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The US 500 stock index (Cash) is being curbed by the Ichimoku cloud after the index unearthed positive traction around a 13½-month low of 3,858, just shy of the March 2021 trough of 3,853. The diving simple moving averages (SMAs) are defending the more than six-week decline in the benchmark index.

Currently, the Ichimoku lines are reflecting the struggle buyers are encountering to extend push beyond the cloud. This is also being mirrored in the short-term oscillators. The MACD and the stochastic oscillator are promoting further upside impetus, while the RSI is implying positive momentum has become weak.

As things stand, the rebound in the index is facing upside constraints from the cloud and the resistance area between the 4,098 barrier and the falling 100-period SMA at 4,122. In the event the price overcomes the cloud, the 4,155 border, which is the 38.2% Fibonacci retracement level of the down leg from 4,638 until 3,858, could hinder additional gains in the index. Yet, persistent bullish backing may drive the price to test the 50.0% Fibo of 4,247 prior to confronting the dipping 200-period SMA at 4,297, adjacent to a key resistance section linking the 4,306 high with the 61.8% Fibo of 4,339.

Alternatively, if the cloud dampens positive forces, a nearby fortified support region from 4,056 until the 50-day SMA at 4,030 could test sellers’ efforts to reignite the bearish trajectory. However, a successful push lower may bring into play the 3,955-4,000 boundary before sellers navigate for the 13½-month trough of 3,858. Sinking past the 3,853 border may rekindle negative tendencies of a deeper correction with the bears aiming for the 3,818 and 3,798 lows from the early part of March 2021.

Summarizing, the US 500 index is suggesting a snag in risk-appetite. For sentiment to bolster, the price would need to steer north of the cloud.

St. Louis Fed president James Bullard reiterated that "we have a good plan for now", in raising interest rate by 50bps at the next couple of meetings. He hoped that could bring inflation down with "the least amount of disruption we can get."

Bullard also said growth in range of 2.5-3.0% is " "fast compared to the long run potential rate of growth" of the economy, which may be just below 2%. Also, "labor markets are super strong...Household consumption is expected to hold through this year.".

People "want to put the pandemic behind them and they have lots of plans about spending," Bullard added.

Markets

Market sentiment is subject to quite some wild swings. Last week, investors panicked that aggressive CB (especially Fed) rate hikes to address elevated (core) inflation would inevitably slow growth, triggering a sharp risk-off correction annex decline in core bond yields. Both factors currently are again moving the opposite way. Equities, European indices in particular, are rebounding. The Eurostoxx50 today gains another 1.4%. US indices open up to 1.9% higher (Nasdaq). We see this mainly as a corrective rebound. Recent eco data were mixed. Today, US April retail sales were much stronger than expected with core/control group sales rising 1.0% M/M and with March sales sharply upwardly revised. However, US consumer confidence (Friday) and the Empire manufacturing (yesterday) recently missed consensus by a wide margin. Whatever, markets see the glass again half full rather than half empty. Despite a mixed outlook on growth, central bankers reiterate that they can’t but give priority to prevent a de-anchoring of inflation expectations. This was one of the key take-aways from yesterday’s hearing of BoE members before a Treasury committee. Their view was supported by solid UK labour market data and higher than expected wages published this morning. In EMU, Q1 growth was upwardly revised from 0.2% Q/Q to 0.3% Q/Q. This is a backward looking indicator and won’t change the ECB’s assessment in any profound way. Even so, it gives some comfort for ECB policy makers who cautiously joined the scenario of a July rate hike of late. Dutch ECB member Knot, a well-known hawk, estimated the time ripe to air the idea of 50 bps ECB step if necessary. Both in EMU and the UK, the curve bear flattens. German are rising between 13 bps (2-y, corrected for a benchmark change) and 9 bps (30-y). 10-y intra-EMU spreads hardly change, with Greece the exception to the rule (-7 bps). UK yields are jumping between 19 bps (2-y) and 10 bps (30-y). US bond markets outperform the UK and Germany with yields rebounding between 9 bps (5-y/10-y) and 6 bps (30-y). As said, panic on growth (temporarily) subsided. Inflation is again in focus. However, it wouldn’t surprise us to see new pockets of uncertainty on growth resurface in the (near) future. Later today, ECB’s Lagarde and Fed Chair Powell are still scheduled to speak.

