Shanghai surprise

It seems appropriate on Oscar’s day that one of the worst films ever made according to critics, Shanghai Surprise, is also dominating Asian markets today. In what was really not much of a Shanghai surprise, Chinese authorities announced over the weekend that Shanghai the city, would enter a two-stage lockdown to stymie surging covid cases and allow mass testing. Half of the city will lockdown from today through to April 1^st. The other half will lockdown from April 1^st through to April 5^th.

As China’s financial centre and an economic powerhouse in its own right, the impact has been immediate. Tesla has halted production at its factory there and other major manufacturers are sure to follow. Mainland China equity markets have fallen today along with Taipei which has a high manufacturing beta to the region. The impact on growth and consumption had also seen oil prices, at least temporarily, sink by around 2.0%.

That has drowned out an improved China Industrial Profits number that was released over the weekend. Industrial Profits for a combined January and February rose by 5.0% YoY, an improvement on December’s 4.0%. Dig below the surface though, and the gains were concentrated, unsurprisingly, in the energy and raw materials sectors.

Additionally, it looks like China’s third-largest property developer missed two bond payments on Friday. This soft underbelly of the China economy has been shifted from the front pages by the Ukraine conflict but hasn’t gone away. The cost-push inflation from the Russian sanctions won’t make the sector any more appealing. China still has work to do on the stimulus front, despite its obvious reluctance to do so. RRR and LPR rate cuts, and a weaker yuan, should be on the way, especially as China’s attempt to jawbone the stock market higher two weeks ago has quickly run out of steam.

Friday’s main data points haven’t done much to dispel economic nerves around inflation dampening demand, or the downstream effects of the Ukraine conflict. UK Retail Sales and Germany’s IFO both missed badly to the downside. US Pending Home Sales slumped by 4.10% versus a 1.0% gain expected. Michigan Consumer Expectations for March also eased to 54.3. They say the best cure for high prices is high prices. Be that the cost of goods or rising mortgage rates. It seems that the signs of that are increasing while inflation shows no sign of abating. Unsurprisingly, the US yield curve moved higher again on Friday. Even more surprisingly, US equities recorded modest gains. You must think one of them has to lose eventually, I know which one my money is on.

The news stream around the Ukraine conflict was relatively light over the weekend, allowing markets to temporarily focus on fundamentals. The main headlines surrounded President Biden saying President Putin had to go. That was greeted by European allies’ face-slapping as they try to negotiate the delicate nuances of not escalating an already very unstable situation on their doorstep. US officials have gone to great lengths to walk back those comments, and the market impact has been limited.

One thing that is moving today in Asia is USD/JPY, which has shot 0.70% to 122.90 this morning. As one of the few dovish central banks left in the world, the Bank of Japan placed an unlimited offer to buy 10-year JGBs at 0.25% this morning, capping yields as they move to the top of the BOJ’s acceptable rate corridor. We can expect some more “watching forex moves closely” comments as well, but I expect their impact to be much less potent than last week. Japan and the USD/JPY are a microcosm of the stresses much of Asia will face this year, with the propensity to tighten monetary policy with the US very low.

The heavyweight data releases this week are skewed towards the end of the week. We have Australian Retail Sales and US JOLTS Jobs Openings tomorrow and German Inflation on Wednesday. Asia’s highlight will be the release of China’s official Manufacturing and Non-Manufacturing PMIs on Thursday, with the Caixin PMIs on Friday. Thursday also features US Personal Income and Spending before we hit US Non-Farm Payrolls on Friday, with the early betting on a 475,000 gain. I don’t know about you, but the Non-Farms seems to have come around again very quickly.

I’ll be watching the US bond market this week, and another strong US Non-Farms is likely to spark more upside pain for yields. The China covid situation and the Ukraine conflict will keep the news tickers busy, as will more Talking Heads than Stop Making Sense from the Federal Reserve.

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