Outlook: We get retail sales and consumer sentiment today, but watch out–the data is a minefield. Sales can rise on inflated prices alone, and picking out what is a true rise vs. a price-only one is well-nigh impossible. Then there are the exclusions, like gasoline, and in addition, some lingering base affects. Last March we had just got the vaccine and sales were still soft, especially in services. Don’t forget the ex-autos idea. Bottom line, efforts to create a “controlled” number–controlled for special factors–are not convincing and all too subjective. As the rest of the world starts copying the Fed (although to be fair, some were ahead of the Fed, like New Zealand and Norway), we see more and more forecasts of rate hikes. The latest is the UK, after yesterday’s high inflation readings. Sterling obediently rose, as did the CAD, finally, on actual action. Gains in other bond yields coupled with a backlash against an overshooting in the YS 10-year was a dollar negative yesterday. The question is whether we get a reality check from the ECB, which is expected to do and say absolutely nothing of use with respect to forward guidance. This looks like they don’t know what to do and are paralyzed by conflicting objectives. Overall, a majority of financial managers expect Europe to get recessionary as the year wears on, according to the BoA/ML survey–with corporate earnings following suit. And yet the euro itself is bouncey. We deduce that it’s the dollar that is soft and not the euro that is firm. Bloomberg in one of it summaries writes that “Global bonds rallied amid market confidence that central banks are on track to tame inflation.” Bloomberg has splendid headline writers that sell newspapers, so to speak, but is that really true? Nobody knows how high inflation can go–remember Kiplinger’s 10%--but Fitch just gave us pause. See the chart from the Daily Shot–oil has already peaked at over $110 and the next year should see $90-100. We don’t know the assumptions and reasoning, but Fitch is hardly a bunch of loonies or wishful thinkers–they have to put ratings on companies and countries in this sector. We choose to give Fitch credibility despite the events of 2008. Meanwhile, the IEA said watch out, the impact of sanctions on Russian oil won’t hit the market until May. It also named falling Chinese demand, the emergency release of strategic reserves and OPEC output increases are all moderating factors that will bring “balance” in Q2. This sounds like utter bilge but we lack hard data to refute. China can buy and stockpile, as it has done before. OPEC refused outright to raise output and some members wouldn’t even take a meeting with Biden. The strategic releases are said to be a drop in the bucket. Anyway, looking at core producer prices is scary enough. See the chart from Trading Economics. Removing energy and food, the rise is still significant at a record 9.2% y/y (from 8.7% and beating the forecast of 8.4%). We guess the pullback in US yields is a normal response to having overshot to the upside once the bond boys belatedly got the message that the Fed means business. It’s a blip. Let’s not overthink it. The Fed still leads and the dollar will reflect that. Foreign Affairs: Ukraine may have taken out of service the lead flagship Russian warship in the Black Sea. This is more symbolic than militarily meaningful but bravo. The US and Ukraine are able to fend off Russian hacker cyberattacks, although the news is spotty. The US is giving even more aid. Finland and Sweden are about to request membership in Nato. As a sign of how screwed up the Republican party has become under Trump, some Republicans say they would oppose those memberships. Serious Tidbit: JP Morgan CEO Dimon said some serious dirt can hit the economic fan even if it’s not still a remote possibility and so far most metrics are hunky-dory. The bank is setting aside $900 million in reserves against possible loan defaults if the worst happens. The interesting thing is that a year ago, it “freed up the $5.2 billion it had reserved for potential loan losses in the pandemic’s early months.” (WSJ) The implication is that the Russian war/oil price issue is less than 20% as bad as the worst case that could have arisen from the pandemic. Fun Tidbit: TreasSec Yellen warned China against joining with Russia to form a bipolar financial system. A lot of people thought she was talking about the dollar losing reserve currency status. Some of the foolish commentary is hilarious (but also bothersome because it puts on display the lack of understanding of money, the financial system, what a reserve currency is in the first place, the status of gold...

