The FOMC meet next week and markets are expecting a 50 bps rate hike from the Fed as well as QT being announced. The Fed is also widely expected to announce another 50 bps rate hike to come. So, this means the bar is set very high for the fed to surprise markets and send the USD even higher. With so much bullish expectations priced in a ‘buy the rumour sell the fact response’ may be the path of least resistance for the USD next week. One interesting pair to look at for next month is the NZDUSD. Over the last 22 years, the pair has risen 14 times. If the Fed fails to give reasons for more USD strength then the NZDUSD could gain as the RBNZ is still on its hawkish rate path cycle. Over the last 22 years, between May 17 and June 10, the NZDUSD has risen 14 times. It has had an average return of over 1.5%. The maximum gain was nearly 10% in 2020 and the largest loss was in 2008’s global financial crisis with more than a 2.5% loss. Will the NZDUSD pair rise again this year? Major Trade Risks: If earnings releases from Apple disappoint on Thursday then that could weigh on broader stock sentiment on growth concerns.

The Russian-Ukrainian war entered its third month, without any signs that the conflict will be resolved any time soon. After failing to capture Kyiv, Russian forces are focussing their attacks on the Donbass region in the Southeast and with the 9 May Victory Day approaching, we think Russia is likely to step up their offensive against Ukraine (read more in Research Russia-Ukraine - Several signals point to an escalation in the war in Ukraine as Victory Day looms, 26 April). Global growth concerns have again hit the market mood. Assets that tend to trade closely in tandem with the cyclical outlook have performed poorly and market volatility has increased. News that Russia halted gas deliveries to Poland and Bulgaria after they failed to make payments in Ruble did nothing to turn around sour risk sentiment and sent oil and gas prices higher. Market concerns have been amplified by another COVID-19 outbreak in Beijing, which could trigger a shut-down of the city similar to Shanghai, putting further pressure on global supply chains. Amid broad USD strength, CNY has seen the sharpest weekly decline since 2015, EUR/USD fell to the lowest level since 2017 and USD/JPY moved higher after Bank of Japan stuck to its dovish policy and yield curve cap. The combination of higher energy prices and a weaker growth outlook put central banks in a tough spot. Yet Riksbank felt no need to wait and hiked its repo rate by 25bp already in April and we look for further rate increases in June, September and November this year. In line with recent comments from Governing Council members, we now expect a first 25bp hike from ECB already in July, followed by continued hikes in September, December and March, taking the deposit rate back to 0.5% in Q1 23. Incumbent French President Emmanuel Macron secured another five-year term. His re-election bodes well for further EU integration, but he is also facing increasing economic and political headwinds. With only 59% of voters endorsing him for a second term, he has to govern a divided country and the weaker mandate could make it challenging to push ahead with ambitious reforms of the pension, health and education systems. To what degree Macron can implement his plans will depend on parliamentary elections held in June. Chinese Covid-19 developments will remain in focus next week, while a further decline in Chinese PMIs from already low levels seems likely due to the Shanghai lockdown. A busy week awaits markets also in the US, where the FOMC meeting on Wednesday is the highlight. We expect the Federal Reserve to hike the target range by 50bp, a view shared by consensus and market pricing, and signal that further 50bp rate hikes are looming this year (read more in Fed Preview, 28 April). The US jobs report released on Friday will be interesting in that respect. We expect the job market continued to tighten in April, with an increase in nonfarm payrolls of ~400k and possibly a further drop in the unemployment rate to 3.5%. On Thursday, we expect Bank of England to hike the Bank Rate to 1.00% from 0.75%, but stick to its softer guidance on the hiking pace from last time. In the euro area, focus will remain on further potential cuts to Russian energy supplies, as the EU is working on another sanctions package that might include an oil embargo. An emergency meeting among EU energy ministers is scheduled for Monday. Download The Full Weekly Focus

Gold prices declined amid a worsening demand outlook this week. Fed's rate outlook and balance sheet reduction plan to impact dollar valuation. XAU/USD faces the next significant resistance at $1,930. Gold started the new week under heavy bearish pressure and lost nearly 2% on Monday. Following a meagre recovery attempt on Tuesday, XAU/USD failed to hold above $1,900 and touched its weakest level in more than two months at $1,872 on Tuesday but erased a large portion of its losses to close the week above $1,900. What happened last week? As Shanghai’s coronavirus lockdown dragged into the fourth week, China ordered mass coronavirus testing in Beijing on Monday, escalating fears over a lockdown in the capital city of the world’s second-biggest economy. In turn, XAU/USD dropped below $1,900 for the first time in nearly a month. “After a strong start to Q1 in China, demand came to a virtual halt in March,” the World Council noted in a recently published research. “Tough new lockdowns imposed to contain a resurgence of COVID-19 had a marked impact on demand for jewellery, bars and coins,” the publication further read, suggesting that the gold price is likely to struggle to gain traction as long as China sticks to its zero-COVID policy. Meanwhile, the greenback capitalized on safe-haven flows and put additional weight on XAU/USD’s shoulders. On top of China-related concerns, the protracted Russia-Ukraine conflict caused investors to grow increasingly worried about a global economic slowdown.  