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Market movers today

Today we get the euro area consumer confidence data for May. A rebound from the very depressed levels would be a welcome sign, but it might be too early in light of the mounting headwinds from still rising consumer prices.

We also get consumer confidence in Denmark. We expect rising prices are still being felt by consumers who will therefore have a negative opinion of their own finances. In contrast, we expect consumers' views on the Danish economy to improve, as the economy is still in fine fettle and the war in Ukraine has not escalated further.

In Norway, Friday brings Norges Bank's expectations survey for Q2. Both wage and price expectations have risen steadily since the start of last year, so the big question is whether they will now turn or keep on climbing. We will also be keeping a close eye on business leaders' profitability expectations.

Several ECB speakers are also on the wires.

The 60 second overview

Rate cut in China: Overnight, the People's Bank of China (PBoC) cut the five-year loan prime rate (a reference for mortgage rates), to 4.45% from 4.60%, which was larger than anticipated. The Chinese housing market has been under pressure for several months and both home sales and prices are declining. Additionally, the rest of the economy is under pressure from COVID-19 lockdowns. Unlike Western central banks, PBoC is in easing mode, which eventually should support global growth, all else equal. The rate cut supported risk sentiment overnight and Chinese stocks are up this morning.

China may buy cheap Russian oil: Apparently, China is in talks with Russia (at government level) as China would like to buy (cheap) Russian oil for its strategic reserves. Russian oil is trading with a discount because of fewer Western buyers.

Inflation in Japan: CPI inflation excluding fresh food in Japan rose to 2.1% y/y in April from 0.8% in March, slightly higher than consensus of 2.0%. Total CPI inflation rose to 2.5% y/y. High inflation is to a large extent a global phenomenon, which now seems to have arrived in Japan as well, although inflation remains significantly below what Europeans and Americans are currently experiencing. Bank of Japan is unlikely to react to above-target inflation just yet, as they would like to see it on a more sustained basis, also because inflation has been too low for so many years. The combination of easy monetary policy and weak JPY puts upward pressure on Japanese prices.

FI: Classic risk off moves dominated markets yesterday leaving yield curves bullish flattening and intra euro area spreads wider on continued concerns about growing recession risks. Bunds ended 8bp lower. The ECB minutes had no particular news. Swap spreads widened 2bp yesterday. In the late afternoon, media reported that the EC is set to prolong the suspension of the deficit and debt rules through the end of 2023. There was no immediate effect on peripheral spreads.

FX: Yesterday, broad USD depreciated despite still poor risk sentiment with notably EUR/USD briefly crossing the 1.06 mark. We still believe however, that USD weakness is temporary as we still see the current environment as USD positive. EUR/CHF fell below 1.03. EUR/DKK rose to around 7.4430, the highest level since March.

Equities: The free fall in equities took a breather on Thursday, with both Europe and US holding up fairly well. Nor were there any clear preference between cyclicals vs defensives: Materials and consumer discretionary outperformed, but also health care. Implied volatility moved somewhat lower. S&P closed down -0.6%, Nasdaq -0.3%, Dow -0.8% and Russell 2000 0.1% higher. US futures are 1% higher this morning.

Credit: Credit spreads followed equities in a bearish rout on Thursday. Itraxx Main closed 1.9bp wider, ending the day at 98.5bp. This was after briefly moving as high as 101.5bp intraday. Itraxx Crossover ended the day 11.2bp higher, to close at 476bp, after reaching slightly more than 493bp intraday. Aside from March 2020, the intraday high was the widest level seen in Crossover since the European debt crisis 10 years ago.

Nordic macro

Today brings Norges Bank's expectations survey for Q2. Both wage and price expectations have risen steadily since the start of last year, so the big question is whether they will now turn or keep on climbing. We will also be keeping a close eye on business leaders' profitability expectations, as overall costs are now rising so quickly that margins have to be coming under pressure. This could put a damper on wages despite the tight labour market.

The US equities closed Thursday’s session in the negative following a choppy trading session, as investors’ hearts pounded between buying the dip, or selling further on recession fear. The latter gained the upper hand; the S&P500 lost 0.58%, while Nasdaq slid 0.44%.

