Olivia

Risk sentiment is wavering as investors are constantly evaluating the likelihood of a recession. The flash PMIs for May might help guide those expectations in the coming week. In the US, there will be plenty of additional drivers for the dollar, such as the FOMC minutes and the PCE inflation readings. Markets remain fixated on seeing peak inflation so any trace of this might help calm nerves. In the world of central banks, the Reserve Bank of New Zealand is expected to hike interest rates again.

Fed minutes – 25/05 – as expected, the Federal Reserve raised rates by 50bps pushing the upper bound of the funds rate to 1%. There had been talk that some on the committee were keen on a 75bps move, however these concerns came to nought with all on the FOMC agreeing to a 50bps hike. The central bank also laid out the start of the balance sheet reduction program starting with $47.5bn in June, rising to $95bn a month after 3 months. This could be construed as being on the dovish side, given that they were starting the program from a lowish base and then ramping up, rather than going for $95bn straight out of the gate. Fed chair Jay Powell also said that based on current data, that the Fed had no intention of going faster than 50bps in a single month, firmly burying any prospect that the Fed would be much more aggressive in subsequent months. He specifically made the point that a 75bps hike wasn’t something the FOMC was actively considering, although in subsequent comments he’s being careful not to rule it out entirely. The discussion over balance sheet reduction is likely to be the more interesting… Read More »The Week Ahead: Fed minutes, US Q1 GDP, Marks & Spencer, Kingfisher, Zoom and Nvidia results

Producer inflation continues to accelerate as it reached a 33.5% y/y in April, setting another record for the indicator. Prices added 2.8% last month after jumping 4.9% during March, continuing to gain strength. Germany is said to have the most substantial fear of inflation of any European country, which is eating into German savings. However, the Bundesbank cannot act alone in tightening policy but can only form a hawkish coalition by bringing the moment of policy tightening closer. And we see some movement in that direction. Increasingly the consensus of the ECB officials is tilting towards a rate hike of 25 points in July. Furthermore, policymakers have not ruled out a further rate increase by 50 points. Whilst this ECB stance is softer than that of the Fed and Euro-region inflation is not inferior to that of the USA. There remains a medium-term pressure factor on the Euro against the Dollar. In the short term, however, the Euro is gathering strength after an oversold year of EURUSD declines with brief stoppages. A rebound in the movement of the last 12 months could correct the EURUSD towards 1.1080, Fibonacci’s 61.8% retracement. However, at 1.08, it might hit the resistance near the… Read More »German inflation awakens European hawks by helping the Euro

Summary United States: April Economic Data Show Resilient U.S. Economy U.S. retail sales topped expectations in April, while industrial production also grew more rapidly than economists expected. Data on housing starts, home sales and homebuilder sentiment, however, showed tentative signs of cooling. Next week: New Home Sales (Tue), Durable Goods (Wed), Personal Income & Spending (Fri) International: U.K. and Canada Inflation Reach New Cycle Highs U.K. inflation surged to a fresh 40-year high in April, quickening to 9.0% and placing additional pressure on the Bank of England (BoE) to double down and tighten monetary policy. Inflation in Canada also reached a new high, but this time of “only” 30 years; headline CPI inched up to 6.8% year-over-year in April. Next week: Eurozone PMIs (Tue), U.K. PMIs (Tue), RBNZ Rate Decision (Wed) Interest Rate Watch: Bond Yields Up Significantly in Many Foreign Economies The United States is not the only major economy in which long-term interest rates have risen significantly. For example, the yield on the two-year government bond in Germany has risen about 100 bps since the beginning of the year, while the comparable yield in the United Kingdom is up about 80 bps over the same period. Topic of… Read More »Weekly economic and financial commentary

Equity markets are back in positive territory on Friday but I'm struggling to get too excited by the moves we see going into the weekend. The rebound may partly reflect the scale of the declines we've seen in the previous couple of sessions, while the cut to the five-year loan prime rate in China may also be giving global markets a bit of a lift. But ultimately, very little has changed and I expect that will continue to hold these markets back. The rate cut announced by the PBOC is obviously good news and is clearly targeted a revitalizing the ailing property market which continues to suffer due to the crackdown last year and Covid lockdowns this. Along with other measures already announced, this could help to revive a hugely important part of the economy. Whether it's enough to help China hit its 5.5% growth target this year is another thing. I imagine we may see further stimulus efforts this year in order to try and get close to that as the country is facing numerous headwinds, as every other is around the world right now. What it has that others lack though is room to manoeuvre on both the… Read More »Recovering into the weekend