Although gold managed to stage a modest rebound amid a more-than-3% decline witnessed in the benchmark 10-year US Treasury bond yield on Tuesday, the relentless dollar-buying made it difficult for XAU/USD to gather bullish momentum. Meanwhile, Russia's Foreign Minister Sergei Lavrov said that they rejected Ukraine's proposal to hold peace talks in Ukraine and warned that they must not underestimate the risks of a nuclear conflict, boosting the dollar even further.  The unabated dollar rally continued on Wednesday and gold ended up losing more than 1%. On Thursday, data from the US showed that the economy contracted at an annualized rate of 1.4% in the first quarter of the year following the impressive 6.9% expansion recorded in the fourth quarter of 2021. The initial market reaction to the disappointing growth data forced the dollar to lose some interest and gold closed the day in positive territory. With the dollar selloff picking up steam ahead of the weekend, gold extended its rebound beyond $1,900. The US Bureau of Economic Analysis announced on Friday that the Personal Consumption Expenditures (PCE) Price Index climbed to 6.6% on a yearly basis in March from 6.3% in February. On an encouraging note, the Core PCE Price Index, the Fed’s preferred gauge of inflation, edged lower to 5.2% from 5.3%.  Next week The ISM will release the US Manufacturing PMI on Monday. Markets expect the report to show that the business activity in the manufacturing sector continued to expand at a robust pace in April. A weaker-than-expected PMI reading is likely to force the greenback to stay under bearish pressure and help XAU/USD push higher. In case the headline PMI surprises to the upside, the dollar might have a tough time capitalizing on it ahead of Wednesday’s all-important FOMC meeting.  The Fed is widely expected to hike its policy rate by 50 basis points and unveil its plan to shrink the balance sheet. The most likely scenario for the Fed is to trim its holdings of US Treasury bonds and mortgage-backed securities by $60 billion and $35 billion, respectively, per month from June, bringing the total reduction to $95 billion.  It’s worth noting that markets have already priced in these actions. A QE reduction of less than $95 billion could be seen as a slight dovish tilt in the Fed’s policy outlook and trigger a voluminous dollar selloff. Such an action is likely to cause US Treasury bond yields to fall sharply and provide a boost to XAU/USD.  The Fed’s forward guidance on the rate outlook will also be scrutinized intensely by investors. According to the CME Group FedWatch Tool, markets are pricing a 94.5% probability of a total of 125 basis points (bps) rate hikes in the next two meetings. In case either the policy statement or FOMC Chairman Jerome Powell outright dismisses the possibility of 75 bps rate hikes in 2022, the dollar will have more room for a downward correction. On the other hand, any mention of a 75 bps rate hike being on the table in the near future would be assessed as a confirmation of the Fed’s willingness to tighten the policy in an aggressive way and not allow gold to hold its ground. On Friday, the US Bureau of Labor Statistics will release the April jobs report. Nonfarm Payrolls (NFP) are expected to rise by 400,000 following March’s increase...

Oh, to be back in Japan now. Next week is Golden Week in Japan. That means there are three consecutive holidays: Tuesday: Constitutional Memorial Day. Wednesday: Greenery Day (like St. Patrick’s Day, when everyone wears green? More like Arbor Day.). Thursday: Children’s Day (traditionally 3/3 was Girl’s Day and 5/5 was Boy’s Day, now they’re one public holiday). That means most Japanese will simply take the whole week off, which is what the Japanese government intends. Japan has the most public holidays of any country (19) because the culture frowns on workers taking personal days off and so the government compensates. (Ask Glen Wood about this.) In olden days only New Year’s Day was a holiday – one day a year. Alas the rest of us will still be beavering away. It’s a pretty intense week, with Three major central bank meetings: The Reserve Bank of Australia (RBA) on Monday, the US Federal Open Market Committee (FOMC) on Wednesday, and the Bank of England on Thursday. UK local elections on Thursday. The ever-popular US nonfarm payrolls on Friday, heralded by the ADP report on Wednesday. The final manufacturing PMIs on Monday and service-sector PMIs on Wednesday (with some adjustment for the UK, which is on holiday on Monday). Also the US Institute of Supply Management (ISM) version of those reports. German unemployment (Tue), factory orders (Thu), and industrial production (Fri). New Zealand and Canadian employment data (Wed & Fri, respectively). Tokyo CPI (Fri). The regular monthly OPEC+ meeting (Fri). The central bank meetings will no doubt be the focus of attention. This past week only one major central bank that I follow closely, the Bank of Japan, met. They’re a total outlier so their decision is no guide to what other central banks might do. Contrary to the trend almost everywhere else, they decided to double down on their “yield curve control” (YCC) program to make sure that interest rates don’t rise. By contrast, every other central bank seems to be channeling Sylvester Stone: I want to take you higher. The only question is, as Tosca said, how much higher? Sweden’s Riksbank, which I don’t follow closely, did meet this past week as well. They joined the global rate-hike bandwagon, finally raising their policy rate to 0.25% from zero and promising another two or three hikes this year. For next week the main question will be whether the RBA follows the Riksbank and joins the global hiking trend or whether it sticks with its view that Australia’s inflation is not “sustainably” within its 2%-35% target range. Until now it’s said that it wants to see “actual evidence” that inflation is “sustainably” within its 2%-3% target range before hiking. “Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs,” it said last month, while noting that it will have “an updated set of forecasts to be published in May.” Under normal