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US 10-year bond yields fell last week, retreating from the 3.2% mark. This is one of the most critical levels of the debt market during the previous ten years, so investors and traders should pay increased attention to further developments.

10-year yields have reversed to the downside near the 3.2% level five times since mid-2011, asserting an era of ultra-low interest rates. The last time was in 2018.

Both then and now, attempts by the debt market to consolidate at current yield levels have caused stock market turbulence and notably strengthened the dollar against its major peers.

At the end of last week, yields fell from that height. This week it remains to be seen whether we have seen a trend reversal or only temporary market fluctuations near past significant levels.

A renewed rise in yields of 10-year US government bonds could be the trigger for an even more furious flight out of risky assets, rushing capital into the dollar.

The Canadian dollar is unchanged on Monday, as it trades at the 1.29 line.

Weak US consumer confidence boosts Canadian dollar

The Canadian dollar ended the week in splendid fashion, with gains of over 1 per cent. This marked the Canadian dollar’s best one-day performance this year and recovered all of the week’s losses. The strong gains were driven by a disappointing UoM Consumer Sentiment index for May, which dropped to 59.2, down sharply from 65.2 in April and the lowest since October 2011. Just one year ago, the index was 82.8, indicative of a massive erosion in the confidence levels of the US consumer.

Consumers were more pessimistic about current and future expectations, and inflation expectations remained at 5.4% for a third straight month, a 40-year high. A fall in consumer confidence has so far not spilled over to consumer spending, but soaring inflation could cause consumers to cut back on spending, which would hurt economic growth.

Canada posted some solid numbers earlier today, although that wasn’t enough for the Canadian dollar to extend Friday’s impressive gains. Housing Starts and Wholesale Sales improved and were stronger than expected. Manufacturing Sales rose 2.5% in March, crushing the estimate of 1.7%. Oil and metal sales rose, reflective of high commodity prices, which is bullish for the commodity-based Canadian dollar.

Canada’s tightening job market is putting further pressure on the Bank of Canada to raise rates at a faster pace than expected. The benchmark rate is currently at an even 1.00%, after the 0.50% hike in April. Governor Macklem has hinted that he could deliver more 0.50% hikes and we could see rates rise to 2% by the end of Q2. Macklem has signalled the rate-hike cycle could be very aggressive, saying that he will lift rates above 3% if necessary, in order to beat back spiralling inflation.

USD/CAD Technical

• USD/CAD is testing resistance at 1.2962. Above, there is resistance at 1.3023
• There is support at 1.2848 and 1.2787

At the report to the Treasury Committee, BoE Governor Andrew Bailey reiterated that most MPC members judge that "some degree of further tightening in monetary policy might still be appropriate in the coming months".

But he also acknowledged there are "risks on both sides of that judgement", and a "range of views among these members on the balance of risks". "This reflects the narrow path we are navigating, given the magnitude of the risks on both sides of our inflation projections," he added.

Reflecting risks on one side of that "narrow path", three MPC members voted for 50bps hike in May, instead of 25bps.

Reflecting risks on the other side, there were also a "range of views about the need for, and extent of, any further tightening in policy in the coming months". Some members judged that "the risks around activity and inflation over the policy horizon were more evenly balanced and that such guidance was not appropriate at this juncture.

Full report here.

Markets

“Expect a decisive June meeting, and an active summer”, French ECB governor Villeroy said today in a speech. He also stressed the central bank “carefully monitor(s) developments in the effective exchange rate, as a significant driver of imported inflation”, echoing comments made last week. It is an umpteenth indication for a rate hike lift-off in July. Last week, even president Lagarde hinted at such a move. Unfortunately, risk-off kept markets too busy to pick it up back then. But calm returned somewhat at the start of this week. European equities are still down but don’t face the sizeable losses seen last week. WS opens up to 0.4% in the red. German Bunds underperform US Treasuries in fixed income. Yields rise 2.9-4.3 bps across the curve. The European Commission slashed growth and jacked up inflation forecasts in its latest economic update. The war in Ukraine adds to high energy and food prices (today’s surging wheat price serves as point in case) and already snarled supply chains while simultaneously weighing on economic confidence. GDP is now expected to rise 2.7% this year, down from the 4% pencilled in earlier. Growth next year could slow further to 2.3%. Inflation on the other hand would average 6.1% in 2022, up from 3.5%, before sharply easing to 2.7% in 2023. The Commission warned for risks “skewed heavily towards unfavourable outcomes”. In the most severe alternative scenario where Russian gas flows were cut outright, the economy would barely grow this year (0.2%) while inflation would shoot up to more than 9%. US yields tried to recover from early Asian weakness following a poor Chinese economic update. But the move ran into resistance soon. Treasury yields currently trade 0.8 to 1.7 bps lower, with the 30y yield being an exception (+1.5 bps).

