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Daily Pivots: (S1) 0.6586; (P) 0.6619; (R1) 0.6641; More...

While AUD/USD's retreat from 0.6713 extends lower, it's staying above 0.6578 cluster support (38.2% retracement of 0.6361 to 0.6713 at 0.6579. Intraday bias remains neutral for the moment, and further rally is in favor. As noted before, fall from 0.6870 has probably completed with three waves down to 0.6361 already. Above 0.6713 will target 0.6870 resistance next. However, firm break of 0.6578 will dampen this bullish view, and bring deeper fall to 61.8% retracement at 0.6495.

In the bigger picture, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern to the down trend from 0.8006 (2021 high). Fall from 0.7156 (2023 high) is seen as the second leg, which could have completed at 0.6269 already. Rise from there is seen as the third leg which is now trying to resume through 0.6870 resistance.

The week hasn’t been pleasant for the market bulls. On Wednesday, the FOMC minutes showed the disturbing truth that ‘many’ Fed members wondered whether keeping the rates ‘high for longer’ was sufficiently restrictive to tame inflation, and if hiking the rates wouldn’t be a better idea. Then, the UK PM Sunak announced a general election beginning of July – way earlier than many expected – abating the slightest glimmer of hope to see the Bank of England (BoE) cut its rates in June. Meanwhile, the latest British CPI data came in hotter-than-expected, anyway, warning that the policy easing wouldn’t necessarily be on the pipeline for June. Across the Channel, the data released this week showed that wage growth in the euro area increased 4.7% in Q1 – a red flag for officials who have been banking on a slowdown to keep inflation in check. And finally, a set of too-strong-to-be-pleasant data from the US gave a final punch to the bulls. The US services PMI accelerated way faster than expected in May, according to the S&P’s preliminary PMI data, manufacturing activity also improved, while jobless claims came in soft. The US 2-year yield – which captures the rate expectations – advanced to 4.95%, the 10-year gilt yield reached 4.25%, the 10-year Bund yield hit 2.60%, the S&P500 and Nasdaq sold off from a record, the Stoxx 600 managed to eke out a small gain, but the FTSE 100 is down by more than 1.50% since last week’s peak, hit by a decent decline in energy prices as well.

Waning reflation appetite?

US crude extended losses below the 100-DMA for a third session, and is set for a further fall toward the $75pb level. Copper futures gave back almost 10% since the Monday peak and gold lost more than $100 per ounce since Monday record. If the reflation trade loses momentum due to a hawkish shift in major central bank expectations, we shall see a period of pullback and profit-taking in risk assets, and a further dollar appreciation against major counterparts.

The US dollar index strengthened past the 50-DMA following the hawkish Federal Reserve (Fed) minutes and yesterday’s strong economic data, the EURUSD slipped below its 100-DMA and is preparing to test the 1.08 support. Cable eased below 1.27 and could reasonably expected to extend losses on the back of fading appetite before the general election, while the USDJPY is now back above 157. Inflation data out this morning showed a slowdown in core CPI to 2.2%, ruling out any sense of emergency for the BoJ to continue hiking the rates. And the AUDUSD tipped a toe below the 66 cents mark this morning and could lose the latest positive momentum if the pair slips below 0.6580, the major 38.2% Fibonacci retracement on the latest rebound.

Clear skies

Nvidia remains a well-sheltered harbor from the rising hawkish winds. Nvidia jumped more than 9% after beating revenue expectations for Q1 and exceeding the forecast for the current quarter. Nvidia is catapulted to the overbought market territory following yesterday’s rally, but nothing suggests that the company’s good fortunes, or demand for AI, are about to reverse. Therefore, there is a good chance that the $1000 per share level becomes the new dip for those who are willing to jump on the back of a bull.

UK retail sales volume fell sharply by -2.3% mom in April, much worse than expectation of -0.6% mom. Sales volumes fell across most sectors, with clothing retailers, sports equipment, games and toys stores, and furniture stores doing badly as poor weather reduced footfall. More broadly, sales volumes rose by 0.7% in the three months to April 2024 when compared with the previous three months

Full UK retail sales release here.

