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Summary United States: Signs of a Slowdown Begin to Emerge April brought a steep 16.6% decline in new home sales and a 3.9% drop in pending home sales, the latest signs the housing market is cooling down amid sharply higher mortgage rates. Personal income rose 0.4% during April, while personal spending increased 0.9%. Inflation continues to run hot. The headline PCE deflator was up 6.3% year-to-year, while the core measure rose 4.9%. Next week: Consumer Confidence (Tue), ISM Manu. & Services (Wed/Fri), Nonfarm Payrolls (Fri) International: Mixed Fortunes for Europe's Economies This week's May PMI surveys offered the latest insight into how some of Europe's key economies are faring, and indicated varying fortunes across the region. The Eurozone PMIs reported a mild decline, suggesting a modest loss of momentum, though to levels that remain well within growth territory. For the United Kingdom however, the PMI surveys suggested the economy could suffer a sharper slowdown. Next week: China PMIs (Tue), Eurozone CPI (Tue), Canada GDP (Tue) Interest Rate Watch: FOMC Minutes Show Another 50 bps Rate Hike Is Probable The minutes from the May FOMC meeting were released this week and offered additional evidence that a second consecutive 50 bps rate… Read More »Weekly economic and financial commentary

The latest US employment report will be in the spotlight next week for any signs that recession worries have started to impact hiring. The dollar has lost some of its power lately and this dataset could determine whether we are in the early stages of a trend reversal. Inflation numbers from Europe will be another crucial variable for that equation. Elsewhere, the Bank of Canada is set to raise interest rates. 

EUR/USD – 1.0737 Euro's strong rebound from 1.0663 to 1.0731 in New York on broad-based usd's weakness due to rally in U.S. stocks suggests pullback form Tue's 1-month 1.0748 peak has possibly ended and above would extend upmove from May's 5-year bottom at 1.0350 to 1.0780/90, however, loss of momentum should cap price below 1.0807 and yield decline later. On the downside, only a daily close below 1.0690/95 would indicate a temporary top possibly made and yield weakness towards 1.0663, then 1.0643 Monday. Data to be released on Friday Japan Tokyo CPI, Australia retail sales, Italy trade balance. U.S. personal income, personal spending, PCE price index, goods trade balance, wholesale inventories, University of Michigan sentiment and Canada budget balance.

Equities are rallying again today as speculation around peak Fed hawkishness from Wednesday's FOMC minutes and the potential for China's zero-Covid policies easing keep sentiment afloat. But one must wonder whether we are back to 'bad news is good news” for the equity markets. Despite the disappointing US pending home sales number, Wall Street was hugely bid from the New York get-go.  The run of negative US economic news seems to be taking the sting out of fears the Federal Reserve will be forced to hike aggressively. Cleaner positioning, a return of “buy the dip” mentality from Retail and a reduction in bond market volatility with USD strength showing signs of peaking has investors tentatively back on the rally wagon, indicative that there was more at play than simply a “cover bid.” And the icing on the cake was a surprisingly strong showing from US retailers Macy's and Dollar Tree, which helped calm recessionary fears last week as investors hit the reset button for the setup in consumer names. Peak Fed hawkishness and China reopening with a possible reset in consumer names make the short thesis more challenging now. OIL Momentum is flat-out bullish, with many factors pointing to a… Read More »Peak Fed hawkishness, windfall taxes push oil higher, USD running out of steam

EUR/USD witnessed heavy intraday selling on Wednesday amid resurgent USD demand. The recent hawkish comments by the ECB policymakers helped limit any further losses. A move beyond the 1.0770 confluence is needed to support prospects for any further gains. The EUR/USD pair faced rejection near the 50-day SMA on Wednesday and retreated nearly 100 pips from its highest level since April 25 touched the previous day. The US dollar made a solid comeback and snapped a two-day losing streak to a nearly one-month low amid concerns about softening global economic growth. Investors remain worried that a more aggressive move by major central banks to constrain inflation and the Russia-Ukraine war could pose challenges to the global economy. The European Central Bank's (ECB) Financial Stability Review reinforced market fears and warned that further corrections in financial markets could be triggered by escalation of war, even weaker global growth or if the monetary policy needs to adjust faster than expected. This, in turn, was seen as a key factor that prompted fresh selling around the major. On the economic data front, the US Durable Goods Orders fell short of market expectations, though they did little to dent the intraday bullish sentiment surrounding… Read More »EUR/USD Forecast: Bulls need to wait for move beyond 50% Fibo./50-DMA confluence

