The week that was:
The combination of the US bank stress, the approaching debt ceiling, and the Fed's opening the door to a pause in rates weighed on risk sentiment and dragged the greenback lower.
Ongoing concerns that the US government could default on its debt saw the 1-year credit default swap for US government debt (cost to insure it) rise to a record high, far beyond its 2008 peak
A mini-flash crash at Asia’s market open on Thursday saw oil prices drop to a 17-month low and gold spike to a record high, before both markets quickly reversed
The RBA surprised with a 25bp hawkish hike, with Governor Lowe later saying that inflation remains “too high” at 7% and a “good outcome” would be 3% inflation in ‘two years’ (so forget cuts for some time if that is correct. They also noted that population growth could increase domestic demand (inflation) and services inflation could move higher
The ECB hiked interest rates by 25bp to 3.75% with an “almost unanimous decision”, and more hikes are likely with Lagarde saying…
The Fed raised by 25bp to 5.25%, Jerome Powell pushed back rate cuts this year yet markets began to price them in anyway
Mixed employment data from the US muddied the monetary-policy waters, with a very strong ADP print, higher initial claims
What to look for this week:
US debt ceiling and banking crisis:
These undesirable themes keep rearing their ugly heads and refuse to flush. With news that more US regional banks are looking at ‘strategic options’ to sell up or stimmy the rate of deposit outflows, CEO’s requesting more protection to protect deposits, it was no surprise to see regional banks lead the way lower as we headed towards the weekend. Not helping is intensified fear that the US government may actually default on their debt, which is nicely encapsulated with the 1-year credit default swaps of US government debt hitting a record high, far beyond the 2008 peak. So we doubt this theme will simply disappear, and is a key reason that sentiment remains fragile, index gains remain capped, oil is plummeting and gold is erratically trading around its record high.
CPI. With the Fed hike and the April jobs report behind it, the market now looks toward the US inflation reports. April CPI (May 10) is expected to have risen by 0.4%, which would leave the year-over-year rate unchanged at 5.0%.
The Dollar Index appears to have carved a shelf in the 100.80-101.00 area. A break would target the 99.00 area, the (61.8%) retracement of the rally since the January 2021 low (~89.20). A move above the 102.00-40 area would help stabilize the technical tone.
The BOE are expected to hike by another 25bp to take rates to 4.75%. They hiked in March by the same amount 7-2 in favour, and Governor Bailey warned that he was not sure it would be the peak rate. Goldman Sachs have also upwardly revised their peak rate to 5%, which leaves room for another hike if so. Investors will keep a close eye on the MPC votes to see if fewer than 7 vote in favour of a hike, as it shows confidence in future hikes is wavering. Last week we head BOE’s Broadbent say that there are signs that price pressures are easing, the UK is experiencing second-round inflation effect but not a wage spiral, and even if they’d began hiking six months sooner it would have only shaved 0.5% off of the peak rate.
The market is confident that the BOE will deliver another quarter-point hike to lift the base rate to 4.50%. The peak is seen between 4.75% and 5.0%, with a clear leaning toward the latter.
Sterling reached its best level since last June at the end of last week near $1.2635. It has been helped by the upgraded economic outlook. The rise of the April composite PMI to 54.9, its highest since April 2022 illustrate the improved prospects. The next nearby target is $1.2660-70 area. Further afield, the $1.2760 area is the (61.8%) retracement of sterling's decline from the June 2021 high near $1.4250. The momentum indicators are not overbought. However, the upper Bollinger Band is at $1.26. Initial support may be found in the $1.2500-25 band.
Eurozone: The economic calendar is light in the week ahead. There are some national reports that will draw attention. Germany's March industrial output may garner interest, after it reported horrible factory orders data (-10.7%) and French industrial output tumbled by 1.1%. The recent release of Q1 GDP (flat after a 0.5% contraction in Q4 22) renders most Q1 data moot, but the dismal March retail sales reported last week (-2.4% vs. the median forecast in Bloomberg's survey for a 0.4% increase) saw the euro slump to a seven-day low (~$1.0940).
Australia: The Reserve Bank of Australia surprised the market by exiting its pause after one month and hiking the overnight cash target rate by 25 bp to 3.85%.
The Australian dollar rose every session last week for the first time this year. The Aussie reached a two-week high slightly above $0.6755 ahead of the weekend. The $0.6800 area marks the upper end of a two-month range. The momentum indicators are constructive, and the five-day moving average is poised to cross back above the 20-day moving average. An upside break could spur a move toward $0.6860 and then $0.6900-30.
Monday 8th May: (Public holiday in the UK)
US: Employment Trends Index (ETI), Wholesale Trade, Survey Of Consumer Expectations, Oil Price Dynamics Report
EU: Sentix Investor Confidence, German Industrial Production
Japan: BOJ release monetary policy minutes
Australia: Building Approvals
Tuesday 9th May:
US: NFIB Small Business Optimism Index, API's Weekly Statistical Bulletin (WSB)
EU: French Trade Balance
China: Trade balance
Japan: Household spending
Australia: NAB business conditions, Westpac Consumer Sentiment
New Zealand: Electronic card transactions
Other: API's Weekly Statistical Bulletin (WSB)
Wednesday 10th May:
US: Consumer Price Index, Real Earnings, Underlying Inflation Gauge,
Canada: Building Permits, NY Fed John Williams
EU: German CPI (Final)
Japan: Indexes of Business Conditions (Preliminary), Foreign Reserves, Coincident Index, Leading Indicator
New Zealand: Food price index
Thursday 11th May:
US: Initial Claims, Producer Prices, Weekly Economic Index
UK: BOE interest rate decision
China: Consumer Price Index, Producer Price Index
Japan: BOJ release summary of opinions, Foreign investment
Australia: Weekly Payroll Jobs and Wages in Australia, Monthly Business Turnover Indicator
New Zealand: NZ Finance Minister to speak ahead of the budget
Other: OPEC Monthly Report
Friday 12th May:
US: Michigan Consumer Survey (Preliminary), Imports and Exports, Survey of Professional Forecasters, SCE Household Spending, Fed’s Bullard and Jefferson speak
EU: French CPI (Final)
UK: BOE Huw Pill and Fergal Shortall give a briefing on the Monetary Policy Report, GDP, Industrial/Manufacturing output, Trade Balance
New Zealand: Inflation Expectations, Services PMI, NZ Finance Minister to provide a pre-budget speech, International migration and migration