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Markets

US data on Friday (almost) perfectly fitted the dovish post-Fed market momentum. After several consensus-beating monthly releases, the US economy in April ‘only’ added 175k jobs, the slowest growth in six months. US wage growth also eased with Average Hourly Earnings (AHE) slowing to 0.2% M/M and 3.9% Y/Y (from 0.3% M/M and 4.1% Y/Y). The unemployment rate rose from 3.8% to 3.9%. A bit later in the session, the US services ISM copied the setback seen in the manufacturing measure earlier last week. The headline services ISM unexpectedly dropped in contraction territory (49.4 from 51.4). The new orders component slowed further to 52.2 (from 54.4). Employment also slipped further into contraction territory (from 48.5 to 45.9). Other sub-indices were more mixed but there was one big exception to the overall soft narrative: the prices paid index jumped to 59.2 from 53.4. One set of monthly data for sure isn’t enough to conclude the US economy is heading to stagflation, but it’s something to keep an eye on as it might complicate the Fed’s room of maneuver. In a first reaction, markets clearly saw the data reaffirming the potential for the Fed to cut rate later this year. US yields corrected further off the YTD highs reached end April or earlier last week, declining between 7.4 bps (10-y) and 5.7 bps (2-y). Interestingly, the 2-y yield intraday tested the 4.7% area (level traded just before the release of the higher than expected US CPI early April), but closed well above that. Investors now again see a 90% chance of a first rate cut in September and 80% a second 25 bps step in December. German yields showed similar declines easing between 6.6 bps (2-y) and 2.6 bps (30-y). Despite ongoing high inflation readings, equity markets were happy to further bet on an easing of financial conditions with US indices rebounding up to 2.0% (Nasdaq). The dollar initially lost substantial ground but in the end losses were modest (EUR/USD close 1.0761; DXY 105.03 from 105.30). Japanese authorities also got some further breathing space. USD/JPY closed at 153.05, compared to a brief journey above 160 early last week.

Today’s eco calendar is thin. Japanese and UK markets are closed and there are no important data in the US. Later this week, we keep an eye at the US Treasury refinancing (combined sale of $125 bln of 3-y, 10-y and 30-y Notes) and Fed governors given their view on recent data. For US yields, we expect some consolidation off recent peak levels. Stick inflation probably will limit any sustained further decline in yields especially at the long end of the curve. The short-term technical picture for the dollar also turned more neutral. Still we see room for some bottoming. The EUR/USD 1.08 area probably won’t be that easy to regain in a sustainable way.

News & Views

The OECD in a new biennial economic survey released today zoomed in on New Zealand this time. It said the country has limited scope to cut rates in 2024 amid inflation that’s likely to be persistent. The OECD advised to keep rates constant at 5.5% until “there is clear evidence that inflation will fall to the middle of the RBNZ’s target range”. Prices in the first quarter of the year rose by 4%, above the 1-3% range. A domestic gauge even came in at 5.8% with the OECD noting that high migration has pushed up domestic demand higher than the central bank (RBNZ) had expected. It also pressed the government to get spending under control and reduce the deficit. Finance minister Willis in March said the aim for a surplus was 2028, a year later than previously projected because of weaker economic growth. The OECD forecasts a 0.8% expansion in 2024 before picking up to 1.9% next year.

Chicago Fed president Goolsbee argued the FOMC’s dot plot needs more context than the current form provides. Right now, “the dot plot is just a collection of opinions without economic content." Goolsbee noted that a policymaker adding or removing cuts for this year does not inform whether the participant believes the economy is overheating or that it simply “has the capacity to grow faster and therefore can tolerate higher rates.” His solution would be a matrix that matches the economic forecasts to the rate path for each FOMC participant. Goolsbee’s comments come amid a general rethink of central bank communication in the wake of the huge forecasting errors made in recent years. Former Fed governor Bernanke recently concluded an exercise for the Bank of England while ECB’s Schnabel floated the idea of publishing an ECB dot plot. The Fed prepares a review of its own policy framework, expected to begin later this year..