Daily Pivots: (S1) 1.3676; (P) 1.3710; (R1) 1.3763; More...

USD/CAD's rebound from 1.3589 extended higher today. The development indicates that correction from 1.3845 has completed with three waves down to 1.3589. Intraday bias is back on the upside for 1.3761 resistance first. Break there will bring retest of 1.3845 high. On the downside, below 1.3655 minor support will dampen this bullish case and turn intraday bias neutral again first.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern. In case of another fall, strong support should emerge above 1.2947 resistance turned support to bring rebound. Firm break of 1.3976 will confirm up resumption of whole up trend from 1.2005 (2021 low). Next target is 61.8% projection of 1.2401 to 1.3976 from 1.3176 at 1.4149.

Dollar's rebound is gathering momentum, as fueled by yesterday's data indicating a resurgence in the services sector, which could impede disinflation progress. While fed fund futures still reflect over 50% probability of a rate cut in September, there is now a 0.6% chance of a rate hike—an occurrence not seen for quite some time. Currently, the Dollar is the week's strongest performer, with the upcoming durable goods orders report likely to influence its next move.

Sterling follows as the second strongest currency this week, supported by higher-than-expected inflation data, which quashed hopes for a June rate cut by BoE. The focus now shifts to the upcoming UK retail sales data for further direction. Euro is also performing well as the third strongest, bolstered by strong Eurozone PMI data.

In contrast, Australian Dollar is the worst performer this week, dragged down by pullback in global risk sentiment. Yen is the second weakest, followed by New Zealand Dollar. Swiss Franc and Canadian Dollar are positioned in the middle.

Technically, EUR/GBP remains a major focus for the rest of the week. It's now eyeing 0.8491/97 support zone. Decisive break there will confirm resumption of whole down trend from 0.9267 (2022 high). Next target is 100% projection of 0.8764 to 0.8497 from 0.8643 at 0.8376.

In Asia, at the time of writing, Nikkei is down -0.97%. Hong Kong HSI is down -1.24%. China Shanghai SSE is down -0.35%. Singapore Strait Times is down -0.37%. Japan 10-year JGB yield is up 0.006 at 1.009. Overnight, DOW fell -1.53%. S&P 500 fell -0.74%. NASDAQ fell -0.39%. 10-year yield rose 0.041 to 4.475.

Japan's core CPI eases to 2.2% in Apr, marking second month of slowdown

Japan's CPI core, which excludes food, decelerated from 2.6% yoy to 2.2% yoy in April. This aligns with market expectations and marks the second consecutive month of decline from February's 2.8%. Despite the slowdown, core inflation has remained at or above BoJ's 2% target for the 25th straight month.

CPI core-core, which strips out both food and energy costs, also showed signs of easing, slowing from 2.9% yoy to 2.4% yoy. This is the slowest pace of increase since September 2022. Meanwhile, headline CPI, which includes all items, fell from 2.7% yoy to 2.5% yoy.

A closer look at the major components reveals varied trends. Food prices rose by 3.5% yoy, but this was a moderation from 4.6% yoy increase seen in March. The surge in accommodation fees, up 18.8% yoy, was driven by a revival in inbound tourism. Energy prices edged up slightly by 0.1% yoy, with increases in kerosene and gasoline prices leading the way. Service prices also showed a deceleration, rising by 1.7% yoy compared to 2.1% yoy increase in the previous month.

RBNZ stresses vigilance on inflation, prepared to raise rates if necessary

In an interview today, RBNZ Assistant Governor Karen Silk highlighted the central bank's readiness emphasized that there are "risks still to the upside in the near term" regarding inflation. She stated that RBNZ is "absolutely" prepared to raise interest rates if necessary, adding, "Right now we are saying that the level of restrictiveness is there, but we are awake at the wheel."

