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Annual Core PCE inflation is forecast to rise to 5.5% in February. A strong inflation print could revive expectations of a 50 bps rate hike in May. Technical outlook points to a bearish tilt in the US Dollar Index.   The dollar has failed to build on the previous week’s gains and instead has lost nearly 1% in the first half of the week. In the absence of high-tier data releases, the positive shift witnessed in risk sentiment seems to be making it difficult for the dollar to find demand. On Thursday, the US Bureau of Economic Analysis will release the Personal Consumption Expenditures (PCE) Price Index data for February. The Core PCE Price Index – the Fed’s preferred gauge of inflation that leaves out volatile food and energy prices – is expected to rise to 5.5% from 5.2% in January. Inflation and Fed rate outlook Following the FOMC’s March policy meeting, policymakers have adopted a hawkish tone by voicing their willingness to vote in favor of 50 basis points (bps) rate hikes in upcoming meetings to tame inflation. Chicago Fed President Charles Evans said that a 50 bps hike could help them move rates close to neutral. Cleveland Fed President… Read More »US February PCE Inflation Preview: Will inflation data confirm 50 bps May hike?

The long end of the yield curve rallied strongly on Tuesday with the middle of the curve pricing in more hikes by the Fed. More inversions signal a recession sooner rather than later. Yield Curve data from the New York Fed as of 2022-03-29, yellow highlights mark Inversions, chart by Mish The highly watched 2-10 spread was positive 6 basis point (2.41 minus 2.35) as of the close on March 29 having briefly inverted (negative) intraday.  Yield Curve Spreads Since January 2021 Yield Curve Spreads Since January 2022 Yield Curve data from the New York Fed as of 2022-03-29, chart and calculations by Mish Six Inversions  20-Year to 30-Year: 15 Basis Points  7-Year to 10-Year: 9 Basis Points 5-Year to 10-Year: 8 Basis Points 5-Year to 3-Year: 5 Basis Points 3-Year to 10-Year: 13 Basis Points 3-Year to 30-Year: 1 Basis Point   Inversions (shorter-duration bonds yielding more than longer-duration bonds) are a sign of a weakening economy and a recession.  The most widely watched recession harbinger is the 2-10 spread which briefly inverted intraday on March 29 but finishing the day at a positive 6 basis points. Recession Coming A recession is on the way. The only question is… Read More »A recession in 2022 looks increasingly likely as more yield curve inversions appear

Hopes for diplomacy in Ukraine triggered aggressive short-covering on EUR/USD on Tuesday. Surging German bond yields further underpinned the euro and remained supportive of the move. The risk-on impulse, retreating US bond yields weighed on the USD and fueled the momentum. The EUR/USD pair witnessed an aggressive short-covering move on Tuesday and rallied to a two-week high amid hopes for a breakthrough in the Russia-Ukraine peace negotiations. In the latest development, the Russian Defense Ministry promised to scale down military activity in Kyiv and Chernihiv to create conditions for dialogue. Adding to this, top Russian negotiator Vladimir Medinsky was quoted saying that there have been enough developments to hold a meeting between President Vladimir Putin and his Ukrainian counterpart Volodymyr Zelenskyy. The headlines fueled optimism about a diplomatic solution to end the war and provided a strong boost to the euro, which has been battered in recent weeks amid fears about the economic fallout from the Ukraine crisis. The common currency was further underpinned by surging German government bond yields. The yield on two-year notes briefly moved above zero for the first time since late 2014 and the benchmark 10-year bund yield shot to levels last seen in 2018. The… Read More »EUR/USD Forecast: Bulls looking to seize control amid hopes for peace in Ukraine

Outlook: The consumer is two-thirds of the US economy and if we are going to get a recession, first we have to see a change in consumer behavior. So far we are not seeing that. We are not sure that the Conference Board consumer confidence index today will be a good measure—we’d rather see what they do, not what they say. Whatever the Conference Board delivers, it can’t be as bad as the GfK indicator in Germany (see above). And consumers are buying houses like there is a shortage or something, driving up prices dramatically. In the Jolts report, everyone will be looking for evidence of the labor shortage and more information on that quit rate. Every newsletter and newspaper has the 5/30 yield curve inversion. White Rabbits are scurrying hither and yon, muttering “Oh my fur and whiskers! I'm late, I'm late, I'm late!” It’s the Fed considered late, aka “behind the curve. But we say a yield curve inversion is irrelevant to the recession outlook, or relevant to something else, in a world in which the Fed holds $8.96 trillion of the $28.43 trillion debt outstanding (as of 3/15/22). The yield curve debate is not going to fade… Read More »Is the US going to get into a recession?

EUR/USD – 1.0984 Although Monday's initial break of last week's low at 1.0961 to 1.0945 in Europe suggests euro's correction from March's 22-month bottom at 1.0807 has ended, subsequent short-covering rebound to 1.0999 would yield choppy swings before prospect of another fall, loss of momentum should keep price above pivotal sup at 1.0902. \Only a daily close above 1.1000 may shift risk to the upside for risk stronger retracement to 1.1035/45. Data to be released today Japan unemployment rate, Australia retail sales. Germany import prices, Gfk consumer sentiment. Canada average weekly earnings, U.S. redbook, monthly home price, JOLTS jobs openings and consumer confidence on Tuesday.

