Daily Market Notes Tickmill UK

Commercial Content
391

Dovish surprise in US retail sales leaves little to salvage dollar bulls

The Bank of Japan dismissed market rumors about further adjustments in yield curve control and left policy unchanged today, disappointing recent buyers of the yen. The report from Bloomberg released yesterday that the ECB plans to execute more caution in the rest of tightening cycle caused brief market embarrassment sending EURUSD to 1.08 and below, but later, as expected, bearish mood proved to be transitory. The dollar index, following a week of consolidation, traded below 102 points on signals of the growing slack in the US economy.

Dollar sentiment began to deteriorate yesterday after release of the Empire State manufacturing index. The headline reading plunged to -32.9 points vs. -9 points forecast, indicating a significant decline in business activity in the sector. The auction of 3- and 6-month Treasuries showed strong demand yesterday, indicating investors’ preference to buy more fixed income in anticipation of weakening activity in the US, which should obviously be reflected in softer inflation figures.

Those greenback buyers that bet on rebound after consolidation, faced strong headwinds after release of the key for this week US eco reports. US retail sales report and PPI released today were noticeably worse than expected:

Basically, dovish surprise in key consumption component and business activity prompted quick revision of US inflation forecast towards a faster decline and less hawkish Fed in 2023. The market reaction was clear: sell the dollar and bid stocks and bonds. As mentioned earlier, the dollar index fell below 102 points, while US futures posted a moderate increase within 0.5%. A significant reaction was observed in Treasuries - the yield on 10-year bonds fell to 3.45%, and two-year - to 4.08%. EURUSD broke through 1.0850 and the breakout of 1.09 is next, followed by a move towards 1.10, where the main resistance is expected:

Yesterday was a day of controversial headlines for the euro. In a lengthy interview with the Financial Times, Chief Economist Philip Lane provided detailed arguments in support of the ECB’s recent hawkish rhetoric. Later in the day, however, a Bloomberg report quoted some ECB officials as saying that members of the Governing Council were actually considering a slower tightening (25bps). On this news, EUR/USD fell below 1.08, but today’s data on the US formed the counterbalance and the pair quickly recovered.

This morning in the UK were published data on the consumer price index for December, which generally coincided with the consensus forecasts. Headline inflation fell from 10.7% to 10.5%, while core inflation remained at 6.3%. The peak appears to be behind us and headline inflation in the UK could return to 6% in the summer and 3.5-4% by the end of the year.

It is important to note that the rise in prices for core services accelerated from 6.4% to 6.8%, which the Bank of England should especially take into account, and when added to yesterday’s wage data, the balance of risks should shift upward to a possible 50 bp tightening in February.

The EUR/GBP pair returned to pre-Christmas levels below 0.8800 thanks to some peculiar lagging of the euro and support of the pound. As discussed above, ECB-related euro weakness may not last long and EUR/GBP may struggle to trade sustainably below 0.8800 for now, also given the absence of strong bullish forces in the pound.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

392

USD remains range-bound on dovish Fed rate hike outlook

Asset markets are somewhat sluggish and reluctant to recover on Friday, following Thursday drop, which saw S&P 500 breaking through 3900 points. Dollar was slightly bid on the back of growing risk-off, however, during this week the DXY appears to remain in equilibrium in the range of 102-102.50:

Despite a slew of negative updates on the US economy for December (ISM indices, retail sales, industrial orders, etc.), the labor market continues to shine bright. Thursday data on unemployment claims showed that the number of applications not only did not increase, but even decreased, and significantly: initial claims from 205 to 194K, continuing claims fell to 1647K against the forecast of 1660K. Another positive aspect of yesterday’s eco data was the pace of housing construction: housing starts declined in December, but were higher than estimates - 1.382 million against the forecast of 1.359 million.

On the side of US energy consumption, which is obviously correlated with the business cycle of the economy, there is a worrisome moment: both crude oil and gasoline inventories have been growing at a high pace for more than a week in a row. EIA data released on Thursday showed that oil inventories jumped 8.5 million barrels, indicating a sharp decline in oil refining, while gasoline inventories jumped 3.4 million barrels against a forecast of 2.5 million:

The data will definitely raise the market’s attention to any further signs of weakening activity in the US.

The ECB reacted sensibly this week to reports that a rate hike of just 25 basis points was being considered. Christine Lagarde repeated her recent hawkish rhetoric yesterday, and the minutes of the December meeting all but confirmed the growing pressure from hawks on the governing board. The details of the “deal” with a more moderate short-term outlook were quite clear: a conservative 50bp hike in December was acceptable only with a preliminary commitment of two increases of 50 bp in February and March. This is good news for the euro, and as long as the data from the US remains weak, EUR/USD should benefit from a rather favorable rate differential. A test of 1.0900/1.0950 is expected next week but things are pretty quiet today as the eurozone calendar is empty and Christine Lagarde shouldn’t surprise with anything new as she speaks again in Davos.

The UK retail sales data for December was released this morning and was rather disappointing. The numbers are down about 1% m/m and follow another drop in consumer confidence, according to data released earlier this morning. GDP in the fourth quarter is unlikely to change. But continued weakness in consumption and some expected decline in other areas (possibly in construction/manufacturing) means GDP in the first quarter is likely to fall by more than 0.5%.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

393

Weak UK PMI data points to further Pound weakness

Incoming data on the EU economy roughly correspond to the thesis put forward by the market that the bloc will be able to dodge a recession. The PMI index from S&P Global climbed into the positive zone in January, amounting to 50.2 points against the forecast of 49.8 points. Positive MoM dynamics is observed for the first time since June last year.

A number of factors contributed positively to activity, from a faster slowdown in inflation and improved supply chains to mild weather that helped the EU avoid an energy crisis.

Activity indices in the EU’s two largest economies, France and Germany, remained at levels below 50 points, but there was a surprising improvement in the service sector in Germany and in the manufacturing sector in France.

