Summary United States: Signs of a Slowdown Begin to Emerge April brought a steep 16.6% decline in new home sales and a 3.9% drop in pending home sales, the latest signs the housing market is cooling down amid sharply higher mortgage rates. Personal income rose 0.4% during April, while personal spending increased 0.9%. Inflation continues to run hot. The headline PCE deflator was up 6.3% year-to-year, while the core measure rose 4.9%. Next week: Consumer Confidence (Tue), ISM Manu. & Services (Wed/Fri), Nonfarm Payrolls (Fri) International: Mixed Fortunes for Europe's Economies This week's May PMI surveys offered the latest insight into how some of Europe's key economies are faring, and indicated varying fortunes across the region. The Eurozone PMIs reported a mild decline, suggesting a modest loss of momentum, though to levels that remain well within growth territory. For the United Kingdom however, the PMI surveys suggested the economy could suffer a sharper slowdown. Next week: China PMIs (Tue), Eurozone CPI (Tue), Canada GDP (Tue) Interest Rate Watch: FOMC Minutes Show Another 50 bps Rate Hike Is Probable The minutes from the May FOMC meeting were released this week and offered additional evidence that a second consecutive 50 bps rate hike is imminent. Credit Market Insights: Household Well-Being Strengthens in 2021 This week, the Federal Reserve Board issued its Economic Well-Being of U.S. Households in 2021, a report which surveys the financial health and sentiment of U.S. adults and their families. Financial well-being among respondents reached its highest level since 2013 when the survey first began. Topic of the Week: Biden Announces an Asia-Specific Strategy We unpack a few recent developments in terms of U.S. foreign relations this week, like the newly introduced Indo-Pacific Economic Framework, where things stand with trade policy more broadly and how there's a review under way of U.S. tariffs on China that likely won't lead to large changes to preexisting policy. Download the full report

The latest US employment report will be in the spotlight next week for any signs that recession worries have started to impact hiring. The dollar has lost some of its power lately and this dataset could determine whether we are in the early stages of a trend reversal. Inflation numbers from Europe will be another crucial variable for that equation. Elsewhere, the Bank of Canada is set to raise interest rates. 

EUR/USD - 1.0737 Euro's strong rebound from 1.0663 to 1.0731 in New York on broad-based usd's weakness due to rally in U.S. stocks suggests pullback form Tue's 1-month 1.0748 peak has possibly ended and above would extend upmove from May's 5-year bottom at 1.0350 to 1.0780/90, however, loss of momentum should cap price below 1.0807 and yield decline later. On the downside, only a daily close below 1.0690/95 would indicate a temporary top possibly made and yield weakness towards 1.0663, then 1.0643 Monday. Data to be released on Friday Japan Tokyo CPI, Australia retail sales, Italy trade balance. U.S. personal income, personal spending, PCE price index, goods trade balance, wholesale inventories, University of Michigan sentiment and Canada budget balance.

Equities are rallying again today as speculation around peak Fed hawkishness from Wednesday's FOMC minutes and the potential for China's zero-Covid policies easing keep sentiment afloat. But one must wonder whether we are back to 'bad news is good news" for the equity markets. Despite the disappointing US pending home sales number, Wall Street was hugely bid from the New York get-go.  The run of negative US economic news seems to be taking the sting out of fears the Federal Reserve will be forced to hike aggressively. Cleaner positioning, a return of "buy the dip" mentality from Retail and a reduction in bond market volatility with USD strength showing signs of peaking has investors tentatively back on the rally wagon, indicative that there was more at play than simply a "cover bid." And the icing on the cake was a surprisingly strong showing from US retailers Macy's and Dollar Tree, which helped calm recessionary fears last week as investors hit the reset button for the setup in consumer names. Peak Fed hawkishness and China reopening with a possible reset in consumer names make the short thesis more challenging now. OIL Momentum is flat-out bullish, with many factors pointing to a tighter market even more so with the EU on the precipice of a total ban on Russian energy.  Ahead of peak US driving season, refined products remain in alarmingly short supply in the West which should keep a high floor on oil prices through the summer, although US gasoline demand on a four-week rolling basis just tumbled to the lowest level for this time of year since 2013, not counting 2020 when consumption was shattered due to the pandemic( worth keeping an eye one)   But the windfall taxes are a massive boon for oil bulls as the duty will likely reduce CAPEX budgets at energy companies, which would lead to less supply in the future—indeed, deterring investment in expanding capacity amid tight markets is a recipe for higher oil.  Russia is still producing oil, but a record amount of output from the Urals is now on the high seas looking for a home. Though those barrels are fetid geopolitically, they may go to India and China, but it is a high-stakes game of Axis and Allies.  FOREX  Lower equity and rates vol is leaving USD longs struggling for any material upside traction. Since we have not taken out any major ranges, I suspect the USD downside reflects investors are pulling back long USD exposure rather than opening outright dollar shorts in meaningful size. However, increasing efforts from China's official institutions to loosen economic policy could spur a more long-lasting USD downside.

