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Overview: A pullback in US yields yesterday and the Bank of Japan's stepped-up efforts to defend the Yield Curve Control policy helped extend the yen's recovery. This spurred profit-taking on Japanese stocks, where the Nikkei had rallied around 11% over the past two weeks. Hong Kong, China, and Taiwan led the regional advance. However, facing a surge in inflation (Spain and German states) and a jump in European natural gas prices (~9%) is snapping the Stoxx 600's three-day advance. US futures are trading with a heavier bias. The US 10-year yield has edged a little higher to 2.40%, while the two-year that briefly traded above the 10-year yield yesterday is off about four basis points. European benchmark yields are 3-6 bp higher. The greenback is trading lower against all of the major currencies, led by the yen's recovery. After poking above JPY125 to start the week, the dollar fell to around JPY121.30 today before steadying. The Canadian and Australian dollars are the laggards with minor gains. Among emerging market currencies, the Turkish lira is the notable exception and is posting a modest decline. Gold appeared to post a bullish hammer pattern yesterday but there has not been much follow-through and the yellow metal is in around a $6 range on either side of $1922. May WTI is also in a narrow range--mostly $105-$107 today. Copper and iron ore are trading firmer. Wheat is still soft after losing around 8% over the past couple of sessions.

Asia Pacific

The Bank of Japan stepped up its efforts to cap interest rates earlier today. It increased the number of bonds it bought at its regular scheduled operation. It offered to buy JPY600 bln (instead of JPY450 bln) 3–5-year bond, and JPY725 bln (instead of JPY425 bln) of 5-10-year bonds, in addition to the pre-announced defense of the 0.25% cap on the 10-year bond. It did not increase the amount of longer-term bonds. Tomorrow, the BOJ is expected to announce next quarter's asset purchase plans. 

Although BOJ Governor Kuroda, who met with Prime Minister Kishida earlier today, does not seem concerned about the yen's weakness, Finance Minister Suzuki seemed more cautious. He suggested continuing to check if the yen weakness is harming the economy. For example, the weaker yen is aggravating the surge in energy prices, which Kishida was to cushion the blow to households and businesses. If intervention is best understood as an escalation ladder, as we suggest, then this might be seen as a low rung. Separately, Japan reported that retail sale fell by 0.8% in February, which was more than twice the decline expected by the median forecast in Bloomberg's survey. It also drove the year-over-year rate below zero (-0.8%) for the first time since last September. 

Beijing has offered some economic support for Shanghai, but the surge in Covid there, and lockdowns there and elsewhere, are seeing economists slash growth forecasts and lift inflation projections. China's March PMI will be released tomorrow. A poor report is expected, and the risks are on the downside. Thus far, though, officials have used targeted measures and not provided the overall economy with new support.

The dollar did not trade for long above JPY125 on Monday, but it seems to have completed something and the greenback has traded down to JPY121.30 today. The (38.2%) retracement of this month's rally is around JPY121.10 and the next retracement (50%) is a little below JPY120. Month-end and fiscal-year end considerations may also be at work but are often used as a catch-all narrative. Note that reports suggested that Japanese retail accounts were beginning to buy yen toward the end of last week. The Australian dollar bounced off four-day lows slightly below $0.7460 yesterday and settled above $0.7500. It is firm today but below this year's high set Monday near $0.7540. It still feels like it is consolidating. The broad US dollar weakness was evident against the Chinese yuan today. It is trading nearly 0.25% lower, the most in about two weeks. The greenback is trading at a nine-day low near the 20-day moving average, slightly below CNY6.35. That is also around the middle of this month's range (~CNY6.3080-CNY6.3860). The PBOC set the dollar's reference rate at CNY6.3566. The median projection in Bloomberg's survey was CNY6.3560.

Europe

The common narrative now is that Putin initially anticipated a quick overwhelming victory over Ukraine and as it has stalled, he is falling back on Plan B. Plan B is to secure the territorial claims of the two separatist regions and later incorporate them into Russia. Russia is curtailing the use of Hryvnia in the occupied areas and introducing the rouble. This military objective has not been met. Turning Clausewitz on his head, the political negotiations are a continuation of the war by other means. Putin has already achieved a key strategic goal; Ukraine will foreswear joining NATO. One cannot help but wonder that if Zelenskiy accepted this more than a month ago, the course of events may have been different. The date for the next round of negotiations has not been set. In a war, the losing side is more anxious for negotiations by definition. After consolidating its forces and enlarging the field of control of the separatist regions, Russia can then be in a position to negotiate. This seems to be the key to the timeline that can lead to a sustainable cease-fire. The cost of rebuilding Ukraine, which had serious developmental challenges before the war, will fall to the EU, IMF, World Bank, and UN.