The ECB has already raised rates by 2.5% and is expected to make another 50bp hike next week. What happens after is unclear: some Governing Council officials suggest it may be appropriate to slow down the pace of tightening, others continue to insist on the need for significant increases. The hawkish ECB case in 2023 finds its justification mainly in a strong labor market: employment continued to rise in December, supporting high wage growth, which usually generates the lion’s share of domestic inflation.

Unlike the EU, the situation in the UK is less rosy. The S&P Global PMI index for the British economy dived deeper into the recession zone, to 47.8 points in January against 49 points in December. This means that the rate of deterioration in activity has been accelerating this month:

The negative momentum prevailed in the services sector, but manufacturers also reported that output declined in January at the fastest pace since the start of the pandemic. The pound fell by 0.6% after release of the index for January, market participants are beginning to price in the idea that the BoE will be forced to bring forward the point of time when it completes the tightening cycle. Traders are looking for another 50 bp hike, according to the current valuation in February and by 25 bp in March.

Additional pressure on the pound was also exerted by the publication of data on the UK budget deficit. It swelled by £27.4bn from a forecast of £17.3bn, an outcome that calls into question fiscal stimulus hopes, raising the risk of a UK recession in 2023.

From a technical point of view, GBPUSD has broken through the lower limit of the short-term range of 1.231 - 1.23, and now the next sellers’ target is likely to be 1.2250. In the event that the price encounters weak resistance, there will be no potential bounce to 1.23 (which will already be a resistance zone) and the price will continue to move towards the main support at 1.22, as shown in the chart below:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

394

US data surprises helps USD to stage mini-rebound

Currency markets continue to remain in a relative equilibrium with FX majors fluctuating in fairly narrow ranges. US broad equity indices also lack direction, the key benchmark of the market, SP500, after two mini-selloffs to 3900 and 3960 in January, remains tied to the level of 4000 points. Oil (WTI benchmark) has been rising since the beginning of the year, but so far without serious prospects, facing strong resistance in the area of 82-82.5 dollars per barrel.

The macro picture of the market suggests that investors are clearly waiting for the easing of the Fed’s stance in the first quarter of 2023 in response to slowing inflation and somewhat deteriorating activity data, but doubt whether the reaction will be adequate to the risks that have arisen. On the one hand, if the Fed gets worried and signals a quick end to the tightening cycle, risk assets will continue to rise, and the dollar will go to new lows. On the other hand, if fears of an “inflation comeback” and confidence that the economy is strong enough outweigh among the policymakers, markets will likely price in Fed’s policy error that will accelerate the onset of recession, what will clearly be risk-negative event. Hence the absence of pronounced trends in the market, since it is not clear what the Fed will put at the forefront in this situation. This uncertainty will likely be the key near-term trading theme until the middle of next week, when the Fed will hold a meeting on monetary policy.

Thursday’s economic calendar contained some interesting surprises, including unexpected strong growth in January in US durable goods orders (5.6% YoY growth, 2.5% forecast) and fourth-quarter GDP (2.9% QoQ, 2.6% forecast). Employment in the US continues to inspire calm, initial applications rose by 186K against the forecast of 205K. Slightly higher than the forecast were long-term claims for unemployment benefits - 1.675 million, the forecast was 1.659 million:

Despite waves of sales, the dollar index is offered quite solid support at 101.50. It is worth noting that buyers’ confidence in the dollar’s rebound is falling, which can be seen from the gradual decrease in the amplitude of upward corrections in January, which forms the “triangle” pattern. This figure in a downtrend is often interpreted as a trend continuation pattern:

Today’s data helped USD to stage a mini-rebound that reflects reducing bets on a dovish outcome of the Fed meeting in February. However, the dollar index is unlikely to move into an uptrend now: bullish momentum can definitely lead to a breakout of the level of 102 with an upside correction to 102.2-102.3, however, the market is unlikely to take medium-term direction before the FOMC meeting outcome. A short-term tactic in this situation may be to short EUR, GBP and USDJPY with positions covered closer to the middle of next week.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

395

EURUSD consolidates ahead of the FOMC meeting

The dollar index started the week on a rather pessimistic note, trading below 102 points, suggesting that the market is setting low expectations for a hawkish Fed outcome on Wednesday. A moderate correction is taking place in the risk assets as a reaction to a possible turbulence due to a series of central bank meetings this week. Major European indexes and futures for US indices are in the red on Monday. The price of gold, which has been a pretty good proxy for expectations for the Fed’s interest rate path since the beginning of this year, is consolidating around $1925, also indicating relatively mild expectations for a dovish Fed surprise.
The dollar could come under pressure, with EUR/USD above 1.10 if the Fed makes a big surprise, in particular by saying that any additional rate hike after 25bp this week will depend on incoming data. However, the chance of such an outcome is low. It is more likely that the Fed will reject market expectations of a 50 basis point rate cut in the second half of the year, in which case the dollar will move into a short-term rally.

         Potential EURUSD reaction following FOMC decision

In addition to the FOMC meeting on Wednesday, there are two important reports on the US economy on the US data calendar. First, the Fourth Quarter Labor Cost Indicator (ECI) is one of the Fed’s preferred measures of price pressure in labor markets. This indicator rose to 1.4% in the first quarter of last year from the previous three months, but is expected to fall to 1.1% in the fourth quarter from 1.2% in the third. Any surprise upside here could see expectations shift towards a more hawkish FOMC decision. And on Friday, the US jobs report for January comes out.

