Global Macro and Markets
- Global markets: After two days of indecision, equities made a more meaningful move lower yesterday. The S&P 500 fell 0.6%, while the NASDAQ fell 0.8%. Equity futures are looking slightly more positive though, so the drop may halt today. Chinese stocks were mixed, with the Hang Seng index up slightly on the day but the CSI 300 moving slightly lower. US Treasury yields reversed some of their recent increases. The yield on the 2Y note fell 10.1bp, while that on the 10Y bond fell 5.9bp to 3.532%. European 10Y Government bond yields were also about 7bp lower. EURUSD hasn’t done a lot over the last 24 hours and is currently 1.0968, just a little higher than this time yesterday. The AUD has moved more meaningfully higher to 0.6743, Cable is roughly unchanged at 1.2441, and the JPY has moved a little lower to 134.13. Asian FX has been fairly quiet. The PHP made small gains taking it down to 56.02, but otherwise, there was not too much going on.
- G-7 macro: Today is another quiet day for macro data in the G-7, following yesterday’s uneventful calendar. US PMI data may get a quick look, and there is PMI data out in Europe too. Otherwise, a lazy Friday beckons. Fed speakers yesterday broadly confirmed what the market is currently expecting, namely one more hike and then a pause. This was the view promoted by Raphael Bostic with Loretta Mester also supporting another hike but suggesting that the Fed was nearing the peak in rates. Today is filled with Fed speakers with six separate speaking engagements on the calendar. ECB speakers yesterday suggested that there was still some tightening to come. Isabel Schnabel noted the stickiness of core inflation even as headline rates were coming down. And ECB President, Christine Lagarde, said there was still “…a little way to go…” in the inflation fight. Schnabel speaks again today, along with several other ECB members.
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Japan: Headline inflation slowed to 3.2% YoY in March (vs 3.3% in Feb, 3.2% market consensus) as utility prices eased (-2.3%) due to the government subsidy program. But CPI inflation excluding fresh food and energy accelerated more than expected to 3.8% YoY (vs 3.5% in Feb, 3.6% market consensus). Price pressures are broadening in Japan for the following reasons. 1) the secondary impact of past high commodity prices – housing goods (9.4%), clothing (3.6%), 2) rising service prices boosted by reopening – entertainment (2.3%), transport (1.6%). As we expect higher-than-usual wage growth this year, real spending should be able to keep up with this higher inflation. We expect the headline inflation rate to slow down to 2% later this year due to base effects and the energy subsidy program, but core inflation could remain above 2% for longer.
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Yesterday, the tertiary industry index also confirmed strong service activity. So, we believe that there is a growing possibility that the BoJ will revise its yield curve control (YCC) policy as early as June. Next Friday, the Bank of Japan will keep its monetary policy settings. But with stronger-than-expected core inflation, wage growth, and service activity, we think it is possible that they may change their forward guidance on the statement by dropping the reference to “lower levels” in the text that normally states, “…short-and long-term policy interest rates to remain at their present or lower levels” giving them more flexibility to adjust policy in the future.
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Flash PMI indices showed that the strong service vs weak manufacturing trend continued. The service PMI edged down to 54.9 (vs 55 in March) but remains at a historically high level. Among sub-indices, employment and prices charged rose compared to the previous month, which signals a robust job market and higher pressure for services. Meanwhile, the manufacturing PMI edged up to 49.5 (vs 49.2 in March). And although it stayed below 50 for a sixth consecutive month, it seems to be improving gradually. The output sub-index continued to decline but new orders rose.
Korea: Early April trade data confirmed that the weak export trend will extend this month and probably for several more months ahead. Chip exports dropped 39.3%, exports to China dropped 26.8%, but exports to the US rose 1.4%. The outlook for Korean exports is quite cloudy, given the continued slump in semiconductor demand and the exclusion of Korean automakers from the recently developed EV-related incentive program in the US. The recovery of exports could be delayed until 2H23 when China’s reopening should eventually have a positive impact and the semiconductor cycle bottoms out.
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