circumstances one might infer that those updated forecasts would be the trigger for a rate hike. I don’t think they’ll need to wait for those forecasts. The surge in inflation in Q1 to 5.1% yoy from 3.5% reported this week was outside the range of all forecasts (4.0% to 4.9%, median 4.6%) and the highest in 21 years (since Q2 2001). The quarter-on-quarter rate of increase (2.1% qoq) met their target for the year-on-year rate! And both their core measures are now above the target zone. This was followed by a surge in the producer price index (PPI) to 4.9% yoy from 3.7% yoy, the highest since Q4 2008, as reported this morning. Accordingly, the market thinks – and I agree – that they will hike rates 15 bps to 0.25%. The expectation then is that once the RBA gets its new forecasts in May it might have to start playing “catch-up” and hike by 50 bps at a time. To make up for its slow start, the RBA is expected to tighten policy by the most of any of the major central banks over the next year. That’s a tall order. Will the RBA validate these expectations? That’s what Tuesday’s meeting will have to decide. I think it may take until May, when they have the new forecasts, before they fully change their tune. I think AUD could stumble after next week’s meeting if the RBA fails to confirm the market’s expectations. The Fed, by contrast, is pretty much a done deal. Last week (April 21st) Fed Chair Powell said that a 50 bps hike was “on the table” for the May meeting. Other Committee members have since chimed in with their support. The market now assumes it’s not only on the table but wrapped up and ready to go. Powell also said “it is appropriate” in his...

GBP/USD battered to 21-month lows just above 1.2400. The US dollar index surged to its highest level in 20 years. Cable could see a technical rebound ahead of the Fed and BOE decisions. There was no reprieve for GBP bulls, as the previous week’s selling spiral gathered steam and smashed GBP/USD to its lowest level since July 2020 at 1.2410. King dollar reigned supreme amid heightening volatility within the G10 fx space throughout the week. The monetary policy divergence between the Fed and BOE will remain the main underlying theme ahead of policy announcements and US Nonfarm Payrolls. GBP/USD: A brutal week GBP/USD set off the week on the wrong footing, extending Friday’s 200 pip meltdown below the 1.3000 level. Over the week, the currency pair lost roughly 2.5% and hit 21-month lows, as the US dollar was on a rampage amid varied factors and a relatively better market mood. The US dollar index reached its highest in 20-years just shy of the 104.00 level. In the absence of any first-tier economic releases from the UK, the major remained at the mercy of dollar price action. The greenback remained the most sought-after currency, as aggressive Fed rate hike expectations shot through the roof, with the CME’s FedWatch tool showing a 96.5% probability of a 50 bps rate hike in May and a 85% chance of a 50 bps June lift-off. Further, China’s covid lockdowns extended into Beijing while the Shanghai-reopening hopes faltered on a fresh uptick in infections. Chinese lockdowns-induced supply chain constraints raised concerns over global growth prospects, while Europe battled an energy crisis, in the face of the Russia-Ukraine war. In times of uncertainty and market unrest, investors took refuge in the ultimate safe-haven, the dollar. Additionally, the dovish BOJ policy outcome triggered a massive slump in the yen, which powered the unrelenting dollar upsurge. Meanwhile, the divergence between the Fed and BOE also remained in play and kept GBP bulls at bay. Although a 1.4% contraction in the US economy in the first quarter of 2021 prompted a profit-taking decline in the buck heading into the weekly close. This helped the pound breathe a sigh of relief but it remains to be seen if the GBP/USD recovery has additional legs. Week ahead: The Fed, BOE and NFP The first week of May is likely to be the most eventful and busy week of the month, loaded with the critical Fed and BOE interest rate decisions midweek while the US NFP release will come out on Friday. On Monday, light trading will likely persist in GBP/USD, as Chinese and the UK markets remain closed in observance of Labor Day. Therefore, thin liquidity could exaggerate moves, aiding the turnaround in cable. The US ISM and S&P Global Manufacturing PMIs, however, could offer some incentives. Tuesday’s UK S&P Global Final Manufacturing PMI and US JOLTS Job Openings will have little to no impact on the pair, as the Fed meeting commences. The US ADP employment data due on Wednesday will be largely ignored, as the Fed decision and Chair Jerome Powell’s press conference will hog the limelight. Fed and BOE expectations will have a significant influence on the pair ahead of policy announcement. The US central bank is seen raising interest rates by 50 bps, lifting the target range to 0.75%-1%. In contrast, the BOE will hike the key rate by 25 bps to 1%. The forward guidance on monetary policy, as well as, on the inflation and growth outlook from both the central banks will hold the key for a fresh direction in GBP/USD. Markets will have little time to settle the dust over the central banks’ events, as US employment data for April will drop in on Friday. The American employment sector remains solid and will continue to justify the hawkish Fed outlook.   GBP/USD: Technical outlook Despite edging higher on Friday, the Relative Strength Index (RSI) indicator on the daily chart stays below 30, suggesting that GBP/USD has more room on the upside to correct its oversold conditions. 1.2600 (Fibonacci 23.6% retracement of the weekly decline) aligns as initial resistance. If that level turns into support, the next recovery targets could be seen at 1.2700 (Fibonacci 38.2% retracement) and 1.2780 (Fibonacci 50% retracement). In case the pair comes under bearish pressure and makes a daily close below 1.2410 (21-month low touched on April 28), additional losses toward 1.2300 (static level from June 2020) and 1.2160 (static level) could be witnessed.   