Clearly this is a busy week for FX and perhaps most of the volatility will come from the results of Wednesday night’s FOMC meeting and the ECB/BoE decision on Thursday. The opening of Chinese markets after the public holiday of the Lunar New Year should also add some volatility to Asian markets price action. Investors are very optimistic about China reopening its doors and will need more data this week to see if the potential recovery momentum in the Chinese economy remains. Tomorrow we will see the Chinese PMI for January, where a significant rebound is expected to support the bullish positions on Chinese risk assets.
The main view of the ECB meeting is that the central bank will remain hawkish and resist the 2024 easing. This should see EURUSD’s 2-year swap differentials continue to narrow and be positive for EUR/USD. The narrowing of the swap differential is the main market factor in the EUR/USD appreciation.

Before the ECB meeting on Thursday, euro zone economic confidence figures for January will be published today. They are expected to improve slightly, but any upside surprises will fuel the hypothesis of lower energy consumption and strong fiscal stimulus to ensure recessions, if any, are mild.

A 50 basis point rate hike by the Bank of England could provide moderate support for the pound sterling. The base scenario for a 50 basis point upswing is not fully priced in by the market. And with wage pressures lingering and the impact of a low base not leading to a significant decline in the consumer price index until the second quarter, it looks like it’s too early for the Bank of England to relax on the predictability of inflation. Depending on the state of the dollar after the FOMC meeting, by the end of the week GBP/USD may rise to 1.2500.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

396

Dollar major recovery becomes a real risk after surprisingly strong US Payrolls report

US equities posted good performance on Thursday, with SPX almost testing 4200 points and NASDAQ jumping 3.56%, very close to 13000 points, the highest level since the end of August. The FOMC meeting was a nothingburger with the FOMC statement and Powell comments indicating a strong bias towards much less hawkish stance, which could open the way to new local highs this year, but Friday Payrolls report thwarted bullish outlook for risk assets. Also, market rebound on Thursday was not reflected in a corresponding decline in Treasury yields: despite the rise in equities, the 10-year bond yield hovered very subduedly around 3.35%, the level that formed after the Fed meeting on Wednesday. Thus, speculative momentum could join the rise in the stock market, which should make it more vulnerable to a pullback in the event of bearish catalysts.

Gold price, despite initial rise after the FOMC, plunged on Thursday, leaving many questions about investors’ take on the FOMC meeting. Since gold returns are a function of the real interest rate (the lower the expected rate, the higher the value of gold, all other things being equal), gold collapse suggests that the Fed meeting did not provide a convincing argument that real US rates will go down in 2023, including through the transition of the Fed to a soft policy.

The shocking Non-Farm Payrolls report today brought back a 50 bp Fed rate hike to the list of possible scenarios at the next meeting! Job growth more than doubled the forecast - 517K (expected 185K). The previous Payrolls figure was also significantly revised upwards to 260K. Wages in annual terms accelerated to 4.4%:

The release of the report caused a sharp strengthening of the dollar, the index of the US currency jumped by more than 0.5%, and the yield of the 10-year bond returned to the level of 3.5%. Gold collapsed:

Strong Payrolls report, in my opinion, will significantly complicate further rally in risk assets market, since the outlook for lower Fed rates in the second half of 2023 was the driver of bull run. Now, market participants may seriously consider that instead of a single rate hike, the central bank will deliver more or move to “large-caliber shells” (a 50 bp increase) as strong labor market can generate inflation longer, which may require a longer central bank intervention. On the other hand, the report showed that the US economy is in excellent shape and maintains momentum of expansion, which allows investors to revise growth outlook for US firms, and hence their expected yield. As one can see, the risk assets market will now be affected by two factors: one positive, in the form of a strong economy, and one negative, the Fed’s later transition to a neutral policy setting.

The most likely market scenario next week is a moderate downward correction of risk assets and extension of the dollar rebound, these trends may sharply intensify in the event of a re-acceleration of inflation in January. The January CPI will help to clarify this risk.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

397

Dollar to extend recovery this week as risk sentiment deteriorates

Market sentiment this week will depend on how three key themes evolve. First, exceptionally strong US labor market data released last Friday poses the risk of a more hawkish Fed in 2023, which market participants will no doubt factor into asset prices. Secondly, deterioration of diplomatic relations between the United States and China against the backdrop of the story with a civilian (?) balloon. Thirdly, rumors about a change in the stance of the Bank of Japan due to the possible appointment of a new head of the Central Bank.

The U.S. jobs report for January, released on Friday, beat expectations, showing an increase in employment of half a million people and a decline in the unemployment rate to 3.4%:

The strong reading is a clear signal that employers remain willing to hire despite months of declines in industrial production, housing construction and disappointing consumer spending. On a positive note, wage growth has slowed from a revised 4.8% to 4.4% yoy, suggesting that firms can hire without offering significantly higher salaries despite a very limited labor supply.

However, the US labor market clearly holds significant potential for inflation, and a 25 basis point Fed hike now looks very likely. Recall that Powell, at a press conference after the Fed meeting, outlined a potential soft-landing scenario in which inflation declines without a significant increase in unemployment. Tomorrow we will see how confident he is in this scenario after the payrolls report when he speaks at the Economics Club of Washington. The focus on inflation worries may signal that the Fed is not as relaxed as it seemed last week on easing financial conditions.

The US data calendar is rather unimpressive this week, which leaves more room for geopolitical topics to influence market sentiment. Hopes for an improvement in US-China relations were dashed after the US shot down a Chinese balloon it claimed contained spy equipment. China confirmed that it was a civilian balloon that veered off course into US airspace and threatened retaliation.

It looks like a major setback in what has been an important bullish factor in 2023, namely the thaw in relations between Beijing and Washington as China’s economy recovers from the lockdowns. A bounce to the 6.85-6.90 area in USD/CNY could signal that markets are actually moving towards discounting more negative trade impacts for China, which would be contrary to the recent bullish sentiment in China, which has partly passed on the baton of optimism to Western markets as well. markets.

