DXY was stable last night as its uptrend base has held. EUR was soft:
The Australian dollar still has a monstrous head and shoulders topping pattern (yet to break), a gently declining EUR trend but JPY looks likely to break higher:
EMs are outperforming AUD now:
Oil and gold are new found friends:
Base metals eased their blowoff:
Big miners are flying. Only the Australians are yet to break out:
EM stocks look sick:
But junk is fine:
As US yields bid again:
But that could not save tech stocks. That is a possible mighty double-top in place:
Credit Suisse sums up where we are at:
Last week’s FOMC did little to move the dial on general USD direction, in line with muted market expectations. But the Q&A was notable for the fact that Fed chair Powell appeared to acknowledge that perhaps ultra-loose Fed monetary policy was indeed a contributory factor to “froth in equity markets”, even if he quickly went on to point to economic recovery as a more material factor. In a similar vein, yesterday US Treasury Secretary Yellen noted that some very modest rises in interest rates may be to needed “to make sure our economy doesn’t overheat”. This appears to be the first acknowledgment from policymakers that, coming on top of all the other stimulus measures already enacted, it could actually be the case that the Biden administration’s plans to spend a further $4tn in coming years on infrastructure and family support measures could possibly contribute to inflation pressures in a manner that requires a monetary response. It’s unusual to see the Treasury Secretary who is planning all the spending be the source of the warning on this front; usually finance ministers who want to spend seem happy to assume there won’t be an overheating problem to worry about. But given this particular one was the previous Fed chair, it’s perhaps less surprising that she would have a more technocratic view to offer, and one that might have some longer-term persistence as an influence on the policy debate if US data continue to post strong readings.
From our FX perspective, the Fed’s strong efforts to break the link between strong current US data on the one hand, and market expectations for either tapering of asset purchases or rate hikes on the other, were a key factor behind April’s decline in longer-term US real interests rates – and by extension a weaker USD too. Going into May, US Treasury yields appeared to have found a base and markets were again looking at the possibility of a renewed march higher for longer-term yields, at least if data were going to remain supportive. Especially against a backdrop where notable market figures, for example Warren Buffet, are regularly warning about high inflation risks while media flag constant stories pointing to rising prices linked to raw material shortages and supply chain constraints across multiple industries. But what we have in practice is ongoing support for inflation breakevens even as a modest bout of “risk off” appears to have hit markets, leading to US real yields continuing to head south.
While this renewed decline in US real yields hasn’t prevented the most pro-cyclical G10 currencies like AUD and NZD from losing some ground thus far inMay, it appears to be having at least a subtle dampening effect on the capacity for USD to surge higher, as it has in the past during corrective phases for risky assets. Still, with the RBA having stuck to a cautious and dovish tone while keeping its cash rate unchanged at its rate decision earlier this week, there is certainly room for softness in pairs like AUDUSD if global equity markets retain a weak tone.
In short, US yields remain the key. The next big test on that front is Friday’s US jobs report. The key data release last night was US ADP employment which slightly missed expectations at 742k versus 830k expected:
However, ADP routinely under-reports the BLS report so I’d take that with a grain of salt. Consensus for BLS is 978k but many are calling considerably higher. Standard Chartered is one:
We expect the US April non-farm payroll report(NFP;released7May) to show anincreaseof1.5mn versustheconsensusofc.1mn, and the number could well be higher, in our view (Early leads point to 1mn+ jobs). Of 69 forecasters in the Bloomberg consensus,33see1mn jobs or more; our forecast is close to the top. Our judgment is that it would take 2mn jobs for investorsto think that the Fed might reconsider its view that the tapering discussion is premature. We think investors will see anything below 1.5mn as a continuation of strong data, but not enough to shift the Fed. Between 1.5 and 2mn there is likely to be uncertainty on Fed perceptions.
That’s all a bit binary for me. The report will be strong and very likely strong enough to continue the basing of yields and DXY.
My base case is that despite US inflation coming off in Q3, the market will grind yields higher through H2 as labour markets tighten. Capital Economics is much more alarmed than I am but it has a point:
The April ISM services report suggests that a combination of strong demand and supply constraints is putting significant upward pressures on prices, underlining that the coming surge in inflation is far broader than just increases in commodity prices and rising goods inflation.
The slight decline in the ISM services index to 62.7 in April, from 63.7, still leaves it at a level consistent with GDP growth of 7% annualised. Encouragingly, the employment index rose to 58.8, from 57.2, signalling that employment growth is still gathering momentum. As with the ISM manufacturing index, released earlier this week, the most eye-catching details were the further lengthening in supplier delivery times, which rose to 66.1 from 61.0, and the increase in the prices index to 76.8, from 74.0. The comments in the report point to supply shortages in almost every industry, with many sectors also reporting difficulties finding workers. A weighted average of the prices paid indices from the ISM manufacturing and services surveys rose to 80.1 from 77.0, a level consistent with CPI inflation hitting 5% over the coming months.
The ISM surveys for April paint a consistent picture of supply struggling to keep pace with red-hot demand across most sectors of the economy, which is leading to almost unprecedented upward pressure on prices. We suspect it is only a matter of time before that shows up in the consumer price data With the Fed adamant that the coming rise in inflation will be “largely transient”, however, we expect they will continue to stress that interest rates are remaining at near-zero for a long time yet.
As yields rise, DXY will as well.
