May 2022

Summary United States: Don't Look Down Yet Consumer price inflation may have peaked, but the climb down from here will not be free of obstacles. The CPI and PPI rose 0.3% and 0.5%, respectively, in April. Small business optimism stalled during the month, as owners are concerned about their ability to continue to pass on higher costs to consumers. Next week: Retail Sales (Tues), Industrial Production (Tues), Housing Starts (Wed) International: Inflation Plague Continues in Emerging Markets Price growth is a global problem; however, inflation seems to be more of a problem across the emerging markets. With commodity prices still high and weak local currencies, most emerging market countries are experiencing above-target inflation. Next week: UK CPI (Wed), Japan CPI (Thurs), South Africa Reserve Bank (Fri) Interest Rate Watch: Will Tighter Financial Conditions Lead to a More Dovish Fed? In the post-FOMC meeting press conference last week, Chair Powell indicated that financial conditions would need to tighten to help the Fed restore price stability. The Bloomberg Financial Conditions Index began to tighten early this year when FOMC members signaled that the committee would become more aggressive in battling inflation. This week, conditions tightened further to the least-supportive posture in two… Read More »Weekly economic and financial commentary

There are currently increasing indications that global economic growth will slow down in the coming quarters. The leading indicator of the OECD for the world economy weakened in April to an index value of around 100.2. In the downturns since 2000, it took an average of around 12 months to reach the cyclical low from this index level in times of growth slowdown. Based on this data, the cyclical cooling of the global economy could therefore last until spring 2023. Currently, the significant increase in inflation in some economies such as the Eurozone is already putting a considerable strain on private consumption. The outbreak of war in Ukraine has exacerbated the rise in inflation at a global level through energy and food prices. Unfortunately, there are no signs of any significant relaxation here in the short term. The current cooling of commodity prices that are sensitive to the economy, such as copper, could dampen global inflationary pressures in the longer term. On the other hand, falling raw material prices are another indicator of a slowdown in the global economy. In addition, unexpectedly strict Covid-related containment measures in China are further clouding the global economic outlook. This could again exacerbate the… Read More »Global economy cooling

A combination of negative factors dragged EUR/USD to a fresh multi-year low on Thursday. Aggressive Fed rate hike bets, the risk-off mood continued underpinning the safe-haven USD. Looming recession risk led by the Ukraine crisis exerted heavy downward pressure on the euro. The EUR/USD pair witnessed aggressive selling on Thursday and finally broke down through a near one-week-old trading range. The steep intraday decline dragged spot prices to the lowest level since January 2017 and was sponsored by a combination of factors. The US dollar rallied to a fresh 20-year high amid the global flight to safety. The markets now seem worried that a more aggressive policy tightening by major central banks to constrain inflation could hit global economic growth. This, along with the resurgence of geopolitical tensions, took its toll on the risk sentiment and forced investors to take refuge in the traditional safe-haven assets. In the latest developments surrounding the Russia-Ukraine saga, the latter announced that it would suspend Gazprom gas transit on its territory. Separately, Finland confirmed that it would apply to join NATO “without delay” and Sweden is expected to follow suit, citing security concerns following Russia's invasion of Ukraine. Meanwhile, Russia vowed an unspecified response.… Read More »EUR/USD Analysis: Bearish trend pauses just ahead of 2017 low, not out of the woods yet

A combination of negative factors dragged EUR/USD to a fresh multi-year low on Thursday. Aggressive Fed rate hike bets, the risk-off mood continued underpinning the safe-haven USD. Looming recession risk led by the Ukraine crisis exerted heavy downward pressure on the euro. The EUR/USD pair witnessed aggressive selling on Thursday and finally broke down through a near one-week-old trading range. The steep intraday decline dragged spot prices to the lowest level since January 2017 and was sponsored by a combination of factors. The US dollar rallied to a fresh 20-year high amid the global flight to safety. The markets now seem worried that a more aggressive policy tightening by major central banks to constrain inflation could hit global economic growth. This, along with the resurgence of geopolitical tensions, took its toll on the risk sentiment and forced investors to take refuge in the traditional safe-haven assets. In the latest developments surrounding the Russia-Ukraine saga, the latter announced that it would suspend Gazprom gas transit on its territory. Separately, Finland confirmed that it would apply to join NATO “without delay” and Sweden is expected to follow suit, citing security concerns following Russia's invasion of Ukraine. Meanwhile, Russia vowed an unspecified response.… Read More »EUR/USD Analysis: Bearish trend pauses just ahead of 2017 low, not out of the woods yet

Outlook: The data plate is skimpy today, just jobless claims and PPI. Someone is sure to try to make hay out of jobless claims. PPI is going to undergo the same scrutiny as CPI but we already know its input materials, especially energy and strange stuff like rare earths and specialty ingredients (fertilizer), driving prices. The market is expecting a dip in PPI but even if we get it, it won’t be believed–and rightly so. After PPI, the important data will be in. But instead of any upcoming data, what we need to care about is sentiment toward risk, and that is in the process of going full withdrawn-head turtle. As Bloomberg editor Joe Wiesenthal puts it, “Now the Fed is raising rates, and the meme stuff and crypto and growth stuff is getting crushed the hardest. But the question is why? What's the big deal if the Fed Funds rate goes from 0% to 0.8% or whatever? How does that change the value of Terra or a digital ape? Of course the Fed Funds rate alone actually doesn't matter. What matters is that the big risk-taking cycle is doing a 180, and the rate hikes while important are only… Read More »What’s the big deal if the Fed funds rate goes from 0% to 0.8%?

