Calmer but fragile markets

Overview: The financial and economic chokehold on Russia continued to tighten as many corporations seek to reduce ties. The market seems to be tentatively concluding that Russia can be ringfenced to a large degree, though, of course not fully. The US NASDAQ's resilience yesterday, settling higher on the day may have helped lift the MSCI Asia Pacific Index for the third consecutive session. European stocks are still struggling though. Gains in energy, materials, and consumer services is not enough to offset the decline elsewhere.US futures are nursing small losses. The US 10-year yield fell a little more than 13 bp yesterday and is another 8 bp lower now at 1.74%. In the middle of last week it was toying with the 2% threshold.  European yields are 13-16 bp lower today.The dollar is mixed.The yen and dollar-bloc currencies are advancing. The other major currencies are weaker.The euro has stalled below yesterday's $1.1250 high, while the dollar is struggling to reestablish a foothold above JPY115.00. Emerging market currencies are weakening as the session progresses, and the JP Morgan Emerging Market Currency Index is off about 0.3% after dumping 2.25% yesterday. Gold is trading higher but is within yesterday's range when it peaked near $1931. April WTI is extending yesterday's nearly 4.5% gain with another 3% advance today to near $99 a barrel. US natural gas is snapping a three-day slide of around 5% with a 1%+ gain today. Europe's benchmark is up nearly 6% after yesterday's 7.4% rally. Iron ore and copper are trading higher. May Wheat prices rallied 8.6% yesterday and are up another 5.2% today. It has rallied by nearly a fifth since the US warned on February 11 that a Russian attack could happen at any moment. 

Asia Pacific

China's February PMI was better than expected. The manufacturing PMI slipped to 50.1 from 50.2, while the market (median of the Bloomberg survey) was for a sub-50 reading. The service PMI rose to 51.6 from 51.1. Here, too, the market expected a decline. The composite edged up to 51.2 from 51.0. The Caixin manufacturing PMI also was somewhat better than expected, rising to 50.4 from 49.1. Economists had expected a flat report. 

Japan's February manufacturing PMI was revised to 52.7 from the 52.9 preliminary estimate. It is the lowest since last September and was at 55.4 in January. We note that other Japanese data disappointed, including January housing starts and vehicle sales. The takeaway here confirms what the market already knows in broad terms: the world's third-largest economy is struggling as Covid curbs and disruptions take an economic toll. The services and composite PMI will be reported later this week and are expected to have remained below the 50 boom/bust level. 

The Reserve Bank of Australia kept a steady hand on policy. Governor Lowe underscored the RBA's patience and recognized developments in Ukraine as a new risk. The swaps curve showed hardly any reaction. Note that housing price growth slowed and prices in Sydney reportedly fell for the first time in nearly a year and a half. Separately, February's manufacturing PMI was revised to 57.0 from the flash reading of 57.6. It stood at 55.1 in January and 55.7 at the end of 2021. The Q4 current account surplus fell to A$12.7 bln from a revised A$22.0 bln in Q3. The surplus was smaller than expected. Last year's current account surplus averaged A$19.2 bln a quarter, A$12.75 bln in 2020 and A$3.0 bln in 2019. 

The US dollar is slipping against the yen and is trading at a three-day low in Europe near JPY114.80. It seems to be sandwiched between two sets of expiring options. There is a set for a little more than $400 mln at JPY115.30 (today's high is a smidgeon below that) and nearly $530 mln at JPY114.70. The Australian dollar reached $0.7290, its highest level since mid-January. Recall that yesterday, it briefly traded below $0.7160. Some consolidation ought not to be surprising. Support is seen in the $0.7240-$0.7260 area. The dollar traded inside yesterday's range against the Chinese yuan. The market may be turning a bit cautious as the CNY6.30-level is approached. The PBOC set the dollar's reference rate noticeably stronger than the market (Bloomberg survey median) today (CNY6.3014 vs.CNY6.2955), which is being interpreted as a protest.

Europe

The German and French preliminary February manufacturing PMIs were revised lower in the final reading, but Italy and Spain showed an unexpected increase. The net result was that the aggregate was shaved to 58.2 from 58.4. It is still the softest since February 2021. The eurozone manufacturing PMI has fallen six of the last eight months. 

