TradeDay Macro Matters
Macroeconomic / Geopolitical developments
- US debt ceiling concerns
- Stubborn US inflation and cooling Chinese inflation add to negative risk appetite
Debt ceiling concerns continue
Treasury Secretary Janet Yellen is not mincing her words on the debt ceiling. On Thursday, she commented that a US default would be an “economic and financial catastrophe”. Traditionally, agreement to raise the debt ceiling is a game of brinkmanship. However, the political divide has rarely been wider than it is now and agreement remains elusive.
Traders are increasingly having to come around to the idea that a default could actually happen. This has been driving flow into safe haven assets such as the US Treasuries (well, at least not those about to mature), the US dollar and Japanese yen. Yellen added that a default would “spark a global economic downturn that would set us back much further (than the pandemic)”. She has forecast that the US Government could run out of cash in early June. The countdown clock is ticking ever louder.
Inflation declines give little cause for cheer
Interesting developments in the levels of inflation for the world’s two mega economies. Neither really does a great deal to help souring market sentiment either.
Headline US CPI inflation fell a shade more than expected to 4.9%. However, core inflation dipped slightly but was in line with expectations at 5.5%. Whilst headline inflation will continue to fall sharply in the coming months due to favourable base factors, core inflation (the one that sustains) is set to remain stubbornly high. This gives no reason to think the Fed can ease off quite yet.
Inflation continues to dive in China. With the PPI (factory-gate inflation) accelerating down to -3.6% the headline CPI is now at +0.1% which is the lowest since early 2021. This suggests the Chinese economic recovery from zero-COVID is spluttering and domestic demand is frail. A sharp reduction in imports in April also adds to a picture of an economy that is misfiring in its recovery. This only adds to the picture of negative risk appetite for major markets.
US
- Risk appetite sapped by the debt ceiling concerns
- Jobless claims show the strain
- Support for the USD and tech stocks breaking higher
Safe haven flows from the debt ceiling concerns
It seems increasingly as though Congress will take the debt ceiling debate right down to the wire. No sane person would believe that those in Congress would take the US into default. Would they? Well, the closer we get to June (when Janet Yellen believes the government may begin to run out of money), the more that markets will need to price for the possible.
Ultimately, the rational brain in my head believes that an agreement will be reached and a relief rally will surge back in. However, in the meantime, there are increasing safe haven flows. Yields are tracking lower, the US dollar is catching a bit and the Japanese yen is in recovery mode.
Strains in the labor market
Nonfarm Payrolls were recently much better than expected. However, the data is around three weeks out of date as it is published. For arguably a more prescient view, the weekly jobless claims are continuing to rise. The most recent week’s data showed a sharp rise to 265,000 which was 20,000 higher than expected. A warning indeed.
USD rebounds, NASDAQ breaks out
Two key market moves caught our eye in the past week. Firstly, the rebound in the USD. Treasury yields continue to fluctuate, but even as they fell, the USD found support. This points to a safe haven flow forming in forex markets. If the Dollar Index can pull decisively above 102.40 it would open the key resistance band 102.80/103.45.
However, the other interesting mover was on NASDAQ futures. Lower yields play well for growth stocks. Big Tech continues to pull more than its weight as the NASDAQ outperforms the broader market. The E-mini NASDAQ 100 futures breaking above 13370 to its highest level since August 2022 has opened a test of the key high at 13740.
What’s next?
Earnings season is very much on the wane now, but this week is all about the retailers. Home Depot will give a gauge of the outlook for the DIY market. However, the earnings from consumer staples giant Walmart might give better insight into the household finances of Main Street America.
Europe
- GBP performance after the BoE hike
- The waning EUR
Bank of England hikes, with more likely to come
The Bank of England joined a string of major central banks in hiking interest rates by 25bps in May. Inflation remains particularly high and the BoE is understandably worried that it needs to continue to hike to bring inflation lower. Interest rate swaps markets continue to price the likelihood of perhaps two more 25bps hikes to bring the rate to a nice round 5.00% before stopping later in the summer. The rather more upbeat view of the BoE now expects the UK to avoid a recession, although let’s call a spade a spade, bumping along a shade above zero growth and avoiding the word “recession” is hardly something to celebrate.
