April 5, 2022

Markets Today: Crimes, curves and patience

Talk of Europe restricting Russian oil and gas has re-surfaced, driving oil prices higher

Todays podcast


Overview April Sun in Cuba

  • Little news flow overnight with equities higher (S&P500 0.8%) and yields mixed
  • Tech-led equity rally with Twitter soaring 29% after Musk takes a 9.8% stake
  • EU contemplates further Russia sanctions, hits EUR (-0.6%), lifts Oil (Brent +3.7%)
  • AUD (+0.7%) the commodity poster child, hits a 5 month high, trades at 0.7547
  • Coming up today: RBA, Final PMIs, US ISM, US Fed’s Brainard & Williams

“Take me to the April sun in Cuba (Oh-oh-oh); Take me where the April sun; Gonna treat me so right, so right, so right; Take me to the April sun; Come on take me” , Dragon, 1977


A quiet start to the week with little in the way of news flow or top-tier data. US equities were higher, led by the tech sector with Musk’s 9.8% stake in Twitter (+29%) helping to drive as did Tesla (+5.6%). The tech-heavy NASDAQ closed +1.90%, and while the S&P500 was also 0.8%, 7 out of 11 sub-sectors were in the red. Meanwhile Europe is contemplating further sanctions against Russia amid reports of war crimes. Talk of Europe restricting Russian oil and gas has re-surfaced, driving oil prices higher with Brent Oil +3.4% to $107.96. The growth implications from such a move are clear. European yields were lower on the news with the German 10yr -4.9bps to 0.51%. The EUR (-0.6%) also fell, helping to lift the USD with DXY +0.4% and BBDXY +0.2%. The AUD (+0.7%) meanwhile continues to be the commodity poster child, hitting a five month high and currently trades at 0.7545. As for US yields, they were mixed with 10yr +1.7bps to 2.40%. Nothing overnight has shifted aggressive central bank pricing. Curves steepened, but remain flat to inverted with US 2s/10s at -2.9 bps.

There has been no economic data of note. US Factory Orders were broadly as expected (-0.5% m/m vs. -0.6% expected).  The Bank of Canada’s Business Survey conducted before the Russia/Ukraine showed “the number of firms reporting capacity pressures related to labour or supply chain challenges is at a record high ” and helps cement expectations of a 50bps hike from the BoC next week. Markets currently price an 85% chance of a 50bps hike at the April meeting. A separate survey by the Bank of Canada on inflation expectations also reported 1 and 2 year inflation expectations at survey highs, but importantly “long-term expectations remained relatively stable in the first quarter of 2022 and below their pre-pandemic level”. On the news flow front, the EU issued a statement that it would work on further sanctions against Russia as a “matter of urgency” after condemning the reported atrocities committed by Russian forces. There are increasing calls to impose a European embargo of Russian oil and gas, but Germany is resisting going down that track given the impact on Germany’s economy.

Yields were mixed in the US with a small steepening in US curves, but overall curves remain flat to inverted. The 2/10 curve is currently -3.1bps, a little higher than the -8.0bps seen on Friday. US 10yr yields were up slightly by 1.7bps to 2.40%, while the 2yr yield fell -4bps to 2.42%. Financial press are replete with articles on what the yield curve inversion means and whether it signals a US recession in late 2023. Despite that talk, equities remain resilient and looking at prior cycles this is not unusual to see equities move higher even as yield curves start to invert. Prime broking data in the US continues to indicate the recent recovery in equities is being driven by retail money, which is likely squeezing those who were under positioned or positioned short. While the equity news overnight centred on Musk’s 9.8% stake in Twitter, the more interesting story for your scribe was Starbucks suspending its buy-back program to free up cash to invest in cafes and employees. Profit reporting season in the US kicks of next week and it will be interesting to see how firms are interpreting the tea leaves, and whether earnings guidance is revised down.

In FX , lower European yields on the back of potentially growth-sapping sanction fears have driven a weaker EUR, down 0.6% to 1.0972, with some negative spillover for GBP, which is flat at 1.3115. The yen (USD/JPY +0.2%) is slightly weaker on the positive risk backdrop, while commodity currencies continue to find support with the AUD the poster child. The AUD is at a five month high, up 0.7% to 07545. The NZD is also up 0.3%, as is the Loonie (USD/CAD -0.3%).

Finally, in Australia inflation indicators are running hot with the Melbourne Institute Inflation Gauge yesterday rising 0.6% m/m for the trimmed mean measure. In quarter average terms, the trimmed mean measure is up 1.1% q/q, its highest since Q2 2008. While the monthly MI series does not map neatly on the official quarterly CPI data, it is consistent with an acceleration in underlying inflation and further reinforces the risks to the RBA’s February inflation forecasts are firmly to the upside. In our recent early Q1 CPI preview, NAB pencilled in a trimmed mean increase of 1.2% q/q, well above the RBA’s February SoMP forecast of 0.8% q/q. (See NAB CPI Preview – Core inflation to surge further, pressuring the RBA).

Coming up today:

Domestically the RBA meets and we get also get Weekly Consumer Confidence. Offshore it is quiet until NY opens with the ISM Services and a few Fed Speakers. Details below:

  • AU: RBA Meeting: The RBA meets and while no change is expected, the key focus will be on the final policy paragraph and whether rates guidance is put on a more agile setting. The prior March post-meeting Statement concluded “The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve” . With core inflation expected to blast through the RBA’s February SoMP forecasts, the RBA will have reduced scope to be patient in balancing the risks of moving too early (i.e. achieving full employment) against moving too late. Unemployment is already at its equal lowest since 1974 and set to head below 4% next month, while NAB forecasts Q1 trimmed mean inflation at 1.2% q/q against the RBA’s SoMP forecast of 0.8%. RBA Governor Lowe has started to shift the risk assessment in recent speeches, noting “it is only possible to achieve a sustained period of low unemployment if inflation remains low and stable” and the RBA will “will respond as needed and do what is necessary to maintain low and stable inflation in Australia ”. If the RBA removes the word “patient”, markets will take that as a sign as a clear nod to the importance of Q1 CPI and lines up a May or June for the first rate hike.
  • EZ/UK: Final PMIs: The final version of the PMIs are out with consensus little changed on the flash estimate.
  • US: ISM Services/Fed Speakers: The ISM Services is expected to be 58.4, from 56.5. The ISM Services will be closely watched given the sharp fall in the ISM Manufacturing’s New Orders subindex last Friday.  There are also two important Fed speakers with Brainard talking on “unequal impacts of inflation”, while the Fed’s Williams takes part on a moderated virtual discussion on health and the economy hosted. Also out is the trade balance with the consensus at -88.5bn from -89.7bn.

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