Graphs

GE 10y yield

ECB President Lagarde clearly hinted at a summer (June) rate cut and has broad backing. EMU disinflation will continue in April and bring headline CPI (temporarily) at/below the 2% target. Together with weak growth momentum, this gives backing to deliver a first 25 bps rate cut. A more bumpy inflation path in H2 2024 and the Fed’s higher for longer strategy make follow-up moves difficult. Markets have come to terms with that.

US 10y yield

The Fed in May acknowledged the lack of progress towards the 2% inflation objective, but Fed’s Powell left the door open for rate cuts later this year. Soft US ISM’s and weaker than expected payrolls supported markets’ hope on a first cut post summer, triggering a correction off YTD peak levels. Sticky inflation suggests any rate cut will be a tough balancing act. 4.37% (38% retracement Dec/April) already might prove strong support for the US 10-y yield.

EUR/USD

Economic divergence, a likely desynchronized rate cut cycle with the ECB exceptionally taking the lead and higher than expected US CPI data pushed EUR/USD to the 1.06 area. From there, better EMU data gave the euro some breathing space. The dollar lost further momentum on softer than expected early May US data. Some further consolidation in the 1.07/1.09 are might be on the cards short-term.

EUR/GBP

Debate at the Bank of England is focused at the timing of rate cuts. Most BoE members align with the ECB rather than with Fed view, suggesting that the disinflation process provides a window of opportunity to make policy less restrictive (in the near term). Sterling’s downside turned more vulnerable with the topside of the sideways EUR/GBP 0.8493 - 0.8768 trading range serving as the first real technical reference.

Friday’s US jobs data brightened up the mood among Federal Reserve (Fed) doves, as both the NFP, unemployment rate and wages pointed at a slowing labour market in April. The US economy added 175K new nonfarm jobs last month, the wages grow less than 4% - which is still twice the Fed’s inflation target but falling – and the unemployment rate rose to 3.9% versus the expectation of a steady 3.8%. The Fed won’t be in a position to cut its interest rates right away, but is given a higher chance to do so a bit earlier than what was expected at the start of last week. Odds for a September rate cut rose to more than 67% - even though, September would be a politically uncomfortable time for the Fed to start cutting rates given that the presidential election is just around the corner and no one at the Fed wants to be pointed at for manipulating the results.

Anyway, the US 2-year yield shortly dipped to 4.70% after Friday’s soothingly soft US jobs data and the US dollar index tested the 50-DMA to the downside. But note that the inflation leg of the story is far from being resolved and gains could remain limited.

The EURUSD tested the 1.08 resistance, near the 50, 200-DMA and the ytd downtrending channel top. I think that clearing that level sustainably will demand a soft inflation read from the US next week. The USDJPY shortly slipped below the 152 level, is better bid this morning but last week’s sharp moves – which suggest that the Bank of Japan (BoJ) intervened – should soften the yen bears’ hands as they now know that the 160 is the line in the sand. Elsewhere, Cable is fighting the 200-DMA offers but the widening gap between the Fed – which has its hands tied due to a pickup in US inflation – and the Bank of England (BoE) which could justify a summer rate cut due to slowing British inflation and a morose British economic outlook, could limit the pound’s upside potential against the greenback. The BoE will deliver its latest policy decision on Thursday. There is a growing chatter that the bank could use this week’s meeting to throw the foundation of a June rate cut – if that’s the case, we could rapidly see Cable give back its recent gains. The latest CFTC data shows that the speculative positions turned negative on pound over the past two weeks on expectation that the BoE could pull a dovish surprise from its hat this week. And finally, the AUDUSD is better bid ahead of tomorrow’s Reserve Bank of Australia (RBA) rate decision. The RBA is expected to maintain its rate unchanged at 4.35%, but the bank could revise its inflation outlook upwards and the accompanying statement will likely deliver a hawkish message - a message that could give the AUD bulls a further conviction to test the 68-70 cents range against the greenback with the risk of being stopped out if US inflation puts the Fed hawks back in the race. In energy, US crude hit the $78pb level last week. The near oversold conditions and the dovish Fed expectations – that also back the reflation trade - could help the price of a barrel recover to and above the $80pb.