Finally, USD/JPY briefly topped 132.00 in early Asian deals after reports that the government has offered a BOJ deputy governor to become the next BOJ governor. He was mostly seen as dovish and more inclined to continue Haruhiko Kuroda’s loose policies rather than implement the kind of structural changes to the yield curve that have been the subject of recent market speculation following the BOJ YCC surprise. It is too early to draw conclusions about this, and both data and market dynamics may have more influence on potential changes in the policy of the Bank of Japan than the new governor: at the moment, however, markets may be more reluctant to increase investments in Japanese government bonds (JGB) and USD/JPY may find some support.

Overall, these three themes tip the balance of risk for the dollar towards a further rally. DXY may consolidate around 103.00, price has broken bearish channel, however RSI is overbought, increasing chances of a slight pullback (102.8-103.0):

The range of the dollar index this week is 103-103.5, going beyond it is likely to be possible after the release of the US CPI for January, which may lead to a second revision of the US growth outlook and a major shift in Fed rate expectations.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

398

US eco surprises gain momentum signaling Dollar has more room to rally

January US CPI released on Tuesday was broadly in line with market expectations. Core and headline inflation were higher than expected, but given exceptionally strong Payrolls (+500K jobs in January) it was pretty clear that the CPI was likely to surprise on the upside, which is exactly what happened. Surprise in the CPI still left a mark on the market, the US Treasury yield traded on Wednesday at a higher level than before the release of the report (up about 4 basis points), US futures remained on a slippery slope. Gold price fell today by 1% to $1835 per troy ounce and, in fact, erased gains made this year:

Currencies of the G10 and EM countries extended decline against the dollar on Wednesday after release of the US Retail Sales report, which substantially beat expectations. Broad retail sales jumped 3% YoY, with core sales growth nearly triple the forecast at 2.3% vs. 0.8% expected. The Empire State manufacturing index also showed a significant improvement, rising from -32.9 to -5.8 (forecast -18):

If a single Payrolls report or a single strong CPI print could still be attributed to a statistical outlier or influence of some unique one-time factors, then a significant improvement in three macro parameters at once (employment, inflation, consumption) is very difficult to ignore. Today, the market got another evidence that the US economy growth rate could reaccelerate in January. This is probably not the development that the Fed projected (2023 will be “the year of lower inflation” according to Powell), so the risk of policy adjustments by the Fed, is growing. Since the market is living with expectations, we are already seeing the corresponding reactions. Bond rates are creeping up (the 10-year rate is at a maximum since the beginning of the year), and the main US stock indices are consolidating in inclined (SPX, NASDAQ) or horizontal (DOW) channels, signaling that the wait-and-see stance becomes a dominating mood. The dollar is quickly regaining its “former glory” for itself, gaining about 3% since the beginning of February. Today, the Dollar is rising against all major currencies and currencies of emerging markets. The technical picture of the dollar index deserves consideration, where a rather interesting situation has formed. After a rebound in early February, the price consolidated for about a week in an oblique flag pattern, a classic trend continuation pattern. Today, there was a breakout following retail sales report release and now the target may be a large horizontal resistance level 105.50-106:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

399

Is EURUSD primed for a reversal? Technical analysis says it is

Incoming data on the US economy and the Fed’s rhetoric pushed greenback higher to a new local high (105 on DXY). Dollar demand also rose against the backdrop of increasing geopolitical risks - in particular, China issued a statement condemning certain features of US foreign policy, in which the market considered its readiness to increase its support for Russia. February and March are seasonally strong months for the dollar, and overnight deposit rates of 4.50% make the dollar an attractive asset for investors.

Since the start of the February, the Chinese yuan has slipped 3% and has come close to the key resistance level at 7.00. This suggests that China’s much-touted reboot after the pandemic is not going as smoothly as many would expect. In addition, the idea that 2023 will be the year of disinflation, that was the part of the Powell message at FOMC press-conference in January, seems less and less plausible, because the incoming data suggests the opposite. In general, the main theses of cheap dollar in 2023 are in danger of becoming irrelevant.

Today, the release of Core PCE became a large shock for the market. Inflation, contrary to expectations of a decrease, accelerated from 4.4% to 4.7%, while in monthly terms, the price level increased by 0.6%, compared to forecast of 0.4%:

SPX futures fell to 3960 points, the NY session began with aggressive sales and the main US stock market indices lost an average of 1.5%. The 2-year Treasury rate soared to 4.8%, and the 10-year Treasury to almost 4%. It is becoming abundantly clear that the Fed’s disinflation narrative is not supported by the incoming data, and the market is now pricing in at least two federal funds rate hikes.

From the positive aspects of the price data for the US - the growth of household spending exceeded the forecast and amounted to 1.6%.

In the Eurozone, by the way, we also seen upward revisions of inflation, to 5.3% in annual terms. Not surprisingly, ECB officials such as Isabelle Schnabel are eager to debunk any suggestion that the process of disinflation has begun. And the mainstream view, which is slowly creeping into the market, is that the ECB may have to tighten policy by another 100 basis points, but crucially, the central bank will keep rates at these high levels for much of 2024. This is now the main hope for EURUSD buyers, which does not allow the pair to weaken too fast.

A little later today, the Michigan Household Sentiment Index will be published. The index is expected to rise slightly, however, given the re-acceleration of inflation in the US, there is a risk of a negative change.

As expected earlier, EURUSD has broken the trend line and looks poised for the 1.05 test. The intensity of the breakout movement and the fact that a key level is approaching are the two main prerequisites for expecting a selling wave to fizzle out quickly. From the point of view of supply and demand, near 1.05, strong support from medium-term buyers is expected, in addition, large players who sold EURUSD from the level of 1.10 will most likely take profits on short positions. All together, this forms an almost ideal reversal scenario:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

400

EURUSD bounce may fizzle out soon as price breaks through key bearish channel

US Orders for durable goods - one of the key components of consumption, which is a decent proxy of households’ expectations of future incomes, posted decent gain in January. The headline reading declined MoM, however, excluding defense products and civil aviation, it rose by 0.8% (forecast 0.1%). The latter indicator is more important because it characterizes the consumer demand in the economy for expensive goods. A series of strong data on the US economy, thus, was supplemented by another good report.

