, it seems to be only a few hawkish creditor members who have advocated such a path.
Many European centers will be closed on Monday for the May 1 holiday. The Euro is lifted by short hedging ahead of the holiday long weekend and on the heels of Chinese developments. The Euro hit close to $1.0470 yesterday and tested the $1.06 area today. The $1.0630-$1.0650 area offers near resistance. The euro is up in just five sessions this month counting today. This stretched the technical reading. It settled last week just below $1.08, which seems pretty far off now. Some consolidation should not be surprising. The British Pound approached $1.2410 yesterday and today traded slightly to yesterday’s high near $1.2570. It will look like a flat consolidation unless the British pound can break above the $1.2670 area. That seems unlikely today or early next week when UK markets close on Monday. The Bank of England meets next week and is expected to raise its key rate by 25 basis points to 1.0%. Local elections will take place on the same day.
US Q1 GDP disappointed yesterday with an annualized contraction of 1.4%. On the one hand, it was a calculation of GDP at work rather than a signal of the underlying strength of the national economy. Specifically, the broader trade deficit reduced growth by 3.2 percentage points and slower inventory accumulation reduced growth by a further 0.8 percentage points. Actual final sales to domestic buyers rose 2.6% after a 1.7% pace in the fourth quarter. This is the strongest since Q2 21. This is likely the extent to which Fed officials will be emphasizing the most when announcing a 50 basis point rate hike next week. Household demand was solid at 2.7% although not as strong as expected. It contributed nearly 1.9 percentage points to growth. Capital expenditure was also strong, up 9.2%. We argued that the extent of fiscal austerity is underestimated and that the 2.7% drop in government spending (almost 6% cut by the federal government) took many economists by surprise.
The contraction is unlikely to repeat itself in the current quarter, i.e. the economy is not on the verge of a recession. The most likely scenario is a strong rebound this quarter before a more gradual slowdown materializes from H2. In a broader sense, however, the GDP report is concerning in that it says something about the potential growth rate. The sharp increase in employment (and hours worked) led to less production of goods and services. This warns of falling productivity and rising unit labor costs. He warns that trend growth could be down, meaning price pressures may emerge earlier in the expansion.
Yesterday’s GDP report incorporated today’s income and consumption figures. Price deflators may get the most attention, but the CPI report probably stole most of the thunder. The headline deflator, which is the Fed’s target, should have accelerated to 6.7% from 6.4%. The core measure, which the Fed is talking about, may have stabilized or even slipped from the 5.4% pace seen in February. The Q1 employment cost index will also be released. It should have increased by just over 1%. The final consumer survey from the University of Michigan is unlikely to move the markets before the weekend.
Canada reports monthly GDP for February. The data is too historic to have much impact, but it is expected to have accelerated to 0.8% from 0.2% in January. The Canadian dollar is benefiting from the risky mood. The US dollar peaked yesterday near CAD 1.2880, its highest level in just over a month. It began to pull back yesterday afternoon in the US and continued today, falling to CAD 1.2725, which is roughly a retracement (38.2%) of the rally from the 21st low. April close to 1.2460 CAD. Below, the next retracement (50%) is 1.2670 CAD. Mexico publishes today its GDP for the first quarter. It would have increased by around 1% after a flat Q4-21. The greenback reached near 20.64 MXN yesterday, but fell back below our target of 20.60 MXN. Support is now around MXN20.30, and the breakout could prompt a test on more formidable support near MXN20.20.