While RBA, Fed and BoE announced rate hikes last week, the impacts and reactions were rather delivered. RBA's larger than expected hike was well received and helped Aussie secured the first place, even though it pared back much gains on risk-aversion. On the other hand, BoE's announcement was considered dovish, with warning of recession, and hammered the Pound broadly lower as the worst performer. .

Reaction to Fed was mixed and volatile. But in the end, markets seemed to be still buying in the prospect of a 75bps hike next, as seen in the late selloff in stocks. Dollar followed sterling as the second strongest. But it's strength against Euro was capped by hawkish ECB comments. The greenback's rally against Yen was also capped by risk-off sentiment.

Markets still pricing in 82.9% chance of a 75bps hike at June FOMC meeting

Fed delivered the 50bps hikes as widely expected and raised federal funds rate target to 0.75-1.00%. Chair Jerome Powell shocked the markets by saying that "a 75 basis point increase is not something that the committee is actively considering," in the post meeting press conference. Such comments triggered quick adjustment in market expectations and pushed stocks higher.

Yet, investors were quick in readjusting their expectations and markets pricings which sent stocks and bonds lower again. At the end of the week, fed fund futures are still pricing in 82.9% chance of a 75bps hike in at the June 15 FOMC meeting, to 1.50-75%. Traders will continue to tune their bets based on upcoming data like this week's CPI, and comments from other Fed officials.

NASDAQ extended correction after brief recovery

The intra-week rebound provided false hope to stock investors. NASDAQ extended the correction from 16212.22 and closed lower at 12144.66. Near term outlook stays bearish as long as 12985.01 resistance holds. Next target is 100% projection of 16212.22 to 12587.88 from 14646.90 at 11022.56.

Still, strong support is expected around this 11022.56 level, and above 61.8% retracement of 6631.42 to 16212.22 at 10291.28 to contain downside to finish the correction.

10-year yield extended up trend, closing in 3.248 key resistance

US 10-year yield continued its up trend last week and closed well above 3% handle at 3.123. Next target is 3.248 long term resistance level (2018 high). We'd stay cautious on strong resistance from there the break pull back. Break of 2.911 support level will indicate short term topping and turn into a correction phase. Nevertheless, firm break of 3.248 will target 161.8% projection of 0.398 to 1.765 from 1.343 at 3.554 next.

It should be emphasized again that sustained break of 3.248 will finally break the lower-high-lower-low pattern that started back in 1981. If could confirm the start of an era of higher yields in the long term.

Dollar index struggled to extend gain above 2017 high

Dollar index also breached a key resistance at 103.82 (2017 high), but struggled to extend gains above there. That was a result of both resilience in Euro and Yen. Euro was firstly talked up by comments from ECB hawks. Secondly, it's lifted by buying against the weak Sterling. Thirdly, German 10-year bund yield also closed above 1% handle for the first time since 2015, closing at 1.135. On the other hand, risk aversion is providing some support to Yen.

For now, further rise is still expected in DXY as long as 102.35 support holds. Firm break of 103.82 will resume long term up trend from 70.69 (2008 low). Next medium term target is 61.8% projection of 72.69 to 103.82 from 89.20 at 108.43. However, break of 102.35 should bring near term correction first.

GBP/AUD the worst performer, but defended 1.7171 support

Sterling ended as the worst performing one even though BoE delivered the fourth 25bps rate hike as expected. The surprise was found in BoE's warning of a very "sharp slowdown" in growth ahead, even with risks of recession. On the other hand, Aussie ended as the stronger, after RBA delivered a larger than expected hike of 25bps to 0.35%. That set the stage of a possible 40bps hike to 0.75% in June.

GBP/AUD, thus, ended as the biggest mover, down -2.10% for the week. However, after initial decline, it quickly recovered after just missing 1.7171 low by an inch. While outlook stays bearish with 1.7844 resistance intact, the development suggests that downside break out would only come at a slightly later stage. When that happens, next target is 61.8% projection of 1.9218 to 1.7171 from 1.7884 at 1.6619.

EUR/USD Weekly Outlook

EUR/USD stayed in consolidation above 1.0470 last week and outlook is unchanged. Initial bias remains neutral this week first. In case of another recovery, upside should be limited by 1.0756 support turned resistance to bring fall resumption. On the downside, firm break of 1.0470 will resume larger down trend to 161.8% projection of 1.1494 to 1.0805 from 1.1184 at 1.0069.

In the bigger picture, the decline from 1.2348 (2021 high) is expected to continue as long as 1.1185 support turned resistance holds. The break of 1.0635 (2020 low) now raises the chance that it's resuming long term down trend from 1.6039 (2008 high). Retest of 1.0339 (2017 low) low should be seen next. Decisive break there will confirm this bearish case.

