For much of the evening the US dollar was headed back into the abyss and the Australian dollar marching higher. But that did not last once Fed minutes were released and whispered the word “taper”. All markets jackknifed, not least the AUD which reversed down like a falling stone. DXY:
The Australian dollar is still wrestling with either a bearish head and shoulders top or a bullish ascending triangle. It is breaking down versus EUR:
Gold sank, oil was hit by Iran:
Just a little taper and inflation goes “poof”:
Along with miners:
EM stocks will cop it today:
Junk is still OK:
Yields lifted:
Stocks were stable:
Westpac has the wrap:
Event Wrap
The FOMC minutes mostly reiterated the April meeting policy statement and Chair Powell’s press conference comments: “the economy was still far from the Committee’s longer-run goals. Moreover, the path ahead continued to depend on the course of the virus, and risks to the economic outlook remained. Consequently, participants judged that the current stance of policy and policy guidance remained appropriate to foster further economic recovery as well as to achieve inflation that averages 2% over time and longer-term inflation expectations that continue to be well anchored at 2%.”The minutes did highlight the improvement in the economy and the expectation that annual inflation would rise near term due to base effects. The surprise element came from “a number of participants” indicating that “if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchase.” This contrasts with Powell’s recent comments that they were “not even thinking about thinking about tapering”.
FOMC member Quarles said he expects a temporary increase in prices as the economy reopens, but the Fed understands how to tackle unwelcome inflation if it proves to be lasting: “The Federal Reserve has the tools to address inflationary concerns should they prove to be more durable and higher than we currently analyse them to be”.
Canadian CPI inflation in April was firmer than expected, with headline CPI rising 3.4% y/y (est. 3.1%, prior 2.2%), core measures also rising further.
UK CPI inflation in April was mostly as expected, headline up 1.5%y/y, and core 1.3%y/y, while RPI inflation was stronger at 2.9%y/y (est. 2.4%y/y).
Final Eurozone CPI in April was unchanged at 1.6%y/y, but the core measure was marked down to 0.7%y/y from an initial 0.8%y/y.
Event Outlook
Australia: Several factors will be at play in the April labour force survey. On the positive side is the robust jobs vacancies data and surging employment indicators pointing to strong demand for labour. On the negative side is the ending of JobKeeper and the languishing of tourism and hospitality industries in the CBDs in particular. Add to this, those industries that are growing are finding it hard to recruit labour. We are looking for a 10k rise in employment, and if the participation rate is flat at 66.3% this will see the unemployment rate holding at 5.6%. Ahead of the May update, MI inflation expectations have held below pre-Covid levels.
New Zealand: Budget 2021 will show a dramatic improvement in New Zealand’s fiscal position compared to the Half- Year Update. Essentially, the Covid hit to the Government’s books has been significantly less than anyone feared and particularly so for the Treasury. Tax revenue and the operating balance tracks will show large upward revisions, and with a sharply lower debt track, Treasury will pare back bond issuance plans. While banking some of this upside surprise, the Government has also indicated that it will dial up its spending and investment plans.
US: Like many recent regional surveys, the May Philly Fed Index should show a strong rise in activity and input prices (market f/c: 41.0). Initial jobless claims hit another pandemic low last week, and the downtrend is set to continue (market f/c: 450k). The April leading index will be supported by improving jobless claims and ISM new orders (market f/c: 1.3%). The FOMC’s Bullard, Quarles and Bostic will speak.
There’s not much more to add. I personally thought the Fed minutes pretty balanced. But it is a warning that US fiscal exceptionalism will keep more pressure on the FOMC than other central banks in the coming cycle.
That is one reason why I remain bullish DXY and bearish AUD medium and long term.