At the end of another choppy week for European markets sentiment appears to have become much more fragile, with the moves being seen in bond yields reflecting concern that we are heading for a growth slowdown. Yesterday’s price action saw a sea of red for markets in Europe with the most pain being felt by the retail sector after this week’s profit warnings from US retail giants Walmart, Target and Kohl’s. US markets have also seen some heavy selling this week, with both the S&P500 and Nasdaq 100 managing to hold above their lows from last week of 3,858 and 11,692, while still finishing the day lower for the second day in succession. Asia markets, on the other hand have seen a strong rebound this morning after China cut its 5-year loan prime rate by 15 basis points, for the second time this year. Consequently, European markets look set to open higher this morning at the end of yet another rollercoaster week for investors. The one silver lining from the selling of the past two days was that we managed to close well off from last week’s lows, suggesting a general reluctance to become too bearish too quickly. That said… Read More »UK Retail Sales set to decline for the 3rd month in a row

Outlook: Today we get the usual weekly jobless claims. April existing home sales, the Philly Fed, and for the policy wonks, the ECB policy meeting minutes from the April meeting. The elephant in the room is the S&P down over 4% in the worst rout since June 2020, just when everyone got the message the Covid pandemic was a Big Deal and worthy of the panic that had started a few months before. Ironically, in 2020 the Q1 GDP was down 9.1% and Q2, not yet released when the S&P tanked that time, was a whole lot less bad at -2.9%. The implication is that markets are awfully slow to recognize a serious problem, but that flies in the face of the old attribution of the S&P being a leading indicator of economic health. We say the hysteria yesterday was unwarranted and that will be seen when facts get unspooled. The problem with hysterical panic is that it spreads like wildfire and disregards offsetting information. This is the classic behavior of crowds.  Reuters has a headline “Which earnings to the rescue?” but then the story goes nowhere and doesn’t name anything. So how does a bear market get halted? One… Read More »Markets are awfully slow to recognize a serious problem

EUR/USD – 1.0479 Euro's selloff from 1.0563 to 1.0461 in New York yesterday on renewed safe-haven usd's buying due to fall in U.S. yields and U.S. stocks suggests recent corrective upmove from last Friday's fresh 5-year bottom at 1.0350 has ended there and below 1.0438/42 would yield further weakness to 1.0390/00 later. On the upside, only a daily close above 1.0495/00 may risk stronger recovery to 1.0530/40. Data to be released on Thursday: Japan machinery orders, exports, imports, trade balance, Australia employment change, unemployment rate. EU current account, construction orders. U.S. initial jobless claims, continuing jobless claims, Philly Fed manufacturing index, existing home sales, leading index, Canada new housing price index and producer prices.

Shanghai's “freedom day” and JP Morgan's optimism have sparked a relief rally, adverse for the dollar. US data and tough Fed talk on inflation could trigger fresh demand for the greenback. EUR/USD seems especially vulnerable to a shift in the mood.  EUR/USD and other short-term assets are short-term bullish, then bearish. My colleague Tomàs Salles will tackle the technical patterns emerging, and I will focus on the fundamentals.  *Note: This content first appeared as an answer to a Premium user. Sign up and get unfettered access to our analysts and exclusive content. Reasons for the recovery First, China announced that the six-week lockdown in Shanghai will end after the city reported three consecutive days without community infections. The city is the country's largest and the most important one economically. A significant chunk of the recent market gloom came from the downturn in Chinese consumption – and production – due to lockdowns. Any easing is risk-on, adverse for the dollar. The news is different from that on Monday – weak Chinese figures.  The second positive note is also a positive one contradicting a negative one. On Monday, the financial media discussed Lloyd Blankfein's comments that a US recession is a “very high… Read More »Dollar weakness stands on two vulnerable legs, Fed fear set to trigger greenback comeback

Markets US equities fell sharply Wednesday, S&P down 4%, the most significant daily decline since June 2020. The weakness came as Target's quarterly earnings added fuel to the recession risk narrative, while the drop of US10 year yields down 10bps to 2.88% offered little support. And Oil settled at 2.3% lower on the day. Equities continue to be at the mercy of broader macro themes, with more hawkish comments from Fed Chair Jay Powell leading to a further move higher in front-end rates, which continues to prove problematic for risk. Medium-term, the Fed is likely to respond to any easing in financial conditions by ratcheting up the hawkish noises and, in effect, acting as a lid on the markets. And this should keep active money on the sidelines. The relief rally trap door sprung when the S& P 500 4000 pins snapped after Target's earnings results exacerbated some recession fears that continued the theme of rising inventories detailed by Walmart on Tuesday. And the broad-based sell-off absolutely hammered tech. Indeed, contagion from bellwether consumer earnings prints is sending stagflationary shockwaves through the market, and equities suffered another massive bout of indigestion after yesterday's Alka Seltzer moment. While rising inventories and higher… Read More »Stocks sink in a vicious sea of red, gold in no man’s land