Olivia

Summary United States: Minutes Put All Eyes on the Fed, but Economic Activity Remains Strong In an otherwise calm week of data, Wednesday's release of the FOMC minutes stirred things up as they showed committee members agreeing that elevated inflation and the tight labor market warrant balance sheet reduction to start soon. The minutes also stressed that current economic indicators point to strong activity, which was affirmed by the robust domestic demand that drove the ISM services index higher in March and kept the February trade balance at a record deficit. Next week: CPI (Tuesday), Retail Sales (Thursday), Industrial Production (Friday) International: Commodity Price Spike Keeps Latam Inflation Elevated In our view, one of the regions that is most at risk to elevated commodity prices is Latin America. This week, we received evidence that inflation is indeed moving higher as a result of the push higher in commodity prices. Furthermore, the Canadian economy continues to demonstrate a robust recovery from the COVID pandemic. Next week: India CPI (Tuesday), Bank of Canada (Wednesday), European Central Bank (Thursday) Interest Rate Watch: Balance Sheet Runoff Takes Shape The minutes of the March FOMC meeting released this week signaled the committee is likely to… Read More »Weekly economic and financial commentary

The Reserve Bank of New Zealand to raise OCR by 25bps  to 1.25% in April. Increased odds that the RBNZ could deliver a 50-bps hike to tackle inflation. The kiwi’s turnaround hinges on the central bank’s tightening outlook. NZD/USD is keenly awaiting the Reserve Bank of New Zealand (RBNZ) policy meeting next Wednesday to find some comfort after being smashed to two-week lows below 0.6900 on the aggressive Fed’s tightening outlook. The RBNZ is set to announce its interest rate decision on Wednesday, April 13, at 0200 GMT. RBNZ to surprise with a double shot hike? The RBNZ is widely expected to increase the Official Cash Rate (OCR) by another 25bps from 1% to 1.25% on Wednesday. If the expectation is met, the central bank will hike rates for the fourth straight meeting. This meeting will not be followed by Governor Adrian Orr’s press conference. A majority of the economists polled by Reuters predicted a 25bps lift-off this month, although a quarter of them kept doors open for a 50-bps increase. The overnight index swaps (OIS) roughly price in seven rate hikes from the central bank, expecting the OCR to reach 2.50% or higher by the end of this year.… Read More »Reserve Bank of New Zealand Preview: A tough call as hard-landing risks loom

Key highlights Eurozone retail sales jumped slightly more than expected y-o-y in February with automotive fuel and non-food products driving the growth. The European Union's statistics office Eurostat said retail sales in the 19 countries sharing the euro rose 0.3% m-o-m in February for a 5.0% y-o-y increase. China has promised once again to step up monetary support, raising expectations that an interest rate cut or other easing measures could happen as early as next week. The proportion of Japanese households expecting prices to rise a year from now has hit a 14-year high, a central bank survey showed, as inflationary pressures from rising raw material costs grew. USD/INR movement The USDINR pair remained higher amid a strong dollar and outflows from domestic stocks. The dollar hovered near two-year highs against a basket of major currencies after meeting minutes showed the Federal Reserve preparing to move aggressively to fight inflation, while commodity currencies fell from recent peaks. Investors would closely monitor the RBI MPC statement which is due for tomorrow. Global currency updates The pound traded slightly higher against the US dollar after the US Treasury yields fell from their highs. The UK administration has imposed an outright ban on all… Read More »Could China cut interest rates or take other easing measures next week?

It’s going to be a major week for central banks ahead of the long Easter weekend, with three meetings on the way and rate hikes looking almost certain to be the outcome of at least two of them. So the spotlight will fall on the Bank of Canada, Reserve Bank of New Zealand and European Central Bank for much of the week. Although economic data will also be ample – inflation numbers will be watched in China, the United States and United Kingdom, while French elections might rattle European markets.

1)    UK wages/unemployment (Feb) – 12/04 – the cost-of-living squeeze is no better illustrated than in the gap between wage growth which saw an increase of 4.8%, in January, including bonuses and 3.8% excluding them. On the plus side, this trend of higher wages is set to rise in the coming months, however it won’t even come close to matching the impact of rising prices in the shops, even when the various pay increases announced by various retailers recently. The change in NI insurance thresholds from July will help in the longer term, but as far as the here and now, upward pressure on wages is likely to increase in the coming months, helped by rising vacancies which rose to a new record high of 1.3m for the three months to January. Unemployment also fell back to 3.9% in January and is expected to fall back to its pre-pandemic lows of 3.8%, when this week’s February numbers are released.          2)    UK CPI (Mar) – 13/04 – the picture for UK CPI looks set to get even worse for March, even as February CPI rose to a new 30 year high of 6.2%, up from… Read More »The week ahead: UK, US CPI, ECB, Bank of Canada rates, JPMorgan Chase, Tesco, and easyJet results