In the long term picture, current development suggests that long term down trend from 1.6039 (2008 high) is ready to resume. Break of 1.0339 will target 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. Decisive break there could bring downside acceleration towards 100% projection at 0.8694.

Monday, May 9, 2022

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Tuesday, May 10, 2022

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Wednesday, May 11, 2022

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Thursday, May 12, 2022

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Friday, May 13, 2022

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U.S. Highlights

• The Fed raised the monetary policy rate by 50 basis points for the first time since 2000 and signaled more hikes of the same magnitude are in the works.
• The economy added more jobs than expected in April, but the labor market remains tight with the number of workers looking for jobs retreating.
• Supply constraints continue to create a mismatch between demand and supply. Should supply fail to improve, inflation will remain high, making the Fed’s job more difficult.

Canadian Highlights

• The Canadian 10-year bond yield broke the 3% threshold for the first time since 2011 this week.
• Higher rates are weighing on housing, with early data pointing to steep April sales declines in Vancouver, Calgary, and Toronto. The latter is now on the cusp of being a buyer’s market.
• Job growth cooled in April and hours worked fell. However, both follow big gains in Feb/March and some slowing was expected given an economy operating excess demand.

U.S. - Tight Corners of the Economy

This was a big week for the U.S. economy with a Federal Reserve interest rate decision and early macroeconomic indicators for the month of April. As widely anticipated, the Fed raised the monetary policy rate by 50 basis points for the first time since 2000. More tightening is in the works: we anticipate the central bank will hike the fed funds rate in two more 50 basis point moves at its next two meetings. A that point, we expect it to return to more gradual quarter-point adjustments (see Dollars & Sense). Chair Powell’s push back against the possibility of a larger hike was first accepted as bullish by the equity market, but the sentiment reversed quickly pushing the equity market a quarter of a percent lower and bond yields 15 bps higher for the week (at the time of writing).

This morning’s jobs report surprised with 428k jobs added in February, according to the payrolls survey, well above 380k anticipated by forecasters. The unemployment rate, which is measured by the household survey held steady 3.6%. The labor force – a measure of people working or actively looking for work – dropped unexpectedly, pushing the participation rate down to 62.2%. As a result, an already sizeable shortfall relative to the pre-pandemic trend, expanded even further (Chart 1). Without progress on this front, the labor market will remain very tight, providing little relief for businesses already struggling to attract workers.

Meanwhile, leading business indicators – the ISM purchasing managers indexes – came in weaker than expected by the consensus, while remaining in the expansionary territory. The manufacturing sector decelerated for the second month in a row. All major subcomponents but the supplier deliveries index declined, with the largest drop in the employment index. Softness in demand is consistent with our expectation that consumers start to cut back on manufactured products in favor of services. In this context, a deceleration in the services sector was somewhat disappointing. The underlying details suggest that current business activity accelerated, but new orders and new export orders slipped. Another drag was the employment sub-index, which dropped back into the contractionary territory, likely due to “hypercompetitive” demand for workers, as suggested by one of the purchasing managers.

Importantly, supply constraints and challenges in logistics continue to create a mismatch between demand and supply in both sectors of the economy. Comparing to history, the supplier delivery index has been unusually strong since March of 2021, creating a wedge between this sub-component the rest of the index’s drivers (Chart 2). Another way to think about it is that delivery times remain atypically slow relative to softer demand.

Should supply fail to improve in lock steps with demand softening, inflation is likely to remain elevated. This will make it more difficult for the Fed to soften growth without crushing the economy into a recession. The good news is that the strength of consumer finances points to a softening in spending, rather than an outright retreat. This should help the Fed navigate the economy out of its tight spot.

Canada - Higher Rates Are Doing Their Job

For the housing market, the most important yield is on the 5-year Canada, which drives the pricing of many mortgage products and is hovering near 24-year highs. And, with the Bank of Canada taking their policy rate higher, rates on variable mortgages are on the rise as well. This means that there's nowhere to run, nowhere to hide for potential buyers. Affordability is rapidly eroding, and housing demand is softening.

This week brought fresh evidence that the housing market correction intensified in April (Chart 1). Home sales declined in month-on-month terms in Calgary and Vancouver but plunged nearly 30% in one month in Toronto. The latter region seems to be the real outlier here, as supply/demand conditions are now closer to favouring buyers, and average prices were down 6.4% during the month. In contrast, markets remained quite tight in Calgary and Vancouver and price growth seems to have been stronger. It's no great surprise that Toronto's market is correcting more than these other jurisdictions – this is the other side of the rapid runup in prices that had Toronto challenging for the most expensive market in all of Canada in recent months.

