MNI ASIA OPEN: Fed Gov Waller, Tighter Policy Likely Needed

EXECUTIVE SUMMARY

• Fed's Waller: Fed Policy Likely Needs To Be Tightened As Financial Conditions Haven't Significantly Tightened
• Ex Fed Aide tells MNI that US inflation is likely being understated by seasonal factors

NEWS

North America

US (MNI): Waller Says Fed Policy Likely Needs To Be Tightened
Federal Reserve Governor Christopher Waller said Friday the Fed still has more work to do bring inflation toward the central bank's 2% target, but stands ready to adjust his stance for the May FOMC meeting. "Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further," Waller concluded in a speech. "How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions."

US (MNI): Inflation Understated On Seasonals - Ex Fed Aide
U.S. inflation may be higher than government statistics have shown because of big seasonal adjustments earlier in the year and because those filters haven't properly accounted for the Ukraine war, former Fed staffer and expert on seasonal adjustments Jonathan Wright told MNI.

FED (BBG): Fed’s Goolsbee Says Rate Hikes Take Time to Work Through Economy
Federal Reserve Bank of Chicago President Austan Goolsbee said tighter credit conditions stemming from the recent banking turmoil could help the US central bank in its effort to bring down inflation, and reiterated that policymakers should not be too aggressive in raising interest rates.

US Banks (BBG): JPMorgan, Citi Reap Gains From Rates Roiling Smaller Banks
JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. are reeling in windfalls from higher interest rates that upended smaller lenders last month. The three giant US banks, which kicked off the industry’s quarterly earnings reports Friday, are each finding ways to benefit from rate hikes that contributed to the collapse of Silicon Valley Bank in March and left customers at regional lenders racing to move uninsured deposits to safe havens.

US Treasury (BBG): Treasury Asks Dealers Views on Buybacks, Post Debt-Limit T-Bills
The US Treasury Department’s quarterly survey of primary dealers asked for additional insights regarding the potential use of debt buybacks and about the bill issuance that follows the eventual lift or re-suspension of the debt limit.

Asia

CHINA (MNI): China Q1 GDP Seen Up 4%, But Demand Weak Into H2 - Advisors
China’s economy probably grew by over 4% in the first quarter and could expand by more than 7% in H1 thanks to accommodative monetary policy and public infrastructure investment, but private sector weakness will weigh on activity in the second half without fresh stimulus, policy advisors and researchers told MNI.

Europe

ECB (MNI) Uncertainty Clouds Improving Outlook - Lagarde
The European Central Bank will decide its interest rate path on the basis of incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission, president Christine Lagarde told the International Monetary and Financial Committee in Washington on Friday, with historically high wage growth expected to support core inflation as it returns to target over the projection horizon.

ECB (MNI) Invitation To Webcast with ECB's Andrea Enria - April 25
MNI are hosting a live webcast with Andrea Enria, Chair of the Supervisory Board of the European Central Bank
* Topic of discussion: 'Euro area banks: risk outlook and supervisory priorities'
* Date: Tuesday 25th April, 9am-10:30am London time

ECB (BBG): Nagel Says It’s ‘Certainly Too Soon to Stop Raising Rates’
European Central Bank Governing Council member Joachim Nagel said it’s definitely too early to call time on the euro zone’s most aggressive bout of monetary tightening. “We are not pre-committed to future rate hikes, but we are committed to delivering price stability,” the Bundesbank president said Friday in a speech in Washington. “Thus, it’s certainly far too early to stop raising rates or even think about lowering them.”