A surge in eurozone inflation was expected, but the Spanish and German state figures are over the top. The market (Bloomberg median forecast) was for a strong 1.3% monthly increase in Spain, instead, the national figure jumped 3%. The harmonized measure surged 3.9% this month and lifted the year-over-year rate to 9.8% from 7.6% in February. Details are sparse in the initial estimate, but the Economic Minister suggests that three-quarters of the rise was due to food and energy. Still, the core rate rose by 0.4% in the month. Most of the German states reporting CPI figures today showed a 2.6%-2.7% month-over-month increase in their CPI. The national and harmonized figures are due shortly. There seems to be an upside risk to the expectations that the year-over-year rate of the harmonized measures (HICP) an acceleration to 6.8% from 5.5% in February. The aggregate preliminary estimate for the euro area is due Friday. 

The euro rallied yesterday on the hopes that the Russian invasion of Ukraine may be near the endgame and is extending the gains today amid position further positioning squaring. We note that the US premium over Germany on two-year money has reversed sharply lower. It peaked on Monday above 245 bp and is testing 230 bp today. The German two-year yield is up around seven basis points today and is again trying to secure a foothold above zero for the first time since 2014. Yesterday's attempt was rebuffed. The surging inflation will strengthen the hawks’ hands, many of whom see scope for two hikes this year that could bring the deposit rate to zero. The euro is trading at its best level since March 1, which was the last time it traded above $1.12. Its gains have now retraced a little more than half of this month's decline (~$1.1150). The next technical target is the $1.1200-$1.1230. Sterling is a laggard. It is trading inside yesterday's range (~$1.3050-$1.3160). There may be scope for additional gains, albeit marginal, as the intraday momentum indicators are stretched. We suspect the $1.3180-$1.3200 cap may suffice today.

America

The US 2-10-year yield curve briefly inverted yesterday before finishing around three basis points. It is drawing a great deal of attention, but like any statistic, it needs to be placed in a context. Few believe the US is recession-bound. The median forecast in Bloomberg's survey has the US economy growing 3.5% this year and 2.3% next year. This is still above the Fed's estimates of the long-term growth trend (1.6%-2.2%.). The most pessimistic forecasts in Bloomberg's survey do have growth of less than 1% this year or next. That said, there are those who are warning of a recession, including ourselves, and the yield curve did not enter the picture. Interest rates are not waiting for the Fed's meetings to increase, as the 93 bp increase in the 2-year yield this month. The halving of the deficit (as a percentage of GDP) this year still strikes us as an under-appreciated drag. The rise in energy and food prices cuts the purchasing power of households. 

US inflation expectations are not just a function of what the Fed is or is not doing. The correlation of the change in the 10-year breakeven (the difference between the yield of the inflation-protected security and the conventional note) and oil (the front-month light sweet crude oil contact, WTI) over the past 30-days is nearly 0.65, the highest in seven months. The 60-day correlation is almost 0.55, a five-month-high. The price of May WTI has risen by almost 25% ($20 a barrel) net since the US warned that a Russian attack could happen at any moment on February 11. OPEC+ meets tomorrow and there still seems to be little chance that it will boost output. Most of OPEC's spare capacity is in Saudi Arabia (~1.6 mln barrels a day) and the UAE (~1.3 mln barrels a day).

Today's ADP private-sector jobs estimate is the data highlight. We remind that it is not a particularly useful guide to the BLS estimate for the particular month, though it gets the larger trend fairly right. The median estimate for Friday's nonfarm payroll report has crept up in recent days to stand at 490k. The US also reports another revision to Q4 21 GDP. It may be left at 7.0%. With Q1 22 nearly over, the market will not be sensitive to Q4 data. The economy is expected to have slowed to around 1.0%-1.5% this year from 7% last. The Fed's Barkin and George speak today. While George is a voting member of the FOMC this year, Barkin, like Harker and Bostic, who spoke yesterday, does not.

Mexico reports February unemployment today. It may have ticked up slightly. Canada's economic calendar is light, but there is much talk about Ontario's imposition of a 20% tax on foreign purchases are real estimate in the province. The "speculation levy" is meant to slow the surge in house prices. Lastly, late yesterday Chile hiked its overnight target rate from 150 bp to 7.0%. This was a bit less than expected and the central bank indicated that it may not need to make such big moves going forward. Latam countries hiked rates early and many aggressively, and ideas that the tightening cycles may end later this year appear to be encouraging flows into local bond markets. That said, the swaps market has about 300 bp of additional hikes over the next six months before a cut in rates toward the end of the year or early 2023. 

The US dollar is near the recent trough against the Canadian dollar (~CAD1.2465-CAD1.2475). Below there is the year's low is around CAD1.2450. A break targets the CAD1.2400 area. However, the intraday momentum indicators suggest the greenback may bounce first in early North American activity and a retest of CAD1.2500-CAD1.2515 would not be surprising. Meanwhile, the greenback is slipping to new lows for the year against the Mexican peso (~MXN19.9120). The next notable chat support is closer to MXN19.85, a shelf from last September. Here, too, the intraday momentum indicators favor a US dollar bounce in the North American morning.