Of course, the Bank of Canada is not done hiking rates. Our updated forecasts see the central bank taking its policy rate to 2% in very short order before shifting to a more gradual rate hike cadence, ultimately finishing the year at 2.5%. This means that further downward pressure is in store for Canadian home sales and prices.

While the interest-sensitive housing sector is softening under the weight of higher rates, the overall economy seems to have taken a breather last month as well. This morning's jobs report showed that employment expanded by 0.1% m/m (or 15k positions), but hours worked dropped 1.9% m/m. Other details were soft, as full-time employment dropped. However, the more modest jobs gain follows a massive 409k positions being added in February and March, and the drop-in hours worked only partially retraces the large gains made during those two months (Chart 2). Moreover, some of the decline was due to COVID-19 related absences. In addition, job growth of 15k is only a touch below the long-term average and was made in the context of an economy operating in excess demand.

While the decline in hours worked throws some cold water on the Bank's forecast for a 6% annualized Q2 expansion in GDP, the jobs report is not going to knock the Bank off its tightening course. Expect a 50 bps move in June.

Every asset class has been on a rollercoaster ride as investors are watching central bankers all around globe tighten monetary policy to fight inflation. Financial conditions are starting to tighten and the risks of slower growth are accelerating.

The focus for the upcoming week will naturally be a wrath of Fed speak and the latest US CPI data which is expected to show inflation decelerated sharply last month. A sharper decline with prices could vindicate Fed Chair Powell’s decision to remove a 75 basis-point rate increase at the next couple policy meetings.

A close eye will also stay on energy markets which has shown traders remain convinced that the market will remain tight given OPEC+ will stick to their gradual output increase strategy and as US production struggles to ramp up despite rising rig counts. Energy traders will continue to watch for developments with the EU nearing a Russian energy ban.

US

Market volatility following the FOMC decision won’t ease up anytime soon as traders will look to the next inflation report to see if policymakers made a mistake in removing even more aggressive rate hikes off the table over the next couple of meetings.  The April CPI report is expected to show further signs that peak inflation is in place.  The month-over-month reading is expected to decline from 1.2% to 0.2%, while the year-over-year data is forecasted to decrease from 8.5% to 8.1%.

The producer prices report comes out the next day and is also expected to show pricing pressure are moderating.  On Friday, the University of Michigan Consumer Sentiment report for the month of May should show continued weakness.

The upcoming week is filled with Fed speak that could show a divide from where Fed Chair Powell stands with tightening at the June and July meetings.  On Tuesday, Fed’s Williams, Barkin, Waller, Kashkari, Mester, and Bostic speak.  Wednesday will have another appearance by Bostic. Thursday contains a speech from the Fed’s Daly.  On Friday, Fed’s Kashkari and Mester speak.

UK

The Bank of England delivered a 0.25% rate hike at this week’s meeting. This brings the benchmark rate to 1.00%, its highest since 2009. At the same time, the BoE painted a grim economic picture at the meeting, as it revised its inflation forecast to above 10% and warned of a recession.

The UK releases GDP for Q1 on Thursday. The consensus estimate stands at 1.0% after a 1.3% gain in Q4 of 2021. A loss of momentum in the economy could mean a contraction in the second quarter, raising the likelihood of stagflation. The only new data in the GDP report will be the March figures, as January and February were already published. The estimate for March is for a flat reading, after gains of 0.1% in February and 0.8% in January.

EU

The Russia/Ukraine war and the sanctions against Russia have dampened economic activity in the eurozone. Germany, the largest economy in the bloc has been posting weak numbers as the war goes on. With the EU announcing it will end Russian energy imports by the end of the year, there are concerns that the German economy could tip into a recession.

On Tuesday Germany releases ZEW Survey Expectations, which surveys financial professionals.

Economic Sentiment is expected to decline to -42.5 in May, down from -41.0 in April.

On Friday, the Eurozone releases Industrial Production for March. The Ukraine conflict has exacerbated supply line disruptions, which is weighing on industrial production. The sharp drop in German Industrial Production (-3.9%), suggests that the Eurozone release will also show a contraction. The March estimate is -1.8%, following a gain of 0.7% in February. 

Russia

Russia’s inflation has been accelerating sharply since the invasion of Ukraine. In March, CPI rose to

16.7% (YoY) and is expected to climb to 18.1% in April. The driver behind the sharp upswing has been Western sanctions, which have reduced the availability of consumer imports and key components for domestic products. CPI is expected to continue to climb in the coming months.

China

China releases its Balance of Trade on Monday and Inflation on Tuesday. Both have downside risks given the disruption to business and the collapse in property sales and sentiment due to the covid-zero policy. Restrictions continue tightening in Beijing and the covid-zero policy has become the biggest headwind to a China recovery. The government reaffirmed its commitment to the policy Friday, sending China stocks lower.

