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The major indices in Europe and the US across traded rangebound near their ATH levels and the US dollar index fluctuated a touch above the 105 level ahead of the US and European inflation updates that will start flowing in today.

The major story of Monday was a renewed rally in Gamestop and AMC shares after Keith Gill, aka, Roaring Kitty, posted on X for the first time since 2021. The moves revived the 2021’s meme nostalgia, but the meme stocks will unlikely see their original glory. First, the macroeconomic setting is different: we are in a period of higher interest rates and tight monetary policies where the Federal Reserve (Fed) and other central banks are no longer pumping pandemic-rescue cash into the system. 2. People are not stuck home and savings have melted since the pandemic pile-up. 3. The trading volumes are nowhere close to 2021: around 700’000 options changed hands yesterday, while this number was around 8.5 mio back in 2021. And last but not least, most of the retail traders know that if they are the last the come in, they will lose it all. Of course, because the meme story is irrational, we can’t predict what’s next. But thank you, Roaring Kitty, for spicing up a day that would’ve otherwise been long hours of waiting for the US and European inflation numbers.

Let’s go back to our beans. The US will release the PPI figures for April today. The core PPI is seen stable at 2.4% on a yearly basis, while headline PPI may have ticked slightly higher, from 2.1% to 2.2% last month. A figure in line, or ideally below expectation, should give a sigh of relief to the Fed doves, let the US dollar soften against major peers and help lift appetite in risk assets, while a figure above expectations will further dampen the Fed cut expectations, give a boost to the US dollar and weigh on stock and bond valuations.

Across the Atlantic Ocean, headline inflation in the Eurozone may have stabilized near 2.4% and core inflation may have eased further to 2.7% from 2.9% printed a month ago.

This week’s inflation updates should maintain the ‘diverging inflation dynamics’ narrative live. The US inflation is seen heating up whereas inflation in the Eurozone and the UK are forecasted to continue their journey to the south – toward the central banks’ 2% inflation target. The latter divergence obliges the Fed to postpone its rate cut plans, but keeps the European Central Bank (ECB) and the Bank of England (BoE) on track to cut their rates this summer.

Both the ECB and the BoE say that they are ‘data dependent and not Fed dependent’. But that’s true under one condition: the euro and sterling should not depreciate significantly against the USD. So far, both the euro and sterling resist surprisingly well to the divergence between the hawkish Fed versus dovish ECB and BoE.

• Slight improvement in EZ growth numbers versus a significant slide in the latest growth data partly explain the tempered USD appreciation.
• The idea that the Fed’s next move is a rate cut – even if it comes a bit later than many have hoped at the start of the year – prevents the USD bulls from coming back forcefully in charge. The Fed also announced to slow QT at the March meeting.

Yet, note that the US dollar index advanced up to 5% since the start of this year and risks are tilted to the upside as long as we don’t see the US inflation return to the falling path.

And the reality is that we are all Fed dependent. No matter what the ECB and the BoE say, they can’t walk it alone if the US dollar appreciates due to a U-turn in the US inflation. A significant dollar appreciation would boost inflation in the Eurozone and the UK, and bring the ECB and the BoE to review their rate cutting plans beyond summer.

UK payrolled employment fell -85k or -0.3% mom in April. This is a rise of 129,000 people over the 12-month period. Median monthly pay growth was 6.9% yoy, accelerated from March's 6.4% yoy. Claimant count rose 8.9k, below expectation of 13.9k.

In the three months to March, unemployment rate rose from 4.2% to 4.3%, matched expectations. Average earnings including bonus rose 5.7% yoy. Average earnings excluding bonus rose 6.0% yoy. Both were unchanged from February's figures.

Full UK employment data here.

In focus today

In the US, April PPI is due for release this afternoon, unusually ahead of the CPI release tomorrow. This means markets could pay even more attention to it than usual, not least after the upside surprises seen in the March inflation data.

In Germany, we receive the ZEW survey for May. The assessment of the current economic situation has been flat for the past six months while expectations have risen greatly. Hence, it will be interesting to see if we finally get an improvement in the assessment of the economic situation.

Overnight, China will announce policy rates (Medium Lending Facility) but a rate cut is unlikely at this stage as China is likely waiting for the Fed to ease before cutting rates further.

Economic and market news

What happened yesterday

In the US, the Survey of Consumer Expectations from the New York Fed echoed the University of Michigan sentiment survey. 1y inflation expectations rose to 3.3% from 3.0%, the highest print since November 2023, while the 5y figure increased to 2.8% from 2.6%. Conversely, the 3y measure decreased to 2.8% from 2.9%. The elevated inflation expectations are largely attributed to anticipated rises in home prices, food, fuel, and medical costs.

Moreover, Fed vice-chair Philip Jefferson (voting member) was on the wire stating that the Fed should maintain interest rates at restrictive levels until it has further evidence that inflation is reaching its 2% target.

