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US CPI to Surge, but is it All Base Effect?

Summary:
Overview:  The US raised 7 bln yesterday by selling bills and coupons with little fanfare.  The bid-cover on the three-year and 10-year sales were a little softer than at the last auctions. Today, the US will sell bln 30-year bonds, a few hours after news that is expected to show that CPI accelerated to its highest level since early last year.   At around 2.35%, the 30-year yield is at the lower end of the range seen over the past several weeks. The 10-year yield is near 1.69%, a five-day high.  European yields are edging higher, and Italian bonds seem to be under more pressure following news of plans to raise another 40 bln euros.  Equity markets are mostly firmer,  though China and Taiwan were notable exceptions.  Europe's Dow Jones Stoxx 600 is up around 0.2% and is just below

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US CPI to Surge, but is it All Base Effect?

Overview:  The US raised $207 bln yesterday by selling bills and coupons with little fanfare.  The bid-cover on the three-year and 10-year sales were a little softer than at the last auctions. Today, the US will sell $24 bln 30-year bonds, a few hours after news that is expected to show that CPI accelerated to its highest level since early last year.   At around 2.35%, the 30-year yield is at the lower end of the range seen over the past several weeks. The 10-year yield is near 1.69%, a five-day high.  European yields are edging higher, and Italian bonds seem to be under more pressure following news of plans to raise another 40 bln euros.  Equity markets are mostly firmer,  though China and Taiwan were notable exceptions.  Europe's Dow Jones Stoxx 600 is up around 0.2% and is just below last week's record highs.  US futures are steady to firmer.  The dollar is decidedly mixed.  Among the majors, sterling leads the modest advancers, while the Norwegian krone, Swiss franc, and Canadian dollar nurse modest losses.  The euro and yen are little changed.  Emerging market currencies are also mixed.  Eastern and Central European currencies are the weakest, though the Russian ruble's 0.3% gain puts it atop the EM FX screens, followed by the Turkish lira. The JP Morgan Emerging Market Currency Index is posting its first increase in three sessions.  Gold is heavy and is slipping through the 20-day moving average (~$1731).  The next area of support is seen near $1718.  Ahead of the OPEC report and US inventories, June WTI is trading in a narrow range of around $60.  

Asia Pacific

China's trade surplus narrowed dramatically in March to $13.8 bln from $37.9 bln in February and $65.4 bln in January.  The median forecast in Bloomberg's survey was for a $52 bln.  The magnitude of the miss is significant and has knock-on effects on how economists view the pressures on the currency.  Exports were weaker than expected, rising only 30.6% from a year ago, while imports were stronger, 38.1% above year-ago levels.  Exports to the US rose by a third to $21.4 bln, while imports from the US surged 75.1%.  China, which is punishing Australia essentially for its pro-US foreign policy by putting tariffs on some goods and banning others, still reported a 47.3% jump in imports from Australia.  

The semi-annual US Treasury report on the foreign exchange market is due on April 15, but the deadline is not enforced.  In any event, the new Treasury Secretary may have extra leeway.  Press reports suggest that Bejing will most likely not be cited as a currency manipulator despite the Biden administration's confrontational stance toward China.  Why this was leaked or in whose interest was it to let the detail out is not clear.  To be sure, the yuan is closely managed, but in recent months, the PBOC has made the setting of the daily reference rate more transparent and predictable, which means less if any of a subjective element plays much of a role.  Some think that the state-owned banks' actions could be the hidden hand of officials, but remember that there are enormous trade-related flows, and only a small percentage of it is invoiced and paid in yuan.  Separately, though not totally unrelated, Yellen appreciates, as most economists recognize, that bilateral trade balances are not a particularly robust metric.  

Other press reports have played up the probability that Taiwan is cited as a currency manipulator.  One of the criteria is its large bilateral trade surplus with the US.  The US has been pressing Taiwan to send more semiconductor chips, especially for the auto sector, where both GM and Ford announced idling plants and production due to the shortage.   At yesterday's chip summit in Washington, the Biden administration offered $50 bln assistance to boost domestic chip R&D and manufacturing.  Meanwhile, China sent its largest force of 25 fighters and bombers into the Straits of Taiwan as it continues its intimidation campaign.  Note that Japan Prime Minister Suga is to visit Washington at the end of the week and is the only G7 country not to sanction China yet for its human rights violations in its treatment of the Uighur population. 

The dollar continues to trade on a JPY109-handle.  It is the fifth consecutive session in the range.  The greenback has been mostly confined to a JPY109.25-JPY109.75 range so far today.  The five-day moving average is slipping below the 20-day for the first time since late January, reflecting the recent loss of the dollar's upside momentum after rising by nearly 4% last month.  The Australian dollar continues to hover around $0.7600, where an option for about A$625 mln expires today. The 20-day moving average, near $0.7650, caps upticks.  The greenback is slightly heavier against the Chinese yuan for the second day.  It is the first back-to-back loss in a month.  The PBOC set the dollar's reference rate at CNY6.5454,  a bit softer than expected.  

