Olivia

There are understandable concerns about the high and persistent inflation rates around the globe. Much of this is to do with the spike in energy costs, but also in other commodities. Partly this is due to supply issues and increased demand as the economy bounced back from the pandemic, but there’s also the war in Ukraine to consider as well. High energy prices are proving to be quite persistent, and central bankers have been very slow and reluctant to raise interest rates in response. Their fear has been that the global economy is far from robust. But high and persistent inflation is forcing central banks, led by the US Federal Reserve, to tighten monetary policy aggressively just as global economic growth is faltering. This is causing great concern and adding to fears that the US and other countries could be heading for a recession.  Recession Stock markets don’t like recessions. Rising prices lead to a decline in consumer demand as workers struggle to pay their bills and cut back on their spending. This is exacerbated as companies are forced to make redundancies and the newly unemployed must rely on savings and government benefits. But recessions can be short and sharp,… Read More »The yield curve and recessions

Gross Domestic Product declined at a 1.4% annual rate in the first quarter, far below the 1% consensus forecast. Equities, Treasury yields and the dollar rally as underlying growth appears strong.  Federal Reserve rate policy and May hike should be unaffected. Economic growth in the US contracted for the first time in two years, shrinking at a 1.4% annualized pace in the first quarter after expanding 5.7% in 2021 with the best yearly performance since 1984. The surprise decline was worse than the already low 1% forecast of the Reuters survey and even missed the Atlanta Fed GDPNow estimate of 0.4%.  From the first quarter of last year the economy grew 3.6%.  Despite the steep deceleration in growth from 6.9% in the fourth quarter, equities rallied sharply and Treasury yields and the dollar saw modest gains as traders noted several negative factors that are unlikely to be repeated in future quarters.  Trade and inventory The trade deficit widened in the first two months of the quarter as importers sought to overcome supply-chain problems and exports fell. In the government’s economic accounts trade deficits subtract from GDP. Businesses slowed inventory acquisition from the rapid pace in the second half of last year. Together… Read More »US economy contracts 1.4% in the first quarter on trade, inventory, consumer spending remains strong

Outlook: Today we get US GDP for Q1 and remember that yesterday, the Atlanta Fed GDPNow had lowered its forecast from 1.3% to 0.4%, on consumer lassitude. (Tomorrow’s eurozone GDP is expected at 0.3%, by the way.) The Conference Board has 1.5%. We also get the usual jobless claims today, which show the rearview mirror of Q1 GDP likely not having any influence on sentiment at all. When jobs are still on the upswing, despite peculiar participation rates, it’s hard to talk of a slowdown. Besides, in Q1, we were still coming off the latest Covid surge, which peaked around the first week of January. The relative return theme attracts a higher number of traders every day with no end in sight. He who has the highest rate wins and notice that’s nominal rates, not the real ones. So, with the US about to raise by 50 bp, the dollar wins regardless of any other “high-frequency” data. Canada loses, but only a little because it intends to copy the US, as does Mexico. The Brazilian central bank, in contrast, has been dealing with high inflation from the cradle and is getting weary of hikes. Japan stands out with its stubborn… Read More »The dollar’s rapid rise is abnormal and will correct at some point – When Fed delivers that 50 bp?

A combination of factors dragged EUR/USD to a fresh five-year low on Thursday. Concerns about the economic fallout from the Ukraine crisis weighed on the euro. Aggressive Fed rate hike bets continued boosting the USD and contributed to the fall. The EUR/USD pair continued losing ground for the sixth successive day and dropped to its lowest level since March 2017, around the 1.0500 psychological mark during the Asian session on Thursday. The shared currency was weighed down by concerns that the European economy, which relies heavily on Russia to meet its energy needs, will suffer the most from the Ukraine crisis. The worries resurfaced after Russia announced a plan to halt gas flows to Poland and Bulgaria amid a standoff over fuel payments from “unfriendly” buyers in rubles. It is worth mentioning that the EU gets about 40% of its gas and 30% of its oil from Russia and has no easy substitutes if supplies are disrupted. The risk of an energy crisis could make it difficult for the European Central Bank to tighten its monetary policy, leaving it lagging far behind the Fed. The US central bank is widely expected to hike interest rates by 50 bps when it… Read More »EUR/USD Analysis: Oversold conditions warrant caution for bears ahead of German CPI/US GDP

Outlook: Yesterday’s data was mostly ignored, including the Atlanta Fed’s GDPNow, down to a lousy 0.4% for Q1om 1.3% last time. We get another estimate today. The drop was due to “yesterday’s annual revision to retail sales by the US Census Bureau showing real personal consumption expenditures growth declined from 3.8 percent to 2.4 percent.” In other words, the consumer is flagging. The relationship between the dollar and the stock is a weird one. Just about anything you want to say about it will be true for one period or another, and you will see strongly held views on the subject that are very hard to argue with.  For many years, they were inversely correlated—stock market up, dollar down. This was weird and somewhat inexplicable, and had nothing to do with international capital flows. For the past decade or so, the two markets have been positively correlated, if not very closely. See the monthly chart (the green candles are the dollar). We have been keeping an eye peeled for a spillover in sentiment from equities to the dollar, and are tentatively deciding it’s there now, if not every day. Yesterday is a good case in point—all the equity indices down by… Read More »The relationship between the dollar and the stock is a weird one

