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.  

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Read more by Marc on his site Marc to Market.

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