Overview: European bourses are playing catch-up as they reopen after the long holiday weekend. The Dow Jones Stoxx 600 gapped higher and is trading at record levels, led by materials and financials. Asia Pacific markets were mixed after US indices rallied yesterday. A sharp fall in household spending may have weighed on Japanese shares. US futures are softer too. The US 10-year yield is flat neat 1.70%, while European benchmark yields are 2-4 bp higher. The dollar is paring yesterday's losses. The Antipodean currencies and sterling are leading the way, with around 0.5%-0.6% losses in late morning turnover in Europe. The euro is hovering around $1.18, and despite the brief slippage yesterday, the greenback is holding above JPY110.00.Emerging market currencies are mixed, with Asia mostly higher and Europe mostly lower, leaving the JP Morgan Emerging Market Currency Index little changed. Gold is firmer, reaching its best level in almost two weeks, a little under $1739.Oil is recovering from its biggest drop in two weeks. The market seemed to overreact to the talks today in Vienna as an international effort tries to get both the US and Iran back into compliance with the arms/embargo agreement. However, it does not mean that Iranian oil will hit the markets any time soon. Still, May WTI has so far been unable to regain the $60-handle and remains within yesterday's range.  

Asia Pacific

Japanese data underscore the pressure on the world's third-largest economy. Household spending fell a sharp 6.6% in February, a larger drop than expected. It has been falling since the sale tax was hiked in October 2019. There were two exceptions, last October and November. While data was distorted by the leap year, consumption fell from a year ago even without it. Part of what weighs on consumption is weak income. Cash earnings fell 0.2% year-over-year in February. This was a bit better than expected but was largely offset by the downward revision in the January series to show a 1.3% decline from a 0.8% fall initially reported.  

The press reports that China has requested domestic and foreign lenders limit loan growth going forward after a 16% surge in the January-February period. The idea is to stay within last year's levels. The stimulative efforts have boosted the property market and new home sales. Small banks are thought to be particularly vulnerable. The move further underscores the shift in Chinese policy from boosting growth to controlling credit risks. Separately, note that S&P Dow Jones reports that its indices that had dropped from its benchmarks due to the US stance will be reinstated starting in July.  

As widely expected, the Reserve Bank of Australia left policy unchanged. It reiterated that it does not intend to lift rates until CPI is back into the 2%-3% target, which it does not anticipate for a couple of years. Growth is expected to be above trend this year and next. The pressures are building, and house prices are one release. Officials also expressed concern for house prices, which have risen by the most in 30 years.  

Sometimes it is hard to distinguish between cause and effect, but the net result is that tensions over Taiwan seem to be rising. On the one hand, China appears to have become more assertive in general. There have been clashes with India, a new 25-year agreement with Iran, retaliatory sanctions against US, Canadian, UK, and EU officials for initiating sanctions over the treatment of Uighurs, and maritime shows of force in disputed waters. Beijing has continually harassed Taiwan by sending fighter planes and other aircraft into Taiwanese territory. Eight fighter planes were sent yesterday alongside two other military aircraft. In late March, Beijing sent 20 warplanes in a single day. It could have looked like an invasion.  

The narrative in the financial press often does not see the provocative role of America itself. Consider the case of the missing semiconductor chips. The shortage of semiconductors has been exacerbated by US sanctions against the largest consumer of chips in China (Huawei), forcing it to scramble to re-source and China's largest producer of semiconductor chips (SMIC), but one is rarely presented with the linkages. Similarly, it is not coincidental that China's show of force happened a day after the US and Taiwan agreed to boost cooperation between their coast guards. Right from the start, with the planned call with Taiwan shortly after the 2016 election, the Trump administration moved to weaken the taboos governing the formal US-Taiwan relationship. In its waning days, many of the curbs that had been in place were rescinded, and the Biden administration is extending the departure from the traditional approach. According to press reports, Secretary of State Blinken has referred to Taiwan as a country. Beijing seems just as worried about the US and its allies trying to alter the status quo as American officials are concerned that Xi will move. The high degree of mistrust makes the situation particularly tense. Meanwhile, China has sent dozen of "fishing boats" to the Whitsun Reef, claimed by the Philippines, and have kept them there were a few days now, seemingly testing and probing the US resolve.  

The dollar is trading quietly against the yen. It briefly traded below JPY110 yesterday for the first time in a week but has remained above it today. There has been no follow-through selling after yesterday's outside down day. Resistance is seen in the JPY110.50-JPY110.75, though last week approached JPY111.00. The Australian dollar posted an outside up day yesterday, but there also has been no follow-through buying. While the $0.7660 area caps, pressure is on the downside. The $0.7620 area offers initial support, and a break could see $0.7585. The US dollar fell by about 0.25% against the Chinese yuan, which is a relatively large move. Last month, the dollar fell by more on only two occasions. The Caixin services and composite PMI rose more than expected, lending credence to ideas that the composition of activity is changing in favor of a little more demand. The PBOC set the dollar's reference rate at CNY6.5527, a little firmer than expectations.  

