Flip-flop

It was another night of tail-chasing overnight, this time led by Goldman Sachs who said a US recession is a real possibility and that the US dollar might fall as a result. That of course would lead to terminal Fed Funds rates sooner, so sell US dollars and buy US bonds. Oddly enough, the eternal bottom fishers of the equity market didn’t follow suit, and not did oil markets, which rose again overnight, despite an EU deal on banning Russian imports continuing to be held up by Hungary.

All-in-all, the price action is suggestive of a market that can’t decide what it wants to do here, and in the equity market’s case, has still not been released from Accident and Emergency. Equity markets are creeping higher today in Asia as Shanghai records a third day of no covid-19 cases outside of quarantine facilities. Pencil in peak-covid equals peak covid-zero equals buy risk assets equals buy equities, Asian currencies, and gold, and sell US dollars. Ignoring the shocking data dump of yesterday although markets might argue that is “backwards-looking.”

The world really should know by now that in a covid-zero country (you know who they were), the authorities have to get lucky 100% of the time, and the virus has to get lucky once. Let’s not get in the way of the “one dip to rule them all” narrative, markets have been conditioned to it these past two years. I won’t pour too much water on the optimism, I’m as keen as anyone for China to move past this.

BoE’s Bailey gloomy about economy

In fact, it is right to start being nervous about recessions. Apart from having any faith in Federal Reserve forward guidance, given their track record these past two years, we should all get nervous when they say, “soft landing.” The Bank of England Governor overnight said there wasn’t much he could do to stop inflation from hitting 10% this year. He was particularly concerned about food prices, with the impact on that value chain from the Ukraine/Russia conflict yet to be fully felt. He did trot out the favoured central bank mantra of unforecastable events causing inflation to accelerate; I don’t completely agree with him there. In any case, concerns around recessions make me feel that a decent correction lower from the US dollar and US yields are increasingly likely. That should provide some temporary relief to the Euro and Asian currencies and possibly gold and cryptos; at least until the Fed hikes by another 0.50% in June. I’m still not sure it provides markets with a reason to turn long once again on equities.

The data calendar isn’t giving us too many clues in Asia today. Singapore’s non-oil exports held steady in April on a YoY basis but fell heavily, MoM. Thailand’s Q1 GDP barely exceeded forecasts as it rose 2.20% YoY. Meanwhile, Indonesia’s trade surplus in March leapt higher to USD 7.56 billion, thanks to a near 48% jump in exports YoY, with imports climbing below forecast 31.0%. Jakarta Airport was mobbed on Friday, and the infamous traffic is back, so Indonesia is definitely rebounding for now. If nothing else, it reinforces the thesis that commodity-exporting countries are likely to remain a least-worst choice in the stagflationary environment of 2022.

Later today we receive India’s April WPI for food, manufacturing, fuel, and inflation. All of those data points have upside risks and could lock and load another Reserve Bank of India rate hike next month. The Philippines BSP will probably hike by 0.25% finally this week, with Indonesia to follow in June. While supportive of their currencies, it is likely to be a headwind for their equity markets with all three at the beginning of their tightening cycles.

Weak UK Employment data this afternoon could deepen the gloom around the British pound, especially with the BOE raising the white flag over inflation and pricing in a recession next year. The saga of the Northern Ireland Protocol continues and is another risk point for UK markets if the government decides to enact legislation unwinding part of it unilaterally, provoking a trade response from Europe.

US Retail Sales this evening should be good for some volatility, especially if it comes in lower than the expected 0.90% increase for MoM for April. We also get manufacturing and industrial production as well. Weaker than expected numbers will increase the R-word noise and could see the US dollar accelerate lower. Throw in the usual mix of Federal Reserve talking heads and another chop-fest session for New York looms.

Asia’s next major data point this week will come Friday when China announces its one and five-year Loan Prime Rates. We should expect the 3.70% 1-year LPR to get trimmed, but the PBOC has consistently disappointed on this front this year. Otherwise, we should continue watching the headline ticker for daily omicron cases. Most especially, in Shanghai, where if literally one case appears again, any relief rally in Chinese markets could disappear in a puff of smoke.

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