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Fed Expectations All Over the Place Amid Strong Data, Bank Stress, Debt Ceiling Impasse

Friday’s US jobs data was nowhere sad. The US economy added 253K new nonfarm jobs in April, beating analyst expectations for the 13th straight month! The unemployment rate unexpectedly fell to 3.4%, a multi-decade low, and wages grew 0.5% on a monthly basis, and 4.4% on a yearly basis. Both, higher than expected.

Strong jobs data reversed expectation of a Federal Reserve (Fed) rate cut in July. The expectation that the Fed would cut rates fell from 85bp to near 79bp after the data, and we even saw a slim expectation that the Fed could hike the rates again in June, of 10%.

The US 2-year yield rebounded from last week’s lows, but stayed below the 4% mark, as the dollar index remained offered at session highs, on the unresolved US debt ceiling debate, and despite some relief on regional banks front.

US President Biden will meet some congressional leaders on Wednesday but will unlikely compromise on spending. US treasury Secretary Yellen urges Congress to lift the debt ceiling, as the government could run out of money by June 1st and that Biden taking unilateral action would provoke a constitutional crisis.
On the data front

We have two CPI reports and one more jobs data to go before the Fed’s next decision.

The next US CPI report is due this Wednesday. The expectation is that the US core inflation may have eased from 5.6% to 5.5% in April, headline figure may have steadied around 5% but the monthly headline figure may have ticked from 0.1% to 0.4% due to the jump in energy prices after OPEC cut production. Any upside surprise in inflation figures would bring the Fed hawks back to the market and help scale back the Fed cut expectations.

In the FX

The US dollar remains under a decent selling pressure. The debt ceiling and the ongoing stress in US regional banks help keep the Fed doves in charge of the market despite economic data calling for a tight hand from the Fed.

As a result, the EURUSD – which dropped below the 1.10 mark after the strong US jobs data, quickly rebounded and remains bid above the 1.10 mark in Asia this morning. Sentiment remains upbeat for the euro bulls although there is a solid resistance into the 1.11 mark.

Cable tests the ceiling of a long-term down-trending channel, as economists and markets can’t agree on what the Bank of England (BoE) should do, or what it WILL do.

Economists bet for one more rate hike from the BoE and pause, whereas the interest rate markets price in a 25bp hike this Thursday, followed by one, and possibly two more rate hikes until September – which would push the British policy rate to the 5% psychological mark.

Given how scary UK inflation looks, the BoE should continue hiking the rates. Even though BoE Governor Bailey thinks that price pressure will drastically cool later this year, he should consider the risk that… they might not.

As such, expectations between the BoE and the Fed are diverging in favour of the latter, and that should keep Cable on a path toward further gains.

S&P 500 had a good quarter, after all

The S&P500 closed with a 1.85% gain on Friday, as US regional banks closed a turbulent week with a decent rally. PacWest shares rallied more than 80%, Western Alliance jumped nearly 50% and SPDR’s regional bank index was up by more than 6% on Friday.

Zooming out, overall, 85% of the companies in the S&P 500 have reported results for Q1. According to FactSet, 79% of them revealed earnings above estimates, which also helped keep the S&P500 afloat despite the fuming regional bank stocks.

US Crude jumps, gains could remain capped into $75pb

US crude jumped nearly 4% on Friday, along with the US equities, and is bid above $71pb this morning.

We are now far below the price level when OPEC announced cutting production to boost prices.

Consequently, the OPEC boost to oil prices remained short-lived. The latter means 1. market is strongly concerned about the deteriorating growth outlook that weighs on oil demand outlook, and 2. OPEC could surprise with another production cut announcement to keep the price pressure on the upside.

In the absence of such a surprise, upside potential in US crude will likely remain capped near $75/76, region that shelters the 50 and 100-DMA.

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