May 2022

The Fed's 50 bp rate hike is behind us.  Another 50 bp hike is expected next month. The April employment report will do little to calm the anxiety about the “too tight” labor market.  The decline in the participation rate was disappointing and this coupled with decline in Q1 productivity raies questions about the economy's non-inflationary speed limit.     One of the fascinating things about the markets is that sometimes the cause take place after the effect.  This is an interesting way to express the observation that investors anticipate, discount, futures scenarios.  The dollar has been bought and fixed income sold on ideas that the Fed had taken a hawkish turn.  The market now accepts that the Federal Reserve will bring it Fed funds target rate within the range regarded as neutral before the end of the year.  The hikes will be front-loaded with the next 50 bp hikes discounted for the next two meetings (June and July) and a strong leaning for the same in September (~66%).  The balance sheet will begin shrinking next month at roughly the same pace that it peaked in the 2017-2019 experience before ramping up to twice the pace ($95 bln). The week ahead is… Read More »The Week Ahead: US CPI and PPI set to soften

The Fed's 50 bp rate hike is behind us.  Another 50 bp hike is expected next month. The April employment report will do little to calm the anxiety about the “too tight” labor market.  The decline in the participation rate was disappointing and this coupled with decline in Q1 productivity raies questions about the economy's non-inflationary speed limit.     One of the fascinating things about the markets is that sometimes the cause take place after the effect.  This is an interesting way to express the observation that investors anticipate, discount, futures scenarios.  The dollar has been bought and fixed income sold on ideas that the Fed had taken a hawkish turn.  The market now accepts that the Federal Reserve will bring it Fed funds target rate within the range regarded as neutral before the end of the year.  The hikes will be front-loaded with the next 50 bp hikes discounted for the next two meetings (June and July) and a strong leaning for the same in September (~66%).  The balance sheet will begin shrinking next month at roughly the same pace that it peaked in the 2017-2019 experience before ramping up to twice the pace ($95 bln). The week ahead is… Read More »The Week Ahead: US CPI and PPI set to soften

S&P 500 finishes the week moderately lower despite wild swings. SPY -0.34% for the week. Nasdaq finishes lower as high growth tech still not favored. QQQ -1.44%. S&P closes off intra-day lows as some position squaring evident. A lot to get through this week. The equity market had looked to put the worst behind it by midweek when a dovish Powell looked after his equity friends by taking a 75bps hike off the table. This set equities on a charge. It was actually up to the plain-speaking Bank of England to set things straight when they talked in strongly bearish terms about the possibility of a recession. Yields had already begun spiking in the US and the resultant collapse in the pound sterling sent the dollar charging and yields again spiked up. Equities went into full panic mode and have not yet fully recovered. This is despite Friday's employment report coming more or less as good as can be for equities. Earnings (wages) were below forecast while the jobs number showed the still healthy employment market in the US. But at the time of writing the major US indices are down again. Sentiment is terrible, it will take a bit more… Read More »Week Ahead on Wall Street: Employment report to fails to calm equities as bears still in control

The EURUSD pair moved lower from its daily highs but remained somewhat higher on the day, trading at 1.0560 shortly after the US labor market figures. US jobs market remains strong Earlier today, data showed the US economy posted 428,000 new jobs for April, precisely at the March level and higher than the 391,000 expected. As a result, the unemployment rate stayed at 3.6%. However, wage growth slowed monthly, down to 0.3% from 0.5% previously, while the yearly change slipped a notch from 5.6% to 5.5%.  Since the numbers came somewhat in line with expectations, there was no initial volatility. However, the market's medium-term trends are expected to continue since today's numbers have reinforced the Fed's hawkish stance on monetary policy.  However, recent improvements in payrolls and earnings and a lower unemployment rate have not translated into a similar gain in many Americans' financial situations. Consumer price rises have outpaced earnings growth as inflation has reached 40-year highs. According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) in the United States climbed at an annual pace of 8.5 percent in March, the quickest since 1981. Still above 1.05 The key support for the following days seems to… Read More »EUR/USD ticks lower after US jobs data

Outlook: The big story today is supposed to be nonfarm payrolls, with critics already saying a low number will encourage the Fed to back down. Morgan Stanley has a forecast of 475,000, higher participation, the unemployment rate at 3.5% and average hourly earnings up to 5.7% y/y. Bloomberg has a forecast of 380,000, almost 100,000 lower, and the same unemployment rate. The WSJ has 400,000 and the same unemployment rate. It was 431,000 in March, by the way. It looks like the unemployment rate is the thing to watch, along with average hourly earnings. We will soon be getting guesses about how high unemployment can go before the Fed feels the heat. Since we have surplus of jobs and a shortage of labor, that seems unlikely. If average hourly wages are up 5.7% but inflation is closer to 8%, what can draw the worker? It’s important to keep remembering that the Fed can do nothing about supply chain disruptions or the price of oil, both heavy influencers of input prices and hiring decisions, so we are not so sure even bad numbers will stay its hand—0and we don’t expect bad jobs numbers. About those those disruptions: The NY Fed updated the… Read More »It looks like the unemployment rate is the thing to watch, along with average hourly earnings