Europe

France and Italy have extended their social restriction. Germany seems on the verge of new restrictions itself. In a rare reversal, Merkel abandoned the proposed hard lockdown over Easter. Although Merkel apologized, the government is still struggling to get ahead of the covid curve. Reports indicated that Germany's covid victims in intensive care are at their highest level in two months. The Chair of the CDU, and candidate to replace Merkel as Chancellor, Laschet, wants to revisit the hard and short lockdown. Merkel is to meet with the other state leaders next week, but Laschet is pushing for a meeting earlier. The mere fact that Europe is experiencing a new wave is problematic for governments. Until last November, Continental Europe had fared better than the US and UK several metrics. The goodwill earned in the early part of the pandemic has dissipated for Merkel and Macron. Lashet's endorsement of the lockdown may be the proper move for public health, but it would seem to boost the chances of Soeder, the CSU-head of Bavaria, to lead the CDU/CSU coalition in September's general election. 

The EU is returning from the holiday in a seemingly upbeat mood. The news reports suggest that the EC now projects that there will be sufficient vaccine supplies to immunize a majority of people by the end of June. In new projections, the five largest countries (Germany, France, Italy, Spain, and the Netherlands) will be able to vaccinate a little more than half their populations. The EC wants 70% of the adults immunized by the summer, which is 55%-60% of their populations in many countries.,

The euro posted an outside up day yesterday and rose above $1.18 for the first time since March 26. Follow-through buying today has been limited to about 2/100 of a penny. The euro appears to have carved out a small head and shoulders bottom, and if the pattern is valid, it should hold above the $1.1780 area. The pattern projects to a little above $1.19. However, ahead of it is the 200-day moving average (~$1.1885) and a little lower is the retracement objective of the leg down since March 18, when it last approached $1.20. Sterling rose to its best level since March 19, just shy of $1.3915 yesterday.  It managed to extend it a few ticks before sellers emerged and pushed the sterling back toward yesterday's lows. A break of $1.38 could spur another half-cent decline. Some pressure on cable appears to be coming from a cross-rate adjustment against the euro. The euro slipped below GBP0.8500 yesterday, its lowest level in more than a year, and is bouncing back smartly today. Initial resistance is seen near GBP0.8550-GBP0.8560.  

America

The US sees the JOLTS jobs report today, but the market accepts that the labor market is improving. Ahead of tomorrow's FOMC minutes, the February trade balance (a record deficit?), and consumer credit, the investors will digest two other developments. First, the Senate Parliamentarian ruled yesterday that the special budget rules that allow the avoidance of a filibuster (reconciliation) can be applied to the two-part infrastructure/jobs proposals and allow passage with a simple majority. That means the disputes within the Democratic party need to be resolved. This will also mean that the debt ceiling suspension that runs through July may not be renewed. The Biden administration will use extraordinary measures to extend its borrowing authority until the 2022 budget. It will raise the debt ceiling. Second, the US Court of International Trade concluded that the Trump administration's expansion of Section 232 tariffs on steel and aluminum derivatives last January overstepped its authority, and deposits must be refunded.  

In the 19th-century, tariffs were the main source of the federal government's revenue. With the liberalization of trade, this source dried up. Corporate and household income tax became necessary in the age of free trade. Tax schedules can be misleading due to exemptions and loopholes, and the like. In 2019, the tax/GDP ratio in the US was 24.5%, according to the OECD. The OECD average was 33.8%. The Biden administration's American Jobs Plan (aka infrastructure plan) calls for repealing the 2017 corporate tax cut. At the same time, not coincidentally, the US endorses OECD efforts to negotiate a minimum corporate tax. There seems to be a common element in the framing of Biden's foreign economic policy: the convergence of values and interest. Treasury Secretary Yellen explicitly framed the issue of helping developing countries fight covid in these terms. She pushed the traditional American position that stable and prosperous countries tend not to be security threats to the US. She could also have recognized that virus mutations in other countries can come back and overwhelm the current vaccines. Negotiating one will still prove to be an arduous task, and the low-tax centers like Ireland (12.5%) will be loath to have higher tax forced on them from the OECD, let alone the EU. Hungary's corporate tax rate is 9%, and Lithuania's is 15%. According to one study, 80 countries have corporate tax schedule rates of less than 20%.  

Canada and Mexico's economic diaries are light today, and there is only one Fed speaker (Barkin). The IMF/World Bank will present updated forecasts as their meetings get underway. The US dollar posted an outside down day against the Canadian dollar yesterday and fell to a two-week low near CAD1.2500. As was the case against other currencies, there has been no follow-through selling of the greenback. It is testing the middle of yesterday's range (~CAD1.2550) in the late-morning turnover in Europe. Resistance is seen closer to CAD1.2600. After trading at its lowest level since mid-February (~MXN20.23), the US dollar rebounded yesterday and traded as high as MXN20.38. It remains firm, even if it has not made new highs (yet). There does not appear to be meaningful resistance ahead of MXN20.50.