March 15, 2022

Markets Today: Will China pick a side?

Yields have soared even as commodity prices have fallen.

Todays podcast


Overview We Can Get Together

  • China’s lockdown of Shenzhen and Jilin sends shivers through commodities
  • Hopes remain for a Russia/Ukraine deal, though nothing concrete has emerged
  • Yields surge ahead of FOMC, US 10yr yield now at 2.13% and highest since July 2019
  • Commodities fall sharply on China and Russia/Ukraine hopes; Brent Oil -5.7%
  • Coming up today: RBA Minutes, CH Retail/IP/1yr rate, German ZEW, US PPI, Empire Fed

“There must be something we can talk about; Maybe there’s something here that we can do; Don’t go back home, babe; Don’t go too far; Maybe there’s one more thing; Whenever you come this way”, Flowers (aka Icehouse) 1980


Markets remain volatile ahead of the FOMC Meeting on Wednesday (Thursday 5.00am AEDT). China’s lockdown of Shenzhen (17m) and Jilin (25m population) has sent shivers through commodities, while also potentially creating a new round of supply chain disruptions. Meanwhile hope remains for a Russia/Ukraine deal with negotiators meeting again tomorrow after a technical pause today. Adding to a sense of momentum has been headlines of US and Chinese advisors meeting in Rome where “substantial discussion” was held, and President Biden has also flagged a possible trip to Europe. Weekend press had reported Russia requested military equipment from China, though Chinese officials have denied suggestions. To be clear there has not been material progress, but ongoing talk suggests an off ramp may be in the wings even as fighting continues on the ground. The lockdowns in China of course will compound supply chain problems at a time when inflation is already uncomfortably high.

Yields have soared even as commodity prices have fallen. The US 10yr yield broke through 2.1% to currently trade at 2.13% (up 14.3bps over the past 24 hours), for the first time since July 2019. The sell-off has also been fully reflected in real yields with the 10yr tip +15bps to -0.83%, while the 10yr implied breakeven is little changed at 2.96%. Heading into Wednesday’s FOMC decision markets fully price 7 rate hikes from the Fed in 2022, that would take the Fed Funds Rate to 1.75-2.00%, a rate that is closer to their 2.50% neutral rate. Key for markets in the FOMC meeting will be whether the Fed sees the need to go into restrictive territory in 2023 or 2024 – this could be indicated by the Fed dot plot or by the press conference. Curves were mixed with 2/10s steeping slightly by +3.4bps to 27.8bps, while 5/30s flattened by -2.2bps to 38.2bps. Notably the 30yr yield at 2.48% is very close to the Fed’s 2.50% neutral. While curves are mixed, OIS and Eurodollars continue to show inversion after September 2023, with markets pricing in rate cuts thereafter. As many of noted, it will a difficult line to balance getting inflation back to target without triggering a pronounced slowdown/recession. Meanwhile across the pond Germany’s 10-year yield rose 12bps to 0.37%, its highest level since November 2018.

Equities have had a mixed night. US equities are in the red with the S&P500 so far down -0.7% after having initially been up 0.4% following the positive lead from Europe (the Eurostoxx 50 was up 1.50%). Oil names have been sold heavily after the sharp fall in oil prices overnight (WTI -6.2% to 102.54), while tech stocks have come under pressure given China’s lockdown is likely to interrupt production, especially for iPhones (Apple -2.0%; NASDAQ -2.2%). The lockdowns create the potential to further extend supply chain issues, which are already being impacted by the Russia/Ukraine war. Meanwhile, Chinese equities fell sharply in Asia yesterday with the HangSang -5.0% and CSI300 -3.1%. Chinese tech in particularly is under pressure amid rumours that Tencent might be facing a record fine for running afoul of anti-money laundering laws (Tencent -10%). Chinese stocks listed on the NASDAQ were down some 12% and are at their lowest level since July 2013. Meanwhile highlighting the pandemic is far from over, vaccine stocks popped higher after Pfizer’s CEO said a four COVID shot is necessary “right now” amid a new virus mutation, dubbed ‘Deltacron’.