USD/JPY The USDJPY returned to bullish mode, after shallow pullback from new 20-year high found firm ground at 129 zone, contained by rising 10DMA and Fibo 23.6% of 121.27/131.24 upleg. Bulls are establishing above 130 level, but need weekly close above here to confirm bullish signal, after last week’s spike to 131.24 was short-lived and failed to register close above 130. Thursday’s rebound left a double-bottom and formed bullish engulfing pattern that underpins near-term action and adds to positive signals. However, traders remain cautious despite the dollar regained traction, awaiting fresh signals from the US labor report, while daily studies show weakening bullish momentum, which warns bulls may lose steam on renewed probe through 120 pivot. Near-term action is expected to keep bullish bias above rising 10DMA (129.42) with sustained break above 130.00 and 130.65 (Fibo 76.4% of 147.68/75.55) to open way for retest of new peak at 131.24 and unmask 2002 peak at 135.16. Res: 130.47; 130.65; 130.80; 131.24. Sup: 130.00; 129.42; 128.89; 128.62. Interested in USD/JPY technicals? Check out the key levels

Politics French President Emmanuel Macron defended his mandate in the second round of the presidential election with 58.55% of the vote. His opponent Marine Le Pen obtained 41.45%. Turnout was just under 72%. The liberal green Freedom Movement won the parliamentary elections in Slovenia with 34.3% of the vote. The Slovenian Democratic Party of incumbent Prime Minister Janez Jansa came in second with 23.8%. The ruling group has already acknowledged the defeat, and Jansa, who heads the government of the country with 2.1 million inhabitants, will soon finish his term. The Russian gas company Gazprom has completely stopped gas supplies to Poland and Bulgaria. It justified its decision by saying that local gas companies PGNiG and Bulgargaz refused to pay for gas in rubles, as Moscow demands. Projections for Europe without Russian gas point to a problem by the end of January 2023 (according to Bruegel). In the event of a complete supply shutdown, EU countries would have to reduce annual consumption by 10 to 15%. At that time, even record high supplies from other countries would not be enough and gas storage facilities in Europe would be emptied at the turn of January and February 2023. The European Central… Read More »EU news monthly May 2022

The euro rose against key currencies as investors focused on the widening gap between German and Italian bonds. The spread between the 10-year bonds of the two countries rose to 2.007%, which was its highest level since May 2020. This means that investors have a preference for safer German government bonds. It also signals that there are expectations that the European Central Bank will start hiking interest rates in its July meeting. The hawkish state of the ECB comes at a time when there are worries about stagflation in the region as inflation rises to over 7%. Global stocks continued crashing on Friday as the mood in the market deteriorated following the hawkish Federal Reserve decision. In the United States, futures tied to the Dow Jones declined by 170 points while those linked to the Nasdaq 100 fell by 150 points. The two indices declined by 1,100 and 600 points on Thursday. The same trend happened in Europe where the DAX, CAC, and Stoxx dropped by more than 1.50%. The worry is that major central banks like the Fed, BOE and the ECB will accelerate their tightening process soon. Also, while most companies have reported strong revenue growth, their margins… Read More »Euro spikes as German and Italian bond yields spread

GBP/CAD traded lower yesterday after the BoE hiked interest rates but warned over recession risks to the UK economy. The dip brought the rate below the 1.5925 barrier, marked by the low of April 28th, a move that confirmed a forthcoming lower low on both the 4-hour and daily charts. This, combined with the fact that we can draw a downside resistance line from the high of February 22nd, paints a positive near-term picture. Today, the rate rebounded somewhat after nearly hitting again support at 1.5775, and thus, we cannot rule out some further recovery, even back above 1.5925. However, as long as the pair stays below the aforementioned downside line, we will see decent chances for the bears to jump back into the action, perhaps from near the high of May 4th, at 1.6105. A possible slide from there could result in another test near the 1.5775 zone, the break of which would confirm another forthcoming lower low and perhaps set the stage for declines towards the low of August 1st, 2013, at 1.5583. Shifting attention to our short-term oscillators, we see that the RSI rebounded and exited its below-30 zone, while the MACD, although below both its zero… Read More »GBP/CAD extends its downtrend

EUR/NZD is trading in an ascending channel on the four-hour chart after the 50-exponential moving average crossed over the 200 EMA. Moreover, the positive slope of divergent moving averages indicates a strengthening bullish Momentum in the short term. In addition, the candlestick bars suggest that Euro buyers have taken control of the European morning trading session by accelerating upward bias. Currently, they are attempting to push the price towards the channel ceiling around 1.65 after defeating the 1.63980 resistance level. If this barrier can halt the rally, we may see a price consolidation for some time. With a sustained move above this level, the 1.65873 mark could come under the spotlight. Otherwise, if sellers take cues from the price at the ascending channel resistance, the pair could return to the support area between 1.63539 and 1.63980. If this area is broken, the probability of falling to the 50-EMA will increase. However, as long as the price floor of 1.60736 remains intact, the uptrend will continue. Short-term momentum oscillators indicate that buyers are dominating the market. The RSI is approaching 70 in the buying area. Despite falling from a three-day peak, the Momentum is still above the -100 line. Positive MACD… Read More »EUR/NZD bulls aim for ascending channel’s ceiling