Market movements

Equities: Global equities saw a marginal increase yesterday, characterised by low trading volume and what felt like a snoozefest. In other words, it was a wait-and-see game in anticipation of the Wednesday data release, particularly the US CPI numbers. Tech and growth sectors, along with small caps, outperformed slightly. Of more concern is the resurgence of the meme stock frenzy, with a few names showing remarkable gains and Bitcoin's value on the rise. This indicates a return of complacency and exuberance in the markets following a downturn in volatility and a perceived lack of clear market threats. In the US yesterday, the Dow was down by 0.2%, the S&P 500 by 0.02%, while the Nasdaq rose 0.3% and the Russell 2000 increased 0.1%. Asian markets are mixed or marginally lower this morning, a trend mirrored by futures in Europe and the US.

FI: There were modest movements in global bond yields yesterday with both US Treasuries and Bunds range trading ahead of the US inflation data released on Wednesday. Yesterday, a survey by the New York Federal Reserve showed that consumers expect prices to rise to 3.3% for 2024 relative to the consensus forecast of 3.1% for 2024. Today, we have US Producer prices for April as well as the ZEW indicator from Germany.

FX: EUR/USD trended slightly higher, trading just below 1.08 in a rather uneventful session. USD/JPY has continued to climb, surpassing the 156-mark. EUR/NOK and EUR/SEK still trade around 11.70, with the former slightly below, benefiting from higher oil prices. EUR/GBP continues to hover just below 0.8600, ahead of today's UK labour market report.

Daily Pivots: (S1) 1.3655; (P) 1.3673; (R1) 1.3684; More...

Intraday bias in USD/CAD stays neutral and outlook is unchanged. On the upside, break of 1.3761 resistance will argue that correction from 1.3845 has already completed. Intraday bias will be back to the upside to resume larger rally from 1.3176 through 1.3845. However, sustained trading below 55 D EMA (now at 1.3630) will argue that whole rise from 1.3176 has completed already, and bring deeper fall to 1.3477 support next.

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.

Daily Pivots: (S1) 0.6586; (P) 0.6608; (R1) 0.6629; More...

Intraday bias in AUD/USD stays neutral at this point. Further rally is expected as long as 0.6557 support holds. Break of 0.6645 will will resume the rebound from 0.6361. On the downside, however, firm break of 0.6557 will bring deeper fall back to 0.6464 support instead.

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 still be in progress. Overall, sideway trading could continue in range of 0.6169/7156 for some more time. But as long as 0.7156 holds, an eventual downside breakout would be mildly in favor.

Daily Pivots: (S1) 1.0768; (P) 1.0788; (R1) 1.0809; More...

Intraday bias in EUR/USD remains neutral for the moment. Further rally is in favor as long as 1.0723 minor support holds. On the upside, break of 1.0810 will resume the rebound from 1.0601 to 1.0884 resistance next. However, firm break of 1.0723 will argue that the rebound has completed, and turn bias to the downside for 1.0648 support instead.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern. Fall from 1.1138 is seen as the third leg and could have completed. Firm break of 1.1138 will argue that larger up trend from 0.9534 (2022 low) is ready to resume through 1.1274 high. On the downside, break of 1.0601 will extend the corrective pattern instead.

Daily Pivots: (S1) 1.2526; (P) 1.2547; (R1) 1.2581; More...

Intraday bias in GBP/USD remains neutral for the moment. Further rise is mildly in favor with 1.2445 support intact. On the upside, break of 1.2633 will resume the rally from 1.2298 to 1.2708 resistance next. However, firm break of 1.2445 will indicate that this rebound has completed, and revive near term bearishness. Retest of 1.2298 should then be seen in this case.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern. Fall from 1.2892 is seen as the third leg which might have completed already. Break of 1.2892 resistance will argue that larger up trend from 1.0351(2022 low) is ready to resume through 1.3141. Meanwhile, break of 1.2298 support will extend the corrective pattern instead.

Daily Pivots: (S1) 0.9057; (P) 0.9072; (R1) 0.9099; More....

Intraday bias in USD/CHF remains neutral at this point. Further decline is in favor as long as 55 4H EMA (now at 0.9083) holds. On the downside, break of 0.9005 and sustained trading below 55 D EMA (now at 0.9010) will bring deeper fall to 38.2% retracement of 0.8332 to 0.9223 at 0.8883. However, firm break of 55 4H EMA will suggest that the pull back from 0.9223 has completed, and bring stronger rebound to retest 0.9223 high.

In the bigger picture, price actions from 0.8332 medium term bottom are tentatively seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Rejection by 0.9243 resistance, followed by sustained break of 38.2% retracement of 0.8332 to 0.9223 at 0.8883 will strengthen this case, and maintain medium term bearishness. However, decisive break of 0.9243 will argue that the trend has already reversed and turn medium term outlook bullish for 1.0146.

Daily Pivots: (S1) 155.74; (P) 156.00; (R1) 156.47; More...