With the unrest in the Black Sea basin, it appears that there are two more cross-trade wars in the world. These are about energy and currency. Crude oil prices, down most of Friday, finally ended the week higher after a huge fire broke out at oil facilities in Jeddah, Saudi Arabia, following attacks by Yemeni rebels. The great winner of the Russian-Ukrainian conflict is undoubtedly the United States, which now seems to be taking advantage of Europe’s moment of weakness. The latter is indeed currently switching its energy supplies from Russian natural gas (pipeline-transported) to the much more polluting and much more expensive US shale gas. The reasons are much higher extraction (fracking) and transportation costs since it requires additional processes such as liquefaction/degasification and the deployment of more port terminals that are able to provide such steps – also much more energy-consuming – linked to Liquefied Natural Gas (LNG) supplies. By doing so, the European Union is going to increase its dependence on the US whilst a new and stronger block (including Asia) emerges on the east side. As a result, we have already started to witness dedollarisation in international trade, with the petroyuan set to dethrone the heavily-printed… Read More »Who benefits most from the Russia-Ukraine war?

AUD/USD Current Price: 0.7489 Inflation and the Eastern European crisis undermined the market’s mood. Australian Retail Sales are foreseen up by 1% in February. AUD/USD has begun correcting lower, although the AUD remains resilient. The AUD/USD pair gapped lower at the weekly opening, closing the gap before resuming its slide. The pair ends the day with modest losses trading in the 0.7490 price zone after bottoming for the day at 0.7466. The Australian dollar remains resilient, as it barely gave up, despite the poor performance of equities and a strengthening greenback. Stocks came under selling pressure amid persistent concerns related to the Russian invasion of Ukraine and its effects on the global economy. Markets talks are hinting at an upcoming round of peace talks in Turkey, although there’s no confirmation yet, neither much room for a diplomatic solution. Russian Foreign Minister Lavrov said that a meeting between the Russian and the Ukrainian presidents would be counter-productive at the time being.   Government bond yields, in the meantime, soared across the world after the Japanese Central Bank jumped to intervene in financial markets for a second time this year, a sign that the current monetary policy is falling short of helping… Read More »AUD/USD Forecast: Bulls ready to take some profits out of the table

EUR/USD continued losing ground through the Asian session on Monday amid sustained USD buying. The Russia-Ukraine crisis, rising bets for a 50-bps Fed rate hike move underpinned the safe-haven buck. A sustained break below the 1.0900 round-figure mark will set the stage for a further depreciating move. The EUR/USD pair extended its recent downfall witnessed over the past one week or so and witnessed some follow-through selling during the Asian session on Monday. Investors remain concerned that the European economy would suffer the most from the spillover effects of the Ukraine crisis. This was reinforced by Friday's release of the dismal German Ifo Business Climate Index, which dropped from 98.5 to 90.8 in March and acted as a headwind for the shared currency. On the other hand, a combination of factors benefitted the US dollar, which further exerted downward pressure on the major. Against the backdrop of the lack of progress in the Russia-Ukraine peace negotiations, hawkish Fed expectations continued lending support to the safe-haven greenback. Investors seem convinced that the Fed would adopt a more aggressive policy to combat high inflation. In fact, the markets have been pricing in a 50 bps rate hike in the May meeting amid… Read More »EUR/USD Forecast: 1.0900 mark is the last line of defense for bullish traders

US non-farm payrolls – 01/04 – The most recent US payrolls report was by all accounts a fairly decent one, although the number was of lesser importance given that we already knew that the Fed was going to raise rates come what may when they met in March. Nonetheless the headline number smashed expectations of 415k, coming in at 678k, while January was revised modestly higher to 481k. During that same week the ADP payrolls report saw a huge revision from -301k to 509k, an 810k swing from negative to positive, altering the picture for the US labour market substantially. The unemployment rate also fell back, slipping to 3.8%, while in an extremely encouraging development the participation rate rose to 62.3%, its highest level since March 2020, when we were at 62.7%. This trend needs to continue if we are to get back to the 63.4% level we saw in February 2020. The only cloud on an otherwise positive report in February was a slide in the average hourly earnings data from 5.5% to 5.1%, which at a time of rising inflation is probably not what you want to see if you are concerned about the rising cost of living. This… Read More »US Nonfarm Payrolls, US PCE, EU CPI, AG Barr, Walgreens Boots earnings

Asia markets are opening g soft on the back of Covid concerns in  Shanghai as the city goes into semi-lockdown from today, with potential disruption across tech/EV supply chains.  Weaker bond markets are setting records with the benchmark UST indices, which are the worst on paper at this stage in data going back to 1972. Barring an end-of-month rally, Q1 2022 will underperform the weakest quarter on the record set in Q1 1980. The cross-asset reaction to higher yields has been a collective shoulder shrug in sharp contrast to the equity market drawdowns seen earlier this quarter Significant month and quarter-end rebalancing following the steepest YTD drawdowns in bond markets in decades could push implied rates and equity market volatility higher this week and next. But with CPI inflation yet to peak in the major economies, higher highs in yields look set to follow in Q2 beyond any near-term rallies.   Oil Oil fell at the NYMEX open as China's worsening virus resurgence raised concerns about demand in the world's biggest crude importer. Global markets seem to be a bit nervous about the effectiveness of China's zero-tolerance policy towards covid and the potential for more demand and supply chain disruptions as we… Read More »Markets, Oil, Gold, CNH/USD: Asia sentiment a bit fragile amid Shanghai Covid concerns