TradeDay Macro Matters
Macroeconomic / Geopolitical developments
- Central banks hike but the monetary policy transmission is weighing on economic activity
- A rebound in bond yields is unlikely to last
- Drone attack on the Krelim ramps up the geopolitical risk
Central banks hike again but look cautious
The theme of the week has been the 25bps hikes from the major central banks. The Reserve Bank of Australia did it unexpectedly, driving a recovery in the AUD. The Fed did it, but it was fully expected. However, interest rate futures markets are already calling the bluff of Fed Chair Powell, as he attempted to act tough on fighting inflation. Finally, the ECB also did it, broadly as expected. However, markets are now beginning to see the fissures in claims of consensus on the Governing Council.
Bond yields are choppy but a path lower is likely
Bond yields have been more volatile again this week, with the ICE BoAML MOVE Index spiking back to three-week highs again. The more cautious look to the central banks tightening is a drag on yields, even if the higher-than-expected Nonfarm Payrolls pulled them back higher again on Friday. Given the Fed is highly likely to have seen its final hike, the US 2yr yield still looks uncomfortable in the 4.00%/4.25% region, and gravitation back towards 3.50% in the coming days/weeks looks more likely.
Will Russia escalate tensions?
Following a drone attack on the Kremlin, President Putin is attempting to turn a potentially embarrassing situation into an opportunity. Who dun it? The culprit is yet to be determined. But, Putin is at pains to deflect the blame to actors outside of Russia. The US and Ukraine are the primary sources of his attention. Although there does not seem to be any evidence to back his claims, history tells us that nothing Putin does is without its reason.
Firstly it helps to diffuse the concern of the public in Russia, but more concerningly it gives him the basis of potentially escalating tensions. Could there be more nuclear threats in the coming days/weeks? Markets have been looking past the Russia/Ukraine war for a while, but increased geopolitical tensions could become a factor once more. The deal that is preventing blockades of grain exports through the Black Sea could also be threatened.
US
- One final Fed rate hike
- Nonfarm Payrolls surprises to the upside
- Down the backside of earnings season
- US CPI will be key
The end of the tightening cycle
The Fed has made its final hike. Or at least the meeting on Wednesday seemed to suggest. The bar to additional hikes from here seems to be very high, given that “policy is tight”. Also, given the concern that the Fed has with the “lags with which monetary policy affects economic activity and inflation, and economic and financial developments”. In other words, the hikes are beginning to hurt and it is likely to get worse. The sharp decline in outlook for the US regional banks (check out the SPDR S&P Regional Banking ETF) reflects the pain being felt.
However, Fed Chair Powell has tried to push back on the prospect of rate cuts. He noted that some further weakening of demand and labor market conditions may be required before rate cuts would be appropriate. Whilst this weakening is already beginning to develop, this is confirmation for equity markets that there will either be prolonged high rates or a likely recession. Neither scenario sets up well for sustainable gains on Wall Street. The range on the E-Mini S&P 500 futures is likely to continue.
Nonfarm Payrolls show resilience to an economic slowdown
The jobs report was strong on Friday, showing incredible resilience to the expectations that the labor market is beginning to deteriorate. The headline jobs number in the Employment Situation report has now beaten expectations for an incredible 13 months in a row. With unemployment back down at multi-year lows and average earnings growth higher than expected, it is not the jobs data that is driving the pause in the Fed’s tightening. So markets are, for now, taking this as a positive. However, remember, labor is a lagging indicator and given the size of the revision to the March data, it might be wise not to make too much of this.
Apple’s solid earnings add another tick to the tech column
Apple posted a pretty decent set of results on Thursday. Yet another win for the tech giants on earnings. However, elsewhere earnings from AMD, Starbucks and Ford all disappointed in some capacity or another. The forward guidance seemed to be an issue for AMD (Q2 sales forecasts below estimates) and Starbucks (not increasing its full-year profit guidance). We are very much on the wane with earnings now and the heavy hitters are largely done.
What’s next?
With the strong payrolls report out of the way, attention will now turn to the US CPI inflation data on Wednesday. Inflation remains stubbornly high. There are also signs that the pace of reduction is slowing with both core and headline consensus fairly steady around 5.5% and 5.0% respectively. Given the decline in the Conference Board’s Consumer Confidence a couple of weeks ago, Friday’s prelim Michigan Sentiment for May will be also eyed.