The Eurozone will update its CPI inflation and GDP growth readings on Friday at 09:00 GMT. While investors expect a firmer economic expansion and another upturn in inflation, the data could produce only temporary volatility as the war in Ukraine will remain the major, if not, the only driver for the battered euro in the short term. Euro may shrug off new record inflation The euro has been hammered badly this week, depreciating by more than 2.0% against the US dollar in the face of hawkish Fed rate hike talk and Russia’s gas supply cuts to NATO members Poland and Bulgaria. That is the largest damage since March 2020, but the week is not over yet and the common currency may have one more opportunity to rebound before the focus solely turns to the 2017 trough of 1.0339 as Friday’s preliminary CPI inflation and GDP growth data appear on the radar. Looking first at CPI readings, there is growing speculation that global inflation is nearing a peak, as year-on-year comparisons with 2021 high levels could produce softer CPI figures. The ECB’s vice president Luis de Guindos reaffirmed his hopes for a peak in inflation today, though the forecasts for the Eurozone flash estimates for April suggest this phenomenon may arise at a later stage, as they point to a new record high of 7.5% y/y from 7.4% previously. Excluding volatile food and energy prices, the core measure is also projected to run beyond the central bank’s symmetrical 2.0% target, unlocking a fresh high at 3.4% y/y, up from 3.2% in March. The above outcome or even a stronger-than-expected print could amplify calls for a July 25bps rate hike, which is currently almost fully priced in futures markets. However, whether the inflation data will provide the much-needed upturn in the euro remains to be seen. Under normal circumstances, a continuous inflation spiral would raise the stakes for tighter monetary policy, stirring fresh bullish volatility in the currency as in the greenback's case. That said, another record CPI mark in the Eurozone may not be very surprising to investors after all. Stronger-than-expected German CPI figures have already foreshadowed this scenario. Also, the war in Ukraine and lately Russia's gas supply cuts could add more fuel to the already rocketing energy and food crisis in the coming months. GDP growth may not help the euro either Perhaps, the euro could recoup some lost ground if a potential upbeat inflation report is accompanied by firmer GDP stats. Analysts believe that the Eurozone economy has expanded at a faster annual pace of 5.0% y/y in Q1 versus 4.6% reported in the preceding quarter, and at a steady quarterly rate of 0.3%. Nevertheless, investors could again barely react to the data since Ukraine’s negative economic spillovers may become more evident in the next GDP releases. Perhaps a sudden pullback in the US core PCE inflation index could give a second chance to euro bulls later on Friday, increasing the likelihood of a narrowing monetary divergence between the Fed and the ECB. But again, given the non-existing support from the recent negative US GDP print, as well as the short-lived impact from the ECB’s recent hawkish rate hike comments, it’s hard to see what can come to the euro’s rescue if not a ceasefire in Russia-Ukraine geopolitical tensions. EUR/USD From a technical perspective, the devastating loss in euro/dollar has opened the door for the 2017 trough of 1.0335 but traders may wait for a close below 1.0500 before they engage in additional selling activities. Beneath the crucial 1.0339 threshold, the pair will re-activate the 2008 downtrend, bringing the scenario of parity back into scope after two decades. In the event of an upside reversal, there is a nearby resistance at 1.056, which the pair needs to claim to continue towards the 1.0750 – 1.0800 region. The 1.0900 round level could be the next obstacle and perhaps the green light for an acceleration towards 1.1045.

