Overview:  

The market took US short-term rates and the dollar lower after the CPI data, which was largely in line with expectations.

On the one hand, the odds of a quarter-point hike next month increased slightly (73.6% vs. 71.6%) to 5.25%, but it reinforced that sense that it is last hike and that the Fed will unwind this hike and more before the end of the year. The year-end implied policy rate fell by about six basis points to 4.33%. The dollar was sold against all the G10 currencies, and it fell by almost 0.5% on a trade-weighted basis. The dollar remains offered today. The euro and sterling are testing the year's highs. Most emerging market currencies are also higher against the US dollar, and the JP Morgan Emerging Market Currency Index is rising for the third consecutive session.

Asia-Pacific equities were mixed. China, Taiwan, and Australia slipped lower. Japan, South Korea, Hong Kong, and India gained. Europe's Stoxx 600 is up for the fourth consecutive session and US equity futures are posting modest gains. Benchmark 10-year yields are 2-4 bp higher, putting the US 10-year yield near 3.42%. The 2-year yield continues to hover near 4.0%. Gold is trading near $2028 to approach last week's high near $2032. A combination of apparently slower Russian oil sales, OPEC+ cut and six weekly declines in oil stocks at Cushing, has lifted June WTI to almost $83.40 yesterday, the high for this year. It is trading in a narrow range slightly below there today.

Asia Pacific

China's trade figures surprised. Exports unexpectedly rose for the first time in six months. The 14.8% increase (year-over-year) contrasts with the median forecast in Bloomberg's survey for a 7.1% decline. Imports fell by 1.4%, holding in considerably better than the 6.4% decline forecast. The net result was an $88.2 bln monthly trade surplus, twice as large as expected and twice the March 2022 surplus. The trade surplus in Q1 23 stood at $205 bln and in Q1 22 it was nearly $154 bln. China's auto exports were particularly strong, and as we have seen from recent press converge, this may turn into a new trade flash point.

Australia reported a stronger labor market in March than expected. Australia created 53k new jobs, more than twice what economists expected. Of these jobs 72.2k were full-time positions, slowing ever so slightly from the 79.2k full-time positions filled in February. The unemployment rate was unchanged at 3.5%, defying expectations for a small increase. The cyclical and record low were set last October at 3.4%. The participation rate was unchanged at 66.7%, following February's upward revision from 66.6%. The record high was seen in June and November last year at 66.8%. Next week, the minutes from this month's central bank meeting, which announced the pause, will be published next Tuesday followed by the preliminary April PMI ahead of next weekend. 

Foreign investors poured into Japan in the first week of April, the new fiscal year. They bought a record amount of Japanese stocks (JPY2.37 trillion or ~$17.8 bln). They also bought JPY1.31 trillion of Japanese bonds. Japanese investors, who had been buying foreign bonds in Q1 at twice the pace they sold in 2022, pared back and sold JPY788 bln of foreign bonds last week, while buying a small amount of foreign equities (~JPY28.2 bln).

The dollar is consolidating in a narrow range (~JPY133.40-JPY133.90) in the lower end of yesterday's range when the greenback reached JPY132.75. Firmer US rates are not helping the greenback recoup more of yesterday's losses. A break of yesterday's low could spur a move toward JPY132.00-35. On the upside, JPY134.00 may offer firm resistance. Although rate expectations did not change after Australia's strong jobs data, but the Aussie reached a six-day high near $0.6735. The Australian dollar has approached the 200-day moving average (~$0.6745), which stands in the way of a return to last week's high near $0.6795. The intraday momentum indicators are stretched. A close below $0.6700 would disappoint now. A doubling of China's trade surplus and the broadly weaker US dollar failed to push the yuan out of its recent narrow trading range. The greenback traded between CNY6.8680 and CNY6.8785. It traded between CNH6.8660-CNY6.8945 last week. The PBOC set the dollar's reference rate at CNY6.8658 while the market expected CNY6.8673. Lastly, Hong Kong Monetary Authority intervened again to defend the peg and bought HKD9.05 bln.

Europe

The UK economy stagnated February rather than eke out a small gain, but January's growth was revised to 0.4% from 0.3%. The recovery industrial output did not materialize (-0.2% vs. -0.5% in January) but construction was stronger than expected (2.4% vs. 1.0%). The trade deficit was also a little larger than expected. Next week the UK reports its latest employment figures, March CPI and retail sales, and the preliminary April PMI. The market remains confident (~79%) of a BOE hike next month. That would bring the base rate to 4.50% and the swaps market leans toward one more hike in the cycle after that.