We haven’t seen it for a while, but FX markets today show a combination of both euro strength and a USD weakness, or at least correction. After a rejected test of the 105 area end last week, the DXY trade-weighted index (103.50) eases further. USD/JPY is the exception to the USD correction (129.75 from an open of 129.16). However, the risk-on and the comments from ECB’s Knot finally give the single currency some breathing space. The pair regains the 105 handle. To call off the downside alert EUR/USD needs to regain 1.0642 early May top. Sterling had a strong start this morning supported by solid labour market data including higher than expected wage growth. This supported BoE Bailey’s case to continue to raise rates, even given the risk for a sharp cooling of growth further down the road. EUR/GBP tested the 0.84 area. However, during the day, the euro strength also came in play. In addition, UK foreign Secretary Lizz Truss formally revealed UK plans to unilaterally change parts of the Northern Ireland protocol also didn’t help sterling. EUR/GBP currently trades again in the 0.8450 area.  

News Headlines

Hungarian first quarter GDP was stronger than expected, printing at 2.1% q/q (1.5% expected), matching almost the upwardly revised 2.2% of Q4 last year. The economy is now 8.2% bigger in yearly terms. The flash reading only provides details on the sector level. All sectors contributed to the increase, the Hungarian statistical office said, but mostly industry and market services. The strong growth probably received a boost from PM Orban’s pre-election spending spree and may be unsustainable for coming quarters. Hungary’s forint strengthens today though that is at least equally as much inspired by the broad risk-on. EUR/HUF eases from near-record lows at 390 to 386.86. GDP in Poland added a lofty 2.4% q/q in Q1 to be up 9.1% compared to the same quarter last year. There are no decomposition tables available yet. The zloty appreciates in lockstep with other CE currencies. EUR/PLN drifts to 4.64, the lowest level since end April.

Retail sales started the second quarter on a strong footing with an increase of 0.9% month-on-month (m/m), in line with the consensus estimate. Moreover, March's reading was revised up to 1.4% m/m from 0.5% m/m reported previously, which makes today's number stronger than the headline appears.

Sales at autos & parts dealers rose by 2.2% m/m, while March's first estimate was revised up to -1.6% (vs. the 1.9% decline reported earlier). Solid growth and upward revisions were seen in both auto dealers and automotive parts & tire stores, where sales increased by 2.2% m/m and 2.0% m/m, respectively. Excluding autos, retail sales were up 0.6% m/m in April.

Sales at gasoline stations were down by 2.7% m/m, while building materials retailers reported a modest pullback of 0.1% m/m.

Sales in the "control group", which excludes the above categories and are used in calculating personal consumption expenditures (and GDP), were up by 1.0% m/m. Previous month's sales were revised to a much stronger 1.1% m/m from the advance reading of -0.1% m/m.

Within the group, the only categories in the red were sporting goods & music stores and food & beverage stores where sales declined by 0.5% and 0.2% m/m, respectively.

The rest of the categories reported gains with miscellaneous stores retailers (+4.0% m/m) leading the pack, followed by non-store retailers (+2.1% m/m), and food services & drinking places (+2.0% m/m). March's sales at all of these categories were revised up.

Key Implications

March's upward revisions helped retail sales finish the first quarter of 2022 at 3.4% – higher than we originally expected, which will push Q1 spending a bit higher than what was initially reported (2.7% q/q ann.) in the advanced estimate of GDP. Combined with decent growth in April, real consumption is on track to grow at 2.3% (annualized) in the second quarter. This means that consumer spending will continue to prime the economy.

Drilling down to details, adjusted for inflation, demand for "going out" categories continued to increase with sales at clothing stores and food services & drinking places each growing by 1.5%. Meantime, despite the slump in nominal terms, our real estimates of sales at gas stations are showing growth of almost 4%, which suggests that a modest decline in April's gas prices was enough for drivers to fill up their tanks.

