Consolidative Session Marked by Weak Chinese Imports and White House Debt Ceiling Talks

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Marc Chandler
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Overview: The market sentiment remains fragile. Equities are mostly lower. Japan was a notable exception, and concerns about China's economy after a sharp decline in imports took mainland and Hong Kong listed companies sharply lower. Europe's Stoxx 600 is giving back yesterday's 0.35% gain plus more. Bank shares are off 0.65% after rallying 4.20% over the past two sessions. US equity futures are heavier. Benchmark 10-year yields are mostly a couple basis points softer in Europe, but the 10-year Gilt yields are a little higher. The 10-year US Treasury yield is about three basis points lower to 3.47%, and the two-year yield is back below 4%.

The dollar recovered in the North American session yesterday and is mostly firmer today. Yet, given its recent losses, today's upticks look more consolidative than a reversal. The focus is on the debt ceiling, where a meeting of Congressional leaders and President Biden takes place today at the White House. Bank shares also remain in focus. Tomorrow the US reports April CPI figures. The greenback is also enjoying a firmer bias against most emerging market currencies today. Gold is firm but in about a $10 range on either side of $2020. Last week's high was near $2063. June WTI peaked yesterday near $73.70 and has pulled back to around $72.15 today. News of softer Chinese demand may be a weight today, after a sharp run-up in recent days. Nearby support is seen near $71.80.

Asia Pacific

Japan reported March labor cash earnings and household spending. They will allow economists to fine-tune expectations for next week's Q1 GDP. Consumption had been a bright spot of the Japanese economy, but household spending slumped by 1.9% year-over-year in March. The median forecast in Bloomberg's survey was for a 0.8% increase. Labor cash earnings rose 0.8%, missing expectations for a 1.0% gain. Adjusted for inflation, labor earnings dropped 2.9% from a year ago, more than expected. These figures do not bode well for Q1 GDP, which had been projected to expanded by 0.2% quarter-over-quarter. Business investment appears to have fallen for the second consecutive quarter. Net exports also appear to have been a drag. It had fallen in the three months through January. Labor cash earnings rose 1.0% from a year ago. They averaged slightly better than a 1.4% year-over-year in Q1 22 and a little less than 0.9% this year.

China's trade surplus widened to $90.2 bln in April, up from $88.2 bln in March, and $49.5 bln in April 22. Economists had expected the trade surplus to narrow. Exports were weaker but imports even weaker still. Exports rose 8.5%, down from 14.8% in March, but were slightly above expectation. Imports had been projected to rise by 0.2% in Bloomberg's survey, but instead fell by 7.9%, the second-consecutive year-over-year decline. Despite the larger surplus, the weakness of imports reinforces the sense that the Chinese economy is struggling, which was not shaken-off fully even though Q1 GDP was stronger expected. Many look for the some more monetary accommodation before the end of the quarter. 

Australia's government is expected to announce its the first budget surplus since 2008. It is seen around A$4 bln (~$2.7 bln) in the year ending next month. Still, it is widely understood to be temporary, helped by surging revenue and a strong rise in immigration, helping to boost growth. In the 12-months through March, Australia recorded an A$1 bln surplus and the last quarter of the year is typically strong, boosted by corporate tax revenues. Earlier today, Australia reported its second consecutive quarterly decline in real retail sales.

The dollar is straddling the JPY135 area. It has been confined to almost a third of the yen on either side of JPY135, essentially duplicating yesterday's range. The market looks comfortable in that range, and penetration in the North American session could lead to a quarter-of-a-yen widening of the range in either direction amid this consolidation phase, which is unlikely to last past tomorrow's US CPI figures. The Australian dollar briefly flirted with the upper end of its two-month trading range near $0.6800 yesterday. It has pulled back toward about $0.6755 but is likely to find some support near here. The Aussie had tested the lower end of its range near $0.6575 at the end of April and was near $0.6630 last Thursday. The greenback is firm against the Chinese yuan. It reached a four-day high near CNY6.9290. The 200-day moving average is around CNY6.9380 and it has not closed above it since the Ides of March. The PBOC set the dollar's reference rate at CNY6.9255. The median in Bloomberg's survey was CNY6.9238. 

Europe

In response to softer than expected CPI before the weekend, the Swiss franc was sold-off. The nearly 0.60% fall was the most since late March. Last month, CPI was flat, while the median forecast was for a 0.2% increase. The year-over-year rate eased to 2.6% from 2.9%, and the core was unchanged at 2.2% (economists had looked for a small increase). Separately, total sight deposits appear to have resumed their downtrend after jumping amid Credit Suisse-related turmoil. Last month, sight deposits fell by almost CHF40 bln after rising nearly CHF43 bln in March. The Swiss deposit rate is at 1.50%. The Swiss National Bank meets on June 22, and the swaps market favors quarter-point hike after the last two moves were of 50 bp and the one before that was 75 bp.