The eurozone reported industrial output rose by 1.5% in February, which was stronger than expected. Previously, Germany reported its industrial production rose by 2.0% (the median forecast in Bloomberg's survey was for a 0.1% decline), and it follows a 3.7% surge in January. France reported a 1.2% increase (median forecast was for a 0.5% gain). Spain also beat expectations with a 0.6% gain in industrial output (median forecast was for 0.4%). Italy was the exception. Industrial output slipped by 0.2%. The market expected a 0.5% increase. 

The euro pushed above $1.10 to come with a hundredth of a cent of the high set two months ago near $1.1035. Some of the euro buying may be linked to large option expirations at $1.10 today (~3.4 bln euros) and tomorrow (1.7 bln euros). We also note that the US 2-year premium over Germany has fallen to around 117 bp, the least since Q4 21. The intraday momentum indicators are overbought in the European morning. Sterling is firm and matched the high from earlier this month near $1.2525. The intraday momentum indicators are also overbought ahead of the start of the North American session. Initial support now is seen around $1.2480.

America

The deceleration in headline CPI to 5.0%, slightly lower than expected, appeared to reinforce the sense the market had prior to the report that after a likely hike at the May 3 FOMC meeting, the Fed will "pause" its tightening cycle. The pricing in the derivative markets see 5.25% as the terminal rate. Moreover, the market continues to price in rate cuts later this year and the year-end rate is seen near 4.33%. That implied a policy rate between 4.25% and 4.50%. While possible, it seems aggressive. The FOMC minutes showed that the general sense was that the data had, as Chair Powell previously suggested, warranted a higher terminal rate than the Fed had previously (December) projected. However, the fallout from the bank failures steadied their hand: the median remained at 5.1%, though seven of the 16 members thought higher would be appropriate. The minutes said that "some" had wanted a 50 bp hike in March before the banking stress, and "several" officials considered a pause. The Federal Reserve's staff forecast a mild recession starting this year. The median Fed forecast was for growth to slow to 0.4% year-over-year here in 2023. Given the kind of growth that looked likely when the Fed met, it would seem to imply a contracting quarter if not more. In December, the median dot forecast was 0.5%.

Today, the US reports weekly jobless claims and March PPI. As of the end of March, the four-week moving average stood at almost 238k. It finished last year near 209k. Weekly initial jobless claims of 235k in the first week of April will see the four-week moving average tick up slightly. More interest will be in the PPI. The median forecast in Bloomberg's survey expects an unchanged reading month-over-month (after a 0.1% decline in February). The year-over-year rate is seen slowing to 3.0% from 4.6%, which would match the low from February 2021. It would be the ninth consecutive deceleration. The core rate is expected to slow to 3.4% from 4.4.  The last time the year-over-year rate rose was in March 2022.

Surprising no one, the Bank of Canada heled its policy rate steady at 4.50%, where it has been since January's quarter-point hike. It does not meet again until early June (June 7), a week before the Fed. It seems that the bar of lifting the central bank's "conditional pause" is relatively high. Despite, officials acknowledging that economic activity has been stronger than it expected at the start of the year, the central bank still sees signs that the tightening of monetary policy is in fact cooling the economy. The Bank of Canada raised its Q1 GDP forecast to 2.3% (annualized) slightly higher than the 2% seen previously. It puts Q2 GDP at 1.0%. Next week, Canada report March CPI figures. Given the base effect (March 2022, CPI rose by 1.4%), the year-over-year rate could slow toward 4.2% from 5.2%. The official forecast is for 3.3% in Q2.

 The US dollar has been sold through CAD1.3400 for the first time in nearly two months. It has punched through the 200-day moving average (also near CAD1.3400) for the first time since August 2022. There is little meaningful support ahead of the CAD1.3335 area and this year's lows set in February (~CAD1.3260-75). The Mexican peso is not participating much in today's move against the greenback. The US dollar is holding above yesterday's low near MXN18.02. Trading is subdued and perhaps, the peso has been eclipsed by the Brazilian real. The Brazilian real led the world's currencies higher yesterday, rising almost 1.8% against the dollar. Many attributed it to the general move out of the US dollar after the CPI figures. However, note that the real appreciated by 1.2% on Tuesday. It is trading at a 10-month high against the greenback. The government claims that it is its credible fiscal policy that is boosting demand for Brazilian bonds. The dollar's sharp drop has left it oversold--momentum indicators are stretched, and it closed below the lower Bollinger Band (BRL4.9340). 

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