Indeed, while elevated prices continue to reduce consumer purchasing power, consumers have no plans on cutting back. According to New York Fed's April Household Spending Survey, expected growth in monthly expenditures was the highest since the survey began in August 2015. Growth in essential spending remains the biggest driver, while the median expected growth in nonessential spending remained unchanged and above the historical trend. When making plans for large purchases, consumers reported that they are more likely to splurge on vacations, supporting our expectations for a further acceleration in services spending.

Daily Pivots: (S1) 128.68; (P) 129.15; (R1) 129.59; More...

USD/JPY is staying in consolidation from 131.34 and intraday bias remains neutral. Another fall cannot be ruled out and below 127.51 will target 125.09 cluster support (38.2% retracement of 114.40 to 131.34 at 124.86). On the upside, firm break of 131.34 will resume larger up trend.

In the bigger picture, current rally is seen as part of the long term up trend form 75.56 (2011 low). Sustained trading above 61.8% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 130.04 will pave the way to 100% projection at 149.26, which is close to 147.68 (1998 high). For now, this will remain the favored case as long as 121.27 support holds.

Daily Pivots: (S1) 0.9997; (P) 1.0030; (R1) 1.0053; More....

Intraday bias in USD/CHF remains neutral for the moment. Considering bearish divergence condition in 4 hour MACD, break of 0.9871 support will indicate short term topping at 1.0063. Intraday bias will be turned to the downside for 38.2% retracement of 0.9193 to 1.0063 at 0.9731. On the upside, above 1.0063 will resume larger up trend.

In the bigger picture, down trend from 1.0342 (2016 high) should have completed with three waves down to 0.8756 (2021 low) already. Rise from 0.8756 is likely a medium term up trend of its own. Next target is 161.8% projection of 0.8756 to 0.9471 from 0.9149 at 1.0306, which is close to 1.0342 (2016 high). This will remain the favored case as long as 0.9459 resistance turned support holds.

Daily Pivots: (S1) 1.2250; (P) 1.2290; (R1) 1.2362; More..

Intraday bias in GBP/USD remains neutral first. Considering bullish convergence condition in 4 hour MACD, break of 1.2637 will confirm short term bottoming at 1.2154. Intraday bias will be turned back to the upside for 55 day EMA (now at 1.2831). On the downside, break of 1.2154 will resume the down trend from 1.4248 to 200% projection of 1.3641 to 1.2999 from 1.3297 at 1.2013 next

In the bigger picture, based on current momentum, fall from 1.4248 (2018 high) at least at the same degree as the rise from 1.1409 (2020 low). That is, fall from 1.4248 could be a leg inside the pattern from 1.1409, or resuming the longer term down trend. In either case, deeper decline is expected as long as 1.2999 support turned resistance holds. Next target is 1.1409 low.

Daily Pivots: (S1) 1.0402; (P) 1.0422 (R1) 1.0455; More...

EUR/USD is still limited below 1.0641 resistance and intraday bias stays neutral first. On the upside, firm break of 1.0641 resistance will confirm short term bottoming at 1.0348, ahead of 1.0339 long term support. Intraday bias will be turned back to the upside for 1.0805 support turned resistance. On the downside, however, decisive break of 1.0339 will carry larger bearish implication and target 161.8% projection of 1.1494 to 1.0805 from 1.1184 at 1.0069.

In the bigger picture, break of medium term channel support suggests downside acceleration. Current decline from 1.2348 (2021 high) is probably resuming long term down trend from 1.6039 (2008 high). Decisive break of 1.0339 will confirm this bearish case. Next target is 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. This will now remain the favored case as long as 1.0805 support turned resistance holds.

Yen and Dollar falls broadly today as risk-on sentiment is gaining steam. European majors are making a strong come back too. Sterling is boosted by upbeat job market data. Euro is also lifted after a ECB policymaker threw out the idea of a 50bps rate hike. Commodity currencies are mixed for the moment, slightly on the soft side.