EUR/USD witnessed heavy intraday selling on Wednesday amid resurgent USD demand. The recent hawkish comments by the ECB policymakers helped limit any further losses. A move beyond the 1.0770 confluence is needed to support prospects for any further gains. The EUR/USD pair faced rejection near the 50-day SMA on Wednesday and retreated nearly 100 pips from its highest level since April 25 touched the previous day. The US dollar made a solid comeback and snapped a two-day losing streak to a nearly one-month low amid concerns about softening global economic growth. Investors remain worried that a more aggressive move by major central banks to constrain inflation and the Russia-Ukraine war could pose challenges to the global economy. The European Central Bank's (ECB) Financial Stability Review reinforced market fears and warned that further corrections in financial markets could be triggered by escalation of war, even weaker global growth or if the monetary policy needs to adjust faster than expected. This, in turn, was seen as a key factor that prompted fresh selling around the major. On the economic data front, the US Durable Goods Orders fell short of market expectations, though they did little to dent the intraday bullish sentiment surrounding the USD. Later during the US session, minutes from the May 3-4 FOMC meeting showed that most participants believed a 50 bps rate increase would likely be appropriate in June and July. The minutes, however, lacked any major surprises as the expected move is already priced in, reaffirming the idea that the Fed could pause the rate hike cycle later this year. This, along with a goodish recovery in the US equity markets, acted as a headwind for the safe-haven buck. Apart from this, the recent hawkish remarks by the ECB policymakers, hinting at an increase of at least 50 bps to the deposit rate, assisted the EUR/USD pair in finding decent support near the 1.0645-1.0640 region. The pair recovered around 50 pips from the daily low and gained some follow-through traction during the Asian session on Friday, though it struggled to capitalize on the move. The worsening global economic outlook continued weighing on investors' sentiment and drove some haven flows towards the greenback, which, in turn, capped the EUR/USD pair. Given that several European markets are closed in observance of Ascension Day, the USD price dynamics will play a key role in influencing the pair. Later during the early North American session, traders will take cues from the US economic docket - featuring the release of Prelim Q1 GDP, the usual Weekly Initial Jobless Claims and Pending Home Sales. Apart from this, the broader market risk sentiment will drive the USD demand and produce short-term trading opportunities around the pair. Technical outlook From a technical perspective, the recent strong recovery from the YTD low faltered ahead of a confluence resistance comprising of 50-day SMA and the 50% Fibonacci retracement level of the 1.1185-1.0350 fall. The said barrier, around the 1.0770 region, should now act as a pivotal point, which if cleared decisively will be seen as a fresh trigger for bullish traders. The EUR/USD pair might then surpass the 1.0800 mark and aim to test the next relevant hurdle near mid-1.0800s en route to the 1.0880 supply zone. The latter coincides with the 61.8% Fibo. level and cap any further upside, at least for the time being. On the flip side, the overnight swing low, around the 1.0645-1.0640 region, now seems to protect the immediate downside. Some follow-through selling would expose the 23.6% Fibo. level support, near mid-1.0500s, with intermediate support near the 1.0600 round-figure mark.