Additionally, US-listed China stocks face new delisting risk from US regulators that is weighing on Hong Kong markets especially, where most dual listings live. Negative headlines around Covid 19 or US delisting over the weekend could send China equities sharply lower into the start of the week.

USD/CNY and USD/CNH have now risen from  6.4000 to 6.7000 in just two weeks. The PBOC remains comfortable at this stage, being a back door stimulus to manufacturers. The PBOC USD/CNY fixing will be the key indicator as to whether the authorities have said Yuan depreciation has gone far enough.

India

The Reserve Bank of India sprung a surprise rate hike on markets this past week, sending the Sensex lower whilst providing some support to the INR temporarily. India’s CPI inflation release on Thursday will be this week’s key risk event. If the data comes in above expectations at 7.30%, expectations will rise of a faster more aggressive hiking cycle from the RBI which was quite hawkish in its guidance after the hike. THat will send Indian equities sharply lower once again, while possibly mollifying the impact on the INR from a rampant US Dollar.

Australia

Australia could be a correlation trade for the tier-1 PMI releases from China over the weekend. Poor China data could see the AUD and local equities pressured with most of Asia, ex-Japan closed.SImilarly, a decent showing by the China PMIs will have a positive impact.

Markets, especially currency markets, could face liquidity issues and see sharp moves if the weekend news wire is heavy as Australia and Japan will be the only two major centres open.

Most attention will be focused on Tuesday’s RBA rate decision. A 0.15% hike is fully priced by markets and the clouds from Ukraine and China are weighing heavily on AUD/USD anyway. If the RBA does not hike AUD/USD could fall sharply in the short-term. If the RBA hikes and adjusts its guidance to a more hawkish, AUD/USD could potentially see a big move higher.

New Zealand

NZ Retail Card Spending has downside risks and the Food Price Index, upside risks this week. The cost of living has become the central issue in New Zealand at the moment and a high FPI will heap pressure on the RBNZ to accelerate rate hikes as the economy starts to show signs of stress elsewhere.

NZD/USD has traded very heavy in past two weeks as investors price in a hard landing and an RBNZ behind the curve, and as risk sentiment sours internationally. NZD/USD is closing at the weeks lows and could test 0.6200 this week.

Japan

Japan releases a raft of second tier data this week. THe 10 and 30-year JGB auctions will be closely watched, if only for signs of poor cover ratio given the BOJ JGB intervention and weakening Yen.

THe centre of attention will remain the USD/JPY as the US/Japan rate differential widens. USD/JPY could well test 135.00 in the week ahead if the negative sentiment sweeping markets on Friday spills into next week. Higher oil prices will also weigh onthe Yen. We expect the noise to increase from Tokyo but little chance of USD/JPY intervention at these levels.

Singapore

No significant data. The currency remains under pressure as a proxy for China and also because the MAS meets six monthly to determine monetary policy. The next meeting will not be until October to determine if monetary policy gets tightened once again. 

Markets

Oil

Crude prices are steadily rising as the EU is making progress towards its Russia oil sanctions ban. The oil market will remain tight going forward now that OPEC+ is set on delivering meager output increases and as US production struggles despite rising rig counts. The biggest uncertainty for the crude demand outlook remains the outlook for the Chinese economy. China won’t be abandoning their zero-COVID policy anytime soon and that will keep the short-term crude demand outlook vulnerable. China’s COVID situation might not be improving anytime soon and now that the data is showing the impact of business restrictions is more widespread than just to Shanghai and Beijing.

Oil will remain a volatile trade going forward with most of the fundamentals still pointing to higher prices.

Gold

Just when gold seems to be showing signs it is getting its luster back, the bond market says ‘not so fast’.  Gold continues to struggle in this current environment of surging global bond yields and that might last a little while longer as some central banks for the purpose of defeating inflation might be willing to send their respective economies into a recession.

Gold’s awful few weeks of trade has seen a collapse of the $1900 level and that should prove to be key resistance now.  If the bond market selloff accelerates and the dollar surges, gold could be vulnerable to a drop towards $1835 and if that does not hold, $1800 might be targeted.

Bitcoin

Confidence in crypto markets is waning after Bitcoin tumbled below the $37,000 level following the surge in global bond yields.  If risk appetite does not return, Bitcoin could be vulnerable to a significant drop towards the $30,000 level.  Choppy trading between $35,000 and $40,000 could be where Bitcoin settles if Wall Street does not price in much more tighter monetary policy by the Fed.