Minutes from the FOMC meeting on May 3-4 show concern about what the average person already knows. Image courtesy of Fed Board of Governors, Text by Mish from Latest Minutes Minutes of the Federal open market committee Please consider the Minutes of the FOMC May 2-3 Meeting.  Notably, the Fed is sticking with an over-optimistic economic outlook. The staff anticipates “GDP growth would rebound in the second quarter and advance at a solid pace over the remainder of the year.” On retail sales, “participants indicated that they expected robust growth in consumption spending. They pointed to several elements supporting this outlook, including strong household balance sheets, wide availability of jobs, and the U.S. economy's resilience in the face of new waves of the virus.” “All participants concurred that the U.S. economy was very strong, the labor market was extremely tight, and inflation was very high and well above the Committee's 2 percent inflation objective.” The Fed is drinking Kool-Aid. A recession is baked in the cake, and obviously so.  But the Fed cannot admit that. Given the stated nonsense on a “strong economy” perhaps a clueless Fed does not even see a recession. At best, the Fed masks its outlook with… Read More »Fed minutes show inflation risks are skewed to the upside

MARKET Given that the Fed pivot is the most clearly communicated rate hike cycle in modern history and will continue to be so, stocks moved higher as the market now seems convinced there will be few double paced rate hike twists in the future. That should lift some worries for equity investors about impending policy mistakes. Investors seem ok with what is currently priced, which is a very flat FED FUNDS futures at an implied 2.50-2.75% for the Fed far into the future. The FOMC minutes were a bit outdated anyway. Fed members have been pretty clear in their comments around 50bp hikes recently, while some have even softened the hawkish tone. So, equity traders quickly looked past the release moving from catch-down camp to short covering mode lifting stocks higher. But the S&P 500 benchmark remains well entrenched within the 3800-4100 range trade as investors stay in wait and see mode.  At 3800, the market is pricing a fair amount of P/E de-rating plus earnings risk. At the same time, ongoing headwinds from central bank tightening, the Ukraine conflict and the China lockdown should prevent any meaningful rally beyond 4100. Next up is US preliminary GDP, which is expected… Read More »Post FOMC: Market shift from catch-down camp to short covering mode

EUR/USD – 1.0728 Although euro's rally above 1.0697 (Mon) to a 1-month peak at 1.0748 in New York after hawkish comments from ECB's Lagarde suggests upmove from May's 5-year bottom at 1.0350 would extend marginally, reckon 1.0770/75 would remain intact and yield prospect of another fall due to loss of momentum. On the downside, daily close below 1.0697 would indicate a temporary top is in place and yield weakness towards 1.0662, break, 1.0608/10 later. Data to be released on Wednesday Australia construction work done, New Zealand RBNZ interest rate decision, Japan coincident index, leading indicator. Germany GDP, Gfk consumer confidence, France consumer confidence, Swiss investor sentiment, U.S. mortgage application, durable goods, durables ex-transport and durables ex-defense.

FOMC will release the minutes of the May policy meeting on Wednesday, May 25. Markets have already priced in two more 50 bps Fed rate hikes. Investors will pay close attention to discussions around the Fed's balance sheet reduction plan. The greenback is having a hard time preserving its strength toward the end of May and the US Dollar Index (DXY) remains on track to post monthly losses for the first time in 2022. Following the US Federal Reserve’s decision to hike its policy rate by 50 basis points (bps) earlier in the month, policymakers have been voicing their willingness to raise the policy rate by a total of another 100 bps in the next two meetings. Two more 50 bps Fed rate hikes a done deal  Markets seem to have already priced in those expectations with the CME Group FedWatch Tool pointing to a more-than-80% probability of the Fed hiking by 50 bps in June and July. Hence, the dollar is struggling to find demand as investors see the US central bank adopting a cautious stance moving forward. Renewed optimism about the annual Consumer Price Index (CPI) having peaked at 8.3% in April and the hawkish tilt in other… Read More »FOMC May Minutes Preview: Will the Fed have to sell MBS?

The Reserve Bank of New Zealand is set to hike OCR by 50 bps to 2% in May. The pace of future tightening will hold the key amid global recession risks. The kiwi needs more than a 50 bps hike to extend the ongoing recovery. Another double-dose rate hike is on the table from the Reserve Bank of New Zealand (RBNZ) when it meets this Wednesday to decide on its monetary policy at 0200 GMT. The central bank’s outlook on the pace of tightening, however, will be key in determining NZD/USD’s next price direction. RBNZ: A 50 bps hike already baked in A 50 bps hike to the Official Cash Rate (OCR) from 1.50% to 2% on Wednesday is well priced in by the market. The RBNZ will raise the key rate for the fourth consecutive time since last October, accounting for two back-to-back double-dose lift-offs. With the half percentage point rate hike coming this time, the central bank will become the first major central bank to achieve a neutral stance for the first time since 2015. The policy announcement will be followed by Governor Adrian Orr’s press conference at 0300 GMT. 20 out of the 21 economists surveyed by… Read More »Reserve Bank of New Zealand Preview: Will they step up their tightening game?