Concerns over US banks rival today's jobs report

Overview: The unexpectedly large rise in US weekly jobless claims, the largest since the end of last September and concerns about the impact of the sharp rise in interest rates on the liquidity and value of assets (bonds) owned by small and medium-sized banks saw the market unwind the effect of Fed Chair Powell's comments. The yield on the US two-year note slumped almost 20 bp to 4.87% yesterday and fell to 4.75% today before stabilizing (~4.82%). It settled near 4.89% Monday, the day before Powell's testimony began.

The sell-off of US bank stocks and the broad decline in US equities drove down global markets today. In the Asia Pacific region, Hong Kong led the decline with a 3% sell-off and the index of mainland shares that trade in HK was also off by 3%. Europe's Stoxx 600 is down by almost 1.6% to rival its biggest loss of the year. US equity futures are nursing small losses. Safe haven buying of bonds is driving down yields. European benchmark 10-year yields are off 3-9 bp. Falling rates often seem to coincide with smaller premium in the periphery, but not today as spreads are widening a few basis points. Gold is extended yesterday's gains to test the $1837 area.  April WTI that had pushed above $80 at the start of the week is set new lows since the end of February today below $75. 

Asia Pacific

An era is ending. Governor Kuroda chaired his last BOJ policy meeting. When he began his first term a decade ago, he offered a stark contrast with his predecessor Shirakawa by taking bold action. Traditional LDP policy mix was expanding fiscal policy and accommodative monetary policy. Abenomics, of which Kuroda oversaw the monetary dimension, was putting the traditional LDP policy mix on steroids. Kuroda's successor inherits a policy that seems unsustainable, yet after Ueda endorsed the current policy settings to the Diet, it would have been impolitic to change the settings. Policy was left unchanged today and Ueda was approved by the Diet. His term begins April 9, and the next BOJ meeting is April 28. 

At the same time, it seems clear that Japanese economy is still fragile, illustrated by dramatic 4.6% decline (month-over-month) of industrial output and a 4.1% decline in real wages in January. Real household spending, reported earlier today, fell by 0.3% January (year-over-year), the third consecutive month decline. The decline in consumption seems intuitively understandable given the inflation-adjusted disposable income fell by 2.8% year-over-year in January. The BOJ will update its forecast next at next month's meeting, but its last forecast was for core inflation to fall to 1.6% this year from 3.0% last year. It stood at 4.2% in January. The Tokyo core reading for February fell to 3.3% from 4.3%.

The dollar slipped to around JPY135.80 before the BOJ meeting concluded, easing slightly below yesterday's low, before rebounding smartly when no change in policy was confirmed. It reached almost JPY137 quickly, but was sold back to nearly JPY136, from where it launched another attempt at JPY137 in early European turnover. Yesterday's high was closer to JPY137.40 and the week's high was set a little shy of JPY138. The 200-day moving average is found at JPY137.50 today. Needless to say, the performance today rests on the US jobs report and the reaction in the debt market, where US financial concerns are also top of mind. The Australian dollar made a marginal new low since last November earlier today near $0.6565. Recall that the (61.8%) retracement of the Aussie's rally from last October's low is found slightly below $0.6550. There may be some resistance in the $0.6610-20 area but yesterday's high (~$0.6635) needs to be overcome to be of note. Last week, the dollar snapped a five-week gain against the Chinese yuan nearly recouped the 0.8% loss this week. However, today, the greenback is heavier but consolidating within yesterday's range (~CNY6.9565-CNY6.9740). There did not seem to be much of a reaction to 1) news that aggregate lending stronger than expected last month around CNY3.1 trillion (median forecast in Bloomberg's survey was for CNY2.3 trillion, following the nearly CNY6 trillion increase in January) and 2) that Xi was "given" a third term as China's president. Today's dollar fix was at CNY6.9655 compared with expectations for CNY6.9667.

Europe

While the German trade surplus jumped more than expected in January (16.7 bln euros from 10.0 bln in December and 12.1 bln euros in January 2022), the French trade deficit (12.9 bln euros) was a little smaller than the Q4 average (~13.4 bln euros). The record shortfall was reported last September at almost 17.2 bln euros. However, France's broader external balance, the current account deficit is considerably smaller. Still, current account in December was a record deficit of about 8.5 bln euros was revised to a 7.6 bln deficit and the January shortfall fell to 3.6 bln euros.

