TradeDay Macro Matters
Macroeconomic / Geopolitical developments
- US recession warnings mount
- Treasury yields fluctuate
- Renewed Russian threats on grain deal
Recession warnings in the US
The US economy is dealing with the effects of the most aggressive monetary tightening for 40 years. You can also add in a banking crisis, that whilst may have eased from its worst, is leading to a reluctance by banks to lend. Job losses are increasing and business confidence is plunging. The ingredients for a harder landing than a “mild recession” predicted by the Fed are being added to the mixing bowl.
Treasury yields fluctuate
The volatility on Treasuries may be off its peaks, but it remains elevated. Swings in sentiment between narratives of recession fears and inflation tackling are pulling yields around. This leaves uncertainty for equity futures and a lack of conviction in any trending move.
Renewed Russian threats over grain deal
With the prospect of further sanctions imposed by the West on Russia, the threat of retaliation is rising. One key card that Russia has to play is the Black Sea Grain Initiative, the agreement that has helped to bring a modicum of sanity to grain prices. If Russia reneges on the deal and does not ensure safe passage for grain-carrying ships, then this could spike soft commodity prices higher and renew inflationary pressures once more.
US
- One final hike by the Fed
- Tech earnings prop up an ailing market
- Ready to sell in May and go away?
A final 25bps hike by the FOMC
Markets have been confidently pricing for a 25bps hike by the Federal Reserve for a while. After a bit of a mid-week wobble, Friday’s surprise increase to the Q1 Employment Cost Index and the stubbornly high US Core PCE has firmed expectation of a hike. However, the reasons for this being one more and done are screaming out. This is leaving interest rate futures pricing for at least one if not two rate cuts by the end of the year.
The message the Fed gives on Wednesday will be important for market reaction. Equity futures have been propped up by Big Tech earnings, but the broader fears of a recession are weighing on sentiment. If the Fed can engineer a dovish hike, then there could yet be legs to run in this March/April rally.
Tech earnings prop up Wall Street
With NASDAQ significantly outperforming a relatively tired-looking S&P 500, it is notable that tech earnings are propping up US equity markets. Impressive numbers from Microsoft and Meta Platforms, in addition to a solid performance from Alphabet, have helped to sustain the significant heavy lifting that the “Big Tech” shares have done for Wall Street in recent weeks.
However, the boost from these earnings may soon begin to dissipate. Of the tech giants, only Apple is reporting in the coming week and this may allow the steam to escape from the March/April rally.
Sell in May?
Unless the tech stocks can continue to see their share price performances soar, there is a big risk that the supportive bias of earnings season fizzles out. We are firmly into the back end of the quarterly US corporate announcements now, and it will leave investors focusing on growth concerns amidst a final Fed rate hike.
With technical indicators waning around key resistance, traders and investors will be asking themselves a crucial question again. “Is it time to sell in May and go away?”. A failure to overcome key resistance whilst using the crutched support of earnings from Big Tech could easily leave the answer moving towards “Yes”. A downbeat Non-farm Payrolls report could be the tipping point.
What’s next?
The likelihood of a 25bps rate hike by the Fed will be dominant for traders, but also the guidance over whether it is the final one. ISM data will also be watched, but surveys are likely to reflect subdued activity.
However, the calendar ends the week in a crescendo with the April jobs report. Nonfarm Payrolls are expected to moderate into the 150k region. This suggests little growth of note in the US labor market. Weekly jobless data continues to trend higher, whilst the weekly hours worked are trending lower. A disappointing payrolls report would play into the mounting recession concerns.
On the corporate calendar, earnings from Apple will generate the headlines.
Europe
- ECB set to hike by 25bps
- Eurozone inflation and final PMIs on the docket
ECB set to hike by 25bps on Thursday
The hawkish-leaning European Central Bank (ECB) has been a key source of the outperformance of the EUR in recent weeks. The need to tackle inflation that remains sticky remains clear. Headline inflation is falling as eye-watering energy price rises drop out of the year-on-year comparatives. However, core inflation remains a stubborn beast.
Tuesday’s HICP inflation for April is expected to confirm that core inflation for the euro area remains at 5.7%. and shows little sign of easing yet. It means the debate on the ECB Governing Council will be of either +25bps or the more aggressive +50bps of hikes. A prominent hawk on the ECB, Isabel Schnabel suggested that 50bps should be on the table for discussion. A 50bps hike may not be seen, but it does suggest that markets pricing for peak rates of around 75bps higher than current levels may be correct. The EUR will remain supported by this hawkish bias.