Europe

Three data releases in Europe are the talking points today.  First, the UK reported February GDP expanded by 0.4%, a touch less than expected, but the January slump was revised to show a 2.2% contraction instead of 2.9%.  Industrial production and construction rebound while services stabilized.  The trade deficit deteriorated markedly (GBP7.12 bln from GBP3.37 bln in January).  Second, Germany's April ZEW survey surprised by showing an unexpected deterioration in the expectations component (70.7 vs. 76.6) and larger than expected improvement in the current assessment (-48.8 from -61.0).  Third, Italy reported a 0.2% gain in February industrial output, missing expectations for a 0.6% gain.  However, ironically, it was the strongest of the Big 4 in Europe.  Germany was expected to have reported a 1.5% gain and instead, last week reported a 1.6% drop.  French industrial output was forecast to rise by 0.5%.  It fell by 4.7%.  Spain's industrial production was expected to have risen by 0.7%.  It was flat.  The aggregate figure for the eurozone is due tomorrow.  The likely drop will more than offset January's 0.8% increase.  

German political uncertainty increased yesterday as the CDU endorsed its head Laschet, and its sister party, the CSU in Bavaria, supported its leader, Soeder.  The CDU is the bigger of the two and usually leads the alliance. Candidates from the CSU have made losing bids for the chancellorship twice before (Strauss 1980 and Stoiber 2002).  Recent polls show Soeder enjoys greater public support than Laschet.  A  poll by Forsa showed Soeder with a plurality of votes, while Lashet trails both the SPD's Scholz and Baerback, who the Greens will likely pick next week.  

Turkey's central bank meets on Thursday.  Governor Kavcioglu has been in his post for less than a month, and his challenges have been immense from the get-go. President Erdogan has compromised the institutional integrity and independence of the central bank, which in turn, undermines investor confidence in the government's ability to meet the profound economic challenges.  The lira has depreciated by around 11.5% since Kavcioglu's predecessor was sacked, making it easily the worst-performing currency, partly as foreign investors express their concerns by liquidating Turkish stocks and bonds.  Inflation is accelerating.  Headline CPI was at a lofty 14.6% at the end of 2020 and  16.2% last month.  The core rate is higher still and approaching 17%.  The current account appears to be deteriorating.  The February figures out yesterday put the shortfall in the first two months of 2021 at $4.4 bln compared with $3.4 bln in Jan-Feb 2020 and $410 mln in the prior-year period.  The unemployment rate is rising.  It stood at 13.4% in February and 12.6% at the end of last year.  Earlier today, Turkey reported that industrial output stalled in February after a 1% gain in January.  The overwhelming majority of the Bloomberg survey participants expect Kavcioglu to keep the key one-week repo rate 19.00%.  There is a chance that some other rate is adjusted instead as part of the shift away from the more orthodox approach of the former governor Agbal. 

The euro continues to trading in a narrow range of roughly $1.1860-$1.1930.  So far today, it is in less than a 20 tick range on either side of $1.1900.  An option struck there for about 465 mln euros that expires today, and one there for nearly 3.1 bln euros expires tomorrow.  Tomorrow, there is also a 1.12 bln euro option at $1.1925 that rolls off.  Sterling is firm but within yesterday's range (~$1.3670-$1.3780).  The intraday technicals give it scope for marginal new highs, but the market may be reluctant to take it much above $1.38, where the 20-day moving average is found.   

America

The year-over-year jump in  US CPI is all the talk, and yes, everyone now sees they will look through it because it is due to the base effect.  In March 2020 headline CPI fell by 0.3% and in April it crashed by 0.7%.  In May, it slipped another 0.1%.  These will be replaced with positive numbers and push the year-over-year rate toward 3%.  There is another element of the inflation story.  Price pressures are accelerating.  Consider that at an annualized rate in Q4 20, headline CPI rose by a little more than 2%.  In Q1 21, it appears to have risen by closer to 5% (assuming the Bloomberg survey median of a 0.5% rise last month is on the money).  This acceleration is mostly due to food and energy prices.  Core CPI was flat in March 2020, and it is expected to have risen by 0.2% last month.  If so, the annualized rate in Q1 21 will be the same as in Q4 20, a little more than 1.2%.  

The US earnings season gets underway in earnest this week, with almost 5% of the S&P500 reporting this week.  The focus is often on the financials at the start of the cycle.  Delta, Pepsi, and Alcoa also report.  According to FactSet Research, overall earnings are expected to rise by 24.5% from a year ago, while earnings in the financial sector can soar by 80%, given Q1 20 hit.  Rising rates, steeper yield curve, and economic recovery has helped lift bank stocks.  The S&P 500 Banks Index is up about 26% this year, while the Financial Select Sector ETF (XLF) is up about 20%.  The volatility of the S&P 500 (VIX) is hovering just above the last week's lows, near 16%, the lowest since before the pandemic struck.  

Outside of the US CPI, earnings, and six Fed speakers, the economic calendars are light.  The greenback is firm against the Canadian dollar, pushing near CAD1.26.  Resistance in the past two weeks has been found in the CAD1,2635-CAD1.2650 area.  A break of it could see CAD1.2735-CAD1.2750.  The central bank meets next week, and its confidence in the recovery is likely to see an adjustment to its forward guidance.  The US dollar is steady to firmer against the Mexican peso, but it has gone nowhere in the past five sessions.  It is trading in a roughly MXN20.05-MXN20.25 range.  Since the lower end was tested yesterday, the rule of alternation would seem to favor the upside now.  



Disclaimer



Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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