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The global tightening cycle is in full swing with half point interest rate hikes from the Bank of Canada and Reserve Bank of New Zealand. Expectations for changes by both central banks did not stop the Canadian and New Zealand dollars from reacting strongly to these adjustments. The Canadian soared dollar after the rate decision while the New Zealand dollar plunged. Their diametrically opposite movements underscores the importance of policy guidance.   To the surprise of many investors including ourselves, the Canadian dollar sold off ahead of the rate decision, hitting a bottom about an hour before the Bank of Canada raised interest rates by 50bp for the first time in 22 years. This was the bank’s largest single move in more than two decades. According to Governor Tiff Macklem, “the economy can handle higher interest rates, and they are needed.”  Like many countries around the world, Canada is struggling with high inflation – the last consumer price report from February showed prices growing at its fastest rate in 30 years. Russia’s invasion of Ukraine drove prices even higher in March. Although a half point hike and end to bond purchases were widely anticipated, Macklem’s guidance sent the loonie soaring.… Read More »ECB preview and half point hikes for CAD and NZD

EUR/USD – 1.0823 Euro's selloff from 1.1184 (Thur) to 1.0837 on Mon and yesterday's break there to a fresh 1-month bottom at 1.0822 in New York on continued usd's strength due to rally in U.S. yields suggests early correction from Mar's 22-month bottom at 1.0807 has ended and downside bias remains for re-test of 1.0807, break would recent downtrend to 1.0760.later. On the upside, only a daily close above 1.0903 signals a temporary bottom is in place and risks stronger retracement towards 1.0933/38, break, 1.0961. Data to be released on Wednesday New Zealand food price index, RBNZ interest rate decision, Japan machinery orders, Australia consumer sentiment, China trade balance, imports, exports. U.K. PPI output prices, PPI input prices, RPI, CPI, DCLG house price, Italy industrial output. U.S. MBA mortgage application, PPI and Canada interest decision.

Outlook: We get CPI today, expected up substantially to 8.4% from 7.9% the month before. We can blame post-lockdown demand, supply chain cost pushes, and the Russian invasion of Ukraine. But also important is the New York Fed’s survey showing expectations for the future. While the public expects today’s data to be grim, by March 2025, it expects inflation at only 3.7%. This is down from 3.8% in February! And see the ZEW data above–Germans also expect a massive drop in inflation. Wishful thinking? Are we being snookered or is this realistic? Judging from Fed resolve, yes, it’s realistic. As for being snookered, it all depends on the Russian war and what happens in the oil/gas industry. Nobody is willing to forecast that right now. Today we woke up to the US contemplating higher ethanol content in gasoline, which reduces reliance on oil but also raises smog (and may not work if the sources of ethanol, like corn, are supply-constrained). If the public is right, we may well have a real return on fixed income for the first time in years. Say what you will about the motivation to save, a decent return on a safe investment will not go… Read More »US government bond are still considered the safest thing on earth

This is a shorter trading week for the Easter public holiday, however, there are some key data releases to watch out for and as we have mentioned in recent notes, the markets are being driven by fundamentals at this stage of the cycle, so keeping up to date with political and economic data is critical. The main event that the markets are digesting at the start of this week is news that incumbent French President Macron won the largest share of votes in the first round of the Presidential election on Sunday. He will now face the second-round run-off with the far-right candidate Marine Le Pen, who made a stunning comeback, winning a decent 23% of the vote. The question for French and European asset prices, will the anti-EU, anti-NATO candidate become the French version of Donald Trump, and how will the euro react? Euro’s hopes rest with Macron While Le Pen has won a large share of the French vote, the last time she had a run-off with President Macron in 2017, the gap between them was narrower, thus, the markets are pricing in for another Macron victory. This is good news for the euro and European stock prices,… Read More »Three drivers of markets: Macron, UK stagflation worries and US price data

EUR/USD – 1.0881 Euro's selloff from 1.1184 (Thursday) to a 1-month bottom at 1.0837 on continued usd's strength due to rally in U.S. yields suggests early correction from March's 22-month bottom at 1.0807 has ended and as price has fallen again after yesterday's gap-up open to 1.0934 in New Zealand, consolidation with downside bias remains for re-test of 1.0837, break, 1.0807 later. On the upside, only a daily close above 1.0934/38 would signal a temporary bottom is in place and risk stronger retracement towards 1.0961, break, 1.0988 later. Data to be released on Tuesday Japan producer prices, Australia NAB business confidence, NAB business conditions. U.K. BRC retail sales, average weekly earnings, employment change, ILO unemployment rate, claimant count, Germany HICP, CPI, ZEW current conditions, ZEW economic sentiment, France exports, imports, trade balance, current account, EU ZEW survey expectation. U.S. CPI, redbook and Federal budget.