There are understandable concerns about the high and persistent inflation rates around the globe. Much of this is to do with the spike in energy costs, but also in other commodities. Partly this is due to supply issues and increased demand as the economy bounced back from the pandemic, but there’s also the war in Ukraine to consider as well. High energy prices are proving to be quite persistent, and central bankers have been very slow and reluctant to raise interest rates in response. Their fear has been that the global economy is far from robust. But high and persistent inflation is forcing central banks, led by the US Federal Reserve, to tighten monetary policy aggressively just as global economic growth is faltering. This is causing great concern and adding to fears that the US and other countries could be heading for a recession.  Recession Stock markets don’t like recessions. Rising prices lead to a decline in consumer demand as workers struggle to pay their bills and cut back on their spending. This is exacerbated as companies are forced to make redundancies and the newly unemployed must rely on savings and government benefits. But recessions can be short and sharp, or long and drawn out. We had a short and sharp recession in early 2020 due to the coronavirus pandemic, while the recession we saw during the Great Financial Crisis of 2008/9 was relatively drawn out. But in both cases central banks and governments helped stave off the worst effects by injecting huge dollops of monetary and fiscal stimuli into the global economy. That was seen by most people as right and proper during the pandemic. After all, it was policymakers who were responsible for ordering lockdowns and the subsequent closing of many businesses. But it can be reasonably argued that much of the financial help that was doled out during 2008/9 went to the people and businesses that were responsible for the crash in the first place. This should be borne in mind when the next recession comes, because they do come around quite often. In my lifetime they have cropped up in the early 1990s, 1980s and mid-1970s. Yield curves About a month ago we saw an inversion in parts of the US yield curve. This is where the yields on shorter duration Treasuries pushed above those on some of the longer ones.  In this case, the yield on the 2-year US Treasury exceeded that of the 10-year. An inverted yield curve means something is wrong in the economy. Yields are supposed to reflect risk, and risk grows with time. The chance something bad will happen in the next 10 years is higher than the chance something equally bad will happen in the next two years. Consequently, longer-term bond investors require higher yields as compensation for that higher risk. So, what does inversion tell us? In specific cases, an inversion can be a reliable indicator that a recession will follow in 18-24 months’ time. The thinking goes that central banks will have to push up interest rates (yields) now to dampen inflation. But this will cause future economic growth to fall to such an extent that they will have to slash rates later to compensate. There’s no doubt that yield curve inversion does precede recessions. But recessions don’t always follow from yield curve inversion. The inversion must be deep and last for a significant period. The longer the inversion, the stronger its predictive value. All the recent inversions we saw reversed out again after a few days. In addition, the most reliable recession indicator is an inversion of the 3-month yield against the 10-year. We haven’t seen that happen yet - not even close.  Federal Reserve  But we all know that the US Federal Reserve has been keeping a lid on its Fed Funds rate, the shortest-term US interest rate. In March, the Fed raised it to just under 50 basis points (bps) from 25 bps. With the 10-year currently well under 300 bps, there’s a big gap to be filled, even though the 3-month is presently above the fed funds rate. But recent speculation over how aggressive the US central bank may be in raising rates to try and cap inflation has raised serious concerns. For instance, the Fed is now expected to raise rates by 50 bps in early May. On top of this and following Fed Chair Jerome Powell’s comments about ‘front loading’ rate hikes, some analysts reckon the Fed could then hike rates by 75 bps in both June and July. If so, that would put the fed funds rate at just under 2.50% or 250 bps. The current 10-year yield is 276 bps. That’s getting perilously close to inverting. all other things being equal. But such a move from the Fed would be...

There are understandable concerns about the high and persistent inflation rates around the globe. Much of this is to do with the spike in energy costs, but also in other commodities. Partly this is due to supply issues and increased demand as the economy bounced back from the pandemic, but there’s also the war in Ukraine to consider as well. High energy prices are proving to be quite persistent, and central bankers have been very slow and reluctant to raise interest rates in response. Their fear has been that the global economy is far from robust. But high and persistent inflation is forcing central banks, led by the US Federal Reserve, to tighten monetary policy aggressively just as global economic growth is faltering. This is causing great concern and adding to fears that the US and other countries could be heading for a recession.  Recession Stock markets don’t like recessions. Rising prices lead to a decline in consumer demand as workers struggle to pay their bills and cut back on their spending. This is exacerbated as companies are forced to make redundancies and the newly unemployed must rely on savings and government benefits. But recessions can be short and sharp, or long and drawn out. We had a short and sharp recession in early 2020 due to the coronavirus pandemic, while the recession we saw during the Great Financial Crisis of 2008/9 was relatively drawn out. But in both cases central banks and governments helped stave off the worst effects by injecting huge dollops of monetary and fiscal stimuli into the global economy. That was seen by most people as right and proper during the pandemic. After all, it was policymakers who were responsible for ordering lockdowns and the subsequent closing of many businesses. But it can be reasonably argued that much of the financial help that was doled out during 2008/9 went to the people and businesses that were responsible for the crash in the first place. This should be borne in mind when the next recession comes, because they do come around quite often. In my lifetime they have cropped up in the early 1990s, 1980s and mid-1970s. Yield curves About a month ago we saw an inversion in parts of the US yield curve. This is where the yields on shorter duration Treasuries pushed above those on some of the longer ones.  In this case, the yield on the 2-year US Treasury exceeded that of the 10-year. An inverted yield curve means something is wrong in the economy. Yields are supposed to reflect risk, and risk grows with time. The chance something bad will happen in the next 10 years is higher than the chance something equally bad will happen in the next two years. Consequently, longer-term bond investors require higher yields as compensation for that higher risk. So, what does inversion tell us? In specific cases, an inversion can be a reliable indicator that a recession will follow in 18-24 months’ time. The thinking goes that central banks will have to push up interest rates (yields) now to dampen inflation. But this will cause future economic growth to fall to such an extent that they will have to slash rates later to compensate. There’s no doubt that yield curve inversion does precede recessions. But recessions don’t always follow from yield curve inversion. The inversion must be deep and last for a significant period. The longer the inversion, the stronger its predictive value. All the recent inversions we saw reversed out again after a few days. In addition, the most reliable recession indicator is an inversion of the 3-month yield against the 10-year. We haven’t seen that happen yet - not even close.  Federal Reserve  But we all know that the US Federal Reserve has been keeping a lid on its Fed Funds rate, the shortest-term US interest rate. In March, the Fed raised it to just under 50 basis points (bps) from 25 bps. With the 10-year currently well under 300 bps, there’s a big gap to be filled, even though the 3-month is presently above the fed funds rate. But recent speculation over how aggressive the US central bank may be in raising rates to try and cap inflation has raised serious concerns. For instance, the Fed is now expected to raise rates by 50 bps in early May. On top of this and following Fed Chair Jerome Powell’s comments about ‘front loading’ rate hikes, some analysts reckon the Fed could then hike rates by 75 bps in both June and July. If so, that would put the fed funds rate at just under 2.50% or 250 bps. The current 10-year yield is 276 bps. That’s getting perilously close to inverting. all other things being equal. But such a move from the Fed would be...

