Olivia

Outlook: US economic data remains feisty but existing home sales today look gimmer. The Bloomberg forecast is a drop of 4.1% after a bigger drop in Feb, a whopping 7%. Trading Economics forecasts 5.9%. The commentary points out a handful of exceptional data points: “Existing-home sales in the US sank 7.% mom to a seasonally adjusted annualized rate of 6.02 million in February of 2022, below market forecasts of 6.1 million. It is the lowest reading in six months. The inventory of unsold existing homes slightly increased to 870,000, equivalent to 1.7 months of supply at the current monthly sales pace. The median sales price rose to $357,300, up 15% YoY. This marks 120 consecutive months of year-over-year price increases, the longest-running streak on record.” Housing is not usually a mover in the FX market but can contribute to the reversal of fortunes in the dollar today. As journalists like to say, not having a clue, “it fell because of” or “it fell despite of” Factor X. The downward correction in the too-strong, overbought dollar is appearing in every major currency and some not so major. The dollar/yen broke its nearly two-week trendlet and is down about 100 points from… Read More »Corrections are terribly tricky – Impossible to judge between a true breakout and a false one

French President Emmanuel Macron faces a tough reelection campaign. A victory for far-right candidate Marine Le Pen would crash the euro. EUR/USD is struggling, partly in due to a re-estimation of Le Pen's chances. A victory for Macron would boost the euro. Once bitten, twice shy – Investors are still licking the wounds from Brexit, Russia's invasion of Ukraine and other improbable events that became reality. A low-chance event carries big risks, and markets seem unwilling to take any – but with the French elections, they may have gone too far. Background France is the eurozone's second-largest economy, the only member with nuclear arms and after German Chancellor Angela Merkel's departure, the old continent's leading pro-integration force. Incumbent President Emmanuel Macron has been a champion of “more Europe” and a victory for his far-right rival Marine Le Pen – who supported “Frexit” in the past – would be a nightmare for the project. It would also devastate the euro. France's economy is over one-sixth for the full 27-member bloc: Source: Eurostat The young, energetic and well-educated leader at the Elysee Palace suffers from an image of being a president only for the rich, which is exacerbated by rising costs and… Read More »French Elections Preview: EUR/USD buy opportunity? Macron lead is underestimated, three scenarios

Outlook: The data today is housing starts and permits, never inspiring in FX. A couple of other things are holding attention. St. Louis Fed Bullard said the FOMC shouldn’t rule out rate increases of 75 basis points. This seems to be a generality and not a call to arms for 75 bp in May, but is still a shocker. Secondly, the dollar/yen has zoomed past the previous high (125.86 from June 2015) and is now at the highest since April 2002, literally 20 years ago. The all time high on our eSignal data base is 135.16 from December 2001. The much longer Reuters data base remind us that the dollar/yen was 250-300 during the 1980’s and broke below 200 around 1985. See the chart. Various Japanese officials, including FinMin Suzuki, have been muttering about a too-weak yen as destabilizing, etc., leading to some muted chatter about intervention. Overnight he said “the Japanese currency was weakening rapidly and indicated that the impact of the moves could be harmful for the economy,” according to Bloomberg. “We are monitoring moves in the foreign exchange market with a strong sense of vigilance.” Language that includes “watching carefully” is language that usually precedes intervention—but the day before,… Read More »Is now Bullard the hero of the “sane and reasonable” crowd?

EUR/USD – 1.0774 Euro's selloff from last Thursday's peak at 1.0923 to a near 2-year bottom at 1.0758 in post-ECB suggests medium term downtrend remains in force and as 1.0830 has capped subsequent recovery, yesterday's retreat to 1.0771 on broad-based usd's strength due to rally in U.S. yields suggests consolidation with downside bias remains, below 1.0758 would yield 1.0730/35. On the upside, only a daily close above 1.0834 signals a temporary trough is in place and risks stronger gain to 1.0860/70. Data to be released on Tuesday  New Zealand business NZ PSI, GDT price index, Japan industrial production, capacity utilization. Canada housing starts, U.S. housing starts, building permits and redbook.

If the current market phenomena were to star in a Shakespeare drama, they would be ideal candidates for the Three Witches. Can you guess who would play who? Have you ever heard of Shakespeare’s mythological characters, the Three Witches? They are depicted as prophets who represent evil, darkness, chaos, and conflict. If you look at the market today, you will find ideal candidates for these dark roles. However, while rising commodity prices and inflation have a casting win in their pocket, there is no certain actor to play the third witch. Would the recession stand a chance? No Easter eggs today – instead, here is a story that may provide food for thought. (Credit: Macbeth meets the three witches; scene from Shakespeare's 'Macbeth'. Wood engraving, 19th century. Wellcome Collection. Public Domain Mark). Let’s start by representing an economic cycle with its different phases: Global commodity prices – in particular energy prices – surged at a fast pace following the COVID crisis. Notably, as major central banks responded to the economic slowdown by printing money, rising levels of inflation were observed as a result of accommodating monetary policy combined with accelerating oil and gas demand. The context was tight supply and… Read More »The witchy trio: Commodities supercycle, inflation, and recession?