Minutes from the FOMC meeting on May 3-4 show concern about what the average person already knows. Image courtesy of Fed Board of Governors, Text by Mish from Latest Minutes Minutes of the Federal open market committee Please consider the Minutes of the FOMC May 2-3 Meeting.  Notably, the Fed is sticking with an over-optimistic economic outlook. The staff anticipates "GDP growth would rebound in the second quarter and advance at a solid pace over the remainder of the year." On retail sales, "participants indicated that they expected robust growth in consumption spending. They pointed to several elements supporting this outlook, including strong household balance sheets, wide availability of jobs, and the U.S. economy's resilience in the face of new waves of the virus." "All participants concurred that the U.S. economy was very strong, the labor market was extremely tight, and inflation was very high and well above the Committee's 2 percent inflation objective." The Fed is drinking Kool-Aid. A recession is baked in the cake, and obviously so.  But the Fed cannot admit that. Given the stated nonsense on a "strong economy" perhaps a clueless Fed does not even see a recession. At best, the Fed masks its outlook with a discussion of risks. Risk discussion Participants judged that the implications for the U.S. economy were highly uncertain.  Some participants noted that their business contacts had reported an easing of supply constraints, participants assessed that supply constraints overall were still significant and would likely take some time to be resolved. Participants observed that inflation continued to run well above the Committee's longer-run goal and that inflation pressures were evident in a broad array of goods and services.  Participants agreed that risks to inflation were skewed to the upside and cited several such risks, including those associated with ongoing supply bottlenecks and rising energy and commodity prices Several participants who commented on issues related to financial stability noted that the tightening of monetary policy could interact with vulnerabilities related to the liquidity of markets for Treasury securities and to the private sector's intermediation capacity. "Participants observed that developments associated with Russia's invasion of Ukraine and the COVID-related lockdowns in China posed heightened risks for both the United States and economies around the world." "In light of continuing inflation risks, members judged that it would be appropriate for the postmeeting statement to note that the Committee is highly attentive to the upside risks to inflation." "Regarding risks related to the balance sheet reduction, several participants noted the potential for unanticipated effects on financial market conditions." "With regard to funding risk, the staff highlighted structural vulnerabilities in some types of mutual funds as a continuing focus." "The staff noted that increased uncertainty and ongoing volatility had reduced risk appetite in financial markets and eased price pressures, although valuations of many assets remained elevated." "The staff continued to judge that the risks to the baseline projection for real activity were skewed to the downside and that the risks to the inflation projection were skewed to the upside."   On rate hikes and quantitative tightening (QT) "All participants reaffirmed their strong commitment and determination to take the measures necessary to restore price stability." Participants agreed that the Committee should expeditiously move the stance of monetary policy toward a neutral posture, through both increases in the target range for the federal funds rate and reductions in the size of the Federal Reserve's balance sheet." "Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings." "All participants supported the plans for reducing the size of the balance sheet. This reduction, starting on June 1, would work in parallel with increases in the target range for the policy rate in firming the stance of monetary policy.  "A number of participants remarked that, after balance sheet runoff was well under way, it would be appropriate for the Committee to consider sales of agency MBS to enable suitable progress toward a longer-run SOMA portfolio composed primarily of Treasury securities." Words of the day are risk and inflation The word "risk" appeared in the minutes 31 times. The word "inflation" appeared 66 times.  The text is a warning sign to the markets the Fed intends to hike until inflation is under control.  Sales of agency MBS (mortgage-backed securities) is a warning to the housing markets that the Fed is willing to sell its mortgage portfolio which would drive mortgage rates higher.  Given all the lovey-dovey projections, the Fed either does not see a recession or is warning that inflation, not recession, is its focus.  To repeat "Risks to the baseline projection for real activity were skewed to the downside and that the risks to the inflation projection were skewed to the upside." Finally, please note the warning "valuations of many assets remained elevated." No kidding, but guess who is largely...