Gross Domestic Product declined at a 1.4% annual rate in the first quarter, far below the 1% consensus forecast. Equities, Treasury yields and the dollar rally as underlying growth appears strong.  Federal Reserve rate policy and May hike should be unaffected. Economic growth in the US contracted for the first time in two years, shrinking at a 1.4% annualized pace in the first quarter after expanding 5.7% in 2021 with the best yearly performance since 1984. The surprise decline was worse than the already low 1% forecast of the Reuters survey and even missed the Atlanta Fed GDPNow estimate of 0.4%.  From the first quarter of last year the economy grew 3.6%.  Despite the steep deceleration in growth from 6.9% in the fourth quarter, equities rallied sharply and Treasury yields and the dollar saw modest gains as traders noted several negative factors that are unlikely to be repeated in future quarters.  Trade and inventory The trade deficit widened in the first two months of the quarter as importers sought to overcome supply-chain problems and exports fell. In the government’s economic accounts trade deficits subtract from GDP. Businesses slowed inventory acquisition from the rapid pace in the second half of last year. Together these two items, trade and inventories reduced first quarter growth by about 4%. Real final sales, a category that excludes trade and inventories, accelerated to a 2.6% yearly rate.  Government spending has also faded as the stimulus and infrastructure packages from last year reached the end of their funding. Consumer spending, the warp engine of the US economy, expanded at a 2.7% annual rate in the last quarter, compared to 2.5% in the fourth quarter. Purchases of consumer goods were little changed while spending in the service sector added 1.9% to GDP.  Business investment for equipment and research and development was robust,  rising 9.2%. Private demand  expanded at a 3.7% rate in the first quarter, more than double the 1.8% pace the Fed considers likely over the long-term. Markets Stocks were dramatically higher with the Dow gaining 1.85%, 614.46 points to 33,916.39 and the S&P 500 adding 103.54 points, 2.47% to 4,287.50. The Nasdaq was the equity leader, rising 3.06%, 382.60 points to 12871.60, helped by a strong earnings report from Meta Platforms, the parent company of Facebook.  S&P 500 CNBC Treasury yields rose modestly with the 10-year about 1.5 basis points higher at  2.832% and the 2-year climbing 5 points to 2.629%.  The US dollar rose in all major pairs except the USD/CAD where the loonie was buoyed by a 2.6% gain in West Texas Intermediate (WTI) to $104.20 and the Bank of Canada’s (BoC) recent and anticipated rate increases. The EUR/USD closed at 1.0498, its first finish below 1.0500 since early January 2017. Dollar yen rose 1.8% on the day, ending at 130.80, its highest in two decades as the Bank of Japan (BoJ) reaffirmed its dovish monetary policy on Thursday in Tokyo. The USD/JPY is  up a remarkable 13.9% since the open at 114.81 on March 7 fueled by the surge in US Treasury rates while yields on Japanese Government Bonds (JGB) have been largely unchanged. The USD/CAD dropped 19 points to 1.2805. The AUD/USD dropped 0.4% GBP/USD fell 0.6% even though the Reserve Bank of Australia (RBA) and the Bank of England are expected to hike rates 25 basis points and 15 basis points next week.  The GDP report is not expected to alter the Federal Reserve’s plans for a 0.5% increase at Wednesday’s meeting. Treasury futures predict an 81.5% chance that the fed funds rate will be at 2.75% or higher by this year’s final Fed Meeting on December 14. Conclusion Inflation is the economy’s wild card. So far the year-long tidal wave of price increases washing over every sector of the consumer economy has not deterred household spending. One key to consumer resilience is the job market. Employment is easy to find. The number of positions on offer has averaged over 11 million for ten months, an all-time record. Unemployment claims were 180,00 in the latest week, also very near the record low, and wage gains are strong. Average Hourly Earnings were up 5.6% in March, though that was overwhelmed by the 8.5% headline inflation rate. Over the prior year consumers lost 2.7% in purchasing power.  As long as Americans continue to fund the economic expansion, the Fed’s hope that it can curtail inflation without instigating a recession can remain alive. 