Economic Calendar

Saturday, May 7

Economic Data/Events:

• China forex reserves

Sunday, May 8

Economic Data/Events:

• Former secretary for security and chief secretary John Lee is expected to be named replacement for Hong Kong Chief Executive Carrie Lam.
• Atlanta Fed financial market conference starts

Monday, May 9

Economic Data/Events:

• US Wholesale Inventories
• President Putin expected to speak
• BOJ releases Minutes to last policy decision
• Mexico CPI
• China Trade, aggregate financing, money supply, new yuan loans
• France Trade
• Singapore foreign reserves
• Indonesia GDP, CPI, consumer confidence
• Japan cash earnings, PMI services, composite

Tuesday, May 10

Economic Data/Events:

• Fed’s Mester and Bostic speak at Atlanta Fed conference
• Fed’s Williams speaks NABE/Bundesbank symposium
• Fed’s Waller and Kashkari speak at the Economic Club of Minnesota
• Germany ZEW survey expectations
• Italy industrial production
• Italy PM Draghi visits White House
• Japan household spending
• Mexico international reserves
• New Zealand home sales, card spending
• Australia household spending, business confidence, retail sales
• Thailand consumer confidence

Wednesday, May 11

Economic Data/Events:

• US CPI
• Fed’s Bostic speaks
• China CPI, FDI
• Germany CPI
• ECB’s Knot speaks in Madrid
• Australia consumer confidence
• Japan leading index
• EIA Crude Oil Inventory Report

Thursday, May 12

Economic Data/Events:

• US PPI, initial jobless claims
• Fed’s Daly speaks in Alaska
• President Biden hosts special summit of ASEAN leaders
• USDA World Agricultural Supply/Demand report
• UK GDP
• G-7 and NATO foreign ministers meetings begin in Germany
• India CPI
• UK Industrial production
• Mexico central bank (Banxico) rate decision: Expected to raise Overnight Rate by 50bps to 7.00%
• Mexico industrial production
• Russia trade
• Japan BoP, bank lending, bankruptcies
• New Zealand food prices, net migration, inflation expectations
• Australia consumer inflation expectations
• South Africa manufacturing production

Friday, May 13

Economic Data/Events:

• US University of Michigan consumer sentiment
• Federal Reserve Bank of New York hosts “Climate Change: Implications for Macroeconomics” symposium
• France CPI
• Poland CPI
• Russia CPI and GDP
• Norway GDP
• Eurozone Industrial production
• Turkey Industrial production
• Canada existing home sales
• India trade
• Japan money stock
• New Zealand manufacturing index
• Thailand foreign reserves, forward contracts
• China medium-term lending
• RBA Bullock speaks

Sovereign Rating Updates:

• Switzerland (Fitch)
• Iceland(S&P)

Summary

United States: 'Til the Medicine Takes

• The latest economic data suggest supply challenges worsened in April. Delivery times lengthened, and while employers continued to add jobs at a solid pace, the supply of labor weakened. Price pressure has remained elevated as a result. The FOMC raised its federal funds rate 50 bps this week at the conclusion of its policy meeting, and the incoming data for April reinforce our expectation for another 50 bp hike in June.
• Next week: NFIB Small Business Optimism (Tues), CPI (Wed), U. of Mich. Consumer Sentiment (Fri)

International: Reserve Bank of Australia Delivers Initial Rate Hike, BoE & BCB Continue Tightening

• Faced with concerns about high inflation, multiple central banks around the world tightened monetary policy this week. Notably, the Reserve Bank of Australia (RBA) raised its Cash Rate by 25 bps to 0.35%, citing a resilient economy with inflation that has accelerated faster and higher than previously expected, as well as progress toward full employment and wage growth. The Bank of England and Brazilian Central Bank also delivered rate hikes this week.
• Next week: Mexico CPI/Banxico Rate Decision (Mon/Thu), U.K. GDP (Thu), Russia CPI (Fri)

Interest Rate Watch: The First 50 bps Rate Hike from the FOMC in 22 Years

• At the conclusion of its meeting this week, the FOMC increased the target range for the federal funds rate by 50 bps to 0.75%-1.00%. The move was widely anticipated by financial market participants, but that does not diminish the fact that it was the first 50 bps rate hike from the Federal Reserve in 22 years.

Credit Market Insights: Monetary Policy Is Impacting Mortgages, Including Refinancing

• Freddie Mac reported on Thursday that 30-year mortgage rates reached 5.27%, 17 bps higher than the previous week and the highest level since 2009. After more than a decade of sub-5.0% mortgage rates, the past few months of expectation setting and quantitative tightening have already affected the mortgage market.

Topic of the Week: Shining a Light on the Rising Economic Potential of AAPI Small Business

• In commemoration of AAPI Heritage Month and Small Business Month, we highlighted some economic contributions of the Asian American and Pacific Islander community with a focus on AAPI-owned small businesses in a recent report.

Full report here.

