Biden goodie bag lifts Asia

President Biden’s Preliminary Budget is envisaging a $1.8 trillion deficit next year, after tax rises. Of course, what the President would like, and what he will get from Congress could be quite different, but with that level of spending, Asia appears to feel that some of that goody bag will fall their way, and Asian equity markets have risen today. I’m not sure what that will mean for the US yield curve, as that is a lot of government financing to get away, with JP Morgan and Goldman Sachs forecasting tapering to start from the Federal Reserve in Q4 of this year and Q1 of 2022, respectively. I’m going to play a waiting on game on higher US rates after several false starts this year.

The overnight data from the US was a mixed bag. Durable Goods ex transport rose respectably by 1.0%, above expectations of 0.80%. Pending Home Sales fell 4.40%, which isn’t much of a surprise given mortgage applications have been falling. With the US freshly vaccinated, escaping the zombie apocalypse in the city and escaping to suburban Wisteria Lane is now less appealing. Most notably, Initial Jobless Claims fell to 406,000, which seems to have supported some modestly bullish sentiment for the remainder of the session.

The two speed Covid world was evident in Asia this morning as Japan Unemployment rose slightly to 2.80%, and Tokyo CPI YOY for May printed at -0.40%. No inflation problems for Japan then, business as usual after 30 years. Malaysia’s Trade Balance at 1200 SGT may show similar base effects as Covid-19’s return in force continues to wreak havoc with the country. Singapore PPI will be flattered by YoY base effects, but as a bellwether for world trade, rapidly rising Export and Import Prices plus PPI could cause some inflationary nerves.

We may see the same story with German Export/Import Prices this afternoon, which also features pan-Europe sentiment data. The US saves the best for last. It releases April Personal Spending and Income, Core PCR Price Index, a Fed favourite, Chicago PMI for May and Michigan Consumer Sentiment, Inflation Expectations and Consumer Expectations. That will be followed by President Biden formally presenting his FY2022 Budget. Any combination of those could spark inflationary nerves as the week finishes, and I wouldn’t bet on either a soft finish for US equities or a bout of cyclical rotation into the Dow Jones.

Next week the data calendar accelerates into the first week of June, with pan-Asia PMIs followed by the rest of the world. We also have a swath of other data globally, but all will culminate with the US Non-Farm Payrolls on Friday. After last month’s huge downside miss, this month’s data really needs to perform to keep that inflation story alive and taper-talk on track. That is followed mid-month by the June FOMC meeting, which will be a live one. No changes in rates or QE, but will the “t-word” be mentioned? We should have a much better idea about the direction of travel for the US Dollar, bonds and equities by the end of June.

Asian equities rise

Asian equity markets are almost all higher today, with Wall Street’s neutral finish offset by reports that the Biden budget tonight will contain some serious spending, some of which will land in the region. The S&P 500 rose 0.12%, while the Nasdaq was unchanged. The Dow Jones caught a cyclical tailwind once again, increasing 0.40%. Index futures on all three have risen strongly in Asian trading on the same fiscal tailwinds; Dow Jones futures are 0.50% higher, while the Nasdaq and S&P futures are up 0.35%.

Japan’s Nikkei 225 has leapt higher by 2.20% as the BoJ is apparently considering extending pandemic support measures as the country grapples with its latest virus wave. The Kospi has risen by 0.70%, with Taipei rising by 1.30%.

The PBOC fixing of the Yuan at a two-year high this morning, and its indications that it has no real issue with further appreciation, has dampened spirits in Mainland China. Nevertheless, both the Shanghai Composite and CSI 300 are still 0.02% in the green. The strong IPO of JD. Com Logistics today has lifted the Hang Seng, which is 0.60% higher.

Regionally, Singapore is 0.80% higher, with Bangkok climbing 0.95% and Jakarta by 0.60%, while Manilla has fallen 1.0%. Kuala Lumpur has also retreated by 0.60% as its latest Covid-19 wave continues to increase in seriousness, raising fears that Malaysia’s tepid domestic recovery will seriously falter. Australia shows no such nerves regarding Victoria, with another good night for commodities and potential US fiscal largesse lifting the ASX 200 and All Ordinaries by 1.10%.