The euro heard Villeroy’s speech too but we admit it required eagle eyes to spot it. It only highlights the common currency is in dire need of actions, not words. EUR/USD ekes out a small gain to 1.043 and thus remains in the danger zone. The trade-weighted greenback eased to 104.38 after testing, but failing to take out the 105 mark last Friday. Sterling is losing out a little vs. the euro and the USD as it awaits the BoE’s performance before the Treasury Committee this afternoon, PM Johnson possibly scrapping key parts of the NI protocol as soon as tomorrow and an extensive economic update (labour market, CPI, retail sales) later this week. EUR/GBP stays north of 0.85.

News Headlines

The National Bank of Poland published core inflation data for the month of April. Net of food and energy prices, prices rose by 1.3% M/M to 7.7% Y/Y, from 6.9% Y/Y in March. It’s the highest level since the end of 2000. This compares to headline inflation running at 12.2% Y/Y. The 15% trimmed mean (excluding the impact of 15% of the price basket characterized by the highest and lowest growth rates) was running at 9.2%, compared to 7.8% a month earlier. The Polish zloty firms today, but stable risk sentiment is probably as much responsible for the move as the core inflation numbers. EUR/PLN is changing hands around 4.66. The Polish central bank is on an aggressive tightening cycle which already lifted the policy rate to 5.25%. Polish money markets take into account a cycle peak in H2 this year of 7.5%.

The US Empire Manufacturing index (NY region) crashed in May from 24.6 to -11.6. Consensus expected a more modest setback to 15. The May outcome suggests that the April reading was the odd one out. The index in the first quarter of this year fell from 31.9 to -11.8 in March. Sub-zero levels point to economic contraction in the sector. Details showed sinking new orders (-8.8 from 25.1) and shipments (-15.4 from 34.5) as main culprit. Employment and average workweek broadly stabilized. Prices paid cooled off a cycle peak. Looking forward, business conditions six months ahead rose marginally from 15.2 to 18 which compares to a 6-month average of 28.3. The disappointing NY Fed index is the first of several regional gauges to be published in coming weeks. We look for more evidence of a stalling sector in Thursday’s Philly Fed Business outlook.

Daily Pivots: (S1) 128.53; (P) 128.99; (R1) 129.73; More...

USD/JPY is staying in consolidation from 131.34 and intraday bias remains neutral. Risk will stay mildly on the downside with 131.34 resistance intact. Correction from there could extend with another falling leg. Below 127.51 will target 125.09 cluster support (38.2% retracement of 114.40 to 131.34 at 124.86).

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) 0.9992; (P) 1.0019; (R1) 1.0047; More....

USD/CHF's rally is still in progress and intraday bias remains on the upside. Current up trend should target 1.0306 medium term fibonacci projection level. On the downside, considering bearish divergence condition in 4 hour MACD, break of 0.9871 support will indicate short term topping, and turn bias to the downside for pull back.

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) 1.2191; (P) 1.2227; (R1) 1.2297; More..

GBP/USD is staying in consolidation above 1.2154 temporary low. Intraday bias remains neutral and stronger recovery cannot be ruled out. But outlook will stay bearish as long as 1.2637 resistance holds. 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) 1.0365; (P) 1.0393 (R1) 1.0435; More...

EUR/USD is staying in consolidation above 1.0339 long term support. Intraday bias remains neutral for the moment. Outlook also stays bearish as long as 1.0641 resistance holds. 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. Nevertheless, break of 1.0641 will indicate short term bottoming and turn bias back to the upside for rebound.

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.

The financial markets are generally quiet today. Major European indexes are mixed while US futures are treading water. Gold is still trying to defend 1800 handle, despite dipping earlier. Silver is also recovering ahead of 20 handle. Bitcoin and Ethereum are also staying in sideway trading. Euro is firmer in general with Dollar and Yen. Swiss Franc is trading lower, followed by Aussie and Canadian.

Technically, one focus in the week is whether overall risk sentiment would stabilize and rebound further. AUD/JPY could provide a guide to the development While it recovered ahead of 86.24 key medium term support, upside is capped by 55 day EMA (now at 89.99), around 90 handle. Sustained break of 90 handle will be a sign that overall risk sentiment is turning positive again.

In Europe, at the time of writing, FTSE is up 0.27%. DAX is down -0.65%. CAC is down -0.26%. Germany 10-year yield is up 0.0048 at 0.999. Earlier in Asia, Nikkei rose 0.45%. Hong Kong HSI rose 0.26%. China Shanghai SSE dropped -0.34%. Singapore Strait Times is up 0.82%. Japan 10-year JGB yield dropped -0.0014 at 0.244.

