- Many see the eruption of the scandal that threatens senior Japan government officials as yen positive
- Prime Minister May confronted Russia on allegations that it used nerve gas in the UK
- The US government blocked Broadcom’s $117 bln acquisition of Qualcomm; US reports February CPI
- The OECD just upgraded its global growth forecasts
- Brazil January retail sales are expected to rise 3.5% y/y; Mexico January IP is expected to rise 0.4% y/y
The dollar is mostly firmer against the majors ahead of US CPI data. Kiwi and Stockie are outperforming, while Nokkie and yen are underperforming. EM currencies are mixed. THB and INR are outperforming, while ZAR and TRY are underperforming. MSCI Asia Pacific was up 0.1%, with the Nikkei rising 0.7%. MSCI EM is up 0.3% on the day, with the Shanghai Composite falling 0.5%. Euro Stoxx 600 is up 0.1% near midday, while S&P futures are pointing to a higher open. The 10-year US yield is up 1 bp at 2.88%. Commodity prices are mixed, with oil up 0.4%, copper down 0.1%, and gold down 0.3%.
The yen’s 5% gain against the dollar this year makes it the second strongest of the major currencies here in the first quarter. Only the Norwegian krone has done better, at 5.6% YTD. Investors have been given another reason not to resist the seasonal pressures that often see Japanese investors repatriate capital ahead of the end of the fiscal year later this month.
Many see the eruption of the scandal that threatens senior government officials as yen positive because it weakens those that ostensibly want to depreciate the yen through monetary policy. The scandal involves falsifying documents to conceal a sweetheart deal. The government sold state-owned land to a school-operator, reportedly with connections to Prime Minister Abe’s wife at an incredibly low price. At the end of last week, the head of the National Tax Agency chief resigned over comments he made before the Diet about the case. There is also an investigation into the possible suicide of a local finance ministry official that handled the land sale.
There is pressure on Finance Minister Aso. Reports already suggest he will not attend the upcoming G20 meeting. The scandal is weighing on public support for the government. The goodwill won by Prime Minister Abe on his tough line on North Korea and China and more may have been lost. It is important for Abe to get closure on this as soon as possible or he may face a stronger challenge for party leadership in September.
Initial support for the dollar is near JPY106.20, which was today’s low before the pair moved higher. The JPY105 area is important psychological and chart support and the strongest support ahead of JPY100. In the second half of February, the dollar was turned back from JPY108. The cap has come down now to around JPY107.00, which is currently being tested.
Prime Minister May gave Russia until the end of business on Tuesday to address the allegations that it used nerve gas in the UK earlier this month. When she was Home Secretary, May did not press Russia in the 2006 poisoning by plutonium of a Russian informant for British intelligence. This comes on the heels of the UK’s objections to Russian interference in their election. A Labour MP claims that there are as many as 14 deaths that UK officials do not regard as suspicious though reportedly US intelligence suggests potential Russian involvement.
Sterling traded higher yesterday after recovering from a dip below $1.38 after the US employment data before the weekend. The $1.3920-1.3960 area offers nearby resistance, and cable is struggling today to move much above $1.39. Our reading of the technical indicators favors the upside, but risk-reward for the short-term suggests buying closer to the lower end of the range, which is still around $1.3800.
A third non-economic development was the US government’s preemptive decision to block Broadcom’s $117 bln acquisition of Qualcomm. National security concerns were cited. The US President acted on the recommendation by the Committee on Foreign Investment in the US, which reviews foreign acquisitions of US companies. Still, the prohibition was seen as aggressive because there was no agreement between the two companies. It is the first non-Chinese company that was blocked by the US in a year.
Last year, Broadcom indicated it was considering moving its headquarters to the US. Reports suggest that, unlike the steel and aluminum tariffs, the Pentagon actually pressed for this sanction, while the Treasury Department was reportedly initially more reluctant.
US reports February CPI. January’s outsized 0.5% monthly increase will not be repeated. Economists look for a 0.2% increase in February, which would lift the headline y/y pace to 2.2% from 2.1%. Due to the base effect, the expected 0.2% mm rise in the core rate will keep the y/y rate steady at 1.8%.
Yet as we have noted before, the high frequency data will not impact Fed policy near-term. Another 25 bp hike this month is universally priced in, as are two more hikes later this year. We continue to believe that the Fed will maintain its current dot plot trajectory at the March 21 meeting, but could tweak its growth forecasts higher. The OECD noted that tax cuts should boost business investment and add as much as 0.75 percentage points to US growth in 2018 and 2019.
The OECD also just upgraded its global growth forecasts. It sees growth this year and next at 3.9%, up from 3.7% and 3.6%, respectively, that it forecast back in November. This is the strongest rate since 2011. However, the OECD warned that “Trade protectionism remains a key risk that would negatively affect confidence, investment and jobs. Governments of steel-producing economies should avoid escalation and rely on global solutions.”
Brazil January retail sales are expected to rise 3.5% y/y vs. 3.3% in December. The economy is picking up even as price pressures remain low. February IPCA inflation was 2.8% y/y, near the bottom of the 2.5-6.5% target range. We believe COPOM will cut rates 25 bp to 6.5% at the next meeting March 21.
Mexico January IP is expected to rise 0.4% y/y vs. -0.7% in December. The economy remains sluggish and yet the central bank has had to tighten policy with 25 bp hikes at both the December and February meetings. Next policy meeting is April 12, and much will depend on how the peso is trading then.