After contracting by 0.5% in December, the UK economy grew by 0.3% in January, better than the 0.1% expected. Services and a smaller drag from trade were the bright spots, while manufacturing and (-0.4%) and construction (-1.7%) were weaker than expected. Manufacturing output was seen up slightly while the median forecast in Bloomberg's survey looked for a flat construction report. Some economists have backtracked from ideas that the UK economy has entered a recession. The highlight next week are the employment report (March 14) and the presentation of the spring budget to Parliament (March 15). The Bank of England meets the following week (March 23), and the swaps market has nearly priced in a quarter point hike then and at the next meeting (May 11). Those two hikes would bring the base rate to 4.50% and the terminal rate is now seen likely at 4.75%.

The euro rose to a three-day high a little through $1.0600 in late Asia Pacific turnover. It is struggling to maintain the upside momentum in the European morning, ahead of the US jobs report. Nearby resistance is seen in the $1.0610-35 area. The euro settled last week near $1.0635. The increase in US weekly jobless claims and the concerns about US small and medium-sized banks reduces speculation about a 50 bp hike by the Fed later this month, while the ECB seems committed to a half-point hike next week. Sterling has been lifted by the GDP figures and is the strongest of the G10 currencies today with a nearly 0.5% gain through most of the European morning. It had fallen to a four-month low near $1.18 in the middle of the week and briefly rose above $1.20 in early European turnover. The 20-day moving average is near $1.2020, and sterling has not closed above it in over a month. Sterling settled around $1.2035 last week. 

America

Fed Chair Powell said the pace and extent of further tightening of monetary policy will depend on the "totality" of the economic data. Today's employment report is an important part of that "totality" and set the general tone for the upcoming data. Job growth is expected to slow to 224k, according to the median forecast in Bloomberg's survey, which has crept up from 200k late last week. If accurate, it would be the smallest job creation since the end of 2020. While this would be more consistent with a 25 bp increase by the Fed instead of 50 bp, given the sensitivity to price pressures, the market may focus instead on the year-over-year increase in average hourly earnings. The 0.3% expected month-over-month increase (for the consecutive month) is consistent with the modest slowing that has been seen. However, in February 2022, average hourly earnings for flat so the 0.3% increase will lift the year-over-year rate to 4.7% from 4.4%, which would be the largest increase since last March. 

The focus on the jobs data is being rivaled by concerns about the unrealized losses of US banks' (bond) portfolios that do not have to be marked-to-market. It is estimated to be around $300 bln in aggregate. While concern about Silicon Valley Bank may have sparked the concern, the market sees it to be possibly symptomatic of wider issue. The KBW Bank Index fell by around 7% yesterday, its steepest loss since June 2020.

Canada also reports is February jobs data. The 121k surge in full-time positions in January is not sustainable and slower jobs growth is expected. Overall, counting part-time positions, job growth is expected to slow to 10k (median forecast in Bloomberg's survey) after a 150k increase in January. The unemployment rate may tick up to 5.1% from 5.0%, where it was in December and January. Average hourly pay for permanent workers may have risen back above 5% for the first time since last November. 

With risk assets under pressure, the Canadian dollar continues to struggle, despite the decline in US two-year rates that had seemed to be a bigger driver recently. The greenback made a new five-month high today a little above CAD1.3860 and is extending its gains for the seventh consecutive session. There is little in the way of technical barriers ahead of last October's high near CAD1.3975. Support is seen around CAD1.3820. The greenback settled by CAD1.3600 last week. In thin trading after the futures market closed, the Mexican peso sold off dramatically. There did not seem to be a local spark, but the peso is the only emerging market currency that trades 24-hours a day and is often used a proxy for other EM currencies. The dollar was bid most of the yesterday and was around MXN18.10 before surging to around MXN18.44. It rose to almost MXN18.60 today but has come back offered in Europe and approached MXN18.27. While recognizing the attractiveness of carry and the near-shoring/friend-shoring meme, we had become concerned about over-extended technical picture and what seemed to be the deterioration of underlying political considerations. The dramatic correction seems to be more an issue of market positioning (the Chilean peso, the second-best currency this year, did not suffer was the Mexican peso did). The Mexican peso's relatively low volatility also favored carry strategies. However, the one-month implied vol has soared from about 11.5% at yesterday's lows to 13.2% today, its highest level since last October. The peso's strength had deterred some buyers who did not want to chase it has it appreciated. This setback is likely seen as an opportunity for those participants who need to secure pesos.