Investors continued to buy U.S. dollars, driving the greenback to its strongest level against the Japanese Yen in more than 6 years. The biggest driving force for USD/JPY right now are U.S. yields which have been in a relentless uptrend for the past 2 months. Today marks the seventh consecutive day of gains for 10 year yields which broke above 2.7%. To put this into perspective, just over a month ago 10 year rates were hovering under 1.8%.     Investors are convinced that the Federal Reserve will raise interest rates by 50bp at their next meeting as high prices persist. This is consistent with everything we’ve heard from Fed Presidents last week. We’ll hear from more policymakers this week and they are widely expected to reinforce the central bank’s hawkish views.  The upcoming inflation and consumer spending reports should also harden the case for aggressive tightening. CPI will be hot and retail sales will be supported by higher prices, higher wages and strong labor market conditions. The big question is how much further can USD/JPY rally? The closest resistance level is the May high of 125.86 but if this week’s U.S. economic reports surprise to the upside we could… Read More »Will USD/JPY hit 130? Beware of broad FX sell-off

Key Highlights EUR/USD extended decline below the 1.0950 support. It broke a key bullish trend line with support near 1.0980 on the 4-hours chart. EUR/USD Technical Analysis Looking at the 4-hours chart, the pair even traded below the 1.1000 level, the 200 simple moving average (green, 4-hours), and the 100 simple moving average (red, 4-hours). There was a break below a key bullish trend line with support near 1.0980 on the same chart. The pair traded as low as 1.0835 and is currently consolidating losses. An immediate resistance on the upside is near the 1.0915 level. The first major resistance is near the 1.0950 level (the previous support zone). The next major resistance is near the 1.1000 level. Any more gains might send the pair towards the 1.1050 level in the coming sessions. On the downside, an immediate support is near the 1.0840 level. The next major support is near the 1.0820 level. A downside break below the 1.0820 support level might send the pair towards the 1.0750 level.

Outlook: The data plate is not interesting (wholesale sales and inventories) and no Fed speakers are scheduled. The original trouble-maker, St. Louis Fed Pres Bullard, said he prefers the Fed funds target at 3-3.25% by year-end. The CME FedWatch tool shows a mere 10.8% of Fed funds traders see that as likely. (www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html). We think Bullard will prevail—again. But first, bond market turmoil arising from acceptance of the Fed’s tightening plan. The 10-year yield has moved from 1.19% on Aug 8, 2021 to 1.52% at year-end to 2.50-2.68% this week. A Reader asked whether we will see a replay of 3/78 to 10/81 when the 30-year went from 8.24% to 14.49%. The answer is no, for several reasons. First, we didn’t have QE in the late 1970’s. QE artificially reduced yields and nobody knows by how much. This is a key reason why yield curve inversion today that predicted past recessions is questionable. History will not repeat exactly but some of it may rhyme. Consider that when yields were up in the stratosphere, they still delivered a real (after-inflation) return. Ed Yardeni rides to the rescue. See his chart of the 30-year. It was not a real negative for 42 years until QE… Read More »Now what do we do about recession?

Equity markets remain choppy with a lack of clear momentum. Next week's start of the earnings season should at least give us some trend. Financial stocks to open earnings season as per usual. The first earnings season under the super-sized inflation conditions gets underway next week and will demonstrate just how well or poorly companies are able to deal with inflation. History shows us that for the most part, equities are actually a pretty good hedge against inflation, as companies push up prices in response to rising input costs. The early stage of an inflationary cycle is where equities tend to do best. After time, consumer sentiment sours, demand falls as prices rise, and so company revenues and margins suffer. But currently, we are at the early stage of this inflationary cycle, so we expect earnings to hold up. Next week kicks off with financials, who would usually benefit from rising yields anyway as this increases their net interest margin. The energy sector also should report huge numbers on the back of surging energy prices. So for now, we remain in the moderately bullish camp, albeit with some serious buffeting along the way. Headwinds to buffet, include some familiar themes from… Read More »Week Ahead on Wall Street (SPY) (QQQ): Earnings season to give equity indices more direction

As the Federal Reserve ramps up its rhetoric on rate hikes, precious metals markets continue to consolidate. Metals markets haven’t been helped by a rising U.S. Dollar Index. Yes, despite the Federal Reserve note losing purchasing power at the most rapid pace in four decades, it is gaining against most major foreign currencies. A big part of this superficial dollar strength is based on expectations that the Federal Reserve will raise interest rates more aggressively than central banks in Europe and elsewhere.  On Wednesday, the Fed released the minutes from its most recent policy meeting. Officials indicated they wanted to shrink the central bank’s massive bond purchasing program at a faster pace than previously indicated. Some also pushed for larger 50 basis point rate hikes in response to alarming inflation data.   The financial media widely reported the Fed’s monetary policy stance as being “hawkish.” But policy itself remains extremely accommodative.  And the Fed will face immense pressure to continue accommodating the borrowing spending binges on Wall Street and in Washington. There are very few deficit hawks these days on Capitol Hill.  Both establishment Republicans and Democrats regularly vote for budgets that grow government spending beyond the ability of revenues… Read More »New Biden tax and spend plan throws gasoline on inflation bonfire