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Markets

Yesterday’s market moves may have been atypically erratic ahead of key events (see second bullet), but today’s for sure weren’t. US stocks open mixed while European equity markets fluctuated around opening levels and currently trade with minor losses of around 0.15%. Bond yields in the euro area gapped higher at the start of cash market trading before paring some of the gains. Maybe it were ECB Board Executive Schnabel comments in an interview late yesterday resonating in early European dealings. She said the central bank needs to act to prevent high inflation from becoming entrenched in people’s expectations and called a rate increase in July possible. Euro area money markets indeed are just shy of fully pricing in such a scenario. Anyway, German yields add 0.9 (2y)/3.9 bps (5y) in a daily perspective with the belly of the curve underperforming wings. Both the German 10y yield and the European 2y swap yield again banged on the 1% door but those resistance levels didn’t give in (yet?). The US curve bear flattens ahead of tonight’s Fed policy meeting that will pave the way for a series of aggressive rate hikes. Yields add up to 4.3 bps (2y, hitting a new cycle high). FX market moves are extremely limited. The currency in focus today, the USD, is trading marginally on the backfoot. EUR/USD ekes out a negligible gain to 1.055, the trade-weighted DXY eases to 103.25. Both still trade near multi-year lows/highs respectively. US data today included the ADP job report. With a 247k job creation, the bar wasn’t met (383k) but in combination with yesterday’s exceptional JOLTS data it still suggest a labour market in (more than) full swing. The US services ISM after this report gets published. US Treasury also announced it will reduce the size of  the 2-, 3-, and 5-year note auctions by $1 billion per month in the next quarter. It also anticipates decreases of $1 billion to 10-, and 30-year note auction sizes starting in May. It’s the third straight reduction and possibly not the last even at the eve of the Fed starting quantitative tightening, citing “strong” federal tax revenues. No word on sterling here today. The Queen’s money’s time to shine is tomorrow (BoE).

It’s Fed-day. The central bank will almost certainly raise policy rates by 50 bps to 0.75-1%. Such a bigger-than-usual hike stretches back to 2000. What’s more is that it will be the first of several similar moves, making the current tightening cycle the most aggressive in almost three decades. Powell recently embraced such heavy frontloading. During the press conference, he’ll stress the importance of bringing the policy rate as soon as possible to neutral territory, estimated at 2.4%. Current circumstances (red hot labour market, sky high inflation) even warrant an outright restrictive policy rate. We therefore see little reason for Powell to forcefully push back against market expectations of at least four consecutive 50 bps hikes and a peak policy rate by mid-2023 between 3.25 and 3.5%. We will also see plans for a fast balance sheet roll-off formalized. March Meeting Minutes already revealed intentions of going from zero to $95bn per month in just three months’ time, extracting liquidity at a much faster pace than previously. Not only did the Treasury market lose a huge buyer a few months ago, from tonight on, the Fed will actually have become a net-seller. All this suggests both the USD and US bond yields remain supported.

News Headlines

The Reserve Bank of India raised its policy rate unexpectedly, in between meetings, by 40 bps from 4% to 4.4%. It’s the start of a tightening cycle and the first rate hike since mid-2018. RBI governor Das said that inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth. He warned for the risk that prices stay at current or higher levels for too long (particularly food) and that expectations become unanchored. Headline inflation rose to 6.95% Y/Y in March, printing above the 2%-6% target range for a third month running. The Indian rupee initially gained ground, but failed to hold on to those moves. At USD/INR, the currency continues to trade near historically weak levels.

GBPUSD is hovering around 1.2500 for the sixth consecutive trading session. But this stabilisation is more like the calm before the storm than a new balance point.

The Pound enjoys a fragile equilibrium as investors and traders choose to take a wait-and-see approach ahead of the super week when the Fed (later today) and Bank of England (Thursday) decisions will be released, as well as the US monthly employment report (Friday).

These three events have enough potential to trigger the Pound’s most substantial volatility in weeks, capable of also reversing the decline in mid-April.

On the technical analysis side, GBPUSD, which started April above 1.3100, is highly oversold, typically creating the potential for a rebound to 1.2660 or further to 1.2880.

However, such a fragile technical picture could be disrupted by news if the market reaction to it proves to be one-sided. In case of a tough Fed stance and a relatively toothless Bank of England stance on Thursday, a rather fast track to 1.2000 opens for GBPUSD, where the pair could end up before the summer.

Although the GBPUSD went briefly lower in March 2020, it has not been consistently lower since 1985, having spent less than six months below that line.

Fed expected to hike by half-point

The Fed holds its policy meeting later today, and any move other than a half-point hike would be a huge surprise. A half-point increase is significant, as it will mark the Fed’s largest rate increase in 20 years and demonstrates that the Fed is determined to lower inflation. The half-point increase has been priced in, but investors will be monitoring the hawkishness of the rate statement, as well as the size of the trim to the Fed’s balance sheet (quantitative tightening).

The Fed has been transparent with the markets and we’re likely to see further rate hikes in June and July. I expect to see a front-loaded hiking cycle, as the Fed feels it can load up on rate increases early on without dampening growth. The plan is to then ease up on increases, hopefully allowing the economy to make a soft landing and avoiding a recession.