EU CPI (Mar) – 21/04 – with the ECB starting to taper its asset purchase program, pressure is increasing for the central bank to outline a plan for raising rates as EU CPI hits new record highs at 7.5%. This is a huge jump on the 5.9% we saw in February and serves to highlight the challenges facing the European Central Bank. PPI prices are also trading at record highs and while core prices are lower when food and energy are stripped out at 3%, this is little comfort to EU consumers who need to eat and move about. Businesses are also struggling as they have to contend with the same challenges when it comes to economic output. EU CPI is expected to be confirmed at 7.5%.         UK Retail Sales (Mar) – 22/04 – UK consumer spending saw a strong rebound in January, after the -0.4% slowdown seen in December. Not only did fuel sales recover, but we also saw a strong rebound in household goods and furniture, with high street sales showing a decent pickup, as 2022 got off to a decent start with a 1.9% rise. This slowed in February as retail sales slipped back by -0.3%. On the plus side, we saw non-food sales post a decent gain with clothing sales rising 13.2%, while fuel sales also rose as the relaxing of Plan B restrictions saw an uplift to travel. Online sales fell back as did food store sales as more people went out to bars and restaurants. On an annualized basis sales rose by 7%. The decline in February was a little surprising given that other retail sales measures have looked more resilient with BRC retail sales numbers for February looking strong. The picture for March is likely to remain equally as challenging especially with consumer confidence looking weak and at their lowest levels since November 2020. The latest BRC retail sales numbers for March showed that like-for-like sales declined -0.4% in a sign that consumers were already starting to hold back.   France/Germany flash PMIs (Apr) – 21/04 – recent PMI numbers would appear to beg the question as how accurate the numbers are, when compared to the corresponding manufacturing and industrial production numbers and various business surveys, which have shown marked slowdowns in manufacturing, as well as services activity. In March we saw manufacturing activity for Germany slow to 56.9 from 58.4, and France to 54.7 from 57.2, still fairly decent numbers. Some have put this down to manufacturers restocking inventory in order to get ahead of sharp increases in prices in April, along with a similar pattern playing out on the services sector. This begs the question whether this can be sustained into April and given the further squeezes being seen in energy prices one has to question whether a decent Q1 performance can be sustained into Q2 as we look ahead to this week’s April flash PMIs.   Germany IFO Business Climate – (Apr) – 20/04 – against a backdrop of rising costs and factory shutdowns, along with its key export markets of Russia being shut down, and the Chinese economy undergoing a self-induced covid-19 circuit break the most recent March German IFO survey was an absolute shocker. Economic activity in March cratered in the face of surging energy and producer prices, with the Institute claiming that sentiment in the German economy had collapsed, a trend that so far hasn’t been reflected in recent flash PMI numbers. Business climate fell to 90.8 and its lowest level since January 2021, while on the expectations index sentiment fell from 98.4 to 85.1, the biggest single-month fall since March 2020.        Rio Tinto Q1 22 – 20/04 – has been one of the better performers on the FTSE100 so far this year, with the shares up over 20% year to date. At the end of last year Rio Tinto posted record profits of just over $21bn, a 116% increase on 2020, as well as announcing a huge total dividend of $10.40c a share, an 87% increase on last year. This shouldn’t really be a surprise given the big rises we’ve seen in commodity prices over the last 12 months with copper, iron ore and aluminium in huge demand. In terms of the outlook Rio expressed uncertainty about the outlook for iron ore pricing, along with higher production costs at its Pilbara operation, although the outlook for aluminum and copper was more positive due to their roles in the transition to renewables. The company is coming under pressure from investors to cut the level of indirect emissions after a number of investors expressed concerns about the levels at the recent AGM. In October last year the miner announced a $7.5bn plan to reduce emissions by 2030 without giving too much...