Silk pointed out that the central bank's primary concern is domestic inflation, particularly noting the significant miss last quarter when non-tradables inflation hit 5.8%, compared to RBNZ's forecast of 5.3%. "Our concern is in that near term, around what are we really seeing in terms of domestic aligned inflation," she explained.

Separately, Deputy Governor Christian Hawkesby reinforced the cautious stance, stating that "cutting interest rates is not part of near-term discussion." He acknowledged the near-term inflation risks are to the upside but expressed confidence that medium-term inflation is returning to target.

Hawkesby emphasized that no single data point will trigger a rate hike, but the bank is closely watching domestic inflation pressures and expectations. He also noted the significant uncertainty surrounding tradable inflation moving forward.

RBNZ's central projection is for headline inflation to fall back into its 1-3% target band by the fourth quarter of this year. However, the bank now projects that it won't achieve its 2% goal until mid-2026.

New Zealand's exports falls -2.6% yoy in Apr, imports down -0.7% yoy

In April, New Zealand's goods exports fell by -2.6% yoy to NZD 6.4B, while goods imports decreased by -0.7% yoy to NZD 6.3B. Contrary to expectations of a NZD -202m deficit, trade balance recorded a surplus of NZD 92m.

Examining the top monthly export movements by country, exports to China decreased by NZD -206m (-11% yoy), and exports to Australia fell by NZD -17m (2.4% yoy). In contrast, exports to the US increased by NZD 35m (4.9% yoy), exports to EU rose by NZD 62m (13% yoy), and exports to Japan surged by NZD 91m (26% yoy).

On the import side, imports from China increased by NZD 120m (10% yoy), and imports from South Korea soared by NZD 371m (119% yoy). However, imports from the EU decreased by NZD -79m (-8.1% yoy), and imports from the US dropped by NZD -154m (24% yoy). Imports from Australia grew modestly by NZD 9.8m (1.4% yoy).

Fed's Bostic: Inflation not yet at safe point for rate cuts

Atlanta Fed President Raphael Bostic emphasized caution regarding interest rate cuts, stating that the US economy is not yet past the "worry point" for inflation to return to the target of 2%.

Speaking at an event overnight, Bostic highlighted the robustness of job growth, describing it as "a lot of energy in the economy." This robust job growth gives him confidence in maintaining a "more restrictive level" of monetary policy, as he doesn't believe there's a risk of "falling into a contractionary environment."

Bostic also mentioned the need to be "a little more patient" and ensure inflation is on a clear path to 2% before considering rate cuts.

He underscored the importance of moving in "one direction only" to avoid the uncertainty that would come from cutting rates only to raise them again. This approach, he believes, would prevent creating "policy uncertainty."

Looking ahead

UK retail sales and Germany GDP final are the focuses in European session. Later in the day, Canada will release retail sales. US will publish durable goods orders.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.3676; (P) 1.3710; (R1) 1.3763; More...

USD/CAD's rebound from 1.3589 extended higher today. The development indicates that correction from 1.3845 has completed with three waves down to 1.3589. Intraday bias is back on the upside for 1.3761 resistance first. Break there will bring retest of 1.3845 high. On the downside, below 1.3655 minor support will dampen this bullish case and turn intraday bias neutral again first.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern. In case of another fall, strong support should emerge above 1.2947 resistance turned support to bring rebound. Firm break of 1.3976 will confirm up resumption of whole up trend from 1.2005 (2021 low). Next target is 61.8% projection of 1.2401 to 1.3976 from 1.3176 at 1.4149.

Economic Indicators Update

Key insights from the week that was.

In Australia, Westpac-MI Consumer Sentiment is still yet to show any material signs of recovery. In May, the headline index remained locked in deeply pessimistic territory, moving 0.3% lower to 82.2. The latest update captured consumer reactions to the Federal Budget, which included a number of cost-of-living relief measures. The Budget was well received, with fewer households than usual expecting to be ‘worse off’ post-Budget than traditionally is the case. That said, the survey suggests households plan to save around 80% of the benefit from the Stage 3 tax cuts. Such an outcome would aid the RBA in their goal to ensure inflation returns to, and remains sustainably, at target.