Commodity markets have seen sharp moves with falls across the board. Brent crude fell to as low as $103.50 and is currently down about 6.6% to $105.28. The two forces driving were Russia/Ukraine negotiation hopes, as well as China’s lockdown of Shenzhen and Jilin. China is the world’s largest oil importer, so the lockdown in these two areas has the potential to crimp near term oil demand significantly, while also impacting the demand for other commodities at a time of tight supply due to the Russia/Ukraine war. There were sharp falls for iron ore (futures -7.7%), copper (-2.5%) and aluminium (-5.1%). Given the sharp rise in energy prices since the start of Russia/Ukraine tensions, China has said it plans to increase domestic coal mining by 10%. So much for near-term focus on emissions.

In FX, the PBoC yesterday set a weak fix above 6.35 on USD/CNY, a strong hint that the central bank has become uncomfortable with CNY strength. This follows weak money and credit data released Friday night, despite the modest easing in policy to date. A front-page article in the China Securities Journal highlighted the need for further policy easing, including a further cut in the reserve requirement ratio and lower lending rates. The focus on China and the weaker CNY have seen the AUD underperform, currently down over 1.4% to just above 0.7191. With this focus, the NZD is also weak, down 0.9% to 0.6760. In terms of the majors, EUR has outperformed +0.4% to 1.0953 with the narrow USD DXY -0.1%. GBP is -0.3% at 1.3003, and also on the weak side of the ledger, JPY is +0.7% as the BoJ’s yield curve control policy keeps Japanese bond yields suppressed against a backdrop of surging global rates. USD/JPY broke above 118 for the first time since 2016, and is currently trading at 118.3.

Coming up today:

Very quiet domestically with only the RBA Minutes and weekly consumer confidence of note. Offshore most focus remains on Russia/Ukraine, but of interest will be whether China cuts its medium-term lending rate, how far the German ZEW survey falls and whether wage pressure continues to build in the UK. Details below:

  • AU: RBA Minutes, Consumer Confidence, House Prices: We are unlikely to gain much insight from the RBA Board Minutes given Governor Lowe’s extensive remarks last week. Those remarks highlight the RBA is pivoting to a more hawkish stance with rate hikes seen as plausible and Governor Lowe backing away from needing to see two more CPI prints before hiking, with “inflation psychology” (i.e. inflation expectations and wage expectations) now key. Weekly ANZ/RoyMorgan Consumer Confidence may get a passing look to see whether the Russia/Ukraine situation is weighing on households, while house price data is likely to ignored given it is for Q4 and we have monthly house price data for February 2022 already .
  • NZ: Services PMI: No consensus available with the prior read being 45.9.
  • CH: 1yr Medium-term Lending Rate, Retail, Industrial Production, Fixed Asset Investment: The lending rate is expected to be cut by 10bps to 2.75% from 2.85%. Separately China Securities Journal says China may also cut its RRR to stabilize growth. Yesterday, the PBoC set a weak fix above 6.35 on USD/CNY, a strong hint that the central bank has become uncomfortable with CNY strength. This follows weak money and credit data released Friday night, despite the modest easing in policy to date. Also out is the usual trio of monthly activity indicators. Whatever they print, they will slow next month given lockdowns in Shenzhen and Jilin.
  • EZ: German ZEW Survey/Industrial Production: Sharp falls are expected given the Russia/Ukraine situation with the current situation expected to fall to -22.5 from -8.1, while the consensus for the expectations component is 5 from 54.3. Meanwhile the pan-Eurozone Industrial Production for January is also out with consensus at +0.1% m/m and pre-dating the sharp rise in gas prices from the Russia/Ukraine conflict.
  • UK: Employment/Wages: ahead of the BoE on Thursday, UK labour market data is out. Key focus will remain on the earnings measure with the consensus for earnings excluding bonus at 3.7% y/y, a rate similar to last month. Meanwhile unemployment is expected to fall a tenth to 4.0% from 4.1%, along with 20k jobs (3m/3m). Nothing in the figures will change the dial on the BoE with markets fully pricing a 25bps hike on Thursday with a further 5.5 hikes priced by the end of the year.
  • US: PPI & Empire Fed Manufacturing: Producer Price Inflation is expected to remain very strong with the consensus for core at 8.7% y/y from 8.3% y/y. Given Russia/Ukraine, further producer price pressure is likely. The normally second-tier Empire Fed Survey may get a closer look this month to see any initial confidence effects given the survey asks several forward-looking questions on conditions and prices.


Market Prices


Read our NAB Markets Research disclaimer

For further FX, Interest rate and Commodities information visit