Torrid growth in the U.S. inflation rate likely slowed in April. This would mark the first decline in almost a year and come on the heels of price growth that soared to 8.5% year-over-year in March. Oil prices in April reversed part of that March surge, which was driven by Russia’s invasion of Ukraine. But prices at the pump were still much higher compared to the beginning of the year. The price for regular grade gas was $4.1 per gallon in April compared to $3.3 per gallon in January. Growth in food prices is also expected to have remained strong, as producers continue to pass on rising input, labour and transport costs to consumers. These challenges are not limited to food producers and distributors. Labour shortages (and wage pressures) in particular are widespread and expected to persist given exceptionally high demand for workers and long-run demographic headwinds that will add to the crunch.

Outside food and energy products, growth in core CPI at 0.3% in March marked the smallest increase in 6 months. The measure was slowed by a 3.8% decline in used car prices during the period. Though still elevated, those prices likely fell again in April according to early reports from the Manheim used vehicle value index. The slowdown compares to an almost 10% month over month surge in April 2021. And it should leave the used car series accounting for almost all (0.4 ppts by our count) of the expected moderation in the headline year over year CPI growth rate from March.

Still, inflation pressure remains broadly based. Further risks to global supply chains from the Russian invasion and China’s lockdowns will continue to add tailwinds to global inflation pressures. With labour markets still exceptionally tight and inflation pressures exceptionally strong, the Fed is expected to continue to act quickly to move interest rates higher. We expect another 50bp hike in June to build on the 50 bps hike (and start of QT tightening) announced earlier this week.

The Fed signaled that it will avoid shock-and-awe rate increases, putting more emphasis on avoiding a recession rather than vanquishing inflation. Another round of US inflation data is on tap next week and the Fed might finally get some good news, as the yearly CPI rate may have peaked. Is this the beginning of the end for the dollar’s supremacy? Maybe not. 

Inflation crest

The message from the Federal Reserve this week was much softer than feared. Chairman Powell shut down speculation for 75 basis point rate increases and even opened the door for a slowdown in the pace of tightening after the summer. The plan is to raise rates by a half percentage point another couple of times, and then reassess.

Money markets were priced for an even more hawkish trajectory, so this initially inflicted some damage on the mighty US dollar. However, the reserve currency quickly got back on its feet and started steamrolling the FX market again. The Fed told investors it will play it slow, as it doesn’t want to risk a recession by slamming on the brakes too hard.

Traders concluded that by not acting with sufficient force now, the Fed will need to do even more later to tame inflation. The market-implied probability for a 75 basis point rate increase in June, which Powell effectively ruled out, currently stands around 80%. Meanwhile, Treasury yields have stormed to new highs, particularly at the longer end of the curve. That’s the bond market telling the Fed that it is committing a policy error.

All this elevates the importance of the CPI inflation print for April, which will be released on Wednesday. Forecasts point to a monthly print of just 0.2%, which is far lower than recent months. It would be tempting therefore to believe that inflation has peaked, but this is not really the case.

Business surveys from Markit and ISM both suggest that inflationary pressures remained scorching hot in April, reaching new records in fact. Here’s the catch - this is when base effects from last year start to kick in. This period last year was when inflation really started to fire up, so as those strong monthly prints drop out of the 12-month CPI calculation, it becomes harder for the yearly rate to keep rising.

In other words, the monthly CPI forecast of just 0.2% seems like a lowball estimate from economists. However, any number below 0.9% - which is what will be dropping out of the calculation now - will still push the yearly CPI rate lower. It’s an artificial effect but it may be enough to calm some nerves around the inflation outlook.

As for the dollar, it has gone on a rampage lately, demolishing everything in its path amid a perfect storm of rising US rates, risk aversion, and slowing growth in the rest of the world. If incoming data dispel some concerns about inflation and traders dial back bets for rapid-fire Fed rate increases, the dollar could take a step back, but that’s unlikely to be enough to derail the overall uptrend.

An energy crisis has brought Europe to its knees, Chinese authorities remain committed to growth-crippling lockdowns, and the Bank of Japan has sacrificed the yen by doubling down on its yield curve control strategy. Until these dynamics begin to change and growth in other regions starts to pick up, it’s difficult to envision a trend reversal in the dollar.

Sterling sinks ahead of UK GDP

In the United Kingdom, GDP stats for March and the entire first quarter are out on Thursday. The pound fell without a parachute this week after the Bank of England raised interest rates, but in a very cautious manner, opening the door for pausing the tightening cycle soon.

The overall takeaway was that downside risks around economic growth are intensifying, and the BoE is much more focused on avoiding a recession rather than fighting inflation. Markets responded by recalibrating the trajectory for UK interest rates lower, dragging Cable down to new two-years lows. The carnage in equity markets added fuel to this selloff.