Here and now however, headwinds continue to be felt. The sub-index tracking family finances versus a year ago fell 3.6% to 63.2, while views on ‘time to buy a major household item’ declined 2.8% to 76.5; these indexes are now 28% and 39% below their respective long-run averages. The higher-than-expected Q1 inflation outcome is likely the chief culprit, and helps explain the positive reception the Budget has received. Thankfully, forward views on finances continue to improve, ‘finances next twelve months’ rising another 0.7% to 96.1, only 10% below the long-run average. Also encouraging is that the one-year and five-year economic outlook measures remain constructive, lifting 0.7% and 2.6% respectively, the 5-year view now in line with the historic average.

The RBA May Minutes provided more colour around the Board’s deliberations, in particular the considerations for monetary policy of stronger-than-expected inflation outcomes. The case for another hike was premised on risk judgements, the two main considerations being that staff forecasts could be viewed as “overly optimistic about the forces that would drive down inflation” and that consumption may “pick up somewhat more rapidly if labour market outcomes remained benign”. The case for leaving policy unchanged was deemed stronger though, the Board of the view that, while recent updates have slightly tilted the balance of risks, it is not to the degree that warrants further tightening. The Board expects inflation to continue decelerating towards target as demand and supply come into better balance, but it needs more confidence in this view before debating the timing and scale of easing. We continue to believe the Board will have this confidence by November, allowing the RBA to embark on a measured rate cutting cycle, 25bps per quarter to 3.10% in Q4 2025. The coordination between fiscal and monetary policy frameworks was explored in this week’s essay from Chief Economist Luci Ellis.

The RBNZ’s May Monetary Policy Statement meanwhile highlighted that significant risks remain for New Zealand’s inflation outlook. Inflation is forecast to fall back into the 1-3% band at the end of 2024, but is now not anticipated to return to the 2% mid-point until mid-2026. The RBNZ cash rate track points to the risk of another hike in late-2024 and the first cut not occurring until August 2025. Westpac remains of the view that the first cut will come earlier, in February 2025; but that the ensuing cutting cycle will be gradual, and the end-point in mid-2026 100bps above the RBNZ’s upwardly revised estimate of neutral (3.75% versus 2.75%).

Further afield, S&P Global flash PMIs for May were constructive regarding activity but highlighted lingering inflation risks. The US measures received the most attention, the services PMI jumping 3.5pts, while the manufacturing PMI retraced half April’s loss. Unnerving some participants was an acceleration in input prices for manufacturing and services; however, output prices were little changed in the month, and all of the price indexes remain well below the elevated readings of 2021-23. If employment slows in coming months, as this survey suggests, further pressure will be placed on output prices. As alluded to by FOMC members and the minutes this week (see below), inflation risks remain; but a return to, or very near, the 2.0% inflation target during the next 6-12 months is most probable.

Over in the UK, the service and manufacturing indexes came in below the market’s expectations and April’s outcomes, but were still expansionary. Helpfully, UK businesses reported that cost and wage pressures continue to abate, setting the scene for rate relief later in 2024 despite the latest CPI report coming in above expectations – April seeing a headline rise of 0.3% against the consensus estimate of 0.1% as services inflation held up. The Euro Area results also point to abating consumer price risks; input prices continue to grow at a robust pace, but selling prices are under pressure. As the ECB begins to cut interest rates from mid-year, the services sector should gain further strength. Having recovered to a 15-month high, the manufacturing index suggests European manufacturers are ready to benefit from stronger growth at home and abroad. This is also the case for Japan’s manufacturers, the Jibun manufacturing PMI returning to growth in May after almost 18 months of contraction. Japan’s service sector meanwhile continues to benefit from Yen weakness and nascent positive real income growth amongst households.

With other data inconsequential, for much of the week, the market again focused on the subtleties of US FOMC policy guidance. From the minutes and the members who spoke, the message was clear: as yet, the FOMC do not have enough confidence in the inflation outlook to begin cutting; but policy is considered restrictive and effective; hence a return to target inflation is believed to be only a matter of time, with further tightening only required if inflation surprises to the upside.

