Overview

The dollar has come back bid. A disappointing and unexpected increase in the US weekly jobless claims pressed yields lower, with the 10-year falling a two-week low and seemingly dragging the greenback with it. The greenback is trading higher against nearly all the major and emerging market currencies today amid heightened geopolitical risk, a stronger than expected rise in China's inflation gauges, and poor European industrial production data, despite the improvement in the PMI. The US 10-year yield is around five basis points higher at 1.67% and appears to be dragging European yields higher too. Equity markets have been knocked back. Japanese stocks bucked the regional trend to post modest gains that pared this week's losses. European shares are trading a little softer, but barring a dramatic increase in selling pressure, the Dow Jones Stoxx 600 will post a gain for the fifth consecutive week. In fact, it is off only three weeks since mid-December. US futures indices are narrowly mixed. Coming into today, the S&P 500 is up 3.1% and the Nasdaq, 4.4% on the week. Gold overcame resistance in the $1750-$1755 area but is pulling back today. Initial support is seen in the $1730-$1735 area. After swinging dramatically in the second half of March, May WTI prices have ground down into a narrow range in recent days. It has not been above $60 since mid-week. It has not been below $58.00 since Monday. 

Asia Pacific

China's March inflation readings were higher than expected. After negative readings for the past two months and three of the past four, China's CPI poped to 0.4% year-over-year in March. Food prices fell by 0.7%, while core prices rose by 0.3%. The more pressing issue is producer prices. They jumped 4.4% year-over-year, the most since mid-2018. Commodity prices have surged. Part of this is a base effect, which is recognized in the US and Europe, but few accounts of Chinese inflation acknowledge this. Beijing has already moved to slow lending and appears to have reduced its commodity purchases, and maybe looking for cheaper substitutes, such as scrap steel, to reduce imported iron ore.

Japan is edging toward what could be an inflection point. Specifically, in the highest reaches of the government, there is interest in selectively moving toward a four-day workweek. Initially, it is conceived to be voluntary, and the three-day weekends could vary. The main purpose is social, but an experiment at Microsoft in Japan saw an increase in productivity. Japanese policymakers are interested in work/life balance, but a troubling undercurrent led to Prime Minister Suga appointing the first Minister of Loneliness in February. Last year, Japan experienced the first rise in suicides in 11 years. More people have committed suicide in Japan than have died from Covid-19. Meanwhile, social restrictions will likely be reinstated for Tokyo, Kyoto, and Okinawa, which could be extended to May 5 or May 11. Restrictions have already been imposed in Osaka, Hyogo, and Miyagi. Opening ceremonies for the Olympics are slated for July 23.

The US slapped export controls on several more Chinese companies and government facilities involved with helping China develop a new supercomputer (that will be able to do a million trillion calculations a second). There are numerous civilian and military applications. It is the latter that draws the US ire. Biden is extending the approach that began with Trump. It does not appear to have unwound a single action toward China. Meanwhile, the US hosts a "chip" summit on Monday as both Ford and General Motors announce more plant closures due to the shortage. Separately, a bill introduced in the US Senate yesterday and is scheduled to be debated in committee next week (the Strategic Competition Act) represents an escalation of US efforts to curb China's expansion and aggressiveness. It includes measures to build closer ties with Taiwan, funds to "promote democracy in Hong Kong," and more sanctions.

The rise in the US 10-year yields coincided with the dollar's recovery against the yen. Yesterday, as the 10-year yield slipped below 1.62% on the back of the second consecutive unexpected rise in weekly jobless claims (largely skewed by two states, California and New York), the greenback slumped to JPY109, near a two-week low. It has rebounded with yields today. It has been up to nearly JPY109.70, and a close above JPY109.90-JPY110.00 would seem to put it in good stead for next week when coupon supply resumes (~$110 bln), and a series of strong US economic reports are expected. The Reserve Bank of Australia's semi-annual financial stability report elevated concern about house prices and household debt but does not appear set to raise rates, a blunt instrument. It will likely rely on macroprudential measures. The Australian dollar was sold to a new low for the week, a little below $0.7590 in Asia, before recovering. It approached $0.7620 in the European morning. It finished last week near $0.7610. The US dollar rose for the third consecutive session against the Chinese yuan. However, these upticks pared the losses suffered at the start of the holiday-shortened week, and the greenback snapped a six-week advance. The PBOC set the dollar's reference rate at CNY6.5409, somewhat softer than bank models projected.

