China disappoints on stimulus hopes, again

China maintains LPRs

China disappointed markets that were looking for more comprehensive stimulus measures as it left both its one and five-year Loan prime Rates (LPR) unchanged. Although the PBOC did announce some targeted support measures for homeowners and small businesses and set a much weaker CNY fix versus the US dollar today, equities in China have bucked the trend elsewhere, heading directly south.

China continues to stay wedded to deleveraging parts of the economy while attempting to add stimulus in a targeted sector manner. However, the Shanghai lockdown and fears its Covid-zero policy will crimp growth this year continue to weigh on markets that clearly want more of the usual cast-of-thousands stimulus measures from years past. The IMF overnight downgraded world growth citing both the Ukraine war and the China Covid-zero policy.

A weaker CNY fix today might hint at China’s attempt to offset the slowdown, weakening the yuan to boost exports. If supply chains remain constrained though, this may well be for naught. As US 10-year and 30-year yields approach 3.0%, eroding a 40-year downtrend line, it is notable that both USD/CNY and USD/CNH smashed through one-year resistance lines overnight. That points to more currency weakness ahead, something that will undoubtedly spill over to regional Asian currencies.

Another hint that Asia is putting growth ahead of inflation, and thus likely currency weakness, came from Indonesia yesterday. Bank Indonesia left policy rates unchanged and was surprisingly dovish in the post-meeting press conference. That is something of a U-turn, especially as Indonesia’s commodity complex is partially shielding it from the ravages of the global inflation wave. With core and headline inflation numbers still creeping up, and growth slowing, Southeast Asia’s biggest economy is likely showing the path for other regional central banks.

Nowhere is the US/Asia interest rate differential showing up more than in Japan. Japan trade data today showed exports slowing, but a blowout in imports thanks to soaring energy prices. That in itself is a yen negative as importers pay for energy in US dollars. The Bank of Japan has been forced to intervene once again in the JGB market today, capping 10-year yields at 0.25%. That has given temporary solace to the yen, which has rallied versus the US dollar in Asia today. However, no amount of BOJ/MOF-speak, or yield curve intervention can overcome the stark differences in monetary policy trajectory versus the Anglo-Saxon world. They will not be alone in Asia this year and Asian currency weakness will be one of the themes of 2022.

Some temporary relief came from Fed speakers overnight, who were markedly less hawkish than James Bullard on Friday, sticking to the 2.50% terminal Fed Funds story. That was an excuse for an increasingly desperate stock market to buy back equities even as US yields and the US dollar moved higher. Thankfully, US earnings season has been relatively trouble-free, Netflix aside. It faces another challenge tonight though as Tesla releases results. Netflix fell by 20% overnight on soft results and outlooks, continuing a trend starting with Facebook of punishing technology-related darlings who don’t keep the perpetual mega growth story going. Tesla likely has a bit more leeway as an “energy-transition” stock, but weak results will likely stop any broader equity recovery in its tracks.

The data calendar is now quiet in Asia with the China LPRs out of the way. It is a similar look across Europe as well. In the US, Existing Home Sales have downside risk as 30-year mortgages hit multi-decade highs. The Fed releases its Beige Book, but more attention is likely to be on the bid-to-cover ratio of the 20-year US bond auction tonight. A weak bid cover likely sees US yields move higher once again.  We have Evans and Daily from the Federal Reserve speaking tonight, introducing some more hawkish upside risk again.

The Russian invasion of Ukraine has fallen off the front pages with financial markets, but that complacency is dangerous. Russia’s new offensive has started and if it doesn’t go well, we can’t discount Russia lashing out in economic petulance. Certainly, the situation in Ukraine, now that part two of the war is unfolding, will kneecap any sustained recovery by European equities and add another headwind to a very wobbly-looking euro. Gold may have fallen overnight, along with oil, but that is just the fast money being given the usual gold whipsaw. Gold’s price action of late, rising with both US yields and the US dollar, is telling us that serious and persistent risks abound in the world.

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