Intraday bias in USD/JPY stays mildly on the upside at this point. Rebound from 151.86, as the second leg of the corrective pattern from 160.20, is in progress for 157.98 resistance. On the downside, break of 155.25 minor support will suggest that the third leg has started, and turn bias back to the downside for 151.86 support.

In the bigger picture, a medium term top might be formed at 160.20. But as long as 150.87 resistance turned support holds, fall from there is seen as correcting rise from 150.25 only. However, decisive break of 150.87 will argue that larger correction is possibly underway, and target 146.47 support next.

Yen's decline persisted in Asian session, continuing to reverse its strong gains from earlier in the month. Traders seem confident that Japan will not intervene as long as Yen remains above 160 level against Dollar, with no apparent determination to push it through 150. This range appears to be set for the near term.

Japan's response to Yen's selloff has been restrained. Finance Minister Shunichi Suzuki reiterated his commitment to closely monitoring the currency markets and taking all possible measures against excessive, speculative moves. He emphasized the importance of close communication and coordination BoJ.

Elsewhere in the currency markets, Sterling ranks as the second strongest currency of the day after Dollar. The Pound is anticipating today's UK employment data, with particular attention on wage growth. BoE Governor Andrew Bailey has left the door open for a June rate cut, but some economists believe the central bank will not rush into a decision until the risk of wage-driven inflation resurgence is mitigated. Currently, Aussie follows Yen as the second weakest currency, with Loonie trailing behind. Euro and Swiss Franc are positioned in the middle.

Technically, EUR/GBP's rebound from 0.8529 stalled ahead of 0.8643 resistance as well as medium term falling trend line. Price actions from 0.8497 are seen as a corrective pattern. Break of 0.8585 support will add to the case that larger down trend is ready to resume and target 0.8529 support first.

In Asia, at the time of writing, Nikkei is up 0.09%. Hong Kong HSI is down -0.13%. China Shanghai SSE is down -0.12%. Singapore Strait Times is down -0.06%. Japan 10-year JGB yield is up 0.0176 at 0.959. Overnight, DOW fell -0.21%. S&P 500 fell -0.02%. NASDAQ rose 0.29%. 10-year yield fell -0.023 to 4.481.

Fed's Jefferson: Restrictive rates necessary amid slow disinflation progress

Fed Vice Chair Philip Jefferson indicated that with the economy showing robust job growth, Fedcan focus "even more so" on ensuring that inflation returns to its 2% target. Jefferson acknowledged the slow progress in reducing inflation, asserting that it justifies keeping the policy rate elevated.

"In light of the attenuation in progress, in terms of getting inflation down to our target, it is appropriate that we maintain the policy rate in restrictive territory," Jefferson noted.

He reiterated that the Fed is vigilant in seeking clear evidence of inflation decreasing to the desired level before considering any policy rate adjustments.

Fed's approach is influenced by the varied perspectives among policymakers, which Jefferson believes enriches policy discussions. However, he cautioned that increased communication from Fed might sometimes lead to greater uncertainty about its policies, rather than clarity.

IMF recommends gradual approach for future BoJ rate hikes

IMF projects Japan's economic growth to continue, with a noticeable increase in consumption anticipated later this year. According to a report, Japan's growth rate is expected to decelerate to 0.9% in 2024, largely due to the fading impact of one-off factors that boosted growth in 2023.

The report highlights that consumption will pick up in the latter half of 2024 and into 2025, driven by rising nominal wages following a strong Shunto settlement in 2024 and a decrease in headline inflation that will boost real wages.

IMF foresees core inflation gradually declining as the impact of higher import prices diminishes. However, core inflation is expected to remain above BoJ's 2% target until the second half of 2025.

In light of these developments, IMF suggests that further increases in BoJ's short-term policy rate should "proceed at a gradual pace" and be "data­dependent", considering the balanced risks to inflation and the mixed signals from recent economic data.

IMF emphasizes the importance of Japan's adherence to a "flexible exchange rate regime", which will play a crucial role in absorbing economic shocks and supporting the central bank's focus on maintaining price stability.

Looking ahead

UK employment data is a major focus in European session. Swiss PPI, Germany ZEW economic sentiment and CPI final, will be released too. Later in the day, US PPI will be the highlight.

USD/JPY Daily Outlook

Daily Pivots: (S1) 155.74; (P) 156.00; (R1) 156.47; More...

Intraday bias in USD/JPY stays mildly on the upside at this point. Rebound from 151.86, as the second leg of the corrective pattern from 160.20, is in progress for 157.98 resistance. On the downside, break of 155.25 minor support will suggest that the third leg has started, and turn bias back to the downside for 151.86 support.

In the bigger picture, a medium term top might be formed at 160.20. But as long as 150.87 resistance turned support holds, fall from there is seen as correcting rise from 150.25 only. However, decisive break of 150.87 will argue that larger correction is possibly underway, and target 146.47 support next.

Economic Indicators Update