Weekly Investment View: PBoC Tries to Close Pandora’s Box

This Week

• US Macro – Dominique argues the February savings rate will remain around 3.75%, with monetary policy tightening appearing to have little impact.
• EM Strategy – Mirza watches RMB this week. He thinks PBoC is releasing market pressure and will tolerate an adjustment to a new range around 7.40 in spot.
• EM Macro – Caroline expects a hawkish hold from the SARB this week given looming risks from the general election alongside still-elevated inflation and inflation expectations.
• EZ and UK Macro – Henry thinks the market could further trim the possibility of an ECB June cut given upside risks to EZ core inflation.
• Commodities – Viresh sees Brent retreating towards $83/ bbl and holds his short CO M4/M5 time spreads. He refrains from short gold despite downside risks due to the lack of a near-term catalyst.
• US Equities – John expects equities to range trade or grind higher, with a yawning gap between companies building AI infrastructure and those using it.

Dominique Dwor-Frecaut – US Macro

The most important data of the week is PCE, but Chair Powell has removed the uncertainty by telling us it will be well below 0.3%. I think the second most important data is the savings rate. This is because the greatest downside risk to my positive view on the economy comes from the household savings rate, which is almost as low as before the GFC and has been a major driver of above-trend growth.

The low savings rate reflects higher goods consumption relative to income and higher interest payments than before the pandemic. By contrast, consumption of services relative to income is still below pre-pandemic levels. The low savings rate is enabled by strong household balance sheets, though a limited share of households (mainly with low incomes) is starting to experience financial distress. I expect the February savings rate to remain around 3.75%. Monetary policy tightening appears to be having little impact (Chart 1).

Mirza Baig – Emerging Markets

Keep an eye on the RMB this week. Devaluation pressure has been building for a while, and on Friday, the dams finally burst. While it is unclear what triggered the unusually large depreciation of almost 1% in the spot rate, the move was led by the offshore market and seems to be exacerbated by option market flows.

On Monday and Tuesday this week, Chinese authorities tried to dial back the weakness by setting the fixing well below (stronger than) market expectations. This has led to spot retracing some of Friday’s move. Perhaps PBoC was spooked by the fallout of Friday’s move, but we are convinced that this is not over. As we wrote last week, we think PBoC is releasing market pressure and will tolerate an adjustment to a new range around 7.40 in spot.

Caroline Grady – Emerging Markets

Looming risks from the 29 May general election, alongside still-elevated inflation and inflation expectations, point to another hawkish hold from the SARB this week. Governor Kganyago is likely to repeat that the fight against inflation continues and that upside risks remain from food prices, domestic constraints on energy and logistics, and the recent water shortages. We are in line with consensus and expect rates on hold at 8.25%.

Henry Occleston – Eurozone & UK Macro

In Europe, the most important release in the next fortnight will probably be the preliminary March Eurozone inflation. We start to receive that at the national level this week with Spain, Italy and France, while the Eurozone aggregate is out on Wednesday 3 April.

I am currently conservatively penciling in EZ core inflation at +3.0% YoY, but with upside risk. Such an outturn would constitute +1.15% MoM, pretty typical for March, but even that would be to the topside of ECB forecasts.

As such, I still see risk the market further pares the possibility of an ECB June cut. The most important element to watch will be the trend in services inflation, which has been ticking up lately (Chart 4). This week we will be watching the national numbers for early indications of this.

Viresh Kanabar – Commodities

Oil

We turned short Brent 12m time spreads (M4/M5) last week thinking Russian supply fears were overdone and oil’s rally was stretched.

The news flow has gone against us somewhat. Ukraine continued to target Russian facilities over the weekend, this time the Kuibyshev refinery. Also, Russian President Putin stated yesterday in local media that he has ordered companies to cut crude output to 9mn b/d until the end of June (a reduction of around 400k b/d). The rationale provided was ensuring compliance with OPEC+ commitments. However, it also seems Ukrainian drone attacks are impacting Russian capacity to refine and ship oils.

These latest comments appear to be a slight change from Russian minister Novak’s earlier comments stating Q2 would see a combination of crude export and production cuts.

We must take Russian communique with a pinch of salt. Crude oil exports typically decline in April due to field maintenance (except for last year). Meanwhile, drone attacks look to be accelerating the need for refinery repair and maintenance. Whether these latest cuts reflect a real-world impact or Russia would have broadly reduced production slightly during this time anyway is unclear.

As expected, speculative positioning has increased significantly. Managed money net longs have risen to 9% of open interest, the highest since last October. Current positioning now ranks in the 71^st percentile over the last three years.

We therefore reiterate our caution against entering bullish oil trades and remain comfortable being short CO M4/M5 time spreads.

Market implication: We would not chase this rally in Brent near $87/ bbl and now favour a pullback towards $83/ bbl.

Gold

Gold looks to be consolidating above $2,150/ oz, supported by the dollar’s lack of direction and a decline in real interest rates.

Meanwhile, gold’s premium in China has risen again towards $34/ oz, or 1.5%, after declining towards parity at the end of February. Also, positioning on the Shanghai exchange has sharply increased, with net long contracts rising by 21.6k since the end of January. This also correlates with the increase shown in the CoT data, with managed money net long positioning exceeding 10.5% of open interest, the highest since the end of December.

Market implication: We see risks skewed to the downside. This is due to extended positioning, bullish sentiment, and gold more than 5% above its 50dma (a level typically associated with shorter-term pullbacks). However, without a near-term catalyst, we refrain from going short for now.

John Tierney – US Equities

In good news, the Fed has all but promised to deliver three rate cuts in 2024 even if inflation remains slow to drop. In bad news, the market had already priced this. With the 2Y Treasury yield still trading above 4.5%, little visibility exists on whether or when further cuts come (Chart 7).

Last week, Micron Technology stock soared 20% and Accenture tanked 10% on upbeat and downbeat earnings reports, respectively. This highlights the yawning gap between companies producing hardware to build out AI infrastructure and those hoping to capitalize on that capacity with software and AI apps.

Only 15 companies report this week. Cruise operator Carnival Corp will be the big headliner with a key report on whether demand for cruise experiences is softening. Cintas Corp and Paychex will provide useful colour on how busy and optimistic industrial America is.

We expect equities to trade in a narrow range and perhaps grind higher for now.

(The commentary contained in the above article does not constitute an offer, a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)