Europe
- The cracks are starting to appear in the consensus of ECB tightening
- The focus switches to the Bank of England’s decision
The mixed messages of the ECB weigh on EUR performance
The market reaction to the ECB rate hike has been intriguing. A 25bps hike and with ECB President Lagarde insisting “we are not done” all sounds fairly hawkish. However, just as the Fed did the night before, the ECB is concerned that the “rate increases are being forcefully transmitted to the euro area financing and monetary conditions”. Bank lending is falling fast.
Lagarde is sounding tough on inflation but markets are taking a different view. Yields fell sharply and pricing for further rate hikes is being reined in. Now, just one more rate hike (in June) is being priced with any degree of certainty. This is leading to the previously strong EUR being weighed down, especially when crossed with GBP and a resurgent AUD (see below). A barrier of resistance on EUR/USD between 1.1030/1.1095 is growing too.
How much further can the BoE hike?
With the RBA, the Fed and the ECB all hiking by 25 basis points, the Bank of England is likely to make a similar move. How much further beyond that will be the question for Thursday’s meeting of the MPC. The committee is already pretty split but there could even be a call for a rate cut (although this might still be a little early (even for arch-dove Silvana Tenreyro). The EUR and USD have suffered from markets calling for an earlier end to the tightening of the ECB and the Fed. Given the strength of the GBP in recent weeks, the risk of profit-taking is elevated.
What’s next?
There is a UK focus on the data this week. A first look at Q1 GDP is likely to show measly growth of +0.1%. The UK economy continues to bump along the bottom without yet dipping into official recession.
Asia
- A surprise from the RBA
- The rebound in Asian major currencies
The RBA surprises everyone
The Reserve Bank of Australia gave the shock of the week with a surprise +25bps rate hike when the majority felt that they were done with hiking. This calls into question the prospect of when the RBA will cut rates. Previous forecasts for rate cuts later in 2023 might have to be pushed back into 2024 now.
A big rebound in AUD, NZD but uncertainty for the safe haven JPY
The result of the RBA rate hike has been a strong bounce in the AUD. However, the move is also helping NZD to recover as well. There are question marks over the near-term outlook for the JPY. The yen had been recovering well with US yields falling hard, but Friday’s upside surprise in the Nonfarm Payrolls report has scuppered that JPY rebound for the time being. It will be interesting to see how markets settle early in the week, but the US CPI data will likely drive elevated volatility through USD/JPY.
What’s next?
Chinese trade data and inflation will be a driver of sentiment for the European session at least on Tuesday and Thursday. Continued moderation in Chinese inflation would not be positive for broader market risk appetite.
Commodities
- Oil futures find support for a rally
- Gold futures fall back after US jobs report
Oil rebounds
Oil had already been starting to find some support in recent sessions but the announcement of better than expected Nonfarm Payrolls helped to drive a decisive rebound. Better jobs growth, better wage growth and lower unemployment speaks of a positive revision for the outlook on oil demand. The momentum of this move will be key but there is plenty of room for an unwinding rally into the $73.93/$76.92 resistance on NYMEX WTI oil futures. The reaction to the resistance will be a key gauge to the next move.
Gold unwinds previous gains
The Fed has signalled an end to its tightening amid fears over an economic slowdown but retained concerns over stubbornly high inflation. These are the building blocks of continued support for a gold rally. The volatility continued in the wake of the payrolls report, with gold futures spiking sharply lower. However, this is likely to be short-lived. Once the market settles down, the trends on the technical analysis remain positive and the fundamentals also point higher. A retest of the highs should not be ruled out.
On the calendar
Central Banks
After the raft of central banks and tier-one data last week, the economic calendar is a little less busy this week. However, at least there is still the Bank of England on the docket. Another 25bps hike is on the cards.
Macro data
Date | Major Macro Data |
08/05/2023 | N/A |
09/05/2023 | Australian Consumer Confidence, Chinese trade data |
10/05/2023 | US CPI |
11/05/2023 | Chinese CPI inflation, Bank of England monetary policy, US Weekly Jobless Claims, US PPI |
12/05/2023 | UK GDP (Q1 prelim), UK Industrial Production, US Michigan Sentiment (prelim) |
Corporate earnings
Date | US corporate earnings |
08/05/2023 | PayPal Holdings |
09/05/2023 | Airbnb, Occidental Petroleum, Virgin Galactic |
10/05/2023 | The Trade Desk, The Walt Disney Co |
11/05/2023 | Fiverr International |
12/05/2023 | N/A |
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.