The S&P500 is a stone’s throw from stepping into a bear market, and if the index closes the week lower, it would be the longest losing streak since the dotcom crisis. And there is nothing Jerome Powell will do to save the day.

Could the gold rally extend?

The US 10-year yield declined yesterday, and the sharp retreat in the US yields gave a boost to gold. The yellow metal jumped $25 dollar in a single move, reviving the bulls’ hopes to see the rally extend higher. Is it possible?

Well, the falling yields have been the major trigger of the gold rebound yesterday, therefore the positive momentum could remain short lived, as the medium-term trend for the US yields remains comfortably positive on the back of prospects of higher interest rates in the US. The Federal Reserve (Fed) declared war against inflation, and it will raise the interest rates. The higher rates will have a straight positive impact on the yields.

From a technical perspective, gold is at an important crossroads. It is now testing the 200-DMA resistance, which also coincides with the negative correction band top, building since mid-April. The actual levels are interesting for topsellers, who bet on further positive pressure on the yields, which would continue pressuring gold lower.

But if the 200-DMA resistance is broken to the upside, we could see the rally persist toward the $1880/1900 range. And the Russian shock on gold supply could support that move.

I still maintain my bearish outlook for gold in the medium to long run based on the expectation of higher yields, as the Fed won’t get rid of inflation fast enough.

The dollar must ease to let majors gain field on their own reasons

Yesterday’s retreat in the US yields pulled the dollar lower. The US dollar index eased 103 mark, and the majors gained against a broadly softer greenback.

The EURUSD flirted with the 1.06 mark. as Cable had a quick rebound above the 1.25 mark.

But the outlook for majors broadly depends on the dollar’s performance. We must see a sustained downside correction in the US dollar to let the euro and the sterling have a sustained positive correction.

As per the dollar, only a slowdown in the equity selloff could soften the dollar appetite and let it lose some field against its major peers. As a result, the US yields, and the dynamic in the equity markets are what mostly determine the value of the pound and the single currency against the dollar.

If we could get rid of the dollar skew, the euro could start trading on its own reasons, and the euro traders could finally bring in the expectations that the European Central Bank (ECB) would raise the rates by July to fight the rising European inflation - which would rationally lead to some upside correction in the euro.

Markets

European stock markets eventually lost 1.5% to 2% yesterday. Given WS’s performance on Wednesday evening, the damage remained “contained”. It’s nevertheless telling that stocks barely managed to show some form of intraday rebound following those steep opening losses.

Market wires played that same tune. Central bankers are preparing to up the ante in both tackling inflation and re-anchoring inflation expectations even if it can cause harm to an already weakening economy. US stock markets ended a day fluctuating near the sell-off lows with daily losses of 0.25% to 0.75%. Again, unconvincing.

Eco data included a small tick-up in weekly jobless claims, but especially an unexpected drop in Philly Fed Business Outlook (lowest since May 2020). Details differed from the weak Empire Manufacturing Survey earlier this week. New orders and shipments improved, with the employment component, average workweek and inventories dragging the headline number lower. Both prices paid and received remain at elevated levels, but moderated compared to April.

Safe haven flows underpinned core bonds. The US yield curve bull steepened with yields sliding by 6.1 bps (2-yr) to 1.5 bps (30-yr). The German yield curve bull flattened with yields dropping 1.7 bps (2-yr) to 7.9 bps (30-yr).

Unlike Wednesday, the dollar failed to profit in this climate. The nature of bond move in the US (underperformance front end) has likely to do with it. The trade-weighted greenback closed below 103 for the first time since early May. Support stands at 102.35 which is the neckline of a double top formation. USD/JPY shows a more or less similar technical formation with neckline support tested at 126.95. EUR/USD closed just below 1.06, compared with opening levels around 1.0460. First, minor, resistance, arrives at 1.0642.

Asian stock markets gain around 1% this morning with China (up to 2.5%) outperforming. The rumoured PBOC rate cut came this morning. The central bank cut the 5-yr loan prime rate by 15 bps from 4.6% to 4.45%. The rate is key reference for home mortgages and aimed to boost loan demand. The 1-yr loan prime rate was left unchanged at 3.7%. The response on global bonds and FX markets is much more guarded. Interestingly, the Chinese yuan gains (in a sign of a softer USD) with USD/CNY moving back below 6.70 for the first time since early May.