Japan's CPI core, which excludes food, decelerated from 2.6% yoy to 2.2% yoy in April. This aligns with market expectations and marks the second consecutive month of decline from February's 2.8%. Despite the slowdown, core inflation has remained at or above BoJ's 2% target for the 25th straight month.

CPI core-core, which strips out both food and energy costs, also showed signs of easing, slowing from 2.9% yoy to 2.4% yoy. This is the slowest pace of increase since September 2022. Meanwhile, headline CPI, which includes all items, fell from 2.7% yoy to 2.5% yoy.

A closer look at the major components reveals varied trends. Food prices rose by 3.5% yoy, but this was a moderation from 4.6% yoy increase seen in March. The surge in accommodation fees, up 18.8% yoy, was driven by a revival in inbound tourism. Energy prices edged up slightly by 0.1% yoy, with increases in kerosene and gasoline prices leading the way. Service prices also showed a deceleration, rising by 1.7% yoy compared to 2.1% yoy increase in the previous month.

In an interview today, RBNZ Assistant Governor Karen Silk highlighted the central bank's readiness emphasized that there are "risks still to the upside in the near term" regarding inflation. She stated that RBNZ is "absolutely" prepared to raise interest rates if necessary, adding, "Right now we are saying that the level of restrictiveness is there, but we are awake at the wheel."

Silk pointed out that the central bank's primary concern is domestic inflation, particularly noting the significant miss last quarter when non-tradables inflation hit 5.8%, compared to RBNZ's forecast of 5.3%. "Our concern is in that near term, around what are we really seeing in terms of domestic aligned inflation," she explained.

Separately, Deputy Governor Christian Hawkesby reinforced the cautious stance, stating that "cutting interest rates is not part of near-term discussion." He acknowledged the near-term inflation risks are to the upside but expressed confidence that medium-term inflation is returning to target.

Hawkesby emphasized that no single data point will trigger a rate hike, but the bank is closely watching domestic inflation pressures and expectations. He also noted the significant uncertainty surrounding tradable inflation moving forward.

RBNZ's central projection is for headline inflation to fall back into its 1-3% target band by the fourth quarter of this year. However, the bank now projects that it won't achieve its 2% goal until mid-2026.

In April, New Zealand's goods exports fell by -2.6% yoy to NZD 6.4B, while goods imports decreased by -0.7% yoy to NZD 6.3B. Contrary to expectations of a NZD -202m deficit, trade balance recorded a surplus of NZD 92m.

Examining the top monthly export movements by country, exports to China decreased by NZD -206m (-11% yoy), and exports to Australia fell by NZD -17m (2.4% yoy). In contrast, exports to the US increased by NZD 35m (4.9% yoy), exports to EU rose by NZD 62m (13% yoy), and exports to Japan surged by NZD 91m (26% yoy).

On the import side, imports from China increased by NZD 120m (10% yoy), and imports from South Korea soared by NZD 371m (119% yoy). However, imports from the EU decreased by NZD -79m (-8.1% yoy), and imports from the US dropped by NZD -154m (24% yoy). Imports from Australia grew modestly by NZD 9.8m (1.4% yoy).

Full New Zealand trade balance release here.

Atlanta Fed President Raphael Bostic emphasized caution regarding interest rate cuts, stating that the US economy is not yet past the "worry point" for inflation to return to the target of 2%.

Speaking at an event overnight, Bostic highlighted the robustness of job growth, describing it as "a lot of energy in the economy." This robust job growth gives him confidence in maintaining a "more restrictive level" of monetary policy, as he doesn't believe there's a risk of "falling into a contractionary environment."

Bostic also mentioned the need to be "a little more patient" and ensure inflation is on a clear path to 2% before considering rate cuts.

He underscored the importance of moving in "one direction only" to avoid the uncertainty that would come from cutting rates only to raise them again. This approach, he believes, would prevent creating "policy uncertainty."