Q2 of 2022 is going to start as messily as Q1 has finished, with markets buffeted by a multitude of strong winds from various directions, with the outcome no clearer for the future than ever. The Russian invasion of Ukraine continues to grab headlines, with massive downstream impacts on commodity prices globally. The Federal Reserve may engage in a series of 0.50% rate hikes that will change the investing landscape profoundly for the world. Other countries may also be forced to play vigorous catchup on monetary policy to rein in soaring inflation. The Ukraine invasion re-energised the commodity price complex, pushing into the future, the previously anticipated falls in inflation as baseline effects kicked in.
Economic historians and others are fretting that the sanctions on the Russian central bank and the freezing of its international reserves, could be the start of the end of the US dollar as the world’s primary reserve currency. The world’s food supply chain is in danger as well as fertiliser prices soar. Natural gas is a vital component in that process and it’s expensive. Russia and Belarus are major potash exporters and Russia and Ukraine are global wheat powerhouses.
Will Europe have its gas supplies from Russia turned off in May if it refuses to pay for them in roubles? President Putin signed a decree overnight saying as much, having told the Germans something completely different a few days ago. Will there be blackouts that plunge Europe into a recession? Are Venezuela and Iran going to make their way back onto international oil markets? That would certainly be helpful.
Did I mention elections in France, Japan and Australia and mid-terms in the US?
In Asia, all eyes are on China, whose economy is has been slowing anyway. The property developer leverage problem has gone quiet but has not been resolved. Its Covid-zero policy is also becoming a bit more challenging, with Shanghai’s lockdowns tightened overnight. That will weigh on equity markets locally today. Will the Chinese leadership hit the “s for stimulating” button this time around? That’s not a foregone conclusion if you look at China’s equity markets.
There’s plenty there to give investors headaches and I know I’ve missed some. I pity the economic forecaster in this environment. Further signs that all these forces are starting to impact Asia have appeared this morning in the PMI data dump across the region.
Asian PMIs weaken
China’s Caixin Manufacturing PMI fell to 48.1 from 50.4 in March. Plenty of that retreat can be laid at the feet of Covid lockdowns but soaring energy and commodity prices are playing their part. Across ASEAN S&P Global Manufacturing PMIs for March eased. The exceptions were commodity-heavy Indonesia which recorded an asthmatic 0.10 gain to 51.3, and the Philippines, which rose to 53.2 but was starting from the back of the pack anyway.
Other bright spots were Japan, where Jibun Bank Manufacturing PMI rose to 54.10 in March, helped no doubt by a weaker yen. South Korea’s trade balance shrank though to USD 0.14 billion (in dollar terms), versus an expected print of USD 6.50 bio. Soaring imports, which rose by 27.90% in March are to blame. It is not at all clear whether soaring imports were due to a post-lockdown consumption rally, or whether soaring costs of manufacturing inputs are starting to bite. Finally, Singapore’s URA Property Index rose only 0.40% QoQ, a far cry from Q4 2021s 5.0% gain. With the MAS due to tighten this month, Singapore’s property rally, like plenty of others right now, appear to be running out of steam in the face of higher rates and less disposable income.
Rising interest rates around the world, soaring food and energy prices, re-energised by the Ukraine invasion, have yet to make their presence fully felt, and are not going away anytime soon, even if that war ended tomorrow. The initial data from Asia, encompassing the Ukraine war, is not making comforting reading today.
US equities fell overnight, but I am taking that with a grain of salt. Price action over a month and quarter-end can be very misleading thanks to portfolio rebalancing flows. Not just in equity, but also in currency markets as well. Tonight’s Non-Farm Payrolls data will hopefully answer some of the questions around whether the Fed really will have to say 0.50% multiple times this year. Last night’s PCE Price Index and Personal Income and Spending came in roughly on expectations and didn’t move us closer to a definitive answer.
Markets are pricing in a gain of around 500,000 jobs this evening. Another monthly print above 600,000 will have the hawks locked and loaded. A soft number under 400,000 will probably just add to the head-scratching about the future. I won’t guess what equity markets will do in either scenario, they probably don’t know which headless chicken direction they will take either. It will be a similar story for bonds. Be prepared for a “peace in our time rally” once again at the first sign of progress in today’s Ukraine/Russia talks as well. As ever, the winner will be V for volatility, surely the best call I’ve made in 2022.
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