Markets Becalmed Ahead of Key Data and BOJ Meeting Outcome

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Marc Chandler
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Overview: Some regional bank earnings were weighing on investor sentiment but reports that the FDIC is running out of patience with First Republic Bank to strike a private deal and could decide to downgrade its assessment. This could lead to limits on its ability to use the Fed's emergency facilities. Other reports said that the bank's advisers are securing commitments to buy a new stock as part of a broader restructuring. Still, while the KBW bank index of large banks fell for the fifth consecutive session, the index of regional banks snapped a four-day slide with a 1.25% gain. 

That was yesterday, and today risk appetites have been rekindled, it appears. Most of the large Asia Pacific bourses (but Australia) advanced, including China's CSI 300, which snapped a six-day slide. Europe's Stoxx 60 is up the first time this week. US equity futures are higher following some favorable earnings reports. Benchmark 10-year bond yields are 1-3 bp firmer in Europe and the 10-year US Treasury yield is slightly firmer near 3.46%. The dollar is mixed but mostly confined to narrow ranges. Gold is also trading inside yesterday's range and is struggling to re-establish a foothold above $2000. It has not closed above it since April 20. June WTI closed the gap created at the start of the month when OPEC+ announced fresh output cuts. That gap extended to about $75.85, and yesterday's sell-off took it to almost $74.00. It has steadied today below $75.00.

Asia Pacific

Australia and China have light economic calendars for the remainder of the week. China reported a 21.4% decline in industrial profits in Q1 23, with profits falling 19.2% year-over-year in March alone. Weaker prices offset the rise in output. There were some pockets of strength, including profitability in the auto sector, where China as emerged as a significant exporter. China reports its April PMI over the coming weekend and both the manufacturing and non-manufacturing readings are expected to slip a little. Meanwhile, Xi and Zelensky talked by telephone yesterday. China has tried to position itself as a mediator and seeks a political settlement. It is not clear that Zelensky is prepared to make territorial concessions yet. Reserve Bank of Australia's rate decision will be announced on May 2, and any lingering speculation of a rate hike after last month's pause were dashed by the downtick in Q1 CPI.

The focus is on Japan. Earlier today, the Ministry of Finance showed portfolio flows for last week. After buying a record amount of Japanese shares earlier in April, foreign investors slowed their purchases last week to JPY343 bln (~$2.6 bln) from JPY1.88 trillion. Japanese investors sold nearly JPY1.1 trillion of foreign bonds, the most last October. It is the third week in four that Japanese investors have been net sellers of foreign bonds.

Before the outcome of the BOJ meeting on Friday, Japan will report March employment, retail sales, and industrial production. Tokyo's April CPI will also be released. Japan's unemployment rate is expected to tick down to 2.5% from 2.6%. Recall that in February, it unexpectedly popped up from 2.4% in January. Encouraged by subsidies for gas, electricity, and domestic travel, Japanese consumers have been gone shopping. Retail sales rose 0.8% in January and a dramatic 2.1% in February. The median forecast in Bloomberg's survey is for a 0.3% gain in March. If so, that would put the average increase in Q1 at 1.06%. In Q1 22, retail sales rose by 0.1%. Weak exports, seemingly related to lunar new year, saw Japan's industrial output implode by 5.3% in January. It jumped by 4.6% in February. The median forecast is for a 0.4% increase in March., which would leave it around 1.2% lower year-over-year. Tokyo's CPI increasingly looks like a preliminary estimate of the national figures. The headline and core (excludes fresh good) look to have stabilized now that the effect of the subsides has worked its way through (3.3% and 3.2% respectively). The challenge is coming from the measures that excludes fresh food and energy. It is seen rising to a new cyclical high of 3.5% (from 3.4%). It was at 2.7% at the end of last year. and April 2022 was the first positive print since March 2021.

Governor Ueda chairs his first meeting at the Bank of Japan. His recent comments underscore the lack of urgency. Surveys suggest that most look for an adjustment in the June/July period. However, the updated growth and inflation forecasts will be scrutinized for insight into the new leadership's thinking. Recall that the February forecasts saw 3% inflation this year, 1.6% next and 1.8% the following year. If the new forecasts show inflation above 2% in 2024 or 2025, it would be understood as hawkish. Growth forecasts were for 1.9% this year, 1.7% next year, and 1.1% in 2025. 