In equities, last week’s dovish Fed pricing and better-than-expected earnings from Apple and Amazon helped the S&P500 eke out a 0.6% gain last week. The index closed last week right on its 50-DMA. Six of the Magnificent 7 stocks reported earnings so far and their results beat lofty market expectations. Nvidia is not due to report before the 22nd of May, so investors could enjoy the fact that the earnings season has been fine, so far. Beyond the Magnificent 7, 77% of the S&P 500 companies have reported a positive EPS surprise so far, according to FactSet. The blended year-over-year earnings growth rate for the S&P 500 printed a strong 5.0% - versus 3-4% expected by analysts.

In focus today

Today, Swedish Service PMIs for April are released at 8:30 CET. All its subindices were above the 50 marks in March. Although price index for raw materials and intermediate goods is lower compared to a year ago, it was still significantly higher compared to the manufacturing side. Composite PMI has been in expansionary territory for four consecutive months and thus further indicates a turnaround in the business cycle.

In the euro area, we look out for the March producer price index. Momentum in goods inflation has been very low in the past six months, and the PPI today will inform us about what we can expect going forward. Also, we follow the final euro area service PMI for April and the Sentix investor confidence indicator for May.

In the US, the Fed's Q2 Senior Loan Officer Opinion Survey (SLOOS) is due for release in the evening. The survey will provide hints on how the Fed's current policy stance is affecting demand for lending, which remained subdued in Q1.

Overnight, the Reserve Bank of Australia (RBA) will publish its rate decision. We expect no changes to the Cash Rate, in line with market pricing and consensus. Markets have pushed back their rate cut expectations significantly after the clear upside surprise in Q1 inflation data.

Looking ahead, we expect the Riksbank to keep the policy rate unchanged on Wednesday, and the BoE to keep the bank rate unchanged on Thursday. We also look for University of Michigan preliminary consumer sentiment for May on Friday. In a relatively quiet week on the data front, markets will be extra observant on Fedspeak. We are also set for Norwegian core CPI on Friday. Note that due to Ascension Day, there is no DMM on Thursday and Friday.

Economic and market news

What happened over the weekend

Peace talks in Cairo did not show progress over the weekend, with the Hamas delegation saying it would leave Sunday night, though they are set to return on Tuesday, Reuters reports. Hamas has been negotiating with mediators from Egypt and Qatar over the weekend. The main point of contention continues to be the withdrawal of Israeli troops from Gaza and an end to the war, with both sides blaming each other for the lack of progress.
What happened on Friday

Friday brought dovish signals for the Fed as the April NFP figure surprised to the downside (+175k, cons: +243k), while data for average hourly earnings and average weekly hours showed that growth in the total wage sum paid to workers stalled in April. Bonds continued their rally and the dollar lost steam, with the 10Y treasury down 15bp and DXY (broad dollar index) 1.2% weaker since Wednesday's FOMC meeting. Oil prices also settled lower (Brent: 82.96 USD/bbl) on concerns of weaker demand, extending losses to 7% for the week.

Friday's monetary policy statement from Norges Bank brought no game changers, as they kept their policy rate unchanged and largely maintained verbal guidance for the rate to stay at that level "for some time ahead". We did get a slightly hawkish verbal shift, however, with the MPC acknowledging that developments since March could mean a hypothetically higher rate path.

Market movements

Equities: Global equity sentiment appeared to shift last week, but was it a genuine turnaround? Despite equities ending higher on Friday and for the week, the majority of the gains came towards the end of the week. Earnings were comparable, if not slightly weaker than previous weeks, and there were no significant changes in the geopolitical situation. However, yields shifted after the FOMC meeting on Wednesday and non-farm payroll (NFP) on Friday. The short end of the yield curve dropped almost 25bp and the long end almost 20bp from Wednesday to Friday, marking a significant shift from the trends observed in April. This shift impacted equity sentiment, but not the prevailing narrative. Unsurprisingly, with higher yields, small cap, tech, and growth outperformed, while the outperformance of utilities was more unexpected. On the US front on Friday, the Dow was up by 1.2%, S&P 500 by 1.3%, Nasdaq by 2.0%, and Russell 2000 by 1.0%. Asian markets are mostly higher this morning, and futures in Europe and the US are in the green.