Technically, EUR/USD's rebound raises the chance of successfully defending 2017 low. Immediate focus is now on 1.0641 resistance. Firm break there will at least confirm short term bottoming and bring stronger rebound. If that happens, focus will also be on 1.2637 resistance in GBP/USD and 0.9871 support in USD/CHF. Break of these levels will also add to the case of extended pull back in Dollar.

In Europe, at the time of writing, FTSE is up 0.79%. DAX is up 1.44%. CAC is up 1.17%. Germany 10-year yield is up 0.101 at 1.040. Earlier in Asia, Nikkei rose 0.42%. Hong Kong HSI rose 3.27%. China Shanghai SSE rose 0.65%. Singapore Strait Times rose 0.34%. Japan 10-year JGB yield rose 0.0010 to 0.245.

US retail sales rose 0.9% mom in Apr, ex-auto sales up 0.6% mom

US retail sales rose 0.9% mom to USD 677.7B in April, below expectation of 1.1% mom. Ex-auto sales rose 0.6% mom, above expectation of 0.3% mom. Ex-gasoline sales rose 1.3% mom. Ex-auto, ex-gasoline sales rose 1.0% mom. Retail trade rose 0.7% mom.

Total sales for the three-period, February through April, were up 10.8% from the same period a year ago.

ECB Knot: 25bps hike realistic, 50bps must not be excluded

ECB Governing Council member Klaas Knot told Dutch TV program College Tour, "the first interest rate hike is now being priced in for the monetary policy meeting of 21 July." A 25bps hike " seems realistic to me."

He also added that if inflation is "broadening further or accumulating... a bigger increase must not be excluded either."

"In that case a logical next step would amount (to) half a percentage point," he said.

Released today, Eurozone GDP grew 0.3% qoq in Q1, above expectation of 0.2% qoq. Employment rose 0.5% qoq, matched expectations.

UK payrolled employees rose 131k in Apr, unemployment rate dropped to 3.7% in Mar

In April, UK payrolled employees rose 0.4% mom, or 131k, to 29.5m. Claimant count dropped -56.9k, versus expectation of -42.3k.

Unemployment rate dropped from 3.8% to 3.7%, versus expectation of being unchanged at 3.8%. Employment rate rose to 75.7%. Average earnings including bonus jumped 7% 3moy, versus expectation of 5.4%. Average earnings excluding bonus rose 4.2% 3moy, matched expectations.

RBA considered 15bps, 25bps, 40bps hikes in May

In the minutes of May 3 meeting, RBA revealed that three options on interest rate hikes were considered, including 15bps, 25bps and 40bps.

Raising the cash rate by 15bps was not preferred "given that  policy was very stimulatory and that it was highly probable that further rate rises would be required." And argument for 40bps "could be made given the upside risks to inflation and the current very low level of interest rates".

But the preferred option of was 25bps, as "a move of this size would help signal that the Board was now returning to normal operating procedures after the extraordinary period of the pandemic".

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0402; (P) 1.0422 (R1) 1.0455; More...

EUR/USD is still limited below 1.0641 resistance and intraday bias stays neutral first. On the upside, firm break of 1.0641 resistance will confirm short term bottoming at 1.0348, ahead of 1.0339 long term support. Intraday bias will be turned back to the upside for 1.0805 support turned resistance. On the downside, however, decisive break of 1.0339 will carry larger bearish implication and target 161.8% projection of 1.1494 to 1.0805 from 1.1184 at 1.0069.

In the bigger picture, break of medium term channel support suggests downside acceleration. Current decline from 1.2348 (2021 high) is probably resuming long term down trend from 1.6039 (2008 high). Decisive break of 1.0339 will confirm this bearish case. Next target is 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. This will now remain the favored case as long as 1.0805 support turned resistance holds.

Economic Indicators Update

US retail sales rose 0.9% mom to USD 677.7B in April, below expectation of 1.1% mom. Ex-auto sales rose 0.6% mom, above expectation of 0.3% mom. Ex-gasoline sales rose 1.3% mom. Ex-auto, ex-gasoline sales rose 1.0% mom. Retail trade rose 0.7% mom.

Total sales for the three-period, February through April, were up 10.8% from the same period a year ago.

Full release here.