Outlook: The calendar is skimpy this week with most of the interesting data coming from the housing market, although now that mortgage rates are over 5%, we have some extrapolating to do. Because of the holiday, which seems to be getting stronger every year–we didn’t get Good Friday off in banking in decades past–we may have missed really quite good US data last week. The Empire State manufacturing survey jumped to 24.6 in April from -11.8 when a mere 1% was forecast. March industrial output rose by 0.9%, double the forecast, and capacity utilization is at 78.3%, the highest since 2007. This bodes well for the PMI due Friday. And weirdly, the University of Michigan's preliminary April consumer confidence survey showed a rise when a drop was forecast. Trading Economics has this: “The University of Michigan consumer sentiment for the US unexpectedly jumped to 65.7 in April of 2022 from an eleven-year low of 59.4 in March, preliminary estimates showed. Figures also beat market forecasts of 59, with the expectations index surging by 18% to 64.1. “Perhaps the most surprising change was that consumers anticipated a year-ahead increase in gas prices of just 0.4 cents in April, completely reversing March's… Read More »Will the Fed tame inflation?

EUR/USD struggled to register any meaningful recovery and languished near the two-year low. Dovish ECB, the Ukraine crisis weighed on the euro and acted as a headwind amid a stronger USD. Bets for a more aggressive Fed policy tightening, elevated US bond yields underpinned the buck. The EUR/USD pair languished near the 1.0800 mark through the Asian session on Monday and remained well within the striking distance of the two-year low touched in reaction to a dovish European Central Bank decision last week. In fact, the ECB left its key policy rates unchanged and reaffirmed that rate hikes would only come sometime after the Asset Purchase Program (APP) is concluded in the third quarter. This disappointed some investors anticipating a more hawkish tilt amid the record-high inflation. Apart from this, growing worries about the potential economic fallout from the Ukraine crisis continued to act as a headwind for the shared currency. On the other hand, the US dollar stood tall near its highest level since April 2020 and continued drawing support from expectations for a faster policy tightening by the Fed. The bets were reaffirmed by comments from New York Fed President John Williams on Thursday, saying that a half-point… Read More »EUR/USD Outlook: Dovish ECB and uncertainty over Ukraine favour bearish traders

Arguably the most important data next week is the flash PMI.   It is not available for all countries, but for those generally large G10 economies, the preliminary estimate is often sufficiently close to the final reading to steal its thunder. Moreover, and this applies to high-frequency data more broadly, given the overshoot of inflation in most counties, with some exceptions, notably in Asia, central banks appear to be on set courses.  The near-term data are interesting if you are into that kind of thing, but the Federal Reserve and the Bank of Canada seem committed to bring the policy rate to neutral expeditiously.  The hawkish chord struck by the Bank of Canada has the market favoring 50 bp moves at its next two meetings.  It is difficult to see the market getting more aggressive even though March CPI (April 20) likely accelerated above 6.0% (from 5.7%).  The housing market (existing home sales and housing starts) appears to be holding up better than in the US.  However, February retail sales look weak after a strong January.   The Fed funds futures market has nearly priced in three 50 bp hikes and 3 quarter-point moves before the end of the year.  Perhaps, it is fairer to say… Read More »Central banks on a preset course reduces significance of high-frequency data

Summary Activity in the industrial sector of the economy broadly improved in March. More recent disruptions, such as closures of key Chinese factories and the continued conflict in Ukraine, pose near-term headwinds to U.S. manufacturing, but today's report is the latest sign of incremental improvement in supply chains. Production resilient in face of new supply disruptions Industrial production rose 0.9% in March, more than double the gain expected by the consensus, while past data for February were also revised higher to show an equivalent 0.9% gain in output. Remarkably, this improvement in production comes amid new supply disruptions during the month with fresh lockdowns at key Chinese factories and the continued war in Ukraine. The data signal incremental progress in manufacturing amid slowly improving supply as manufacturers were able to continue to chip away at backlogged orders last month. Manufacturing output rose 0.9% after a 1.2% gain in February. Production was led by a 7.8% surge in motor vehicles, reflecting some payback from the near 5% decline a month prior. Auto assemblies jumped 23% last month to 1.86 million, which marks the highest number of vehicles assembled in a single month since the start of 2021 (chart), a marked improvement in an… Read More »March industrial output signals improvement in supply

– Quiet markets with bulk of global centers closed for holiday. – French and Italian final March CPI readings reinforced concern over the region's inflation outlook. Asia – China PBoC Monthly MLF Setting left the 1-year Medium-Term Lending Facility unchanged at 2.85% (not expected). – More speculation that China could cut RRR to support the real economy, cites official [in line]. – China military said to conduct drills around Taiwan aimed to target the wrong signal sent by US regarding Taiwan (Note: Several US officials are visiting Taiwan including Senator Menendez (D-NJ) and Senator Graham (R-SC). Russia/Ukraine – Russia Defense Min confirmed its flagship of Black Sea fleet, Moskva had sunk while being towed to port in stormy weather (Note: 1st Russian loss of a flagship since the Russian-Japanese war of 1904-1905). Europe – ECB policymakers saw a July rate hike as still possible after its April meeting. Consensus seemed to be growing for 25 basis point hike in Q3 as several ECB officials sought an earlier end to bond buying program. Speakers/Fixed income/FX/Commodities/Erratum Equities – Europe closed for Easter Holiday. Speakers – ECB Survey of Professional Forecasters raised its inflation outlook while cutting the growth forecast for the 2022… Read More »Quiet price action as markets closed for Easter holiday