What’s next?
Monday’s May Day public holidays across Europe may leave traders twiddling their thumbs, but the week quickly ramps into gear on Tuesday with Eurozone HICP inflation. Any upside surprises could push the ECB into a 50bps hike, although this remains the less likely scenario. Markets tend to react far more to the flash PMIs, leaving little surprise often in final PMIs for April.
Asia
- Dovish BoJ sends JPY plunging
- Falling inflation will leave the RBA on pause
BoJ's patience sends JPY tumbling
The Japanese yen (JPY) was sent spiralling lower on Friday as the Bank of Japan (BoJ) seemed to outdo itself on the dovish scale. Yes, the line in the statement about rates being “at current levels or lower” was removed, but simply “patiently continue with monetary easing” was hardly a signal for tightening. Markets have been pondering whether a new governor at the BoJ would herald a change of tack. It seems that cautiousness will prevail for some time to come. A review of monetary policy of “around one to one and a half years” reflects the glacial pace of change to come. With Japanese yields dropping, the JPY is tumbling into a new phase of underperformance.
Lower inflation leaves the RBA on pause
The Reserve Bank of Australia (RBA) paused its rate hikes in April. With core inflation for March coming in below expectations the RBA is highly likely to remain on pause in its May monetary policy meeting. With the cash rate up at 3.60%, this could very realistically be the peak rate for the cycle, with falling inflation and the expectation of rate cuts towards the end of the year.
What’s next?
Aside from the RBA, traders will also be looking out for a reaction to Chinese PMI data to impact market sentiment. The official NBS China PMIs are released on Sunday and could impact volatility for markets on bank holiday-thinned volumes and liquidity. But also later in the week, with the China Caixin PMIs.
Commodities
- Oil searches for support after the sell-off
- Gold is still treading water
Oil tries to find support
After a near -$10 decline in NYMEX WTI Crude, the price has started to find a near-term floor in recent sessions. However, the sell-off came from a deterioration in the outlook for demand. The prospects of a rally to $100 that some had predicted following the decision by OPEC+ to cut production by -5% to the end of the year, seems to be some way off. Strap yourselves in for elevated volatility week as there is plenty of tier-one US data to further develop the narrative on a US slowdown. Further signs of a US slowdown could mean that floor on oil is breached.
Fluctuating yields mean fluctuating metals
Precious metals have fluctuated in the past week as US Treasury yields have hit a choppy patch. However, there is still a feeling that gold will hold broadly positive in an environment of fear over a US recession, a subdued USD, and whereby real US bond yields are also flat to trending lower. We would still see support around $1950 on the Gold futures as being important to maintaining a positive technical outlook.
On the calendar
Central Banks
It may be a shortened week for some markets with the May Day bank holidays, however, the economic calendar is jam-packed with central banks.
- Tuesday: The Reserve Bank of Australia is expected to keep rates on hold at 3.60%
- Wednesday: The US Federal Reserve is expected to hike by 25bps to a Fed Funds range of 5.00%/5.25%
- Thursday: The European Central Bank is expected to hike the deposit rate by 25bps to 3.25%
Macro data
Date | Major Macro Data |
01/05/2023 | ISM Manufacturing |
02/05/2023 | RBA monetary policy, Eurozone final Manufacturing PMI, UK final Manufacturing PMI, Eurozone HICP inflation, US JOLTS, US Factory Orders |
03/05/2023 | ADP Employment Change, ISM Services PMI, FOMC monetary policy |
04/05/2023 | China Caixin Manufacturing PMI, Eurozone final Composite PMI, UK final Composite PMI, ECB monetary policy |
05/05/2023 | China Caixin Composite PMI, US Non-farm Payrolls |
Corporate earnings
Date | US corporate earnings |
01/05/2023 | N/A |
02/05/2023 | Pfizer, Advanced Micro Devices, Ford, Starbucks |
03/05/2023 | Barrick Gold, Uber |
04/05/2023 | Moderna, Apple |
05/05/2023 | AMC Entertainment |
Steve Miley
Co-Founder of TradeDay.
Steve is the former head of Technical Analaysis research at Merrill Lynch and Credit Suisse, and owner of the award winning research boutique Market Chartist.