France and Spain had earlier reported higher than expected February CPI. Today, it is Germany and Italy’s turn ahead of the aggregate release tomorrow. Italy's EU harmonized measure surged by 0.8% in the month for a 6.2% year-over-year pace. The market (Bloomberg survey median) was for a 0.2% rise on the month and 5.5% rise year-over-year. German states are reporting more price pressures and the national gauge due later today is expected to show a 5.4% year-over-year rate, up from 5.1% in January. The EMU figure is expected to rise by 0.6% for a 5.6% year-over-year pace. The core measure is seen rising to 2.6% from 2.3%. 

The UK's February manufacturing PMI was revised higher to 58.0 from 57.3. It is the first rise in two months. Separately, it reported a slightly slower expansion of consumer credit in January, and a pick-up in mortgage approvals and lending. Still, the market has just about ruled out a 50 bp hike at the March 17 BOE meeting. The swaps market has it now less than a 7% chance. Before the US warning about Russia on February 11, the market saw more than a 60% chance of a 50 bp move. 

When Russia first invaded Ukraine last week, the euro traded in a range of roughly $1.1105 and $1.1315. It has remained in that range since. It stalled in front of $1.1250 yesterday and is slipping below $1.1170 in late morning dealings in Europe. We see support in the $1.1140-$1.1160 area. We note that the US premium over Germany for two-year borrowings is making a new high today above 200 bp. Sterling has run into a cap near $1.3440, which has been tested and held for the third consecutive session today. It is struggling to sustain the $1.34-handle in Europe today. Still, ahead of yesterday's low (~$1.3315) there is plenty of support. We look for the $1.3360 area to hold. 

America

Over the weekend, the financial noose on Russia tightened. In the last 24 hours or so, companies are also joining the efforts. Not only oil companies, but a wide range of other companies are reducing their sales or presence in Russia, including Boeing, Uber, GM, Disney, and Sony (not meant to be exhaustive, but representative). Meanwhile, Finland's parliament is debating whether it should join NATO.  A petition seeking a referendum on the issue got over 50k signatures. A local poll found 53% of the Finns support NATO membership. A similar poll in January found less than a third were in favor. There is much debate about Putin's timing. We have tried to put in context the withdrawal from Afghanistan, the end of Merkel's tenure, and the inflationary backdrop in the US and Europe. However, at the same time, one could argue that there was no reason for Putin to move earlier. Before the 2020 US election, the President had talked about withdrawing from NATO, reducing US troop presence in Europe, and reducing weapon sales to Ukraine. Simply, if crudely put, there was no need for an invasion, the US was giving Putin what he seemed to want.

US economic data includes the final February manufacturing PMI. Recall that the preliminary report showed an increase to 57.5 from 55.5. It was the first increase since July 2021. The ISM manufacturing report is also due. A small rise is expected. Prices paid may have ticked up, but new orders and employment may have eased. Last month's auto sales will trickle in over the course of the US session. Auto sales still seem to be an under-appreciated economic indicator. They jumped 2.6% in January, the most since May 2020, and above 15 mln units for the first time since June 2021. A pullback toward the 14.4 mln unit pace is expected (median Bloomberg survey).  The Fed's Bostic and Mester speak today. Bostic outlined his views yesterday but does not have the vote this year. Mester votes this year and is on board with a hike later this month. For all practical purposes, the market has practically no chance of a 50 bp hike discounted now. It was above 80% before the US warning about Russia on February 11. Note the that implied yield of the December 2022 Fed funds futures contract fell 20 bp yesterday and is off another 10 bp today. It now has slightly less than five hikes discounted this year. 

Canada reports its December monthly GDP and Q4 21 GDP figures today. The market is looking beyond them and the manufacturing PMI. The Bank of Canada meets tomorrow. The market has also moved hard against a 50 bp hike that had been the odds-on favorite scenario in the swaps market. Mexico reports January worker remittances and the Markit manufacturing PMI and IMEF surveys. There is some hope that the economy is stabilizing rather than contracting. 

The US dollar spiked to the highs for the year against the Canadian dollar on the Russian invasion last week to reach almost CAD1.2880. It has surrendered those gains to test the lower end of last month's range in the CAD1.2650-CAD1.2660 band today. Look for a consolidative North American session today with the CAD1.2700 area to offer initial resistance. The dollar also remains in last Thursday's range against the Mexican peso (~MXN20.2380-MXN20.7850). It is trading inside yesterday’s range (~MXN20.32-MXN20.6550). We see choppy but range-trading as the most likely scenario today, dependent on the broader, though fickle, appetite for risk.