The Ukraine war and the ensuing sanctions against Russia have taken a toll on the eurozone economy. This point was brought home as German exports dropped sharply in March, falling 3.3% MoM. The driver behind the downswing was the plunge in exports to Russia, which dropped by 60% MoM.

Another headwind for the German economy is the fall in growth in China in recent months. The severe Covid lockdowns have resulted in prolonged supply chain disruptions. This could spell trouble for the German economy, with a recent Ifo survey noting that almost half of German companies are dependent on imports from China. Last week, the German government cut its growth forecast for 2022 to 2.2%, down sharply from 3.6% in a previous forecast.

With question marks surrounding Germany, the eurozone’s largest economy, the risk to the euro is tilted downwards. EUR/USD fell 4.71% in April and if the euro falls below 1.03, it could drop all the way to parity.

EUR/USD Technical

• There is resistance at 1.0612 and 1.0699
• 1.0408 is providing support, followed by 1.0321

Daily Pivots: (S1) 1.0481; (P) 1.0530 (R1) 1.0567; More...

EUR/USD is still bounded in consolidation from 1.0470 and intraday bias remains neutral. Upside of recovery should be limited by 1.0756 support turned resistance to bring fall resumption. Break of 1.0470 will resume larger down trend and target 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.

Daily Pivots: (S1) 1.2454; (P) 1.2511; (R1) 1.2550; More...

Intraday bias in GBP/USD remains neutral as consolidation from 1.2410 is extending. In case of stronger recovery, upside should be limited below 1.2999 support turned resistance. On the downside, break of 1.2410 will target 161.8% projection of 1.3641 to 1.2999 from 1.3297 at 1.2258.

In the bigger picture, rise from 1.1409 (2020 low) has completed at 1.4248, ahead of 1.4376 long term resistance (2018 high). Based on current momentum, fall from 1.4248 is probably the start of a long term down trend. The break of 61.8% retracement of 2.1161 to 1.1409 at 1.2493 is affirming this bearish case too. For now, deeper decline would be seen as long as 1.3158 support turned resistance holds. Next target is 1.1409 low.

Daily Pivots: (S1) 0.9740; (P) 0.9770; (R1) 0.9819; More....

USD/CHF's rally is in progress and intraday bias stays on the upside. Current rally should target next medium term projection level at 0.9864. On the downside, however, considering bearish divergence condition in 4 hour MACD, break of 0.9669 minor support should indicate short term bottoming, and turn bias back to the downside for deeper 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 100% projection of 0.8756 to 0.9471 from 0.9149 at 0.9864. This will now remain the favored case as long as 0.9459 resistance turned support holds.

Daily Pivots: (S1) 129.79; (P) 130.04; (R1) 130.38; More...

Intraday bias in USD/JPY remains neutral as consolidation from 131.24 is still extending. Near term outlook remains bullish with 126.91 support intact. Break of 131.24 will resume recent up trend to 261.8% projection of 109.11 to 116.34 from 114.40 at 133.26. However, considering bearish divergence condition in 4 hour MACD, break of 126.91 will confirm short term topping and turn bias back to the downside for a correction.

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) 1.0265; (P) 1.0290; (R1) 1.0325; More....

EUR/CHF's rebound from 1.0186 continues today and intraday bias stays on the upside for 1.0369/0400 resistance zone. Firm break there will resume the rebound from 0.9970 to 1.0610 structural resistance. On the downside, below 1.0186 will turn bias back to the downside for 1.0086 support, to extend the corrective pattern from 1.0400.

In the bigger picture, as long as 1.0505 support turned resistance (2020 low) holds, long term down trend from 1.2004 (2018 high) is expected to continue. Next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650. However, firm break of 1.0505 will suggest medium term bottoming, and bring stronger rebound towards 1.1149 structural resistance.

Major forex pairs are generally stuck inside yesterday's range as markets await FOMC rate decision. Swiss Franc is the exception, though, as the selloff against Euro spreads to other Franc pairs. Dollar and Canadian are the next weaker ones. On the other hand, Aussie and Kiwi are the firmer one while Euro and Sterling are mixed. The picture should easily be changed by post FOMC volatility.

Fed is widely expected to raise federal funds rate by 50bps to 0.75-1.00% today. The plan for balance sheet runoff should be announced too. But the main question is what next. Fed fund futures are currently pricing in 99.1% chance of a 75bps hike in June. Markets would be eager to get some hints from Chair Jerome Powell on such expectations. But then, Powell is unlikely to give anything concrete.

Here are some previews on FOMC:

• Fed to Speed Up Rate Hikes, But How Far Will Powell Go?
• FOMC meeting preview – Hawkish, but will it be hawkish enough?
• FOMC Meeting Preview: 50bps a "Done Deal" but Balance Sheet Update Will be Key
• Fed Research – Preview: 50bp Rate Hike

In Europe, at the time of writing, FTSE is down -0.42%. DAX is down -0.04%. CAC is down -0.57%. Germany 10-year yield is up 0.0216 at 0.993. Earlier in Asia, Hong Kong HSI dropped -1.10%. Singapore Strait Times dropped -0.23%. Japan and China were on holiday.