FI: The weaker than expected US labour market data sent US bond yields lower on Friday. Hence, the 10Y US Treasury yield has declined almost 20bp from the peak seen in late April and are trading at 4.5%, while 2Y US Treasury yields trade at 4.8% down from 5%. European yields also declined as the 10Y German government bond yield declined some 10-12bp since late April and are now trading at 2.5%. Hence, our upper estimate for 2Y and 10Y Treasuries of 5% and 4.75% continue to hold as well as 2.75% for 10Y German government bonds.

FX: EUR/USD stabilised within the mid 1.07-1.08 range, briefly topping 1.08 following a weaker-than-expected US jobs report on Friday. Also, NOK had a strong finish to last week getting some much-needed support after having been among the outperformers in Majo'’s space so far this year (alongside SEK above and the JPY). The Reserve Bank of Australia (RBA) is widely expected to keep its cash rate unchanged early tomorrow morning by both analyst consensus and the markets. The big event in UK markets this week is the Bank of England (BoE) meeting on Thursday, where we expect EUR/GBP to end the day higher on a dovish vote split and remarks as well as a downward revision to the inflation forecast in the medium term.

Daily Pivots: (S1) 1.0720; (P) 1.0766; (R1) 1.0809; More...

Intraday bias in EUR/USD remains on the upside for the moment. Fall from 1.0980 could have completed with three waves down to 1.0601. Further rally is expected and firm break of 100% projection of 1.0601 to 1.0752 from 1.0648 at 1.0799 will pave the way to 161.8% projection at 1.0892. For now, risk will stay on the upside as long as 1.0648 support holds, in case of retreat.

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) 1.2491; (P) 1.2564; (R1) 1.2619; More...

Intraday bias in GBP/USD stays on the upside for the moment. Fall from 1.2892 could have completed with three waves down to 1.2298. Further rise should be seen and break of 61.8% projection of 1.2298 to 1.2568 from 1.2471 will target 100% projection at 1.2741. For now, further rally will be expected as long as 1.2471 support holds, in case of retreat.

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) 0.9001; (P) 0.9055; (R1) 0.9104; More....

Intraday bias in USD/CHF remains on the downside for the moment. Sustained break of 55 D EMA (now at 0.8989) will bring deeper fall to 38.2% retracement of 0.8332 to 0.9223 at 0.8883. On the upside, above 0.9087 minor resistance will turn intraday bias again first.

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) 151.95; (P) 152.90; (R1) 153.92; More...

Intraday bias in USD/JPY is turned neutral first with current recovery. On the upside, firm break of 55 4H EMA (now at 155.00) will bring stronger rebound towards 157.98 resistance. On the downside, below 151.86 will resume the fall from 160.20. But strong support should be seen from 150.87 resistance turned support to bring rebound.

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.

Daily Pivots: (S1) 0.6564; (P) 0.6606; (R1) 0.6651; More...

Intraday bias in AUD/USD stays on the upside for the moment. Fall from 0.6870 could have completed with three waves down to 0.6361. Further rally would be seen to 100% projection of 0.6361 to 0.6585 from 0.6464 at 0.6688 next. On the downside, below 0.6567 minor support will turn intraday bias neutral first. But further rally is expected as long as 0.6464 support holds, in case of retreat.

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) 1.3633; (P) 1.3663; (R1) 1.3715; More...

Intraday bias in USD/CAD remains neutral for the moment. Strong rebound from current level, followed by break of 1.3782 resistance, will retain near term bullishness. Further break of 1.3845 will resume larger rise from 1.3176 towards 1.3976 key resistance next. However, sustained trading below 55 D EMA (now at 1.3618) will argue that whole rise from 1.3176 has completed already, and target 1.3477 support next.

In the bigger picture, price actions from 1.3976 (2022 high) are viewed as a corrective pattern only. 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) 0.9724; (P) 0.9746; (R1) 0.9762; More...

Intraday bias in EUR/CHF remains on the downside at this point. Fall from 0.9835 is seen as the third leg of the corrective pattern from 0.9847, and should target 0.9563 support. For now, risk will stay on the downside as long as 0.9835 resistance holds, in case of recovery.

In the bigger picture, as long as 0.9563 support holds, rise from 0.9252 medium term bottom is still in favor to continue. Break of 0.9847 resistance will target 38.2% retracement of 1.2004 (2018 high) to 0.9252 (2023 low) at 1.0303, even as a correction to the down trend from 1.2004.