Ahead of the weekend, we’re inclined to err on the side of caution with regards to risk sentiment. UK April retail sales this morning beat consensus, by rising 1.4% M/M both for the headline and core number. Sterling isn’t impressed, with EUR/GBP trading just shy of the 0.85 big figure.

News Headlines

Japanese headline inflation and a measure excluding fresh food jumped to 2.5% and 2.1% respectively in April, from 1.2% and 0.8% in March. It’s the first time since 2014-2015 that inflation surpasses the 2% BoJ target. Back then, tax hikes artificially boosted prices and statistical effects are at play this time too. April’s sharp acceleration is to a large extent the result of cheaper phone fees fading out from a year ago (adding 1 ppt to the figure). The narrowest core gauge (ex fresh food and energy) shot up as well, though remains with 0.8% (up from -0.7% last month) well below target. Today’s figures are unlikely to change the BoJ’s policy stance. It already said that the current surge is cost-push inflation and unsustainable. It may even hurt consumer spending instead and eventually act as an opposing force unless wage growth picks up materially. The Japanese yen trades unchanged around 127.67 this morning.
 
GfK consumer confidence in the UK dropped to the lowest on record. At -40, down from -38 in April, it surpassed the previous trough seen in the aftermath of the GFC (-39). The economic situation over the last and next 12 months was seen darker still in May compared to the previous month. Personal finances for the next 12 months tanked in recent months in the midst of the worst cost-of-living crisis in decades. The indicator stood at -26 in April. At -25 in May, UK consumers barely expect the situation to improve any time soon. Saving intensions held at the post-pandemic low of 10. Sterling currently holds steady, south of EUR/GBP 0.85.

Daily Pivots: (S1) 1.2772; (P) 1.2834; (R1) 1.2885; More...

Intraday bias in USD/CAD stays neutral and further rally is in favor with 1.2712 support intact. On the upside, break of 1.3075 will resume the rise from 1.2401. Sustained trading above 1.3022 fibonacci level will carry larger bullish implications. Next target will be 100% projection of 1.2005 to 1.2947 from 1.2401 at 1.3343. On the downside, however, break of 1.2712 support will indicate rejection by 1.3022 key fibonacci resistance, and bring deeper decline back to 1.2401 support.

In the bigger picture, focus stays on 38.2% retracement of 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022. Sustained break there should confirm that the down trend from 1.4667 has completed after defending 1.2061 long term cluster support. Further rise would then be seen towards 61.8% retracement at 1.3650. However, rejection by 1.3022 will maintain medium term bearishness. Break of 1.2005 will resume the down trend from 1.4667 and that carries larger bearish implications too.

Daily Pivots: (S1) 0.6976; (P) 0.7024; (R1) 0.7097; More...

Intraday bias in AUD/USD is mildly on the upside at this point. Rebound from 0.6828 short term bottom would target 55 day EMA (now at 0.7187). On the downside, below 0.6948 minor support will bring retest of 0.6828 support first. Firm break there will resume larger fall from 0.8006, and target 0.6756/60 medium term fibonacci level next.

In the bigger picture, price actions from 0.8006 are seen as a corrective pattern to rise from 0.5506 (2020 low). Deeper fall should be seen to 50% retracement of 0.5506 to 0.8006 at 0.6756. This coincides with 100% projection of 0.8006 to 0.7105 from 0.7660 at 0.6760. Strong support is expected from 0.6756/60 cluster to contain downside to complete the correction. However, sustained break of 0.6756/60 would argue that AUD/USD is indeed already in a medium term down trend.

Daily Pivots: (S1) 126.92; (P) 127.94; (R1) 128.84; More...

Intraday bias in USD/JPY remains on the downside. Correction from 131.34 would extend lower to 125.09 cluster support (38.2% retracement of 114.40 to 131.34 at 124.86). Strong support is expected from there to contain downside to bring rebound. On the upside, break of 129.77 minor resistance will suggest that the correction is finished and bring retest of 131.34.

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) 1.0496; (P) 1.0551 (R1) 1.0642; More...