US ADP jobs grew 247k only, recovery showed signs of slowing

US ADP private employment grew 247k only in April, well below expectation of 370k. By company size, small businesses lost -120k jobs. Medium businesses added 46k jobs. Large businesses added 321k jobs. By sector goods-producing jobs grew 46k. Service-providing jobs grew 202k.

"In April, the labor market recovery showed signs of slowing as the economy approaches full employment," said Nela Richardson, chief economist, ADP. "While hiring demand remains strong, labor supply shortages caused job gains to soften for both goods producers and services providers. As the labor market tightens, small companies, with fewer than 50 employees, struggle with competition for wages amid increased costs."

US goods and services trade deficit widened to USD 109.8B in Mar

US goods and services exports rose 5.6% mom to USD 241.7B in March. Imports rose 10.3% mom to USD 351.5B. Trade deficit widened from USD 89.2B to USD 109.8B, larger than expectation of USD 106.6B.

Deficit with China increased USD 7.4B to USD 48.6B. Deficit with Canada increased USD 3.7B to USD 10.3B in March. Deficit with the European Union decreased USD 1.3B to USD 15.6 B.

Eurozone retail sales dropped -0.4% mom in Mar, EU down -0.2% mom

Eurozone retail sales dropped -0.4% mom in March, worse than expectation of -0.2% mom. Volume of retail trade decreased by -2.9% for automotive fuels, and by -1.2% for non-food products, while it increased by 0.8% for food, drinks and tobacco.

Retail sales contracted -0.2% mom in EU. Among Member States for which data are available, the largest monthly decreases in the total retail trade volume were registered in Spain (-4.0%), Luxembourg (-3.3%) and France (-1.9%). The highest increases were observed in Slovenia (+11.4%), Latvia (+11.1%), and Hungary (+7.3%).

Eurozone PMI composite finalized at 55.8, surprisingly resilience in face of war

Eurozone PMI Services was finalized at 57.7 in April, up from March's 55.6, an 8-month high. PMI Composite was finalized at 55.8, up from March's 54.9, a 7-month high.

Looking at some member states, France PMI composite was finalized at 57.6, a 51-month high. Spain rose to 55.7, 2-month high. Italy rose to 54.5, 4-month high. Germany, however, dropped to 54.3, 3-month low.

Chris Williamson, Chief Business Economist at S&P Global said: "The eurozone economy has shown surprising resilience in the face of the Ukraine-Russia war, thanks to a renewed burst of service sector activity as virus containment measures were relaxed further during April. The survey data are consistent with GDP rising at a quarterly rate of around 0.7% at the start of the second quarter after signalling a 0.4% rise in the first quarter.

NZ unemployment rate unchanged at 3.2%, high wage inflation

New Zealand employment rose 0.1% qoq in Q1, matched expectations. However, total actual weekly hours worked dropped slightly by -0.2%. Unemployment rate was unchanged at 3.2%, slightly above expectation of 3.1%. Participation rate dropped -0.1% to 70.9%.

Labor cost index rose 0.7% qoq, matched expectations. All sectors wage inflation rose 0.8% qoq. Annual rate jumped from 2.6% to 3.0%. "Wage inflation is at its highest level since the March 2009 quarter," business prices delivery manager Bryan Downes said.

Australia retail sales rose 1.6% mom to new record in Mar

Australia retail sales rose 1.6% mom to new record AUD 33.6B in March, well above expectation of 0.5% mom. Over the 12-month period, sales rose 9.4% yoy.

Director of Quarterly Economy Wide Statistics, Ben James, said the result was up 0.8% on the previous record level set in November 2021. This follows a 1.8% rise in February 2022, a 1.6% rise in January 2022 and a fall of -4.1% in December 2021.

"Rising prices, combined with the continued easing of restrictions across the country has led to rises in turnover in all three months of the March quarter.

EUR/CHF Mid-Day Outlook

Daily Pivots: (S1) 1.0265; (P) 1.0290; (R1) 1.0325; More....

EUR/CHF's rebound from 1.0186 continues today and intraday bias stays on the upside for 1.0369/0400 resistance zone. Firm break there will resume the rebound from 0.9970 to 1.0610 structural resistance. On the downside, below 1.0186 will turn bias back to the downside for 1.0086 support, to extend the corrective pattern from 1.0400.

In the bigger picture, as long as 1.0505 support turned resistance (2020 low) holds, long term down trend from 1.2004 (2018 high) is expected to continue. Next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650. However, firm break of 1.0505 will suggest medium term bottoming, and bring stronger rebound towards 1.1149 structural resistance.

Economic Indicators Update

US goods and services exports rose 5.6% mom to USD 241.7B in March. Imports rose 10.3% mom to USD 351.5B. Trade deficit widened from USD 89.2B to USD 109.8B, larger than expectation of USD 106.6B.

Deficit with China increased USD 7.4B to USD 48.6B. Deficit with Canada increased USD 3.7B to USD 10.3B in March. Deficit with the European Union decreased USD 1.3B to USD 15.6 B.

Full release here.