Another important upbeat report was on pending home sales in the US. MoM gain of 8.1% beat forecast of 1% signaling demand remains robust despite pressure from mortgage rates near 7%.

The optimism of European equities after strong data on inflation in France and Spain quickly faded out, buying activity following data releases eventually gave way to sell-off. YoY rise in consumer price level in France amounted to 6.2%, which is slightly higher than the forecast of 6.1%, in Spain - 6.1% against the forecast of 5.7%. Hot inflation data propped up EURUSD, leading to 30 pip gain from 1.058 to 1.062:

Short-term speculative pressure could take the pair to 1.0650, but as we discuss below, the lack of updates from the US and EU central banks this week, as well as important macroeconomic reports (not counting the German inflation report tomorrow, where potential positive surprise is already partly priced in by the market), will determine the global wait-and-see position for EURUSD, and hence potential range for the pair.

US Treasury bonds are little changed today, yields fluctuate near local highs (4% for a 10-year bond and 4.85% for a 2-year bond).

Markets will likely pay attention to the index of consumer confidence from the Conference Board (USA), as well as the housing price index from Case-Schiller which are due later today.

Looking at the EURUSD chart, one can see that the price rebounded from the 1.05 area and in the course of recovery the price broke through the current bearish channel. At the same time, the RSI approached the oversold zone, which in the current context, in my opinion, should be considered as a signal that the upward movement will soon fizzle out and sellers will seize the initiative for a while. That is, it is worth considering shorting the pair from the 1.065 zone. The fundamental background makes it unlikely that the price will fall below 1.05 for the time being (risks of a recession have significantly decreased this year in the EU, and the ECB is set to further raise the rate), so the price is likely to enter a distribution phase and form a range of 1.055-1.065 by the end of this week:


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

1 Like
401

So i upbeat US data necessarily good for USD positive price moves, or is it always a “it depends” situation?

402

EU inflation surprises prompt re-pricing of EU interest rate curve, lifts EUR

Financial markets face a difficult choice between two narratives: a soft landing in key economies after a period of high inflation (thanks to the restart of China’s economy) and signs of stubborn inflation that call into question dovish policy outlook of central banks this year. The search for equilibrium is likely to keep fixed income instruments under pressure, and the currency market in a trendless environment with increased volatility.

The dollar weakened Wednesday and emerging market currencies rose today on a number of reassuring data from China’s economy. China’s business activity indices in manufacturing and services significantly surpassed forecasts and indicated an expansion compared to the previous month. In the manufacturing sector, the NBS China activity index rose to 52.6 points compared to the forecast of 50.6 points, the previous figure was 50.1 points. Activity in the services sector showed even more confident expansion, the corresponding index rose to 56.3 points, in the previous month the index was 54.4 points.

Yesterday, the euro rose after data showing that base inflation in Spain and France in February reached a new maximum in the current business cycle. The worrisome trend in consumer prices continues to fuel expectations of a tighter ECB policy in 2023, the market apparently counting on an extended tightening cycle until 2024, with a terminal deposit rate estimated at 4%.

The German Consumer Price Index, which remained at its cyclical high as data showed today, lifted EURUSD even higher, closer to 1.07. Headline inflation was 8.7% (forecast 8.5%) on an annual basis and 0.8% on a monthly basis:

The ongoing re-pricing of the yield curve in the EU provides some support to the EUR/USD pair and suggests that 1.05 will likely be the firm lower bound of the EUR/USD range in the first quarter. It’s becoming increasingly clear that talks of disinflation are taking a backseat.

Euro was a clear outperformer in the complex of European currencies, gaining 0.9% against the dollar on surprising inflation figures:

Today a few ECB speakers are taking the stage, who are likely to try to reconcile their monetary policy forecasts with the hot inflation reports. Against the backdrop of hawkish comments, EURUSD may well try to test 1.07. The US will publish ISM manufacturing data today, a weak reading of 48 points is expected (ie, a weakening in activity in February compared to the previous month). More interest will be towards the ISM non-manufacturing data on Friday. Nevertheless, China’s PMI data may dominate currency trading today and support a slightly negative tone for the US dollar. DXY is likely to find support at 104.10-104.20.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

403

Two questions ahead of today’s Powell Testimony

Tuesday at the market was quite calm, despite the potential storm that Powell’s testimony in Congress today is supposed to bring. The head of the Fed will have a tough time: back in January, he confidently spoke about disinflation in 2023 and made pretty transparent hints that the Fed will soon end the tightening cycle. If in January the markets predicted one 25 basis point increase and a terminal rate of 4.75-5.00%, then currently the consensus has shifted to three rate hikes this year and a terminal range of 5.50-5.75%. Today, Powell will have to explain what he meant back then and connect his soft rhetoric with the February surprises in data into a single story, otherwise there will be a communication failure that could harm the regulator’s reputation. This, in turn, increases the costs of conducting monetary policy - if market participants start forming their own expectations rather than listening to the Fed, it will be more difficult for the regulator to expect the policy to work as intended. Therefore, it is necessary to strike a balance between not bending too much to deny what is happening and not going along with every swing of market sentiment.

From a practical point of view, investors may be concerned about two questions today:

  1. What is the likelihood that the Fed will raise rates by 50 basis points at this month’s meeting?
  2. How has the expected terminal rate range changed?

However, most likely these two questions will remain unanswered. We are still waiting for another NFP and CPI report for February, which will allow us to clarify whether the February strengthening in data is the beginning of a new trend or still a temporary aberration. Most likely, the Fed and Powell will prefer to get more information to give more accurate forecasts to the markets about forthcoming policy decisions. In addition, the market’s recent reaction to expectations of a tighter monetary policy suggests tightening credit conditions in the market (as seen from higher bond yields and wider credit spreads), which should itself have a depressing effect on inflation and economic activity. Powell cannot fail to understand this, and in theory, this should be an argument in favor of a more cautious tone today.