Euro has been struggling to find demand since the beginning of April. ECB is widely expected to leave key rates unchanged. A hawkish shift in ECB's policy outlook could trigger a steady rebound in EUR/USD. EUR/USD is already down more than 2% in April amid the apparent policy divergence between the Federal Reserve and the European Central Bank (ECB). The European economy is widely expected to suffer heavier damage from a protracted conflict between Russia and Ukraine than the US economy, and the Fed remains on track to hike its policy rate by 50 basis points in May. The shared currency needs the ECB to adopt a hawkish policy stance in order to stay resilient against the greenback. In March, the ECB left interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50% respectively. The bank further announced that monthly net purchases under the Asset Purchase Programme (APP), which were initially planned to end in the fourth quarter, will amount to €40 billion in April, €30 billion in May and €20 billion in June before ending in the third quarter.  The accounts of the ECB’s March meeting revealed earlier in the month that a large number of the governing council members held the view that the current high level of inflation and its persistence called for immediate further steps towards monetary policy normalization. Hawkish scenario The ECB could decide to adjust the monthly purchases to open the door for a rate hike in the second half of the year if needed. The bank might keep the purchases under APP unchanged at €40 billion in April but bring them down to €20 billion in May to conclude the program by June. Even if the policy statement refrains from offering hints on the timing of the first rate increase, such an action could be seen as a sign pointing to a June hike. In a less-hawkish stance, the bank may choose to leave the APP as it is but change the wording on the QE to say that it will be completed in June rather than in Q3. ECB President Christine Lagarde’s language on the timing of the rate hike will be key if the bank decides not to touch the APP. During the press conference in March, Lagarde noted that the rate hike would come “some time” after the end of QE. If Lagarde confirms that they will raise the policy rate right after they end the APP, this could also be seen as a hawkish change in forward guidance.  Dovish scenario The ECB might downplay inflation concerns and choose to shift its focus to supporting the economy in the face of heightened uncertainty by leaving the policy settings and the language on the outlook unchanged.  The euro is likely to come under heavy selling pressure if the bank reiterates that the APP will end in the third quarter as planned. That would push the timing of the first rate hike toward September and put the ECB way behind the curve in comparison to other major central banks. According to the CME Group FedWatch, markets are pricing in a more-than-60% probability of back-to-back 50 bps hikes in May and June. Conclusion The ECB is likely to respond to the euro’s weakness, aggressive tightening prospects of major central banks and hot inflation in the euro area by turning hawkish in April. For EUR/USD to stage a steady rebound, however, the bank may have to convince markets that they are preparing to hike the policy rate by June. On the other hand, there will be no reason to stop betting against the euro if the bank chooses to leave its policy settings and forward guidance unchanged.  EUR/USD technical outlook EUR/USD closed the previous seven trading days below the 20-day SMA and the Relative Strength Index (RSI) indicator stays below 40, suggesting that bears continue to dominate the pair’s action. On the downside, 1.0800 (psychological level, March low) aligns as first support. With a daily close below that level on a dovish ECB, EUR/USD could target 1.0700 (psychological level) and 1.0630 (March 2020 low). Key resistance seems to have formed at 1.0900 (psychological level, static level). In case this level turns into support, a steady rebound toward 1.1000 (psychological level, 20-day SMA) and 1.1100 (static level, psychological level) could be witnessed. 

The Reserve Bank of Australia has surprised investors with a hawkish shift. Australia is expected to have created 40K new jobs in March.  AUD/USD is trapped between Fibonacci levels, employment to be a ‘make it’ or ‘break it’. Australia will release its March employment figures early on Thursday, and this time, the market will be paying more attention than usual to the report. The Reserve Bank of Australia, in its latest meeting, surprised investors by turning hawkish. Policymakers are now open to hiking rates before year-end and announced they will keep a close eye on upcoming inflation and jobs data. Job creation vs wage growth The country is expected to have added 40K new positions in the month, while the Unemployment Rate is foreseen contracting to 3.9% from 4.0%, while the Participation rate is seen increasing to 66.5%. Back in February, Australia added 121.9K full-time positions, quite an impressive figure in the lockdown´s aftermath. Governor Philip Lowe acknowledged that the Australian economy remains resilient in the post-decision statement, which also noted that “inflation has increased sharply in many parts of the world. Ongoing supply-side problems, Russia's invasion of Ukraine and strong demand as economies recover from the pandemic are all contributing to the upward pressure on prices.” The Board also noted that growth in labor costs has been below rates that are likely to be consistent with inflation being sustainably at target, adding that it would assess upcoming “important” data on inflation and labor costs to set its policies. Australia releases its Wage Price Index on a quarterly basis, and the release of the Q1 figure is scheduled for May 18. The latest release showed that the seasonally adjusted  Wage Price Index rose 0.7% QoQ and 2.3% YoY. It was the highest reading since Q2 2019, although previous to the pandemic, wage growth had stagnated to on average 2.2%, well below the record high of 4.3% QoQ from 2008. Clearly, the RBA is much more concerned about wage growth than job creation. However, the latter is directly linked to economic growth and stability. It’s rather a matter of the RBA wishing to avoid unemployment, which would be an even bigger problem, than it being concerned about the possibility of extensive hiring pushing real wages lower. AUD/USD possible scenarios The AUD/USD pair has retreated from a multi-year high of 0.7660 and trades in the 0.7420 price zone ahead of the event. The corrective decline has met buyers around the 38.2% retracement of the 2022 rally at 0.7395, an immediate support level. A discouraging report may push the pair below it, favoring an extension of the current bearish corrective decline towards the next Fibonacci support level at around 0.7310. On the other hand, upbeat figures could push the pair above 0.7500, the 23.6% retracement of the aforementioned rally, leading to sustained gains towards the aforementioned 2022 high.

