Daily Market Outlook, March 28, 2022

Overnight Headlines

In a busy week for key global economic data, the U.S. jobs report for March, due on Friday, could impact growing expectations of a large Federal Reserve rate hike at the next policy meeting.

The market is currently pricing in a 68% chance of a 50-basis-point hike in May. The Reuters poll forecast is for a 475,000 rise in non-farm payrolls, unemployment to ease to 3.7% from 3.8% and average hourly earnings to rise 0.4% month-on-month. Other U.S. data includes ADP jobs, final Q4 GDP, ISM manufacturing PMI, consumer confidence, home prices, and the Fed's favoured inflation gauge, the core PCE price index.

The main data event for Europe will be flash euro zone March CPI; the poll forecast is for a 6.5% year-on-year rise after 5.9% in February. Other EZ data includes consumer confidence, industrial sentiment, unemployment and German retail sales. UK data includes Q4 GDP and current account.

Japan's calendar is packed, with industrial production, employment, retail sales, final manufacturing PMI and the closely watched Tankan survey. Housing starts and construction orders are also due.

China will release official manufacturing and non-manufacturing PMI for March along with the Caixin manufacturing PMI.

Australia will be releasing retail sales and building approvals. New Zealand has no top-tier data scheduled, while Canada has January GDP.

Equities are trading mostly lower across the Asia Pacific as concerns around the impact of high inflation and tightening monetary policy weigh on sentiment. Across China, stocks have also dipped in response to news that Shanghai will enter a staggered eight-day lockdown period, with half of the city going into lockdown over the next four days, followed by the other half for the latter four days. Ahead of the resumption of negotiation talks between Ukraine and Russia later this week, the US White House has continued its efforts of tempering comments made by the US President, insisting that the US wasn’t seeking a regime change in Russia.

The war in Ukraine continues to cast a shadow over the global economy, particularly with the impact of rising prices – particularly for energy items – raising concerns over the outlook for consumer spending across major economies. Last week’s UK inflation print showed the annual CPI moved up to 6.2% in February, with further increases expected as the impact of higher energy prices feed through. At last week’s Spring Statement, the UK Chancellor Rishi Sunak sought to offset some of the rise in the cost-of-living squeeze by announcing a number of measures. However, even with these accounted for, the Office for Budget Responsibility (OBR) said that real incomes this year were still likely to drop at their sharpest pace since the 1950s.

Later today, Mr Sunak will be questioned by the Treasury Committee over his Spring Statement, with the focus likely to be on whether he could have done more. The OBR’s latest Economic and Fiscal Outlook also predicted that cumulative borrowing over the forecast horizon would be lower compared with previous projections from last October. That suggests that the Chancellor has banked a large part of the fiscal improvement in the public finances from the current fiscal year (2021/22) and points to some ‘headroom’ for further giveaways in the future.

Elsewhere, the Bank of England Governor, Andrew Bailey, is due to speak at an event in Brussels hosted by the European think tank, Bruegel. With interest rate markets expecting a sharper increase in Bank Rate this year relative to economists’ expectations, any clarity on the policy outlook could see some narrowing in this gap. On the data front, today’s focus is limited to the US trade balance for February and the Dallas Fed manufacturing survey for March.

This week’s snapshot of FX positioning and sentiment among speculative investors revealed a further improvement in broader bullish sentiment, building on the rebound that emerged in last week’s data. The aggregate USD longs rose by USD4.6bn in the week to USD13.5bn, the highest since early January.

The biggest week over week change in positioning was reflected in net CAD positioning where speculators slashed the net CAD long that the market it had been nursing over the past few weeks by USD1.8bn, even as the CAD was in the midst of one of its best rallies in a number of years. Gross CAD longs were cut sharply again in the past week while gross shorts edged fractionally higher. The CAD long liquidation was the largest, single-currency shift in positioning in this week’s CFTC data.

Investors took a generally dim view of commodity currencies; net AUD shorts advanced nearly USD600mn this week and while net NZD longs were cut USD72mn, overall positioning in the Kiwi remains very light. Net MXN shorts were lifted USD191mn. Equally, however, haven currencies were also under pressure; net CHF shorts were boosted by USD434mn while net JPY shorts rose USD1.5bn to total USD8.1bn sizable but just the biggest bear bet on the JPY since mid-January.

Bearish bets on the GBP rose USD718mn to just over USD3bn, as gross shorting activity increased. Investors were, however, more constructive on the EUR last week,a view that has probably been tested by this week’s price action and boosted net longs by just over USD700mn to USD3.3bn