EUR/USD is staying in range above 1.0348 and intraday bias remains neutral first. Considering bullish convergence condition in 4 hour MACD, 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.

Daily Pivots: (S1) 1.2364; (P) 1.2445; (R1) 1.2551; More..

Intraday bias in GBP/USD remains neutral and outlook is unchanged. . Further decline will remain in favor as long as 1.2637 resistance holds. On the downside, break of 1.2154 will resume the down trend from 1.4248. However, 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 1.2789).

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.

Dollar and Yen traded with an undertone in Asian session today but Aussie is also mildly weaker. On the other hand, Swiss Franc is the stronger one, followed by Kiwi and Canadian. Sterling is treading water despite strong UK retail sales data. Swiss Franc is staying at the winner for the week, on talks that SNB is turning more open for rate hike. Sterling is a distant second. Dollar is the worst performing one, followed by Canadian and Yen.

Technically, a big question is on whether Dollar's selloff could gather momentum before weekend to secure more selloff next week. Focuses will be on 1.0641 resistance in EUR/USD, 1.2627 resistance in GBP/USD, and 1.2712 support in USD/CAD. Also, if Gold could break through 1858.57 minor resistance, that could be a hint on Dollar weakness too.

In Asia, Nikkei closed up 1.28%. Hong Kong HSI is up 2.20%. China Shanghai SSE is up 1.26%. Singapore Strait Times is up 1.37%. Japan 10-year JGB yield is down -0.0026 at 0.240. Overnight, DOW dropped -0.75%. S&P 500 dropped -0.58%. NASDAQ dropped -0.26%. 10-year yield dropped -0.031 to 2.855.

UK retail sales rose 1.4% mom in Apr, ex-fuel sales up 1.4% mom

UK retail sales rose 1.4% mom in April, well above expectation of -0.2% mom decline. That's also more than enough to recover the -1.2% mom decline in March. Ex-fuel sales also rose 1.4% mom, versus expectation of -0.2% mom, reversing the -0.9% mom decline in March.

However, for the most recent 3 months on previous 3 months, headline sales dropped -0.3% while ex-fuel sales dropped -0.5%.

From Germany, PPI came in at 2.8% mom, 33.5% yoy in April, above expectation of 1.4% mom, 31.4% yoy.

New Zealand export rose 17% yoy in Apr, imports rose 15% yoy

New Zealand goods exports rose 17% yoy to NZD 6.3B in April. Imports rose 15% yoy to NZD 5.7%B. Monthly trade surplus came in at NZD 584m, versus expectation of NZD -350m deficit.

Exports rose for all top destinations except China, which was down -1.8%. Exports to Australia was up 4.9%, US up 26%, EU up 26%, Japan up 58%.

Import from all top partners rose, including China (up 8.9%), EU (up 18%), Australia (up 44%), US (up 29%), Japan (up 0.5%).

Japan CPI core rose to 2.5% yoy in Apr, CPI core-core rose to 0.8% yoy

Japan headline CPI (all items) rose from 1.2% yoy to 2.5% yoy in April. CPI core (ex-fresh food) rose from 0.8% yoy to 2.1% yoy. CPI core-core (ex-fresh food, energy) rose from -0.7% yoy to 0.8% yoy.

The 2.1% CPI core reading was slightly above expectation of 2.0% yoy. It topped BoJ's 2% target for the firs time since March 2015. Also, it should be noted that CPI core-core was positive for the first time since July 2020.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.2364; (P) 1.2445; (R1) 1.2551; More..

Intraday bias in GBP/USD remains neutral and outlook is unchanged. . Further decline will remain in favor as long as 1.2637 resistance holds. On the downside, break of 1.2154 will resume the down trend from 1.4248. However, 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 1.2789).

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.

Economic Indicators Update

UK retail sales rose 1.4% mom in April, well above expectation of -0.2% mom decline. That's also more than enough to recover the -1.2% mom decline in March. Ex-fuel sales also rose 1.4% mom, versus expectation of -0.2% mom, reversing the -0.9% mom decline in March.

However, for the most recent 3 months on previous 3 months, headline sales dropped -0.3% while ex-fuel sales dropped -0.5%.

Full release here.