The global tightening cycle is in full swing with half point interest rate hikes from the Bank of Canada and Reserve Bank of New Zealand. Expectations for changes by both central banks did not stop the Canadian and New Zealand dollars from reacting strongly to these adjustments. The Canadian soared dollar after the rate decision while the New Zealand dollar plunged. Their diametrically opposite movements underscores the importance of policy guidance.   To the surprise of many investors including ourselves, the Canadian dollar sold off ahead of the rate decision, hitting a bottom about an hour before the Bank of Canada raised interest rates by 50bp for the first time in 22 years. This was the bank’s largest single move in more than two decades. According to Governor Tiff Macklem, “the economy can handle higher interest rates, and they are needed.”  Like many countries around the world, Canada is struggling with high inflation – the last consumer price report from February showed prices growing at its fastest rate in 30 years. Russia’s invasion of Ukraine drove prices even higher in March. Although a half point hike and end to bond purchases were widely anticipated, Macklem’s guidance sent the loonie soaring. He said “we are prepared to move as forcefully as needed to get inflation on target” and that rates should return to the “neutral range of 2% and 3%.”  Canada should brace for another 100 to 200bp of tightening this year.    The New Zealand dollar plunged despite a similar size rate hike from the Reserve Bank. The half point move from the RBNZ was a surprise as economists had been looking for a quarter point hike. However according to the RBNZ, “The committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations.” Even though they said “it is appropriate to continue to tighten monetary conditions at pace,” investors interpreted today’s move as a dovish hike and a sign of the central bank slowing down.  They have raised interest rates for four straight meetings since October as inflation surged to 5.9 percent.    Tomorrow, the focus turns to the European Central Bank who is not expected to change monetary policy. Although high inflation is also a problem in the Eurozone, growth is hampered by sanctions on Russia, supply chain issues and the shock of higher food and energy costs on consumers.  The rise in long term rates across Europe should help to cool prices. Even if the ECB can’t raise rates this week, there are steps that can be taken in that direction. The most important of which is addressing their Quantitative Easing program. Previously, the ECB said rates won’t increase until asset purchases end. The choice now is to end QE immediately or to shift guidance by suggesting that rates could increase as QE is unwound. We expect the ECB to raise interest rates this year but the move may not happen until the late third or early fourth quarter, leaving the central bank far behind its peers.   The U.S. dollar is trading strongly, particularly against the Japanese Yen ahead of Thursday’s retail sales report. With prices and wages rising, consumer spending growth is expected to accelerate. The focus will be on core prices – if spending ex autos and gas beats, USD/JPY could extend its gains. Even if it doesn’t expectations for a half point hike at the next FOMC meeting will remain intact. 

EUR/USD - 1.0823 Euro's selloff from 1.1184 (Thur) to 1.0837 on Mon and yesterday's break there to a fresh 1-month bottom at 1.0822 in New York on continued usd's strength due to rally in U.S. yields suggests early correction from Mar's 22-month bottom at 1.0807 has ended and downside bias remains for re-test of 1.0807, break would recent downtrend to 1.0760.later. On the upside, only a daily close above 1.0903 signals a temporary bottom is in place and risks stronger retracement towards 1.0933/38, break, 1.0961. Data to be released on Wednesday New Zealand food price index, RBNZ interest rate decision, Japan machinery orders, Australia consumer sentiment, China trade balance, imports, exports. U.K. PPI output prices, PPI input prices, RPI, CPI, DCLG house price, Italy industrial output. U.S. MBA mortgage application, PPI and Canada interest decision.