The dollar is trading quietly against the Japanese yen, sandwiched, as it were, between the five-day moving average (~JPY134) and the 20-day moving average (JPY133.30). It may hold +/- 20 pips in the North American session. The Australian dollar frayed support yesterday near $0.6600 for the first time in over a month. It has steadied today inside yesterday's range (~$0.6590-$0.6640). The issue is whether the Aussie is breaking down or is at the bottom of its trading range. March's four-month low was set near $0.6565. The greenback continued to flirt with the 200-day moving average against the Chinese yuan (~CNY6.9325) as it consolidated Tuesday's surge (~0.5% gain capping the three-day rally). The PBOC set the dollar's reference rate at CNY6.9207. The median in Bloomberg's survey was for CNY6.9203. Chinese markets are closed for the first three sessions next week.

Europe

The focus in Europe is not so much on today's confidence numbers, but on tomorrow's Q1 GDP figures and national April inflation reports from Germany, France, and Spain. The eurozone is thought to have expanded by 0.2% in Q1 after Q4 22 was revised to -0.1% from flat. Germany, France, and Italy are forecast (median Bloomberg's survey) to have grown by 0.2%, while Spanish growth is seen at 0.3%. Turning to the CPI figures, German and French year-over-year inflation is expected to be steady at 7.8% and 6.7% respectively (EU harmonized measure), while Spain's CPI is seen jumped to 4.1% from 3.1%. Germany CPI rose by more than 10% at an annualized rate in Q1, while France's CPI rose slightly less than 10%. Spain's CPI rose near 6.5% at annualized pace in Q1 and Italy's fell at an annualized pace of about 2.5%. The divergence of inflation, the longer it is sustained, boosts competitiveness of the periphery.

The euro set a new 12-month high yesterday, just shy of $1.11. It is mired in a narrow range of less than a third of a cent above $1.1035. The consolidative tone may persist through the North American session. Note that the upper Bollinger Band is near $1.1075. Sterling topped yesterday near $1.2515, its highest level since the April 14 high of $1.2545. It, too, has been confined to about a 30-pip range below $1.2490. A push below $1.2420-40 would be disappointing.

America

Today's first estimate of US Q1 GDP is top of mind. It will steal whatever thunder there may have been from the weekly jobless claims, pending house sales, and the KC Fed's manufacturing survey. Data over the past week prompted the Atlanta Fed's GDP tracker to downgrade its projection from 2.5% to 1.1%. The median forecast in Bloomberg's survey was for a 2.0% annualized growth after a 2.6% pace in Q4 22. That said, of the 67 forecasts, five were updated yesterday. The average of those five forecasts was around 1.1% too. The GDP report also will embed the March personal income and consumption reports due tomorrow. Recall that in December, the median Fed forecast was that the US economy would expand by 0.5% year-over-year. In March, when the FOMC minutes noted that the staff now thinks a shallow recession is likely later this year, the median forecast was shaved to 0.4%.

The KBW bank index ended a four-day slide with a minor gain. As central bank officials have noted in word and deed, interest rate policy is to help manage the business cycle. There are other tools to address the bank stress in the current environment. Earnings from some regional banks seemed to have triggered the renewed stress but this seems to simply resurface the bank-specific challenges that have been known since SVB and Signature's failures. Today's report on emergency borrowing from the Fed and tomorrow's report that covers bank deposits and lending will update the broader picture, but a repeat of 2008 memes still seem misplaced.

Separately, news that the US House of Representatives passed a bill to lift the debt ceiling in exchange for spending cuts failed to have much market impact. The vote was largely along party lines and is intended to begin negotiations with the White House rather than important in its own right on substantive grounds. Note that a surge in tax revenue has prompted some push the X date further into July. Second, the record from the Bank of Canada's recent meeting showed that officials debated whether a rate hike was needed. It ultimately decided to extend its pause. The swaps market seemed unimpressed and is continuing to price in a cut before the end of the year. 

The US dollar made a margin new high for the move yesterday to CAD1.3650, which is a retracement target of the greenback's losses since the CAD1.3860 peak last month. It is trading quietly in a CAD1.3615-CAD1.3645 range today. The momentum indicators are getting stretched, but the risk is that the high is not in place yet. That said, a break of the CAD1.3600 area could be an early sign that it has peaked. The US dollar poked above MXN18.19 for the first time in nearly three weeks but is trading little changed in Europe near MXN18.15. The greenback's downside momentum has faded, and the governor of the central bank suggested that Banxico may not follow the Fed if it hikes rates next week.