Overview:  The US dollar is paring its recent gains against most major and emerging market currencies today, mainly on the back of month and quarter-end position adjustments.  The euro held the $1.1700 level, while the Japanese yen continues to trade heavily.  Better than expected PMI readings from China appeared to help sentiment.  The JP Morgan Emerging Market Currency Index is higher for the first time this week.  Asia Pacific equities traded lower after losses in the US yesterday.  Australia was an exception, where the bourse gained about 0.8%.  European shares are slightly firmer, and the Dow Jones Stoxx 600 drew closer to the record high set last February.  US shares are narrowly mixed. The debt markets are quiet.  The US 10-year benchmark yield is a little firmer at 1.73%.  European yields have also edged higher.  Gold prices are hovering near the month's low ($1677) and have been unable to resurface above $1690. Oil is little changed ahead of the OPEC+ Joint Ministerial Meeting.  API reported an unexpected build in US inventories, while the EIA report today was anticipated to show the first drawdown in six weeks.  

Asia Pacific

As it typically does after the Lunar New Year holidays, China's PMI bounced back in March. The manufacturing PMI rose to 51.9 from 50.6, well above expectations.  The service PMI was even more impressive, jumping to 56.3 from 51.4 and just missing last year's high set in November at 56.4.  The net result was that the composite reading now stands at 55.3, up from 51.6.  Last year's high was 55.7. To be sure, March's recovery is not simply from depressed February readings.  Recall, the composite PMI fell for three months through February.  However, confirmation that the world's second-largest economy is out of its soft patch will come from the economy's performance in April. 

Japan reported disappointing February industrial output figures, which served to dent a bit of the optimism that stemmed from the much stronger than expected retail sales figures reported yesterday (3.1% vs. median forecast in the Bloomberg survey for a 0.8% gain).  Industrial output slumped 2.1% in February, well more than the 1.3% decline economists projected.  The world's third-largest economy appears to have contracted in Q1.  Tomorrow it reports the Tankan Survey, and the split is not simply between manufacturing and services, but even more pronounced is the divergence between large companies and small.  Capex plans are expected to still be weak.  

Australia reported slightly softer than expected growth in private sector credit expansion.  However, the dramatic recovery in building approvals blew away forecasts.  Building approvals have fallen 19.4% in January, and economists expected a modest 3% recovery in February.  Instead, building approvals surged by 21.6%.  Approvals for private homes jumped 15.1% after a revised 11.8% decline in January (initially -12.2%).  The Antipodeans, Canada, the US appear to be seeing rising home prices. The UK often is grouped here too, but Nationwide's house price index reported today slipped in March (-0.2%), and the year-over-year gain is modest 5.7%.  It is tempting to attribute it to the low yields, but given that the EMU and Japan have even lower interest rates, it seems that rates are a necessary but not sufficient condition.  The political economy culture that encourages widespread homeownership is also important.  Macroprudential measures that regulate loan-value and aspects are preferred over the blunter instrument of rates to address concerns, which do appear to be gradually rising.  

The dollar approached JPY111 in Tokyo before backing off and finding support in early European turnover near JPY110.50, where an expiring option for $585 mln is struck.  Recall that the dollar made two highs last March as the pandemic hit.  The first was near JPY112.25, and the second was about JPY111.70.  The 2019 high was set in April by JPY112.40.  Those offer obvious targets.  The Australian dollar posted an outside down day yesterday by trading on both sides of Monday's range and closing below its low.  However, there was no follow-through selling, and the Aussie is straddling the $0.7600-area today.  An option for almost A$625 mln at $0.7600 expires today.  A recovery above $0.7665 would lift the technical tone.  The dollar slipped against the Chinese yuan for the first time this week.  The PBOC set the dollar's reference rate at CNY6.5713, spot on what the banks' models anticipated.  Some reports seek to link the yuan's recent weakness to the hidden hand of the state working through the large banks in the swap market.  However, such accounts often ignore the large exposures created by companies that are among the world's largest exporters and importers. 

Europe

The preliminary eurozone March CPI was mixed.  The headline rose by 0.9% after February's 0.2% increase.  The median forecast in Bloomberg's survey called for a 1% increase.  The net result is that the year-over-year pace accelerated to 1.3% (not 1.4% projected) from 0.9% in February.  The core rate unexpectedly slipped to 0.9% from 1.1%.  An unchanged reading was expected.  As ECB President Lagarde sketched at her press conference a few weeks ago, inflation readings are very noisy right now, and what appears to be a rebuilding of price pressures is due to some technical factors and base effect and will prove transitory.  There are no policy implications.  