Considering that market prices have already factored in a fairly aggressive Fed policy for the next few meetings, Powell’s cautious tone may balance the odds towards a more moderate policy trajectory, and as a result, risky assets will respond with a small rise and the dollar with a decline. Based on the dollar index, within the current mini bearish trend, we can consider a drop in the index towards the lower border of the channel, which will correspond to the level of 104.20:

This would correspond to the EURUSD rise to the area of 1.0725/30.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

404

Markets look completely unprepared for dovish NFP report

US equity indices continue to cling to key levels that currently separate the bearish and bullish markets. For the SP500 index, this level is 4000 points, around which it has been hovering since the end of February. On Thursday, futures for US stocks are trading moderately lower, as are European stock indices. The dollar index, after a brief rise to the level of 106 points, corrected on Wednesday and continues to moderately decline on Thursday. Employment data from the ADP agency exceeded expectations, but only slightly, with an increase of 242K jobs compared to the forecast of 200K. Due to the positive surprise in employment data, demand for risk assets remains subdued, so risks for tomorrow’s report are also shifting towards a positive surprise.

However, considering that the chances of a 50 b.p. rate hike at the upcoming Fed meeting are already 74.9%, there is little room for further selling in case of a strong report:

A much greater effect will be caused by job growth below the forecast of 200K - a shift in expectations could be significant and the hypothesis that the February improvement in data was another temporary aberration may start to gain ground. In that case, the dollar will face strong headwinds, and risk assets, including the cryptocurrency market, may rebound due to retreat of bond yields.

Fed Chair Powell, speaking to the House of Representatives on Wednesday, generally said the same things as he did in the Senate on Tuesday. In addition, he hinted that the JOLTS job openings report, the NFP report for February, and the CPI next week will be key data that will affect the FOMC’s March decision.

JOLTS data showed that the number of job openings decreased to 10.824 million, with the previous reading revised up to 11.234 million:

The consensus was for 10.5 million. The layoff rate decreased from 2.6% to 2.5%, the lowest level since January 2021, but still above the historical average of 1.9%. The job openings/unemployed ratio decreased to 1.9, but it is still above the level that would characterize a balanced labour market. However, Oxford Economics noted that the share of those surveyed decreased to 32% from 64.3% in July 2022, meaning that there is an increased risk that the JOLTS report distorts the real situation in the labour market, particularly it may overstate labour shortage.

According to the ADP report, employment in the US increased to 242K from 119K in February, which exceeded the expected 200K. The report noted that there is active hiring, which is good for the economy and workers, but wage growth is still quite high and that moderate slowing of wage growth itself is unlikely to lead to a rapid reduction in inflation in the near term. At the same time, job holders showed a 7.2% (prev. 7.3% m/m) which is the slowest pace of growth in the past 12 months, and the proportion of workers who changed jobs was 14.3% (prev. 15.4% m/m). The ADP report comes out before the employment report is released on Friday, but recently it has been showing low predictive power in providing an accurate estimate of new jobs. Regarding the employment report, Pantheon Macroeconomics noted: “Our model is based on solid employment data from Homebase and does not take into account ADP figures; this model correctly predicted January and indicates employment growth of 200K in February”.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

405

The Fed set to ease monetary policy in response to banking sector tensions, propping up risk assets as US economy is still in good shape

Over the weekend, American politicians took steps to restore trust in the US banking system and prevent bank runs, but unfortunately two pretty big banks couldn’t be saved. In the next few days, the markets will be primarily focused on the performance of US banks, and over the next week, they’ll be looking to the government for additional measures. Expectations for the Fed rate have sharply changed, and the spread between long-term and short-term bond yields has started to narrow. Essentially, this indicates that expected inflation has decreased and the risk of recession in the US has increased. Demand for safe havens should remain high this week, with traders keeping an eye on low-yielding JPY and CHF.

Following the second-largest bankruptcy in US history on Friday, American politicians took steps to restore trust in the US banking system. The Federal Reserve, US Treasury, and Deposit Insurance Corporation announced two key measures. The first measure is that all uninsured depositors in Silicon Valley Bank will be fully reimbursed. This solves the problem of uninsured depositors (in this case, in venture capital/technology) potentially losing their deposits and withdrawing money from other banks with high levels of uninsured deposits (reports suggest that 96% of deposits in SVB were uninsured). The second key measure is that the Federal Reserve announced a new liquidity program - the Bank Term Funding Program (BTFP). This will allow qualified financial institutions to access dollar liquidity in exchange for placing US bonds, agencies, or mortgage-backed securities as collateral. Importantly, the collateral value will be accepted at face value, meaning that the Fed will temporarily bear the bank losses from Treasury depreciation. This solves the problem of SVB, which needed to sell securities to cover deposit outflows - this led to losses and capital reduction.

Investors today will be keeping a close eye on the stocks of US banks to see if the measures taken were enough to restore trust. Unfortunately, the picture doesn’t look too good:

Over the weekend, another bank, Signature Bank in New York, was also declared bankrupt by US authorities. The clear takeaway for the market is that the Federal Reserve won’t be able to raise rates by 50 basis points on March 22 if it’s introducing new liquidity measures for the US banking system at the same time.
Right now, the market has lowered its expectations for the FOMC rate for this month to +25bp, and some experts predict unchanged rates. In fact, the price for the December 2023 FOMC meeting is now 75bp lower than it was in the middle of last week.

For the currency market, this means that the first major financial crisis in the US since 2008 has led to a significant reduction in the US yield curve, which has negatively affected the dollar. The same thing is happening now. The US economy is in good shape and, for now, the beginnings of a financial crisis are seen by the market as something that can be quickly isolated with Fed liquidity injections. That’s why risk assets, despite the decline, are holding up pretty well, and the most speculative segment - cryptocurrencies - has even risen in anticipation that the Fed will radically change course in the near future, either by no longer raising rates or by cutting them.