Outlook: Today we get US GDP for Q1 and remember that yesterday, the Atlanta Fed GDPNow had lowered its forecast from 1.3% to 0.4%, on consumer lassitude. (Tomorrow’s eurozone GDP is expected at 0.3%, by the way.) The Conference Board has 1.5%. We also get the usual jobless claims today, which show the rearview mirror of Q1 GDP likely not having any influence on sentiment at all. When jobs are still on the upswing, despite peculiar participation rates, it’s hard to talk of a slowdown. Besides, in Q1, we were still coming off the latest Covid surge, which peaked around the first week of January. The relative return theme attracts a higher number of traders every day with no end in sight. He who has the highest rate wins and notice that’s nominal rates, not the real ones. So, with the US about to raise by 50 bp, the dollar wins regardless of any other “high-frequency” data. Canada loses, but only a little because it intends to copy the US, as does Mexico. The Brazilian central bank, in contrast, has been dealing with high inflation from the cradle and is getting weary of hikes. Japan stands out with its stubborn adherence to the idea inflation is transitory. Not using that exact word doesn’t alter the fact that the BoJ feels the Japanese economy has been mired in deflation for decades and this burst of higher prices will not contaminate the Japanese economy. If Mr. Kuroda and his economists are right, what is it about the Japanese economy that has inflation-proofed it? And can we get some? It’s worth noting that the latest stimulus program gives cash to Japanese families (a little under $400 per child). The last time we saw this, it was $200 and most of it was never spent and the coupons expired worthless. At the time there was a lot of talk about Keyne’s “pushing on string.” We wrote that this shows Japanese are not materialistic as are Americans, and in part because they literally lack the space to put Stuff. Europe is somewhere in never-never land. The latest idea from ECB chief Lagarde is that asset purchases will, maybe, end in July, after which the bank can consider raising rates. Caution on Lagarde’s part is probably warranted considering Europe is at war, whether it admits it and names it that. There is a whisper of hope that opening the fiscal purse will “take care of” donations to Ukraine, for those excellent German tanks or some country’s gas or whatever (not to mention the cost of refugees). Lagarde doesn’t speak of inflation as transitory but seems to think it must be borne with clenched teeth because of other factors. She may be right. As we have said before, the dollar’s rapid and steep rise is wildly abnormal and will correct at some point, possibly when the Fed actually delivers that 50 bp (“buy on the rumor, sell on the news”). Whenever the timing, come it will. Pullbacks are normal, although this one could be a doozy. Start shaking in your boots. Technical analysis king Larry Williams says “buy high and sell higher” for occasions like this, and he’s not wrong, as long as you know your last trade is going to be a giant loss. The guture of Europe We keep writing that the Europe of the Maastricht Treaty in 1993 is gone. The Russian invasion of Ukraine and the first land war in Europe in more than 75 years has altered “Europe” in ways that can never be turned back. Solidarity with Ukraine is heart-warming and noble, but misses the point entirely–f something named “Europe” is to come out the other side, it has to change in some fundamental ways nobody is yet willing to admit. Foremost is the concept of union and what that means. EU and EMU critics have long bemoaned that federalism was adopted in only a few areas, like the Schengen passport rules and the currency. But a true federal union, like the US, has a lot more both on the surface and under the skin. Economists name nationwide unemployment insurance and Social Security for example, not to mention various forms of health and safety regulations, health care, food stamps and a dozen other things. Just social security pensions alone have been political nightmares in Italy and France, for example. We don’t have that in the US. We also don’t have a national security or foreign affairs function at the state level. In the current situation, it’s nice that the European governments are banding together, but they shouldn’t have to. A European foreign policy should already be in place. (Why is Ireland not a member of Nato?) To be fair, the US has been an obstacle to federalism in Europe. So far...

A combination of factors dragged EUR/USD to a fresh five-year low on Thursday. Concerns about the economic fallout from the Ukraine crisis weighed on the euro. Aggressive Fed rate hike bets continued boosting the USD and contributed to the fall. The EUR/USD pair continued losing ground for the sixth successive day and dropped to its lowest level since March 2017, around the 1.0500 psychological mark during the Asian session on Thursday. The shared currency was weighed down by concerns that the European economy, which relies heavily on Russia to meet its energy needs, will suffer the most from the Ukraine crisis. The worries resurfaced after Russia announced a plan to halt gas flows to Poland and Bulgaria amid a standoff over fuel payments from “unfriendly” buyers in rubles. It is worth mentioning that the EU gets about 40% of its gas and 30% of its oil from Russia and has no easy substitutes if supplies are disrupted. The risk of an energy crisis could make it difficult for the European Central Bank to tighten its monetary policy, leaving it lagging far behind the Fed. The US central bank is widely expected to hike interest rates by 50 bps when it meets on May 3-4, and again in June and July, and ultimately lift rates to around 3.0% by the end of the year. The bets were reaffirmed by the recent hawkish comments by influential FOMC members, including Fed Chair Jerome Powell, last week. Apart from this, the deteriorating global economic outlook boosted the US dollar's reserve currency status and pushed it to the highest level since March 2020, which exerted additional pressure on the pair. The prospects for rapid interest rate hikes in the US, the prolonged Russia-Ukraine conflict and the latest COVID-19 outbreak in China have been fueling fears about stalling global growth. That said, signs of stability in the equity markets could act as a headwind for the safe-haven buck and extend some support to the pair amid extremely oversold conditions. The fundamental backdrop, however, remains tilted firmly in favour of bearish traders and suggests that the path of least resistance for the pair is to the downside. Market participants now look forward to the release of the prelim German consumer inflation figures for some impetus ahead of the key US macro data. The US economic docket highlights the release of the Advance Q1 GDP report and the usual Weekly Initial Jobless Claims. The data could influence Fed rate hike expectations and drive the USD demand. This, along with fresh developments surrounding the Russia-Ukraine saga, should allow traders to grab some short-term opportunities around the pair. Technical outlook From a technical perspective, acceptance below the 1.0500 round figure would mark a fresh bearish breakdown and make the pair vulnerable. The subsequent downfall has the potential to drag spot prices towards intermediate support near the 1.0450 area en route to the 1.0400 mark and 2017 low, around the 1.0340 region. That said, RSI (14) on daily/weekly charts is already flashing extremely oversold conditions and warrants some caution for aggressive bearish traders. This makes it prudent to wait for some near-term consolidation or modest recovery before positioning for the next leg down. On the flip side, the 1.0550 area now seems to act as an immediate resistance, above which a bout of short-covering could lift the pair back towards the 1.0600 mark. The recovery momentum could further get extended, though it runs the risk of fizzling out rather quickly near the 1.0640-1.0650 area. The latter should act as a pivotal point for short-term traders, which, if cleared, will suggest that the pair has formed a near-term bottom and pave the way for additional gains.

