Zero Covid strategy weighs on Chinese PMI

• China’s official PMI figures for March disappointed in data released this morning, with the manufacturing survey coming in at 49.5 – this puts it into contractionary territory after last month’s minimally (50.2%) expansionary reading, and also falls short of consensus projections of 49.8. Non-manufacturing PMI fared even worse, falling to 48.4 from 51.6 in February and missing projections of 50.3. The composite reading was 48.8. China is struggling to contain its worst outbreak of Covid-19 and the draconian lockdowns still being implemented as part of its zero-Covid strategy has weighed heavily on industry. These surveys were taken prior to the current lockdown of Shanghai, suggesting that worse might be yet to come.
• Germany’s CPI inflation hit 7.6% y/y in March, far higher than the projected 6.8%. This was up from 5.5% the previous month and was the highest reading on the data series which runs back to 1992. On a monthly basis, prices were 2.5% higher than in February. Transport and housing costs (which include utilities) were the drivers of the inflation surge, reflecting the sharp rise in energy costs in Europe as the war in Ukraine has continued. This is the latest of a run of disappointing data releases from Germany over the past week, indicating more pressure on the consumer.
• Japanese industrial production expanded just 0.1% m/m in February, missing projections of 0.5% growth. The little growth there was was driven by the autos sector which produced 11% more, suggesting that some of the supply chain issues around semiconductors are easing, but output as a whole disappointed, likely weighed down by the Omicron wave of Covid-19.
• Saudi Arabia has reportedly deposited USD 5bn at the Central Bank of Egypt, which adds to the USD 5.2bn already there. It has also earmarked a further USD 10bn in investment in the country, into sectors such as healthcare and agriculture. Regional partners in the GCC have been coming out to support Egypt’s financial situation over the past week, with this latest development following news of investment pledges by Qatar and Abu Dhabi.

Today’s key economic data releases and events

5:45 China Caixin manufacturing PMI, March. Forecast: 49.9

10:00 Germany retail sales, m/m, February. Forecast: 0.5%

10:45 France CPI inflation, y/y, March. Forecast: 4.3%

Fixed Income

• Treasury markets continued their pattern of intra-day oscillation as few fundamental data points support a move one way or the other. On the 2yr UST, yields moved around 5bps from top to bottom, closing at 2.3063%, down about 6bps. The 10yr showed wider moves with around a 10bps move centred on 2.40%. Yields ultimately ended the day down 5bps at 2.3488%.
• European bond markets closed weaker as elevated inflation in Germany will raise the expectation of the ECB hiking rates earlier than planned this year. Bund yields on the 10yr settled up 1bps at 0.641% while the 10yr gilt yield added 2bps to 1.663%.

FX

• Currency markets pulled away from the dollar overnight as the prospects of tighter monetary policy in the Eurozone helped support the single currency. Madis Muller, a member of the ECB’s governing council, said that a rate hike from the eurozone’s central bank was likely this year and that there was “no longer a need” for asset purchases. With German inflation for March also coming in sharply higher than expected, the prospect for the ECB to move ahead with rate hikes is increasing, helping to push EURUSD higher in the near term. EURUSD gained for a third day, settling up 0.66% at 1.1159.
• USDJPY moved lower overnight by 0.85% to 121.83, tempering some of the yen’s recent substantial losses. The BoJ remains steadfast in providing accommodative policy to markets as inflation pressures in Japan are a shade of what they are elsewhere.
• GBPUSD moved higher in tandem with the euro, up 0.3% to 1.3134. The deputy governor of the Bank of England, Ben Broadbent, nudged markets in a hawkish direction by saying markets should focus on near-term economic data, rather than central bank guidance.
• Commodity currencies generally closed stronger against the dollar. USDCAD fell 0.13% to 1.2481 in favour of the loonie while NZDUSD added 0.6% to 0.6978. AUDUSD was unchanged.

Equities

• The optimism around a cessation in hostilities in Ukraine seen on Tuesday faded yesterday, and most major global indices ended the day lower. In the US, the Dow Jones, the S&P 500 and the NASDAQ lost -0.2%, -0.6% and -1.2% respectively, although news that President Biden is considering releasing oil from the SPR has seen futures boosted this morning.
• In Europe, the FTSE 100 was an outlier as it closed up 0.6%, but both the CAC (-0.7%) and the DAX (-1.5%) ended lower. The composite European STOXX 600 dropped -0.4%.
• Locally, the DFM added 0.4% while the ADX lost -0.6%. In Saudi Arabia, the Tadawul ended the day -0.5% lower.

Commodities

• Oil prices settled higher overnight with Brent futures up 2.9% at USD 113.45/b and WTI adding 3.4% to USD 107.82/b. However, those moves have been unwound in early trade today as the US contemplates a major release of its strategic petroleum reserves to an equivalent of around 1m b/d for several months. Brent futures have dropped sharply, down almost 4% to USD 109/b and WTI off by nearly 5% to around USD 103/b.
• The announcement comes ahead of today’s OPEC+ meeting and will likely reinforce the plan from the producers’ alliance to only incrementally add production back to markets even as consuming nations take emergency steps to limit the pass-through effects of high energy prices.
• EIA data showed a drop of 3.4m bbl in crude inventories last week with product stockpiles not showing a sustained trend. Total stocks, excluding strategic reserves, actually rose by 1.8m bbl last week. US oil production moved higher, its first weekly increase since the start of February and at 11.7m b/d its highest level since the start of the year.

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