OVERNIGHT DATA

• US MAR RETAIL SALES $691.7B VS FEB $698.6B
• US MAR RETAIL SALES -1.0%; EX-MOTOR VEH -0.8%
• US FEB RETAIL SALES REVISED -0.2%; EX-MV +0.0%

• US MAR INDUSTRIAL PROD +0.4%; CAP UTIL 79.8%
• US MAR MFG OUTPUT -0.5%

• US FEB BUSINESS INVENTORIES +0.2%; SALES +0.0%

• UMICH APR. PRELIM CONS SENTIMENT 63.5 (62.1 EXP., 62.0 MAR)
• UMICH APR. PRELIM CURR COND 68.6 (66.0 EXP., 66.3 MAR)
• UMICH APR. PRELIM EXPECTATIONS 60.3 (58.5 EXP., 59.2 MAR)
• UMICH APR. PRELIM 1Y INFL EXPECTATIONS 4.6% (3.7% EXP; 3.6% MAR)
• UMICH APR. PRELIM 5-10Y INFL EXPECTATIONS 2.9% (2.9% EXP, 2.9% MAR)

BANK EARNINGS: Big Banks off to Strong Start - but can Regionals follow?

• Earnings season now well underway for Q2, with large-cap financials (WFC, C, JPM) topping street consensus this week.
• Financials and large cap banks remain the focus in the coming week, with Bank of America, Goldman Sachs, US Bancorp and BNY Mellon set to follow. Market focus remains on any gaps in performance between mega-cap and smaller-cap regional names following the SVB crisis.
• The rally across banking names Friday has also lent support to the greenback and supports Fed implied pricing, which took a further leg higher today.
• Full schedule including EPS & revenue expectations here: https://roar-assets-auto.rbl.ms/files/52491/MNIUSEARNINGS170423.pdf

MNI Fed Balance Sheet Tracker - April 14, 2023

In the latest sign of relief for the US banking sector following March’s turmoil, Fed balance sheet data shows that banks paid back some of their recent “emergency” borrowing.

• We would still expect takeup of the Fed's new Bank Term Funding Program to increase over the coming months, given its generous terms, but some of the early analyst estimates for the eventual size may prove to have been overblown.
• With the Treasury's account at the Fed nearly depleted, the April 18 tax deadline looms large.
• Full analysis in PDF here

US TSYS: Holding Cheaper After Retail Sales and Broader Confluence Of Factors

• Cash Tsys heading nearer the close with the 2Y +13bps after most of the action came early with retail sales. Even though the ex-autos & gas/control group beats were small, they were treated as at least ruling out consumers coming under the cosh following banking stresses and built on better-than-expected large bank earnings landing beforehand.
• Moves were further stoked by hawkish commentary from the Fed’s Waller before a surprise jump in near-term U.Mich inflation expectations.
• The front end drags the rest of the yield curve higher, with 10YY +7.5bps (real yields +5.5bps), whilst in futures space, TYM3 trades at 114-28+ (-18) off a post-retail low of 114-23 that stopped short of 114-18 (Apr 3 low).
• Fed Funds: 20bp hike for May FOMC, a cumulative 24bp of hikes for Jun, mostly reversed by Sep and moving onto 35bp of cuts from current levels to year-end vs closer to 50bps yesterday.

FOREX: Dollar Index Snaps Losing Streak, NZD Sharply lower

• A mixture of solid bank earnings and potential profit taking ahead of the weekend worked in favour of the USD on Friday. The DXY has risen around 0.6%, snapping a three-day losing streak in the process. The greenback rally picked up momentum following the bumper University of Michigan sentiment release: 1y inflation expectations came in well ahead of forecast (4.6% vs. Exp. 3.7%, the biggest beat on consensus since 2021) and the associated moves in US yields (2-yr +13bps).
• Weakness for equities left antipodean currencies at the bottom of the G10 pile, with a notable 1.5% drop for NZD. However, it is worth noting that the moves are just an unwind of the prior day’s significant rally. GBPUSD sits close behind, declining 0.95% and hovers just above the 1.2400 handle approaching the weekend close.
• This is potentially an important turnaround for cable given the bullish significance of the recent breach of 1.2448, the Jan 23 high and the top of a broad 3.5 month range. The weekly close back below this point could test the resolve for bulls, especially ahead of next week’s UK CPI data.
• In similar vein, EURUSD has been unable to consolidate above the 1.10 handle and the recent trend highs of 1.1033, sliding 0.55% on Friday and halving the week’s advance.
• Overall, the USD Index remains over 1% below the Monday high, but has steadily been paring these losses throughout the session. 101.80 marks the 50% retracement of the week's range, of which a breach may prove constructive for a further recovery towards the 50-dma which intersects at 103.45.
• Monday’s docket sees US Empire State Manufacturing as well as potential comments from ECB’s Lagarde. China GDP data, along with other activity metrics, all cross early on Tuesday.