Outlook: Yesterday’s data was mostly ignored, including the Atlanta Fed’s GDPNow, down to a lousy 0.4% for Q1om 1.3% last time. We get another estimate today. The drop was due to “yesterday’s annual revision to retail sales by the US Census Bureau showing real personal consumption expenditures growth declined from 3.8 percent to 2.4 percent.” In other words, the consumer is flagging. The relationship between the dollar and the stock is a weird one. Just about anything you want to say about it will be true for one period or another, and you will see strongly held views on the subject that are very hard to argue with.  For many years, they were inversely correlated—stock market up, dollar down. This was weird and somewhat inexplicable, and had nothing to do with international capital flows. For the past decade or so, the two markets have been positively correlated, if not very closely. See the monthly chart (the green candles are the dollar). We have been keeping an eye peeled for a spillover in sentiment from equities to the dollar, and are tentatively deciding it’s there now, if not every day. Yesterday is a good case in point—all the equity indices down by a lot but the dollar up on the day. Still, there’s a bit of leakage there. It shouldn’t come as a surprise—both markets respond to the same factors—the Fed, bond yields, growth prospects, geopolitics. But the self-interest is not the same, and of course things like important company earnings are of only secondary interest to FX (and tucked away as a growth factor).  The FX market doesn’t need any uncertainty fuel from equities—it’s generating enough of its own. We are seeing multi-year lows in the euro with some wild-eyed folks mentioning the old lows around 1.0350 (December 2016) and perhaps parity. Sterling is also on the ropes but note that on the weekly chart, it’s nearing the 62% retracement level of the rise off the April 2020 Covid freakout level. There was no data reason driving the pound down, just the Crowd. Here’s the thing—we almost always get a pushback higher off that 62% line. Softly, softly.   It should go without saying that trend-following charting fails when you don’t have trendedness, and also when you have moves in the same direction as the trend but breaking the norms as shown by bands and channels. Those speed limits lose their usefulness when the FX market is in full freak-out mode, and that what we see today. Only the yen, pulling back as it “should,” has any semblance to normalcy. Even if the analysis, such as it is, justifies the move, as we see with Europe likely going into recession later this year and the ECB falling farther behind the Fed, the FX moves are excessive. Watch out! A backlash against the dollar is on the agenda. Tidbit: The WSJ writes that China is serious about getting growth better than the US, despite the US surpassing China is Q1 with 5.5% and China, 4.8% President Xi tells his government this will prove “that China’s one-party system is a superior alternative to Western liberal democracy, and that the U.S. is declining both politically and economically.” So, China plans to ramp up big construction projects and issue coupons to individuals to boost spending, plus regulatory loosening in real estate. The target is 5.5% in GDP this year—but the IMF sees 4.4%, which will still beat the US with 3.7%, if the IMF is right, although it might not satisfy Mr. Xi. Russia’s invasion of Ukraine is a distraction from the authentic threat posed by China, not least because they steal every invention and innovation they can get their hands on, according to the FBI. Now we have a new book by trade expert Fred Bergsten, The United States vs. China: The Quest for Global Economic Leadership, published April 18. It’s getting rave reviews. According to the Peterson Institute (which Bergsten founded in 1981), “Bergsten calls on China to exercise constructive global leadership and on the United States to reject a policy of containment, avoid a new Cold War, and instead pursue ‘conditional competitive cooperation’ to work with its allies and China to lead, rather than destroy, the world economy.” Wonder what ‘conditional competitive cooperation” means… The Petersen Institute is holding a discussion with bigwigs today from 10 to 11 am, including Larry Summers. Tidbit: Why is the US not pumping massive amounts of oil and shipping it to Europe? The NYT has a sensible explanation—producers fear the high prices won’t last. The US is pumping a mere 2% more since Dec and only 11.8 million bpd, compared to 13.1 million bpd in March 2020 (the record). The Dallas Fed surveyed 141 oil companies in mid-March and found 60% of them gave the price reason. They need...