EU downgrades EZ 2022 GDP forecast to 2.7%, inflation upgraded to 6.1%

In the Spring 2022 Economic Forecast, EU revised 2022 GDP growth forecast for Eurozone sharply lower, and inflation forecast sharply higher. Here are the new forecasts for Eurozone:

• 2022 GDP growth at 2.7% (down from Autumn forecast of 4.3%.)
• 2023 GDP growth at 2.3% (down from 2.4).
• 2022 HICP inflation at 6.1% (up from 2.2%).
• 2023 HICP inflation at 2.7% (up from 1.4%).
• 2022 HICP core inflation at 3.5% (up from 2.0%).
• 2023 HICP core inflation at 2.4% (up from 1.7%).

Valdis Dombrovskis, Executive Vice-President said: "There is no doubt that the EU economy is going through a challenging period due to Russia's war against Ukraine... The overwhelming negative factor is the surge in energy prices, driving inflation to record highs... While growth will continue this year and next, it will be much more subdued than previously expected. Uncertainty and risks to the outlook will remain high as long as Russia's aggression continues."

Eurozone exports rose 14.0% yoy in Mar, imports rose 35.4% yoy

Eurozone exports of goods rose 14.0% yoy to EUR 250.1B in March. Imports rose 35.4% yoy to EUR 266.5B. Trade deficit came in at EUR 16.4B. Intra-Eurozone trade rose 21.2% yoy to EUR 236.8B.

In seasonally adjusted terms, Eurozone exports rose 0.9% mom to EUR 225.3B. Imports rose 3.5% mom to EUR 242.8B. Trade deficit widened from EUR -11.3B to EUR -17.6B, versus expectation of EUR 2.3B surplus. Intra-Eurozone trade rose from February's EUR 207.2B to EUR 210.3B.

ECB Villeroy: A too weak Euro goes against price stability objective

ECB Governing Council member Francois Villeroy de Galhau said in a Bank of France conference, "let me stress this: we will carefully monitor developments in the effective exchange rate, as a significant driver of imported inflation". He added, "a euro that is too weak would go against our price stability objective."

Villeroy said a "decisive" governing council meeting would be expected in June, followed by an "active summer" on policy. "The pace of the further steps will take into account actual activity and inflation data with some optionality and gradualism," he said. Policymakers should "at least move towards the neutral rate", he added.

BoJ Kuroda: Excess exchange rate volatility recently is undesirable

BoJ Governor Haruhiko Kuroda told the parliament today that "excess (exchange rate) volatility in a short term as seen recently is undesirable." He pledged to keep a close watch of the impact of the currency moves on the economy and prices. He also added that exchange rate moves should be stable and reflecting economic fundamentals.

On monetary policy, "it's important to back the economic activity with powerful monetary easing," Kuroda reiterated. "It will take time for sustainable, stable inflation to take hold in Japan."

China retail sales down -11.1% yoy in Apr, industrial production down -2.9% yoy

China retail sales dropped -11.1% yoy in April, worse than expectation of -6.0% yoy. Industrial production dropped -2.9% yoy, versus expectation of 0.7% yoy. Fixed asset investment rose 6.8% ytd yoy, also below expectation of 7.0%.

The "increasingly grim and complex international environment and greater shock of [the] Covid-19 pandemic at home obviously exceeded expectation, new downward pressure on the economy continued to grow." The NBS said in a statement. But it added, "with progress in Covid controls and policies to stabilize the economy taking effect, the economy is likely to recover gradually."

New Zealand BNZ services dropped to 51.4, disappointing in context of easing restrictions

New Zealand BNZ Performance of Services Index ticked down from 51.5 to 51.4 in April. Looking at some details, activity/sales dropped from 53.5 to 52.7. Employment rose from 49.2 to 51.2. New orders/business dropped from 59.0 to 53.6. Stocks/inventories rose from 52.8 to 54.8. Supplier deliveries dropped from 40.5 to 40.1.

BNZ Senior Economist Doug Steel said that "for large parts of the service sector that have been through the ringer over recent times, we suspect any result above breakeven would be welcomed. But, on the other hand, April's result also looks somewhat disappointing in the context of easing COVID restrictions (from Red to Orange) halfway through the month."

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0365; (P) 1.0393 (R1) 1.0435; More...

EUR/USD is staying in consolidation above 1.0339 long term support. Intraday bias remains neutral for the moment. Outlook also stays bearish as long as 1.0641 resistance holds. 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. Nevertheless, break of 1.0641 will indicate short term bottoming and turn bias back to the upside for rebound.

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