GBP/USD tumbled to multi-month lows below 1.3000 amid policy divergence. The UK slapped new sanctions on Russian banks, oil and coal imports. Focus shifts to UK and US inflation amid looming Ukraine risks. GBP/USD booked the second straight week of losses, as bears refused to give in amid hawkish Fed-driven sentiment and risk-aversion. Cable touched its lowest level since November below 1.3000, as King dollar reigned supreme, partly buoyed by the US bond market rout. With UK and US inflation dropping next week, the downside risks for the currency pair remain intact. GBP/USD sold-off into policy divergence, Russian sanctions The risk-off flows and the dollar’s demand remained the central narrative this week, which revived the downside for GBP/USD after witnessing a consolidative phase a week ago. GBP/USD stood resilient at the start of the week, in the face of the heightening tensions between the West and Russia over Ukraine. Over the weekend, Ukraine accused Russia of mass killings of civilians in the Ukrainian city of Bucha. Russia declined committing any war crimes. These re-ignited tensions and prompted the US, Europe and the UK to propose additional sanctions against Moscow. Meanwhile, the greenback continued to cheer Friday’s upbeat US labor market report… Read More »GBP/USD Weekly Forecast: Downside risks remain intact ahead of a big week

The first round of the French presidential election will be held on April 10, ahead of the runoff two weeks later. Opinion polls have narrowed significantly in recent weeks and a victory for President Macron doesn’t look so certain anymore. For the euro, this election seems like an asymmetric downside risk.  The rules Presidential elections in France consist of two stages. In the first round, candidates from all parties can participate. If one candidate manages to secure more than 50% of the vote, they instantly win. Otherwise, there is a second round between the two most popular candidates.  Nobody has ever won from the first round. That’s unlikely to change this time, since the field is very crowded with twelve candidates running. The frontrunners in opinion polls are the current president, Emmanuel Macron, and the opponent he defeated in the last election, the far-right Marine Le Pen.  In third place comes the leftist Jean-Luc Melénchon, followed by the ultra-nationalist TV pandit Eric Zemmour and the conservative Valérie Pécresse who are virtually tied in fourth and fifth place.  2017 repeat?  Therefore, it seems like Macron will be squaring off against Le Pen once again in the second round, only his polling… Read More »French election: What does it mean for the euro?

EUR/USD – 1.0862 Euro's selloff from last Thursday's high at 1.1184 to 1.0866 in New York yesterday on continued USD's strength, then present break there in Asia suggests correction from March's 22-month bottom at 1.0807 has ended and bearishness remains for re-test of said support, break needed to extend decline to 1.0755/60. On the upside, only a daily close above 1.0938 would signal a temporary bottom is in place and risk stronger retracement towards 1.0961, break, 1.0988 later. Data to be released on Friday Japan current account, trade balance, consumer confidence, Eco watchers current, Eco watchers outlook. Italy retail sales. Canada unemployment rate, employment change, U.S. wholesale sales and wholesale inventories.  

Outlook: The markets took the Fed news remarkably well–suspiciously so. This is a market that thinks Musk buying Twitter stock is as important and interesting as Buffett buying Occidental Petroleum and HP, so perhaps we shouldn’t be surprised. The underlying problem is that we are not prepared for inflation to persist. Or maybe equity traders deduce higher prices mean higher earnings, so that’s good. The Fed is making it clear that inflation is the top priority (over employment) and to tame it, the planned hikes and quantitative tightening are going to be huge. The $95 billion is the equivalent of a 25 bp hike, according to Powell. So multiply that times 7 months (1.75%) plus the actual outright hikes expected (4 more at 25 bp each and 2 at 50 bp for a total of 2%) and it’s a stunning tightening, effectively 4.00% counting the 25 bp hike we already had. Fed funds was zero-25 bp only last month. As for the rate hikes, the Fed is sticking to the data-dependency story. The problem is that the inflation forecasts are so wonky. If we believe market-based expectations, inflation in five years should be 3.28% according to FRED as of late… Read More »The Fed is making it clear that inflation is the priority – Plans hikes and quantitative tightening

Stock markets are back in the red on Thursday as further hawkish commentary from the Fed increases the odds of a recession over the next couple of years. The soft landing that the Fed so desires is easier said than done, especially in an environment when inflation is so high and energy prices are through the roof. And when you consider the kind of tightening that's being proposed, the economy is going to have to display incredible resilience to weather the storm. The central bank has quickly gone from fighting the market to standing shoulder to shoulder with it. The next few meetings are likely to deliver three super-sized rate hikes it seems and that could be ramped up further if we don't see some progress on inflation in that time. Policymakers are clearly spooked by the data we've seen over the last couple of months and when faced with dealing with soaring inflation and supporting the economy, there's only ever going to be one winner. They better hope any recession is mild and short-lived or the decision to drag their feet on starting the tightening cycle will look even more negligent. Oil below $100 after IEA and EIA Oil… Read More »Fed raises recession risks