Europe

The dollar was sold yesterday, partly due to the disappointing weekly jobless claims, and today the euro has been big misses in industrial output. The PMI has suggested the manufacturing sector was proving resilient in Europe, making today's data a shock. German industrial production was expected to rise by 1.5%. Instead, it fell by 1.6%. The upward revision to the January series (-2.0% from -2.5%) did not ease the sting. French industrial output was expected to rise by around 0.5%, and it slumped 4.7%. The January gain was shaved to 3.2% from 3.3%. Spain missed too. Industrial production was expected to have risen by 0.7% in February, and instead, it was flat. One bright spot among the EMU reports was the 6.6% month-over-month rise in Italian retail sales (2.0% expected), and January's 3.0% decline was pared to -2.7%.

While we have been tracking China's aerial harassment of Taiwan and stepped-up US military presence, another potential flashpoint is unfolding in east Ukraine, where Russia has been amassing forces. In a call, Merkel reportedly asked Putin to remove the troops. He seems unlikely to comply. The US says that the Russian deployment is consistent with training, exercises, and intelligence gathering, but Putin accuses Kyiv of "provocative actions." He may be referring to Ukraine President Zelenskiy's call earlier in the week for a path toward NATO membership. Reports suggest the US may send a warship into the Black Sea. The US Navy routinely operates in the Black Sea. Sending an extra ship now would ostensibly send a message to Russia. The rub here is that under a 1936 treaty, a 14-day notice must be given to Turkey who administers access. 

Belfast has experienced the most violence in several years, and nationalists clashed with unionists and the police. Some link it to the signs of a border between Northern Ireland and the UK with customs checks and new documents required. Others point to the police not prosecuting Sinn Fein leaders for violating social restrictions at a funeral for a former IRA member. The UK, Northern Ireland, and the Irish Republic called for order, and the US, a guarantor of the 1998 Good Friday Agreement, chimed in too. 

The euro peaked yesterday, a little above $1.1925, and is trading with a softer bias today, but within yesterday's range. Initial support is seen near $1.1880 and then $1.1860. There is a 980 mln euro option at $1.1850 that expires today. The euro settled near $1.1760 a week ago, and it is poised to close higher to snap three consecutive weeks of losses. Sterling, which reversed lower after testing $1.39 at the start of the week, retired to the lows from the second half of last March (~ $1.3670) in late Asian turnover and recovered above $1.3700 in early European turnover. It is the fourth consecutive down day for sterling. It finished last week near $1.3830.

America

The base effect will be clear in today's US PPI report. Last March, producer prices fell by 0.5%, followed by a 1.1% plunge in April. Producer prices likely rose by 0.5% last month, so the year-over-year rate is likely to jump toward 3.8% from 2.8% in February. The core is expected to be milder, and a 0.2% rise would lift the year-over-year rate to 2.7% from 2.5%. Next week, an even more striking jump in consumer prices is expected, with the year-over-year rate jumping toward 2.5% from 1.7%.

Canada reports March employment figures today. It lost 1.95 mln full-time jobs last March and April, but people have been returning to work in the past ten months. Roughly 1.61 mln have, leaving Canada around 340k full-time positions short. Canada also reports part-time, but they are more difficult to read. For example, Canada lost around 16k part-time positions in Q4 19. In February, about 88k people returned to their full-time jobs and 171k took on part-time work. Employment growth slowed in March as the virus spread, but employment is expected to rise by around 100k (Bloomberg's survey median), and unemployment is expected to fall to 8.0% from 8.2%. A robust report will boost official confidence in the economic recovery, helped too by strong US growth as well, and it may allow the Bank of Canada to calibrate its forward guidance to suggest tapering of its C$4 bln a week bond-buying in H2.

The greenback eased to a three-day low against the Canadian dollar in Asia (~CAD1.2555) before recovering. It is straddling the CAD1.2600 in the European morning. Last week and this week's highs were set in the CAD1.2635-CAD1.2650 area. The US dollar settled near CAD1.2580 last week, and if the Canadian employment report does not spur Canadian dollar buying, it will be the fourth consecutive week of greenback gains. The US dollar was sold to MXN20.0650 yesterday, its lowest level since mid-February. The jump in Mexico's inflation seems to signal the end of the easing cycle, though the central bank says not necessarily. Mexico's one-month to six-month bills (cetes) pay 4.11%-4.41%. The short-term US bills have no yield, while the six-month bill generates a two bp yield. The greenback is firm against the peso today and is approaching yesterday's high near MXN20.23. Above there, the week's high was in the MXN21.38 area. The dollar settled last week close to MXN21.31.