RMB weakness accelerates and steady EMU inflation drive markets at month end
There has been much economic data reported today, and there are month-end considerations, but the two main drivers of the capital markets today have been the biggest one day loss in the Chinese yuan and new that the preliminary February CPI did not tick down as many expected. The headline rate was unchanged at 0.8%, though the core measure did rise to 1.0% from 0.8%.
The PBOC did fixed the dollar-yuan lower (CNY61.214 from CNY6.1224) for the first time after eight consecutive increases. And for the second consecutive session the key 7-day repo rate increased. However, the PBOC actions have triggered a response, that we suspect is not wholly undesired by officials, to unwind some of the highly speculative and leveraged plays. For the first time since July 2012, the dollar trough its upper band permissible by Chinese officials, near CNY6.1760. It has since eased back to around CNY6.1450. Reports suggest that some of the losses on these leveraged products accelerate above CNY6.15.
Although some observers linked pressure on the Australian dollar to the Chinese developments, we note that it has recovered and that other markets do not seem to have been thrown off kilter. The MSCI Emerging Market equity is up about 0.4%. The Shanghai Composite itself advanced for the third consecutive session.
The euro area inflation news offsets all the other news from the euro area today, which included a dismal consumer spending report from France (-2.1% in January compared with expectations for +0.2%) and a new record high of Italian unemployment in January (12.9% compared with expectations for a steady 12.7% rate). Even though EMU inflation has remained below 1% for the fifth consecutive month the absence of fresh deterioration means that drastic options, such as sovereign bond purchases or a negative deposit rate has receded (though we did not think either was likely in the first place).
Draghi has acknowledged, as other central bankers, that persistently low inflation can be a problem in its own right. A repo rate cut is largely symbolic. A lending rate cut could help reduce the volatility and amplitude of spikes in EONIA. The ECB does not yet seem ready to address the continued decline in lending or the disinflationary pressures.
The euro rallied across the board; rising a cent against the US dollar to poke through the $1.3800 level for the first time since the end of last year. The next immediate target is near $1.3830. However, we note that intra-day technical readings are stretched and over the last six months, the euro has toyed with the $1.3800 level, but has only closed above it once (Dec 30 and even then it was by 1 tick according to Bloomberg).
We note that the euro is posting an outside up day (engulfing pattern) against sterling and is testing resistance near GBP0.8250. Here too, we expect the euro to struggle to sustain further gains ahead of the weekend.
Yet, it is the Swedish krona that is leading the broad move against the dollar that all the major currencies, but the Canadian and Australian dollars. Up 1.5% against the dollar, it is up more than twice the euro. It was bolstered by a simply stunning Q4 GDP report. The 1.7% quarter-over-quarter expansion is three times more than the Bloomberg consensus and Q3 GDP was revised to 0.5% from 0.1%. Despite low inflation (CPI 0.2% year-over-year in Jan), today’s GDP figures removes a sense of urgency for policy makers. Separately, stronger than expected Norwegian retail sales has kept the euro near 3-month lows against the krone.
Japan released a slew of data. The take-away is that real sector data, including industrial production, overall household spending, and retail sales were stronger than expected. Headline January inflation softened slightly, while core measures were unchanged. Tokyo readings for February all ticked up. Recall that the BOJ’s Kuroda recently warned that he expected price pressures to stabilize for a few months before rising again.
The North American session features a likely downward revision to US Q4 GDP toward 2.5%, due to more recent trade, inventory and consumption data. It is unlikely to be a market mover. Canada also reports Q4 GDP. It is expected to by about the same as the revised US figures, though the economy lost momentum in December (weather?) and likely contracted (-0.3%). Four Fed officials speak today, but Yellen essentially indicated that tapering will continue next month.
Finally, note that Moody’s may make an announcement on Germany (could raise outlook to stable) and Austria (risk of a loss of its AAA status, has negative watch already) and S&P looks at Belgium, but seems little risk of action.