EUR/USD extended its sideways consolidative price moves in a two-week-old trading range. Concerns about the economic fallout from the Ukraine crisis acted as a headwind for the euro. Aggressive Fed rate hike bets continued underpinning the USD and contributed to cap gains. The technical set-up favours bearish traders as the focus remains glued to the US CPI report. The EUR/USD pair continued with its struggle to gain meaningful traction and has been oscillating in a range over the past two weeks. Spot prices remained well within striking distance of a more than five-year low touched at the end of the previous month amid lingering recession fears. Investors remain concerned that the European economy will suffer the most from the Ukraine crisis, which, in turn, acted as a headwind for the shared currency. Apart from this, the underlying strong bullish sentiment surrounding the US dollar exerted some downward pressure on the major during the latter part of trading action on Tuesday. The USD stood tall near a two-decade high and remained supported by expectations that the Fed would take more drastic action to bring inflation under control. In fact, the markets are still pricing in a further 200 bps rate hike for… Read More »EUR/USD Outlook: Range play intact, bears await US CPI before placing fresh bets

Annual CPI in the US is forecast to decline to 8.1% in April.  Underlying factors driving inflation higher remain in place.  A soft CPI print could cause the dollar to face temporary selling pressure. Annual inflation in the US, as measured by the Consumer Price Index (CPI), climbed to its highest level in four decades at 8.5% in March. On a yearly basis, CPI is forecast to decline to 8.1% in April. Core CPI, which excludes volatile food and energy prices, is expected to fall to 6% from 6.5% in the same period. US Consumer Price Index (YoY) Has inflation peaked in the US? The Prices Paid component of the ISM Manufacturing PMI declined to 84.6 in April from 87.1, showing that input prices in the manufacturing sector continued to rise at a softer pace than they did in March. On the other hand, the ISM Services PMI report revealed that the Prices Paid sub-index climbed to a new all-time high of 84. from 83.8. Moreover, crude oil prices rose more than 3% in April. Just by looking at these figures, it’s difficult to conclude that the 8.5% CPI inflation recorded in March was the peak. Additionally, coronavirus-related restriction measures… Read More »US April CPI Preview: Has inflation peaked?

EUR/USD – 1.0562 Although euro's retreat from last Thursday's 8-day high of 1.0641 suggests recovery from April's fresh 5-year bottom at 1.0472 has possibly ended, Friday's rebound from 1.0483 to 1.0600 in New York and yesterday's fall to 1.0496 at European open suggest further volatile swings above said support would continue before prospect of another fall, below 1.0483 would head towards 1.0472, then 1.0405/10. On the upside, only a daily close above 1.0600 would risk re-test of 1.0641, break, 1.0698/00 later. Data to be released on Tuesday New Zealand retail sales, NAB business conditions, NAB business confidence. U.K. BRC retail sales, Japan all household spending, Australia retail sales, Italy industrial output, Germany ZEW economic sentiment, ZEW economic expectation. Canada leading index and U.S. redbook.

EUR/USD – 1.0562 Although euro's retreat from last Thursday's 8-day high of 1.0641 suggests recovery from April's fresh 5-year bottom at 1.0472 has possibly ended, Friday's rebound from 1.0483 to 1.0600 in New York and yesterday's fall to 1.0496 at European open suggest further volatile swings above said support would continue before prospect of another fall, below 1.0483 would head towards 1.0472, then 1.0405/10. On the upside, only a daily close above 1.0600 would risk re-test of 1.0641, break, 1.0698/00 later. Data to be released on Tuesday New Zealand retail sales, NAB business conditions, NAB business confidence. U.K. BRC retail sales, Japan all household spending, Australia retail sales, Italy industrial output, Germany ZEW economic sentiment, ZEW economic expectation. Canada leading index and U.S. redbook.

Outlook: Payrolls were 428,000 and the unemployment rate, 3.6%. This nearly matches the original March print of 431,000 and beats most forecasts. Some folks are still struggling to disambiguate the Fed’s comments, or rather Mr. Powell’s. Fed-watcher Ip at the WSJ has a spot-on summary: “Employment is the best contemporaneous indicator of the business cycle and it shows no sign of a slowdown. Indeed, job growth remains well above its long-run sustainable pace, suggesting the labor market is not just tight, but too tight. “Moreover, recent gains in labor supply evaporated as the labor-force participation rate ticked down to 62.2% from 62.4%, although for people aged 25 to 54, it only edged down to 82.4% from 82.5%, not far from its pre-pandemic level.” The Journal is kind enough to note in the chart footnote that 2022 data is not really comparable with earlier data. But in the end, the main point we should take away is that the economy is nowhere close to stagnation or recession, if we consider the jobs data has predictive value. We suspect jobs and employment data to be inaccurate, to be polite, and while heed it we must, we like capital investment better. Broadly, capital… Read More »The main point we should take away is that the economy is nowhere close to stagnation or recession