The Bank of Japan not to make changes to its monetary policy settings in April. BOJ’s view on the yen decline will be critical amid inflation forecast upgrade. USD/JPY remains poised to retest 129.40, will BOJ aid the bullish move? Following the conclusion of its two-day review meeting on April 28, the Bank of Japan (BOJ) is unlikely to announce any changes to its monetary policy settings. The central bank, however, is expected to upgrade its inflation forecasts amid a fragile economic recovery. BOJ’s views on yen devaluation in focus The BOJ is likely to maintain the benchmark policy rate at -10bps while holding onto its pledge to buy J-REITS at an annual pace of up to JPY180 bln. Japan is witnessing a gradual uptick in inflation towards the central bank's 2% target, in the face of rising material costs. Inflation, however, remains modest when compared with soaring price pressures in other countries while still below pre-pandemic levels. The central bank, therefore, may be in no rush to increase borrowing costs or modify a pledge to keep rates at current or lower levels, Reuters has reported, citing sources familiar with the BOJ’s thinking. Governor Haruhiko Kuroda said last Friday, “the… Read More »BOJ Rate Decision Preview: Sharp yen moves grab attention

EUR/USD – 1.0640 Although euro's selloff below 1.0698 (Monday) to 1.0637 in New York yesterday, then intra-day break there to a 5-year bottom at 1.0636 in Australia on continued usd's strength suggests marginal weakness is seen, oversold condition should prevent steep fall today and yield a much-needed correction, above 1.0698 would head back to 1.0720 later. On the downside, only a daily close below 1.0600/10 may dampen bullish prospect of view and risk further weakness towards 1.0571 before rebound. Data to be released on Wednesday Australia CPI, Germany Gfk consumer sentiment. Italy trade balance, Swiss investor sentiment. U.S. MBA mortgage application, goods trade balance, wholesale inventories and pending home sales.

Overview: The recovery attempt of risk appetites, reflected in the recovery and strong close in US stocks yesterday was dealt a blow by Russia's Foreign Minister's warning of a “serious” danger of nuclear conflict.  In Asia-Pacific, most of the large equity markets advanced.  China was an exception even though the currency snapped a five-day slide following the hike in foreign currency reserve requirements announced yesterday.  Australia's resource companies led the ASX to its largest loss (~2%) since Russia's invasion of Ukraine two months ago.  European shares are trying to stabilize after the Stoxx 600 fell by 3.6% over the past two sessions. US futures are softer.  The US 10-year yield is a few basis points lower around 2.79%. European benchmark yields are slightly softer. The dollar is mostly firmer, though the Antipodean and yen have edged higher.   The euro's loss has been extended deeper into the $1.06-handle and sterling still struggles to sustain modest upticks.  Among emerging market currencies, several Asia Pacific currencies, in addition to the yuan have traded better.  European currencies are taking the brunt.  Gold closed below $1900 yesterday for the first time since late February and is straddling that area in quiet turnover.  June WTI stabilized after… Read More »Risk appetites challenged by Lavrov’s warning about nuclear conflict

Overview: The recovery attempt of risk appetites, reflected in the recovery and strong close in US stocks yesterday was dealt a blow by Russia's Foreign Minister's warning of a “serious” danger of nuclear conflict.  In Asia-Pacific, most of the large equity markets advanced.  China was an exception even though the currency snapped a five-day slide following the hike in foreign currency reserve requirements announced yesterday.  Australia's resource companies led the ASX to its largest loss (~2%) since Russia's invasion of Ukraine two months ago.  European shares are trying to stabilize after the Stoxx 600 fell by 3.6% over the past two sessions. US futures are softer.  The US 10-year yield is a few basis points lower around 2.79%. European benchmark yields are slightly softer. The dollar is mostly firmer, though the Antipodean and yen have edged higher.   The euro's loss has been extended deeper into the $1.06-handle and sterling still struggles to sustain modest upticks.  Among emerging market currencies, several Asia Pacific currencies, in addition to the yuan have traded better.  European currencies are taking the brunt.  Gold closed below $1900 yesterday for the first time since late February and is straddling that area in quiet turnover.  June WTI stabilized after… Read More »Risk appetites challenged by Lavrov’s warning about nuclear conflict

Overview: The recovery attempt of risk appetites, reflected in the recovery and strong close in US stocks yesterday was dealt a blow by Russia's Foreign Minister's warning of a “serious” danger of nuclear conflict.  In Asia-Pacific, most of the large equity markets advanced.  China was an exception even though the currency snapped a five-day slide following the hike in foreign currency reserve requirements announced yesterday.  Australia's resource companies led the ASX to its largest loss (~2%) since Russia's invasion of Ukraine two months ago.  European shares are trying to stabilize after the Stoxx 600 fell by 3.6% over the past two sessions. US futures are softer.  The US 10-year yield is a few basis points lower around 2.79%. European benchmark yields are slightly softer. The dollar is mostly firmer, though the Antipodean and yen have edged higher.   The euro's loss has been extended deeper into the $1.06-handle and sterling still struggles to sustain modest upticks.  Among emerging market currencies, several Asia Pacific currencies, in addition to the yuan have traded better.  European currencies are taking the brunt.  Gold closed below $1900 yesterday for the first time since late February and is straddling that area in quiet turnover.  June WTI stabilized after… Read More »Risk appetites challenged by Lavrov’s warning about nuclear conflict