Looking ahead, money markets are still pricing in another 5 quarter-point rate increases from the BoE for this year, which may be a little too optimistic considering the growing risk of a ‘pause’. In addition, volatility in stocks tends to hurt the pound given its sensitivity to global risk appetite, so the environment ahead seems challenging.

Chinese data in focus

Crossing into China, trade data for April will hit the markets early on Monday ahead of inflation stats on Wednesday. Imports into the country imploded last month as major cities went into strict lockdowns and an even uglier print is expected this month, with imports set to fall 3% on a yearly basis.

This spells bad news for nations that rely on Chinese demand for their commodity products - most notably Australia. With the Chinese economy slowing down so dramatically, there will inevitably be some negative spillover effects on the Australian economy.

And yet, money markets are pricing in another 11 quarter-point rate hikes from the Reserve Bank of Australia this year. It would be a miracle if the RBA delivers anything close to that with China losing power, which suggests that the risks surrounding the Australian dollar remain tilted to the downside.

On a similar note, keep an eye on the Hong Kong dollar. It is currently testing the weaker band of its peg with the US dollar and local authorities will need to decide whether to defend that peg by burning through their FX reserves, or effectively abandon it. The Hong Kong economy is very weak, so following the Fed in raising interest rates is out of the question.

We saw significant market jitters this week with VIX volatility starting off at a two month high. The lack of a hawkish message from the Federal Reserve (Fed) turned things around for a while only for US equities to take a big plunge on Thursday as investors largely consider Fed to be behind the curve. In London, a trading error caused a flash crash in Swedish stocks of 8% on Monday, which immediately spread to the other Nordic and European bourses. Markets quickly normalised again, though.

This was also the week where 10-year US treasuries traded through the 3%-level for the first time since 2018. Oil prices bounced to the highest level since March on the back of EU plans to phase out imports of Russian oil and US looking to start re-filling its strategic reserves. Adding further to inflation pressures, refined oil products have increased more in price than crude since the war broke out as Russia is a big exporter here.

The Fed largely did what was expected of them this week, as they hiked rates by 50bp and hinted that they will hike by 50bp again at the "next couple of meetings". Fed chair Powell communicated that the Fed is not "actively considering" a larger 75bp rate hike although he did not rule it out. We are still just at the beginning of the hiking cycle and we see risks skewed towards more aggressive tightening.

Several other central banks also hiked rates this week. Bank of England did 25bp as widely expected but removed the risk of steep rate hikes for now, as the BoE remains concerned about the growth outlook, which translated into a weaker pound. We also got hikes from the Reserve Bank of Australia and surprise 75bp hikes from both the National Bank of Poland and the Czech National Bank. The former was significantly less than priced by markets and the latter was more.

This week's economic data predominantly indicates European resilience to the war in Ukraine so far. Unemployment declined to an all-time low in March and the service sector showed a nice rebound amid reopening in April. On the other hand, the manufacturing sector is slowing down, German industrial orders and output are declining and producer price inflation increased further in March, indicating more headwinds for consumers going forward. We saw high inflation starting to take its toll on Euro area retail sales, which declined in March. Chinese PMI's plunged in April on the back of the Shanghai lockdown, a warning for the global manufacturing sector, which typically lags China by a few months. On a positive note, the outbreak seems increasingly under control.

Next week, we will look out for Russian victory day. We expect Russian president Putin will escalate his rhetoric against the West. The market reaction is uncertain and will depend on the possibility of a Russian attack on other countries. We will also follow discussions on the EU's sixth sanctions package and if agreement for a Russian oil embargo is found. In the US, April CPI data could very well mark the peak in inflation. We will focus on mom moves, though, which are still too high for the Fed to feel really comfortable.

Full report in PDF.

Markets

ECB’s Holzmann suggesting a June rate hike is an actual possibility during an interview yesterday evening broke the ice. The influential French ECB governor Villeroy in a speech this morning didn’t want to “preclude the next few Governing Council meetings” for a rate liftoff, implicitly leaving the option of June open. He also said that a too-weak euro would go against the inflation target. It suggests the ailing currency and its implications for inflation is getting noticed by Frankfurt. It’s time to act, sooner rather than later. Slovenian ECB governor Vasle believes so too, saying the appropriate time for a rate hike is “before the summer”. On a sidenote, ECB’s president Lagarde is due to speak in Slovenia next week. European assets in any case picked up the idea. Swap yields shot up by 9 bps. The euro rebounded from an intraday low sub 1.05 to test the 1.06 big figure. A break did not materialize though as nothing in the April US payrolls report today suggested the Fed can take it down a notch or two. It kept EUR/USD (1.058) in check via the dollar side of the equation. Sure, wages grew a less-than-expected 0.3% m/m (to be up 5.5% y/y) but it came on the back of an upward revision last month. Job creation (428k) meanwhile surpassed the bar with ease. The participation rate dropped from 62.4% to 62.2% while the unemployment rate stabilized at 3.6%. Markets expected a rise in the former and a slight decline to the 50-year (!) low by the latter. All things considered, this is still a red hot labour market begging for a cooldown. US yields quickly erased a knee-jerk move lower (on the wages data) to trade up to 5.5 bps (30y) higher, supported by real yields (+6.5 bps in the 10y). It also renewed momentum in EMU yields which were fading going in to the payrolls. Swap yields are 2.4 (2y) to 6.5 bps (10y) higher. Germany’s 10y yield extends is trip above 1% (5.2 bps). US stocks reacted negatively in futures trading to the report and open with follow-up losses of almost 2% (Nasdaq) after yesterday’s whammy. European equities slide up to 1.8% in the EuroStoxx50.