DXY will likely trade together with the US banking sector index, particularly the regional banking sector index, today. Risks indicate a drop towards 103.50 and potentially down to 102.50 this week.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

406

Stock markets plunge on Deutsche Bank worries as contagion risks grow

The stock market is once again under pressure as worries about the banking crisis increase again, this time mainly on the European continent, after a brief respite. The STOXX 50, DAX, and French CAC 40 are all down more than 2%. The trigger for the correction was a surge in concerns over Deutsche Bank’s position - the cost of default insurance on the bank’s bonds jumped from 142 to 193 points on Friday. This was preceded by news that the bank intends to redeem Tier 2 subordinate bonds, which raised concerns about the bank’s ability to service its debts (this type of bond offers perpetual income) and caused outrage in the subordinated debt market (AT1 bonds), which was the source of volatility for the entire EU banking sector a few days ago.


Source: Bloomberg

The risk-off sentiment has also spread to the American continent, with Treasury yields across the maturity spectrum falling and hitting a local low. The yield on the 10-year bond fell to 3.28%, the lowest since the beginning of September 2022. The derivatives markets which have federal funds rate as underlying asset, now completely rule out the possibility of a rate hike in May.

Defensive assets rose sharply on Friday, with gold once again testing the $2,000 per ounce level. This time, the breakout move is likely to push the price higher than the previous local maximum. The potential target for buyers could be $2,050 per ounce. Oil prices also collapsed, signalling a rise in recessionary sentiment. Both main benchmarks lost more than 3% in the moment.

Regarding the economic calendar for today, data on orders for durable goods added pessimism to the US economy, with a decrease of 1%, against a forecast of 0.6% compared to the previous month. Recall that Powell stated at the press conference that stress in the banking sector would be reflected in a slowdown in economic activity and faster inflation decline, so market sensitivity to incoming data, particularly negative surprises, may be reduced as investors may discount negative deviations. The PMI indices for the economies of the European bloc produced a mixed impression: activity in the manufacturing sectors of countries once again fell below expectations, while the positive momentum in the service sector persisted, so the corresponding indices exceeded expectations.

On the American market, the focus is back on the financial sector of the S&P 500: the price has dropped to the support level (500 points).

Next week, it’s important to keep an eye on whether the price can hold below the level, as in case of successful consolidation, a technical signal may trigger further selling and then this sector will continue to generate risk aversion.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

407

Stock market rebound may help the Fed to gain confidence in its tightening course

News related to Deutsche Bank shook financial markets on Friday, but the trend on Monday suggests that the market overreacted with panic: SPX futures topped 4000 points, gold fell by more than 1.5%. Shares of American banks, which are probably some of the best proxies for broad market volatility, bounced back in pre-market trading, ensuring that Monday’s trading will be driven by a search for yield. The catalyst for the rebound is believed to be the news that the FDIC has approved the purchase of SVB Financial by another US bank. Together with full deposit insurance, the purchase of a troubled bank significantly reduces the risks of a domino effect in the US banking sector, which until recently “hung like a stone around the market’s neck.”

Earlier, an official from the Fed stated that the situation with SVB Financial is unique, hinting that if the threat of “contagion” can be prevented, the central bank can return to its main task at the moment - combating inflation.

The interest rate differential between EU and US bonds continues to change unfavourably for the dollar, as the Fed leans towards a gradual tightening of its program, while ECB officials continue to express concern about inflation and pedal the topic of prolonged policy tightening. Thus, ECB official Nagel spoke about QT on Monday, saying that its pace should be accelerated closer to the summer.

It is well known that the interest rate differential on short-term bonds explains large portion of exchange rate movements in the short term, and EURUSD is no exception. Since the beginning of March, the interest rate differential on 2-year bonds between the US and Germany has decreased by more than 30 basis points, but the strengthening of EURUSD has not been significant:

One of the main reasons for the “lag” in the EURUSD rate from the dynamics of the corresponding differential may be the reluctance to part with the dollar due to high volatility and the recent surge in bearish sentiment. In other words, demand for the dollar as a protective asset may now be holding back its depreciation, and if the risks of new episodes of bank stress dissipate, EURUSD is likely to grow at a “leading” pace.

However, along with the increase in risk appetite, expectations for aggressive actions by the Fed at upcoming meetings will be simultaneously revised. Powell said that the recent risk-off worked like a rate hike (credit spreads widened, yields on high-yield bonds rose, increasing the cost of borrowing), therefore an increase in risk appetite will have the opposite effect and should add work to the Fed. Overall, this can be seen already: along with the market rally, the chances of a Fed rate hike in May have doubled, from 17 to 35%:

It is obvious that the prospects of a prolonged market rally under such conditions are not visible.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

408

As banking system shocks subside the focus shifts to central banks’ battle with inflation

The dollar index struggles to bounce back up after dropping to 102.50 level, in line with the earlier idea that the Fed is avoiding clear policy recommendations, while the ECB is showing more readiness to raise rates. This shifts the interest rate differential in the direction that works against the US currency.

European indices bounced up more than 1% on Wednesday, almost recovering to pre-SVB Financial correction levels:

UBS and Deutsche Bank stocks, which are indicators of the Eurozone’s perception of banking stress, continued to rise today, up 2.49% and 3.94% respectively. It’s a pretty positive sign that market participants are becoming more confident that shocks in the banking system are successfully isolated and their impact is diminishing.

Significant declines in US crude oil and gasoline inventories according to EIA data supported oil prices, with WTI and Brent rising to two-week highs. Crude oil inventories fell by more than 7 million barrels (forecast +0.1 million), while gasoline inventories fell by 2.9 million (forecast -1.61 million). The inventory drop suggests increased demand from refineries and fuel distributors, such as gas stations, which in turn positively characterizes the dynamics of consumer demand, a key driver of economic expansion.