Europe should still open higher today, although it does not have quite the same beta to US government spending that Asia does. New York should also initially move higher again, but with plenty of data and the US Budget, later on, how it finishes the week will depend on whether those inflation genies reappear.

Dollar Divergence

The dollar index was barely changed overnight, finishing just 0.05% lower at 90.00, nestled near to the top of its weekly range. That belied the offsetting moves within its components, though. EUR/USD is almost unchanged at 1.2190. Still, GBP/USD rose strongly by 0.60% to 1.4200 as investors continued to bet on the UK recovery and with dialing down of Northern Ireland Brexit Protocol tension overnight.

Meanwhile, USD/JPY rose 0.65% to 109.85 as the divergence between the US, and Japan inflation trajectories raised expectations of a widening interest rate differential. Fears over the trajectory of Covid-19 in Japan and the potential cancellation of the Olympics also weighed on Yen. The break higher overnight sets up USD/JPY for a move through 110.00 and onto 111.00 next week, especially if US data tonight has an inflationary tone to it.

The North/South divide in Asia is making a reappearance, with the PBOC setting the Yuan at a near two-year high of 6.358 this morning versus the US Dollar. That has lifted the currencies of neighbouring South Korea and Taiwan and comes after the PBOC made it easier for financial institutions to secure off-shore funding for their balance sheets. The Yuan and the KRW, and NTD are also benefitting from international investor inflows into the local equity and bond markets. Until the PBOC signals its displeasure or US yields push the greenback higher, the Yuan will continue its appreciation path.

By contrast, ASEAN currencies remain locked in much tighter trading ranges. Much of this can be laid at the door of Covid-19, with the entire region now engaged in virus struggles to greater or lesser degrees. Offsetting that is the pace of the global recovery in the Northern hemisphere and the potential of large scale US fiscal spending flowing into those markets.

The US Dollar is steady in Asia as markets take a wait-and-see attitude ahead of the US data dump and budget tonight. If those releases set an inflationary tone, nerves may see a rotation into the greenback at the end of the session. I expect currency volatility to ratchet higher next week when we get a heavy schedule of tier-1 data releases from across the globe.

Oil grinds higher on US data

Oil price ground higher overnight, as the US Initial Jobless, Claims suggested the US recovery remains on track. Also aiding the rally was the general perception that next week’s OPEC+ meeting would leave the pace of production increases unchanged. Markets are becoming increasingly comfortable that any Iranian oil that returns to official international markets will be comfortably absorbed as global economic recovery proceeds. That noise will increase if India starts showing concrete progress in its Covid-19 battle.

Brent crude rose 0.95% to $69.40 overnight, rising another 0.45% to $69.70 a barrel in Asia. WTI rose 1.12% to $66.90 overnight, climbing 0.42% to $67.20 a barrel in Asia. The expected expansionary US budget announcement this evening lifting the consumption outlook.

Brent crude has resistance just above at $70.00 a barrel, followed by $72.00 a barrel. Support lies at $69.50 barrel, and only failure of significant support at $68.00 a barrel changes the bullish picture. WTI has resistance at $68.00, which opens the path for a test of $70.00 a barrel. Support lies $67.00 with only a failure of $65.00 a barrel, changing the bullish outlook.

Gold consolidates

Gold moved sideways overnight, finishing unchanged at $1896.00 an ounce, having probed the $1900.00 an ounce level once again earlier in the session. Some inflationary nerves have seen gold retreat slightly to $1892.00 an ounce in Asia.

Ahead of the US Budget and data this evening, those same inflation nerves are likely to cap gold gains, as is the Relative Strength Index (RSI), which remains in overbought territory. That suggests that gold is still vulnerable to a downside correction from here, within the greater bullish trend.

Gold has resistance at $1903.00 and $1913.00 an ounce, with support at $1889.00 and $1875.00 an ounce. Gold’s correction could extend all the way to $1845.00 an ounce without undermining the greater bullish outlook.