Although GBP was volatile on Thursday it leaves the pound open for sustainable outperformance, especially on its major crosses such as EUR/GBP and GBP/AUD. The picture is more clouded against a resurgent USD and the safe haven JPY as risk appetite sours.
The waning Euro
The Euro (EUR) had been one of the standout performers on major forex in recent months. However, this has started to tail off since the ECB meeting over a week ago. Cracks in the hawkish bias have seen the EUR/USD rally faltering under 1.1100 with a reverse move that is testing the key eight-month uptrend. Support at 1.0785/1.0830 giving way would be a key corrective signal that could open a retreat towards 1.0500.
What’s next?
The UK unemployment data contains the latest wage growth data. Real wages remain deeply negative (c. -4%) which is weighing on retail sales. However, rising wages are a double edge sword, adding to inflationary concerns for the Bank of England.
A second reading of Eurozone GDP is unlikely to shake markets too much, whilst inflation is also a final reading. So the German ZEW Economic Sentiment is probably the indicator to watch for EUR moves.
Asia
- The JPY is rallying as yields fall over
- Safe haven flows also scupper the AUD rebound
A recovery in JPY
The relative recovery in the Japanese yen may not be showing too decisively against the resurgent USD, but looking elsewhere on the JPY major crosses shows a far different story. The rebound reflects a trend of decline in major government bond yields amid a safe haven flow. The JPY tends to be favoured during times like these and this one is no exception.
AUD & NZD both faltering again
We take that JPY view and extrapolate it to the higher-risk major currencies. This results in what we are seeing as a sharp faltering of the Australian dollar, whilst the New Zealand dollar is also not immune and is suffering a similar fate.
What’s next?
Chinese sector data will set the tone for risk appetite in the early part of the week. Even though the Reserve Bank of Australia’s surprise rate hike was down to concerns over inflation, traders will be mindful of developments in the labour market too. Any surprises in the Australian unemployment data always tend to drive a reaction in the AUD.
Commodities
- A rebound on oil futures rebound is faltering as risk appetite sags
- Gold futures falter as the USD rebounds
Oil rally falters
The rebound that we saw in oil over the past week has started to fall over again. With little to overtly drive the move, it seems that the rally was down to some short-covering, and that seems to have been short-lived. Despite the run of lower highs posted over several months, NYMEX oil futures have frequently managed to rally every few weeks. However, this one could already have run its course now.
Reaction to the resistance now at $73.89 will be a gauge. However, the faltering outlook for demand should continue to weigh the price towards a test of support levels. This leaves the March/May lows around $63.65/$65.65 under threat.
Metals reflect the safe haven flow
Metals have had another pretty tough week. With copper again sharply lower and iron ore also dropping back, this reflects the concerns that markets are pricing for a US slowdown. On the precious metals, silver was sharply lower too, but with safe haven flows, it is not a surprise to see gold faring much better.
As inflation expectations have slipped, this is holding up real bond yields. With a USD rally also into the mix, this is weighing on Gold futures. We are looking at the reaction low at $2004 to act as support but a breach would open a deeper unwind towards the next support area around $1970/$1977.
On the calendar
Central Banks
With the monetary policy decisions from the major central banks now done for a while, attention will turn to the speakers. The FOMC has Bostic and Barkin scheduled for Monday. Bank of England Governor Bailey also speaks on Wednesday.
Macro data
Date | Major Macro Data |
15/05/2023 | Eurozone Industrial Production |
16/05/2023 | Chinese Industrial Production & Retail Sales; UK Unemployment; Eurozone Trade Balance; Eurozone GDP (2nd); German ZEW Economic Sentiment; Canadian Inflation; US Retail Sales & Industrial Production |
17/05/2023 | Japanese GDP (Q1 prelim) & Industrial Production; Eurozone HICP Inflation (final); US Building Permits & Housing Starts |
18/05/2023 | Australian Unemployment, US Weekly Jobless Claims, Philly Fed Manufacturing; US Existing Home Sales |
19/05/2023 | Japanese inflation |
Corporate earnings
Date | US corporate earnings |
15/05/2023 | Nothing of note |
16/05/2023 | Home Depot |
17/05/2023 | Cisco Systems, Take-Two Interactive Software |
18/05/2023 | Walmart, Applied Materials |
19/05/2023 | Deere & Co |
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.