The reduction of concerns about banking stress in the US and EU will inevitably intensify search for yield (rotation from quality to risk), and therefore a narrowing of credit spreads (lower borrowing costs). As shown in the chart below, the spread between investment-grade bonds and high-yield bonds, after rising in mid-March, has stabilized and is likely to soon begin to decline:

As a result, there will also be an increase in inflation risks (thanks to credit expansion), which will inevitably reactivate hawkish rhetoric from the Fed as inflation is still quite high. That’s why it may make sense to approach the current rally with great caution and consider the possibility of short positions on risk assets or profit-taking ahead of upcoming speeches by the Fed officials, especially Powell.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

409

Optimism gradually gives way to caution?

The US stock indices closed slightly down on Tuesday, despite a decrease in risk-free rates after the release of US job market data (JOLTS report). The S&P 500 and Dow indices fell by 0.58 and 0.59%, while the technology sector stocks (which are more defensive assets) lost slightly less - 0.37%. At the same time, bond yields (risk-free rates) reacted downwards after the data was released - the two-year rate lost more than 18 basis points in the moment, while the 10-year rate lost about 12 basis points.
To understand what a decrease in bond yields along with a negative reaction in the stock market means, two scenarios need to be considered:

  1. Bond yields are falling, and stock prices are rising:

This scenario is characterized by capital inflows into both bonds and stocks. It is clear that this happens when expectations shift towards monetary policy easing and the expectation of firm income growth or a decrease in uncertainty. For this to happen, moderately negative information (aka “bad news - good news”) is necessary, which should trigger a monetary stimulus that is expected to be sufficient to provide expansion.

  1. Bond yields are falling, and stock prices are also falling:

This same scenario rather characterizes the capital outflow from stocks into bonds (rotation between asset classes), i.e., a flight from risky assets into defensive ones. This also happens when expectations shift towards monetary policy easing, but at the same time, expectations regarding firm income growth worsen or uncertainty increases. This is usually facilitated by the release of excessively weak economic indicators (“bad news - bad news”), and there is concern that the central bank may provide insufficient stimulus when changing policy.

Yesterday’s JOLTS report, which, as I previously mentioned, is currently in focus for the Federal Reserve due to the increased importance of the labour market in inflation forecasts, surprised with a sharp decline in job openings from 10.5 to 9.9 million, with a forecast of 10.4 million:

The sharp reduction in excess job openings indicates that employers are less willing to compete for workers (which should slow down wage growth and then inflation) and that firms’ expectations regarding demand for their goods/services may have worsened, causing them to reduce hiring rates.

Considering the leading nature of this indicator and the sharp negative change, the market’s reaction to the report in stocks and bonds yesterday may well be the first sign of a shift towards caution. For this scenario to gain traction, market participants may prefer to wait for reports on service activity today (with a focus on hiring components) and Non-Farm Payrolls on Friday. If wage growth did indeed slow significantly in March, concerns about an economic downturn could increase, and the market may experience a sell-off that will “demand” interventions from the central bank (hints of an end to the tightening cycle or rate cuts).

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

410

Bearish Economic Reports Put US Equity Markets at Risk of Downturn

Equity market investors are getting increasingly nervous and risk-averse as the US economy continues to surprise with bearish economic reports this week. On Tuesday, it was the JOTLS data and the ISM manufacturing report, on Wednesday, the ADP employment report and PMI in the non-manufacturing sector were released, all four of which failed to meet modest forecasts, and in some cases were significantly worse than expected (such as JOLTS), although there are currently no signs of an impending recession in the data. Overall, it can be said that the data sharply limited the potential for equity market rally and made it more vulnerable to a downturn as concerns about a slowdown in the economy intensified, but at the same time there is hope that the Federal Reserve will take decisive action to delay the onset of a slowdown.

According to the ISM, activity in the US non-manufacturing sector grew at a slower pace in March compared to the previous month. The corresponding index fell from 55.1 to 51.2 points, which is significantly lower than the forecast of 54.5 points. New orders sub-index led decline, falling from 62.6 to 52.2 points:

This index is a leading indicator for price and hiring plans in the sector, and its sharp slowdown suggests that firms may be more cautious about raising prices in the near future and reduce demand for labour.

In turn, the hiring sub-index fell from 54 to 51.2 points, indicating slower growth in demand for labour in March compared to February and confirming the trend in JOLTS and ADP data: the US labour market imbalance, which has been generating inflation throughout the last year, began to gradually weaken in the end of the first quarter.

The ADP agency reported that the US economy added only 145,000 jobs in March, compared to the forecast of 200,000. The previous figure was slightly revised upwards to 261,000. Wage growth slowed down for both those who held on to their jobs and those who were willing to switch. The chief economist of ADP said that labour market data for January showed that the economy may have started to slow down.

The US stock market showed mixed dynamics yesterday, but labour market data probably increased market fragility and made it more susceptible to sharp corrections. Treasury yields hit lows for this year, with the 10-year Treasury yield breaking through the 3.3% level, the lowest since September 2022.

The price of gold is rising and approaching historic highs. The increase may be partly due to the fact that BRICS countries are increasing their non-dollar reserves to reduce the influence of the US through dollar reserves. The main factor behind the rally is, of course, the increased expectations of a recession in the global economy and expectations of a decline in real interest rates, which have a negative correlation with gold prices.

Data on the Chinese economy supported oil prices. Activity in China’s services sector continued to expand in March, with the corresponding index rising from 55 to 57.8 points. The composite index rose from 54.2 to 54.5 points, indicating that the pace of expansion in the sector is gradually picking up.

Today’s focus is on data on initial and continuing jobless claims. In addition, markets may pay attention to comments from Fed representative Bullard.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.