EGBs-GILTS CASH CLOSE: Yields End Week On Highs

European yields closed at one-month highs Friday, with markets taking a hawkish cue from US data.

• The German and UK curves bear flattened, with ECB and BoE terminal rate expectations pushing 6-7bp higher.
• A strong US UMichigan consumer inflation survey and hawkish comments by Fed's Waller exacerbated the global move.
• For the ECB, not only is a 25bp now fully priced in, but the debate is increasingly over whether they will go 50bp (30% priced).
• A Reuters sources piece and comments by Belgium's Wunsch set a hawkish tone by suggesting a more aggressive QT stance may be ahead.
• Periphery EGB spreads were mixed but basically flat, coming off wides in the afternoon as Bunds sold off.
• Next week sees huge EGB issuance (E45bln) and several key data points, including UK CPI and flash PMIs.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 10.2bps at 2.881%, 5-Yr is up 8.1bps at 2.473%, 10-Yr is up 6.8bps at 2.44%, and 30-Yr is up 4.5bps at 2.507%.
• UK: The 2-Yr yield is up 10.1bps at 3.618%, 5-Yr is up 10.2bps at 3.508%, 10-Yr is up 9.2bps at 3.667%, and 30-Yr is up 7.9bps at 4.021%.
• Italian BTP spread up 0.7bps at 185.7bps / Spanish down 0.8bps at 103.7bps

US STOCKS: Real Yields Outweigh Initial Bank Optimism

• The S&P E-mini has pulled back off lows of 4138 but remains under pressure at 4149 at typing (-0.6%) as it unwinds half of yesterday’s push higher.
• It comes with the 10Y real yield pushing back towards session highs seen after retail sales, currently +5bps on the day with real yields behind most of the sell-off in nominal yields.
• Nasdaq trims earlier losses to see similar declines (-0.6%) whilst in banks, the KBW index (+0.7%) still sees striking contrast between large banks after positive earnings this morning and regionals currently -2.7%.
• North of the border, the TSX outperforms with 0.0%, with banks gaining +0.5%.

COMMODITIES: Gold Slumps On USD Bounce Whilst Oil Holds Week’s Gain

• Crude oil is edging higher on the day having seen a volatile session, holding on for reasonable gains on the week, buoyed for the most part by dollar weakness except for today’s snap higher for the DXY.
• The IEA has also warned that rising demand from China and developing economies will outpace production in 2H23.
• WTI is +0.3% at $82.45, earlier remaining under key resistance at $83.53 (Jan 23 high) but also off support at $79.00 (Apr 3 low).
• The day sees most active strikes in the CLK3 seeking protection at $80/bbl puts.
• Brent is +0.2% at $86.24,with resistannce seen at $87.49 (Apr 12 high) and support at $83.50 (Apr 3 low).
• Gold is -1.8% at $2003.71, sliding with the lurch higher in the dollar having overnight come close to yesterday’s high of $2048.74. It unwinds large gains for the week although the abruptness of prior gains still leaves support at $1981.7 (Apr 10 low) despite today’s slide.
• Weekly moves; WTI +2.2%, Brent +1.3%, Gold -0.2%, US nat gas +5.1%, EU TTF nat gas -7.7%