Sterling remained under pressure in the wake of the Bank of England’s messy message of tightening vs souring growth expectations. Chief economist Pill struck a hawkish note, mainly touching on upside inflation risks but it was in vain. Sterling bears eat bulls alive. EUR/GBP rises further north to 0.858 – the highest level since December ’21. Cable (GBP/USD) lost important support at 1.2495/25 yesterday and declines further to 1.233 today. Next week UK GDP Q1 numbers are due. It may well be the last decent reading for quite some time.

News Headlines

Canada published its April labour market statistics. Momentum in the Canadian labour market eased after impressive job growth in March and February. Net employment rose 15.3k vs 40k expected. The unemployment rate declined from 5.3% to 5.2%, the lowest since 1976. However, the participation rate declined slightly to 64.3%. A lack of available employees might have been in play. The average hourly wage rate also disappointed at 3.4% from 3.7%. Last month the Bank of Canada raised its policy rate by 50 bps to 1.0% and started reducing its balance sheet to arrest inflation that moved well above the 2.0% target (6.7%). Aside from external factors, the BoC said the domestic economy is moving into excess demand, with the tight labour market causing further wage increases. Today’s data probably won’t change the BoC’s assessment, allowing it to continue with hikes of 50 bps (or more) at the next policy meeting on June 1. The Canadian dollar recently suffered from the risk-off and a stabilization in some commodity prices and lost further ground after the release. USD/CAD trades near 1.287.

According to a Czech news website, Czech central bank board member Ales Michl is likely to be appointed as the new CNB governor to replace Jiri Rusnok. His term will end on June 30. The CNB governor has to be appointed by the Czech president, Zeman. For now there is no official confirmation. Michl is an ultra-dove within the Czech MPC and was opposed the aggressive hiking campaign as he considers most of the inflation as external in nature. The koruna declined after the headlines appeared. EUR/CZK rose from 24.55 around noon to currently trade near 24.8.

GBPAUD’s recent bullish impetus from the early April 4¼-year low region has run out of steam just beneath the mid-Bollinger band at 1.7468. The longer-term 100- and 200-period simple moving averages (SMAs) are suggesting that the negative bearing has softened, while the downward pointing 50-period SMA is reflecting that buyers have yet to gain the upper hand.

The short-term oscillators are implying that negative momentum has weakened to a degree, but it is difficult for positive sentiment to take hold when the directional picture is tilting to the downside. Currently, the MACD is improving in the negative region over its red trigger line, while the RSI is finding difficulty to reach the 50 threshold. Moreover, the stochastic %K and %D lines are flirting with the 80 level, failing to definitively pilot into overbought territory.

In the negative scenario, a dip back beneath the immediate 1.7350 obstacle could cheer sellers to eye the lower Bollinger band at 1.7228 and the sturdy multi-year bottom of 1.7173. From here, if profound selling interest unfolds, overwhelming the more than four-year trough and the 1.7096-1.7120 support band - moulded by the lows of January 2018 and November 2017 - the bears may snag around the 1.7036 barrier. However, if downside pressures remain heavy, the price could then target the 1.6850-1.6894 key support boundary, which began to take shape back in the last months of 2017.

Otherwise, if the price pushes off the 1.7350 support, resistance could commence from the mid-Bollinger band at 1.7468 before buyers challenge the tough resistance section between the 1.7542 obstacle and the 100-period SMA at 1.7604. Conquering this hurdle, the bulls may then aim for the falling upper Bollinger band at 1.7688 prior to shifting their focus toward the 1.7834-1.7886 resistance ceiling, involving the now highs of April and May.

Summarizing, GBPAUD is sustaining a neutral-to-bearish bias beneath the 1.7834-1.7886 boundary. A dive in the pair below 1.7173, which extends past the 1.7096-1.7120 obstacle, could upgrade negative momentum. Yet, for a positive vibe to begin to return, the price would need to initially climb above the converged SMAs.