Monthly house prices in the UK fell by 0.2% in March, according to Nationwide.  A 0.4% increase was anticipated.  It is difficult to read much into one month's data as house prices rose by 0.7% in February.  Some suspect that the impact of the temporary property-tax cut has run its course.  The tax holiday was extended for three months through Q2.  A new mortgage guarantee program will start tomorrow and may help spur activity.  Also, after a strong H2 20, the base effect works against UK house prices later this year.  

The $1.17-level in the euro held on the first attempt.  That area corresponds to the (38.2%) retracement of the euro's recovery from last March's low (~$1.0635) to the January high (~$1.2350).  It recovered to almost $1.1750 in early European turnover.  The single currency had appeared to build a small shelf near $1.1760 before yesterday's drop, and it offers resistance today.  A move above $1.1800 is really needed to improve the technical tone.  Sterling is firm and is approaching $1.38 in Europe after being sold to almost $1.3700 yesterday.  The week's high was set on Monday near $1.3850, which also corresponds to the 20-day moving average.  It seems too far away to be challenged.  That said, the euro is pressing against one-year lows near GBP0.8500, and a break could help underpin sterling against the dollar.  

America

The ADP private-sector job estimate (~550k vs. 117k in February) will draw early attention, but the real interest lies with President Biden's speech in Pittsburgh in which the infrastructure program will be announced.  What the administration has in mind is so large that, as we have suggested, it will be broken into two parts.  According to the latest leaks, the price tag of the first part is about $2.25 trillion.  It is focused on the material infrastructure, including the electrical grid, nationwide broadband internet, modernize the water system, bridges, and roads, and bolster housing and manufacturing. The second part will focus on people, like health care, and making permanent the expansion of the earned income tax credit, the child tax credit, and paid family leave/medical leave.  The combined cost is estimated at around $4 trillion.  

While the spending part makes some feel uncomfortable, others are more concerned about the revenue enhancers tax increases.  In essence, Biden appears likely to propose the repealing of large parts of the 2017 tax cuts.  This would include returning the corporate tax rate to 28% from 21%. There would be a minimum corporate tax.  The new proposals would also close or at least narrow loopholes that provide tax incentives to invest offshore. Federal subsidies for fossil fuel companies would end.  Households with income over $400k would see an increase in the marginal rate.  Unlike the $1.9 trillion stimulus bill, which saw votes strictly along party lines, the Democrats are divided over elements of these infrastructure measures, the role of taxes, and how much emphasis on environmentally-friendly initiatives. 

Biden has tried to make a case for these proposals because they are necessary to compete with China.  While it may be true to some extent, the competitive element does not only apply to China.  But aren't there other reasons why one of the richest countries should have a first-rate power grid and better bridges and roads with rural communities have broadband access.  One of the lessons of the pandemic was that poverty and poor health are comorbidities, especially in societies that distribute health care primarily via the pricing mechanism.  Subsuming the issues under national security strategy is not necessary and seems to be a dangerous precedent. As we have seen previously, there is practically no limit to what can be justified on national security grounds. 

Canada reports January GDP figures today.  They are too historical to have much market impact, but barring a downside surprise to the 0.5% gain projected by the median forecast in Bloomberg's survey, the takeaway will reinforce the shift in sentiment.  Previously, the consensus view was the Canadian economy would contract in Q1 by 1% (annualized), but that has switched, and the latest survey shows the expectation is for a nearly 3% expansion.  The economy is forecast to have expanded by 0.5% in January.  Separately, but not unrelated, the IMF will update its forecasts next week, and an upward revision to its US and Chinese forecasts will lift the anticipated global growth from the 5.5% pace seen previously.  Canada benefits from the spillover from the US stimulus.  

The US dollar is consolidating within yesterday's range against the Canadian dollar (~CAD1.2580-CAD1.2650). It has been two weeks since the greenback posted a key upside reversal from the three-year low set near CAD1.2365.  The upside momentum has slowed in recent sessions.  It likely takes a break of the CAD1.2540 area to boost confidence, a top is in place.  The greenback traded at two-week lows against the Mexican peso in the European morning (~MXN20.5225).  A break of MXN20.50 could signal a move toward MXN20.28, last week's low.  Initial resistance is seen around MXN20.65.  

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