The Swiss franc is the second best G10 performer this year with a 3.9% gain against the dollar (sterling is first, up ~4.4%) and about 1.1% better than the euro. The Swiss franc's 2022 loss of 1.25% against the dollar was the least among the G10. The underlying demand for the franc likely remains and if the euro falls through the CHF0.9780 area it could spur a move to CHF0.9740 area where it was trading before the Swiss CPI. However, the real play is for a break of CHF0.9700 and a retest on the CHF0.9400 area seen last September, the lowest level since the lifting of the euro's floor/franc's cap in early 2015. The dollar has fallen in five of the past six months against the Swiss franc. It fell to about CHF0.8820 last month to approach the low set in early 2021 near CHF0.8760, a six-year low.

The euro was turned lower after trading $1.1055 yesterday and settled slightly above $1.10, the session low. Today is has pushed below there and slipped a little below $1.0975. Support is seen in the $1.0940-65 band. Note that the 20-day moving average is found near $1.10 today and the euro has not closed below it since March 17. Good buying was seen on pullbacks last week. The poor German and French data recently reported adds to the sense that the best news for the eurozone, that it dodged a winter energy crisis is fully known and discounted. Sterling reached a new high yesterday near $1.2670 but has not been able to sustain the momentum. It settled near $1.2620 yesterday and has been confined to about a fifth of a cent in either direction. Consolidation may be the order of the day, and only a break of $1.2550 would likely be technically significant. 

America

Fed Chair Powell indicated at last week's press conference that the Senior Loan Officer Opinion Survey (SLOOS) would be consistent with the previous survey that showed weaker loan demand and tighter lending conditions. True that. The Fed's tighter monetary policy was already having the desired effect before the flare-up of banking stress. The percentage of banks reporting tighter lending standards for medium and large businesses increased marginally, to 46% from 44.8% in Q4 22. To be sure, it is not just supply. Demand for loans is also waning. The proportion of banks reporting weaker demand for commercial and industrial loans fell by 55.6% in the first quarter after a 31.3% decline in Q4 22. The Fed hiked rates last week, fully cognizant of the SLOOS report. The key question remains about the extent and duration of the tightening of lending conditions spurred by the regional banks stress. Before the bank stress emerged, the market was favoring a terminal Fed funds rate of 5.75%. 

The US economy continues to be resilient to the headwinds, and the Atlanta Fed's GDP tracker sees Q2 growth at 2.7%. From their model, the increase employment will boost consumption while the sharp decline in wholesale trade (-2.1% rather than 0.4% that the median in Bloomberg's projected) translates into weaker private investment growth. The two practically offset each other, leaving the Atlanta's Fed's tracker virtually unchanged since May 4. The quarter is nearly half over. Bloomberg's monthly survey will be updated on May 19. The median in last month's survey has the US economy practically stagnating this quarter, which seems unduly pessimistic.

Mexico's central bank meets on May 18. Of the six economists in Bloomberg's survey, two look for a hike and the others do not. Last month Governor Rodriguez indicated a pause would be discussed, and previously commented on the decline in the core rate. Today, Mexico announces April CPI. The core rate is expected to fall 7.70% from a little above 8% in March. It peaked last November at 8.50% but was at 8.45% in January. The headline rate reached a high of 8.7% in September and October 2022. It was at 6.85% in March, and the median forecast in Bloomberg's survey is for a decline to 6.22% last month. Any disappointment with today's report, especially the core rate, and opinion may swing toward another hike. Mexico's core CPI rose at an annualized rate of 7.2% in Q1 23, slight faster than in Q4 22.

Congressional leaders meet with President Biden in the White House today to talk about the debt ceiling. The impact of the brinkmanship continues to be evident in the bill market. The US dollar recovered from CAD1.3315 yesterday to almost CAD1.3390. It is consolidating in a narrow range below there today (~CAD1.3365-CAD1.3385). Recall that last week, it peaked near CAD1.3640. The expulsion of a Chinese diplomat yesterday will, of course, irk Beijing, who can be expected to retaliate in some fashion. Meanwhile, the greenback is consolidating in its trough against the Mexican peso (~MXN17.75-MXN17.82) in dull dealings. The lower Bollinger Band is near MXN17.78. There seems to be little to no reaction to news that Mexico's Supreme Court has annulled part of AMLO's controversial electoral reform.